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.
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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
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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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1-800CALLATT (Collect). 1-800CALLATT for collect calls continues to be
AT&T Consumer Services Group's lead discounted collect calling offer in the
operator services portfolio. 1-800CALLATT is a domestic, automated, flat-rate
collect calling service. The service is targeted at price conscious consumers
and advertised nationally through multiple media channels. Optional collect
messaging capabilities exist as well.
AT&T PrePaid Card. AT&T PrePaid cards provide local, long distance and
international calls charged to an AT&T PrePaid card account maintained on AT&T's
PrePaid platform. The AT&T PrePaid card service is available 24 hours a day, 7
days a week. Currently, AT&T PrePaid cards are available in over 60,000 retail
locations of various types including grocery, drug, convenience, mass
merchandise, wholesale clubs, electronics/office and military/government. More
than half of AT&T's prepaid card sales in 2001 were to a single retail account
under an agreement with a one-term term.
10-10-345. 10-10-345 is a non-AT&T-branded dial-around service that allows
customers an alternative way to make a long distance call. The service is
targeted at price-sensitive dial-around and other common carriers' users
completing domestic and/or international calls from home. When customers dial
10-10-345, they pay a competitive per-minute rate, 24 hours a day, 7 days a week
with a minimal surcharge per call. Charges made for calls using 10-10-345 are
billed through the local exchange carrier.
AT&T DSL SERVICE
AT&T Consumer Services Group is currently developing and market testing an
offer that bundles AT&T long distance with local services, using incumbent local
exchange carrier network combinations, AT&T Worldnet Services and high-speed
Internet access services, which AT&T Consumer Services Group delivers using DSL
technology. The DSL Service would broaden AT&T Consumer Services Group's
franchise from long distance to a portfolio of voice, Internet, high speed data,
e-mail and messaging. In addition, AT&T Consumer Services Group would offer
competitively priced local and long distance packages to customers with features
such as voice mail and call waiting.
The DSL Service is provided over traditional telephone "twisted pair"
copper lines leased from local exchange carriers. Using electronics attached to
a typical telephone line both at the customer premises (through a modem) and at
a point in the AT&T network, the DSL Service provides customers with a
continuous connection to the Internet, featuring AT&T Worldnet Service. The
typical residential offering would feature connection speeds up to 12 times
faster than 56k modem technology.
COMBINED LOCAL AND LONG DISTANCE
AT&T Consumer Services Group offers, as of April 1, 2002, customers
combined local, via unbundled network elements platform, and long distance
service in New York, Texas, Michigan and Georgia. AT&T Consumer Services Group
handles all aspects of the phone service for the customer, including ordering,
customer service, billing and inside wiring. AT&T Consumer Services Group also
offers many of the same local calling features as the incumbent local exchange
carriers, such as call waiting and caller ID.
AT&T WORLDNET SERVICE
AT&T offers dial-up Internet access to consumers through its AT&T WorldNet
Service, a leading provider of Internet access service in the United States.
AT&T WorldNet Service currently has dial-up subscribers that use IP
communication services within the AT&T WorldNet Service offer, such as e-mail,
calendar and alerting. AT&T Consumer Services Group's objective is to increase
usage by the long distance customer base of AT&T Consumer Services Group's
IP-based services and then migrate those customers to more advanced IP-based
services, such as voice mail.
MARKETING, SALES AND CUSTOMER CARE
AT&T Consumer Services Group develops customer awareness through its
marketing and promotion efforts. AT&T Consumer Services Group markets its
products and services to a broad spectrum of
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customers seeking to communicate locally or globally. AT&T Consumer Services
Group markets under the AT&T brand, with the exception of its 10-10-345 service
and certain prepaid card offerings, and strives to provide superior customer
care. AT&T Consumer Services Group extensively utilizes direct marketing
channels, including the Internet, direct mail, mass media, probe and transfer,
and outbound telemarketing to communicate with its existing customer base as
well as to market to prospective customers regarding the breadth of services
available to them. AT&T Consumer Services Group's marketing efforts focus on
offering its services to its customers based on their needs. These efforts
involve the selling of stand-alone services, such as long distance, local and
AT&T WorldNet Service, as well as bundled service offerings including long
distance/AT&T WorldNet Service, long distance/local, and long distance/calling
card.
AT&T Consumer Services Group relies on an integrated sales and service team
to solicit and handle customer contact opportunities. The customer care centers
consist of a network of internal and external vendors. The breadth of support
provided by the centers ranges from universal sales and service to specialized
services based on functional area or customer needs. AT&T Consumer Services
Group generally pays its vendors based on a contracted hourly rate and some on a
pay-for-performance scale methodology. AT&T Consumer Services Group has 22
service centers, of which ten are operated by AT&T and 12 are outsourced to
outside vendors. These service centers handle 9 million calls per month in 12
different languages.
AT&T Consumer Services Group also has begun to implement various
initiatives aimed at improving the overall quality of its sales channels as well
as lowering its costs of adding new subscribers. Recent initiatives targeted at
reducing costs and enhancing channel efficiencies have included the expansion of
AT&T Consumer Services Group's on-line capacity and capabilities, including
billing, sales and service, and the increased use of interactive voice response
technology.
AT&T Consumer Services Group is pursuing an e-enabling strategy designed to
create a more convenient, interactive relationship with the consumer, while
streamlining its existing processes and reducing the costs of providing
services. AT&T Consumer Services Group's electronic consumer strategy embodies
the entire business process from advertising and marketing through sales,
ordering, billing, fulfillment, customer service, and after-sales support. AT&T
Consumer Services Group is supplying a range of product information, bill
management utilities and customer care capabilities designed to attract and
retain its most valuable customers. AT&T Consumer Services Group's on-line
billing infrastructure enables customers to view, sort, adjust, investigate and
resolve questions regarding their billing statements. To further the
relationship with specific customer segments, AT&T Consumer Services Group
provides access to information in five languages other than English. These
transactions are designed to increase consumer satisfaction by providing a new
level of control and, in many cases, reduce time-consuming contacts with AT&T
Consumer Services Group's care and sales channels.
In January 2002, AT&T entered into a five-year agreement with Accenture
Ltd., for Accenture to provide management, new technology and training for AT&T
Consumer Services Group. Under the terms of the agreement, Accenture will be
responsible for providing new technology development and ongoing management
direction to improve AT&T Consumer Services Group's customer care operations,
with goals of reducing costs, raising productivity, and improving sales and
customer service. AT&T Consumer Services Group will continue to develop and
implement its overall business and marketing strategies and new product
offerings.
CUSTOMER OFFERS
AT&T Consumer Services Group offers long distance customers a family of
calling plans. These calling plans are simple and are consistently offered on
the web and over the telephone. Further, these plans offer customers a broad
choice of price points designed to meet their needs. Currently, there are two
leading long distance offers. The first is the AT&T One Rate 7 cents Plan. For a
monthly plan fee of $3.95, customers pay 7 cents per minute for direct dialed
state-to-state long distance calls from home, at all times. The second is AT&T
Unlimited, which offers AT&T residential long distance subscribers unlimited
intraLATA and interLATA long distance calls from home to all other AT&T
residential long distance
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customers served by Consumer Services in the United States for $19.95 per month.
All other domestic direct-dialed calls under this plan are priced at 7 cents per
minute.
AT&T Consumer Services Group also offers various reward and partnership
programs for higher spending long distance customers. For example, customers
enrolled in AT&T rewards receive redemption options every six months based on
their long distance spending. AT&T Consumer Services Group relationships with
companies such as Continental Airlines, Inc., Starwood Hotels & Resorts
Worldwide Inc. and Cablevision, among others, provide customers with options
ranging from airline miles to hotel nights to premium cable channel upgrades.
Recently, market research has indicated consumer interest in college investment
funds. Through an agreement announced in January 2001 with UPromise Inc., a
customer can receive a contribution equal to 4% of the cost of residential long
distance calls made into a UPromise savings account to be used for college
education. Consumers can also invite family and friends to participate in
collectively building the UPromise savings account.
AT&T WorldNet Service seeks to build brand recognition and customer loyalty
and to make it easy for consumers to remain with AT&T WorldNet Service. In
addition to direct marketing through brand name mass advertising, direct mail
and magazine insert promotions and bundling offers, AT&T WorldNet Service
maintains a large indirect channel marketing effort. Through this indirect
channel, AT&T WorldNet Service software is bundled in new computers produced by
major manufacturers and is included in millions of copies of software titles
published by independent software vendors. AT&T WorldNet Service also has a
co-branded ISP offer that enables businesses to offer customers their own
branded, full-featured Internet access in affiliation with AT&T. AT&T WorldNet
Service currently offers AT&T WorldNet Service Plus for $16.95 per month, which
includes 150 hours of monthly usage (with additional hours billed at $.99/hour),
video e-mail, and live technical support.
RATES AND BILLING
AT&T Consumer Services Group generally continues to charge long distance
customers for jurisdictionally intrastate services based on applicable tariffs
filed with various individual states. However, effective as of August 1, 2001,
the rates for state-to-state and international calls are now generally set by
contract rather than by FCC tariffs as a result of an FCC de-tariffing order.
Customers select different services and various rate plans, which determine the
monthly or per minute price that customers pay on their long distance calls. Per
minute rates typically vary based on a variety of factors, particularly the
volume of usage and the day and time that calls are made.
AT&T Consumer Services Group long distance charges may include fees per
minute for transporting a call, per call or per minute surcharges, monthly
recurring charges, minimums and price structures that offer a fixed number of
minutes each month for a specific price and price structure that offer unlimited
calling to certain numbers for a monthly fee. The fees per minute for
transporting a call may vary by time of day or length of call and by whether the
call is domestic or international. Within the United States, in-state rates may
vary from interstate rates. These rate structures apply to customer dialed
calls, calling card calls, directory assistance calls, operator-assisted calls
and certain miscellaneous services. Customers also may be assessed a percentage
of revenue, or a fixed monthly fee, to satisfy AT&T Consumer Services Group's
obligations to recover U.S. federal- and state-mandated assessments and access
surcharges.
Customers for combined long distance and local services are charged a flat
rate per month for local service and usage fees and/or monthly charges for long
distance. AT&T Worldnet Service offers a variety of pricing plan options.
Generally, customers are charged a flat rate for a certain number of hours with
charges for each additional hour of usage. AT&T Worldnet Service also offers a
plan without a usage restriction. The AT&T Worldnet High Speed Service will
offer integrated high speed data combined with comprehensive voice services for
one flat rate each month, generally billed electronically to a credit card or
through electronic funds transfers.
AT&T Consumer Services Group generally provides billing via traditional
paper copy or on-line billing. The traditional paper bills provide call details
for calls that are separately charged and are sent directly by AT&T or
indirectly through local exchange carriers. An additional fee is charged for
customers
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receiving their bills through local exchange carriers. In the case of on-line
billing, the charges are billed to a credit card or directly debited from a
checking account; call details for toll charges are available via the AT&T
website.
COMPETITION
Competition in communications services is based on price and pricing plans,
types of services offered, customer service, access to customer premises and
communications quality, reliability and availability. AT&T Consumer Services
Group's principal competitors include the MCI Group of Worldcom, Inc., Sprint
Corporation and regional phone companies. AT&T also experiences significant
competition in long distance from dial-around resellers. In addition, long
distance telecommunications providers have been facing competition from
non-traditional sources, including as a result of technological substitutions,
such as Internet telephony, high speed cable Internet service, e-mail and
wireless services. Providers of competitive high-speed data offerings include
cable television companies, direct broadcast satellite companies and DSL
resellers.
Incumbent local exchange carriers own the only universal telephone
connection to the home, have very substantial capital and other resources,
long-standing customer relationships and extensive existing facilities and
network rights-of-way, and are AT&T Consumer Services Group's primary
competitors in the local services market. In addition, it is anticipated that a
number of long distance telecommunication, wireless and cable service providers
and others have entered or will enter the local services market in competition
with AT&T Consumer Services Group. Some of these potential competitors have
substantial financial and other resources. AT&T Consumer Services Group also
competes in the local services market with a number of competitive local
exchange carriers, a few of which have existing local networks and significant
financial resources. See "Summary and Overview of the Transactions -- Risk
Factors -- Risk Factors Relating to AT&T Consumer Services Group and AT&T
Business Services Group -- AT&T Consumer Services Group and AT&T Business
Services Group face substantial competition that may materially adversely impact
both market share and margins."
AT&T Consumer Services Group currently faces significant competition and
expects that the level of competition will continue to increase. As competitive,
regulatory and technological changes occur, including those occasioned by the
Telecommunications Act described under "-- Legislative and Regulatory
Developments -- Telecommunications Act of 1996," AT&T Consumer Services Group
anticipates that new and different competitors will enter and expand their
position in the communications services markets. These will include regional
phone company competitors in existing states and new states plus entrants from
other segments of the communications and information services industry or global
competitors seeking to expand their market opportunities. Many of these new
competitors are likely to enter with a strong market presence, well-recognized
names and pre-existing direct customer relationships.
The Telecommunications Act already has affected the competitive
environment. Anticipating changes in the industry, non-regional phone company
local exchange carriers, which are not required to implement the
Telecommunications Act's competitive checklist prior to offering long distance
in their home markets, have integrated their local service offerings with long
distance offerings in advance of AT&T Consumer Services Group offering combined
local and long distance service in these areas, adversely affecting AT&T
Consumer Services Group's revenues and earnings in these service regions.
In addition, the Telecommunications Act permits regional phone companies to
provide in-region interLATA interexchange services after demonstrating to the
FCC that providing these services is in the public interest and satisfying the
conditions for developing local competition established by the
Telecommunications Act. See "-- Legislative and Regulatory
Developments -- Telecommunications Act of 1996." Regional phone companies have
petitioned the FCC for permission to provide interLATA interexchange services in
one or more states within their home markets. In December 1999, Verizon became
the first regional phone company to obtain approval to provide long distance in
a state within its home territory, in New York. Petitions have been granted to
regional phone companies with respect to ten
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states prior to April 1, 2002. 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.
To the extent that regional phone companies obtain in-region interLATA
authority before the Telecommunications Act's checklist of conditions have been
fully or satisfactorily implemented and adequate facilities-based local exchange
competition exists, or before there is an ability to resell at fair and
competitive rates there is a substantial risk that AT&T Consumer Services Group
and other interexchange service providers, will be at a disadvantage to regional
phone companies in providing both local service and combined service packages.
Because it is widely anticipated that substantial numbers of long distance
customers will seek to purchase local, interexchange and other services from a
single carrier as part of a combined or full service package, any competitive
disadvantage, inability to profitably provide local service at competitive rates
or delays or limitations in providing local service or combined service packages
could materially adversely affect AT&T Consumer Services Group's future revenue
and earnings. In any event, the simultaneous entrance of numerous new
competitors for interexchange and combined service packages is likely to
materially adversely affect AT&T Consumer Services Group's future long distance
revenue and could affect materially adversely future earnings.
In addition to the matters referred to above, various other factors,
including technological hurdles, market acceptance, start-up and ongoing costs
associated with the provision of new services and local conditions and
obstacles, could materially adversely affect the timing and success of AT&T
Consumer Services Group's entrance into the local exchange services market and
AT&T Consumer Services Group's ability to offer combined service packages that
include local service.
EMPLOYEES
At December 31, 2001, AT&T Consumer Services Group employed approximately
13,800 individuals in its operations, virtually all of whom are located in the
United States. About 75% of the domestically located employees of AT&T Consumer
Services Group are represented by unions. Of those represented by unions, about
96% are represented by the Communications Workers of America and about 4% are
represented by the International Brotherhood of Electrical Workers, both of
which are affiliated with the AFL-CIO. Labor agreements with most of these
unions extend through May 2002.
LEGAL PROCEEDINGS
In the normal course of business, AT&T Consumer Services Group is subject
to proceedings, lawsuits and other claims, including proceedings under
government laws and regulations related to environmental and other matters. Such
matters are subject to many uncertainties and outcomes are not predictable with
assurance. Consequently, AT&T Consumer Services Group is unable to ascertain the
ultimate aggregate amount of monetary liability or financial impact with respect
to these matters at December 31, 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 Consumer Services Group beyond that provided for at
year-end would not be material to AT&T Consumer Services Group's annual combined
financial statements.
For additional information on legal proceedings, please see the discussion
on legal proceedings under "Legal Proceedings" contained in AT&T's Annual Report
on Form 10-K, as amended, for the year ended December 31, 2001, which is
incorporated by reference in this document. See "Additional Information for
Shareholders -- Where You Can Find More Information."
LEGISLATIVE AND REGULATORY DEVELOPMENTS
Telecommunications Act of 1996. In February 1996, the Telecommunications
Act became law. The Telecommunications Act, among other things, was designed to
foster local exchange competition by establishing a regulatory framework to
govern new competitive entry in local and long distance telecommunications
services. The Telecommunications Act permits a regional phone company to provide
interexchange services originating in any state in its region after it
demonstrates to the FCC that this
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provision is in the public interest and it satisfies the conditions for
developing local competition established by the Telecommunications Act.
In August 1996, the FCC adopted rules and regulations, including pricing
rules, to implement the local competition provisions of the Telecommunications
Act, including with respect to the terms and conditions of interconnection with
local exchange carrier networks and the standards governing the purchase of
unbundled network elements and wholesale services from local exchange carriers.
These rules and regulations rely on state public utility commissions, or PUCs,
to develop the specific rates and procedures applicable to particular states
within the framework prescribed by the FCC.
On July 18, 1997, the Eighth Circuit Court of Appeals issued a decision
holding that the FCC lacked authority to establish pricing rules to implement
the sections of the local competition provisions of the Telecommunications Act
applicable to interconnection with incumbent local exchange carrier networks and
the purchase of unbundled network elements and wholesale services from incumbent
local exchange carriers. Accordingly, the Eighth Circuit Court of Appeals
vacated the rules that the FCC had adopted in August 1996, and that had been
stayed by the Court since September 1996. On October 14, 1997, the Eighth
Circuit Court of Appeals vacated an FCC rule that prohibited incumbent local
exchange carriers from separating network elements that are combined in an
incumbent local exchange carrier's network, except at the request of the
competitor purchasing the elements. This decision increased the difficulty and
cost of providing competitive local service through the use of unbundled network
elements purchased from incumbent local exchange carriers.
On January 25, 1999, the Supreme Court issued a decision reversing the
Eighth Circuit Court of Appeals' holding that the FCC lacks jurisdiction to
establish pricing rules applicable to interconnection and the purchase of
unbundled network elements, and the Eighth Circuit Court of Appeals' decision to
vacate the FCC's rule prohibiting incumbent local exchange carriers from
separating network elements that are combined in an incumbent local exchange
carrier's network. The effect of the Supreme Court's decision was to reinstate
the FCC's rules governing pricing and the separation of unbundled network
elements. The pricing issues were then remanded to the Eighth Circuit Court of
Appeals to consider the incumbent local exchange carriers' claims that, although
the FCC has jurisdiction to adopt pricing rules, the rules it adopted are not
consistent with the applicable provisions of the Telecommunications Act. The
Supreme Court also vacated the FCC's rule identifying and defining the unbundled
network elements that incumbent local exchange carriers are required to make
available to new entrants, and directed the FCC to reexamine this issue in light
of the standards mandated by the Telecommunications Act.
In response to the Supreme Court's decision, in November 1999, the FCC
completed its reexamination of, and released an order identifying and defining,
the unbundled network elements that incumbent local exchange carriers are
required to make available to new entrants. That order re-adopted the original
list of elements, with certain limited exceptions. An association of incumbent
local exchange carriers has appealed the FCC's order to the District of Columbia
Circuit Court of Appeals, and has asked this Court to hear the appeal on an
expedited basis. A number of parties, including AT&T and other incumbent local
exchange carriers, have petitioned the FCC to reconsider and/or clarify its
order. The FCC has moved to hold the appeal in abeyance pending its disposition
of the reconsideration petitions. In addition, in December 2001 the FCC opened a
proceeding in which it proposes to review the availability of unbundled network
elements based on current market conditions. The FCC has proposed to respond to
issues raised in the earlier reconsideration petitions in this new docket.
In July 2000, the Eighth Circuit Court of Appeals issued a decision
addressing the incumbent local exchange carriers' claims that the FCC's pricing
rules are not consistent with the applicable provisions of the
Telecommunications Act. It rejected the incumbent local exchange carriers'
claims that the prices for network elements must be based on their "historical
costs" rather than, as the FCC had held, their "forward-looking" costs. It also
held, however, that the FCC rule providing that forward-looking costs should be
calculated on the basis of the cost of the most efficient alternatives was
contrary to the Telecommunications Act. The Eighth Circuit Court of Appeals then
stayed this ruling to enable the
X-23
parties to seek review before the Supreme Court, so the FCC's rules remain in
effect until the Supreme Court decides the case. The Supreme Court agreed to
review the Eighth Circuit Court of Appeals' decision, and a decision by the
Supreme Court is anticipated by the end of June 2002. The Supreme Court will be
considering the claims of AT&T, the FCC and others that the Eighth Circuit Court
of Appeals erred by invalidating the FCC rule, and the claim by the incumbent
local exchange carriers that the Eighth Circuit Court of Appeals erred by not
requiring prices to be based on their historical cost. The Supreme Court is also
considering the Eighth Circuit's decision that incumbent local exchange carriers
are not required to provide competitors with "new" combinations of unbundled
network elements.
The Eighth Circuit Court of Appeals also invalidated the FCC's rules
setting the pricing methodology for resold local services. That aspect of its
decision was not stayed and will not be reviewed by the Supreme Court. The
effect of the most recent decision by the Eighth Circuit Court of Appeals is to
increase the risks, costs, difficulties, and uncertainty of entering local
markets through using the incumbent local exchange carriers' facilities and
services.
In addition, the United States House of Representatives has passed
legislation that would permit the regional phone companies to provide certain
long distance services without satisfying the Telecommunications Act's checklist
of conditions and also would substantially reduce the regional phone companies'
obligations to provide AT&T Consumer Services Group and other local competitors
with the facilities needed to provide competitive local services, particularly
high speed data services. The prospects that the United States Senate will pass
such legislation remain uncertain. The FCC also opened a proceeding in February
2002 that could limit the obligations of the regional phone companies to provide
AT&T Consumer Services Group and other local competitors with access to
facilities needed to provide high speed data services. This proceeding, and the
other FCC proceedings referenced above could also reduce the regional phone
companies obligations to provide facilities to AT&T Consumer Services Group and
other local competitors, and could accelerate the regional phone companies'
ability to provide long distance services.
In view of the proceedings pending before the Supreme Court, the District
of Columbia Circuit Court of Appeals, the FCC and state PUCs and possible
legislation, there can be no assurance that the prices and other conditions
established in each state will provide for effective local service entry and
competition or provide AT&T Consumer Services Group with new market
opportunities.
Regulation of Rates. AT&T Consumer Services Group is subject to the
jurisdiction of the FCC with respect to interstate and international rates,
lines and services, and other matters. From July 1989 to October 1995, the FCC
regulated AT&T Consumer Services Group under a system known as "price caps"
whereby AT&T Consumer Services Group's prices, rather than its earnings, were
limited. On October 12, 1995, recognizing a decade of enormous change in the
long distance market and finding that AT&T lacked market power in the interstate
long distance market, the FCC reclassified AT&T as a "non-dominant" carrier for
its domestic interstate services. Subsequently, the FCC determined that AT&T
Consumer Services Group's international services were also non-dominant. As a
result, AT&T Consumer Services Group became subject to the same regulations as
its long distance competitors for these services. Thus, AT&T Consumer Services
Group was no longer subject to price cap regulation for these services, was able
to file tariffs that are presumed lawful on one day's notice, and was free of
other regulations and reporting requirements that apply only to dominant
carriers.
In subsequent orders, the FCC decided to exercise its authority to forbear
from requiring non-dominant carriers to file tariffs for their services; first
for domestic interstate services and then for international services. As a
result, non-dominant carriers, including AT&T Consumer Services Group, have
implemented mechanisms other than tariffs to establish the terms and conditions
that apply both to domestic, interstate telecommunications services and
international services, effective August 1, 2001. Accordingly these mechanisms
apply to virtually all of AT&T Consumer Services Group's interstate and
international telecommunications services.
X-24
In May 1997, the FCC adopted orders relating to price caps, access reform
and universal service that substantially revised the level and structure of
access charges that AT&T Consumer Services Group, as a long distance carrier,
pays to incumbent local exchange carriers. Under the price cap order, local
exchange carriers were required to reduce their price cap indices by 6.5%
annually, less an adjustment for inflation, which has resulted in significant
reductions in access charges that long distance companies pay to local exchange
carriers. The access reform order permitted increased flat-rate assessments to
multiline business customers and to residential customers other than for the
primary telephone line. AT&T Consumer Services Group has agreed to pass through
to consumers any savings to AT&T Consumer Services Group as a result of these
access charge reforms. Consequently, AT&T Consumer Services Group's results
after June 1997 reflect lower revenue per minute of usage and lower access and
other interconnection costs per minute of usage.
In May 2000, the FCC adopted the CALLS order for the price cap local
exchange carriers, which made additional significant access and price cap
changes. The CALLS order reduced by $3.2 billion during 2000 the interstate
access charges that AT&T Consumer Services Group and other long distance
carriers paid to these local exchange carriers for access to their networks, and
established target access rates for the long distance carriers companies, which,
over the next two years, will result in further reductions, albeit of a much
smaller magnitude. Once the target rates are reached, the annual price
reductions required by the price cap order no longer apply. In addition, the
CALLS order removed implicit subsidies from access charges and converted them
into an explicit, portable subsidy administered as part of the universal service
program described below. Also, under the CALLS order, the caps on certain
line-based costs that do not vary with usage have been increased so that these
costs increasingly are recovered from end user customers. These restructurings
allowed the reduction in access charges assessed on long distance carriers on a
usage basis. As part of the CALLS order, AT&T Consumer Services Group agreed to
pass through to customers access charge reductions over the five-year life of
the CALLS order and made certain other commitments regarding the rate structure
of certain residential long distance offerings. The FCC CALLS order was recently
reversed and remanded in part, and is the subject of ongoing remand proceedings
before the FCC.
Under the August 1999 local exchange carrier pricing flexibility order,
which was affirmed by the District of Columbia Circuit Court of Appeals in
February 2001, the FCC established certain triggers that enable the price cap
local exchange carriers to obtain pricing flexibility for their interstate
access services, including Phase II relief that permits them to remove these
services from price cap regulation. Although these triggers purportedly indicate
a competitive presence, they may allow for premature deregulation that could
force access rates upwards.
Finally, in the universal service order, the FCC adopted a new mechanism
for funding universal service, which includes programs that defray the costs of
telephone service in high-cost areas, for low-income consumers, and for schools,
libraries and rural health care providers. Specifically, the FCC expanded the
set of carriers that must contribute to support universal service from solely
long distance carriers to all carriers, including local exchange carriers, that
provide interstate telecommunications services. Similarly, the set of carriers
eligible for the universal service support has been expanded from only local
exchange carriers to any eligible carrier providing local service to a customer,
including AT&T Consumer Services Group as a new entrant in local markets. The
universal service order also adopted measures to provide discounts on
telecommunications services, Internet access and inside wiring for eligible
schools and libraries and on telecommunications services only for rural health
care providers. The mechanism used to collect universal service contributions
relies on historical revenues, which disproportionately shifts the burden of
these programs to carriers that are losing market share, like AT&T in the long
distance market, to carriers that are growing market share. The FCC is currently
considering reform of this mechanism.
AT&T Consumer Services Group remains subject to the statutory requirements
of Title II of the Communications Act of 1934, as amended. AT&T Consumer
Services Group must offer service under rates, terms and conditions that are
just, reasonable and not unreasonably discriminatory. It also is subject
X-25
to the FCC's complaint process, and it must give notice to the FCC and affected
customers prior to discontinuance, reduction or impairment of service.
In addition to the matters described above with respect to the
Telecommunications Act, PUCs or similar authorities having regulatory power over
intrastate rates, lines and services and other matters regulate AT&T Consumer
Services Group's local and intrastate communications services. The system of
regulation applied to AT&T Consumer Services Group's intrastate and local
communications services varies from state to state and generally includes
various forms of pricing flexibility rules. AT&T Consumer Services Group's
services are not regulated in the states through rate of return regulation.
X-26
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
To understand and place in context AT&T Consumer Services Group
Management's Discussion and Analysis, we urge you to read the AT&T Corp.
Management's Discussion and Analysis on page .
OVERVIEW
AT&T Consumer Services Group is an integrated business of AT&T and is not a
stand-alone entity. The combined financial statements included herein reflect
the results of the proposed AT&T Consumer Services Group tracking stock.
Separate financial statements are not required to be filed for tracking stocks.
However, AT&T Consumer Services Group has provided the financial statements as
an exhibit to this document to provide additional disclosures to investors to
allow them to assess the financial performance of AT&T Consumer Services Group.
Presenting separate financial statements for AT&T Consumer Services Group does
not indicate that AT&T has changed title to any assets or responsibility for any
liabilities, and does not purport to affect the rights of any of AT&T's
creditors. Holders of AT&T Consumer Services Group tracking stock do not have
claims against the assets of AT&T Consumer Services Group. Instead, AT&T
Consumer Services Group shareholders own a separate class of AT&T common stock
that is intended to reflect the financial performance and economic value of
AT&T's consumer services businesses. Since the tracking stocks are governed by a
common board of directors, AT&T's board of directors could make operational and
financial decisions or implement policies that affect disproportionately the
businesses of any group. For example, AT&T's board of directors may decide to
transfer funds or to reallocate assets, liabilities, revenue, expenses and cash
flows among groups, without the consent of shareholders. All actions by the
board of directors are subject to the board members' fiduciary duties to all
shareholders of AT&T as a group, not just to holders of a particular class of
tracking stock, and to AT&T's charter, policy statements, by-laws and
inter-company agreements.
AT&T's board of directors may change or supplement the policies set forth
in the tracking stock policy statements and AT&T's by-laws at the sole
discretion of AT&T's board of directors, subject to the provisions of any
inter-group agreement but without approval of AT&T's shareholders. In addition,
the fact that AT&T has separate classes of common stock could give rise to
occasions when the interests of the holders of the various classes of stock
diverge, conflict or appear to diverge or conflict. AT&T's board of directors
would make any change or addition to the policies set forth in the tracking
stock policy statements or AT&T's by-laws, and would respond to any actual or
apparent divergence of interest among AT&T's groups, in a manner consistent with
its fiduciary duties to AT&T and all of AT&T's shareholders after giving
consideration to the potentially divergent interests and all other relevant
interests of the holders of the separate classes of AT&T shares.
YOU SHOULD CONSIDER THAT AS A RESULT OF THE FLEXIBILITY PROVIDED TO THE
AT&T BOARD, IT MAY BE DIFFICULT FOR INVESTORS TO ASSESS THE FUTURE PROSPECTS OF
A TRACKING STOCK GROUP BASED ON THAT GROUP'S PAST PERFORMANCE.
AT&T Consumer Services Group is a 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 through
the traditional "one plus" dialing of the desired call destination; local
X-27
toll calling; transaction-based long distance services such as calling cards and
prepaid phone cards; local calling through unbundled network elements platform
service offers; and dial-up Internet service through AT&T WorldNet Service.
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 reaffirmed its commitment to creating a tracking stock
designed to reflect the financial performance and economic value of AT&T
Consumer Services Group, 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.
Debt has been allocated to AT&T Consumer Services Group based on AT&T's
future view of AT&T's debt position after taking into account the significant
deleveraging activities of AT&T Corp. This allocation took into account the
following factors: prospective financing requirements, working capital and
capital expenditure requirements, equity issuance and comparable company
profiles. Changes in historical debt levels are based, in general, on historical
cash flows generated by AT&T Consumer Services Group in relation to total AT&T.
Such cash flows include acquisitions, dividend payments, capital expenditures
and cash flows from operations. For purposes of this allocation, certain
"corporate" activities were deemed to be partially funded by this entity by
contributing proceeds to the parent for these activities. These activities
included the repurchase of common shares by AT&T and cash payments associated
with the TCI merger and the MediaOne acquisition. The interest expense on the
allocated debt was calculated based on a rate intended to be equivalent to the
rate AT&T Consumer Services Group would have received if it were a stand-alone
entity. Long term debt due to AT&T matures in 2004, however, AT&T Consumer
Services Group has the option to repay this debt prior to its stated maturity.
Due to the expected positive operating cash flow of AT&T Consumer Services
Group, the level of debt of AT&T Consumer Services Group in the future is
expected to be significantly lower than the level at December 31, 2001.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS
AT&T Consumer Services 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, 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 Consumer Services
Group believes that of its significant accounting policies, the following may
involve a higher degree of judgment or complexity:
Revenue recognition -- AT&T Consumer Services Group only records
revenue for transactions which are considered to be part of its central,
ongoing operations. AT&T Consumer Services Group recognizes long distance
and local voice services revenue based upon minutes of traffic processed or
contracted fee schedules, including sales of prepaid calling cards.
Customer activation fees, along with the related costs up to but not
exceeding the revenue, are deferred and amortized over the customer
relationship period.
Allowances for doubtful accounts -- AT&T Consumer Services Group
maintains allowances for doubtful accounts for estimated losses which
result from the inability of its customers to make required payments. AT&T
Consumer Services 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
X-28
its estimates, AT&T Consumer Services Group 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 Consumer Services 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 Consumer
Services 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 Consumer Services Group 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 Standard (SFAS) No. 142, "Goodwill and Other Intangible Assets,"
AT&T Consumer Services Group will no longer amortize goodwill, but will
test this asset at least annually for impairment.
Income taxes -- Consolidated income tax provision, related tax
payments or refunds, and deferred tax balances of AT&T have been allocated
to AT&T Consumer Services Group based principally on the taxable income and
tax credits directly attributable to AT&T Consumer Services Group,
essentially a stand-alone presentation. AT&T Consumer Services 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 Consumer Services Group
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 $5 million.
COMBINED RESULTS OF OPERATIONS
The comparison of 2001 results with 2000 was impacted by events that
occurred during these two periods. For example, effective July 1, 2000, the FCC
eliminated Primary Interexchange Carrier Charges, or per-line charges, that AT&T
Consumer Services Group pays for residential and single-line businesses. The
elimination of these per-line charges resulted in lower access expense, as well
as lower revenue, since AT&T Consumer Services Group has historically billed its
customers for these charges.
The comparison of 2000 results with 1999 was impacted by events that
occurred during these two years. For example, on January 5, 2000, AT&T launched
Concert, its global joint venture with BT. AT&T contributed all of its
international cross-border network facilities, the economic value of
approximately 270 AT&T Business Services Group multinational customers
specifically targeted for direct sales by Concert and substantially all
international traffic of AT&T Consumer Services Group. As a result, AT&T
Consumer Services Group's 2000 results do not include the revenue and expenses
associated with international traffic contributed to Concert.
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.
The unwind of Concert closed on April 1, 2002.
In addition, comparison of 2000 results with 1999 was impacted by the
elimination of Primary Interexchange Carrier Charges.
X-29
REVENUE
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------
2001 2000 1999
------- ------- -------
(DOLLARS IN MILLIONS)
Revenue................................................. $15,079 $18,894 $21,753
AT&T Consumer Services Group revenue declined 20.2%, or $3,815 million, in
2001 compared with 2000. The decline was primarily due to an approximate $3,680
million 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 an approximate $500 million impact due to the
elimination of per-line charges in July 2000. Partially offsetting these revenue
declines was revenue growth of approximately $560 million for prepaid card
services and local service. AT&T Consumer Services Group expects product
substitution, competition, including the continued entry of the Regional Bell
Operating Companies into the long distance market, as well as customer migration
to lower-priced calling plans and products, to continue to negatively impact
AT&T Consumer Services Group revenue in 2002.
In 2000, AT&T Consumer Services Group revenue declined 13.1%, or $2,859
million, compared with 1999. Approximately $885 million 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.
OPERATING EXPENSES
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
2001 2000 1999
------ ------ ------
(DOLLARS IN MILLIONS)
Access and other connection................................ $4,040 $5,204 $6,223
Access and other connection expenses decreased 22.4%, or $1,164 million, in
2001 compared with 2000. Included within access and other connection expenses
are costs that AT&T Consumer Services Group 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 $915
million of the decrease was due to lower per-line charges, mandated reductions
in per minute access rates and lower international connection rates. In July
2000, per-line charges that AT&T paid for residential customers were eliminated
by the FCC. Since most of the per-line and minute access-rate charges are passed
through to the customer, these reductions have generally resulted in a
corresponding impact on revenue. Also contributing to the decrease was
approximately $465 million due to lower volumes. Partially offsetting these
declines was higher local connectivity expense of approximately $215 million
primarily due to the expansion of local service in New York and Texas.
In 2002, access and other connection expenses will continue to decline as a
result of lower long distance call volumes, continued mandated reductions in per
minute access rates and lower universal service fund contributions. These
reductions will be partially offset by an increase in local connectivity
expenses primarily due to growth in local services.
X-30
Access and other connection expenses declined $1,019 million, or 16.4%, in
2000 compared with 1999. Approximately $930 million of this decline was driven
by mandated reductions in per-minute access rates in 2000 and decreased per-line
charges. Approximately $295 million of this decline was driven by volume
declines in 2000. These decreases were partially offset by an increase in
Universal Service Fund contributions of about $225 million. In addition, local
connectivity charges increased approximately $175 million, reflecting growth in
the local business.
Costs paid to telephone companies outside of the United States to connect
calls made to countries outside of the United States (international settlements)
also are included within access and other connection expenses. These costs
decreased approximately $195 million in 2000, as a result of the commencement of
operations of Concert. Concert incurred most of AT&T's international
settlements, as well as earned most of AT&T's foreign-billed revenue, previously
incurred and earned directly by AT&T Consumer Services Group. In 2000, Concert
billed AT&T Consumer Services Group a net expense composed of international
settlement (interconnection) expense, administrative fees, and foreign-billed
revenue. The amount charged by Concert in 2000 was lower than interconnection
expense incurred in 1999, since AT&T Consumer Services Group recorded these
transactions as revenue and expense in 1999 as applicable.
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
2001 2000 1999
------ ------ ------
(DOLLARS IN MILLIONS)
Selling, general and administrative........................ $3,805 $4,128 $4,688
Selling, general and administrative (SG&A) expenses decreased 7.8%, or $323
million, in 2001 compared with 2000, primarily due to lower costs associated
with customer care and billing expenses and cost management efforts.
In 2000, SG&A expenses decreased 11.9%, or $560 million, compared with
1999. This reduction was primarily attributed to cost control efforts such as
targeted marketing, consolidation of functions and reduction of support and
corporate staff headcount.
FOR THE YEARS
ENDED DECEMBER 31,
------------------------
2001 2000 1999
------ ------ ------
(DOLLARS IN MILLIONS)
Costs of services and products............................. $2,382 $2,557 $3,316
Costs of services and products expenses include such costs as the transport
costs for utilizing AT&T's network, operator services costs, and the provision
for uncollectible receivables. Costs of services and products decreased 6.8%, or
$175 million, in 2001 compared with 2000. Approximately $135 million of the
decrease was due to lower costs for utilizing AT&T's network, primarily as a
result of lower volumes. An additional $70 million of the decrease was due to
lower operator services costs, also related to lower volumes.
In 2000, costs of services and products decreased 22.9%, or $759 million,
compared with 1999. These declines were due to volume declines and network
cost-control initiatives of approximately $560 million, and the lower provision
for uncollectible receivables of $154 million.
FOR THE YEARS ENDED
DECEMBER 31,
---------------------
2001 2000 1999
----- ----- -----
(DOLLARS IN MILLIONS)
Depreciation and amortization............................... $200 $167 $184
Depreciation and amortization expenses increased 19.8%, or $33 million,
compared with 2000. In 2000, depreciation and amortization expenses decreased
9.2%, or $17 million, compared with 1999. Capital
X-31
expenditures and additions to internal-use software for 2001, 2000 and 1999 were
$140 million, $148 million and $299 million, respectively.
FOR THE YEARS ENDED
DECEMBER 31,
---------------------
2001 2000 1999
----- ----- -----
(DOLLARS IN MILLIONS)
Net restructuring and other charges......................... $31 $97 $7
During 2001, AT&T Consumer Services Group recorded $31 million of net
restructuring and other charges, which represented restructuring and exit costs
in conjunction with AT&T's continued cost reduction initiatives, primarily
related to headcount reductions, including the consolidation of customer care,
fraud investigation centers and call centers. The exit costs represent
termination benefits associated with the separation of 666 employees, 91 of
which were part of voluntary termination plans, and 575 of which were part of
involuntary termination plans. Approximately 25% of the individuals were
management employees and 75% were nonmanagement employees. Approximately 12% 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.
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 Consumer Services Group
expects to yield approximately $37 million of cash savings per year.
Accordingly, there was no benefit to operating income (net of restructuring
charges recorded) in 2001. In subsequent years, the operating income benefit
will increase, due to timing of actual separations, until the completion of the
exit plan at which time AT&T Consumer Services Group expects a benefit to
operating income of approximately $42 million per year.
During 2000, AT&T Consumer Services Group recorded $97 million of net
restructuring and other charges, which included $18 million of asset impairment
charges related to the write-down of unrecoverable assets in certain businesses
where the carrying value was no longer supported by estimated future cash flows
and $79 million for restructuring and exit costs. The restructuring and exit
plans primarily focused on headcount reductions, including the consolidation of
customer care and call centers. Included in exit costs was $79 million of cash
termination benefits associated with the involuntary separation of about 1,300
employees. Approximately 65% of the individuals were management employees and
35% were nonmanagement employees.
During 1999, AT&T Consumer Services Group recorded $7 million of net
restructuring and other charges. This $7 million charge for restructuring and
exit costs was recorded in conjunction with AT&T's initiative to reduce costs.
The restructuring and exit plans primarily focused on the maximization of
synergies through headcount reductions, including the consolidation of customer
care and call centers. The exit costs represent cash termination benefits
associated with the separation of 164 employees as part of involuntary
termination plans. All of the terminations were nonmanagement employees.
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
2001 2000 1999
------ ------ ------
(DOLLARS IN MILLIONS)
Operating income........................................... $4,621 $6,741 $7,335
Operating income decreased 31.4%, or $2,120 million, in 2001 compared with
2000. In 2000, operating income decreased 8.1%, or $594 million, compared with
1999. The decrease in both periods was primarily due to revenue declines,
partially offset by reductions in operating expenses. Operating income margin
(operating income as a percent of revenue) was 30.6%, 35.7% and 33.7% in 2001,
2000 and 1999, 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 Group customers.
However, these customers generate less revenue while the billing, customer care
and
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fixed costs generally remain, resulting in lower operating income margins. AT&T
Consumer Services Group expects the impacts of continued revenue decline to
negatively impact operating income and margins in future periods.
FOR THE YEARS ENDED
DECEMBER 31,
---------------------
2001 2000 1999
----- ----- -----
(DOLLARS IN MILLIONS)
Other income, net........................................... $189 $81 $208
Other income increased 133.3%, or $108 million, in 2001 compared with 2000.
This increase was primarily due to the receipt of $139 million for the
settlement of contract disputes relating to obligations resulting from the sale
of AT&T Universal Card Services to Citigroup in 1998.
Other income decreased 61.1%, or $127 million, in 2000 compared with 1999.
This decrease was primarily due to the 1999 sale of AT&T Consumer Services
Group's Language Line Service business, which resulted in a gain of $153
million.
FOR THE YEARS ENDED
DECEMBER 31,
---------------------
2001 2000 1999
----- ----- -----
(DOLLARS IN MILLIONS)
Interest expense............................................ $154 $164 $41
Interest expense decreased 6.1%, or $10 million, in 2001 compared with
2000. The decrease was attributable to a decrease in the average long-term debt
due to AT&T.
Interest expense increased 300%, or $123 million, in 2000 compared with
1999. The increase was attributable to an increase in the average long-term debt
due to AT&T.
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
2001 2000 1999
------ ------ ------
(DOLLARS IN MILLIONS)
Provision for income taxes................................. $1,783 $2,546 $2,869
The provision for income taxes decreased 30.0%, or $763 million, in 2001
compared with 2000. The provision for income taxes decreased 11.3%, or $323
million, in 2000 compared with 1999. The decrease in both periods was primarily
due to lower income before income taxes.
The effective income tax rate is the provision for income taxes as a
percentage of income before income taxes. The effective income tax rate for AT&T
Consumer Services Group was 38.3%, 38.2%, and 38.2%, in 2001, 2000 and 1999,
respectively. The effective income tax rate is higher than the 35% statutory
federal tax rate principally due to state income taxes, net of federal benefits.
LIQUIDITY
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------
2001 2000 1999
------- ------- -------
(DOLLARS IN MILLIONS)
Cash Flows:
Provided by operating activities...................... $ 3,766 $ 4,787 $ 4,350
(Used in) provided by investing activities............ (139) (132) 1,398
Used in financing activities.......................... (3,626) (4,661) (5,742)
In 2001, net cash provided by operating activities decreased $1,021
million. This decrease was primarily due to a decrease in net income, excluding
the noncash impacts of depreciation and amortization, and a decrease in accounts
payable. These decreases were partially offset by a decrease in accounts
receivable and changes in other operating assets and liabilities.
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In 2000, net cash provided by operating activities increased $437 million
compared with 1999. This increase was primarily due to a lower increase in
accounts receivable and an increase in accounts payable, partially offset by a
decrease in net income excluding the noncash impacts of depreciation and
amortization and the provision for uncollectibles.
Investing activities resulted in a net use of cash of $139 million and $132
million for 2001 and 2000, respectively. The primary use of cash in both years
was for capital expenditures and additions to internal-use software. In 1999,
net cash provided by investing activities of $1,398 million was primarily due to
the repayment of a short-term loan receivable from AT&T.
In 2001, net cash used in financing activities decreased by $1,035 million
primarily as a result of lower contributions to AT&T as well as lower dividend
payments due to the reduction in the AT&T annual dividend rate from $0.88 per
share to $0.15 per share, two-thirds of which is funded by AT&T Consumer
Services Group. These decreases were partially offset by repayments of long-term
debt due to AT&T. In 2000, net cash used in financing activities decreased by
$1,081 million over 1999 primarily due to an increase in long-term debt due to
AT&T, partially offset by higher contributions to AT&T and higher dividend
payments.
Due to the expected positive operating cash flow of AT&T Consumer Services
Group, the level of debt of AT&T Consumer Services Group in the future is
expected to be significantly lower than the level at December 31, 2001.
Accordingly, the interest payments on the debt are expected to significantly
decline.
In 2002, AT&T Consumer Services Group expects to fund operations primarily
with cash from operations. If economic conditions worsen or do not improve
and/or competition and product substitution accelerate beyond current
expectations, AT&T Consumer Services Group's cash flow from operations would
decrease, negatively impacting liquidity.
The following summarizes AT&T Consumer Services Group's contractual
obligations at December 31, 2001, and the effect such obligations are expected
to have on liquidity and cash flow in future periods.
AFTER
LESS THAN 2-3 4-5 5
TOTAL 1 YEAR YEARS YEARS YEARS
------ --------- ------ ----- -------
DOLLARS IN MILLIONS
Long-term debt............................. $ 978 $ -- $ 978 $ -- $--
Unconditional purchase obligations(a)...... 922 391 428 103 --
------ ---- ------ ---- ---
Total contractual cash obligations......... $1,900 $391 $1,406 $103 $--
---------------
(a) AT&T has contracted obligations to utilize network facilities from local
exchange carriers with terms greater than one year that AT&T Consumer
Services Group operates under. These contracts are based on volumes and have
penalty fees if certain volume levels are not met. AT&T would incur
penalties to exit these contracts in any given year in the amount of
approximately $1.5 billion. A portion of any penalties associated with these
contracts could be attributed to AT&T Consumer Services Group.
AT&T'S BOARD OF DIRECTORS HAS THE POWER TO MAKE DETERMINATIONS THAT MAY IMPACT
THE FINANCIAL AND LIQUIDITY POSITION OF EACH OF ITS TRACKING STOCK GROUPS. THIS
POWER INCLUDES THE ABILITY TO SET PRIORITIES FOR USE OF CAPITAL AND DEBT
CAPACITY, TO DETERMINE CASH MANAGEMENT AND DIVIDEND POLICIES AND TO MAKE
DECISIONS REGARDING WHETHER TO MAKE CAPITAL EXPENDITURES AND AS TO THE TIMING
AND AMOUNT OF ANY CAPITAL EXPENDITURES. ALL ACTIONS BY THE BOARD OF DIRECTORS
ARE SUBJECT TO THE BOARD MEMBERS FIDUCIARY DUTIES TO ALL SHAREHOLDERS OF AT&T AS
A GROUP, NOT JUST TO HOLDERS OF A PARTICULAR CLASS OF TRACKING STOCK, TO AT&T'S
POLICY STATEMENTS, BY-LAWS AND INTER-COMPANY AGREEMENTS. AS A RESULT OF
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THIS DISCRETION OF AT&T'S BOARD OF DIRECTORS, IT MAY BE DIFFICULT FOR INVESTORS
TO ASSESS EACH GROUP'S LIQUIDITY AND CAPITAL RESOURCE NEEDS AND IN TURN THE
FUTURE PROSPECTS OF EACH GROUP BASED ON PAST PERFORMANCE.
FINANCIAL CONDITION
AT DECEMBER 31,
----------------------
2001 2000
--------- ----------
(DOLLARS IN MILLIONS)
Total assets................................................ $2,344 $ 3,543
Total liabilities........................................... 2,627 6,084
Combined attributed net (liabilities) assets................ (283) (2,541)
Total assets decreased 33.8%, or $1,199 million, during 2001. The decrease
in total assets was primarily associated with a decrease in accounts receivable,
reflecting lower revenue.
Total liabilities decreased 56.8%, or $3,457 million during 2001. This
decrease was primarily due to the repayment of $3,022 million of long-term debt
due to AT&T and a decrease in accounts payable.
Total combined attributed net liabilities decreased $2,258 million in 2001,
reflecting net income of $2,873 million, partially offset by dividends of $360
million and contributions to AT&T of $255 million.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations," which superceded Accounting Principles Board
(APB) Opinion No. 16. SFAS No. 141 requires all business combinations initiated
after June 30, 2001 be accounted for under the purchase method. In addition,
SFAS No. 141 establishes criteria for the recognition of intangible assets
separately from goodwill. The adoption of SFAS No. 141 will not have a material
effect on AT&T Consumer Services Group'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 superceded APB Opinion No. 17. Under SFAS No. 142,
goodwill and indefinite-lived intangible assets will no longer be amortized, but
rather will be tested for impairment upon adoption and at least annually
thereafter. In addition, the amortization period of intangible assets with
finite lives will no longer be limited to 40 years. SFAS No. 142 is effective
for AT&T Consumer Services Group as of January 1, 2002. In connection with the
adoption of this standard, AT&T Consumer Services Group's unamortized goodwill
balance will no longer be amortized, but will continue to be tested for
impairment. The goodwill balance at December 31, 2001 was $70 million, and the
related amortization in 2001 was $9 million. In accordance with SFAS No. 142,
the goodwill was tested for impairment by comparing the fair value of AT&T
Consumer Services Group to its carrying value. As of January 1, 2002, the fair
value of AT&T Consumer Services Group exceeded its carrying value, therefore no
impairment loss will be recognized upon implementation.
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
Consumer Services Group, this means the standard will be adopted on January 1,
2003. AT&T Consumer Services Group does not expect
X-35
that the adoption of this statement will have a material impact on AT&T Consumer
Services Group's results of operations, financial position or cash flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which superceded 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 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 Consumer Services
Group as of January 1, 2002. The adoption of SFAS No. 144 will not have a
material impact on AT&T Consumer Services Group's results of operations,
financial position or cash flows.
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RELATIONSHIP BETWEEN THE AT&T GROUPS
AT&T shareholders should read the by-law amendment relating to the AT&T
Groups capital stock committee and the AT&T Groups policy statement, copies of
which are attached as Annexes N and O, respectively, to this document.
THE AT&T GROUPS CAPITAL STOCK COMMITTEE
Upon creation and issuance of AT&T Consumer Services Group tracking stock,
AT&T will amend AT&T's by-laws to establish an AT&T Groups capital stock
committee of the AT&T Board to oversee the interaction among the businesses of
the AT&T groups. The members of the AT&T Groups capital stock committee will be
independent directors selected by the AT&T Board. The by-law amendment provides
that the AT&T Board will delegate to the AT&T Groups capital stock committee
authority to:
- interpret, make determinations under and oversee the implementation of
the policies described in the Policy Statement Regarding AT&T Groups
Tracking Stock Matters described under "-- The AT&T Groups Policy
Statement;"
- review the policies, programs and practices of AT&T relating to:
-- business and financial relationships of the AT&T groups, and
-- any matters arising in connection with any of the foregoing, all to the
extent the AT&T Groups capital stock committee may deem appropriate;
and
- recommend changes in the policies, programs and practices that the AT&T
Groups capital stock committee may deem appropriate.
The AT&T Groups capital stock committee will have and may exercise other
powers, authority and responsibilities as the AT&T Board may determine from time
to time.
However, there will not be a separate board of directors for AT&T Consumer
Services Group and the AT&T Groups capital stock committee will not function as
a board of directors for AT&T Consumer Services Group tracking stock. Under
existing law, neither the AT&T Board nor the AT&T Groups capital stock committee
owes a separate fiduciary duty to the holders of AT&T Consumer Services Group
tracking stock apart from the general duty that is owed to all AT&T shareholders
as a whole.
Although the AT&T Board has no present intention to do so, it may modify,
suspend or rescind the by-law amendment or adopt additional by-laws, at any
time, without the approval of AT&T shareholders, subject to the AT&T Board's
fiduciary duties.
THE AT&T GROUPS POLICY STATEMENT
In connection with the creation and issuance of AT&T Consumer Services
Group tracking stock, AT&T will, effective upon issuance of AT&T Consumer
Services Group tracking stock, adopt the AT&T Groups policy statement.
GENERAL POLICY
The AT&T Board has determined that all material matters in which holders of
AT&T common stock and AT&T Consumer Services Group tracking stock may have
divergent interests generally will be resolved in a manner that is in the best
interests of AT&T and all AT&T common shareholders as a whole after giving fair
consideration to the potentially divergent interests and all other relevant
interests of the holders of the separate classes of AT&T common shares. Under
the AT&T Groups policy statement, the relationships between AT&T groups and the
means by which the terms of any material transactions among them will be
determined will be governed by a process of fair dealing.
X-37
RELATIONSHIP BETWEEN AT&T GROUPS
The AT&T Groups policy statement provides that AT&T will seek to manage
AT&T groups in a manner that maximizes the operational performance and value of
all AT&T groups taken as a whole, even though in certain circumstances actions
could disproportionately impact an individual group; provided, however, that
such disproportionate actions will not, in the aggregate, have an adverse
material impact on the results of operations or financial position of either
group.
General. Subject to special arrangements or existing commercial
arrangements in effect at the time the AT&T Groups policy statement is adopted
(and renewals or extensions thereof), the AT&T Groups policy statement provides
that, except as otherwise provided in the AT&T Groups policy statement, all
material commercial transactions among the AT&T groups will be on commercially
reasonable terms taken as a whole, and will be subject to the review and
approval of the AT&T Groups capital stock committee.
The AT&T groups may make loans to each other 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. AT&T expects that AT&T Consumer Services Group
will make such loans from time to time to AT&T Business Services Group. For
example, AT&T Consumer Services Group may loan funds to AT&T Business Services
Group to continue to upgrade its network and make new functions and features
available on the network.
For shared corporate services that arise as a result of being part of a
combined entity, including securities filing and financial reporting services,
costs relating to these services will be:
- allocated directly to the AT&T group utilizing those services, and
- if not directly allocable to an AT&T group, allocated between the AT&T
groups on a fair and reasonable basis as the AT&T Board determines.
For other support services, the AT&T Groups policy statement provides that
the AT&T groups will seek to achieve enterprise efficiencies to reduce the
aggregate costs incurred by the AT&T groups on a combined basis.
CORPORATE OPPORTUNITIES
The AT&T Groups policy statement provides that the AT&T Board will allocate
any business opportunities and operations, any acquired assets and businesses
and any assumed liabilities between the AT&T groups, in whole or in part, as it
considers to be in the best interests of AT&T and AT&T shareholders as a whole
and as contemplated by the other provisions of the AT&T Groups policy statement.
If a business opportunity or operation, an acquired asset or business, or an
assumed liability would be suitable to be undertaken by or allocated to more
than one AT&T group, the AT&T Board will allocate it using its business judgment
or in accordance with procedures that the AT&T Board adopts from time to time to
ensure that decisions will be made in the best interests of AT&T and AT&T
shareholders as a whole. Any allocation of this type may involve the
consideration of a number of factors that the AT&T Board determines to be
relevant, including, without limitation, whether the business opportunity or
operation, the acquired asset or business, or the assumed liability is
principally within the existing scope of an AT&T group's business and whether an
AT&T group is comparatively better positioned to undertake or have allocated to
it the business opportunity or operation, acquired asset or business or assumed
liability.
Except under the AT&T Groups policy statement and any other policies
adopted by the AT&T Board, and except as may arise under branding agreements and
arrangements, neither AT&T group will have any duty, responsibility or
obligation to refrain from:
- engaging in the same or similar activities or lines of business as any
member of the other AT&T group;
X-38
- doing business with any potential or actual supplier, competitor or
customer of any member of the other AT&T group; or
- engaging in, or refraining from, any other activities whatsoever relating
to any of the potential or actual suppliers or customers of any member of
the other AT&T group.
In addition, except under the AT&T Groups policy statement and any other
policies adopted by the AT&T Board, neither AT&T group will have any duty,
responsibility or obligation:
- to communicate or offer any business or other corporate opportunity to
any other person, including any business or other corporate opportunity
that may arise that more than one AT&T group may be financially able to
undertake, and that is, from its nature, in the line of more than one
AT&T group's business and is of practical advantage to more than one AT&T
group;
- to provide financial support to the other AT&T group, or any member of
the other AT&T group, except as described under "-- Relationship with
AT&T Business Services Group -- Financing Arrangements;" or
- otherwise to assist the other AT&T group.
Under no circumstances will any members of either AT&T group be prevented
from entering into written agreements with the other AT&T group to define or
restrict any aspect of the relationship between the AT&T groups.
DIVIDEND POLICY
The AT&T Groups policy statement provides that, subject to the limitations
on dividends set forth in AT&T's charter, including any preferential rights of
any series of AT&T preferred stock, and to the limitations of applicable law,
holders of shares of any class of AT&T common stock will be entitled to receive
dividends on that AT&T stock when, as and if the AT&T Board authorizes and
declares dividends on that AT&T stock. The payment of dividends on any class of
AT&T common stock will be a business decision that the AT&T Board makes from
time to time based on the results of operations, financial condition, cash
requirements and future prospects of AT&T and other factors that the AT&T Board
considers relevant. Payment of dividends on any class of AT&T common stock also
may be restricted by loan agreements, indentures and other transactions that
AT&T enters into from time to time.
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 will be
allocated to AT&T Consumer Services Group tracking stock in a manner to be
determined by the AT&T Board. The available dividend amount for AT&T Consumer
Services Group tracking stock will be designed to be equivalent to 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. The
declaration of dividends by AT&T and the amount of that dividend will, however,
be in the discretion of the AT&T Board, and will depend upon the AT&T groups'
financial performance, the dividend policies and capital structures of
comparable companies and each AT&T group's ongoing capital needs. If and when
the AT&T Board determines to pay any dividends on shares of AT&T Consumer
Services Group tracking stock, the AT&T Groups policy statement provides that
this determination also will be subject to factors similar to those described
above with respect to the payment of dividends on each class of AT&T common
stock.
AT&T GROUPS CAPITAL STOCK COMMITTEE
AT&T's bylaws will provide for the AT&T Groups capital stock committee of
the AT&T Board. In making determinations in connection with the policies set
forth in the AT&T Groups policy statement, the members of the AT&T Board and the
AT&T Groups capital stock committee will act in a fiduciary capacity and in
accordance with legal guidance concerning their respective obligations under
applicable
X-39
law. The delegation of responsibilities to the AT&T Groups capital stock
committee will be subject to changes the AT&T Board may determine.
AMENDMENT AND MODIFICATION TO THE AT&T GROUPS POLICY STATEMENT
The AT&T Board may modify, suspend or rescind the policies set forth in the
AT&T Groups policy statement, including any resolution implementing the
provisions of the AT&T Groups policy statement. The AT&T Board also may adopt
additional or other policies or make exceptions with respect to the application
of the policies described in the AT&T Groups policy statement in connection with
particular facts and circumstances, all as the AT&T Board may determine,
consistent with its fiduciary duties to AT&T and AT&T shareholders as a whole.
RELATIONSHIP WITH AT&T BUSINESS SERVICES GROUP
BRANDING
AT&T will continue to own and manage all AT&T brands, and AT&T Consumer
Services Group will have the right, on a royalty-free basis, to continue to use
certain of the AT&T brands, including the AT&T globe design and the AT&T trade
dress, which we collectively refer to as "AT&T Consumer Services brands," in
accordance with a brand agreement. Under the brand agreement, AT&T Consumer
Services Group will be entitled to use AT&T Consumer Services brands for the
provision of stand-alone residential long distance services, prepaid consumer
calling card services, consumer calling card services, operator-assisted
international telephone services for consumer travelers, certain DSL-based
communications services, residential local telephony services, consumer dial-up
narrow-band Internet access services and consumer high-speed Internet access
services, and certain portals, content, equipment and software, and for bundles
of the foregoing offered by AT&T Consumer Services Group. The rights of AT&T
Consumer Services Group under the brand agreement will remain in effect while
AT&T Consumer Services Group tracking stock remains outstanding. After that
time, AT&T Consumer Services Group will no longer be able to use the AT&T
Consumer Services brands unless the parties agree on a mutually acceptable
arrangement at the time. The "rollover" of the AT&T Consumer Services Group
tracking stock into a comparable tracking stock of another company, the
redemption of the AT&T Consumer Services Group tracking stock for any reason or
the failure of these shares to remain outstanding for any other reason will
result in the termination of these rights.
Under the brand agreement, AT&T Consumer Services Group's rights to use the
AT&T Consumer Services brands in connection with the foregoing services provided
(directly or indirectly) and billed to consumers will be exclusive domestically
(subject to preexisting agreements, AT&T's right to use the brand with all
customers in Alaska, and any applicable legal requirements) and nonexclusive
internationally. The agreement will establish principles to delineate whether
particular customers for certain services are within the brand scope of AT&T
Business Services Group or AT&T Consumer Services Group.
The territory of the brand agreement generally will be worldwide, with
exceptions where AT&T already has granted brand license agreements or where
another AT&T unit has exclusive brand rights for competing services. Subject to
certain conditions set forth in the brand agreement, AT&T Consumer Services
Group also may extend certain rights to use the AT&T Consumer Services brands to
authorized dealers of AT&T Consumer Services Group's services. The brand
agreement will provide that AT&T Consumer Services Group must comply with
specified quality, customer care, graphics and marketing standards and
guidelines to avoid confusion in connection with the use of the AT&T Consumer
Services brands. It also will provide that, for so long as AT&T Consumer
Services Group uses the AT&T Consumer Services brands, it will pay AT&T a brand
maintenance fee for the administration, protection and promotion of the AT&T
Consumer Services brands.
X-40
INTELLECTUAL PROPERTY
Intellectual property will generally continue to be managed by the AT&T
group that has managed it historically. Each AT&T group will have the right to
use certain intellectual property managed by the other AT&T group, or with
respect to which either AT&T group has the power to grant these rights, in
accordance with an intellectual property agreement. Rights under future
intellectual property will be governed by sponsored development agreements that
may, or may not, be entered into by the AT&T groups. Pursuant to any sponsored
development agreement, the AT&T group that performed the work would own the
newly developed intellectual property and the funding group would be granted
perpetual, paid-up rights necessary to use the development on a worldwide basis
as well as certain rights designed to secure a competitive advantage.
The intellectual property agreement to be entered into by AT&T Consumer
Services Group will specify the ownership and license rights in existing
patents, patents that may result from pending patent applications, software,
copyrights and trade secrets. AT&T Consumer Services Group will have a
nonexclusive, fully paid-up, worldwide, perpetual license under such patents to
make, use and sell all products and services in the conduct of its present and
future business. AT&T Consumer Services Group also will have special rights
under those patents, for defensive protection, special affiliate licensing and
supplier licensing. Each AT&T group will own all of the software, trade secrets
and copyrights that it created prior to the effective date of the intellectual
property agreement. Each AT&T group will grant to the other AT&T group a
nonexclusive, fully paid-up, worldwide, perpetual license to use the AT&T
group's software, trade secrets, excluding customer information and other
commercial information that relates solely to one of the units, and copyrights
that the other AT&T group possesses as of the effective date of the intellectual
property agreement. Proprietary information related to an AT&T group's customers
will receive special protection under the intellectual property agreement. The
provisions with respect to intellectual property were intended to apply so long
as AT&T Consumer Services Group remains an affiliate of AT&T and the shares of
AT&T Consumer Services Group tracking stock are outstanding. In the event that
this relationship were to change, the provisions of those agreements would be
renegotiated between AT&T Consumer Services Group and AT&T.
COMMERCIAL TRANSACTIONS BETWEEN AT&T GROUPS
AT&T intends that, except as otherwise provided in the AT&T Groups policy
statement, all commercial transactions between the AT&T groups will be on
commercially reasonable terms taken as a whole. AT&T expects the AT&T groups
will negotiate and develop their arrangements over time, and that these
arrangements will be subject to the review and approval of the AT&T Groups
capital stock committee, either at the time of execution or as part of periodic
reviews.
There will be two network agreements between AT&T Consumer Services Group
and AT&T.
- Master Carrier Agreement. The master carrier agreement will specify the
rates, terms and conditions on which Network Services within AT&T
Business Services Group will provide voice, data, IP dial-up access and
other services to AT&T Consumer Services Group, both for internal
corporate purposes and for resale to other customers. AT&T Consumer
Services Group will procure all of its telecommunications needs during
the 3-year term of the agreement directly from Network Services within
AT&T Business Services Group. Pricing of such services will be based on
the costs to Network Services of providing those services, unless
otherwise agreed, and the agreement will contain provisions assuring that
AT&T Consumer Services Group is treated no less favorably than AT&T
Business Services Group with respect to the allocation of costs between
the units, including a fair allocation of any low cost capacity that
Network Services provides or obtains. In addition, in those circumstances
where substantial new investment is required, the agreements will contain
provisions covering the responsibility for deploying assets and the
mechanisms for recovering that investment. In addition, after the initial
term of the agreement, the parties expect to enter into a comparable
cost-based agreement that will provide that AT&T Consumer Services Group
will
X-41
procure all of its telecommunications services from Network Services
within AT&T Business Services Group as long as AT&T Consumer Services
Group tracking stock remains outstanding.
- Intercarrier Compensation Agreement. The intercarrier compensation
agreement will specify that, during the 3-year term of the agreement,
AT&T Business Services Group and AT&T Consumer Services Group will
provide, on a "bill and keep basis" (without any compensation), services
concerning:
-- the origination and termination of interexchange traffic, and
-- the exchange of local traffic between each other's local customers.
In addition, there will be a number of other agreements governing the provision
of other services between AT&T Consumer Services Group and AT&T Business
Services Group.
REALLOCATION OF ASSETS AND LIABILITIES
AT&T may reallocate assets and liabilities between the AT&T groups in
exchange for an increase or decrease in the retained portion of value held by
AT&T Business Services Group. Any reallocations of assets and liabilities
between the AT&T groups that do not result in this adjustment, other than
reallocations made under a contract for the provision of goods or services
between the AT&T groups, will be accompanied by:
- the reallocation by one AT&T group to the other AT&T group of other
assets, liabilities or consideration,
- the creation of inter-group debt owed by one AT&T group to the other AT&T
group, or
- the reduction of inter-group debt owed by one AT&T group to the other
AT&T group,
in each case, in an amount having a fair market value, in the judgment of the
AT&T Board, equivalent to the fair market value of the assets or liabilities, as
applicable, reallocated.
FINANCING ARRANGEMENTS
Loans between AT&T groups will be made at interest rates and on other terms
and conditions designed to be substantially equivalent to the interest rates and
other terms and conditions that the borrowing AT&T group would be able to obtain
from third parties, including the public markets, as a non-affiliate of AT&T
without the benefit of any guaranty by AT&T or any member of either AT&T group.
This policy contemplates that these loans will be made on the basis set forth
above, regardless of the interest rates and other terms and conditions on which
AT&T or members of any AT&T group may have acquired the funds. If, however, an
AT&T group incurs any fees or charges in order to keep available funds for use
by the other AT&T group, those fees or charges will be allocated to the
borrowing AT&T group.
In the case of AT&T Consumer Services Group, the financial statements
included elsewhere in this document make no distinction between the inter-group
rate and the cost at which AT&T historically was able to raise funds in the
external market. AT&T believes that the inter-group rate is a reasonable
estimate of the rate of borrowing in the external market. However, in the
future, AT&T Consumer Services Group may be charged interest at a rate higher or
lower than its current rate. The actual rates of interest charged or paid by
AT&T Consumer Services Group in the future is uncertain, and will depend on a
variety of factors, including the credit profile of AT&T Consumer Services Group
and market conditions. As a result, future interest rates charged or paid by
AT&T Consumer Services Group may materially exceed those reflected in the
financial statements included elsewhere in this document.
Although AT&T may borrow funds and provide the proceeds to AT&T Consumer
Services Group on the terms and conditions described above, AT&T expects that
AT&T Consumer Services Group will from time to time loan or otherwise make
available funds to AT&T Business Services Group, on commercially reasonable
terms. AT&T expects that AT&T Business Services Group will use these funds to
repay debt
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and for other general corporate purposes, including to continue to upgrade its
network and make new features and functions available on the network. To the
extent that any of the cash flow of AT&T Consumer Services Group is loaned or
otherwise made available to AT&T Business Services Group, fewer funds may be
immediately available to support new activities of AT&T Consumer Services Group.
ACCOUNTING MATTERS
Following the issuance of shares of AT&T Consumer Services Group tracking
stock, AT&T will continue to prepare financial statements in accordance with
generally accepted accounting principles, consistently applied, for AT&T
Consumer Services Group, as well as full consolidated financial statements of
AT&T. The financial statements and information for each of the AT&T groups
principally will reflect the financial position, results of operations and cash
flows of the businesses included in those AT&T groups, respectively.
Notwithstanding any allocation of assets or liabilities for dividend purposes or
the purpose of preparing AT&T group financial statements, holders of AT&T common
stock and holders of AT&T Consumer Services tracking stock will continue to be
subject to risks associated with an investment in a single corporation and all
of AT&T's businesses, assets and liabilities.
TAX SHARING AGREEMENT
Prior to issuance of any shares of AT&T Consumer Services Group tracking
stock, AT&T Consumer Services Group and AT&T Business Services Group will enter
into a tax sharing agreement that will provide for tax sharing payments between
AT&T Consumer Services Group and AT&T Business Services Group based on the taxes
or tax benefits of a hypothetical affiliated group consisting of AT&T Consumer
Services Group and AT&T Business Services Group. Each of AT&T Consumer Services
Group and AT&T Business Services Group shall generally be responsible for the
taxes attributable to its lines of business and entities comprising its group as
of such date.
Under the tax sharing agreement between AT&T Consumer Services Group and
AT&T Business Services Group, the consolidated tax liability before credits of
the hypothetical group will be allocated to each of AT&T Consumer Services Group
and AT&T Business Services Group and based on each of AT&T Consumer Services
Group's and AT&T Business Services Group's contribution to consolidated taxable
income of the hypothetical group. This allocation will take into account losses,
deductions and other tax attributes, such as capital losses or charitable
deductions, 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 Consumer
Services Group and AT&T Business Services Group consistent with the allocations
under the tax sharing agreement. In addition, under the tax sharing agreement,
AT&T Consumer Services Group will be responsible for all tax items, and benefits
from all tax benefits, resulting from the attribution of assets or interests to
AT&T Consumer Services Group, or transfer to a legal entity that is a member of
such group of assets, as well as any tax items and benefits resulting from the
distribution of the stock of any company the assets of which are tracked by AT&T
Consumer Services Group tracking stock. Except as described in the following
sentence, tax items or tax benefits arising from or related to assets or
interests that are not tracked by AT&T Consumer Services Group tracking stock
will be for the account of AT&T Business Services Group. A percentage of AT&T's
contingent tax 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 Common Stock. This
percentage may differ in the case of different categories of contingent tax
liabilities.
The tax sharing payments under the tax sharing agreement assume that the
members of AT&T Consumer Services Group and AT&T Business Services Group are
members of the same affiliated, consolidated, combined or unitary group for the
relevant U.S. federal, state or local or foreign income tax purposes with
respect to taxable periods ending after the issuance of the shares of AT&T
Consumer Services Group tracking stock. It is possible, however, that the
Internal Revenue Service may assert that
X-43
AT&T Consumer Services Group tracking stock is not stock of AT&T, in which case
each of AT&T Consumer Services Group and AT&T Business Services Group may not be
members of the same U.S. federal income tax affiliated group filing consolidated
returns. AT&T believes that it is unlikely that the Internal Revenue Service
would prevail on that view, but no assurance can be given in that regard. AT&T
Consumer Services Group will be responsible, under the tax sharing agreement,
for any corporate-level taxes resulting from the treatment of AT&T Consumer
Services Group tracking stock as not stock of AT&T, and any corporate-level
taxes on the actual or deemed disposition of assets caused by the issuance of
AT&T Consumer Services Group tracking stock.
Except as described above with respect to contingent tax liabilities,
non-income tax liabilities generally will be allocated based on line of business
as of the issue date. As between AT&T Consumer Services Group and AT&T Business
Services Group, if the tax liability is associated with a particular line of
business, but the portion of the tax liability associated with the line of
business is not readily determinable, then the tax liability will be shared
between the businesses based on an allocation formula.
With respect to taxes resulting from audit adjustments, other than those
relating to characterization of tracking stock as not stock of AT&T, except as
described above with respect to contingent tax liabilities, tax liabilities
generally will be allocated between AT&T Consumer Services Group and AT&T
Business Services Group based on line of business.
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THE INCENTIVE PLAN PROPOSAL
GENERAL
AT&T currently issues stock-based awards to its employees and non-employee
directors under the AT&T 1997 Long Term Incentive Program. AT&T shareholders
approved this plan in 1997 and approved amendments to the plan in 1999 and 2000.
As of January 1, 2002, this plan authorized a total of approximately 351.4
million shares of AT&T common stock for stock-based awards consisting of:
- stock options, including incentive stock options, or ISOs, under the
Code,
- stock appreciation rights, or SARs, in tandem with stock options or
free-standing,
- restricted stock,
- performance shares and performance units conditioned upon meeting
performance criteria, and
- other awards of stock or awards valued, in whole or in part, by reference
to, or otherwise based on, stock or other property of AT&T, or other
stock unit awards.
In connection with any award or any deferred award, payments also may be made
representing dividends or their equivalent.
In anticipation of the issuance of AT&T Consumer Services Group tracking
stock, the AT&T Board has approved the adoption of the AT&T Consumer Services
Group 2002 Long Term Incentive Program, or Consumer Services incentive plan,
subject to the approval of AT&T shareholders.
Approval of the Consumer Services incentive plan requires a majority of the
votes cast by all outstanding shares of AT&T common stock to vote in its favor.
THE AT&T BOARD RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE CONSUMER SERVICES
INCENTIVE PLAN. Any shares not voted, whether by abstention, broker non-vote or
otherwise, will have no effect on the approval of the Incentive Plan proposal.
The AT&T Board will not implement the Consumer Services incentive plan
unless its shareholders approve the corresponding Consumer Services charter
amendment proposal.
The 1997 incentive plan, and a number of additional compensation plans,
under which stock-based awards with respect to AT&T common stock are
outstanding, are administered by the Compensation and Employee Benefits
Committee of the AT&T Board, subject to delegations by the Compensation and
Employee Benefits Committee to AT&T's Chairman and Chief Executive Officer,
committees comprised of other AT&T senior officers or other compensation
committees that may be designated in the additional plans. If approved, the
Consumer Services incentive plan is expected to be administered in the same
manner.
DESCRIPTION OF THE CONSUMER SERVICES INCENTIVE PLAN
Administration and Eligibility. The Consumer Services incentive plan will
be administered by a committee, each of the members of which is a "non-employee
director" as defined in the Securities Exchange Act of 1934, as amended, and an
"outside director" as defined in the Code. Under the Consumer Services incentive
plan, the committee has the authority to select employees to whom awards are
granted, to determine the types of awards and the number of shares covered, and
to set the terms, conditions, and provisions of these awards and to cancel or
suspend awards. In each case, the committee is authorized to interpret the
incentive plan and to establish, amend, and rescind any rules and regulations
relating to the incentive plan, to determine the terms and provisions of any
agreements entered into under the incentive plan, and to make all other
determinations which may be necessary or advisable for the administration of the
plan. Prospectively, all active employees and non-employee directors and certain
former employees and former non-employee directors of AT&T and its subsidiaries
and other affiliates are eligible to be participants in the Consumer Services
incentive plan.
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Shares Subject to Plan. Subject to adjustment as described below, the
following shares will be available for awards granted under the Consumer
Services incentive plan during its term:
- 10% of the total number of outstanding shares of AT&T Consumer Services
Group tracking stock, provided that the number of shares available for
awards other than stock options shall not exceed 50% of the total number
of shares available for awards.
As defined in the plan, the term "outstanding" includes:
- the total issued and outstanding shares of AT&T Consumer Services Group
tracking stock, plus
- the number of shares of AT&T Consumer Services Group tracking stock
represented by the retained portion of the interest held by AT&T on the
particular reference date.
If another company is acquired by AT&T, or combines with AT&T, any shares
of AT&T Consumer Services Group tracking stock issued or reserved for issuance
as a result of the assumption or substitution of outstanding grants of the
acquired company would not be deemed issued under the incentive plan and would
not be subtracted from the shares of AT&T Consumer Services Group tracking stock
available for grant under the incentive plan. If any shares subject to any award
under the Consumer Services incentive plan are forfeited, or such award is
settled for cash, or expires, or is otherwise terminated without issuance of
shares, the shares subject to such award will again be available for grant under
that incentive plan. The number of shares available for awards under the
Consumer Services incentive plan will also increase by the number of shares AT&T
withholds or tenders in connection with the payment of the exercise price of an
option or other award under the Consumer Services incentive plan or the
satisfaction of tax withholding obligations. The shares of stock deliverable
under the Consumer Services incentive plan may consist in whole or in part of
authorized and unissued shares, treasury shares, or shares purchased in the open
market, or otherwise.
Stock Options. The price per share of stock purchasable under any stock
option will be determined by a committee, but will not be less than 100% of the
fair market value of the stock on the date of the grant of such option.
Substitute awards or adjustment awards will have a purchase price intended to
preserve the economic value of the award that was replaced or adjusted. The term
of each option will be fixed by the committee. Options will be exercisable at
such time or times as determined by the committee, but no stock option will be
exercisable after the expiration of ten years from the date the option is
granted.
Stock Appreciation Rights. An SAR may be granted free-standing or in
tandem with new options or after the grant of a related option that is not an
ISO. Upon exercise of an SAR, the holder of that SAR is entitled to receive the
excess of the fair market value of the shares for which the right is exercised,
calculated as of the exercise date or, if the committee shall so determine in
the case of any SAR, not related to an ISO, as of any time during a specified
period before the exercise date, over the grant price of the SAR. The grant
price, which will not be less than the fair market value of the shares on the
date of grant, and other terms of the SAR will be determined by the committee.
Payment by AT&T upon exercise of an SAR will be in cash, stock, other property
or any combination, as the committee determines. Unless otherwise determined by
the committee, any related option will no longer be exercisable to the extent
the SAR has been exercised and the exercise of an option will cancel the related
SAR to the extent of the exercise.
Restricted Stock. Restricted stock may not be disposed of by the recipient
until restrictions established by the committee lapse. Any award of restricted
stock which become nonforfeitable solely after the passage of time will have a
restriction period of no less than three years. Recipients of restricted stock
are not required to provide consideration other than the rendering of services
or the payment of any minimum amount required by law. The participant will have,
with respect to restricted stock, all of the rights of a shareholder of AT&T,
including the right to vote the shares, and the right to receive any cash
dividends, unless the committee determines otherwise. Upon termination of
employment during the restriction period, all restricted stock shall be
forfeited, subject to such exceptions, if any, as are authorized by the
committee.
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Performance Awards. From time to time, the committee may select a period
during which performance criteria determined by the committee are measured for
the purpose of determining the extent to which a performance award has been
earned. Performance awards may be in the form of performance shares, which are
units valued by reference to shares of stock, or performance units, which are
units valued by reference to cash or property other than stock. Performance
awards may be paid in cash, stock, other property, or a combination thereof.
Recipients of performance awards are not required to provide consideration other
than the rendering of service or the payment of any minimum amount required by
law.
Other Stock Unit Awards. The committee is authorized to grant other stock
unit awards to participants, either alone or in addition to other awards granted
under the Consumer Services incentive plan. Other stock unit awards may be paid
in tracking stock, cash, or any other form of property as the committee
determines.
Performance Accelerated Restricted Stock Awards. The committee may grant
awards that combine the characteristics of restricted stock or other stock unit
awards with those of performance awards, for example by providing that the
vesting of a restricted stock unit award could be accelerated if specified
performance criteria determined by the committee are met.
Nonassignability of Awards. Unless the committee determines otherwise at
the time of an award, no award granted under the Consumer Services incentive
plan may be assigned, transferred, pledged or otherwise encumbered by a
participant, other than by will, by designation of a beneficiary after death, or
by the laws of descent and distribution. Each award will be exercisable, during
the participant's lifetime, only by the participant, or, if permissible under
applicable law, by the participant's guardian or legal representative.
Deferrals of Awards. The committee may permit participants to defer the
distribution of all or part of the specified stock, cash or other consideration
in accordance with the terms and conditions as the committee shall establish.
Adjustments. In the event of any change affecting the shares of AT&T
Consumer Services Group tracking stock subject to the Consumer Services
incentive plan by reason of any stock dividend or split, recapitalization,
reorganization, merger, consolidation, spin-off, combination, or exchange of
shares or other corporate change, or any distributions to common shareholders
other than cash dividends, the committee will substitute or adjust the aggregate
number or class of shares that may be distributed under the Consumer Services
incentive plan, including the substitution of similar options to purchase shares
of, or other awards denominated in shares of, another company, and substitute or
adjust the number, class, and option price or other price of shares subject to
the outstanding awards granted under the Consumer Services incentive plan as the
committee deems to be appropriate to maintain the purpose of the original grant.
The committee will be authorized to make adjustments in performance award
criteria or in the terms and conditions of other awards in recognition of
unusual or nonrecurring events affecting AT&T or AT&T's financial statements or
changes in applicable laws, regulations or accounting principles. The committee
may correct any defect, supply any omission or reconcile any inconsistency in
the Consumer Services incentive plan or any award in the manner and to the
extent it shall deem desirable to carry the incentive plan into effect.
Amendment and Termination. The AT&T Board may assume responsibilities
otherwise assigned to the committee under the Consumer Services incentive plan
and may amend, alter, or discontinue the Consumer Services incentive plan or any
portion of the Consumer Services incentive plan at any time. The committee may
amend the terms of any award granted under the Consumer Services incentive plan,
prospectively or retroactively.
Effective Date. The Consumer Services incentive plan will become effective
on the date shareholder approval is obtained.
Plan Benefits. Because the Consumer Services incentive plan is
discretionary and based on AT&T's financial performance, it is not possible to
determine or to estimate the benefits or amounts that will be
X-47
received in the future by individual employees or groups of employees under the
Consumer Services incentive plan.
Section 162(m) of the Internal Revenue Code Performance-Based
Compensation. If the committee determines at the time restricted stock, a
performance award, or other stock unit award is granted under the Consumer
Services incentive plan to a participant who is, or is likely to be, as of the
end of the tax year in which AT&T would claim a tax deduction in connection with
such award, a "covered employee" under Section 162(m) of the Code, then the
committee may provide as to such award that the lapsing of restrictions thereon
and the distribution of cash, shares, or other property pursuant thereto, as
applicable, shall be subject to the achievement of one or more objective
performance goals established by the committee, which will be based on the
achievement of specified levels of one or any combination of the following: net
cash provided by operating activities, earnings per share from continuing
operations, operating income, revenues, cash flow, return on investment, gross
margin, return on operating assets, return on equity, economic value added,
stock price appreciation, total shareholder return, or cost control of AT&T or
the affiliate or division of AT&T for or within which the participant is
primarily employed. Performance goals also may be based on achievement of
specified levels of AT&T performance, or performance of the applicable affiliate
or division of AT&T, including of AT&T Consumer Services Group, under one or
more of the measures described above relative to the performance of other
corporations.
The Consumer Services incentive plan provides that, subject to any
adjustments described above, no participant may be granted options and/or SARs
in any thirty-six month period with respect to more than 4 million shares of
AT&T Consumer Services Group tracking stock. Furthermore, no participant may be
granted restricted stock, performance awards or other stock unit awards, as to
which there is established a performance period of thirty-six months, for more
than 1 million shares (or for cash amounts based upon the value of 1 million
shares). For performance periods with a duration of more or less than thirty-six
months, the maximum award shall be determined by multiplying 1 million shares by
a fraction the numerator of which is the number of months in the performance
period and the denominator of which is thirty-six.
Change of Control. The Consumer Services incentive plan contains
provisions requiring or permitting the vesting of awards or the acceleration of
options and lapse of restrictions and similar adjustments in the event of a
change of control of AT&T.
Tax Aspects of the Consumer Services Incentive Plan. AT&T believes that
under present law, the following are the federal tax consequences generally
arising with respect to awards granted under the Consumer Services incentive
plan. The grant of an option or SAR will create no tax consequences for an
employee or AT&T. The employee will have no taxable income upon exercising an
ISO, except that the alternative minimum tax may apply, and AT&T will receive no
deduction when an ISO is exercised. Upon exercising an SAR or an option other
than an ISO, the employee must recognize ordinary income equal to the difference
between the exercise price and the fair market value of the stock on the date of
exercise; AT&T will be entitled to a deduction for the same amount. The
treatment to an employee of a disposition of shares acquired through the
exercise of an option depends on how long the shares have been held and if such
shares were acquired by exercising an ISO or by exercising an option other than
an ISO. Generally, there will be no tax consequence to AT&T in connection with a
disposition of shares acquired under an option, except that AT&T may be entitled
to a deduction in the case of a disposition of shares acquired under an ISO
before the applicable ISO holding periods have been satisfied.
With respect to other awards granted under the Consumer Services incentive
plan that are settled either in cash or in stock or other property that is
either transferable or not subject to substantial risk of forfeiture, the
participant must recognize ordinary income equal to the cash or the fair market
value of shares or other property received; AT&T will generally be entitled to a
deduction for the same amount. With respect to awards that are settled in stock
or other property that is restricted as to transferability and subject to
substantial risk of forfeiture, the participant must recognize ordinary income
equal to the fair market value of the shares or other property received at the
first time the shares or other property become
X-48
transferable or not subject to substantial risk of forfeiture, whichever occurs
earlier; AT&T will generally be entitled to a deduction for the same amount.
RECOMMENDATION OF THE AT&T BOARD
THE AT&T BOARD HAS APPROVED THE INCENTIVE PLAN PROPOSAL AND RECOMMENDS THAT
YOU VOTE FOR THE INCENTIVE PLAN PROPOSAL.
X-49
THE EMPLOYEE STOCK PURCHASE PLAN PROPOSAL
GENERAL
AT&T's 1996 Employee Stock Purchase Plan was initially adopted in 1996 and
authorized the issuance of 50,000,000 shares of AT&T common stock, which was
later adjusted for AT&T's three-for-two stock split paid on April 15, 1999. The
employee stock purchase plan was restated effective July 1, 2001 authorizing an
additional 30,000,000 shares for issuance under this plan. The AT&T Board has
approved, subject to the approval of the AT&T shareholders, an AT&T Amended 1996
Employee Stock Purchase Plan. If approved by AT&T shareholders this plan will
provide eligible employees with an opportunity to purchase AT&T common stock,
and effective on the later of January 1, 2003, or the first day of the month
following the date on which AT&T Consumer Services Group tracking stock is
issued and publicly traded, AT&T Consumer Services Group tracking stock, through
payroll deductions. This plan is intended to assist eligible employees in
acquiring a stock ownership interest in AT&T pursuant to a plan that is intended
to qualify as an "employee stock purchase plan" under Section 423 of the Code.
This plan also includes a component not intended to qualify under Section 423 of
the Code, or the "Non-423 Component," which will permit participation by certain
eligible employees based outside the United States. A description of this plan
is outlined below.
SHARES RESERVED FOR THIS PLAN
The aggregate number of shares of AT&T common stock, which may be purchased
under the plan during the period from July 1, 2001 through June 30, 2006, will
not exceed 30 million, subject to adjustment. Additionally, any shares remaining
as of June 30, 2001 of the shares previously reserved to the AT&T 1996 Employee
Stock Purchase Plan will continue to be available for issuance under this plan
through June 30, 2006. On January 1, 2001, 18,474,247 shares remained available
for issuance under the AT&T 1996 Employee Stock Purchase Plan. Of the 30 million
shares that were newly authorized effective July 1, 2001, one million are
reserved for the Non-423 Component.
The aggregate number of shares of AT&T Consumer Services Group tracking
stock that may be purchased under the plan during the period of January 1, 2003
through June 30, 2006, will not exceed seven million shares per year. Of the
newly authorized shares of AT&T Consumer Services Group tracking stock, 700,000
are reserved for the Non-423 Component.
Shares issued under this plan may consist, in whole or in part, of
authorized and unissued shares, treasury shares, or shares bought on the market.
ELIGIBLE PARTICIPANTS
All employees of AT&T, and those of a subsidiary designated by AT&T, are
eligible if they meet certain conditions. To be eligible, the employee must have
completed one month of continuous employment. Part-time employees are eligible
to participate.
Approximately 160,000 employees would have been eligible to participate as
of December 31, 2000.
On the first day of each month beginning on the later of July 1, 2002 or
the first day of the month following the date on which AT&T Consumer Services
Group tracking stock is issued and publicly traded, except as otherwise
determined by the committee, AT&T will grant options as permitted under this
plan. The term of each option will end on the last day of the month containing
the date on which the option was granted.
Each eligible employee on a date of exercise will be entitled to purchase
shares of common stock at a purchase price equal to 85% of the average of the
reported highest and lowest sale prices of shares of common stock on the NYSE on
the applicable date of exercise. Dates of exercise will take place on the last
day of each month common stock is traded on the NYSE during the applicable
option period. The eligible employee will elect the allocation of AT&T common
stock and AT&T Consumer Services Group tracking stock to be purchased.
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Payment for shares of common stock purchased under this plan will be made
by authorized payroll deductions from an eligible employee's total regular
compensation payable from AT&T or a participating subsidiary of AT&T during an
option period or, when authorized by the Committee, an eligible employee may pay
an equivalent amount for such shares.
Eligible employees who elect to participate in this plan will designate a
stated whole percentage equaling at least 1%, but no more than 10% of their
eligible compensation, to be deposited into a periodic deposit account. On each
date of exercise, the entire periodic deposit account of each participant in the
plan is used to purchase whole and/or fractional shares of common stock. AT&T
will maintain a stock purchase account for each participant to reflect the
shares of common stock purchased under the plan by each participant. No
participant in this plan is permitted to purchase common stock under this plan
at a rate that exceeds $25,000 in fair market value of common stock, determined
at the time options are granted, for each calendar year. For purposes of making
this determination, all of the AT&T common stock and AT&T Consumer Services
Group tracking stock purchased by a participant will be aggregated.
All funds received by AT&T from the sale of common stock under this plan
may be used for any corporate purpose.
NEW PLAN BENEFITS
It is not possible to determine how many eligible employees will
participate in this plan in the future. Therefore, it is not possible to
determine with certainty the dollar value or number of shares of common stock
that will be distributed under this plan. On the average, approximately 5
million shares of AT&T common stock have been distributed annually during the
prior five-year term of this plan.
The following table sets forth certain information with respect to shares
purchased under the 1996 AT&T Employee Stock Purchase Plan during 2001 by all
current executive officers as a group, and all employees as a group, excluding
executive officers:
NUMBER OF SHARES
NAME AND POSITION DOLLAR VALUE(1) PURCHASED
----------------- --------------- ----------------
All current executive officers as a group............ $ 63,606.20 3,512.214
All employees as a group (excluding current executive
officers).......................................... $113,493,316.10 6,266,886.590
---------------
(1) Based upon $18.11 per share, the fair value of AT&T common stock on December
31, 2001.
TAX TREATMENT
This plan, other than the Non-423 Component, is intended to qualify as an
employee stock purchase plan within the meaning of Section 423 of the Code.
Under the Code, an employee who elects to participate in an offering under this
plan will not realize income at the time the offering commences or when the
shares purchased under this plan are transferred to him or her. If an employee
disposes of such shares after two years from the date the offering of such
shares commences and after one year from the date of the transfer of such shares
to him or her, the employee will be required to include in income, as
compensation for the year in which such disposition occurs, an amount equal to
the lesser of (1) the excess of the fair market value of such shares at the time
of disposition over the purchase price, or (2) 15% of the fair market value of
such shares at the time the offering commenced. The employee's basis in the
shares disposed of will be increased by an amount equal to the amount so
includable in his or her income as compensation, and any gain or loss computed
with reference to such adjusted basis which is recognized at the time of the
disposition will be a capital gain or loss, either short-term or long-term,
depending on the holding period for such shares. In such event, AT&T, or the
subsidiary by which the employee is employed, will not be entitled to any tax
deduction from income.
If any employee disposed of the shares purchased under this plan within
such two-year or one-year period, the employee will be required to include in
income, as compensation for the year in which such
X-51
disposition occurs, an amount equal to the excess of the fair market value of
such shares on the date of purchase over the purchase price. The employee's
basis in such shares disposed of will be increased by an amount equal to the
amount includable in his or her income as compensation, and any gain or loss
computed with reference to such adjusted basis which is recognized at the time
of disposition will be a capital gain or loss, either short-term or long-term,
depending on the holding period for such shares. In the event of a disposition
within such two-year or one-year period, AT&T, or the subsidiary by which the
employee is employed, will be entitled to a tax deduction from income equal to
the amount the employee is required to include in income as a result of such
disposition.
An AT&T employee who is a non-resident of the United States will generally
not be subject to the U.S. federal income tax rules described above with respect
to the shares of common stock purchased under this plan.
PLAN ADMINISTRATION AND TERMINATION
The AT&T Board, or its delegate, will appoint a committee, which will be
composed of one or more employees, to administer the plan on behalf of AT&T.
This committee may delegate any or all of the administrative functions under the
plan to such individuals, subcommittees, or entities, as the committee considers
appropriate. The committee may adopt rules and procedures not inconsistent with
the provisions of this plan for its administration. The committee's
interpretation and construction of this plan is final and conclusive.
The AT&T Board may at any time, or from time to time, alter or amend this
plan in any respect, except that, without approval of the AT&T shareholders, no
amendment may increase the number of shares reserved for purchase, or reduce the
purchase price per share under this plan, other than as described above.
The AT&T Board will have the right to terminate this plan or any offering
at any time for any reason. The plan may continue in effect through June 30,
2006.
RECOMMENDATION OF THE AT&T BOARD
THE AT&T BOARD RECOMMENDS A VOTE FOR THE ADOPTION OF THE AT&T AMENDED 1996
EMPLOYEE STOCK PURCHASE PLAN.
X-52
CHAPTER ELEVEN
DESCRIPTION OF AT&T BUSINESS SERVICES GROUP
OVERVIEW
AT&T Business Services is one of the nation's largest business services
communications providers, offering 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 operates one of the largest telecommunications networks in the
United States and, through AT&T's Global Network Services and other investments
and affiliates, provides an array of services and customized solutions in 60
countries and 850 cities worldwide.
AT&T Business Services 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 IP services for a variety of network standards, including frame
relay and ATM;
- managed networking services and outsourcing solutions; and
- wholesale transport services.
STRATEGY
AT&T Business Services intends to leverage its existing leadership position
in communications connectivity and substantial customer base to become a leading
provider of value-added managed communications services and outsourcing
solutions. The following strategic objectives are critical to this
transformation:
Offer comprehensive enterprise networking solutions to large business
customers. AT&T Business Services provides integrated communications services
to enterprise customers, bundling an array of communications and data services
to create customized end-to-end solutions. AT&T Business Services offers large
domestic and U.S.-based multinational corporations solutions comprised of local
voice and data, long-distance voice and data, IP, virtual private networks,
hosting and managed network services. AT&T Business Services believes it has a
well-established reputation for reliability, restoration and overall customer
satisfaction, and that this provides it with critical competitive advantages in
offering enterprise networking solutions.
Increase sales of new services. AT&T Business Services focuses on
increasing sales of high-growth communications services, including local voice
and data, IP connectivity and managed services. AT&T Business Services is
focused on increasing sales on its extensive existing local, long distance and
IP networks. With substantial infrastructure already in place, AT&T Business
Services believes that future capital expenditures will be focused primarily on
meeting specific customer demands for incremental capabilities and capacity.
AT&T Business Services believes that increased sales of high-growth services
will help increase asset utilization and expand operating margins for these new
services.
Lower operating costs and increase efficiencies. AT&T Business Services
believes it is imperative to maintain a cost leadership position. AT&T Business
Services continuously evaluates its operations on an ongoing basis to streamline
core processes and reduce costs, focusing on key operational areas including
access, network operations, provisioning, billing, customer care and sales. In
particular, AT&T focuses on providing its customers direct access to its network
to enhance service quality and to reduce AT&T's access charge cost. AT&T
Business Services routinely evaluates its performance relative to competitors
through benchmarking studies. AT&T Business Services also reviews best-of-class
companies across all industries to identify new process improvements and
additional cost reduction opportunities.
XI-1
Improve asset utilization. AT&T Business Services plans to continue to
improve network asset utilization. AT&T Business Services has invested
substantial capital to create an end-to-end network that supports
next-generation communication services, such as IP-enabled virtual private
networks. AT&T Business Services plans to selectively invest as market demand
and asset utilization levels warrant in order to achieve competitive returns on
capital.
Develop and offer new, innovative customer solutions. AT&T Business
Services believes its market and technological leadership positions enable it to
develop and offer new advanced communications services and managed service
solutions. AT&T Business Services evaluates and launches new products and
services on an ongoing basis to accelerate bundling of transport and
connectivity services with other communications products, such as managed
network services and outsourcing solutions. AT&T Business Services' goal is to
develop and integrate new advanced applications in a manner that ensures
effortless customer migration; for example, to transition from voice private
networks to IP-enabled virtual private networks that support voice as an
application. AT&T Business Services believes its leadership in voice services
coupled with the technological leadership of AT&T Labs in developing IP and
enterprise networking solutions will help attract new enterprise network
customers and generate incremental revenue among AT&T's existing enterprise
customers while increasing network utilization and improving margins.
INDUSTRY OVERVIEW
The communications services industry continues to evolve, both domestically
and internationally, providing significant opportunities and risks to the
participants in these markets. Factors that have been driving this change
include:
- entry of new competitors and investment of substantial capital in
existing and new services, resulting in significant price competition;
- technological advances resulting in a proliferation of new services and
products and rapid increases in network capacity;
- the Telecommunications Act; and
- deregulation of communications services markets in selected countries
around the world.
One factor affecting the communications services industry is the rapid
development of data services. The development of frame relay, ATM and IP
networks as modes of transmitting information electronically has dramatically
transformed the array and breadth of services offered by telecommunications
carriers.
Use of the Internet, including intranets and extranets, has grown rapidly
in recent years. This growth has been driven by a number of factors, including
the large and growing installed base of personal computers, improvements in
network architectures, increasing numbers of network-enabled applications,
emergence of compelling content and commerce-enabling technologies, and easier,
faster and cheaper Internet access. Consequently, the Internet has become an
important new global communications and commerce medium. The Internet represents
an opportunity for enterprises to interact in new and different ways with both
existing and prospective customers, employees, suppliers and partners.
Enterprises are responding to this opportunity by substantially increasing their
investment in Internet connectivity and services to enhance internal voice and
data networks.
In the United States, the Telecommunications Act has had a significant
impact on AT&T Business Services' 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. In addition, prices
for long distance minutes and other basic communications services have declined
as a result of increased competitive pressures, governmental deregulation,
introduction of more efficient networks and advanced technologies, and product
substitution. Competition in these basic communications services segments has
more recently been based more on price and less on other differentiating factors
that
XI-2
appeal to the larger business market customers, including range of services
offered, bundling of products, customer service, and communications quality,
reliability and availability.
SERVICES AND PRODUCTS
VOICE SERVICES
Long Distance Voice Services. AT&T Business Services' long distance voice
communication offerings include the traditional "one plus" dialing of domestic
and international long distance for customers that select AT&T Business Services
as their primary long distance carrier.
AT&T Business Services offers toll-free (for example, 800, 888 or 877)
inbound services, where the receiving party pays for the call. These services
are used in a wide variety of applications, including sales, reservation centers
or customer service centers. AT&T Business Services also offers a variety of
value-added features to enhance customers' toll-free services, including call
routing by origination point and time-of-day routing. In addition, AT&T Business
Services provides virtual private network applications, including dedicated
outbound facilities.
AT&T Business Services also offers audio and video teleconferencing
services, as well as web-based video conferencing. These services offer
customers the ability to establish automated teleconference lines, as well as
teleconferences moderated by an AT&T representative. Customers can also
establish a dedicated audio conference number that can be used at any time
without the necessity of a reservation.
AT&T Business Services also offers a variety of calling cards that allow
the user to place calls from virtually anywhere in the world. Additional
features include prepaid phone cards, conference calling, international
origination, information service access (such as weather or stock quotes), speed
dialing and voice messaging.
Business Local Services. AT&T Business Local provides a wide range of
local voice and data telecommunications services in major metropolitan markets
throughout the United States. Services include basic local exchange service,
Centrex, exchange access, private line, high speed data and video services. AT&T
Business Local typically offers local service as part of a package of services
that can include any combination of other AT&T Business Services offerings.
Integrated Voice/Data/IP Offers. AT&T Business Services provides a variety
of integrated service offers targeted at business customers. For small
businesses, AT&T's All in One service offering provides both local and long
distance services through a single bill, providing discounts based on volume and
term commitments. The AT&T Business Network service offers a wide range of voice
and data services through a single service package. Among the features of the
integrated services offering is the ability to enable customers to
electronically order new services, perform maintenance and manage administrative
functions.
AT&T also has a number of integrated voice and data services, such as
Integrated Network Connections, that provide customers the ability to integrate
access for their voice and data services and thereby qualify for lower prices.
DATA AND INTERNET SERVICES
Private Line Services. AT&T Business Services' data services include
private line and special access services that use high-capacity digital circuits
to carry voice, data and video or multimedia transmission from point-to-point in
multiple configurations. These services provide high-volume customers with a
direct connection to an AT&T Business Services switch instead of switched access
shared by many users. These services permit customers to create internal
computer networks and to access external computer networks and the Internet,
thereby reducing originating access costs.
Packet Services. Packet services consist of data networks utilizing packet
switching and transmission technologies. Packet services include frame relay,
ATM and IP connectivity services. Packet services enable customers to transmit
large volumes of data economically and securely. Packet services are utilized
XI-3
for local area network interconnection, remote site, point of sale and branch
office communications solutions. While frame relay and ATM Services are widely
deployed as private data networks, AT&T Business Services offers customers the
ability to connect these networks to the Internet through services such as
IP-enabled frame relay. High speed packet services, including IP-enabled frame
relay service, are utilized extensively by enterprise customers for an expanding
range of applications.
AT&T Business Internet Services. AT&T Business Services provides IP
connectivity and managed IP services, messaging, and electronic commerce
services to businesses. AT&T offers managed Internet services, which give
customers dedicated, high-speed access to the Internet for business applications
at a variety of speeds and types of access, as well as business dial service, a
dial-up version of Internet access designed to meet the needs of small- and
medium-sized businesses. AT&T's web services consist of a family of hosting and
transactional services and platforms serving the web needs of thousands of
businesses; these offers include AT&T Small Business Hosting Services.
MANAGED SERVICES AND OUTSOURCING SOLUTIONS
AT&T Business Services provides clients with an array of managed networking
services, professional services and outsourcing solutions intended to satisfy
clients' complete networking technology needs-ranging from managing individual
network components such as routers and frame relay networks to managing entire
complex global networks. AT&T Business Services is engaged in: designing,
developing and delivering integrated and interoperable global services, allowing
enterprises to optimize networking-based mission-critical and electronic
commerce applications. AT&T Business Services also works selectively with
qualified partners to offer enhanced services to customers.
Enterprise Networking Services. With a global scale and reach in 60
countries and 850 different cities, AT&T Business Services' enterprise
networking services strive to provide comprehensive support from network design,
implementation and installation to ongoing network operations and lifecycle
management of solutions for networks of varying scales, including Local Area
Networks, Wide Area Networks, and Virtual Private Networks. These managed
enterprise networking services enable customers to accommodate specific business
applications, such as e-mail, voice over IP, order entry systems, employee
directories, human resource transaction and other database applications; to
create secure remote access intranet and extranet solutions with controlled
access to employees, business partners and customers; and to use Intelligent
Content Distribution Services to accelerate delivery of content to any Internet
user.
Web Services. AT&T Business Services' continuum of managed web hosting
services supports clients' hosted infrastructure needs from the network layer
all the way up through managing the performance of their business applications.
With 18 Internet Data Centers located on three continents and with a capacity of
more than 1.8 million square feet of web hosting space, AT&T's hosting services
provide a fully flexible, managed environment of network, server and security
infrastructure as well as built-in data storage. AT&T's full suite of managed
hosting services includes application performance management, database
management, hardware and operating system management, intelligent content
distribution services, high availability data and computing services, storage
services, managed security and firewall services. AT&T's web hosting services
also include a range of business tools, including client portal services that
provide managed hosting customers with personalized, secure access to detailed
reporting information about their infrastructure and applications.
High Availability and Security Services. AT&T Business Services' high
availability and security services deliver enterprise-class, high-end integrated
solutions to ensure the continuous operations of clients' critical business
processes and availability of critical data by leveraging the core competencies
of AT&T's end-to-end professional services; world-class global networks; global
management and monitoring; Internet Data Centers and conditioned facilities. In
addition, AT&T's high availability and security services include business
continuity and disaster recovery services that provide core network disaster
recovery, information technology, work center, and risk management/business
continuity analysis, planning and operational capabilities.
XI-4
Outsourcing Solutions. AT&T Business Services provides customers with
outsourcing solutions designed to manage customers' highly complex voice and
data networks. These services range from consulting to outsourcing and
management of highly complex global data networks. AT&T Business Services
designs, engineers and implements seamless solutions for clients that are
designed to maximize the competitive advantage of networking-based electronic
commerce applications.
Transport. AT&T Business Services considers itself one of the leaders in
providing wholesale networking services to other carriers, providing both
network capacity and switched services. AT&T Business Services offers a
combination of high-volume transmission capacity, conventional dedicated line
services and dedicated switched services on a regional and national basis to
ISPs and facility-based and switchless resellers. AT&T Business Services'
wholesale customers are primarily large tier-one ISPs, competitive local
exchange carriers, regional phone companies, interexchange carriers, cable
companies and systems integrators. AT&T Business Services focuses on ensuring
optimal network utilization through the sale of off-peak capacity. Further,
wholesale switched services are priced to reflect the cost of access incurred.
In limited circumstances, AT&T Business Services also has sold network capacity
through indefeasible rights-of-use agreements under which capacity is furnished
for contract terms as long as 25 years.
SALES AND MARKETING
AT&T Business Services markets its suite of voice and data communications
services through its global sales and marketing organization. The sales and
marketing organization is primarily organized by customer type and targets
retail, wholesale and government organizations throughout the United States and
the rest of the world. AT&T Business Services' direct sales and marketing force
consists of approximately 6,800 sales representatives. In addition, the sales
and marketing group works in connection with several outside telemarketing firms
to target small businesses in a cost efficient manner. For small businesses with
more sophisticated service needs, AT&T Business Services uses a direct sales
force of approximately over 450 representatives trained to market the full suite
of products and services and customized services solutions. In addition, the
AT&T Solution Center provides a centralized resource designed to respond rapidly
to complex customer requirements. For many large and multinational clients, a
senior AT&T officer is responsible for maintaining a continuous relationship
with the senior management of the customer, helping to ensure a continuous and
effective marketing effort.
CUSTOMER CARE AND SUPPORT
AT&T Business Services places a high priority on ensuring all customers
receive the highest level of customer care, including contracting, ordering,
provisioning, maintenance and collections. AT&T's customer care organization
places particular emphasis on the ordering, provisioning and maintenance
processes. Customer care and support group monitors these functions and responds
to inbound customer inquiries in a manner intended to ensure customer orders for
new services, service changes and maintenance requests are completed on-time and
accurately. Customer care and support has approximately 10,000 customer care
associates world-wide at 27 customer care centers, of which 24 are company-owned
and three are operated by outside customer care firms.
AT&T Business Services determines the appropriate customer care program
based on the size and sophistication of the customer and its communications
needs. For larger and multinational customers and government agencies, AT&T
Business Services provides customer care services and support through dedicated
account teams designed to provide support on a rapid and personalized basis.
AT&T Business Services believes that the web has greatly enhanced AT&T
Business Services' customer care programs. Through a dedicated customer care
website, www.iadvantgage@att.com, customers may submit questions or initiate
service requests, including ordering new services or submitting maintenance
requests. Customer care delivered via the web is often quicker and more
convenient for customers and reduces errors.
XI-5
RATES AND BILLING
AT&T Business Services provides the majority of its services through
long-term contracts. General descriptions of AT&T Business Services' services,
applicable rates, warranties, limitations on liability, user requirements and
other material service provisioning information are outlined in service guides
that are provided directly to prospective clients or are available on AT&T's
website. Clients enter into contracts, based on the service guides, detailing
customer-specific terms and information, including volume discounts, service
bundling, extended warranties and other customized terms. Through combined
offerings, AT&T Business Services also provides customers with such features as
single billing, unified services for multi-location companies and customized
calling plans. Most intrastate services are provided in accordance with
applicable tariffs filed with the states.
Most domestic and international switched voice services originating in the
United States are billed in 1 or 6 second increments after a fixed initial
period. Switched voice services originating in international markets are also
billed in increments, subject to local market conditions and interconnect
agreements. Switched long distance and local services are billed in arrears,
with monthly billing statements itemizing date, time, duration and charges. Data
services are billed generally in advance, based on a fixed circuit charge, with
rates that vary according to speed of transmission and service type.
NETWORK
AT&T Business Services' U.S. network comprises 46,500 route miles of
long-haul backbone fiber-optic cable, plus another 17,000 route miles of local
metro fiber, capable of carrying OC-192 (10 billion bits, or 10 gigabits per
second) traffic. In addition, AT&T Business Services has recently completed
installation of over 10,000 new route miles of the latest generation fiber-optic
cable capable of carrying OC-768 (40 gigabits per second) when that standard is
ready for deployment. This new fiber capacity presently connects 22 of the
largest U.S. cities, and provides AT&T substantial capacity for future growth of
network traffic with minimal incremental capital expenditure requirements. AT&T
Business Services was the first in the industry with a coast-to-coast OC-192
backbone, connecting Boston, New York, Chicago, St. Louis, San Francisco and Los
Angeles. In addition to this state-of-the-art 10 gigabits per second backbone,
AT&T Business Services also has over 400 Synchronous Optical Network points-of-
presence in the continental U.S., offering high-speed data connectivity to the
majority of U.S. business centers. Currently, 78 of these points-of-presence are
tariffed with OC-48 service.
AT&T Business Services' network, which also supports AT&T Consumer Services
Group's services, carries over 300 million voice calls every business day and
more than 2,175 trillion bytes (terabytes) of data each day. On the voice
network, AT&T Business Services employs its patented Real Time Network Routing
to automatically complete domestic voice calls through more than 100 possible
routes. The reliability of certain portions of the network is maximized by using
Synchronous Optical Network rings that can restore service on a severed fiber
optic cable within 50 to 60 milliseconds by sending traffic in the other
direction on the ring. On other routes, AT&T uses its patented FASTAR technology
to route traffic around a cable cut by automatically transferring traffic to
alternative spare capacity. AT&T Business Services stands behind its reliability
claims with service level agreements. For example, on its IP backbone, AT&T
Business Services guarantees business customers no more than 60 milliseconds of
latency, or delay in the transmission of a packet of information, and 0.7%
packet loss per month.
AT&T Business Services has been a leader in deploying Dense Wavelength
Division Multiplexing, or DWDM, technology that divides an optical fiber into
multiple channels, each carrying up to 10 gigabits per second of information
today. When DWDM was introduced in 1996, the technology could put only eight
wavelengths on a fiber strand. Today, AT&T Business Services is deploying 64-and
80-wavelength DWDM systems, as well as systems capable of carrying 160
wavelengths. When installed with OC-192 capabilities, a 160-wavelength DWDM
system will enable 1.6 terabits (trillion bits per second) on a single fiber
strand.
Since digital switching was introduced in the late 1970s, the heart of the
AT&T voice network has been the 4ESS, a circuit switch specifically designed for
long distance use, and currently AT&T Business
XI-6
Services has 143 of these switches in the network. AT&T Business Services has
recently installed nearly 60 standard tandem switches that allow AT&T to
accommodate the transition from circuit-switched to packet networks. While AT&T
Business Services will continue to have both circuit and packet switching
technologies for some time, significant future capital expenditures are not
planned for circuit switching.
In addition to its long distance network, AT&T Business Services has an
extensive local network serving business customers in 80 U.S. cities. AT&T
Business Services has expanded its local network so that it now includes 118
local switches and reaches more than 6,200 buildings. This network provides
voice service to business users, as well as data connections up to OC-48
capacity. In order to maximize asset utilization, AT&T's local network also
handles consumer traffic, providing most of the dial-in numbers for AT&T
WorldNet Service, as well as switching cable telephony calls for customers of
AT&T Broadband.
AT&T Business Services also operates one of the largest IP networks in the
United States. As a Tier 1 provider, AT&T has direct peering relationships with
other Tier 1 providers, providing service to carriers that go through public
peering sites. AT&T offers multiple access choices to the IP network, including
dial-up, dedicated private line, cable modem and DSL, as well as IP-enabled
access through ATM and frame relay networks.
AT&T Business Services is deploying Internet Data Centers across the U.S.,
offering web hosting services. Currently, AT&T Business Services has 18 Internet
Data Centers, with an aggregate 1.8 million square feet of space, all directly
connected to AT&T Business Services' high-speed IP backbone.
Over the next few years, AT&T Business Services plans to evolve its network
to an all-optical facility. The first element of the optical network is AT&T
Business Services' existing fiber-optic backbone. The next step is the
Intelligent Optical Switch, which was introduced by the end of 2001. The
Intelligent Optical Switch switches wavelengths of light, and can communicate
and establish a connection with other switches automatically when a customer
requests a new service. The third element is the Multi-Service Platform, located
in either the AT&T local network or on the customer premise, that aggregates
low-speed and high-speed services and sends the information to the Intelligent
Optical Switch for routing.
INTERNATIONAL
AT&T Business Services has entered into a number of agreements and
alliances with international communications companies, and has made strategic
investments in several countries in order to provide customers end-to-end
network management capabilities and highly customized solutions.
Concert. On January 5, 2000 AT&T and British Telecommunications plc, or
BT, created a global venture to serve the communications needs of multinational
companies and the international calling needs of businesses around the world. On
April 1, 2002 AT&T and BT announced that they had completed their unwinding of
Concert. Under the Concert dissolution agreement with BT, AT&T reclaimed
customer contracts and assets that were initially contributed to the venture,
including international transport facilities and gateway assets. In addition,
AT&T Business Services obtained 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. AT&T Business Services will honor all
contracts and service level agreements that it assumed from Concert. AT&T
Business Services and BT have agreed to enter into transitional commercial
agreements enabling them to provide existing Concert services for a period of
three years. Under these agreements, AT&T Business Services and BT will pay each
other market-based prices.
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
XI-7
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 BT'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 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
XI-8
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 anytime 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 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.
AT&T Latin America Corp. On August 28, 2000, AT&T Business Services
established AT&T Latin America in connection with the merger of Netstream, a
competitive local exchange carrier in Brazil, and FirstCom Corporation. AT&T
Latin America provides voice, data and Internet access services in five
countries, Argentina, Brazil, Chile, Colombia and Peru. AT&T Business Services
owns a 62.5% economic interest (94% voting interest) in AT&T Latin America.
Alestra. S. de R.L. de C.V. AT&T Business Services also owns a 49%
economic interest in Alestra S. de R.L. de C.V., a competitive
telecommunications company in Mexico. Alestra offers voice, data and Internet
services throughout Mexico to residential, small business and enterprise
customers. Alestra's state-of-the-art network comprises approximately 3,500
route miles, with four interconnection points to AT&T's network at the
U.S.-Mexico border.
COMPETITION
AT&T Business Services faces the same competition issues applicable
generally to the communications services industry that are discussed with
respect to AT&T Consumer Services Group. See "AT&T Consumer Services Group
Tracking Stock -- Description of AT&T Consumer Services Group -- Competition"
and "Summary and Overview of the Transactions -- Risk Factors -- Risk Factors
Relating to AT&T Consumer Services Group and AT&T Business Services
Group -- AT&T Consumer Services Group and AT&T Business Services Group face
substantial competition that may materially adversely impact both market share
and margins."
EMPLOYEES
At December 31, 2001, AT&T Business Services employed approximately 57,500
individuals in its operations. Of those employees, approximately 53,300 are
located domestically. About 17,400 of the domestically located employees of AT&T
Business Services are represented by unions. Of those so represented, about 94%
are represented by the Communications Workers of America and about 5% are
represented by the International Brotherhood of Electrical Workers, both of
which are affiliated with the AFL-CIO. In addition, there is a very small
remainder of domestic employees represented by other unions. Labor agreements
with most of these unions extend through May 2002.
XI-9
LEGAL PROCEEDINGS
In the normal course of business, AT&T Business Services 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 Business Services 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 Business Services beyond that provided for at year-end
would not be material to AT&T Business Services' annual consolidated financial
position or results of operations.
For additional information on legal proceedings, please see the discussion
on legal proceedings under "Legal Proceedings" contained in AT&T's Annual Report
on Form 10-K for the year ended December 31, 2001, which is incorporated by
reference in this document. See "Additional Information for
Shareholders -- Where You Can Find More Information."
AT&T LABS
AT&T Labs conducts research and development for AT&T. AT&T Labs' scientists
and engineers conduct research in a variety of areas, including IP and future
broadband technologies; advanced network design and architecture; network
operations systems; data mining technologies and advanced speech technologies.
AT&T Labs works with the other business units within AT&T to create new services
and invent tools and systems to manage secure and reliable networks for AT&T and
its customers. With a heritage that extends from fundamental advances such as
the development of the transistor, AT&T Labs has made numerous recent advances
in the areas of IP communications infrastructure, data mining and wireless
networks.
PATENTS AND TRADEMARKS
AT&T actively pursues patents and trademarks to protect its intellectual
property within the United States and abroad. AT&T has developed a focused law
practice to prepare and prosecute its patent and trademark applications. On
average, AT&T receives over 300 U.S. patents per year and maintains a portfolio
of over 2,500 trademark and service mark registrations.
LEGISLATIVE AND REGULATORY DEVELOPMENTS
Legislative and regulatory developments discussed with respect to AT&T
Consumer Services Group also apply to AT&T Business Services. See "AT&T Consumer
Services Group Tracking Stock -- Description of AT&T Consumer Services
Group -- Legislative and Regulatory Developments."
XI-10
CHAPTER TWELVE
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareowners of AT&T Corp.:
In our opinion, based on our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of income, changes in shareowners' equity and of cash flows present fairly, in
all material respects, the financial position of AT&T Corp. and its subsidiaries
(AT&T) at December 31, 2001 and 2000, and the results of their operations and
their cash flows for each of the three years ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of AT&T's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the financial statements as of and for the years
ended December 31, 2000 and 1999 of Liberty Media Group, an equity method
investee, which was acquired by AT&T on March 9, 1999. AT&T's financial
statements include an investment of $34,290 million as of December 31, 2000, and
equity method earnings (losses) of $1,488 million and $(2,022) million, for the
years ended December 31, 2000 and 1999, respectively. Those statements were
audited by other auditors whose report thereon has been furnished to us, and our
opinion expressed herein, insofar as it relates to the amounts included for
Liberty Media Group, as of and for the years ended December 31, 2000 and 1999,
is based solely on the report of the other auditors. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for our
opinion.
As discussed in the notes to the financial statements, AT&T was required to
adopt Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities, effective January 1, 2001.
PRICEWATERHOUSECOOPERS LLP
New York, New York
March 25, 2002
XII-1
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------
2001 2000 1999
------- ------- -------
(DOLLARS IN MILLIONS
EXCEPT PER SHARE AMOUNTS)
Revenue..................................................... $52,550 $55,533 $54,973
------- ------- -------
Operating Expenses
Costs of services and products (excluding depreciation of
$4,818, $4,410 and $4,215 included below)................. 13,960 12,795 11,013
Access and other connection................................. 12,136 13,140 14,439
Selling, general and administrative......................... 10,832 9,752 10,894
Depreciation and other amortization......................... 6,865 5,924 5,137
Amortization of goodwill, franchise costs and other
purchased intangibles..................................... 2,473 2,665 1,057
Net restructuring and other charges......................... 2,530 7,029 975
------- ------- -------
Total operating expenses.................................... 48,796 51,305 43,515
------- ------- -------
Operating income............................................ 3,754 4,228 11,458
Other (expense) income...................................... (1,547) 1,150 826
Interest expense............................................ 3,242 2,964 1,503
------- ------- -------
(Loss) income from continuing operations before income
taxes, minority interest, and (losses) earnings related to
equity investments........................................ (1,035) 2,414 10,781
(Benefit) provision for income taxes........................ (791) 3,284 4,016
Minority interest income (expense).......................... 963 4,103 (126)
Equity (losses) earnings from Liberty Media Group........... (2,711) 1,488 (2,022)
Net losses related to other equity investments.............. 4,850 588 756
------- ------- -------
(Loss) income from continuing operations.................... (6,842) 4,133 3,861
Income (loss) from discontinued operations (net of income
taxes of $158, $307, and $(238)).......................... 150 536 (433)
Gain on disposition of discontinued operations.............. 13,503 -- --
------- ------- -------
Income before cumulative effect of accounting change........ 6,811 4,669 3,428
Cumulative effect of accounting change (net of income taxes
of $578).................................................. 904 -- --
------- ------- -------
Net income.................................................. 7,715 4,669 3,428
Dividend requirements of preferred stock.................... 652 -- --
Premium on exchange of AT&T Wireless tracking stock......... 80 -- --
------- ------- -------
Net income available to common shareowners.................. $ 6,983 $ 4,669 $ 3,428
======= ======= =======
AT&T Common Stock Group -- per basic share:
(Loss) earnings from continuing operations.................. $ (1.33) $ 0.76 $ 1.91
Earnings (loss) from discontinued operations................ 0.03 0.13 (0.14)
Gain on disposition of discontinued operations.............. 3.70 -- --
Cumulative effect of accounting change...................... 0.10 -- --
------- ------- -------
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
Earnings (loss) from discontinued operations................ 0.03 0.13 (0.13)
Gain on disposition of discontinued operations.............. 3.70 -- --
Cumulative effect of accounting change...................... 0.10 -- --
------- ------- -------
AT&T Common Stock Group earnings............................ $ 2.50 $ 0.88 $ 1.74
======= ======= =======
AT&T Wireless Group -- per basic and diluted share:
Earnings from discontinued operations....................... $ 0.08 $ 0.21 $ --
Liberty Media Group -- per basic and diluted share:
(Loss) earnings -- before cumulative effect of accounting
change.................................................... $ (1.05) $ 0.58 $ (0.80)
Cumulative effect of accounting change...................... 0.21 -- --
------- ------- -------
Liberty Media Group (loss) earnings......................... $ (0.84) $ 0.58 $ (0.80)
======= ======= =======
The notes are an integral part of the consolidated financial statements.
XII-2
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31,
---------------------
2001 2000
--------- ---------
(DOLLARS IN MILLIONS)
ASSETS
Cash and cash equivalents................................... $ 10,592 $ 64
Accounts receivable, less allowances of $827 and $1,185..... 7,736 9,408
Other receivables........................................... 1,645 1,645
Investments................................................. 668 2,102
Deferred income taxes....................................... 1,230 720
Other current assets........................................ 657 781
-------- --------
Total Current Assets........................................ 22,528 14,720
-------- --------
Property, plant and equipment, net.......................... 41,322 41,269
Franchise costs, net of accumulated amortization of $2,501
and $1,664................................................ 42,819 48,218
Goodwill, net of accumulated amortization of $1,307 and
$609...................................................... 24,675 26,782
Investment in Liberty Media Group and related receivables,
net....................................................... -- 34,290
Other investments and related advances...................... 23,818 30,875
Prepaid pension costs....................................... 3,337 3,003
Other assets................................................ 6,783 7,979
Net assets of discontinued operations....................... -- 27,224
-------- --------
Total Assets................................................ $165,282 $234,360
======== ========
LIABILITIES
Accounts payable............................................ $ 4,744 $ 5,382
Payroll and benefit-related liabilities..................... 2,084 1,991
Debt maturing within one year............................... 12,958 31,838
Liability under put options................................. -- 2,564
Other current liabilities................................... 5,641 6,200
-------- --------
Total Current Liabilities................................... 25,427 47,975
-------- --------
Long-term debt.............................................. 40,527 33,089
Long-term benefit-related liabilities....................... 3,594 3,670
Deferred income taxes....................................... 28,160 32,054
Other long-term liabilities and deferred credits............ 7,614 4,823
-------- --------
Total Liabilities........................................... 105,322 121,611
-------- --------
Minority Interest........................................... 3,560 4,841
Company-Obligated Convertible Quarterly Income Preferred
Securities of Subsidiary Trust Holding Solely Subordinated
Debt Securities of AT&T................................... 4,720 4,710
SHAREOWNERS' EQUITY
Common Stock:
AT&T Common Stock, $1 par value, authorized 6,000,000,000
shares; issued and outstanding 3,542,405,744 shares (net
of 851,746,431 treasury shares) at December 31, 2001 and
3,760,151,185 shares (net of 416,887,452 treasury shares)
at December 31, 2000...................................... 3,542 3,760
AT&T Wireless Group Common Stock, $1 par value, authorized
6,000,000,000 shares, issued and outstanding 361,802,200
shares at December 31, 2000............................... -- 362
Liberty Media Group Class A Common Stock, $1 par value,
authorized 4,000,000,000 shares, issued and outstanding
2,363,738,198 shares (net of 59,512,496 treasury shares)
at December 31, 2000...................................... -- 2,364
Liberty Media Group Class B Common Stock, $1 par value,
authorized 400,000,000 shares, issued and outstanding
206,221,288 shares (net of 10,607,776 treasury shares) at
December 31, 2000......................................... -- 206
Additional paid-in capital.................................. 51,964 90,496
(Accumulated deficit) retained earnings..................... (3,484) 7,408
Accumulated other comprehensive loss........................ (342) (1,398)
-------- --------
Total Shareowners' Equity................................... 51,680 103,198
-------- --------
Total Liabilities and Shareowners' Equity................... $165,282 $234,360
======== ========
The notes are an integral part of the consolidated financial statements.
XII-3
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
--------- --------- --------
(DOLLARS IN MILLIONS)
AT&T Common Stock
Balance at beginning of year.............................. $ 3,760 $ 3,196 $ 2,630
Shares issued (acquired), net:
Under employee plans................................... 15 3 --
For acquisitions....................................... 44 607 566
Settlement of put option............................... 155 -- --
For Wireless tracking stock exchange................... (372) -- --
Other*................................................. (60) (46) --
-------- -------- -------
Balance at end of year...................................... 3,542 3,760 3,196
-------- -------- -------
AT&T Wireless Group Common Stock
Balance at beginning of year.............................. 362 -- --
Shares issued:
For stock offering..................................... -- 360 --
Under employee plans................................... 2 2 --
For Wireless stock exchange............................ 438 -- --
Conversion of preferred stock.......................... 406 -- --
AT&T Wireless Group split-off............................... (1,208) -- --
-------- -------- -------
Balance at end of year...................................... -- 362 --
-------- -------- -------
Liberty Media Group Class A Common Stock
Balance at beginning of year.............................. 2,364 2,314 --
Shares issued (acquired), net:
For acquisitions....................................... -- 62 2,280
Other.................................................. 14 (12) 34
Liberty Media Group split-off............................. (2,378) -- --
-------- -------- -------
Balance at end of year...................................... -- 2,364 2,314
-------- -------- -------
Liberty Media Group Class B Common Stock
Balance at beginning of year.............................. 206 217 --
Shares issued (acquired), net............................. 6 (11) 220
Liberty Media Group split-off............................. (212) -- --
Other..................................................... -- -- (3)
-------- -------- -------
Balance at end of year...................................... -- 206 217
-------- -------- -------
Additional Paid-In Capital
Balance at beginning of year.............................. 90,496 59,526 15,195
Shares issued (acquired), net:
Under employee plans................................... 279 98 431
For acquisitions....................................... 827 23,097 42,425
Settlement of put option............................... 3,237 -- --
Other*................................................. (1,007) (2,767) 323
Proceeds in excess of par value from issuance of AT&T
Wireless common stock.................................. -- 9,915 --
Common stock warrants issued.............................. -- -- 306
Gain on issuance of common stock by affiliates............ 20 530 667
Conversion of preferred stock............................. 9,631 -- --
AT&T Wireless Group split-off............................. (20,955) -- --
XII-4
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
--------- --------- --------
(DOLLARS IN MILLIONS)
Liberty Media Group split-off............................. (30,768) -- --
Wireless tracking stock exchange.......................... 14 -- --
Beneficial conversion value of preferred stock............ 295 -- --
Dividends declared -- AT&T Common Stock Group............. (265) -- --
Other..................................................... 160 97 179
-------- -------- -------
Balance at end of year...................................... 51,964 90,496 59,526
-------- -------- -------
Guaranteed ESOP Obligation
Balance at beginning of year.............................. -- (17) (44)
Amortization.............................................. -- 17 27
-------- -------- -------
Balance at end of year...................................... -- -- (17)
-------- -------- -------
(Accumulated Deficit)/Retained Earnings
Balance at beginning of year.............................. 7,408 6,712 7,800
Net income................................................ 7,715 4,669 3,428
Dividends declared -- AT&T Common Stock Group............. (275) (2,485) (2,807)
Dividends accrued -- preferred stock...................... (652) -- --
Premium on exchange of AT&T Wireless tracking stock....... (80) -- --
Treasury shares issued at less than cost.................. (7) (1,488) (1,709)
AT&T Wireless Group split-off............................. (17,593) -- --
-------- -------- -------
Balance at end of year...................................... (3,484) 7,408 6,712
-------- -------- -------
Accumulated Comprehensive Income
Balance at beginning of year.............................. (1,398) 6,979 (59)
Other comprehensive income................................ 1,742 (8,377) 7,038
AT&T Wireless Group split-off............................. 72 -- --
Liberty Media Group split-off............................. (758) -- --
-------- -------- -------
Balance at end of year...................................... (342) (1,398) 6,979
-------- -------- -------
Total Shareowners' Equity................................... $ 51,680 $103,198 $78,927
======== ======== =======
Summary of Total Comprehensive Income (Loss):
Income before cumulative effect of accounting change........ $ 6,811 $ 4,669 $ 3,428
Cumulative effect of accounting change...................... 904 -- --
Net income.................................................. 7,715 4,669 3,428
Other comprehensive income (loss)[net of income taxes of
$1,119, $(5,348) and $4,600].............................. 1,742 (8,377) 7,038
-------- -------- -------
Comprehensive Income (Loss)................................. $ 9,457 $ (3,708) $10,466
======== ======== =======
---------------
AT&T accounts for treasury stock as retired stock.
We have 100 million authorized shares of preferred stock at $1 par value.
* Other activity in 2001 and 2000 represents AT&T common stock received in
exchange for entities owning certain cable systems.
The notes are an integral part of the consolidated financial statements.
XII-5
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
-------- -------- --------
(DOLLARS IN MILLIONS)
OPERATING ACTIVITIES
Net income.................................................. $ 7,715 $ 4,669 $ 3,428
Deduct:
Income (loss) from discontinued operations................ 150 536 (433)
Gain on disposition of discontinued operations............ 13,503 -- --
-------- -------- --------
(Loss) income from continuing operations.................... (5,938) 4,133 3,861
Adjustments to reconcile (loss) income from continuing
operations to net cash provided by operating activities of
continuing operations:
Cumulative effect of accounting change -- net of income
taxes................................................... (904) -- --
Net gains on sales of businesses and investments.......... (528) (1,321) (585)
Cost investment impairment charges........................ 1,083 248 40
Put option settlement loss and mark-to-market charges..... 838 537 --
Net restructuring and other charges....................... 2,343 6,793 678
Depreciation and amortization............................. 9,338 8,589 6,194
Provision for uncollectible receivables................... 1,130 1,080 1,216
Deferred income taxes..................................... (4,818) 341 354
Net revaluation of certain financial instruments.......... 809 -- --
Minority interest (income) expense........................ (1,263) (4,329) 24
Net equity losses (earnings) from Liberty Media Group..... 2,711 (1,488) 2,022
Net losses related to other equity investments............ 7,889 1,017 1,223
Decrease (increase) in receivables........................ 716 (2,512) (2,409)
Decrease in accounts payable.............................. (819) (577) (165)
Net change in other operating assets and liabilities...... (2,153) (376) (1,785)
Other adjustments, net.................................... 124 (470) (159)
-------- -------- --------
Net Cash Provided by Operating Activities of Continuing
Operations................................................ 10,558 11,665 10,509
-------- -------- --------
INVESTING ACTIVITIES
Capital expenditures and other additions.................... (9,300) (11,511) (11,876)
Proceeds from sale or disposal of property, plant and
equipment................................................. 83 600 286
(Increase) decrease in other receivables.................... (114) (1,052) 17
Sales of marketable securities.............................. 102 96 --
Purchases of marketable securities.......................... (18) -- --
Investment distributions and sales.......................... 3,014 992 1,574
Investment contributions and purchases...................... (378) (2,394) (7,837)
Net dispositions (acquisitions) of businesses, net of cash
disposed/acquired......................................... 4,913 (16,657) (5,969)
Other investing activities, net............................. (162) (119) (79)
-------- -------- --------
Net Cash Used in Investing Activities of Continuing
Operations................................................ (1,860) (30,045) (23,884)
-------- -------- --------
FINANCING ACTIVITIES
Proceeds from long-term debt issuances, net of issuance
costs..................................................... 12,415 4,601 8,396
Retirement of long-term debt................................ (1,661) (2,118) (2,255)
(Decrease) increase in short-term borrowings, net........... (17,168) 16,973 10,173
Repayment of borrowings from AT&T Wireless.................. (5,803) -- --
Issuance of convertible preferred securities and warrants... 9,811 -- 4,638
Redemption of redeemable securities......................... -- (152) --
Issuance of AT&T common shares.............................. 224 99 --
Issuance of AT&T Wireless Group common shares............... 54 10,314 --
Net issuance (acquisition) of treasury shares............... 24 (581) (4,624)
Dividends paid on common stock.............................. (549) (3,047) (2,712)
Dividends paid on preferred securities...................... (336) (294) (135)
Other financing activities, net............................. (41) (63) 373
-------- -------- --------
Net Cash (Used in) Provided by Financing Activities of
Continuing Operations..................................... (3,030) 25,732 13,854
-------- -------- --------
Net cash provided by (used in) discontinued operations...... 4,860 (8,306) (2,594)
Net increase (decrease) in cash and cash equivalents........ 10,528 (954) (2,115)
Cash and cash equivalents at beginning of year.............. 64 1,018 3,133
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 10,592 $ 64 $ 1,018
======== ======== ========
The notes are an integral part of the consolidated financial statements.
XII-6
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED (EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include all controlled subsidiaries.
All significant intercompany accounts and transactions have been eliminated in
consolidation. Investments in majority-owned subsidiaries where control does not
exist and investments in which we exercise significant influence but do not
control (generally a 20% to 50% ownership interest) are accounted for under the
equity method of accounting. Investments in which there is no significant
influence (generally less than a 20% ownership interest) are accounted for under
the cost method of accounting.
FOREIGN CURRENCY TRANSLATION
For operations outside the United States that prepare financial statements
in currencies other than the U.S. dollar, we translate income statement amounts
at average exchange rates for the year, and we translate assets and liabilities
at year-end exchange rates. We present these translation adjustments as a
component of accumulated other comprehensive income within shareowners' equity.
Gains and losses from foreign currency transactions are included in results of
operations.
REVENUE RECOGNITION
We recognize long distance, local voice and data services revenue based
upon minutes of traffic processed or contracted fee schedules. 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 systems.
Customer activation fees, along with the related costs up to but not exceeding
the revenue, are deferred and amortized over the customer relationship period.
We recognize 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.
ADVERTISING AND PROMOTIONAL COSTS
We expense costs of advertising and promotions, including cash incentives
used to acquire customers, as incurred. Advertising and promotional expenses
were $1,549, $1,377 and $1,418 in 2001, 2000 and 1999, respectively. Of these
amounts, $236, $288 and $320 were cash incentives to acquire customers in 2001,
2000 and 1999, respectively.
INCOME TAXES
Under the balance sheet method we recognize deferred tax assets and
liabilities at enacted income tax rates for the temporary differences between
the financial reporting basis and the tax basis of our assets and liabilities.
Any effects of changes in income tax rates or tax laws are included in the
provision for income taxes in the period of enactment. When it is more likely
than not that a portion or all of a deferred tax asset will not be realized in
the future, we provide a corresponding valuation allowance against the deferred
tax asset. We amortize investment tax credits as a reduction to the provision
for income taxes over the useful lives of the assets that produced the credits.
XII-7
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CASH EQUIVALENTS
We consider all highly liquid investments with original maturities of
generally three months or less to be cash equivalents.
PROPERTY, PLANT AND EQUIPMENT
We state property, plant and equipment at cost. Construction costs, labor
and applicable overhead related to installations and interest during
construction are capitalized. Costs of additions and substantial improvements to
property, plant and equipment are capitalized. The costs of maintenance and
repairs of property, plant and equipment are charged to operating expense.
Depreciation is determined based upon the assets' estimated useful lives using
either the group or unit method. The useful lives of communications and network
equipment range from three to 15 years. The useful lives of other equipment
ranges from three to seven years. The useful lives of buildings and improvements
range from 10 to 40 years. The group method is used for most depreciable assets,
including the majority of communications and network equipment. The unit method
is primarily used for large computer systems, buildings and support assets.
Under the group method, a specific asset group has an average life. The
depreciation rate is developed based on the average useful life for the specific
asset group. This method requires the periodic revision of depreciation rates.
Under the unit method, assets are depreciated based on the useful life of the
individual asset. When we sell or retire assets depreciated using the group
method, the cost is deducted from property, plant and equipment and charged to
accumulated depreciation, without recognition of a gain or loss. When we sell
assets that were depreciated using the unit method, we include the related gains
or losses in "Other income (expense)" in the Consolidated Statements of Income.
We use accelerated depreciation methods primarily for certain
high-technology computer-processing equipment and digital equipment used in the
telecommunications network, except for switching equipment placed in service
before 1989, where a straight-line method is used. All other plant and equipment
is depreciated on a straight-line basis.
FRANCHISE COSTS
Franchise costs include the value assigned to agreements with local
authorities that allow access to homes in cable service areas acquired in
connection with business combinations. Such amounts are amortized on a
straight-line basis over 25 or 40 years. Beginning in 2002, in accordance with
the provisions of Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets", such franchise costs will no longer be
amortized, but will continue to be tested for impairment (see Note 23).
GOODWILL
Goodwill is the excess of the purchase price over the fair value of net
assets acquired in business combinations accounted for under the purchase
method. We amortize goodwill on a straight-line basis over the periods
benefited, ranging from five to 40 years. Beginning in 2002, in accordance with
the provisions of SFAS No. 142 such goodwill will no longer be amortized, but
will continue to be tested for impairment (see Note 23).
SOFTWARE CAPITALIZATION
Certain direct development costs associated with internal-use software are
capitalized, including external direct costs of material and services, and
payroll costs for employees devoting time to the software projects. These costs
are included within other assets and are amortized over a period not to exceed
five years beginning when the asset is substantially ready for use. Costs
incurred during the preliminary project
XII-8
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stage, as well as maintenance and training costs, are expensed as incurred. AT&T
also capitalizes initial operating-system software costs and amortizes them over
the life of the associated hardware.
AT&T also capitalizes costs associated with the development of application
software incurred from the time technological feasibility is established until
the software is ready to provide service to customers. These capitalized costs
are included in property, plant and equipment and are amortized over a useful
life not to exceed five years.
VALUATION OF LONG-LIVED ASSETS
Long-lived assets, such as property, plant and equipment, franchise costs,
goodwill, investments and software, are reviewed for impairment annually or
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. If the total of the expected future undiscounted cash
flows is less than the carrying amount of the asset, a loss is recognized for
the difference between the fair value and carrying value of the asset.
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
We use derivative financial instruments to mitigate market risk from
changes in interest rates, foreign currency exchange rates and equity prices.
Derivative financial instruments may be exchange-traded or contracted in the
over-the-counter market and include swaps, options, warrants and forward
contracts. We do not use derivative financial instruments for speculative
purposes.
All derivatives are recognized on the balance sheet at fair value. To
qualify for hedge accounting treatment, derivatives, at inception, must be
designated as hedges and evaluated for effectiveness throughout the hedge
period. We designate certain derivative contracts, at the date entered into, as
either (1) a hedge of the fair value of a recognized asset or liability or of an
unrecognized firm commitment (fair value hedge), (2) a hedge of a forecasted
transaction or of the variability of cash flows to be received or paid related
to a recognized asset or liability (cash flow hedge) or (3) a foreign currency
fair value or cash flow hedge (foreign currency hedge). Other derivatives
(undesignated) are not formally designated for accounting purposes. These
derivatives, except for warrants, although undesignated for accounting purposes
are entered into to hedge economic risks.
We record changes in the fair value of fair-value hedges (including fair
value foreign currency hedges), along with the changes in fair value of the
hedged asset or liability that is attributable to the hedged risk (including
losses or gains on firm commitments), in "Other income (expense)" in the
Consolidated Statement of Income.
We record changes in the fair value of cash-flow hedges (including foreign
currency cash flow hedges) that are highly effective in "Other comprehensive
income", net of income taxes, as a component of shareowners' equity, until
earnings are affected by the variability of cash flows of the hedged
transaction.
Changes in the fair value of undesignated derivatives are recorded in
"Other income (expense)" in the Consolidated Statement of Income, along with the
change in fair value of any related asset or liability.
We currently do not have any net investment hedges in a foreign operation.
We assess embedded derivatives to determine whether (1) the economic
characteristics of the embedded instruments are not clearly and closely related
to the economic characteristics of the remaining component of the financial
instrument (the host instrument) and (2) whether a separate instrument with the
same terms as the embedded instrument would meet the definition of a derivative
instrument. When it is determined that both conditions exist, we designate the
derivatives as described above, and recognize at fair value.
XII-9
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
We formally document all relationships between hedging instruments and
hedged items, as well as its risk-management objective and strategy for
undertaking various hedge transactions. This process includes linking all
derivatives that are designated as fair value or cash flow hedges to specific
assets and liabilities on the balance sheet or to specific firm commitments or
forecasted transactions.
We discontinue hedge accounting prospectively when (1) it is determined
that the derivative is no longer effective in offsetting changes in the fair
value of cash flows of a hedged item (2) the derivative expires or is sold,
terminated, or exercised; (3) it is determined that the forecasted hedged
transaction will no longer occur; (4) a hedged firm commitment no longer meets
the definition of a firm commitment or (5) management determines that the
designation of the derivative as a hedge instrument is no longer appropriate.
When hedge accounting is discontinued because it is determined that the
derivative no longer qualifies as an effective fair value hedge, the derivative
will continue to be adjusted for changes in fair value through "Other income
(expense)" in the Consolidated Statement of Income, and the hedged asset or
liability will no longer be adjusted for changes in fair value. When hedge
accounting is discontinued because the hedged item no longer meets the
definition of a firm commitment, the derivative will continue to be adjusted for
changes in the fair value through "Other income (expense)" in the Consolidated
Statement of Income, and any asset or liability that was recorded pursuant to
the recognition of the firm commitment will be removed from the balance sheet
and recorded in current period earnings. When hedge accounting is discontinued
because it is probable that a forecasted transaction will not occur, the
derivative will then be adjusted for changes in the fair value through "Other
income (expense)" in the Consolidated Statement of Income, and gains and losses
that were accumulated in "Other comprehensive income" as a component of
shareowners' equity, will be recognized immediately in "Other income (expense)"
in the Consolidated Statement of Income. In all other situations in which hedge
accounting is discontinued, the derivative will continue to be carried at fair
value on the balance sheet, with changes in its fair value recognized in "Other
income (expense)" in the Consolidated Statement of Income.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and revenue and expenses during the period reported. Actual results
could differ from those estimates. Estimates are used when accounting for
certain items such as allowances for doubtful accounts, depreciation and
amortization, employee benefit plans, taxes, restructuring reserves and
contingencies.
CONCENTRATIONS
As of December 31, 2001, we do not have any significant concentration of
business transacted with a particular customer, supplier or lender that could,
if suddenly eliminated, severely impact our operations. We also do not have a
concentration of available sources of labor, services, franchises or other
rights that could, if suddenly eliminated, severely impact our operations. We
invest our cash with several high-quality credit institutions.
ISSUANCE OF COMMON STOCK BY AFFILIATES
Changes in our proportionate share of the underlying equity of a subsidiary
or equity method investee, which result from the issuance of additional equity
securities by such entity, are recognized as increases or decreases to
additional paid-in capital in the Consolidated Statements of Shareowners'
Equity.
XII-10
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RECLASSIFICATIONS AND RESTATEMENTS
We reclassified certain amounts for previous years to conform to the 2001
presentation.
2. 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 have been 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 expects, 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 we currently expect or in the time frames that we
currently contemplate, or at all. Alternative forms of restructuring, including
sales of interests in these businesses, would reduce what is available for
distribution to shareowners in the restructuring.
On May 25, 2001, AT&T completed an exchange offer of AT&T common stock for
AT&T Wireless stock. Under the terms of the exchange offer, AT&T issued 1.176
shares of AT&T Wireless Group tracking stock in exchange for each share of AT&T
common stock validly tendered. A total of 372.2 million shares of AT&T common
stock were tendered in exchange for 437.7 million shares of AT&T Wireless Group
tracking stock. 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
XII-11
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 2001. The
remaining portion of these holdings was monetized in October and December of
2001 through the issuance of debt that is exchangeable into Wireless shares (or
their cash equivalent) 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. This gain was recorded in the third
quarter of 2001 as a "Gain on disposition of discontinued operations."
On August 10, 2001, AT&T completed the split-off of Liberty Media
Corporation as an independent, publicly traded company (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.
3. SUPPLEMENTARY FINANCIAL INFORMATION
SUPPLEMENTARY INCOME STATEMENT INFORMATION
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
2001 2000 1999
------- ------ ----
INCLUDED IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Research and development expenses........................... $ 325 $ 402 $550
======= ====== ====
OTHER (EXPENSE) INCOME
Cost investment impairment charges.......................... $(1,083) $ (248) $(40)
Settlement loss and mark-to-market charges on Excite@Home
put options............................................... (838) (537) --
Net revaluation of certain financial instruments............ (809) -- --
Net gains on sales of businesses and investments............ 528 1,321 585
Investment-related income................................... 426 512 203
Miscellaneous, net.......................................... 229 102 78
------- ------ ----
Total other (expense) income................................ $(1,547) $1,150 $826
======= ====== ====
SUPPLEMENTARY BALANCE SHEET INFORMATION
AT DECEMBER 31,
-------------------
2001 2000
-------- --------
PROPERTY, PLANT AND EQUIPMENT
Communications, network and other equipment................. $ 64,372 $ 60,232
Buildings and improvements.................................. 8,512 8,643
Land and improvements....................................... 484 523
-------- --------
Total property, plant and equipment......................... 73,368 69,398
Accumulated depreciation.................................... (32,046) (28,129)
-------- --------
Property, plant and equipment, net.......................... $ 41,322 $ 41,269
======== ========
XII-12
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LEVERAGED LEASES
We lease airplanes, energy-producing facilities and transportation
equipment under leveraged leases having original terms of 10 to 30 years,
expiring in various years from 2004 through 2020. The investment in leveraged
leases is primarily included in other assets on the balance sheet. Following is
a summary of our investment in leveraged leases:
AT DECEMBER 31,
---------------
2001 2000
------ ------
Rentals receivable (net of nonrecourse debt*)............... $1,241 $1,278
Estimated unguaranteed residual values...................... 964 976
Unearned income............................................. (953) (997)
Allowance for credit losses................................. (31) (33)
------ ------
Investment in leveraged leases (included in other assets)... 1,221 1,224
Deferred taxes.............................................. 1,105 1,124
------ ------
Net investment.............................................. $ 116 $ 100
====== ======
---------------
* The rentals receivable are net of nonrecourse debt of $3.2 billion and $3.4
billion at December 31, 2001 and 2000, respectively.
SUPPLEMENTARY SHAREOWNERS' EQUITY INFORMATION
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------
2001 2000 1999
------ ------- ------
OTHER COMPREHENSIVE INCOME (LOSS)
Net foreign currency translation adjustment [net of income
taxes of $(160), $(181) and $87](1)..................... $ (250) $ (309) $ 148
Net revaluation of certain financial instruments:
Unrealized gains (losses) [net of income taxes of $343,
$(4,686) and $4,499](2).............................. 475 (7,317) 6,868
Recognition of previously unrealized losses (gains) on
available-for-sale securities [net of income taxes of
$950, $(480) and $7](3).............................. 1,535 (750) 10
Net minimum pension liability adjustment [net of income
taxes of $(14), $(1) and $7]............................ (18) (1) 12
------ ------- ------
Total other comprehensive income (loss)................... $1,742 $(8,377) $7,038
====== ======= ======
---------------
(1) Includes LMG's foreign currency translation adjustments, net of applicable
income taxes, totaling $(149) in 2001 through July 31, 2001, $(202) in 2000
and $60 in 1999, from March 1, 1999, date of acquisition, to December 31,
1999.
(2) Includes LMG's unrealized gains (losses) on available-for-sale securities,
net of applicable income taxes, totaling $1,286 in 2001 through July 31,
2001, $(6,117) in 2000 and $6,497 in 1999, from March 1, 1999, date of
acquisition, to December 31, 1999.
(3) See below for a summary of the "Recognition of previously unrealized losses
(gains) on available-for-sale securities" and the income statement line
items impacted.
XII-13
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUMMARY OF RECOGNITION OF PREVIOUSLY UNREALIZED LOSSES (GAINS) ON
AVAILABLE-FOR-SALE
SECURITIES AND THE INCOME STATEMENT LINE ITEMS IMPACTED
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
2001 2000 1999
------------------ ------------------- ------------------
PRETAX AFTER-TAX PRETAX AFTER-TAX PRETAX AFTER-TAX
------ --------- ------- --------- ------ ---------
AT&T GROUP:
Other (expense) income:
Reclassification of securities
to "trading" in conjunction
with the adoption of SFAS No.
133(4)....................... $1,154 $ 713 $ -- $ -- $-- $--
Sales of various securities.... 317 196 (476) (294) (3) (2)
Other-than-temporary investment
impairments.................. 985 608 290 179 -- --
LIBERTY MEDIA GROUP:
Earnings (losses) from Liberty
Media Group:
Sale of various securities..... 173 105 (1,044) (635) 20 12
Cumulative effect of accounting
change(4)...................... (144) (87) -- -- -- --
------ ------ ------- ----- --- ---
Total recognition of previously
unrealized losses (gains) on
available-for-sale securities..... $2,485 $1,535 $(1,230) $(750) $17 $10
====== ====== ======= ===== === ===
---------------
(4) See Note 14 for detailed discussion.
SUPPLEMENTARY CASH FLOW INFORMATION
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
-------- -------- --------
Interest payments, net of capitalized interest of $138,
$177 and $143.......................................... $3,396 $3,059 $1,292
Income tax payments...................................... 803 2,369 3,948
4. MERGERS WITH MEDIAONE GROUP, INC., AND TELE-COMMUNICATIONS, INC.
MERGER WITH MEDIAONE GROUP, INC.
On June 15, 2000, AT&T completed a merger with MediaOne Group, Inc.
(MediaOne) in a cash and stock transaction valued at approximately $45 billion.
For each share of MediaOne stock, MediaOne shareowners received, in the
aggregate 0.95 of a share of AT&T common stock and $36.27 per share in cash,
consisting of $30.85 per share as stipulated in the merger agreement and $5.42
per share based on AT&T's stock price preceding the merger, which was below a
predetermined amount. AT&T issued approximately 603 million shares of common
stock in the transaction, of which approximately 60 million were treasury
shares. The AT&T shares had an aggregate market value of approximately $21
billion, and cash payments totaled approximately $24 billion.
XII-14
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The merger was accounted for under the purchase method. Accordingly, the
results of MediaOne have been included in the accompanying consolidated
financial statements since the date of acquisition as part of our AT&T Broadband
segment.
Approximately $17 billion of the purchase price of $45 billion has been
attributed to agreements with local franchise authorities that allow access to
homes in our broadband service areas (franchise costs) and is being amortized on
a straight-line basis over 40 years. Also included in the purchase price was
approximately $22 billion related to nonconsolidated investments, including
investments in Time Warner Entertainment Company, L.P. (TWE) and Vodafone Group
plc (Vodafone), approximately $5 billion related to property, plant and
equipment, and approximately $5 billion of other net assets. In addition,
included was approximately $13 billion in deferred income tax liabilities,
approximately $10 billion attributable to MediaOne debt, and approximately $1
billion of minority interest in Centaur Funding Corporation, a subsidiary of
MediaOne. The purchase resulted in goodwill of approximately $20 billion, which
is being amortized on a straight-line basis over 40 years.
MERGER WITH TELE-COMMUNICATIONS, INC.
On March 9, 1999, AT&T completed a merger with Tele-Communications, Inc.
(TCI), renamed AT&T Broadband, in an all-stock transaction valued at
approximately $52 billion. Each share of TCI Group Series A common stock was
converted into 1.16355 shares of AT&T common stock, and each share of TCI Group
Series B common stock was converted into 1.27995 shares of AT&T common stock.
AT&T issued approximately 664 million shares of common stock in the transaction,
of which approximately 149 million were treasury shares. The AT&T shares had an
aggregate market value of approximately $27 billion. Certain subsidiaries of TCI
held TCI Group Series A common stock, which was converted into 216 million
shares of AT&T common stock. These shares were held by the subsidiaries
throughout 1999 and 2000 and were reflected as treasury stock in the balance
sheet. In the second quarter of 2001, these shares were converted into AT&T
Subsidiary Exchangeable Preferred Stock. Each subsidiary preferred share is
exchangeable into 1,000 shares of AT&T Common Stock.
In addition, TCI simultaneously combined its LMG programming business with
its TCI Ventures Group technology investment business, forming LMG. In
connection with the closing, AT&T issued separate tracking stock in exchange for
the TCI, LMG and TCI Ventures Group tracking shares previously outstanding. We
issued 2,280 million shares of LMG Class A tracking stock (including 120 million
shares related to the conversion of convertible notes) and 220 million shares of
Liberty Media Group Class B tracking stock. The tracking stock was designed to
reflect the separate financial performance and economic value of LMG. These
shares had an aggregate market value of approximately $23 billion. LMG was
split-off from AT&T as an independent, publicly-traded company on August 10,
2001 (see Notes 2 and 10).
The TCI merger was accounted for under the purchase method. Accordingly,
the results of TCI have been included in the financial results of AT&T since the
date of acquisition as part of our AT&T Broadband segment. The operating results
of TCI have been included in the accompanying consolidated financial statements
at their fair value since March 1, 1999, the deemed effective date of
acquisition for accounting purposes. The impact of the results from March 1
through March 9, 1999, were deemed immaterial to our consolidated results.
Approximately $20 billion of the purchase price of $52 billion was
attributed to franchise costs and is being amortized on a straight-line basis
over 40 years. Pursuant to SFAS No. 109, "Accounting for Income Taxes", AT&T
recorded an approximate $13 billion deferred tax liability in connection with
this franchise intangible, which is also included in franchise costs. We do not
expect that this deferred tax liability will ever be paid. This deferred tax
liability is being amortized on a straight-line basis over 40 years and is
included in the provision for income taxes. Also included was approximately $11
billion
XII-15
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
related to nonconsolidated investments, approximately $5 billion related to
property, plant and equipment, approximately $11 billion of TCI long-term debt
and approximately $7 billion related to other net liabilities. In addition, our
investment in LMG was recorded at approximately $34 billion, including
approximately $11 billion of goodwill.
In 2002, in accordance with the provisions of SFAS No. 142, "Goodwill and
Other Intangible Assets", we will no longer amortize goodwill, franchise costs
or the deferred tax liability associated with franchise costs related to the
mergers discussed above (see Note 23).
Following is a summary of the pro forma results of AT&T as if the mergers
with MediaOne and TCI had closed effective January 1, 1999:
FOR THE YEARS ENDED
DECEMBER 31,
-------------------
2000 1999
-------- --------
(SHARES IN MILLION)
(UNAUDITED)
Revenue..................................................... $56,858 $58,609
Income from continuing operations........................... 5,081 6,885
Weighted-average AT&T common shares......................... 3,762 3,784
Weighted-average AT&T common shares and potential common
shares.................................................... 3,821 3,906
Weighted-average Liberty Media Group shares................. 2,572 2,519
AT&T Common Stock Group earnings from continuing operations
per common share:
Basic..................................................... $ 0.96 $ 2.41
Diluted................................................... 0.95 2.34
Liberty Media Group earnings (loss) per common share:
Basic and diluted......................................... $ 0.58 $ (0.89)
Pro forma data may not be indicative of the results that would have been
obtained had these events actually occurred at the beginning of the periods
presented, nor does it intend to be a projection of future results.
5. CONCERT AND AT&T CANADA
On October 16, 2001, AT&T announced a decision to unwind Concert, its
global venture with British Telecommunications plc (BT), which was launched in
January 2000. Under the partnership termination agreement, each of the partners
generally will reclaim the customer contracts and assets that were initially
contributed to the joint venture, including international transport facilities
and gateway assets. In addition, AT&T will assume certain other assets that BT
originally contributed to the joint venture. AT&T also will acquire BT's 9%
interest in AT&T Canada and assume BT's obligation to purchase a portion of the
publicly owned shares of AT&T Canada. The agreement to dissolve the Concert
venture impacted AT&T's intent and ability to hold its investment in Concert,
therefore, AT&T recorded a $1.8 billion after-tax investment impairment charge
($2.9 billion pretax) in 2001 included in "Net losses related to other equity
investments" in the Consolidated Statement of Income. This charge primarily
relates to the difference between the fair market value of the net assets AT&T
will receive in the transaction and the carrying value of AT&T's investment in
Concert which included a note receivable from Concert of approximately $1.1
billion. Our investment in Concert was accounted for as an equity method
investment. The remaining carrying value of our investment in Concert was
approximately $0.1 billion at December 31, 2001. The agreement to dissolve
Concert remains subject to regulatory approval in the United States, Europe and
other jurisdictions and is expected to close by the first-half of 2002.
XII-16
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Through a joint venture, AT&T and BT have an approximate 31% equity
ownership of AT&T Canada. In connection with the decision to unwind Concert,
AT&T has agreed to acquire BT's 9% interest in AT&T Canada 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 has the right to trigger, at any time, the purchase by AT&T
or another entity the remaining equity of AT&T Canada for the Back-end Price
which is the greater of the floor price (Cdn $47.45 as of December 31, 2001) and
the fair market value. The floor price accretes at 4% each quarter, commencing
on June 30, 2000. 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 Back-end Price. If foreign ownership
restrictions in Canada are not lifted and we do not exercise the call right by
June 30, 2003, the shares would be put up for auction, and AT&T would have to
make the 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 after-tax charges ($3.0 billion pretax)
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 BT'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, including the 4% accretion of the floor price, and are included in
"Net losses related to other equity investments" in the Consolidated Statement
of Income and the related liability within "Other long-term liabilities and
deferred credits" in the Consolidated Balance Sheet. The purchase commitment
will continue to be evaluated against the difference between the contractual
floor price and underlying value of AT&T Canada shares, which could result in
the recognition of additional future charges in the amount of approximately $1.1
billion, assuming that the commitment is executed on June 30, 2003. As of
December 31, 2001, the aggregate amount that AT&T would need to pay to complete
its obligation related to AT&T Canada is approximately $3.2 billion. This
obligation may be settled using cash or AT&T common stock, or any combination
thereof.
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 December 31, 2001, AT&T Canada had outstanding debt of $2.9 billion
and other net assets of $2.8 billion.
6. OTHER ACQUISITIONS, EXCHANGES, STOCK OFFERING, AND DISPOSITIONS
CABLEVISION SYSTEMS CORPORATION
On October 23, 2001, AT&T sold approximately 19.2 million shares of
Cablevision NY Group Class A common stock and, monetized through a trust, 26.9
million shares of a mandatorily exchangeable trust security that is exchangeable
into up to 26.9 million shares of Cablevision NY Group Class A common stock at
maturity in three years. The offering price was $36.05 per share for both the
common shares and the exchangeable securities. The offerings generated
approximately $1.4 billion of pretax proceeds, net of underwriting fees. The
sale resulted in a pretax loss of approximately $0.3 billion recorded in "Other
(expense) income" in the Consolidated Statement of Income.
On January 8, 2001, AT&T and Cablevision Systems Corporation (Cablevision)
completed the transfer of cable systems in which AT&T received cable-systems
serving 358 thousand customers in Boston and Eastern Massachusetts. In exchange,
Cablevision received cable-systems serving approximately 130 thousand customers
in the northern New York suburbs, and 44 million shares of AT&T common stock
valued at approximately $0.9 billion, and approximately $0.2 billion in cash.
Cablevision recorded a gain as a result of the transaction. AT&T did not record
any gain or loss on the transaction, however due
XII-17
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to its ownership interest in Cablevision, AT&T recorded a proportionate amount
of a gain recorded by Cablevision of approximately $0.1 billion included within
"Net losses related to other equity investments" in the Consolidated Statement
of Income.
AT HOME CORPORATION
On August 28, 2000, AT&T and At Home Corporation (Excite@Home) announced
shareholder approval of a new board of directors and governance structure for
Excite@Home. AT&T was given the right to designate six of the 11 Excite@Home
board members. In addition, Excite@Home converted approximately 50 million of
AT&T's Series A shares into Series B shares, each of which has 10 votes. As a
result of these governance changes, AT&T gained a controlling interest and began
consolidating Excite@Home's results upon the closing of the transaction on
September 1, 2000. As of December 31, 2000, AT&T had, on a fully diluted basis,
approximately 23% of the economic interest and 74% of the voting interest in
Excite@Home.
The consolidation of Excite@Home resulted in minority interest of
approximately $2.2 billion, goodwill of approximately $2.4 billion, short-term
liabilities of approximately $2.4 billion (including an initial put option
liability), other net assets of approximately $1.2 billion and the removal of
our investment in Excite@Home of approximately $1.9 billion.
On September 28, 2001, At Home Corporation filed for bankruptcy protection
under Chapter 11 in the U.S. Bankruptcy Court, for the Northern District of
California. As a result of the bankruptcy and AT&T's removal of four of its six
members from the Excite@Home board of directors, AT&T ceased consolidating
Excite@Home as of September 30, 2001. 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.
The noncash impacts of the deconsolidation of At Home Corporation primarily
included a reduction to property, plant and equipment of approximately $0.3
billion, goodwill of approximately $0.3 billion and debt of approximately $1.0
billion. This resulted in the recording of a liability of approximately $0.4
billion. This liability will continue to be evaluated. In addition, other
noncash items included a tax benefit of $0.7 billion reflecting changes to
deferred tax liabilities.
COX COMMUNICATIONS, INC. AND COMCAST -- EXCITE@HOME PUT OPTIONS
In August 2000, in exchange for Cox Communications, Inc. (Cox) and Comcast
relinquishing their rights under the shareholder agreement in connection with
Excite@Home's governance change, AT&T granted put options to Cox and Comcast.
The obligation under these put options was recorded at fair value, with gains or
losses resulting from changes in fair value being recorded as a component of
"Other (expense) income" in the Consolidated Statement of Income. For 2001 and
2000, changes in fair market value resulted in a pretax expense of $63 and $537,
respectively. On May 18, 2001, AT&T, Cox and Comcast reached an agreement to
revise the terms of the put options. Under the new agreement, Cox and Comcast
retained their stakes in Excite@Home and AT&T issued 75 million AT&T common
shares to Cox and more than 80 million AT&T common shares to Comcast. We
recorded an approximate $0.8 billion loss in "Other (expense) income" in the
Consolidated Statement of Income for this put option settlement in 2001. The new
agreement resulted in a tax benefit to AT&T, which essentially offset this loss.
COMCAST CABLE SYSTEM TRANSACTIONS
On June 30, 2001, AT&T transferred its 99.75% interest in an entity owning
the Baltimore Maryland cable-system serving approximately 115 thousand customers
to Comcast for approximately $0.5 billion
XII-18
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
cash. The transaction resulted in a pretax gain of $0.1 billion recorded in
"Other (expense) income" in the Consolidated Statement of Income.
On April 30, 2001, AT&T received 63.9 million shares of AT&T common stock
held by Comcast in exchange for cable systems that served approximately 590
thousand customers in six states. The transaction resulted in a pretax loss of
$0.3 billion recorded in "Other (expense) income" in the Consolidated Statement
of Income.
JAPAN TELECOM CO. LTD
On April 27, 2001, AT&T completed the sale of our 10% stake in Japan
Telecom Co. Ltd to Vodafone for $1.35 billion in cash. The proceeds from the
transaction were split evenly between AT&T and AT&T Wireless Group since AT&T
Wireless Group held approximately one-half of AT&T's investment. The transaction
resulted in a pretax gain of approximately $0.5 billion recorded in "Other
(expense) income" and a pretax gain of approximately $0.5 billion recorded in
"Income from discontinued operations" in the Consolidated Statement of Income.
INSIGHT COMMUNICATIONS COMPANY LP
Effective January 1, 2001, AT&T sold to Insight Communications Company LP
(Insight) several Illinois cable systems serving approximately 98 thousand
customers for $0.4 billion. Insight subsequently contributed the purchased cable
system and additional cable systems serving approximately 177 thousand customers
to Insight Midwest L.P. in which AT&T has a 50% interest. AT&T also contributed
cable systems serving approximately 248 thousand customers in Illinois to
Insight Midwest L.P. The transactions resulted in a pretax gain of $0.2 billion,
which was deferred due to a debt support agreement with Insight Midwest, L.P.
AT&T WIRELESS GROUP
On April 27, 2000, AT&T created a new class of stock and completed a public
stock offering of 360 million shares, which represented 15.6% of AT&T Wireless
Group tracking stock at a price of $29.50 per share. This stock was intended to
track the financial performance and economic value of AT&T's wireless services
business. The net proceeds to AT&T, after deducting the underwriter's discount
and related fees and expenses, were $10.3 billion. AT&T allocated $7.0 billion
of the net proceeds to AT&T Wireless Group, which were used for acquisitions,
network expansion, capital expenditures and general corporate purposes. The
remaining net proceeds of $3.3 billion were utilized by AT&T for general
corporate purposes. On July 9, 2001, AT&T completed the split-off of AT&T
Wireless (see Notes 2 and 7).
COX -- CABLE SYSTEM TRANSACTION
On March 15, 2000, AT&T received 50.3 million shares of AT&T common stock
held by Cox in exchange for an entity owning cable systems serving approximately
312 thousand customers and certain other net assets. The transaction resulted in
a pretax gain of $0.2 billion recorded in "Other (expense) income" in the
Consolidated Statement of Income.
LENFEST COMMUNICATIONS, INC.
On January 18, 2000, AT&T sold its ownership in Lenfest Communications,
Inc. to a subsidiary of Comcast. In connection with the sale, we received 47.3
million shares of Comcast Class A Special common stock. The transaction resulted
in a pretax gain of $0.2 billion recorded in "Other (expense) income" in the
Consolidated Statement of Income.
XII-19
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACC EUROPE
On November 5, 1999, AT&T sold ACC Corp. (ACC) in Europe, including ACC's
principal operations in the United Kingdom as well as ACC's operating companies
in France, Germany and Italy, to WORLDxCHANGE Communications. We were required
to dispose of this investment pursuant to a government mandate since it would
have competed directly with Concert. The transaction resulted in a pretax loss
of $0.2 billion recorded in "Other (expense) income" in the Consolidated
Statement of Income.
IBM GLOBAL NETWORK
On April 30, 1999, AT&T completed its acquisition of the IBM Global Network
business (renamed AT&T Global Network Services or AGNS) and its assets in the
United States. The non-U.S. acquisitions were completed in phases throughout
1999 and during the first quarter of 2000. Under the terms of the agreement,
AT&T acquired the global network of IBM, and the two companies entered into
outsourcing agreements with each other. The acquisition was accounted for under
the purchase method. Accordingly, the operating results of AGNS have been
included in the accompanying consolidated financial statements since the date of
acquisition. The pro forma impact of AGNS on historical AT&T results is not
material.
7. DISCONTINUED OPERATIONS
Pursuant to AT&T's restructuring plan (see Note 2), AT&T completed the
split-off of AT&T Wireless as a separate, independently traded company on July
9, 2001. All AT&T Wireless tracking stock was converted into AT&T Wireless
common stock on a one-for-one basis and 1,136 million shares of AT&T Wireless
common stock, held by AT&T, were distributed to AT&T common shareowners on a
basis of 0.3218 of a share of AT&T Wireless for each AT&T share outstanding.
AT&T common shareowners received whole shares of AT&T Wireless and cash payments
for fractional shares. The 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. 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 resulting in a $0.5 billion gain recorded in
"Other (expense) income" in the Consolidated Statement of Income. The remaining
portion of these holdings was monetized in October and December of 2001 through
the issuance of debt that is exchangeable into Wireless shares (or their cash
equivalent) at maturity (see Note 12).
In connection with the split-off of AT&T Wireless, AT&T wrote-up the net
assets of AT&T Wireless to fair value. This resulted in a tax-free noncash gain
of $13.5 billion, which represented the difference between the fair value of
AT&T Wireless at the date of the split-off and AT&T's book value in AT&T
Wireless. This gain was recorded as a "Gain on disposition of discontinued
operations" in the Consolidated Statement of Income.
The consolidated financial statements of AT&T have been restated to reflect
AT&T Wireless as a discontinued operation. Accordingly, the revenue, costs and
expenses, assets and liabilities and cash flows of AT&T Wireless have been
excluded from the respective captions in the Consolidated Statements of Income,
Consolidated Balance Sheets and Consolidated Statements of Cash Flows, and have
been reported through June 30, 2001, the deemed effective split-off date for
accounting purposes, as "Income from discontinued operations", net of applicable
income taxes; as "Net assets of discontinued operations"; and as "Net cash
provided by (used in) discontinued operations". The impact of the operating
results from July 1 through July 9, 2001, were deemed immaterial to our
consolidated results.
Revenue for discontinued operations was $6,592, $10,448 and $7,627 for
2001, 2000 and 1999, respectively.
XII-20
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 2000, "Net Assets of Discontinued Operations" included
total assets of $35,087 and total liabilities of $7,822. Total assets were
comprised primarily of licensing costs, property, plant and equipment, goodwill
and investments. Total liabilities were comprised primarily of deferred income
taxes, accounts payable and other short-term liabilities. Net assets of
discontinued operations also included minority interest of $41 at December 31,
2000.
Interest expense of $153, $330 and $253 was allocated to discontinued
operations in 2001, 2000 and 1999, respectively, based on the debt of AT&T that
was attributable to AT&T Wireless. This debt was repaid to AT&T in connection
with the split-off of AT&T Wireless.
The noncash impacts of the split-off of AT&T Wireless include the reduction
of assets of approximately $39.7 billion and reduced shareowners' equity of
approximately $39.7 billion, including the $13.5 billion noncash gain on
split-off.
8. EARNINGS PER COMMON SHARE AND POTENTIAL COMMON SHARE
Income (loss) attributable to the different classes of AT&T common stock is
as follows:
AT&T WIRELESS
AT&T COMMON STOCK GROUP GROUP LIBERTY MEDIA GROUP
------------------------- ------------------ --------------------------
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
2001 2000 1999 2001 2000 1999 2001 2000 1999
------- ------ ------ ---- ---- ---- ------- ------ -------
(Loss) income from continuing
operations before cumulative effect
of accounting change................. $(4,131) $2,645 $5,883 $-- $-- $-- $(2,711) $1,488 $(2,022)
Dividend requirements of preferred
stock................................ 652 -- -- -- -- -- -- -- --
Premium on Wireless tracking stock
exchange............................. 80 -- -- -- -- -- -- -- --
(Loss) income from continuing
operations available to common
shareowners.......................... (4,863) 2,645 5,883 -- -- -- (2,711) 1,488 (2,022)
Income (loss) from discontinued
operations........................... 115 460 (433) 35 76 -- -- -- --
Gain on disposition of discontinued
operations........................... 13,503 -- -- -- -- -- -- -- --
Cumulative effect of accounting
change............................... 359 -- -- -- -- -- 545 -- --
------- ------ ------ --- --- -- ------- ------ -------
Net income (loss) available to common
shareowners.......................... $ 9,114 $3,105 $5,450 $35 $76 $-- $(2,166) $1,488 $(2,022)
======= ====== ====== === === == ======= ====== =======
Basic earnings (loss) per share for AT&T Common Stock Group for 2001, 2000
and 1999 were computed by dividing AT&T Common Stock Group income (loss) by the
weighted-average number of shares outstanding of 3,643 million, 3,486 million
and 3,082 million during 2001, 2000 and 1999, respectively.
Since AT&T recorded a loss from continuing operations for 2001, the diluted
loss per share is the same as basic, as any potentially dilutive securities
would be antidilutive to continuing operations. At December 31, 2001,
potentially dilutive securities outstanding, included shares issuable for stock
options, convertible quarterly income preferred securities, TCI Pacific
Communications, Inc. preferred securities and the settlement of AT&T's
commitment to purchase the public shares of AT&T Canada (see Note 5).
Diluted earnings per share (EPS) for AT&T Common Stock Group for 2000 and
1999 were computed by dividing AT&T Common Stock Group income, adjusted for the
conversion of securities, by the weighted-average number of shares and dilutive
potential shares outstanding during the year, assuming conversion of the
potential shares at the beginning of the years presented using the treasury
stock method, which assumes any (after-tax) proceeds are used to repurchase
shares. Shares issuable upon conversion of
XII-21
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
preferred stock of subsidiaries, convertible debt securities of a subsidiary and
stock options have been included in the diluted calculation of weighted-average
shares to the extent that the assumed issuance of such shares would have been
dilutive, as illustrated below. The convertible quarterly income preferred
securities were antidilutive and were excluded from the computation of diluted
EPS.
A reconciliation of the income and share components for basic and diluted
EPS calculations with respect to AT&T Common Stock Group continuing operations
is as follows:
FOR THE YEARS ENDED
DECEMBER 31,
--------------------
2000 1999
-------- --------
AT&T Common Stock Group:
Income from continuing operations......................... $2,645 $5,883
Income impact of assumed conversion of preferred stock of
subsidiary............................................. 32 26
Income adjusted for conversion of securities.............. $2,677 $5,909
Shares in millions
Weighted-average common shares............................ 3,486 3,082
Stock options............................................. 19 35
Preferred stock of subsidiary............................. 40 33
Convertible debt securities of subsidiary................. -- 2
Weighted-average common shares and potential common
shares................................................. 3,545 3,152
Basic EPS from discontinued operations for AT&T Wireless Group for 2001
through June 30, 2001, the deemed effective split-off date for accounting
purposes, and from April 27, 2000, the stock offering date, through December 31,
2000, was computed by dividing income attributable to AT&T Wireless Group by the
weighted-average number of shares outstanding of AT&T Wireless Group of 438
million and 361 million, respectively.
Basic (loss) earnings per share for LMG was computed by dividing (loss)
income attributable to LMG by the weighted-average number of LMG shares
outstanding of 2,582 million in 2001 through July 31, 2001, the deemed effective
split-off date for accounting purposes, 2,572 million in 2000 and 2,519 million
from March 9, 1999, date of issuance through December 31, 1999. Potentially
dilutive securities, including fixed and nonvested performance awards and stock
options, have not been factored into the dilutive calculations because past
history indicated that these contracts were generally settled in cash.
9. NET RESTRUCTURING AND OTHER CHARGES
During 2001, we recorded $2,530 of net restructuring and other charges.
These charges included approximately $1,330 of restructuring and exit costs
associated with AT&T's continued cost reduction initiatives and $1,200 of asset
impairment charges which were primarily related to Excite@Home.
The $1,330 of charges for restructuring and exit plans were primarily due
to headcount reductions with $1,014 for employee separations and benefit plan
curtailment costs, $322 for facility closings and $27 related to termination of
contractual obligations. The restructuring and exit plans support our 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 through September 2001), in addition to impacts
of the MediaOne merger. These charges were slightly offset by the reversal in
December 2001 of $33 related to the business restructuring plans for fourth
quarter 1999 and first quarter 2000.
XII-22
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Included in the $1,014 of employee separations were $200 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 non-management employees. Nearly 17 thousand employee separations related to
involuntary terminations and more than 1 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 were paid throughout 2001.
The following table displays the activity and balances of the restructuring
reserve account:
TYPE OF COST
------------------------------------------
EMPLOYEE FACILITY
SEPARATIONS CLOSINGS OTHER TOTAL
----------- -------- ----- ------
Balance at January 1, 1999.................... $ 118 $ 369 $ 30 $ 517
Additions................................... 142 -- 3 145
Deductions.................................. (110) (130) (12) (252)
Balance at December 31, 1999.................. 150 239 21 410
Additions................................... 503 32 62 597
Deductions.................................. (394) (98) (47) (539)
Balance at December 31, 2000.................. 259 173 36 468
Additions................................... 1,014 322 27 1,363
Deductions.................................. (765) (179) (44) (988)
Balance at December 31, 2001.................. $ 508 $ 316 $ 19 $ 843
Deductions reflect cash payments of $209, $369, and $428 for 1999, 2000 and
2001, respectively. These payments included cash termination benefits of $40,
$257 and $341, respectively, which were primarily funded through cash from
operations. Deductions also reflect noncash utilization of $43, $170 and $560
for 1999, 2000 and 2001, respectively. Noncash utilization in 2001 includes $200
associated with benefit plan curtailment costs, $188 associated with management
separation benefits in connection with U.S. based managers expected to be funded
through AT&T's pension assets, $121 for the deconsolidation of Excite@Home,
reversal of $33 related to the 1999 and 2000 business restructuring plan (of
which $15 related to employee separations and $18 related to contract
terminations) and $18 of deferred severance payments primarily related to
executives. Noncash utilization in 1999 and 2000 included deferred severance
payments primarily related to executives. The business restructuring plans of
1999 and 2000 are substantially complete as of December 31, 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 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 recorded a related goodwill impairment charge of $139 associated with its
acquisition goodwill of Excite@Home. Since we 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 our Consolidated Statement of Operations as a component of
"Minority interest income (expense)." Additionally, we recorded asset impairment
charges
XII-23
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of $29 related to the write-down of unrecoverable support assets where the
carrying value was no longer supported by estimated future cash flows.
During 2000, we recorded $7,029 of net restructuring and other charges,
which included $6,179 of asset impairment charges related to Excite@Home, $759
for restructuring and exit costs associated with AT&T's initiative to reduce
costs, and $91 related to the government-mandated disposition of AT&T
Communications (U.K.) Ltd., which would have competed directly with Concert.
The charges related to Excite@Home included $4,609 of asset impairment
charges recorded by Excite@Home associated with the impairment of goodwill from
various acquisitions, including Excite, and a related goodwill impairment charge
of $1,570 recorded by AT&T associated with goodwill from the acquisition of our
investment in Excite@Home.
The impairments resulted from the deterioration of the market conditions
and market valuations of Internet-related companies during the fourth quarter of
2000, which caused Excite@Home to conclude that intangible assets related to
their acquisitions of Internet-related companies may not be recoverable. In
accordance with SFAS No. 121, "Accounting For The Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", 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 in December 2000, representing
the excess of the carrying amount of the impaired assets over their fair value.
The review for impairment included a review of publicly traded Internet
companies that are comparable to the companies that Excite@Home acquired. These
companies experienced a substantial decline in stock price and market
capitalization during the fourth quarter of 2000.
Excite@Home also reviewed the business climate for Internet advertising and
web-based infrastructure companies as of December 31, 2000, and observed the
following: (1) investor and consumer enthusiasm for the Internet sector severely
deteriorated during the fourth quarter of 2000; (2) many Internet companies,
including those acquired by Excite@Home, experienced significant decelerations
in their growth both as a result of economic conditions and due to
Internet-sector specific issues such as competition and the weakening of the
Internet advertising market; and (3) funding sources for Internet-based consumer
businesses, which require considerable amounts of capital, had substantially
evaporated as of December 31, 2000. As a result, Excite@Home concluded that
fundamental, permanent and significant adverse changes had occurred during the
fourth quarter of 2000 in the business climate for companies providing Internet
advertising and other web-based services.
In addition, Excite@Home reviewed operating and cash flow projections that
existed at the time Excite@Home made the acquisitions and that were used as a
basis upon which the decisions to complete the acquisitions were made. These
operating and cash flow projections indicated that the acquired companies, over
their useful lives, would be profitable and generate positive cash flows. The
operating and cash flow projections were compared to operating results after the
date of the acquisitions through December 31, 2000, as well as to projected
operating results for 2001. These comparisons indicated that certain
acquisitions generated operating and cash flow losses through the end of 2000,
and were projected to continue generating operating and cash flow losses for the
foreseeable future.
As a result of these factors, Excite@Home determined that the intangible
assets related to the acquisitions might not be recoverable and conducted
impairment tests.
Generally, the impairment tests were performed at an asset group level
corresponding to the lowest level at which cash flows independent of other
assets could be identified. Each asset group consisted of the goodwill and
acquired identifiable intangible assets related to a specific acquisition.
Acquired intangible
XII-24
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assets were combined for those acquisitions where separately identifiable cash
flows that are largely independent of the cash flows of other groups of assets
could not be identified.
For each of the asset groups to be tested for impairment, Excite@Home
projected undiscounted cash flows over a future projection period of five years,
based on Excite@Home's determination of the current remaining useful lives of
the asset groups, plus an undiscounted terminal period cash flow to reflect
disposition of the entities at the end of their useful lives. Undiscounted
future cash flows were estimated using projected net realizable value in a sales
transaction (undiscounted cash flows during the expected remaining holding
period until disposition were estimated as negligible). The undiscounted future
cash flows were compared to the carrying amount of each asset group and for
those asset groups where the carrying amount exceeded the undiscounted future
cash flows, Excite@Home concluded that the asset group was impaired.
Excite@Home measured the impairment loss related to impaired asset groups
based on the amount by which the carrying amount of the asset group exceeded the
fair value of the asset group. Measurement of fair value was based on an
analysis by Excite@Home utilizing the best information available in the
circumstances using reasonable and supportable assumptions and projections, and
including the discounted cash flow and market comparison valuation techniques.
The discounted cash flow analysis considered the likelihood of possible outcomes
and was based on Excite@Home's best estimate of projected future cash flows,
including terminal value cash flows expected to result from the disposition of
the asset at the end of its useful life, discounted at our weighted average cost
of capital. Weighted average cost of capital was based on historical risk
premiums required by investors for companies of Excite@Home's size, industry and
capital structure and included risk factors specific to Excite@Home. The market
comparison model represented Excite@Home's estimate of the prices that a buyer
would be willing to pay currently for similar assets, based on comparable
products and services, customer base, risks, earnings capabilities and other
factors.
Based on the foregoing, Excite@Home recorded an impairment write-down of
$4,609 in the aggregate, which was allocated to each asset group based on a
comparison of carrying values and fair values. The impairment write-down within
each asset group was allocated first to goodwill, and if goodwill was reduced to
zero, to identifiable intangible assets in proportion to carrying values.
Also as a result of the foregoing, AT&T recorded a goodwill and
acquisition-related impairment charge of $1,570 associated with the acquisition
of our investment in Excite@Home. The write-down of our investment to fair value
was determined utilizing discounted expected future cash flows.
Since we consolidated but owned only 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 the Consolidated Statement of Income as
"Minority interest income (expense)."
The $759 charge for restructuring and exit plans was primarily due to
headcount reductions, mainly in AT&T Business Services, including network
services, 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 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.
We also recorded $62 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 related to
the disposition of facilities primarily due to synergies created by the MediaOne
merger.
XII-25
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Also included in restructuring and exit costs in 2000 was $144 of benefit
plan curtailment costs associated with employee separations as part of these
exit plans. Further, we recorded an asset impairment charge of $18 related to
the write-down of unrecoverable assets in certain businesses where the carrying
value was no longer supported by estimated future cash flows.
During 1999, we recorded $975 of net restructuring and other charges. A
$594 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 acquisition, which had not yet reached technological feasibility or had no
alternative future use. The projects identified related to efforts to offer
voice over Internet protocol (IP), product-integration efforts for advanced
set-top devices that would enable the offering of next-generation digital
services and cost-savings efforts for broadband-telephony implementation. In
addition, Excite@Home had research and development efforts underway, including
projects to allow for self-provisioning of devices and the development of
next-generation client software, network and back-office infrastructure to
enable a variety of network devices beyond personal computers, and improved
design for the regional data centers' infrastructure.
Also in 1999, a $145 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 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.
We also recorded net losses of $307 related to the government-mandated
disposition of certain international businesses that would have competed
directly with Concert, and $50 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. In addition, we recorded benefits of $121 related to the
settlement of pension obligations for former employees who accepted AT&T's 1998
voluntary retirement incentive program (VRIP) offer.
10. INVESTMENT IN LIBERTY MEDIA GROUP
As a result of our merger with TCI, we acquired Liberty Media Group (LMG).
Although LMG was wholly-owned, we accounted for it as an equity method
investment since we did not have a controlling financial interest. On August 10,
2001, AT&T completed the split-off of Liberty Media Corporation (LMC) as an
independent, publicly-traded company (see Note 2). The operating results of LMG
from March 1, 1999, the date of acquisition through July 31, 2001, the deemed
effective split-off date for accounting purposes, were reflected as "Equity
(losses) earnings from Liberty Media Group" in the Consolidated Statements of
Income. The impact of the operating results from August 1 through August 10,
2001, were deemed immaterial to our consolidated results. Our investment in LMG
at December 31, 2000, was reflected as "Investment in Liberty Media Group and
related receivables, net" in the accompanying Consolidated Balance Sheet.
Upon split-off, AT&T paid LMG $0.8 billion pursuant to a tax sharing
agreement, related to TCI net operating losses generated prior to AT&T's merger
with TCI. In addition, AT&T received approximately $0.1 billion from LMG related
to taxes pursuant to a tax-sharing agreement between LMG and AT&T Broadband
which existed prior to the TCI merger. At December 31, 2000, this receivable was
included in "Investment in Liberty Media Group and related receivables, net" in
the Consolidated Balance Sheet. At
XII-26
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2001, the remaining receivable from LMG under the tax-sharing
agreement was $0.1 billion and was included in "Accounts receivable" in the
Consolidated Balance Sheet.
Summarized results of operations for LMG were as follows:
FOR THE SEVEN FOR THE TEN
MONTHS ENDED FOR THE YEAR ENDED MONTHS ENDED
JULY 31, 2001 DECEMBER 31, 2000 DECEMBER 31, 1999
------------- ------------------ -----------------
Revenue................................ $ 1,190 $1,526 $ 729
Operating (loss) income................ (426) 436 (2,214)
(Loss) income from continuing
operations before cumulative effect
of accounting change................. (2,711) 1,488 (2,022)
Cumulative effect of accounting
change............................... 545 -- --
Net (loss) income...................... $(2,166) $1,488 $(2,022)
AT
DECEMBER 31,
2000
------------
Current assets.............................................. $ 2,954
Noncurrent assets........................................... 51,314
Current liabilities......................................... 2,962
Noncurrent liabilities...................................... 16,668
Minority interest........................................... 348
During 2000, certain investees of LMG issued common stock. Changes in the
equity of the investees, net of the dilution of LMG's ownership interest,
resulted in an increase to AT&T's additional paid-in capital of $355.
11. OTHER INVESTMENTS
We have investments in various companies and partnerships that are
accounted for under the equity method of accounting and included within "Other
investments and related advances" in the Consolidated Balance Sheets. Under the
equity method, investments are stated at initial cost, and are adjusted for
subsequent contributions and our share of earnings, losses and distributions. At
December 31, 2001 and 2000, we had equity investments (other than LMG) of $4.6
billion and $10.5 billion, respectively. The carrying value of these investments
exceeded our share of the underlying reported net assets by approximately $3.1
billion and $8.3 billion, at December 31, 2001 and 2000, respectively. The
excess basis, or goodwill is being amortized over periods ranging from 15 to 40
years. Pretax amortization of excess basis was $0.2 billion, $0.5 billion and
$0.5 billion in 2001, 2000 and 1999, respectively. The amortization is shown as
a component of "Net losses related to other equity investments" in the
Consolidated Statements of Income. Effective January 1, 2002, in accordance with
the provisions of SFAS No. 142, this excess basis will no longer be amortized
(see Note 23). Distributions from equity investments totaled $25, $13, and $85,
for the years ended December 31, 2001, 2000 and 1999, respectively.
XII-27
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Ownership of significant equity investments was as follows:
AT DECEMBER 31,
-----------------
2001 2000
------ ------
Cablevision Systems Corporation............................. N/A(a) 27.98%(a)
Concert..................................................... 50.00%(b) 50.00%(b)
AT&T Canada Corporation..................................... 21.52%(c) 21.52%(c)
Texas Cable Partnerships.................................... 50.00% 50.00%
Net2Phone, Inc.............................................. N/A(d) 31.34%(d)
Insight Midwest LP.......................................... 50.00% 50.00%
Century-TCI California, LP.................................. 25.00% 25.00%
Kansas City Cable Partners.................................. 50.00% 50.00%
Midcontinent Communications................................. 50.00% 50.00%
Parnassos, LP............................................... 33.33% 33.33%
---------------
(a) In June 2001, as a result of AT&T no longer having representation on the
Cablevision board of directors, the accounting of our investment in
Cablevision was changed from equity method to cost method of accounting. At
December 31, 2001, we owned 29.8 million shares, or a 16.8% ownership
interest, of Cablevision NY Group Class A common stock, which had a closing
market price of $47.45 per share. At December 31, 2000, we owned 48.9
million shares of Cablevision Systems Corporation Class A common stock,
which had a closing market price of $84.94 per share.
(b) On October 16, 2001, AT&T announced a decision to unwind Concert, its Global
venture with BT formed on January 5, 2000 (see Note 5).
(c) AT&T no longer records equity earnings or losses related to AT&T Canada
because AT&T recognized losses in excess of its investment in AT&T Canada
(see Note 5).
(d) At December 31, 2000, we owned 18.9 million shares of Net2Phone, Inc. Class
A common stock, which had a closing market price of $7.38 per share on that
date. In 2001, AT&T recorded a pretax investment impairment charge of $1.1
billion included in "Net losses related to other equity investments" in the
Consolidated Statement of Income. This charge primarily represents the
difference between the fair market value and the carrying value of our
investment in Net2Phone, resulting from the deterioration of market
valuations of Internet-related companies. Also, in October 2001, AT&T
contributed its investment of 18.9 million shares in Net2Phone to NTOP
Holdings, LLC (NTOP), and received 189 units of NTOP ownership. AT&T then
sold 160 units of NTOP to LMC Animal Planet, a subsidiary of Liberty Media
Corporation, and IDT Corporation. AT&T retained 29 units of NTOP ownership
at December 31, 2001, which was accounted for as a cost method investment.
XII-28
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized combined financial information for investments accounted for
under the equity method was as follows:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
--------- -------- ---------
CONCERT
Revenue.................................................. $ 6,189 $7,748 --
Operating (loss) income.................................. (3,574) 329 --
(Loss) income from continuing operations before
extraordinary items and cumulative effect of accounting
change................................................. (3,609) 103 --
Net (loss) income........................................ (3,609) 103 --
AT DECEMBER 31,
---------------
2001 2000
------ ------
Current assets.............................................. $3,744 $4,652
Non-current assets.......................................... 1,758 4,702
Current liabilities......................................... 4,296 4,677
Non-current liabilities..................................... 76 2,107
Redeemable preferred stock.................................. -- --
Minority interest........................................... -- --
FOR THE YEARS ENDED DECEMBER
31,
----------------------------
2001 2000 1999
------- ------- ------
AT&T CANADA
Revenue................................................... $1,000 $1,001 $ 590
Operating (loss).......................................... (226) (225) (248)
(Loss) from continuing operations before extraordinary
items and cumulative effect of accounting change........ (521) (351) (4)
Net (loss)................................................ (518) (351) (4)
AT DECEMBER 31,
---------------
2001 2000
------ ------
Current assets.............................................. $ 391 $ 227
Non-current assets.......................................... 2,590 2,661
Current liabilities......................................... 256 276
Non-current liabilities..................................... 2,963 2,439
Redeemable preferred stock.................................. -- --
Minority interest........................................... -- --
XII-29
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
-------- --------- ---------
OTHER EQUITY INVESTMENTS
Revenue.................................................. $8,150 $18,686 $ 8,376
Operating income (loss).................................. 87 (1,051) (1,278)
Income (loss)from continuing operations before
extraordinary items and cumulative effect of accounting
change................................................. 729 (1,503) (2,266)
Net income (loss)........................................ 716 (1,550) (2,373)
AT DECEMBER 31,
-----------------
2001 2000
------- -------
Current assets.............................................. $ 654 $ 4,994
Non-current assets.......................................... 11,183 25,015
Current liabilities......................................... 1,188 4,042
Non-current liabilities..................................... 7,010 17,970
Redeemable preferred stock.................................. 7 1,589
Minority interest........................................... 151 623
We also have investments accounted for under the cost method of accounting.
At December 31, 2001 and 2000, we had cost method investments included in "Other
investments and related advances" in the Consolidated Balance Sheets of $19.2
billion and $20.4 billion, respectively. At December 31, 2001 and 2000,
approximately $7.9 billion and $6.5 billion, respectively, of our cost
investments are indexed to certain long term debt instruments (see Note 12). In
addition, there were approximately $0.7 billion and $2.1 billion of investments
that were classified as current assets at December 31, 2001 and 2000,
respectively, since they are indexed to certain currently maturing debt
instruments. Under the cost method, investments are stated at cost, and earnings
are recognized to the extent distributions are received from the accumulated
earnings of the investee. Distributions received in excess of accumulated
earnings are recognized as a reduction of our investment balance. These
investments, are covered under the scope of SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" and are carried at fair
value. Some of our cost method investments are classified as "trading"
securities, and are marked-to-market through the income statement. Other cost
investments are classified as "available-for-sale" securities, and are
marked-to-market through other comprehensive income on the balance sheet. We
record an investment impairment charge on our "available-for-sale" securities in
"Other (expense) income" in the Consolidated Statement of Income when we believe
the decline in the investment value is other than temporary. During 2001, we
recorded impairment charges on such securities of $1.1 billion, consisting
primarily of charges related to Vodafone plc and Time Warner Telecom of $0.4
billion and $0.3 billion, respectively.
In addition, at December 31, 2001 and 2000, our 25.5% interest in TWE is
accounted for as a cost method investment since we do not have the right to
exercise significant influence. On February 28, 2001, we exercised our
registration rights in TWE and formally requested TWE to begin the process of
converting the limited partnership into a corporation with registered equity
securities. If the proposed spin-off of AT&T Broadband occurs as currently
structured, our investment in TWE will be included in the net assets spun-off.
XII-30
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. DEBT OBLIGATIONS
DEBT MATURING WITHIN ONE YEAR
AT DECEMBER 31,
-----------------
2001 2000
------- -------
Commercial paper............................................ $ 5,087 $16,234
Short-term notes............................................ 3,970 11,505
Currently maturing long-term debt........................... 3,779 3,724
Other....................................................... 122 375
------- -------
Total debt maturing within one year......................... $12,958 $31,838
======= =======
Weighted-average interest rate of short-term debt........... 5.4% 6.5%
SECURITIZATIONS
During 2001, AT&T initiated a 364-day accounts receivable securitization
program providing for up to $2.7 billion of funding, limited by monthly eligible
receivables. Under the program, AT&T Business Services and AT&T Consumer
Services accounts receivable were sold on a discounted, revolving basis, to a
special purpose, wholly-owned subsidiary of AT&T, which assigns interests in
such receivables to unrelated third-party financing entities. The securitization
proceeds were recorded as a borrowing and included in "Debt maturing within one
year" in the Consolidated Balance Sheet. At December 31, 2001, such short-term
notes totaled $2.3 billion. The interest payment for the associated loan was
approximately $54 for the year ending December 31, 2001. Interest is currently
paid based on a floating London Interbank Offered Rate (LIBOR) set by the
corresponding agreements. At December 31, 2001, the borrowing was collateralized
by $5.4 billion of accounts receivable.
CREDIT FACILITY
On December 14, 2001, we amended and restated a pre-existing
revolving-credit facility. The amended facility, which is syndicated to 30
banks, is for commercial paper back-up and makes $8 billion available to AT&T
for a 364-day term. At December 31, 2001, AT&T had not utilized this facility,
and currently has the entire $8 billion facility available to us. 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, we were in compliance with this covenant. If AT&T
were to become noncompliant it could result in the cancellation of the credit
facility and any amounts outstanding under the credit facility becoming payable
immediately.
XII-31
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LONG-TERM DEBT
AT DECEMBER 31,
-----------------
2001 2000
DEBENTURES, NOTES AND TRUST PREFERRED SECURITIES(A) ------- -------
INTEREST RATES(B) MATURITIES
----------------- ----------
4.00% -- 6.00% 2002 -- 2009................................. $ 7,353 $ 6,639
6.06% -- 6.50% 2002 -- 2029................................. 7,253 6,660
6.55% -- 7.50% 2002 -- 2037................................. 8,252 6,470
7.53% -- 8.50% 2002 -- 2097................................. 7,788 5,267
8.60% -- 19.95%* 2002 -- 2038................................. 6,994 7,317
Variable rate 2002 -- 2054................................. 6,744 4,164
------- -------
Total debentures, notes and trust preferred securities............... 44,384 36,517
Other................................................................ 382 360
Unamortized discount, net............................................ (460) (64)
------- -------
Total long-term debt................................................. 44,306 36,813
Less: Currently maturing long-term debt.............................. 3,779 3,724
------- -------
Net long-term debt................................................... $40,527 $33,089
======= =======
---------------
* 19.95% interest rate relates to bank loans held by AT&T Latin America in the
amount of $2.7 million
(a) Included in these balances was $858 and $946 representing the remaining
excess of the fair value over the recorded value of debt in connection with
the TCI and MediaOne mergers at December 31, 2001 and December 31, 2000,
respectively. The excess is being amortized to interest expense over the
remaining lives of the underlying debt obligations.
(b) The actual interest paid on our debt obligations may have differed from the
stated amount due to our entering into interest rate swap contracts to
manage our exposure to interest rate risk and our strategy to reduce finance
costs (see Note 14).
The following table shows the maturities at December 31, 2001, of the
$44,306 in total long-term obligations:
2002 2003 2004 2005 2006 LATER YEARS
---- ---- ---- ---- ---- -----------
$3,779 $4,753 $5,801 $4,357 $5,867 $19,749
On November 21, 2001, AT&T completed a private bond offering which consists
of $1.5 billion in five-year Senior Notes with an interest rate of 6.5%, $2.75
billion in 10 year Senior Notes with an interest rate of 7.30%, $2.75 billion in
30 year Senior Notes with an interest rate of 8.00%, 1.5 billion Euros of
two-year Senior Notes with a floating interest rate of Euro Interbank Offered
Rate (EURIBOR) plus 1.50% and 2.0 billion Euros of five-year Senior Notes with
an interest rate of 6.00%. We received net proceeds of approximately $10.0
billion from the sale of the notes. The proceeds will primarily be utilized to
retire short-term indebtedness and for general corporate purposes. The bond
offering included 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 the 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 at specified times and if
credit ratings of these notes are downgraded below a certain level.
XII-32
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUBSIDIARY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUSTS HOLDING SOLELY SUBORDINATED DEBT SECURITIES
Included in long-term and short-term debt are subsidiary-obligated
mandatorily redeemable preferred securities of subsidiary trusts holding solely
subordinated debt securities.
Certain subsidiary trusts of TCI (TCI Trusts) had preferred securities
outstanding at December 31, 2001 and 2000, as follows:
CARRYING AMOUNT
INTEREST MATURITY ---------------
SUBSIDIARY TRUST RATE DATE 2001 2000
---------------- -------- -------- ------ ------
TCI Communications Financing I.................... 8.72% 2045 $ 527 $ 528
TCI Communications Financing II................... 10.00% 2045 513 514
TCI Communications Financing III.................. 9.65% 2027 380 357
TCI Communications Financing IV................... 9.72% 2036 204 204
------ ------
Total............................................. $1,624 $1,603
====== ======
The TCI Trusts exist for the purpose of issuing trust preferred securities
and investing the proceeds into subordinated deferrable interest notes
(subordinated debt securities) of TCI. The subordinated debt securities have
interest rates equal to the interest rate of the corresponding trust preferred
securities and have maturity dates ranging from 30 to 49 years from the date of
issuance. The preferred securities are mandatorily redeemable upon repayment of
the subordinated debt securities, and are callable by AT&T. The Financing I and
II trust preferred securities were redeemable at face value beginning in January
and May 2001, respectively. Financing III trust preferred securities are
callable at 104.825% of face value beginning in March 2007. Financing IV trust
preferred securities are callable at face value beginning in March 2002.
On February 28, 2002, AT&T called for early redemption Financing I and II
preferred securities. On February 26, 2002, AT&T announced that it was notifying
holders that it will call Financing IV preferred securities for early redemption
on April 1, 2002. At December 31, 2001, the Financing I, II and IV trust
preferred securities were reclassed from long-term debt to short-term debt.
TCI effectively provides a full and unconditional guarantee of the TCI
Trusts' obligations under the trust preferred securities. During 2000, AT&T
provided a full and unconditional guarantee of the trust preferred securities
for TCI Communications Financing I, II and IV subsidiary trusts (see Note 21).
AT&T has the right to defer interest payments up to 20 consecutive
quarters; as a consequence, dividend payments on the trust preferred securities
can be deferred by the trusts during any such interest-payment period.
Certain subsidiary trusts of MediaOne (MediaOne Trusts) had preferred
securities outstanding at December 31, 2001 and 2000, as follows:
CARRYING
AMOUNT
INTEREST MATURITY -----------
SUBSIDIARY TRUST RATE DATE 2001 2000
---------------- -------- -------- ---- ----
MediaOne Financing A................................. 7.96% 2025 $ 30 $ 30
MediaOne Financing B................................. 8.25% 2036 28 28
MediaOne Finance II.................................. 9.50% 2036 214 214
MediaOne Finance III................................. 9.04% 2038 504 504
---- ----
Total................................................ $776 $776
==== ====
XII-33
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The MediaOne Trusts exist for the purpose of issuing the trust preferred
securities and investing the proceeds into subordinated deferrable interest
notes (subordinated deferrable notes) of MediaOne Group Funding, Inc., a wholly
owned subsidiary of MediaOne. The subordinated deferrable notes have the same
interest rate and maturity date as the trust preferred securities to which they
relate. All of the subordinated deferrable notes are redeemable by AT&T at a
redemption price of $25.00 per security, plus accrued and unpaid interest. Upon
redemption of the subordinated deferrable notes, the trust preferred securities
will be mandatorily redeemable, at a price of $25.00 per share, plus accrued and
unpaid distributions. The 7.96% subordinated deferrable notes became redeemable
after September 11, 2000. The 9.50% and 8.25% subordinated deferrable notes
became redeemable after October 29, 2001. The 9.04% subordinated deferrable
notes are redeemable after October 28, 2003.
On March 4, 2002, AT&T called for early redemption MediaOne Financing A,
MediaOne Financing B and MediaOne Financing II preferred securities. At December
31, 2001, the Financing A, B and II preferred securities were reclassed from
long-term debt to short-term debt.
MediaOne has effectively provided a full and unconditional guarantee of the
MediaOne Trusts' obligations under the trust preferred securities. During 2000,
AT&T provided a full and unconditional guarantee of MediaOne's trust preferred
securities (see Note 21).
AT&T has the right to defer interest payments up to 20 consecutive
quarters; as a consequence, dividend payments on the trust preferred securities
can be deferred by the trusts during any such interest-payment period.
EXCHANGEABLE NOTES
Included in long-term and short-term debt are exchangeable notes. During
2001, we issued exchangeable notes which are mandatorily redeemable at AT&T's
option into shares of AT&T Wireless and Cablevision NY Group Class A
(Cablevision) common stock and Rainbow Media Group Class A (Rainbow Media Group)
tracking stock, as applicable or its cash equivalent. During 2000, we issued
exchangeable notes which are mandatorily redeemable at AT&T's option into shares
of Comcast and Microsoft Corporation (Microsoft) common stock, as applicable, or
its cash equivalent. During 1999 and 1998, MediaOne issued exchangeable notes
which are mandatorily redeemable at AT&T's option into (i) Vodafone American
Depository Receipts (ADRs) held by MediaOne, (ii) the cash equivalent, or (iii)
a combination of cash and Vodafone ADRs. The maturity value of these
exchangeable notes varies based upon the fair market value of the security it is
indexed to.
Following is a summary of the exchangeable notes outstanding at December
31, 2001, which are indexed to 45.8 million shares of AT&T Wireless common
stock:
PUT PRICE
PER CALL PRICE CARRYING
MATURITIES FACE VALUE INTEREST RATE SHARE PER SHARE VALUE
---------- ---------- ------------- --------- ---------- --------
2005....................... $220 LIBOR + 0.4% $14.41 $18.87 $220
2006....................... 220 LIBOR + 0.4% 14.41 19.31 219
2006....................... 220 LIBOR + 0.4% 14.41 19.74 219
XII-34
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following is a summary of the exchangeable notes outstanding at December
31, 2001, which are indexed to 45 million shares of AT&T Wireless common stock:
PUT PRICE
PER CALL PRICE CARRYING
MATURITIES FACE VALUE INTEREST RATE SHARE PER SHARE VALUE
---------- ---------- ------------- --------- ---------- --------
2006....................... $204 LIBOR + 0.4% $13.57 $19.03 $216
2006....................... 201 LIBOR + 0.4% 13.37 19.27 216
2006....................... 204 LIBOR + 0.4% 13.57 19.90 216
At maturity, the exchangeable notes will be redeemed, at AT&T's option,
with (i) a number of shares of AT&T Wireless common stock equal to the
underlying shares multiplied by the exchange ratio, or (ii) its equivalent cash
value. The exchange ratio will be calculated at maturity in the following
manner:
(a) If the fair market value of a share of AT&T Wireless common stock
is greater than the call price, the exchange ratio will be a fraction, the
numerator of which is equal to the sum of (i) the put price, plus (ii) the
excess of the fair market value of a share of AT&T Wireless common stock
over the call price, and the denominator of which is equal to the fair
market value of a share of AT&T Wireless common stock;
(b) If the fair market value of a share of AT&T Wireless common stock
is less than or equal to the put price, the exchange ratio will be 1;
(c) If the fair market value of a share of AT&T Wireless common stock
is less than or equal to the call price but greater than the put price, the
exchange ratio will be a fraction, the numerator of which is equal to the
put price, and the denominator of which is equal to the fair market value
of a share of AT&T Wireless common stock.
Following is a summary of the exchangeable notes outstanding at December
31, 2001, which are indexed to 26.9 million shares of Cablevision common stock:
PUT PRICE
PER CALL PRICE CARRYING
MATURITY FACE VALUE INTEREST RATE SHARE PER SHARE VALUE
-------- ---------- ------------- --------- ---------- --------
2004.......................... $970 6.50% $36.05 $43.98 $1,030
At maturity, the exchangeable notes will be redeemed, at AT&T's option,
with (i) a number of shares of Cablevision common stock equal to the underlying
shares multiplied by the exchange ratio, or (ii) its equivalent cash value. The
exchange ratio will be calculated at maturity in the following manner:
(a) If the fair market value of a share of Cablevision common stock is
greater than the call price, the exchange ratio will be 0.8197;
(b) If the fair market value of a share of Cablevision common stock is
less than or equal to the put price, the exchange ratio will be 1;
(c) If the fair market value of a share of Cablevision common stock is
less than or equal to the call price but greater than the put price, the
exchange ratio will be a fraction, the numerator of which is equal to the
put price, and the denominator of which is equal to the fair market value
of a share of Cablevision common stock.
XII-35
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following is a summary of the exchangeable notes outstanding at December
31, 2001, which are indexed to 9.8 million shares of Rainbow Media Group
tracking stock:
PUT PRICE
PER CALL PRICE CARRYING
MATURITY FACE VALUE INTEREST RATE SHARE PER SHARE VALUE
-------- ---------- ------------- --------- ---------- --------
2005.......................... $220 6.25% $22.50 $27.45 $196
At maturity, the exchangeable notes will be redeemed, at AT&T's option,
with (i) a number of shares of Rainbow Media Group tracking stock equal to the
underlying shares multiplied by the exchange ratio, or (ii) its equivalent cash
value. The exchange ratio will be calculated at maturity in the following
manner:
(a) If the fair market value of a share of Rainbow Media Group
tracking stock is greater than the call price, the exchange ratio will be
0.8197;
(b) If the fair market value of a share of Rainbow Media Group
tracking stock is less than or equal to the put price, the exchange ratio
will be 1;
(c) If the fair market value of a share of Rainbow Media Group
tracking stock is less than or equal to the call price but greater than the
put price, the exchange ratio will be a fraction, the numerator of which is
equal to the put price, and the denominator of which is equal to the fair
market value of a share of Rainbow Media Group tracking stock.
Following is a summary of the exchangeable notes outstanding at December
31, 2001 and 2000, which are indexed to 25 million shares of Comcast common
stock:
PUT PRICE CARRYING VALUE
PER CALL PRICE --------------
MATURITIES FACE VALUE INTEREST RATE SHARE PER SHARE 2001 2000
---------- ---------- ------------- --------- ---------- ----- -----
2003.................... $371 6.75% $41.50 $49.80 $320 $371
2004.................... 314 5.50% 41.06 49.27 277 314
2005.................... 329 4.63% 39.13 46.96 286 329
At maturity, the exchangeable notes will be redeemed, at AT&T's option,
with (i) a number of shares of Comcast common stock equal to the underlying
shares multiplied by the exchange ratio, or (ii) its equivalent cash value. The
exchange ratio will be calculated at maturity in the following manner:
(a) If the fair market value of a share of Comcast common stock is
greater than the call price, the exchange ratio will be 0.8333;
(b) If the fair market value of a share of Comcast common stock is
less than or equal to the put price, the exchange ratio will be 1;
(c) If the fair market value of a share of Comcast common stock is
less than or equal to the call price but greater than the put price, the
exchange ratio will be a fraction, the numerator of which is equal to the
put price, and the denominator of which is equal to the fair market value
of a share of Comcast common stock.
XII-36
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following is a summary of the exchangeable notes outstanding at December
31, 2001 and 2000, which are indexed to 10 million shares of Microsoft common
stock:
PUT PRICE CARRYING VALUE
PER CALL PRICE --------------
MATURITIES FACE VALUE INTEREST RATE SHARE PER SHARE 2001 2000
---------- ---------- ------------- --------- ---------- ----- -----
2003.................... $227 6.96% $67.87 $97.39 $201 $145
2004.................... 226 7.00% 67.87 111.64 198 144
2005.................... 226 7.04% 67.87 128.60 196 144
At maturity, the exchangeable notes will be redeemed, at AT&T's option,
with (i) a number of shares of Microsoft common stock equal to the underlying
shares multiplied by the exchange ratio, or (ii) its equivalent cash value. The
exchange ratio will be calculated at maturity in the following manner:
(a) If the fair market value of a share of Microsoft common stock is
greater than the call price, the exchange ratio will be a fraction, the
numerator of which is equal to the sum of (i) the put price, plus (ii) the
excess of the fair market value of a share of Microsoft common stock over
the call price, and the denominator of which is equal to the fair market
value of a share of Microsoft common stock;
(b) If the fair market value of a share of Microsoft common stock is
less than or equal to the put price, the exchange ratio will be 1;
(c) If the fair market value of a share of Microsoft common stock is
less than or equal to the call price but greater than the put price, the
exchange ratio will be a fraction, the numerator of which is equal to the
put price, and the denominator of which is equal to the fair market value
of a share of Microsoft common stock.
Following is a summary of the exchangeable notes outstanding at December
31, 2001 and 2000, which are indexed to 22.3 million shares of Comcast common
stock:
PUT PRICE CARRYING VALUE
PER CALL PRICE --------------
MATURITIES FACE VALUE INTEREST RATE SHARE PER SHARE 2001 2000
---------- ---------- ------------- --------- ---------- ----- -----
2003.................... $267 6.76% $35.89 $50.64 $244 $267
2004.................... 267 6.80% 35.89 58.39 244 267
2005.................... 267 6.84% 35.89 67.97 245 267
At maturity, the exchangeable notes will be redeemed, at AT&T's option,
with (i) a number of shares of Comcast common stock equal to the underlying
shares multiplied by the exchange ratio, or (ii) its equivalent cash value. The
exchange ratio will be calculated at maturity in the following manner:
(a) If the fair market value of a share of Comcast common stock is
greater than or equal to the call price, the exchange ratio will be a
fraction, the numerator of which is equal to the sum of (i) the put price,
plus (ii) the excess of the fair market value of a share of Comcast common
stock over the call price, and the denominator of which is equal to the
fair market value of a share of Comcast common stock;
(b) If the fair market value of a share of Comcast common stock is
less than or equal to the put price, the exchange ratio will be 1;
(c) If the fair market value of a share of Comcast common stock is
less than the call price but greater than the put price, the exchange ratio
will be a fraction, the numerator of which is equal to the put price, and
the denominator of which is equal to the fair market value of a share of
Comcast common stock.
XII-37
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following is a summary of the exchangeable notes outstanding at December
31, 2001 and 2000, which are indexed to Vodafone ADRs:
PUT PRICE CARRYING VALUE
PER CALL PRICE --------------
MATURITIES FACE VALUE INTEREST RATE SHARE PER SHARE 2001 2000
---------- ---------- ------------- --------- ---------- ---- ------
2001.................. $1,686 6.25% $19.65 $25.10 $ -- $2,337
2002.................. $1,129 7.00% 43.44 51.26 715 1,012
In the third quarter of 2001, exchangeable notes that were indexed to a
portion of holdings of Vodafone ADR securities matured. Prior to the settlement,
the carrying value of the notes was $1,634. These notes were settled with
approximately 70 million shares of Vodafone ADR's and $252 million in cash.
Approximately 57 million shares of the Vodafone ADR's used in the settlement
were accounted for as "trading" securities and the remaining shares were
accounted for as "available-for-sale" securities under SFAS No. 115. The
settlement resulted in a pretax loss of approximately $392, which was
reclassified from "Other comprehensive income" to "Other (expense) income" in
the Consolidated Statement of Income.
The exchangeable notes that mature in 2002 are indexed to 26 million
Vodafone ADRs, and will be exchanged at maturity as follows:
(a) If the fair market value of a Vodafone ADR is greater than or
equal to the call price, each exchangeable note is equivalent to 0.8475 of
a Vodafone ADR;
(b) If the fair market value of a Vodafone ADR is less than or equal
to the put price, each exchangeable note is equivalent to one Vodafone ADR;
or
(c) If the fair market value of a Vodafone ADR is less than the call
price but greater than the put price, each exchangeable note is equivalent
to a fraction of a Vodafone ADR equal to (i) the put price divided by (ii)
the fair market value of a Vodafone ADR.
The exchangeable notes indexed to AT&T Wireless, Cablevision, Comcast and
Microsoft common stock and Rainbow Media Group that are secured by AT&T's
investments in AT&T Wireless, Cablevision, Comcast, Microsoft and Rainbow Media
Group. The exchangeable notes indexed to Vodafone ADRs that are unsecured
obligations, ranking equally in right of payment with all other unsecured and
unsubordinated obligations of AT&T.
These exchangeable notes are being accounted for as indexed debt
instruments since the maturity value of the debt is dependent upon the fair
market value of the underlying securities. These exchangeable notes contain
embedded derivatives that require separate accounting as the maturity value of
the debt is dependent upon the fair market value of the underlying AT&T
Wireless, Cablevision, Rainbow Media Group, Comcast, Microsoft and Vodafone
securities, as applicable. The economic characteristics of the embedded
derivatives (i.e., equity like features) are not clearly and closely related to
that of the host instruments (a debt security). As a result the embedded
derivatives are separated from the host debt instrument for valuation purposes
and are carried at fair value within the host debt instrument. The embedded
derivatives for AT&T Wireless, Cablevision and Rainbow Media Group exchangeable
notes are designated as cash flow hedges. These designated options are carried
at fair value with changes in fair value recorded, net of income taxes, within
"Other comprehensive income" as a component of shareowners' equity. There was no
ineffectiveness recognized on the cash flow hedges. The Comcast, Microsoft,
Vodafone and certain of the Cablevision and Rainbow Media Group options are
undesignated and are carried at fair value with changes in fair value recorded
in "Other income (expense)" in the Consolidated Statement of Income.
XII-38
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The options hedge the market risk of a decline in value of AT&T Wireless,
Cablevision, Rainbow Media Group, Comcast, Microsoft and Vodafone securities.
The market risk of a decline in these securities, below the respective put
prices has been eliminated. In addition, any market gains we may earn have been
limited to the call prices, with the exception of certain debt indexed to
Comcast stock, the Cablevision stock, Rainbow Media Group and Vodafone ADRs,
which provide for our participation in a portion of the market gains above the
call price.
Since all the AT&T Wireless, Cablevision and Rainbow Media Group securities
and a portion of the Comcast, Microsoft and Vodafone ADR securities are cost
method investments being accounted for as "available-for-sale" securities under
SFAS No. 115, changes in the maturity value of the options and the underlying
securities are being recorded as unrealized gains or losses, net of income
taxes, within "Other comprehensive income as a component of shareowners'
equity." The remaining portion of the Comcast, Microsoft and Vodafone securities
are cost method investments being accounted for as "trading" securities as
permitted under SFAS No. 115 and changes in the fair value of the options and
the underlying securities are being recorded as net revaluation of certain
financial instruments within "Other income (expense)" in the Consolidated
Statement of Income.
OTHER DEBT
Included in long-term debt is other debt. During 2000, we entered into a
series of purchased and written options on 21.9 million shares of Microsoft
common stock, and issued floating rate debt. The carrying value of the debt at
both December 31, 2001 and 2000, was $1,369, which pays interest at three-month
LIBOR plus 0.4%. The debt in conjunction with the options is, repayable at
AT&T's option in either Microsoft stock or cash and matures annually with $458
maturing in 2003 and 2004, and $453 maturing in 2005 (see Note 14).
In addition, during 1999 two subsidiaries of MediaOne, MediaOne SPC IV and
MediaOne SPC VI, entered into a series of purchased and written options on
Vodafone ADRs contributed to them by MediaOne, and issued floating rate debt.
The carrying value of the debt at both December 31, 2001 and 2000, was $1,739,
which pays interest at three-month LIBOR plus 0.5%. This debt matures in equal
quarterly installments beginning in 2003 and ending in 2005. The assets of
MediaOne SPC IV, which are primarily 29.1 million Vodafone ADRs, are available
only to pay the creditors of MediaOne SPC IV. Likewise, the assets of MediaOne
SPC VI, which are primarily 18.0 million Vodafone ADRs, are available only to
pay the creditors of MediaOne SPC VI. MediaOne SPC IV and VI will generate cash
to settle these notes by selling its Vodafone ADRs to the market (or to AT&T, at
AT&T's option) and cash settle the option (see Note 14).
13. OTHER SECURITIES
PREFERRED STOCK OF SUBSIDIARIES
Prior to the TCI merger, TCI Pacific Communications Inc. (Pacific) issued
5% Class A Senior Cumulative Exchangeable preferred stock, which was outstanding
as of December 31, 2001. Each share is exchangeable, from and after August 1,
2001, for approximately 8.365 shares of AT&T common stock (as adjusted for the
July 2001 split-off of AT&T Wireless Services, Inc. from AT&T), subject to
certain antidilution adjustments. Additionally, Pacific may elect to make any
dividend, redemption or liquidation payment in cash, shares of AT&T common stock
or a combination of the foregoing.
Dividends on the Pacific preferred stock were $31, $31 and $26 for the
years ended December 31, 2001, 2000 and 1999, respectively and are reported
within "Minority interest income (expense)" in the Consolidated Statements of
Income. The Pacific preferred stock is reflected within "Minority Interest" in
the Consolidated Balance Sheets, and aggregated $2.1 billion at both December
31, 2001 and 2000.
XII-39
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 2001, 59 thousand shares of the Pacific preferred stock
had been exchanged for 495 thousand shares of AT&T common stock. At December 31,
2001 and 2000 there were approximately 6.2 million and 6.3 million shares
outstanding, respectively.
Pacific has elected to exercise its right to redeem all outstanding shares
of the Pacific preferred stock, that have not been exchanged as of April 26,
2002, at a price of $102.50 per share plus accrued dividends of $0.96 per share.
The redemption price will be paid in AT&T Common Stock, up to a maximum of 52.3
million shares which were registered with the SEC in February of 2002, with any
shortfall paid in cash.
COMPANY-OBLIGATED CONVERTIBLE QUARTERLY INCOME PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY SUBORDINATED DEBT SECURITIES OF AT&T AND
RELATED WARRANTS
On June 16, 1999, AT&T Finance Trust I (AT&T Trust), a wholly owned
subsidiary of AT&T, completed the private sale of 100 million shares of 5.0%
cumulative quarterly income preferred securities (quarterly preferred
securities) to Microsoft. Proceeds of the issuance were invested by the AT&T
Trust in junior subordinated debentures (debentures) issued by AT&T due 2029,
which represent the sole asset of the AT&T Trust.
The quarterly preferred securities pay dividends at an annual rate of 5.0%
of the liquidation preference of fifty dollars per security, and are convertible
at any time prior to maturity into 88.016 million shares of AT&T common stock
(as adjusted for the July 2001 split-off of AT&T Wireless Services, Inc. from
AT&T). The quarterly preferred securities are subject to mandatory redemption
upon repayment of the debentures at maturity or their earlier redemption. The
conversion feature can be terminated, under certain conditions, after three
years.
The debentures make a quarterly payment in arrears of 62.5 cents per
security on the last day of March, June, September and December of each year.
AT&T has the right to defer such interest payments up to 20 consecutive
quarters. As a consequence, quarterly dividend payments on the quarterly
preferred securities can be deferred by the AT&T Trust during any such
interest-payment period. If AT&T defers any interest payments, we may not, among
other things, pay any dividends on our common stock until all interest in
arrears is paid to the AT&T Trust.
Dividends paid on the quarterly preferred securities were $250, $250 and
$135 for the years ended December 31, 2001, 2000 and 1999, respectively, and
were reported within "Minority interest income (expense)" in the Consolidated
Statements of Income.
On June 16, 1999, AT&T also issued to Microsoft 53 million warrants, each
to purchase one share of AT&T common stock at a price of fifty-seven dollars per
share at the end of three years (as adjusted for the July 2001 split-off of AT&T
Wireless Services, Inc. from AT&T). Alternatively, the warrants are exercisable
on a cashless basis. If the warrants are not exercised on the three-year
anniversary of the closing date, the warrants expire.
A discount on the quarterly preferred securities equal to the value of the
warrants of $306 was recognized and is being amortized over the 30-year life of
the quarterly preferred securities as a component of "Minority interest income
(expense)" in the Consolidated Statements of Income.
In connection with the merger of Comcast and AT&T Broadband (see Note 2),
AT&T Comcast Corporation will assume the quarterly preferred securities. In
conjunction with this transaction, Microsoft Corporation has agreed to convert
these preferred securities into 115 million shares of AT&T Comcast Corporation
common stock.
XII-40
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CENTAUR FUNDING CORPORATION
Centaur Funding Corporation (Centaur), a subsidiary of MediaOne, issued
three series of preferred shares prior to AT&T's acquisition of MediaOne.
Centaur was created for the principal purpose of raising capital through the
issuance of preferred shares and investing those proceeds into notes issued by
MediaOne SPC II, a subsidiary of MediaOne. Principal and interest payments from
the notes are expected to be Centaur's primary source of funds to make dividend
and redemption payments on the preferred shares. In addition, the dividend and
certain redemption payments on the preferred shares will be determined by
reference to the dividend and redemption activity of the preferred stock of
AirTouch Communications, Inc. (ATI Shares) held by MediaOne SPC II. Payments on
the preferred shares are neither guaranteed nor secured by MediaOne or AT&T. The
assets of MediaOne SPC II, which include the ATI shares, are available only to
pay the creditors of MediaOne SPC II. These securities remained outstanding at
December 31, 2001 and 2000 as follows:
CARRYING AMOUNT
---------------
DIVIDEND RATE MATURITY DATE 2001 2000
------------- ------------- ------ ------
Series A.................................. Variable None $ 100 $ 100
Series B.................................. 9.08% April, 2020 927 927
Series C.................................. None April, 2020 127 118
------ ------
Total..................................... $1,154 $1,145
====== ======
The Auction Market Preference Shares, Series A, have a liquidation value of
$250 thousand per share and dividends are payable quarterly when declared by
Centaur's board of directors out of funds legally available. The 9.08%
Cumulative Preference Shares, Series B, have a liquidation value of $1 thousand
per share and dividends are payable quarterly in arrears when declared by
Centaur's board of directors out of funds legally available. In addition,
dividends may be declared and paid only to the extent that dividends have been
declared and paid on the ATI shares. The preference shares, Series C, have a
liquidation value of $1 thousand per share at maturity. The value of the Series
C will be accreted to reach its liquidation value upon maturity. The Series B
shares rank equally with the Series C shares as to redemption payments and upon
liquidation, and the Series B and Series C shares rank senior to the Series A
shares as to redemption payments and upon liquidation. The preference shares
issued by Centaur are reflected within "Minority interest" in the Consolidated
Balance Sheets.
Dividends on the preferred shares were $99 for the year ended December 31,
2001 and $55 for the period ended December 31, 2000, and were included within
"Minority interest income (expense)" in the Consolidated Statements of Income.
CONVERTIBLE PREFERRED STOCK
On January 22, 2001, NTT DoCoMo invested approximately $9.8 billion for
812,512 shares of a new class of AT&T preferred stock with a par value of $1 per
share; and five-year warrants to purchase the equivalent of an additional 41.7
million shares of AT&T Wireless Group tracking stock at $35 per share. The $9.8
billion of proceeds were recorded based on their relative fair values as $9.2
billion for the preferred shares, $0.3 billion for the warrants in other current
liabilities and $0.3 billion for the amortizable beneficial conversion feature.
The beneficial conversion feature represented the excess of the fair value of
the preferred shares issued over the proceeds received and were recorded in
"Additional paid-in capital" in the Consolidated Balance Sheet. Prior to the
split-off of AT&T Wireless Group, the preferred shares, convertible at NTT
DoCoMo's option, were economically equivalent to 406 million shares (a 16
percent interest) of AT&T Wireless Group tracking stock.
XII-41
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. Upon
conversion, AT&T reduced its portion of the financial performance and economic
value in the AT&T Wireless Group by 178 million shares, and the balance of the
406 million shares came from the issuance of 228 million new shares of AT&T
Wireless common stock.
In 2001, included in "Dividends requirements of preferred stock" in the
Consolidated Statement of Income, was the amortization of the beneficial
conversion feature of $0.3 billion as well as dividends on the preferred shares
of $0.3 billion.
14. FINANCIAL INSTRUMENTS
ADOPTION OF SFAS NO. 133
Effective January 1, 2001, AT&T adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" and its corresponding amendments
under SFAS No. 138. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. All derivatives, whether designated
in hedging relationships or not, are required to be recorded on the balance
sheet at fair value. The adoption of SFAS No. 133 on January 1, 2001, resulted
in a pretax cumulative-effect increase to income of $1.5 billion ($0.9 billion
net-of-tax). $0.6 billion ($0.4 billion net-of-tax) and $0.9 billion ($0.5
billion net-of-tax) were attributable to AT&T Group (other than LMG) and LMG,
respectively.
AT&T GROUP
AT&T Group's cumulative-effect increase to net income of $0.4 billion was
attributable primarily to equity based derivative instruments embedded in
indexed debt instruments and warrants held in both public and private companies.
Included in the after-tax cumulative effect benefit of $0.4 billion, was a
$0.2 billion benefit for the changes in the valuation of the embedded and
non-embedded net purchased options related to the indexed debt instruments and
$0.2 billion benefit for changes in the fair value of warrants.
Upon adoption, AT&T Group, as permitted by SFAS No. 133, reclassified $9.3
billion of securities from "available-for-sale" to "trading." This
reclassification resulted in the recognition, in the income statement, of losses
previously recorded within accumulated Other Comprehensive Income (OCI). A
portion of the loss ($1.6 billion pretax; $1.0 billion net-of-tax) was recorded
as part of the cumulative effect of adoption. This loss completely offset a gain
for amounts also previously recorded within accumulated OCI on the indexed debt
obligation that had been considered a hedge of Comcast, Microsoft and Vodafone
available-for-sale securities. The reclassification of securities also resulted
in a pretax charge of $1.2 billion ($0.7 billion net-of-tax) recorded in "Other
(expense) income" in the Consolidated Statement of Income.
In addition, the adoption of SFAS No. 133 also resulted in a pretax charge
to OCI of $10 ($6 net-of-tax) on cash flow hedges. The net derivative loss
included in OCI as of January 1, 2001 will be reclassified into earnings over
the life of the instruments, of which the last expires in February 2005.
LMG
LMG's cumulative-effect increase to income of $0.5 billion was attributable
primarily to separately recording the embedded call option obligations
associated with LMG's senior exchangeable debentures. Also included in the
cumulative-effect was $87 previously included in OCI related primarily to
changes in the fair value of LMG's warrants and options to purchase certain
available-for-sale securities.
XII-42
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FINANCIAL INSTRUMENTS
In the normal course of business, we use various financial instruments,
including derivative financial instruments, for purposes other than trading.
These instruments include letters of credit, guarantees of debt, interest rate
swap agreements, foreign currency exchange contracts, option contracts, equity
contracts and warrants. Collateral is generally not required for these types of
instruments.
By their nature, all such instruments involve risk, including the credit
risk of nonperformance by counterparties, and our maximum potential loss may
exceed the amount recognized in our balance sheet. However, at December 31, 2001
and 2000, in management's opinion, there was no significant risk of loss in the
event of nonperformance of the counterparties to these financial instruments. We
control our exposure to credit risk through credit approvals, credit limits and
monitoring procedures. We do not have any significant exposure to any individual
customer or counterparty, nor do we have any major concentration of credit risk
related to any financial instruments.
LETTERS OF CREDIT
Letters of credit are purchased guarantees that ensure our performance or
payment to third parties in accordance with specified terms and conditions.
Management has determined that the Company's letters of credit do not create
additional risk to AT&T. The notional amounts outstanding at December 31, 2001
and 2000 were $696 and $833 respectively. The fair values of the letters of
credit, based on the fees paid to obtain the obligations, were immaterial at
December 31, 2001 and 2000.
GUARANTEES OF DEBT
From time to time, we guarantee the debt of our subsidiaries and certain
unconsolidated joint ventures. TCI, primarily before the merger, had agreed to
take certain steps to support debt compliance with respect to obligations
aggregating $1,461 at both December 31, 2001 and 2000 of certain cable
television partnerships in which TCI has a noncontrolling ownership interest.
Although there can be no assurance, management believes that it will not be
required to meet its obligations under such guarantees. Additionally, in
connection with the restructuring of AT&T in 1996, we issued guarantees for
certain debt obligations of our former subsidiaries AT&T Capital Corp. and NCR.
The amount of guaranteed debt associated with AT&T Capital Corp. and NCR was $51
at both December 31, 2001 and 2000, respectively. Total notional amounts of
guaranteed debt at December 31, 2001 and 2000 were $1,522 and $1,557,
respectively. At December 31, 2001 and 2000, there were no quoted market prices
for similar agreements.
INTEREST RATE SWAP AGREEMENTS
We enter into interest rate swaps, which are typically designated as either
cash flow or fair value hedges, to manage our exposure to changes in interest
rates. We enter into swap agreements to manage the fixed/floating mix of our
debt portfolio in order to reduce aggregate risk to interest rate movements.
Interest rate swaps also allow us to raise funds at floating rates and
effectively swap them into fixed rates that are generally lower than those
available to us if fixed-rate borrowings were made directly. These agreements
involve the exchange of floating-rate for fixed-rate payments or fixed-rate for
floating-rate without the exchange of the underlying principal amount.
Floating-rate payments are based on rates tied to LIBOR.
XII-43
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table indicates the types of swaps in use at December 31,
2001 and 2000, the respective notional amounts and their weighted-average
interest rates. Average variable rates are those in effect at the reporting
date, and may change significantly over the lives of the contracts:
2001 2000
----- -----
Fixed-rate to variable-rate swaps -- notional amount........ $ 500 $ 750
Average receive rate...................................... 9.68% 8.16%
Average pay rate.......................................... 4.02% 8.16%
Variable-rate to fixed-rate swaps -- notional amount........ $ 218 $ 218
Average receive rate...................................... 2.08% 6.81%
Average pay rate.......................................... 7.31% 7.31%
In addition, we also have combined interest rate, foreign currency swap
agreements for foreign-currency-denominated debt, which hedge our risk to both
interest rate and currency movements. At December 31, 2001 and 2000 the notional
amounts related to these contracts were $3,826 and $739 respectively. The
increase is primarily related to the hedges associated with our Euro bond
offering in 2001. The notional amounts of these hedges were approximately $3,087
at December 31, 2001.
The table below summarizes the fair and carrying values of the interest
rate swaps. These swaps are valued using current market quotes which were
obtained from dealers.
2001 2000
----------------- -----------------
FAIR/CARRYING FAIR/CARRYING
VALUE VALUE
----------------- -----------------
ASSET LIABILITY ASSET LIABILITY
----- --------- ----- ---------
Interest rate swap agreements......................... $26 $19 $4 $5
Combined interest rate foreign currency swap
agreements.......................................... 18 26 1 3
FOREIGN EXCHANGE
We enter into foreign currency forward contracts to manage our exposure to
changes in currency exchange rates related to foreign-currency-denominated
transactions. Although we do not designate most of our foreign exchange
contracts as accounting hedges, we have certain contracts that are designated as
foreign currency cash flow hedges in accordance with SFAS No. 133. In 2001, our
foreign exchange contracts consisted principally of Canadian dollars, related to
our obligation to purchase the remaining shares of AT&T Canada (the Canadian
obligation), Euros, Japanese yen, Swiss francs, and Brazilian reais related to
debt. In 2000, our foreign exchange contracts consisted principally of Brazilian
reais and Swiss francs related to debt. In addition, we are subject to foreign
exchange risk related to other foreign-currency-denominated transactions. The
notional amounts under contract at December 31, 2001 and 2000 were $6,422 and
$71 respectively. The increase in our foreign currency contract activity was
primarily related to foreign exchange contracts entered into relating to the
commencement of a Euro commercial paper program and the Canadian obligation with
notional amounts outstanding of $5.3 billion respectively at December 31, 2001.
The following table summarizes the fair and carrying values of the foreign
exchange contracts at December 31, 2001 and 2000.
2001 2000
----------------- -------------------------------------
FAIR/CARRYING
VALUE FAIR VALUE CARRYING VALUE
----------------- ----------------- -----------------
ASSET LIABILITY ASSET LIABILITY ASSET LIABILITY
----- --------- ----- --------- ----- ---------
Foreign Exchange Contracts............ $72 $299 $1 $2 $-- $1
XII-44
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EQUITY COLLARS
In 2000, we entered into three series of option agreements (Microsoft
collars) with a single bank counterparty (counterparty) to hedge our exposure to
21.9 million shares of Microsoft common stock. These option agreements, combined
with the underlying shares, secure a floating-rate borrowing from the
counterparty, the face value of which is equal to the product of (i) the
underlying shares multiplied by (ii) the put price. (see Note 12)
The option agreements are a series of purchased and written options that
hedge a portion of our holdings in Microsoft common stock. The Microsoft collar
is undesignated for accounting purposes in accordance with SFAS No. 133 and is
carried on our balance sheet at fair value, with unrealized gains or losses
being recorded in "Other income (expense)" in the Consolidated Statement of
Income. These unrealized gains or losses are largely offset by the changes in
the fair value of a certain number of our shares of Microsoft common stock that
are classified as "trading in accordance with SFAS No. 115." The carrying value
of the Microsoft collar was $6 and $419 at December 31, 2001 and 2000,
respectively. The fluctuation of the carrying value of the collars is primarily
due to the change in the market prices of the underlying shares, which were
$66.25 per share and $43.375 per share at December 31, 2001 and 2000,
respectively and the adoption of SFAS No. 133, which required valuing the
instruments at fair value rather than intrinsic value.
The following is a summary of the Microsoft collars outstanding at December
31, 2001:
MATURITY DATE 2003 2004 2005
------------- ------ ------- -------
Put price per share...................................... $62.48 $ 62.48 $ 62.48
Call price per share..................................... 86.26 100.44 118.36
Since the debt and the collar are contracted with the same counterparty,
the treatment is similar to a debt instrument with an embedded instrument and
will be net settled as follows:
At the expiration of the Microsoft collar, we will satisfy the debt and
collar net obligations under the floating-rate debt by delivering (i) a number
of Microsoft shares equal to the underlying share amount multiplied by the
exchange ratio, or (ii) its equivalent cash value. The exchange ratio will be
calculated at expiration in the following manner:
(a) If the fair market value of a share of Microsoft common stock is
greater than the call price, the exchange ratio will be a fraction, the
numerator of which is equal to the sum of (i) the put price, plus (ii) the
excess of the fair market value of a share of Microsoft common stock over
the call price, and the denominator of which is equal to the fair market
value of a share of Microsoft common stock;
(b) If the fair market value of a share of Microsoft common stock is
less than or equal to the put price, the exchange ratio will be 1;
(c) If the fair market value of a share of Microsoft common stock is
less than or equal to the call price but greater than the put price, the
exchange ratio will be a fraction, the numerator of which is equal to the
put price, and the denominator of which is equal to the fair market value
of a share of Microsoft common stock.
Prior to our merger with MediaOne, two subsidiaries of MediaOne, MediaOne
SPC IV and MediaOne SPC VI, each entered into a series of option agreements
("Vodafone collars") with a single bank counterparty ("counterparty") to hedge
its exposure to 47.2 million Vodafone ADRs. In conjunction with the Vodafone
collars, MediaOne SPC IV and MediaOne SPC VI also issued floating-rate debt in a
series of private placements, the face value of which is equal to the product of
(i) the underlying shares multiplied by (ii) the put price. Simultaneous with
the execution of the Vodafone collars, MediaOne SPC IV and MediaOne SPC VI each
entered into floating-to-fixed interest rate swaps in which future
XII-45
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fixed payments were prepaid by each of MediaOne SPC IV and MediaOne SPC VI at
inception. Therefore, the on-going interest payments on the floating-rate notes
are paid by the counterparty. These prepaid interest rate swaps are designated
as cash flow hedges in accordance with SFAS No. 133.
The option agreements are a series of purchased and written options that
hedge a portion of our holdings in Vodafone ADRs. The Vodafone collars are
undesignated for accounting purposes in accordance with SFAS No. 133 and are
carried on our balance sheet at fair value, with unrealized gains or losses
being recorded to "Other income (expense)" in the Consolidated Statement of
Income. These unrealized gains or losses are largely offset by the changes in
the fair value of a certain number of our Vodafone ADRs that are classified as
"trading". The carrying value of the Vodafone collars was $462 and $(453) at
December 31, 2001 and 2000, respectively. The fluctuation of the carrying value
of the collars is primarily due to the change in the per share market price of
the underlying ADRs, which was $25.68 per share and $35.81 per share at December
31, 2001 and 2000, respectively, and the adoption of SFAS No. 133, which
requires valuing the instruments at fair value rather than intrinsic value.
The following is a summary of the Vodafone collars outstanding at December
31, 2001:
MATURITY DATE
------------------------
MEDIAONE SPC IV VODAFONE COLLARS 2003 2004 2005
-------------------------------- ------ ------ ------
Average put price per share................................ $34.06 $33.78 $33.53
Average call price per share............................... 49.13 48.85 48.60
MATURITY DATE
------------------------
MEDIAONE SPC VI VODAFONE COLLARS 2003 2004 2005
-------------------------------- ------ ------ ------
Average put price per share................................ $39.85 $39.86 $39.86
Average call price per share............................... 57.72 57.72 57.73
Since the debt and the collars are contracted with different
counterparties, the instruments will be settled independently. MediaOne SPC IV
and MediaOne SPC VI will satisfy its obligations to the floating-rate debt
holders by delivering cash equal to the face value (see note 12). At the
expiration of the Vodaphone collars, MediaOne SPC IV and MediaOne SPC VI will
cash settle its collars with the counterparty. Cash settlement of the Vodafone
collars will be completed in the following manner:
a. If the fair market value of a Vodafone ADR is greater than the
call price, MediaOne SPC IV or MediaOne SPC VI (as appropriate) will pay a
sum of cash equal to the excess of the fair market value of a Vodafone ADR
over the call price;
b. If the fair market value of a Vodafone ADR is less than the put
price, the counterparty will pay to MediaOne SPC IV or MediaOne SPC VI (as
appropriate) a sum of cash equal to the excess of the put price over the
fair market price of a Vodafone ADR;
c. If the fair market value of a Vodafone ADR is less than or equal
to the call price but greater than or equal to the put price, the Vodafone
collar will expire worthless and no cash payment will be made or received
by MediaOne SPC IV or MediaOne SPC VI (as appropriate).
The net value of (i) the sale of all Vodafone ADRs and (ii) the cash
settlement of the Vodafone collars will always be equal to or greater than the
face value of the floating-rate notes. Any remaining cash will be retained by
MediaOne SPC IV and MediaOne SPC VI and would become available to AT&T for
general corporate purposes.
XII-46
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EQUITY OPTION AND EQUITY SWAP CONTRACTS
We enter into equity option and equity swap contracts, which are
undesignated in accordance with SFAS No. 133, to manage our exposure to changes
in equity prices associated with stock appreciation rights of previously
affiliated companies. The notional amounts outstanding on these contracts at
December 31, 2001 and 2000 were $360 and $392 million, respectively. The
following table summarizes the carrying and fair values of these instruments.
Market prices are based on market quotes.
2001 2000
----------------- -----------------
CARRYING/FAIR CARRYING/FAIR
VALUE VALUE
----------------- -----------------
ASSET LIABILITY ASSET LIABILITY
----- --------- ----- ---------
Equity hedges......................................... $-- $85 $2 $100
WARRANTS
We may obtain warrants to purchase equity securities in other private and
public companies as a result of certain transactions. Private warrants and
public warrants that provide for net share settlement (i.e. allow for cashless
exercise) are considered to be derivative instruments and recognized on our
balance sheet at fair value (in accordance with SFAS No. 133). Warrants are not
eligible to be designated as hedging instruments because there is no underlying
exposure. Instead, these are effectively investments in private and public
companies. The fair value of these warrants was $41 at December 31, 2001.
DEBT AND PREFERRED SECURITIES
The carrying value of debt maturing within one year approximates market
value. The table below summarizes the carrying and fair values of long-term
debt, excluding capital leases, and certain preferred securities. The market
values of long-term debt were obtained based on quotes or rates available to us
for debt with similar terms and maturities, and the market value of the
preferred securities was based on market quotes. It is not practicable to
estimate the fair market value of our quarterly preferred securities that
aggregated $4,720 and $4,710 at December 31, 2001 and 2000, respectively as
there are no current market quotes available on this private placement.
2001 2000
--------------------------- ---------------------------
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
-------------- ---------- -------------- ----------
Long-term Debt, excluding capital
leases................................ $43,978 $41,845 $32,591 $29,735
Pacific preferred stock................. 2,100 948 2,121 595
DERIVATIVE IMPACTS
For the year ended December 31, 2001, "Other comprehensive income", as a
component of shareowners' equity, net of tax, included deferred net unrealized
losses of $244 relating to derivatives that are designated as cash flow hedges.
This amount included net losses of $166 related to the ongoing fair value
adjustments of equity based derivative instruments embedded in certain debt
instruments, net losses of $78 related to certain swaps and foreign currency
transactions.
For the year ended December 31, 2001, "Other (expense) income" in the
Consolidated Statement of Income, included net gains of $1,328, relating to
ongoing fair value adjustments of undesignated derivatives and derivatives
designated as fair value hedges. The fair value adjustments included net gains
of $1,247 for equity based derivative instruments related to certain debt
instruments, net gains of $81 for changes in the fair value of warrants, swaps
and foreign currency transactions. These gains were offset by the ongoing
mark-to-market adjustments of the "trading" securities underlying the
monetizations of $(983).
XII-47
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. PENSION, POSTRETIREMENT AND OTHER EMPLOYEE BENEFIT PLANS
We sponsor noncontributory, defined benefit pension plans covering the
majority of our employees. Pension benefits for management employees are based
principally on career-average pay. Pension benefits for occupational employees
are not directly related to pay. Pension trust contributions are made to trust
funds held for the sole benefit of plan participants. Our benefit plans for
current and certain future retirees include health-care benefits, life insurance
coverage and telephone concessions.
The following table shows the components of the net periodic benefit costs
included in our Consolidated Statements of Income:
PENSION BENEFITS POSTRETIREMENT BENEFITS
--------------------------- ------------------------
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------
2001 2000 1999 2001 2000 1999
------- ------- ------- ------ ------ ------
Service cost benefits earned during
the period......................... $ 257 $ 248 $ 247 $ 27 $ 35 $ 54
Interest cost on benefit
obligations........................ 951 991 919 346 352 324
Amortization of unrecognized prior
service cost....................... 172 174 159 4 4 13
Credit for expected return on plan
assets............................. (1,660) (1,821) (1,458) (201) (230) (200)
Amortization of transition asset..... (89) (156) (158) -- -- --
Amortization of gains................ (181) (332) (10) -- (16) (1)
Charges for special termination
benefits*.......................... 188 -- -- 28 16 5
Net curtailment losses (gains)*...... 112 121 -- 58 (14) --
Net settlement losses (gains)*....... 4 8 (121) -- -- --
------- ------- ------- ----- ----- -----
Net periodic benefit (credit)cost.... $ (246) $ (767) $ (422) $ 262 $ 147 $ 195
======= ======= ======= ===== ===== =====
---------------
* Primarily included in "Net restructuring and other charges" in the
Consolidated Statements of Income.
In connection with our restructuring plan announced in the fourth quarter
of 2001 we recorded a $188 charge related to management employee separation
benefits expected to be funded by assets of the AT&T Management Pension Plan. We
also recorded pension and postretirement benefit curtailment charges of $170 and
a $28 charge related to expanded eligibility for postretirement benefits for
certain employees expected to exit under the plan.
In 1998 we offered a voluntary retirement incentive program (VRIP) to
employees who were eligible participants in the AT&T Management Pension Plan.
Approximately 15,300 management employees accepted the VRIP offer and had
terminated employment as of December 31, 1999. The VRIP permitted employees to
choose either a total lump-sum distribution of their pension benefits or
periodic future annuity payments. Lump-sum pension settlements resulted in
settlement gains of $121 recorded in 1999.
XII-48
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables provide a reconciliation of the changes in the plans'
benefit obligations and fair value of assets, and a statement of the funded
status:
PENSION BENEFITS POSTRETIREMENT BENEFITS
----------------- ------------------------
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
2001 2000 2001 2000
------- ------- ---------- ----------
CHANGE IN BENEFIT OBLIGATIONS:
Benefit obligation, beginning of year......... $13,063 $12,868 $ 4,886 $ 4,642
Service cost.................................. 257 248 27 35
Interest cost................................. 951 991 346 352
Plan amendments............................... 62 32 -- (45)
Actuarial losses (gains)...................... 655 5 376 203
Acquisition................................... -- 204 -- 38
Benefit payments.............................. (1,117) (1,228) (407) (362)
Special termination benefits.................. 188 -- 28 16
Settlements................................... (17) (57) -- --
Curtailment losses............................ (7) -- 60 7
------- ------- ------- -------
Benefit obligation, end of year............... $14,035 $13,063 $ 5,316 $ 4,886
======= ======= ======= =======
CHANGE IN FAIR VALUE OF PLAN ASSETS:
Fair value of plan assets, beginning of
year........................................ $21,203 $21,854 $ 2,526 $ 2,852
Actual return on plan assets.................. (1,650) 335 (214) (128)
Employer contributions........................ 66 94 255 159
Acquisition................................... -- 205 -- 5
Benefit payments.............................. (1,117) (1,228) (407) (362)
Settlements................................... (17) (57) -- --
------- ------- ------- -------
Fair value of plan assets, end of year........ $18,485 $21,203 $ 2,160 $ 2,526
======= ======= ======= =======
At December 31,
Funded (unfunded) benefit obligation.......... $ 4,450 $ 7,992 $(3,156) $(2,360)
Unrecognized net (gain) loss.................. (2,506) (6,493) 605 (188)
Unrecognized transition asset................. (34) (123) -- --
Unrecognized prior service cost............... 883 1,100 (12) (9)
------- ------- ------- -------
Net amount recorded........................... $ 2,793 $ 2,476 $(2,563) $(2,557)
======= ======= ======= =======
At December 31, 2001, our pension plan assets included $31 of AT&T common
stock. At December 31, 2000, our pension plan assets included $34 of AT&T common
stock and $26 of LMG Series A common stock, and $2 of AT&T Wireless Group common
stock.
XII-49
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table provides the amounts recorded in our Consolidated
Balance Sheets:
PENSION BENEFITS POSTRETIREMENT BENEFITS
----------------- ------------------------
AT DECEMBER 31,
--------------------------------------------
2001 2000 2001 2000
------- ------- ---------- ----------
Prepaid pension cost............................ $3,337 $3,003 $ -- $ --
Benefit related liabilities..................... (648) (579) (2,563) (2,557)
Intangible asset................................ 50 30 -- --
Accumulated other comprehensive income.......... 54 22 -- --
------ ------ ------- -------
Net amount recorded............................. $2,793 $2,476 $(2,563) $(2,557)
====== ====== ======= =======
Our nonqualified pension plans had an unfunded accumulated benefit
obligation of $132 and $125 at December 31, 2001 and 2000, respectively. On
January 1, 2001 our postretirement health and life benefit plans were merged
into one plan. At December 31, 2000, our postretirement health and telephone
benefit plans had accumulated postretirement benefit obligations of $4,282,
which were in excess of plan assets of $1,413.
The assumptions in the following table were used in the measurement of the
pension and postretirement benefit obligations and the net periodic benefit
costs as applicable.
WEIGHTED-AVERAGE
ASSUMPTIONS
AT DECEMBER 31:
------------------
2001 2000 1999
---- ---- ----
Discount rate............................................... 7.25% 7.5% 7.75%
Expected return on plan assets.............................. 9.5% 9.5% 9.5%
Rate of compensation increase............................... 4.5% 4.5% 4.5%
We assumed a rate of increase in the per capita cost of covered health-care
benefits (the health-care cost trend rate) of 9.5%. This rate was assumed to
gradually decline after 2001 to 5.0% by 2012 and then remain level. Assumed
health-care cost trend rates have a significant effect on the amounts reported
for the health-care plans. A one percentage point increase or decrease in the
assumed health-care cost trend rate would increase or decrease the total of the
service and interest-cost components of net periodic postretirement health-care
benefit cost by $11 and $10, respectively, and would increase or decrease the
health-care component of the accumulated postretirement benefit obligation by
$155 and $135, respectively.
We also sponsor savings plans for the majority of our employees. The plans
allow employees to contribute a portion of their pretax and/or after-tax income
in accordance with specified guidelines. We match a percentage of the employee
contributions up to certain limits. Our contributions amounted to $185 in 2001,
$220 in 2000 and $197 in 1999.
16. STOCK-BASED COMPENSATION PLANS
Under the 1997 Long-term Incentive Program (Program), which was effective
June 1, 1997, and amended on May 19, 1999 and March 14, 2000, we grant stock
options, performance shares, restricted stock and other awards on AT&T common
stock as well as stock options on AT&T Wireless Group tracking stock prior to
the split-off of AT&T Wireless.
Under the initial terms of the Program, there were 150 million shares of
AT&T common stock available for grant with a maximum of 22.5 million common
shares that could be used for awards other than stock options. Subsequent to the
1999 modification, beginning with January 1, 2000, the remaining
XII-50
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shares available for grant at December 31 of the prior year, plus 1.75% of the
shares of AT&T common stock outstanding on January 1 of each year, become
available for grant. Under the amended terms, a maximum of 37.5 million shares
can be used for awards other than stock options. As a result of the equity
restructuring of stock options and other awards in connection with the AT&T
Wireless split-off, the number of shares available for stock option grants and
the number of shares available for other stock-based awards increased by 17.7
million and 2.9 million, respectively. The exercise price of any stock option is
equal to the stock price when the option is granted. Generally, the options vest
over three or four years and are exercisable up to 10 years from the date of
grant.
Under the Program, performance share units are awarded to key employees in
the form of either common stock or cash at the end of a three-year period, based
on certain financial-performance targets.
On April 27, 2000, AT&T created a new class of stock and completed an
offering of AT&T Wireless Group tracking stock. Under the Program, 5% of the
outstanding AT&T Wireless Group shares became available for grant with a maximum
of 1.25% of the outstanding shares that could be used for awards other than
options. On January 1, 2001, the remaining AT&T Wireless Group shares available
for grant at December 31, 2000, plus 2% of the outstanding AT&T Wireless Group
shares on January 1 became available for grant. The exercise price of any stock
option was equal to the stock price when the option was granted. When granted,
the options had a two to three and one-half year vesting period. They are
exercisable up to 10 years from the date of grant. In 2001 and 2000, there were
no grants of awards other than stock options. On April 27, 2000, substantially
all employees were granted AT&T Wireless Group tracking stock options.
On July 9, 2001, AT&T completed the split-off of AT&T Wireless Group 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 AT&T
Wireless common stock held by AT&T was distributed to AT&T common shareowners on
a basis of 0.3218 of a share of AT&T Wireless for each AT&T share outstanding.
All outstanding AT&T Wireless Group tracking stock options and all AT&T common
stock options granted prior to January 1, 2001 were treated in a similar manner.
AT&T modified the terms and conditions of all outstanding stock option grants to
allow the AT&T Wireless common stock options held by AT&T employees to
immediately vest and become exercisable for their remaining contractual term and
to also allow the AT&T common stock options held by AT&T Wireless employees to
immediately vest and become exercisable for their remaining contractual term. In
2001, AT&T recognized $3 of compensation expense related to these modifications.
Under the AT&T 1996 Employee Stock Purchase Plan (Plan), which was
effective July 1, 1996, and amended on May 23, 2001, we are authorized to sell
up to 105 million shares of AT&T common stock to our eligible employees through
June 30, 2006. Under the terms of the Plan, employees may have up to 10% of
their earnings withheld to purchase AT&T's common stock. The purchase price of
the stock on the date of exercise is 85% of the average high and low sale prices
of shares on the New York Stock Exchange for that day. Under the Plan, we sold
approximately 6 million shares to employees in both 2001 and 2000 and 3 million
shares to employees in 1999.
We apply APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations in accounting for our plans. Accordingly, no
compensation expense has been recognized for our stock-based compensation plans
other than for our performance-based and restricted stock awards and stock
appreciation rights (SARs). Stock based-compensation (expense) income was
$(121), $253 and $(462) in 2001, 2000 and 1999, respectively. These amounts
included (expense) income of $(3), $269 and $(382) in 2001, 2000 and 1999,
respectively, related to grants of SARs of affiliated companies held by certain
employees subsequent to the TCI merger. We also entered into an equity hedge in
1999 to offset potential future compensation costs associated with these SARs.
(Expense) income related to this hedge was $(16), $(324) and $227 in 2001, 2000
and 1999, respectively.
XII-51
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the AT&T common stock option transactions is shown below:
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
2001 PRICE 2000 PRICE 1999 PRICE
------- --------- ------- --------- ------- ---------
SHARES IN THOUSANDS
Outstanding at January
1....................... 249,026 $35.82 168,763 $37.42 131,904 $30.41
Options assumed in
mergers................. -- 29,613 $24.71 11,770 $14.79
Options granted........... 68,402 $22.17 74,570 $36.12 47,927 $57.13
AT&T Wireless split-off
adjustments............. 21,644
Options and SARs
exercised............... (5,218) $11.63 (11,446) $22.07 (17,858) $22.87
Options canceled or
forfeited............... (16,308) $31.07 (12,474) $45.61 (4,980) $42.44
AT DECEMBER 31:
Options outstanding....... 317,546 $24.58 249,026 $35.82 168,763 $37.42
Options exercisable....... 171,446 $26.05 131,450 $30.44 57,894 $28.21
Shares available for
grant................... 34,718 34,204 41,347
The weighted average exercise prices for the period prior to the AT&T
Wireless split-off in 2001, and for the years ended December 31, 2000 and 1999
have not been adjusted to reflect the impact of the split-off.
At December 31, 2001, there were 4.5 million AT&T stock options with 2.2
million tandem SARs outstanding that were originally assumed in connection with
our merger with MediaOne. All of the SARs were exercisable at a price of $19.33.
There were no SARs exercised during 2001 or 2000.
XII-52
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about the AT&T common stock
options outstanding at December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- --------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
RANGE OF EXERCISE PRICES 2001 LIFE PRICE 2001 PRICE
------------------------ -------------- ----------- --------- -------------- ---------
(IN THOUSANDS) (IN THOUSANDS)
$2.03 -- $13.65............ 16,245 4.9 $ 7.90 15,767 $ 7.75
$13.70 -- $16.77........... 12,968 8.6 $15.84 3,882 $15.38
$16.85 -- $17.33........... 28,866 9.4 $16.86 1,319 $16.95
$17.39..................... 48,088 9.2 $17.39 2,907 $17.39
$17.44 -- $18.49........... 11,193 5.3 $17.88 7,312 $17.78
$18.50..................... 14,420 5.6 $18.50 14,420 $18.50
$18.53 -- $19.77........... 9,325 5.7 $19.12 8,159 $19.11
$19.79..................... 15,858 5.1 $19.79 15,858 $19.79
$19.88 -- $24.13........... 19,659 5.8 $22.88 14,768 $22.83
$24.23..................... 25,088 8.6 $24.23 6,287 $24.23
$24.30 -- $31.74........... 24,575 7.4 $27.98 17,337 $28.89
$31.79..................... 23,874 6.1 $31.79 23,874 $31.79
$31.85 -- $34.30........... 19,406 8.1 $34.16 7,372 $34.00
$34.33 -- $44.98........... 22,925 7.7 $38.80 16,105 $38.42
$45.20 -- $46.90........... 25,056 7.1 $45.21 16,079 $45.21
------- -------
317,546 7.4 $24.58 171,446 $26.05
A summary of the AT&T Wireless Group tracking stock option transactions is
shown below:
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
2001 PRICE 2000 PRICE
------- --------- ------ ---------
SHARES IN THOUSANDS
OUTSTANDING AT JANUARY 1...................... 73,626 $29.29 -- $ --
Options granted............................... 4,037 $22.57 76,983 $29.29
Options exercised............................. (1) $22.03 -- $ --
Options canceled or forfeited................. (2,711) $29.11 (3,357) $29.43
Options assumed by AT&T Wireless on July
9th......................................... (74,951)
AT DECEMBER 31:
Options outstanding........................... -- 73,626 $29.29
Options exercisable........................... -- 12,391 $29.48
Shares available for grant.................... -- 41,874
AT&T has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". If AT&T had elected to recognize
compensation costs based on the fair value at the date
XII-53
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of grant of the awards, consistent with the provisions of SFAS No. 123, net
income and earnings per share amounts would have been as follows:
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------
2001 2000 1999
------- ------ ------
AT&T COMMON STOCK GROUP:
(Loss) income from continuing operations available to
common shareowners...................................... $(5,423) $2,342 $5,685
Income (loss) from discontinued operations................ 58 283 (492)
Gain on sale of discontinued operations................... 13,503 -- --
Cumulative effect of accounting change.................... 359 -- --
Net income available to common shareowners................ $ 8,497 $2,625 $5,193
(LOSS) EARNINGS PER AT&T COMMON STOCK GROUP COMMON
SHARE -- BASIC:
Continuing operations..................................... $ (1.48) $ 0.67 $ 1.84
Discontinued operations................................... 0.01 0.08 (0.16)
Gain on sale of discontinued operations................... 3.70 -- --
Cumulative effect of accounting change.................... 0.10 -- --
AT&T Common Stock Group earnings.......................... 2.33 $ 0.75 $ 1.68
(LOSS) EARNINGS PER AT&T COMMON STOCK GROUP COMMON
SHARE -- DILUTED:
Continuing operations..................................... $ (1.48) $ 0.66 $ 1.80
Discontinued operations................................... 0.01 0.08 (0.15)
Gain on sale of discontinued operations................... 3.70 -- --
Cumulative effect of accounting change.................... 0.10 -- --
AT&T Common Stock Group earnings.......................... 2.33 $ 0.74 $ 1.65
AT&T WIRELESS GROUP:
Income.................................................... $ 18 $ 51 $ --
EARNINGS PER SHARE:
Basic and diluted......................................... $ 0.04 $ 0.14 $ --
The pro forma effect on net loss from continuing operations available to
AT&T common shareowners for 2001 includes an expense of $50 due to the
conversion of AT&T common stock options in connection with the split-off of AT&T
Wireless, and also includes an expense of $175 due to the accelerated vesting of
AT&T Wireless stock options held by AT&T employees after the split-off.
The weighted-average fair values at date of grant for AT&T common stock
options granted during 2001, 2000 and 1999 were $7.90, $12.10 and $15.64,
respectively, and were estimated using the Black-Scholes option-pricing model.
The weighted-average risk-free interest rates applied for 2001, 2000 and 1999
were 4.61%, 6.29% and 5.10%, respectively. The following assumptions were
applied for 2001, 2000 and 1999, respectively: (i) expected dividend yields of
..85%, 1.6% and 1.7%, (ii) expected volatility rates of 36.9%, 33.5% and 28.3%
and (iii) expected lives of 4.7 years in 2001 and 2000 and 4.5 years in 1999.
The weighted-average fair values at date of grant for AT&T Wireless Group
tracking stock options granted during 2001 and 2000 were $11.58 and $14.20,
respectively, and were estimated using the Black-Scholes option-pricing model.
The following weighted-average assumptions were applied for 2001 and
XII-54
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2000, respectively: (i) risk-free rate of 4.92% and 6.53%, (ii) expected
volatility rate of 55.0% in 2001 and 2000 and (iii) expected lives of 4.8 years
and 3.9 years.
In January 2002, AT&T modified its outstanding stock option agreements for
AT&T stock options and other equity awards held by current AT&T Broadband
employees to provide that upon the change in control of AT&T Broadband their
stock options and other equity awards granted prior to January 1, 2002 will be
immediately vested and exercisable through their remaining contractual term. The
potential compensation cost associated with this modification for current AT&T
Broadband employees has been measured as of the modification date and is
approximately $50 pretax. The actual charge will be finalized and recorded by
AT&T Broadband at the time of the change in control in connection with the
anticipated merger with Comcast.
17. INCOME TAXES
The following table shows the principal reasons for the difference between
the effective income (benefit) tax rate and the U.S. federal statutory income
tax rate:
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------
2001 2000 1999
------- ------ ------
U.S. federal statutory income tax rate.................... 35% 35% 35%
Federal income tax (benefit) provision at statutory
rate.................................................... $ (362) $ 845 $3,774
Amortization of investment tax credits.................... (18) (23) (10)
State and local income tax (benefit) provision, net of
federal income tax provision (benefit) effect........... (92) 176 279
In-process research and development write-off............. -- -- 208
Amortization of intangibles............................... 188 91 26
Foreign rate differential................................. 209 104 56
Taxes on repatriated and accumulated foreign income, net
of tax credits.......................................... (84) (84) (45)
Research and other credits................................ (43) (37) (61)
Valuation allowance....................................... -- -- (76)
Investment dispositions, acquisitions and legal entity
restructurings.......................................... (176) (445) (94)
Operating losses and charges relating to Excite@Home...... 649 2,757 --
Deconsolidation of and put obligation settlement related
to Excite@Home.......................................... (1,045) -- --
Other differences, net.................................... (17) (100) (41)
------- ------ ------
(Benefit) provision for income taxes...................... $ (791) $3,284 $4,016
Effective income (benefit) tax rate....................... 76.4% 136.1% 37.3%
XII-55
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The U.S. and foreign components of (loss) income from continuing operations
before income taxes and the (benefit) provision for income taxes are presented
in this table:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
--------- -------- ---------
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES
United States.......................................... $(1,030) $2,823 $10,449
Foreign................................................ (5) (409) 332
------- ------ -------
Total.................................................. $(1,035) $2,414 $10,781
(BENEFIT) PROVISION FOR INCOME TAXES
CURRENT
Federal................................................ $ 1,392 $2,323 $ 2,896
State and local........................................ 152 281 417
Foreign................................................ 102 89 100
------- ------ -------
1,646 2,693 3,413
DEFERRED
Federal................................................ (2,125) 633 593
State and local........................................ (293) (14) 12
Foreign................................................ (1) (5) 8
------- ------ -------
(2,419) 614 613
Deferred investment tax credits.......................... (18) (23) (10)
------- ------ -------
(Benefit) provision for income taxes..................... $ (791) $3,284 $ 4,016
In addition, we also recorded current and deferred income tax benefits
related to minority interest income (expense) and net equity losses related to
other equity investments, respectively in the amounts of $756 and $2,383 in
2001, $279 and $251 in 2000 and $273 and $249 in 1999, respectively.
Deferred income tax liabilities are taxes we expect to pay in future
periods. Similarly, deferred income tax assets are recorded for expected
reductions in taxes payable in future periods. Deferred income taxes arise
because of differences in the book and tax basis of certain assets and
liabilities.
XII-56
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax liabilities and assets consist of the following:
AT DECEMBER 31,
-----------------
2001 2000
------- -------
LONG-TERM DEFERRED INCOME TAX LIABILITIES
Property, plant and equipment............................. $ 6,420 $ 5,393
Investments............................................... 7,768 9,558
Franchise costs........................................... 16,839 18,571
Other..................................................... 2,519 2,694
------- -------
Total long-term deferred income tax liabilities........... 33,546 36,216
LONG-TERM DEFERRED INCOME TAX ASSETS
Business restructuring.................................... 163 127
Net operating loss/credit carryforwards................... 180 602
Employee pensions and other benefits, net................. 1,027 1,470
Reserves and allowances................................... 1,724 99
Other..................................................... 2,349 2,604
Valuation allowance....................................... (57) (740)
------- -------
Total net long-term deferred income tax assets.............. 5,386 4,162
Net long-term deferred income tax liabilities............... $28,160 $32,054
CURRENT DEFERRED INCOME TAX LIABILITIES
Investments............................................... $ 11 $ 670
Other..................................................... 121 310
------- -------
Total current deferred income tax liabilities............. 132 980
CURRENT DEFERRED INCOME TAX ASSETS
Business restructuring.................................... 216 155
Employee pensions and other benefits...................... 182 377
Reserves and allowances................................... 493 621
Other..................................................... 471 586
Valuation allowance....................................... (0) (39)
------- -------
Total net current deferred income tax assets................ 1,362 1,700
Net current deferred income tax assets...................... $ 1,230 $ 720
At December 31, 2001, we had net operating loss carryforwards (tax
effected) for federal and state income tax purposes of $15 and $116,
respectively, expiring through 2020. In addition, we had federal tax credit
carryforwards of $17, of which $1 has no expiration date and $16 expire through
2003. We also had state tax credit carryforwards (tax effected) of $32 expiring
through 2003. In connection with the TCI and MediaOne mergers, we acquired
certain federal and state net operating loss carryforwards that are subject to a
valuation allowance of $23 at December 31, 2001. If in the future, the
realization of these acquired deferred tax assets becomes more likely than not,
any reduction of the associated valuation allowance will be allocated to reduce
franchise costs and other intangibles.
On September 30, 2001, the assets and liabilities of Excite@Home were
deconsolidated from AT&T's consolidated balance sheet. Accordingly, AT&T's
deferred income tax assets and liabilities at December 31, 2001, presented
above, exclude any amounts related to Excite@Home.
XII-57
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. COMMITMENTS AND CONTINGENCIES
In the normal course of business we are subject to proceedings, lawsuits
and other claims, including proceedings under laws and regulations related to
environmental and other matters. Such matters are subject to many uncertainties,
and outcomes are not predictable with assurance. Consequently, we are unable to
ascertain the ultimate aggregate amount of monetary liability or financial
impact with respect to these matters at December 31, 2001. These matters could
affect the operating results of any one quarter when resolved in future periods.
However, we believe that after final disposition, any monetary liability or
financial impact to us beyond that provided for at year-end would not be
material to our annual consolidated financial statements.
We lease land, buildings and equipment through contracts that expire in
various years through 2050. Our rental expense under operating leases was $696
in 2001, $705 in 2000 and $622 in 1999. The total of minimum rentals to be
received in the future under non-cancelable operating subleases as of December
31, 2001, was $189.
The following table shows our future minimum commitments due under
non-cancelable operating and capital leases at December 31, 2001:
OPERATING CAPITAL
LEASES LEASES
--------- -------
2002........................................................ $ 550 $ 66
2003........................................................ 492 63
2004........................................................ 432 60
2005........................................................ 350 58
2006........................................................ 298 44
Later years................................................. 874 131
------ ----
Total minimum lease payments................................ $2,996 $422
====== ====
Less: Amount representing interest.......................... 95
----
Present value of net minimum lease payments................. $327
====
In addition, under certain real estate operating leases, we could be
required to make payments to the lessor up to $586 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.
AT&T has an agreement with Motorola, Inc. to purchase a minimum of 1.6
million digital set-top devices at an average price of $234 per unit in 2002.
During 2001, AT&T satisfied its obligation under a previous agreement with
Motorola, Inc. to purchase set-top devices.
AT&T has certain commitments relating to AT&T Canada (see Note 5).
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. Starz Encore Group is a
subsidiary of LMG. The future commitment, which is calculated based on a fixed
number of subscribers, increases annually from $306 in 2002 to $315 in 2003 and
will increase annually through 2022 with inflation, subject to certain
adjustments, including increases in the number of subscribers. The affiliation
term sheet further provides that to the extent Starz Encore Group's programming
costs increase above certain levels, AT&T's payments under the term sheet will
be increased in proportion to the excess. Excess
XII-58
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
programming costs that may be payable by AT&T in future years are not presently
estimable and could be significant. By letter dated May 29, 2001, AT&T Broadband
indicated that in its view the Starz Encore term sheet as a whole is
unenforceable and reserved its right to terminate the term sheet. Starz Encore
subsequently initiated a lawsuit against AT&T Broadband seeking a declaration
that the term sheet is a binding and enforceable contract.
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. We assessed
our 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.
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, the agreement expires on December 31,
2012. The agreement calls for monthly payments which are subject to adjustments
and conditions pursuant to the terms of the underlying agreements. The annual
commitment under the agreement is $130 for 2002 and will increase annually with
inflation.
19. RELATED PARTY TRANSACTIONS
AT&T has various related party transactions with Concert.
Included in "Revenue" in the Consolidated Statements of Income was $1,080
for services provided to Concert for the years ended December 31, 2001 and 2000.
Included in "Access and other connection" in the Consolidated Statements of
Income are charges from Concert representing costs incurred on our behalf to
connect calls made to foreign countries (international settlements) and costs
paid by AT&T to Concert for distributing Concert products totaling $2,073 and
$2,364 for the year ended December 31, 2001 and 2000, respectively.
AT&T loaned $1,000 to Concert; that loan was included within "Other
investments and related advances" in the Consolidated Balance Sheet. Interest
income of $67 was recognized for the year ended December 31, 2000. This loan
together with the associated accrued interest was written off in connection with
the decision to unwind Concert (see Note 5).
At December 31, 2001 and 2000, AT&T had a floating rate loan payable to
Concert in the amount of $80 and $126, respectively. The loan, which is due on
demand, is included in "Debt maturing within one year" in the Consolidated
Balance Sheets. Interest expense was $3 and $6 for the year ended December 31,
2001 and 2000, respectively.
Included in "Accounts receivable" in the Consolidated Balance Sheets at
December 31, 2001 and 2000, was $438 and $462, respectively, related to
telecommunications transactions with Concert. Included in "Accounts payable" in
the Consolidated Balance Sheets at December 31, 2001 and 2000, was $201 and
$518, respectively, related to transactions with Concert.
Included in "Other receivables" in the Consolidated Balance Sheets at
December 31, 2001 and 2000, was $781 and $1,106, respectively, related to
administrative transactions performed on behalf of Concert. Included in "Other
current liabilities" in the Consolidated Balance Sheets at December 31, 2001 and
2000, was $935 and $1,032, respectively, related to administrative transactions
performed on behalf of Concert.
We had various related party transactions with LMG. Included in costs of
services and products were programming expenses related to services from LMG.
These expenses amounted to $199 for the 7 months ended July 31, 2001, the
effective split-off date of LMG for accounting purposes, $239 for the year ended
December 31, 2000, and $184 for the 10 months ended December 31, 1999 (see Note
9).
XII-59
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. SEGMENT REPORTING
AT&T's results are segmented according to the way we manage our business:
AT&T Business Services, AT&T Consumer Services and AT&T Broadband.
AT&T Business Services includes long distance, international and toll-free
voice, local, data and Internet protocol (IP) networking, managed networking
services and outsourcing solutions, and wholesale transport services (sales of
services to service resellers).
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 and prepaid phone
cards, local and local toll (intrastate calls outside the immediate local area)
and dial-up Internet.
AT&T Broadband offers a variety of services through our cable (broadband)
network, including traditional analog video and advanced services such as
digital video, high-speed data and broadband telephony.
The balance of AT&T's continuing operations (excluding LMG) is included in
a "Corporate and Other" group. This group reflects corporate staff functions and
the elimination of transactions between segments, as well as the impacts of
Excite@Home. In addition, all impacts of the adoption of SFAS No. 133 as well as
the ongoing investment and derivative revaluations are reflected in the
Corporate and Other group. LMG was not an operating segment of AT&T prior to its
split-off from AT&T because AT&T did not have a controlling financial interest
in LMG for financial accounting purposes. Therefore, we accounted for this
investment under the equity method. Additionally, LMG's results were not
reviewed by the chief operating decision-makers for purposes of determining
resources to be allocated.
Total assets for our reportable segments generally include all assets,
except intercompany receivables. AT&T prepaid pension assets and Corporate-owned
or leased real estate are held at the corporate level and therefore, are
included in the Corporate and Other group. AT&T Broadband and MediaOne prepaid
pension assets and owned or leased real estate is included in the AT&T Broadband
segment. In addition, as the "Net Assets of Discontinued Operations" is not
considered to be a part of AT&T's ongoing operations, it is included in a
category separate from reportable segments and Corporate and Other group for
reporting purposes. Capital additions for each segment include capital
expenditures for property, plant and equipment, additions to nonconsolidated
investments, increases in franchise costs and additions to internal-use
software.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies (see Note 1). AT&T evaluates
performance based on several factors, of which the primary financial measure is
earnings before interest and taxes, including pretax minority interest and net
pretax losses from other equity investments (EBIT).
Generally, AT&T accounts for AT&T Business Services' and AT&T Broadband's
Inter-segment transactions at market prices.
XII-60
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
AT&T Business Services external revenue................. $27,284 $28,157 $28,087
AT&T Business Services internal revenue............... 740 743 605
------- ------- -------
Total AT&T Business Services revenue.................... 28,024 28,900 28,692
AT&T Consumer Services external revenue................. 15,079 18,894 21,753
AT&T Broadband external revenue....................... 9,785 8,212 5,069
AT&T Broadband internal revenue....................... 14 14 1
------- ------- -------
Total AT&T Broadband revenue............................ 9,799 8,226 5,070
------- ------- -------
Total reportable segments.......................... 52,902 56,020 55,515
Corporate and Other(1).................................. (352) (487) (542)
------- ------- -------
Total revenue........................................... $52,550 $55,533 $54,973
======= ======= =======
---------------
(1) Includes $418, $248 and $10 related to Excite@Home in 2001, 2000 and 1999,
respectively.
DEPRECIATION AND AMORTIZATION(1)
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
2001 2000 1999
------ ------ ------
AT&T Business Services..................................... $4,215 $4,220 $4,219
AT&T Consumer Services..................................... 200 167 184
AT&T Broadband............................................. 4,376 3,063 1,636
------ ------ ------
Total reportable segments............................. 8,791 7,450 6,039
Corporate and Other(2)..................................... 547 1,139 155
------ ------ ------
Total depreciation and amortization........................ $9,338 $8,589 $6,194
====== ====== ======
---------------
(1) Includes the amortization of goodwill, franchise costs and other purchased
intangibles.
(2) Includes $404, $991 and $38 related to Excite@Home in 2001, 2000 and 1999,
respectively.
(LOSSES) EARNINGS RELATED TO OTHER EQUITY INVESTMENTS
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
2001 2000 1999
------- ----- -----
AT&T Business Services..................................... $(3,978) $ 35 $ (72)
AT&T Broadband............................................. (40) (215) (396)
------- ----- -----
Total reportable segments............................. (4,018) (180) (468)
Corporate and Other(1)..................................... (832) (408) (288)
------- ----- -----
Total net losses related to other equity investments....... $(4,850) $(588) $(756)
======= ===== =====
---------------
(1) Includes $(29), $(382) and $(311) related to Excite@Home in 2001, 2000 and
1999, respectively.
XII-61
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RECONCILIATION OF EBIT TO INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES, MINORITY INTEREST AND LOSSES RELATED TO OTHER EQUITY INVESTMENTS
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
AT&T Business Services.................................. $(2,154) $ 5,990 $ 5,248
AT&T Consumer Services.................................. 4,875 6,893 7,619
AT&T Broadband.......................................... (3,215) (1,240) (1,545)
------- ------- -------
Total reportable segments.......................... (494) 11,643 11,322
Corporate and Other(1).................................. (4,324) (3,279) (441)
Deduct: Pretax minority interest income (expense)....... 864 4,003 (180)
Add: Pretax losses related to other equity
investments........................................... 7,889 1,017 1,223
Interest expense........................................ (3,242) (2,964) (1,503)
------- ------- -------
Total income from continuing operations before income
taxes, minority interest and losses from other equity
investments........................................... $(1,035) $ 2,414 $10,781
======= ======= =======
---------------
(1) Includes $(714), $(3,603) and $(686) related to Excite@Home in 2001, 2000
and 1999, respectively.
ASSETS
AT DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
AT&T Business Services............................... $ 40,339 $ 42,747 $ 37,974
AT&T Consumer Services............................... 2,141 3,150 3,781
AT&T Broadband....................................... 103,060 114,848 53,810
-------- -------- --------
Total reportable segments....................... 145,540 160,745 95,565
Corporate and Other Assets:
Other segments..................................... 1,145 1,174 1,204
Prepaid pension costs.............................. 3,329 3,003 2,464
Deferred income taxes.............................. 960 406 527
Other corporate assets(1)(2)....................... 14,308 7,518 7,874
Net assets of discontinued operations................ -- 27,224 17,363
Investment in Liberty Media Group and Related
receivables, net................................... -- 34,290 38,460
-------- -------- --------
Total assets......................................... $165,282 $234,360 $163,457
======== ======== ========
---------------
(1) Includes $2,541 and $2,726 related to Excite@Home for 2000 and 1999,
respectively.
(2) 2001 amount includes cash of $10,425.
XII-62
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EQUITY INVESTMENTS (EXCLUDING LMG)
AT DECEMBER 31,
--------------------------
2001 2000 1999
------ ------- -------
AT&T Business Services................................... $ 84 $ 2,355 $ 582
AT&T Broadband........................................... 4,287 6,473 10,327
------ ------- -------
Total reportable segments........................... 4,371 8,828 10,909
Corporate and Other(1)................................... 228 1,666 3,012
------ ------- -------
Total equity investments................................. $4,599 $10,494 $13,921
====== ======= =======
---------------
(1) Includes $35 and $2,726 related to Excite@Home for 2000 and 1999,
respectively.
CAPITAL ADDITIONS
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
-------- --------- ---------
AT&T Business Services................................... $5,456 $ 6,839 $ 9,091
AT&T Consumer Services................................... 140 148 299
AT&T Broadband........................................... 3,607 4,968 4,759
------ ------- -------
Total reportable segments........................... 9,203 11,955 14,149
Corporate and Other(1)................................... 327 1,683 271
------ ------- -------
Total capital additions.................................. $9,530 $13,638 $14,420
====== ======= =======
---------------
(1) Includes $181 and $92 related to Excite@Home in 2001 and 2000, respectively.
Geographic information is not presented due to the immateriality of revenue
attributable to international customers.
Reflecting the dynamics of our business, we continually review our
management model and structure, which may result in additional adjustment to our
operating segments in the future.
21. GUARANTEE OF PREFERRED SECURITIES
TCI SECURITIES:
Prior to the consummation of the TCI merger, TCI issued mandatorily
redeemable preferred securities through subsidiary trusts that held subordinated
debt securities of TCI. At December 31, 2001, $1,244 of the guaranteed
redeemable preferred securities remained outstanding.
In the first quarter of 2002, AT&T notified holders that it will call the
mandatorily redeemable preferred securities issued by TCI Communications
Financing I, TCI Communications Financing II and TCI Communications Financing IV
for early redemption. (see Note 12)
MEDIAONE SECURITIES:
Prior to the consummation of the MediaOne merger, MediaOne issued
mandatorily redeemable preferred securities through subsidiary trusts that held
subordinated debt securities of MediaOne. At December 31, 2001, $776 of the
guaranteed securities remained outstanding.
XII-63
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In the first quarter of 2002, AT&T notified holders that it will call the
mandatorily redeemable preferred securities issued by MediaOne Financing A,
MediaOne Financing B and MediaOne Financing II for early redemption (see Note
12).
AT&T provides a full and unconditional guarantee on the outstanding
securities issued by TCI Communications Financing I, II and IV and the
outstanding securities issued by MediaOne Financing A and B and MediaOne Finance
II and III. Following are the condensed consolidating financial statements of
AT&T Corp., which include the financial results of TCI and MediaOne for each of
the corresponding periods. The results of MediaOne have been included in the
financial results of AT&T since the date of acquisition on June 15, 2000, and
the results of TCI have been included since the March 9, 1999, date of
acquisition.
XII-64
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AT&T CORP.
CONSOLIDATING CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 2001
TCI MEDIAONE MEDIAONE
GUARANTOR GUARANTOR GUARANTOR FINANCING FINANCING FINANCE
AT&T SUBSIDIARY SUBSIDIARY ------------------ --------- -----------
PARENT TCI MEDIAONE I II IV A B II III
--------- ---------- ---------- ---- ---- ---- --- --- ---- ----
(DOLLARS IN MILLIONS)
ASSETS
Cash and cash equivalents......... $ 10,415 $ -- $ 12 $ -- $ -- $ -- $-- $-- $ -- $ --
Receivables....................... 11,682
Investments.......................
Deferred income taxes............. 729
Other current assets.............. 302 71 689 527 513 204 31 29 220 11
Total Current Assets.............. 23,128 71 701 527 513 204 31 29 220 11
Property, plant & equipment,
net.............................. 8,580 135
Franchise costs, net.............. 20
Goodwill, net..................... 70 2,526
Investment in Liberty Media Group
and related receivables, net.....
Other investments and related
advances......................... 130,219 12,747 41,413
Other assets...................... 5,445 91 21 16 16 516
Net assets of discontinued
operations.......................
Total Assets...................... $167,442 $13,064 $44,640 $527 $513 $204 $52 $45 $236 $527
LIABILITIES
Debt maturing within one year..... $ 34,195 $ 616 $ 753 $527 $513 $204 $30 $28 $214
Liability under put options.......
Other current liabilities......... 8,763 597 59 1 1 6 11
Total Current Liabilities......... 42,958 1,213 812 527 513 204 31 29 220 11
Long-term debt.................... 23,810 9,866 676 504
Deferred income taxes............. 1,147 934
Other long-term liabilities and
deferred credits................. 6,850 45 23
Total Liabilities................. 74,765 11,124 2,445 527 513 204 31 29 220 515
Minority Interest.................
Company-Obligated Convertible
Quarterly Income Preferred
Securities of Subsidiary Trust
Holding Solely Subordinated Debt
Securities of AT&T............... 4,720
SHAREOWNERS' EQUITY
AT&T Common Stock................. 3,542
AT&T Wireless Group common stock..
Liberty Media Group Class A Common
Stock............................
Liberty Media Group Class B Common
Stock............................
Preferred stock issued to
subsidiaries..................... 10,559
Other shareowners' equity......... 73,856 1,940 42,195 21 16 16 12
Total Shareowners' Equity......... 87,957 1,940 42,195 21 16 16 12
Total Liabilities and Shareowners'
Equity........................... $167,442 $13,064 $44,640 $527 $513 $204 $52 $45 $236 $527
ELIMINATION
AND
NON-GUARANTOR CONSOLIDATION CONSOLIDATED
SUBSIDIARIES ADJUSTMENTS AT&T CORP.
------------- ------------- ------------
(DOLLARS IN MILLIONS)
ASSETS
Cash and cash equivalents......... $ 165 $ -- $ 10,592
Receivables....................... 44,516 (46,817) 9,381
Investments....................... 668 668
Deferred income taxes............. 501 1,230
Other current assets.............. (45) (1,895) 657
Total Current Assets.............. 45,805 (48,712) 22,528
Property, plant & equipment,
net.............................. 32,607 41,322
Franchise costs, net.............. 42,799 42,819
Goodwill, net..................... 22,079 24,675
Investment in Liberty Media Group
and related receivables, net..... --
Other investments and related
advances......................... 63,996 (224,557) 23,818
Other assets...................... 8,835 (4,820) 10,120
Net assets of discontinued
operations....................... --
Total Assets...................... $216,121 $(278,089) $165,282
LIABILITIES
Debt maturing within one year..... $ 8,985 $ (33,107) $ 12,958
Liability under put options....... --
Other current liabilities......... 11,419 (8,388) 12,469
Total Current Liabilities......... 20,404 (41,495) 25,427
Long-term debt.................... 14,640 (8,969) 40,527
Deferred income taxes............. 26,079 28,160
Other long-term liabilities and
deferred credits................. 7,378 (3,088) 11,208
Total Liabilities................. 68,501 (53,552) 105,322
Minority Interest................. 3,560 3,560
Company-Obligated Convertible
Quarterly Income Preferred
Securities of Subsidiary Trust
Holding Solely Subordinated Debt
Securities of AT&T............... 4,720
SHAREOWNERS' EQUITY
AT&T Common Stock................. 3,542
AT&T Wireless Group common stock.. --
Liberty Media Group Class A Common
Stock............................ --
Liberty Media Group Class B Common
Stock............................ --
Preferred stock issued to
subsidiaries..................... (10,559) --
Other shareowners' equity......... 144,060 (213,978) 48,138
Total Shareowners' Equity......... 144,060 (224,537) 51,680
Total Liabilities and Shareowners'
Equity........................... $216,121 $(278,089) $165,282
XII-65
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AT&T CORP.
CONSOLIDATING CONDENSED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2001
TCI MEDIAONE MEDIAONE
GUARANTOR GUARANTOR GUARANTOR FINANCING FINANCING FINANCE
AT&T SUBSIDIARY SUBSIDIARY --------------- ------------- ---------
PARENT TCI MEDIAONE I II IV A B II III
--------- ---------- ---------- --- --- --- ----- ----- --- ---
(DOLLARS IN MILLIONS)
Revenue............................... $19,587 $ -- $ -- $-- $-- $-- $ -- $ -- $-- $--
Operating Expenses
Costs of services and products........ 3,310 1
Access and other connection........... 6,355
Selling, general and administrative... 1,600 406 14
Depreciation and other amortization... 1,470 57
Amortization of goodwill, franchise
costs and other purchased
intangibles.......................... 35 3 71
Net restructuring and other charges... 693
Total operating expenses.............. 13,463 466 86
Operating income (loss)............... 6,124 (466) (86)
Other (expense) income................ 1,245 91 978 43 46 17 4 3 21 47
Interest expense (benefit)............ 4,214 1,149 180 43 46 17 3 2 20 45
(Loss) income from continuing
operations before income taxes,
minority interest, and (losses)
earnings related to other equity
investments.......................... 3,155 (1,524) 712 1 1 1 2
(Benefit) provision for income
taxes................................ (237) (569) 299
Minority interest income (expense).... (160)
Equity losses from Liberty Media
Group................................ 2,711
Net (losses) earnings related to other
equity investments................... (2,690) (2,098) (2,577)
(Loss) income from continuing
operations........................... 542 (5,764) (2,164) 1 1 1 2
Income (loss) from discontinued
operations (net of income taxes).....
Gain on disposition of discontinued
operations........................... 13,503
Income (loss) before cumulative effect
of accounting change................. 14,045 (5,764) (2,164) 1 1 1 2
Cumulative effect of accounting change
(net of income taxes)................ 508 545 540
Net income (loss)..................... 14,553 (5,219) (1,624) 1 1 1 2
Dividend requirements of preferred
stock................................ 652
Premium on exchange of AT&T Wireless
tracking stock....................... 80
Net income (loss) available to common
shareowners.......................... $13,821 $(5,219) $(1,624) $-- $-- $-- $ 1 $ 1 $ 1 $ 2
ELIMINATION
AND
NON-GUARANTOR CONSOLIDATION CONSOLIDATED
SUBSIDIARIES ADJUSTMENTS AT&T CORP.
------------- ------------- ------------
(DOLLARS IN MILLIONS)
Revenue............................... $35,413 $(2,450) $52,550
Operating Expenses
Costs of services and products........ 12,871 (2,222) 13,960
Access and other connection........... 5,976 (195) 12,136
Selling, general and administrative... 8,822 (10) 10,832
Depreciation and other amortization... 5,338 6,865
Amortization of goodwill, franchise
costs and other purchased
intangibles.......................... 2,364 2,473
Net restructuring and other charges... 1,837 2,530
Total operating expenses.............. 37,208 (2,427) 48,796
Operating income (loss)............... (1,795) (23) 3,754
Other (expense) income................ (834) (3,208) (1,547)
Interest expense (benefit)............ 1,263 (3,740) 3,242
(Loss) income from continuing
operations before income taxes,
minority interest, and (losses)
earnings related to other equity
investments.......................... (3,892) 509 (1,035)
(Benefit) provision for income
taxes................................ (284) (791)
Minority interest income (expense).... 1,123 963
Equity losses from Liberty Media
Group................................ 2,711
Net (losses) earnings related to other
equity investments................... (4,382) 6,897 (4,850)
(Loss) income from continuing
operations........................... (6,867) 7,406 (6,842)
Income (loss) from discontinued
operations (net of income taxes)..... 178 (28) 150
Gain on disposition of discontinued
operations........................... 13,503
Income (loss) before cumulative effect
of accounting change................. (6,689) 7,378 6,811
Cumulative effect of accounting change
(net of income taxes)................ (689) 904
Net income (loss)..................... (7,378) 7,378 7,715
Dividend requirements of preferred
stock................................ 652
Premium on exchange of AT&T Wireless
tracking stock....................... 80
Net income (loss) available to common
shareowners.......................... $(7,378) $ 7,378 $ 6,983
XII-66
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AT&T CORP.
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2001
TCI MEDIAONE MEDIAONE
GUARANTOR GUARANTOR GUARANTOR FINANCING FINANCING FINANCE
AT&T SUBSIDIARY SUBSIDIARY --------------- --------- ---------
PARENT TCI MEDIAONE I II IV A B II III
--------- ---------- ---------- --- --- --- --- --- --- ---
(DOLLARS IN MILLIONS)
Net Cash Provided by (Used in)
Operating Activities of Continuing
Operations........................... $ 6,500 $ (1,238) $ 808 $ 1 $ 1 $ 1 $ 2
INVESTING ACTIVITIES
Capital expenditures and other
additions............................ (1,325) (67)
Investment distributions and sales.... 813 19,730 59
Net (acquisitions) dispositions of
businesses, net of cash
acquired/disposed.................... 14
Other................................. 6,136 158
Net Cash (Used in) Provided by
Investing Activities of Continuing
Operations........................... 5,638 19,821 59
FINANCING ACTIVITIES
Proceeds from long-term debt
issuances, net of issuance costs..... 11,281
Proceeds from debt from AT&T.......... 3,990
Retirement of long-term debt.......... (629) (252)
Retirement of AT&T debt............... (5,867) (22,213) (354)
Repayment of borrowings from AT&T
Wireless.............................
Issuance of convertible preferred
securities and warrants.............. 9,811
(Decrease)increase in short-term
borrowings, net...................... (19,589) (360)
(Decrease)increase in short-term
borrowings from AT&T, net............ 2,471 (249)
Other................................. 799 (1) (1) (1) (2)
Net Cash (Used in) Provided by
Financing Activities of Continuing
Operations........................... (1,723) (18,583) (855) (1) (1) (1) (2)
Net cash provided by (used in)
discontinued operations..............
Net increase (decrease) in cash and
cash equivalents..................... 10,415 12
Cash and cash equivalents at beginning
of year..............................
Cash and cash equivalents at end of
period............................... $ 10,415 $ -- $ 12 $-- $-- $-- $-- $-- $-- $--
ELIMINATION
AND
NON-GUARANTOR CONSOLIDATION CONSOLIDATED
SUBSIDIARIES ADJUSTMENTS AT&T CORP.
------------- ------------- ------------
(DOLLARS IN MILLIONS)
Net Cash Provided by (Used in)
Operating Activities of Continuing
Operations........................... $ 4,520 $ (37) $ 10,558
INVESTING ACTIVITIES
Capital expenditures and other
additions............................ (7,825) (9,217)
Investment distributions and sales.... 2,201 (19,789) 3,014
Net (acquisitions) dispositions of
businesses, net of cash
acquired/disposed.................... 4,899 4,913
Other................................. 2,725 (9,589) (570)
Net Cash (Used in) Provided by
Investing Activities of Continuing
Operations........................... 2,000 (29,378) (1,860)
FINANCING ACTIVITIES
Proceeds from long-term debt
issuances, net of issuance costs..... 1,134 12,415
Proceeds from debt from AT&T.......... (3,990)
Retirement of long-term debt.......... (780) (1,661)
Retirement of AT&T debt............... 28,434
Repayment of borrowings from AT&T
Wireless............................. (5,803) (5,803)
Issuance of convertible preferred
securities and warrants.............. 9,811
(Decrease)increase in short-term
borrowings, net...................... 2,781 (17,168)
(Decrease)increase in short-term
borrowings from AT&T, net............ (649) (1,573)
Other................................. (7,801) 6,383 (624)
Net Cash (Used in) Provided by
Financing Activities of Continuing
Operations........................... (11,118) 29,254 (3,030)
Net cash provided by (used in)
discontinued operations.............. 4,699 161 4,860
Net increase (decrease) in cash and
cash equivalents..................... 101 10,528
Cash and cash equivalents at beginning
of year.............................. 64 64
Cash and cash equivalents at end of
period............................... $ 165 $ -- $ 10,592
XII-67
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AT&T CORP.
CONSOLIDATING CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 2000
TCI MEDIAONE MEDIAONE
GUARANTOR GUARANTOR GUARANTOR FINANCING FINANCING FINANCE
AT&T SUBSIDIARY SUBSIDIARY ------------------ --------- -----------
PARENT TCI MEDIAONE I II IV A B II III
--------- ---------- ---------- ---- ---- ---- --- --- ---- ----
(DOLLARS IN MILLIONS)
ASSETS
Cash and cash equivalents........ $ -- $ -- $ -- $ -- $ -- $ -- $-- $-- $ -- $ --
Receivables...................... 11,424 2,577 78
Investments......................
Deferred income taxes............ 811
Other current assets............. 1,103 11
Total Current Assets............. 13,338 2,588 78
Property, plant & equipment,
net............................. 9,463 102 22
Franchise costs, net............. 838 30
Goodwill, net.................... 161 19,786
Investment in Liberty Media Group
and related receivables, net.... 34,290
Other investments and related
advances........................ 164,844 32,650 27,712
Other assets..................... 5,500 186 528 514 204 51 44 230 516
Net assets of discontinued
operations......................
Total Assets..................... $194,144 $69,846 $47,598 $528 $514 $204 $51 $44 $230 $516
LIABILITIES
Debt maturing within one year.... $ 52,556 $ 664 $ 2,337 $ -- $ -- $ -- $-- $-- $ -- $ --
Liability under put options......
Other current liabilities........ 9,535 1,129 76
Total Current Liabilities........ 62,091 1,793 2,413
Long-term debt................... 21,333 30,096 1,702 528 514 204 30 28 214 504
Deferred income taxes............ 569 230
Other long-term liabilities and
deferred credits................ 7,341 773 129
Total Liabilities................ 91,334 32,662 4,474 528 514 204 30 28 214 504
Minority Interest................
Company-Obligated Convertible
Quarterly Income Preferred
Securities of Subsidiary Trust
Holding Solely Subordinated Debt
Securities of AT&T.............. 4,710
SHAREOWNERS' EQUITY
AT&T Common Stock................ 4,176
AT&T Wireless Group common
stock........................... 362
Liberty Media Group Class A
Common Stock.................... 2,364
Liberty Media Group Class B
Common Stock.................... 206
Other shareowners' equity........ 90,992 37,184 43,124 21 16 16 12
Total Shareowners' Equity........ 98,100 37,184 43,124 21 16 16 12
Total Liabilities and
Shareowners' Equity............. $194,144 $69,846 $47,598 $528 $514 $204 $51 $44 $230 $516
ELIMINATION
AND
NON-GUARANTOR CONSOLIDATION CONSOLIDATED
SUBSIDIARIES ADJUSTMENTS AT&T CORP.
------------- ------------- ------------
(DOLLARS IN MILLIONS)
ASSETS
Cash and cash equivalents........ $ 64 $ -- $ 64
Receivables...................... 48,896 (51,922) 11,053
Investments...................... 2,102 2,102
Deferred income taxes............ (91) 720
Other current assets............. (328) (5) 781
Total Current Assets............. 50,643 (51,927) 14,720
Property, plant & equipment,
net............................. 31,685 (3) 41,269
Franchise costs, net............. 47,350 48,218
Goodwill, net.................... 6,835 26,782
Investment in Liberty Media Group
and related receivables, net.... 34,290
Other investments and related
advances........................ 19,673 (214,004) 30,875
Other assets..................... 15,714 (12,505) 10,982
Net assets of discontinued
operations...................... 24,876 2,348 27,224
Total Assets..................... $196,776 $(276,091) $234,360
LIABILITIES
Debt maturing within one year.... $ 5,432 $ (29,151) $ 31,838
Liability under put options...... 2,564 2,564
Other current liabilities........ 11,219 (8,386) 13,573
Total Current Liabilities........ 19,215 (37,537) 47,975
Long-term debt................... 2,558 (24,622) 33,089
Deferred income taxes............ 31,255 32,054
Other long-term liabilities and
deferred credits................ 331 (81) 8,493
Total Liabilities................ 53,359 (62,240) 121,611
Minority Interest................ 4,841 4,841
Company-Obligated Convertible
Quarterly Income Preferred
Securities of Subsidiary Trust
Holding Solely Subordinated Debt
Securities of AT&T.............. 4,710
SHAREOWNERS' EQUITY
AT&T Common Stock................ (416) 3,760
AT&T Wireless Group common
stock........................... 362
Liberty Media Group Class A
Common Stock.................... 2,364
Liberty Media Group Class B
Common Stock.................... 206
Other shareowners' equity........ 138,992 (213,851) 96,506
Total Shareowners' Equity........ 138,576 (213,851) 103,198
Total Liabilities and
Shareowners' Equity............. $196,776 $(276,091) $234,360
XII-68
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AT&T CORP.
CONSOLIDATING CONDENSED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2000
TCI MEDIAONE
GUARANTOR GUARANTOR GUARANTOR FINANCING FINANCING
AT&T SUBSIDIARY SUBSIDIARY --------------------- -------------
PARENT TCI MEDIAONE I II IV A B
--------- ---------- ---------- ----- ----- ----- ----- -----
(DOLLARS IN MILLIONS)
Revenue................................. $22,234 $ -- $ -- $ -- $ -- $ -- $ -- $ --
Operating Expenses
Costs of services and products.......... 2,961
Access and other connection............. 7,047
Selling, general and administrative..... 2,071 19 29
Depreciation and other amortization..... 1,806 52 7
Amortization of goodwill, franchise
costs and other purchased
intangibles............................ 50 6 226
Net restructuring and other charges..... 443 60
Total operating expenses................ 14,378 137 262
Operating income (loss)................. 7,856 (137) (262)
Other (expense) income.................. 971 30 64 43 46 18 2 2
Interest expense (benefit).............. 4,786 1,793 170 43 46 18 1 1
(Loss) income from continuing operations
before income taxes, minority interest
and (losses) earnings from equity
investments............................ 4,041 (1,900) (368) 1 1
(Benefit) provision for income taxes.... 1,505 (727) (54)
Minority interest income (expense)...... (161)
Equity earnings from Liberty Media
Group.................................. 1,488
Net (losses) earnings related to other
equity investments..................... 6,258 (3,765) (202)
(Loss) income from continuing
operations............................. 8,633 (3,450) (516) 1 1
Income from discontinued operations (net
of income taxes).......................
Net income (loss)....................... 8,633 (3,450) (516) 1 1
Dividend requirements on preferred stock
held by AT&T, net......................
Net income (loss) after preferred stock
dividends.............................. $ 8,633 $(3,450) $(516) $ -- $ -- $ -- $ 1 $ 1
MEDIAONE ELIMINATION
FINANCE NON- AND
------------- GUARANTOR CONSOLIDATION CONSOLIDATED
II III SUBSIDIARIES ADJUSTMENTS AT&T CORP.
----- ----- ------------ ------------- ------------
(DOLLARS IN MILLIONS)
Revenue................................. $ -- $ -- $35,386 $(2,087) $55,533
Operating Expenses
Costs of services and products.......... 11,536 (1,702) 12,795
Access and other connection............. 6,425 (332) 13,140
Selling, general and administrative..... 7,649 (16) 9,752
Depreciation and other amortization..... 4,059 5,924
Amortization of goodwill, franchise
costs and other purchased
intangibles............................ 2,383 2,665
Net restructuring and other charges..... 6,526 7,029
Total operating expenses................ 38,578 (2,050) 51,305
Operating income (loss)................. (3,192) (37) 4,228
Other (expense) income.................. 11 25 4,242 (4,304) 1,150
Interest expense (benefit).............. 11 24 311 (4,240) 2,964
(Loss) income from continuing operations
before income taxes, minority interest
and (losses) earnings from equity
investments............................ 1 739 (101) 2,414
(Benefit) provision for income taxes.... 1 2,559 3,284
Minority interest income (expense)...... 4,264 4,103
Equity earnings from Liberty Media
Group.................................. 1,488
Net (losses) earnings related to other
equity investments..................... (586) (2,293) (588)
(Loss) income from continuing
operations............................. 1,858 (2,394) 4,133
Income from discontinued operations (net
of income taxes)....................... 546 (10) 536
Net income (loss)....................... 2,404 (2,404) 4,669
Dividend requirements on preferred stock
held by AT&T, net...................... 111 (111)
Net income (loss) after preferred stock
dividends.............................. $ -- $ -- $ 2,293 $(2,293) $ 4,669
XII-69
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AT&T CORP.
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2000
TCI MEDIAONE MEDIAONE
GUARANTOR GUARANTOR GUARANTOR FINANCING FINANCING FINANCE
AT&T SUBSIDIARY SUBSIDIARY --------------------- --------- -------------
PARENT TCI MEDIAONE I II IV A B II III
--------- ---------- ---------- ----- ----- ----- --- --- ----- -----
(DOLLARS IN MILLIONS)
Net Cash Provided by (used in)
Operating Activities of Continuing
Operations........................... $ 2,735 $ (374) $ (138) $ -- $ -- $ -- $ 1 $ 1 $ -- $ --
INVESTING ACTIVITIES
Capital expenditures and other
additions............................ (51) (79) (21)
Investment distributions and sales.... 363 1,384
Investment contributions and
purchases............................ (1,700) (7,360)
Net (acquisitions) dispositions of
businesses, net of cash
acquired/disposed.................... (23,943)
Other................................. (2,057) (48)
Net Cash (used in) Provided by
Investing Activities of Continuing
Operations........................... (27,388) (7,487) 1,363
FINANCING ACTIVITIES
Proceeds from long-term debt
issuances, net of issuance costs..... 739
Proceeds from debt from AT&T.......... 5,867 13,743 275
Retirement of long-term debt.......... (498) (1,058)
Retirement of AT&T debt............... (4,990) (1,500)
Issuance of AT&T Wireless Group common
shares............................... 10,314
Dividends paid on common stock........ (3,047)
(Decrease) increase in short-term
borrowings, net.................... 12,108
Other................................. (830) 166 (1) (1)
Net Cash Provided by (used in)
Financing Activities of Continuing
Operations........................... 24,653 7,861 (1,225) (1) (1)
Net cash (used in) provided by
discontinued operations..............
Net increase (decrease) in cash and
cash equivalents.....................
Cash and cash equivalents at beginning
of year..............................
Cash and cash equivalents at end of
period............................... $ -- $ -- $ -- $ -- $ -- $ -- $-- $-- $ -- $ --
ELIMINATION
AND
NON-GUARANTOR CONSOLIDATION CONSOLIDATED
SUBSIDIARIES ADJUSTMENTS AT&T CORP.
------------- ------------- ------------
(DOLLARS IN MILLIONS)
Net Cash Provided by (used in)
Operating Activities of Continuing
Operations........................... $ 9,079 $ 361 $ 11,665
INVESTING ACTIVITIES
Capital expenditures and other
additions............................ (10,760) (10,911)
Investment distributions and sales.... 629 (1,384) 992
Investment contributions and
purchases............................ (694) 7,360 (2,394)
Net (acquisitions) dispositions of
businesses, net of cash
acquired/disposed.................... 7,286 (16,657)
Other................................. (6,186) 7,216 (1,075)
Net Cash (used in) Provided by
Investing Activities of Continuing
Operations........................... (9,725) 13,192 (30,045)
FINANCING ACTIVITIES
Proceeds from long-term debt
issuances, net of issuance costs..... 3,862 4,601
Proceeds from debt from AT&T.......... 4,595 (24,480)
Retirement of long-term debt.......... (562) (2,118)
Retirement of AT&T debt............... 6,490
Issuance of AT&T Wireless Group common
shares............................... 10,314
Dividends paid on common stock........ (3,047)
(Decrease) increase in short-term
borrowings, net.................... 706 4,159 16,973
Other................................. (1,242) 917 (991)
Net Cash Provided by (used in)
Financing Activities of Continuing
Operations........................... 7,359 (12,914) 25,732
Net cash (used in) provided by
discontinued operations.............. (7,667) (639) (8,306)
Net increase (decrease) in cash and
cash equivalents..................... (954) (954)
Cash and cash equivalents at beginning
of year.............................. 1,018 1,018
Cash and cash equivalents at end of
period............................... $ 64 $ -- $ 64
XII-70
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AT&T CORP.
CONSOLIDATING CONDENSED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1999
GUARANTOR TCI FINANCING
AT&T GUARANTOR --------------------------------- NON-GUARANTOR
PARENT SUBSIDIARY TCI I II IV SUBSIDIARIES
--------- -------------- --------- --------- --------- -------------
(DOLLARS IN MILLIONS)
Revenue............................ $24,755 $ -- $-- $-- $-- $31,879
Operating Expenses
Costs of services and products..... 1,536 10,707
Access and other connection........ 8,403 6,232
Selling, general and
administrative................... 4,363 575 5,960
Depreciation and other
amortization..................... 2,072 49 3,016
Amortization of goodwill, franchise
costs and other purchased
intangibles...................... 34 4 1,019
Net restructuring and other
charges.......................... 18 326 631
Total operating expenses........... 16,426 954 27,565
Operating income (loss)............ 8,329 (954) 4,314
Other (expense) income............. 539 6 36 40 16 2,734
Interest expense (benefit)......... 3,186 342 36 40 16 634
(Loss) income from continuing
operations before income taxes,
minority interest, and (losses)
earnings related to other equity
investments...................... 5,682 (1,290) 6,414
(Benefit) provision for income
taxes............................ 2,118 (363) 2,261
Minority interest income
(expense)........................ (87) (39)
Equity losses from Liberty Media
Group............................ 2,022
Net (losses) earnings related to
other equity investments......... 4,171 (1,271) (779)
(Loss) income from continuing
operations....................... 7,648 (4,220) 3,335
Income (losses) from discontinued
operations (net of income
taxes)........................... (458)
Net income (loss).................. $ 7,648 $(4,220) $-- $-- $-- $ 2,877
ELIMINATION AND
CONSOLIDATION CONSOLIDATED
ADJUSTMENTS AT&T CORP.
--------------- ------------
(DOLLARS IN MILLIONS)
Revenue............................ $(1,661) $54,973
Operating Expenses
Costs of services and products..... (1,230) 11,013
Access and other connection........ (196) 14,439
Selling, general and
administrative................... (4) 10,894
Depreciation and other
amortization..................... 5,137
Amortization of goodwill, franchise
costs and other purchased
intangibles...................... 1,057
Net restructuring and other
charges.......................... 975
Total operating expenses........... (1,430) 43,515
Operating income (loss)............ (231) 11,458
Other (expense) income............. (2,545) 826
Interest expense (benefit)......... (2,751) 1,503
(Loss) income from continuing
operations before income taxes,
minority interest, and (losses)
earnings related to other equity
investments...................... (25) 10,781
(Benefit) provision for income
taxes............................ 4,016
Minority interest income
(expense)........................ (126)
Equity losses from Liberty Media
Group............................ 2,022
Net (losses) earnings related to
other equity investments......... (2,877) (756)
(Loss) income from continuing
operations....................... (2,902) 3,861
Income (losses) from discontinued
operations (net of income
taxes)........................... 25 (433)
Net income (loss).................. $(2,877) $ 3,428
XII-71
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AT&T CORP.
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDING DECEMBER 31, 1999
GUARANTOR GUARANTOR TCI FINANCING
AT&T SUBSIDIARY --------------------------------- NON-GUARANTOR
PARENT TCI I II IV SUBSIDIARIES
--------- ---------- --------- --------- --------- -------------
(DOLLARS IN MILLIONS)
Net Cash Provided by (used in)
Operating Activities of Continuing
Operations......................... $ 2,672 $ (578) $-- $-- $-- $ 8,613
INVESTING ACTIVITIES
Capital expenditures and other
additions.......................... (1,733) (60) (9,797)
Investment distributions and sales... 61 1,513
Investment contributions and
purchases.......................... (5,473) (1,857) (2,364)
Net (acquisitions) dispositions of
businesses net of cash
acquired/disposed.................. (6,405) 436
Other................................ (203) 103 (15,056)
Net Cash (used in) Provided by
Investing Activities of Continuing
Operations......................... (13,753) (1,814) (25,268)
FINANCING ACTIVITIES
Proceeds from long-term debt
issuances.......................... 8,396
Proceeds from debt from AT&T......... 5,866 5,365
Retirement of long-term debt......... (1,014) (1,365) 124
Retirement of AT&T debt.............. (2,109)
Issuance of AT&T convertible
preferred securities and
warrants........................... 4,694 (56)
Net acquisitions of treasury
shares............................. (4,624)
Dividends paid on common stock....... (2,685) (27)
(Decrease) increase in short-term
borrowings, net.................... 19,154 (1,207)
Other................................ (13,215) 13,365
Net Cash (used in) Provided by
Financing Activities of Continuing
Operations......................... 10,706 2,392 17,564
Net cash provided by (used in)
discontinued operations............ (2,649)
Net increase (decrease) in cash and
cash equivalents................... (375) (1,740)
Cash and cash equivalents at
beginning of year.................. 375 2,758
Cash and cash equivalents at end of
period............................. $ -- $ -- $-- $-- $-- $ 1,018
ELIMINATION AND
CONSOLIDATION CONSOLIDATED
ADJUSTMENTS AT&T CORP.
--------------- ------------
(DOLLARS IN MILLIONS)
Net Cash Provided by (used in)
Operating Activities of Continuing
Operations......................... $ (198) $ 10,509
INVESTING ACTIVITIES
Capital expenditures and other
additions.......................... (11,590)
Investment distributions and sales... 1,574
Investment contributions and
purchases.......................... 1,857 (7,837)
Net (acquisitions) dispositions of
businesses net of cash
acquired/disposed.................. (5,969)
Other................................ 15,094 (62)
Net Cash (used in) Provided by
Investing Activities of Continuing
Operations......................... 16,951 (23,884)
FINANCING ACTIVITIES
Proceeds from long-term debt
issuances.......................... 8,396
Proceeds from debt from AT&T......... (11,231)
Retirement of long-term debt......... (2,255)
Retirement of AT&T debt.............. 2,109
Issuance of AT&T convertible
preferred securities and
warrants........................... 4,638
Net acquisitions of treasury
shares............................. (4,624)
Dividends paid on common stock....... (2,712)
(Decrease) increase in short-term
borrowings, net.................... (7,774) 10,173
Other................................ 88 238
Net Cash (used in) Provided by
Financing Activities of Continuing
Operations......................... (16,808) 13,854
Net cash provided by (used in)
discontinued operations............ 55 (2,594)
Net increase (decrease) in cash and
cash equivalents................... (2,115)
Cash and cash equivalents at
beginning of year.................. 3,133
Cash and cash equivalents at end of
period............................. $ -- $ 1,018
XII-72
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
22. QUARTERLY INFORMATION (UNAUDITED)
FIRST SECOND THIRD(1) FOURTH
------- ------- -------- -------
2001
Revenue................................................... $13,551 $13,326 $13,087 $12,586
Operating income(2)....................................... 814 1,364 1,365 211
(Loss) income from continuing operations before cumulative
effect of accounting change(3).......................... (1,180) (2,176) (2,095) (1,391)
(Loss) income from discontinued operations -- net of
income taxes............................................ (68) 218 -- --
Net (loss) income before cumulative effect of accounting
change.................................................. (1,248) (1,958) 11,408 (1,391)
Net (loss) income(4)...................................... $ (344) $(1,958) $11,408 $(1,391)
AT&T Common Stock Group:
Earnings (loss) per share -- basic:
Continuing operations before cumulative effect of
accounting change.................................... $ (.17) $ (.10) $ (.69) $ (.39)
Discontinued operations................................. (.02) .05 -- --
Total................................................... $ (.10) $ (.05) $ 3.13 $ (.39)
Earnings (loss) per share -- diluted:
Continuing operations before cumulative effect of
accounting change.................................... $ (.17) $ (.10) $ (.69) $ (.39)
Discontinued operations................................. (.02) .05 -- --
Total................................................... $ (.10) $ (.05) $ 3.13 $ (.39)
Dividends declared........................................ $ .0375 $ .0375 $ .0375 $ .0375
AT&T Wireless Group:(5)
(Loss) earnings from discontinued operations per share:
Basic and diluted.................................... $ (.02) $ .08 -- --
Liberty Media Group:(3,6)
(Loss) earnings per share:
Basic and diluted.................................... $ (.06) $ (.82) $ .04 --
Stock price(7)
AT&T common stock
High.................................................... $ 19.53 $ 18.07 $ 21.46 $ 20.00
Low..................................................... 13.40 15.39 16.50 14.75
Quarter-end close....................................... 16.54 17.09 19.30 18.14
AT&T Wireless Group common stock(5)
High.................................................... 27.30 21.10 19.92 --
Low..................................................... 17.06 15.29 12.52 --
Quarter-end close....................................... 19.18 16.35 -- --
Liberty Media Group Class A common stock(6)
High.................................................... 17.25 18.04 17.85 --
Low..................................................... 11.88 11.50 14.50 --
Quarter-end close....................................... 14.00 17.49 -- --
Liberty Media Group Class B common stock(6)
High.................................................... 18.69 18.75 18.35 --
Low..................................................... 14.20 12.50 12.00 --
Quarter-end close....................................... 15.00 18.15 -- --
XII-73
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRST SECOND THIRD(1) FOURTH
------- ------- -------- -------
2000
Revenue................................................... $13,703 $13,744 $14,176 $13,910
Operating income (loss)(2)................................ 2,347 3,140 2,907 (4,166)
Income (loss) from continuing operations before the
cumulative effect of accounting change.................. 2,650 1,857 3,074 (3,448)
Income (loss) from discontinued operations -- net of
income taxes............................................ 33 177 (2) 328
Net income (loss)......................................... $ 2,683 $ 2,034 $ 3,072 $(3,120)
AT&T Common Stock Group:
Earnings (loss) per share -- basic:
Continuing operations before the cumulative effect of
accounting change.................................... $ .54 $ .49 $ .35 $ (.52)
Discontinued operations................................. .01 .05 -- .07
Total................................................... $ .55 $ .54 $ .35 $ (.45)
Earnings (loss) per share -- diluted:
Continuing operations before the cumulative effect of
accounting change.................................... $ .53 $ .48 $ .35 $ (.52)
Discontinued operations................................. .01 .05 -- .07
Total................................................... $ .54 $ .53 $ .35 $ (.45)
Dividends declared........................................ $ .22 $ .22 $ .22 $ .0375
AT&T Wireless Group:(5)
Earnings (loss) from discontinued operations per share:
Basic and diluted.................................... $ -- $ .06 $ (.01) $ .16
Liberty Media Group:(6)
Earnings (loss) per share:
Basic and diluted.................................... $ .37 $ .10 $ .68 $ (.57)
Stock price(7)
AT&T common stock
High.................................................... $ 47.37 $ 45.67 $ 27.33 $ 23.30
Low..................................................... 34.41 24.27 21.16 12.81
Quarter-end close....................................... 43.73 24.71 22.52 13.40
AT&T Wireless Group common stock
High.................................................... -- 36.00 29.56 24.94
Low..................................................... -- 23.56 20.50 16.38
Quarter-end close....................................... -- 27.88 20.88 17.31
Liberty Media Group Class A common stock
High.................................................... 30.72 29.94 26.56 19.25
Low..................................................... 24.44 19.19 17.44 10.75
Quarter-end close....................................... 29.63 24.25 18.00 13.56
Liberty Media Group Class B common stock
High.................................................... 36.56 32.69 32.63 20.63
Low..................................................... 27.00 22.13 18.75 12.75
Quarter-end close....................................... 32.81 32.50 18.75 18.75
---------------
(1) Third quarter 2001 net income included a gain on disposition of discontinued
operations of $13,503, or $3.82 per share.
XII-74
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) Operating income (loss) included net restructuring and other charges of $808
in first quarter 2001, $287 in second quarter 2001, $399 in third quarter
2001, $1,036 in fourth quarter 2001, $773 in first quarter 2000, $24 in
third quarter 2000 and $6,232 in fourth quarter 2000.
(3) First quarter 2001 results have been restated to properly classify losses
related to the implementation of SFAS No. 133. A loss of $1.6 billion pretax
($1.1 billion after-tax) was reclassified from other (expense) income to
cumulative effect of accounting change. There was no impact to the total net
loss or the loss per share recorded in the first quarter of 2001.
(4) First quarter 2001 net income included cumulative effect of accounting
change of $359 and $545, or $0.09 per share and $0.21 per share, for AT&T
Common Stock Group and LMG, respectively, due to the adoption of SFAS No.
133.
(5) No dividends had been declared on AT&T Wireless Group common stock. AT&T
Wireless Group was split-off from AT&T on July 9, 2001.
(6) No dividend had been declared on LMG common stock. LMG was split-off from
AT&T on August 10, 2001.
(7) Stock prices obtained from the New York Stock Exchange Composite Tape. AT&T
Common Stock prices have been restated to reflect the split-off of AT&T
Wireless.
23. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations", which supercedes Accounting Principles Board (APB) opinion No.
16. SFAS No. 141 requires all business combinations initiated after June 30,
2001, 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 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
as of December 31, 2001, was $8.8 billion with related amortization in 2001 of
$0.2 billion. In addition, we have determined that our 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 our franchise costs as
of December 31, 2001, was $42.8 billion and the related amortization in 2001 was
$1.2 billion. The adoption of SFAS No. 142 will have a significant impact on our
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 our
reporting units to their carrying values. As of January 1, 2002, the fair value
of the reporting units' goodwill exceeded their fair 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.
XII-75
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." SFAS No. 144 applies to all long-lived assets, including
discontinued operations, and consequently amends APB opinion No. 30, "Reporting
the Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." Based on SFAS No. 121, SFAS No. 144 develops one accounting model
for long-lived assets that are to be disposed of by sale, as well as addresses
the principal implementation issues. SFAS No. 144 requires that long-lived
assets that are to be disposed of by sale be measured at the lower of book value
or fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of
discontinued operations to include all components of an entity with operations
that (1) can be distinguished from the rest of the entity and (2) will be
eliminated from the ongoing operations of the entity in a disposal transaction.
SFAS No. 144 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.
24. SUBSEQUENT EVENTS
In March 2002, AT&T Canada announced the formation of a committee of its
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 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 of additional losses on its commitment to purchase the publicly owned
shares of AT&T Canada, excluding any impact of the floor price accretion (see
Note 5).
(Unaudited) 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 (see Note 5).
XII-76
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareowners of AT&T Corp.:
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations and changes in combined attributed net assets
and of cash flows present fairly, in all material respects, the financial
position of AT&T Broadband Group at December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the two years in the period
ended December 31, 2001 and for the ten-month period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of AT&T Broadband
Group's management; our responsibility is to express our opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
AT&T Broadband Group is a fully integrated business unit of AT&T Corp.;
consequently, as indicated in Note 1, these combined financial statements have
been derived from the consolidated financial statements and accounting records
of AT&T Corp. and reflect certain assumptions and allocations. Moreover, as
indicated in Note 1, AT&T Broadband Group relies on AT&T Corp. for
administrative, management and other services. The financial position, results
of operations and cash flows of AT&T Broadband Group could differ from those
that would have resulted had AT&T Broadband Group operated autonomously or as an
entity independent of AT&T Corp. As more fully discussed in Note 1, the combined
financial statements of AT&T Broadband Group should be read in conjunction with
the audited consolidated financial statements of AT&T Corp.
As discussed in the notes to the financial statements, AT&T Broadband Group
was required to adopt Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities, effective January
1, 2001.
PricewaterhouseCoopers LLP
New York, New York
March 25, 2002
XII-77
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED TEN MONTHS
DECEMBER 31, ENDED
---------------------- DECEMBER 31,
2001 2000 1999
------------ ------- ------------
(DOLLARS IN MILLIONS)
Revenue.................................................... $10,132 $ 8,445 $5,080
Operating expenses:
Cost of services (excluding depreciation of $1,881,
$1,291 and $663 for 2001, 2000 and 1999, respectively,
included below)....................................... 5,459 4,600 2,686
Selling, general and administrative...................... 2,582 2,180 1,253
Depreciation and other amortization...................... 2,626 1,674 805
Amortization of goodwill, franchise costs and other
purchased intangibles................................. 2,154 2,377 869
Asset impairment, restructuring and other charges........ 1,494 6,270 644
------- ------- ------
Total operating expenses................................... 14,315 17,101 6,257
------- ------- ------
Operating loss............................................. 4,183 8,656 1,177
Investment (expense) income.............................. (1,947) (84) 47
Other (expense) income................................... (927) 45 3
Interest expense......................................... 1,735 1,323 705
------- ------- ------
Loss before income taxes, net losses from equity
investments, minority interest and cumulative effect of
accounting change........................................ 8,792 10,018 1,832
Benefit for income taxes................................... 3,857 1,183 465
Net losses from equity investments......................... 69 597 707
Minority interest income (expense)......................... 833 4,062 (126)
------- ------- ------
Loss before cumulative effect of accounting change......... 4,171 5,370 2,200
Cumulative effect of accounting change (net of income taxes
of $142)................................................. 229 -- --
------- ------- ------
Net loss................................................... $ 3,942 $ 5,370 $2,200
======= ======= ======
The notes are an integral part of the combined financial statements.
XII-78
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
COMBINED BALANCE SHEETS
DECEMBER 31,
---------------------
2001 2000
--------- ---------
(DOLLARS IN MILLIONS)
ASSETS
Cash and cash equivalents................................... $ -- $ 61
Accounts receivable, less allowances of $73 and $74......... 584 774
Other receivables........................................... 214 267
Investments................................................. 668 2,204
Other current assets........................................ 184 200
-------- --------
Total current assets................................... 1,650 3,506
Property, plant and equipment, net.......................... 14,519 15,187
Franchise costs, net of accumulated amortization of $2,501
and $1,664................................................ 42,819 48,218
Goodwill, net of accumulated amortization of $741 and
$240...................................................... 19,361 21,139
Investments................................................. 21,913 25,045
Other assets, net of accumulated amortization of $563 and
$578...................................................... 2,925 4,439
-------- --------
Total assets........................................... $103,187 $117,534
======== ========
LIABILITIES AND COMBINED ATTRIBUTED NET ASSETS
Accounts payable............................................ $ 678 $ 1,250
Payroll and benefit-related liabilities..................... 478 570
Debt maturing within one year............................... 2,824 3,073
Short-term debt due to AT&T................................. 3,959 5,830
Deferred income tax liability............................... -- 486
Liability under put options................................. -- 2,564
Other current liabilities................................... 1,691 2,177
-------- --------
Total current liabilities.............................. 9,630 15,950
Long-term debt.............................................. 16,502 19,517
Deferred income taxes....................................... 25,810 28,550
Other long-term liabilities and deferred credits............ 1,059 1,069
-------- --------
Total liabilities...................................... 53,001 65,086
Minority interest........................................... 3,302 4,421
Company-Obligated Convertible Quarterly Income Preferred
Securities of Subsidiary Trust Holding Solely Subordinated
Debt Securities of AT&T................................... 4,720 4,710
Combined attributed net assets.............................. 42,164 43,317
-------- --------
Total liabilities and combined attributed net assets........ $103,187 $117,534
======== ========
The notes are an integral part of the combined financial statements.
XII-79
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
COMBINED STATEMENTS OF CHANGES IN COMBINED ATTRIBUTED NET ASSETS
YEAR ENDED TEN MONTHS
DECEMBER 31, ENDED
----------------- DECEMBER 31,
2001 2000 1999
------- ------- ------------
(DOLLARS IN MILLIONS)
COMBINED ATTRIBUTED NET ASSETS:
Balance at beginning of period............................ $43,317 $14,889 $14,377
Net loss.................................................. 3,942 5,370 2,200
Contributions from AT&T, net.............................. 1,928 35,101 2,128
Issuance of common stock by affiliates.................... 39 (54) 515
Net revaluation of financial instruments.................. (599) (1,402) 69
Reclassification of previously unrealized losses.......... 1,414 146 --
Net minimum pension liability adjustment.................. (22) -- --
Other comprehensive income................................ 29 7 --
------- ------- -------
Balance at end of period.................................. $42,164 $43,317 $14,889
======= ======= =======
SUMMARY OF TOTAL COMPREHENSIVE LOSS:
Loss before cumulative effect of accounting change........ $ 4,171 $ 5,370 $ 2,200
Cumulative effect of accounting change.................... 229 -- --
------- ------- -------
Net loss.................................................. 3,942 $ 5,370 $ 2,200
Net revaluation of financial instruments (net of income
tax (provision) benefit of $375, $778 and $(36))....... (599) (1,402) 69
Recognition of previously unrealized losses (net of income
tax benefit of $891, $29 and $0)....................... 1,414 146 --
Net minimum pension liability adjustment (net of income
taxes of $16, $0 and $0)............................... (22) -- --
Other comprehensive income (net of income taxes of $7, $0
and $0)................................................ 29 7 --
------- ------- -------
Total comprehensive loss............................... $ 3,120 $ 6,619 $ 2,131
======= ======= =======
The notes are an integral part of the combined financial statements.
XII-80
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
COMBINED STATEMENTS OF CASH FLOWS
YEAR ENDED TEN MONTHS
DECEMBER 31, ENDED
----------------- DECEMBER 31,
2001 2000 1999
------- ------- ------------
(DOLLARS IN MILLIONS)
OPERATING ACTIVITIES:
Net loss.................................................. $(3,942) $(5,370) $(2,200)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Cumulative effect of accounting change, net of income
taxes................................................. (229) -- --
Net losses (gains) on sales of businesses and
investments........................................... 710 (616) (39)
Asset impairment, restructuring and other charges, net
of cash payments...................................... 1,370 6,216 594
Depreciation and amortization........................... 4,780 4,051 1,674
Provision for uncollectible receivables................. 246 154 75
Net losses from equity investments...................... 106 967 1,145
Deferred income taxes................................... (3,579) (880) (422)
Impairment of investments............................... 539 240 --
Put option settlement and mark-to-market charge......... 838 537 --
Minority interest (income) expense...................... (872) (4,039) 180
Net revaluation of certain financial instruments........ 959 -- --
Decrease (increase) in receivables...................... 57 (263) (116)
(Decrease) increase in accounts payable................. (515) (90) 447
Net change in other operating assets and liabilities.... (635) (298) 143
Other adjustments, net.................................. 64 193 (101)
------- ------- -------
Net cash (used in) provided by operating activities... (103) 802 1,380
------- ------- -------
INVESTING ACTIVITIES:
Capital expended for property and equipment, net of
proceeds from disposal.................................. (3,413) (4,426) (3,161)
Sales of marketable securities............................ 102 96 --
Purchase of marketable securities......................... (18) (14) --
Investment distributions and sales........................ 1,429 578 817
Investment contributions and purchases.................... (276) (593) (1,308)
Net cash received (paid) for acquisitions and dispositions
of businesses........................................... 4,898 (71) 740
Other investing activities, net........................... (179) (81) (3)
------- ------- -------
Net cash provided by (used in) investing activities... 2,543 (4,511) (2,915)
------- ------- -------
FINANCING ACTIVITIES:
Proceeds from long-term debt issuances.................... 1,025 3,862 --
Issuance of convertible securities........................ -- -- 4,638
Retirements of long-term debt............................. (938) (1,429) (2,031)
Retirements of redeemable securities...................... -- (152) --
Dividends paid on preferred securities.................... (336) (294) (135)
Change in short-term debt due to AT&T..................... (2,252) 1,533 4,297
Transfers from (to) AT&T, net............................. -- 765 (5,234)
Other financing activities, net........................... -- (515) --
------- ------- -------
Net cash (used in) provided by financing activities... (2,501) 3,770 1,535
------- ------- -------
Net change in cash and cash equivalents..................... (61) 61 --
Cash and cash equivalents at beginning of period............ 61 -- --
------- ------- -------
Cash and cash equivalents at end of period.................. $ -- $ 61 $ --
======= ======= =======
The notes are an integral part of the combined financial statements.
XII-81
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND UNLESS OTHERWISE NOTED)
(1) BASIS OF PRESENTATION
AT&T Broadband Group is an integrated business of AT&T Corp. ("AT&T") and
not a stand-alone entity. AT&T Broadband Group consists primarily of the assets,
liabilities and business of AT&T Broadband, LLC (formerly Tele-Communications,
Inc. ("TCI")), acquired by AT&T on March 9, 1999 in the TCI merger, and MediaOne
Group, Inc. ("MediaOne"), acquired by AT&T on June 15, 2000 in the MediaOne
merger. AT&T Broadband, LLC ("ATTBLLC") and MediaOne are both separate
subsidiaries of AT&T. AT&T Broadband Group is one of the nation's largest
broadband communications providers, providing cable television, high-speed cable
Internet and broadband telephone services. AT&T intends to assign and transfer
substantially all of the assets, liabilities and business of AT&T Broadband
Group to AT&T Broadband Corp., a newly formed holding company for AT&T's
broadband business, which will be subsequently merged with Comcast Corporation
("Comcast") as discussed below.
Comcast and AT&T have agreed to a merger of Comcast and AT&T Broadband
Corp. (the "AT&T Comcast Merger"). The AT&T Comcast Merger is pursuant to, and
subject to the terms and conditions set forth in the Agreement and Plan of
Merger, dated as of December 19, 2001 (the "Merger Agreement"). The AT&T Comcast
Merger will occur in several steps, which are expected to occur on the closing
date of the AT&T Comcast Merger. First, AT&T will assign and transfer to AT&T
Broadband Corp., substantially all of the assets and liabilities of AT&T's
broadband business. Following the transfer, AT&T will spin off AT&T Broadband
Corp. to AT&T shareholders by distributing one share of AT&T Broadband Corp.
common stock to each holder of record of a share of AT&T common stock, NYSE
symbol "T," as of the close of business on the record date for the AT&T
Broadband Corp. spin-off ("AT&T Broadband Spin-off"). Immediately following the
AT&T Broadband spin-off, AT&T Broadband Corp. will merge with AT&T Broadband
Acquisition Corp., a newly formed, wholly owned shell subsidiary of AT&T Comcast
Corporation ("AT&T Comcast"), with AT&T Broadband Corp. continuing as the
surviving corporation. At approximately the same time, Comcast will merge with
Comcast Acquisition Corp., a newly formed, wholly owned shell subsidiary of AT&T
Comcast, with Comcast continuing as the surviving entity. As a result of these
mergers, AT&T Comcast will become the parent company of both AT&T Broadband
Corp. and Comcast.
AT&T Comcast will issue shares of AT&T Comcast common stock to the AT&T
shareholders who received shares of AT&T Broadband Corp. common stock in the
AT&T Broadband Spin-off. As of the date of execution of the Merger Agreement, it
was estimated that each holder of AT&T Broadband Corp. common stock would have
received 0.34 of a share of AT&T Comcast common stock for each of such holder's
shares of AT&T Broadband Corp. common stock. Assuming Comcast retains its AT&T
shares and converts them into exchangeable preferred stock of AT&T as
contemplated by the Merger Agreement, the exchange ratio would be approximately
0.35. The exchange ratio is dependent on a number of factors that may change
between the date of execution of the Merger Agreement and the date of completion
of the AT&T Comcast transaction, including the number of outstanding shares of
AT&T common stock, the value of options and stock appreciation rights and the
price of Comcast Class A common stock.
AT&T will pay Comcast a termination fee in the amount of $1.5 billion in
cash if the Merger Agreement is terminated because (i) the AT&T Board withdraws
or modifies, in a manner adverse to Comcast, its recommendation of the AT&T
Comcast transaction, (ii) AT&T willfully and materially breaches certain terms
of the Merger Agreement and (iii) if the AT&T shareholders fail to approve the
AT&T Comcast Merger because a competing acquisition proposal made by a third
party is pending at the time of the AT&T shareholder meeting and within one year
of the AT&T meeting, AT&T enters into an agreement relating to an alternative
material transaction. Comcast will pay to AT&T a sum of $1.5 billion
XII-82
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
termination fee in cash if the Merger Agreement is terminated because the
Comcast shareholders fail to approve the AT&T Comcast Merger.
Consummation of the AT&T Comcast Merger is subject to the satisfaction or
waiver of several conditions, including but not limited to, approval by the
shareholders of AT&T and Comcast and receipt of all necessary governmental
consents and approvals. As a result, there can be no assurance that the AT&T
Comcast Merger will be consummated, or if the AT&T Comcast Merger is
consummated, as to the date of such consummation.
On March 9, 1999, AT&T acquired TCI in a merger (the "TCI Merger") which
was attributed to AT&T Broadband Group. The results of operations, financial
position, changes in combined attributed net assets and cash flows of the
business of AT&T Broadband, LLC which are included in AT&T Broadband Group have
been included since March 1, 1999, the deemed effective date of the TCI Merger
for accounting purposes. The impact of the results from March 1 through March 9,
1999 were deemed immaterial to the combined results. On June 15, 2000, AT&T
acquired MediaOne which was attributed to AT&T Broadband Group. The results of
operations, financial position, changes in combined attributed net assets and
cash flows of the businesses of MediaOne which are included in AT&T Broadband
Group have been included since June 15, 2000. See note 4.
The combined financial statements of AT&T Broadband Group are prepared in
accordance with generally accepted accounting principles. The combined financial
statements of AT&T Broadband Group reflect the assets, liabilities, revenue and
expenses directly attributable to AT&T Broadband Group, as well as allocations
deemed reasonable by management, to present the results of operations, financial
position, changes in combined attributed net assets and cash flows of AT&T
Broadband Group on a stand-alone basis. The allocation methodologies have been
described within the notes to the combined financial statements where
appropriate, and management considers the allocations to be reasonable. All
significant intercompany accounts and transactions within the AT&T Broadband
Group have been eliminated. The financial information included herein may not
necessarily reflect the combined results of operations, financial position,
changes in combined attributed net assets and cash flows of AT&T Broadband Group
in the future or what they would have been had AT&T Broadband Group been a
separate, stand-alone entity during the periods presented. Earnings per share
disclosure has not been presented as AT&T Broadband Group is a business unit of
AT&T and earnings per share data is not considered meaningful. The combined
financial statements of AT&T Broadband Group should be read in conjunction with
AT&T's Form 10-K for the year ended December 31, 2001.
AT&T Broadband Group's operations have been dependent on cash infusions
from AT&T in order for AT&T Broadband Group to operate and execute on its
business and growth strategies. If, for any reason, AT&T is unwilling or cannot
provide the level of financing necessary to fund future operations, AT&T
Broadband Group will need to seek additional financing from third parties.
Debt attributed to AT&T Broadband Group includes the third party
obligations of ATTBLLC and MediaOne and monetization debt backed by assets held
by AT&T Broadband Group. Additional intercompany debt has been allocated to AT&T
Broadband Group to achieve a total debt level based on several factors,
including prospective financing requirements, desired stand-alone credit
profile, working capital and capital expenditure requirements, expected sources
of future deleveraging, and comparable company profiles. Changes in historical
intercompany debt are based on historical cash flows. Such cash flows include
capital expenditures, operating activities, and investments in and dispositions
of cable companies. The historical interest expense on the allocated
intercompany debt was calculated based on a rate intended to be equivalent to
the rate AT&T Broadband Group would receive if it were a stand-alone entity.
AT&T's expected deleveraging activities that relate to AT&T Broadband Group
include, but may
XII-83
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
not be limited to, proceeds that may result from the exercise of AT&T's
registration rights in Time Warner Entertainment ("TWE") and continued
evaluation and sale of non-strategic cable systems.
As a result of the above methodology, from time to time AT&T Broadband
Group may advance funds to AT&T. These advances will be accounted for as
borrowings between entities and bear interest at a market rate that is
substantially equal to the rate at which AT&T would be able to borrow from third
parties on debt with similar maturities.
AT&T performs cash management functions on behalf of the AT&T Broadband
Group. Substantially all of the AT&T Broadband Group's cash balances are swept
to AT&T on a daily basis, where they are managed and invested by AT&T. Transfers
of cash to and from AT&T, after giving consideration to the debt allocation
methodology, are reflected as a component of combined attributed net assets. Net
transfers to or from AT&T are assumed to be settled in cash. AT&T's capital
contributions for purchase business combinations and initial investments in
joint ventures and partnerships which AT&T attributed to AT&T Broadband Group
have been treated as noncash transactions.
General corporate overhead related to AT&T's corporate headquarters and
common support divisions has been allocated to AT&T Broadband Group as it was
not deemed practical to specifically identify such common costs to AT&T
Broadband Group. The allocation of corporate overhead is divided into an
allocation of shared services (e.g., payroll and finance) and other corporate
overhead. Costs of shared services are allocated to AT&T Broadband Group based
on transaction based prices. Other corporate overhead is allocated to AT&T
Broadband Group based on the ratio of AT&T Broadband Group's external costs and
expenses adjusted for any functions AT&T Broadband Group performs on its own.
The costs of these services charged to AT&T Broadband Group are not necessarily
indicative of the costs that would have been incurred if AT&T Broadband Group
had performed these functions entirely as a stand-alone entity, nor are they
indicative of costs that will be charged or incurred in the future. However,
management believes such allocations are reasonable.
Consolidated income tax provisions or benefits, related tax payments or
refunds, and deferred tax balances of AT&T have been allocated to AT&T Broadband
Group based principally on the taxable income and tax credits directly
attributable to AT&T Broadband Group, resulting in essentially a stand-alone
presentation. AT&T and AT&T Broadband Corp. entered into a tax sharing agreement
effective as of January 1, 2002, which, consistent with the principles described
in the preceding sentence, provides for tax sharing payments based on the tax
expense or tax benefits of a hypothetical affiliated group consisting of AT&T
Broadband Group and AT&T. Based on this agreement, the consolidated tax
liability before credits are allocated between the groups, based on each group's
contribution to the consolidated taxable income of the hypothetical group.
Consolidated tax credits of the hypothetical group are allocated between groups
based on each group's contribution to such tax credit.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Video, voice and data services revenue is recognized based upon monthly
service fees, fees per event or minutes of traffic processed. Revenue for
customer fees, equipment rental, advertising, and pay-per-view programming is
recognized in the period the services are delivered. Video and nonvideo
installation revenue is recognized in the period the installation services are
provided to the extent of direct selling costs. Any remaining amount is deferred
and recognized over the estimated average period customers are expected to
remain connected to the cable distribution system.
XII-84
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
ADVERTISING AND PROMOTIONAL COSTS
Advertising and promotional costs are expensed as incurred. Advertising and
promotional expenses were $439, $325 and $138 for the years ended December 31,
2001 and 2000 and the ten months ended December 31, 1999, respectively.
INCOME TAXES
AT&T Broadband Group is not a separate taxable entity for federal and state
income tax purposes and its results of operations are included in the
consolidated federal and state income tax returns of AT&T and its affiliates.
The provision for income taxes is based on AT&T Broadband Group's contribution
to the overall income tax liability or benefit of AT&T and its affiliates. Under
the balance sheet method, AT&T Broadband Group recognizes deferred tax assets
and liabilities at enacted income tax rates for the temporary differences
between the financial reporting basis and the tax basis of its assets and
liabilities. Any effects of changes in income tax rates or tax laws are included
in the provision for income taxes in the period of enactment. When it is more
likely than not that a portion or all of a deferred tax asset will not be
realized in the future, AT&T Broadband Group provides a corresponding valuation
allowance against the deferred tax asset.
STOCK-BASED COMPENSATION
Stock-based compensation is accounted for in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
AT&T Broadband Group follows the disclosure-only provisions of Statement of
Financial Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123").
CASH EQUIVALENTS
All highly liquid investments with original maturities of three months or
less are considered to be cash equivalents.
INVESTMENTS
Investments in which AT&T Broadband Group exercises significant influence,
but does not control, are accounted for under the equity method of accounting.
Under the equity method, investments are stated at cost and are adjusted for
AT&T Broadband Group's subsequent contributions and share of earnings, losses
and distributions. The excess of the investment over the underlying book value
of the investee's net assets is being amortized over periods ranging from 25 to
40 years. Effective January 1, 2002, in accordance with SFAS No. 142 "Goodwill
and Other Intangible Assets" ("SFAS 142"), such excess costs will no longer be
amortized. Investments in which AT&T Broadband Group has no significant
influence over the investee are accounted for under the cost method of
accounting. Under the cost method, investments are stated at cost and earnings
are recognized to the extent distributions are received from the accumulated
earnings of the investee. Distributions in excess of accumulated earnings are
recognized as a reduction of the investment balance.
Marketable equity securities classified as "trading" securities are carried
at fair value with any unrealized gain or loss being recorded within investment
(expense) income in the combined statement of operations. Marketable equity
securities classified as "available-for-sale" are carried at fair market value
with unrealized gains and losses, net of tax, included in combined attributed
net assets as a component of other comprehensive income. The fair market value
of these securities is based on quoted market prices.
XII-85
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
AT&T Broadband Group recognizes impairment charges on investment holdings
in the combined statement of operations when management believes the decline in
the investment value is other-than-temporary.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Construction costs, labor
and applicable overhead related to installations and interest during
construction are capitalized. Costs of additions and substantial improvements to
property, plant and equipment are capitalized. The cost of repairs and
maintenance of property, plant and equipment is charged to operations.
Depreciation is computed on a straight-line basis based upon the assets'
estimated useful lives using either the group or unit method. The useful lives
of distribution systems ranges from three to 15 years. The useful lives of
support equipment and buildings ranges from three to 40 years. The group method
is used for most depreciable assets, including distribution systems. Under the
group method, a specific asset group has an average life. The depreciation rate
is developed based on the average useful life for the specified asset group.
This method requires the periodic revision of depreciation rates.
Under the group method, at the time of ordinary retirements, sales or other
dispositions of assets, the original cost of such asset is deducted from
property, plant and equipment and charged to accumulated depreciation, without
recognition of a gain or loss. Gains and losses are only recognized in
connection with the sales of properties in their entirety.
FRANCHISE COSTS
Franchise costs include the value attributed to agreements with local
authorities that allow access to homes in cable service areas acquired in
connection with a business combination. Such amounts are generally amortized on
a straight-line basis over 25 or 40 years. Costs incurred by AT&T Broadband
Group in negotiating and renewing franchise agreements are amortized on a
straight-line basis over the life of the franchise, generally 10 to 20 years.
Beginning in 2002, in accordance with SFAS 142, franchise costs associated with
a business combination will no longer be amortized, but will continue to be
tested for impairment (see note 16).
GOODWILL
Goodwill is the excess of the purchase price over the fair value of net
assets acquired in business combinations accounted for as purchases. Goodwill is
amortized on a straight-line basis over seven to 40 years. Beginning in 2002, in
accordance with SFAS 142, such goodwill will no longer be amortized, but will
continue to be tested for impairment (see note 16).
SOFTWARE CAPITALIZATION
Certain direct development costs associated with internal-use software are
capitalized, including external direct costs of material and services, and
payroll costs for employees devoting time to the software projects. Such costs
are included within other assets and are amortized over a period not to exceed
five years beginning when the asset is substantially ready for use. Costs
incurred during the preliminary project stage, as well as maintenance and
training costs, are expensed as incurred. Initial operating-system software
costs are capitalized and amortized over the life of the associated hardware.
XII-86
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
VALUATION OF LONG-LIVED ASSETS
Long-lived assets such as property, plant and equipment, franchise costs,
goodwill, investments and software are reviewed for impairment annually or
whenever events or changes in circumstances indicate the carrying amount may not
be recoverable. If the total of the expected future undiscounted cash flows is
less than the carrying amount of the asset, a loss is recognized for the
difference between the fair value and carrying value of the asset. Assets to be
disposed of are carried at the lower of their financial statement carrying value
or fair value less cost to sell.
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
Effective January 1, 2001, AT&T Broadband Group adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), and
its corresponding amendments under SFAS No. 138. AT&T Broadband Group uses
derivative financial instruments to mitigate market risk from changes in
interest rates and equity prices. Derivative financial instruments may be
exchange-traded or contracted in the over-the-counter market and include swaps,
options, warrants and forward contracts. AT&T Broadband Group does not use
derivative financial instruments for speculative purposes.
All derivatives are recognized on the balance sheet at fair value. To
qualify for hedge accounting treatment, derivatives, at inception, must be
designated as hedges and evaluated for effectiveness throughout the hedge
period. AT&T Broadband Group designates certain derivative contracts, at the
date entered into, as either (i) a hedge of the fair value of a recognized asset
or liability or of an unrecognized firm commitment ("fair value" hedge) or (ii)
a hedge of a forecasted transaction or of the variability of cash flows to be
received or paid related to a recognized asset or liability ("cash flow" hedge).
Other derivatives ("undesignated") are not formally designated for accounting
purposes. These derivatives, except for warrants, although undesignated for
accounting purposes are entered into to hedge economic risks.
AT&T Broadband Group records changes in the fair value of fair-value
hedges, along with the changes in fair value of the hedged asset or liability
that is attributable to the hedged risk (including losses or gains on firm
commitments), in other (expense) income in the combined statement of operations.
AT&T Broadband Group records changes in the fair value of cash-flow hedges
that are highly effective in other comprehensive income, as a component of
combined attributed net assets, until earnings are affected by the variability
of cash flows of the hedged transaction.
The changes in fair value of undesignated hedges are recorded in other
(expense) income in the combined statements of operations along with the change
in fair value of the related asset or liability.
AT&T Broadband Group currently does not have any net investment hedges in a
foreign operation.
AT&T Broadband Group assesses embedded derivatives to determine whether the
economic characteristics of the embedded instruments are not clearly and closely
related to the economic characteristics of the remaining component of the
financial instrument (the host instrument) and whether a separate instrument
with the same terms as the embedded instrument would meet the definition of a
derivative instrument. When it is determined that both conditions exist, AT&T
Broadband Group designates the derivative as described above and recognizes the
derivative at fair value.
AT&T Broadband Group formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management objective and
strategy for undertaking various hedge transactions. This process includes
linking all derivatives that are designated as fair value or cash flow hedges to
specific assets and liabilities on the balance sheet or to specific firm
commitments or forecasted transactions.
XII-87
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
AT&T Broadband Group discontinues hedge accounting prospectively when: (i)
it is determined that the derivative is no longer effective in offsetting
changes in the fair value of cash flows of a hedged item; (ii) the derivative
expires or is sold, terminated, or exercised; (iii) it is determined that the
forecasted hedged transaction will no longer occur; (iv) a hedged firm
commitment no longer meets the definition of a firm commitment; or (v)
management determines that designation of the derivative as a hedge instrument
is no longer appropriate.
When hedge accounting is discontinued because it is determined that the
derivative no longer qualifies as an effective fair value hedge, the derivative
will continue to be adjusted for changes in fair value through other (expense)
income, and the hedged asset or liability will no longer be adjusted for changes
in fair value. When hedge accounting is discontinued because the hedged item no
longer meets the definition of a firm commitment, the derivative will continue
to be adjusted for changes in the fair value through other (expense) income, and
any asset or liability that was recorded pursuant to recognition of the firm
commitment will be removed from the balance sheet and recorded in current period
earnings. When hedge accounting is discontinued because it is probable that a
forecasted transaction will not occur, the derivative will then be adjusted for
changes in the fair value through other (expense) income and gains and losses
that were accumulated in other comprehensive income will be recognized
immediately in other (expense) income. In all other situations in which hedge
accounting is discontinued, the derivative will be carried at its fair value on
the balance sheet, with changes in its fair value recognized in other (expense)
income.
CASH FLOWS
For purposes of the combined statements of cash flows, all transactions
between AT&T Broadband Group and AT&T, except for purchase business combinations
and initial investments in joint ventures and partnerships which were funded by
AT&T and contributed by AT&T to AT&T Broadband Group, have been accounted for as
having been settled in cash at the time the transaction was recorded by AT&T
Broadband Group.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and revenue and expenses during the period reported. Actual results
could differ from those estimates. Estimates are used when accounting for
certain items such as allowances for doubtful accounts, depreciation and
amortization, employee benefit plans, income taxes, restructuring reserves,
impairments and contingencies.
CONCENTRATIONS
As of December 31, 2001, except as disclosed below, AT&T Broadband Group
does not have any significant concentration of business transacted with a
particular customer, supplier or lender that could, if suddenly eliminated,
severely impact its operations. AT&T Broadband Group does not have a
concentration of available sources of labor, services, franchises or other
rights that could, if suddenly eliminated, severely impact its operations.
All video and high-speed data billing services are provided by a single
vendor (see note 14). In addition, all broadband telephone billing services are
provided by a separate single vendor. AT&T Broadband Group also purchases its
digital set-top devices from one source (see note 14).
XII-88
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
ISSUANCE OF COMMON STOCK BY AFFILIATES
Changes in AT&T Broadband Group's proportionate share of the underlying
equity of an attributed entity or equity method investee, which result from the
issuance of additional equity securities by such entity, are recognized as
increases or decreases to combined attributed net assets.
RECOGNITION OF GAINS ON ASSET DISPOSITIONS
From time to time, AT&T Broadband Group contributes cable television
systems to joint ventures and partnerships in exchange for a non-controlling
interest in such entity. In connection with such contributions, AT&T Broadband
Group may guarantee the debt of the joint venture or partnership. AT&T Broadband
Group defers any gain associated with such transactions until such time as AT&T
Broadband Group has no remaining financial obligation to the joint venture or
partnership.
RECLASSIFICATIONS
Certain amounts in previous years have been reclassified to conform to the
2001 presentation.
(3) SUPPLEMENTAL FINANCIAL INFORMATION
SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION
YEAR ENDED TEN MONTHS
DECEMBER 31, ENDED
-------------- DECEMBER 31,
2001 2000 1999
------- ---- ------------
INVESTMENT (EXPENSE) INCOME, NET
Net (losses) gains on sales of businesses and
investments........................................ $ (318) $616 $39
Investment impairment charges......................... (539) (240) --
Interest and dividend income.......................... 140 77 8
Settlement loss and mark-to-market charge on put
options............................................ (838) (537) --
Loss on settlement of exchangeable notes.............. (392) -- --
------- ---- ---
Investment (expense) income, net................... $(1,947) $(84) $47
======= ==== ===
OTHER (EXPENSE) INCOME, NET
Reclassification of securities to "trading" in
connection with the adoption of SFAS 133........... $(1,154) $ -- $--
Fair value adjustments of derivatives and "trading"
securities......................................... 195 -- --
Other................................................. 32 45 3
------- ---- ---
Other (expense) income............................. $ (927) $ 45 $ 3
======= ==== ===
XII-89
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTARY BALANCE SHEET INFORMATION
DECEMBER 31,
-----------------
2001 2000
------- -------
PROPERTY, PLANT AND EQUIPMENT
Land and improvements..................................... $ 115 $ 135
Distribution systems...................................... 14,186 13,187
Support equipment and buildings........................... 2,382 2,526
Construction in progress.................................. 794 1,417
Accumulated depreciation.................................. (2,958) (2,078)
------- -------
Property, plant and equipment, net..................... $14,519 $15,187
======= =======
LEVERAGED LEASES
AT&T Broadband Group leases airplanes and energy-producing facilities under
leveraged leases having original terms of 10 to 30 years, expiring in various
years from 2004 through 2017. The investment in leveraged leases is primarily
included in other assets in the accompanying combined balance sheets. Following
is a summary of AT&T Broadband Group's investment in leveraged leases:
DECEMBER 31,
-------------
2001 2000
----- -----
Rentals receivable (net of nonrecourse debt*)............... $ 606 $ 616
Estimated unguaranteed residual values...................... 244 244
Unearned income............................................. (656) (685)
Allowance for credit losses................................. (3) (3)
----- -----
Investment in leveraged leases (included in other assets)... 191 172
Deferred taxes.............................................. 41 19
----- -----
Net investment in leveraged leases.......................... $ 150 $ 153
===== =====
---------------
* The rentals receivable are net of nonrecourse debt of $1.2 billion and $1.3
billion at December 31, 2001 and 2000, respectively.
XII-90
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTARY STATEMENT OF CHANGES IN COMBINED ATTRIBUTED NET ASSETS
INFORMATION
YEAR ENDED TEN MONTHS
DECEMBER 31, ENDED
------------- DECEMBER 31,
2001 2000 1999
------ ---- ------------
Reclassification of securities to "trading" in
conjunction with the adoption of SFAS 133 (net of
income taxes of $446)(a)............................... $ 708 $ -- $ --
Settlement of exchangeable notes (net of income taxes of
$152)(b)............................................... 240 -- --
Sale of various securities (net of income tax benefit
(provision) of $63 and $(16)).......................... 100 (27) --
Other than temporary investment impairments (net of
income taxes of $197 and $45).......................... 314 173 --
Revaluation of derivatives (net of income taxes of
$33)................................................... 52 -- --
------ ---- -----
Total recognition of previously unrealized losses........ $1,414 $146 $ --
====== ==== =====
---------------
(a) See note 10 for further discussion.
(b) See note 7 for further discussion.
SUPPLEMENTARY CASH FLOW INFORMATION
YEAR ENDED TEN MONTHS
DECEMBER 31, ENDED
--------------- DECEMBER 31,
2001 2000 1999
------ ------ ------------
Interest payments, net of amounts capitalized.......... $1,555 $1,016 $488
====== ====== ====
Income tax (refunds) payments.......................... $ (442) $ 62 $ 8
====== ====== ====
(4) MERGERS, ACQUISITIONS, VENTURES, DISPOSITIONS AND EXCHANGES
MERGER WITH TELE-COMMUNICATIONS, INC.
AT&T Broadband Group was created upon the merger of TCI with a subsidiary
of AT&T. The TCI Merger was completed on March 9, 1999, in an all-stock
transaction valued at approximately $52 billion. TCI simultaneously combined its
Liberty Media Group programming business with its TCI Ventures Group technology
investments business, forming Liberty Media Group ("LMG"). In connection with
the TCI Merger, AT&T issued a separate tracking stock in exchange for the TCI
Liberty Media Group and TCI Ventures Group tracking shares previously
outstanding. LMG is excluded from AT&T Broadband Group.
The TCI Merger was accounted for under the purchase method of accounting,
accordingly, AT&T recorded the assets and liabilities of TCI at their fair
values and TCI results have been included since March 1, 1999, the deemed
effective date of the merger. Approximately $20 billion of the purchase price of
$52 billion was attributed to franchise costs and is being amortized on a
straight-line basis over 40 years. Pursuant to SFAS No. 109, "Accounting for
Income Taxes," AT&T recorded an approximate $13 billion deferred tax liability
in connection with this franchise intangible, which is also included in
franchise costs. AT&T does not expect that this deferred tax liability will ever
be paid. This deferred tax liability is being amortized on a straight-line basis
over 40 years and is included in the provision for income taxes. Also included
in the $52 billion purchase price was approximately $11 billion related to
XII-91
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
nonconsolidated investments, approximately $5 billion related to property, plant
and equipment, approximately $11 billion of TCI long-term debt, and $7 billion
related to other net liabilities. In addition, $34 billion was attributed to the
investment in LMG which is excluded from the AT&T Broadband Group.
MERGER WITH MEDIAONE
On June 15, 2000, AT&T completed a merger with MediaOne in a cash and stock
transaction valued at approximately $45 billion (the "MediaOne Merger"). The
AT&T shares had an aggregate market value of approximately $21 billion and cash
payments totaled approximately $24 billion.
The MediaOne Merger was accounted for under the purchase method of
accounting, accordingly the results of MediaOne have been included in the
accompanying combined financial statements since the date of acquisition.
Approximately $17 billion of the $45 billion purchase price has been attributed
to franchise costs and is being amortized on a straight-line basis over 40
years. Also included in the purchase price was approximately $22 billion related
to nonconsolidated investments, including investments in TWE and Vodafone Group
plc ("Vodafone"), approximately $5 billion related to property, plant and
equipment, and $5 billion related to other net assets. In addition, included was
approximately $13 billion in deferred income tax liabilities, approximately $10
billion of MediaOne debt and approximately $1 billion of minority interest in
Centaur Funding Corporation, a subsidiary of MediaOne. AT&T did not attribute $7
billion of cash acquired in the MediaOne Merger to AT&T Broadband Group. The
purchase price resulted in goodwill of $20 billion, which is being amortized on
a straight-line basis over 40 years.
In accordance with the provisions of SFAS 142, AT&T Broadband Group will no
longer amortize goodwill, franchise costs associated with a business combination
or the deferred tax liability associated with franchise costs related to the
mergers discussed above (see note 16 for further discussions of the impacts of
SFAS 142).
PRO FORMA RESULTS
Following is a summary of the pro forma results of AT&T Broadband Group as
if the MediaOne Merger had closed effective March 1, 1999:
TEN MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
Revenue..................................................... $ 9,770 $7,326
Operating loss.............................................. $ 9,089 $1,832
Net (loss) income........................................... $(4,422) $1,047
Pro forma data may not be indicative of the results that would have been
obtained had the events actually occurred at the beginning of the periods
presented, nor does it intend to be a projection of future results.
CABLEVISION SYSTEMS CORPORATION ("CABLEVISION") AND RAINBOW MEDIA GROUP
On January 8, 2001, a subsidiary of AT&T and Cablevision completed the
transfer of cable systems in which AT&T received cable systems serving 358,000
customers in Boston and Eastern Massachusetts. In exchange, Cablevision received
cable systems serving approximately 130,000 customers in northern New York
suburbs, 44 million shares of AT&T common stock valued at approximately $871,
and approximately
XII-92
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
$204 in cash. Cablevision recorded a gain as a result of the transaction. AT&T
Broadband Group did not record any gain or loss on the transaction, however, due
to ATTBLLC's ownership interest in Cablevision, $143, net of taxes, of
Cablevision's gain is included in "net losses from equity investments."
On October 23, 2001, AT&T Broadband Group, through ATTBLLC, sold
approximately 19.2 million shares of Cablevision NY Group Class A common stock
and, monetized through a trust, 26.9 million shares of a mandatorily
exchangeable trust security that is exchangeable into up to 26.9 million shares
of Cablevision NY Group Class A common stock at maturity in approximately three
years. The offering price was $36.05 per share for both the common shares and
the exchangeable securities. The offerings generated approximately $1,422 of
pretax proceeds, net of underwriting fees. The sale resulted in a pretax loss of
approximately $271 recorded in investment (expense) income.
On December 12, 2001, AT&T Broadband Group sold approximately 14.7 million
shares of Cablevision's Rainbow Media Group Class A tracking stock and,
monetized through a trust, 9.8 million shares of mandatorily exchangeable trust
security that was exchangeable into up to 9.8 million shares of Rainbow Media
Group Class A tracking stock at maturity in approximately three years. The
offering price was $22.50 per share for both the tracking stock shares and the
exchangeable securities. The offering generated approximately $487 of pretax
proceeds, net of underwriting fees. The sale resulted in a pretax gain of
approximately $63 recorded in investment (expense) income.
AT HOME CORPORATION
On August 28, 2000, AT&T and At Home Corporation ("Excite@Home") announced
shareholder approval of a new board of directors and governance structure for
Excite@Home. AT&T was given the right to designate six of the 11 Excite@Home
board members. In addition, Excite@Home converted approximately 50 million of
ATTBLLC's Excite@Home Series A shares into Series B shares, each of which has 10
votes. As a result of these governance changes, AT&T Broadband Group, through
ATTBLLC, gained a controlling interest and began consolidating Excite@Home's
results upon the closing of the transaction on September 1, 2000. As of December
31, 2000, AT&T Broadband Group had, on a fully diluted basis, approximately 23%
of the economic interest and 74% of the voting interest in Excite@Home. The
consolidation of Excite@Home in September 2000 resulted in minority interest of
approximately $2,200, goodwill of approximately $2,400, short-term liabilities
of approximately $2,400 (including an initial put option liability), other net
assets of approximately $1,200 and the removal of the investment in Excite@Home
of approximately $1,900.
On September 28, 2001, Excite@Home filed for bankruptcy protection under
Chapter 11 in the U.S. Bankruptcy Court, for the Northern District of
California. As a result of the bankruptcy filing and the removal by AT&T of four
of its six directors from the Excite@Home board of directors, AT&T Broadband
Group ceased consolidating Excite@Home as of September 30, 2001. Beginning
October 1, 2001, AT&T Broadband Group no longer records equity earnings or
losses related to Excite@Home since AT&T Broadband Group recognized losses in
excess of its investment in Excite@Home.
The noncash impacts of the deconsolidation of Excite@Home primarily
included a reduction to property, plant and equipment of approximately $320,
goodwill of approximately $326 and debt of approximately $988. The
deconsolidation of Excite@Home resulted in the recording of a liability which
was approximately $362 at December 31, 2001. The liability will continue to be
evaluated. In addition, other noncash items included a tax benefit of $673
reflecting changes to deferred tax liabilities.
XII-93
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
COX AND COMCAST AGREEMENT
In August 2000, in exchange for Cox Communications, Inc. ("Cox") and
Comcast relinquishing their rights under the shareholder agreement in connection
with Excite@Home's governance change, AT&T granted put obligations to Cox and
Comcast. On May 18, 2001, AT&T, Cox and Comcast reached an agreement to revise
the terms of the put options. Under the new agreement, Cox and Comcast retained
their stakes in Excite@Home and AT&T issued 75 million AT&T common shares to Cox
and more than 80 million AT&T common shares to Comcast. The obligation under
these put obligations was recorded at fair value, with gains or losses resulting
from changes in fair value being recorded in investment (expense)income. AT&T
Broadband Group recorded an approximate $838 and $537 loss in investment
(expense) income related to the settlement and mark-to-market of the put option
in 2001 and 2000, respectively. The new agreement resulted in a tax benefit to
AT&T Broadband Group, which essentially offset this loss.
INSIGHT COMMUNICATIONS COMPANY LP
Effective January 1, 2001, entities attributed to AT&T Broadband Group sold
to Insight Communications Company LP ("Insight"), for net cash proceeds of $391,
several Illinois cable systems serving approximately 98,400 customers. Insight
subsequently contributed such cable systems and additional cable systems serving
approximately 177,000 customers to Insight Midwest L.P., an entity in which AT&T
Broadband Group, through its attributed entities, has a 50% interest. Entities
attributed to AT&T Broadband Group also contributed several Illinois systems
serving approximately 247,500 customers to Insight Midwest, L.P. The
transactions resulted in a pretax gain of $168, which was deferred due to a debt
support agreement with Insight Midwest, L.P.
KEARNS-TRIBUNE, LLC
On January 2, 2001, AT&T, through ATTBLLC, completed the sale of
Kearns-Tribune, LLC to MediaNews Group for $200 in cash. The transaction
resulted in a pretax gain of approximately $117 recorded in investment (expense)
income.
COMCAST
On April 30, 2001, a subsidiary of AT&T received 63.9 million shares of
AT&T stock held by Comcast which were valued at $1,423 in exchange for cable
systems attributed to AT&T Broadband Group serving approximately 590,000
customers in New Mexico, Maryland, New Jersey, Pennsylvania, Delaware and
Tennessee. The transaction resulted in a pretax loss of $297 recorded in
investment (expense) income.
Effective June 30, 2001, AT&T, together with certain subsidiaries
attributed to AT&T Broadband Group, transferred its 99.75% interest in an entity
owning the Baltimore, Maryland cable systems serving approximately 115,000
customers to Comcast for approximately $510 in net cash proceeds. The
transaction resulted in a pretax gain of $149 recorded in investment (expense)
income.
MEDIACOM COMMUNICATIONS
On June 29, 2001, a subsidiary of AT&T sold to MediaCom Communications
Corporation ("MediaCom") cable systems attributed to AT&T Broadband Group
serving approximately 94,000 customers in Missouri for approximately $295 in net
cash proceeds. The transaction resulted in a pretax gain of $5 recorded in
investment (expense) income.
XII-94
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
On July 18, 2001, subsidiaries of AT&T sold to MediaCom cable systems
attributed to AT&T Broadband Group serving approximately 710,000 customers
located primarily in Georgia, Iowa and Southern Illinois for approximately
$1,724 in net cash proceeds. The transaction resulted in a pretax loss of $93
recorded in investment (expense) income.
CHARTER COMMUNICATIONS
On June 30, 2001, a subsidiary of AT&T transferred to Charter
Communications, Inc. ("Charter") cable systems attributed to AT&T Broadband
Group serving approximately 563,000 customers in Alabama, California, Illinois,
Missouri and Nevada. AT&T Broadband Group, through its attributed entities,
received $1,497 in net proceeds, $222 in cash restricted for future acquisitions
of cable systems, and a cable system in Florida serving 9,000 customers. The
transaction resulted in a pretax loss of $42 recorded in investment (expense)
income.
LENFEST COMMUNICATIONS, INC.
On January 18, 2000, AT&T Broadband Group, through ATTBLLC, sold its
ownership interest in Lenfest Communications, Inc., to a subsidiary of Comcast.
In connection with the sale, AT&T Broadband Group received 47.3 million shares
of Comcast Class Special A common stock. The transaction resulted in a pretax
gain of $224 recorded in investment (expense) income.
COX COMMUNICATIONS, INC.
On March 15, 2000, AT&T Broadband Group, through ATTBLLC, received 50.3
million shares of AT&T common stock held by Cox in exchange for an entity owning
cable television systems serving approximately 312,000 customers and certain
other net assets. The AT&T common stock received in such transaction has been
included in combined attributed net assets. The transaction resulted in a pretax
gain of $189 recorded in investment (expense) income.
(5) ASSET IMPAIRMENT, RESTRUCTURING AND OTHER CHARGES
During 2001, AT&T Broadband Group recorded $1,494 of asset impairment,
restructuring and other charges. The charge included $1,171 of asset impairment
charges related to Excite@Home and $323 for restructuring and exit costs, which
consisted of $151 for severance costs, $156 for facilities closing and $16 for
termination costs of contractual obligations.
The $1,171 of asset impairment charges recorded during 2001 consisted of
$1,032 related to Excite@Home associated with the write down of goodwill and
other intangible assets, warrants granted in connection with distributing the
@Home service, and property, plant and equipment. These charges were due to
continued deterioration in the business climate of, and reduced levels of
venture capital funding activity for, Internet advertising and other
Internet-related companies, continued significant declines in the market values
of Excite@Home's competitors in the Internet advertising industry, and changes
in their operating and cash flow forecasts for the remainder of 2001. These
charges were also impacted by Excite@Home's decision to sell or shut down
narrowband operations. As a result of the foregoing, and other factors,
Excite@Home entered into bankruptcy proceedings in September 2001. In addition,
AT&T Broadband Group, through ATTBLLC, recorded a related goodwill impairment
charge of $139 associated with its acquisition goodwill of Excite@Home. Since
AT&T Broadband Group, through ATTBLLC, consolidated Excite@Home but only owned
approximately 23% of Excite@Home, a portion of the charges recorded by
Excite@Home has been eliminated in the statement of operations as minority
interest income (expense).
XII-95
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The severance costs of $151, for the involuntary separation of
approximately 7,700 employees, primarily resulted from continued cost reduction
efforts by AT&T Broadband Group and Excite@Home in addition to impacts of the
MediaOne Merger. Approximately 36% of the affected employees are management
employees and 64% are non-management employees. Nearly all of the affected
employees have left their positions as of December 31, 2001.
The following table displays the activity and balances of the restructuring
reserve account from January 1, 2000, to December 31, 2001. There was no
activity in the restructuring reserve account in 1999.
EMPLOYEE FACILITY
TYPE OF COST SEPARATIONS CLOSINGS OTHER TOTAL
------------ ----------- -------- ----- -----
January 1, 2000................................... $ -- $ -- $ -- $ --
Additions....................................... 61 30 -- 91
Deductions...................................... (45) (30) -- (75)
----- ----- ---- -----
December 31, 2000................................. 16 -- -- 16
Additions....................................... 151 156 16 323
Deductions...................................... (145) (144) (16) (305)
----- ----- ---- -----
December 31, 2001................................. $ 22 $ 12 $ -- $ 34
===== ===== ==== =====
Total deductions for the year ended December 31, 2000, included cash
payments of $45 related to employee separations and $30 noncash utilization for
the loss realized on disposition of facilities. Total deductions for the year
ended December 31, 2001, included $121 related to the deconsolidation of
Excite@Home and cash payments of $184 related to employee separations, facility
closings, litigation and contractual obligations.
During 2000, AT&T Broadband Group recorded $6,270 of asset impairment,
restructuring and other charges which included $6,179 of asset impairment
charges related to Excite@Home.
The charges related to Excite@Home include $4,609 in asset impairment
charges taken by Excite@Home associated with the goodwill impairment from
various acquisitions and a related goodwill impairment of $1,570 recorded by
AT&T Broadband Group associated with its acquisition goodwill of Excite@Home.
The impairments resulted from the deterioration of the market conditions
and market valuations of Internet-related companies during the fourth quarter of
2000, which caused Excite@Home to conclude that intangible assets related to
their acquisitions of Internet-related companies may not be recoverable. In
accordance with SFAS No. 121, "Accounting For the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of ("SFAS 121"), Excite@Home
conducted a detailed assessment of the recoverability of the carrying amounts of
acquired intangible assets. This assessment resulted in a determination that
certain acquired intangible assets, including goodwill, related to these
acquisitions were impaired as of December 31, 2000. As a result, Excite@Home
recorded impairment charges of $4,609 in December 2000, representing the excess
of the carrying amount of the impaired assets over their fair value.
The review for impairment included a review of publicly-traded Internet
companies that are comparable to the companies that Excite@Home acquired. These
companies experienced a substantial decline in stock price and market
capitalization during the fourth quarter of 2000.
Excite@Home also reviewed the business climate for Internet advertising and
web-based infrastructure companies as of December 31, 2000, and observed the
following: (i) investor and consumer enthusiasm for the Internet sector severely
deteriorated during the fourth quarter of 2000; (ii) many
XII-96
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Internet companies, including those acquired by Excite@Home, experienced
significant decelerations in their growth both as a result of economic
conditions and due to Internet-sector specific issues such as competition and
the weakening of the Internet advertising market; and (iii) funding sources for
Internet-based consumer businesses, which require considerable amounts of
capital, had substantially evaporated as of December 31, 2000. As a result,
Excite@Home concluded that fundamental, permanent and significant adverse
changes had occurred during the fourth quarter of 2000 in the business climate
for companies providing Internet advertising and other web-based services.
In addition, Excite@Home reviewed operating and cash flow projections that
existed at the time Excite@Home made the acquisitions and that were used as a
basis upon which the decisions to complete acquisitions were made. These
operating and cash flow projections indicated that the acquired companies, over
their useful lives, would be profitable and generate positive cash flows. The
operating and cash flow projections were compared to operating results after the
date of the acquisitions through December 31, 2000, as well as to projected
operating results for 2001. These comparisons indicated that certain
acquisitions generated operating and cash flow losses through the end of 2000,
and were projected to continue generating operating and cash flow losses for the
foreseeable future.
As a result of these factors, Excite@Home determined that the intangible
assets related to the acquisitions might not be recoverable and conducted
impairment tests.
Generally, the impairment tests were performed at an asset group level
corresponding to the lowest level at which cash flows independent of other
assets could be identified. Each asset group consisted of the goodwill and
acquired identifiable intangible assets related to a specific acquisition.
Acquired intangible assets were combined for those acquisitions where separately
identifiable cash flows that are largely independent of the cash flows of other
groups of assets could not be identified.
For each of the asset groups to be tested for impairment, Excite@Home
projected undiscounted cash flows over a future projection period of five years,
based on Excite@Home's determination of the current remaining useful lives of
the asset groups, plus an undiscounted terminal period cash flow to reflect
disposition of the entities at the end of their useful lives. Undiscounted
future cash flows were estimated using projected net realizable value in a sales
transaction (undiscounted cash flows during the expected remaining holding
period until disposition were estimated as negligible). The undiscounted future
cash flows were compared to the carrying amount of each asset group and for
those asset groups where the carrying amount exceeded the undiscounted future
cash flows, Excite@Home concluded that the asset group was impaired.
Excite@Home measured the impairment loss related to impaired asset groups
based on the amount by which the carrying amount of the asset group exceeded the
fair value of the asset group. Measurement of fair value was based on an
analysis by Excite@Home, with assistance from independent valuation experts,
utilizing the best information available in the circumstances using reasonable
and supportable assumptions and projections, and including the discounted cash
flow and market comparison valuation techniques. The discounted cash flow
analysis considered the likelihood of possible outcomes and was based on
Excite@Home's best estimate of projected future cash flows, including terminal
value cash flows expected to result from the disposition of the asset at the end
of its useful life, discounted at Excite@Home's weighted average cost of
capital. Weighted average cost of capital was based on historical risk premiums
required by investors for companies of Excite@Home's size, industry and capital
structure and included risk factors specific to Excite@Home. The market
comparison model represented Excite@Home's estimate of the prices that a buyer
would be willing to pay currently for similar assets, based on comparable
products and services, customer base, risks, earnings capabilities and other
factors.
XII-97
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Based on the foregoing, Excite@Home recorded an impairment write-down of
$4,609 in aggregate, which was allocated to each asset group based on a
comparison of carrying values and fair values. The impairment write-down within
each asset group was allocated first to goodwill, and if goodwill was reduced to
zero, to identifiable intangible assets in proportion to carrying values.
Also as a result of the foregoing, AT&T Broadband Group recorded a goodwill
and acquisition-related impairment charge of $1,570 associated with the
acquisition of ATTBLLC's investment in Excite@Home. The write-down of ATTBLLC's
investment to fair value was determined utilizing discounted expected future
cash flows.
Since AT&T Broadband Group, through ATTBLLC only owned approximately 23% of
Excite@Home, 77% of the charge recorded by Excite@Home was not included as an
increase in AT&T Broadband Group's net loss, but rather was eliminated in the
combined statement of operations as minority interest income (expense).
In 2000, a $91 charge for restructuring and exit costs was recorded
primarily as part of the integration of MediaOne, the centralization of certain
functions, and the consolidation of call center facilities. The charge for the
year ended December 31, 2000, included termination benefits of $61 associated
with the involuntary separation of about 1,060 employees. Approximately 25% of
the individuals were management employees and 75% were non-management employees.
The $91 charge included a loss of $30 recognized on the disposition of
facilities as a result of synergies created by the MediaOne Merger.
During 1999, AT&T Broadband Group recorded $644 of asset impairment,
restructuring and other charges. Such amount included a $594 in-process research
and development charge which reflected the estimated fair value of research and
development projects at AT&T Broadband Group, as of the date of the TCI Merger,
which had not yet reached technological feasibility or that had no alternative
future use. The projects identified related to TCI's efforts to offer voice over
Internet protocol, product integration efforts for advanced set-top devices that
would enable AT&T Broadband Group to offer next-generation digital services, and
cost-savings efforts for broadband telephone implementation. In addition,
Excite@Home had research and development efforts underway, including projects to
allow for self-provisioning of devices and the development of next-generation
client software, network and back-office infrastructure to enable a variety of
network devices, and improved design for the regional data center's
infrastructure.
The 1999 charge also included a $50 loss related to a contribution
agreement TCI entered into with Phoenixstar, Inc. that requires AT&T Broadband
Group to satisfy certain liabilities owed by Phoenixstar, Inc. and its
subsidiaries.
(6) INVESTMENTS
Subsidiaries of AT&T have investments in various companies and partnerships
accounted for under the equity method which have been attributed to AT&T
Broadband Group. At December 31, 2001 and 2000, equity investments of $4,286 and
$6,350, respectively, had been attributed to AT&T Broadband Group. The carrying
value of these investments exceeded AT&T Broadband Group's share of the
underlying reported net assets by approximately $2,969 and $5,455 at December
31, 2001 and 2000, respectively. The excess cost is being amortized over periods
ranging from 25 to 40 years. Pretax amortization of the excess cost of $148,
$485 and $476 for the years ended December 31, 2001 and 2000 and for the ten
months ended December 31, 1999, respectively, is reflected as a component of net
losses from equity investments in the accompanying combined statements of
operations. Effective January 1, 2002, in accordance with the provisions of SFAS
142, such excess costs will no longer be amortized (see note 16).
XII-98
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Ownership of significant equity investments attributed to AT&T Broadband
Group was as follows:
AT DECEMBER 31,
-----------------
2001 2000
------ ------
Cablevision Systems Corporation............................. --%(a) 27.98%(a)
Texas Cable Partnerships.................................... 50.00% 50.00%
Insight Midwest LP.......................................... 50.00% 50.00%
Century-TCI California Communications, LP................... 25.00% 25.00%
Kansas City Cable Partners.................................. 50.00% 50.00%
Parnassos Communications, LP................................ 33.33% 33.33%
US Cable of Coastal-Texas, LP............................... 48.16% 37.06%(b)
Midcontinent Communications................................. 50.00% 50.00%
---------------
(a) In June 2001, as a result of AT&T no longer having representation on
Cablevision's board of directors, the accounting for the investment in
Cablevision was changed from equity method to cost method accounting. At
December 31, 2001, AT&T Broadband Group owned 29,790,887 shares, or a 16.8%
ownership interest, of Cablevision NY Class A common stock which had a
closing market price of $47.45 per share. At December 31, 2000, AT&T
Broadband Group, through ATTBLLC, owned 48,942,172, shares of Cablevision
Systems Corporation Class A common stock, which had a closing market price
of $84.94 per share.
(b) On April 1, 2001, AT&T Broadband Group contributed cable systems serving
approximately 18,000 customers to US Cable of Coastal-Texas, LP ("US Cable")
in exchange for an additional 11.10% ownership interest in US Cable.
Summarized combined financial information for investments accounted for
under the equity method was as follows:
FOR THE
FOR THE YEAR ENDED TEN MONTHS
DECEMBER 31, ENDED
------------------- DECEMBER 31,
2001 2000 1999
-------- -------- ------------
Revenue................................................ $4,337 $6,537 $ 6,148
Operating income (loss)................................ $ 1 $ 175 $(1,401)
Income (loss) from continuing operations before
extraordinary items and cumulative effect of
accounting change.................................... $ 747 $ (20) $(2,327)
Net income (loss)...................................... $ 736 $ (20) $(2,327)
DECEMBER 31,
-----------------
2001 2000
------- -------
Current assets.............................................. $ 483 $ 1,493
Noncurrent assets........................................... $10,538 $18,262
Current liabilities......................................... $ 1,009 $ 2,712
Noncurrent liabilities...................................... $ 6,420 $15,034
Redeemable preferred stock.................................. $ -- $ 1,544
Minority interests.......................................... $ 186 $ 588
At December 31, 2001, AT&T Broadband Group, through MediaOne, had a 25.51%
interest in TWE. This investment is accounted for as a cost investment since
AT&T Broadband Group does not have the
XII-99
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
right to exercise significant influence. On February 28, 2001, AT&T Broadband
Group exercised its registration rights in TWE and formally requested TWE to
begin the process of converting the limited partnership into a corporation with
registered equity securities.
Other investments at December 31, 2001 for AT&T Broadband Group consisted
of the following:
COST UNREALIZED ESTIMATED
BASIS GAINS (LOSSES) FAIR VALUE
------- -------------- --------------
Trading securities............................... $ 4,388 $ -- $4,388
Available-for-sale securities.................... 3,246 (169) 3,077
Preferred stock.................................. 2,164 -- 2,164
Cost investments, warrants and other............. 269 -- 269
------- ----- ------
$10,067 $(169) $9,898
======= ===== ======
Other investments at December 31, 2000 for AT&T Broadband Group consisted
of the following:
COST UNREALIZED ESTIMATED
BASIS GAINS (LOSSES) FAIR VALUE
------- -------------- --------------
Available-for-sale securities.................... $12,927 $(3,620) $ 9,307
Preferred stock.................................. 1,467 105 1,572
Cost investments, warrants and other............. 1,109 14 1,123
------- ------- -------
$15,503 $(3,501) $12,002
======= ======= =======
At December 31, 2001 and 2000, $6,547 and $6,473, respectively, of
investments are indexed to certain long-term debt instruments (see note 7). In
addition, approximately $668 and $2,102 of such investments were classified as
current assets at December 31, 2001 and 2000, respectively, since they are
indexed to certain currently maturing debt instruments.
During 2001, AT&T Broadband Group recorded an impairment charge on
investments of $539, including $20 recorded by Excite@Home, consisting primarily
of charges related to Vodafone, plc, Quokka Sports, Inc. and Internet Pictures,
Inc. The impairment charge primarily resulted from management's conclusion that
declines in fair value were not temporary or the investment could not be held
for a period of time to allow for recoverability of fair value as in the case of
exchangeable notes due in late 2002 that can be settled with shares of Vodafone
ADRs. The fair value was based on quoted market prices.
During 2000, AT&T Broadband Group recorded an impairment charge on
investments of $111. Management determined the loss was not temporary due to the
downturn in market conditions and its inability to hold the investments as a
result of requirements related to the regulatory approval of the MediaOne
Merger. The fair value was based on quoted market prices.
During the fourth quarter of 2000, Excite@Home recognized a loss on
investments totaling $129 which included $107 loss on publicly held companies
and $22 on privately held investments. The loss recognized on the publicly held
investment was a result of Excite@Home's decision that the decline in market
value of certain investments was not temporary. The loss recognized on the
privately held companies was based on Excite@Home's determination that the
carrying value of certain investments was not recoverable, based on indicators
such as limited liquidity and poor prospects for additional funding. Since AT&T
Broadband Group, through ATTBLLC owns 23% of Excite@Home, 77% of the loss
recorded by Excite@Home is not included as an increase of AT&T Broadband Group's
net loss, but rather is eliminated in the statement of operations as minority
interest income (expense).
XII-100
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(7) DEBT OBLIGATIONS
LONG-TERM DEBT
DEBENTURES, NOTES AND TRUST PREFERRED SECURITIES(A):
DECEMBER 31,
-----------------
INTEREST RATES(B) MATURITIES 2001 2000
----------------- ---------- ------- -------
4.00%-6.50% 2002-2008........................................ $ 2,855 $ 4,599
6.55%-7.49% 2002-2037........................................ 3,793 4,369
7.53%-8.50% 2002-2097........................................ 3,141 3,370
8.60%-10.75% 2002-2038........................................ 6,292 6,594
Variable rate 2002-2005........................................ 3,309 3,388
------- -------
Total debentures, notes and trust preferred securities................ 19,390 22,320
Other (see Note 14)................................................... 247 270
Unamortized discount, net............................................. (311) --
------- -------
Total long-term debt.................................................. 19,326 22,590
Less currently maturing long-term debt................................ 2,824 3,073
------- -------
Net long-term debt.................................................... $16,502 $19,517
======= =======
---------------
(a) At December 31, 2001 and 2000, these balances included $858 and $946,
respectively, representing the remaining excess of the fair value over the
recorded value of debt at the time of the TCI Merger and MediaOne Merger.
The excess is being amortized to interest expense over the remaining lives
of the underlying debt obligations.
(b) The actual interest paid on debt obligations may have differed from the
stated amount due to interest rate swap contracts entered into to manage
exposure to interest rate risk and other strategies used to reduce finance
costs (see Note 10).
Annual maturities at December 31, 2001, of the $19,326 in total long-term
obligations are as follows:
2002........................................................ $2,824
2003........................................................ 3,416
2004........................................................ 3,343
2005........................................................ 3,056
2006........................................................ 1,107
Later years................................................. 5,580
EXCHANGEABLE NOTES
During 2001, AT&T Broadband Group, through ATTBLLC, issued exchangeable
notes which are mandatorily redeemable at AT&T Broadband Group's option into
shares of Cablevision NY Group Class A ("Cablevision NY") common stock or its
cash equivalent (the "Cablevision NY Exchangeable Notes") and Rainbow Media
Group Class A ("Rainbow Media Group") tracking stock or its cash equivalent (the
"Rainbow Exchangeable Notes"). During 2000, AT&T Broadband Group, through
ATTBLLC and MediaOne, issued debt which is mandatorily redeemable at AT&T
Broadband Group's option into shares of Comcast common stock or its cash
equivalent (the "Comcast Exchangeable Notes")
XII-101
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
and Microsoft Corporation ("Microsoft") common stock or its cash equivalent (the
"Microsoft Exchangeable Notes"). During 1999 and 1998, MediaOne issued
exchangeable notes which are mandatorily redeemable at AT&T Broadband Group's
option into (i) Vodafone ADRs held by MediaOne, (ii) the cash equivalent, or
(iii) a combination of cash and Vodafone ADRs (the "Vodafone Exchangeable
Notes"). The maturity value of the exchangeable notes varies based upon the fair
market value of the security it is indexed to.
Following is a summary of the Cablevision NY Exchangeable Notes outstanding
at December 31, 2001, which are indexed to 26.9 million shares of Cablevision NY
common stock:
Maturity Date............................................... 2004
Face value.................................................. $ 970
Interest rate............................................... 6.50%
Put price per share......................................... $36.05
Call price per share........................................ $43.98
Carrying value.............................................. $1,030
At maturity, the Cablevision NY Exchangeable Notes will be redeemed, at
AT&T Broadband Group's option, with (i) a number of shares of Cablevision NY
common stock equal to the underlying shares multiplied by the exchange ratio, or
(ii) its equivalent cash value. The exchange ratio will be calculated at
maturity in the following manner:
(a) If the fair market value of a share of Cablevision NY common stock
is greater than the call price, the exchange ratio will be 0.8197;
(b) If the fair market value of a share of Cablevision NY common stock
is less than or equal to the put price, the exchange ratio will be 1;
(c) If the fair market value of a share of Cablevision NY common stock
is less than or equal to the call price but greater than the put price, the
exchange ratio will be a fraction, the numerator of which is equal to the
put price, and the denominator of which is equal to the fair market value
of a share of Cablevision NY common stock.
Following is a summary of the Rainbow Exchangeable Notes outstanding at
December 31, 2001, which are indexed to 9.8 million shares of Rainbow Media
Group tracking stock:
Maturity Date............................................... 2005
Face value.................................................. $ 220
Interest rate............................................... 6.25%
Put price per share......................................... $22.50
Call price per share........................................ $27.45
Carrying value.............................................. $ 196
At maturity, the Rainbow Exchangeable Notes will be redeemed, at AT&T's
option, with (i) a number of shares of Rainbow Media Group tracking stock equal
to the underlying shares multiplied by the exchange ratio, or (ii) its
equivalent cash value. The exchange ratio will be calculated at maturity in the
following manner:
(a) If the fair market value of a share of Rainbow Media Group
tracking stock is greater than the call price, the exchange ratio will be
0.8197;
XII-102
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(b) If the fair market value of a share of Rainbow Media Group
tracking stock is less than or equal to the put price, the exchange ratio
will be 1;
(c) If the fair market value of a share of Rainbow Media Group
tracking stock is less than or equal to the call price but greater than the
put price, the exchange ratio will be a fraction, the numerator of which is
equal to the put price, and the denominator of which is equal to the fair
market value of one share of Rainbow Media Group tracking stock.
Following is a summary of the Comcast Exchangeable Notes outstanding at
December 31, 2001 by year of maturity which are indexed to 25 million shares of
Comcast common stock:
MATURITY DATE 2003 2004 2005
------------- ------ ------ ------
Face value................................................. $ 371 $ 314 $ 329
Interest rate.............................................. 6.75% 5.50% 4.63%
Put price per share........................................ $41.50 $41.06 $39.13
Call price per share....................................... $49.80 $49.27 $46.96
Carrying value at:
December 31, 2001........................................ $ 320 $ 277 $ 286
December 31, 2000........................................ $ 371 $ 314 $ 329
At maturity, the Comcast Exchangeable Notes will be redeemed, at AT&T's
option, into (i) a number of shares of Comcast common stock equal to the
underlying shares multiplied by the exchange ratio, or (ii) its equivalent cash
value. The exchange ratio will be calculated at maturity in the following
manner:
(a) If the fair market value of a share of Comcast common stock is
greater than the call price, the exchange ratio will be 0.8333;
(b) If the fair market value of a share of Comcast common stock is
less than or equal to the put price, the exchange ratio will be 1;
(c) If the fair market value of a share of Comcast common stock is
less than or equal to the call price but greater than the put price, the
exchange ratio will be a fraction, the numerator of which is equal to the
put price, and the denominator of which is equal to the fair market value
of one share of Comcast common stock.
Following is a summary of the Comcast Exchangeable Notes outstanding at
December 31, 2001, which are indexed to 22.3 million shares of Comcast common
stock:
MATURITY DATE 2003 2004 2005
------------- ------ ------ ------
Face value................................................. $ 267 $ 267 $ 267
Interest rate.............................................. 6.76% 6.80% 6.84%
Put price per share........................................ $35.89 $35.89 $35.89
Call price per share....................................... $50.64 $58.39 $67.97
Carrying value at:
December 31, 2001........................................ $ 244 $ 244 $ 245
December 31, 2000........................................ $ 267 $ 267 $ 267
At maturity, such Comcast Exchangeable Notes will be redeemed, at AT&T's
option, with (i) a number of shares of Comcast common stock equal to the
underlying shares multiplied by the exchange
XII-103
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
ratio, or (ii) its equivalent cash value. The exchange ratio will be calculated
at maturity in the following manner:
(a) If the fair market value of a share of Comcast common stock is
greater than or equal to the call price, the exchange ratio will be a
fraction the numerator of which is equal to the sum of (i) the put price,
plus (ii) the excess of the fair market value of one share of Comcast
common stock over the call price, and the denominator of which is equal to
the fair market value of one share of Comcast common stock;
(b) If the fair market value of a share of Comcast common stock is
less than or equal to the put price, the exchange ratio will be 1;
(c) If the fair market value of a share of Comcast common stock is
less than the call price but greater than the put price, the exchange ratio
will be a fraction of which the numerator is equal to the put price, and
the denominator of which is equal to the fair market value of one share of
Comcast common stock.
Following is a summary of the Microsoft Exchangeable Notes outstanding at
December 31, 2001, which are indexed to 10 million shares of Microsoft common
stock:
MATURITY DATE 2003 2004 2005
------------- ------ ------- -------
Face value............................................... $ 227 $ 226 $ 226
Interest rate............................................ 6.96% 7.00% 7.04%
Put price per share...................................... $67.87 $ 67.87 $ 67.87
Call price per share..................................... $97.39 $111.64 $128.60
Carrying value at:
December 31, 2001...................................... $ 201 $ 198 $ 196
December 31, 2000...................................... $ 145 $ 144 $ 144
At maturity, the Microsoft Exchangeable Notes will be redeemed, at AT&T's
option, with (i) a number of shares of Microsoft common stock equal to the
underlying shares multiplied by the exchange ratio, or (ii) its equivalent cash
value. The exchange ratio will be calculated at maturity in the following
manner:
(a) If the fair market value of a share of Microsoft common stock is
greater than the call price, the exchange ratio will be a fraction the
numerator of which is equal to the sum of (i) the put price, plus (ii) the
excess of the fair market value of one share of Microsoft common stock over
the call price, and the denominator of which is equal to the fair market
value of one share of Microsoft common stock;
(b) If the fair market value of a share of Microsoft common stock is
less than or equal to the put price, the exchange ratio will be 1;
(c) If the fair market value of a share of Microsoft common stock is
less than or equal to the call price but greater than the put price, the
exchange ratio will be a fraction of which the numerator is equal to the
put price, and the denominator of which is equal to the fair market value
of one Microsoft common stock.
In the third quarter of 2001, exchangeable notes that were indexed to a
portion of holdings of Vodafone ADR securities matured. The carrying value of
the notes was $2,337 at December 31, 2000. Prior to the settlement, the carrying
value of the notes was $1,634. These notes were settled with approximately 70
million shares of Vodafone ADR's and $252 in cash. Approximately 57 million
shares of
XII-104
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the Vodafone ADR's used in the settlement were accounted for as "trading"
securities and the remaining shares were accounted for as "available-for-sale"
securities under SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities ("SFAS 115")." The settlement resulted in a pretax loss of
approximately $392 which was reclassified from other comprehensive income to
investment (expense) income in the statement of operations.
Following is a summary of the Vodafone Exchangeable Notes outstanding at
December 31, 2001, which are indexed to Vodafone ADRs:
MATURITY DATE 2002
------------- ------
Face value.................................................. $1,129
Interest rate............................................... 7.0%
Put price................................................... $43.44
Call price.................................................. $51.26
Carrying value at:
December 31, 2001......................................... $ 715
December 31, 2000......................................... $1,012
The redemption formula for Vodafone Exchangeable Notes that mature in 2002,
which are indexed to 26 million shares of Vodafone ADRs, is as follows:
(a) If the fair market value of a Vodafone ADR is greater than or
equal to the call price, each Vodafone exchangeable Note is equivalent to
0.8475 of a Vodafone ADR;
(b) If the fair market value of a Vodafone ADR is less than or equal
to the put price, each Vodafone Exchangeable Note is equivalent to one
Vodafone ADR; or
(c) If the fair market value of a Vodafone ADR is less than the call
price but greater than the put price, each Vodafone Exchangeable Note is
equivalent to a fraction of a Vodafone ADR equal to (i) the put price
divided by (ii) the fair market value of one Vodafone ADR.
AT&T Broadband Group's exchangeable notes that are indexed to Cablevision
NY, Comcast and Microsoft common stock and Rainbow Media Group are secured by
AT&T Broadband Group's investments in Cablevision NY, Comcast, Microsoft and
Rainbow Media Group. AT&T Broadband Group's exchangeable notes which are indexed
to Vodafone ADRs are unsecured obligations, ranking equally in right of payment
with all other unsecured and unsubordinated obligations of AT&T Broadband Group.
These exchangeable notes are being accounted for as indexed debt
instruments since the maturity value of the debt is dependent upon the fair
market value of the underlying securities. These exchangeable notes contain
embedded derivatives that require separate accounting as the maturity value of
the debt is dependent upon the fair market value of the underlying Cablevision
NY, Rainbow Media Group, Comcast, Microsoft and Vodafone ADR securities, as
applicable. The economic characteristics of the embedded derivatives (i.e.,
equity like features) are not clearly and closely related to that of the host
instruments (a debt security). As a result, the embedded derivatives are
separated from the host debt instrument for valuation purposes and are carried
at fair value within the host debt instrument. The embedded derivatives for
Cablevision NY and Rainbow Media Group exchangeable notes are designated as cash
flow hedges. These designated options are carried at fair value with changes in
fair value recorded, net of income taxes, within other comprehensive income as a
component of combined attributed net assets. There was no ineffectiveness
recognized on the cash flow hedges. The Comcast, Microsoft, Vodafone and certain
of the
XII-105
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Cablevision NY and Rainbow Media Group options are undesignated and are carried
at fair value with changes in fair value recorded in other (expense) income in
the combined statement of operations.
The options hedge the market risk of a decline in value of Cablevision NY,
Rainbow Media Group, Comcast, Microsoft and Vodafone securities. The market risk
of a decline in these securities, below the respective put prices has been
eliminated. In addition, any market gains AT&T Broadband Group may earn have
been limited to the call prices, with the exception of certain debt indexed to
Comcast stock, the Cablevision NY stock, Rainbow Media Group and Vodafone ADRs,
which provide for participation in a portion of the market gains above the call
price.
Since all the Cablevision NY and Rainbow Media Group securities and a
portion of the Comcast, Microsoft and Vodafone securities are cost method
investments being accounted for as "available-for-sale" securities under SFAS
115, changes in the maturity value of the options and the underlying securities
are being recorded as unrealized gains or losses, net of income taxes, within
other comprehensive income as a component of combined attributed net assets. The
remaining portion of the Comcast, Microsoft and Vodafone securities are cost
method investments being accounted for as "trading" securities and changes in
the fair value of the options and the underlying securities are being recorded
as net revaluation of securities within other (expense) income.
OTHER EXCHANGEABLE NOTES
During 2000, AT&T Broadband Group, through MediaOne, also entered into a
series of purchased and written options to monetize its holdings of 21.9 million
shares of Microsoft common stock and issued floating rate debt, which is
attributed to AT&T Broadband Group. The carrying value of the debt outstanding
at both December 31, 2001 and 2000 was $1,369, which pays interest at the three
month London Inter-Bank Offered Rate ("LIBOR") plus 0.4%. The debt matures
annually with $458 maturing in 2003 and 2004, and $453 maturing in 2005, and is
repayable at AT&T's option in either Microsoft common stock or cash. (See note
10 for discussion of the purchased and written options.)
In addition, during 1999 two subsidiaries of MediaOne, MediaOne SPC IV and
MediaOne SPC VI, entered into a series of purchased and written options on
Vodafone ADRs contributed to them by MediaOne and issued floating rate debt. The
carrying value of the debt outstanding at both December 31, 2001 and 2000 was
$1,739, which pays interest at a three-month LIBOR plus 0.5%. This debt has been
attributed to AT&T Broadband Group and matures in equal quarterly installments
beginning in 2003 and ending in 2005. The assets of MediaOne SPC IV, which are
primarily 29.1 million Vodafone ADRs, are only available to pay the creditors of
MediaOne SPC IV. Likewise, the assets of MediaOne SPC VI, which are primarily
18.0 million Vodafone ADRs, are only available to pay the creditors of MediaOne
SPC VI. MediaOne SPC IV and VI will generate cash to settle these notes by
selling their Vodafone ADRs to the market (or to AT&T, at AT&T's option) and
cash settle the option. (See note 10 for discussions of the purchased and
written options.)
XII-106
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
SUBSIDIARY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUSTS HOLDING SOLELY SUBORDINATED DEBT SECURITIES
Certain subsidiary trusts (the "Trusts") of AT&T Broadband Group, through
ATTBLLC and MediaOne, had preferred securities ("Trust Preferred Securities")
outstanding at December 31, 2001 and 2000 as follows:
CARRYING AMOUNT
INTEREST MATURITY ---------------
SUBSIDIARY TRUST RATE DATE 2001 2000
---------------- -------- -------- ------ ------
TCI Communications Financing I.................... 8.72% 2045 $ 527 $ 528
TCI Communications Financing II................... 10.00% 2045 513 514
TCI Communications Financing III.................. 9.65% 2027 380 357
TCI Communications Financing IV................... 9.72% 2036 204 204
MediaOne Financing A.............................. 7.96% 2025 30 30
MediaOne Financing B.............................. 8.25% 2036 28 28
MediaOne Finance II............................... 9.50% 2036 214 214
MediaOne Finance III.............................. 9.04% 2038 504 504
------ ------
$2,400 $2,379
====== ======
The Trusts were created for the exclusive purpose of issuing the Trust
Preferred Securities and investing the proceeds thereof into Subordinated
Deferrable Interest Notes (the "Subordinated Debt Securities") of TCI and
MediaOne. The Subordinated Debt Securities have interest rates equal to the
interest rate of the corresponding Trust Preferred Securities. The TCI
Communications Financing I and II Trust Preferred Securities were redeemable at
face value beginning January and May 2001, respectively. The TCI Communications
Financing III Trust Preferred Securities are callable at 104.825% of face value
beginning in March 2007. TCI Communications Financing IV Trust Preferred
Securities were callable at face value beginning in March 2002. Upon redemption
of the Subordinated Debt Securities, the Trust Preferred Securities will be
mandatorily redeemable. All of the MediaOne Subordinated Debt Securities are
redeemable at a redemption price of $25.00 per security, plus accrued and unpaid
interest. Upon redemption of the MediaOne Subordinated Debt Securities, the
MediaOne Trust Preferred Securities are mandatorily redeemable at a price of
$25.00 per share, plus accrued and unpaid distributions. The 7.96% MediaOne
Subordinated Debt Securities became redeemable after September 11, 2000. The
9.50% and 8.25% MediaOne Subordinated Debt Securities became redeemable after
October 29, 2001. The 9.04% MediaOne Subordinated Debt Securities are redeemable
after October 28, 2003. The Trust Preferred Securities are recorded within
short-term and long-term debt in the accompanying combined balance sheet. AT&T
Broadband, LLC effectively provides a full and unconditional guarantee of all
the TCI Trusts' obligations under the Trust Preferred Securities. In 2000, AT&T
provided a full and unconditional guarantee on the outstanding securities issued
by TCI Communications Financing I, II and IV. MediaOne has effectively provided
a full and unconditional guarantee of the MediaOne trust obligations under the
Trust Preferred Securities. In 2000, AT&T provided a full and unconditional
guarantee of the MediaOne Trust Preferred Securities. Dividends accrued and paid
on the Trust Preferred Securities aggregated $208, $182 and $114 for the years
ended December 31, 2001 and 2000 and the ten months ended December 31, 1999,
respectively, and are included in interest expense in the accompanying combined
statement of operations. AT&T has the right to defer interest payments up to 20
consecutive quarters; as a consequence, dividend payments on the Trust Preferred
Securities can be deferred by the trusts during any such interest-payment
period.
XII-107
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
On February 26, 2002, AT&T announced that it was notifying holders that it
will call TCI Communications Financing IV Trust Preferred Securities for early
redemption on April 1, 2002. On February 28, 2002, AT&T called for early
redemption the TCI Communications Financing I and II Trust Preferred Securities.
On March 4, 2002, AT&T called for early redemption the MediaOne Financing A,
Financing B and Financing II Trust Preferred Securities. At December 31, 2001,
the TCI Communications Financing I, II and IV and MediaOne A, B and II Trust
Preferred Securities were reclassed from long-term debt to short-term debt.
(8) MINORITY INTEREST
PREFERRED STOCK OF SUBSIDIARIES
Prior to the TCI Merger, TCI Pacific Communications Inc. ("Pacific"), an
attributed entity of AT&T Broadband Group, issued 5% Class A Senior Cumulative
Exchangeable preferred stock. Each share is exchangeable, from and after August
1, 2001, for 8.365 shares of AT&T common stock (as adjusted for the July 2001
split-off of AT&T Wireless Services, Inc. from AT&T), subject to certain
antidilution adjustments. Additionally, Pacific may elect to make any dividend,
redemption or liquidation payment in cash, shares of AT&T common stock or a
combination of the foregoing. Dividends on the Pacific preferred stock were $31
for both the years ended December 31, 2001 and 2000 and $26 for the ten months
ended December 31, 1999 and are reflected in minority interest income (expense)
in the accompanying combined statements of operations. The Pacific preferred
stock is reflected within minority interest in the accompanying combined balance
sheets and aggregated $2.1 billion at December 31, 2001 and 2000.
As of December 31, 2001, 59,187 shares of the Pacific preferred stock had
been exchanged for 494,808 shares of AT&T common stock. At December 31, 2001 and
2000 there were 6.2 million and 6.3 million shares outstanding, respectively,
out of 6.3 million shares authorized. Pacific has elected to exercise its right
to redeem all outstanding shares of the Pacific preferred stock that have not
been exchanged as of April 26, 2002, at a price of $102.50 per share plus
accrued dividends of $0.96 per share. The redemption price will be paid in AT&T
common stock, up to a maximum of the 52.3 million shares which were registered
with the Securities and Exchange Commission in February of 2002, with any
shortfall paid in cash.
CENTAUR FUNDING CORPORATION
Prior to the MediaOne Merger, Centaur Funding Corporation ("Centaur"), a
subsidiary of MediaOne, issued three series of preferred shares, the Auction
Market Preference Shares, Series A ("Series A Shares"), the 9.08% Cumulative
Preference Shares, Series B (the "Series B Shares"), and the Preference Shares,
Series C (the "Series C Shares"). Centaur was created for the principal purpose
of raising capital through the issuance of preferred shares and investing those
proceeds into notes issued by MediaOne SPC II, a subsidiary of MediaOne.
Principal and interest payments from the notes are expected to be Centaur's
principal source of funds to make dividend and redemption payments on the
preferred shares. In addition, the dividend and redemption payments on the
preferred shares will be determined by reference to the dividend and redemption
activity of the preferred stock of AirTouch Communications, Inc. ("ATI shares")
held by MediaOne SPC II. AirTouch Communications, Inc. is a subsidiary of
Vodafone. Payments on the preferred shares are neither guaranteed nor secured by
MediaOne or AT&T. The assets of MediaOne SPC II, which include the ATI shares,
are only available to pay creditors of MediaOne SPC II. Centaur and MediaOne SPC
II are attributed entities of AT&T Broadband Group.
XII-108
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 2001 and 2000, the following Centaur preferred securities,
which have been attributed to AT&T Broadband Group, were outstanding:
CARRYING AMOUNT
SHARES ---------------
DIVIDEND RATE MATURITY DATE OUTSTANDING 2001 2000
------------- ------------- ----------- ------ ------
Series A Shares................ Variable None 400 $ 100 $ 100
Series B Shares................ 9.08% April 2020 934,500 927 927
Series C Shares................ None April 2020 715,500 127 118
------ ------
$1,154 $1,145
====== ======
The Series A Shares have a liquidation value of $250 thousand per share and
dividends are payable quarterly when declared by Centaur's Board of Directors
out of funds legally available. The Series B Shares have a liquidation value of
$1 thousand per share and dividends are payable quarterly in arrears when
declared by Centaur's Board of Directors out of funds legally available. In
addition, dividends may be declared and paid only to the extent dividends have
been declared and paid on the ATI shares. The Series C Shares have a liquidation
value of $1 thousand per share at maturity. The value of the Series C Shares
will be accreted to its liquidation value upon maturity. The Series B Shares
rank equally with the Series C Shares as to the redemption payments and upon
liquidation. The Series B and Series C Shares rank senior to the Series A Shares
and the common stock shares of Centaur as to the redemption payments and upon
liquidation. The Series B Shares rank senior to the Series A Shares and the
common shares with respect to dividend payments. The preferred shares issued by
Centaur are recorded within minority interest in the accompanying combined
balance sheets at December 31, 2001 and 2000.
Dividends on the preferred shares were $99 and $55 for the years ended
December 31, 2001 and 2000 and were included within minority interest income
(expense) in the accompanying combined statements of operations.
(9) COMPANY-OBLIGATED CONVERTIBLE QUARTERLY INCOME PREFERRED SECURITIES
On June 16, 1999, AT&T Finance Trust I (the "AT&T Trust"), a wholly owned
subsidiary of AT&T completed the private sale of 100 million shares of 5.0%
cumulative quarterly income preferred securities ("Quarterly Preferred
Securities") to Microsoft. Proceeds from the issuance were invested by the AT&T
Trust in junior subordinated debentures ("Debentures") issued by AT&T due 2029,
which represent the sole asset of the AT&T Trust. The Quarterly Preferred
Securities have been attributed to AT&T Broadband Group.
The Quarterly Preferred Securities pay dividends at an annual rate of 5.0%
of the liquidation preference of $50 per security, and are convertible at any
time prior to maturity into 88.016 million shares of AT&T common stock (as
adjusted for the July 2001 split-off of AT&T Wireless, Services, Inc. from
AT&T). The Quarterly Preferred Securities are subject to mandatory redemption
upon repayment of the Debentures at maturity or their earlier redemption. The
conversion feature can be terminated, under certain conditions, after three
years.
The Debentures make a quarterly payment in arrears of 62.5 cents per
security on the last day of March, June, September and December of each year.
AT&T has the right to defer such interest payments up to 20 consecutive
quarters. As a consequence, quarterly dividend payments on the Quarterly
Preferred Securities can be deferred by the AT&T Trust during any such
interest-payment period. If AT&T defers any interest payments, AT&T may not,
among other things, pay any dividends on AT&T common stock until all interest in
arrears is paid to the AT&T Trust.
XII-109
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Dividends on the Quarterly Preferred Securities were $250, $250 and $135
for the years ended December 31, 2001 and 2000 and the ten months ended December
31, 1999, respectively, and are reported within minority interest income
(expense) in the accompanying combined statements of operations.
On June 16, 1999, AT&T also issued to Microsoft 53 million warrants, each
to purchase one share of AT&T common stock at a price of $57 per share at the
end of three years (as adjusted for the July 2001 split-off of AT&T Wireless
Services, Inc. from AT&T). Alternatively, the warrants are exercisable on a
cashless basis. If the warrants are not exercised on the three-year anniversary
of the closing date, the warrants expire.
A discount on the Quarterly Preferred Securities equal to the value of the
warrants of $306 was recognized at the issuance date and is being amortized over
the 30-year life of the Quarterly Preferred Securities as a component of
minority interest income (expense) in the accompanying combined statements of
operations.
In connection with the AT&T Comcast Merger (see note 1), AT&T Comcast will
assume the Quarterly Preferred Securities. In conjunction with the AT&T Comcast
Merger, Microsoft has agreed to convert the Quarterly Preferred Securities into
115 million shares of AT&T Comcast common stock.
(10) FINANCIAL INSTRUMENTS
ADOPTION OF SFAS 133
Effective January 1, 2001, AT&T Broadband Group adopted SFAS 133 and its
corresponding amendments under SFAS No. 138. SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. All
derivatives, whether designated in hedging relationships or not, are required to
be recorded on the balance sheet at fair value. The adoption of SFAS 133 on
January 1, 2001, resulted in a pretax cumulative effect decrease to net loss of
$371 ($229 net-of-tax).
AT&T Broadband Group's cumulative effect decrease to net loss of $229 was
attributable primarily to equity based derivative instruments related to indexed
debt instruments and warrants held in both public and private companies.
Included in the after tax cumulative effect benefit of $229 was a $185 benefit
for the changes in valuations of both embedded and non-embedded net purchased
options related to indexed debt instruments and $44 benefit for recording the
fair value of warrants.
Upon adoption, as permitted by SFAS 133, AT&T Broadband Group reclassified
$9.3 billion of securities from "available-for-sale" to "trading". This
reclassification resulted in the recognition, in the statement of operations, of
losses previously recorded within accumulated other comprehensive income. A
portion of the loss ($1,638 pretax; $1,005 net-of-tax) was recorded as part of
the cumulative effect of adoption. This loss completely offset a gain for
amounts also previously recorded within accumulated other comprehensive income
on the indexed debt obligation that had been considered a hedge of Comcast,
Microsoft and Vodafone "available-for-sale" securities. The reclassification of
securities also resulted in a pretax charge of $1,154 ($708 net-of-tax) recorded
in other (expense) income.
FINANCIAL INSTRUMENTS
In the normal course of business, AT&T Broadband Group uses various
financial instruments, including derivative financial instruments, for purposes
other than trading. AT&T Broadband Group does not use derivative financial
instruments for speculative purposes. Financial instruments used by AT&T
Broadband Group include guarantees of debt, letters of credit, option contracts,
equity hedges, warrants and interest rate swap agreements. Collateral is
generally not required for these types of instruments.
XII-110
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
By their nature, all such instruments involve risk, including the credit
risk of nonperformance by counterparties. The maximum potential loss associated
with such risk may exceed the amount recognized in the balance sheet. However,
at December 31, 2001 and 2000, in management's opinion there was no significant
risk of loss in the event of nonperformance of the counterparties to these
financial instruments. AT&T Broadband Group controls its exposure to credit risk
through credit approvals, credit limits and monitoring procedures. AT&T
Broadband Group does not have any significant exposure to any individual
customer or counterparty, or any major concentration of credit risk related to
any financial instruments.
GUARANTEES OF DEBT
From time to time, ATTBLLC and MediaOne may guarantee the debt of their
subsidiaries and certain unconsolidated joint ventures. ATTBLLC has taken
certain steps to support debt compliance with respect to obligations aggregating
$1,461 at December 31, 2001 and 2000 of certain cable television partnerships in
which ATTBLLC has a non-controlling ownership interest and which have been
attributed to AT&T Broadband Group. Although there can be no assurance,
management believes that it will not be required to meet its obligations under
such guarantees. Total notional amounts of guarantees for ATTBLLC and MediaOne
were $1,463 and $1,486 at December 31, 2001 and 2000, respectively. At December
31, 2001 and 2000, there were no quoted market prices for similar agreements.
LETTERS OF CREDIT
Letters of credit are purchased guarantees that ensure performance or
payment to third parties in accordance with specified terms and conditions.
Management has determined that letters of credit do not create additional risk
to AT&T Broadband Group. Outstanding letters of credit at December 31, 2001 and
2000 were $288 and $263, respectively. The fair values of letters of credit,
based on fees paid to obtain the obligations, were immaterial at December 31,
2001 and 2000.
INTEREST RATE SWAP AGREEMENTS
Interest rate swaps which are usually designated as either cash flow or
fair value hedges, are entered into to manage exposure to changes in interest
rates. AT&T enters into swap agreements to manage the fixed/floating mix of the
debt portfolio in order to reduce aggregate risk to interest rate movements.
Interest rate swaps also allow funds to be raised at floating rates and
effectively swap them into fixed rates that are generally lower than those
available if fixed-rate borrowings were made directly. These agreements involve
the exchange of fixed-rate for floating-rate payments without the exchange of
the underlying principal amount. These floating-rate payments are based on rates
tied to the LIBOR.
The following table indicates the type of swaps in use at December 31, 2001
and 2000, the notional amounts, and their weighted average interest rates. Their
average variable rates are those in effect at the reporting date and may change
significantly over the lives of the contracts.
2001 2000
---- ----
Fixed rate to variable rate swaps
Notional amount........................................... $500 $500
Average receive rate...................................... 9.68% 9.68%
Average pay rate.......................................... 4.02% 8.92%
At December 31, 2001 the fair value and carrying value of the swaps was a
liability of $25. Such swaps were valued using current market quotes that were
obtained from dealers.
XII-111
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
EQUITY COLLARS
In 2000, AT&T Broadband Group entered into three series of option
agreements (the "Microsoft Collars") with a single bank counterparty to hedge
exposure to 21.9 million shares of Microsoft common stock. The Microsoft
Collars, combined with the underlying shares, secure a floating-rate borrowing
from the counterparty, the face value of which is equal to the product of (i)
the underlying shares multiplied by (ii) the put price. (See note 7 for
discussion of the debt.)
The Microsoft Collars are a series of purchased and written options that
hedge a portion of AT&T Broadband Group's holdings in Microsoft common stock.
The Microsoft Collars are undesignated for accounting purposes in accordance
with SFAS 133 and are carried in the balance sheet at fair value, with
unrealized gains or losses being recorded in other (expense) income. These
unrealized gains or losses are largely offset by the changes in the fair value
of a certain number of shares of Microsoft common stock that are classified as
"trading". The carrying value of the Microsoft Collars was $6 and $419 at
December 31, 2001 and 2000, respectively. The fluctuation of the carrying value
of the Microsoft Collars was primarily due to the change in the market prices of
the underlying shares, which were $66.25 per share and $43.375 per share at
December 31, 2001 and 2000, respectively, and the adoption of SFAS 133 which
required the instruments to be valued at fair value rather than intrinsic value.
The following is a summary of the Microsoft Collars outstanding at December
31, 2001:
MATURITY DATE 2003 2004 2005
------------- ------ ------- -------
Put price per share...................................... $62.48 $ 62.48 $ 62.48
Call price per share..................................... $86.26 $100.44 $118.36
Since the Microsoft Collars and related debt are contracted with the same
counterparty, the treatment is similar to a debt instrument with an embedded
instrument and will be net settled as follows:
At the expiration of the Microsoft Collars, AT&T Broadband Group will
satisfy the debt and the net obligations of the Microsoft Collars under the
floating-rate debt by delivering (i) a number of Microsoft shares equal to the
underlying share amount multiplied by the exchange ratio, or (ii) its equivalent
cash value. The exchange ratio will be calculated at expiration in the following
manner:
(a) If the fair market value of a share of Microsoft common stock is
greater than the call price, the exchange ratio will be a fraction, the
numerator of which is equal to the sum of (i) the put price, plus (ii) the
excess of the fair market value of a share of Microsoft common stock over
the call price, and the denominator of which is equal to the fair market
value of a share of Microsoft common stock;
(b) If the fair market value of a share of Microsoft common stock is
less than or equal to the put price, the exchange ratio will be 1;
(c) If the fair market value of a share of Microsoft common stock is
less than or equal to the call price but greater than the put price, the
exchange ratio will be a fraction, the numerator of which is equal to the
put price, and the denominator of which is equal to the fair market value
of a share of Microsoft common stock.
Prior to the MediaOne Merger, two subsidiaries of MediaOne, MediaOne SPC IV
and MediaOne SPC VI, each entered into a series of option agreements (the
"Vodafone Collars") with a single bank counterparty to hedge their exposure to
47.2 million Vodafone ADRs. In conjunction with the Vodafone Collars, MediaOne
SPC IV and MediaOne SPC VI also issued floating-rate debt in a series of private
placements, the face value of which is equal to the product of (i) the
underlying shares multiplied by (ii) the put price. Simultaneous with the
execution of the Vodafone Collars, MediaOne SPC IV and MediaOne SPC VI each
entered into floating-to-fixed interest rate swaps in which future fixed
payments
XII-112
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
were prepaid by each of MediaOne SPC IV and MediaOne SPC VI at inception.
Therefore, the on-going interest payments on the floating-rate notes are paid by
the counterparty with no recourse to AT&T Broadband Group. These prepaid
interest rate swaps are designated as cash flow hedges in accordance with SFAS
133.
The Vodafone Collars are a series of purchased and written options that
hedge a portion of AT&T Broadband Group's holdings in Vodafone ADRs. The
Vodafone Collars are undesignated for accounting purposes in accordance with
SFAS 133 and are carried in the balance sheet at fair value, with unrealized
gains or losses being recorded to other (expense) income. These unrealized gains
or losses are largely offset by the changes in the fair value of a certain
number of Vodafone ADRs that are classified as "trading" in accordance with SFAS
115. The carrying value of the Vodafone Collars was $462 and $(453) at December
31, 2001 and 2000 respectively. The fluctuation of the carrying value of the
Vodafone Collars is primarily due to the change in the per share market price of
the underlying ADRs, which was $25.68 per share and $35.81 per share at December
31, 2001 and 2000, respectively, and the adoption of SFAS 133, which required
the instruments to be valued at fair value rather than intrinsic value.
The following is a summary of the Vodafone Collars outstanding at December
31, 2001:
MATURITY DATE 2003 2004 2005
------------- ------ ------ ------
MEDIAONE SPC IV VODAFONE COLLARS
Average put price per share................................ $34.06 $33.78 $33.53
Average call price per share............................... $49.13 $48.85 $48.60
MEDIAONE SPC VI VODAFONE COLLARS
Average put price per share................................ $39.85 $39.86 $39.86
Average call price per share............................... $57.72 $57.72 $57.73
Since the Vodafone Collars and related debt are contracted with different
counterparties, the instruments will be settled independently. MediaOne SPC IV
and MediaOne SPC VI will satisfy its obligations to the floating-rate debt
holders by delivering cash equal to the face value of the debt (see note 7). At
the expiration of the Vodaphone Collars, MediaOne SPC IV and MediaOne SPC VI
will cash settle its Vodaphone Collars with the counterparty. Cash settlement of
the Vodafone Collars will be completed in the following manner:
(a) If the fair market value of a Vodafone ADR is greater than the
call price, MediaOne SPC IV or MediaOne SPC VI (as appropriate) will pay a
sum of cash equal to the excess of the fair market value of a Vodafone ADR
over the call price;
(b) If the fair market value of a Vodafone ADR is less than the put
price, the counterparty will pay to MediaOne SPC IV or MediaOne SPC VI (as
appropriate) a sum of cash equal to the excess of the put price over the
fair market price of a Vodafone ADR;
(c) If the fair market value of a Vodafone ADR is less than or equal
to the call price but greater than or equal to the put price, the Vodafone
Collars will expire worthless and no cash payment will be made or received
by MediaOne SPC IV or MediaOne SPC VI (as appropriate).
The net value of (i) the sale of all Vodafone ADRs and (ii) the cash
settlement of the Vodafone Collars will always be equal to or greater than the
face value of the floating-rate notes. Any remaining cash will be retained by
MediaOne SPC IV and MediaOne SPC VI and would become available to AT&T Broadband
Group for general corporate purposes.
XII-113
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
EQUITY HEDGES
Equity hedges are used to manage exposure to changes in equity prices
associated with stock appreciation rights of previously affiliated companies and
are undesignated in accordance with SFAS 133. The notional amount outstanding on
these contracts at December 31, 2001 and 2000 was $340 and $370, respectively.
These instruments are recorded at fair value based on market quotes and were
liabilities of $71 and $87 at December 31, 2001 and 2000, respectively.
WARRANTS
AT&T Broadband Group may obtain warrants to purchase equity securities in
other private and public companies as a result of certain transactions. Private
warrants and public warrants that provide for net share settlement (i.e. allow
for cashless exercise) are considered to be derivative instruments and
recognized in the balance sheet at fair value in accordance with SFAS 133.
Warrants are not eligible to be designated as hedging instruments because there
is no underlying exposure. Instead, warrants are effectively investments in
private and public companies. The fair value of warrants held by AT&T Broadband
Group was $15 at December 31, 2001.
DEBT AND PREFERRED SECURITIES
The carrying value of debt maturing within one year approximates market
value. The table below summarizes the carrying and fair values of long-term
debt, excluding capital leases, and certain preferred securities. The market
values of long-term debt were obtained based on quotes or rates available for
debt with similar terms and maturities, and the market value of the preferred
securities was based on market quotes. It is not practicable to estimate the
fair market value of the Centaur Series A Shares, Series B Shares, Series C
Shares and the Quarterly Preferred Securities that aggregated $5,874 and $5,855
at December 31, 2001 and 2000, respectively, as there are no current markets
quotes available on these private placements.
2001 2000
------------------ ------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ------- -------- -------
Debt, excluding capital leases................. $19,079 $17,237 $22,182 $20,275
Pacific preferred stock........................ $ 2,100 $ 948 $ 2,121 $ 595
DERIVATIVE IMPACTS
For the year ended December 31, 2001, accumulated other comprehensive
income, as a component of combined attributed net assets, net of taxes, included
net unrealized losses of $224 relating to derivatives that are designated as
cash flow hedges. This amount included net losses of $143 related to the ongoing
fair value adjustments of equity based derivative instruments embedded in
certain debt instruments and net losses of $81 related to certain swap
transactions.
For the year ended December 31, 2001, other (expense) income included net
gains of $1,178, relating to ongoing fair value adjustments of undesignated
derivatives. The fair value adjustments included net gains of $1,247 for
derivatives instruments related to certain debt instruments and net losses of
$69 for changes in the fair value of warrants. These gains were offset by net
losses of $983 from the ongoing mark-to-market adjustments of the "trading"
securities underlying the monetizations.
XII-114
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(11) PENSION, POSTRETIREMENT AND OTHER EMPLOYEE BENEFIT PLANS
As a result of the MediaOne Merger, AT&T sponsors a pension plan covering
substantially all former MediaOne employees, and beginning in 2001, AT&T
sponsors a pension plan covering substantially all AT&T Broadband Group
employees. Pension benefits are principally based on pay and service. In
addition, AT&T sponsors retiree benefit plans for certain former MediaOne
employees.
The following table shows the components of the net periodic benefit costs
included in the accompanying combined statements of operations of AT&T Broadband
Group:
PENSION POSTRETIREMENT
BENEFITS BENEFITS
----------- ---------------
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------------
2001 2000 2001 2000
---- ---- ------ ------
Service cost-benefits earned during the period............. $ 31 $9 $1 $1
Interest cost on benefit obligations....................... 13 8 2 1
Credit for expected return on plan assets.................. (13) (9) (1) --
Amortization of gains...................................... 1 -- -- --
Net curtailment gains...................................... (1) -- (1) --
---- -- -- --
Net periodic benefit cost.................................. $ 31 $8 $1 $2
==== == == ==
The following tables provide a reconciliation of the changes in the plans'
benefit obligations and fair value of assets, and a statement of the funded
status:
PENSION POSTRETIREMENT
BENEFITS BENEFITS
----------- ---------------
2001 2000 2001 2000
---- ---- ------ ------
CHANGE IN BENEFIT OBLIGATIONS:
Benefit obligation, beginning of year.................... $165 $ -- $ 35 $ --
Acquisition of MediaOne.................................. -- 204 -- 38
Service cost............................................. 31 9 1 1
Interest cost............................................ 13 8 2 1
Plan amendments.......................................... -- (5) -- --
Actuarial losses (gains)................................. -- 17 3 (5)
Benefit payments......................................... (46) (68) (1) --
Curtailments............................................. (6) 0 (1) --
---- ---- ---- ----
Benefit obligation, end of year.......................... $157 $165 $ 39 $ 35
==== ==== ==== ====
CHANGE IN FAIR VALUE OF PLAN ASSETS:
Fair value of plan assets, beginning of year............. $148 $ -- $ 5 $ --
Acquisition of MediaOne.................................. 0 205 -- 5
Actual return on plan assets............................. (12) (12) -- --
Employer contributions................................... 8 23 -- --
Benefit payments......................................... (46) (68) (1) --
---- ---- ---- ----
Fair value of plan assets, end of year................... $ 98 $148 $ 4 $ 5
==== ==== ==== ====
XII-115
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
PENSION POSTRETIREMENT
BENEFITS BENEFITS
----------- ---------------
AT DECEMBER 31,
-----------------------------
2001 2000 2001 2000
---- ---- ------ ------
Unfunded benefit obligation.............................. $(59) $(17) $(35) $(30)
Unrecognized net loss (gain)............................. 56 38 (1) (5)
Unrecognized prior service cost.......................... (4) (5) -- --
---- ---- ---- ----
Net amount recorded...................................... $ (7) $ 16 $(36) $(35)
==== ==== ==== ====
The following table provides the amounts recorded in AT&T Broadband Group's
combined balance sheet:
PENSION POSTRETIREMENT
BENEFITS BENEFITS
----------- ---------------
AT DECEMBER 31,
-----------------------------
2001 2000 2001 2000
---- ---- ------ ------
Prepaid pension cost..................................... $ 8 $ 36 $ -- $ --
Benefit related liabilities.............................. (53) (21) (36) (35)
Accumulated other comprehensive income................... 38 1 -- --
---- ---- ---- ----
Net amount recorded...................................... $ (7) $ 16 $(36) $(35)
==== ==== ==== ====
The nonqualified pension plan had an unfunded accumulated benefit
obligation of $19 at December 31, 2001.
The assumptions in the following table were used in the measurement of the
pension and postretirement benefit obligations and the net periodic benefit
costs as applicable.
2001 2000
---- ----
Weighted-average assumptions at December 31:
Discount rate............................................. 7.25% 7.50%
Expected return on plan assets............................ 9.50% 9.50%
Rate of compensation increase............................. 4.00% 4.00%
A 9.5% rate of increase in the per capita cost of covered health-care
benefits (the health-care cost trend rate) was assumed. This rate was assumed to
gradually decline after 2001 to 5% by the year 2011 and then remain level.
Assumed health-care cost trend rates have a significant effect on the amounts
reported for the health-care plans. A one percentage point increase or decrease
in the assumed health-care cost trend rate would increase or decrease the
health-care component of the accumulated postretirement benefit obligation by $4
and $4, respectively. A one percentage point increase or decrease in the assumed
health-care cost trend rate would not have a material impact on the service and
interest-cost components of net periodic postretirement health-care benefit
costs.
AT&T also sponsors savings plans for the majority of its employees. The
plans allow employees to contribute a portion of their pretax and/or after-tax
income in accordance with specified guidelines. Employee contributions are
matched up to certain limits. AT&T Broadband Group contributions amounted to
$54, $70 and $38 for the years ended December 31, 2001 and 2000 and the ten
months ended December 31, 1999.
XII-116
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(12) STOCK-BASED COMPENSATION PLANS
Under AT&T's 1997 Long-term Incentive Program (the "Program"), AT&T grants
stock options, performance shares, restricted stock and other awards on AT&T
common stock as well as stock options or AT&T Wireless Group tracking stock
prior to the split-off of AT&T Wireless Group. The exercise price of any stock
option is equal to the stock price when the option is granted. Generally, the
options vest over two to three years and are exercisable up to 10 years from the
date of grant.
Under the Program, performance share units are awarded to key employees in
the form of either common stock or cash at the end of a three-year period, based
on AT&T's total shareholder return and/or certain financial-performance targets.
On July 9, 2001, AT&T completed the split-off of AT&T Wireless Group as a
separate, independently-traded company. The AT&T Wireless common stock held by
AT&T was distributed to AT&T common shareowners on a basis of 0.3218 of a share
of AT&T Wireless for each AT&T share outstanding. All outstanding AT&T common
stock options granted prior to January 1, 2001 were treated in a similar manner.
AT&T modified the terms and conditions of all outstanding stock option grants to
allow the AT&T Wireless Group common stock options held by AT&T employees to
immediately vest and become exercisable for their remaining contractual term.
Under the AT&T 1996 Employee Stock Purchase Plan (the "Plan"), which was
effective July 1, 1996, and amended on May 23, 2001, AT&T is authorized to sell
up to 105 million shares of AT&T common stock to its eligible employees through
June 30, 2006. Under the terms of the Plan, employees may have up to 10% of
their earnings withheld to purchase AT&T's common stock. The purchase price of
the stock on the date of exercise is 85% of the average high and low sale prices
of shares on the New York Stock Exchange for that day. Under the Plan, AT&T sold
approximately 705 thousand, 506 thousand and 102 thousand shares to AT&T
Broadband Group employees in 2001, 2000 and 1999, respectively.
AT&T Broadband Group applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its plans. Accordingly, no compensation expense has been
recognized for stock-based compensation plans other than for performance-based
and restricted stock awards and stock appreciation rights ("SARs"). Stock
based-compensation (expense) income for AT&T Broadband Group was $(4), $268 and
$(366) for the years ended December 31, 2001 and 2000 and the ten months ended
December 31, 1999, respectively. These amounts included (expense) income of
$(3), $269 and $(382) for the years ended December 31, 2001 and 2000 and the ten
months ended December 31, 1999, respectively, related to grants of SARs of
affiliated companies held by certain employees subsequent to the TCI Merger.
AT&T entered into an equity hedge in 1999 to offset potential future
compensation costs associated with such SARs. (Expense) income related to this
hedge was $(16), $(324) and $227 for the years ended December 31, 2001 and 2000
and the ten months ended December 31, 1999, respectively.
At December 31, 2001, there were 4.5 million AT&T stock options with 2.2
million tandem SARs outstanding that were originally assumed in connection with
the MediaOne Merger. All of the SARs were exercisable at a price of $19.33.
There were no SARs exercised during 2001 or 2000.
AT&T Broadband Group has adopted the disclosure-only provisions of SFAS
123. If AT&T Broadband Group had elected to recognize compensation costs based
on the fair value at the date of grant for AT&T awards granted to AT&T Broadband
Group employees, consistent with the provisions of
XII-117
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
SFAS 123, AT&T Broadband Group's net loss would have been adjusted to reflect
additional compensation expense resulting in the following pro forma amounts:
YEAR ENDED TEN MONTHS
DECEMBER 31, ENDED
--------------- DECEMBER 31,
2001 2000 1999
------ ------ ------------
Net loss............................................... $4,011 $5,390 $2,203
The pro forma effect on net loss for 2001 includes $10 due to the
conversion of AT&T common stock options in connection with the split-off of AT&T
Wireless Group, and also includes $12 due to the accelerated vesting of AT&T
Wireless Group stock options held by AT&T Broadband Group employees after the
split-off.
AT&T granted approximately 13.8 million, 13.4 million and 1.0 million stock
options to AT&T Broadband Group employees during 2001, 2000 and 1999,
respectively. At the date of grant, the weighted average exercise prices for
AT&T stock options granted to AT&T Broadband Group employees during 2001, 2000
and 1999 were $22.46, $34.17 and $56.56, respectively. The weighted-average fair
values at date of grant for AT&T stock options granted to AT&T Broadband Group
employees during 2001, 2000 and 1999 were $7.13, $10.28 and $17.45,
respectively, and were estimated using the Black-Scholes option-pricing model.
The weighted-average risk-free interest rates applied for 2001, 2000 and 1999
were 4.71%, 6.24% and 5.26%, respectively. The following weighted-average
assumptions were applied for 2001, 2000 and 1999, respectively: (i) expected
dividend yields of 0.85%, 1.7% and 1.7% (ii) expected volatility rates of 36.5%,
33.9% and 28.6%, and (iii) expected lives of 3.8, 3.7 years and 5.7 years.
In January 2002, AT&T modified its outstanding stock option agreements for
AT&T stock options and other equity awards held by current AT&T Broadband
employees to provide that upon the change in control of AT&T Broadband their
stock options and other equity awards granted prior to January 1, 2002 will be
immediately vested and exercisable through their remaining contractual terms.
The potential compensation cost associated with this modification for current
AT&T Broadband employees has been measured as of the modification date is
approximately $50 pre-tax. The actual charge will be finalized and recorded by
AT&T Broadband at the time of the change in control in connection with the
anticipated merger with Comcast.
(13) INCOME TAXES
AT&T Broadband Group is not a separate taxable entity for federal and state
income tax purposes and its results of operations are included in the
consolidated federal and state income tax returns of AT&T and its affiliates, as
described in note 1.
XII-118
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the provision (benefit) for income taxes are as follows:
YEAR ENDED
DECEMBER 31, TEN MONTHS ENDED
----------------- DECEMBER 31,
2001 2000 1999
------- ------- -----------------
Federal:
Current........................................ $ (245) $ (786) $(469)
Deferred ...................................... (3,104) (215) 64
------- ------- -----
(3,349) (1,001) (405)
------- ------- -----
State and local:
Current........................................ (34) (136) 22
Deferred ...................................... (477) (47) (82)
------- ------- -----
(511) (183) (60)
------- ------- -----
Foreign:
Current........................................ 3 1 --
------- ------- -----
Benefit for income taxes......................... $(3,857) $(1,183) $(465)
======= ======= =====
AT&T Broadband Group also recorded current and deferred income tax benefits
related to minority interest and net equity losses on other equity investments
in the amounts of $100 and $37 for the years ended December 31, 2001, $100 and
$370 for the years ended December 31, 2000 and $54 and $438 for the ten months
ended December 31, 1999, respectively.
The following table shows the principal reasons for the difference between
the effective income tax rate and the United States federal statutory income tax
rate:
YEAR ENDED
DECEMBER 31, TEN MONTHS ENDED
---------------- DECEMBER 31,
2001 2000 1999
------ ------- ----------------
U.S. federal statutory income tax rate............ 35% 35% 35%
Federal income tax benefit at statutory rate...... $3,077 $ 3,507 $ 642
Operating losses and charges relating to
Excite@Home..................................... (649) (2,758) --
Investment dispositions, acquisitions and legal
entity restructuring............................ 238 374 --
Deconsolidation of and put obligation settlement
related to Excite@Home.......................... 1,045 -- --
In-process research and development write-off..... -- -- (208)
State and local income taxes, net of federal
income tax benefit.............................. 333 119 39
Amortization of intangibles....................... (177) (81) (12)
Foreign rate differential......................... (3) -- --
Taxes on repatriated and accumulated foreign
income, net of tax credits...................... 3 -- --
Other............................................. (10) 22 4
------ ------- -----
Benefit for income taxes.......................... $3,857 $ 1,183 465
====== ======= =====
Effective tax rate................................ 43.9% 11.8% 25.3%
====== ======= =====
XII-119
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax liabilities are taxes AT&T Broadband Group expects to
pay in future periods. Similarly, deferred income tax assets are recorded for
expected reductions in taxes payable in future periods. Deferred income taxes
arise because of differences in the book and tax bases of certain assets and
liabilities. Deferred income tax liabilities and assets consist of the
following:
DECEMBER 31,
-----------------
2001 2000
------- -------
LONG-TERM DEFERRED INCOME TAX LIABILITIES:
Property, plant and equipment............................... $ 1,335 $ 1,319
Investments................................................. 8,130 9,148
Franchises.................................................. 16,939 18,571
Other....................................................... 1,519 2,087
------- -------
Total long-term deferred income tax liabilities............. 27,923 31,125
------- -------
LONG-TERM DEFERRED INCOME TAX ASSETS:
Business restructuring...................................... 13 3
Net operating loss/credit carryforwards..................... 80 509
Employee pensions and other benefits, net................... 330 520
Reserves and allowances..................................... 12 65
Valuation allowances........................................ (23) (726)
Other....................................................... 1,701 2,204
------- -------
Total long-term deferred income tax assets.................. 2,113 2,575
------- -------
Net long-term deferred income tax liabilities............... 25,810 28,550
------- -------
CURRENT DEFERRED INCOME TAX LIABILITIES:
Investments................................................. 11 670
Other....................................................... 1 6
------- -------
Total current deferred income tax liabilities............... 12 676
------- -------
CURRENT DEFERRED INCOME TAX ASSETS:
Employee pensions and other benefits........................ 4 22
Reserves and allowances..................................... 10 10
Valuation allowances........................................ -- (39)
Other....................................................... 36 197
------- -------
Total current deferred income tax assets.................... 50 190
------- -------
Net current deferred income tax (liabilities) assets........ 38 (486)
------- -------
Total deferred income tax liabilities....................... $25,772 $29,036
======= =======
The valuation allowance for deferred tax assets as of December 31, 2001 and
2000 was $23 and $765, respectively. The realization of AT&T Broadband Group's
deferred tax assets is not dependent upon the consolidated tax group of AT&T. On
a stand alone basis, AT&T Broadband Group has sufficient reversing taxable
temporary differences to warrant recognition of its deferred tax assets without
the need for any additional valuation allowance.
XII-120
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 2001, AT&T Broadband Group had federal net operating loss
carryforwards of $4, expiring through 2013 and state net operating loss
carryforwards of $60, expiring through 2016. AT&T Broadband Group also has
federal tax credit carryforwards of $16 expiring through 2004. In connection
with the TCI Merger, certain federal and state net operating loss carryforwards
were subject to a valuation allowance of $23 at December 31, 2001. If, in the
future, the realization of these acquired deferred tax assets becomes more
likely than not, any reduction of the associated valuation allowance will be
allocated to reduce franchise costs and other purchased intangibles.
On September 30, 2001, the assets and liabilities of Excite@Home were
deconsolidated from AT&T Broadband Group's consolidated balance sheet.
Accordingly, AT&T Broadband Group's deferred income tax assets and liabilities
at December 31, 2001, presented above, exclude any amounts related to
Excite@Home.
(14) COMMITMENTS AND CONTINGENCIES
The Cable Television Consumer Protection and Competition Act of 1992 (the
"1992 Cable Act") imposed certain rate regulations on the cable television
industry. Under the 1992 Cable Act, all cable systems are subject to rate
regulation, unless they face "effective competition," as defined by the 1992
Cable Act and expanded in the Telecommunications Act of 1996 (the "1996 Act"),
in their local franchise area.
Management of AT&T Broadband Group believes that they have complied in all
material respects with the provisions of the 1992 Cable Act and the 1996 Act,
including its rate setting provisions. If, as a result of the review process, a
system cannot substantiate its rates, it could be required to retroactively
reduce its rates to the appropriate benchmark and refund the excess portion of
rates received.
In the normal course of business AT&T Broadband Group is subject to
proceedings, lawsuits and other claims, including proceedings under laws and
regulations related to environmental and other matters. Such matters are subject
to many uncertainties, and outcomes are not predictable with assurance.
Consequently, AT&T Broadband Group is unable to ascertain the ultimate aggregate
amount of monetary liability or financial impact with respect to these matters
at December 31, 2001. These matters could affect the operating results of any
one quarter when resolved in future periods. However, management believes after
final disposition, any monetary liability or financial impact to AT&T Broadband
Group beyond that provided for at year-end would not be material to AT&T
Broadband Group's annual combined financial statements.
XII-121
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
AT&T Broadband Group leases land, buildings and equipment through contracts
that expire in various years through 2050. Rental expense under operating leases
was $144, $122 and $68 for the years ended December 31, 2001 and 2000, and the
ten months ended December 31, 1999, respectively. The following table shows the
future minimum lease payments due under noncancelable operating and capital
leases at December 31, 2001:
OPERATING CAPITAL
LEASES LEASES
--------- -------
2002........................................................ $135 $ 58
2003........................................................ 129 56
2004........................................................ 117 52
2005........................................................ 95 51
2006........................................................ 77 36
Later years................................................. 270 36
---- ----
Total minimum lease payments................................ $823 289
==== ====
Less amount representing interest........................... 42
----
Present value of net minimum lease payments................. $247
====
In addition, under certain real estate operating leases, AT&T Broadband
Group could be required to make payments to the lessor up to $155 at the end of
the lease term (lease terms range from 2002 through 2006). The actual amount
paid, if any, would be reduced by amounts received by the lessor upon
remarketing the property.
In July 1997, ATTBLLC's predecessor, TCI, and ATTBLLC's subsidiary,
Satellite Services, Inc., entered into a 25 year affiliation term sheet with
Starz Encore Group (formerly Encore Media Group) pursuant to which AT&T
Broadband Group may be obligated to make fixed monthly payments in exchange for
unlimited access to Encore and Starz! programming. Starz Encore Group is a
subsidiary of LMG, a former subsidiary of AT&T. The commitment, which is based
on a fixed number of subscribers, increases annually from $306 in 2002 to $315
in 2003, and will increase annually through 2022 with inflation, subject to
certain adjustments, including increases in the number of subscribers. The
affiliation term sheet further provides that to the extent Starz Encore Group's
programming costs increase above certain levels, AT&T Broadband Group's payments
under the term sheet will be increased in proportion to the excess. Excess
programming costs that may be payable by AT&T Broadband Group in future years
are not presently estimable, and could be significant. By letter dated May 29,
2001, AT&T Broadband Group disputed the enforceability of the excess programming
pass through provisions of the term sheet and questioned the validity of the
term sheet as a whole. AT&T Broadband Group also has raised certain issues
concerning the uncertainty of the provisions of the term sheet and the
contractual interpretation and application of certain of its provisions to,
among other things, the acquisition and disposition of cable systems. In July
2001, Starz Encore Group filed suit seeking payment of the 2001 excess
programming costs and a declaration that the term sheet is a binding and
enforceable contract. In October 2001, AT&T Broadband Group and Starz Encore
Group agreed to stay the litigation until August 31, 2002 to allow the parties
time to continue negotiations toward a potential business resolution of this
dispute. The Court granted the stay on October 30, 2001. The terms of the stay
order allow either party to petition the Court to lift the stay after April 30,
2002 and to proceed with the litigation.
At December 31, 2001, an entity attributed to AT&T Broadband Group has an
agreement with Motorola, Inc. to purchase a minimum of 1.6 million digital
set-top devices at an average price of $234
XII-122
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
per unit in 2002. During 2001, AT&T Broadband Group satisfied its obligation
under a previous agreement with Motorola, Inc. to purchase set-top devices.
AT&T Broadband Group is party to an agreement under which it purchases
certain billing services from CSG Systems, Inc. ("CSG"). Unless terminated by
either party pursuant to terms of the agreement, the agreement expires on
December 31, 2012. The agreement calls for monthly payments which are subject to
adjustments and conditions pursuant to the terms of the underlying agreements.
The annual commitment under the agreement is $130 for 2002 and will increase
annually with inflation.
(15) RELATED PARTY TRANSACTIONS
As discussed in Note 1, AT&T provides necessary working capital
requirements through intercompany debt and capital contributions to AT&T
Broadband Group. These amounts are reflected in the accompanying combined
balance sheets as short-term debt due to AT&T or a component of attributed net
assets. Short-term debt due to AT&T and interest was assumed based upon the
methodology outlined in Note 1. Intercompany debt was $3,959 and $5,830 at
December 31, 2001 and 2000, respectively. Intercompany interest expense was
$320, $323 and $91 for the years ended December 31, 2001 and 2000 and for the
ten months ended December 31, 1999, respectively.
AT&T Consumer Services Group provides AT&T Broadband Group with sales
support and customer care services at cost based prices. For the years ended
December 31, 2001 and 2000 and the ten months ended December 31, 1999, such
amounts totaled $190, $89 and $121, respectively, and are included in selling,
general and administrative expenses in the accompanying combined statements of
operations.
In addition, AT&T Business Services Group provides AT&T Broadband Group
with wireline communication and other services. For the years ended December 31,
2001 and 2000 and the ten months ended December 31, 1999, charges for such
services totaled $232, $104 and $31, respectively, and are included in costs of
services in the accompanying combined statements of operations.
Included in current liabilities at December 31, 2001 and 2000, was $2 and
$98, respectively, related to amounts due AT&T Consumer Services Group and AT&T
Business Services Group for the above described services.
AT&T allocates general corporate overhead expenses, including finance,
legal, marketing, use of the AT&T brand, planning and strategy and human
resources to AT&T Broadband Group, as well as costs for AT&T employees who
directly support the activities of the AT&T Broadband Group. Charges for such
services amounted to $146, $159 and $120 for the years ended December 31, 2001
and 2000 and for the ten months ended December 31, 1999, respectively. These
amounts are included in selling, general and administrative expenses in the
accompanying combined statements of operations and were determined based on
methodology described in note 1.
AT&T Broadband Group transferred $628 of marketable securities and equity
investments and $180 of related deferred tax liabilities to AT&T through
combined attributed net assets during the first quarter of 2001. No gain or loss
was recorded on this transaction.
In addition, AT&T Broadband Group had various related party transactions
with LMG. Included in cost of services were programming expenses related to
services from LMG. These expenses amounted to $199, $239 and $184 for the seven
months ended July 31, 2001, the deemed effective date of the LMG spin-off from
AT&T for accounting purposes, the year ended December 31, 2000 and the ten
months ended December 31, 1999, respectively.
On October 2, 2000, AT&T Broadband Group, through MediaOne, completed the
sale of several equity interests in international ventures acquired as a result
of the MediaOne Merger to the AT&T
XII-123
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Wireless Group. Such interests were sold for approximately $1 billion, which was
based upon a third party valuation. AT&T Broadband Group received 120,335,081 of
AT&T common shares for sale of such equity interests. The AT&T Common stock
received in such transaction has been included in combined attributed net
assets. In connection with such sale, $196 of related deferred tax liabilities
were transferred to AT&T Wireless Group. No gain or loss was recognized on the
sale of such equity interests.
(16) NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations ("SFAS 141")," which supersedes Accounting
Principles Board ("APB") Opinion No. 16. SFAS 141 requires all business
combinations initiated after June 30, 2001 be accounted for under the purchase
method. In addition, SFAS 141 establishes criteria for the recognition of
intangible assets separately from goodwill. These requirements are effective for
fiscal years beginning after December 15, 2001, which for AT&T Broadband Group
means January 1, 2002. The adoption of SFAS 141 will not have a material effect
on AT&T Broadband Group's results of operations, financial position or cash
flow.
Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets ("SFAS 142")," which supercedes APB Opinion No. 17. Under SFAS
142 goodwill and indefinite lived intangible assets will no longer be amortized,
but rather will be tested for impairment upon adoption and at least annually
thereafter. In addition, the amortization period of intangible assets with
finite lives will no longer be limited to 40 years. SFAS 142 is effective for
fiscal years beginning after December 15, 2001, which for AT&T Broadband Group
means the standard will be adopted on January 1, 2002. In connection with the
adoption of this standard, AT&T Broadband Group's unamortized goodwill balance
and excess basis related to goodwill of equity method investments will no longer
be amortized, but will continue to be tested for impairment. In addition, AT&T
Broadband Group has determined that franchise costs are indefinite lived assets
and therefore, as of January 1, 2002 will no longer be subject to amortization,
but will continue to be tested for impairment. The adoption of SFAS 142 will
have a significant impact on future operating results due to the cessation of
goodwill and franchise cost amortization. The goodwill balance as of December
31, 2001 was $19.3 billion with related amortization expense for the year ended
December 31, 2001, of $659. The excess basis related to AT&T Broadband Group's
equity method investments as of December 31, 2001 was $3.0 billion with related
amortization of $148. AT&T Broadband Group performed an impairment test on the
goodwill balance as of January 1, 2002. In accordance with SFAS 142, the
impairment test was performed by comparing the fair value of the reporting unit
to its carrying value. As of January 1, 2002, the fair value of the reporting
unit exceeded its carrying value, and therefore no impairment loss will be
recognized upon adoption. The franchise cost balance as of December 31, 2001 was
$42.8 billion with related amortization expense for the year ended December 31,
2001 of $1,224. In accordance with SFAS 142, franchise costs were tested for
impairment as of January 1, 2002, by comparing the fair values to the carrying
values (at a market level). As a result of such tests, an impairment loss of
$856, net of taxes of $530, will be recognized as a change in accounting
principle in the first quarter of 2002.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations ("SFAS 143")." This standard requires that obligations
associated with the retirement of tangible long-lived assets be recorded as
liabilities when those obligations are incurred, with the amount of the
liability initially measured at fair value. Upon initially recognizing a
liability for an asset retirement obligation, an entity must capitalize the cost
by recognizing an increase in the carrying amount of the related long-lived
asset. Over time, this liability is accreted to its present value, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. SFAS 143 is effective
for financial statements issued for fiscal years beginning after June 15, 2002,
which for AT&T Broadband Group means
XII-124
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T CORP.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the standard will be adopted on January 1, 2003. AT&T Broadband Group does not
expect that the adoption of this statement will have a material impact on AT&T
Broadband Group's results of operations, financial position or cash flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS 144")," which supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of ("SFAS 121")." SFAS 144 applies to all long-lived
assets, including discontinued operations, and consequently amends APB Opinion
No. 30, "Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." Based on SFAS 121, SFAS 144 develops one
accounting model for long-lived assets that are to be disposed of by sale, as
well as addresses the principal implementation issues. SFAS 144 requires that
long-lived assets that are to be disposed of by sale be measured at the lower of
book value or fair value less cost to sell. Additionally, SFAS 144 expands the
scope of discontinued operations to include all components of an entity with
operations that (i) can be distinguished from the rest of the entity and (ii)
will be eliminated from the ongoing operations of the entity in a disposal
transaction. SFAS 144 also amends Accounting Research Bulletin ("ARB") No. 51,
"Consolidating Financial Statements" to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. SFAS 144 is
effective for AT&T Broadband Group as of January 1, 2002. The adoption of SFAS
144 will not have a material impact on AT&T Broadband Group's results of
operations, financial position or cash flows.
XII-125
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
FINANCIAL STATEMENTS
AT&T Consumer Services Group is an integrated business of AT&T Corp. (AT&T)
and is not a stand-alone entity. The combined financial statements included
herein reflect the results of the proposed AT&T Consumer Services Group tracking
stock. Separate financial statements are not required to be filed for tracking
stocks. However, we have provided the financial statements in this document to
provide additional disclosures to investors to allow them to assess the
financial performance of AT&T Consumer Services Group. Presenting separate
financial statements for AT&T Consumer Services Group does not indicate that we
have changed title to any assets or responsibility for any liabilities, and does
not purport to affect the rights of any of AT&T's creditors. Holders of AT&T
Consumer Services Group tracking stock do not have claims against the assets of
AT&T Consumer Services Group. Instead, AT&T Consumer Services Group shareholders
own a separate class of AT&T common stock that is intended to reflect the
financial performance and economic value of AT&T's consumer services'
businesses.
XII-126
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareowners of AT&T Corp.:
In our opinion, the accompanying combined balance sheets and the related
combined statements of income and changes in combined attributed net assets and
of cash flows present fairly, in all material respects, the financial position
of AT&T Consumer Services Group at December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of AT&T Consumer Services Group's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
AT&T Consumer Services Group is a fully integrated business unit of AT&T
Corp.; consequently, as indicated in Note 1, these combined financial statements
have been derived from the consolidated financial statements and accounting
records of AT&T Corp. and reflect certain assumptions and allocations. Moreover,
as indicated in Note 1, AT&T Consumer Services Group relies on AT&T Corp. for
administrative, management and other services. The financial position, results
of operations and cash flows of AT&T Consumer Services Group could differ from
those that would have resulted had AT&T Consumer Services Group operated
autonomously or as an entity independent of AT&T Corp. As more fully discussed
in Note 1, the combined financial statements of AT&T Consumer Services Group
should be read in conjunction with the audited consolidated financial statements
of AT&T Corp.
PRICEWATERHOUSECOOPERS LLP
New York, New York
March 25, 2002
XII-127
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
(DOLLARS IN MILLIONS)
Revenue..................................................... $15,079 $18,894 $21,753
Operating Expenses
Access and other connection................................. 4,040 5,204 6,223
Selling, general and administrative......................... 3,805 4,128 4,688
Costs of services and products (excluding depreciation of
$165, $137 and $168 included below)....................... 2,382 2,557 3,316
Depreciation and amortization............................... 200 167 184
Net restructuring and other charges......................... 31 97 7
Total operating expenses.................................... 10,458 12,153 14,418
Operating income............................................ 4,621 6,741 7,335
Other income, net........................................... 189 81 208
Interest expense............................................ 154 164 41
Income before income taxes.................................. 4,656 6,658 7,502
Provision for income taxes.................................. 1,783 2,546 2,869
Net income.................................................. $ 2,873 $ 4,112 $ 4,633
The notes are an integral part of the combined financial statements.
XII-128
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED BALANCE SHEETS
AT DECEMBER 31,
----------------------
2001 2000
--------- ---------
(DOLLARS IN MILLIONS)
ASSETS
Cash and cash equivalents................................... $ 1 $ --
Receivables, less allowances of $267 and $410............... 1,595 2,681
Deferred income taxes....................................... 247 314
Other current assets........................................ 83 68
Total Current Assets........................................ 1,926 3,063
Property, plant and equipment, net of accumulated
depreciation of $547 and $468............................. 129 170
Other assets................................................ 289 310
Total Assets................................................ $2,344 $3,543
LIABILITIES
Accounts payable............................................ $ 787 $1,133
Payroll and benefit-related liabilities..................... 168 149
Debt maturing within one year............................... -- 13
Other current liabilities................................... 380 475
Total Current Liabilities................................... 1,335 1,770
Long-term debt due to AT&T.................................. 978 4,000
Deferred income taxes....................................... 48 29
Other long-term liabilities and deferred credits............ 266 285
Total Liabilities........................................... 2,627 6,084
Combined attributed net liabilities......................... 283 2,541
Total Liabilities and Combined Attributed Net Liabilities... $2,344 $3,543
The notes are an integral part of the combined financial statements.
XII-129
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED STATEMENTS OF CHANGES IN COMBINED
ATTRIBUTED NET (LIABILITIES) ASSETS
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
(DOLLARS IN MILLIONS)
Combined Attributed Net (Liabilities) Assets
Balance at beginning of year.............................. $(2,541) $ 1,070 $ 3,266
Net income............................................. 2,873 4,112 4,633
Dividends declared to AT&T............................. (360) (1,657) (1,871)
Contributions to AT&T, net............................. (255) (6,066) (4,958)
Balance at end of year.................................... $ (283) $(2,541) $ 1,070
The notes are an integral part of the combined financial statements.
XII-130
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
(DOLLARS IN MILLIONS)
OPERATING ACTIVITIES
Net income.................................................. $ 2,873 $ 4,112 $ 4,633
Adjustments to reconcile net income to net cash provided by
operating activities:
Gains on sales of businesses and investments.............. -- (56) (162)
Net restructuring and other charges....................... 30 55 6
Depreciation and amortization............................. 200 167 184
Provision for uncollectible receivables................... 600 595 749
Decrease (increase) in receivables........................ 486 (161) (954)
(Decrease) increase in accounts payable................... (346) 249 (55)
Net change in other operating assets and liabilities...... (77) (174) (51)
Net Cash Provided by Operating Activities................... 3,766 4,787 4,350
INVESTING ACTIVITIES
Capital expenditures and other additions.................... (140) (148) (300)
Repayment of loan from AT&T................................. -- -- 1,580
Net dispositions of businesses.............................. -- 15 125
Other investing activities, net............................. 1 1 (7)
Net Cash (Used in) Provided by Investing Activities......... (139) (132) 1,398
FINANCING ACTIVITIES
(Decrease) increase in long-term debt due to AT&T........... (3,022) 3,100 900
Dividends paid to AT&T...................................... (366) (2,031) (1,808)
Contributions to AT&T, net.................................. (225) (5,707) (4,829)
Decrease in short-term borrowings, net...................... (13) (23) (5)
Net Cash Used in Financing Activities....................... (3,626) (4,661) (5,742)
Net increase (decrease) in cash and cash equivalents........ 1 (6) 6
Cash and cash equivalents at beginning of year.............. -- 6 --
Cash and cash equivalents at end of year.................... $ 1 $ -- $ 6
The notes are an integral part of the combined financial statements.
XII-131
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
1. BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
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 reaffirmed its commitment to creating a tracking stock
designed to reflect the financial performance and economic value of AT&T
Consumer Services Group, 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.
BASIS OF PRESENTATION
AT&T Consumer Services Group provides a variety of communications services
to residential customers including long distance, local toll (intrastate calls
outside the immediate local area) and Internet access. In addition, AT&T
Consumer Services Group provides calling card, operator-handled calling services
and, in certain areas, local phone services.
AT&T Consumer Services Group is an integrated business of AT&T and is not a
separate legal entity. These combined financial statements reflect the results
of operations, financial position, changes in combined attributed net
(liabilities) assets and cash flows of AT&T Consumer Services Group as if it
were a separate entity for all periods presented. The combined financial
statements of AT&T Consumer Services Group were prepared in accordance with
Generally Accepted Accounting Principles. The financial information included
herein may not necessarily reflect the combined results of operations, financial
position, changes in combined attributed net (liabilities) assets and cash flows
of AT&T Consumer Services Group had it been a separate, stand-alone entity
during the periods presented. These financial statements should be read in
conjunction with AT&T's 2001 annual consolidated financial statements included
elsewhere in this document.
The combined financial statements of AT&T Consumer Services Group reflect
the assets, liabilities, revenue and expenses directly attributable to AT&T
Consumer Services Group, as well as allocations deemed reasonable by management,
to present the results of operations, financial position and cash flows of AT&T
Consumer Services Group on a stand-alone basis. The allocation methodologies
have been described within the notes to the combined financial statements where
appropriate. All significant intercompany accounts and transactions within AT&T
Consumer Services Group have been eliminated. Earnings per share disclosure has
not been presented as AT&T Consumer Services Group is a business unit of AT&T
and earnings per share data is not considered meaningful.
The combined financial statements of AT&T Consumer Services Group primarily
include the results of the following legal entities: AT&T Communications of the
Southern States Inc., AT&T Communications of the Southwest, Inc., AT&T Puerto
Rico, AT&T Virgin Islands, AT&T Communications companies in other jurisdictions
and certain attributed assets of AT&T Corp.
Debt has been allocated to AT&T Consumer Services Group based on AT&T's
future view of AT&T's debt position after taking into account the significant
deleveraging activities of AT&T Corp. This allocation took into account the
following factors: prospective financing requirements, working capital and
capital expenditure requirements, equity issuances and comparable company
profiles. Changes in historical
XII-132
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
debt levels are based, in general, on historical cash flows generated by this
entity in relation to total AT&T. Such cash flows include acquisitions, dividend
payments, capital expenditures and cash flows from operations. For purposes of
this allocation, certain "corporate" activities were deemed to be partially
funded by this entity by contributing proceeds to the parent for these
activities. These activities included the repurchase of common shares by AT&T
and cash payments associated with the TCI merger and the MediaOne acquisition.
The interest expense on the allocated debt was calculated based on a rate
intended to be equivalent to the rate AT&T Consumer Services Group would have
received if it were a stand-alone entity. Long term debt due to AT&T matures in
2004, however, AT&T Consumer Services Group has the option to repay this debt
prior to its stated maturity. Due to the expected positive operating cash flow
of AT&T Consumer Services Group, the level of debt of AT&T Consumer Services
Group in the future is expected to be significantly lower than the level at
December 31, 2001.
As a result of the above methodology, AT&T Consumer Services Group may
advance funds to AT&T Corp. These advances are accounted for as borrowings
between the entities and bear interest at a market rate that is substantially
equal to the rate at which AT&T would be able to borrow from third parties on
debt with similar maturities.
General corporate overhead related to AT&T's Corporate headquarters and
common support divisions has been allocated to AT&T Consumer Services Group as
it was not deemed practicable to specifically identify such common costs to AT&T
Consumer Services Group. The allocation of corporate overhead is divided into an
allocation of shared services (e.g., payroll and accounts payable) and other
corporate overhead. Costs of shared services are allocated to AT&T Consumer
Services Group based on transaction based prices. Other corporate overhead is
allocated to AT&T Consumer Services Group based on the ratio of AT&T Consumer
Services Group's external costs and expenses adjusted for any functions that
AT&T Consumer Services Group performs on its own. The costs of these services
charged to AT&T Consumer Services Group are not necessarily indicative of the
costs that would have been incurred by AT&T Consumer Services Group had they
performed these functions entirely as a stand-alone entity, nor are they
indicative of costs that will be charged or incurred in the future. However,
management believes that such allocations are reasonable.
AT&T Consumer Services Group purchases network related services from AT&T
at cost-based prices, which approximate market prices.
AT&T performs cash management functions on behalf of AT&T Consumer Services
Group. Substantially all of AT&T Consumer Services 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 are reflected as a component of combined
attributed net (liabilities) assets, after giving effect to the allocation of
debt described above.
Changes in combined attributed net (liabilities) assets primarily represent
net transfers to or from AT&T, after giving effect to the net income or loss of
AT&T Consumer Services Group during the period, and were primarily assumed to be
settled in cash.
Consolidated income tax provision, related tax payments or refunds, and
deferred tax balances of AT&T have been allocated to AT&T Consumer Services
Group based principally on the taxable income and tax credits directly
attributable to AT&T Consumer Services Group, essentially a stand-alone
presentation. AT&T Business Services Group and AT&T Consumer Services Group
will, prior to the issuance of any shares of AT&T Consumer Services Group
tracking stock, enter into a tax sharing agreement which, consistent with the
principles described in the preceding sentence, will provide for tax sharing
payments based on the tax expense or tax benefit of a hypothetical affiliated
group consisting of AT&T Business Services Group and AT&T Consumer Services
Group. Based on this agreement, the
XII-133
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
consolidated tax liability before credits is allocated between the groups, based
on each group's contribution to consolidated taxable income of the hypothetical
group. Consolidated tax credits of the hypothetical group are allocated between
groups based on each group's contribution to each tax credit.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
AT&T Consumer Services Group recognizes long distance and local services
revenue based upon minutes of traffic processed or contracted fee schedules.
AT&T Consumer Services Group recognizes revenue as services are rendered or as
products are delivered to and are accepted by customers and when services are
provided in accordance with contract terms. Customer activation fees, along with
related costs up to but not exceeding the revenue, are deferred and amortized
over the customer relationship period. AT&T Consumer Services Group records
revenue net of an estimate for unbillable accounts.
ADVERTISING AND PROMOTIONAL COSTS
AT&T Consumer Services Group expenses costs of advertising and promotions,
including cash incentives used to acquire customers, as incurred. Advertising
and promotional expenses were $947, $930 and $1,085 in 2001, 2000 and 1999,
respectively. Of these amounts, $236, $288 and $320 were cash incentives to
acquire customers in 2001, 2000 and 1999, respectively.
CASH EQUIVALENTS
AT&T Consumer Services Group considers all highly liquid investments with
original maturities of generally three months or less to be cash equivalents.
CASH FLOWS
For purposes of the combined statements of cash flows, transactions between
AT&T Consumer Services Group and AT&T, other than dividends, have been accounted
for as having been settled in cash at the time the transaction was recorded by
AT&T Consumer Services Group.
PROPERTY, PLANT AND EQUIPMENT
AT&T Consumer Services Group states property, plant and equipment at cost.
Costs of additions and substantial improvements to property, plant and equipment
are capitalized. The costs of maintenance and repairs of property, plant and
equipment is charged to operating expense. Depreciation is determined based upon
the assets' estimated useful lives using either the group or unit method. AT&T
Consumer Services Group's property, plant and equipment consists primarily of
certain communications and network equipment. The useful lives of communications
and network equipment range from three to 15 years. The group method is used for
the majority of communications and network equipment. Support assets are
depreciated using the unit method over useful lives which range from three to
seven years. Under the group method a specific asset group has an average life.
The depreciation rate is developed based on the average useful life for the
specific asset group. This method requires the periodic revision of depreciation
rates. Under the unit method assets are depreciated based on the useful life of
the individual asset. When AT&T Consumer Services Group sells or retires assets
depreciated using the group method, the cost is deducted from property, plant
and equipment and charged to accumulated depreciation, without recognition of a
gain or loss. When AT&T Consumer Services Group sells assets that were
depreciated using the unit method, we include the related gains or losses in
other income (expense). All plant and equipment, including capitalized software,
is depreciated on a straight-line basis.
XII-134
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
SOFTWARE CAPITALIZATION
Certain direct development costs associated with internal-use software are
capitalized, including external direct costs of material and services, and
payroll costs for employees devoting time to the software projects. These costs
are included within other assets and are amortized over a period not to exceed
five years beginning when the asset is substantially ready for use. Costs
incurred during the preliminary project stage, as well as maintenance and
training costs, are expensed as incurred. AT&T Consumer Services Group also
capitalizes initial operating-system software costs and amortizes them over the
life of the associated hardware. AT&T Consumer Services Group also capitalizes
costs associated with the development of application software incurred from the
time technological feasibility is established until the software is ready to
provide service to customers. These capitalized costs are included in property,
plant and equipment and are amortized over a useful life not to exceed five
years.
GOODWILL
Goodwill is the excess of the purchase price over the fair value of net
assets acquired in business combinations accounted for as purchases. AT&T
Consumer Services Group amortizes goodwill on a straight-line basis over 10
years. Beginning in 2002, in accordance with the provisions of Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets," such goodwill will no longer be amortized, but will continue to be
tested for impairment (see Note 13).
INCOME TAXES
AT&T Consumer Services Group is not a separate taxable entity for federal
and state income tax purposes and its results of operations are included in the
consolidated federal and state income tax returns of AT&T and its affiliates.
AT&T Consumer Services Group's provision or benefit for income taxes is based
upon its contribution to the overall income tax liability of AT&T and its
affiliates as described in Note 1. Under the balance sheet method AT&T Consumer
Services Group recognizes deferred tax assets and liabilities at enacted income
tax rates for the temporary differences between the financial reporting basis
and the tax basis of its assets and liabilities. Any effects of changes in
income tax rates or tax laws are included in the provision for income taxes in
the period of enactment. When it is more likely than not that a portion or all
of a deferred tax asset will not be realized in the future, AT&T Consumer
Services Group will provide a corresponding valuation allowance against the
deferred tax asset.
VALUATION OF LONG-LIVED ASSETS
Long-lived assets such as property, plant and equipment, goodwill,
investments and software are reviewed for impairment annually or whenever events
or changes in circumstances indicate that the carrying amount may not be
recoverable. If the total of the expected future undiscounted cash flows is less
than the carrying amount of the asset, a loss is recognized for the difference
between the fair value and carrying value of the asset.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and revenue and expenses during the period reported. Actual results
could differ from those estimates. Estimates are used when accounting for
certain items such as long-term contracts, allowance for doubtful accounts,
depreciation and amortization, employee benefit plans, taxes, restructuring
reserves and contingencies.
XII-135
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
CONCENTRATIONS
More than half of AT&T Consumer Services Group's prepaid card sales in 2001
were to a single vendor under an agreement with a one-year term. Loss of this
distribution channel could temporarily affect the results of AT&T Consumer
Service Group's operations until a similar distribution channel could be found.
In addition, AT&T Consumer Services Group currently obtains a significant
portion of its transport services exclusively from AT&T Business Services Group.
If AT&T Consumer Services Group were unable to procure such transport services,
this could affect its ability to meet demand for its products which would have
an adverse affect on its results.
As of December 31, 2001, AT&T Consumer Services Group does not have any
other significant concentration of business transacted with a particular
customer, supplier or lender that could, if suddenly eliminated, severely impact
AT&T Consumer Services Group's operations. AT&T Consumer Services Group also
does not have a concentration of available sources of labor, services, or other
rights that could, if suddenly eliminated, severely impact AT&T Consumer
Services Group's operations.
3. SUPPLEMENTARY FINANCIAL INFORMATION
SUPPLEMENTARY INCOME STATEMENT INFORMATION
FOR THE YEARS ENDED
DECEMBER 31,
---------------------
2001 2000 1999
----- ----- -----
INCLUDED IN DEPRECIATION AND AMORTIZATION
Amortization of purchased intangibles..................... $ 26 $21 $ 9
Amortization of goodwill.................................. 9 9 7
INCLUDED IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Research and development expenses......................... $ 21 $59 $101
OTHER INCOME, NET
Interest income........................................... 13 14 45
Gains on sales of businesses and investments.............. -- 56 162
Proceeds from contract settlement......................... 139 -- --
Miscellaneous, net........................................ 37 11 1
Total other income, net................................... $189 $81 $208
The proceeds from contract settlement relate to the sale of AT&T Universal Card
Services to Citigroup in 1998.
XII-136
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTARY BALANCE SHEET INFORMATION
AT
DECEMBER 31,
-------------
2001 2000
----- -----
OTHER ASSETS:
Software development costs, net........................... $158 $155
Goodwill, net............................................. 70 81
Other..................................................... 61 74
---- ----
$289 $310
OTHER CURRENT LIABILITIES:
Marketing incentives...................................... $188 $255
Deferred revenue.......................................... 107 98
Other..................................................... 85 122
---- ----
$380 $475
SUPPLEMENTARY CASH FLOW INFORMATION
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
2001 2000 1999
------ ------ ------
Interest payments.......................................... $ 154 $ 164 $ 41
Income tax payments........................................ $1,783 $2,546 $2,869
4. ACQUISITIONS AND DISPOSITIONS
In 1999, AT&T Consumer Services Group purchased certain assets of SmarTalk
Teleservices, Inc., a leading seller of prepaid calling cards. The difference
between the purchase price and the fair value of net assets acquired has been
recorded as goodwill in the accompanying financial statements. Also in 1999,
AT&T Consumer Services Group sold its Language Line Services business for a gain
of $153, which is reflected in "Other income, net" in the combined statements of
income.
5. NET RESTRUCTURING AND OTHER CHARGES
During 2001, AT&T Consumer Services Group recorded $31 of net restructuring
and other charges, which represented restructuring and exit costs in conjunction
with AT&T's continued cost reduction initiatives, primarily related to headcount
reductions, including the consolidation of customer care, fraud investigation
centers and call centers.
The exit costs represent termination benefits associated with the
separation of 666 employees, 91 of which were part of voluntary plans and 575 of
which were part of involuntary plans. Approximately 25% of the individuals were
management employees and 75% were nonmanagement employees. Approximately 12% 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.
XII-137
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following table displays the activity of the restructuring reserve
account:
EMPLOYEE
SEPARATIONS
-----------
Balance at January 1, 1999.................................. $ 5
Additions................................................. 7
Deductions................................................ (6)
Balance at December 31, 1999................................ $ 6
Additions................................................. 79
Deductions................................................ (44)
Balance at December 31, 2000................................ $ 41
Additions................................................. 31
Deductions................................................ (32)
Balance at December 31, 2001................................ $ 40
Deductions reflect cash payments of $6, $44 and $22 for 1999, 2000, and
2001, respectively. These payments included cash termination benefits of $0, $42
and $22 for the years ended December 31, 1999, 2000 and 2001, respectively,
which were primarily funded through cash from operations. Deductions in 2001
also included $10 of non-cash utilization primarily associated with management
separation benefits in connection with U.S. based managers expected to be funded
through AT&T's pension assets.
During 2000, AT&T Consumer Services Group recorded $97 of net restructuring
and other charges, which included $18 of asset impairment charges related to the
write-down of unrecoverable assets in certain businesses where the carrying
value was no longer supported by estimated future cash flows and $79 for
restructuring and exit costs. The restructuring and exit plans primarily focused
on the maximization of synergies through headcount reductions, including the
consolidation of customer-care and call centers. Included in exit costs was $79
of cash termination benefits associated with the involuntary separation of about
1,300 employees. Approximately 65% of the individuals were management employees
and 35% were nonmanagement employees.
During 1999, AT&T Consumer Services Group recorded $7 of net restructuring
and other charges. This $7 charge for restructuring and exit costs was recorded
in conjunction with AT&T's initiative to reduce costs. The restructuring and
exit plans primarily focused on the maximization of synergies through headcount
reductions, including the consolidation of customer care and call centers. The
exit costs represent cash termination benefits associated with the separation of
164 employees as part of involuntary termination plans. All of the terminations
were nonmanagement employees.
6. SECURITIZATION OF RECEIVABLES
On June 20, 2001, AT&T amended an existing accounts receivable
securitization program for a new 364-day term providing for up to $500 of
funding. Under the program, AT&T Consumer Services Group accounts receivable
were sold on a discounted, revolving basis, to a special purpose, wholly-owned
subsidiary, which assigns interests in such receivables to unrelated third-party
financing entities. The securitization proceeds were recorded as debt by AT&T.
At December 31, 2001 such debt was $500 and was collateralized by approximately
$900 of accounts receivable. In January 2002, approximately $300 of the debt was
repaid.
XII-138
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. RELATED PARTY TRANSACTIONS
AT&T Consumer Services Group purchases network related services from AT&T
at cost-based prices, which approximate market prices. In 2001, 2000 and 1999,
these amounts totaled $601, $846 and $1,249, respectively, and are reflected
within costs of services and products in the combined statements of income.
There are no inter-entity payables for these services as amounts are deemed to
be settled in cash.
AT&T Consumer Services Group purchases sales and sales support, customer
care, billing, and research and development services from AT&T Business Services
Group at cost-based prices, which approximate market prices. In 2001, 2000 and
1999, these amounts totaled $497, $445 and $704, respectively, and are reflected
within selling, general and administrative (SG&A) expenses in the combined
statements of income. There are no inter-entity payables for these services as
amounts are deemed to be settled in cash.
AT&T has allocated general corporate overhead expenses related to AT&T's
corporate headquarters and common support division to AT&T Consumer Services
Group. In 2001, 2000 and 1999, these amounts totaled $234, $244 and $335,
respectively, and are reflected within SG&A. There are no inter-entity payables
for these services as amounts are deemed to be settled in cash.
AT&T Consumer Services Group purchased receivables from AT&T Wireless
Services and provided customer care and billing services to AT&T Wireless
Services at cost-based prices, through the split-off date, which approximate
market prices. For the period January 1 through July 9, 2001 (the date AT&T
completed the split-off of AT&T Wireless as a separate, independently-traded
company), these customer care and billing services totaled $32. In 2000 and
1999, these amounts totaled $88 and $77, respectively, and are reflected as a
reduction of SG&A expenses in the combined statements of income. Because of the
aforementioned split-off of AT&T Wireless, there were no accounts payable at
December 31, 2001. Included within accounts payable at December 31, 2000 was
$79.
AT&T Consumer Services Group provides AT&T Broadband Group with sales
support and customer care services at cost-based prices, which approximate
market prices. In 2001, 2000 and 1999, these amounts totaled $190, $89 and $121,
respectively, and are reflected as a reduction of SG&A expenses in the combined
statements of income. There were no inter-entity receivables from AT&T Broadband
Group at December 31, 2001; included in accounts receivable at December 31, 2000
was $130. AT&T Consumer Services Group provides billing and collections services
on behalf of AT&T Broadband Group. Included within accounts payable at December
31, 2001 and 2000 were $1 and $48, respectively.
AT&T invests excess cash of AT&T Puerto Rico and AT&T Virgin Islands on
their behalf. Notes receivable related to this cash, included within accounts
receivable at December 31, 2001 and 2000 were $152 and $262, respectively.
8. PENSION, POSTRETIREMENT AND OTHER EMPLOYEE BENEFIT PLANS
The majority of AT&T Consumer Services Group's employees participate in
AT&T's noncontributory defined benefit pension plans and postretirement benefit
plans. Pension benefits for management employees are principally based on
career-average pay. Pension benefits for occupational employees are not directly
related to pay. AT&T's benefit plans for current and certain future retirees
include health care benefits, life insurance coverage and telephone concessions.
For purposes of allocating a portion of AT&T's net pension and
postretirement periodic benefit cost to AT&T Consumer Services Group's financial
statements, certain estimates were made as of December 31, 2001, 2000 and 1999
of AT&T Consumer Services Group's share of AT&T's pension and postretirement
assets and benefit obligations related to AT&T Consumer Services Group's active
employees. Based on
XII-139
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
this methodology, AT&T Consumer Services Group's share of AT&T's net pension and
postretirement periodic benefit cost (credit) was $2 and $11 in 2001, $(14) and
$11 in 2000, and $(11) and $17 in 1999, respectively.
AT&T Consumer Services Group's employees are also eligible to participate
in savings plans sponsored by AT&T. The plans allow employees to contribute a
portion of their pretax and/or after-tax income in accordance with specified
guidelines. AT&T matches a certain percentage of employee contributions, up to
certain limits. AT&T Consumer Services Group's expense related to the AT&T
savings plans was $16 in 2001, $21 in 2000 and $26 in 1999.
9. STOCK-BASED COMPENSATION PLANS
Under the 1997 Long-term Incentive Program (Program), AT&T grants stock
options, performance shares, restricted stock and other awards on AT&T common
stock. The exercise price of any stock option is equal to the stock price when
the option is granted. Generally, the options vest over three or four years and
are exercisable up to 10 years from the date of grant.
Under the Program, performance share units are awarded to key employees in
the form of either common stock or cash at the end of a three-year period, based
on certain financial-performance targets.
On July 9, 2001, AT&T completed the split-off of AT&T Wireless Group as a
separate, independently-traded company. The AT&T Wireless common stock held by
AT&T was distributed to AT&T common shareowners on a basis of 0.3218 of a share
of AT&T Wireless for each AT&T share outstanding. All outstanding AT&T common
stock options granted prior to January 1, 2001 were treated in a similar manner.
AT&T modified the terms and conditions of all outstanding stock option grants to
allow the AT&T Wireless common stock options held by AT&T employees to
immediately vest and become exercisable for their remaining contractual term.
Under the AT&T 1996 Employee Stock Purchase Plan (Plan), which was
effective July 1, 1996, and amended on May 23, 2001, AT&T is authorized to sell
up to 105 million shares of AT&T common stock to its eligible employees through
June 30, 2006. Under the terms of the Plan, employees may have up to 10% of
their earnings withheld to purchase AT&T's common stock. The purchase price of
the stock on the date of exercise is 85% of the average high and low sale prices
of shares on the New York Stock Exchange for that day. Under the Plan, AT&T sold
approximately 385 thousand, 389 thousand and 311 thousand shares to AT&T
Consumer Services Group's employees in 2001, 2000, and 1999, respectively.
AT&T and AT&T Consumer Services Group applied Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its plans. Accordingly, no compensation
expense has been recognized for its stock-based compensation plans other than
for performance-based and restricted stock awards. Compensation costs charged
against AT&T Consumer Services Group's results of operations were $5, $3, and $4
in 2001, 2000 and 1999, respectively.
AT&T and AT&T Consumer Services Group have adopted the disclosure-only
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." If AT&T
Consumer Services Group had elected to recognize compensation costs based on the
fair value at the date of grant for AT&T awards granted to AT&T Consumer
Services Group's employees, consistent with the provisions of SFAS No. 123, AT&T
XII-140
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Consumer Services Group's net income would have been adjusted to reflect
additional compensation expense resulting in the following pro forma amounts:
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
2001 2000 1999
------ ------ ------
Net income................................................. $2,840 $4,095 $4,621
AT&T granted approximately 4.2 million, 5.2 million, and 2.5 million stock
options to AT&T Consumer Services Group's employees during 2001, 2000 and 1999,
respectively. At the date of grant, the weighted average exercise price for AT&T
options granted to AT&T Consumer Services Group's employees during 2001, 2000
and 1999 were $22.22, $36.06 and $55.96, respectively. The weighted-average fair
values at date of grant for AT&T options granted to AT&T Consumer Services
Group's employees during 2001, 2000 and 1999 were $8.06, $12.41 and $15.53,
respectively, and were estimated using the Black-Scholes option-pricing model.
The weighted-average risk-free interest rates applied for 2001, 2000 and 1999
were 4.64%, 6.29% and 5.15%, respectively. The following assumptions were
applied for 2001, 2000 and 1999, respectively: (i) expected dividend yields of
0.9%, 1.6% and 1.7% (ii) expected volatility rates of 36.9%, 33.6% and 28.5%,
and (iii) expected lives of 4.8, 4.9 and 4.6 years.
10. INCOME TAXES
AT&T Consumer Services Group is not a separate legal entity for federal and
state income tax purposes and its results of operations are included in the
consolidated federal and state income tax returns of AT&T and its affiliates.
(See Note 1). AT&T Consumer Services Group's provision for income taxes has been
prepared as if the entity prepares separate tax returns for federal and state
tax purposes.
The following table shows the principal reasons for the difference between
the effective income tax rate and the U.S. federal statutory income tax rate:
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
2001 2000 1999
------ ------ ------
U.S. federal statutory income tax rate..................... 35.00% 35.00% 35.00%
Federal income tax at statutory rate....................... $1,630 $2,330 $2,626
Foreign income taxes....................................... 22 21 26
Taxes on repatriated and accumulated foreign income, net of
tax credits.............................................. (22) (21) (26)
State and local income taxes, net of federal income tax
effect................................................... 151 216 244
Research and other credits................................. (2) (1) (2)
Other differences, net..................................... 4 1 1
Provision for income taxes................................. $1,783 $2,546 $2,869
Effective income tax rate.................................. 38.3% 38.2% 38.2%
XII-141
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The U.S. and foreign components of income from continuing operations before
income taxes and the provision for income taxes are presented in this table:
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
2001 2000 1999
------ ------ ------
INCOME BEFORE INCOME TAXES
United States............................................ $4,774 $6,656 $7,497
Foreign.................................................. (118) 2 5
Total.................................................... $4,656 $6,658 $7,502
PROVISION FOR INCOME TAXES
Current
Federal.................................................. $1,451 $2,150 $2,402
State and local.......................................... 223 327 366
Foreign.................................................. 22 21 26
Deferred
Federal.................................................. $ 76 $ 42 $ 65
State and local.......................................... 11 6 10
Provision for income taxes................................. $1,783 $2,546 $2,869
Deferred income tax liabilities are taxes AT&T Consumer Services Group
expects to pay in future periods. Similarly, deferred income tax assets are
recorded for expected reductions in taxes payable in future periods. Deferred
income taxes arise because of differences in the book and tax basis of certain
assets and liabilities.
XII-142
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax liabilities and assets consist of the following:
AT DECEMBER 31,
----------------
2001 2000
------ ------
LONG-TERM DEFERRED INCOME TAX LIABILITIES
Property, plant and equipment............................. $ 30 $ 18
Intangibles............................................... 53 60
Other..................................................... 27 1
Total long-term deferred income tax liabilities........... $110 $ 79
LONG-TERM DEFERRED INCOME TAX ASSETS
Employee Benefits......................................... $ 43 $ 41
Other reserves and allowances............................. 19 9
Total long-term deferred income tax assets................ $ 62 $ 50
Net long-term deferred income tax liabilities............... 48 29
CURRENT DEFERRED INCOME TAX LIABILITIES
Total current deferred income tax liabilities............... $ 8 $ 9
CURRENT DEFERRED INCOME TAX ASSETS
Business restructuring.................................... $ 21 $ 17
Employee benefits......................................... 36 23
Other reserves and allowances............................. 182 256
Advanced payments......................................... 16 27
Total current deferred income tax assets.................... $255 $323
Net current deferred income tax assets...................... $247 $314
11. COMMITMENTS AND CONTINGENCIES
In the normal course of business AT&T Consumer Services Group is subject to
proceedings, lawsuits and other claims, including proceedings under laws and
regulations related to environmental and other matters. Such matters are subject
to many uncertainties, and the outcomes are not predictable with assurance.
Consequently, AT&T Consumer Services Group is unable to ascertain the ultimate
aggregate amount of monetary liability or financial impact with respect to these
matters at December 31, 2001. These matters could affect the operating results
of any one quarter when resolved in future periods. However, AT&T Consumer
Services Group believes that after final disposition, any monetary liability or
financial impact to us beyond that provided for at year-end would not be
material to AT&T Consumer Services Group's annual combined financial statements.
AT&T Consumer Services Group leases equipment through contracts that expire
in various years through 2004. Rental expense under operating leases was $11,
$15 and $19 for the years ended December 31, 2001, 2000 and 1999, respectively.
AT&T Consumer Services Group has various contracts that require minimum
payments of $391 in 2002, $180 in 2003, $122 in 2004, $126 in 2005 and $104 in
2006. These figures include the Accenture Ltd. management contract signed in
January 2002.
AT&T has contracted obligations to utilize network facilities from local
exchange carriers with terms greater than one year that AT&T Consumer Services
Group operates under. These contracts are based on volumes and have penalty fees
if certain volume levels are not met. AT&T would incur penalties to exit
XII-143
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
these contracts in any given year in the amount of approximately $1.5 billion. A
portion of any penalties associated with these contracts could be attributed to
AT&T Consumer Services Group.
12. STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 133 ACCOUNTING FOR
DERIVATIVES INSTRUMENTS AND HEDGING ACTIVITIES
Effective January 1, 2001, AT&T Consumer Services Group adopted SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," and its
corresponding amendments under SFAS No. 138. SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. All
derivatives, whether designated in hedging relationships or not, are required to
be recorded on the balance sheet at fair value. The adoption of SFAS No. 133 on
January 1, 2001 did not have an impact on AT&T Consumer Services Group's
financial statements.
13. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations," which superceded Accounting Principles Board
(APB) Opinion No. 16. SFAS No. 141 requires all business combinations initiated
after June 30, 2001 be accounted for under the purchase method. In addition,
SFAS No. 141 establishes criteria for the recognition of intangible assets
separately from goodwill. The adoption of SFAS No. 141 will not have a material
effect on AT&T Consumer Services Group'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 supersedes APB Opinion No. 17. Under SFAS No. 142,
goodwill and indefinite- lived intangible assets will no longer be amortized,
but rather will be tested for impairment upon adoption and at least annually
thereafter. In addition, the amortization period of intangible assets with
finite lives will no longer be limited to 40 years. SFAS No. 142 is effective
for AT&T Consumer Services Group as of January 1, 2002. In connection with the
adoption of this standard, AT&T Consumer Services Group's unamortized goodwill
balance will no longer be amortized, but will continue to be tested for
impairment. The goodwill balance at December 31, 2001 was $70 and the related
amortization in 2001 was $9. In accordance with SFAS No. 142, the goodwill was
tested for impairment by comparing the fair value of AT&T Consumer Services
Group to its carrying value. As of January 1, 2002, the fair value of AT&T
Consumer Services Group exceeded its carrying value, therefore no impairment
loss will be recognized upon implementation.
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
Consumer Services Group this means the standard will be adopted on January 1,
2003. AT&T Consumer Services Group does not expect that the adoption of this
statement will have a material impact on AT&T Consumer Services Group's results
of operations, financial position or cash flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which 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,
XII-144
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 Consumer Services Group as of January 1, 2002. The adoption
of SFAS No. 144 will not have a material impact on AT&T Consumer Services
Group's results of operations, financial position or cash flows.
XII-145
REPORT OF INDEPENDENT ACCOUNTANTS
ON ACCOMPANYING CONSOLIDATING CONDENSED INFORMATION
To the Board of Directors and
Shareowners of AT&T Corp.
The report on our audit of the consolidated financial statements, in which
we indicated the extent of our reliance on the report of other auditors, of AT&T
Corp. and its subsidiaries at December 31, 2001 and 2000 and for each of the
three years in the period ended December 31, 2001, appears on page XII-1 of this
document. That audit was conducted for the purpose of forming an opinion on the
consolidated financial statements taken as a whole. The consolidating condensed
information that appears on pages XII-148 through XII-155 is presented for
purposes of additional analysis of the consolidated financial statements rather
than to present the financial position, results of operations and cash flows of
the individual companies. Accordingly, we do not express an opinion on the
financial position, results of operations and cash flows of the individual
companies. However, the consolidating condensed information has been subjected
to the auditing procedures applied in the audit of the consolidated financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the consolidated financial statements taken as a whole.
PricewaterhouseCoopers LLP
New York, New York
March 25, 2002
XII-146
CONSOLIDATING CONDENSED FINANCIAL INFORMATION
In conjunction with the issuance of Liberty Media Group tracking stock, and
the proposed issuance of AT&T Consumer Services Group tracking stock, AT&T has
separated for financial reporting purposes in all periods the AT&T Common Stock
Group, Liberty Media Group and AT&T Consumer Services Group. Below is the
consolidating financial information reflecting the businesses of these
individual groups, including the allocation of expenses between the groups in
accordance with our allocation policies, as well as other related party
transactions such as sales of services between groups and interest income and
expense on intercompany borrowings. AT&T does not have a controlling financial
interest in Liberty Media Group for financial accounting purposes; therefore,
our ownership in Liberty Media Group is reflected as an investment accounted for
under the equity method and is reflected as such in the consolidating financial
statements below. The results of AT&T Broadband Group are reflected within AT&T
Common Stock Group.
AT&T Consumer Services Group purchases long distance and other
network-related services from AT&T at market-based prices and such amounts are
eliminated in consolidation. Debt has been allocated to AT&T Consumer Services
Group based on the future view of AT&T's debt position after taking into account
the significant deleveraging activities of AT&T. This allocation took into
account the following factors: prospective financing requirements, desired
stand-alone credit profile, working capital and capital expenditure requirements
and comparable company profiles. The historical interest expense on the
allocated debt was calculated based on a rate intended to be equivalent to the
rate AT&T Consumer Services Group would have received if it was a stand-alone
entity. General corporate overhead related to AT&T's corporate headquarters and
common support divisions has been allocated to the groups based on the ratio of
each group's external costs and expenses to AT&T's consolidated external costs
and expenses, adjusted for any functions that any group performs on its own. The
consolidated income tax provision, related tax payments or refunds, and deferred
tax balances of AT&T have been allocated to the groups based principally on the
taxable income and tax credits directly attributable to each group.
On July 9, 2001, AT&T completed the split-off of AT&T Wireless as a
separate, independently-traded company. All AT&T Wireless tracking stock was
converted into AT&T Wireless common stock on a one-for-one basis and 1,136
million shares of AT&T Wireless common stock, held by AT&T, was distributed to
AT&T common shareowners on a basis of 0.3218 of a share of AT&T Wireless for
each AT&T share outstanding. The results of AT&T Wireless have been included as
discontinued operations for all periods presented. The split-off of AT&T
Wireless resulted in a non-cash gain of approximately $13.5 billion.
On August 10, 2001, AT&T completed the split-off of Liberty Media
Corporation as an independent, publicly-traded company. AT&T redeemed each
outstanding share of Class A and Class B Liberty Media Group (LMG) tracking
stock for one share of Liberty Media Corporation's Series A and Series B common
stock, respectively. The split-off was recorded as a book value transaction,
therefore, no gain or loss was recorded.
Pursuant to the Inter-Group agreement, AT&T did not allocate general
overhead expenses to Liberty Media Group and only charged Liberty Media Group
for specific services that Liberty Media Group received from AT&T pursuant to
service agreements or similar arrangements. Additionally, as Liberty Media Group
operated independent of AT&T, there was no cash or debt allocated to them.
XII-147
AT&T
CONSOLIDATING CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2001
AT&T AT&T
COMMON CONSUMER LIBERTY ELIMINATIONS/
STOCK SERVICES MEDIA RECLASSI- CONSOLIDATED
GROUP(1) GROUP GROUP FICATIONS(2) AT&T CORP.
-------- -------- ------- ------------- ------------
(DOLLARS IN MILLIONS)
External revenue....................... $37,471 $15,079 $ -- $ -- $52,550
Inter-group revenue.................... 288 (288)
Total revenue.......................... 37,759 15,079 (288) 52,550
Operating Expenses
Costs of services and products......... 12,179 1,781 13,960
Access and other connection............ 8,096 4,040 12,136
Selling, general and administrative.... 7,568 3,264 10,832
Depreciation and other amortization.... 6,700 200 (35) 6,865
Amortization of goodwill, franchise
costs and other purchased
intangibles.......................... 2,438 35 2,473
Net restructuring and other charges.... 2,499 31 2,530
Inter-group expenses................... (854) 1,142 (288)
Total operating expenses............... 38,626 10,458 (288) 48,796
Operating (loss) income................ (867) 4,621 3,754
Other (expense) income................. (1,736) 189 (1,547)
Inter-group interest income............ 151 (151)
Interest expense....................... 3,239 3 3,242
Inter-group interest expense........... 151 (151)
(Loss) income from continuing
operations before income taxes,
minority interest, and (losses)
earnings from equity investments..... (5,691) 4,656 (1,035)
(Benefit) provision for income taxes... (2,574) 1,783 (791)
Minority interest income............... 963 963
Equity losses from Liberty Media
Group................................ (2,711) (2,711)
Net losses related to other equity
investments.......................... 4,850 4,850
(Loss) income from continuing
operations........................... (7,004) 2,873 (2,711) (6,842)
Income from discontinued operations
(net of income taxes)................ 150 150
Gain on disposition of discontinued
operations........................... 13,503 13,503
Income before cumulative effect of
accounting change.................... 6,649 2,873 (2,711) 6,811
Cumulative effect of accounting change
(net of income taxes)................ 359 545 904
Net income............................. 7,008 2,873 (2,166) 7,715
Dividend requirements of preferred
stock................................ 652 652
Premium on exchange of AT&T Wireless
tracking stock....................... 80 80
Net income available to common
shareowners.......................... $ 6,276 $ 2,873 $(2,166) $ -- $ 6,983
---------------
(1) The results of AT&T Broadband Group are reflected within AT&T Common Stock
Group.
(2) Includes the elimination of inter-group transactions, consolidating entries,
as well as reclassifications and adjustments.
XII-148
AT&T
CONSOLIDATING CONDENSED BALANCE SHEET
AT DECEMBER 31, 2001
AT&T AT&T
COMMON CONSUMER ELIMINATIONS/
STOCK SERVICES RECLASSI- CONSOLIDATED
GROUP(1) GROUP FICATIONS(2) AT&T CORP.
-------- -------- ------------- ------------
(DOLLARS IN MILLIONS)
ASSETS
Cash and cash equivalents....................... $ 10,591 $ 1 $ -- $ 10,592
Receivables..................................... 7,941 1,595 (155) 9,381
Investments..................................... 668 668
Deferred income taxes........................... 999 247 (16) 1,230
Other current assets............................ 609 83 (35) 657
Total current assets....................... 20,808 1,926 (206) 22,528
Property, plant & equipment, net................ 41,193 129 41,322
Franchise costs, net............................ 42,819 42,819
Goodwill, net................................... 24,605 70 24,675
Other investments & related advances............ 23,817 1 23,818
Other assets.................................... 9,902 289 (71) 10,120
Long-term assets due from related party......... 978 (978)
Total Assets............................... 164,122 2,344 (1,184) 165,282
LIABILITIES
Debt maturing within one year................... 12,958 12,958
Other current liabilities....................... 11,340 1,335 (206) 12,469
Total current liabilities.................. 24,298 1,335 (206) 25,427
Long-term debt.................................. 40,527 40,527
Long-term debt due to related party............. 978 (978)
Deferred income taxes........................... 28,112 48 28,160
Other long-term liabilities & deferred
credits....................................... 10,942 266 11,208
Total Liabilities.......................... 103,879 2,627 (1,184) 105,322
Minority Interest............................... 3,560 3,560
Company-Obligated Convertible Quarterly Income
Preferred Securities of a Subsidiary Trust
Holding Solely Subordinated Debt Securities of
AT&T.......................................... 4,720 4,720
SHAREOWNERS' EQUITY
AT&T Common Stock............................... 3,542 3,542
Other shareowners' equity....................... 51,963 (283) (3,542) 48,138
Total shareowners' equity.................. 51,963 (283) 51,680
Total Liabilities and Shareowners'
Equity................................... $164,122 $2,344 $(1,184) $165,282
---------------
(1) The results of AT&T Broadband Group are reflected within AT&T Common Stock
Group.
(2) Includes the elimination of inter-group transactions, consolidating entries,
as well as reclassifications and adjustments.
XII-149
AT&T
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2001
AT&T AT&T
COMMON CONSUMER LIBERTY ELIMINATIONS/
STOCK SERVICES MEDIA RECLASSI- CONSOLIDATED
GROUP(1) GROUP GROUP FICATIONS(2) AT&T CORP.
-------- -------- ------- ------------- ------------
(DOLLARS IN MILLIONS)
Net cash provided by operating
activities of continuing
operations........................... $ 6,792 $ 3,766 $ -- $ -- $10,558
INVESTING ACTIVITIES
Capital expenditures and other
additions............................ (9,077) (140) (9,217)
Decrease (increase) in other
receivables.......................... 2,908 (3,022) (114)
Investment distributions and sales..... 3,014 3,014
Net dispositions of businesses, net of
cash disposed........................ 4,913 4,913
Other.................................. (457) 1 (456)
Net cash provided by (used in)
investing activities of continuing
operations........................... 1,301 (139) (3,022) (1,860)
FINANCING ACTIVITIES
Proceeds from long-term debt issuances,
net of issuance costs................ 12,415 12,415
Decrease in short-term borrowings,
net.................................. (17,155) (13) (17,168)
Repayment of borrowings from AT&T
Wireless............................. (5,803) (5,803)
Issuance of convertible preferred
securities and warrants.............. 9,811 9,811
Other.................................. (1,694) (3,613) 3,022 (2,285)
Net cash used in financing activities
of continuing operations............. (2,426) (3,626) 3,022 (3,030)
Net cash provided by discontinued
operations........................... 4,860 4,860
Net increase in cash and cash
equivalents.......................... 10,527 1 10,528
Cash and cash equivalents at beginning
of year.............................. 64 64
Cash and cash equivalents at end of
year................................. $10,591 $ 1 $ -- $ -- $10,592
---------------
(1) The results of AT&T Broadband Group are reflected within AT&T Common Stock
Group.
(2) Includes the elimination of inter-group transactions, consolidating entries,
as well as reclassifications and adjustments.
XII-150
AT&T
CONSOLIDATING CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2000
AT&T AT&T
COMMON CONSUMER LIBERTY ELIMINATIONS/
STOCK SERVICES MEDIA RECLASSI- CONSOLIDATED
GROUP(1) GROUP GROUP FICATIONS(2) AT&T CORP.
-------- -------- ------- ------------- ------------
(DOLLARS IN MILLIONS)
External revenue........................ $36,639 $18,894 $ -- $ -- $55,533
Inter-group revenue..................... 298 (298)
Total revenue........................... 36,937 18,894 (298) 55,533
Operating Expenses
Access and other connection............. 7,936 5,204 13,140
Costs of services and products.......... 11,084 1,711 12,795
Selling, general and administrative..... 6,204 3,548 9,752
Depreciation and other amortization..... 5,788 167 (31) 5,924
Amortization of goodwill, franchise
costs and other purchased
intangibles........................... 2,634 31 2,665
Net restructuring and other charges..... 6,932 97 7,029
Inter-group expenses.................... (1,128) 1,426 (298)
Total operating expenses................ 39,450 12,153 (298) 51,305
Operating (loss) income................. (2,513) 6,741 4,228
Other income............................ 1,069 81 1,150
Inter-group interest income............. 164 (164)
Interest expense........................ 2,964 2,964
Inter-group interest expense............ 164 (164)
(Loss) income before income taxes,
minority interest and earnings
(losses) from equity investments...... (4,244) 6,658 2,414
Provision for income taxes.............. 738 2,546 3,284
Minority interest income................ 4,103 4,103
Equity earnings from Liberty Media
Group................................. 1,488 1,488
Net losses related to other equity
investments........................... 588 588
(Loss) income from continuing
operations............................ (1,467) 4,112 1,488 4,133
Income from discontinued operations (net
of income taxes)...................... 536 536
Net (loss) income....................... $ (931) $ 4,112 $1,488 $ -- $ 4,669
---------------
(1) The results of AT&T Broadband Group are reflected within AT&T Common Stock
Group.
(2) Includes the elimination of inter-group transactions, consolidating entries,
as well as reclassifications and adjustments.
XII-151
AT&T
CONSOLIDATING CONDENSED BALANCE SHEET
AT DECEMBER 31, 2000
AT&T AT&T
COMMON CONSUMER LIBERTY ELIMINATIONS/
STOCK SERVICES MEDIA RECLASSI- CONSOLIDATED
GROUP(1) GROUP GROUP FICATIONS (2) AT&T CORP.
-------- -------- ------- ------------- ------------
(DOLLARS IN MILLIONS)
ASSETS
Cash and cash equivalents...................... $ 64 $ -- $ -- $ -- $ 64
Receivables.................................... 8,894 2,681 (522) 11,053
Investments.................................... 2,102 2,102
Deferred income taxes.......................... 406 314 720
Other current assets........................... 713 68 781
Total current assets...................... 12,179 3,063 (522) 14,720
Property, plant & equipment, net............... 41,099 170 41,269
Franchise costs, net........................... 48,218 48,218
Goodwill, net.................................. 26,701 81 26,782
Investment in Liberty Media Group and related
receivables, net............................. 34,290 34,290
Other investments & related advances........... 30,871 4 30,875
Other assets................................... 10,757 310 (85) 10,982
Net assets of discontinued operations.......... 27,224 27,224
Long-term assets due from related party........ 4,000 (4,000)
Total Assets.............................. 201,049 3,543 34,290 (4,522) 234,360
LIABILITIES
Debt maturing within one year.................. 31,825 13 31,838
Liability under put options.................... 2,564 2,564
Other current liabilities...................... 12,338 1,757 (522) 13,573
Total current liabilities................. 46,727 1,770 (522) 47,975
Long-term debt................................. 33,089 33,089
Long-term debt due to related party............ 4,000 (4,000)
Deferred income taxes.......................... 32,025 29 32,054
Other long-term liabilities & deferred
credits...................................... 8,208 285 8,493
Total Liabilities......................... 120,049 6,084 (4,522) 121,611
Minority Interest.............................. 4,841 4,841
Company-Obligated Convertible Quarterly Income
Preferred Securities of a Subsidiary Trust
Holding Solely Subordinated Debt Securities
of AT&T...................................... 4,710 4,710
SHAREOWNERS' EQUITY
AT&T Common Stock.............................. 3,760 3,760
AT&T Wireless Group Common Stock............... 362 362
Liberty Media Group Class A Common Stock....... 2,364 2,364
Liberty Media Group Class B Common Stock....... 206 206
Other shareowners' equity...................... 71,449 (2,541) 34,290 (6,692) 96,506
Total shareowners' equity................. 71,449 (2,541) 34,290 103,198
Total Liabilities and Shareowners'
Equity.................................. $201,049 $ 3,543 $34,290 $(4,522) $234,360
---------------
(1) The results of AT&T Broadband Group are reflected within AT&T Common Stock
Group.
(2) Includes the elimination of inter-group transactions, consolidating entries,
as well as reclassifications and adjustments.
XII-152
AT&T
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2000
AT&T AT&T
COMMON CONSUMER LIBERTY ELIMINATIONS/
STOCK SERVICES MEDIA RECLASSI- CONSOLIDATED
GROUP(1) GROUP GROUP FICATIONS(2) AT&T CORP.
-------- -------- ------- ------------- ------------
(DOLLARS IN MILLIONS)
Net cash provided by operating
activities of continuing
operations........................... $ 6,878 $ 4,787 $ -- $ -- $ 11,665
INVESTING ACTIVITIES
Capital expenditures and other
additions............................ (10,763) (148) (10,911)
(Increase) decrease in other
receivables.......................... (4,152) 3,100 (1,052)
Investment distributions and sales..... 992 992
Investment contributions and
purchases............................ (2,394) (2,394)
Net acquisitions of businesses,
including cash acquired.............. (16,672) 15 (16,657)
Other.................................. (24) 1 (23)
Net cash used in investing activities
of continuing operations............. (33,013) (132) 3,100 (30,045)
FINANCING ACTIVITIES
Proceeds from long-term debt
issuances............................ 4,601 4,601
Retirement of long-term debt........... (2,118) (2,118)
Issuance of AT&T Wireless Group common
shares............................... 10,314 10,314
Dividends paid......................... (1,016) (2,031) (3,047)
Increase (decrease) in short-term
borrowings, net...................... 16,996 (23) 16,973
Other.................................. 4,716 (2,607) (3,100) (991)
Net cash provided by (used in)
financing activities of continuing
operations........................... 33,493 (4,661) (3,100) 25,732
Net cash used in discontinued
operations........................... (8,306) (8,306)
Net decrease in cash and cash
equivalents.......................... (948) (6) (954)
Cash and cash equivalents at beginning
of year.............................. 1,012 6 1,018
Cash and cash equivalents at end of
year................................. $ 64 $ -- $ -- $ -- $ 64
---------------
(1) The results of AT&T Broadband Group are reflected within AT&T Common Stock
Group.
(2) Includes the elimination of inter-group transactions, consolidating entries,
as well as reclassifications and adjustments.
XII-153
AT&T
CONSOLIDATING CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1999
AT&T AT&T
COMMON CONSUMER LIBERTY ELIMINATIONS/
STOCK SERVICES MEDIA RECLASSI- CONSOLIDATED
GROUP(1) GROUP GROUP FICATIONS(2) AT&T CORP.
-------- -------- ------- ------------- ------------
(DOLLARS IN MILLIONS)
External revenue....................... $33,220 $21,753 $ -- $ -- $54,973
Inter-group revenue.................... 328 (328)
Total revenue.......................... 33,548 21,753 (328) 54,973
Operating Expenses
Access and other connection............ 8,216 6,223 14,439
Costs of services and products......... 8,946 2,067 11,013
Selling, general and administrative.... 7,099 3,795 10,894
Depreciation and other amortization.... 4,969 184 (16) 5,137
Amortization of goodwill, franchise
costs and other purchased
intangibles.......................... 1,041 16 1,057
Net restructuring and other charges.... 968 7 975
Inter-group expenses................... (1,814) 2,142 (328)
Total operating expenses............... 29,425 14,418 (328) 43,515
Operating income....................... 4,123 7,335 11,458
Other income........................... 652 174 826
Inter-group interest income............ 38 34 (72)
Interest expense....................... 1,500 3 1,503
Inter-group interest expense........... 34 38 (72)
Income before income taxes, minority
interest and earnings (losses) from
equity investments................... 3,279 7,502 10,781
Provision for income taxes............. 1,147 2,869 4,016
Minority interest expense.............. 126 126
Equity losses from Liberty Media
Group................................ (2,022) (2,022)
Net losses related to other equity
investments.......................... 756 756
Income (loss) from continuing
operations........................... 1,250 4,633 (2,022) 3,861
Loss from discontinued operations (net
of income taxes)..................... (433) (433)
Net income (loss)...................... $ 817 $ 4,633 $(2,022) $ -- $ 3,428
---------------
(1) The results of AT&T Broadband Group are reflected within AT&T Common Stock
Group.
(2) Includes the elimination of inter-group transactions, consolidating entries,
as well as reclassifications and adjustments.
XII-154
AT&T
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999
AT&T AT&T
COMMON CONSUMER LIBERTY ELIMINATIONS/
STOCK SERVICES MEDIA RECLASSI- CONSOLIDATED
GROUP(1) GROUP GROUP FICATIONS(2) AT&T CORP.
-------- -------- ------- ------------- ------------
(DOLLARS IN MILLIONS)
Net cash provided by operating activities of
continuing operations...................... $ 6,159 $ 4,350 $ -- $ -- $ 10,509
INVESTING ACTIVITIES
Capital expenditures and other additions..... (11,290) (300) (11,590)
(Increase) decrease in other receivables..... (1,054) 1,580 (509) 17
Investment distributions and sales........... 1,574 1,574
Investment contributions and purchases....... (7,837) (7,837)
Net acquisitions of businesses, including
cash acquired.............................. (6,094) 125 (5,969)
Other........................................ (72) (7) (79)
Net cash (used in) provided by investing
activities of continuing operations........ (24,773) 1,398 (509) (23,884)
FINANCING ACTIVITIES
Proceeds from long-term debt issuances....... 8,396 8,396
Retirement of long-term debt................. (2,255) (2,255)
Issuance of convertible securities........... 4,638 4,638
Net acquisition of treasury shares........... (4,624) (4,624)
Dividends paid............................... (904) (1,808) (2,712)
Increase (decrease) in short-term borrowings,
net........................................ 8,769 (5) 1,409 10,173
Other........................................ 5,067 (3,929) (900) 238
Net cash provided by (used in) financing
activities of continuing operations........ 19,087 (5,742) 509 13,854
Net cash used in discontinued operations..... (2,594) (2,594)
Net (decrease) increase in cash and cash
equivalents................................ (2,121) 6 (2,115)
Cash and cash equivalents at beginning of
year....................................... 3,133 3,133
Cash and cash equivalents at end of year..... $ 1,012 $ 6 $ -- $ -- $ 1,018
---------------
(1) The results of AT&T Broadband Group are reflected within AT&T Common Stock
Group.
(2) Includes the elimination of inter-group transactions, consolidating entries,
as well as reclassifications and adjustments.
XII-155
AT&T
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The unaudited pro forma combined condensed financial statements set forth
below for AT&T give effect to
- the Liberty Media Group distribution
- the AT&T Broadband Group distribution
(collectively, the AT&T restructuring events), as if such events had been
completed on January 1, 1999 for income statement purposes, and at December 31,
2001 for balance sheet purposes, subject to the assumptions and adjustments in
the accompanying notes to the pro forma financial statements. Upon the
distribution of AT&T Broadband Group, AT&T will report AT&T Broadband Group as a
Discontinued Operation, in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." For accounting purposes, the
spin-off (the distribution) of AT&T Broadband Group is considered a non pro-rata
distribution and is expected to be recorded at fair value resulting in the
recognition of a gain or loss by the remaining AT&T entity upon the distribution
date. The split-off of Liberty Media Group, which was completed on August 10,
2001, was a pro-rata distribution and was therefore recorded at historical cost.
Since Liberty Media Group was split-off from AT&T on August 10, 2001, no balance
sheet pro forma adjustments were made for Liberty Media Group. See the Notes to
the Unaudited Pro Forma Combined Condensed Financial Statements for additional
disclosure of potential material nonrecurring charges and credits directly
attributable to the events as noted above which are not reflected in the pro
forma financial statements. Note (i) to the AT&T Unaudited Pro Forma Combined
Condensed Financial Statements includes the impacts to earnings per share of the
proposed one-for-five reverse stock split.
The pro forma adjustments included herein are based on available
information and certain assumptions that management believes are reasonable and
are described in the accompanying notes to the pro forma financial statements.
The Unaudited Pro Forma Combined Condensed Financial Statements do not
necessarily represent what AT&T's financial position or results of operations
would have been had the AT&T Broadband distribution or the Liberty Media Group
distribution occurred on such dates or to project AT&T's financial position or
results of operations at or for any future date or period. In the opinion of
management, all adjustments necessary to present fairly the unaudited pro forma
financial information have been made. The Unaudited Pro Forma Combined Condensed
Financial Statements should be read in conjunction with the historical financial
statements of AT&T, Liberty Media Group and AT&T Broadband Group, incorporated
by reference or included herein.
If the AT&T Consumer Services Group tracking stock proposal is approved,
AT&T currently intends to dividend AT&T Consumer Services Group tracking stock
to current AT&T shareholders representing some or all of the financial
performance and economic value of AT&T Consumer Services Group at such time as
AT&T determines that there is sufficient market receptivity and support for such
a distribution. Due to the accumulated deficit that exists at AT&T Corp., the
dividend will be reflected as a reduction of additional paid-in capital for the
fair value of AT&T Consumer Services with a corresponding increase in par value
of AT&T Consumer Services Group tracking stock and additional paid-in capital.
The issuance of the AT&T Consumer Services Group tracking stock has no impact on
the pro forma balance sheet or pro forma income statements other than to result
in the attribution of net income to AT&T Consumer Services Group and therefore
to reduce income and earnings attributable to AT&T Common Stock Group. For
purposes of these pro forma financial statements we have assumed distribution of
all of the AT&T Consumer Services Group tracking stock.
XII-156
AT&T
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AT DECEMBER 31, 2001
AT&T
BROADBAND PRO
HISTORICAL GROUP OTHER FORMA
AT&T(a) DISTRIBUTION(e) ADJUSTMENTS(g) AT&T
---------- --------------- -------------- ---------
(DOLLARS IN MILLIONS)
ASSETS
Cash and cash equivalents.......................... $ 10,592 $ -- $ 88 $ 10,680
3,959(f)
(3,959)(f)
Receivable-net..................................... 9,381 (798) 2 8,585
Investments........................................ 668 (668) -- --
Deferred income taxes.............................. 1,230 (38) 1,192
Other current assets............................... 657 (184) 41 514
3,959(f)
(3,959)(f)
Property, plant and equipment-net.................. 41,322 (14,519) -- 26,803
Franchise costs-net................................ 42,819 (42,819) -- --
Goodwill-net....................................... 24,675 (19,361) -- 5,314
Other investments and related advances............. 23,818 (21,913) -- 1,905
Prepaid pension costs.............................. 3,337 -- (8) 3,329
Other assets....................................... 6,783 (2,925) 77 3,935
(7,066)(c)
7,066(c)
-------- --------- ----- --------
Total Assets................................... 165,282 (103,187) 162 62,257
======== ========= ===== ========
LIABILITIES
Accounts payable................................... 4,744 (678) 90 4,156
Payroll and benefit-related liabilities............ 2,084 (478) -- 1,606
Debt maturing within one year...................... 12,958 (6,783) -- 6,175
3,959(f)
(3,959)(f)
Other current liabilities.......................... 5,641 (1,691) 11 3,961
Long-term debt..................................... 40,527 (16,502) -- 24,025
Long-term benefit-related liabilities.............. 3,594 (135) 3,459
Deferred income taxes.............................. 28,160 (25,810) 87 2,437
Other long-term liabilities and deferred credits... 7,614 (1,059) 204 6,938
179(d)
-------- --------- ----- --------
Total Liabilities.............................. 105,322 (52,822) 257 52,757
Minority interest.................................. 3,560 (3,302) -- 258
Company-obligated convertible quarterly income
preferred securities of subsidiary trust holding
solely subordinated debt securities of AT&T...... 4,720 (4,720) -- --
SHAREOWNERS' EQUITY
Common Stock:
AT&T common stock, $1 par value, authorized
6,000,000,000 shares; issued and outstanding
3,542,405,744 shares............................. 3,542 52(d) -- 3,594
Additional paid-in capital......................... 51,964 (42,523) (185) 16,091
7,066(c)
(2,100)(d)
(179)(d)
2,048(d)
Accumulated deficit................................ (3,484) (7,066)(c) 90 (10,460)
Accumulated other comprehensive income............. (342) 359 17
-------- --------- ----- --------
Total shareowners' equity...................... 51,680 (42,343) (95) 9,242
Total Liabilities & Shareowners' Equity........ $165,282 $(103,187) $ 162 $ 62,257
======== ========= ===== ========
See Notes To AT&T Unaudited Pro Forma Combined Condensed Financial Statements
XII-157
AT&T
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
LIBERTY AT&T
MEDIA BROADBAND PRO
HISTORICAL GROUP GROUP OTHER FORMA
AT&T(a) DISTRIBUTION(b) DISTRIBUTION(e) ADJUSTMENTS(g) AT&T
---------- --------------- --------------- -------------- ---------
(DOLLARS IN MILLIONS)
Revenue........................... $52,550 $ -- $ (10,132) $247 $42,665
OPERATING EXPENSES
Costs of services and products.... 13,960 -- (5,459) 298 8,799
Access and other connection....... 12,136 -- -- (51) 12,085
Selling, general and
administrative.................. 10,832 -- (2,582) -- 8,250
Depreciation and amortization..... 9,338 -- (4,780) -- 4,558
Net restructuring and other
charges......................... 2,530 -- (1,494) -- 1,036
------- ------ --------- ---- -------
Total operating expenses.......... 48,796 -- (14,315) 247 34,728
Operating income.................. 3,754 -- 4,183 -- 7,937
Other (expense) income............ (1,547) -- 2,874 -- 1,327
Interest expense.................. 3,242 -- (1,735) -- 1,507
(Loss) income from continuing
operations before income taxes,
minority interest and (losses)
earnings from equity
investments..................... (1,035) -- 8,792 -- 7,757
(Benefit) provision for income
taxes........................... (791) -- 3,857 (90) 2,976
Minority interest income.......... 963 -- (833) -- 130
Equity losses from Liberty Media
Group........................... (2,711) 2,711 -- -- --
Net losses related to other equity
investments..................... (4,850) -- 69 -- (4,781)
(Loss) income from continuing
operations...................... (6,842) 2,711 4,171 90 130
Dividend requirements of preferred
stock........................... 652 -- -- -- 652
Premium on exchange of AT&T
Wireless tracking stock......... 80 -- -- -- 80
------- ------ --------- ---- -------
Net loss from continuing
operations attributable to
common shareowners.............. $(7,574) $2,711 $ 4,171 $ 90 $ (602)
======= ====== ========= ==== =======
AT&T COMMON STOCK GROUP:
Loss from continuing operations... $(4,863) $(3,475)(h)
Weighted average shares
outstanding (basic & diluted)... 3,643 3,695
Basic loss per share.............. (1.33) (0.94)(i)
LIBERTY MEDIA GROUP:
Basic and diluted loss per
share........................... $ (1.05)
See Notes To AT&T Unaudited Pro Forma Combined Condensed Financial Statements
XII-158
AT&T
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2000
LIBERTY AT&T
MEDIA BROADBAND PRO
HISTORICAL GROUP GROUP OTHER FORMA
AT&T(a) DISTRIBUTION(b) DISTRIBUTION(e) ADJUSTMENTS(g) AT&T
---------- --------------- --------------- -------------- ---------
(DOLLARS IN MILLIONS)
Revenue......................... $55,533 $ -- $ (8,445) $116 $47,204
OPERATING EXPENSES
Costs of services and
products...................... 12,795 (4,600) 117 8,312
Access and other connection..... 13,140 -- -- (1) 13,139
Selling, general and
administrative................ 9,752 -- (2,180) 7,572
Depreciation and amortization... 8,589 -- (4,051) -- 4,538
Net restructuring and other
charges....................... 7,029 -- (6,270) -- 759
------- ------- -------- ---- -------
Total operating expenses........ 51,305 -- (17,101) 116 34,320
Operating income................ 4,228 -- 8,656 -- 12,884
Other income.................... 1,150 -- 39 -- 1,189
Interest expense................ 2,964 -- (1,323) -- 1,641
Income from continuing
operations before income taxes
and (losses) earnings from
equity investments............ 2,414 -- 10,018 -- 12,432
Provision for income taxes...... 3,284 -- 1,183 -- 4,467
Minority interest income........ 4,103 -- (4,062) -- 41
Equity earnings from Liberty
Media Group................... 1,488 (1,488) --
Net (losses) earnings related to
other equity investments...... (588) -- 597 -- 9
------- ------- -------- ---- -------
Net income from continuing
operations attributable to
common shareowners............ $ 4,133 $(1,488) $ 5,370 $ -- $ 8,015
======= ======= ======== ==== =======
AT&T COMMON STOCK GROUP:
Earnings from continuing
operations.................... $ 2,645 $ 3,903(h)
Weighted average shares
outstanding -- basic.......... 3,486 3,526
Basic earnings per share........ 0.76 1.11
Earnings from continuing
operations.................... 2,677 3,903(h)
Weighted average shares
outstanding -- diluted........ 3,545 3,545
Diluted earnings per share...... 0.75 1.10(i)
LIBERTY MEDIA GROUP:
Basic and diluted earnings per
share......................... $ 0.58
See Notes To AT&T Unaudited Pro Forma Combined Condensed Financial Statements
XII-159
AT&T
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1999
LIBERTY AT&T
MEDIA BROADBAND PRO
HISTORICAL GROUP GROUP OTHER FORMA
AT&T(a) DISTRIBUTION(b) DISTRIBUTION(e) ADJUSTMENTS(g) AT&T
---------- --------------- --------------- -------------- ---------
(DOLLARS IN MILLIONS)
Revenue........................... $54,973 $ -- $(5,080) $32 $49,925
OPERATING EXPENSES
Costs of services and products.... 11,013 -- (2,686) 32 8,359
Access and other connection....... 14,439 -- -- -- 14,439
Selling, general and
administrative.................. 10,894 -- (1,253) -- 9,641
Depreciation and amortization..... 6,194 -- (1,674) -- 4,520
Net restructuring and other
charges......................... 975 -- (644) -- 331
------- ------ ------- --- -------
Total operating expenses.......... 43,515 -- (6,257) 32 37,290
Operating income.................. 11,458 -- 1,177 -- 12,635
Other income...................... 826 -- (50) -- 776
Interest expense.................. 1,503 -- (705) -- 798
Income from continuing operations
before income taxes and (losses)
earnings from equity
investments..................... 10,781 -- 1,832 -- 12,613
Provision for income taxes........ 4,016 -- 465 -- 4,481
Minority interest expense......... (126) -- 126 -- --
Equity losses from Liberty Media
Group........................... (2,022) 2,022 -- -- --
Net losses related to other equity
investments..................... (756) -- 707 -- (49)
------- ------ ------- --- -------
Net income from continuing
operations attributable to
common shareowners.............. $ 3,861 $2,022 $ 2,200 $-- $ 8,083
======= ====== ======= === =======
AT&T COMMON STOCK GROUP:
Earnings from continuing
operations...................... $ 5,883 $ 3,450(h)
Weighted average shares
outstanding -- basic............ 3,082 3,115
Basic earnings per share.......... 1.91 1.11
Earnings from continuing
operations...................... 5,909 3,450(h)
Weighted average shares
outstanding -- diluted.......... 3,152 3,152
Diluted earnings per share........ 1.87 1.09(i)
LIBERTY MEDIA GROUP:
Basic and diluted loss per
share........................... $ (0.80)
See Notes To AT&T Unaudited Pro Forma Combined Condensed Financial Statements
XII-160
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS
(a) These columns reflect the historical results of operations and
financial position of AT&T Corp.
(b) These adjustments deduct the historical results of operations of
Liberty Media Group to reflect the split-off of Liberty Media Group from AT&T.
(c) This entry reflects the fair value adjustment for accounting purposes
which we anticipate will be recorded upon the distribution of AT&T Broadband
Group. Comcast currently owns shares of AT&T common stock ("T"). In the event
Comcast retains these shares at the time of the AT&T Broadband Group
distribution, pursuant to certain provisions of the merger agreement, these
shares will be converted into exchangeable preferred stock of AT&T and Comcast
will not participate in the AT&T Broadband Group distribution. Therefore the
distribution would be a non pro-rata transaction among the "T" shareholders
accounted for at fair value.
Additionally, the timing of the issuance of the AT&T Consumer Services
Group tracking stock is uncertain. However, in the event the AT&T Consumer
Services Group tracking stock is created and distributed prior to the
distribution of AT&T Broadband Group, shareowners of the AT&T Consumer Services
Group tracking stock would not receive shares of AT&T Broadband Group, therefore
the distribution of AT&T Broadband Group would also be a non pro-rata
transaction in these circumstances.
The distribution has been reflected in the pro forma balance sheet at fair
value, resulting in a nonrecurring loss or gain upon distribution equal to the
deficiency or excess of the fair value of AT&T Broadband Group over AT&T's
carrying value of the net assets of AT&T Broadband Group to be distributed. The
actual loss or gain will be determined upon distribution based on the stock
price of the Comcast shares received pursuant to the merger agreement. Based on
the closing share price of Comcast Corp. on May 10, 2002, the distribution
results in a loss. Due to the fact that the loss is a one-time event, its
effects have not been included as a pro forma adjustment to the income
statement; however it has been included as a pro forma adjustment to retained
earnings on the pro forma balance sheet. The estimated loss is calculated as
follows (dollars in millions):
Fair value of Comcast Corp. shares to be received in the
transaction (1,235,000,000 shares at a closing stock price
of $30.21 per share on May 10, 2002)...................... $37,309
Carrying value of AT&T Broadband Group net assets to be
distributed............................................... 44,375
-------
Loss on distribution........................................ $(7,066)
=======
In the event Comcast does not hold any AT&T shares at the time of the AT&T
Broadband Group distribution and if the AT&T Consumer Services Group tracking
stock is not issued prior to the distribution of AT&T Broadband Group, the
distribution would be a pro-rata transaction. This treatment would still result
in the recognition of a loss in the event the carrying value of AT&T Broadband
Group exceeded the fair value of the Comcast shares received in the transaction
pursuant to the provisions of SFAS No. 144, paragraph 29, however, in the event
the fair value of the Comcast shares received in the transaction exceeded the
carrying value of AT&T Broadband Group, no gain would be recorded in a pro-rata
transaction.
(d) These entries represent adjustments to AT&T Broadband Group combined
attributed net assets pursuant to the Merger Agreement. The Merger Agreement
calls for the redemption by AT&T of $2,100 million in TCI Pacific Preferred
Stock for AT&T Common Stock. AT&T expects to issue approximately 52 million
shares of common stock (par value $1 per share) for the redemption. In addition,
the Merger agreement stipulates that AT&T will retain certain liabilities
currently reflected in the AT&T Broadband Group financial statements.
Accordingly, these liabilities were transferred to AT&T along with the related
deferred income taxes.
XII-161
(e) These adjustments deduct the historical results of operations and the
historical financial position of AT&T Broadband Group to reflect the spin-off of
AT&T Broadband from AT&T. The distribution is being accounted for as a fair
value transaction and as such the fair value of the net assets of AT&T Broadband
Group have been recorded as a reduction to additional paid in capital, given the
deficit that exists in retained earnings.
(f) These adjustments reflect the repayment of the intercompany loan
balance from AT&T Broadband Group. The repayment of intercompany indebtedness is
contained in the Separation and Distribution Agreement between AT&T and AT&T
Broadband Corp.
(g) Reflects certain Inter-Group transactions appropriately reflected in
the separate financial statements of AT&T after excluding the AT&T Broadband
Group on a pro forma basis that were eliminated in the AT&T consolidated
financial statements and were therefore not reflected in AT&T's historical
results and financial position. These transactions include adjustments to
properly reflect the stand-alone tax rates of AT&T subsequent to the
distribution of the AT&T Broadband Group. These entries also reflect the
reclassification of certain items appropriately reflected on the separate
financial statements of AT&T Broadband.
(h) Income attributable to the AT&T Common Stock Group shareholders has
been reduced by $2,873, $4,112 and $4,633 for the years ended December 31, 2001,
2000 and 1999, respectively, to reflect the income attributable to the AT&T
Consumer Services Group tracking stock shareholders.
(i) Adjusted for the proposed one-for-five reverse stock split of AT&T
common stock, (loss) earnings per basic share would have been $(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.
Additionally, pursuant to the merger agreement, prior to the AT&T Broadband
spin-off, shares of AT&T common stock held by Comcast (currently 83.5 million
shares) will be exchanged on a one-for-one basis into a newly created series of
AT&T exchangeable preferred stock. The AT&T exchangeable preferred stock will be
mandatorily exchangeable after the closing of the Comcast merger into shares of
AT&T common stock utilizing a conversion formula. The conversion formula will
provide Comcast with an interest in AT&T that is equal in value to the interest
Comcast held in AT&T prior to the Comcast merger, subject to a maximum share
issuance of 10% of the outstanding shares of AT&T common stock. The conversion
formula is computed as the combination of average post closing AT&T Comcast
Class A common stock and AT&T common stock trading values divided by average
AT&T common stock trading values utilizing ten randomly selected trading days
after the closing of the Comcast merger. At December 31, 2001, assuming a
one-for-five reverse stock split of AT&T common stock, the maximum additional
shares that Comcast could receive would be approximately 55 million shares,
resulting in (loss) earnings per basic share of $(4.38), $5.13 and $5.09 for the
years ended December 31, 2001, 2000 and 1999, respectively, and (loss) earnings
per diluted share of $(4.38), $5.11 and $5.03 for the years ended December 31,
2001, 2000 and 1999, respectively. At December 31, 2001, assuming no reverse
stock split of AT&T common stock, the maximum additional shares that Comcast
could receive would be approximately 276 million shares, resulting in (loss)
earnings per basic share of $(0.88), $1.03 and $1.02 for the years ended
December 31, 2001, 2000 and 1999, respectively, and (loss) earnings per diluted
share of $(0.88), $1.02 and $1.01 for the years ended December 31, 2001, 2000
and 1999, respectively.
XII-162
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
AT&T Comcast Corporation
Philadelphia, Pennsylvania
We have audited the accompanying balance sheet of AT&T Comcast Corporation as of
December 31, 2001. This financial statement is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the balance sheet
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the balance sheet. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, such balance sheet presents fairly, in all material respects,
the financial position of AT&T Comcast Corporation as of December 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
April 29, 2002
XII-163
AT&T COMCAST CORPORATION
BALANCE SHEET
DECEMBER 31, 2001
Assets...................................................... $--
Stockholders' Equity
Stock subscription receivable............................. ($2)
Common stock, $.01 par value, authorized 100 shares; 2
shares issued and outstanding.......................... $--
Additional capital........................................ $ 2
---
$--
===
See note to balance sheet.
XII-164
AT&T COMCAST CORPORATION
NOTE TO BALANCE SHEET
DECEMBER 31, 2001
1. ORGANIZATION
On December 7, 2001, CAB Holdings Corp. was incorporated under the laws of
the State of Pennsylvania and was authorized to issue 100 shares of $.01 par
value common stock. At that date of incorporation, CAB Holdings Corp.'s name was
changed to AT&T Comcast Corporation ("the Company") and the Company issued one
share of its $.01 par value common stock to each of Comcast Corporation
("Comcast") and AT&T Corp. ("AT&T") for $1 per share. The Company was organized
to conduct, subsequent to the combination of Comcast and AT&T's Broadband
division ("AT&T Broadband"), the businesses currently conducted by Comcast and
AT&T Broadband.
On December 19, 2001, Comcast and AT&T entered into an Agreement and Plan
of Merger that will result in the combination of Comcast and AT&T Broadband.
AT&T will spin off AT&T Broadband to its stockholders immediately prior to the
combination. The combined company will also hold AT&T's approximate 25.5%
interest in Time Warner Entertainment. The transaction is subject to customary
closing conditions and shareholder and regulatory approvals and is expected to
close by the end of 2002.
Upon completion of the combination of Comcast and AT&T Broadband, Comcast
and an entity which will then own AT&T Broadband will be wholly-owned
subsidiaries of the Company.
From the date of inception on December 7, 2001 through December 31, 2001,
the Company had no operations.
XII-165
CHAPTER THIRTEEN
INFORMATION ABOUT THE COMCAST SPECIAL MEETING AND VOTING
The Comcast Board is using this document to solicit proxies from holders of
Comcast common stock for use at the Comcast special meeting. Comcast is first
mailing this document to Comcast shareholders, and the accompanying form of
proxy to holders of Comcast Class A common stock, on or about May 14, 2002. THE
INFORMATION AND INSTRUCTIONS CONTAINED IN THIS CHAPTER ARE ADDRESSED TO COMCAST
SHAREHOLDERS, AND ALL REFERENCES TO "YOU" IN THIS CHAPTER SHOULD BE UNDERSTOOD
TO BE ADDRESSED TO COMCAST SHAREHOLDERS.
MATTERS RELATING TO THE COMCAST SPECIAL MEETING
Date, Time and Place: July 10, 2002
10:00 a.m. (Eastern Time)
The Doubletree Hotel Philadelphia
Broad and Locust Streets
Philadelphia, Pennsylvania 19107-5686
----------------------------------------------------------------------------------------------------
Purpose of Special Meeting is to Vote on - To approve and adopt the merger agreement and the
the Following Items: 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 document
- To approve and adopt an amendment to the Comcast
charter to allow the implementation of the Preferred
Structure
- To vote on such other business which may properly come
before the meeting
----------------------------------------------------------------------------------------------------
Record Date: The record date for shares entitled to vote is April 25,
2002.
----------------------------------------------------------------------------------------------------
Outstanding Shares Held on Record Date: As of the record date, there were outstanding
approximately 21,591,115 shares of Comcast Class A
common stock, 915,590,935 shares of Comcast Class A
Special common stock and 9,444,375 shares of Comcast
Class B common stock.
----------------------------------------------------------------------------------------------------
Votes Necessary to Approve the The affirmative vote of a majority of the votes cast by
Proposals:* the holders of the outstanding shares of Comcast Class A
common stock and Comcast Class B common stock, voting
together as a single class, is required to approve the
Comcast transaction proposal and the AT&T Comcast
charter proposal. Approval of these proposals is assured
because Sural LLC, which holds approximately 86.7% of
the combined voting power of the Comcast stock, has
agreed in the support agreement to vote its shares in
favor of the Comcast transaction proposal and the AT&T
Comcast charter proposal.
XIII-1
-----------------------------------------------------------------------------------------------------------------
It is a condition to implementation of the Preferred Structure that a
majority of the votes cast by holders of the outstanding shares of
Comcast Class A common stock, voting as a single class, and holders
of outstanding shares of Comcast Class A common stock and Comcast
Class B common stock, voting together as a single class, approve the
preferred structure proposal. If holders of Comcast Class A common
stock, voting as a single class, approve the preferred structure
proposal, the Preferred Structure will be implemented upon completion
of the AT&T Comcast transaction because Sural LLC, which holds
approximately 86.7% of the combined voting power of the Comcast Class
A common stock and Comcast Class B common stock, has agreed in the
support agreement to vote its shares in favor of the preferred
structure proposal thereby assuring approval of the proposal by
holders of Comcast Class A common stock and Comcast Class B common
stock, voting together as a single class.
Each holder of Comcast Class B common stock is entitled to 15 votes
per share, and each holder of Comcast Class A common stock is
entitled to one vote per share. Holders of the Comcast Class A
Special common stock do not have any voting rights.
Abstentions and broker "non-votes" will have no effect on the outcome
of any of the Comcast proposals (except that broker "non-votes" will
not count as present for establishing a quorum).
Shares held by Comcast in its treasury are not voted.
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.
-----------------------------------------------------------------------------------------------------------------
Quorum Requirements: A quorum of shareholders is necessary to hold a valid meeting.
With respect to each of the Comcast proposals, the presence in person
or by proxy at the Comcast special meeting of holders of shares
representing a majority of the voting power of the outstanding shares
of Comcast common stock entitled to vote on such proposal is a
quorum.
Abstentions count as present for establishing a quorum. Broker
"non-votes" do not count as present for establishing a quorum.
Shares held by Comcast in its treasury do not count toward a quorum.
A broker non-vote occurs on an item when a broker is not permitted to
vote on that item without instruction from the beneficial owner of
the shares and no instruction is given.
XIII-2
-----------------------------------------------------------------------------------------------------------------
Shares Beneficially Owned by Comcast As of the record date, approximately 987,656 shares of Comcast Class
Directors and Executive Officers as of A common stock and 9,444,375 shares of Comcast Class B common stock,
the record date: including exercisable options and including shares beneficially owned
by Sural LLC, holder of all of the outstanding Comcast Class B common
stock, were beneficially owned by Comcast directors and executive
officers.
These shares represent in total approximately 4.6% of the outstanding
shares of Comcast Class A common stock and approximately 87.4% of the
aggregate voting power represented by the outstanding shares of
Comcast Class A common stock and Comcast Class B common stock, in
each case as of the record date.
These individuals have indicated or agreed that they will vote to
approve each of the Comcast proposals.
* Under The Nasdaq Stock Market rules, if your broker holds your shares in its name, your broker may not vote
your shares with respect to any of the Comcast proposals absent instructions from you. Without your voting
instructions, a broker non-vote will occur. However, assuming the presence of a quorum, a broker non-vote will
have no effect on the outcome of the Comcast proposals.
PROXIES
Voting the Comcast Proxy. You may vote in person at the Comcast special
meeting or by proxy. Comcast recommends that you vote by proxy even if you plan
to attend the Comcast special meeting. You can always change your vote at the
Comcast special meeting.
Voting instructions are included on your proxy card. If you properly give
your proxy and submit it to Comcast in time to vote, one of the individuals
named as your proxy will vote your shares as you have directed. You may vote for
or against any or all of the proposals submitted at the Comcast special meeting
or abstain from voting.
HOW TO VOTE BY PROXY
----------------------------------------------------------------------------------------------------
COMCAST SHAREHOLDERS
----------------------------------------------------------------------------------------------------
By Telephone:* Call toll-free 1-877-779-8683 and follow the instructions.
You will need to give the personal identification number
contained on your proxy card.
----------------------------------------------------------------------------------------------------
By Internet:* Go to http://www.eproxyvote.com/cmcsa1 and follow the
instructions. You will need to give the personal
identification number contained on your proxy card.
----------------------------------------------------------------------------------------------------
In Writing:* Complete, sign, date and return your proxy card in the
enclosed envelope.
----------------------------------------------------------------------------------------------------
* If you hold shares through a broker or other custodian, please check the voting form used by
that firm to see if it offers telephone or Internet voting.
----------------------------------------------------------------------------------------------------
If you submit a proxy but do not mark a box with respect to one or more of
the Comcast proposals, your proxies will follow the Comcast Board's
recommendations and vote these shares:
- "FOR" the approval and adoption of the merger agreement and the
transactions contemplated by the merger agreement
- "FOR" the approval of the AT&T Comcast charter, including the corporate
governance provisions of the AT&T Comcast charter described in this
document
XIII-3
- "FOR" the approval and adoption of an amendment to the Comcast charter to
allow the implementation of the Preferred Structure
- In its discretion as to any other business which may properly come before
the Comcast special meeting
Revoking your proxy. You may revoke your proxy before it is voted by:
- submitting a new proxy with a later date, including a proxy given by
telephone or Internet,
- notifying Comcast's Secretary in writing before the Comcast special
meeting that you have revoked your proxy, or
- voting in person at the Comcast special meeting.
Voting In Person. If you plan to attend the Comcast special meeting and
wish to vote in person, Comcast will give you a ballot at the Comcast special
meeting. However, if your shares are held in the name of your broker, bank or
other nominee and you wish to vote in person, you must obtain a proxy in your
name from your broker, bank or other nominee in order to vote by ballot at the
Comcast special meeting.
People With Disabilities. Comcast can provide reasonable assistance to
help you participate in the Comcast special meeting if you tell Comcast about
your disability and your plan to attend. Please call or write the Comcast
Secretary at least two weeks before the Comcast special meeting at the number or
address under "Summary and Overview of the Transactions -- Summary -- The
Companies."
Confidential Voting. Independent inspectors count the votes. Each Comcast
shareholder's individual vote is kept confidential from Comcast unless special
circumstances exist. For example, a copy of your proxy card will be sent to
Comcast, as applicable, if you write comments on the card.
Proxy Solicitation and Exchange of Shares. Comcast and AT&T will equally
share the expenses incurred in connection with the printing and mailing of this
document. Comcast has retained Innisfree M&A Incorporated, for a fee of $15,000
plus additional charges related to telephone calls and other services, to assist
in the solicitation of proxies and otherwise in connection with the Comcast
special meeting. Comcast has also retained D.F. King & Co., Inc., for a fee of
$7,500 plus additional charges related to telephone calls and other services, to
assist in connection with the Comcast special meeting. AT&T has retained
Georgeson Shareholder Communications Inc., at an estimated cost of $125,000 plus
reimbursement of reasonable out-of-pocket expenses, to assist in the
solicitation of proxies. Comcast, AT&T and their respective proxy solicitors
will also request banks, brokers and other intermediaries holding shares of
Comcast or AT&T common stock beneficially owned by others to send this document
to, and obtain proxies from, the beneficial owners and will reimburse holders
for their reasonable expenses in so doing. Solicitation of proxies by mail may
be supplemented by telephone, telegram and other electronic means,
advertisements and personal solicitation by the directors, officers and
employees of Comcast and AT&T. No additional compensation will be paid to
directors, officers or employees for such solicitation.
The extent to which these proxy soliciting efforts will be necessary
depends entirely upon how promptly proxies are submitted. You should send in
your proxy by mail, telephone or Internet without delay.
Stock Certificates. You should not send in any stock certificates with
your proxy card. If you hold your Comcast shares in certificated form, a
transmittal letter with instructions for the surrender of your Comcast stock
certificates in exchange for your AT&T Comcast shares will be mailed to you as
soon as practicable after completion of the AT&T Comcast transaction. If you
hold your Comcast shares in uncertificated form, after the completion of the
AT&T Comcast transaction your AT&T Comcast shares will be delivered to you
without your having to take any action.
Electronic Access to Comcast Proxy Materials and Annual Report. Comcast
shareholders can access Comcast's Notice of Meeting and this document via the
Internet at the Comcast Investor Relations website at http://www.cmcsk.com.
XIII-4
Householding of Proxy Materials. If you and other residents at your
mailing address own shares of Comcast stock in street name, your broker or bank
may have sent you a notice that your household will receive only one annual
report and proxy statement for each company in which you hold stock through that
broker or bank. This practice of sending only one copy of proxy material is
known as "householding." If you received a notice and elected to participate in
householding or did not respond that you did not want to participate in
householding within 60 days of the mailing of the notice, you were deemed to
have consented to the process. In such case, your broker will send one copy of
this document to your address. For voting purposes, a separate vote instruction
form instructing your bank or broker how to vote your shares will be included
for each account at the shared address.
You may revoke your consent to householding at any time by contacting your
broker or financial institution for specific information on this matter. In any
event, if you did not receive an individual copy of this document, we will send
a copy to you upon your written request to D.F. King at 77 Water Street, New
York, NY 10005 or Innisfree at 501 Madison Avenue, 20th Floor, New York, NY
10022.
Other Business; Adjournments. Comcast is not currently aware of any other
business to be acted upon at the Comcast special meeting. If, however, other
matters are properly brought before the meeting, or any adjourned meeting, your
proxies will have discretion to vote or act on those matters according to their
best judgment, including to adjourn the meeting.
Adjournments may be made for the purpose of, among other things, soliciting
additional proxies. Any adjournment may be made from time to time by approval of
holders of shares representing a majority of the votes present in person or by
proxy at the Comcast special meeting, whether or not a quorum exists, without
further notice other than by an announcement made at the meeting. Comcast does
not currently intend to seek an adjournment of its meeting.
Admittance. If you plan to attend the Comcast special meeting, you may be
required to present a valid government-issued photo identification (federal,
state or local), such as a driver's license or passport, in order to enter the
Comcast special meeting. In addition, if you hold your shares in the name of
your broker, bank or other nominee, you may be required to present a bank or
brokerage firm account statement or letter from the nominee indicating that you
are the beneficial owner of the shares on April 25, 2002, the record date for
voting at the Comcast special meeting, in order to enter the meeting. Video and
audio recording devices and other electronic devices will not be permitted at
the Comcast special meeting, and attendees will be subject to security
inspections.
XIII-5
CHAPTER FOURTEEN
INFORMATION ABOUT THE AT&T ANNUAL MEETING AND VOTING
This document and the accompanying AT&T proxy card were mailed to holders
of voting shares of AT&T in connection with the solicitation of proxies by the
AT&T Board for the 2002 Annual Meeting of Shareholders in Charleston, South
Carolina. Proxies are solicited to give all AT&T shareholders of record at the
close of business on May 14, 2002 an opportunity to vote on matters that come
before the AT&T annual meeting. This procedure is necessary because AT&T
shareholders live in all U.S. states and abroad and most will not be able to
attend. Shares of AT&T common stock can be voted only if the shareholder is
present in person or is represented by proxy.
THE INFORMATION AND INSTRUCTIONS CONTAINED IN THIS CHAPTER ARE ADDRESSED TO
AT&T SHAREHOLDERS, AND ALL REFERENCES TO "YOU" IN THIS CHAPTER SHOULD BE
UNDERSTOOD TO BE ADDRESSED TO AT&T SHAREHOLDERS.
Registered AT&T shareholders (those who hold AT&T shares directly or
through AT&T plans rather than a bank or broker) can simplify their voting and
save AT&T expense by calling 1-800-273-1174 or voting via the Internet at
http://att.proxyvoting.com/. Telephone and Internet voting information is
provided on the AT&T proxy card. A Control Number is designed to verify AT&T
shareholders' identities and allow them to vote their shares and confirm that
their voting instructions have been properly recorded. It is located above the
shareholder's name and address in the lower left section of the AT&T proxy card.
If an AT&T shareholder holds shares through a bank or broker, the shareholder
will receive separate instructions on the form he or she receives. Although most
banks and brokers now offer telephone and Internet voting, availability and
specific processes will depend on their voting arrangements.
MATTERS RELATING TO THE AT&T ANNUAL MEETING
Date, Time and Place: July 10, 2002
9:30 a.m. local time
Charleston Area Convention Center Complex
5001 Coliseum Drive
N. Charleston, South Carolina 29418
Please see the end of this Chapter XIV for travel
directions.
--------------------------------------------------------------------------------------------------------
Purpose of AT&T Annual Meeting is to Vote - to elect directors for the ensuing year;
on the Following Items:
- 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 AT&T's 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 this document;
- 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;
- the shareholder proposals described starting on page
XIV-16; and
- to act upon such other matters as may properly come before
the AT&T annual meeting or any adjournment or postponement
thereof.
XIV-1
Record Date: The record date for AT&T shares entitled to vote is May 14, 2002.
------------------------------------------------------------------------------------------------------------------
Outstanding Shares Held on March 1, 2002: As of March 1, 2002, there were outstanding approximately
3,545,295,334 shares of AT&T common stock.
------------------------------------------------------------------------------------------------------------------
Votes Necessary to Approve the With respect to the election of directors, the nominees who receive
Proposals:* the most votes of holders of AT&T common stock will be elected.
The affirmative vote of a majority of the outstanding shares of AT&T
common stock entitled to vote at the AT&T annual meeting is required
to approve the AT&T transaction proposal, the Consumer Services
charter amendment proposal and the reverse stock split proposal.
The affirmative vote of a majority of the votes cast by holders of the
outstanding shares of AT&T common stock is required to approve any of
the proposals to be voted upon at the AT&T annual meeting other than
the election of directors, the AT&T transaction proposal, the Consumer
Services charter amendment proposal and the reverse stock split
proposal.
Each holder of AT&T common stock is entitled to one vote per share on
each of the AT&T proposals.
An abstention with respect to the AT&T transaction proposal, the
Consumer Services charter amendment proposal or the reverse stock
split proposal will have the effect of a vote against such proposal.
Shares held by AT&T in its treasury are not voted.
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.
------------------------------------------------------------------------------------------------------------------
Quorum Requirements: A quorum of shareholders is necessary to hold a valid meeting.
The presence in person or by proxy at the meeting of holders of 40% of
the outstanding shares of AT&T common stock entitled to vote at the
meeting is a quorum.
Abstentions and broker "non-votes" count as present for establishing a
quorum.
A broker non-vote occurs on an item when a broker is not permitted to
vote on the item without instruction from the beneficial owner of the
shares and no instruction is given.
------------------------------------------------------------------------------------------------------------------
Shares Beneficially Owned by AT&T As of March 1, 2002, approximately 61,741,916 of the outstanding
Directors and Executive Officers as of shares of AT&T common stock, including exercisable options, were
March 1, 2002: beneficially owned by AT&T directors and executive officers.
These shares represent in total approximately 1.7% of the outstanding
shares of AT&T common stock as of March 1, 2002.
These individuals have indicated or agreed that they will vote to
approve the AT&T transaction proposal.
* Under NYSE Rules, if your broker holds your shares in its name, your broker may not vote your shares with
respect to certain types of proposals absent instructions from you. Specifically, absent instructions from you,
your broker may not vote your shares on 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. Broker non-votes will have the effect of a vote against the AT&T transaction proposal and the
Consumer Services charter amendment proposal. Broker non-votes will have no effect on the AT&T Comcast charter
proposal, the incentive plan proposal or the employee stock purchase plan proposal. If you do not provide
instructions to your broker, the broker may still vote your shares with respect to the reverse stock split
proposal, the election of directors, the ratification of auditors and each of the shareholder proposals.
XIV-2
ELECTRONIC ACCESS TO AT&T PROXY MATERIALS AND ANNUAL REPORT
AT&T shareholders can access AT&T's Notice of Meeting and Proxy Statement
and annual report via the Internet on the AT&T Investor Relations Website at
http://www.att.com/ir/. For future shareholder meetings, AT&T's registered
shareholders can further save AT&T expense by consenting to access their proxy
statement and annual report electronically. AT&T shareholders can choose this
option by marking the "Electronic Access" box on the proxy card or by following
the instructions provided when voting by telephone or via the Internet. If you
choose this option, prior to each shareholder meeting you will receive in the
mail your proxy card that provides a notice of meeting with a business reply
envelope. You do not need to select this option each year; however, you may want
to choose this option for more than one account held in your name. Your choice
will remain in effect unless you revoke it by contacting AT&T's transfer agent,
EquiServe, at 1-800-348-8288 or visiting the AT&T Investor Relations Website at
http://www.att.com/ir/. Beneficial shareholders, (those who hold shares through
a bank, broker, or other record holder) may request electronic access by
contacting their broker or financial institution.
DELIVERY OF PROXY MATERIALS TO HOUSEHOLDS
The SEC recently implemented a new rule regarding the delivery of proxy
materials to households (annual reports, proxy statements, proxy statements
combined with a prospectus, or any information statement to shareholders). This
new method of delivery, often referred to as "householding," permits AT&T and
other companies to mail a single set of proxy materials to any household in
which two or more different shareholders reside and are members of the same
household or in which one shareholder has multiple accounts. For voting
purposes, a separate proxy card will be included for each account at the shared
address.
In January 2002, AT&T mailed each registered shareholder (those who hold
shares directly or through AT&T plans) at the shared address a separate notice
of its intention to household proxy materials. Beneficial shareholders were
notified in 2001 of the householding process. Those beneficial shareholders who
are eligible and have not opted-out of the householding process will receive one
set of proxy materials this year.
Registered shareholders who reside at such a household and would like to
receive a separate annual report and proxy statement, or have questions
regarding the householding process, may contact AT&T's transfer agent,
EquiServe, by calling 1-800-348-8288, forwarding a written request addressed to
EquiServe, Post Office Box 43007, Providence, RI 02940-3007, or via e-mail to
att@equiserve.com. Beneficial shareholders should contact their broker or
financial institution for specific information on this matter.
PROXY VOTING
If you do not vote by telephone or the Internet, you may still return your
proxy card, properly signed, and the shares represented will be voted in
accordance with your directions. You can specify your choices by marking the
appropriate boxes on your proxy card. If an AT&T proxy card is signed and
returned without specifying any choices, the shares will be voted as recommended
by the AT&T Board. Abstentions marked on the proxy card are voted neither "for"
nor "against," but are counted in the determination of a quorum for each of the
proposals. Abstentions have the effect of a vote against the AT&T transaction
proposal, the Consumer Services charter amendment proposal and the reverse stock
split proposal. IF YOU VOTE BY TELEPHONE OR THE INTERNET, IT IS NOT NECESSARY TO
RETURN YOUR PROXY CARD.
If you wish to give your proxy to someone other than the AT&T Proxy
Committee, all names that appear on the proxy card must be crossed out and the
name of another person or persons (not more than three) inserted. The signed
card must be presented at the meeting by the person or persons representing you.
You may revoke your proxy at any time before it is voted at the meeting by
executing a later-voted proxy by telephone, the Internet, or mail, by voting by
ballot at the meeting, or by filing an instrument of revocation with the
inspector of election in care of the Vice President -- Law and Secretary of
AT&T.
XIV-3
YOUR VOTE IS IMPORTANT. ACCORDINGLY, AT&T SHAREHOLDERS ARE ENCOURAGED TO
VOTE BY TELEPHONE, THE INTERNET, OR BY SIGNING AND RETURNING THE ACCOMPANYING
PROXY CARD WHETHER OR NOT THEY PLAN TO ATTEND THE MEETING. If you do attend, you
may vote by ballot at the AT&T annual meeting, thereby canceling any proxy
previously voted.
CONFIDENTIAL VOTING
For many years, AT&T has had a confidential voting policy. AT&T has
formalized its policy by amending its bylaws so that all proxies and other
voting materials, including telephone and Internet voting, are kept confidential
and are not disclosed to AT&T or its officers and directors, subject to standard
exceptions. Such documents are available for examination only by the inspector
of election and certain personnel associated with processing proxy cards and
tabulating the vote. This bylaw provision cannot be amended, rescinded, or
waived except by a shareholder vote. AT&T's independent inspector of election,
an officer of IVS Associates, Inc., has been appointed.
VOTING SHARES HELD IN DIVIDEND REINVESTMENT AND SAVINGS PLANS
For participants in the AT&T Shareowner Dividend Reinvestment and Stock
Purchase Plan or the AT&T 1996 Employee Stock Purchase Plan, your shares will be
voted as specified on your proxy card and will not be voted if the proxy card is
not returned. For employee shareholders participating in the AT&T Long Term
Savings Plan for Management Employees, the AT&T Long Term Savings and Security
Plan, the AT&T Retirement Savings and Profit Sharing Plan, the AT&T of Puerto
Rico, Inc. Long Term Savings Plan for Management Employees, the AT&T of Puerto
Rico, Inc. Long Term Savings and Security Plan, the AT&T Broadband Long Term
Savings Plan, or the AT&T Wireless Services 401(k) Retirement Plan, your shares
will be voted as specified on your proxy card. If the proxy cards are not
returned, the Trustee of the plan will vote those shares in the same proportion
as the shares for which instructions were received from all other participants
in that plan. If you wish to abstain from voting on a shareholder matter, you
must indicate this when you vote by telephone, the Internet or by mail.
ANNUAL MEETING ADMISSION
If you are a registered AT&T shareholder and plan to attend the AT&T
meeting in person, please detach and retain the admission ticket that is
attached to your proxy card. If you will attend the meeting, please be sure to
respond to the "I/We plan to attend the Annual Meeting" question when you vote.
A beneficial owner of AT&T shares who plans to attend the meeting may obtain an
admission ticket in advance by sending a written request, with proof of
ownership, such as a bank or brokerage firm account statement, to:
Manager -- Proxy, AT&T Corp., 295 North Maple Avenue, Room 1216L2, Basking
Ridge, New Jersey 07920-1002. Admittance to the annual meeting will be based
upon availability of seating.
AT&T shareholders who do not present admission tickets at the meeting will
be admitted upon verification of ownership at the admissions counter.
If you attend the AT&T meeting you may be asked to present valid
government-issued photo 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.
The annual meeting location is fully accessible to disabled persons, and
sign interpretation and wireless headsets will be available for hearing-impaired
AT&T shareholders.
Highlights of the meeting will be available on the AT&T Investor Relations
Website at http://www.att.com/ir/.
THE AT&T BOARD
The AT&T Board is responsible for establishing broad corporate policies and
monitoring the overall performance of AT&T. However, in accordance with
corporate legal principles, the AT&T Board is not involved in day-to-day
operating matters. Members of the AT&T Board are kept informed of AT&T's
XIV-4
business by participating in AT&T Board and committee meetings, by reviewing
analyses and reports sent to them each month, and through discussions with the
Chairman and other officers.
The AT&T Board held 17 meetings and the committees held 19 meetings in
2001. The average attendance in the aggregate of the total number of meetings of
the AT&T Board and the total number of committee meetings was 96.6%.
ELECTION OF DIRECTORS (ITEM 1 ON PROXY CARD)
The AT&T Proxy Committee intends to vote for the election of the 15
nominees listed on the following pages. These nominees have been selected by the
AT&T Board on the recommendation of the Governance and Nominating Committee. If
you do not wish your shares to be voted for particular nominees, please identify
the exceptions in the designated space provided on the proxy card or, if you are
voting by telephone or the Internet, follow the system instructions. Directors
will be elected by a plurality of the votes cast. Any shares not voted, whether
by abstention, broker non-vote, or otherwise, have no impact on the vote.
If at the time of the meeting one or more of the nominees have become
unavailable to serve, shares represented by proxies will be voted for the
remaining nominees and for any substitute nominee or nominees designated by the
Governance and Nominating Committee or, if none, the size of the AT&T Board will
be reduced. Except as noted below in cases of directors moving to new boards in
conjunction with restructuring activities, the Governance and Nominating
Committee knows of no reason why any of the nominees will be unavailable or
unable to serve.
Directors elected at the AT&T annual meeting will hold office until the
next annual meeting or until their successors have been elected and qualified,
except as noted below for those directors moving to new boards in conjunction
with restructuring activities. For each nominee there follows a brief listing of
principal occupation for at least the past five years, other major affiliations,
and age as of March 31, 2002.
NOMINEES FOR ELECTION AS DIRECTORS
C. MICHAEL ARMSTRONG AGE: 63 DIRECTOR SINCE: 1997
BUSINESS EXPERIENCE: Mr. Armstrong has been the Chairman and Chief Executive
Officer of AT&T since 1997. He was formerly the Chairman and Chief Executive
Officer of Hughes Electronics.
OTHER DIRECTORSHIPS: Citigroup Inc. Chairman of U.S.-Japan Business Council and
former Chairman of FCC Network Reliability and Interoperability Council. Member
of the President's Export Council, the Council on Foreign Relations, the
National Security Telecommunications Advisory Committee, the Defense Policy
Advisory Committee on Trade, the Business Roundtable, and the Business Council.
Director of National Cable Television Association (NCTA) and a member of its
Executive Committee. Member of the supervisory board of the Thyssen-Bornemisza
Group, Trustee of John Hopkins University, Chairman of the Board of Visitors of
John Hopkins University School of Medicine, and member of the Advisory Board of
the Yale School of Management.
J. MICHAEL COOK AGE: 59 DIRECTOR SINCE: 2001
BUSINESS EXPERIENCE: Mr. Cook is the retired Chairman and Chief Executive
Officer of Deloitte & Touche LLP, a professional services firm. He served as
Chairman and Chief Executive Officer of Deloitte & Touche LLP from 1989 to 1999.
He was also Chairman of the Deloitte & Touche Foundation and a member of the
Board of Deloitte Touche Tohmatsu.
OTHER DIRECTORSHIPS: International Flavors & Fragrances Inc., Rockwell
Automation International, The Dow Chemical Company, and HCA. Trustee of the
Fidelity Group of Mutual Funds. Member of the Advisory Board of the Securities
Regulation Institute, Chairman Emeritus of the Board of Catalyst, a Director of
the STAR Foundation (Society to Advance the Retarded and Handicapped), and
Chairman of the Accountability Advisory Panel to the Comptroller General of the
United States. Member of the Board of Overseers of the Columbia Business School
and Member of the Advisory Board of the Graduate School of the University of
Florida.
XIV-5
KENNETH T. DERR AGE: 65 DIRECTOR SINCE: 1995
BUSINESS EXPERIENCE: Mr. Derr is the Retired Chairman of the Board of Chevron
Corporation, an international oil company, where he was also Chairman and Chief
Executive Officer until 1999.
OTHER DIRECTORSHIPS: Citigroup Inc., Calpine Corp., and Halliburton Company.
DAVID W. DORMAN AGE: 48 DIRECTOR SINCE: 2002
BUSINESS EXPERIENCE: Mr. Dorman has been President of AT&T since 2000. He is
the former Chief Executive Officer of Concert, a former global venture created
by AT&T and British Telecom. Mr. Dorman has also been Chairman, President, and
CEO of PointCast, Executive Vice President of SBC, and Chairman, President, and
CEO of Pacific Bell. Prior to that he was President of Sprint Business.
OTHER DIRECTORSHIPS: Science Applications International Corporation (SAIC),
Scientific-Atlanta Inc., and Sabre Holdings Corporation. Served as member of the
President's Advisory Committee on High Performance Computing and Communications,
Information Technology and the Next Generation Internet.
M. KATHRYN EICKHOFF AGE: 62 DIRECTOR SINCE: 1987
BUSINESS EXPERIENCE: Ms. Eickhoff has been President of Eickhoff Economics,
Inc., an economic consulting firm, since 1987. She is a past Associate Director
for Economic Policy for the U.S. Office of Management and Budget and the former
Executive Vice President and Treasurer of Townsend-Greenspan & Co., Inc.
OTHER DIRECTORSHIPS: Pharmacia Corporation and Tenneco Automotive Inc.
GEORGE M. C. FISHER AGE: 61 DIRECTOR SINCE: 1997
BUSINESS EXPERIENCE: Mr. Fisher is the retired Chairman and CEO of Eastman
Kodak Company, an imaging company. He served as Chairman of the Board, Eastman
Kodak Company from January to December 2000. Before this, he held the Kodak
positions of Chairman, President, and CEO (December 1993 to January 1997), and
Chairman and CEO (January 1997 to January 2000). Mr. Fisher was also Chairman of
the Board (1990-1993) and Chief Executive Officer (1988-1993) of Motorola, Inc.
He is a former Chairman of the Boards of Directors of: the University of
Illinois Foundation (1997-1999), the U.S.-China Business Council (1997-1999),
and the U.S. Council on Competitiveness (1991-1993).
OTHER DIRECTORSHIPS: Delta Airlines, Inc., Eli Lilly and Company, and General
Motors Corporation. Member of the Business Council and the President's Advisory
Committee for Trade Policy and Negotiations. Elected to the American Academy of
Arts and Sciences and the National Academy of Engineers, the latter of which he
is Chairman.
FRANK C. HERRINGER AGE: 59 DIRECTOR SINCE: 2002
BUSINESS EXPERIENCE: Mr. Herringer has been Chairman of the Board of
Transamerica Corporation, part of Aegon N.V., an international insurance
organization, since 1999. He served as Chairman, President, and Chief Executive
Officer (1995-1999) and President and Chief Executive Officer (1991-1995) at
Transamerica Corporation. Prior to joining Transamerica, Mr. Herringer was
General manager and Chief Executive Officer of the San Francisco Bay Area Rapid
Transit District.
OTHER DIRECTORSHIPS: Charles Schwab Corporation, Fluid Ventures LLP, Mirapoint,
Inc. and Unocal Corporation.
XIV-6
AMOS B. HOSTETTER, JR. AGE: 65 DIRECTOR
SINCE: 1999
BUSINESS EXPERIENCE: Mr. Hostetter is the Chairman of Pilot House Associates, a
family investment company. He is the co-founder and former Chairman and Chief
Executive Officer of Continental Cablevision, Inc. Mr. Hostetter is a former
Chairman of the Board (1973-74) and Director (1968-1998) of the National Cable
Television Association and is a founding member and past Chairman of the Cable-
Satellite Public Affairs Network (C-SPAN).
OTHER DIRECTORSHIPS: Member of C-SPAN's Board and Executive Committee. Chairman
of the Board of Trustees of Amherst College, a Trustee of the Museum of Fine
Arts, Boston and of WGBH FM/TV, the public broadcasting stations in Boston.
SHIRLEY A. JACKSON, PH.D. AGE: 55 DIRECTOR
SINCE: 2001
BUSINESS EXPERIENCE: Dr. Jackson is the President of Rensselaer Polytechnic
Institute. Prior to becoming President of Rensselaer Polytechnic Institute in
1999, Dr. Jackson was Chairman of the U.S. Nuclear Regulatory Commission
(1995-1999), held a position as a theoretical physicist at the former AT&T Bell
Laboratories (1975-1991), and in academe as a professor of theoretical physics
at Rutgers University (1991-1995).
OTHER DIRECTORSHIPS: FedEx Corporation, Public Service Enterprise Group, Sealed
Air Corporation, Marathon Oil Corporation, U.S. Steel Corp., Albany Molecular
Research, Inc., Medtronic, Inc., and KeyCorp. Trustee of the Brookings
Institution. Serves on the Executive Committee of the Council on
Competitiveness, Council of the Government -- University-Industry Research
Roundtable, U.S. Comptroller General's Advisory Committee for the Government
Accounting Office (GAO), and Advisory Council for the Department of Energy
National Nuclear Security Administration (NNSA). Elected to the National Academy
of Engineering (NAE) in 2001. Fellow of the American Academy of Arts and
Sciences and the American Physical Society. Life Member of the M.I.T.
Corporation (Board of Trustees).
DONALD F. MCHENRY AGE: 65 DIRECTOR SINCE: 1986
BUSINESS EXPERIENCE: Mr. McHenry has been a Distinguished Professor in the
Practice of Diplomacy, Georgetown University, since 1981. He has also been
President of IRC Group LLC, international relations consultants, since 1981.
OTHER DIRECTORSHIPS: Fleet Boston Corp. and its subsidiary, Fleet Bank,
Coca-Cola Co., International Paper Co., and GlaxoSmithKline plc (U.K.).
CHARLES H. NOSKI AGE: 49 DIRECTOR SINCE: 2002
BUSINESS EXPERIENCE: Mr. Noski has been Vice Chairman of the Board of AT&T
Corp. since February 2002 and Chief Financial Officer of AT&T Corp. since 1999.
Prior to joining AT&T, he was President and Chief Operating Officer of Hughes
Electronics Corporation, a publicly-traded subsidiary of General Motors
Corporation in the satellite and wireless communications business. Mr. Noski was
a partner at Deloitte & Touche LLP prior to joining Hughes.
OTHER DIRECTORSHIPS: Air Products & Chemicals, Inc., Private Sector Council,
and California State University Northridge Foundation. Member of American
Institute of Certified Public Accountants.
XIV-7
LOUIS A. SIMPSON AGE: 65 DIRECTOR SINCE: 2000
BUSINESS EXPERIENCE: Mr. Simpson has been President and Chief Executive Officer
Capital Operations, GEICO Corporation, a national property and casualty
insurance company, since 1993, and was its former Vice Chairman of the Board
(1985-1993) and Senior Vice President and Chief Investment Officer (1979-1993).
Prior to joining GEICO, he was President and Chief Executive Officer of Western
Asset Management, a subsidiary of Western Bancorporation, a partner at Stein Roe
and Farnham, and an instructor of Economics at Princeton University.
OTHER DIRECTORSHIPS: Western Asset Funds, Inc., Pacific American Income Shares,
Inc., Science Applications International Corporation (SAIC), and HNC Software.
Member of the endowments committee of Ohio Wesleyan University, trustee for the
Cate School, the University of California San Diego Foundation, the Urban
Institute, and the Woodrow Wilson National Fellowship Foundation. He is also
Chair of the Scripps Institution of Oceanography Council.
MICHAEL I. SOVERN AGE: 70 DIRECTOR SINCE: 1984
BUSINESS EXPERIENCE: Mr. Sovern is Chairman of Sotheby's Holdings, Inc. He is
President Emeritus and Chancellor Kent Professor of Law at Columbia University,
where he was President from 1980 to 1993. Mr. Sovern is President and Director
of Shubert Foundation and Director of Shubert Organization.
OTHER DIRECTORSHIPS: Sequa Corp. and Sotheby's Holdings, Inc. Chairman of the
Japan Society and Chairman of the American Academy in Rome.
SANFORD I. WEILL AGE: 69 DIRECTOR SINCE: 1998
BUSINESS EXPERIENCE: Mr. Weill has been Chairman and Chief Executive Officer of
Citigroup Inc., a financial services company, since October 1998. He is Chairman
of the Board of Trustees of Carnegie Hall and Chairman of the Board of Overseers
for Cornell University's Joan and Sanford I. Weill Medical College and Graduate
School of Medical Sciences. Mr. Weill is a founder and Chairman of the National
Academy Foundation. He formerly served as Chairman and Chief Executive Officer
of Travelers Group and its predecessor, Commercial Credit Company, President of
American Express Company, and Chairman and Chief Executive Officer of the
Fireman's Fund Insurance Company subsidiary.
OTHER DIRECTORSHIPS: New York Presbyterian Hospital, Memorial Sloan-Kettering
Cancer Center, United Technologies Corporation, and Federal Reserve Bank of New
York. Member of the Business Council.
TONY L. WHITE AGE: 55 DIRECTOR SINCE: 2002
BUSINESS EXPERIENCE: Mr. White is Chairman, President, and Chief Executive
Officer of Applera Corporation (formerly known as PE Corp.), a developer and
marketer of systems used by the life science industry and research community for
scientific discoveries and development of new pharmaceuticals. Prior to that he
was Executive Vice President and Member of the Office of the CEO at Baxter
International, Inc.
OTHER DIRECTORSHIPS: C.R. Bard, Inc. and Ingersoll-Rand Company.
COMMITTEES OF THE AT&T BOARD
The AT&T Board has established a number of committees, including the Audit
Committee, the Compensation and Employee Benefits Committee, the Finance
Committee, and the Governance and Nominating Committee, each of which is briefly
described below. Another committee of the AT&T Board is the Proxy Committee
(that votes the shares represented by proxies at the annual meeting of
shareholders).
The Audit Committee meets with AT&T management to consider the adequacy of
the internal controls and the objectivity of financial reporting. The committee
also meets with the independent auditors and with appropriate AT&T financial
personnel and internal auditors concerning these matters. The committee
recommends to the AT&T Board the appointment of the independent auditors,
subject to ratification by the shareholders at the annual meeting. Both the
internal auditors and the independent
XIV-8
auditors periodically meet alone with the committee and always have unrestricted
access to the committee. The committee, which consists of five non-employee
directors, met six times in 2001.
The Compensation and Employee Benefits Committee administers incentive
compensation plans, including stock option plans, and keeps informed and advises
the AT&T Board regarding employee benefit plans. The committee establishes the
compensation structure for senior managers of AT&T and makes recommendations to
the AT&T Board with respect to compensation of the officers as listed on page
. The committee, which consists of five non-employee directors, met seven
times in 2001.
The Finance Committee meets with AT&T management to review the financial
policy and procedures of AT&T, including AT&T's Financing Plan, Capital and
Investment Program, and Dividend Policy. The committee advises the AT&T Board on
AT&T's financial condition and makes recommendations concerning the dividend
policy and payments of AT&T. The committee, which consists of five non-employee
directors, met four times in 2001.
The Governance and Nominating Committee advises and makes recommendations
to the AT&T Board on all matters concerning directorship and corporate
governance practices, including compensation of directors and the selection of
candidates as nominees for election as directors, and it provides guidance with
respect to matters of public policy. The committee, which consists of four
non-employee directors, met one time in 2001. On April 10, 2002, the AT&T Board
nominated the slate of directors for election at the 2002 Annual Meeting of
Shareholders.
In recommending AT&T Board candidates, the Governance and Nominating
Committee seeks individuals of proven judgment and competence who are
outstanding in their respective fields. The committee considers such factors as
experience, education, employment history, special talents or personal
attributes, anticipated participation in AT&T Board activities, and geographic
and other diversity factors. Shareholders who wish to recommend qualified
candidates should write to: Vice President -- Law and Secretary, AT&T Corp., 295
North Maple Avenue, Basking Ridge, NJ 07920-1002, stating in detail the
qualifications of such persons for consideration by the committee.
The table below provides membership information for each of the AT&T Board
committees.
COMPENSATION
AND EMPLOYEE GOVERNANCE AND
NAME AUDIT BENEFITS NOMINATING FINANCE
---- ----- ----------------- -------------- -------
Mr. Armstrong...........................
Mr. Cook................................ X X
Mr. Derr................................ X X
Mr. Dorman..............................
Ms. Eickhoff............................ X X
Mr. Fisher.............................. X* X
Mr. Herringer...........................
Mr. Hostetter, Jr....................... X
Dr. Jackson............................. X X
Mr. McHenry............................. X X*
Mr. Noski...............................
Mr. Simpson............................. X X*
Mr. Sovern.............................. X* X
Mr. Weill............................... X X
Mr. White...............................
---------------
* Chair
XIV-9
COMPENSATION OF DIRECTORS
In 2001, directors who were not AT&T employees received an annual retainer
of $90,000. AT&T common stock units with a then-current market value of $45,000
were deferred automatically and credited to a portion of a deferred compensation
account, pursuant to AT&T's Deferred Compensation Plan for Non-Employee
directors. Pursuant to that same plan, the director had the option of deferring
the remaining $45,000 in AT&T stock units, a deferred cash account, or cash in
hand. The chairpersons of the Audit Committee, Compensation and Employee
Benefits Committee, and Finance Committee each received an additional annual
retainer of $7,500. The chairperson of the Governance and Nominating Committee
received an additional annual retainer of $5,000. No fees are paid for
attendance at regularly scheduled AT&T Board and committee meetings. Directors
received a fee of $1,500 for each special AT&T Board or committee meeting
attended. In addition, non-employee directors received a stock option award to
purchase 6,226 shares of AT&T common stock (adjusted for the special dividend of
AT&T Wireless Services, Inc. common stock) at $15.7897. The options are
exercisable in four equal annual installments commencing on the first
anniversary of the grant date and expire after ten years.
Directors may elect to defer the receipt of all or part of their cash
retainer and other compensation into the AT&T common stock portion or the cash
portion of the deferred compensation account. The AT&T common stock portion (the
value of which is measured from time to time by the market value of AT&T common
stock) is credited on each dividend payment date for AT&T common stock with a
number of deferred shares of AT&T common stock equivalent in market value to the
amount of the quarterly dividend on the shares then credited in the accounts.
The cash portion of the deferred compensation account, representing amounts
deferred prior to January 1, 2001, earns interest, compounded quarterly, at an
annual rate equal to the average interest rate for 10-year United States
Treasury Notes for the previous quarter, plus 5%. Thereafter, amounts deferred
to the cash portion of the deferred compensation account earn interest,
compounded quarterly, at an annual rate equal to the average interest rate for
10-year United States Treasury Notes for the previous quarter, plus 2%.
Effective December 31, 1996, AT&T terminated its Pension Plan for
Non-Employee Directors. The Pension Plan now covers only those non-employee
directors who retired prior to December 31, 1996. Benefits accrued for
then-active directors were valued and converted into a deferred annuity. AT&T
also provides non-employee directors with travel accident insurance when on AT&T
business. A non-employee director may also enroll in a Director's Universal Life
Insurance Program sponsored by AT&T at no cost to the non-employee director. On
June 1, 2001, this program replaced the former AT&T-sponsored life insurance
program under which AT&T shared in the premium expense with the director.
Existing life insurance policies for active non-employee directors under the
former program were exchanged, in a tax-free exchange, for new universal life
insurance policies under the new plan. AT&T recovered the portion of the life
insurance premiums it contributed under the former program during the tax-free
exchange. The life insurance benefit under the Director's Universal Life
Insurance Program will continue after the non-employee director's retirement
from the AT&T Board.
XIV-10
STOCK OWNERSHIP OF MANAGEMENT AND DIRECTORS
The following table sets forth information concerning the beneficial
ownership of AT&T common stock, as of March 1, 2002, for (a) each current
director elected to the AT&T Board in 2001 and each nominee for election as a
director in 2002; (b) each of the officers named in the Summary Compensation
Table herein ("Named Executive Officers") not listed as a director; and (c)
directors and executive officers as a group. No director or executive officer
owns any AT&T preferred shares. Except as otherwise noted, the nominee or family
members had sole voting and investment power with respect to such securities.
NUMBER OF SHARES
---------------------------------------
BENEFICIALLY DEFERRAL PERCENT
NAME OWNED PLANS(1) TOTAL OF CLASS
---- ------------ -------- ---------- --------
(A)
C. Michael Armstrong(2)......................... 1,946,529(3) 90,907 2,037,436 *
J. Michael Cook................................. 3,000 4,527 7,527 *
Kenneth T. Derr(4).............................. 5,450 20,995 26,445 *
David W. Dorman................................. 955,995(5) 0 955,995 *
M. Kathryn Eickhoff(6).......................... 8,500 12,618 21,118 *
George M. C. Fisher............................. 15,132 23,571 38,703 *
Frank C. Herringer(7)........................... 12,528(8) 0 12,528 *
Amos B. Hostetter, Jr........................... 53,562,657(9) 13,147 53,575,804 1.51%
Shirley A. Jackson.............................. 391 4,633 5,024 *
Donald F. McHenry............................... 4,887 17,985 22,872 *
Charles H. Noski(10)............................ 1,243,086(11) 202,665 1,445,751 *
Louis A. Simpson................................ 144,869(12) 10,735 155,604 *
Michael I. Sovern............................... 2,300 19,180 21,480 *
Sanford I. Weill................................ 75,000 6,964 81,964 *
Tony L. White(13)............................... 0 0 0 *
BENEFICIALLY DEFERRAL PERCENT
NAME OWNED PLANS(1) TOTAL OF CLASS
---- ------------ -------- ---------- --------
(B)
Betsy J. Bernard................................ 657,919(14) 0 657,919 *
Frank Ianna..................................... 1,032,170(15) 12,304 1,044,473 *
BENEFICIALLY DEFERRAL PERCENT
NAME OWNED PLANS(1) TOTAL OF CLASS
---- ------------ -------- ---------- --------
(C)
Directors and Executive Officers as a group..... 61,741,916(16) 541,900 62,283,816 1.74%
---------------
* Less than one percent
FOOTNOTES
1. Share units held in deferred compensation accounts that do not constitute
beneficially owned securities.
2. Also beneficially owns 10,000 shares of At Home Corporation Series A common
stock.
3. Includes beneficial ownership of 1,697,362 shares that may be acquired
within 60 days pursuant to stock options awarded under employee incentive
compensation plans.
4. Also beneficially owns 3,735 shares of Comcast Corporation common stock.
XIV-11
5. Includes beneficial ownership of 190,794 shares that may be acquired within
60 days pursuant to stock options awarded under employee incentive
compensation plans.
6. Includes 2,000 shares of AT&T common stock held by a trust, as to which Ms.
Eickhoff has disclaimed beneficial ownership. Also beneficially owns 500
shares of At Home Corporation Series A common stock.
7. Effective April 10, 2002, Frank C. Herringer was elected to the AT&T Board
of Directors.
8. Includes 10,000 shares of AT&T common stock held in the Frank C. Herringer
Contributory IRA and 2,528 shares of AT&T common stock held in family
trusts. Of these shares, Mr. Herringer disclaims beneficial ownership of 28
shares.
9. Includes 9,720,740 shares of AT&T common stock as to which Mr. Hostetter has
disclaimed beneficial ownership.
10. Also beneficially owns 86 shares of Comcast Corporation common stock held in
a family trust.
11. Includes beneficial ownership of 946,332 shares that may be acquired within
60 days pursuant to stock options awarded under employee incentive
compensation plans and 285,108 shares that are held in family and other
trusts.
12. Includes beneficial ownership of 62,631 shares that may be acquired within
60 days pursuant to an existing MediaOne Group, Inc. stock option that was
converted into a fully vested option for AT&T common stock expiring on June
16, 2008, at an exercise price of $18.9446. (See section entitled "Simpson
Transactions" under "Certain Relationships and Related Transactions.")
13. Effective April 10, 2002, Tony L. White was elected to the AT&T Board. Also
beneficially owns 750 shares of Comcast Corporation common stock.
14. Includes beneficial ownership of 408,922 shares that may be acquired within
60 days pursuant to stock options awarded under employee incentive
compensation plans.
15. Includes beneficial ownership of 695,512 shares that may be acquired within
60 days pursuant to stock options awarded under employee incentive
compensation plans.
16. Includes beneficial ownership of 5,491,532 shares that may be acquired
within 60 days pursuant to stock options awarded under employee incentive
compensation plans.
OWNERSHIP OF VOTING SECURITIES IN EXCESS OF FIVE PERCENT BY BENEFICIAL OWNERS
AT&T does not know of any person or entity that beneficially owns more than
5% of its outstanding common stock.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires AT&T's
directors and executive officers, and persons who own more than 10 percent of a
registered class of AT&T's equity securities, to file with the SEC and the NYSE,
initial reports of ownership and reports of changes in beneficial ownership of
such equity securities of AT&T.
To AT&T's knowledge, based upon the reports filed and written
representations that no other reports were required, during the fiscal year
ended December 31, 2001, none of its directors and executive officers failed to
file on a timely basis reports required by Section 16(a) with the following
exception: Richard J. Martin, one report regarding one transaction.
RATIFICATION OF APPOINTMENT OF AUDITORS (ITEM 2 ON PROXY CARD)
Subject to shareholder ratification, the AT&T Board, upon recommendation of
the Audit Committee, has reappointed the firm of PricewaterhouseCoopers LLP as
the independent auditors to examine AT&T's financial statements for the year
2002. PricewaterhouseCoopers LLP has audited AT&T's books for many years. THE
AT&T BOARD RECOMMENDS THAT AT&T SHAREHOLDERS VOTE FOR SUCH RATIFICATION.
Ratification of the appointment of auditors requires a majority of the votes
cast. Any shares not voted, whether by
XIV-12
abstention, broker non-vote, or otherwise, have no impact on the vote. If
shareholders do not ratify this appointment, other independent auditors will be
considered by the AT&T Board upon recommendation of the Audit Committee.
Representatives of PricewaterhouseCoopers LLP are expected to attend the
AT&T meeting and will have the opportunity to make a statement if they desire
and to respond to appropriate questions.
For the year 2001, PricewaterhouseCoopers LLP also examined the financial
statements of AT&T's subsidiaries and provided other audit services to AT&T and
its subsidiaries in connection with SEC filings, review of financial statements,
and audits of pension plans.
DIRECTORS' PROPOSAL 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 (ITEM 3 ON PROXY
CARD)
For information regarding the AT&T transaction proposal, please see
Chapters I-IX, Chapter XII and Chapters XV-XVI of this document.
The AT&T Board recommends that AT&T shareholders vote "FOR" the above
proposal.
DIRECTORS' PROPOSAL 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 (ITEM 3A ON PROXY CARD)
For information regarding the AT&T Comcast charter proposal, please see
Chapter II of this document.
The AT&T Board recommends that AT&T shareholders vote "FOR" the above
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 AT&T shareholders wish
to approve the AT&T Comcast transaction, they must also approve the AT&T Comcast
charter proposal.
DIRECTORS' PROPOSAL TO APPROVE AND ADOPT AN AMENDMENT TO AT&T'S CHARTER TO
AUTHORIZE THE CREATION OF AT&T CONSUMER SERVICES GROUP TRACKING STOCK (ITEM 4 ON
PROXY CARD)
For information regarding the Consumer Services charter amendment proposal,
please see Chapter I, Chapter VI and Chapters X-XII of this document.
The AT&T Board recommends that AT&T shareholders vote "FOR" the above
proposal.
DIRECTORS' PROPOSAL 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 (ITEM 5 ON PROXY CARD)
For information regarding the incentive plan proposal, please see Chapter X
of this document.
The AT&T Board recommends that AT&T shareholders vote "FOR" the above
proposal.
DIRECTORS' PROPOSAL 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 (ITEM 6 ON PROXY CARD)
For information regarding the employee stock purchase plan proposal, please
see Chapter X of this document.
The AT&T Board recommends that AT&T shareholders vote "FOR" the above
proposal.
XIV-13
DIRECTORS' PROPOSAL 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 THE
AT&T BOARD (ITEM 7 ON PROXY CARD)
Subject to shareholder approval, the AT&T Board has approved an amendment
to AT&T's charter that would enable the AT&T Board to effect a one-for-five
reverse stock split of AT&T common stock. The purpose of the reverse stock split
is to seek to adjust the trading prices of AT&T common stock following the
various transactions to effect AT&T's restructuring plan, including the AT&T
Comcast transaction. THE AT&T BOARD HAS UNANIMOUSLY APPROVED, AND RECOMMENDS
THAT AT&T SHAREHOLDERS APPROVE, THE REVERSE STOCK SPLIT PROPOSAL AT THE AT&T
ANNUAL MEETING.
If the reverse stock split is authorized by shareholders, the AT&T Board
will have the discretion to implement it at any time, or to decline to implement
it and have no reverse stock split at all. The AT&T Board expects to implement
the reverse stock split following completion of the AT&T Comcast transaction.
However, the exact timing of the reverse stock split will be determined by the
AT&T Board based upon its evaluation as to when such action will be most
advantageous to AT&T and its shareholders, and the AT&T Board reserves the
right, notwithstanding shareholder approval and without further action by
shareholders, to elect not to proceed with the reverse stock split if the AT&T
Board, in its sole discretion, determines that it is no longer in the best
interests of AT&T and its shareholders. Approval of the reverse stock split 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.
AT&T currently has 16.4 billion shares of authorized common stock and 100
million shares of authorized preferred stock. As of March 1, 2002, AT&T had
issued and outstanding a total of approximately 3,545,295,334 shares of common
stock and 759,792 shares of preferred stock held by subsidiaries of AT&T.
Following the reverse stock split, AT&T will have 2.5 billion shares of
authorized common stock, plus an additional 500 million shares of authorized
common stock if AT&T Consumer Services Group tracking stock is created, and, in
any event, 100 million shares of authorized preferred stock. Relative voting
rights of AT&T shareholders will not be altered by a reverse stock split, except
to the extent a shareholder may own any fractional interest as a result of the
reverse stock split, in which event such shareholder will be paid cash for the
fractional interest as set forth below.
With the limited exception of shareholders who own only fractional share
interests after a reverse stock split, the proportionate ownership interests of
shareholders will not be affected by a reverse stock split.
Pursuant to any reverse stock split, each holder of five shares of AT&T
common stock, par value $1.00 per share ("Old AT&T Common Stock"), immediately
prior to the effectiveness of the reverse stock split will become the holder of
one share of AT&T common stock, par value $1.00 per share ("New AT&T Common
Stock") after consummation of the reverse stock split.
Commencing on the effective date of any reverse stock split, each AT&T
common stock certificate will be deemed for all corporate purposes to evidence
ownership of the reduced number of shares of common stock resulting from the
reverse stock split. As soon as practicable after the effective date, AT&T
shareholders will be notified as to the effectiveness of the reverse stock split
and instructed as to how and when to surrender their certificates representing
shares of Old AT&T Common Stock.
The conversion ratios of AT&T's outstanding stock options and securities
having a conversion or redemption feature will be correspondingly adjusted upon
the consummation of any reverse stock split.
No certificates representing fractional share interests in the New AT&T
Common Stock will be issued and no such fractional share interests will entitle
the holder thereof to any rights as a shareholder of AT&T. In lieu of such
fractional share interests, each holder of Old AT&T Common Stock who would
XIV-14
otherwise be entitled to receive a fractional share of New AT&T Common Stock
will, at the discretion of the AT&T Board, either be paid cash by AT&T upon
surrender of certificates representing Old AT&T Common Stock held by such holder
in an amount equal to the product of such fraction multiplied by the closing
price of the Old AT&T Common Stock on the New York Stock Exchange at the close
of regular trading on the effective date of the reverse stock split or,
alternatively, AT&T will make arrangements with a third party who shall pool
fractional share interests, sell them and return appropriate payment to holders
of fractional share interests.
If approved and effected, the reverse stock split will result in some
shareholders owning "odd-lots" of less than 100 shares of AT&T common stock.
Brokerage commissions and other costs of transactions in odd-lots are generally
somewhat higher than the costs of transactions in "round-lots" of even multiples
of 100 shares.
AT&T common stock is currently registered under the Exchange Act, and as a
result, AT&T is subject to the periodic reporting and other requirements of the
Exchange Act. The proposed reverse stock split will not affect the registration
of AT&T common stock under the Exchange Act.
The par value of AT&T common stock will remain at $1.00 following any
reverse stock split, and the number of shares of AT&T common stock outstanding
will be reduced by 80%. As a consequence, the aggregate par value of the
outstanding AT&T common stock will be reduced, while the aggregate capital in
excess of par value attributable to the outstanding common stock for statutory
and accounting purposes will be correspondingly increased. The resolution
approving the reverse stock split provides that this increase in capital in
excess of par value will be treated as capital for statutory purposes.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material federal income tax consequences
of the proposed reverse stock split. This discussion is based on the Internal
Revenue Code, the Treasury Regulations promulgated thereunder, judicial
opinions, published positions of the Internal Revenue Service, and all other
applicable authorities as of the date of this document, all of which are subject
to change (possibly with retroactive effect). This 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 dealers
in securities, financial institutions, insurance companies, tax-exempt
organizations, foreign individuals and entities, and persons who acquired their
AT&T common stock as compensation). In addition, this summary is limited to
shareholders that hold their AT&T 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 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 REVERSE STOCK SPLIT.
Subject to the discussion below relating to the receipt of cash instead of
fractional share interests, we believe that the U.S. federal income tax
consequences of the reverse stock split are as follows:
- No gain or loss would be recognized by AT&T upon the reverse stock split;
- No gain or loss would be recognized by a shareholder upon the reverse
stock split, except with respect to cash received instead of fractional
share interests;
- The aggregate adjusted basis of the shares of AT&T common stock held by a
shareholder following the reverse stock split would be equal to such
shareholder's aggregate adjusted basis in the AT&T common stock held
immediately prior to the reverse stock split, reduced by any tax basis
allocable to fractional share interests;
- The holding period of the AT&T common stock held by a shareholder
following the reverse stock split would include the holding period of the
shares of AT&T common stock held immediately prior to the reverse stock
split.
XIV-15
AT&T will not issue any fractional share interests in the reverse stock
split. In lieu of fractional share interests, each AT&T shareholder who would
otherwise have been entitled to receive a fractional share interest will, at
AT&T's election, receive a cash payment from AT&T or from an exchange agent who
will aggregate and sell all fractional interests. The receipt of cash instead of
a fractional share of AT&T common stock by a holder of AT&T common stock will
result in taxable gain or loss for U.S. federal income tax purposes based upon
the difference between the amount of cash received by such shareholder and the
shareholder'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 shareholder's holding period is greater than one
year as of the date of the reverse stock split. The deductibility of capital
losses is subject to limitations.
APPRAISAL RIGHTS
No appraisal rights are available under the New York Business Corporation
Law or under AT&T's Certificate of Incorporation or By-Laws to any shareholder
in connection with the reverse stock split.
PER SHARE AMOUNTS
None of the per share amounts for AT&T common stock included in this
document (e.g., price per share or shares of AT&T Comcast common stock to be
issued per share in connection with the AT&T Comcast transaction) have been
adjusted for or give effect to the reverse stock split except as specifically
stated in this document.
SHAREHOLDER PROPOSALS
AT&T receives many suggestions from shareholders, some as formal
shareholder proposals. All are given careful consideration and adopted, if
appropriate. After discussion with AT&T representatives and clarification of
AT&T's position, many proposals are withdrawn.
Proponents of five shareholder proposals have stated that they intend to
present the following proposals at the annual meeting. Information on the
shareholdings of the proponents is available by writing to: MANAGER -- PROXY,
AT&T CORP., 295 NORTH MAPLE AVENUE, ROOM 1216L2, BASKING RIDGE, NEW JERSEY
07920-1002. The proposals and supporting statements are quoted below. The AT&T
Board has concluded it cannot support these proposals for the reasons given.
SHAREHOLDER PROPOSAL (ITEM 8 ON PROXY CARD)
Steve J. Stefan and Marcia A. Stefan, 704 Grafton Avenue, Dayton, Ohio
45460, have submitted the following proposal:
"Whereas, some people are inclined to engage in sexual activity with
members of the opposite sex, some people are inclined to engage in sexual
activity with members of their own sex, some people are inclined to engage
in sexual activity with members of both sexes.
"Whereas, the terms "sexual orientation" or "sexual preference" are
broad terms that could encompass the sexual interests described above.
"Whereas, certain practices are legally proscribed in every state in
the United States.
"Resolved, The shareholders request the Board of Directors to amend
AT&T's Equal Opportunity Statement and eliminate the words "sexual
preference or orientation."
"Supporting Statement: The sexual interest and activities of our
employees are a private matter, not a corporate concern. Unless these
interests and activities violate the law, they should remain private."
YOUR DIRECTORS RECOMMEND A VOTE AGAINST THE ABOVE PROPOSAL. At AT&T's 2001
Annual meeting of Shareholders, this proposal was defeated by more than 85% of
the votes cast. The AT&T Board believes
XIV-16
that adoption of this proposal would inappropriately signal a departure from
historic policy, wrongly suggest tolerance for discrimination based on sexual
orientation, negatively impact our workplace environment, and would not be in
the best interests of AT&T.
AT&T has a long standing policy of non-discrimination in the workplace and
abides by applicable federal, state and local laws. Our corporate policy is, in
part, "to prohibit unlawful discrimination or harassment because of race, color,
creed, religion, national origin, citizenship, sex, marital status, age,
physical or mental disability, sexual orientation, or because of one's status as
a special disabled veteran or veteran of the Vietnam era, in any employment
decision or in the administration of any personnel policy." The primary purpose
of this policy is to foster an inclusive workplace which does not subject any of
our employees to abuse, harassment, or discrimination.
We strive to foster an atmosphere of respect for responsible opinions and
views of all kinds, crossing the full spectrum of beliefs and issues. We also
strive to create an environment that enhances creativity and innovation where
our employees work well together to better serve our customers. This helps us to
attract talented individuals to become employees and to contribute fully to
meeting our business objectives. We believe this is in the best interests of
AT&T, our employees, our customers, and our shareholders. THEREFORE, YOUR
DIRECTORS RECOMMEND THAT SHAREHOLDERS VOTE AGAINST THE ABOVE PROPOSAL.
SHAREHOLDER PROPOSAL (ITEM 9 ON PROXY CARD)
Domini Social Investments LLC, 536 Broadway, 7th Floor, New York, NY
10012-3915; Carol A. Rice, 5402 Connecticut Avenue NW, Washington, DC 20015;
Gerald E. Scorse, 392 Central Park West, #11C, New York, NY 10025; Northstar
Asset Management Inc., 30 St. John Street, Boston, MA 02130; and Lester
Goldstein, 3735 Meridian Avenue North, Seattle, WA 98103-9138, have resubmitted
the following proposal:
"AT&T EMPLOYEE PENSION PLAN
"WHEREAS
"AT&T announced a conversion from their traditional defined benefit
pension plan to a cash balance plan as of July 1997. The method of
conversion to the cash balance plan has the potential to dramatically
reduce the pension of 30,000 AT&T employees. Longer service employees
retain all benefits but pension benefits are frozen with no growth for up
to 13 years. By depriving long term workers of the benefit of their
increased years of service and their peak earning years, employers break
the explicit promises made in the traditional defined benefit pension plan.
"Top executives also enjoying a non-qualified pension plan plus stock
options for the bulk of their retirement package are less affected. AT&T
stated in the 1999 Shareholder Booklet that their intent is to "provide
competitive compensation to the employees and executives who continue to
serve the Company." Executives continue to receive multimillion-dollar
compensation packages despite the reduction of the shareholder dividend and
the millions of dollars lost on poor business ventures, while experienced
employees have seen no growth in their retirement compensation.
"The AT&T employees, conscious of an AT&T brand that took millions of
shareholder dollars to establish, have expressed their concerns via email
and an educational employee website, http://att.nac.net. Unlike IBM and
Bell Atlantic that have both offered concessions, and Kodak, Citibank and
Aetna that have offered to "grandfather" affected employees, AT&T has
offered nothing.
"The employees in AT&T's Management Pension Plan filed a class action
lawsuit against AT&T in August 1998. Presently in the discovery phase, it
alleges that AT&T violated ERISA and The Age Discrimination in Employment
Act in implementing a 1997 conversion to a cash balance pension plan. The
court has certified all class members as plaintiffs. If litigation
continues, the court may award damages estimated to be in the billions of
dollars.
XIV-17
"AARP, formerly known as the American Association of Retired Persons,
has filed an amicus brief on behalf of the suing AT&T employees, and in
Congressional testimony, called for a full investigation to determine
whether cash balance plans violate age discrimination laws.
"AT&T Executives claimed the Cash Balance Plan helped address the
varying needs of our employees. Cash Balance Plans are not the problem. The
problem was caused by AT&T selecting a conversion method which was
financially devastating to their most experienced employees. How will AT&T
retain the loyalty of talented, motivated employees as times get tougher?
"RESOLVED: the shareholders request that the AT&T Board of Directors
adopt the following policy: All employees vested as of Jan 1, 1998 will
have the choice of either (1) the long-promised traditional pension plan
with base window updates no less than every three years; or (2) the cash
balance plan."
"SUPPORTING STATEMENT
At the 2001 Annual Meeting, 11.3% of AT&T shareholders, representing
331 million shares, voted in support of this resolution.
YOUR DIRECTORS RECOMMEND A VOTE AGAINST THE ABOVE PROPOSAL. At the 2001
Annual Meeting of Shareholders, this proposal was defeated by more than 85% of
the votes cast. In 1997, AT&T changed the AT&T Management Pension Plan ("the
Plan") from a traditional defined benefit pension plan to a cash balance plan
because AT&T needed to remain competitive. Changing the Plan brought AT&T in
line with other Fortune 500 companies and was inevitable for several reasons.
First, AT&T was one of the last major companies to provide unreduced pensions at
age 55. Second, it is unlikely the Company could have continued to update the
traditional pension formula as it had in the past. Management considered the
issues and concluded that cash balance was the best approach for employees, the
Company and its shareholders while recognizing the need to offer reasonable
benefits.
With cash balance, an employee's pension is expressed in total dollars, so
it is easier to understand and appreciate its value. An employee's cash balance
account grows with pay credits and interest credits each year. The Plan uses a
progressive scale for pay credits, unlike some other cash plans, which use a
flat rate. The percentage of pay credited to an employee's account increases
from 3% under 30 years of age, gradually rising to 10% after age 54. Cash
balance also provides employees with more pension payout options, including the
ability to roll over pension assets to a new employer's retirement plan or an
IRA.
The proposal for return to a defined benefit pension is based on the
premise that AT&T took away "long-promised" benefits when it changed to the Cash
Balance formula. Rather, employees retained all the benefits accrued under the
Plan through the date of the change. In addition, to transition employees to
Cash Balance, the Company did not simply freeze traditional pension plan
benefits the employees had earned to date, which it could have lawfully done.
Instead, the Company added a "Special Update" transition benefit to the
traditional pension formula, which on average yielded a 25% improvement for
long-service employees. Because employees are legally protected against cutbacks
in accrued pension benefits, employees who retire and elect monthly pension
payments will receive the higher monthly benefit calculated under either the
Special Update formula or the Cash Balance formula.
Although four employees are pursuing a class action lawsuit against AT&T
alleging that AT&T violated the Employee Retirement Income Security Act of 1974,
as amended (ERISA) and The Age Discrimination in Employment Act by amending the
Plan to incorporate the Special Update and the Cash Balance formula, AT&T
believes it has meritorious defenses to this lawsuit. In fact, the court hearing
the case has already dismissed a number of the claims, including all claims of
age discrimination. Moreover, it is up to the court, not the employees or
shareholders, to decide any appropriate remedy if it finds any technical
violations in AT&T's design and/or implementation of the cash balance formula.
In summary, AT&T is committed to providing its employees with a total
compensation and benefits package that is competitive and that serves to attract
and retain the best performers but not burden the Company with an unduly high
cost structure. To do so, AT&T will continue to review its plans and
XIV-18
programs, and make changes where appropriate. Management and the Board are
committed to a cash balance pension plan design, as it better reflects the
reality of today's marketplace, both in terms of employee career expectations
and the competitiveness of our total compensation programs. Furthermore, the
proposal to offer choice is inappropriate for our Company and its employees, and
unnecessary considering the significant increase of the Special Update
transition benefit and the availability of the higher monthly pension benefit
upon termination of employment. THEREFORE, YOUR DIRECTORS RECOMMEND THAT
SHAREHOLDERS VOTE AGAINST THIS PROPOSAL.
SHAREHOLDER PROPOSAL (ITEM 10 ON PROXY CARD)
The AFL-CIO Reserve Fund, 815 Sixteenth Street, N.W., Washington, DC 20006,
has submitted the following proposal:
"RESOLVED: Shareholders of AT&T Corp. ("AT&T") urge the Board of
Directors to adopt a policy that when AT&T seeks shareholder approval for
any future restructuring resulting in the creation of a new corporation by
AT&T, shareholders shall be given the opportunity to vote separately on
whether the new corporation will:
- "Have a classified board of directors;
- "Eliminate the right of shareholders to act by written consent or
impose a requirement that a larger number of consents be delivered than
required under state law;
- "Eliminate the right of shareholders to call a special meeting or
impose a requirement that a larger percentage of shareholders demand
such a meeting than required under state law;
- "Require approval of more than a majority of shareholders to amend
some or all provisions of the charter; or
- "Require approval of more than a majority of shareholders to amend
some or all bylaws.
"Each item above shall be the subject of a separate management
proposal. Nothing in this proposal shall be construed to require AT&T to
breach any existing contractual obligation.
"SUPPORTING STATEMENT
"AT&T has been exploring various ways to restructure its businesses.
In July 2001, AT&T filed a preliminary proxy statement for a special
shareholder meeting seeking shareholder approval for a series of
transactions and changes to AT&T's capital structure.
"AT&T planned to ask shareholders to approve (a) the creation of
tracking stocks reflecting the value of the broadband and consumer services
businesses, and (b) the spinoff of a new company, to be called "AT&T
Communications Services" ("ACS"), to hold the business services and
consumer services businesses. Although the special meeting was not held,
AT&T continues to explore restructuring options.
"We are concerned about the corporate governance features that were
contemplated for ACS. Specifically, AT&T stated in the proxy statement that
ACS's charter would establish a classified board, provide that ACS
shareholders have no right to call a special meeting or act by written
consent, and require the approval of at least 80% of outstanding shares to
amend certain charter provisions and bylaws. We believe that these features
may have the effect of entrenching management and making it more difficult
for shareholders to hold management accountable, especially if ACS adopts a
poison pill (which AT&T stated it expected ACS's board to do).
"There is evidence that firms with the strongest shareholder rights
significantly outperform companies with weaker shareholder rights and the
broader market. A 2001 study of 1,500 firms by researchers at Harvard and
the Wharton School found a significant positive relationship between
greater shareholder rights, as measured by a governance index, and both
firm valuation and performance from 1990 to 1999. The index took into
account, among other things, whether a
XIV-19
company had a classified board or supermajority voting requirement, and
whether shareholders had the right to call a special meeting or act by
written consent.
"In light of this link, we believe shareholders should be permitted to
vote separately on governance features that restrict shareholder rights."
YOUR DIRECTORS RECOMMEND A VOTE AGAINST THE ABOVE PROPOSAL. The AT&T Board
believes that adoption of this policy would be disadvantageous to AT&T and its
shareholders by impairing AT&T's ability to engage in activities that the
majority of shareholders approve. The proposal would require AT&T to
disaggregate transactions in a manner that would limit AT&T's ability to
effectively conclude advantageous transactions by imposing a cumbersome approval
regime. The proposal would make negotiations with third parties in such
transactions complicated and unattractive because of AT&T's inability to agree
to key provisions. Significant value could be lost in such transactions, or the
prospective bidder or combination partner could seek another unconstrained
company to negotiate with or choose to forego a transaction due to the
uncertainty of execution.
The AT&T Board is very attentive to its fiduciary duties to all
shareholders, both in determining whether and how to proceed with any
restructuring and in determining how to use any structural protections that may
be part of any new entities created in a restructuring. The AT&T Board's
response to Comcast's unsolicited offer for AT&T Broadband last year provides a
recent demonstration of the AT&T Board's commitment to act responsibly in the
context of any acquisition bid. The proponent's suggestion that structural
protections might be used for entrenchment is not borne out by the AT&T Board's
prior actions and its commitment to act in the future in the manner it
determines to be in the best interests of shareholders.
AT&T believes that adoption of this proposal is not in the best interests
of AT&T and its shareholders. THEREFORE, YOUR DIRECTORS RECOMMEND THAT
SHAREHOLDERS VOTE AGAINST THIS PROPOSAL.
SHAREHOLDER PROPOSAL (ITEM 11 ON PROXY CARD)
Communications Workers of America, 501 Third Street, N.W., Washington, DC
20001-2797, has submitted the following proposal:
"SHAREHOLDER PROPOSAL
"Resolved: the shareholders request that the Board of Directors adopt
a policy against entering into any future severance contracts or similar
agreements with senior executive, which are contingent upon a change of
control of the corporation, unless they are submitted to a vote of the
shareholders, and approved by a majority of the votes cast.
"STATEMENT OF SUPPORT
"Golden parachutes are lucrative severance agreements, which are
provided to senior executives. They are made contingent on a change of
control, usually through a merger or acquisition of the corporation, and
are often entered into without the approval of shareholders.
"The severance agreement that AT&T has entered into with Michael
Armstrong, who is the current Chairman and CEO, appears to be particularly
lucrative. It provides for a lump sum cash payment to Mr. Armstrong that
would be more than forty-eight times his monthly base salary, plus "two
times the target annual incentive award for the year of termination," if
his employment is terminated by the Company without cause following a
change of control. This means that his lump sum payment could amount to at
least $12.4 million (which would be four times his current annualized base
salary of $1.8 million and two times his 2000 target annual bonus of $2.6
million).
"Mr. Armstrong would actually receive much more. He would also receive
"a payout at target for each open long-term incentive program performance
cycle" (the target payout for the 2000-2002 alone would be equivalent to
the value of 59,300 shares of AT&T common stock). He would receive the
value of continued participation in certain benefit plans and programs. And
finally, in the event
XIV-20
any of his severance payments may be subject to an excise tax under the
Internal Revenue Code, he would be entitled to an additional payment from
the Company to negate that excise tax.
"The severance agreement also provides that "all outstanding unvested
stock options will vest and will be exercisable for the remainder of the
original term of each grant. From 1998 through 2000, Mr. Armstrong was
given options for the purchase of 1.44 million shares of AT&T Common Stock
(which had an aggregate market value of about $24 million on November 27,
2001) and 1.23 million shares of AT&T Wireless Tracking Stock (which had an
aggregate market value of about $18 million on the same date.)
"Under these circumstances, the proponent believes that it would be
prudent to submit future severance agreements with senior executives to a
vote of the shareholders to provide a check against severance payments that
they may view as excessive."
YOUR DIRECTORS RECOMMEND A VOTE AGAINST THE ABOVE PROPOSAL. The AT&T Board
believes that adoption of this proposal would render AT&T uncompetitive and
severely handicapped when recruiting new executives. AT&T operates in an
environment of great industry uncertainty where change in control provisions are
standard and essential. If we cannot protect newly recruited employees against
the risks of a change in control, many may prefer to seek out alternate
employment in more stable industries or companies with change in control
provisions.
Additionally, change in control arrangements become AT&T's and its Board's
method of ensuring that AT&T's management impartially and completely explores a
merger proposal or business combination by eliminating much of the personal
anxiety surrounding an executive's personal financial security. Ultimately, the
AT&T Board believes it is appropriate to provide change in control agreements
and other benefit protections to retain and recruit high caliber executives and
keep AT&T's top management team intact during a potential transaction.
The majority of the severance benefits referred to in the proposed
resolution have already been subject to shareholder approval. In particular,
under the AT&T 1997 Long Term Incentive Program, the Change in Control
provisions clearly identify the treatment of outstanding equity awards for the
Chief Executive Officer, Named Executive Officers, and all participants under
the Program. These provisions and the Program itself were approved by a
shareholder vote.
The Compensation and Employee Benefits Committee recognizes its
responsibility to make executive compensation decisions that are in the best
interest of AT&T and its shareholders. Accordingly, the Committee continually
devotes considerable time and effort to compensation issues and strives to keep
a balance among the various objectives of these programs. The AT&T Board
believes that it is ultimately in the shareholders' best interest that this
ongoing process continue to be vested in the Committee rather than being subject
to the limitations, uncertainties and delays reflected in the proposed
resolution. Further, the Committee must preserve the ability to strike the right
balance in executive compensation and maintain flexibility to negotiate hiring
arrangements for top caliber executives in an extremely competitive marketplace.
This proposal would preclude that from happening. The AT&T Board further
believes that the arrangements entered into with Mr. Armstrong and other
executives, and those approved under certain compensation and benefit plans,
neither incent management to cause transactions to occur nor deter potential
acquirors from entering into specific transactions with AT&T. THEREFORE, YOUR
DIRECTORS RECOMMEND THAT SHAREHOLDERS VOTE AGAINST THIS PROPOSAL.
SHAREHOLDER PROPOSAL (ITEM 12 ON PROXY CARD)
Gerald Souder, 8504 Houston Street, Silver Spring, MD 20910, has submitted
the following proposal:
"STOCKHOLDER PROPOSAL
"Resolved: The stockholders request that the Board of Directors adopt
a policy to assure that the compensation of senior executives will not be
distorted by the use of measures of performance that include pension fund
income.
XIV-21
"SUPPORTING STATEMENT
"Accounting rules require the Company to include gains on the assets
in its pension fund in calculations of income, even though no money is
transferred to the Company. This may distort the principle of pay for
performance if the Company uses such calculations to measure the
performance of senior executives and to determine the amounts of their
compensation.
"According to a recent study by Credit Suisse First Boston (CSFB),
AT&T reported $767 million in pension income in 2000. This pension income
amounted to 19.7% of AT&T's pre-tax income for the year.
"The 2001 proxy statement states that AT&T seeks to link executive
compensation to certain "pre-determined financial targets" and other
measures of performance. However, it does not make clear whether the
achievement of such financial targets or other measures may be based on, or
influenced, by pension fund income.
"AT&T's top five executives were given annual bonus awards of $2.3
million in 2000. They were given long-term incentive awards contingent on
performance over a three year period. In addition, they were given options
for AT&T Common Stock and AT&T Wireless Tracking Stock that had an
estimated value of $77 million on the grant dates.
"Executive compensation ought to be based on performance. It should
not be distorted by pension income, because that item of income does not
represent money the Company has actually received, and does not reflect the
operational performance of either the Company or its executives.
"As Business Week reported on August 13, 2001, when companies "are
inflating earnings with income from pension plan assets, ... their
[reported] results look better than what's really happening with their
business." A Morgan Stanley Dean Witter report declares that "net gains
from pension assets do not deserve the same valuation ... as true operating
income."
"Under these circumstances, the proposed policy would help to assure
that pension fund income will not be permitted to distort the compensation
of the Company's senior executives for the future. In addition, it would
help to increase the confidence of investors and analysts that those
executives will be compensated on the basis of what they actually do to
maintain or improve the performance of the Company and to increase
shareholder value.
"A related concern, according to a Wall Street Journal report, is the
possibility "that companies can use pension accounting to manage their
earnings by changing assumptions to boost the amount of pension income that
can be factored into operating income." They can also boost pension income
at the expense of employees and retirees by reducing anticipated benefits
or withholding improved benefits. While changes in assumptions or benefits
may be appropriate, the proposed policy would have the added benefit of
reducing any temptation that senior executives may have to "use pension
accounting to manage ... earnings" for the purpose of increasing their own
compensation."
YOUR DIRECTORS RECOMMEND A VOTE AGAINST THE ABOVE PROPOSAL. The Board of
Director's Compensation and Employee Benefits Committee has the responsibility
to establish the compensation philosophy for the Company and to make executive
compensation decisions in the best interests of the Company and its
shareholders. All of the members of the Committee are independent directors and
all have and will continue to review performance-based metrics that encompass
the ability to adjust or exclude distorting items with respect to the Company's
incentives for executives. Additional procedures are not required to accomplish
the objective of the proponent.
The Committee and Board have adopted executive compensation programs that
tie a significant portion of an executive's total compensation to the Company's
financial performance and total shareholder return. Compensation plan metrics
used in these programs look to an array of annual performance measures and
various other performance factors that focus on common industry and market
metrics. For these reasons, the Committee approves several financial metrics for
incentive purposes, including net income. The Committee carefully selects
appropriate metrics tied to pre-determined and budgeted targets.
XIV-22
These measures may be affected by pension factors, but pension credit (or
income) growth is either explicitly or implicitly minimized in assessment of
items such as revenue growth, which is unaffected by pension accounting, and
cost reductions, which are already included in the compensation targets. The
Committee and Board believe that the compensation of its executives should be
based on company performance as reported to the shareholders. Accordingly, the
Company is committed to paying its employees and executives based on the results
determined and reported in accordance with generally accepted accounting
principles and by the standards set forth by the Financial Accounting Standards
Board. The Board of Directors' Compensation and Employee Benefits Committee
monitors the Company's true operating performance and can readily discount
extraneous factors, just as it does a variety of accounting events that should
not be allowed to interfere with judgments about overall operating performance
and compensation.
As a result of the multiple forms of measurements, the reliance on
generally accepted accounting principles, and a long-time practice of
eliminating the impact of distorting elements, we already have a series of
procedures that substantially accomplishes what the proponent seeks. The
Committee and Board feel assured that executives and management employees are
rewarded appropriately for actual business results and that their compensation
is aligned with the Company's and shareholders' interests. THEREFORE, YOUR
DIRECTORS RECOMMEND THAT SHAREHOLDERS VOTE AGAINST THIS PROPOSAL.
SUBMISSION OF SHAREHOLDER PROPOSALS
For information regarding the submission of shareholder proposals, see
"Additional Information for Shareholders -- Future Shareholder
Proposals -- AT&T."
ADVANCE NOTICE PROCEDURES; NOMINATION OF DIRECTORS
Under AT&T's bylaws, no nominations of individuals for election as
directors or other business may be brought before an AT&T annual meeting except
as specified in the notice of the meeting (which notice includes shareholder
proposals that AT&T is required to set forth in its proxy statement under SEC
Rule 14a-8) or as otherwise brought before the meeting by or at the direction of
the AT&T Board or by a shareholder entitled to vote who has delivered written
notice to AT&T (containing certain information specified in the bylaws) not less
than 90 or more than 120 days prior to the first anniversary of the preceding
year's annual meeting. These requirements are separate and apart from and in
addition to the SEC's requirements that a shareholder must meet to have a
shareholder proposal included in AT&T's proxy statement under SEC Rule 14a-8.
A copy of the full text of the bylaw provisions discussed above may be
obtained by writing to AT&T's Office of the Corporate Secretary.
OTHER MATTERS TO COME BEFORE THE AT&T ANNUAL MEETING
In addition to the matters described above, there will be an address by the
Chairman of the Board of AT&T and a general discussion period during which
shareholders will have an opportunity to ask questions about the business. In
the event that any matter not described herein may properly come before the
meeting, or any adjournment or postponement thereof, the Proxy Committee will
vote the shares represented by it in accordance with its best judgment. At the
time this document went to press, AT&T knew of no other matters that might be
presented for shareholder action at the AT&T annual meeting.
AT&T BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation and Employee Benefits Committee ("Committee") is
responsible for establishing, approving, and administering executive
compensation policies and practices that govern the compensation paid to all
senior managers of AT&T, except that the AT&T Board (other than directors who
are employees) is responsible for approving the compensation for the Named
Executive Officers in the Summary Compensation Table based upon recommendations
of the Committee. The Committee regularly reports to the AT&T Board and is
comprised of five independent non-employee directors, none of whom
XIV-23
are eligible to participate in any of the pay programs they administer. The
Committee held seven meetings during 2001, including both regularly scheduled
and special meetings.
COMPENSATION PHILOSOPHY AND OBJECTIVES
AT&T operates in an extremely competitive and rapidly changing industry.
The AT&T Board believes that the compensation programs for executives should be
designed to attract and retain executives who possess the high-quality skills
and talent necessary to transform the business. The compensation philosophy
seeks to provide a strong link between an executive's total earnings opportunity
and the short-term and long-term performance of AT&T based on the achievement of
pre-determined financial targets and operational goals relative to AT&T's
competitors, as well as to an individual's contributions. The core principles
underlying the framework for the programs are:
Total compensation opportunities must be competitive -- the value will be
based on comparable companies' pay opportunities and will be targeted at levels
that will attract, motivate, and retain a highly skilled work force and enable
us to compete with other premier employers for the best talent.
Pay must be performance-based -- a significant part of each executive's
compensation is directly linked to accomplishing specific results that will
create shareholder value in the short and long term.
A significant portion of the total compensation opportunity should be
equity-based -- the Committee believes that an equity stake effectively aligns
employee and shareholder interests and provides proper motivation for enhancing
shareholder value.
EXECUTIVE COMPENSATION COMPONENTS AND PRACTICES
AT&T's executive compensation program consists of three key components: (1)
base salary; (2) short-term incentives, i.e., annual bonus; and (3) long-term
incentives, i.e., performance shares, stock options, and restricted stock or
stock units. The Committee relies on analysis from independent compensation
consultants, published compensation studies, and proxy data to compare executive
compensation to market data of similarly sized companies in the
telecommunications industry, as well as other industries in which AT&T competes
for products, services, and talent to develop a competitive compensation
program. This review covers a broader and more diverse set of companies than
those identified as the Peer Group included in the Performance Graph on page
XIV-29. The policies and practices for determining executive compensation and
specifically that of the Chairman of the Board and Chief Executive Officer, Mr.
Armstrong, are described below:
Base Salary. The Committee establishes the salary ranges for each of the
executive officer positions based upon the job responsibilities and scope, level
of expertise and experience required, strategic impact of the position, overall
business performance, and individual contributions, as well as competitive
compensation of similarly positioned executives in comparable companies. Surveys
conducted by external compensation consultants provide the market data utilized
by the Committee annually as part of the determination of the executive
compensation structure. Annual salary adjustments recognize sustained individual
performance by the executive, while overall salary increase funding is sensitive
to both market movement and AT&T's performance.
The Committee presents the salary recommendations for the Named Executive
Officers to the non-employee directors for approval annually. These salary
recommendations are based on the executive's contribution to AT&T, experience,
expertise, and relative position against competitive market rates. There are no
individual performance matrices or pre-established weightings given to each
factor.
Annual Incentives. All executives are eligible to be considered for annual
incentives. The annual bonus for executive officers is based on AT&T's key
financial and operational results as measured against targets for revenue,
earnings (as measured by operational net income, earnings before interest and
taxes, or other metric) and other qualitative measures of performance. Targets
for these measures are established in advance and reviewed and approved by the
Committee and the AT&T Board. The Committee also sets a minimum performance
level that must be met before any awards can be paid. If that minimum level is
not
XIV-24
achieved, there will be no annual bonuses. The final award amount depends on the
actual level of performance achieved in comparison to the targets; however, the
Committee may choose to make adjustments to the targets or awards to eliminate
the effect of certain unplanned events, accounting adjustments, or extraordinary
items. Adjustments, if any, are intended to ensure that award payments reflect
the operating results of AT&T and are not inflated or deflated artificially.
For each of the five most highly compensated officers (the Named Executive
Officers including the Chairman and Chief Executive Officer), the annual bonus
amount is limited to (i) 0.4% of AT&T's net cash provided by operating
activities for the annual performance period, divided by the total number of
Named Executive Officers with respect to such period, or (ii) a lesser amount
based on factors including AT&T's performance relative to pre-set financial,
operational, and individual performance targets applicable to bonuses set for
other executive officers.
Long-Term Incentives. Long-term incentives including stock options,
long-term performance incentive awards, and restricted stock or restricted stock
units provide a mechanism to reward executive officers for maximizing long-term
shareholder value. Grants of stock options and performance shares are made
annually under the AT&T 1997 Long Term Incentive Program (as amended, "1997
LTIP"). The size of these annual grants is based on competitive market grant
levels for similar positions. The size of previous grants and the number of
shares held by an executive generally are not considered in determining annual
award levels. Stock option awards and performance share awards are based on
creating incremental shareholder value or on the attainment of pre-determined
financial targets over a 3-year performance cycle. Grants of restricted stock or
restricted stock units are made on a selective basis for purposes of retention
or reward for outstanding performance. In total, these awards represent a
significant portion of the total compensation opportunity provided to executive
officers. The tables on pages XIV-30 - XIV-35 summarize option grants and other
equity awards in fiscal year 2001 to the Named Executive Officers.
- Performance Shares: Performance shares, that are units equivalent in
value to shares of AT&T common stock, are awarded annually based on
surveys of competitive market grant levels for similar positions. The
value of the payout to each Named Executive Officer for the performance
period is limited to (i) 0.13% of AT&T's net cash provided by operating
activities for each year in the performance period, divided by the total
number of Named Executive Officers receiving such payouts, or (ii) a
lesser amount, based on factors that include targets for AT&T's earnings
and revenue established for performance shares for the 3-year performance
period.
The performance share award approved by the Committee for the 1998-2000
performance period, that paid out in 2001, was based on 3-year cumulative
earnings per share and revenue results against pre-established targets
and relative total shareholder return ("TSR"), as measured against S&P
500 peer group companies. Depending on the level of performance against
the 3-year goals, performance share payouts can range between 0% and 200%
of the target award, as shown in the table on page XIV-34. No more than
100% of target can be awarded and paid out based on achievement of AT&T's
internal financial measures. Award payouts in excess of 100% but no
greater than 200% of target can only be attained if AT&T's TSR ranks
above the 75th percentile TSR when measured against the peer group. The
performance shares are valued based upon the market price of AT&T common
stock at the end of the performance period. Based on AT&T's actual
performance for the period covering 1998-2000, 91% of the performance
shares were earned and distributed at a price of $24.175 for executive
officers as reported in the Summary Compensation Table on page XIV-30.
- Stock Options: All executives are eligible to be considered for stock
option awards granted annually. The size of the grant is determined by
the Committee based on surveys of competitive grant levels for similar
positions. Stock options are granted with an exercise price equal to or
greater than the fair market value of AT&T common stock on the day of
grant and become exercisable after the expiration of a period of time,
typically between one and four years, and continue to be exercisable
until ten years from the date granted. Such stock options provide
incentive for the creation of shareholder value over the long term since
the full benefit of the
XIV-25
compensation package cannot be realized unless AT&T common stock appreciates
during the term of the option. In 2001, the Committee awarded stock options on
March 15, 2001 and July 2, 2001 as part of a broader strategy to balance grants
during the calendar year and enhance long-term incentive opportunities.
- Restricted Stock: Restricted stock and restricted stock unit awards are
granted from time to time to executive officers, primarily for purposes
of retention. Restricted stock is subject to forfeiture and may not be
disposed of by the recipient until certain restrictions established by
the Committee lapse. Generally, recipients of restricted stock or stock
units are not required to provide consideration other than the rendering
of services or the payment of any minimum amount required by law.
As part of an extensive review of competitive total compensation levels,
the Committee approved an enhanced long-term incentive and retention strategy
for 2001 to recognize the need to stabilize the leadership team at a time of
extreme volatility and uncertainty in the telecommunications sector and to
acknowledge that the overall market decline significantly reduced AT&T's holding
power with respect to AT&T's key executives. The Committee awarded restricted
stock units to AT&T's executives and the Named Executive Officers as reported in
the Summary Compensation Table on page XIV-30. This special one-time grant was
awarded as part of the increase to long-term incentive targets for 2001 and was
based on the Committee's findings that suggested AT&T's target award levels were
less than the desired competitive benchmark. The award is intended to motivate
executives to deliver superior shareholder returns and vests 100% after three
years.
OWNERSHIP GUIDELINES
Stock ownership guidelines for executives were established in 1998 to more
closely align their interests with those of the shareholders. The guidelines
provide that within a five-year time period executives should attain an
investment interest in AT&T stock or stock units of one to five times their base
salary, depending upon the executive's position and scope of responsibilities.
The Committee has and will review the guidelines periodically as AT&T is
restructured, and intends to make certain adjustments for the separation of AT&T
Broadband and subsequent merger with Comcast or other transactions resulting in
an equity restructuring.
DEDUCTIBILITY CAP ON EXECUTIVE COMPENSATION
Section 162(m) of the Internal Revenue Code generally disallows a tax
deduction to public companies, such as AT&T, for compensation in excess of $1
million paid to the corporation's Chief Executive Officer and four other most
highly compensated executive officers. Section 162(m) provides that qualifying
performance-based compensation will not be subject to the deduction limit if
certain requirements are met. Elements of compensation under the annual bonus
and long-term incentive plans qualify for exemption from the annual limit on tax
deductibility under Section 162(m) of the Internal Revenue Code. In addition,
AT&T has a salary and incentive award deferral plan that permits compensation
deferred under the plan to be exempt from the limit on tax deductibility.
COMPENSATION FOR THE CHAIRMAN AND CHIEF EXECUTIVE OFFICER
During 2001, the Company's most highly compensated officer was C. Michael
Armstrong, Chairman and Chief Executive Officer. Mr. Armstrong's 2001
performance was reviewed by the Committee, discussed by the non-employee
directors, and reviewed with the AT&T Board. The Committee's recommendations to
the AT&T Board concerning the annual cash component (base salary and annual
bonus) of Mr. Armstrong's compensation and the AT&T Board's approval of the
annual component and his long-term component (performance shares, restricted
stock, and stock options) were based on the considerations discussed below.
XIV-26
Base Salary. Mr. Armstrong's base salary is established based on
competitive market rates for a chief executive with his experience and record of
accomplishment. As specified in Mr. Armstrong's employment agreement, the
Committee reviews Mr. Armstrong's salary annually in comparison with the
salaries of chief executive officers of other Fortune 20 companies, industry
competitors, and selected other large market-capitalized companies during its
annual compensation survey and review process. Mr. Armstrong's salary was not
increased in 2001 based on the competitive review by the AT&T Board and the
Committee.
Annual Bonus. AT&T and the Committee continue to establish aggressive
performance targets for annual bonuses. Based on AT&T's achievement of certain
performance against targeted financial measures described above, and the level
of achievement on certain operational objectives including the management of a
significant restructuring plan for AT&T, the AT&T Board authorized a total
annual bonus for Mr. Armstrong of $2,148,000. This amount, 82% of his target
annual bonus, reflects performance above threshold but below target. The
Committee considered Mr. Armstrong's stewardship in the significant
accomplishment of leading AT&T through a complex bidding process, a protracted
auction and due diligence process involving three potential entities considering
a business combination with AT&T Broadband, and finally the AT&T Comcast merger
agreement. In addition, other factors such as the significant reduction of
AT&T's net debt by nearly $22 billion in 2001, the success in splitting off the
AT&T Wireless Services business, winding down the global joint venture with
British Telecommunications plc, and navigating AT&T through a complex series of
restructuring transactions intended to deliver maximum shareholder value over
the long term were taken into account when assessing Mr. Armstrong's overall
performance. Also, despite an extremely weak telecommunications industry,
volatile financial markets, and a declining economy, Mr. Armstrong's leadership
continued to prove instrumental as AT&T executed its vision of continuing to
transform itself into a preeminent communications leader.
Long-Term Incentives. In January 2001, the AT&T Board increased Mr.
Armstrong's long-term incentive target to better align his total compensation
with comparable executives at premier companies. As a result, during 2001 the
AT&T Board granted Mr. Armstrong options to acquire 1,098,442 shares of AT&T
common stock that become exercisable in equal annual installments in 2002, 2003,
2004, and 2005. The AT&T Board granted the options effective March 15, 2001, and
July 2, 2001, for 659,046 and 439,396 shares, respectively. The Committee also
granted Mr. Armstrong 278,563 performance shares for the 2001-2003 cycle as
described in the previous Long-Term Incentives section above. The 1998-2000
performance cycle, which concluded at year-end 2000, paid out at 91% in 2001
based on 3-year cumulative financial measures. Mr. Armstrong's distribution
(34,125 shares of the 37,500 shares awarded) was valued at $824,972, 100% of
which he previously elected to defer under AT&T's deferral plan. The
distribution amount represents 57% of the original target value of the award at
the time of grant. The AT&T Board also granted Mr. Armstrong a special, one-time
award of 227,434 restricted stock units of AT&T common stock in 2001, consistent
with the compensation strategy for all other executives of AT&T. This award will
vest 100% on March 15, 2004.
The Compensation and Employee
Benefits Committee
George M.C. Fisher, Chairman
Kenneth T. Derr
Amos B. Hostetter, Jr.
Louis A. Simpson
Michael I. Sovern
XIV-27
REPORT OF THE AUDIT COMMITTEE OF THE AT&T BOARD
MEMBERSHIP AND ROLE OF THE AUDIT COMMITTEE
The Audit Committee ("Committee") consists of the following members of the
Company's Board of Directors: Michael I. Sovern (Chairman), J. Michael Cook,
Kenneth T. Derr, M. Kathryn Eickhoff, and Donald F. McHenry. Each member of the
Committee is independent as defined under the New York Stock Exchange listing
standards. In addition, each member is financially literate, as such
qualification is interpreted by the Company's Board of Directors in its business
judgment and at least one member of the Audit Committee has accounting or
related financial management expertise, as the Board of Directors interprets
such qualification in its business judgment. The Committee operates under a
written charter adopted by the Board of Directors.
The primary function of the Committee is to assist the Board of Directors
in fulfilling its oversight responsibilities with respect to certain financial
matters of the Corporation. The Committee's primary responsibilities are to: (1)
monitor the integrity of AT&T's financial reporting processes and systems of
internal controls regarding finance, accounting, security, environmental and
legal compliance, and information systems; (2) monitor the independence and
performance of AT&T's independent public accountants and the Internal Audit
department; (3) provide direction and oversight of the Business Ethics and
Conduct function; and (4) facilitate and maintain an open avenue of
communication among the Board of Directors, Senior Management, the Internal
Audit department, and the independent public accountants.
REVIEW OF THE COMPANY'S AUDITED FINANCIAL STATEMENTS
The Committee has reviewed and discussed the audited financial statements
of the Company for the year ended December 31, 2001, with the Company's
management. The Committee has discussed with PricewaterhouseCoopers LLP, the
Company's independent public accountants, the matters required to be discussed
by Statement on Auditing Standards No. 61 (Communication with Audit Committees).
The Committee has also received the written disclosures and the letter from
PricewaterhouseCoopers LLP required by Independence Standards Board Standard No.
1 (Independence Discussion with Audit Committees) and the Committee has
discussed the independence of PricewaterhouseCoopers LLP with that firm.
Based on the Committee's review and discussions noted above, the Committee
recommended to the Board of Directors that the Company's audited financial
statements be included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2001, for filing with the Securities and Exchange Commission.
PRICEWATERHOUSECOOPERS LLP INFORMATION
Fees related to services performed by PricewaterhouseCoopers LLP in 2001
are as follows: Audit fees -- $6,575,000; Financial Information Systems Design
and Implementation -- $1,576,000; All Other Fees including: Audit related fees,
including statutory audits and SEC filings -- $19,863,000; Tax
Services -- $18,816,000; Consulting Fees -- $18,292,000; Wireless Group (through
date of spin off) -- $9,355,000; and Other Services -- $3,710,000.
The Audit Committee has considered whether the provision of the above
services other than audit services is compatible with maintaining
PricewaterhouseCoopers LLP's independence.
On March 26, 2002, the Committee approved the implementation of a new
policy related to non-audit services provided by PricewaterhouseCoopers LLP. In
implementing that policy:
- AT&T will not obtain financial information system design and
implementation services, or internal audit outsourcing or co-sourcing
services from PricewaterhouseCoopers LLP.
- AT&T may continue to utilize PricewaterhouseCoopers LLP for certain
routine tax services and audit-related services such as statutory audit
services, employee benefit plan audits, regulatory, and other SEC filing
matters.
- The Audit Committee must review and approve in advance any professional
services engagements (including tax consulting) that are estimated in the
aggregate to equal or exceed $500,000.
XIV-28
The Committee will also review the status of PricewaterhouseCoopers LLP
fees at each regularly scheduled Audit Committee meeting.
Submitted by:
Michael I. Sovern (Chairman)
J. Michael Cook
Kenneth T. Derr
M. Kathryn Eickhoff
Donald F. McHenry
FIVE-YEAR PERFORMANCE COMPARISON ON AT&T COMMON STOCK
The graph below provides an indicator of cumulative total shareholder
returns for AT&T common stock compared with the S&P 500 Stock Index and a Peer
Group(1). The Peer Group excludes the Regional Bell Operating companies since
local telephone service is a more major part of their businesses than of AT&T's
business.
[PERFORMANCE GRAPH]
DEC-96 DEC-97 DEC-98 DEC-99 DEC-00 DEC-01
------------ ------------ ------------ ------------ ------------ ------------
AT&T common stock 100 154 194 198 69 93
S&P 500 100 133 171 208 189 166
Peer Group 100 139 265 394 203 151
EXPLANATION
The graph assumes $100 invested on December 31, 1996 in AT&T common stock,
the S&P 500 Index, and Peer Group common stock with the reinvestment of all
dividends, including the Company's distribution to shareholders of NCR common
stock on December 31, 1996, and AT&T Wireless common stock on July 9, 2001(2).
For the purpose of this chart, the NCR and AT&T Wireless distributions are
treated as nontaxable cash dividends that would have been converted into
additional AT&T shares at the close of business for NCR on December 31, 1996 and
at the close of business for AT&T Wireless on July 9, 2001. The number of shares
of AT&T common stock outstanding and per share data have been adjusted to
reflect the three-for-two stock split paid on April 15, 1999.
---------------
FOOTNOTES
1. The Peer Group is composed of companies worldwide that compete against AT&T
in its industry segments of telecommunications and cable television
services. The returns of each company have been
XIV-29
weighted according to their respective stock market capitalization for
purposes of arriving at a peer group average. The Peer Group is comprised of
the following companies: ALLTEL Corporation; British Telecommunications plc
(American Depository Receipt -- "ADR"); Cable & Wireless plc (ADR);
Cablevision Systems Corporation, Class A; Comcast Corporation, Class A
Special; Cox Communications, Inc., Class A; Sprint FON Group; Vodafone Group
Plc (ADR); and WorldCom, Inc. (formerly MCI WorldCom, Inc.).
2. Data Source: S&P Computstat
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION(2)
------------------------------------
OTHER
ANNUAL
NAMED OFFICERS AND COMPEN-
PRINCIPAL POSITION(1) YEAR SALARY($) BONUS($) SATION(3)($)
--------------------- ---- --------- --------- ------------
C. Michael Armstrong.......... 2001 1,800,000 2,214,000 479,379
Chairman and CEO, 2000 1,700,000 650,000 754,523
AT&T Corp. 1999 1,400,000 2,258,000 683,284
David W. Dorman(10)........... 2001 950,000 820,000 425,833
President, AT&T Corp. 2000 239,167 591,800 39,613
1999 476,473 700,000 46,062
Charles H. Noski.............. 2001 787,500 700,000 356,566
Vice Chairman & CFO, 2000 730,980 233,000 591,051
AT&T Corp. 1999 0 0 0
Frank Ianna................... 2001 700,000 575,000 194,575
Executive Vice President 2000 618,750 250,000 215,475
and President -- AT&T 1999 497,250 612,900 185,414
Network Services
Betsy J. Bernard.............. 2001 388,102 640,000 218,075
Executive Vice President 2000 0 0 0
and President and CEO -- 1999 0 0 0
AT&T Consumer Services
LONG-TERM COMPENSATION(2)
----------------------------------------------------------
AWARDS(4)
------------------------------------------ PAYOUTS ALL
RESTRICTED OPTIONS/SARS(#) ------------- OTHER
NAMED OFFICERS AND STOCK ----------------------- LTIP COMPEN-
PRINCIPAL POSITION(1) AWARD(S)(5)($) AT&T(6) WIRELESS(7) PAYOUTS(8)($) SATION(9)($)
--------------------- -------------- --------- ----------- ------------- ------------
C. Michael Armstrong.......... 4,009,198(a) 1,098,442 0 824,972 261,436
Chairman and CEO, 0 419,087 1,237,400 0 171,368
AT&T Corp. 0 573,256 0 0 275,100
David W. Dorman(10)........... 4,957,212(a) 677,636 0 0 572,175
President, AT&T Corp. 11,241,663(b) 356,603 0 0 708,200
0 0 0 0 500,000
Charles H. Noski.............. 1,781,605(a) 456,570 0 446,319 896,278
Vice Chairman & CFO, 0 0 271,300 0 6,131,593
AT&T Corp. 24,405,177(c) 1,402,750 0 0 0
Frank Ianna................... 7,036,607(a)(d) 470,742 0 308,781 1,639,842
Executive Vice President 564,425(d) 199,047 244,100 0 80,074
and President -- AT&T 3,897,863(d) 404,892 0 402,426 16,077
Network Services
Betsy J. Bernard.............. 6,121,443(e) 1,359,501 0 0 3,310,543
Executive Vice President 0 0 0 0 0
and President and CEO -- 0 0 0 0 0
AT&T Consumer Services
FOOTNOTES
1. Includes Chairman of the Board and Chief Executive Officer and the four
other most highly compensated individuals who were executive officers of
AT&T at the end of 2001, as measured by salary and bonus.
2. Compensation deferred at the election of Named Officers is included in the
category (e.g., bonus, Long Term Incentive Program ("LTIP") payouts,) and
year it would have otherwise been reported had it not been deferred.
3. Includes (a) payments of above-market interest on deferred compensation, (b)
dividend equivalents paid with respect to long-term incentive compensation
paid during the year, and (c) tax payment reimbursements. In addition, for
Mr. Armstrong, includes in 2001, 2000, and 1999, $62,104, $55,364, and
$54,146, respectively, for use of corporate aircraft and in 2001, $44,964
for financial consulting services. For Mr. Dorman, includes in 2001 $85,379
for use of corporate aircraft and $62,550 for financial consulting services.
For Mr. Noski, includes in 2001 and 2000, $91,064 and $69,212, respectively,
for use of corporate aircraft. For Ms. Bernard, includes in 2001 $32,993 for
financial consulting services and $77,781 for relocation.
4. Share and per share amounts have been adjusted to reflect AT&T's April 15,
1999, three-for-two stock split and the distribution of AT&T Wireless
Services, Inc. ("AWS") common stock to holders of AT&T common stock in
connection with the split-off of AWS from AT&T on July 9, 2001. Stock
options awarded in 2000 include options exercisable for AT&T Wireless Group
tracking stock that were cancelled on July 9, 2001, and replaced with stock
options for AWS common stock. See note 7 below.
XIV-30
5. All outstanding restricted stock or restricted stock unit awards with
respect to AT&T common stock were adjusted for the distribution of AWS
common stock to holders of AT&T common stock in connection with the
split-off of AWS from AT&T on July 9, 2001, to preserve the economic value
of the awards immediately prior to the distribution and split-off. The
amounts shown represent the dollar value on the date originally granted.
(a) On March 15, 2001, Messrs. Armstrong, Dorman, Noski, and Ianna received
a restricted stock unit award of 227,434; 281,213; 101,067; and 88,483
units, respectively. The value of these awards, as of the grant date,
is reflected in the table. These units vest fully on March 15, 2004.
Dividend equivalents on the units are paid in cash.
(b) On December 1, 2000, Mr. Dorman was granted an award of 763,626
restricted shares. The value of this award, as of the grant date, is
reflected in the table. These shares vest fully on April 1, 2002.
Dividends on the shares are paid to Mr. Dorman in cash.
(c) On December 10, 1999, the Committee granted Mr. Noski an award of
353,693 restricted shares and 127,309 restricted stock units to replace
grants from Hughes Electronics Corporation ("Hughes") that were
forfeited upon his termination from Hughes. The value of these awards,
as of the closing price on the grant date, is reflected in the table.
The vesting schedule for these grants mirrors that applicable to the
original grants from Hughes. 178,040 of the restricted shares vested in
2000 and 164,007 vested on October 26, 2001. The remaining 11,646
restricted shares vest on October 17, 2002. 43,666 of the restricted
stock units vested in 2000; 19,899 units on February 26, 2001; 10,279
units on April 7, 2001; and 13,489 units on May 1, 2001. Of the
remaining 39,976 restricted stock units, 26,359 units vested on
February 26, 2002, and 13,617 units will vest on April 7, 2002.
Dividends on the restricted shares and dividend equivalents on the
restricted units are paid to Mr. Noski in cash.
(d) On January 29, 1999, Mr. Ianna received a special award of 86,231
restricted stock units that will vest in accordance with his employment
agreement. On January 31, 2000, Mr. Ianna received a special award of
14,173 restricted stock units that will vest fully on January 31, 2003.
On March 15, 2001, Mr. Ianna received a special award of 310,690
restricted shares that vest fully on December 31, 2002. The value of
these awards, as of their original grant date, is reflected in the
table. Dividend equivalents on the restricted stock units and dividends
on the restricted shares are paid in cash to Mr. Ianna.
(e) On April 9, 2001, Ms. Bernard received special awards of 158,025
restricted stock units and 231,805 restricted shares. The value of
these awards, as of the original grant date, is reflected in the table.
The restricted stock units vest fully on April 9, 2004, and the
restricted shares vest 77,268 on April 9, 2002, 77,268 on April 9,
2003, and 77,269 on April 9, 2004. Dividend equivalents on the
restricted units and dividends on the restricted shares are paid in
cash to Ms. Bernard.
The aggregate number (and value) with respect to each of the Named
Executive Officers at December 31, 2001, for outstanding restricted
stock and restricted stock unit awards was: Mr. Armstrong 673,613
($12,219,340); Mr. Dorman 1,044,839 ($18,953,379); Mr. Noski 152,689
($2,769,778); Mr. Ianna 499,577 ($9,062,327); and Ms. Bernard 389,830
($7,071,516).
6. All stock option awards granted with respect to AT&T common stock were
adjusted for the impact of the distribution of AWS common stock to holders
of AT&T common stock in connection with the split-off of AWS from AT&T on
July 9, 2001. The share amounts shown represent the number of shares of AT&T
common stock applicable to the awards following the distribution and
split-off adjustments. Each outstanding stock option grant, exercisable for
AT&T common stock granted prior to January 1, 2001, was adjusted into (i) an
adjusted grant for AT&T common shares and (ii) a new stock option grant for
AWS common shares awarded under the AT&T Wireless Services, Inc. Adjustment
Plan adopted by AWS. The combined intrinsic value of the two grants
immediately after the split-off equaled the intrinsic value of the
outstanding grant for AT&T common shares
XIV-31
immediately before the split-off. Each outstanding stock option grant,
exercisable for AT&T common stock granted on or after January 1, 2001, but
prior to July 9, 2001, was adjusted so that the intrinsic value of the grant
immediately after the split-off equaled the intrinsic value of the grant
immediately prior to the split-off. In all cases, the grant price to market
price ratio determined for each grant prior to any adjustment was maintained
in the post-split adjusted grants.
7. All stock option awards granted with respect to AT&T Wireless Group tracking
stock awarded under the AT&T 1997 LTIP were cancelled and replaced in
connection with the split-off of AWS from AT&T on July 9, 2001. The share
amounts shown represent the number of shares of AT&T Wireless Group common
stock applicable to the awards prior to the cancellation. Each outstanding
grant was replaced with a new award under the AT&T Wireless Services, Inc.
Adjustment Plan so that the intrinsic value of the grant immediately after
the split-off equaled the intrinsic value of the grant immediately prior to
the split-off. In all cases, the new awards were fully vested and
non-forfeitable, and the grant price to market price ratio determined for
each grant prior to cancellation was maintained in the replacement grants.
The new awards are obligations of AWS and not of AT&T.
8. Includes distributions in 1999 to Mr. Ianna of stock units as to which the
3-year performance criteria, in recognition of AT&T's restructuring and the
difficulty of setting long-term financial targets while the restructuring
was in progress, were deemed to have been met at the target level. Includes
distributions in 2001 to Messrs. Armstrong, Noski, and Ianna of performance
shares as to which a 3-year performance period ended December 31, 2000.
Performance share cycles ending on December 31, 2001, and December 31, 2002,
held by Messrs. Armstrong, Noski, and Ianna, and Ms. Bernard, and the
performance share cycle ending on December 31, 2002, held by Mr. Dorman were
adjusted in connection with the distribution and split-off of AWS from AT&T
on July 9, 2001, to preserve the economic value of the awards immediately
prior to the distribution and split-off. Each holder of such awards received
an adjusted performance share award and a stock unit award under the AT&T
1997 LTIP. The new stock unit award will be distributed based on the value
of AWS common stock upon the completion of the performance period of the
original performance share award.
9. In 2001, includes (a) AT&T contributions to savings plans (Mr. Armstrong
$6,800, Mr. Noski $4,634, Mr. Ianna $6,800, and Ms. Bernard $5,276); (b)
dollar value of the benefit of premiums paid for universal life insurance
policies (unrelated to term insurance coverage) calculated on an actuarial
basis (Mr. Armstrong $188,611, Mr. Dorman $6,175, Mr. Noski $60,043, Mr.
Ianna $58,250, and Ms. Bernard $3,662); (c) payments equal to lost AT&T
Savings Plan matching contributions caused by IRS limitations (Mr. Armstrong
$61,200, Mr. Noski $22,437, and Mr. Ianna $17,950); (d) payment of $500,000
to Mr. Dorman into a special deferral account; (e) payments equal to $66,000
to Mr. Dorman for living expenses; (f) payments of $190,593 to Mr. Noski for
living expenses and travel; (g) special payments of $518,570 and $100,000 to
Mr. Noski to preserve forfeitures from his prior employer and for his
contributions in 2001 to AT&T's restructuring efforts, respectively; (h)
payment of $1,000,000 to Mr. Ianna into a special deferral account; (i)
payment of $556,483 to Mr. Ianna; (j) payment of $3,000,000 to Ms. Bernard
into a special deferral account; and (k) payment of $300,000 to Ms. Bernard
for replacement of board fees.
In 2000, includes (a) AT&T contributions to savings plans (Mr. Armstrong
$6,800, Mr. Ianna $6,800); (b) dollar value of the benefit of premiums paid
for universal life insurance policies (unrelated to term insurance coverage)
calculated on an actuarial basis (Mr. Armstrong $110,267, Mr. Noski $5,213,
and Mr. Ianna $59,425); (c) payments equal to lost AT&T Savings Plan
matching contributions caused by IRS limitations (Mr. Armstrong $49,601, Mr.
Ianna $13,490); (d) payment of $500,000 to Mr. Dorman into a special
deferral account; (e) payment of $208,200 to Mr. Dorman as a guarantee for
his 2000 bonus; (f) living expenses, travel, and COBRA payments to Mr. Noski
of $204,996; (g) special payments to Mr. Noski of $3,921,384 to preserve
forfeitures from his prior employer; and (h) payment of a $2,000,000 signing
bonus to Mr. Noski.
In 1999, includes (a) AT&T contributions to savings plans (Mr. Armstrong
$6,400, Mr. Ianna $5,917); (b) $219,099 dollar value of the benefit of
premiums paid for split-dollar life insurance to
XIV-32
Mr. Armstrong; (c) payments equal to lost AT&T Savings Plan matching
contributions caused by IRS limitations (Mr. Armstrong $49,601, Mr. Ianna
$10,160); and (d) payment of $500,000 to Mr. Dorman into a special deferral
account.
10. Mr. Dorman's salary and bonus for the years 1999 and 2000 reflect payments
only for the time he was employed by AT&T. Mr. Dorman transferred from AT&T
in 1999 to lead Concert, the joint effort of AT&T and British Telecom. Mr.
Dorman returned to AT&T in 2000.
AGGREGATED OPTION/STOCK APPRECIATION RIGHTS
("SAR") EXERCISES IN 2001 AND YEAR-END VALUES
AT&T COMMON STOCK AND AT&T WIRELESS GROUP TRACKING STOCK
EXERCISABLE/ EXERCISABLE/
UNEXERCISABLE(2) UNEXERCISABLE
----------------------------- ---------------
NUMBER OF $ VALUE OF
NUMBER OF NUMBER OF AT&T WIRELESS $ VALUE OF AT&T WIRELESS
SHARES UNEXERCISED UNEXERCISED IN-THE-MONEY IN-THE-MONEY
ACQUIRED $ VALUE OPTIONS/SARS OPTIONS/SARS OPTIONS/SARS OPTIONS/SARS
NAME(1) ON EXERCISE REALIZED AT YEAR END AT YEAR END AT YEAR END AT YEAR END
------- ----------- -------- -------------- ------------ --------------- ------------
C. Michael
Armstrong........... 0 0 1,277,868 0 $ 0 $0
2,237,535 0 $1,056,667 $0
David W. Dorman....... 0 0 89,151 0 $ 285,836 $0
945,088 0 $1,509,370 $0
Charles H. Noski...... 0 0 877,848 0 $ 0 $0
981,472 0 $ 439,207 $0
Frank Ianna........... 0 0 415,685 0 $ 12,051 $0
1,000,426 0 $ 452,839 $0
Betsy J. Bernard...... 0 0 0 0 $ 0 $0
1,359,501 0 $3,151,965 $0
FOOTNOTES
---------------
1. Includes Chairman of the Board and Chief Executive Officer and the four other
most highly compensated individuals who were executive officers of AT&T at
the end of 2001, as measured by salary and bonus.
2. Share and per share amounts have been adjusted to reflect AT&T's April 15,
1999 three-for-two stock split and the distribution and split-off of AT&T
Wireless Services, Inc. on July 9, 2001, as described in footnotes 6 and 7 in
the Summary Compensation Table.
XIV-33
LONG-TERM INCENTIVE PLANS -- AWARDS IN 2001
ESTIMATED FUTURE PAYOUTS UNDER
PERFORMANCE NON-STOCK PRICE BASED PLANS
NUMBER OF PERIOD UNTIL --------------------------------
PERFORMANCE MATURATION THRESHOLD TARGET MAXIMUM
NAME(1) SHARES(2) OR PAYOUT (#) (#)(3) (#)
------- ----------- ------------ ---------- -------- --------
C. Michael Armstrong.................... 278,563 2001-2003 69,641 278,563 557,126
David W. Dorman......................... 171,801 2001-2003 42,950 171,801 343,602
Charles H. Noski........................ 115,770 2001-2003 28,943 115,770 231,540
Frank Ianna............................. 119,346 2001-2003 29,837 119,346 238,692
Betsy J. Bernard........................ 48,878 2001-2003 12,220 48,878 97,756
FOOTNOTES
---------------
1. Includes Chairman of the Board and Chief Executive Officer and the four other
most highly compensated individuals who were executive officers of AT&T at
the end of 2001, as measured by salary and bonus.
2. All Performance Share Awards from the 2001-2003 cycle, with respect to AT&T
common stock, were adjusted for the impact of the split-off of AT&T Wireless
Services, Inc. from AT&T on July 9, 2001, to preserve the economic value of
the awards by multiplying the outstanding shares by the quotient of the AT&T
closing stock value immediately prior to the split-off, divided by the AT&T
opening stock value immediately after the split-off.
3. In January 2001, the Performance Share Awards listed in the table were made.
If they remain Named Executive Officers at December 31, 2003, the payout
value of these awards to Messrs. Armstrong, Dorman, Noski, and Ianna, and Ms.
Bernard would be (i) 0.13% of the Company's net cash provided by operating
activities for each year in the performance period, divided by the total
number of Named Executive Officers receiving payouts for the period ending
December 31, 2003, or (ii) a lesser amount, based on factors such as targets
for the Company's earnings, return to equity, cash flow, revenue, or total
shareholder return for the period.
OPTION/SAR GRANTS IN 2001
INDIVIDUAL GRANTS IN AT&T
-----------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/
UNDERLYING SARS
OPTIONS/ GRANTED TO EXERCISE OR GRANT DATE
SARS EMPLOYEES IN BASE PRICE EXPIRATION PRESENT
NAME(1) GRANTED(2)(3) FISCAL YEAR ($/SHARE) DATE VALUE(5)($)
------- ------------- ------------ ----------- ---------- -----------
C. Michael Armstrong............. 659,046 0.74% 17.3940 3/15/2011 $4,574,253
439,396 0.50% 16.8541 7/02/2011 $3,063,766
David W. Dorman.................. 406,570 0.46% 17.3940 3/15/2011 $2,821,883
271,066 0.31% 16.8541 7/02/2011 $1,890,055
Charles H. Noski................. 273,934 0.31% 17.3940 3/15/2011 $1,901,296
182,636 0.21% 16.8541 7/02/2011 $1,273,460
Frank Ianna...................... 282,437 0.32% 17.3940 3/15/2011 $1,960,315
188,305 0.21% 16.8541 7/02/2011 $1,312,990
Betsy J. Bernard................. 1,059,680(4) 1.20% 15.7595 4/09/2011 $5,032,000
222,782 0.25% 15.7595 4/09/2011 $1,057,566
77,039 0.09% 16.8541 7/02/2011 $ 537,166
XIV-34
FOOTNOTES
---------------
1. Includes Chairman of the Board and Chief Executive Officer and the four other
most highly compensated individuals who were executive officers of AT&T at
the end of 2001, as measured by salary and bonus.
2. Share and per share amounts have been adjusted to reflect the adjustment to
the number of shares in connection with the distribution and split-off of
AT&T Wireless Services, Inc. on July 9, 2001, as described in footnotes 6 and
7 in the Summary Compensation Table.
3. Options granted for AT&T common stock become exercisable to the extent of
one-fourth of the grant on the first, second, third, and fourth anniversaries
of the grant date, respectively.
4. Options granted for AT&T common stock to Ms. Bernard, per her employment
agreement, become exercisable to the extent of one-third of the grant on the
first, second, and third anniversaries of the grant date, respectively.
5. The Black-Scholes option pricing model was chosen to estimate the Grant Date
Present Value of the options in this table. The Company's use of this model
should not be construed as an endorsement of its accuracy in valuing options.
All stock option valuation models, including the Black-Scholes model, require
a prediction about the future movement of the stock price. The following
assumptions were made for purposes of calculating the Grant Date Present
Value on the grants awarded on March 15, 2001, and on April 9, 2001: an
option term of 6 years, volatility of 36.00%, dividend yield at 0.85%, and
interest rate of 4.77%. The following assumptions were made for purposes of
calculating the Grant Date Present Value on the grants awarded on July 2,
2001: an option term of 6 years, volatility of 37.00%, dividend yield at
0.85%, and interest rate of 5.16%. The actual value of the options in this
table depends upon the actual performance of the Company's stock during the
applicable period.
EQUITY COMPENSATION PLAN INFORMATION
(SHARES IN THOUSANDS)
(A) (B) (C)
----------------------- ---------------------- --------------------------
NUMBER OF SECURITIES
NUMBER OF SECURITIES REMAINING AVAILABLE FOR
TO BE ISSUED UPON WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
EXERCISE OF OUTSTANDING EXERCISE PRICE OF EQUITY COMPENSATION PLANS
OPTIONS, WARRANTS AND OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
PLAN CATEGORY RIGHTS(2) WARRANTS AND RIGHTS(2) REFLECTED IN COLUMN(A)(3))
------------- ----------------------- ---------------------- --------------------------
Equity compensation plans
approved by shareholders....... 313,522 $24.62 34,718
Equity compensation plans not
approved by shareholders(1).... 4,024 $21.67 0
Total.................. 317,546 $24.58 34,718
FOOTNOTES
---------------
1. In connection with AT&T's acquisition of MediaOne Group, Inc. on June 15,
2000, AT&T assumed two compensation plans providing for the issuance of
equity securities that had not been approved by the shareholders of MediaOne
Group, Inc. (i) The US West Media Group 1997 Stock Option Plan originally
provided for the issuance to eligible employees of US West and related
entities of stock options with terms up to ten years with respect to no
greater than 3,300,000 shares in the aggregate of a class of US West, Inc.
common stock intended to reflect the performance of US West Media Group. This
plan provided for accelerated vesting upon death, disability, retirement, or
a change in control. The plan also provided participants who were terminated
other than for cause with a 3-month period to exercise then vested options.
Participants who were terminated for cause forfeited all options granted
under the plan not previously exercised. AT&T's acquisition of MediaOne
Group, Inc. constituted a change in control under this plan and on June 15,
2000, the then outstanding stock options under this
XIV-35
plan were adjusted pursuant to the adjustment provisions of the plan into
fully vested stock options for the purchase of 636,953 shares of AT&T common
stock, of which options for the purchase of 593,778 shares remained
outstanding on December 31, 2001. The plan was originally administered by the
Employee Benefits Committee of US West Group and is now administered by a
committee of AT&T employees. No additional stock options have or can be
granted under this plan subsequent to AT&T's acquisition of MediaOne Group,
Inc. (ii) The MediaOne Group 1999 Supplemental Stock Plan originally provided
for the issuance to eligible employees of MediaOne Group, Inc. and related
entities of stock options with terms up to ten years with respect to no
greater than 10,000,000 shares in the aggregate of MediaOne Group, Inc.
common stock. This plan provided for accelerated vesting upon death,
disability, retirement, or a change in control. The plan also provided
participants who were terminated other than for cause with a 3-month period
to exercise then vested options. Participants who were terminated for cause
forfeited all options granted under the plan not previously exercised. AT&T's
acquisition of MediaOne Group, Inc. constituted a change in control under
this plan and on June 15, 2000, the then outstanding stock options under this
plan were adjusted pursuant to the adjustment provisions of the plan into
fully vested stock options for the purchase of 3,827,496 shares of AT&T
common stock of which options for the purchase of 3,430,640 shares remained
outstanding on December 31, 2001. The plan was originally administered by the
Sponsor Committee of MediaOne Group, Inc. and is now administered by a
committee of AT&T employees. No additional stock options have or can be
granted under this plan subsequent to AT&T's acquisition of MediaOne Group,
Inc.
2. With respect to equity compensation plans that AT&T has assumed in connection
with mergers, acquisitions, or consolidations, the aggregate number of shares
of AT&T common stock to be issued upon exercise of outstanding options,
warrants and rights outstanding under such plans on December 31, 2001, was
34,611,656 shares and the weighted average exercise price of such outstanding
options, warrants, and rights was $17.83.
3. AT&T's 1997 LTIP originally provided for the issuance of 150 million shares
of AT&T common stock. In 1999, the 1997 LTIP was amended to provide for an
annual increase in the number of shares available for awards equal to 1.75%
of the number of shares of AT&T common stock outstanding on the first day of
each year commencing January 1, 2000. Pursuant to this provision, an
additional 61,992,101 shares of AT&T common stock became available for awards
on January 1, 2002. The 1997 LTIP limits the number of shares which may be
used for awards other than stock options or stock appreciation rights to 40.4
million shares, of which 27.6 million shares remain available for awards on
December 31, 2001. The 1997 LTIP is currently the only equity compensation
plan under which AT&T grants awards relating to its equity securities.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
(ALL EQUITY GRANTS AND CORRESPONDING SHARE PRICES DESCRIBED IN THIS SECTION HAVE
BEEN ADJUSTED FOR THE APRIL 1999 THREE-FOR-TWO STOCK SPLIT AND THE JULY 2001
SPLIT-OFF OF AT&T WIRELESS SERVICES, INC., AS APPROPRIATE.)
AT&T entered into an employment agreement with Mr. Armstrong dated October
17, 1997. The agreement provided for an initial base salary of $1,400,000 per
year. It also provided for a guaranteed annual incentive award for the 1998
performance year of no less than 100% of his then base salary, and for 1998 and
1999 performance shares/stock units granted under the 1997 LTIP, a guaranteed
grant value equivalent to no less than 100% of his base salary at the time of
grant. Mr. Armstrong was eligible for annual stock option awards commencing in
1998 in accordance with the Committee-approved compensation structure for such
years.
To address certain forfeitures experienced when Mr. Armstrong left his
previous employer, AT&T paid a premium of $2,050,000 to purchase a split-dollar
survivorship insurance policy insuring Mr. Armstrong and his spouse. Such policy
will, upon the death of the last surviving insured, provide insurance proceeds
equal to the sum of the face amount of the policy and the policy's cash value.
An amount equal to the policy face amount shall be payable to Mr. Armstrong's
beneficiaries or to a trust that
XIV-36
may be established to own Mr. Armstrong's interest in such policy. The balance
of the proceeds will be paid to AT&T and, from its share of the death benefit,
AT&T will pay an AT&T-paid death benefit to Mr. Armstrong's beneficiaries equal
to the death benefit received by AT&T, minus the AT&T-paid premium. The face
amount of such split-dollar survivorship insurance policy will be determined in
accordance with the underwriting requirements of the insurance company providing
such coverage, based on AT&T's premium payment of $2,050,000 and additional
premium payments, if any, that Mr. Armstrong may become eligible for under any
similar program adopted by AT&T for its senior executives and in which Mr.
Armstrong elects to participate.
In accordance with his employment agreement, Mr. Armstrong was also granted
AT&T restricted stock, AT&T restricted stock units, and AT&T stock options under
the 1997 LTIP to replace similar grants forfeited from his prior employer and to
provide strong incentives to create value for AT&T shareholders.
Details of these grants follow:
1. Mr. Armstrong was granted 142,877 shares of AT&T restricted stock,
of which 123,417 shares vested in 1998, 1999, and 2000. The remaining
19,460 shares vested as follows: 3,007 shares on May 1, 2001, and 16,453
shares on October 26, 2001.
2. Mr. Armstrong was also granted 446,179 AT&T restricted stock units
that vest on October 1, 2003, assuming continued employment with a
guarantee that, in the event the fair market value of the AT&T shares
furnished to Mr. Armstrong on October 1, 2003, is less than $10,000,000,
such shortfall will be made up in cash by AT&T. In the event of (a) a
Change in Control (as defined) on or before April 1, 2002, and a subsequent
(within 3 years) AT&T-initiated termination for other than "cause" (as
defined) or Constructive Termination Without Cause (as defined) or (b) Mr.
Armstrong's death, special vesting rules apply.
3. Mr. Armstrong was granted an option to purchase, within ten years,
1,124,699 shares of AT&T common stock with a purchase price of $22.4125 per
share. These options vest one-third each on October 17, 2000, 2001, and
2002, based on continued employment.
As part of his employment agreement, AT&T entered into a supplemental
pension arrangement with Mr. Armstrong. Pursuant to such arrangement, Mr.
Armstrong will receive an annual benefit (as defined in the employment
agreement) commencing at his retirement at or after age 65. Such benefit will
vest 20% per year on each of the first five anniversaries of his hire and will
be payable in actuarially-reduced amounts for retirement and commencement prior
to age 65. Pension benefits payable under this arrangement will be paid out of
AT&T's operating income and will be offset by (1) all amounts actually received
by Mr. Armstrong under any other AT&T qualified or non-qualified retirement plan
or arrangement, and (2) the greater of (a) $655,642 or (b) the actual pension
benefits to be paid to Mr. Armstrong with respect to that year by his prior
employers under their qualified and non-qualified defined benefit plans. In
addition, Mr. Armstrong will be entitled to certain other post-retirement
benefits that are generally made available from time to time to retired
executive officers and service-pension-eligible senior managers.
Mr. Armstrong's agreement provides for certain entitlements in the event of
his termination from AT&T under specified circumstances. Pursuant to his
agreement, in the event of Mr. Armstrong's death, his beneficiaries or estate
will be entitled to his base salary through the end of his month of death, his
target annual incentive award for the year of death, a lump sum payout at target
for each open long-term incentive program performance cycle, and payment of
survivor benefits under his supplemental pension arrangement which vests 100% at
his death. All outstanding unvested stock options will vest and, together with
already vested options, will be exercisable for the remainder of the original
term of each grant; restrictions on the restricted stock granted as part of his
agreement will lapse; and restricted stock units granted in his agreement will
be payable in accordance with the schedule established in his Restricted Stock
Unit Award Agreement (20% to 100% of units granted will be payable, depending on
the date of death) in the event of his death prior to the vesting of such
restricted stock units on October 1, 2003.
XIV-37
Mr. Armstrong's agreement also provides that in the event his employment is
terminated as a result of disability (as defined), he shall be entitled to
receive disability benefits in accordance with the long-term disability program
then in effect for senior managers. In addition, base salary, annual incentive,
stock options, restricted stock, and restricted stock units shall be treated in
the same manner as described above in the case of death. Treatment of long-term
incentives will be as described above in the case of death, provided, however,
payment will be in accordance with the terms of the plan instead of a lump sum.
Pension benefits under his supplemental pension arrangement will vest and will
be offset by any AT&T-provided disability benefits.
In the event of a termination for "cause" or in the event of a voluntary
resignation, other than a termination due to death or disability or a
Constructive Termination (as defined) without "cause" or retirement on October
31, 2003, Mr. Armstrong will forfeit all restricted stock and restricted stock
units as to which restrictions have not lapsed, long-term incentives with
respect to uncompleted performance cycles, outstanding stock options which are
not exercisable, and any pension benefit not yet vested under his supplemental
pension arrangement. He will receive base salary through his date of
termination, and vested stock options shall remain exercisable for 90 days after
termination or until the originally scheduled expiration date, if earlier.
In the event of an AT&T-initiated termination for other than "cause" or in
the event of a Constructive Termination without "cause." Mr. Armstrong will be
provided the following: base salary through the date of termination; a prorated
annual incentive award at target for the year of termination; a 24-month
continuation of monthly base salary or, at his option, the lump-sum present
value of such payments (using the short-term Treasury bill rate for the month of
termination); two times the target annual incentive award for the year of
termination payable over 24 months or, at his option, the lump-sum present value
of such payments (using the short-term Treasury bill rate for the month of
termination); and payout at target for each open long-term incentive program
performance cycle in accordance with the plan or in a lump sum as described
above. In addition, all outstanding unvested stock options will vest and,
together with already vested options, will be exercisable for the remainder of
the original term of each grant; restrictions on the restricted stock granted as
part of his agreement will lapse; and his supplemental pension benefit shall
fully vest. For a period of 24 months following his termination or, if earlier,
until he receives equivalent coverage and benefits from another employer, Mr.
Armstrong will be entitled to continued participation in AT&T's benefit plans
and programs.
In the event of Mr. Armstrong's retirement as of October 31, 2003, he will
be entitled to payment of his supplemental pension and will be treated in
accordance with the plans, programs, and practices applicable to retired senior
managers.
Mr. Armstrong's agreement provides that in the event of a Change in
Control, all amounts and benefits to which he is entitled but are not yet vested
(except with respect to his restricted stock unit grant which is governed by the
terms of the grant agreement) shall become fully vested. In addition, in the
event of an AT&T-initiated termination or a Constructive Termination without
"cause" following a Change in Control, he shall be entitled to the benefits
described above in connection with an AT&T-initiated termination without "cause"
or a Constructive Termination without "cause" not associated with a Change in
Control provided, however: (1) the number of months associated with salary,
annual incentive, and benefits continuation shall be 48 months, and such amounts
will be payable as a lump sum as soon as practicable after his termination; and
(2) restricted stock units granted in his agreement will be payable in
accordance with the schedule established in his Restricted Stock Unit Award
Agreement (25% to 100% of units granted will be payable, depending on date of
termination). In the event the payments in this paragraph are determined to
constitute a payment under Section 280G(b)(2) of the Internal Revenue Code and
such payment is subject to an excise tax under Section 4999 of the Code, AT&T
will provide Mr. Armstrong with a tax gross-up payment to negate the excise tax.
In the event of any termination described above, Mr. Armstrong or his
estate shall also be entitled to the unpaid balance of any incentive awards for
completed performance periods, any expense reimbursements due him, and other
benefits in accordance with applicable plans and programs.
XIV-38
AT&T entered into an employment agreement with Mr. Noski dated December 8,
1999. The agreement provided for an initial base salary of $750,000 per year. It
also provided for a guaranteed annual incentive award for the 2000 performance
year of no less than 100% of his then base salary and three separate performance
shares/stock unit awards under the 1997 LTIP for 20,657, 20,287, and 28,188 for
performance periods ended December 31, 1999, 2000, and 2001, respectively, with
guaranteed distributions valued at no less than the corresponding amounts
provided for by the long-term incentive plan of his previous employer. Mr. Noski
was also provided an option to purchase, within 10 years, 85,977 shares of AT&T
common stock with a purchase price of $43.2915 per share and was granted 24,977
performance shares/stock units covering the 2000-2002 performance period in
accordance with the Committee-approved compensation structure for 2000. The
stock options vest in three equal annual installments, beginning December 10,
2002, based on continued employment.
To address certain forfeitures experienced when Mr. Noski left his previous
employer and to incent him to join AT&T, the agreement provided for (i) a
special lump sum cash payment of $1,561,250 payable within 30 days from hire and
(ii) a signing bonus of $2,000,000, 50% paid within 30 days of hire and the
remaining 50% paid after six months from his date of hire.
In accordance with his employment agreement, Mr. Noski was also granted
AT&T restricted stock, AT&T restricted stock units, and AT&T stock options under
the 1997 LTIP to replace similar grants forfeited from his prior employer and to
provide strong incentives to create value for AT&T shareholders.
Details of these grants follow:
1. To offset certain vested stock option gains forfeited by Mr. Noski
when he left his previous employer, AT&T granted him 353,693 shares of AT&T
restricted stock, of which 342,047 shares vested in 2000 and 2001. The
remaining 11,646 shares vest on October 17, 2002.
2. Mr. Noski was also granted 127,309 AT&T restricted stock units, of
which 87,333 vested in 2000 and 2001. Of the remaining 39,976 stock units,
26,359 vested on February 26, 2002, and 13,617 vested on April 7, 2002.
3. Mr. Noski was granted an option to purchase, within ten years,
1,316,773 shares of AT&T common stock with a purchase price of $43.2915 per
share. These options vest one-third each on December 10, 2000, 2001, and
2002, based on continued employment.
As part of his employment agreement, Mr. Noski entered into a supplemental
pension arrangement with AT&T. Pursuant to such arrangement, Mr. Noski will
receive an annual benefit (as defined in the employment agreement) commencing at
his retirement at or after age 65. Such benefit will vest at age 57 and will be
payable in actuarially-reduced amounts for retirement and commencement prior to
age 65. Pension benefits payable under this arrangement will be paid out of
AT&T's operating income and will be offset by all amounts actually received by
Mr. Noski under any other AT&T qualified and non-qualified retirement plan or
arrangement and the actual pension benefits to be paid to Mr. Noski with respect
to that year by his prior employer under its qualified and non-qualified defined
benefit plans. In addition, Mr. Noski will be entitled to certain other
post-retirement benefits that are made available from time to time to retired
executive officers and service-pension-eligible senior managers.
Mr. Noski's agreement provides for certain entitlements in the event of his
termination from AT&T under specified circumstances. Pursuant to his agreement,
in the event of Mr. Noski's termination resulting from death or disability, Mr.
Noski, his beneficiaries, or estate will be entitled to his target annual
incentive award for the year in which his death or disability resulted in his
termination of employment (prorated for the total period of eligibility
calculated as of his date of death or disability termination), the continuation
of the vesting and distribution of actual payout for each open long-term
incentive program performance share/stock unit cycle, and payment of survivor
benefits under his supplemental pension arrangement based on the amount of the
benefits accrued, but not vested, as of the date of termination for death or
disability. All outstanding unvested stock options will continue to vest and,
together with already vested options, will be exercisable for the remainder of
the original term of each grant; all outstanding
XIV-39
unvested restricted stock and restricted stock units will be payable in
accordance with the schedule established in his Restricted Stock and Restricted
Stock Unit Award Agreements.
In the event of a termination for "cause" (as defined) or in the event of a
voluntary resignation, other than a termination due to death or disability or a
Good Reason termination (as defined) without "cause" or retirement based on
satisfying the age and service requirements included as termination provisions
under the plan, Mr. Noski will forfeit all restricted stock and restricted stock
units as to which restrictions have not lapsed, long-term incentives with
respect to uncompleted performance cycles, outstanding stock options which are
not exercisable, and any pension benefit not yet vested under his supplemental
pension arrangement. He will receive base salary through his date of
termination, and vested stock options shall remain exercisable for 90 days after
termination or until the originally scheduled expiration date, if earlier. In
the event Mr. Noski is precluded from exercising vested stock options within the
90 days due to an AT&T-prohibited trading period, an additional 30 days after
the end of the prohibited period will be provided. In the event of a voluntary
termination, Mr. Noski, to the extent not eligible for retiree medical benefits
from AT&T, will be eligible for coverage under the AT&T Separation Medical Plan
offered to certain former senior managers and will be responsible for the annual
premium for this coverage.
In the event of an AT&T-initiated termination for other than "cause" or a
Good Reason termination without "cause," Mr. Noski will be provided the
following: base salary through the date of termination, a prorated annual
incentive award at target for the year of termination, a lump sum payment equal
to two times the annual base salary and target annual incentive award for the
year of termination. In addition, all outstanding unvested stock options will
continue to vest and, together with already vested options, will be exercisable
for the remainder of the original term of each grant, and all outstanding
unvested restricted stock, restricted stock units, and performance share units
will be payable in accordance with the schedules established in his Restricted
Stock, Restricted Stock Unit, and Performance Share Unit Award Agreements. Mr.
Noski, to the extent not eligible for retiree medical benefits from AT&T, will
be eligible for coverage under the AT&T Separation Medical Plan offered to
certain former senior managers and will be responsible for a portion of the
annual premium for this coverage.
In February 2002, the AT&T Board authorized an addendum to Mr. Noski's
original employment agreement dated December 8, 1999, that details special terms
should he elect to leave AT&T during certain defined periods related to the
separation of AT&T Broadband and its subsequent merger with Comcast. According
to the terms of the addendum dated May 10, 2002, Mr. Noski's salary was
increased to $900,000 effective March 1, 2002, his 2002 target bonus will be
$1,125,000, and the target value of his 2002 long-term incentive award will be
$10,000,000.
If Mr. Noski terminates his employment on or after December 31, 2002, but
prior to the separation of AT&T Broadband and its subsequent merger with
Comcast, he will be eligible to receive his 2002 annual bonus. Such annual bonus
shall be no less than the funded amount, established in accordance with the
funding criteria for such 2002 annual bonuses, applicable for similarly situated
senior officers. At such termination, Mr. Noski will be entitled to the
continuation of the vesting and distribution of the actual payout for each
performance share award (except as provided below); all outstanding unvested
stock options will vest and, together with already vested options, will be
exercisable for the remainder of the original term of each grant; and all
outstanding unvested restricted stock and restricted stock units will vest. His
2002 performance shares will be prorated as of his termination date to reflect
the time worked in the 3-year performance cycle. Mr. Noski and his eligible
dependents will be eligible for coverage under the AT&T Separation Medical Plan
offered by AT&T to certain former senior managers as described in his original
employment agreement. In addition, he will be eligible to receive the
supplemental pension commencing at age 57 in accordance with the terms and
conditions set forth in his original employment agreement and will continue to
participate in the AT&T Senior Management Universal Life Insurance Plan. Mr.
Noski also has certain protections in the event AT&T makes changes in the
payment or security arrangements of the retirement benefits of other executives.
In the event Mr. Noski terminates his employment on or after the earlier of
March 1, 2003, or the time of the separation of AT&T Broadband and its
subsequent merger with Comcast, or at the time of the
XIV-40
termination of the merger, he will be eligible to receive the terms and
conditions outlined in the previous paragraph, subject to the following
modifications. Stock options granted to Mr. Noski in 1999 will be cancelled and
the supplemental pension set forth in his original employment agreement will be
modified to commence at age 50 and will be equal to 40% of his final average pay
less applicable offsets.
In the event of Mr. Noski's long-term disability prior to a termination as
described in the addendum, the special supplemental pension amount payable under
the original employment agreement will be modified to commence at the later of
age 50 or at the commencement of long-term disability and the applicable
percentage will be 40%. In addition, at the termination of AT&T-provided medical
coverage after such disability, Mr. Noski and his eligible dependents will be
eligible to participate in the AT&T Separation Medical Plan. In the event of his
death prior to a termination described in the addendum, the joint and survivor
annuity payable at his death will be modified to equal 50% multiplied by 36.8%
of Mr. Noski's final average pay less applicable offsets. All other terms and
conditions relative to his death or disability will be in accordance with his
employment agreement.
AT&T also established a $3,000,000 special deferral account earning
interest quarterly equal to the 10-year United States Treasury Note rate plus
2%, and two-thirds of this account will vest on December 31, 2002, if he
terminates employment on that date and if the separation of AT&T Broadband and
subsequent merger with Comcast has not closed or terminated on or before that
date. The remaining one-third of the account will be cancelled. If Mr. Noski
does not terminate his employment on December 31, 2002, but rather on the
earliest of March 1, 2003, at the time of the separation of AT&T Broadband and
its subsequent merger with Comcast, or at the time of the termination of the
merger (the "Trigger Date"), the entire account will vest at such termination of
employment. In the event of Mr. Noski's death or disability prior to vesting,
the balance in the special deferral account will vest.
The payments described above at the specified termination dates are in lieu
of any payments that might otherwise be payable as a result of Mr. Noski's
termination and in the event Mr. Noski incurs an excise tax imposed by Section
4999 of the Internal Revenue Code, AT&T shall provide Mr. Noski a gross-up. In
the event Mr. Noski leaves AT&T other than as described in the addendum, the
terms and conditions of his original employment agreement will apply, except
that in the event AT&T terminates Mr. Noski's employment for other than death,
long-term disability or "cause" as defined in his original employment agreement
or as a result of a Good Reason termination (as defined in the agreement and
modified in the addendum) prior to the Trigger Date, he will receive the
benefits associated with a Trigger Date termination under the addendum in lieu
of the benefits under his employment agreement and will be treated as an
employee until the Trigger Date. In the event that Mr. Noski continues his
employment after the Trigger Date, Mr. Noski will receive the benefits
associated with a Trigger Date termination at a subsequent termination in lieu
of any other payments that might otherwise be payable as a result of such a
termination.
Should Mr. Noski transfer to AT&T Broadband at or before the separation and
subsequent merger with Comcast, the terms of the addendum will be cancelled
except that the full amount of the special deferral account shall vest upon
transfer. Also, in the event Mr. Noski terminates employment with AT&T with
entitlement to benefits under the addendum, and, within 12 months of his
termination becomes employed by AT&T Comcast, all future payments under the
supplemental pension will be cancelled.
AT&T entered into an employment agreement with Mr. Dorman dated December 1,
2000, with a term ending December 31, 2002. The agreement is subject to
automatic annual renewals after that date unless either AT&T or Mr. Dorman
provide written notice to terminate at least 60 days prior to the anniversary
date. The agreement provided for an initial base salary of $950,000 per year.
Mr. Dorman was also awarded 66,737 performance shares covering the 2000-2002
performance period, and options to purchase, within ten years, 356,603 shares of
AT&T common stock with a purchase price of $14.9338, in accordance with the
Compensation Committee-approved compensation structure for 2000. These options
will vest in four equal annual installments, beginning on December 1, 2001. Mr.
Dorman was also guaranteed long term incentive grants for 2001, as determined by
the AT&T Board, valued at $9,500,000.
XIV-41
In addition, a Special Retention Bonus of restricted stock units valued at
$3,800,000 was granted to Mr. Dorman on March 15, 2001, which will vest on March
15, 2004.
The agreement also provides that, should AT&T issue a Consumer Services
Group tracking stock, a grant will be made to Mr. Dorman that is consistent with
the grants made to the CEO and other senior executives. In addition, the
agreement also states that in the event AT&T Wireless or AT&T Broadband become
independent companies, all equity granted to Mr. Dorman under this agreement
will be apportioned among AT&T Corp., AT&T Wireless, and AT&T Broadband stock
according to a plan which shall be developed and approved by the AT&T Board and
applicable to Mr. Dorman and other AT&T executives.
To address certain long-term incentive forfeitures and retention
forfeitures experienced when Mr. Dorman left his previous employer and to incent
him to join AT&T, the agreement provided for (i) a special lump sum cash payment
of $800,000 payable in March 2001 to replace a forfeited 2000 bonus from his
former employer; (ii) in connection with a retention arrangement from his prior
employer, additional payments to a previously established special deferral
account in the amount of $500,000 with interest credited effective April 1,
2000, and an additional $500,000 on April 1, 2001, with interest on the account
paid at the rate of 10-year United States Treasury Notes plus 5% and a grant of
46,627 shares of AT&T restricted stock, all of which vest on April 1, 2002; and
(iii) in connection with forfeited long-term incentives, a cash payment to be
paid in April 2003 in the amount of $3,080,000 subject to continued employment
through December 31, 2002, unless Mr. Dorman is no longer employed due to an
AT&T-initiated termination without "cause" (as defined) or a self-initiated
termination for Good Reason (as defined), and a grant of 715,999 shares of AT&T
restricted stock that vested on April 1, 2002.
Mr. Dorman's agreement provides for a special temporary living allowance to
compensate him for temporary housing in New Jersey and related travel. These
payments, which are grossed-up for tax purposes, began January 1, 2001, and will
continue until the earlier of when Mr. Dorman moves his residence to New Jersey,
December 31, 2002, or termination of his employment with AT&T. In addition, his
agreement provides that Mr. Dorman shall have authority to use AT&T aircraft,
and to the extent this results in imputed income, AT&T will provide him with a
tax gross-up.
As part of his employment agreement, Mr. Dorman entered into a supplemental
pension arrangement with AT&T. Pursuant to such arrangement, Mr. Dorman will
receive an annual benefit (as defined) commencing at his retirement. Such
benefit was vested at his hiring date and will be payable in stated reduced
amounts for retirement and commencement prior to December 1, 2013. Pension
benefits payable under this arrangement will be paid out of AT&T's operating
income and will be offset by all amounts actually received by Mr. Dorman under
any other AT&T qualified and non-qualified retirement plan or arrangement, and
the actual pension benefits to be paid to Mr. Dorman with respect to that year
by his prior employers, Concert and British Telecom, under their qualified and
non-qualified defined benefit plans.
Mr. Dorman's agreement provides for certain entitlements in the event of
his termination from AT&T under specified circumstances. Pursuant to his
agreement, in the event of Mr. Dorman's termination resulting from death or
disability, Mr. Dorman, his beneficiaries, or estate will be entitled to
disability benefits in accordance with a disability program then in effect for
senior executives of AT&T, his target annual incentive award for the year in
which his death or disability resulted in his termination of employment
(prorated for the total period of eligibility calculated as of his date of death
or disability termination), the vesting and payout at target for each open
long-term incentive program performance share cycle prorated for the amount of
time worked in the applicable 3-year cycle, payment of any unpaid cash hiring
bonus, financial counseling including individual income tax preparation for one
year, and payment of survivor benefits under his supplemental pension
arrangement based on the amount of the benefits accrued and vested, as of the
date of termination for death or disability. All outstanding unvested stock
options will vest and, together with already vested options, will be exercisable
in accordance with the terms of the grants applicable to death or disability,
and all outstanding unvested restricted stock and restricted stock units will
vest. In addition, Mr. Dorman's special deferral account will vest.
XIV-42
In the event of a termination for "cause," Mr. Dorman shall receive no
further compensation from AT&T as of his termination date, and all stock
options, performance shares, restricted shares, and restricted stock units,
whether unvested or vested but not exercised, shall be cancelled.
In the event of a voluntary resignation, other than a termination due to
death or disability or a Good Reason termination without "cause" or retirement
based on satisfying the age and service requirements included as termination
provisions under the plan, Mr. Dorman will forfeit all restricted stock and
restricted stock units as to which restrictions have not lapsed, long-term
incentives with respect to uncompleted performance cycles, and outstanding stock
options that are not exercisable. He will receive base salary through his date
of termination and vested stock options shall remain exercisable for 90 days
after termination or until the originally scheduled expiration date, if earlier.
Mr. Dorman, to the extent not eligible for retiree medical benefits from AT&T,
and provided his voluntary resignation occurs after December 1, 2002, will be
eligible for benefits under the then-applicable AT&T Separation Medical Plan
offered to certain former senior managers under the terms and conditions of that
plan and will be responsible for a portion of the annual premium for this
coverage. His agreement also provides that, in the event of a self-initiated
termination after December 31, 2002, and if at the time of Mr. Dorman's
resignation Mr. Armstrong is no longer the Chief Executive Officer of AT&T and
Mr. Dorman has not been named CEO, he will be entitled to accelerated vesting of
stock options, restricted stock, restricted stock units, and his outstanding
performance shares will continue to vest.
In the event of an AT&T-initiated termination for other than "cause" or a
Good Reason termination without "cause," Mr. Dorman will be provided the
following under the terms of his agreement: base salary through the date of
termination, a prorated annual incentive award at target for the year of
termination, a severance payment equal to two times the annual base salary and
target annual incentive award for the year of termination, the immediate vesting
of the special deferral account, payment of benefits under his supplemental
pension arrangement based on the amount of the benefits accrued, accelerated
vesting of all outstanding unvested restricted shares and restricted stock
units, performance shares and stock units will continue to vest, vested AT&T
Wireless Services stock options will be exercisable for the remainder of their
original term, payment of any unpaid hiring bonuses, and continuation of his
Senior Manager Universal Life Insurance. Under the terms of the Senior Officer
Separation Plan under which Mr. Dorman is a covered executive, he will be
provided the following: deferral of his severance payment for up to five years
with up to five annual installments thereafter, all outstanding unvested AT&T
stock options will vest and, together with already vested options, will be
exercisable for the remainder of the original term of each grant, financial
counseling for two years, telephone reimbursement under the Senior Manager
Telephone Reimbursement Program, transition counseling and, to the extent not
eligible for retiree medical benefits from AT&T, will be eligible for coverage
under the AT&T Separation Medical Plan offered to certain former senior managers
under the terms and conditions of that plan.
Mr. Dorman's agreement provides that in the event of a Change in Control of
AT&T, severance payments to him shall be governed by the Change in Control
provisions applicable to senior executives as approved by the AT&T Board on
October 23, 2000.
AT&T entered into an employment agreement with Ms. Bernard dated April 9,
2001. The agreement provided for an initial base salary of $600,000 per year. It
also provided a targeted annual incentive award for the 2001 performance year of
100% of her then base salary with payout based on actual financial results and
with no proration for her partial service in 2001. Ms. Bernard was also awarded
48,878 performance shares covering the 2001-2003 performance period, 158,025
restricted stock units vesting on April 9, 2004, and an option to purchase,
within ten years, 115,558 shares of AT&T common stock with a purchase price of
$15.7595 per share granted April 9, 2001, and 77,039 shares of AT&T common stock
with a purchase price of $16.8541 per share granted July 2, 2001, in accordance
with the Compensation Committee-approved compensation structure for 2001. These
option grants vest one-quarter each year beginning on April 9, 2002, and July 2,
2002, respectively, based on continued employment.
In accordance with her employment agreement, Ms. Bernard was also granted
special one-time awards of AT&T restricted stock, AT&T stock options, and AT&T
performance shares as follows: (i) an
XIV-43
option to purchase, within ten years, up to 1,059,680 shares of AT&T common
stock with a purchase price of $15.7595 per share, vesting one-third per year
beginning on April 9, 2002, based on continued employment, (ii) an option to
purchase, within ten years, 107,224 shares of AT&T common stock with a purchase
price of $15.7595 per share, vesting one-quarter per year beginning on April 9,
2002, based on continued employment, (iii) a grant of 231,805 AT&T restricted
shares vesting one-third per year beginning on April 9, 2002, based on continued
employment, and (iv) two awards each consisting of 48,765 performance shares for
the 1999-2001 and 2000-2002 performance periods, respectively. In the event that
AT&T issues a tracking stock for AT&T Consumer Services Group and other
executives are awarded stock options on such tracking stock, Ms. Bernard's
agreement provides that she will be provided stock options consistent with those
awarded to similarly situated executives. In connection with the split-off of
AT&T Wireless and the separation of AT&T Broadband and its subsequent merger
with Comcast, Ms. Bernard's agreement provides that all equity granted under her
employment agreement is to be treated in accordance with the AT&T Board-approved
treatment of equity granted to other AT&T executives.
To address certain forfeitures experienced when Ms. Bernard left her
previous employer and to incent her to join AT&T, the agreement provided for (i)
a special lump sum cash payment of $1,000,000 after one year of employment, (ii)
a signing bonus of $300,000 within 30 days of her hire, and (iii) a special
$3,000,000 deferral account with annual interest equal to the 10-year United
States Treasury Note rate plus 2%, compounded quarterly, vesting April 9, 2004,
based on continued employment. The agreement also provides that when Ms. Bernard
sells her second home she will receive a payment to mitigate certain costs
associated with the sale. On April 1, 2002, the AT&T Board approved an addendum
to Ms. Bernard's agreement that provides for a special one-time payment of
$341,434, payable in April 2002, to address an incremental Colorado state tax
liability resulting from Ms. Bernard joining AT&T.
Ms. Bernard's agreement provides for certain entitlements in the event of
her termination from AT&T under specified circumstances. Pursuant to her
agreement, in the event of Ms. Bernard's termination resulting from death or
disability, Ms. Bernard, her beneficiaries, or estate will be entitled to her
target annual incentive award for the year in which her death or disability
resulted in her termination of employment (prorated for the total period of
eligibility calculated as of her date of death or disability termination), the
vesting and distribution of target payout for each open long-term incentive
program performance share cycle, prorated for time on the payroll during the
performance period (for the 1999-2001 and 2000-2002 performance shares there is
no proration for the period prior to date of hire), and vesting and payout of
the special deferral account, and payment of any unpaid cash hiring bonuses. All
outstanding unvested stock options vest and, together with already vested
options, will be exercisable under the terms and conditions applicable to death
or disability, as may be the case, all outstanding unvested restricted stock and
restricted stock units will vest, and Ms. Bernard or her estate or
beneficiaries, as may be applicable, will be provided financial counseling, plus
a tax gross-up, for one year following death or disability.
In the event of a termination for "cause" (as defined) or in the event of a
voluntary resignation, other than a termination due to death or disability or a
Good Reason termination (as defined) without "cause" or retirement based on
satisfying the age and service requirements included as termination provisions
under the plan, Ms. Bernard will forfeit all restricted stock and restricted
stock units as to which restrictions have not lapsed, long-term incentives with
respect to uncompleted performance cycles, outstanding stock options which are
not exercisable, and any deferral amount not yet vested under her special
deferral account. She will receive base salary through her date of termination,
and in the case of voluntary resignation, vested stock options shall remain
exercisable for 90 days after termination or until the originally scheduled
expiration date, if earlier. Ms. Bernard, to the extent she voluntarily resigns
after September 30, 2003, and to the extent she is not eligible for retiree
medical benefits from AT&T, will be eligible for coverage under the AT&T
Separation Medical Plan offered to certain former senior managers under the
terms and conditions of that plan.
In the event of an AT&T-initiated termination for other than "cause" or a
Good Reason termination without "cause," Ms. Bernard will be provided the
following under the terms of her agreement: base salary through the date of
termination, a prorated annual incentive award at target for the year of
termination, a
XIV-44
lump sum severance payment equal to two times the sum of annual base salary and
target annual incentive award for the year of termination. In addition, all
outstanding unvested restricted stock units will vest, performance shares will
continue to vest, her special deferral account will vest, and any unpaid hiring
bonuses will be paid. Under the terms of the AT&T Senior Officer Separation Plan
under which Ms. Bernard is a covered executive, she will be eligible to defer
receipt of her severance payment for up to five years with up to five annual
installments, her outstanding unvested restricted stock will vest, all
outstanding unvested stock options will vest and, together with already vested
options, will be exercisable for the remainder of the original term of each
grant. Ms. Bernard will be provided continuation of her Senior Management
Universal Life Insurance, financial counseling for two years, transition
counseling, Senior Management Telephone Reimbursement and, to the extent not
eligible for retiree medical benefits from AT&T, will be eligible for coverage
under the AT&T Separation Medical Plan offered to certain former senior managers
under the terms and conditions of that plan. Her agreement also provides that,
in the event of a self-initiated termination after September 30, 2003, at which
time she is not the President and Chief Executive Officer of the AT&T Consumer
Services Group with its own tracking stock, or of another publicly traded AT&T
business unit, such termination will be treated as a Good Reason termination and
she will be entitled to the benefits set forth in this paragraph.
Ms. Bernard's agreement provides that in the event of a Change in Control
(as defined) of AT&T, severance payments to her shall be governed by the Change
in Control provisions applicable to senior executives approved by the AT&T Board
on October 23, 2000.
AT&T entered into an employment/retention agreement with Mr. Ianna dated
December 1, 2000. The agreement provided for a base salary of $700,000 per year.
It also provided a targeted annual incentive award for the 2001 performance year
of 100% of his then base salary with payout based on actual financial results.
Mr. Ianna was also provided a 2001 long-term incentive award with a grant value
of $8,000,000 and a commitment that his 2002 long-term incentive award would
have a grant value of no less than $8,000,000. A special retention restricted
share grant with a value of $4,200,000 was granted March 15, 2001, vesting on
December 31, 2002, based on continued employment. Prior to December 31, 2002,
the grant would vest in the event of death, disability, AT&T-initiated
termination for other than "cause" (as defined), or for Good Reason (as
defined). Under the terms of his agreement, Mr. Ianna's special deferral account
established on November 1, 1997, vested on February 1, 2001. In addition, as
part of his retention, Mr. Ianna was provided a $1,000,000 special deferral
account with annual interest at the 30-year United States Treasury Note rate
plus 2%, compounded quarterly, that vests 50% on December 31, 2001, and 50% on
December 31, 2002, contingent upon continued employment, and a special cash
payment of $300,000 net after taxes payable in February 2001. In the event of an
AT&T-initiated termination for other than "cause," Good Reason termination, or
death or disability, any unvested portion of the special deferral account fully
vests. The agreement also provided, with respect to his outstanding AT&T equity,
the following:
1. 97,974 special options awarded in 2000 will vest under their original
terms and conditions, provided, however, once vested they will remain
exercisable for the full remaining term.
2. 325,413 special options and 86,231 restricted stock units granted in
1999 will vest on December 31, 2002, contingent upon continued
employment, and stock options will remain exercisable for the full
remaining term. Vesting of these special 1999 stock options and
restricted stock units will accelerate upon death, disability, approved
retirement prior to 65 by the Compensation and Benefits Committee of the
AT&T Board, AT&T-initiated termination for other than "cause," or Good
Reason termination.
3. All other stock options not referenced above that are outstanding as of
December 31, 2000, including AT&T Wireless stock options, to the extent
not otherwise vested by virtue of their terms and conditions, will vest
upon retirement and remain exercisable for the full remaining term,
provided such retirement is on or after December 31, 2002.
XIV-45
4. Restricted stock units granted in March 2001 as part of the 2001 annual
long-term incentive award that are not vested upon retirement will vest
upon retirement, provided such retirement is on or after December 31,
2002.
SENIOR OFFICER SEVERANCE PLAN
In 1997, AT&T adopted the Senior Officer Separation Plan, or "Severance
Plan", for members of the Operations Team as constituted at that time and
certain members of the Senior Management Team (a total of ten executives, two of
whom remain with AT&T). Under the Severance Plan, if covered executives (i) are
terminated by AT&T for other than "cause" (as defined in the Severance Plan) or
(ii) self-initiate termination for "good reason" (as defined in the Severance
Plan), they will be provided a severance payment equivalent to two times the sum
of base salary plus target annual incentive in effect at termination. The
severance amount payable may be deferred for up to five years with five annual
payments thereafter and will be credited with interest based on the interest
rate formula in effect for the Senior Management Incentive Award Deferral Plan
on the Severance Plan effective date. In addition, covered executives who
terminate under the terms of the Severance Plan will be entitled to certain
other post-termination benefits that are generally made available from time to
time to retired executive officers and senior managers. The Severance Plan was
amended in 2001 to include certain additional senior officers and to provide
enhanced severance payments, as approved by the AT&T Board in October 2000, in
the event of a Change in Control. In the event of a Change in Control, as such
term is defined in the AT&T 1997 LTIP, the severance payment provided a covered
executive terminated within two years following such Change in Control will be
the sum of three times base salary plus three times target annual incentive plus
three times performance share value at target. The amendments also provide
protection in the form of a gross-up in the event payments are subject to excise
tax under Sections 280G and 4999 of the IRS Code.
PENSION PLANS
AT&T maintains the AT&T Management Pension Plan, a non-contributory pension
plan that covers all management employees, including the Named Executive
Officers listed in the Summary Compensation Table. The normal retirement age
under this plan is 65; however, retirement before age 65 can be elected under
certain conditions.
The AT&T Management Pension Plan was amended in 1997 to update the adjusted
career average pay formula for computing pensions. Effective August 1, 1997, the
adjusted career average pay formula was 1.6% of the average annual pay for the
three years ending December 31, 1996, times the lesser of (a) 105% of the number
of years of service prior to January 1, 1997, or (b) the number of years of
service prior to January 1, 1997, plus one. Only the basic salary was taken into
account in the formula used to compute pension amounts for the Named Executive
Officers and other senior managers under the adjusted career average pay
formula. No service or compensation after December 31, 1996, was used to
calculate an employee's normal retirement benefit under the adjusted career
average pay formula.
Effective January 1, 1998, the AT&T Management Pension Plan was further
amended to convert the plan to a cash balance design. Under the new design, a
hypothetical cash balance account is established for each participant for
record-keeping purposes. Each year a participant's cash balance account is
credited with (a) a pay credit based on the participant's age and eligible pay
for that year, and (b) an interest credit based on the participant's account
balance as of the end of the prior year. Effective January 1, 1998, an eligible
participant's cash balance account received an initial credit based on a
conversion benefit equal to the participant's normal retirement benefit under
the adjusted career average pay formula described above multiplied by a
conversion factor based on the participant's age as of December 31, 1996. The
initial pay credit was made as of January 1, 1998, based on the participant's
eligible pay for 1997, and the initial interest credit was made as of January 1,
1998, based on the conversion benefit. Only basic salary is considered eligible
pay under the cash balance design for the Named Executive Officers and other
senior managers. Interest credits are calculated at the effective annual rate of
7% for calendar years 1997, 1998, 1999, and 2000. Under the cash balance design,
a participant's benefit is determined by projecting interest credits to his or
her cash balance account to age 65, converting the projected cash balance
account to an
XIV-46
annuity, and reducing that annuity for early commencement. A participant's
benefit under the plan after conversion to the cash balance design will be no
less than the benefit calculated under the career average pay formula as
adjusted in 1997.
Federal laws place limitations on pensions that may be paid from the
pension trust related to the AT&T Management Pension Plan. Pension amounts based
on the AT&T Management Pension Plan formula that exceed the applicable
limitations will be paid as an operating expense.
AT&T also maintains the AT&T Non-Qualified Pension Plan. Under the plan,
annual pensions for Messrs. Armstrong, Dorman, Ianna, and Noski, and Ms.
Bernard, and other senior managers are computed based on actual annual bonus
awards under AT&T's Short Term Incentive Plan. Pension benefits under this plan
will commence at the same time as benefits under the AT&T Management Pension
Plan. The annual pension amounts payable under this plan are equal to no less
than the greater of the amounts computed under the Basic Formula or Alternate
Formula that were amended in 1997 and are described below.
BASIC FORMULA
For the 3-year period ending December 31, 1996, 1.6% of the average of the
actual annual bonus awards times the lesser of (a) 105% of the number of years
of service prior to January 1, 1997, or (b) the number of years of service prior
to January 1, 1997, plus one.
ALTERNATE FORMULA
The excess of (a) 1.7% of the adjusted career average pay over (b) 0.8% of
the covered compensation base times the lesser of (i) 105% of the number of
years of service prior to January 1, 1997, or (ii) the number of years of
service prior to January 1, 1997, plus one, minus the benefit calculated under
the AT&T Management Pension Plan formula (without regard to limitations imposed
by the Internal Revenue Code). For purposes of this formula, adjusted career
average pay is the average annual compensation for the 3-year period ending
December 31, 1996, without regard to the limitations imposed by the Internal
Revenue Code. The covered compensation base used in this formula is the average
of the maximum wage amount for which an employee was liable for Social Security
Tax for each year beginning with 1961 and ending with 1996. In 1996, the covered
compensation base was $27,600.
No service or compensation after December 31, 1996, is used to calculate an
employee's normal retirement benefit under the Basic Formula or Alternate
Formula.
Effective January 1, 1998, the AT&T Non-Qualified Pension Plan was further
amended to convert the plan to a cash balance pension design. Under the new
design, a hypothetical cash balance account is established for each participant
for record-keeping purposes. Each year a participant's cash balance account is
credited with (a) an award credit based on the participant's age and short-term
award paid in that year and (b) an interest credit based on the participant's
account balance as of the end of the prior year. Effective January 1, 1998, an
eligible participant's cash balance account received an initial credit based on
a conversion benefit equal to the participant's normal retirement benefit under
the Basic Formula described above multiplied by a conversion factor based on the
participant's age as of December 31, 1996. The initial award credit was made as
of January 1, 1998, based on the participant's short-term award paid in 1997,
and the initial interest credit was made as of January 1, 1998, based on the
conversion benefit. Interest credits are calculated at the effective annual rate
of 7% for calendar years 1997, 1998, 1999, and 2000, and 5.5% for 2001. Under
the cash balance design, a participant's benefit is determined by projecting
interest credits to his or her cash balance account to age 65, converting the
projected cash balance account to an annuity, and reducing that annuity for
early commencement in the same manner as under the AT&T Management Pension Plan.
Senior managers and certain other management employees who are hired at age
35 or over are covered by a supplemental AT&T Mid-Career Pension Plan. For
qualified managers retiring with at least five years at a senior level, the plan
provides additional credits at approximately one-half the rate in the
XIV-47
AT&T Management Pension Plan. The number of credits is equal to the lesser of
(1) actual years of net credited service at retirement, or (2) the employee's
age at the time of hire minus 30. In addition, the AT&T Mid-Career Pension Plan
was amended to provide that liability with respect to senior managers actively
employed on January 1, 1998, be transferred to the AT&T Non-Qualified Pension
Plan and converted to cash balance as described above.
Pension amounts under the AT&T Management Pension Plan formula, the AT&T
Non-Qualified Pension Plan, or the AT&T Mid-Career Pension Plan are not subject
to reductions for Social Security Benefits or other offset amounts. If Messrs.
Armstrong, Dorman, Ianna, and Noski, and Ms. Bernard continue in the positions
as previously stated and retire at the normal retirement age of 65, the
estimated annual pension amount payable under the AT&T Management Pension Plan
formula and the AT&T Non-Qualified Pension Plan would be $454,700, $1,548,500,
$951,400, $1,177,600, and $973,600, respectively. Amounts shown are straight
life annuity amounts not reduced by a joint and survivorship provision that is
available to these officers.
In 1997, AT&T began purchasing annuity contracts to satisfy its unfunded
obligations to retired senior managers under the AT&T Non-Qualified Pension
Plan. In the event AT&T purchases an annuity contract for any of the Named
Executive Officers, the pension payments for such officer will vary from those
set forth above. In such instance there would be a tax gross-up payment to the
officer, and annuity benefits paid by the annuity provider will be reduced to
offset the tax gross-up payment. The after-tax pension benefit will be the same
as the after-tax benefit the participant would otherwise have received under the
AT&T Non-Qualified Pension Plan. Receipt of the annuity is contingent on the
signing of a 2-year non-competition agreement that, should competitive activity
occur within the 2-year period, gives AT&T the right to seek injunctive relief
and to recapture any amounts already paid out under the annuity contract.
In 1997, AT&T also entered into a special individual non-qualified
supplemental retirement arrangement with two executive officers including Mr.
Ianna. Under this agreement, on November 1, 1997, a deferred account
(hereinafter "Deferred Account") was credited with an initial balance of two
times base pay. AT&T shall credit interest to the Deferred Account as of the end
of each calendar quarter at a rate equal to one-quarter of the average 30-year
United States Treasury Bond rate in effect for the last previous quarter.
Pursuant to the provisions of his employment/retention agreement described
above, this Deferred Account became vested on February 1, 2001. The Deferred
Account will be maintained as a bookkeeping account on the records of AT&T and
the named officers have no present ownership right or interest in the Deferred
Account, or in any assets of AT&T with respect thereto.
As part of his employment agreement as described above, AT&T entered into a
supplemental pension arrangement with Mr. Armstrong in 1997. Pursuant to Mr.
Armstrong's arrangement, if he continues in his position as previously stated
and retires at the normal retirement age of 65, the estimated pension amount
payable under the agreement that supplements the annual pension amount payable
under the AT&T Management Pension Plan and the AT&T Non-Qualified Pension Plan
would be $933,300.
As part of his employment agreement as described above, AT&T entered into a
supplemental pension arrangement with Mr. Noski in 2000. Pursuant to Mr. Noski's
arrangement, if he continues in his position as previously stated and retires at
the normal retirement age of 65, the estimated pension amount payable under the
agreement that supplements the annual pension amount payable under the AT&T
Management Pension Plan and the AT&T Non-Qualified Pension Plan would be
$409,800.
As part of his employment agreement as described above, AT&T entered into a
supplemental pension arrangement with Mr. Dorman in 2000. Pursuant to Mr.
Dorman's arrangement, if he continues in his position as previously stated and
retires at the normal retirement age of 65, the estimated pension amount payable
under the agreement that supplements the annual pension amount payable under the
AT&T Management Pension Plan and the AT&T Non-Qualified Pension Plan would be
$531,300.
XIV-48
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
INDEBTEDNESS OF MANAGEMENT
On March 19, 1999, AT&T loaned the amount of $2,000,000 to Mr. Dorman, who
was subsequently elected President of AT&T on December 1, 2000. This loan was
made for the purpose of permitting Mr. Dorman to repay loans made to him by a
previous employer. Repayment of this loan was demanded and made in full in
January 2001, and a new loan for the same purpose and the same amount was made
by AT&T to Mr. Dorman in its place effective January 2, 2001. The new loan,
originally to be repaid by the earliest of April 1, 2002, Mr. Dorman's
termination of employment, or upon his death has been extended for 60 days until
June 1, 2002, in order to allow Mr. Dorman to effect transactions in AT&T stock
in compliance with applicable AT&T trading policies and securities law.
AT&T made additional loans to Mr. Dorman in the amounts of $3,790,520.99 on
December 28, 2000, and $1,240,339.73 on April 13, 2001. The purpose of these
loans was to provide funds for Mr. Dorman to pay federal withholding taxes
resulting from his election under Section 83(b) of the Internal Revenue Code to
include in his 2000 taxable wage base the fair market value of 715,999
restricted shares of AT&T common stock that were granted to Mr. Dorman at the
time of his election as AT&T President. These loans are to be repaid by the
earliest of December 31, 2002, Mr. Dorman's termination of employment, or upon
his death.
Interest on the above loans has been forgiven by AT&T. The forgiven
interest, at the applicable federal short-term rate established by the IRS under
Section 1274(d) of the IRC in effect for each month that there is an outstanding
balance on each loan, results in imputed income to Mr. Dorman. Mr. Dorman is
responsible for the payment of any income taxes resulting from all such imputed
income.
HOSTETTER TRANSACTIONS
AT&T, Meteor Acquisition Inc., and MediaOne Group, Inc. ("MediaOne")
entered into an Agreement and Plan of Merger dated May 6, 1999. Amos B.
Hostetter, Jr., a significant shareholder of MediaOne, assisted AT&T in
negotiating an agreement, to the extent permitted by his shareholder agreement
with MediaOne. On July 21, 1999, Mr. Hostetter was elected to serve on the AT&T
Board. The merger was consummated on June 15, 2000. Upon completion of the
distribution of merger consideration by AT&T, Mr. Hostetter received 39,770,261
shares of AT&T common stock and a cash payment of $1,734,800,958.13. Mr.
Hostetter also received 9,720,740 shares of AT&T common stock and a cash payment
of $424,024,097.34 through a charitable foundation which he disclaims beneficial
ownership.
Mr. Hostetter, indirectly through investment companies, holds greater than
10% attributable ownership interests in four private companies that may derive a
significant percentage of their revenues from AT&T in 2002. These four
companies, Emperative, Inc., Navic Networks, Inc., Stargus, Inc. and Ucentric
Systems, Inc., may individually derive greater than 5% of their 2002 revenues
from AT&T.
SIMPSON TRANSACTIONS
AT&T, Meteor Acquisition Inc., and MediaOne entered into an Agreement and
Plan of Merger dated May 6, 1999. The merger was consummated on June 15, 2000.
Upon completion of the distribution of merger consideration by AT&T, Mr. Simpson
received 32,238 shares of AT&T common stock and a cash payment of $1,406,160. In
addition, an existing MediaOne stock option held by Mr. Simpson was converted
into a fully vested option expiring on June 16, 2008, to purchase 62,631 shares
of AT&T common stock at an exercise price of $18.9446. On July 19, 2000, Mr.
Simpson was elected to serve on the AT&T Board.
OTHER INFORMATION
A Directors' and Officers' liability policy was purchased, effective July
9, 2001, with Lloyds of London and other carriers. The policy insures AT&T for
certain obligations incurred in the indemnification of its
XIV-49
Directors and Officers under New York law or under contract, and insures
Directors and Officers when such indemnification is not provided by AT&T. The
annual policy premium is $2,581,321.
The cost of soliciting proxies in the accompanying form will be borne by
AT&T. In addition to solicitations by mail, a number of regular employees of the
Company and of its subsidiaries may solicit proxies in person or by telephone.
AT&T has retained Georgeson Shareholder Communications Inc. to aid in the
solicitation of proxies, at an estimated cost of $125,000 plus reimbursement of
reasonable out-of-pocket expenses.
XIV-50
TRAVEL DIRECTIONS
FROM THE CHARLESTON AREA
Follow Route I-26 West toward Columbia and take Exit 213 to Montague Avenue.
Turn left at the traffic light and stay on Montague Avenue for about 3/4 of a
mile until you reach International Boulevard. At International Boulevard, turn
right and continue to the next traffic light. At the traffic light, turn left
onto Coliseum Drive. The Charleston Area Convention Center Complex is located at
5001 Coliseum Drive.
FROM THE CHARLESTON INTERNATIONAL AIRPORT (5500 INTERNATIONAL BLVD.)
Follow International Boulevard east for about two miles until you reach Coliseum
Drive. Make a right on Coliseum Drive. The Charleston Area Convention Center
Complex is located at 5001 Coliseum Drive.
FROM THE GREENVILLE/COLUMBIA AREA
Follow Route I-26 East to Charleston and take Exit 213A. The exit ramp will take
you to Montague Avenue. Stay on Montague Avenue for about 1/2 mile until you
reach International Boulevard. At International Boulevard, turn right and
continue to the next traffic light which is Coliseum Drive. Make a right onto
Coliseum Drive. The Charleston Area Convention Center Complex is located at 5001
Coliseum Drive.
FROM THE SAVANNAH/JACKSONVILLE AREA
Follow Route I-95 North to Exit 33. From here, take Highway 17 (Crosstown
Expressway) until you reach the interchange for Route I-526 to North Charleston
(West). From here, take the Airport Exit. At the end of the exit, make a right
turn onto International Boulevard. The next traffic light is Coliseum Drive.
Make a right onto Coliseum Drive. The Charleston Area Convention Center Complex
is located at 5001 Coliseum Drive.
[CONVENTION CENTER COMPLEX MAP]
PARKING INFORMATION -- Shareholders should use the main entrance to the
convention center which is located at the front of the complex at 5001 Coliseum
Drive. Ample on-site public parking facilities are available at the convention
center complex.
XIV-51
CHAPTER FIFTEEN
CERTAIN LEGAL INFORMATION
COMPARISON OF AT&T, COMCAST AND AT&T COMCAST
SHAREHOLDER RIGHTS
This section of this document describes the material differences between
the current rights of AT&T shareholders and Comcast shareholders, on the one
hand, and the rights those shareholders are expected to have as AT&T Comcast
shareholders after completion of the AT&T Comcast transaction, on the other
hand. This section is limited to the changes arising in connection with the AT&T
Comcast transaction and does not address AT&T Consumer Services Group tracking
stock. See "AT&T Consumer Services Group Tracking Stock." As of the date of this
document, the rights of Comcast shareholders are governed by Pennsylvania law,
the Comcast charter and the Comcast bylaws and the rights of AT&T shareholders
are governed by New York law, the AT&T charter and the AT&T bylaws. Upon
completion of the AT&T Comcast transaction, Comcast shareholders will become
AT&T Comcast shareholders, AT&T shareholders will become AT&T Comcast
shareholders (and will also remain AT&T shareholders) and the rights of Comcast
and AT&T shareholders who become AT&T Comcast shareholders will be governed by
Pennsylvania law, the AT&T Comcast charter and AT&T Comcast bylaws. This section
is not meant to be complete and is qualified in its entirety by reference to the
relevant provisions of Pennsylvania and New York corporate law, the Comcast
charter and bylaws and the AT&T charter and bylaws, in each case as currently in
effect, and the AT&T Comcast charter and bylaws that will be in effect upon
completion of the AT&T Comcast transaction, which are more detailed than the
information provided below.
A copy of the AT&T Comcast charter that will be in effect upon completion
of the AT&T Comcast transaction if the Preferred Structure is implemented is
attached to this document as Annex C. A copy of the term sheet describing the
differences between the AT&T Comcast charter that will be in effect upon
completion of the AT&T Comcast transaction if the Preferred Structure is
implemented and the AT&T Comcast charter that will be in effect upon completion
of the AT&T Comcast transaction if the Alternative Structure is implemented is
attached to this document as Annex D. A copy of the AT&T Comcast bylaws that
will be in effect upon completion of the AT&T Comcast transaction is attached to
this document as Annex F. Copies of the charter and bylaws of AT&T and the
charter and bylaws of Comcast, in each case as currently in effect, will be sent
to AT&T shareholders and Comcast shareholders, as applicable, upon request. See
"Additional Information for Shareholders -- Where You Can Find More
Information."
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
AT&T SHAREHOLDER RIGHTS AT&T COMCAST SHAREHOLDER RIGHTS
Authorized The authorized capital stock of AT&T Under the Preferred Structure, the
Capital Stock: consists of 16.4 billion shares of authorized capital stock of AT&T
common stock and 100 million shares of Comcast would consist of 7.5 billion
preferred stock. shares of Class A common stock, 7.5
billion shares of Class A Special
If AT&T Consumer Services Group common stock, 75 million shares of
tracking stock is approved and issued, Class B common stock and 20 million
AT&T will have a new class of AT&T shares of preferred stock.
common stock. For information on this
new class, see "AT&T Consumer Services Under the Alternative Structure, the
Group Tracking Stock." authorized capital stock of AT&T
Comcast would consist of 200 million
shares of Class A common stock, 7.5
billion shares of Class A Special
common stock, 75 million shares of
Class B common stock, 7.5 billion
shares of Class C
XV-1
AT&T SHAREHOLDER RIGHTS AT&T COMCAST SHAREHOLDER RIGHTS
common stock and 20 million shares of
preferred stock.
Voting Rights: AT&T common stock is the only class of AT&T Comcast Class A common stock,
AT&T capital stock with voting rights. AT&T Comcast Class B common stock and,
under the Alternative Structure, AT&T
If the Consumer Services charter Comcast Class C common stock will
amendment proposal is approved and initially be the only classes of AT&T
shares of AT&T Consumer Services Group Comcast capital stock with voting
tracking stock are issued, that class rights.
would have voting rights.
Unlike the other classes of AT&T
The voting interest of the AT&T common Comcast voting stock, subject to
stock may be diluted by issuances of specified exceptions, the voting
other classes of AT&T capital stock interests of the AT&T Comcast Class B
with voting rights. common stock (33 1/3%) and, under the
Alternative Structure, the AT&T
Comcast Class A common stock
(approximately 5.14%) will not be
diluted by issuances of other classes
of AT&T Comcast capital stock with
voting rights.
See "-- Description of AT&T Comcast
Capital Stock."
Approval Rights: No class of AT&T capital stock has Under the Preferred Structure, holders
approval rights over any corporate of AT&T Comcast Class B common stock,
actions, except as required by law. voting as a single class, would have
approval rights over numerous
specified corporate actions.
Under the Alternative Structure,
holders of AT&T Comcast Class A common
stock and AT&T Comcast Class B common
stock, voting together as a single
class, would have approval rights over
numerous specified corporate actions.
See "-- Description of AT&T Comcast
Capital Stock -- AT&T Comcast Class B
Common Stock -- Approval Rights."
Conversions: The shares of AT&T common stock are not Each share of AT&T Comcast Class B
convertible into any other class of common stock will be convertible into
AT&T capital stock. one share of AT&T Comcast Class A
common stock, AT&T Comcast Class A
Special common stock or, under the
Alternative Structure, AT&T Comcast
Class C common stock.
Election of The entire AT&T Board is elected The term of the initial AT&T Comcast
Directors: annually. Board will expire on the date of the
2004 annual meeting of AT&T Comcast
shareholders, which will be the first
annual meeting of AT&T Comcast
shareholders at which directors are
elected that is held after completion
of the AT&T Comcast transaction.
Thereafter, the entire AT&T Comcast
Board will be elected annually.
XV-2
AT&T SHAREHOLDER RIGHTS AT&T COMCAST SHAREHOLDER RIGHTS
See "Description of Governance
Arrangements Following the AT&T
Comcast Transaction -- AT&T Comcast
Board of Directors."
Number The AT&T Board currently consists of 15 From the completion of the AT&T
of Directors: directors. The AT&T Board may fix the Comcast transaction until the 2005
number of directors at any number annual meeting of shareholders, the
between 10 and 25. AT&T Comcast Board will consist of 12
directors. See "Description of
Governance Arrangements Following the
AT&T Comcast Transaction -- AT&T
Comcast Board of Directors."
Thereafter, the AT&T Comcast Board
will determine the number of directors
on the AT&T Comcast Board.
Vacancies: Vacancies on the AT&T Board may be From the completion of the AT&T
filled by the remaining AT&T directors Comcast transaction until the 2005
or by the AT&T shareholders. annual meeting of AT&T Comcast
shareholders, vacancies on the AT&T
Comcast Board will be filled as
described above in "Description of
Governance Arrangements Following the
AT&T Comcast Transaction -- AT&T
Comcast Board of Directors." After the
2005 annual meeting of AT&T Comcast
shareholders, vacancies on the AT&T
Comcast Board may be filled by the
remaining AT&T Comcast directors or by
the AT&T Comcast shareholders.
Nominations of Nominations of individuals for election Nominations of individuals for
Directors: to the AT&T Board may be made by the election to the AT&T Comcast Board
AT&T Board (or a committee of the AT&T will be made by the Directors
Board) or by any AT&T shareholder who Nominating Committee. See "Description
is entitled to vote and follows the of Governance Arrangements Following
proper notice procedures. the AT&T Comcast
Transaction -- Directors Nominating
Committee." In addition, any AT&T
Comcast shareholder who follows the
proper notice procedures will be able
to nominate individuals for election
to the AT&T Comcast Board.
Quorum: Holders of 40% of the outstanding Holders of shares of AT&T Comcast
shares of AT&T common stock constitute capital stock entitled to cast a
a quorum for the transaction of majority of the votes that all AT&T
business at a meeting of AT&T Comcast shareholders are entitled to
shareholders. cast will constitute a quorum for the
transaction of business at a meeting
of AT&T Comcast shareholders.
Shareholder Subject to certain exceptions, a merger Subject to certain exceptions, a
Approval of a involving AT&T or a sale of all or merger involving AT&T Comcast or a
Merger or Sale of substantially all of AT&T's assets sale of all or substantially all of
All or Substantially generally requires approval of a AT&T Comcast's assets generally will
All Assets: majority of the AT&T Board present and require the approval of a majority of
voting (assuming a quorum) and holders the AT&T Comcast Board present and
of a majority of the voting (assuming a quorum) and holders
of a majority of the votes cast by
XV-3
AT&T SHAREHOLDER RIGHTS AT&T COMCAST SHAREHOLDER RIGHTS
outstanding shares of AT&T common stock holders of AT&T Comcast capital stock
(assuming a quorum). entitled to vote (assuming a quorum).
In addition, subject to certain
exceptions, a merger or other
transaction involving AT&T Comcast, in
each case that requires AT&T Comcast
shareholder approval, will also
require the approval of (1) holders of
AT&T Comcast Class B common stock,
voting as a single class, under the
Preferred Structure, and (2) holders
of AT&T Comcast Class A common stock
and AT&T Comcast Class B common stock,
voting together as a single class,
under the Alternative Structure. See
"-- Description of AT&T Comcast
Capital Stock -- AT&T Comcast Class B
Common Stock -- Approval Rights."
Furthermore, Sural LLC is not
permitted to support a merger
involving AT&T Comcast until the tenth
anniversary of the completion of the
AT&T Comcast transaction unless the
merger is approved by disinterested
AT&T Comcast shareholders. See
"Description of the AT&T Comcast
Transaction Agreements -- The Support
Agreement -- Covenants."
Shareholder An AT&T shareholder who wants to bring An AT&T Comcast shareholder who wants
Notice: business before, or nominate directors to bring business before, or nominate
for election at, an annual meeting of directors for election at, an annual
shareholders generally must deliver meeting of shareholders generally will
written notice to AT&T not less than 90 be required to deliver written notice
days but not more than 120 days prior to AT&T Comcast not less than 60 days
to the first anniversary of the but not more than 90 days prior to the
preceding year's annual meeting of first anniversary of the preceding
shareholders. year's annual meeting of shareholders.
Action by AT&T shareholders may not act by Except as described below, AT&T
Written Consent: written consent in lieu of a Comcast shareholders will not be able
shareholder meeting (unless such to act by written consent in lieu of a
consent is unanimous.) shareholder meeting.
Holders of AT&T Comcast Class B common
stock and, under the Alternative
Structure, AT&T Comcast Class A common
stock will be permitted to act by
written consent in lieu of a
shareholder meeting to exercise their
specific approval rights over certain
matters. See "-- Description of AT&T
Comcast Capital Stock."
Calling of Special The Chairman of the Board and the AT&T The AT&T Comcast Board will have the
Meetings of Board have the right to call special right to call special meetings of
Shareholders: meetings of shareholders. shareholders.
XV-4
AT&T SHAREHOLDER RIGHTS AT&T COMCAST SHAREHOLDER RIGHTS
Amendment of The AT&T charter may be amended with The AT&T Comcast charter will be able
Charter and the approval of a majority of the AT&T to be amended with the approval of a
Bylaws: Board present and voting (assuming a majority of the AT&T Comcast Board
quorum) and holders of a majority of present and voting (assuming a quorum)
the outstanding shares of AT&T common and the holders of a majority of the
stock (assuming a quorum). votes cast by AT&T Comcast
shareholders entitled to vote
The AT&T bylaws may be amended by the (assuming a quorum). However, AT&T
AT&T Board or the AT&T shareholders. Comcast charter amendments that affect
the director, officer and committee
arrangements implemented in connection
with the AT&T Comcast transaction will
require 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
Chairman of the AT&T Comcast Board or
CEO of AT&T Comcast and (2) April
2010, as well as the shareholder
approval referred to in the preceding
sentence.
The AT&T Comcast bylaws will be able
to be amended only by the AT&T Comcast
Board or by AT&T Comcast shareholders
with the approval of the AT&T Comcast
Board.
Notwithstanding the foregoing, AT&T
Comcast charter and bylaw amendments
that adversely affect the rights of
holders of AT&T Comcast Class B common
stock will require the approval of
holders of AT&T Comcast Class B common
stock, voting as a single class, under
the Preferred Structure and holders of
AT&T Comcast Class A common stock and
AT&T Comcast Class B common stock,
voting together as a single class,
under the Alternative Structure. See
"-- Description of AT&T Comcast
Capital Stock -- AT&T Comcast Class B
Common Stock -- Approval Rights."
Shareholder AT&T does not have a shareholder rights AT&T Comcast will have a shareholder
Rights Plan: plan. rights plan. See "-- Description of
AT&T Comcast Shareholder Rights Plan."
The existence of this plan may deter
potential acquirors from making an
unsolicited takeover proposal or
tender offer. See "-- Description of
AT&T Comcast Shareholder Rights
Plan -- Anti-Takeover Effects."
Business AT&T has not opted out of New York's AT&T Comcast has opted out of
Combinations business combinations statute, which Pennsylvania's business combinations
Statute: restricts a corporation's ability to statute, which restricts a
engage in corporation's ability to engage in
certain business
XV-5
AT&T SHAREHOLDER RIGHTS AT&T COMCAST SHAREHOLDER RIGHTS
certain business combinations with combinations with holders of shares of
holders of shares of capital stock capital stock representing more than
representing more than 20% of the 20% of the combined voting power, in
combined voting power, in an election an election of directors, of a
of directors, of a corporation's corporation's capital stock.
capital stock.
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
COMCAST SHAREHOLDER RIGHTS AT&T COMCAST SHAREHOLDER RIGHTS
Authorized Capital The authorized capital stock of Comcast Under the Preferred Structure, the
Stock: consists of 200 million shares of Class authorized capital stock of AT&T
A common stock, 2.5 billion shares of Comcast would consist of 7.5 billion
Class A Special common stock, 50 shares of Class A common stock, 7.5
million shares of Class B common stock billion shares of Class A Special
and 20 million shares of preferred common stock, 75 million shares of
stock. Class B common stock and 20 million
shares of preferred stock.
Under the Alternative Structure, the
authorized capital stock of AT&T
Comcast would consist of 200 million
shares of Class A common stock, 7.5
billion shares of Class A Special
common stock, 75 million shares of
Class B common stock, 7.5 billion
shares of Class C common stock and 20
million shares of preferred stock.
Voting Rights: Comcast Class A common stock and AT&T Comcast Class A common stock,
Comcast Class B common stock are the AT&T Comcast Class B common stock and,
only classes of Comcast capital stock under the Alternative Structure, AT&T
with voting rights. Comcast Class C common stock will
initially be the only classes of AT&T
The voting interests of holders of Comcast capital stock with voting
Comcast Class A common stock and rights.
Comcast Class B common stock (currently
approximately 13.4% and 86.6%, Unlike the other classes of AT&T
respectively) may be diluted by Comcast voting stock, subject to
issuances of other classes of Comcast specified exceptions, the voting
capital stock with voting rights. interests of the AT&T Comcast Class B
common stock (33 1/3%) and, under the
Alternative Structure, the AT&T
Comcast Class A common stock
(approximately 5.14%) will not be
diluted by issuances of other classes
of AT&T Comcast capital stock with
voting rights.
See "-- Description of AT&T Comcast
Capital Stock."
Approval Rights: No class of Comcast capital stock has Under the Preferred Structure, holders
approval rights over any corporate of AT&T Comcast Class B common stock,
actions, except as required by law. voting as a single class, would have
approval rights over numerous
specified corporate actions.
XV-6
COMCAST SHAREHOLDER RIGHTS AT&T COMCAST SHAREHOLDER RIGHTS
Under the Alternative Structure,
holders of AT&T Comcast Class A common
stock and AT&T Comcast Class B common
stock, voting together as a single
class, would have approval rights over
numerous specified corporate actions.
See "-- Description of AT&T Comcast
Capital Stock -- AT&T Comcast Class B
Common Stock -- Approval Rights."
Conversions: Each share of Comcast Class B common Each share of AT&T Comcast Class B
stock is convertible into one share of common stock will be convertible into
Comcast Class A common stock or Comcast one share of AT&T Comcast Class A
Class A Special common stock. common stock, AT&T Comcast Class A
Special common stock or, under the
Alternative Structure, AT&T Comcast
Class C common stock.
Election of Directors: The entire Comcast Board is elected The term of the initial AT&T Comcast
annually. Board will expire on the date of the
2004 annual meeting of AT&T Comcast
shareholders, which will be the first
annual meeting of AT&T Comcast
shareholders at which directors are
elected that is held after completion
of the AT&T Comcast transaction.
Thereafter, 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."
Removal of Directors: Comcast directors may be removed, with AT&T Comcast directors will be able to
or without cause, by the Comcast be removed only for cause by AT&T
shareholders. Comcast shareholders.
Number of Directors: The Comcast Board currently consists of From the completion of the AT&T
10 directors. The Comcast Board may Comcast transaction until the 2005
change the number of directors at any annual meeting of shareholders, the
time. AT&T Comcast Board will consist of 12
directors. See "Description of
Governance Arrangements Following the
AT&T Comcast Transaction -- AT&T
Comcast Board of Directors."
Thereafter, the AT&T Comcast Board
will determine the number of directors
on the AT&T Comcast Board.
Vacancies: Vacancies on the Comcast Board may be From the completion of the AT&T
filled by the remaining Comcast Comcast transaction until the 2005
directors or by the Comcast annual meeting of AT&T Comcast
shareholders. shareholders, vacancies on the AT&T
Comcast Board will be filled as
described above in "Description of
Governance Arrangements Following the
AT&T Comcast Transaction -- AT&T
Comcast Board of
XV-7
COMCAST SHAREHOLDER RIGHTS AT&T COMCAST SHAREHOLDER RIGHTS
Directors." After the 2005 annual
meeting of AT&T Comcast shareholders,
vacancies on the AT&T Comcast Board
may be filled by the remaining AT&T
Comcast directors or by the AT&T
Comcast shareholders.
Nominations of Nominations of individuals for election Nominations of individuals for
Directors: to the Comcast Board may be made by the election to the AT&T Comcast Board
Comcast Board (or a committee of the will be made by the Directors
Comcast Board) or by any Comcast Nominating Committee. See "Description
shareholder who follows the proper of Governance Arrangements Following
notice procedures. the AT&T Comcast
Transaction -- Directors Nominating
Committee." In addition, any AT&T
Comcast shareholder who follows the
proper notice procedures will be able
to nominate individuals for election
to the AT&T Comcast Board.
Shareholder Approval Subject to certain exceptions, a merger Subject to certain exceptions, a
of a Merger or Sale of involving Comcast or a sale of all or merger involving AT&T Comcast or a
All or Substantially substantially all of Comcast's assets sale of all or substantially all of
All Assets: generally requires the approval of a AT&T Comcast's assets generally will
majority of the Comcast Board present require the approval of a majority of
and voting (assuming a quorum) and the AT&T Comcast Board present and
holders of a majority of the votes cast voting (assuming a quorum) and holders
by holders of Comcast capital stock of a majority of the votes cast by
entitled to vote (assuming a quorum). holders of AT&T Comcast capital stock
entitled to vote (assuming a quorum).
In addition, subject to certain
exceptions, a merger or other
transaction involving AT&T Comcast, in
each case that requires AT&T Comcast
shareholder approval, will also
require the approval of (1) holders of
AT&T Comcast Class B common stock,
voting as a single class, under the
Preferred Structure, and (2) holders
of AT&T Comcast Class A common stock
and AT&T Comcast Class B common stock,
voting together as a single class,
under the Alternative Structure. See
"-- Description of AT&T Comcast
Capital Stock -- AT&T Comcast Class B
Common Stock -- Approval Rights."
Furthermore, Sural LLC is not
permitted to support a merger
involving AT&T Comcast until the tenth
anniversary of the completion of the
AT&T Comcast transaction unless the
merger is approved by disinterested
AT&T Comcast shareholders. See
"-- Description of the AT&T Comcast
Transaction Agreements -- The Support
Agreement -- Covenants."
XV-8
COMCAST SHAREHOLDER RIGHTS AT&T COMCAST SHAREHOLDER RIGHTS
Action by Written Comcast shareholders may not act by Except as described below, AT&T
Consent: written consent in lieu of a Comcast shareholders will not be able
shareholder meeting (unless such to act by written consent in lieu of a
consent is unanimous). shareholder meeting.
Holders of AT&T Comcast Class B common
stock and, under the Alternative
Structure, AT&T Comcast Class A common
stock will be permitted to act by
written consent in lieu of a
shareholder meeting to exercise their
specific approval rights over certain
matters. See "-- Description of AT&T
Comcast Capital Stock."
Calling of Special The Chairman of the Board, the The AT&T Comcast Board will have the
Meetings of President and the Comcast Board have right to call special meetings of
Shareholders: the right to call special meetings of shareholders.
shareholders.
Amendment of Charter The Comcast charter may be amended with The AT&T Comcast charter will be able
and Bylaws: the approval of a majority of the to be amended with the approval of a
Comcast Board present and voting majority of the AT&T Comcast Board
(assuming a quorum) and holders of a present and voting (assuming a quorum)
majority of the votes cast by the and holders of a majority of the votes
shareholders entitled to vote (assuming cast by AT&T Comcast shareholders
a quorum). entitled to vote (assuming a quorum).
However, AT&T Comcast charter
The Comcast bylaws may be amended by amendments that affect the director,
the Comcast Board or the Comcast officer and committee arrangements
shareholders. implemented in connection with the
AT&T Comcast transaction will require
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
Chairman of the AT&T Comcast Board or
CEO of AT&T Comcast and (2) April
2010, as well as the shareholder
approval referred to in the preceding
sentence.
The AT&T Comcast bylaws will be able
to be amended only by the AT&T Comcast
Board or by the AT&T Comcast
shareholders with the approval of the
AT&T Comcast Board.
Notwithstanding the foregoing, AT&T
Comcast charter and bylaw amendments
that adversely affect the rights of
holders of AT&T Comcast Class B common
stock will require the approval of
holders of AT&T Comcast Class B common
stock, voting as a single class, under
the Preferred Structure and holders of
AT&T Comcast Class A common stock and
AT&T Comcast Class B common stock,
voting together as a single class,
under the Alternative Structure. See
"-- Description
XV-9
COMCAST SHAREHOLDER RIGHTS AT&T COMCAST SHAREHOLDER RIGHTS
of AT&T Comcast Capital Stock -- AT&T
Comcast Class B Common Stock --
Approval Rights."
Shareholder Rights Comcast does not have a shareholder AT&T Comcast will have a shareholder
Plan: rights plan. rights plan. See "-- Description of
AT&T Comcast Shareholder Rights Plan."
The existence of this plan may deter
potential acquirors from making an
unsolicited takeover proposal or
tender offer. See "-- Description of
AT&T Comcast Shareholder Rights
Plan -- Anti-Takeover Effects."
Business Combinations Comcast has not opted out of AT&T Comcast has opted out of
Statute: Pennsylvania's business combinations Pennsylvania's business combinations
statute, which restricts a statute, which restricts a
corporation's ability to engage in corporation's ability to engage in
certain business combinations with certain business combinations with
holders of shares of capital stock holders of shares of capital stock
representing more than 20% of the representing more than 20% of the
combined voting power, in an election combined voting power, in an election
of directors, of a corporation's of directors, of a corporation's
capital stock. capital stock.
DESCRIPTION OF AT&T COMCAST CAPITAL STOCK
This section of this document describes the material terms of the capital
stock of AT&T Comcast that will be issued in the AT&T Comcast transaction under
the charter and bylaws that will be in effect after the completion of the AT&T
Comcast transaction. This section is not meant to be complete and is qualified
in its entirety by reference to the AT&T Comcast charter and AT&T Comcast bylaws
that will be in effect upon the completion of the AT&T Comcast transaction,
which are more detailed than the information provided below. A copy of the AT&T
Comcast charter that will be in effect upon completion of the AT&T Comcast
transaction if the Preferred Structure is implemented is attached to this
document as Annex C. A copy of the term sheet describing the differences between
the AT&T Comcast charter that will be in effect upon completion of the AT&T
Comcast transaction if the Preferred Structure is implemented and the AT&T
Comcast charter that will be in effect upon completion of the AT&T Comcast
transaction if the Alternative Structure is implemented is attached to this
document as Annex D. A copy of the AT&T Comcast bylaws that will be in effect
upon completion of the AT&T Comcast transaction is attached to this document as
Annex F.
AUTHORIZED CAPITAL STOCK
Under the Preferred Structure, the authorized capital stock of AT&T Comcast
will consist of 7.5 billion shares of Class A common stock, 7.5 billion shares
of Class A Special common stock, 75 million shares of Class B common stock and
20 million shares of preferred stock.
Under the Alternative Structure, the authorized capital stock of AT&T
Comcast will consist of 200 million shares of Class A common stock, 7.5 billion
shares of Class A Special common stock, 75 million shares of Class B common
stock, 7.5 billion shares of Class C common stock and 20 million shares of
preferred stock.
AT&T COMCAST CLASS A COMMON STOCK
AT&T Comcast Class A Common Stock Outstanding. The outstanding shares of
AT&T Comcast Class A common stock will be duly authorized, validly issued, fully
paid and nonassessable.
XV-10
Voting Rights. Under the Preferred Structure, on all matters submitted for
a vote of holders of all classes of AT&T Comcast voting stock, holders of the
AT&T Comcast Class A common stock in the aggregate will hold 66 2/3% of the
aggregate voting power of the AT&T Comcast capital stock upon completion of the
AT&T Comcast transaction. Unlike the AT&T Comcast Class B common stock under the
Preferred Structure, the aggregate voting power of the AT&T Comcast Class A
common stock under the Preferred Structure will be dilutable and will decrease
upon the issuance of shares of any other class of AT&T Comcast capital stock
with voting rights (other than any issuance of additional shares of AT&T Comcast
Class B common stock).
Under the Preferred Structure, each share of AT&T Comcast Class A common
stock will have the number of votes equal to a quotient the numerator of which
is the excess of (1) the Total Number of Votes (as defined below in this
paragraph) over (2) the sum of (A) the Total Number of B Votes (as defined below
in this paragraph) and (B) the Total Number of Other Votes (as defined below in
this paragraph) and the denominator of which is the number of outstanding shares
of AT&T Comcast Class A common stock. "Total Number of Votes" on any record date
is equal to a quotient the numerator of which is the Total Number of B Votes on
such record date and the denominator of which is the B Voting Percentage (as
defined below in this paragraph) on such record date. "Total Number of B Votes"
on any record date is equal to the product of (1) 15 and (2) the number of
outstanding shares of AT&T Comcast Class B common stock on such record date.
"Total Number of Other Votes" on any record date means the aggregate number of
votes to which holders of all classes of capital stock of AT&T Comcast other
than holders of AT&T Comcast Class A common stock and AT&T Comcast Class B
common stock are entitled to cast on such record date in an election of
directors. "B Voting Percentage" on any record date means the portion (expressed
as a percentage) of the total number of votes to which all holders of AT&T
Comcast Class B common stock are entitled to cast on such record date in an
election of directors under the Preferred Structure. Initially, the B Voting
Percentage will be 33 1/3%. 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 (assuming, among other things, that the Microsoft
transaction is completed and AT&T Comcast is not required to make any additional
payments of AT&T Comcast stock in connection with the AT&T Comcast transaction),
each share of AT&T Comcast Class A common stock would have approximately 0.2094
of a vote upon completion of the AT&T Comcast transaction.
Under the Alternative Structure, subject to the following two sentences, on
all matters submitted for a vote of holders of all classes of AT&T Comcast
voting stock, holders of the AT&T Comcast Class A common stock and AT&T Comcast
Class B common stock in the aggregate will hold approximately 5.14% and 33 1/3%,
respectively, of the aggregate voting power of the AT&T Comcast capital stock,
regardless of the number of shares of AT&T Comcast Class C common stock or any
other class of AT&T Comcast capital stock outstanding at any time. If the number
of shares of AT&T Comcast Class A common stock or AT&T Comcast Class B common
stock outstanding upon completion of the AT&T Comcast transaction is reduced for
any reason (e.g., by repurchase or, in the case of the AT&T Comcast Class B
common stock only, conversion) after the completion of the AT&T Comcast
transaction, the aggregate voting power of the applicable class of AT&T Comcast
capital stock will be proportionately reduced. If additional shares of AT&T
Comcast Class A common stock or AT&T Comcast Class B common stock are issued
after the completion of the AT&T Comcast transaction, the relative aggregate
voting power of the two classes of AT&T Comcast common stock will change (based
on the principle that each share of AT&T Comcast Class B common stock will be
entitled to 15 times the vote of each share of AT&T Comcast Class A common
stock) to the extent such issuance is disproportionate as between the relative
number of shares of the two classes outstanding prior to the issuance, but the
combined aggregate voting power of the two classes of stock will remain constant
at approximately 38 47/100% (except to the extent there has been a reduction in
the aggregate voting power of either class of stock as described in the
preceding sentence).
Under the Alternative Structure, each share of AT&T Comcast Class A common
stock will have one vote and each share of AT&T Comcast Class B common stock
will have 15 votes.
XV-11
Approval Rights. Under the Preferred Structure, except as required by law,
holders of AT&T Comcast Class A common stock will have no specific approval
rights over any AT&T Comcast corporate actions. Under the Alternative Structure,
holders of AT&T Comcast Class A common stock and holders of AT&T Comcast Class B
common stock, voting together as a single class, will have the approval rights
described under "-- AT&T Comcast Class B Common Stock -- Approval Rights."
Conversion Rights. The shares of AT&T Comcast Class A common stock will
not be convertible into shares of any other class of AT&T Comcast capital stock.
Preemptive Rights. The holders of AT&T Comcast Class A common stock will
have no preemptive rights to purchase, subscribe for or otherwise acquire any
unissued or treasury shares or other securities.
AT&T COMCAST CLASS B COMMON STOCK
AT&T Comcast Class B Common Stock Outstanding. The outstanding shares of
AT&T Comcast Class B common stock will be duly authorized, validly issued, fully
paid and nonassessable.
Voting Rights. Under the Preferred Structure, subject to the next
sentence, on all matters submitted for a vote of holders of all classes of AT&T
Comcast voting stock, holders of AT&T Comcast Class B common stock in the
aggregate will hold 33 1/3% of the aggregate voting power of AT&T Comcast
capital stock, regardless of the number of shares of AT&T Comcast Class A common
stock or any other class of AT&T Comcast capital stock outstanding at any time.
If the number of shares of AT&T Comcast Class B common stock outstanding upon
completion of the transaction is reduced for any reason (e.g., by repurchase or
conversion) after the completion of the AT&T Comcast transaction, the aggregate
voting power of the AT&T Comcast Class B common stock will be proportionately
reduced.
Under the Preferred Structure, each share of AT&T Comcast Class B common
stock will have 15 votes.
Under the Alternative Structure, the voting rights of AT&T Comcast Class B
common stock will be as described above in the fourth paragraph under "-- AT&T
Comcast Class A Common Stock -- Voting Rights."
Approval Rights. Under the Preferred Structure, holders of AT&T Comcast
Class B common stock 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% of the aggregate 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.
Under the Alternative Structure, holders of AT&T Comcast Class B common
stock and AT&T Comcast Class A common stock, voting together as a single class,
will have the same approval rights that holders of AT&T Comcast Class B common
stock have under the Preferred Structure. In addition, under the Alternative
Structure, the approval of holders of AT&T Comcast Class B common stock and AT&T
Comcast Class A common stock, voting together as a single class, will also be
required to issue any AT&T Comcast Class A common stock or any securities
exercisable or exchangeable for or convertible into AT&T Comcast Class A common
stock.
XV-12
Conversion Rights. Each share of AT&T Comcast Class B common stock will be
convertible into one share of AT&T Comcast Class A common stock, AT&T Comcast
Class A Special common stock or, under the Alternative Structure, AT&T Comcast
Class C common stock.
Preemptive Rights. The holders of AT&T Comcast Class B common stock will
have no preemptive rights to purchase, subscribe for or otherwise acquire any
unissued or treasury shares or other securities.
AT&T COMCAST CLASS A SPECIAL COMMON STOCK
AT&T Comcast Class A Special Common Stock Outstanding. The outstanding
shares of AT&T Comcast Class A Special common stock will be duly authorized,
validly issued, fully paid and nonassessable.
Voting Rights. Except as required by law, holders of AT&T Comcast Class A
Special common stock will not be entitled to vote. When holders of AT&T Comcast
Class A Special common stock are entitled to vote by applicable law, each share
of AT&T Comcast Class A Special common stock will have the same number of votes
as each share of AT&T Comcast Class A common stock, under the Preferred
Structure, or AT&T Comcast Class C common stock, under the Alternative
Structure.
Approval Rights. Except as required by law, holders of AT&T Comcast Class
A Special common stock will have no specific approval rights over any AT&T
Comcast corporate actions.
Conversion Rights. The shares of AT&T Comcast Class A Special common stock
will not be convertible into shares of any other class of AT&T Comcast capital
stock.
Preemptive Rights. Holders of AT&T Comcast Class A Special common stock
will have no preemptive rights to purchase, subscribe for or otherwise acquire
any unissued or treasury shares or other securities.
AT&T COMCAST CLASS C COMMON STOCK
AT&T Comcast Class C common stock will be authorized and issued only if the
Alternative Structure is implemented.
AT&T Comcast Class C Common Stock Outstanding. The outstanding shares of
AT&T Comcast Class C common stock will be duly authorized, validly issued, fully
paid and nonassessable.
Voting Rights. On all matters submitted for a vote of holders of all
classes of AT&T Comcast voting stock, holders of AT&T Comcast Class C common
stock in the aggregate will hold approximately 61 53/100% of the aggregate
voting power of AT&T Comcast capital stock upon completion of the AT&T Comcast
transaction. Unlike AT&T Comcast Class A common stock and AT&T Comcast Class B
common stock under the Alternative Structure, the aggregate voting power of AT&T
Comcast Class C common stock will be dilutable and will decrease upon the
issuance of shares of any other class of AT&T Comcast capital stock with voting
rights (other than any issuance of additional shares of AT&T Comcast Class A
common stock or AT&T Comcast Class B common stock).
Each share of AT&T Comcast Class C common stock will have the number of
votes equal to a quotient the numerator of which is the excess of (1) the Total
Number of Votes (as defined below in this paragraph) over (2) the sum of (A) the
Total Number of A and B Votes (as defined below in this paragraph) and (B) the
Total Number of Other Votes (as defined below in this paragraph) and the
denominator of which is the number of outstanding shares of AT&T Comcast Class C
common stock. "Total Number of Votes" on any record date is equal to a quotient
the numerator of which is the Total Number of A and B Votes on such record date
and the denominator of which is the Combined A and B Voting Percentage (as
defined below in this paragraph) on such record date. "Total Number of A and B
Votes" on any record date is equal to the sum of (1) the number of outstanding
shares of AT&T Comcast Class A common stock on such record date and (2) the
product of (A) 15 and (B) the number of outstanding shares of AT&T Comcast Class
B common stock on such record date. "Total Number of Other Votes" on any record
date means the aggregate number of votes to which holders of all classes of
XV-13
capital stock of AT&T Comcast other than holders of AT&T Comcast Class A common
stock, AT&T Comcast Class B common stock and AT&T Comcast Class C common stock
are entitled to cast on such record date in an election of directors. "Combined
A and B Voting Percentage" on any record date means the portion (expressed as a
percentage) of the total number of votes entitled to be cast in an election of
directors by the holders of capital stock of AT&T Comcast to which all holders
of AT&T Comcast Class A common stock and AT&T Comcast Class B common stock are
entitled to cast on such record date in an election of directors under the
Alternative Structure. Initially, the Combined A and B Voting Percentage will be
approximately 38 47/100%. Based on the number of shares of each class of voting
AT&T Comcast common stock anticipated to be outstanding upon completion of the
AT&T Comcast transaction (assuming, among other things, that the Microsoft
transaction is completed and AT&T Comcast is not required to make any additional
payments of AT&T Comcast stock in connection with the AT&T Comcast transaction),
each share of AT&T Comcast Class C common stock would have approximately 0.1953
of a vote upon completion of the AT&T Comcast transaction.
Approval Rights. Except as required by law, holders of AT&T Comcast Class
C common stock will have no specific approval rights over any AT&T Comcast
corporate actions.
Conversion Rights. The shares of AT&T Comcast Class C common stock will
not be convertible into shares of any other class of AT&T Comcast capital stock.
Preemptive Rights. Holders of AT&T Comcast Class C common stock will have
no preemptive rights to purchase, subscribe for or otherwise acquire any
unissued or treasury shares or other securities.
AT&T COMCAST PREFERRED STOCK
AT&T Comcast Preferred Stock Outstanding. It is not anticipated that any
shares of AT&T Comcast preferred stock will be outstanding upon completion of
the AT&T Comcast transaction.
Blank Check Preferred Stock. Under the AT&T Comcast charter, the AT&T
Comcast Board will have the authority, without shareholder approval, to create
and issue one or more series of preferred stock, without par value, in whole or
fractional shares, with full, limited, multiple, fractional, or no voting
rights, and with such designations, preferences, qualifications, privileges,
limitations, restrictions, options, conversion rights, and other special or
relative rights as it so chooses. Acting under this authority, the AT&T Comcast
Board could create and issue a class or series of preferred stock with rights,
privileges or restrictions, and adopt a shareholder rights plan, having the
effect of discriminating against an existing or prospective holder of securities
as a result of that shareholder beneficially owning or commencing a tender offer
for a substantial amount of AT&T Comcast voting capital stock. One of the
effects of authorized but unissued and unreserved shares of capital stock may be
to render more difficult or discourage an attempt by a potential acquiror to
obtain control of AT&T Comcast by means of a merger, tender offer, proxy contest
or otherwise, and thereby protect the continuity of AT&T Comcast's management.
The issuance of such shares of capital stock may have the effect of delaying,
deferring or preventing a change in control of AT&T Comcast without any further
action by the shareholders of AT&T Comcast.
Pursuant to the authority described in the preceding paragraph, prior to
the completion of the AT&T Comcast transaction the AT&T Comcast Board will
designate a series of preferred stock in connection with the adoption of the
AT&T Comcast shareholder rights plan described below. See "-- Description of
AT&T Comcast Shareholder Rights Plan."
DIVIDEND RIGHTS
Holders of AT&T Comcast Class A common stock, AT&T Comcast Class A Special
common stock, AT&T Comcast Class B common stock and, under the Alternative
Structure, AT&T Comcast Class C common stock will be entitled to receive, from
time to time, when, as and if declared, in the discretion of the AT&T Comcast
Board, such cash dividends as the AT&T Comcast Board may from time to time
determine, out of such funds as are legally available therefor, in proportion to
the number of shares held by them, respectively, without regard to class.
XV-14
Holders of AT&T Comcast Class A common stock, AT&T Comcast Class A Special
common stock, AT&T Comcast Class B common stock and, under the Alternative
Structure, AT&T Comcast Class C common stock will also be entitled to receive,
from time to time, when, as and if declared by the AT&T Comcast Board, such
dividends of stock of AT&T Comcast or other property as the AT&T Comcast Board
may determine, out of such funds as are legally available therefor. However,
stock dividends on, or stock splits of, any class of common stock will not be
paid or issued unless paid or issued on all classes of AT&T Comcast common
stock, in which case they will be paid or issued only in shares of that class;
provided, however, that stock dividends on, or stock splits of, AT&T Comcast
Class B common stock may also be paid or issued in shares of AT&T Comcast Class
A Special common stock.
RIGHTS UPON LIQUIDATION
In the event of any liquidation, dissolution or winding up (either
voluntary or involuntary) of AT&T Comcast, holders of AT&T Comcast Class A
common stock, AT&T Comcast Class A Special common stock, AT&T Comcast Class B
common stock and, under the Alternative Structure, AT&T Comcast Class C common
stock will be entitled to receive the assets and funds of AT&T Comcast in
proportion to the number of shares held by them, respectively, without regard to
class.
MERGERS, CONSOLIDATIONS, ETC.
The AT&T Comcast charter will provide that if in a transaction such as a
merger, consolidation, share exchange or recapitalization holders of each class
of AT&T Comcast common stock outstanding upon completion of the AT&T Comcast
transaction do not receive the same consideration for each of their shares of
AT&T 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 AT&T Comcast common stock held by them, respectively,
without regard to class), holders of each such class of AT&T Comcast common
stock will receive "mirror" securities (i.e., shares of a class of stock having
substantially equivalent rights as the applicable class of AT&T Comcast common
stock).
TRANSFER AGENT AND REGISTRAR
EquiServe is the transfer agent and registrar for Comcast common stock and
AT&T common stock as of the date of this document. EquiServe is expected to be
the transfer agent and registrar for AT&T Comcast common stock.
STOCK EXCHANGE LISTINGS
It is a condition to the mergers that the shares of AT&T Comcast Class A
common stock, AT&T Comcast Class A Special common stock and, under the
Alternative Structure, AT&T Comcast Class C common stock to be issued in the
mergers have been approved for listing on The Nasdaq Stock Market, subject to
official notice of issuance.
XV-15
DESCRIPTION OF AT&T COMCAST SHAREHOLDER RIGHTS PLAN
Upon completion of the AT&T Comcast transaction, AT&T Comcast will adopt a
shareholder rights plan pursuant to a rights agreement the material terms of
which are set forth below.
The Rights. The AT&T Comcast rights agreement will provide for the
declaration by the AT&T Comcast Board of a dividend of one preferred stock
purchase right (the "Rights") for each outstanding share of AT&T Comcast Class A
common stock, AT&T Comcast Class A Special common stock, AT&T Comcast Class B
common stock and, under the Alternative Structure, AT&T Comcast Class C common
stock. The dividend will be payable to holders of record as of the close of
business on the record date selected by the AT&T Comcast Board, which date will
occur no later than ten days after the closing date of the AT&T Comcast
transaction.
The Rights will not entitle holders to any rights of a shareholder of AT&T
Comcast, such as voting and dividend rights, but the rights agreement will
include standard antidilution provisions to protect the effectiveness of the
Rights.
The transferability and exercisability of the Rights will depend on whether
a "Distribution Date" has occurred. A Distribution Date generally means the
earlier of (1) the tenth day after a public announcement that any person or
group has become an "Acquiring Person" and (2) the tenth business day after the
date of the commencement of a tender or exchange offer by any person that could
result in such person becoming an Acquiring Person. An Acquiring Person
generally means any person or group (other than any holder of AT&T Comcast Class
B common stock or any of such holder's affiliates) who becomes the beneficial
owner of AT&T Comcast voting capital stock that represents 10% or more of the
total number of votes that holders of AT&T Comcast capital stock are entitled to
cast with respect to any matter presented for a shareholder vote.
Transferability. Prior to the Distribution Date, (1) the Rights will be
evidenced by the certificates of the relevant underlying common stock and the
registered holders of the common stock shall be deemed the registered holders of
the associated Rights and (2) the Rights will be transferable only in connection
with transfers of shares of the underlying common stock. After the Distribution
Date, the rights agent will mail separate certificates evidencing the Rights to
each holder of the relevant underlying common stock as of the close of business
on the Distribution Date. Thereafter, the Rights will be transferable separately
from the common stock.
Exercisability. The Rights will not be exercisable prior to the
Distribution Date. After the Distribution Date, but prior to the occurrence of
an event described below under "-- 'Flip In' Feature" or "-- 'Flip Over'
Feature," each Right will be exercisable to purchase for a price equal to
approximately five times the market price for a share of AT&T Comcast Class A
common stock (under the Preferred Structure) or AT&T Comcast Class C common
stock (under the Alternative Structure) at the time of adoption of the
shareholder rights plan one one-thousandth of a share of AT&T Comcast Series A
Participating Cumulative Preferred Stock.
"Flip In" Feature. If any person becomes an Acquiring Person, each holder
of a Right, except for the Acquiring Person or certain affiliated persons, will
have the right to acquire, instead of one one-hundredth of a share of AT&T
Comcast Series A Participating Cumulative Preferred Stock, a number of 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), in each case
having a market value equal to twice the exercise price of the Right. For
example, if an initial purchase price of $200 were in effect on the date that
the flip in feature of the Rights were exercised, any holder of a Right, except
for the person that has become an Acquiring Person or certain affiliated
persons, could exercise his or her Right by paying to AT&T Comcast $200 in order
to receive 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) having a value equal to $400.
"Exchange" Feature. At any time after a person becomes an Acquiring Person
(but before any person becomes the beneficial owner of AT&T Comcast voting
capital stock representing 50% or more of
XV-16
the total number of votes which holders of AT&T Comcast capital stock are
entitled to cast with respect to any matter presented for a shareholder vote),
the AT&T Comcast Board may exchange all or some of the Rights, except for those
held by any Acquiring Person or certain affiliated persons, for AT&T Comcast
Class A common stock (under the Preferred Structure) at an exchange ratio of one
share of AT&T Comcast Class A common stock for each Right or for AT&T Comcast
Class C common stock (under the Alternative Structure) at an exchange ratio of
one share of AT&T Comcast Class C common stock for each Right. Use of this
exchange feature means that eligible Rights holders would not have to pay cash
before receiving shares of either AT&T Comcast Class A common stock or AT&T
Comcast Class C common stock, as applicable.
"Flip Over" Feature. If, after a person becomes an Acquiring Person, (1)
AT&T Comcast is involved in a merger or other business combination in which it
is not the surviving corporation or any of its common stock is exchanged for
other securities or assets or (2) AT&T Comcast and/or one or more of its
subsidiaries sell or transfer assets or earning power aggregating 50% or more of
the assets or earning power of AT&T Comcast and/or its subsidiaries, then each
Right will entitle the holder, except for any Acquiring Person or certain
affiliated persons, to purchase a number of shares of common stock of the other
party to the transaction having a value equal to twice the exercise price of the
Right.
Redemption of Rights. The AT&T Comcast Board may redeem all of the Rights
at a price of $0.001 per Right at any time prior to the time that any person
becomes an Acquiring Person. The right to exercise will terminate upon
redemption, and at that time, holders of the Rights will have the right to
receive only the redemption price for each Right they hold.
Amendment of Rights. At any time before a person becomes an Acquiring
Person, the terms of the rights agreement may be amended in any respect by AT&T
Comcast without the approval of holders of the Rights. However, after the date
any person becomes an Acquiring Person, the rights agreement may not be amended
in any manner that would adversely affect the interests of holders of the Rights
(other than any person who has become an Acquiring Person and certain affiliated
persons) or cause the Rights to be redeemable at that time.
Expiration of Rights. If not previously exercised or redeemed, the Rights
will expire on the tenth anniversary of the completion of the AT&T Comcast
transaction, unless earlier exchanged or redeemed.
Anti-Takeover Effects. The Rights have anti-takeover effects. Once the
Rights have become exercisable, in most cases they will cause substantial
dilution to a person who attempts to acquire or merge with AT&T Comcast.
Accordingly, the existence of the Rights may deter potential acquirors from
making a takeover proposal or a tender offer. The Rights should not interfere
with any merger or other business combination approved by the AT&T Comcast Board
because the Board may either redeem the Rights or amend the rights agreement so
that a transaction it approves would not cause the Rights to become exercisable.
Taxation. The dividend of the Rights will not be taxable to AT&T Comcast
shareholders, but shareholders may recognize taxable income if the Rights become
exercisable as set forth above.
Series A Preferred Stock. In connection with the creation of the Rights,
the AT&T Comcast Board will authorize the issuance of shares of AT&T Comcast
preferred stock designated as AT&T Comcast Series A Participating Cumulative
Preferred Stock. AT&T Comcast will design the dividend, liquidation, voting and
redemption features of the AT&T Comcast Series A Participating Cumulative
Preferred Stock so that the value of one-thousandth of a share of AT&T Comcast
Series A Participating Cumulative Preferred Stock approximates the value of one
share of AT&T Comcast Class A common stock (under the Preferred Structure) or
one share of AT&T Comcast Class C common stock (under the Alternative
Structure). Shares of AT&T Comcast Series A Participating Cumulative Preferred
Stock will be purchasable only after the Rights have become exercisable. The
rights of the AT&T Comcast Series A Participating Cumulative Preferred Stock as
to dividends, liquidation and voting, and in the event of mergers or
consolidations, are protected by customary antidilution provisions.
XV-17
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This document contains "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. These statements may be
made directly in this document referring to Comcast, AT&T and AT&T Comcast, and
they may also be made a part of this document by reference to other documents
filed with the SEC by Comcast and AT&T, which is known as "incorporation by
reference." These statements may include statements regarding the period
following completion of the AT&T Comcast transaction.
Words such as "anticipate," "estimate," "expect," "project," "intend,"
"plan," "believe" and words and terms of similar substance used in connection
with any discussion of future operating or financial performance, or the AT&T
Comcast transaction, identify forward-looking statements. All forward-looking
statements, including without limitation the projected synergies set forth on
page [II-8], are management's present estimates of future events and are subject
to a number of factors and uncertainties, including without limitation the risks
associated with the lack of complete data and the potential inaccuracy of data
relied upon in making such forward-looking statements, that could cause actual
results to differ materially from those described in the forward-looking
statements. In addition to the risks related to the businesses of Comcast and
AT&T, the factors relating to the AT&T Comcast transaction discussed under
"Summary and Overview of the Transactions -- Risk Factors," among others, could
cause actual results to differ materially from those described in the
forward-looking statements. Shareholders are cautioned not to place undue
reliance on the forward-looking statements, which speak only as of the date of
this document or as of the date of any document incorporated by reference in
this document, as applicable. None of Comcast, AT&T or AT&T Comcast is under any
obligation, and each expressly disclaims any obligation, to update or alter any
forward-looking statements, whether as a result of new information, future
events or otherwise.
For additional information about factors that could cause actual results to
differ materially from those described in the forward-looking statements, please
see the annual reports on Form 10-K and the quarterly reports on Form 10-Q that
Comcast and AT&T have filed with the SEC.
All subsequent forward-looking statements attributable to Comcast, AT&T or
AT&T Comcast or any person acting on their behalf are expressly qualified in
their entirety by the cautionary statements contained or referred to in this
section.
LEGAL MATTERS
The validity of the shares of AT&T Comcast common stock to be issued to
Comcast shareholders and AT&T Broadband shareholders in the mergers will be
passed upon for AT&T Comcast by Wolf, Block, Schorr and Solis-Cohen LLP and
Drinker Biddle & Reath LLP. Davis Polk & Wardwell, counsel for Comcast, and
Wachtell, Lipton, Rosen & Katz, counsel for AT&T, will pass upon certain federal
income tax consequences of the AT&T Comcast transaction for Comcast and AT&T,
respectively.
EXPERTS
The financial statements and the related financial statement schedule of
Comcast incorporated in this document by reference from Comcast's Annual Report
on Form 10-K for the year ended December 31, 2001 have been audited by Deloitte
& Touche LLP, independent auditors, as stated in their reports (which reports
express an unqualified opinion and include an explanatory paragraph related to
the adoption of Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended, effective
January 1, 2001), which are incorporated herein by reference, and have been so
incorporated in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
The balance sheet of AT&T Comcast as of December 31, 2001 included in this
document has been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report, appearing herein, and
XV-18
is so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The audited consolidated financial statements of AT&T Corp. as of December
31, 2001 and 2000, and for each of the three years in the period ended December
31, 2001, included in this document, have been audited by PricewaterhouseCoopers
LLP, independent accountants, whose report thereon appears herein and, insofar
as they relate to Liberty Media Group as of December 31, 2000 and 1999, and for
the two years in the period ended December 31, 2000, by KPMG LLP, independent
certified public accountants. Such financial statements have been so included in
reliance on the reports of such independent accountants given on the authority
of such firms as experts in auditing and accounting.
The combined financial statements of AT&T Broadband Group as of December
31, 2001 and 2000, and for each of the two years in the period ended December
31, 2001 and for the ten-month period ended December 31, 1999, included in this
document, have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The combined financial statements of AT&T Consumer Services Group as of
December 31, 2001 and 2000 and for each of the three years in the period ended
December 31, 2001, included in this document, have been so included in reliance
on the report of PricewaterhouseCoopers LLP, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
The consolidated balance sheets of Liberty Media Corporation and
subsidiaries ("New Liberty or Successor") as of December 31, 2001 and 2000, and
the related consolidated statements of operations, comprehensive earnings,
stockholders' equity, and cash flows for the years ended December 31, 2001 and
2000 and the period from March 1, 1999 to December 31, 1999 (Successor periods)
and from January 1, 1999 to February 28, 1999 (Predecessor period) which appear
as an exhibit to the Annual Report on Form 10-K/A of AT&T Corp., have been
incorporated by reference herein in reliance upon the report, dated March 8,
2002, of KPMG LLP, independent certified public accountants, incorporated by
reference herein, and upon the authority of said firm as experts in accounting
and auditing.
The KPMG LLP report states that Liberty Media Corporation changed its
method of accounting for derivative instruments and hedging activities in 2001.
In addition, the KPMG LLP report contains an explanatory paragraph that
states that, effective March 9, 1999, AT&T Corp., the former parent company of
New Liberty, acquired Tele-Communications, Inc., the former parent company of
Liberty Media Corporation, in a business combination accounted for as a
purchase. As a result of the acquisition, the consolidated financial information
for the periods after the acquisition is presented on a different basis than
that for the periods before the acquisition and, therefore, is not comparable.
The consolidated financial statements of AT&T Canada Inc. as of December
31, 2001 and 2000, and for each of the three years in the period ended December
31, 2001, incorporated in this Registration Statement by reference to the Annual
Report on Form 10-K/A of AT&T Corp. for the year ended December 31, 2001, have
been so incorporated in reliance on the report of KPMG LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The consolidated financial statements of Concert, B.V., incorporated in
this Registration Statement on Amendment No. 3 to Form S-4 of AT&T Comcast Corp.
by reference to the Annual Report on Form 10-K/A of AT&T Corp. for the year
ended December 31, 2001 have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
XV-19
CHAPTER SIXTEEN
ADDITIONAL INFORMATION FOR SHAREHOLDERS
FUTURE SHAREHOLDER PROPOSALS
COMCAST
Comcast will hold an annual meeting of shareholders in the year 2003 only
if the transaction has not already been completed. If such meeting is held, the
deadline for receipt of a proposal to be considered for inclusion in Comcast's
proxy statement for the 2003 annual meeting is December 31, 2002. Notice of a
proposal to be considered by shareholders at the 2003 annual meeting but not
included in Comcast's proxy statement must be received between April 10, 2003
and May 10, 2003; provided, however, that if the date of the annual meeting is
more than 30 days before or after July 10, 2003, then such notice must be
received not later than ten days following the day on which notice of the date
of the meeting was mailed or on which public announcement of the date of the
meeting was made, whichever occurs first. Any such notice of a proposal should
be directed to the attention of Stanley Wang, Executive Vice President and
Secretary, Comcast Corporation, 1500 Market Street, 35th floor, Philadelphia,
Pennsylvania 19102-2148.
AT&T
The deadline for receipt of a proposal to be considered for inclusion in
AT&T's proxy statement for the 2003 annual meeting is January 14, 2003. Notice
of a proposal to be considered by shareholders at the 2003 annual meeting but
not included in AT&T's proxy statement must be received no later than 5:00 p.m.
E.S.T. on April 11, 2003. Any such notice of a proposal should be sent via
registered, certified or express mail to Vice President - Law and Secretary,
AT&T Corp., 295 North Maple Avenue, Basking Ridge, NJ 07920-1002.
WHERE YOU CAN FIND MORE INFORMATION
Comcast and AT&T file annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements or other information Comcast and AT&T file at the SEC's
public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information on the public reference
room. Comcast's and AT&T's SEC filings are also available to the public from
commercial document retrieval services and at the web site maintained by the SEC
at http://www.sec.gov.
AT&T Comcast filed a registration statement on Form S-4 to register with
the SEC the AT&T Comcast common stock to be issued to Comcast and AT&T Broadband
shareholders in the mergers. This document is a part of that registration
statement and constitutes a prospectus of AT&T Comcast in addition to being a
proxy statement of Comcast and AT&T for their respective meetings. As allowed by
SEC rules, this document does not contain all the information you can find in
the registration statement or the exhibits to the registration statement.
The SEC allows Comcast and AT&T to "incorporate by reference" information
into this document, which means that Comcast and AT&T can disclose important
information to you by referring you to another document filed separately with
the SEC. The information incorporated by reference is deemed to be part of this
document, except for any information superseded by information in, or
incorporated by reference in, this document. This document incorporates by
reference the documents set forth below that Comcast and AT&T have previously
filed with the SEC. These documents contain important information about the
companies and their finances.
XVI-1
COMCAST SEC FILINGS (FILE NO. 0-6983) PERIOD
--------------------------------------------- ---------------------------------------------
Annual Report on Form 10-K Year ended December 31, 2001
Current Report on Form 8-K Filed on May 3, 2002
AT&T SEC FILINGS (FILE NO. 1-1105) PERIOD
--------------------------------------------- ---------------------------------------------
Annual Report on Form 10-K Year ended December 31, 2001
(as amended on May 3, 2002 and May 13, 2002)
Current Reports on Form 8-K Filed on January 4, 2002, February 5, 2002,
February 21, 2002, April 16, 2002, April 25,
2002 and May 13, 2002
Comcast and AT&T are also incorporating by reference into this document
additional documents that Comcast and AT&T have filed with the SEC between the
date of this document and each of the AT&T annual meeting and the Comcast
special meeting.
Comcast has supplied all information contained or incorporated by reference
in this document relating to Comcast and AT&T has supplied all information
contained or incorporated by reference in this document relating to AT&T, AT&T
Broadband, AT&T's broadband business, AT&T Consumer Services Group or AT&T
Business Services Group.
If you are a shareholder, Comcast and AT&T may have sent you some of the
documents incorporated by reference, but you can obtain any of them through
Comcast, AT&T or the SEC. Documents incorporated by reference in this document
are available from Comcast and AT&T without charge, excluding all exhibits
unless Comcast and AT&T have specifically incorporated by reference an exhibit
in this document. Shareholders may obtain documents incorporated by reference in
this document by requesting them in writing or by telephone from the Secretary
of the appropriate company at the following address:
Comcast Corporation AT&T Corp.
1500 Market Street 295 North Maple Avenue
Philadelphia, Pennsylvania 19102-2148 Basking Ridge, NJ 07920-1002
Tel: (215) 665-1700 Tel: (908) 221-2000
Attn: Office of the Corporate Attn: Office of the Corporate
Secretary Secretary
IF YOU ARE A COMCAST SHAREHOLDER OR AN AT&T SHAREHOLDER AND WOULD LIKE TO
REQUEST DOCUMENTS, PLEASE DO SO BY JULY 3, 2002 TO RECEIVE THEM BEFORE YOUR
MEETING.
You can also get more information by visiting Comcast's website at
www.comcast.com and AT&T's website at www.att.com. Website materials from these
websites and other websites mentioned in this document are not incorporated by
reference in this document. If you are viewing this document in electronic
format, each of the URLs mentioned in this document is an inactive textual
reference only.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS DOCUMENT TO VOTE ON THE PROPOSALS AT YOUR MEETING. COMCAST AND
AT&T HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS
DIFFERENT FROM WHAT IS CONTAINED IN THIS DOCUMENT. THIS DOCUMENT IS DATED MAY
14, 2002. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS DOCUMENT
IS ACCURATE AS OF ANY DATE OTHER THAN THAT DATE, AND NEITHER THE MAILING OF THIS
DOCUMENT TO SHAREHOLDERS NOR THE ISSUANCE OF AT&T COMCAST COMMON STOCK IN THE
MERGERS OR AT&T CONSUMER SERVICES GROUP TRACKING STOCK AS A DIVIDEND TO AT&T
SHAREHOLDERS OR OTHERWISE SHALL CREATE ANY IMPLICATION TO THE CONTRARY.
XVI-2
---------------------
ANNEXES(1)
---------------------
---------------------
(1)Comcast and AT&T have agreed to certain modifications of the governance
arrangements for AT&T Comcast after completion of the AT&T Comcast transaction.
Comcast and AT&T have also entered into certain technical amendments to the
merger agreement and the separation and distribution agreement. All of these
amendments have been reflected in the text of the Annexes. The disclosure in the
joint proxy statement/prospectus has also been revised to reflect these
amendments.
ANNEX A
AGREEMENT AND PLAN OF MERGER
DATED AS OF
DECEMBER 19, 2001
BY AND AMONG
AT&T CORP.,
AT&T BROADBAND CORP.,
COMCAST CORPORATION,
AT&T BROADBAND ACQUISITION CORP.,
COMCAST ACQUISITION CORP.
AND
AT&T COMCAST CORPORATION
TABLE OF CONTENTS
------------------------
PAGE
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ARTICLE 1 DEFINITIONS
Section 1.01. Definitions................................................. A-1
ARTICLE 2 PARENT AND MERGER SUBS
Section 2.01. Organization of Parent...................................... A-16
Section 2.02. Directors and Officers of Parent............................ A-16
Section 2.03. Organization of Merger Subs................................. A-16
Section 2.04. Actions of Comcast and AT&T................................. A-16
Section 2.05. Rights Plan................................................. A-16
ARTICLE 3 THE MERGERS
Section 3.01. The AT&T Broadband Merger................................... A-16
Section 3.02. The Comcast Merger.......................................... A-17
Section 3.03. Certificate and Articles of Incorporation; Bylaws........... A-17
Section 3.04. Directors and Officers of the Surviving Corporations........ A-17
Section 3.05. Alternative Structure....................................... A-17
ARTICLE 4 CONVERSION OF SECURITIES
Section 4.01. Conversion of Securities.................................... A-18
Section 4.02. Exchange of Certificates.................................... A-21
Section 4.03. Section 355(e) Top-up....................................... A-26
Section 4.04. Additional Payments......................................... A-27
Section 4.05. Additional Exchange Arrangements............................ A-27
Section 4.06. Limitation on Voting Stock.................................. A-27
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF COMCAST
Section 5.01. Corporate Existence and Power............................... A-28
Section 5.02. Corporate Authorization..................................... A-28
Section 5.03. Governmental Authorization.................................. A-28
Section 5.04. Non-contravention........................................... A-29
Section 5.05. Capitalization.............................................. A-29
Section 5.06. Subsidiaries................................................ A-29
Section 5.07. SEC Filings................................................. A-30
Section 5.08. Financial Statements........................................ A-30
Section 5.09. Information Supplied........................................ A-30
Section 5.10. Absence of Certain Changes.................................. A-31
Section 5.11. No Undisclosed Material Liabilities......................... A-31
Section 5.12. Compliance with Laws and Court Orders....................... A-31
Section 5.13. Litigation.................................................. A-31
Section 5.14. Finders' Fees............................................... A-32
Section 5.15. Opinion of Financial Advisor................................ A-32
Section 5.16. Taxes....................................................... A-32
Section 5.17. Tax Opinions................................................ A-33
Section 5.18. Employee Benefit Plans and Labor Matters.................... A-33
Section 5.19. Environmental Matters....................................... A-34
A-i
PAGE
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Section 5.20. Intellectual Property....................................... A-35
Section 5.21. Contracts................................................... A-35
Section 5.22. Vote Required............................................... A-35
Section 5.23. Antitakeover Statutes....................................... A-36
Section 5.24. AT&T Securities............................................. A-36
Section 5.25. Transactions with Affiliates................................ A-36
Section 5.26. Investments................................................. A-36
Section 5.27. No Approval Rights.......................................... A-36
ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF AT&T
Section 6.01. Corporate Existence and Power............................... A-36
Section 6.02. Corporate Authorization..................................... A-37
Section 6.03. Governmental Authorization.................................. A-37
Section 6.04. Non-contravention........................................... A-37
Section 6.05. Capitalization.............................................. A-38
Section 6.06. AT&T Broadband and AT&T Broadband Subsidiaries.............. A-39
Section 6.07. SEC Filings................................................. A-39
Section 6.08. Financial Statements........................................ A-40
Section 6.09. Information Supplied........................................ A-40
Section 6.10. Absence of Certain Changes.................................. A-40
Section 6.11. No Undisclosed Material Liabilities......................... A-41
Section 6.12. Compliance with Laws and Court Orders....................... A-41
Section 6.13. Litigation.................................................. A-41
Section 6.14. Finders' Fees............................................... A-41
Section 6.15. Opinion of Financial Advisor................................ A-42
Section 6.16. Taxes....................................................... A-42
Section 6.17. Tax Opinions................................................ A-42
Section 6.18. Employee Benefit Plans and Labor Matters.................... A-42
Section 6.19. Environmental Matters....................................... A-44
Section 6.20. Intellectual Property....................................... A-44
Section 6.21. Contracts................................................... A-45
Section 6.22. AT&T Shareholder Vote....................................... A-45
Section 6.23. Antitakeover Statutes....................................... A-46
Section 6.24. Comcast Securities.......................................... A-46
Section 6.25. TWE; At Home................................................ A-46
Section 6.26. Intercompany Transactions................................... A-47
Section 6.27. Sufficiency of Transferred Assets........................... A-47
Section 6.28. Investments................................................. A-47
ARTICLE 7 COVENANTS OF COMCAST
Section 7.01. Comcast Interim Operations.................................. A-48
Section 7.02. Comcast Shareholders' Meeting; Proxy Material............... A-50
Section 7.03. Voting Agreement............................................ A-50
ARTICLE 8 COVENANTS OF AT&T
Section 8.01. AT&T Broadband Interim Operations........................... A-51
Section 8.02. AT&T Shareholders' Meeting; Proxy Material.................. A-55
A-ii
PAGE
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Section 8.03. No Solicitation............................................. A-55
Section 8.04. Ancillary Agreements........................................ A-57
Section 8.05. Neutrality Agreement........................................ A-57
Section 8.06. Broadband Employees......................................... A-58
Section 8.07. AT&T Post-Signing Equity Awards............................. A-58
Section 8.08. Redemption of TCI Pacific Preferred Stock................... A-58
Section 8.09. Note Consent Process........................................ A-58
ARTICLE 9 COVENANTS OF AT&T, COMCAST AND PARENT
Section 9.01. Best Efforts................................................ A-58
Section 9.02. Joint Proxy Statement; Registration Statement............... A-59
Section 9.03. Public Announcements........................................ A-60
Section 9.04. Further Assurances.......................................... A-60
Section 9.05. Access to Information....................................... A-60
Section 9.06. Tax-free Transactions....................................... A-61
Section 9.07. Affiliates.................................................. A-61
Section 9.08. Governance and Other Matters................................ A-61
Section 9.09. Notices of Certain Events................................... A-61
Section 9.10. Section 16 Matters.......................................... A-62
Section 9.11. Director and Officer Liability.............................. A-62
Section 9.12. Listing of Stock............................................ A-63
Section 9.13. Employee Matters............................................ A-63
Section 9.14. Employment Agreements....................................... A-64
Section 9.15. Interim Finance Committee................................... A-64
Section 9.16. TOPRS....................................................... A-65
Section 9.17. Consideration............................................... A-66
Section 9.18. QUIPS....................................................... A-66
Section 9.19. Index Stock................................................. A-68
Section 9.20. Use of Name and Logo........................................ A-68
Section 9.21. Exchange Agreement.......................................... A-68
Section 9.22. Significant Excepted Transactions........................... A-68
Section 9.23. Comcast's AT&T Stock........................................ A-69
ARTICLE 10 CONDITIONS TO THE MERGERS
Section 10.01. Conditions to the Obligations of Each Party................. A-70
Section 10.02. Conditions to the Obligations of AT&T....................... A-71
Section 10.03. Conditions to the Obligations of Comcast.................... A-72
ARTICLE 11 TERMINATION
Section 11.01. Termination................................................. A-72
Section 11.02. Effect of Termination....................................... A-74
Section 11.03. Fees and Expenses........................................... A-74
ARTICLE 12 MISCELLANEOUS
Section 12.01. Notices..................................................... A-76
Section 12.02. Survival.................................................... A-76
Section 12.03. Amendments; No Waivers...................................... A-76
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PAGE
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Section 12.04. Successors and Assigns...................................... A-77
Section 12.05. Governing Law............................................... A-77
Section 12.06. Jurisdiction................................................ A-77
Section 12.07. WAIVER OF JURY TRIAL........................................ A-77
Section 12.08. Counterparts; Effectiveness................................. A-77
Section 12.09. Entire Agreement; No Third Party Beneficiaries.............. A-77
Section 12.10. Severability................................................ A-77
Section 12.11. Specific Performance........................................ A-78
Section 12.12. Schedules................................................... A-78
EXHIBITS AND SCHEDULES
Exhibit A -- Form of Support Agreement
Exhibit B -- Form of Rule 145 Affiliate Letter
Exhibit C -- Form of Separation and Distribution Agreement
Exhibit D-1 -- Form of Parent Charter (Preferred Structure)
Exhibit D-2 -- Term Sheet for Parent Charter (Alternative Structure)
Exhibit D-3 -- Form of Parent Bylaws
Exhibit D-4 -- Form of Comcast Articles Amendment
Exhibit E -- AT&T Broadband Financial Statements (12/31/00 and 9/30/01)
Exhibit F -- Admission Agreement
AT&T Disclosure Schedule
Comcast Disclosure Schedule
A-iv
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "AGREEMENT"), dated as of December 19,
2001, by and among AT&T Corp., a New York corporation ("AT&T"), AT&T Broadband
Corp., a Delaware corporation and a wholly owned subsidiary of AT&T ("AT&T
BROADBAND"), Comcast Corporation, a Pennsylvania corporation ("COMCAST"), AT&T
Comcast Corporation, a Pennsylvania corporation ("PARENT"), AT&T Broadband
Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of
Parent ("AT&T BROADBAND MERGER SUB"), and Comcast Acquisition Corp., a
Pennsylvania corporation and a wholly owned subsidiary of Parent ("COMCAST
MERGER SUB").
WHEREAS, AT&T Broadband is a newly formed wholly owned subsidiary of AT&T
that will hold, directly or indirectly, all of the assets and liabilities of the
AT&T Broadband Group in accordance with the terms and conditions of the
Separation and Distribution Agreement (as defined below);
WHEREAS, the Boards of Directors of AT&T, AT&T Broadband and Comcast and
each of the other parties hereto have approved this Agreement and deem it
advisable and in the best interests of their respective shareholders to
consummate the transactions contemplated hereby on the terms and conditions set
forth herein;
WHEREAS, immediately prior to the execution and delivery of this Agreement,
as a condition and inducement to AT&T's willingness to enter into this
Agreement, each of Sural LLC ("COMCAST SHAREHOLDER"), Mr. Brian L. Roberts,
Comcast and Parent has executed and delivered to AT&T the Support Agreement (as
defined below);
WHEREAS, it is intended that, for United States federal income tax
purposes, the Mergers (as defined below) shall qualify as tax-free exchanges
described in Section 351 of the Internal Revenue Code of 1986, as amended (the
"CODE"), and the rules and regulations promulgated thereunder;
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth below, the
parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
SECTION 1.01. Definitions. (a) The following terms, as used herein, have
the following meanings:
"1933 ACT" means the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.
"1934 ACT" means the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder.
"ADDITIONAL COMMERCIAL AGREEMENTS" has the meaning set forth in the
Separation and Distribution Agreement.
"ADMISSION AGREEMENT" means the Instrument of Admission, in the form
attached hereto as Exhibit F, pursuant to which AT&T and Parent will become
parties to the Exchange Agreement.
"AFFILIATE" means, with respect to any Person, any other Person, directly
or indirectly, controlling, controlled by, or under common control with such
Person.
"AGGREGATE FORMER EMPLOYEE BROADBAND OPTION AMOUNT" means:
(a) if the AT&T Common Stock trades "ex-distribution" or "when issued
(to give effect to the Distribution)" on the NYSE on or immediately prior
to the Distribution Date, the excess of (i) the product of the aggregate
number of shares of AT&T Broadband Common Stock subject to Broadband
Options granted pursuant to Section 5.3(b) of the Employee Benefits
Agreement, multiplied by the Broadband Common Stock Value (as defined in
the Employee Benefits Agreement), over (ii) the aggregate exercise price of
such Broadband Options; and
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(b) if the AT&T Common Stock does not trade "ex-distribution" or "when
issued (to give effect to the Distribution)" on the NYSE on or immediately
prior to the Distribution Date, the product of
(i) a fraction, the numerator or which is the product of the
Comcast Stock Price multiplied by the Preliminary Exchange Ratio, and
the denominator of which is the AT&T Closing Stock Value; times
(ii) the excess of (i) the product of the aggregate number of
shares of AT&T Common Stock subject to unexercised AT&T Options held by
Former Employees (both as defined in the Employee Benefits Agreement)
immediately prior to the Distribution Date, times the AT&T Closing Stock
Value, over (ii) the aggregate exercise price of such AT&T Options.
"ANCILLARY AGREEMENTS" has the meaning set forth in the Separation and
Distribution Agreement.
"AOL" means AOL Time Warner Inc., a Delaware corporation.
"ARTICLES AMENDMENT" mean the articles of amendment to the articles of
incorporation of Comcast in the form attached as Exhibit D-4.
"AT HOME" means At Home Corporation, a Delaware corporation and/or its
bankruptcy estate, as the case may be.
"AT&T 10-K" means AT&T's annual report on Form 10-K for the fiscal year
ended December 31, 2000.
"AT&T BALANCE SHEET" means the consolidated balance sheet of AT&T and its
consolidated Subsidiaries as of December 31, 2000 and the footnotes thereto, as
set forth in the AT&T 10-K.
"AT&T BROADBAND ACQUISITION PROPOSAL" means any offer or proposal for, or
any indication of interest in (i) a merger, consolidation, share exchange,
business combination, reorganization, recapitalization or other similar
transaction involving AT&T, the AT&T Broadband Group, AT&T Broadband or any AT&T
Significant Broadband Subsidiary, (ii) the acquisition, directly or indirectly,
of (A) an equity interest representing greater than 25% of the voting securities
of AT&T, the AT&T Broadband Group, AT&T Broadband or any AT&T Significant
Broadband Subsidiary or (B) assets, securities or ownership interests
representing an amount equal to or greater than 25% of the consolidated assets
or EBITDA generating power of the AT&T Broadband Group, or (iii) any transaction
(x) the entering into or the consummation of which would reasonably be expected
to be inconsistent in any material respect with the consummation of the
transactions contemplated by this Agreement and the other Transaction
Agreements, on the terms set forth in this Agreement and the other Transaction
Agreements, as the case may be, or (y) that would reasonably be expected to
prevent or materially delay, impede or adversely affect the consummation of the
transactions contemplated by this Agreement and the other Transaction Agreements
other than (X) in the case of (i) or (ii), (I) the transactions contemplated by
this Agreement, (II) transactions permitted pursuant to Section 8.01 or (III)
transactions that would not directly or indirectly (other than indirectly by
virtue of the ownership of securities of AT&T) include any of the businesses,
assets or liabilities of, or materially affect the business of, AT&T (to the
extent relating to the AT&T Broadband Group), the AT&T Broadband Group, AT&T
Broadband or any AT&T Broadband Subsidiary and (Y) in the case of (i), (ii) or
(iii), a transaction that does not involve the AT&T Broadband Group, AT&T
Broadband or any AT&T Broadband Subsidiary (except to the extent relating to (A)
the transactions contemplated by this Agreement and the other Transaction
Agreements or (B) a spin-off of the AT&T Broadband Group substantially pro rata
to the holders of AT&T Common Stock not in connection with any other transaction
involving the AT&T Broadband Group) that in any such case is consistent in all
material respects with the consummation of the transactions contemplated by this
Agreement and the other Transaction Agreements, on the terms set forth in this
Agreement and the other Transaction Agreements, as the case may be; provided
that each of the parties to such transaction agrees that AT&T and AT&T Broadband
shall honor the terms and conditions of this Agreement (any transaction referred
to in this clause (Y), an "EXCEPTED TRANSACTION").
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"AT&T BROADBAND ASSETS" has the meaning set forth in the Separation and
Distribution Agreement.
"AT&T BROADBAND BALANCE SHEET" means the unaudited combined balance sheet
of the AT&T Broadband Group as of September 30, 2001 and the footnotes thereto,
as attached as Exhibit E.
"AT&T BROADBAND BALANCE SHEET DATE" means September 30, 2001.
"AT&T BROADBAND BUSINESS" has the meaning set forth in the Separation and
Distribution Agreement.
"AT&T BROADBAND COMMON STOCK" means the Common Stock, par value $0.01 per
share, of AT&T Broadband, which, subject to the terms of the Separation and
Distribution Agreement, will be distributed on a one-for-one basis on the
Distribution Date to holders of shares of AT&T Common Stock.
"AT&T BROADBAND ENTITIES" has the meaning set forth in the Separation and
Distribution Agreement.
"AT&T BROADBAND FINANCIAL STATEMENTS" means the unaudited combined
financial statements of the AT&T Broadband Group as of and for the periods
ending December 31, 2000 and September 30, 2001 and the footnotes thereto, as
attached as Exhibit E.
"AT&T BROADBAND GROUP" has the meaning set forth in the Separation and
Distribution Agreement.
"AT&T BROADBAND MATERIAL ADVERSE EFFECT" means a material adverse effect on
the financial condition, assets or results of operations of the AT&T Broadband
Group, taken as a whole, excluding any such effect resulting from or arising in
connection with (i) changes or conditions generally affecting the industries in
which the AT&T Broadband Group (including AT&T Broadband and all the AT&T
Broadband Subsidiaries) operate, (ii) changes in general economic, regulatory or
political conditions, or (iii) the announcement of this Agreement or of the
transactions contemplated hereby.
"AT&T BROADBAND SUBSIDIARY" has the meaning set forth in the Separation and
Distribution Agreement.
"AT&T CLOSING STOCK VALUE" has the meaning set forth in the Employee
Benefits Agreement.
"AT&T COMMON STOCK" means the Common Stock, par value $1.00 per share, of
AT&T.
"AT&T COMMUNICATIONS BUSINESS" has the meaning set forth in the Exchange
Agreement.
"AT&T COMMUNICATIONS GROUP" has the meaning set forth in the Separation and
Distribution Agreement.
"AT&T CONFIDENTIALITY AGREEMENT" means the confidentiality letter
agreement, dated September 28, 2001, as amended, by and between AT&T and Comcast
providing for, among other things, confidential treatment of information
provided by AT&T to Comcast.
"AT&T DISCLOSURE SCHEDULE" means the AT&T disclosure schedule delivered to
Comcast concurrently herewith.
"AT&T EMPLOYEES" has the meaning set forth in the Separation and
Distribution Agreement.
"AT&T ESPP" means the AT&T Employee Stock Purchase Plan.
"AT&T EXCHANGEABLE PREFERRED STOCK" has the meaning set forth in the
definition of Exchange Amount.
"AT&T GROUP" means AT&T together with the AT&T Subsidiaries.
"AT&T REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement dated as of June 11, 2001 between Comcast PC Investments Inc. and
AT&T.
"AT&T SIGNIFICANT BROADBAND SUBSIDIARY" means any AT&T Broadband Subsidiary
that would have constituted a "significant subsidiary" (within the meaning of
Rule 1-02 of Regulation S-X of the SEC) of
A-3
the AT&T Broadband Group as of December 31, 2000 if, as of such date, the AT&T
Broadband Group were a reporting company under the 1934 Act; provided that for
purposes hereof, the phrase "EBITDA" will be substituted for the phrase "income
from continuing operations before income taxes, extraordinary items and
cumulative effect of a change in accounting principle" in Rule 1-02(w)(3).
"AT&T SIGNIFICANT SUBSIDIARY" means any AT&T Subsidiary that would
constitute a "significant subsidiary" (within the meaning of Rule 1-02 of
Regulation S-X of the SEC) as of December 31, 2000; provided that for purposes
hereof, the phrase "EBITDA" will be substituted for the phrase "income from
continuing operations before income taxes, extraordinary items and cumulative
effect of a change in accounting principle" in Rule 1-02(w)(3).
"AT&T SUBSIDIARY" means a Subsidiary of AT&T; provided that notwithstanding
the Distribution, AT&T Broadband and the AT&T Broadband Subsidiaries will be
treated as AT&T Subsidiaries through the Effective Time but not thereafter.
"AVERAGE CLASS A PRICE" means the average (rounded to the nearest 1/10,000)
of the Trading Values for the 10 Trading Days randomly selected by lot by AT&T
and Comcast from the Trading Days occurring during the Pricing Period, which 10
Trading Days shall be the same as the 10 Trading Days used to calculate the
Average Class A Special Price.
"AVERAGE CLASS A SPECIAL PRICE" means the average (rounded to the nearest
1/10,000) of the Trading Values for the 10 Trading Days randomly selected by lot
by AT&T and Comcast from the Trading Days occurring during the Pricing Period.
"AVERAGE CLASS C PRICE" means the average (rounded to the nearest 1/10,000)
of the Trading Values for the 10 Trading Days randomly selected by lot by AT&T
and Comcast from the Trading Days occurring during the Pricing Period, which 10
Trading Days shall be the same as the 10 Trading Days used to calculate the
Average Class A Special Price.
"BENEFIT ARRANGEMENT" means, with respect to any Person, any employment,
severance or similar contract or arrangement (whether or not written) or any
plan, policy, fund, program or arrangement or contract providing for
compensation, bonus, profit-sharing, stock option, or other stock-related rights
or other forms of incentive or deferred compensation, vacation benefits,
insurance coverage (including any self-insured arrangements), health or medical
benefits, disability benefits, workers' compensation, supplemental unemployment
benefits, severance benefits and post-employment or retirement benefits
(including compensation, pension, health, medical or life insurance or other
benefits) that (i) is not an Employee Plan, (ii) is entered into, maintained,
administered or contributed to or required to be contributed to, as the case may
be, by such Person or any of its Affiliates and (iii) covers any employee or
former employee of such Person or any of its Subsidiaries employed in the United
States.
"BROADBAND BENEFIT ARRANGEMENT" means a Benefit Arrangement that is a
Broadband Benefit Plan as defined in the Employee Benefits Agreement.
"BROADBAND DEFERRED COMPENSATION PLAN" means a Deferred Compensation Plan
that is a Broadband Plan as defined in the Employee Benefits Agreement.
"BROADBAND EMPLOYEE" has the meaning set forth in the Employee Benefits
Agreement, except that for purposes of this Agreement, "Broadband Employee"
shall include any Broadband Transferee, and for purposes of Section 9.13,
"Broadband Employee" shall not include any current or former non-employee
director of AT&T Broadband with respect to service as a director.
"BROADBAND EMPLOYEE PLAN" means an Employee Plan that is a Broadband
Benefit Plan as defined in the Employee Benefits Agreement.
"BROADBAND INTERNATIONAL PLAN" means an International Plan that is a
Broadband Benefit Plan as defined in the Employee Benefits Agreement.
"BROADBAND OPTIONS" has the meaning set forth in the Employee Benefits
Agreement.
A-4
"BROADBAND PENSION PLAN" means a Pension Plan that is a Broadband Benefit
Plan as defined in the Employee Benefits Agreement.
"BROADBAND TRANSFEREE" has the meaning set forth in the Employee Benefits
Agreement.
"BROADBAND VALUE" means the product of the Exchange Ratio multiplied by the
average (rounded to the nearest 1/10,000) of the Trading Values of (i) if the
Preferred Structure Approval has been obtained, the Parent Class A Common Stock
or (ii) if the Preferred Structure Approval has not been obtained, the Parent
Class C Common Stock, in either case for the 10 Combined Trading Days randomly
selected by lot by AT&T and Comcast from the Combined Trading Days occurring
during the 20 consecutive Combined Trading Days following the Closing Date.
"BUSINESS DAY" means a day other than a Saturday, Sunday or other day on
which commercial banks in New York City are authorized or required by law to
close.
"CLASS A LIBERTY MEDIA GROUP COMMON STOCK" means the Class A Liberty Media
Group Common Stock, par value $1.00 per share, of AT&T.
"CLASS B LIBERTY MEDIA GROUP COMMON STOCK" means the Class B Liberty Media
Group Common Stock, par value $1.00 per share, of AT&T.
"CLOSING DATE" means the date on which the Effective Time occurs.
"COMBINED TRADING DAY" means any day which is both a Trading Day and a NYSE
Trading Day.
"COMCAST 10-Q" means Comcast's annual report on Form 10-Q for the fiscal
quarter ended September 30, 2001.
"COMCAST AFFILIATE" means an Affiliate of Comcast.
"COMCAST BALANCE SHEET" means the unaudited consolidated balance sheet of
Comcast and its consolidated Subsidiaries as of September 30, 2001 and the
footnotes thereto, as set forth in the Comcast 10-Q.
"COMCAST BALANCE SHEET DATE" means September 30, 2001.
"COMCAST BENEFIT ARRANGEMENTS" means the Benefit Arrangements of Comcast or
any Comcast Subsidiary.
"COMCAST CLASS A COMMON STOCK" means the Class A Common Stock, par value
$1.00 per share, of Comcast.
"COMCAST CLASS A SPECIAL COMMON STOCK" means the Class A Special Common
Stock, par value $1.00 per share, of Comcast.
"COMCAST CLASS B COMMON STOCK" means the Class B Common Stock, par value
$1.00 per share, of Comcast.
"COMCAST COMMON STOCK" means the Comcast Class A Common Stock, the Comcast
Class A Special Common Stock and the Comcast Class B Common Stock.
"COMCAST CONFIDENTIALITY AGREEMENT" means the confidentiality letter
agreement, dated September 28, 2001, as the same may be amended from time to
time, by and between AT&T and Comcast providing for, among other things,
confidential treatment of information provided by Comcast to AT&T.
"COMCAST DEFERRED COMPENSATION PLAN" means a Deferred Compensation Plan of
Comcast or any Comcast Affiliate for the benefit of any current or former
employee or director of Comcast or any Comcast Subsidiary.
"COMCAST DISCLOSURE SCHEDULE" means the Comcast disclosure schedule
delivered to AT&T concurrently herewith.
A-5
"COMCAST EMPLOYEE PLAN" means an Employee Plan of Comcast or any Comcast
Subsidiary.
"COMCAST ESPP" means the Comcast Employee Stock Purchase Plan.
"COMCAST GROUP" means Comcast together with the Comcast Subsidiaries.
"COMCAST INTERNATIONAL PLAN" means an International Plan of Comcast or any
Comcast Subsidiary.
"COMCAST MATERIAL ADVERSE EFFECT" means a material adverse effect on the
financial condition, assets or results of operations of the Comcast Group taken
as a whole, excluding any such effect resulting from or arising in connection
with (i) changes or conditions generally affecting the industries in which
Comcast and the Comcast Subsidiaries, operate, (ii) changes in general economic,
regulatory or political conditions, or (iii) the announcement of this Agreement
or of the transactions contemplated hereby.
"COMCAST PENSION PLAN" means a Pension Plan of Comcast or any of its ERISA
Affiliates.
"COMCAST SIGNIFICANT SUBSIDIARY" means any Comcast Subsidiary that would
constitute a "significant subsidiary" (within the meaning of Rule 1-02 of
Regulation S-X of the SEC) as of December 31, 2000; provided that for purposes
hereof, the phrase "EBITDA" will be substituted for the phrase "income from
continuing operations before income taxes, extraordinary items and cumulative
effect of a change in accounting principle" in Rule 1-02(w)(3).
"COMCAST STOCK PRICE" means the average (rounded to the nearest 1/10,000)
of the Trading Values of Comcast Class A Common Stock for the five consecutive
Trading Days immediately preceding the Distribution Date.
"COMCAST SUBSIDIARY" means a Subsidiary of Comcast.
"COMMUNICATIONS ACT" means the Communications Act of 1934, as amended, and
the rules and regulations promulgated thereunder.
"COMMUNICATIONS VALUE" means the average (rounded to the nearest 1/10,000)
of the Trading Values of AT&T Common Stock for the 10 Combined Trading Days
randomly selected by lot by AT&T and Comcast from the Combined Trading Days
occurring during the 20 consecutive Combined Trading Days following the Closing
Date, which shall be the same 10 Combined Trading Days as used for the
calculation of Broadband Value.
"CONFIDENTIALITY AGREEMENTS" means the AT&T Confidentiality Agreement and
the Comcast Confidentiality Agreement.
"DEBENTURES" means the 5% Junior Convertible Subordinated Debentures due
2029 of AT&T.
"DEFERRED COMPENSATION PLAN" means, with respect to any Person, any plan,
agreement or arrangement that (i) is described under Sections 4(b)(5) or
401(a)(1) of ERISA (or similar plan covering one or more non-employee directors
of a Person), (ii) is maintained, administered or contributed to or required to
be contributed to or required to be contributed to by such Person or any of its
Affiliates and (iii) covers any current or former employee or director of such
Person or any of its Subsidiaries.
"DGCL" means the Delaware General Corporation Law.
"DISTRIBUTION" has the meaning set forth in the Separation and Distribution
Agreement.
"DISTRIBUTION DATE" has the meaning set forth in the Separation and
Distribution Agreement.
"DIVIDEND STOCK" has the meaning set forth in the definition of Exchange
Amount.
"EBITDA" means operating income plus depreciation plus amortization, in
each case as determined in accordance with GAAP.
"EMPLOYEE BENEFITS AGREEMENT" has the meaning set forth in the Separation
and Distribution Agreement.
A-6
"EMPLOYEE PLAN" means, with respect to any Person, any "employee benefit
plan" (as defined in Section 3(3) of ERISA) that (i) is subject to any provision
of ERISA, (ii) is maintained, administered or contributed to or required to be
contributed to by such Person or any of its Affiliates and (iii) covers any
employee or former employee of such Person or any of its Subsidiaries.
"ENVIRONMENTAL LAWS" means any United States federal, state or local,
foreign or supranational law (including common law), treaty, judicial decision,
regulation, rule, judgment, order, decree, injunction, permit or governmental
restriction or requirement or any agreement with any Governmental Authority or
other third party, relating to human health and safety, the environment or to
pollutants, contaminants, wastes or chemicals or any toxic, radioactive,
ignitable, corrosive, reactive or otherwise hazardous substances, wastes or
materials.
"ENVIRONMENTAL PERMITS" means, with respect to any Person, all permits,
licenses, franchises, certificates, approvals and other similar authorizations
of any Governmental Authority relating to or required by Environmental Laws and
affecting, or relating in any way to, the business of such Person or any of its
Subsidiaries as currently conducted.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and the rules and regulations promulgated thereunder.
"ERISA AFFILIATE" of any Person means any other Person that, together with
such Person, would be treated as a single employer under Section 414 of the
Code.
"EXCEPTED TRANSACTION" has the meaning set forth in the definition of AT&T
Broadband Acquisition Proposal.
"EXCHANGE AGREEMENT" means the Exchange Agreement dated as of December 7,
2001, as amended from time to time, between Comcast and Microsoft.
"EXCHANGE AMOUNT"means an amount "K" where "K" is derived from the
following equation:
K = (T x (B + C))/C
provided that in no event shall K exceed the product of 10.0% multiplied by
the total number of shares of AT&T Common Stock that would be outstanding
immediately after giving effect to the exchange of the AT&T Exchangeable
Preferred Stock.
The variables used to calculate K pursuant to the foregoing formula are
defined as follows:
"T" is the number of shares of AT&T Common Stock held by Comcast and
any Comcast Subsidiary immediately prior to the Distribution.
"B" is the Broadband Value.
"C" is the Communications Value.
"EXCHANGE DATE" has the meaning set forth in Section 9.23.
"EXCHANGE RATIO" means the value, "X", as defined below (and rounded to the
nearest 1/10,000). The purpose of the Exchange Ratio is to determine the number
of shares of Parent Common Stock that will be delivered in exchange for each
outstanding share of AT&T Broadband Common Stock at the Effective Time, and to
adjust for the value of certain employee options and stock appreciation rights
to be assumed by Parent as of the Effective Time.
"X" is defined according to the following formula:
1,235,000,000 - (I + F)/C
X = ----------------------
O
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The variables used in calculating X pursuant to the foregoing formula are
defined as follows:
"C" is the Comcast Stock Price.
"O" is (i) the number of shares of AT&T Broadband Common Stock
outstanding immediately prior to the AT&T Broadband Merger excluding any
shares issued pursuant to the QUIPS Exchange and any shares held by any
wholly owned AT&T Broadband Subsidiary plus (ii) the number of shares, if
any, of AT&T Common Stock in respect of which rights pursuant to Section
910 of the NYBCL have purportedly been exercised and not withdrawn. For
purposes of this definition and for the avoidance of doubt, any restricted
shares of AT&T Broadband Common Stock that have been awarded prior to the
date of this Agreement and not forfeited prior to the Closing Date shall be
considered "outstanding", regardless of whether an election has been made
with respect to such shares pursuant to Section 83(b) of the Code.
"I" is the aggregate "in-the-money" amount for all unexercised AT&T
Stock Options outstanding as of the date of this Agreement and held by
Broadband Employees immediately prior to the Closing Date whose exercise
price, as of the Closing Date, is less than the AT&T Closing Stock Value,
calculated with respect to each such AT&T Stock Option as the product of:
(A) the excess of the AT&T Closing Stock Value over the exercise
price, as of the Closing Date, for such option, times
(B) the number of shares of AT&T Common Stock subject to such
option.
For this purpose, a stock appreciation right with respect to AT&T Common
Stock shall be treated as an AT&T Stock Option. In addition, for purposes
of this definition, AT&T Stock Options granted after the date hereof shall
be disregarded.
"F" means the aggregate "in-the-money" amount for AT&T Stock Options
held by Former Employees (as defined in the Employee Benefits Agreement) to
the extent converted into options to purchase AT&T Broadband Common Stock,
calculated as equal to the Aggregate Former Employee Broadband Option
Amount.
"EXPENSE AGREEMENT" means the Expense Agreement dated as of June 16, 1999
between AT&T and the Issuer Trust.
"FCC" means the United States Federal Communications Commission.
"FRACTIONAL SHARES PAYMENT DATE" means the Effective Time, if Standard &
Poor's has then committed that the Parent Class A Common Stock (if the Preferred
Structure Approval has been obtained) or the Parent Class C Common Stock (if the
Preferred Structure Approval has not been obtained) will be included in the
Index immediately after the Effective Time; provided that if as of the Effective
Time, Standard & Poor's has not then committed that the Parent Class A Common
Stock (if the Preferred Structure Approval has been obtained) or the Parent
Class C Common Stock (if the Preferred Structure Approval has not been obtained)
will be included in the Index immediately after the Effective Time, then the
"Fractional Shares Payment Date" shall be the earlier of (i) the date on which
either the Parent Class A Common Stock (if the Preferred Structure Approval has
been obtained) or the Parent Class C Common Stock (if the Preferred Structure
Approval has not been obtained) is included in the Index and (ii) the end of the
Pricing Period.
"FRANCHISE" means a written "franchise" (within the meaning of Section
602(8) of the Communications Act).
"FRANCHISING AUTHORITY" means "franchising authority" (within the meaning
of Section 602(9) of the Communications Act).
"GUARANTEE AGREEMENT" means the Guarantee Agreement dated as of June 16,
1999 between AT&T, as Guarantor, and The Bank of New York, as Guarantor Trustee,
relating to the Issuer Trust.
A-8
"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended, and the rules and regulations promulgated thereunder.
"INDEBTEDNESS" has the meaning set forth in the Separation and Distribution
Agreement.
"INDENTURE" means the Indenture dated as of June 16, 1999, as amended or
supplemented, between AT&T and The Bank of New York, as Trustee, relating to the
Debentures.
"INDEPENDENT PERSON" has the meaning set forth in the Parent Charter.
"INDEX" means the Standard & Poor's 500 Index.
"INTERIM FINANCE COMMITTEE" means the committee described in Section 9.15.
"INTERNATIONAL PLAN" means, with respect to any Person, any employment,
severance or similar contract or arrangement (whether or not written) or any
plan, policy, fund, program or arrangement or contract providing for severance,
insurance coverage (including any self-insured arrangements), workers'
compensation, disability benefits, supplemental unemployment benefits, vacation
benefits, pension or retirement benefits or for deferred compensation,
profit-sharing, bonuses, stock options, stock appreciation rights or other forms
of incentive compensation or post-retirement insurance, compensation or benefits
that (i) is not an Employee Plan or a Benefit Arrangement, (ii) is entered into,
maintained, administered or contributed to or required to be contributed to by
such Person or any of its Affiliates and (iii) covers any employee or former
employee of such Person or any of its Subsidiaries.
"IRS" means the United States Internal Revenue Service.
"ISSUER TRUST" means AT&T Finance Trust I, a Delaware business trust.
"K/A PRICE DIFFERENTIAL" means the number equal to the excess, if any, of
(i) the quotient obtained by dividing (A) the Average Class A Special Price by
(B) the Average Class A Price over (ii) 1; provided that the K/A Price
Differential shall in no event be less than 0 or more than .03.
"K/C PRICE DIFFERENTIAL" means the number equal to the excess, if any, of
(i) the quotient obtained by dividing (A) the Average Class A Special Price by
(B) the Average Class C Price over (ii) 1; provided that the K/C Price
Differential shall in no event be less than 0 or more than .03.
"KNOWLEDGE" means, with respect to any fact, the conscious awareness of
such fact by an "executive officer" (as defined under the 1933 Act) of the
relevant Person or, in the case of AT&T, any Person who would be considered an
"executive officer" (as so defined) of the AT&T Broadband Group.
"LIEN" means, with respect to any property or asset, any mortgage, lien,
pledge, charge, security interest, encumbrance or other adverse claim of any
kind in respect of such property or asset. For purposes of this Agreement, a
Person shall be deemed to own subject to a Lien any property or asset that it
has acquired or holds subject to the interest of a vendor or lessor under any
conditional sale agreement, capital lease or other title retention agreement
relating to such property or asset.
"MERGERS" means the AT&T Broadband Merger and the Comcast Merger.
"MICROSOFT" means Microsoft Corporation, a Washington corporation.
"MULTIEMPLOYER PLAN" means each Employee Plan that is a "multiemployer
plan" (as defined in Section 3(37) of ERISA).
"NASDAQ" means The Nasdaq Stock Market.
"NOTE CONSENT" means, with regard to any given series of securities issued
under the Notes Indenture, the receipt of the irrevocable consent to the
transactions contemplated by the Separation and Distribution Agreement of the
holders of at least a majority in aggregate principal amount of such series.
A-9
"NOTES INDENTURE" means the Indenture dated as of September 7, 1990, as
amended or supplemented, between American Telephone & Telegraph Company and The
Bank of New York, as trustee.
"NYSE" means the New York Stock Exchange.
"NYSE TRADING DAY" means any day on which securities of AT&T are traded on
the NYSE.
"NYSE TRADING VALUE" means, with respect to any equity security on any
given NYSE Trading Day, the volume weighted average trading price (rounded to
the nearest 1/10,000) of such security on the NYSE, as reported by Bloomberg
Financial Markets (or such other source as AT&T and Comcast shall agree in
writing) for that NYSE Trading Day.
"NYBCL" means the New York Business Corporation Law.
"PARENT CLASS A COMMON STOCK" means the Class A Common Stock, par value
$0.01 per share, of Parent.
"PARENT CLASS A SPECIAL COMMON STOCK" means the Class A Special Common
Stock, par value $0.01 per share, of Parent.
"PARENT CLASS B COMMON STOCK" means the Class B Common Stock, par value
$0.01 per share, of Parent.
"PARENT CLASS C COMMON STOCK" means the Class C Common Stock, par value
$0.01 per share, of Parent.
"PARENT COMMON STOCK" means the Parent Class A Common Stock, the Parent
Class A Special Common Stock, the Parent Class B Common Stock and the Parent
Class C Common Stock.
"PARENT INDEXED STOCK" means the class of Parent Common Stock that is
included in the Index on the first Trading Day after the Effective Time;
provided that (A) if the Preferred Structure Approval has been obtained and the
Parent Class A Common Stock and the Parent Class A Special Common Stock are both
included in the Index on the first Trading Day after the Effective Time, "Parent
Indexed Stock" shall mean the Parent Class A Common Stock or (B) if the
Preferred Structure Approval has not been obtained and the Parent Class C Common
Stock and the Parent Class A Special Common Stock are both included in the Index
on the first Trading Day after the Effective Time, "Parent Indexed Stock" shall
mean the Parent Class C Common Stock.
"PARENT MATERIAL ADVERSE EFFECT" means a material adverse effect on the
financial condition, assets or results of operations of the AT&T Broadband Group
and the Comcast Group, taken as a whole, excluding any such effect resulting
from or arising in connection with (i) changes or conditions generally affecting
the industries in which the AT&T Broadband Group and the Comcast Group operate,
(ii) changes in general economic, regulatory or political conditions or (iii)
the announcement of this Agreement or of the transactions contemplated hereby.
"PBCL" means the Pennsylvania Business Corporation Law of 1988.
"PBGC" means the Pension Benefit Guaranty Corporation.
"PENSION PLAN" means, with respect to any Person, any plan (other than a
Multiemployer Plan) that is subject to Title IV of ERISA and is maintained,
administered or contributed to or required to be contributed to by such Person
or any of its ERISA Affiliates.
"PERSON" means an individual, corporation, partnership, limited liability
company, association, trust or other entity or organization, including a
government or political subdivision or an agency or instrumentality thereof.
"PREFERRED STRUCTURE APPROVAL" means the approval, by a majority of the
votes cast, of the holders of the Comcast Class A Common Stock (voting as a
single class at a meeting at which a quorum is present) and the holders of the
Comcast Class A Common Stock and Comcast Class B Common Stock (voting together
as a single class at a meeting at which a quorum is present) of the Articles
Amendment.
A-10
"PRELIMINARY EXCHANGE RATIO" is defined as follows:
1,235,000,000 - I/C
X = -------------------
O
where "I", "C" and "O" have the same meanings as in the definition of Exchange
Ratio.
"PRICING PERIOD" means the 20 consecutive Trading Days commencing on the
first full Trading Day after the later to occur of (i) the fifth Trading Day
after the first date on which Standard & Poors' reweights the Index in respect
of the transactions contemplated hereby and (ii) the 30th calendar day after the
Closing Date; provided that in no event shall the Pricing Period commence later
than the first full Trading Day occurring after the 45th calendar day after the
Closing Date.
"PRIMARY COMMERCIAL AGREEMENTS" has the meaning set forth in the Separation
and Distribution Agreement.
"PRIMARY TRANSACTION AGREEMENTS" has the meaning set forth in the
Separation and Distribution Agreement.
"PRISMS CONTRACTS" means each of the PrISM Variable Prepaid Forward
Securities Contracts dated as of December 1, 2000 among AT&T, TCI Lenfest, Inc.
and Morgan Guaranty Trust Company of New York, relating to shares of Comcast
Class A Special Common Stock.
"QUIPS" means the 5% Convertible Quarterly Income Preferred Securities
issued pursuant to the Trust Agreement.
"QUIPS EXCHANGE" means the issuance of shares of AT&T Broadband Common
Stock in exchange for the QUIPS pursuant to the Exchange Agreement.
"RECORD DATE" has the meaning set forth in the Separation and Distribution
Agreement.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement
dated as of June 16, 1999 between AT&T and Microsoft.
"SAILS CONTRACTS" means the SAILS Mandatorily Exchangeable Securities
Contracts dated as of October 27, 2000, November 6, 2000 and November 10, 2000
among AT&T, TCI Lenfest, Inc., Credit Suisse First Boston International and
Credit Suisse First Boston Corporation, relating to shares of Comcast Class A
Special Common Stock.
"SEC" means the United States Securities and Exchange Commission.
"SENIOR NOTES" means any of the securities issued pursuant to the Indenture
dated as of November 21, 2001 between AT&T and The Bank of New York, as Trustee.
"SEPARATION" has the meaning set forth in the Separation and Distribution
Agreement.
"SEPARATION AND DISTRIBUTION AGREEMENT" means the Separation and
Distribution Agreement dated as of the date hereof by and between AT&T and AT&T
Broadband, in the form attached as Exhibit C, as amended from time to time.
"SIGNIFICANT EXCEPTED TRANSACTION" means any Excepted Transaction providing
for the sale or disposition of at least 50% of the AT&T Communications Group.
"SPECIFIED AT&T SEC DOCUMENTS" means each of (i) AT&T's annual report on
Form 10-K for its fiscal year ended December 31, 2000, (ii) AT&T's quarterly
reports on Form 10-Q filed since December 31, 2000, (iii) AT&T's periodic
reports on Form 8-K filed since December 31, 2000, (iv) AT&T's proxy statement
relating to its 2001 annual meeting of shareholders and (v) AT&T's preliminary
proxy statement filed on July 3, 2001 regarding, among other things, the
creation of a tracking stock reflecting the AT&T Broadband Group.
A-11
"SPECIFIED COMCAST SEC DOCUMENTS" means each of (i) Comcast's annual report
on Form 10-K for its fiscal year ended December 31, 2000, (ii) Comcast's
quarterly reports on Form 10-Q filed since December 31, 2000, (iii) Comcast's
periodic reports on Form 8-K filed since December 31, 2000 and (iv) Comcast's
proxy statement relating to its 2001 annual meeting of shareholders.
"SUBSIDIARY" means, with respect to any Person, any entity of which
securities or other ownership interests having ordinary voting power to elect a
majority of the board of directors or other body performing similar functions
are at any time, directly or indirectly, owned by such Person.
"SUBSIDIARY TRUSTS" means (i) TCI Communications Financing I, (ii) TCI
Communications Financing II, (iii) TCI Communications Financing IV, (iv)
MediaOne Finance Trust I, (v) MediaOne Finance Trust II, (vi) MediaOne Finance
Trust III, (vii) MediaOne Financing A and (viii) MediaOne Financing B, each a
Delaware business trust.
"SUPPORT AGREEMENT" means the Support Agreement dated as of the date hereof
by and between Comcast Shareholder, Mr. Brian L. Roberts, Comcast and Parent, in
the form attached as Exhibit A, as amended from time to time.
"SURVIVING CORPORATIONS" means the AT&T Broadband Surviving Corporation and
the Comcast Surviving Corporation.
"SYSTEM" means a "cable television system" (within the meaning of Section
602(7) of the Communications Act).
"T-HOLDINGS" means AT&T Broadband T-Holdings, Inc. (f/k/a TCI Telephony
Holdings, Inc), a Delaware corporation.
"TAX SHARING AGREEMENT" has the meaning set forth in the Separation and
Distribution Agreement.
"TOPRS" means (i) the 8.72% Trust Originated Preferred Securities of TCI
Communications Financing I; (ii) the 10% Trust Preferred Securities of TCI
Communications Financing II; (iii) the 9.72% Trust Preferred Securities of TCI
Communications Financing IV; (iv) the 9.50% Trust Originated Preferred
Securities of MediaOne Finance Trust II; (v) the 9.04% Trust Originated
Preferred Securities of MediaOne Finance Trust III; (vi) the 7.96% Trust
Originated Preferred Securities of MediaOne Financing A; and (vii) the 8.25%
Trust Originated Preferred Securities of MediaOne Financing B.
"TRADING DAY" means any day on which securities of Comcast or Parent are
traded on Nasdaq.
"TRADING VALUE" means, with respect to any equity security on any given
Trading Day, the volume weighted trading price (rounded to the nearest 1/10,000)
of such security on Nasdaq, as reported by Bloomberg Financial Markets (or such
other source as AT&T and Comcast shall agree in writing) for that Trading Day.
"TRANSACTION AGREEMENTS" means this Agreement, the Support Agreement and
each of the Ancillary Agreements.
"TRUST AGREEMENT" means the Trust Agreement dated as of June 16, 1999 among
AT&T, as Depositor, The Bank of New York, as Property Trustee, The Bank of New
York (Delaware), as Delaware Trustee, and the administrative trustees named
therein, relating to the Issuer Trust.
"TRUST COMMON SECURITIES" means the common securities of the Issuer Trust
issued pursuant to the Trust Agreement.
"TWE" means Time Warner Entertainment Company, L.P., a Delaware limited
partnership.
"TWE OPTION" means the option of MediaOne of Colorado, Inc. to purchase up
to an additional 8.5% participating percentage share in TWE pursuant to the TWE
Option Agreement.
"TWE OPTION AGREEMENT" means the Option Agreement, dated as of September
15, 1993, by and between TWE and US West, Inc.
A-12
"TWE PARTNERSHIP AGREEMENT" means the Agreement of Limited Partnership
dated as of October 29, 1991, as amended.
"TWE SUBSIDIARY" means a Subsidiary of TWE.
"WIRELESS GROUP COMMON STOCK" means the Wireless Group Common Stock, par
value $1.00 per share, of AT&T.
(b) Each of the following additional terms is defined in the Section set
forth opposite such term:
TERM SECTION
---- --------
351 Transactions............................................ 9.06(a)
Agreement................................................... Preamble
AT&T........................................................ Preamble
AT&T Broadband.............................................. Preamble
AT&T Broadband Merger....................................... 3.01(a)
AT&T Broadband Merger Sub................................... Preamble
AT&T Broadband Rule 145 Affiliate........................... 9.07(a)
AT&T Broadband Surviving Corporation........................ 3.01(a)
AT&T Broadband Surviving Corporation Common Stock........... 4.01(a)
AT&T Converted SARs......................................... 4.02(g)
AT&T Converted Stock Options................................ 4.02(g)
AT&T Converted Equity Awards................................ 4.02(g)
AT&T Equity Awards.......................................... 4.02(g)
AT&T Franchise Consents..................................... 6.03
AT&T Intellectual Property.................................. 6.20
AT&T License Consents....................................... 6.03
AT&T Marks.................................................. 9.20(a)
AT&T Parent Charter Approval................................ 6.22
AT&T PUC Consents........................................... 6.03
AT&T SARs................................................... 4.02(g)
AT&T SEC Documents.......................................... 6.07(a)
AT&T Securities............................................. 6.05(b)
AT&T Shareholders' Approvals................................ 6.22
AT&T Shareholders' Meeting.................................. 5.09
AT&T Stock Options.......................................... 4.02(g)
AT&T Subsidiary Preferred Stock............................. 6.05(a)
AT&T Superior Proposal...................................... 8.03(b)
AT&T Termination Fee........................................ 11.03(d)
AT&T Transaction Approval................................... 6.22
Certificates................................................ 4.02(b)
Code........................................................ Recitals
Comcast..................................................... Preamble
Comcast Converted Equity Awards............................. 4.02(h)
Comcast Converted Restricted Stock Awards................... 4.02(h)
Comcast Converted Stock Options............................. 4.02(h)
Comcast Equity Awards....................................... 4.02(h)
Comcast Franchise Consents.................................. 5.03
A-13
TERM SECTION
---- --------
Comcast Intellectual Property............................... 5.20
Comcast License Consents.................................... 5.03
Comcast Merger.............................................. 3.02(a)
Comcast Merger Sub.......................................... Preamble
Comcast Parent Charter Approval............................. 5.22
Comcast PUC Consents........................................ 5.03
Comcast Restricted Stock Awards............................. 4.02(h)
Comcast Rule 145 Affiliate.................................. 9.07(b)
Comcast SEC Documents....................................... 5.07(a)
Comcast Securities.......................................... 5.05(b)
Comcast Shareholder......................................... Preamble
Comcast Shareholders' Approvals............................. 5.22
Comcast Shareholders' Meeting............................... 5.09
Comcast Stock Options....................................... 4.02(h)
Comcast Surviving Corporation............................... 3.03
Comcast Surviving Corporation Class A Common Stock.......... 4.01(b)
Comcast Surviving Corporation Class A Special Common
Stock..................................................... 4.01(b)
Comcast Surviving Corporation Class B Common Stock.......... 4.01(b)
Comcast Surviving Corporation Common Stock.................. 4.01(b)
Comcast Termination Fee..................................... 11.03(b)
Comcast Transaction Approval................................ 5.22
Common Stock Trust.......................................... 4.02(e)
DE Certificate of Merger.................................... 3.01(b)
Effective Time.............................................. 3.01(b)
End Date.................................................... 11.01(b)
Excess Shares............................................... 4.02(e)
Exchange Agent.............................................. 4.02(a)
Exchange Fund............................................... 4.02(a)
Financing................................................... 9.15
Franchise Consents.......................................... 6.03(a)
GAAP........................................................ 5.08
Governmental Authority...................................... 5.03
Indemnified Losses.......................................... 7.04(a)
Indemnified Person.......................................... 7.04(a)
Joint Proxy Statement....................................... 5.09
Letter of Credit............................................ 9.16(d)
License Consents............................................ 6.03
Mandatory Residual Conditions............................... 8.02(a)
Neutrality Agreement........................................ 8.05
Original Award.............................................. 4.02(g)
PA Articles of Merger....................................... 3.02(b)
Parent...................................................... Preamble
Parent Charter.............................................. 2.01
PUC Consents................................................ 6.03
A-14
TERM SECTION
---- --------
Qualified Holders........................................... 4.03(c)
QUIPS Failure Date.......................................... 9.18(a)
QUIPS Fair Market Value..................................... 9.18(f)
QUIPS Transfer.............................................. 9.18(j)
Purchase Rights............................................. 9.01(a)
Registration Statement...................................... 5.09
S-8......................................................... 4.02(g)
Series E Preferred Stock.................................... 6.05(a)
Successor Plan.............................................. 9.13(b)
Support Agreement........................................... Recitals
Tax Returns................................................. 5.16
Taxes....................................................... 5.16
TCI Pacific Preferred Stock................................. 6.05(a)
Transferred Broadband Employees............................. 9.13(a)
Transferred Comcast Employees............................... 9.13(a)
TWE Contracts............................................... 6.25
Uncertificated Shares....................................... 4.02(b)
Warrants.................................................... 6.05(a)
Wireless Preferred Stock.................................... 6.05(a)
(c) Interpretation. In this Agreement, unless otherwise specified or where
the context otherwise requires:
(i) a reference to a Recital is to the relevant Recital to this
Agreement, to a Section is to the relevant Section of this Agreement and to
an Exhibit is to the relevant Exhibit to this Agreement;
(ii) words importing any gender shall include other genders;
(iii) words importing the singular only shall include the plural and
vice versa;
(iv) the words "include", "includes" or "including" shall be deemed to
be followed by the words "without limitation";
(v) the words "hereof", "herein" and "herewith" and words of similar
import shall, unless otherwise stated, be construed to refer to this
Agreement as a whole and not to any particular provision of this Agreement,
and Article, clause and Exhibit references are to the Articles, clauses and
Exhibits to this Agreement unless otherwise specified;
(vi) references to any party hereto or any other agreement or document
shall include such party's successors and permitted assigns; and
(vii) the parties hereto have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of
intent or interpretation arises, this Agreement shall be construed as if
drafted jointly by the parties hereto, and no presumption or burden of
proof shall arise favoring or disfavoring any party hereto by virtue of the
authorship of any provisions of this Agreement.
(d) Headings. In this Agreement the headings to Sections are inserted for
convenience only and shall not affect the construction of this Agreement.
A-15
ARTICLE 2
PARENT AND MERGER SUBS
SECTION 2.01. Organization of Parent. Comcast and AT&T have caused Parent
to be organized under the laws of the Commonwealth of Pennsylvania. The
authorized capital stock of Parent consists of 100 shares of Common Stock, par
value $0.01 per share, of which one share has been issued to Comcast and one
share has been issued to AT&T. At the Effective Time, each of Comcast and AT&T
shall return its share of Parent common stock to Parent for cancellation without
the payment of any consideration therefor. Subject to the terms and conditions
of this Agreement, Comcast and AT&T shall take, and shall cause Parent to take,
all requisite action to cause (i) if the Preferred Structure Approval is
obtained, the articles of incorporation of Parent (the "PARENT CHARTER") to be
in the form of Exhibit D-1 at the Effective Time, (ii) if the Preferred
Structure Approval is not obtained, the Parent Charter to be on the terms set
forth in Exhibit D-2 at the Effective Time and (iii) whether or not the
Preferred Structure Approval is obtained, the bylaws of Parent to be in the form
of Exhibit D-3 at the Effective Time.
SECTION 2.02. Directors and Officers of Parent. Prior to the Effective
Time, the directors and officers of Parent shall consist of equal numbers of
representatives of Comcast and AT&T as designated and elected by Comcast and
AT&T. Comcast and AT&T shall take all requisite action to cause the directors
and officers of Parent as of the Effective Time to be as provided in Section
9.08.
SECTION 2.03. Organization of Merger Subs. Parent has caused AT&T
Broadband Merger Sub and Comcast Merger Sub to be organized for the sole purpose
of effectuating the Mergers. The authorized capital stock of AT&T Broadband
Merger Sub consists of 100 shares of Common Stock, par value $0.01 per share,
all of which shares have been issued to Parent at a price of $1.00 per share.
The authorized capital stock of Comcast Merger Sub consists of 100 shares of
Common Stock, par value $0.01 per share, all of which shares have been issued to
Parent at a price of $1.00 per share.
SECTION 2.04. Actions of Comcast and AT&T. Comcast and AT&T, as the
holders of all the outstanding shares of Parent capital stock, have approved and
adopted this Agreement and the transactions contemplated hereby and have caused
Parent, as the sole stockholder of each of the Merger Subs, to approve and adopt
this Agreement and the transactions contemplated hereby. Each of Comcast and
AT&T shall cause Parent to perform its obligations under this Agreement, and
Parent shall cause the Merger Subs to perform their respective obligations under
this Agreement.
SECTION 2.05. Rights Plan. Parent shall adopt a shareholder rights plan,
effective as of the Effective Time, on the terms and conditions set forth in the
Comcast Disclosure Schedule.
ARTICLE 3
THE MERGERS
SECTION 3.01. The AT&T Broadband Merger. (a) At the Effective Time, AT&T
Broadband Merger Sub shall be merged with and into AT&T Broadband (the "AT&T
BROADBAND MERGER") in accordance with the DGCL and upon the terms set forth in
this Agreement, whereupon the separate existence of AT&T Broadband Merger Sub
shall cease and AT&T Broadband shall be the surviving corporation (the "AT&T
BROADBAND SURVIVING CORPORATION").
(b) As soon as practicable (and, in any event, within five Business Days)
after satisfaction or, to the extent permitted hereunder, waiver of all
conditions to the Mergers set forth in Article 10, other than conditions that by
their nature are to be satisfied at the Effective Time and will in fact be
satisfied at the Effective Time, a certificate of merger shall be duly prepared,
executed and acknowledged by AT&T Broadband Merger Sub and AT&T Broadband and
thereafter delivered to and filed with the Secretary of State of the State of
Delaware pursuant to the DGCL (the "DE CERTIFICATE OF MERGER"). The AT&T
Broadband Merger shall become effective at the Effective Time. As used herein,
the term "Effective Time" means such time as is mutually agreeable to Comcast
and AT&T on the date of filing of the DE Certificate of Merger, or on such other
date or time as may be agreed by Comcast and AT&T. The
A-16
Separation shall occur on the Closing Date prior to the Distribution which shall
occur at the close of business in New York, New York on the Closing Date. With
the consent of Comcast, which consent shall not be unreasonably withheld, AT&T
may effect the Separation and/or the Distribution on different dates or
different times than provided for in the preceding sentence.
(c) From and after the Effective Time, the AT&T Broadband Surviving
Corporation shall possess all the rights, powers, privileges and franchises, and
be subject to all of the obligations, liabilities, restrictions and
disabilities, of AT&T Broadband Merger Sub and AT&T Broadband, all as provided
under the DGCL.
SECTION 3.02. The Comcast Merger. (a) At the Effective Time, Comcast
Merger Sub shall be merged with and into Comcast (the "COMCAST MERGER") in
accordance with the PBCL, and upon the terms set forth in this Agreement,
whereupon the separate existence of Comcast Merger Sub shall cease and Comcast
shall be the surviving corporation (the "COMCAST SURVIVING CORPORATION").
(b) As soon as practicable (and, in any event, within five Business Days)
after satisfaction or, to the extent permitted hereunder, waiver of all
conditions to the Mergers set forth in Article 10, other than conditions that by
their nature are to be satisfied at the Effective Time and will in fact be
satisfied at the Effective Time, an articles of merger shall be duly prepared,
executed and acknowledged by Comcast Merger Sub and Comcast and thereafter
delivered to and filed with the Department of State of the Commonwealth of
Pennsylvania pursuant to the PBCL (the "PA ARTICLES OF MERGER"). The Comcast
Merger shall become effective at the Effective Time.
(c) From and after the Effective Time, the Comcast Surviving Corporation
shall possess all the rights, powers, privileges and franchises, and be subject
to all of the obligations, liabilities, restrictions and disabilities, of
Comcast Merger Sub and Comcast, all as provided under the PBCL.
SECTION 3.03. Certificate and Articles of Incorporation; Bylaws. The
certificate of incorporation of AT&T Broadband in effect at the Effective Time
shall be the certificate of incorporation of the AT&T Broadband Surviving
Corporation and the bylaws of AT&T Broadband Merger Sub in effect at the
Effective Time shall be the bylaws of the AT&T Broadband Surviving Corporation,
in each case, until amended in accordance with applicable law. Immediately prior
to the Effective Time, if the Preferred Structure Approval shall have been
obtained, Comcast shall file the Articles Amendment with the Department of State
of the Commonwealth of Pennsylvania pursuant to the PBCL. The articles of
incorporation of Comcast in effect at the Effective Time shall be the articles
of incorporation of the Comcast Surviving Corporation and the bylaws of Comcast
Merger Sub in effect at the Effective Time shall be the bylaws of the Comcast
Surviving Corporation, in each case, until amended in accordance with applicable
law.
SECTION 3.04. Directors and Officers of the Surviving Corporations. From
and after the Effective Time, until successors are duly elected or appointed and
qualified in accordance with applicable law, (a) the directors of AT&T Broadband
Merger Sub at the Effective Time shall be the directors of the AT&T Broadband
Surviving Corporation, (b) the officers of AT&T Broadband at the Effective Time
shall be the officers of the AT&T Broadband Surviving Corporation, (c) the
directors of Comcast Merger Sub at the Effective Time shall be the directors of
the Comcast Surviving Corporation and (d) the officers of Comcast at the
Effective Time shall be the officers of the Comcast Surviving Corporation.
SECTION 3.05. Alternative Structure. From the date hereof until the
Effective Time, each of AT&T and Comcast agrees that, at the request of the
other party, it will consider in good faith amending the terms of this 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 provided by Articles 2 and 3 and is not adverse to the
other party.
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ARTICLE 4
CONVERSION OF SECURITIES
SECTION 4.01. Conversion of Securities. (a) If the Preferred Structure
Approval shall have been obtained, at the Effective Time, by virtue of the AT&T
Broadband Merger and without any action on the part of any of the parties hereto
or the holders of any of the following securities:
(i) Each issued and outstanding share of capital stock of AT&T
Broadband Merger Sub shall be converted into and become one fully paid and
nonassessable share of Common Stock, par value $.01 per share, of the AT&T
Broadband Surviving Corporation ("AT&T BROADBAND SURVIVING CORPORATION
COMMON STOCK").
(ii) Each share of AT&T Broadband Common Stock held in the treasury of
AT&T Broadband immediately prior to the Effective Time shall be canceled
and retired without any conversion thereof, and no payment shall be made
with respect thereto.
(iii) Subject to Sections 4.02(e), 4.03(a) and 4.06, each issued and
outstanding share of AT&T Broadband Common Stock that is issued and
outstanding immediately prior to the Effective Time (excluding any shares
of AT&T Broadband Common Stock canceled pursuant to Section 4.01(a)(ii))
shall be converted into the right to receive (A) the Exchange Ratio of a
fully paid and nonassessable share of Parent Class A Common Stock and (B)
the number of fully paid and nonassessable shares (if any) of Parent Class
A Common Stock payable pursuant to Section 4.04(a) in respect of each share
of AT&T Broadband Common Stock issued and outstanding immediately prior to
the Effective Time. As of the Effective Time, all such shares of AT&T
Broadband Common Stock shall no longer be outstanding and shall
automatically be canceled and retired and shall cease to exist, and each
owner of any such shares of AT&T Broadband Common Stock shall cease to have
any rights with respect thereto, except the right to receive certificates
representing the shares of Parent Common Stock, any cash in lieu of
fractional shares of Parent Common Stock and any dividends or distributions
to the extent provided in Section 4.02(c) to be issued or paid in
consideration therefor, without interest.
(b) If the Preferred Structure Approval shall have been obtained, at the
Effective Time, by virtue of the Comcast Merger and without any action on the
part of any of the parties hereto or the holders of any of the following
securities:
(i) Each issued and outstanding share of capital stock of Comcast
Merger Sub shall be converted into and become (A) a number of fully paid
and nonassessable shares of Class A Common Stock, par value $1.00 per
share, of the Comcast Surviving Corporation ("COMCAST SURVIVING CORPORATION
CLASS A COMMON STOCK") such that all of such shares of Comcast Surviving
Corporation Class A Common Stock, together with the shares of Comcast
Surviving Corporation Class A Common Stock issuable upon conversion of the
shares of Comcast Common Stock held by Comcast Shareholder pursuant to
Section 4.01(e), equal 200 million shares of Comcast Surviving Corporation
Class A Common Stock, (B) a number of fully paid and nonassessable shares
of Class B Common Stock, par value $1.00 per share, of the Comcast
Surviving Corporation ("COMCAST SURVIVING CORPORATION CLASS B COMMON
STOCK") such that all of such shares of Comcast Surviving Corporation Class
B Common Stock, together with the shares of Comcast Surviving Corporation
Class B Common Stock issuable upon conversion of the shares of Comcast
Common Stock held by Comcast Shareholder pursuant to Section 4.01(e), if
any, equal 50 million shares of Comcast Surviving Corporation Class B
Common Stock and (C) a number of fully paid and nonassessable shares of
Class A Special Common Stock, par value $1.00 per share, of the Comcast
Surviving Corporation ("COMCAST SURVIVING CORPORATION CLASS A SPECIAL
COMMON STOCK" and together with the Comcast Surviving Corporation Class B
Common stock and the Comcast Surviving Corporation Class A Common Stock,
"COMCAST SURVIVING CORPORATION COMMON STOCK") such that all of such shares
of Comcast Surviving Corporation Class A Special Common Stock, together
with the shares of Comcast Surviving Corporation Class A Special Common
Stock issuable upon conversion of the
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shares of Comcast Common Stock held by Comcast Shareholder pursuant to
Section 4.01(e), if any, equal 2.5 billion shares of Comcast Surviving
Corporation Class A Special Common Stock.
(ii) Each share of Comcast Common Stock held in the treasury of
Comcast immediately prior to the Effective Time shall be canceled and
retired without any conversion thereof, and no payment shall be made with
respect thereto.
(iii) Subject to Sections 4.01(e) and 4.02(e), each issued and
outstanding share of Comcast Class A Common Stock, Comcast Class B Common
Stock and Comcast Class A Special Common Stock that is issued and
outstanding immediately prior to the Effective Time (excluding any of such
shares of Comcast Common Stock canceled pursuant to Section 4.01(b)(ii))
shall be converted into the right to receive one fully paid and
nonassessable share of Parent Class A Common Stock, Parent Class B Common
Stock and Parent Class A Special Common Stock, respectively. As of the
Effective Time, all such shares of Comcast Common Stock shall no longer be
outstanding and shall automatically be canceled and retired and shall cease
to exist, and each holder of a Certificate representing any such shares of
Comcast Common Stock shall cease to have any rights with respect thereto,
except the right to receive, upon the surrender of such Certificates,
certificates representing the shares of Parent Common Stock, any cash in
lieu of fractional shares of Parent Common Stock and any dividends or
distributions to the extent provided in Section 4.02(c) to be issued or
paid in consideration therefor upon surrender of such Certificate in
accordance with Section 4.02, without interest.
(c) If the Preferred Structure Approval shall not have been obtained, at
the Effective Time, by virtue of the AT&T Broadband Merger and without any
action on the part of any of the parties hereto or the holders of any of the
following securities:
(i) Each issued and outstanding share of capital stock of AT&T
Broadband Merger Sub shall be converted into and become one fully paid and
nonassessable share of AT&T Broadband Surviving Corporation Common Stock.
(ii) Each share of AT&T Broadband Common Stock held in the treasury of
AT&T Broadband immediately prior to the Effective Time shall be canceled
and retired without any conversion thereof, and no payment shall be made
with respect thereto.
(iii) Subject to Sections 4.02(e), 4.03(b) and 4.06, each issued and
outstanding share of AT&T Broadband Common Stock that is issued and
outstanding immediately prior to the Effective Time (excluding any shares
of AT&T Broadband Common Stock canceled pursuant to Section 4.01(c)(ii))
shall be converted into the right to receive (A) the Exchange Ratio of a
fully paid and nonassessable share of Parent Class C Common Stock and (B)
the number of fully paid and nonassessable shares (if any) of Parent Class
C Common Stock payable pursuant to Section 4.04(b) in respect of each share
of AT&T Broadband Common Stock issued and outstanding immediately prior to
the Effective Time.
(d) If the Preferred Structure Approval shall not have been obtained, at
the Effective Time, by virtue of the Comcast Merger and without any action on
the part of any of the parties hereto or the holders of any of the following
securities:
(i) Each issued and outstanding share of capital stock of Comcast
Merger Sub shall be converted into and become (A) a number of fully paid
and nonassessable shares of Comcast Surviving Corporation Class A Common
Stock such that all of such shares of Comcast Surviving Corporation Class A
Common Stock, together with the shares of Comcast Surviving Corporation
Class A Common Stock issuable upon conversion of the shares of Comcast
Common Stock held by Comcast Shareholder pursuant to Section 4.01(e), equal
200 million shares of Comcast Surviving Corporation Class A Common Stock,
(B) a number of fully paid and nonassessable shares of Comcast Surviving
Corporation Class B Common Stock such that all of such shares of Comcast
Surviving Corporation Class B Common Stock, together with the shares of
Comcast Surviving Corporation Class B Common Stock issuable upon conversion
of the shares of Comcast Common
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Stock held by Comcast Shareholder pursuant to Section 4.01(e), if any,
equal 50 million shares of Comcast Surviving Corporation Class B Common
Stock and (C) a number of fully paid and nonassessable shares of Comcast
Surviving Corporation Class A Special Common Stock such that all of such
shares of Comcast Surviving Corporation Class A Special Common Stock,
together with the shares of Comcast Surviving Corporation Class A Special
Common Stock issuable upon conversion of the shares of Comcast Common Stock
held by Comcast Shareholder pursuant to Section 4.01(e), if any, equal 2.5
billion shares of Comcast Surviving Corporation Class A Special Common
Stock.
(ii) Each share of Comcast Common Stock held in the treasury of
Comcast immediately prior to the Effective Time shall be canceled and
retired without any conversion thereof, and no payment shall be made with
respect thereto.
(iii) Subject to Sections 4.01(e) and 4.02(e), each issued and
outstanding share of Comcast Class A Common Stock, Comcast Class B Common
Stock and Comcast Class A Special Common Stock that is issued and
outstanding immediately prior to the Effective Time (excluding any of such
shares of Comcast Common Stock canceled pursuant to Section 4.01(d)(ii))
shall be converted into the right to receive one fully paid and
nonassessable share of Parent Class A Common Stock, Parent Class B Common
Stock and Parent Class A Special Common Stock, respectively. As of the
Effective Time, all such shares of Comcast Common Stock shall no longer be
outstanding and shall automatically be canceled and retired and shall cease
to exist, and each holder of a Certificate representing any such shares of
Comcast Common Stock shall cease to have any rights with respect thereto,
except the right to receive, upon the surrender of such Certificates,
certificates representing the shares of Parent Common Stock, any cash in
lieu of fractional shares of Parent Common Stock and any dividends or
distributions to the extent provided in Section 4.02(c) to be issued or
paid in consideration therefor upon surrender of such Certificate in
accordance with Section 4.02, without interest.
(e) In lieu of receiving the consideration payable pursuant to Section
4.01(b) or 4.01(d) upon conversion of its shares of Comcast Common Stock in the
Comcast Merger, Comcast Shareholder (or any successor by merger to Comcast
Shareholder) may elect to merge with Parent or a wholly owned Subsidiary of
Parent (and, in the event of a merger with a wholly owned Subsidiary of Parent,
Comcast Shareholder will be the surviving entity in such merger) immediately
prior to the Effective Time in a transaction in which the members of Comcast
Shareholder (or such successor), in exchange for all of their outstanding
membership or other equity interests in Comcast Shareholder (or such successor),
would receive in the aggregate the same consideration that Comcast Shareholder
(or such successor) would have received pursuant to Section 4.01(b) or 4.01(d),
as the case may be, upon conversion of its shares of Comcast Common Stock in the
Comcast Merger. If Comcast Shareholder (or such successor) elects to effect the
foregoing merger, then at the time of such merger (i) Comcast Shareholder (or
such successor) shall have no assets other than shares of Comcast Common Stock
and no liabilities other than possible de minimis liabilities, (ii) each issued
and outstanding share of Comcast Common Stock owned by Comcast Shareholder (or
such successor) shall be converted into and become (A) a number of fully paid
and nonassessable shares of Comcast Surviving Corporation Class A Common Stock
such that all of such shares of Comcast Surviving Corporation Class A Common
Stock, together with the shares of Comcast Surviving Corporation Class A Common
Stock issuable upon conversion of the shares of Comcast Merger Sub capital stock
pursuant to Section 4.01(b)(i) or 4.01(d)(i), as the case may be, equal 200
million shares of Comcast Surviving Corporation Class A Common Stock, (B) a
number of fully paid and nonassessable shares of Comcast Surviving Corporation
Class B Common Stock such that all of such shares of Comcast Surviving
Corporation Class B Common Stock, together with the shares of Comcast Surviving
Corporation Class B Common Stock issuable upon conversion of the shares of
Comcast Merger Sub capital stock pursuant to Section 4.01(b)(i) or 4.01(d)(i),
as the case may be, equal 50 million shares of Comcast Surviving Corporation
Class B Common Stock and (C) a number of fully paid and nonassessable shares of
Comcast Surviving Corporation Class A Special Common Stock such that all of such
shares of Comcast Surviving Corporation Class A Special Common Stock, together
with the shares of Comcast Surviving Corporation Class A Special Common Stock
issuable upon conversion of the shares
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of Comcast Merger Sub capital stock pursuant to Section 4.01(b)(i) or
4.01(d)(i), as the case may be, equal 2.5 billion shares of Comcast Surviving
Corporation Class A Special Common Stock, and (iii) Comcast Shareholder shall
provide an indemnity that is reasonably satisfactory to AT&T and Comcast
pursuant to which one or more members of Comcast Shareholder (which shall
include at a minimum any member or members (on a joint and several basis) who
acquire the shares of Parent Class B Common Stock pursuant to the merger
contemplated by this Section 4.01(e)) agrees to indemnify Parent in respect of
any liabilities (including tax liabilities) of Comcast Shareholder or arising in
connection with the transactions under this Section 4.01(e).
(f) If, between the date of this Agreement and the Effective Time, the
outstanding shares of Comcast Common Stock, AT&T Common Stock or AT&T Broadband
Common Stock shall have been changed into a different number of shares, by
reason of any stock dividend (other than to create the number of shares of AT&T
Broadband Common Stock necessary to effect the Distribution and, if the QUIPS
Exchange occurs, the QUIPS Exchange or otherwise as a result of the Separation
and Distribution), subdivision, split or combination of shares, the
consideration payable pursuant to Section 4.01 will, if appropriate, be
correspondingly adjusted to reflect such stock dividend, subdivision, split or
combination of shares.
(g) For purposes of Sections 4.01(a)-(d) but not for purposes of any other
section of this Agreement (including, without limitation, Sections 5.05 and
6.05), (i) any share of Comcast Common Stock held by any Comcast Subsidiary will
not be treated as a share of Comcast Common Stock held in the treasury of
Comcast and (ii) any share of AT&T Broadband Common Stock held by any AT&T
Broadband Subsidiary will not be treated as a share of AT&T Broadband Common
Stock held in treasury of AT&T Broadband.
SECTION 4.02. Exchange of Certificates. (a) Exchange Agent. At or prior
to the Effective Time, Parent shall deposit with a bank or trust company jointly
designated by AT&T and Comcast (the "EXCHANGE AGENT"), for the benefit of the
holders of shares of AT&T Broadband Common Stock and Comcast Common Stock, for
exchange in accordance with this Article 4, through the Exchange Agent, the
shares of Parent Common Stock (such shares of Parent Common Stock, together with
any dividends or other distributions to the extent provided in Section 4.02(c),
the "EXCHANGE FUND") issuable pursuant to Section 4.01 in exchange for
outstanding shares of AT&T Broadband Common Stock and Comcast Common Stock;
provided that Parent shall not be required to deliver to the Exchange Agent the
portion, if any, of the Exchange Fund that is payable pursuant to Sections 4.03
and 4.04 unless and until the amounts payable thereunder are determined.
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, the Exchange Agent shall mail to each holder of record of a
certificate or certificates that immediately prior to the Effective Time
represented outstanding shares of AT&T Broadband Common Stock or Comcast Common
Stock (the "CERTIFICATES"), other than shares to be canceled or retired or
converted into AT&T Broadband Surviving Corporation Common stock or Comcast
Surviving Corporation Common Stock in each case in accordance with Section 4.01,
(i) a letter of transmittal (which shall specify that delivery shall be
effected, and risk of loss and title to the Certificates shall pass, only upon
delivery of the Certificates to the Exchange Agent, and shall be in such form
and have such other provisions as Parent may reasonably specify) and (ii)
instructions for use in effecting the surrender of the Certificates in exchange
for certificates representing shares of Parent Common Stock. Upon (i) surrender
of a Certificate for cancellation to the Exchange Agent, together with such
letter of transmittal, duly executed, or (ii) receipt of an "agents message" (or
such other evidence, if any, of transfer as the Exchange Agent may reasonably
request) in the case of a book-entry transfer of uncertificated shares
("UNCERTIFICATED SHARES"), and (in either case) receipt of such other documents
as may reasonably be required by the Exchange Agent, the holder of such
Certificate or Uncertificated Shares, as the case may be, shall be entitled to
receive in exchange therefor (A) such shares of Parent Common Stock (which at
Parent's option, shall be in uncertificated book-entry form unless a physical
certificate is requested or is otherwise required by applicable law)
representing in the aggregate that number of whole shares of Parent Common Stock
that such holder has the right to receive pursuant to the provisions of this
Article 4, (B) cash in lieu of any
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fractional shares of Parent Common Stock to the extent provided in Section
4.02(e) and (C) any dividends or distributions to the extent provided in Section
4.02(c), and any Certificate so surrendered shall forthwith be canceled. In the
event of a transfer of ownership of AT&T Broadband Common Stock or Comcast
Common Stock that is not registered in the transfer records of AT&T Broadband or
Comcast, as the case may be, the proper number of shares of Parent Common Stock,
cash in lieu of any fractional shares of Parent Common Stock pursuant to Section
4.02(e) and any dividends or other distributions to which such holder is
entitled pursuant to Section 4.02(c) may be issued and delivered to a Person
other than the Person in whose name the Certificate so surrendered is registered
if such Certificate shall be properly endorsed or otherwise be in proper form
for transfer and the Person requesting such payment shall pay any transfer or
other taxes required by reason of the issuance of shares of Parent Common Stock
to a Person other than the registered holder of such Certificate or establish to
the satisfaction of Parent that such tax has been paid or is not applicable.
Until surrendered as contemplated by this Section 4.02, each Certificate shall
be deemed at any time after the Effective Time to represent only the right to
receive upon such surrender the certificate representing the appropriate number
of whole shares of Parent Common Stock, cash in lieu of any fractional shares of
Parent Common Stock to the extent provided in Section 4.02(e) and any dividends
and distributions to the extent provided in Section 4.02(c). No interest will be
paid or will accrue on any cash payable in lieu of any fractional shares of
Parent Common Stock. Any amounts payable or deliverable pursuant to this
Agreement shall be subject to and made net of applicable withholding taxes to
the extent such taxes are imposed under applicable law as determined by Parent
in its reasonable discretion. To the extent that amounts are so withheld, those
amounts shall be treated for all purposes as having been paid to the holders of
AT&T Broadband Common Stock or Comcast Common Stock, as the case may be, in
respect of which the deduction and withholding was made. It is understood that
the number of whole shares of Parent Common Stock to be issued under the
provisions of this Article 4, other than Sections 4.03 and 4.04, will be issued
and delivered to the holders entitled thereto in advance of the issuance and
delivery of shares of Parent Common Stock to be issued under Sections 4.03 and
4.04, if any, and that the shares of Parent Common Stock to be issued under
Sections 4.03 and 4.04, if any, will be issued and delivered to the holders
entitled thereto promptly after the number of shares payable thereunder, if any,
is determined.
(c) Distributions with Respect to Unexchanged Shares. No dividends or
other distributions with respect to Parent Common Stock with a record date after
the Effective Time shall be paid to the holder of any unsurrendered Certificate
with respect to the shares of Parent Common Stock represented thereby, and no
cash payment in lieu of fractional shares shall be paid to any such holder
pursuant to Section 4.02(e) until the surrender of such Certificate in
accordance with this Article 4. Subject to the effect of applicable law and to
the other provisions hereof, following surrender of any such Certificate, there
shall be paid to the holder of the certificate representing whole shares of
Parent Common Stock issued in exchange therefor, without interest, (i) at the
time of such surrender, the amount of any cash payable in lieu of a fractional
share of Parent Common Stock to which such holder is entitled pursuant to
Section 4.02(e) and the amount of dividends or other distributions with a record
date after the Effective Time theretofore paid with respect to such whole shares
of Parent Common Stock and (ii) at the appropriate payment date, the amount of
dividends or other distributions with a record date after the Effective Time but
prior to such surrender and a payment date subsequent to such surrender payable
with respect to such whole shares of Parent Common Stock.
(d) No Further Ownership Rights in AT&T Broadband Common Stock or Comcast
Common Stock. All shares of Parent Common Stock issued (and any cash paid
pursuant to Section 4.02(c) or 4.02(e)) upon conversion of shares of AT&T
Broadband Common Stock or Comcast Common Stock in accordance with the terms of
this Article 4 shall be deemed to have been issued (and paid) in full
satisfaction of all rights pertaining to the relevant shares of AT&T Broadband
Common Stock or Comcast Common Stock, as the case may be, and there shall be no
further registration of transfers on the stock transfer books of the applicable
Surviving Corporation, of the shares of AT&T Broadband Common Stock or Comcast
Common Stock, as the case may be, that were outstanding immediately prior to the
Effective Time. If, after the Effective Time, Certificates are presented to
Parent or the Exchange Agent for any reason, they shall be canceled and
exchanged as provided in this Article 4, except as otherwise provided by
applicable law.
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Shares of Parent Common Stock shall not be issued to any Person who is a Rule
145 Affiliate until Parent has received written undertakings from such Person in
the form attached as Exhibit B.
(e) No Fractional Shares. (i) No certificates or scrip or shares of Parent
Common Stock representing fractional shares of Parent Common Stock or book-entry
credit of the same shall be issued upon the surrender for exchange of
Certificates or upon conversion of shares, and such fractional share interests
shall not entitle the owner thereof to vote or to any rights of a shareholder of
Parent.
(ii) As promptly as practicable following the Fractional Shares Payment
Date, the Exchange Agent shall determine the excess of (A) the aggregate
number of shares of Parent Common Stock that would be distributed to
holders of the Certificates and Uncertificated Shares pursuant to Section
4.02(b) if no effect were given to Section 4.02(e)(i) over (B) the
aggregate number of whole shares of Parent Common Stock to be distributed
to holders of the Certificates or Uncertificated Shares pursuant to Section
4.02(b) taking into account the effect of Section 4.02(e)(i) (such excess,
the "EXCESS SHARES"). As soon as practicable after the Fractional Shares
Payment Date, the Exchange Agent, as agent for the holders of the
Certificates, shall sell the Excess Shares at then-prevailing prices on
Nasdaq, all in the manner provided in Section 4.02(e)(iii).
(iii) The sale of the Excess Shares by the Exchange Agent shall be executed
on Nasdaq, and shall be executed in round lots to the extent practicable.
The proceeds from such sale or sales available for distribution to the
holders of Certificates and Uncertificated Shares shall be reduced by the
compensation payable to the Exchange Agent and the expenses incurred by the
Exchange Agent, in each case, in connection with such sale or sales of the
Excess Shares, including all related commissions, transfer taxes and other
out-of-pocket transaction costs. Until the net proceeds of such sale or
sales have been distributed to the holders of the Certificates and
Uncertificated Shares, the Exchange Agent shall hold such proceeds in trust
for the holders of the Certificates and Uncertificated Shares (the "COMMON
STOCK TRUST"). The Exchange Agent shall determine the portion of the Common
Stock Trust to which each holder of a Certificate or Uncertificated Share
shall be entitled, if any, by multiplying the amount of the aggregate net
proceeds comprising the portion of the Common Stock Trust attributable to
the relevant class of Parent Common Stock by a fraction, the numerator of
which is the amount of the fractional share interest in such class of
Parent Common Stock to which such holder of a Certificate or Uncertificated
Share is entitled and the denominator of which is the aggregate amount of
fractional share interests in such class to which all holders of the
Certificates and Uncertificated Shares are entitled.
(iv) As soon as practicable after the determination of the amount of cash,
if any, to be paid to holders of Certificates and Uncertificated Shares in
lieu of any fractional share interests, the Exchange Agent shall make
available such amounts, without interest, to such holders of Certificates
and Uncertificated Shares that have surrendered their Certificates in
accordance with this Article 4.
(f) Termination of Exchange Fund and Common Stock Trust. Any portion of
the Exchange Fund and Common Stock Trust that remains undistributed for one year
after the Effective Time shall be delivered to Parent, upon demand, and any
holders of Certificates and Uncertificated Shares who have not theretofore
complied with this Article 4 shall thereafter look only to Parent for payment of
their claim for Parent Common Stock, any cash in lieu of fractional shares of
Parent Common Stock, and any dividends or other distributions with respect to
Parent Common Stock.
(g) AT&T Stock Options and Other AT&T Equity-Based Awards. (i) At the
Effective Time, all options to purchase, and stock appreciation rights with
respect to, shares of AT&T Broadband Common Stock ("AT&T STOCK OPTIONS" and
"AT&T SARS", respectively) that are outstanding and unexercised as of the
Effective Time shall cease to represent rights with respect to shares of AT&T
Broadband Common Stock and shall be converted automatically into options to
purchase, or stock appreciation rights with respect to, shares of Parent Indexed
Stock ("AT&T CONVERTED STOCK OPTIONS" and "AT&T CONVERTED SARS", respectively)
and Parent shall assume each such AT&T Converted Stock Option and AT&T Converted
SAR, on the same terms and conditions as applied to such AT&T Stock Option or
AT&T SAR immediately before the Effective Time (including without limitation any
vesting as a result of the
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consummation of the transactions contemplated hereby); provided, however, that,
from and after the Effective Time, (A) the number of shares of Parent Indexed
Stock subject to such AT&T Converted Stock Option or AT&T Converted SAR, as
applicable, shall be equal to the number of shares, rounded to the nearest whole
share, of Parent Indexed Stock whose fair market value, immediately after the
Effective Time, is equal to (a) minus (b), where "(a)" is the aggregate fair
market value, determined immediately prior to the Distribution using the AT&T
Closing Stock Value, of the AT&T Common Stock subject to the original option or
stock appreciation right (the "ORIGINAL AWARD") with respect to which such AT&T
Stock Option or AT&T SAR was issued pursuant to the Employee Benefits Agreement;
and "(b)," in the case of a Broadband Employee, is zero, and in the case of a
Former Employee is the aggregate fair market value, determined immediately after
the Distribution using the AT&T Opening Stock Value (as such term is defined in
the Employee Benefits Agreement), of the AT&T Common Stock subject to the
"adjusted AT&T Option" into which the Original Award was partially converted
pursuant to Section 5.3(b) of the Employee Benefits Agreement; and (B) the per
share exercise price under such AT&T Converted Stock Option or AT&T Converted
SAR, as applicable, as of the Effective Time, shall be adjusted by dividing the
aggregate exercise price of the Original Award relating to such AT&T Stock
Option or AT&T SAR, as applicable (less, in the case of a Former Employee, the
aggregate exercise price of the relevant "adjusted AT&T Option" referred to in
(A) above), by the number of shares of Parent Indexed Stock to which such AT&T
Converted Stock Option or AT&T Converted SAR is subject, rounded to the nearest
one-hundredth of a cent. Notwithstanding the foregoing, the number of shares and
the per share exercise price of each AT&T Converted Stock Option that is, as of
the Effective Time, after giving effect to any vesting as a result of the
transactions contemplated hereby, an "incentive stock option" (as defined in
Section 422 of the Code) and each related AT&T Converted SAR, if any, shall be
adjusted in accordance with the requirements of Section 424 of the Code.
Accordingly, with respect to any incentive stock options, fractional shares
shall be rounded down to the nearest whole number of shares, and, where
necessary, the per share exercise price shall be rounded up to the nearest cent.
For purposes of this Section 4.02, the fair market value of a share of Parent
Indexed Stock shall be determined using the opening per-share price of Parent
Indexed Stock as listed on Nasdaq as of the opening of trading on the first
Trading Day following the Effective Time; provided, however, that if the
Effective Time occurs at a time when Nasdaq is open for trading, fair market
value shall be determined using the price at which Parent Indexed Stock trades
as of the moment immediately after the Effective Time; provided, further, that
if the Effective Time occurs prior to the opening of trading on Nasdaq, the fair
market value shall be determined using the price at which the Parent Indexed
Stock first trades after the opening of trading on this day.
(ii) At the Effective Time, all shares of AT&T Broadband restricted stock
outstanding as of the Effective Time shall be converted automatically into
the right to receive Parent Common Stock on the terms and conditions set
forth in the applicable sections of this Article 4 and all other equity
based awards based upon shares of AT&T Broadband Common Stock
(collectively, the "AT&T EQUITY AWARDS") outstanding as of the Effective
Time shall be converted automatically into equivalent awards based upon
shares of Parent Indexed Stock (collectively, the "AT&T CONVERTED EQUITY
AWARDS"), on the same terms and conditions as applied to such AT&T Equity
Award immediately before the Effective Time (including without limitation
any vesting as a result of the consummation of the transactions
contemplated hereby); provided, however, that from and after the Effective
Time, the number of shares of Parent Indexed Stock subject to such AT&T
Converted Equity Award shall be equal to the number of shares of Parent
Indexed Stock whose fair market value, immediately after the Effective
Time, is equal to the aggregate fair market value, determined immediately
prior to the Distribution using the AT&T Closing Stock Value, of the AT&T
Common Stock subject to the original equity based award with respect to
which such AT&T Equity Award was issued pursuant to the Employee Benefits
Agreement.
(iii) At or prior to the Effective Time, Parent shall reserve for issuance
the number of shares of Parent Indexed Stock necessary to satisfy Parent's
obligations under this Section 4.02(g). No later than five Business Days
after the Effective Time, Parent shall file with the SEC a registration
statement on Form S-8 (or other appropriate form) (an "S-8") under the 1933
Act with respect to
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the shares of Parent Indexed Stock subject to AT&T Converted Stock Options,
AT&T Converted SARs and AT&T Converted Equity Awards issued pursuant to
this Section 4.02(g), and shall use all reasonable best efforts to maintain
the effectiveness of the applicable S-8 and current status of the
prospectus related to the applicable S-8, as well as comply with any
applicable state securities or "blue sky" laws, for so long as any such
AT&T Converted Stock Options, AT&T Converted SARs and/or AT&T Converted
Equity Awards remain outstanding.
(h) Comcast Stock Options and other Comcast Equity-Based Awards. (i) At
the Effective Time, all options to purchase shares of Comcast Class A Special
Common Stock ("COMCAST STOCK OPTIONS") granted by Comcast or any Comcast
Subsidiary pursuant to the terms of any stock option or incentive plan and held,
as of the Effective Time, by an employee of Comcast of any Comcast Subsidiary
(or any beneficiary thereof) shall cease to represent rights to purchase shares
of Comcast Class A Special Common Stock and shall be converted automatically
into options to purchase ("COMCAST CONVERTED STOCK OPTIONS"), on the same terms
and conditions as applied to such Comcast Stock Option immediately prior to the
Effective Time, that number of shares of Parent Indexed Stock, rounded to the
nearest whole share, whose fair market value, immediately after the Effective
Time, is equal to the aggregate fair market value, determined immediately prior
to the Effective Time, of the Comcast Class A Special Common Stock subject to
such Comcast Stock Option, at a per share exercise price equal to the aggregate
exercise price of such Comcast Stock Option divided by the number of shares of
Parent Indexed Common Stock to which such Comcast Converted Stock Option is
subject. Notwithstanding the foregoing, the number of shares and the per share
exercise price of each Comcast Converted Stock Option that is, as of the
Effective Time, an "incentive stock option" (as defined in Section 422 of the
Code) and each related Comcast Converted SAR, if any, shall be adjusted in
accordance with the requirements of Section 424 of the Code. Accordingly, with
respect to any incentive stock options, fractional shares shall be rounded down
to the nearest whole number of shares, and, where necessary, the per share
exercise price shall be rounded up to the nearest cent.
(ii) At the Effective Time, Comcast restricted stock awards (collectively,
the "COMCAST RESTRICTED STOCK AWARDS") shall be converted automatically
into (A) if the Preferred Structure Approval has been obtained, equivalent
awards based upon shares of Parent Class A Common Stock or (B) if the
Preferred Structure Approval has not been obtained, equivalent awards based
upon shares of Parent Class C Common Stock (collectively, the "COMCAST
CONVERTED RESTRICTED STOCK AWARDS"), on the same terms and conditions as
applied to such Comcast Restricted Stock Award immediately prior to the
Effective Time. The number of shares of Parent Class A Common Stock or
Parent Class C Common Stock, as the case may be, subject to such Comcast
Converted Restricted Stock Award shall be that number of shares of Parent
Class A Common Stock or Parent Class C Common Stock, as the case may be,
rounded to the nearest share, whose fair market value, immediately after
the Effective Time is equal to the aggregate fair market value, determined
immediately prior to the Effective Time, of the shares of Comcast Common
Stock that were subject to such Comcast Restricted Stock Awards. All other
equity based awards based upon shares of Comcast Class A Special Common
Stock (collectively, the "COMCAST EQUITY AWARDS") outstanding as of the
Effective Time shall be converted automatically into equivalent awards
based upon shares of Parent Indexed Stock (collectively, the "COMCAST
CONVERTED EQUITY AWARDS"), on the same terms and conditions as applied to
such Comcast Equity Award immediately prior to the Effective Time. The
number of shares of Parent Indexed Stock subject to such Comcast Converted
Equity Award shall be the number of shares of Parent Indexed Stock, rounded
to the nearest share, whose fair market value, immediately after the
Effective Time, is equal to the aggregate fair market value, determined
immediately prior to the Effective Time, of the shares of Comcast Common
Stock that were subject to such Comcast Equity Award.
(iii) At or prior to the Effective Time, Parent shall reserve for issuance
the number of shares of Parent Indexed Stock necessary to satisfy Parent's
obligations under this Section 4.02(h). No later than five Business days
after the Effective Time, Parent shall file with the SEC an S-8 under the
1933 Act with respect to the shares of Parent Indexed Stock subject to the
Comcast Converted Stock
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Options and Comcast Converted Equity Awards issued pursuant to this Section
4.02(h), and shall use reasonable best efforts to maintain the
effectiveness of the applicable S-8 and current status of the prospectus
related to the applicable S-8, as well as comply with any applicable state
securities or "blue sky" laws, for so long as any such Comcast Converted
Stock Options and/or Comcast Converted Equity Awards remain outstanding.
(i) No Liability. None of the parties hereto or the Exchange Agent shall
be liable to any Person in respect of any shares of Parent Common Stock (or
dividends or distributions with respect thereto) or cash from the Exchange Fund
or the Common Stock Trust delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law. Any shares of Parent
Common Stock, any cash in lieu of fractional shares of Parent Common Stock or
any dividends or other distributions with respect to Parent Common Stock payable
hereunder would otherwise escheat to or become the property of any Governmental
Authority, such shares, cash, dividends or other distributions shall, to the
extent permitted by applicable law, become the property of Parent, free and
clear of all claims or interest of any Person previously entitled thereto.
(j) Investment of Exchange Fund and Common Stock Trust. The Exchange
Agent shall invest any cash included in the Exchange Fund and Common Stock
Trust, as directed by Parent, on a daily basis; provided that no such investment
or loss thereon shall affect the amounts payable or the timing of the amounts
payable to AT&T Broadband or Comcast shareholders pursuant to this Article 4.
Any interest and other income resulting from such investments shall be paid to
Parent.
(k) Lost Certificates. If any Certificate is lost, stolen or destroyed,
upon the making of an affidavit of that fact by the Person claiming such
Certificate to be lost, stolen or destroyed and executing an indemnity
reasonably satisfactory to Parent (and, if required by Parent in the case of a
Certificate representing more than 1,000 shares, the posting by such Person of a
bond, in such reasonable amount as Parent may direct, as indemnity) against any
claim that may be made against it with respect to such Certificate, the Exchange
Agent will issue, in exchange for such lost, stolen or destroyed Certificate and
in respect of the shares of AT&T Broadband Common Stock or Comcast Common Stock,
as the case may be, formerly represented by such lost Certificate, that number
of whole shares of Parent Common Stock that such holder has the right to receive
pursuant to the provisions of this Article 4, cash in lieu of any fractional
shares of Parent Common Stock to the extent provided in Section 4.02(e) and any
dividends or distributions to the extent provided in Section 4.02(c).
(l) If (i) any holder of AT&T Common Stock does not receive shares of AT&T
Broadband Common Stock in the Distribution in respect of such holder's shares of
AT&T Common Stock because such holder has purported to exercise rights pursuant
to Section 910 of the NYBCL in respect of such holder's shares of AT&T Common
Stock and (ii) such rights are subsequently invalidated or such holder
subsequently withdraws his purported exercise of such rights, then Parent shall
deliver to such holder at such time (or at such later time as is otherwise
provided for such delivery) the merger consideration payable pursuant to this
Article 4 in respect of the shares of AT&T Broadband Common Stock issuable in
the Distribution in respect such holder's shares of AT&T Common Stock.
SECTION 4.03. Section 355(e) Top-up. (a) In the event that the Preferred
Structure Approval has been obtained and if, but for a disparity in the per
share value of the Parent Class A Common Stock and the Parent Class A Special
Common Stock, the Qualified Holders would have received a number of shares of
Parent Common Stock pursuant to Section 4.01(a)(iii) at the Effective Time that
represents more than 50% of the total value of all shares of Parent Common
Stock, Parent shall issue additional shares of Parent Common Stock to the same
holders of record of AT&T Broadband Common Stock in an amount sufficient to
ensure that Qualified Holders will be treated as holding at the Effective Time
more than 50% of the value of all shares of Parent Common Stock; provided,
however, that Parent shall not be obligated to issue additional shares pursuant
to this Section 4.03(a) to the extent that AT&T has issued shares in breach of
Section 8.01(v) of this Agreement.
(b) In the event that the Preferred Structure Approval has not been
obtained and if, but for a disparity in the per share value of the Parent Class
C Common Stock and the Parent Class A Special
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Common Stock, the Qualified Holders would have received a number of shares of
Parent Common Stock pursuant to Section 4.01(c)(iii) at the Effective Time that
represents more than 50% of the total value of all shares of Parent Common
Stock, Parent shall issue additional shares of Parent Common Stock to the same
holders of record of AT&T Broadband Common Stock in an amount sufficient to
ensure that Qualified Holders will be treated as holding at the Effective Time
more than 50% of the value of all shares of Parent Common Stock; provided,
however, that Parent shall not be obligated to issue additional shares pursuant
to this Section 4.03(b) to the extent that AT&T has issued shares in breach of
Section 8.01(v) of this Agreement.
(c) For purposes of this Section 4.03, (i) "QUALIFIED HOLDERS" shall mean
the holders of AT&T Broadband Common Stock other than holders that receive such
shares "pursuant to a plan or series of related transactions" with the
Distribution (within the meaning of Section 355(e) of the Code), (ii) the value
of the shares of each class of Parent Common Stock shall be determined as of the
Closing Date unless AT&T receives a ruling from the Internal Revenue Service
that permits Comcast and AT&T to use the valuation methodology used in Section
4.04 (in which event such methodology will be used) and (iii) the value of the
shares of Parent Class B Common Stock shall be determined in accordance with
Section 4.03 of the Comcast Disclosure Schedule.
SECTION 4.04. Additional Payments. (a) In the event that the Preferred
Structure Approval has been obtained and prior to the Effective Time Standard &
Poor's has not committed that the Parent Class A Common Stock will be included
in the Index immediately after the Effective Time, then in addition to the
consideration payable pursuant to Section 4.01(a)(iii)(A), each holder of shares
of AT&T Broadband Common Stock shall be entitled to receive pursuant to Section
4.01(a)(iii)(B), in exchange for each of such holder's shares, a number of
shares of Parent Class A Common Stock equal to the product of (i) the Exchange
Ratio and (ii) the K/A Price Differential; provided that if the Parent Class A
Common Stock is included in the Index at any time prior to the end of the
Pricing Period, such holder of shares of AT&T Broadband Common Stock shall not
be entitled to receive any shares of Parent Class A Common Stock pursuant to
this sentence. The number of shares of Parent Class A Common Stock issuable
pursuant to the preceding sentence (if any) will be reduced by the number of
shares of Parent Class A Common Stock previously issued pursuant to Section
4.03(a) (if any) in respect of each share of AT&T Broadband Common Stock.
(b) In the event that the Preferred Structure Approval has not been
obtained and prior to the Effective Time Standard & Poor's has not committed
that the Parent Class C Common Stock will be included in the Index immediately
after the Effective Time, then in addition to the consideration payable pursuant
to Section 4.01(c)(iii)(A), each holder of shares of AT&T Broadband Common Stock
shall be entitled to receive pursuant to Section 4.01(c)(iii)(B), in exchange
for each of such holder's shares, a number of shares of Parent Class C Common
Stock equal to the product of (i) the Exchange Ratio and (ii) the K/C Price
Differential; provided that if the Parent Class C Common Stock is included in
the Index at any time prior to the end of the Pricing Period, such holder of
shares of AT&T Broadband Common Stock shall not be entitled to receive any
shares of Parent Class C Common Stock pursuant to this sentence. The number of
shares of Parent Class C Common Stock issuable pursuant to the preceding
sentence (if any) will be reduced by the number of shares of Parent Class C
Common Stock previously issued pursuant to Section 4.03(b) (if any) in respect
of each share of AT&T Broadband Common Stock.
SECTION 4.05. Additional Exchange Arrangements. It is understood that
Parent may enter into other additional arrangements mutually acceptable to AT&T
and Comcast with the Exchange Agent to the extent necessary in order to give
effect to the intent of the provisions in Section 4.02 insofar as they apply to
(i) the exchange and/or delivery of Uncertificated Shares by book-entry transfer
or otherwise or (ii) the delivery of the consideration payable under Sections
4.03 and 4.04.
SECTION 4.06. Limitation on Voting Stock. If as a result of the
conversion of their shares of AT&T Broadband Common Stock pursuant to Section
4.01(a)(iii) or 4.01(c)(iii), as the case may be, or the payment of any
additional shares of Parent Common Stock pursuant to Section 4.03 or 4.04,
Microsoft and its Affiliates would hold in the aggregate shares of Parent Common
Stock representing, when combined with any Parent Common Stock received by
Microsoft or its Affiliates by virtue of the Comcast
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Merger, in excess of 4.95% of the combined voting power of Parent capital stock
at the Effective Time (or, if any shares of Parent Common Stock are delivered
pursuant to Section 4.03 or 4.04 after the Effective Time, at the time of such
delivery), then Microsoft and its wholly-owned Subsidiaries shall receive, in
lieu of the number of shares representing such excess voting power, an
equivalent number of shares of Parent Class A Special Common Stock.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF COMCAST
Except as set forth in the Comcast Disclosure Schedule, regardless of
whether the relevant Section herein refers to the Comcast Disclosure Schedule,
or in the Specified Comcast SEC Documents filed prior to the date hereof,
Comcast represents and warrants to AT&T as follows:
SECTION 5.01. Corporate Existence and Power. Comcast is a corporation
duly incorporated, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania and has all corporate powers required to carry on
its business as currently conducted. Comcast is duly qualified to do business as
a foreign corporation and is in good standing in each jurisdiction where such
qualification is necessary, except for those jurisdictions where failure to be
so qualified, individually or in the aggregate, has not had and would not
reasonably be expected to have a Comcast Material Adverse Effect. Comcast has
heretofore delivered or made available to AT&T true and complete copies of the
articles of incorporation and bylaws of Comcast as currently in effect.
SECTION 5.02. Corporate Authorization. (a) The execution, delivery and
performance by Comcast of this Agreement and the consummation by Comcast of the
transactions contemplated hereby are within Comcast's corporate powers and,
except for the Comcast Shareholders' Approvals to the extent required by law,
have been duly authorized by all necessary corporate action on the part of
Comcast. This Agreement constitutes a valid and binding agreement of Comcast,
enforceable against Comcast in accordance with its terms, except (i) as the same
may be limited by applicable bankruptcy, insolvency, moratorium or similar laws
of general application relating to or affecting creditors' rights and (ii) for
the limitations imposed by general principles of equity.
(b) At meetings duly called and held, Comcast's Board of Directors has (i)
unanimously determined that this Agreement and the transactions contemplated
hereby are fair to and in the best interests of Comcast shareholders; (ii)
unanimously approved and adopted this Agreement and the transactions
contemplated hereby; and (iii) resolved to recommend approval of proposals in
respect of each of the Comcast Shareholders' Approvals by Comcast shareholders.
SECTION 5.03. Governmental Authorization. The execution, delivery and
performance by Comcast of this Agreement and the consummation by Comcast of the
transactions contemplated hereby require no action by or in respect of, or
filing with, any United States federal, state or local, foreign or supranational
governmental body, agency, official or authority (a "GOVERNMENTAL AUTHORITY"),
other than (a) notices to, or consents or waivers from, the relevant Franchising
Authorities in respect of the Franchises for the Systems owned and operated by
Comcast or the Comcast Subsidiaries (the "COMCAST FRANCHISE CONSENTS"), and the
FCC in connection with a change of control and/or assignment of the holder of
the FCC licenses of Comcast and the Comcast Subsidiaries ("COMCAST LICENSE
CONSENTS"); (b) notices to, consents or waivers from the state public service
and public utilities commissions having jurisdiction over the assets of Comcast
and the Comcast Subsidiaries ("COMCAST PUC CONSENTS"); (c) the filing of the PA
Articles of Merger pursuant to the PBCL and appropriate documents with the
relevant authorities of other states in which Comcast is qualified to do
business; (d) compliance with any applicable requirements of the HSR Act; (e)
compliance with any applicable requirements of the 1933 Act, the 1934 Act, and
any other applicable securities laws, whether United States state or foreign;
and (f) any actions or filings the absence of which, individually or in the
aggregate, would not reasonably be expected to have a Comcast Material Adverse
Effect or prohibit or materially impair or delay the ability of Comcast to
consummate the transactions contemplated by this Agreement.
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SECTION 5.04. Non-contravention. The execution, delivery and performance
by Comcast of this Agreement and the consummation by Comcast of the transactions
contemplated hereby do not and will not (a) contravene, conflict with, or result
in any violation or breach of any provision of the articles of incorporation or
bylaws of Comcast; (b) assuming compliance with the matters referred to in
Section 5.03, contravene, conflict with or result in a violation or breach of
any provision of any applicable law, statute, ordinance, rule, regulation,
judgment, injunction, order, or decree; (c) assuming compliance with the matters
referred to in Section 5.03, require any consent or other action by any Person
under, constitute a default (or an event that, with or without notice or lapse
of time or both, would constitute a default) under, or cause or permit the
termination, cancellation, acceleration, triggering or other change of any right
or obligation or the loss of any benefit to which Comcast or any Comcast
Subsidiary is entitled under (i) any provision of any agreement or other
instrument binding upon Comcast or any Comcast Subsidiary or any of their
respective assets or properties or (ii) any license, franchise, permit,
certificate, approval or other similar authorization held by, or affecting, or
relating in any way to, the assets, properties or business of, Comcast or any
Comcast Subsidiary; or (d) result in the creation or imposition of any Lien on
any asset or property of Comcast or any Comcast Subsidiary, other than such
exceptions in the case of clauses (b), (c) and (d) above as would not,
individually or in the aggregate, reasonably be expected to have a Comcast
Material Adverse Effect or prohibit or materially impair or delay the ability of
Comcast to consummate the transactions contemplated hereby.
SECTION 5.05. Capitalization. (a) The authorized capital stock of Comcast
consists of (i) 200,000,000 shares of Comcast Class A Common Stock, (ii)
50,000,000 shares of Comcast Class B Common Stock, (iii) 2,500,000,000 shares of
Comcast Class A Special Common Stock and (iv) 20,000,000 shares of preferred
stock. As of the close of business on November 30, 2001, there were outstanding
(1) 21,829,422 shares of Comcast Class A Common Stock, (2) 9,444,375 shares of
Comcast Class B Common Stock, (3) 913,778,527 shares of Comcast Class A Special
Common Stock (inclusive of shares issued pursuant to the Comcast ESPP but
exclusive of all restricted stock awards granted under any compensatory plan or
arrangements), (4) Comcast Stock Options to purchase an aggregate of 55,853,196
shares of Comcast Class A Special Common Stock (of which options to purchase an
aggregate of 16,822,181 shares of Comcast Class A Special Common Stock were
exercisable), (5) phantom shares, stock units, stock appreciation rights, other
stock-based awards or other deferred stock awards issued under any stock option,
compensation or deferred compensation plan or arrangement with respect to an
aggregate of 6,808,916 shares of Comcast Class A Special Common Stock and (6) no
shares of preferred stock. As of November 30, 2001, 23,324,911 shares of Comcast
Class A Special Common Stock were held in treasury, no other shares of Comcast
Common Stock were held in treasury and no shares of Comcast Common Stock were
held in trust. All outstanding shares of capital stock of Comcast have been, and
all shares that may be issued pursuant to any compensatory plan or arrangement
will be, when issued in accordance with the respective terms thereof, duly
authorized, validly issued, fully paid and nonassessable.
(b) Except as set forth in this Section 5.05 and for changes since November
30, 2001 resulting from the exercise of Comcast Stock Options and the vesting of
Comcast Equity Awards outstanding on such date, including, for the avoidance of
doubt, options to purchase stock under the Comcast ESPP (and the grant or award
of Comcast Stock Options and Comcast Equity Awards in the ordinary course of
business and the exercise thereof, including, for the avoidance of doubt,
options to purchase stock under the Comcast ESPP), there are no outstanding (i)
shares of capital stock or voting securities of Comcast, (ii) securities of
Comcast or any Comcast Subsidiary convertible into or exchangeable for shares of
capital stock or voting securities of Comcast or (iii) options or other rights
to acquire from Comcast or any Comcast Subsidiary, or other obligations of
Comcast or any Comcast Subsidiary to issue, any capital stock, voting securities
or securities convertible into or exchangeable for capital stock or voting
securities of Comcast. There are no outstanding obligations of Comcast or any
Comcast Subsidiary to repurchase, redeem or otherwise acquire any of the
securities referred to in clause (i), (ii) or (iii) above (collectively, the
"COMCAST SECURITIES").
SECTION 5.06. Subsidiaries. (a) Each Comcast Subsidiary is a corporation
or other legal entity duly organized, validly existing and in good standing
under the laws of its jurisdiction of organization and
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has all corporate, partnership or other similar powers required to carry on its
business as currently conducted, other than such exceptions as, individually or
in the aggregate, have not had and would not reasonably be expected to have a
Comcast Material Adverse Effect. Each Comcast Subsidiary is duly qualified to do
business as a foreign corporation or other foreign legal entity and is in good
standing in each jurisdiction where such qualification is necessary, other than
such exceptions as, individually or in the aggregate, have not had and would not
reasonably be expected to have a Comcast Material Adverse Effect. Section
5.06(a) of the Comcast Disclosure Schedule sets forth a list of all Comcast
Significant Subsidiaries and their respective jurisdictions of organization.
(b) All of the outstanding capital stock of, or other voting securities or
ownership interests in, each Comcast Significant Subsidiary is owned by Comcast,
directly or indirectly, free and clear of any Lien and free of any other
limitation or restriction (including any restriction on the right to vote, sell
or otherwise dispose of such capital stock or other voting securities or
ownership interests). There are no outstanding (i) securities of Comcast or any
Comcast Subsidiary convertible into or exchangeable for shares of capital stock
or other voting securities or ownership interests in any Comcast Significant
Subsidiary or (ii) options or other rights to acquire from Comcast or any
Comcast Subsidiary, or other obligations of Comcast or any Comcast Subsidiary to
issue, any capital stock, or other voting securities or ownership interests in,
or any securities convertible into or exchangeable for any capital stock or
other voting securities or ownership interests in, any Comcast Significant
Subsidiary. There are no outstanding obligations of Comcast or any Comcast
Significant Subsidiary to repurchase, redeem or otherwise acquire any of the
items referred to in clauses (i) and (ii) above.
SECTION 5.07. SEC Filings. (a) Comcast has delivered or made available to
AT&T (i) Comcast's annual reports on Form 10-K for its fiscal years ended
December 31, 2000, 1999 and 1998, (ii) Comcast's proxy or information statements
relating to meetings of, or actions taken without a meeting by, Comcast
shareholders held since December 31, 1998, and (iii) all of Comcast's other
reports, statements, schedules and registration statements filed with the SEC
since December 31, 1998 (the documents referred to in clauses (i), (ii) and
(iii) above, collectively, the "COMCAST SEC DOCUMENTS").
(b) As of its filing date (and, if amended or superceded by a filing prior
to the date of this Agreement or the Effective Time, then on the date of such
filing), each Comcast SEC Document complied as to form in all material respects
with the applicable requirements of the 1933 Act and the 1934 Act, as the case
may be.
(c) As of its filing date (and, if amended or superceded by a filing prior
to the date of this Agreement or the Effective Time, then on the date of such
filing), each Comcast SEC Document filed pursuant to the 1934 Act did not
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading.
(d) Each Comcast SEC Document that is a registration statement, as amended
or supplemented, if applicable, filed pursuant to the 1933 Act, as of the date
such registration statement or amendment became effective, did not contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not misleading.
SECTION 5.08. Financial Statements. The audited consolidated financial
statements and unaudited consolidated interim financial statements of Comcast
included in the Comcast SEC Documents fairly present, in all material respects,
in conformity with United States generally accepted accounting principles
("GAAP") applied on a consistent basis (except as may be indicated in the notes
thereto), the consolidated financial position of Comcast and its consolidated
Subsidiaries as of the respective dates thereof and their consolidated results
of operations and cash flows for the periods then ended (subject to normal
year-end adjustments in the case of any unaudited interim financial statements).
SECTION 5.09. Information Supplied. The information supplied by Comcast
for inclusion or incorporation in the registration statement on Form S-4 or any
amendment or supplement thereto pursuant to which shares of Parent Common Stock
issuable in the Mergers will be registered with the SEC (the
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"REGISTRATION STATEMENT") shall not at the time the Registration Statement is
declared effective by the SEC contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The information supplied by Comcast for
inclusion in the joint proxy statement/prospectus or any amendment or supplement
thereto (the "JOINT PROXY STATEMENT") to be sent to Comcast shareholders in
connection with their meeting to consider proposals in respect of each of the
Comcast Shareholders' Approvals (the "COMCAST SHAREHOLDERS' MEETING") and to be
sent to AT&T shareholders in connection with their meeting to consider proposals
in respect of each of the AT&T Shareholders' Approvals (the "AT&T SHAREHOLDERS'
MEETING") shall not, on the date the Joint Proxy Statement is first mailed to
the shareholders of each of Comcast and AT&T, at the time of the Comcast
Shareholders' Meeting, at the time of the AT&T Shareholders' Meeting or at the
Effective Time, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading.
SECTION 5.10. Absence of Certain Changes. Since the Comcast Balance Sheet
Date, the business of Comcast and the Comcast Subsidiaries has been conducted in
the ordinary course of business consistent with past practices, and there has
not been (i) any event, occurrence or development of a state of circumstances or
facts that, individually or in the aggregate, has had or would reasonably be
expected to have a Comcast Material Adverse Effect or (ii) any action, event,
occurrence or transaction that would have been prohibited by clause (iii), (iv),
(vii), (viii) or (ix) of Section 7.01 if this Agreement had been in effect at
the time thereof or any agreement, arrangement or commitment in respect of any
action, event, occurrence or transaction that would have been prohibited by the
foregoing clauses of Section 7.01 if this Agreement had been in effect at the
time thereof.
SECTION 5.11. No Undisclosed Material Liabilities. There are no
liabilities or obligations of Comcast or any Comcast Subsidiary of any kind
whatsoever, whether accrued, contingent, absolute, determined, determinable or
otherwise, and there is no existing condition, situation or set of circumstances
that would reasonably be expected to result in such a liability or obligation,
other than:
(a) liabilities or obligations disclosed and provided for in the
Comcast Balance Sheet or in the notes thereto;
(b) liabilities or obligations incurred since the Comcast Balance
Sheet Date in the ordinary course of business of the Comcast Group
consistent with past practice;
(c) liabilities or obligations under commercial transactions and
agreements in accordance with their terms or arising in compliance with
applicable laws, statutes, ordinances, rules or regulations; or
(d) liabilities or obligations that, individually or in the aggregate,
have not had and would not reasonably be expected to have a Comcast
Material Adverse Effect.
SECTION 5.12. Compliance with Laws and Court Orders. Comcast and the
Comcast Subsidiaries hold all licenses, franchises, certificates, consents,
permits, qualifications and authorizations from all Governmental Authorities
necessary for the lawful conduct of their business, except where the failure to
hold any of the foregoing, individually or in the aggregate, has not had and
would not reasonably be expected to have a Comcast Material Adverse Effect.
Comcast and each of the Comcast Subsidiaries are, and have been in compliance
with, and to the knowledge of Comcast, are not under investigation with respect
to and have not been threatened to be charged with or given notice of any
violation of, any such license, franchise, certificate, consent, permit,
qualification or authorization, or any applicable law, statute, ordinance, rule,
regulation, judgment, injunction, order or decree, except for failures to comply
or violations that, individually or in the aggregate, have not had and would not
reasonably be expected to have a Comcast Material Adverse Effect.
SECTION 5.13. Litigation. There is no action, suit, investigation or
proceeding (or any basis therefor) pending against, or, to the knowledge of
Comcast, threatened against or affecting, Comcast, any Comcast Subsidiary or any
of their respective assets or properties before any court or arbitrator or
before
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or by any other Governmental Authority, that, individually or in the aggregate,
would reasonably be expected to have a Comcast Material Adverse Effect.
SECTION 5.14. Finders' Fees. Except for Morgan Stanley & Co.
Incorporated, J.P. Morgan Securities Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Quadrangle Group, whose fees will be paid by Comcast, there is
no investment banker, broker, finder or other intermediary that has been
retained by or is authorized to act on behalf of Comcast or any Comcast
Subsidiary who might be entitled to any fee or commission in connection with the
transactions contemplated by this Agreement and the other Transaction
Agreements. A copy of Comcast's engagement agreement with each of Morgan Stanley
& Co. Incorporated, J.P. Morgan Securities Inc., Merrill Lynch, Pierce, Fenner &
Smith Incorporated and Quadrangle Group has been provided to AT&T.
SECTION 5.15. Opinion of Financial Advisor. Comcast has received an
opinion of each of Morgan Stanley & Co. Incorporated, J.P. Morgan Securities
Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, financial advisors to
Comcast, to the effect that, as of the date hereof, the conversion ratios in the
Comcast Merger applicable to the holders of Comcast Common Stock, in the
aggregate, are fair, from a financial point of view, to the Comcast
shareholders, taken together.
SECTION 5.16. Taxes. Except as would not, individually or in the
aggregate, reasonably be expected to have a Comcast Material Adverse Effect, (a)
all Comcast and Comcast Subsidiary Tax Returns required to be filed on or before
the Effective Time with any taxing authority by, or with respect to, Comcast and
the Comcast Subsidiaries have been or will be timely filed (taking into account
extensions) and are or will be correct in all respects (other than with respect
to Taxes for which adequate reserves are reflected on the Comcast Balance
Sheet); (b) Comcast and the Comcast Subsidiaries have timely paid or will timely
pay all Taxes shown as due and payable on the Comcast Tax Returns that have been
or will be so filed, and, as of the time of filing, the Comcast Tax Returns
correctly reflected the facts regarding the income, business, assets,
operations, activities and the status of Comcast and the Comcast Subsidiaries
(other than with respect to Taxes for which adequate reserves are reflected on
the Comcast Balance Sheet); (c) Comcast and the Comcast Subsidiaries have made
provision for all Taxes payable by Comcast and the Comcast Subsidiaries for
which no Comcast Tax Return has yet been filed; (d) there is no action, suit,
proceeding, audit or claim currently proposed or pending against or with respect
to Comcast or any Comcast Subsidiary in respect of any Tax where there is a
reasonable possibility of an adverse determination; (e) the United States
federal income Tax Returns of Comcast and the Comcast Subsidiaries have been
examined and settled with the IRS (or the applicable statutes of limitation for
the assessment of United States federal income Taxes for such periods have
expired) for all years through 1993; (f) no extension of the statute of
limitations on the assessment of any Taxes has been granted by Comcast or any
Comcast Subsidiary and is currently in effect; (g) except for complete and
accurate copies of Tax sharing agreements and amendments thereto made available
to AT&T prior to the execution of this Agreement and listed in Section 5.16 of
the Comcast Disclosure Schedule, no agreements relating to the allocation or
sharing of Taxes exist between Comcast and/or any of the Comcast Subsidiaries,
on the one hand, and a third party, on the other hand; and (h) there are no
Liens for Taxes on any of the assets of Comcast or any Comcast Subsidiary except
Liens for current Taxes not yet due and payable. "TAXES" means (i) any and all
taxes, charges, fees, levies or other assessments, including all net income,
gross income, gross receipts, excise, stamp, real or personal property, ad
valorem, withholding, social security (or similar), unemployment, occupation,
use, service, service use, license, net worth, payroll, franchise, severance,
transfer, recording, employment, premium, windfall profits, environmental,
customs duties, capital stock, profits, disability, sales, registration, value
added, alternative or add-on minimum, estimated or other taxes, assessments or
charges imposed by any Governmental Authority and any interest, penalties, or
additions to tax attributable thereto, (ii) liability for the payment of any
amount imposed on any Person of the type described in clause (i) as a result of
being or having been before the Effective Time a member of an affiliated,
consolidated, combined or unitary group and (iii) any liability for the payment
of any amount imposed on any Person of the type described in (i) as a result of
any existing express or implied indemnification agreement or arrangement. "TAX
RETURNS" means any return, report,
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form or similar statement required to be filed with respect to any Tax
(including any attached schedules), including any information return, claim for
refund, amended return or declaration of estimated Tax.
SECTION 5.17. Tax Opinions. Neither Comcast nor any Comcast Subsidiary
has taken any action or knows of any facts or circumstances relating to Comcast
or any Comcast Subsidiary that would prevent (i) the ruling or opinion referred
to in Section 10.01(j) from being obtained or (ii) Davis Polk & Wardwell from
delivering the opinion referred to in Section 10.03(b) as of the date hereof.
SECTION 5.18. Employee Benefit Plans and Labor Matters. Except as have
not had and would not reasonably be expected to have, individually or in the
aggregate, a Comcast Material Adverse Effect:
(a) Section 5.18(a) of the Comcast Disclosure Schedule contains a true
and complete list, as of the date hereof, of all Comcast Employee Plans and
all Comcast Benefit Arrangements. Copies of each Comcast Employee Plan and
each Comcast Benefit Arrangement (and, if applicable, related trust
agreements) and all amendments thereto have been made available to AT&T as
of the date hereof, together with the three most recent annual reports
(Form 5500, including, if applicable, Schedule B thereto) and the most
recent actuarial valuation report prepared in connection with any Comcast
Employee Plan.
(b) Neither Comcast nor any ERISA Affiliate nor any predecessor
thereof sponsors, maintains or contributes to any Comcast Employee Plan
subject to Title IV of ERISA. Neither Comcast nor any ERISA Affiliate has
any liability under Title IV of ERISA.
(c) As of September 30, 2001, the aggregate unfunded liability of
Comcast and any Comcast Subsidiary in respect of all Comcast Deferred
Compensation Plans, computed using reasonable actuarial assumptions and
determined as if all benefits under such plans were vested and payable as
of such date, did not exceed $180 million.
(d) Neither Comcast or any Comcast Subsidiary has any liability with
respect of post-retirement health, medical or life insurance benefits for
retired, former or current employees of Comcast or the Comcast Subsidiaries
except as required to avoid excise tax under Section 4980B of the Code.
(e) Each Comcast Employee Plan that is intended to be qualified under
Section 401(a) of the Code is so qualified and a favorable determination
letter is currently in effect for each such Comcast Employee Plan. To the
knowledge of Comcast, no fact or circumstance exists giving rise to a
material likelihood that such Comcast Employee Plan would not be treated as
qualified by the Internal Revenue Service.
(f) There is no contract, plan or arrangement (written or otherwise)
covering any employee or former employee of Comcast or any Comcast
Subsidiary that, individually or in the aggregate, could give rise to the
payment of any amount by Comcast or any Comcast Subsidiary that would not
be deductible pursuant to the terms of Sections 162(m) or 280G of the Code.
(g) Comcast has made available to AT&T, as of the date hereof, a true
and complete list and copies of each material Comcast International Plan,
other than plans mandated by applicable law. According to the actuarial
assumptions and valuations most recently used for the purpose of funding
each Comcast International Plan (or, if the same has no such assumptions
and valuations or is unfunded, according to actuarial assumptions and
valuations in use by the PBGC on the date hereof), as of December 31, 2000,
the total amount or value of the funds available under such Comcast
International Plan to pay benefits accrued thereunder or segregated in
respect of such accrued benefits, together with any reserve or accrual with
respect thereto, exceeded the present value of all benefits (actual or
contingent) accrued as of such date of all participants and past
participants therein in respect of which Comcast or any Comcast Subsidiary
has or would have after the Effective Time any obligation.
(h) Each Comcast Employee Plan, Comcast Benefit Arrangement and
Comcast International Plan has been maintained in compliance with its terms
and with the requirements prescribed by all applicable laws, statutes,
orders, rules and regulations (including any special provisions relating to
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registration or qualification where such plan was intended to be so
registered or qualified) and has been maintained in good standing with
applicable Governmental Authorities.
(i) There has been no amendment to, written interpretation or
announcement (whether or not written) by Comcast or any of its Affiliates
relating to, or change in employee participation coverage under, a Comcast
Employee Plan, Comcast Benefit Arrangement or Comcast International Plan
which would increase materially the expense of maintaining such plan above
the level of expense incurred in respect thereof for the fiscal year ended
December 31, 2000.
(j) No employee or former employee or independent contractor of
Comcast or any Comcast Subsidiary will become entitled to any bonus,
retirement, severance, job security or similar benefit or enhanced or
increased such benefit (including acceleration of vesting or exercise of an
incentive award) as a result of the transactions contemplated hereby
(either alone or together with any other event).
(k) Section 5.18(k) of the Comcast Disclosure Schedule sets forth a
list of all collective bargaining agreements to which Comcast or any of the
Comcast Subsidiaries is a party. Neither Comcast nor any of the Comcast
Subsidiaries is involved in or, to the knowledge of Comcast, threatened
with any labor dispute, work stoppage, labor strike, slowdown or grievance.
To the knowledge of Comcast, there is no organizing effort or
representation question at issue with respect to any collective bargaining
unit of Comcast or any of the Comcast Subsidiaries, or any employee of
Comcast or any of the Comcast Subsidiaries.
(l) There are no pending or threatened claims (other than claims for
benefits in the ordinary course), lawsuits or arbitrations that have been
asserted or instituted, and, to the knowledge of Comcast, no set of
circumstances exists that may reasonably give rise to a claim or lawsuit,
against any of the Comcast Benefit Arrangements, the Comcast Employee Plans
and the Comcast International Plans, any fiduciaries thereof with respect
to their duties thereto or the assets of any of the trusts thereunder, that
could reasonably be expected to result in any material liability of Comcast
or any of the Comcast Subsidiaries to the PBGC, the United States
Department of Treasury, the United States Department of Labor, any foreign
governmental authority, any Multiemployer Plan, any of the Comcast Benefit
Arrangements, the Comcast Employee Plans and the Comcast International
Plans, any participant therein, or any other Person.
SECTION 5.19. Environmental Matters. (a) Except as have not had and would
not reasonably be expected to have, individually or in the aggregate, a Comcast
Material Adverse Effect:
(i) no notice, notification, demand, request for information,
citation, summons or order has been received, no complaint has been filed,
no penalty has been assessed, and no investigation, action, claim, suit,
proceeding or review is pending or, to the knowledge of Comcast, threatened
by any Governmental Authority or other Person relating to or arising out of
any Environmental Law;
(ii) Comcast is and has been in compliance with all Environmental Laws
and all Environmental Permits; and
(iii) there are no liabilities of Comcast or any Comcast Subsidiary of
any kind whatsoever, whether accrued, contingent, absolute, determined,
determinable or otherwise arising under or relating to any Environmental
Law, and there are no facts, conditions, situations or set of circumstances
that would reasonably be expected to result in, or be the basis for, any
such liability.
(b) There have been no environmental investigations, studies, audits,
tests, reviews or other analyses conducted of which Comcast has knowledge in
relation to the current or prior business of Comcast or any Comcast Subsidiary
or any property or facility now or previously owned or leased by Comcast or any
Comcast Subsidiary that reveal matters that, individually or in the aggregate,
have had, or would reasonably be expected to have, a Comcast Material Adverse
Effect.
(c) For purposes of this Section 5.19, the terms "Comcast" and "Comcast
Subsidiary" shall include any entity that is, in whole or in part, a predecessor
of Comcast or any Comcast Subsidiary.
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SECTION 5.20. Intellectual Property. With such exceptions as,
individually or in the aggregate, have not had, and would not reasonably be
expected to have, a Comcast Material Adverse Effect, each of Comcast and the
Comcast Subsidiaries owns or has a valid license or other right to use each
trademark, service mark, trade name, invention, patent, trade secret, copyright,
know-how (including any registrations or applications for registration of any of
the foregoing) or any other similar type of proprietary intellectual property
right (collectively, the "COMCAST INTELLECTUAL PROPERTY") necessary to carry on
its business substantially as currently conducted. Neither Comcast nor any
Comcast Subsidiary has received any notice of infringement of or conflict with,
and, to Comcast's knowledge, there are no infringements of or conflicts with,
the rights of any Person with respect to the use of any Comcast Intellectual
Property in the conduct of Comcast's business that, in either such case,
individually or in the aggregate, have had or would reasonably be expected to
have, a Comcast Material Adverse Effect.
SECTION 5.21. Contracts. Neither Comcast nor any of the Comcast
Subsidiaries is a party to or bound by (a) any "material contract" (as defined
in Item 601(b)(10) of Regulation S-K of the SEC) or any agreement, contract or
commitment that would be such a "material contract" but for the exception for
contracts entered into in the ordinary course of business or (b) any
non-competition agreement or any other agreement or obligation that materially
limits or will materially limit Comcast or any of the Comcast Subsidiaries (or,
after the Mergers, Parent, AT&T Broadband or any of the AT&T Broadband
Subsidiaries) from engaging in the business of providing telephony, data
transmission services, cable television or programming content. With such
exceptions as, individually or in the aggregate, have not had, and would not
reasonably be expected to have, a Comcast Material Adverse Effect, (i) each of
the contracts, agreements and commitments of Comcast and the Comcast
Subsidiaries is valid and in full force and effect and (ii) neither Comcast nor
any of the Comcast Subsidiaries has violated any provision of, or committed or
failed to perform any act that, with or without notice, lapse of time, or both,
would constitute a default under the provisions of any such contract, agreement
or commitment. To the knowledge of Comcast, no counterparty to any such
contract, agreement or commitment has violated any provision of, or committed or
failed to perform any act that, with or without notice, lapse of time, or both
would constitute a default or other breach under the provisions of, such
contract, agreement or commitment, except for defaults or breaches that,
individually or in the aggregate, have not had, and would not reasonably be
expected to have, a Comcast Material Adverse Effect. Neither Comcast nor any
Comcast Subsidiary is a party to, or otherwise a guarantor of or liable with
respect to (including pursuant to any keepwell agreement), (i) any material
interest rate, currency or other swap or derivative transaction (other than
those entered into in the ordinary course of business solely for hedging
purposes) or (ii) any Indebtedness of any other Person except a wholly owned
Comcast Subsidiary. Neither Comcast nor any Comcast Subsidiary is a party to any
joint venture or partnership agreement pursuant to which it is obligated to make
capital contributions in excess of (x) $25,000,000 during the current or any
succeeding calendar year or (y) $100,000,000 during the remaining term of such
agreement. Subject to applicable confidentiality restrictions, Comcast has
provided or made available to AT&T prior to the date hereof a copy of each
agreement of the type described in clause (a) or (b) in the first sentence of
this Section 5.21, in clause (i) or (ii) of the second preceding sentence of
this Section 5.21 or in the immediately preceding sentence.
SECTION 5.22. Vote Required. The only votes of the holders of any class
or series of capital stock of Comcast that are or may be necessary to approve
and adopt this Agreement and the transactions contemplated hereby and the Parent
Charter that will be implemented at the Effective Time, including its corporate
governance provisions, are (i) the affirmative vote of the holders of shares of
Comcast Common Stock representing a majority of the votes cast by such holders
in favor of the approval and adoption of this Agreement and the transactions
contemplated hereby (the "COMCAST TRANSACTION APPROVAL") and (ii) the
affirmative vote of the holders of shares of Comcast Common Stock representing a
majority of the votes cast by such holders in favor of approval of the Parent
Charter, including its corporate governance provisions (the "COMCAST PARENT
CHARTER APPROVAL" and together with the Comcast Transaction Approval, the
"COMCAST SHAREHOLDERS' APPROVALS"). Notwithstanding the preceding sentence, the
Preferred Structure Approval is required in order to effect the provisions
hereof that are expressly subject to obtaining the Preferred Structure Approval.
Assuming Comcast Shareholder (or its successor) votes to approve
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proposals in respect of each of the Comcast Shareholders' Approvals in
accordance with the terms of the Support Agreement, no vote or consent of any
other holder of any class or series of capital stock of Comcast will be required
to approve such proposals, except that the Preferred Structure Approval is
required in order to effect the provisions hereof that are expressly subject to
obtaining the Preferred Structure Approval.
SECTION 5.23. Antitakeover Statutes. Comcast has taken all action
necessary to exempt the Comcast Merger and this Agreement and the transactions
contemplated hereby from the restrictions of Section 2555 of the PBCL or
otherwise to make such provisions inapplicable to this Agreement and the
transactions contemplated hereby, and, accordingly, neither of Section 2555 of
the PBCL nor any other antitakeover or similar statute or regulation applies or
purports to apply to any such transactions. No other "control share
acquisition", "fair price", "moratorium" or other antitakeover laws or
regulations enacted under any United States federal, state or local or foreign
laws apply to this Agreement or any of the transactions contemplated hereby.
SECTION 5.24. AT&T Securities. Neither Comcast nor any Comcast Subsidiary
owns any AT&T Securities.
SECTION 5.25. Transactions with Affiliates. Except as set forth in
Section 5.25 of the Comcast Disclosure Schedule, none of Comcast or any Comcast
Subsidiary is a party (and since December 31, 2000 none of Comcast or any
Comcast Subsidiary has been a party) to any material business arrangement or
business relationship with any Comcast Affiliate (other than another member of
the Comcast Group), and no Comcast Affiliate (other than another member of the
Comcast Group) owns (or has owned since such date) any material property or
right, tangible or intangible, that is used in the business of any member of the
Comcast Group.
SECTION 5.26. Investments. Section 5.26 of the Comcast Disclosure
Schedule sets forth a list of each material investment of Comcast or any Comcast
Subsidiary in any Person (other than a Subsidiary). Neither Comcast nor any
Comcast Subsidiary has any material liability in respect of any such investment.
SECTION 5.27. No Approval Rights. Comcast has not granted any third party
any right to approve any waiver that Comcast may elect to grant to AT&T under
Section 8.01(xiii).
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF AT&T
Except as set forth (i) in the AT&T Disclosure Schedule, regardless of
whether the relevant Section herein refers to the AT&T Disclosure Schedule, or
(ii) (except with respect to Sections 6.08(c), 6.26, 6.27 and 6.28) in the
Specified AT&T SEC Documents filed prior to the date hereof (to the extent the
relevance of any disclosure in any of such Specified AT&T SEC Documents to the
AT&T Broadband Group is reasonably apparent on the face of such disclosure),
AT&T represents and warrants to Comcast as follows:
SECTION 6.01. Corporate Existence and Power. Each of AT&T and the AT&T
Subsidiaries that is or will be a party to a Transaction Agreement is a
corporation or other entity duly incorporated or formed, validly existing and in
good standing under the laws of the state of its incorporation or formation and
has all corporate or other powers required to carry on its business as currently
conducted. Each of AT&T and the AT&T Subsidiaries that is or will be a party to
a Transaction Agreement is duly qualified to do business and is in good standing
in each jurisdiction where such qualification is necessary, except for those
jurisdictions where failure to be so qualified, individually or in the
aggregate, has not had and would not reasonably be expected to have an AT&T
Broadband Material Adverse Effect. AT&T has heretofore delivered or made
available to Comcast true and complete copies of the certificate of
incorporation, bylaws or other organizational document of AT&T and each AT&T
Subsidiary that is or will be a party to a Transaction Agreement, as currently
in effect.
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SECTION 6.02. Corporate Authorization. (a) The execution, delivery and
performance by AT&T and the AT&T Subsidiaries of the Transaction Agreements to
which they are or will be party and the consummation by AT&T and the AT&T
Subsidiaries of the transactions contemplated hereby and thereby are within
AT&T's and the AT&T Subsidiaries' corporate or other powers and, except for the
AT&T Shareholders' Approvals to the extent required by law, have been duly
authorized by all necessary corporate action on the part of AT&T and the AT&T
Subsidiaries. Each Transaction Agreement to which AT&T or any AT&T Subsidiary is
or will be a party constitutes or will when executed constitute a valid and
binding agreement of AT&T and each AT&T Subsidiary that is a party thereto,
enforceable against AT&T and each such AT&T Subsidiary in accordance with its
terms, except (i) as the same may be limited by applicable bankruptcy,
insolvency, moratorium or similar laws of general application relating to or
affecting creditors' rights and (ii) for the limitations imposed by general
principles of equity.
(b) At meetings duly called and held, AT&T's Board of Directors and AT&T
Broadband's Board of Directors (i) determined that this Agreement and the
transactions contemplated hereby are fair to and in the best interests of AT&T
shareholders and AT&T Broadband shareholders, respectively; (ii) approved and
adopted this Agreement and the transactions contemplated hereby; and (iii)
resolved to recommend approval of proposals in respect of each of the AT&T
Shareholders' Approvals by AT&T shareholders (subject to Section 8.02(b)) and
AT&T Broadband shareholders, respectively.
(c) At meetings duly called and held, each of AT&T's Board of Directors and
AT&T Broadband's Board of Directors unanimously approved the Separation and the
Distribution pursuant to the Separation and Distribution Agreement. AT&T and
AT&T Broadband have entered into the Separation and Distribution Agreement.
(d) AT&T, as sole shareholder of AT&T Broadband as of the date hereof, has
adopted this Agreement and the transactions contemplated hereby, including the
AT&T Broadband Merger.
SECTION 6.03. Governmental Authorization. The execution, delivery and
performance by AT&T and the AT&T Subsidiaries of the Transaction Agreements to
which they are or will be party and the consummation by AT&T and the AT&T
Subsidiaries of the transactions contemplated hereby and thereby require no
action by or in respect of, or filing with, any Governmental Authority, other
than (a) notices to, consents or waivers from, the relevant Franchising
Authorities in respect of the Franchises for the Systems owned and operated by
AT&T or the AT&T Subsidiaries (the "AT&T FRANCHISE CONSENTS" and, together with
the Comcast Franchise Consents, the "FRANCHISE CONSENTS")), and the FCC in
connection with a change of control and/or assignment of the holder of the FCC
licenses and social contracts of AT&T or the AT&T Subsidiaries (the "AT&T
LICENSE CONSENTS" and, together with the Comcast License Consents, the "LICENSE
CONSENTS"); (b) notices to, consents or waivers from the state public service
and public utilities commissions having jurisdiction over the assets of AT&T and
the AT&T Subsidiaries (the "AT&T PUC CONSENTS" and, together with the Comcast
PUC Consents, the "PUC CONSENTS"); (c) the filing of the DE Certificate of
Merger pursuant to the DGCL and appropriate documents with the relevant
authorities of other states in which AT&T is qualified to do business; (d)
compliance with any applicable requirements of the HSR Act; (e) compliance with
any applicable requirements of the 1933 Act, the 1934 Act and any other
applicable securities laws, whether United States state or foreign; (f) notices,
consents, waivers, approvals and filings necessary in connection with the
Separation and set forth on Section 6.03 of the AT&T Disclosure Schedule; and
(g) any actions or filings the absence of which, individually or in the
aggregate, would not reasonably be expected to have an AT&T Broadband Material
Adverse Effect or prohibit or materially impair or delay the ability of AT&T and
the AT&T Subsidiaries to consummate the transactions contemplated by this
Agreement and the other Transaction Agreements.
SECTION 6.04. Non-contravention. The execution, delivery and performance
by AT&T and the AT&T Subsidiaries of the Transaction Agreements to which they
are or will be party and the consummation by AT&T and the AT&T Subsidiaries of
the transactions contemplated hereby and thereby do not and will not (a)
contravene, conflict with, or result in any violation or breach of any provision
of the certificate of incorporation, bylaws or other organizational document of
AT&T or any AT&T Subsidiary; (b) assuming compliance with the matters referred
to in Section 6.03, contravene, conflict with or result in a violation or breach
of any provision of any applicable law, statute, ordinance, rule, regulation,
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judgment, injunction, order or decree; (c) assuming compliance with the matters
referred to in Section 6.03, require any consent or other action by any Person
under, constitute a default (or an event that, with or without notice or lapse
of time or both, would constitute a default) under, or cause or permit the
termination, cancellation, acceleration, triggering or other change of any right
or obligation or the loss of any benefit to which AT&T or any AT&T Subsidiary is
entitled under (i) any provision of any agreement or other instrument binding
upon AT&T or any AT&T Subsidiary or any of their respective assets or properties
or (ii) any license, franchise, permit, certificate, approval or other similar
authorization held by, or affecting, or relating in any way to, the assets,
properties or business of AT&T or any AT&T Subsidiary; or (d) result in the
creation or imposition of any Lien on any asset or property of AT&T or any AT&T
Subsidiary, other than such exceptions in the case of clauses (b), (c) and (d)
above as would not, individually or in the aggregate, reasonably be expected to
have an AT&T Broadband Material Adverse Effect or prohibit or materially impair
or delay the ability of AT&T or any AT&T Subsidiary to consummate the
transactions contemplated by any of the Transaction Agreements.
SECTION 6.05. Capitalization. (a) The authorized capital stock of AT&T
consists of (i) 16,400,000,000 shares of Common Stock, of which (A)
6,000,000,000 shares have been designated AT&T Common Stock, (B) 4,000,000,000
shares have been designated Class A Liberty Media Group Common Stock, (C)
400,000,000 shares have been designated Class B Liberty Media Group Common Stock
and (D) 6,000,000,000 shares have been designated Wireless Group Common Stock,
and (ii) 100,000,000 shares of preferred stock, $1.00 par value per share, of
which (A) 1,500,000 shares have been designated Wireless Group Preferred
Tracking Stock ("WIRELESS PREFERRED STOCK"), (B) 1,000,000 shares have been
designated Series E Convertible Preferred Stock ("SERIES E PREFERRED STOCK") and
(C) 2,000,000 shares have been designated Subsidiary Exchangeable Preferred
Stock ("AT&T SUBSIDIARY PREFERRED STOCK"). As of the close of business on
November 30, 2001, there were outstanding (1) 3,540,410,643 shares of AT&T
Common Stock (exclusive of all shares of restricted stock granted under any
compensatory plans or arrangements), (2) no shares of Class A Liberty Media
Group Common Stock, (3) no shares of Class B Liberty Media Group Common Stock,
(4) no shares of Wireless Group Common Stock, (5) compensatory stock options to
purchase an aggregate of 313,598,348 shares of AT&T Common Stock (of which
options to purchase an aggregate of approximately 170,242,786 shares of AT&T
Common Stock were exercisable), (6) phantom shares, stock units, stock
appreciation rights or other stock-based awards issued under any stock option,
compensation or deferred compensation plan or arrangement with respect to an
aggregate of 12,492,305 shares of AT&T Common Stock, (7) 52,808,000 shares of
AT&T Common Stock reserved for issuance under the Warrants issued pursuant to
the Warrant Agreement dated as of June 16, 1999 between AT&T and The Bank of New
York, as Warrant Agent (the "WARRANTS"), (8) 88,015,773 shares of AT&T Common
Stock issuable upon conversion of the QUIPS, (9) 52,347,844 shares of AT&T
Common Stock reserved for issuance upon exchange (and shares of AT&T Common
Stock issuable upon redemption in accordance with the terms thereof) of the
Class A Senior Cumulative Exchangeable Preferred Stock of TCI Pacific
Communications, Inc. (the "TCI PACIFIC PREFERRED STOCK"), (10) no shares of
Wireless Preferred Stock, (11) no shares of Series E Preferred Stock, (12)
759,792 shares of AT&T Subsidiary Preferred Stock held by AT&T Broadband
Subsidiaries that are directly or indirectly wholly owned Subsidiaries of AT&T
and (13) 94,163 shares of AT&T Subsidiary Preferred Stock held by T-Holdings
and/or one of its Subsidiaries. As of November 30, 2001, 851,782,532 shares of
AT&T Common Stock were held in treasury. No shares of AT&T Common Stock are held
by any Subsidiary of AT&T. All outstanding shares of capital stock of AT&T have
been, and all shares that may be issued pursuant to any compensatory plan or
arrangement will be, when issued in accordance with the respective terms
thereof, duly authorized, validly issued, fully paid and nonassessable.
(b) Except as set forth in this Section 6.05 and for changes since November
30, 2001 resulting from the exercise of options to purchase AT&T Common Stock,
stock appreciation rights with respect to AT&T Common Stock and AT&T restricted
stock or equity awards based upon shares of AT&T Common Stock outstanding on
such date, including, for the avoidance of doubt, options to purchase stock
under the AT&T ESPP (and the grant or award of options to purchase AT&T Common
Stock, stock appreciation rights with respect to AT&T Common Stock and AT&T
restricted stock or equity awards based upon shares of AT&T Common Stock in the
ordinary course of business and the exercise thereof, including, for
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the avoidance of doubt, options to purchase stock under the AT&T ESPP) or
resulting from the exercise or conversion of the Warrants or the QUIPS, or the
exchange or redemption of the TCI Pacific Preferred Stock, or as otherwise
expressly contemplated hereby or by the Transaction Agreements, there are no
outstanding (i) shares of capital stock or voting securities of AT&T, (ii)
securities of AT&T or any AT&T Subsidiary convertible into or exchangeable for
shares of capital stock or voting securities of AT&T or (iii) options or other
rights to acquire from AT&T or any AT&T Subsidiary, or other obligations of AT&T
or any AT&T Subsidiary to issue, any capital stock, voting securities or
securities convertible into or exchangeable for capital stock or voting
securities of AT&T. There are no outstanding obligations of AT&T or any AT&T
Subsidiary to repurchase, redeem or otherwise acquire any of the securities
referred to in clause (i), (ii) or (iii) above (collectively, the "AT&T
SECURITIES").
SECTION 6.06. AT&T Broadband and AT&T Broadband Subsidiaries. (a) Each of
AT&T Broadband and the AT&T Broadband Subsidiaries is a corporation or other
legal entity duly organized, validly existing and in good standing under the
laws of its jurisdiction of organization and has all corporate, partnership or
other similar powers required to carry on its business as currently conducted,
other than such exceptions as, individually or in the aggregate, have not had
and would not reasonably be expected to have an AT&T Broadband Material Adverse
Effect. Each of AT&T Broadband and the AT&T Broadband Subsidiaries is duly
qualified to do business as a foreign corporation or other foreign legal entity
and is in good standing in each jurisdiction where such qualification is
necessary, other than such exceptions as, individually or in the aggregate, have
not had and would not reasonably be expected to have an AT&T Broadband Material
Adverse Effect. Section 6.06(a) of the AT&T Disclosure Schedule sets forth a
list of all AT&T Significant Broadband Subsidiaries and their respective
jurisdictions of organization.
(b) All of the outstanding capital stock of, or other voting securities or
ownership interests in, AT&T Broadband is (as of the date hereof) and will be
(immediately prior to the Distribution) directly owned by AT&T, free and clear
of any Lien and free of any other limitation or restriction (including any
restriction on the right to vote, sell or otherwise dispose of such capital
stock or other voting securities or ownership interests). All of the outstanding
capital stock of, or other voting securities or ownership interests in, each
AT&T Significant Broadband Subsidiary is, as of the date hereof, owned by AT&T
and will, at the Effective Time, be owned by AT&T Broadband, directly or
indirectly, free and clear of any Lien and free of any other limitation or
restriction (including any restriction on the right to vote, sell or otherwise
dispose of such capital stock or other voting securities or ownership
interests). There are no outstanding (i) securities of AT&T or any AT&T
Subsidiary convertible into or exchangeable for shares of capital stock or other
voting securities or ownership interests in AT&T Broadband or any AT&T
Significant Broadband Subsidiary or (ii) options or other rights to acquire from
AT&T or any AT&T Subsidiary, or other obligations of AT&T or any AT&T Subsidiary
to issue, any capital stock or other voting securities or ownership interests
in, or any securities convertible into or exchangeable for any capital stock or
other voting securities or ownership interests in, AT&T Broadband or any AT&T
Significant Broadband Subsidiary. Except for the TCI Pacific Preferred Stock,
there are no outstanding obligations of AT&T or any AT&T Subsidiary to
repurchase, redeem or otherwise acquire any of the items referred to in clauses
(i) and (ii) above.
(c) At the time of the Distribution, subject to Section 4.01 of the
Separation and Distribution Agreement, the issued and outstanding capital stock
of AT&T Broadband will consist of a number of shares of AT&T Broadband Common
Stock equal to the number of then outstanding shares of AT&T Common Stock. In
the Distribution, subject to Section 4.01 of the Separation and Distribution
Agreement, AT&T will distribute to each holder of AT&T Common Stock one share of
AT&T Broadband Common Stock per share of AT&T Common Stock. All of the shares of
AT&T Broadband Common Stock have been or will be prior to the Effective Time
duly authorized and validly issued and fully paid and nonassessable. After
giving effect to the Distribution, subject to Section 4.01 of the Separation and
Distribution Agreement, neither AT&T nor any AT&T Subsidiary will own any shares
of AT&T Broadband Common Stock or any other capital stock or other equity
interest in AT&T Broadband.
SECTION 6.07. SEC Filings. (a) AT&T has delivered or made available to
Comcast (i) AT&T's annual reports on Form 10-K for its fiscal years ended
December 31, 2000, 1999 and 1998, (ii) AT&T's
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proxy or information statements relating to meetings of, or actions taken
without a meeting by, AT&T shareholders held since December 31, 1998, and (iii)
all of AT&T's other reports, statements, schedules and registration statements
filed with the SEC since December 31, 1998 (the documents referred to in clauses
(i), (ii) and (iii) above, collectively, the "AT&T SEC DOCUMENTS").
(b) As of its filing date (and, if amended or superceded by a filing prior
to the date of this Agreement or the Effective Time, then on the date of such
filing), each AT&T SEC Document complied as to form in all material respects
with the applicable requirements of the 1933 Act and the 1934 Act, as the case
may be.
(c) As of its filing date (and, if amended or superceded by a filing prior
to the date of this Agreement or the Effective Time, then on the date of such
filing), each AT&T SEC Document filed pursuant to the 1934 Act did not contain
any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading.
(d) Each AT&T SEC Document that is a registration statement, as amended or
supplemented, if applicable, filed pursuant to the 1933 Act, as of the date such
registration statement or amendment became effective, did not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading.
SECTION 6.08. Financial Statements. (a) The audited consolidated
financial statements and unaudited consolidated interim financial statements of
AT&T included in the AT&T SEC Documents fairly present, in all material
respects, in conformity with GAAP applied on a consistent basis (except as may
be indicated in the notes thereto), the consolidated financial position of AT&T
and its consolidated Subsidiaries as of the respective dates thereof and their
consolidated results of operations and cash flows for the periods then ended
(subject to normal year-end adjustments in the case of any unaudited interim
financial statements).
(b) The unaudited combined financial statements and unaudited combined
interim financial statements of the AT&T Broadband Group are attached as Exhibit
E, and subject to and reflecting the assumptions set forth in the notes thereto,
fairly present, in all material respects, in conformity with GAAP applied on a
consistent basis (except as may be indicated in the notes thereto), the combined
financial position of the AT&T Broadband Group as of the respective dates
thereof and its combined results of operations and cash flows for the periods
then ended (subject to normal year-end adjustments in the case of any unaudited
interim financial statements).
(c) Except as set forth in Section 6.08(c) of the AT&T Disclosure Schedule,
the financial statements as of and for the period ending September 30, 2001
attached as Exhibit E reflect in all material respects the transactions
contemplated by the Ancillary Agreements as if such agreements had been in
effect during the nine month period covered by such financial statements.
Section 6.08(c) of the AT&T Disclosure Schedule describes all material
allocations and charges relating to affiliated and intercompany transactions
used in connection with the preparation of the financial statements attached as
Exhibit E.
SECTION 6.09. Information Supplied. The information supplied by AT&T for
inclusion or incorporation in the Registration Statement shall not at the time
the Registration Statement is declared effective by the SEC contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. The information
supplied by AT&T for inclusion in the Joint Proxy Statement shall not, on the
date the Joint Proxy Statement is first mailed to the shareholders of each of
Comcast and AT&T, at the time of the Comcast Shareholders' Meeting, at the time
of the AT&T Shareholders' Meeting or at the Effective Time, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
SECTION 6.10. Absence of Certain Changes. Since the AT&T Broadband
Balance Sheet Date, and except as expressly contemplated hereby or by the
Transaction Agreements, the business of the AT&T Broadband Group, AT&T (to the
extent relating to the AT&T Broadband Group), AT&T Broadband and
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the AT&T Broadband Subsidiaries has been conducted for the benefit of the AT&T
Broadband Group (it being understood that since the AT&T Broadband Balance Sheet
Date the AT&T Communications Group has been conducted for the benefit of the
AT&T Communications Group and that the interests of the AT&T Broadband Group and
the AT&T Communications Group may not have coincided) and in the ordinary course
of business consistent with past practices, and there has not been (i) any
event, occurrence or development of a state of circumstances or facts that,
individually or in the aggregate, has had or would reasonably be expected to
have an AT&T Broadband Material Adverse Effect or (ii) any action, event,
occurrence or transaction that would have been prohibited by clause (iii), (iv),
(vii), (viii), (ix) or (xviii) of Section 8.01 if this Agreement had been in
effect at the time thereof or any agreement, arrangement or commitment in
respect of any action, event, occurrence or transaction that would have been
prohibited by the foregoing clauses of Section 8.01 if this Agreement had been
in effect at the time thereof.
SECTION 6.11. No Undisclosed Material Liabilities. There are no
liabilities or obligations of the AT&T Broadband Group, AT&T (to the extent
relating to the AT&T Broadband Group), AT&T Broadband or any AT&T Broadband
Subsidiary of any kind whatsoever, whether accrued, contingent, absolute,
determined, determinable or otherwise, and there is no existing condition,
situation or set of circumstances that would reasonably be expected to result in
such a liability or obligation, other than:
(a) liabilities or obligations disclosed and provided for in the AT&T
Broadband Balance Sheet or in the notes thereto;
(b) liabilities or obligations incurred since the AT&T Broadband
Balance Sheet Date in the ordinary course of business of the AT&T Broadband
Group consistent with past practice;
(c) liabilities or obligations under commercial transactions and
agreements in accordance with their terms or arising in compliance with
applicable laws, statutes, ordinances, rules or regulations; or
(d) liabilities or obligations that, individually or in the aggregate,
have not had and would not reasonably be expected to have an AT&T Broadband
Material Adverse Effect.
SECTION 6.12. Compliance with Laws and Court Orders. Except as set forth
in Section 6.12 of the AT&T Disclosure Schedule, AT&T (to the extent relating to
the AT&T Broadband Group), AT&T Broadband and the AT&T Broadband Subsidiaries
hold all licenses, franchises, certificates, consents, permits, qualifications
and authorizations from all Governmental Authorities necessary for the lawful
conduct of their business, except where the failure to hold any of the
foregoing, individually or in the aggregate, has not had and would not
reasonably be expected to have an AT&T Broadband Material Adverse Effect. AT&T
(to the extent relating to the AT&T Broadband Group), AT&T Broadband and each of
the AT&T Broadband Subsidiaries are, and have been in compliance with, and to
the knowledge of AT&T, are not under investigation with respect to and have not
been threatened to be charged with or given notice of any violation of, any such
license, franchise, certificate, consent, permit, qualification or authorization
or any applicable law, statute, ordinance, rule, regulation, judgment,
injunction, order or decree, except for failures to comply or violations that,
individually or in the aggregate, have not had and would not reasonably be
expected to have an AT&T Broadband Material Adverse Effect.
SECTION 6.13. Litigation. There is no action, suit, investigation or
proceeding (or any basis therefor) pending against, or, to the knowledge of
AT&T, threatened against or affecting AT&T, the AT&T Broadband Group or any AT&T
Subsidiary, or any of their respective assets or properties before any court or
arbitrator or before or by any other Governmental Authority, that, individually
or in the aggregate, would reasonably be expected to have an AT&T Broadband
Material Adverse Effect.
SECTION 6.14. Finders' Fees. Except for Credit Suisse First Boston and
Goldman Sachs & Co., whose fees, subject to Section 11.03(a), will be paid by
AT&T Broadband, there is no investment banker, broker, finder or other
intermediary that has been retained by or is authorized to act on behalf of AT&T
or any AT&T Subsidiary who might be entitled to any fee or commission in
connection with the transactions contemplated by this Agreement and the other
Transaction Agreements. A copy of AT&T's engagement agreement with each of
Goldman Sachs & Co. and Credit Suisse First Boston have been provided to
Comcast.
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SECTION 6.15. Opinion of Financial Advisor. AT&T has received an opinion
of each of Credit Suisse First Boston and Goldman, Sachs & Co., financial
advisors to AT&T, to the effect that, as of the date hereof, the exchange ratio
in the AT&T Broadband Merger is fair, from a financial point of view, to the
shareholders of AT&T who will become shareholders of AT&T Broadband pursuant to
the Separation and Distribution Agreement (other than Comcast and its
Affiliates).
SECTION 6.16. Taxes. Except as would not, individually or in the
aggregate, reasonably be expected to have an AT&T Broadband Material Adverse
Effect, (a) all AT&T and AT&T Subsidiary Tax Returns required to be filed on or
before the Effective Time with any taxing authority by, or with respect to, AT&T
and the AT&T Subsidiaries have been or will be timely filed (taking into account
extensions) and are or will be correct in all respects (other than with respect
to Taxes for which adequate reserves are reflected on the AT&T Balance Sheet
and, to the extent related to the AT&T Broadband Group, AT&T Broadband or an
AT&T Broadband Subsidiary, on the AT&T Broadband Balance Sheet); (b) AT&T and
the AT&T Subsidiaries have timely paid or will timely pay all Taxes shown as due
and payable on the AT&T Tax Returns that have been or will be so filed, and, as
of the time of filing, the AT&T Tax Returns correctly reflected the facts
regarding the income, business, assets, operations, activities and the status of
AT&T and the AT&T Subsidiaries (other than with respect to Taxes for which
adequate reserves are reflected on the AT&T Balance Sheet and, to the extent
related to the AT&T Broadband Group, AT&T Broadband or an AT&T Broadband
Subsidiary, on the AT&T Broadband Balance Sheet); (c) AT&T and the AT&T
Subsidiaries have made provision for all Taxes payable by AT&T and the AT&T
Subsidiaries for which no AT&T Tax Return has yet been filed; (d) there is no
action, suit, proceeding, audit or claim currently proposed or pending against
or with respect to AT&T or any AT&T Subsidiary in respect of any Tax where there
is a reasonable possibility of an adverse determination; (e) the United States
federal income Tax Returns of AT&T and the AT&T Subsidiaries have been examined
and settled with the IRS (or the applicable statutes of limitation for the
assessment of United States federal income Taxes for such periods have expired)
for all years through 1992; (f) no extension of the statute of limitations on
the assessment of any Taxes has been granted by AT&T or any AT&T Subsidiary and
is currently in effect; (g) except for complete and accurate copies of Tax
sharing agreements and amendments thereto made available to Comcast prior to the
execution of this Agreement and listed in Section 6.16 of the AT&T Disclosure
Schedule, no agreements relating to the allocation or sharing of Taxes exist
between AT&T and/or any of the AT&T Subsidiaries, on the one hand, and a third
party, on the other hand; and (h) there are no Liens for Taxes on any of the
assets of AT&T or any AT&T Subsidiary except Liens for current Taxes not yet due
and payable.
SECTION 6.17. Tax Opinions. Neither AT&T nor any AT&T Subsidiary has
taken any action or knows of any facts or circumstances relating to AT&T or any
AT&T Subsidiary that would prevent (i) the ruling or opinion referred to in
Section 10.01(j) from being obtained or (ii) Wachtell, Lipton, Rosen & Katz from
delivering the opinion referred to in Section 10.02(b) as of the date hereof.
SECTION 6.18. Employee Benefit Plans and Labor Matters. Except as have
not had and would not reasonably be expected to have, individually or in the
aggregate, an AT&T Broadband Material Adverse Effect:
(a) Section 6.18(a) of the AT&T Disclosure Schedule contains a true
and complete list, as of the date hereof, of all Broadband Employee Plans
and all Broadband Benefit Arrangements. Copies of each Broadband Employee
Plan and Broadband Benefit Arrangement (and, if applicable, related trust
agreements) and all amendments thereto have been made available to Comcast
as of the date hereof, together with the three most recent annual reports
(Form 5500 including, if applicable, Schedule B thereto) and the most
recent actuarial valuation report prepared in connection with any Broadband
Employee Plan.
(b) No "accumulated funding deficiency" (as defined in Section 412 of
the Code) has been incurred with respect to any Broadband Employee Plan
subject to such Section 412 of the Code, whether or not waived. No
"reportable event" (within the meaning of Section 4043 of ERISA) for which
the 30-day notice period has not been waived, and no event described in
Section 4062 or 4063 of ERISA, has occurred in connection with any
Broadband Employee Plan. Neither AT&T nor any
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ERISA Affiliate of AT&T has (i) engaged in, or is a successor or parent
corporation to an entity that has engaged in, a transaction described in
Sections 4069 or 4212(c) of ERISA or (ii) incurred, or reasonably expects
to incur prior to the Effective Time, (A) any liability under Title IV of
ERISA arising in connection with the termination of, or a complete or
partial withdrawal from, any plan covered or previously covered by Title IV
of ERISA or (B) any liability under Section 4971 of the Code that in either
case could become a liability of Parent, AT&T Broadband, any AT&T Broadband
Subsidiary, Comcast, any Comcast Subsidiary, or any of their respective
ERISA Affiliates after the Effective Time. No Broadband Employee Plan is a
Multiemployer Plan.
(c) As of June 30, 2001, the fair market value of the assets of each
Broadband Pension Plan (excluding for these purposes any accrued but unpaid
contributions) exceeded the present value of the pension benefit
obligations accrued under such Broadband Pension Plan calculated pursuant
to SFAS No. 87, "Employers' Accounting for Pensions". As of September 30,
2001, the aggregate unfunded liability of AT&T and any AT&T Subsidiary in
respect of all Broadband Deferred Compensation Plans, computed using
reasonable actuarial assumptions and determined as if all benefits under
such plans were vested and payable as of such date, did not exceed $132
million.
(d) Neither AT&T, AT&T Broadband nor any AT&T Broadband Subsidiary has
any liability with respect of post-retirement health, medical or life
insurance benefits for retired, former or current Broadband Employees
except as to required to avoid excise tax under Section 4980B of the Code.
(e) Each Broadband Employee Plan that is intended to be qualified
under Section 401(a) of the Code is so qualified and a favorable
determination letter is currently in effect for each such Broadband
Employee Plan. To the knowledge of AT&T, no fact or circumstance exists
giving rise to a material likelihood that such Broadband Employee Plan
would not be treated as qualified by the Internal Revenue Service.
(f) There is no contract, plan or arrangement (written or otherwise)
covering any Broadband Employee that, individually or in the aggregate,
could give rise to the payment of any amount by AT&T Broadband or any of
the AT&T Broadband Subsidiaries that would not be deductible pursuant to
the terms of Sections 162(m) or 280G of the Code.
(g) AT&T has made available to Comcast, as of the date hereof, a true
and complete list and copies of each material Broadband International Plan,
other than plans mandated by applicable law.
(h) Each Broadband Employee Plan, Broadband Benefit Arrangement and
Broadband International Plan has been maintained in compliance with its
terms and with the requirements prescribed by all applicable laws,
statutes, orders, rules and regulations (including any special provisions
relating to registration or qualification where such plan was intended to
be so registered or qualified) and has been maintained in good standing
with applicable Governmental Authorities.
(i) There has been no amendment to, written interpretation or
announcement (whether or not written) by AT&T or any of its Affiliates
relating to, or change in employee participation coverage under, a
Broadband Employee Plan, Broadband Benefit Arrangement or Broadband
International Plan which would increase materially the expense of
maintaining such plan above the level of expense incurred in respect
thereof for the fiscal year ended December 31, 2000.
(j) No Broadband Employee, former Broadband Employee or independent
contractor of AT&T Broadband or any of the AT&T Broadband Subsidiaries,
will become entitled to any bonus, retirement, severance, job security or
similar benefit or enhanced such benefit (including acceleration of vesting
or exercise of an incentive award) as a result of the transactions
contemplated hereby (either alone or together with any other event).
(k) Section 6.18(k) of the AT&T Disclosure Schedule sets forth a list
of all collective bargaining agreements to which AT&T Broadband or any of
the AT&T Broadband Subsidiaries is a party or otherwise covering any
employee of AT&T Broadband or any of the AT&T Broadband Subsidiaries. None
of AT&T, AT&T Broadband nor any of the AT&T Broadband Subsidiaries is
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involved in, or to the knowledge of AT&T, threatened with any labor
dispute, work stoppage, labor strike, slowdown or grievance relating to the
AT&T Broadband Group. To the knowledge of AT&T, there is no organizing
effort or representation question at issue with respect to any collective
bargaining unit of AT&T Broadband or any of the AT&T Broadband Subsidiaries
or any employee of AT&T Broadband or any of the AT&T Broadband
Subsidiaries.
(l) There are no pending or threatened claims (other than claims for
benefits in the ordinary course), lawsuits or arbitrations that have been
asserted or instituted, and, to the knowledge of AT&T, no set of
circumstances exists that may reasonably give rise to a claim or lawsuit,
against any of the Broadband Benefit Arrangements, the Broadband Employee
Plans and the Broadband International Plans, any fiduciaries thereof with
respect to their duties thereto or the assets of any of the trusts
thereunder, that could reasonably be expected to result in any material
liability of AT&T or any of the AT&T Subsidiaries to the PBGC, the United
States Department of Treasury, the United States Department of Labor, any
foreign governmental authority, any Multiemployer Plan, any of the
Broadband Benefit Arrangements, the Broadband Employee Plans and the
Broadband International Plans, any participant therein, or any other
Person.
SECTION 6.19. Environmental Matters. (a) Except as have not had and would
not reasonably be expected to have, individually or in the aggregate, an AT&T
Broadband Material Adverse Effect:
(i) no notice, notification, demand, request for information,
citation, summons or order has been received, no complaint has been filed,
no penalty has been assessed, and no investigation, action, claim, suit,
proceeding or review is pending or, to the knowledge of AT&T, threatened by
any Governmental Authority or other Person with respect to AT&T (to the
extent relating to the AT&T Broadband Group), AT&T Broadband, any AT&T
Broadband Subsidiary or the AT&T Broadband Group relating to or arising out
of any Environmental Law;
(ii) each member of AT&T (to the extent relating to the AT&T Broadband
Group), AT&T Broadband, the AT&T Broadband Subsidiaries and the AT&T
Broadband Group is and has been in compliance with all Environmental Laws
and all Environmental Permits; and
(iii) there are no liabilities of AT&T (to the extent relating to the
AT&T Broadband Group), AT&T Broadband, the AT&T Broadband Subsidiaries or
the AT&T Broadband Group of any kind whatsoever, whether accrued,
contingent, absolute, determined, determinable or otherwise arising under
or relating to any Environmental Law, and there are no facts, conditions,
situations or set of circumstances that would reasonably be expected to
result in, or be the basis for, any such liability.
(b) There have been no environmental investigations, studies, audits,
tests, reviews or other analyses conducted of which AT&T has knowledge in
relation to the current or prior business of the AT&T Broadband Group, AT&T (to
the extent relating to the AT&T Broadband Group), AT&T Broadband or any AT&T
Broadband Subsidiary or any property or facility now or previously owned or
leased by the AT&T Broadband Group, AT&T (to the extent relating to the AT&T
Broadband Group), AT&T Broadband or any AT&T Broadband Subsidiary that reveal
matters that, individually or in the aggregate, have had, or would reasonably be
expected to have, an AT&T Broadband Material Adverse Effect.
(c) For purposes of this Section 6.19, the terms "AT&T Broadband Group",
"AT&T (to the extent relating to the AT&T Broadband Group)", "AT&T Broadband"
and "AT&T Broadband Subsidiary" shall include any entity that is, in whole or in
part, a predecessor of the AT&T Broadband Group, AT&T (to the extent relating to
the AT&T Broadband Group), AT&T Broadband or any AT&T Broadband Subsidiary.
SECTION 6.20. Intellectual Property. The Transaction Agreements, taken as
a whole, including the Separation and Distribution Agreement and the assets
transferred thereby, the Intellectual Property Agreement (as defined in the
Separation and Distribution Agreement) and the intellectual property licenses
granted thereby and the other Ancillary Agreements and all services furnished
thereby provide sufficient rights in or access to intellectual property owned by
AT&T to enable the AT&T Broadband Group, without violating such AT&T
intellectual property, to conduct its business immediately after the
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Effective Time in all material respects as that business was conducted by the
AT&T Broadband Group immediately prior to the Effective Time. Neither AT&T nor
any AT&T Subsidiary has received any notice of infringement of or conflict with,
and, to AT&T's knowledge, there are no infringements of or conflicts with, the
rights of any Person with respect to the use of any trademark, service mark,
trade name, invention, patent, trade secret, copyright, know-how (including any
registrations or applications for registration of any of the foregoing) or any
other similar type of proprietary intellectual property right that, in either
such case, individually or in the aggregate, have had or would reasonably be
expected to have, an AT&T Broadband Material Adverse Effect.
SECTION 6.21. Contracts. Except as set forth in Section 6.21 of the AT&T
Disclosure Schedule and except as may relate to TWE or At Home, neither AT&T (to
the extent relating to the AT&T Broadband Group), AT&T Broadband nor any of the
AT&T Broadband Subsidiaries is a party to or bound by (a) any "material
contract" (as defined in Item 601(b)(10) of Regulation S-K of the SEC) or any
agreement, contract or commitment that would be such a "material contract" but
for the exception for contracts entered into in the ordinary course of business,
(b) any non-competition agreement or any other agreement or obligation that
materially limits or will materially limit AT&T Broadband, the AT&T Broadband
Group or the AT&T Broadband Subsidiaries (or, after the Mergers, Parent, Comcast
or any of the Comcast Subsidiaries) from engaging in the business of providing
telephony, data transmission services, cable television or programming content,
or (c) any agreement, contract or commitment to which Liberty Media Corporation,
AT&T Wireless or any of their respective Subsidiaries is a party that is
material to or not in the ordinary course of business of the AT&T Broadband
Group. With such exceptions as, individually or in the aggregate, have not had,
and would not reasonably be expected to have, an AT&T Broadband Material Adverse
Effect and except as may relate to TWE or At Home, (i) each of the contracts,
agreements and commitments of the AT&T Broadband Group, AT&T (to the extent
relating to the AT&T Broadband Group), AT&T Broadband and the AT&T Broadband
Subsidiaries is valid and in full force and effect and (ii) neither the AT&T
Broadband Group, AT&T (to the extent relating to the AT&T Broadband Group), AT&T
Broadband nor any of the AT&T Broadband Subsidiaries has violated any provision
of, or committed or failed to perform any act that, with or without notice,
lapse of time, or both, would constitute a default under the provisions of, any
such contract, agreement or commitment. To the knowledge of AT&T, no
counterparty to any such contract, agreement or commitment has violated any
provision of, or committed or failed to perform any act that, with or without
notice, lapse of time, or both would constitute a default or other breach under
the provisions of such contract, agreement or commitment, except for defaults or
breaches that, individually or in the aggregate, have not had, or would not
reasonably be expected to have, an AT&T Broadband Material Adverse Effect.
Except as set forth in Section 6.21 of the AT&T Disclosure Schedule and except
as may relate to TWE or At Home, neither AT&T (to the extent relating to the
AT&T Broadband Group), the AT&T Broadband Group, AT&T Broadband nor any AT&T
Broadband Subsidiary is a party to, or otherwise a guarantor of or liable with
respect to (including pursuant to any keepwell agreement), (i) any material
interest rate, currency or other swap or derivative transaction (other than
those entered into in the ordinary course of business solely for hedging
purposes) or (ii) any Indebtedness of any other Person except a wholly owned
AT&T Broadband Subsidiary. Except as set forth in Section 6.21 of the AT&T
Disclosure Schedule and except as may relate to TWE or At Home, neither AT&T (to
the extent relating to the AT&T Broadband Group), the AT&T Broadband Group, AT&T
Broadband nor any AT&T Broadband Subsidiary is a party to any joint venture or
partnership agreement pursuant to which it is obligated to make capital
contributions in excess of (x) $25,000,000 during the current or any succeeding
calendar year or (y) $100,000,000 during the remaining term of such agreement.
Subject to applicable confidentiality restrictions, AT&T has provided or made
available to Comcast prior to the date hereof a copy of each agreement of the
type described in clause (a), (b) or (c) of the first sentence of this Section
6.21, in clause (i) or (ii) of the second preceding sentence of this Section
6.21 or in the immediately preceding sentence.
SECTION 6.22. AT&T Shareholder Vote. Assuming the receipt of (i) the
affirmative vote of the holders of a majority of the outstanding shares of AT&T
Common Stock in favor of this Agreement and the transactions contemplated hereby
(the "AT&T TRANSACTION APPROVAL") and (ii) the affirmative vote of
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the holders of a majority of the votes cast by the holders of AT&T Common Stock
in favor of approval of the Parent Charter to be implemented at the Effective
Time, including its corporate governance provisions (the "AT&T PARENT CHARTER
APPROVAL" and together with the AT&T Transaction Approval, the "AT&T
SHAREHOLDERS' APPROVALS"), which the parties acknowledge are conditions to the
obligations of the parties to effect the Separation, Distribution and Mergers,
no other vote of the holders of any class or series of capital stock of AT&T
will be necessary to approve and adopt this Agreement and the transactions
contemplated hereby, including the Distribution, or the Parent Charter to be
implemented at the Effective Time, including its corporate governance
provisions. The only vote of the holders of any class or series of capital stock
of any AT&T Subsidiary necessary to approve and adopt this Agreement and the
transactions contemplated hereby, including the AT&T Broadband Merger, or the
Parent Charter to be implemented at the Effective Time, including its corporate
governance provisions, is the affirmative vote of the holders of a majority of
the outstanding shares of AT&T Broadband Common Stock, which vote has previously
been obtained.
SECTION 6.23. Antitakeover Statutes. AT&T Broadband has taken all action
necessary to exempt the AT&T Broadband Merger and this Agreement and the
transactions contemplated hereby from the restrictions of Section 203 of the
DGCL or otherwise to make such provisions inapplicable to this Agreement and the
transactions contemplated hereby, and, accordingly, neither Section 203 of the
DGCL nor any other antitakeover or similar statute or regulation applies or
purports to apply to any such transactions. No other "control share
acquisition", "fair price", "moratorium" or other antitakeover laws or
regulations enacted under any United States federal, state or local or foreign
laws apply to this Agreement or any of the transactions contemplated hereby.
SECTION 6.24. Comcast Securities. Neither AT&T nor any of the AT&T
Subsidiaries owns any Comcast Securities.
SECTION 6.25. TWE; At Home. (a) Section 6.25(a) of the AT&T Disclosure
Schedule sets forth a list of each material agreement, contract or commitment to
which AT&T or any AT&T Subsidiary of AT&T is a party that amends the TWE
Partnership Agreement or any related agreement or that materially affects the
rights or obligations of AT&T (to the extent relating to the AT&T Broadband
Group), AT&T Broadband, the AT&T Broadband Group or the AT&T Broadband
Subsidiaries with respect to TWE or any TWE Subsidiary or that was entered into
in connection with or relates to AT&T's TWE interest (the "TWE CONTRACTS"). None
of AT&T (to the extent relating to the AT&T Broadband Group), AT&T Broadband or
any of the AT&T Broadband Subsidiaries has violated any material provision of,
or committed or failed to perform any act that, with or without notice, lapse of
time, or both, would constitute a default under any material provision of, any
such material contract, agreement or commitment or the TWE Partnership
Agreement, except for defaults or breaches that, individually or in the
aggregate, have not had, or would not reasonably be expected to have, an AT&T
Broadband Material Adverse Effect. The AT&T Broadband Group owns a Class A
Partnership Interest consisting of (x) a Common Sub-Account, entitling the AT&T
Broadband Group to a Participating Percentage Share of 25.51% and (y) an A
Sub-Account, each as described in Article VII of the TWE Partnership Agreement
and as adjusted pursuant to Article VIII of the TWE Partnership Agreement
(capitalized terms used in this sentence and not defined have the meanings set
forth in the TWE Partnership Agreement). The registration rights provisions of
Article 13 of the TWE Partnership Agreement are enforceable in accordance with
their terms and subject to the conditions thereof, except (i) as the same may be
limited by applicable bankruptcy, insolvency, moratorium or similar laws of
general application relating to or affecting creditors' rights and (ii) for the
limitations imposed by general principles of equity. AT&T has provided or made
available to Comcast prior to the date hereof a copy of each TWE Contract.
(b) Section 6.25(b) of the AT&T Disclosure Schedule sets forth a list of
each material agreement, contract or commitment between At Home and its
Subsidiaries, on the one hand, and AT&T (to the extent relating to the AT&T
Broadband Group other than At Home and its Subsidiaries), the AT&T Broadband
Group (other than At Home and its Subsidiaries), AT&T Broadband or any of the
AT&T Broadband Subsidiaries (other than At Home and its Subsidiaries), on the
other hand, that is not described by any of the following: (i) it has been
rejected in bankruptcy proceedings, (ii) it has been filed
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with the SEC by At Home, AT&T or AT&T Broadband, LLC (or its predecessor) or
(iii) Comcast or any of its Subsidiaries is a party thereto or to a comparable
agreement, contract or commitment. None of AT&T or any of its Subsidiaries
(other than At Home and its Subsidiaries) has violated any provision of, or
committed or failed to perform any act that, with or without notice, lapse of
time or both, would constitute a default under any provision of, any such
material contract, agreement or commitment, except for defaults or breaches
that, individually or in the aggregate, have not had, or would not reasonably be
expected to have, an AT&T Broadband Material Adverse Effect. AT&T has provided
or made available to Comcast prior to the date hereof a copy of each agreement
of the type described in the first sentence of this Section 6.25(b).
SECTION 6.26. Intercompany Transactions. (a) Except as described in
Section 6.26(a) of the AT&T Disclosure Schedule, since December 31, 1999 through
the date hereof there have been no material transactions (including allocations)
between the AT&T Broadband Group, on the one hand, and the AT&T Communications
Group, on the other hand.
(b) Except as described in Section 6.26(b) of the AT&T Disclosure Schedule,
since the AT&T Broadband Balance Sheet Date through the date hereof there have
been no material transactions (including allocations) between any AT&T Broadband
Entity, on the one hand, and any member of the AT&T Communications Group, on the
other hand.
SECTION 6.27. Sufficiency of Transferred Assets. (a) Except as set forth
in Section 6.27(a) of the AT&T Disclosure Schedule (and other than the Delayed
Transfer Assets (as defined in the Separation and Distribution Agreement) that
are AT&T Broadband Assets), as of the Effective Time, no material AT&T Broadband
Assets will be owned or held by AT&T or any AT&T Subsidiary. Assuming
consummation of the transactions contemplated by the Separation and Distribution
Agreement and assuming the availability of any assets and services contemplated
to be made available to the AT&T Broadband Group pursuant to the terms of the
Ancillary Agreements, (i) the assets reflected on the unaudited combined balance
sheet of the AT&T Broadband Group as of December 31, 2000 attached as Exhibit E
were sufficient in all material respects to conduct the business of the AT&T
Broadband Group in the manner reflected in the AT&T Broadband Financial
Statements and (ii) at the Effective Time, the AT&T Broadband Assets will be
sufficient for the conduct of the business of the AT&T Broadband Group as it is
being operated immediately prior to the Separation. Assuming the condition set
forth in Section 10.01(l) is satisfied with respect to all outstanding
Indebtedness issued under the Notes Indenture, neither Parent, nor AT&T
Broadband nor any AT&T Broadband Subsidiary will be required to guarantee or
otherwise become liable for any material Indebtedness or liability of AT&T (to
the extent not relating to the AT&T Broadband Group) or any AT&T Subsidiary
(other than AT&T Broadband or any AT&T Broadband Subsidiary) as a result of the
Separation or Distribution.
(b) Since December 31, 2000, (i) no material assets have been transferred
from AT&T (to the extent relating to the AT&T Broadband Group), AT&T Broadband,
any AT&T Broadband Subsidiary or the AT&T Broadband Group to AT&T (to the extent
not relating to the AT&T Broadband Group) or any AT&T Subsidiary other than AT&T
Broadband or any AT&T Broadband Subsidiary, other than the assets set forth in
Section 6.27(b) of the AT&T Disclosure Schedule and (ii) no material liabilities
have been assumed by AT&T (to the extent relating to the AT&T Broadband Group),
AT&T Broadband, any AT&T Broadband Subsidiary or the AT&T Broadband Group from
AT&T (to the extent not relating to the AT&T Broadband Group) or any AT&T
Subsidiary other than AT&T Broadband or any AT&T Broadband Subsidiary, other
than the liabilities set forth in Section 6.27 of the AT&T Disclosure Schedule.
(c) The investments set forth in Section 6.27(c) of the AT&T Disclosure
Schedule (or the net proceeds therefrom) constitute assets of one or more of the
AT&T Broadband Subsidiaries.
SECTION 6.28. Investments. Section 6.28 of the AT&T Disclosure Schedule
sets forth a list of each material investment of AT&T (to the extent relating to
the AT&T Broadband Group), the AT&T Broadband Group, AT&T Broadband or any AT&T
Broadband Subsidiary. Neither AT&T nor any AT&T Subsidiary has any material
liability in respect of any such investment.
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ARTICLE 7
COVENANTS OF COMCAST
SECTION 7.01. Comcast Interim Operations. Except as set forth in the
Comcast Disclosure Schedule, or as otherwise expressly contemplated hereby, from
the date hereof until the Effective Time, Comcast shall, and shall cause each of
the Comcast Subsidiaries to, conduct its business in all material respects in
the ordinary course of business consistent with past practice and use all
reasonable efforts to: (a) preserve intact its present business organization;
(b) keep available the services of its key officers and key employees; (c)
maintain in effect all material foreign and United States federal, state and
local licenses, approvals and authorizations, including all material licenses
and permits that are required for Comcast or any Comcast Subsidiary to carry on
its business; and (d) preserve existing relationships with its material lenders,
suppliers and others having material business relationships with it so that the
business of Comcast and the Comcast Subsidiaries shall not be impaired in any
material respect at the Effective Time. Without limiting the generality of the
foregoing, except as set forth in the Comcast Disclosure Schedule or as
otherwise expressly contemplated hereby and except as prohibited by law, from
the date hereof until the Effective Time, without the prior written consent of
AT&T, such consent not to be unreasonably withheld, Comcast shall not, nor shall
it permit any Comcast Subsidiary to:
(i) amend its articles of incorporation or bylaws or other applicable
governing instruments;
(ii) amend any material term of any of its outstanding securities;
(iii) split, combine, subdivide or reclassify any shares of its
capital stock or other equity interests or declare, set aside or pay any
dividend or other distribution (whether in cash, stock or property or any
combination thereof) in respect of its capital stock, or redeem, repurchase
or otherwise acquire or offer to redeem, repurchase, or otherwise acquire
any of its securities, except for cash dividends paid by any Comcast
Subsidiary to Comcast or any wholly owned Comcast Subsidiary;
(iv) adopt a plan or agreement of complete or partial liquidation,
dissolution, merger, consolidation, restructuring, recapitalization or
other material reorganization (other than a merger or consolidation between
wholly owned Comcast Subsidiaries);
(v) issue, deliver or sell, or authorize the issuance, delivery or
sale of, any shares of any class of its capital stock or other equity
interests or any securities convertible into or exercisable for, or any
rights, warrants or options to acquire, any such capital stock or other
equity interests, other than (A) the issuance of shares of capital stock or
other equity interests (or derivative securities therefor) by a Comcast
Subsidiary that is not a Comcast Significant Subsidiary, (B) the issuance
of shares of Comcast Common Stock upon the exercise of Comcast Stock
Options or options to purchase Comcast Common Stock under the Comcast ESPP
or upon the settlement of Comcast Restricted Stock Awards or Comcast Equity
Awards outstanding as of the date hereof in accordance with their current
terms or (C) the granting of Comcast Stock Options, Comcast Restricted
Stock Awards, Comcast Equity Awards and options to purchase Comcast Common
Stock under the Comcast ESPP in the ordinary course of business and
consistent with past practices and the issuance of shares of Comcast Common
Stock upon the exercise or settlement thereof;
(vi) incur any capital expenditures, except as set forth in the
Comcast Disclosure Schedule;
(vii) except for capital expenditures, which shall be governed by
Section 7.01(vi), acquire (by merger, consolidation, acquisition of stock
or assets or otherwise), directly or indirectly, any assets, other than (A)
pursuant to agreements in effect as of the date hereof, (B) assets used in
the ordinary course of business of Comcast and the Comcast Subsidiaries, in
a manner that is consistent with past practice, (C) assets having a fair
market value not exceeding $100,000,000 in any one transaction or series of
related transactions or $500,000,000 in the aggregate, or (D) in the case
of cable swaps and similar transactions where the primary consideration for
the acquired assets are cable properties, assets having a fair market value
not exceeding $100,000,000 in any one transaction or series of related
transactions or $500,000,000 in the aggregate;
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(viii) other than pursuant to agreements in effect as of the date
hereof and other than in the ordinary course of business, sell, lease,
license, encumber or otherwise transfer any assets other than (A) assets
having a fair market value not exceeding $100,000,000 in any one
transaction or series of related transactions or $500,000,000 in the
aggregate, or (B) in the case of cable swaps and similar transactions where
the primary consideration for the disposed of assets are cable properties,
assets having a fair market value not exceeding $100,000,000 in any one
transaction or series of related transactions or $500,000,000 in the
aggregate;
(ix) incur, assume or guarantee any Indebtedness, other than in the
ordinary course of business;
(x) make any loan, advance or capital contributions to or investment
in any Person other than (A) loans, advances or capital contributions to or
investments in any wholly owned Comcast Subsidiary, (B) pursuant to
agreements in effect as of the date hereof or (C) loans, advances or
capital contributions to joint ventures or Affiliates of Comcast or the
Comcast Subsidiaries pursuant to Schedule 7.01(x) of the Comcast Disclosure
Schedules or as required by agreements currently in effect relating to such
joint ventures or Affiliates;
(xi) except for capital expenditures, which shall be governed by
Section 7.01(vi), engage in or enter into any transaction or commitment,
enter into any contract or agreement, or relinquish or amend in any
material respect any contract or other right, for the provision of goods or
services or the use of facilities (including any programming agreement, any
agreement with any vendor for the purchase of equipment, any agreement for
the provision by one or more third parties of telephone, data or other
services through the facilities of one or more of the Systems of Comcast or
any of the Comcast Subsidiaries or any agreement providing for access to,
or the right to use, the facilities of one or more of the Systems of
Comcast or any of the Comcast Subsidiaries) that is (A) material to Comcast
and the Comcast Subsidiaries, taken as a whole, or (B) that provides for
payments in excess of $50,000,000 per agreement (or $100,000,000 for all
agreements for similar goods or services);
(xii) enter into or amend in any material respect any joint venture,
partnership or other similar venture that is material to Comcast and the
Comcast Subsidiaries, taken as a whole;
(xiii) enter into any agreement or arrangement that materially limits
or otherwise materially restricts Comcast, any Comcast Subsidiary or any of
their respective Affiliates or any successor thereto, or that could, after
the Effective Time, materially limit or restrict Parent, AT&T, any AT&T
Subsidiary or any of their Affiliates, from engaging in any material
business;
(xiv) except as required pursuant to existing written, binding
agreements or as otherwise required by law, (A) enter into any commitment
to provide any severance or termination pay to (or amend any existing
arrangement with) any director, officer or employee of Comcast or any
Comcast Subsidiary, (B) increase the benefits payable under any existing
severance or termination pay policy or employment agreement (other than as
may be increased by function of the existing terms of any such policy or
agreement), (C) other than in the ordinary course of business consistent
with past practice, enter into any employment, deferred compensation or
other similar agreement (or amend any such existing agreement) with any
director or officer of Comcast or any Comcast Subsidiary, (D) establish,
adopt or amend (except as required by applicable law) any collective
bargaining (except to the extent it would contain economic terms that are
not materially less favorable to Comcast or any Comcast Subsidiary than the
terms of existing arrangements), bonus, profit-sharing, thrift, pension,
retirement, deferred compensation, compensation, stock option, restricted
stock or other benefit plan or arrangement covering any director, officer
or employee of Comcast or any Comcast Subsidiary, except that Comcast and
the Comcast Subsidiaries may amend any such existing agreement or plan or
adopt a successor plan or arrangement to the extent mandated by applicable
law or to the extent that such amendment would not result in a more than a
de minimis increase in the costs or liabilities under such agreement or
plan, (E) other than in the ordinary course of business consistent with
past practice, or as required by any agreement in effect as of the date
hereof, increase the compensation, bonus or other benefits payable to any
director, officer or employee of Comcast or any Comcast Subsidiary or (F)
amend the terms of any outstanding Comcast Stock Option, Comcast
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SAR, Comcast Restricted Stock Award or Comcast Equity Award; provided that
the foregoing shall not in any way restrict Comcast or any of its
Subsidiaries from taking any action (including granting any stay bonuses
and paying or providing other compensation pursuant to retention plans or
similar arrangements) on reasonable commercial terms that Comcast
determines is reasonably necessary or desirable in order to retain or
attract any officers or employees to the extent that the aggregate cost of
such actions, grants or payments does not exceed the amount set forth in
Section 7.01(xiv) of the Comcast Disclosure Schedule;
(xv) launch any new channels, except as necessary to comply with any
requirement of any Governmental Authority and except pursuant to pending
agreements in effect as of the date hereof;
(xvi) change (A) its methods of accounting or accounting practices in
any material respect, except as required by changes in GAAP or by law, or
(B) its fiscal year;
(xvii) settle any litigation, investigation, arbitration, proceeding
or other claim if Comcast or any of the Comcast Subsidiaries would be
required to pay in excess of $25,000,000 or if such settlement would
otherwise be material to the Comcast Group taken as a whole;
(xviii) other than in the ordinary course of business and consistent
with past practice, make any material Tax election or enter into any
settlement or compromise of any material Tax liability;
(xix) (A) fail to comply with its obligations under the Exchange
Agreement and the Set-Top Box Commitment (as defined in the Exchange
Agreement) or (B) amend or waive any provision of the Exchange Agreement
except for such amendments or waivers as would not adversely affect AT&T or
delay or adversely affect consummation of the transactions contemplated
hereby;
(xx) engage in any transaction of a type described in Section 5.25 or
take any action that would reasonably be expected to make any
representation or warranty of Comcast hereunder inaccurate in any material
respect at the Effective Time;
(xxi) take any action that would, or would reasonably be expected to,
prevent, impair or materially delay the ability of AT&T or Comcast or any
of their respective Subsidiaries to consummate the transactions
contemplated by this Agreement and the other Transaction Agreements; or
(xxii) agree or commit to do any of the foregoing; provided that the
limitations set forth in Sections 7.01(i) through 7.01(xix) shall not apply
to any transaction between Comcast and any wholly owned Comcast Subsidiary
or between any wholly owned Comcast Subsidiaries.
SECTION 7.02. Comcast Shareholders' Meeting; Proxy Material. (a) Comcast
shall cause the Comcast Shareholders' Meeting to be duly called and held as soon
as reasonably practicable (taking into consideration all relevant factors,
including delays due to complications of preparing required pro forma and other
financial statements) for the purpose of voting on proposals in respect of each
of the Comcast Shareholders' Approvals and the Preferred Structure Approval. In
connection with the Comcast Shareholders' Meeting, Comcast will (i) use its
reasonable best efforts to obtain each of the Comcast Shareholders' Approvals
and the Preferred Structure Approval and (ii) otherwise comply with all legal
requirements applicable to the Comcast Shareholders' Meeting.
(b) Comcast's Board of Directors shall recommend approval of each of the
proposals in respect of the Comcast Shareholders' Approvals and the Preferred
Structure Approval.
SECTION 7.03. Voting Agreement. Comcast agrees to vote, and to cause each
of the Comcast Subsidiaries to vote, any shares of AT&T Common Stock with
respect to which Comcast or such Comcast Subsidiary may have any voting power in
favor of each of the proposals in respect of the AT&T Shareholders' Approvals.
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ARTICLE 8
COVENANTS OF AT&T
SECTION 8.01. AT&T Broadband Interim Operations. Except as set forth in
the AT&T Disclosure Schedule or as otherwise expressly contemplated hereby or by
any of the Ancillary Agreements, from the date hereof until the Effective Time,
AT&T shall, to the extent relating to the AT&T Broadband Group, and shall cause
each of the AT&T Broadband Group, AT&T Broadband and the AT&T Broadband
Subsidiaries to, conduct its business in all material respects for the benefit
of the AT&T Broadband Group (it being understood that the AT&T Communications
Group will be conducted for the benefit of the AT&T Communications Group and
that the interests of the AT&T Broadband Group and the AT&T Communications Group
may not coincide) and in the ordinary course of business consistent with past
practice and use all reasonable efforts to: (a) preserve intact its present
business organization; (b) keep available the services of its key officers and
key employees; (c) maintain in effect all material foreign and United States
federal, state and local licenses, approvals and authorizations, including all
material licenses and permits that are required for the AT&T Broadband Group,
AT&T (to the extent relating to the AT&T Broadband Group), AT&T Broadband or any
AT&T Broadband Subsidiary to carry on its business; and (d) preserve existing
relationships with its material lenders, suppliers and others having material
business relationships with it so that the business of the AT&T Broadband Group,
AT&T (to the extent relating to the AT&T Broadband Group), AT&T Broadband and
the AT&T Broadband Subsidiaries shall not be impaired in any material respect at
the Effective Time. Without limiting the generality of the foregoing, except as
set forth in the AT&T Disclosure Schedule or as otherwise expressly contemplated
hereby or by any of the Ancillary Agreements and except as prohibited by law,
from the date hereof until the Effective Time, without the prior written consent
of Comcast, such consent not to be unreasonably withheld, AT&T shall not, nor
shall it permit the AT&T Broadband Group, AT&T Broadband or any AT&T Broadband
Subsidiary to:
(i) amend its certificate of incorporation or bylaws or other
applicable governing instruments;
(ii) amend any material term of any of its outstanding securities
(other than debt securities of AT&T except to the extent relating to the
AT&T Broadband Group);
(iii) split, combine, subdivide or reclassify any shares of its
capital stock or other equity interests or declare, set aside or pay any
dividend or other distribution (whether in cash, stock or property or any
combination thereof) in respect of its capital stock, or redeem, repurchase
or otherwise acquire or offer to redeem, repurchase, or otherwise acquire
any of its securities or any securities of AT&T Broadband or any AT&T
Broadband Subsidiary, except for (A) the regular quarterly dividend of AT&T
and other dividends or distributions thereon not involving the assets or
securities of the AT&T Broadband Group, AT&T Broadband or any of the AT&T
Broadband Subsidiaries, (B) cash dividends paid by any AT&T Broadband
Subsidiary to AT&T Broadband or another AT&T Broadband Subsidiary, (C) the
exchange or redemption of the TCI Pacific Preferred Stock in accordance
with the terms thereof, (D) repurchases or other acquisitions of any shares
of capital stock of AT&T; provided that none of the assets used to pay for
such repurchases or other acquisitions are assets of the AT&T Broadband
Group; or (E) the creation and issuance of any class of tracking stock of
AT&T that is designed to reflect the financial performance of any of AT&T's
businesses other than the AT&T Broadband Group;
(iv) adopt a plan or agreement of complete or partial liquidation,
dissolution, merger, consolidation, restructuring, recapitalization or
other material reorganization (other than a merger or consolidation between
wholly owned AT&T Broadband Subsidiaries) other than in connection with any
Excepted Transaction;
(v) issue, deliver or sell, or authorize the issuance, delivery or
sale of, any shares of any class of its capital stock or other equity
interests or any securities convertible into or exercisable for, or any
rights, warrants or options to acquire, any such capital stock or other
equity interests, other than (A) the issuance of shares of AT&T Common
Stock upon the exercise of options to purchase AT&T
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Common Stock, stock appreciation rights with respect to AT&T Common Stock
or options to purchase AT&T Common Stock under the AT&T ESPP or upon the
settlement of AT&T restricted stock or equity awards based upon shares of
AT&T Common Stock outstanding as of the date hereof in accordance with
their current terms, (B) the granting of options to purchase AT&T Common
Stock, stock appreciation rights with respect to AT&T Common Stock, AT&T
restricted stock or equity awards based upon shares of AT&T Common Stock
and options to purchase AT&T Common Stock under the AT&T ESPP in the
ordinary course of business and consistent with past practice and the
issuance of shares of AT&T Common Stock upon the exercise or settlement
thereof, (C) the granting of options to purchase AT&T Common Stock, and
AT&T restricted stock or equity awards based upon shares of AT&T Common
Stock that are not exercisable prior to the Distribution and that will
become options or equity awards, as applicable, solely with respect to AT&T
Common Stock following the Distribution, (D) the issuance of shares of AT&T
Common Stock pursuant to any instruments, agreements or other arrangements
contemplated by Section 6.05 or the Schedules thereto and outstanding as of
the date hereof or (E) 275 million shares of AT&T Common Stock as set forth
in Section 6.05(b) of the AT&T Disclosure Schedule in accordance with
Section 8.01(v) of the AT&T Disclosure Schedule;
(vi) incur any capital expenditures in respect of the AT&T Broadband
Group, except as set forth in the AT&T Disclosure Schedule;
(vii) except for capital expenditures in respect of the AT&T Broadband
Group, which shall be governed by Section 8.01(vi), acquire (by merger,
consolidation, acquisition of stock or assets or otherwise), directly or
indirectly, any assets in respect of the AT&T Broadband Group, other than
(A) pursuant to agreements in effect as of the date hereof, (B) assets used
in the ordinary course of business of the AT&T Broadband Group, AT&T (to
the extent relating to the AT&T Broadband Group), AT&T Broadband and the
AT&T Broadband Subsidiaries, in a manner that is consistent with past
practice, (C) assets having a fair market value not exceeding $100,000,000
in any one transaction or series of related transactions or $500,000,000 in
the aggregate, or (D) in the case of cable swaps and similar transactions
where the primary consideration for the acquired assets are cable
properties, assets having a fair market value not exceeding $100,000,000 in
any one transaction or series of related transactions or $500,000,000 in
the aggregate;
(viii) except for the sale of the interest in TWE, which shall be
governed by Section 8.01(xiii), and other than pursuant to agreements in
effect as of the date hereof and other than in the ordinary course of
business, sell, lease, license, encumber or otherwise transfer any assets
other than (A) assets having a fair market value not exceeding $100,000,000
in any one transaction or series of related transactions or $500,000,000 in
the aggregate or (B) in the case of cable swaps and similar transactions
where the primary consideration for the disposed of assets are cable
properties, assets having a fair market value not exceeding $100,000,000 in
any one transaction or series of related transactions or $500,000,000 in
the aggregate;
(ix) incur, assume or guarantee any Indebtedness, other than (A)
borrowings from AT&T or any AT&T Subsidiary on the terms set forth in
Schedule 8.01(ix) either in the ordinary course of business or to refinance
Indebtedness at maturity, (B) any transactions by AT&T and its wholly owned
Subsidiaries that do not involve the AT&T Broadband Group, AT&T Broadband
or any of the AT&T Broadband Subsidiaries, (C) Indebtedness incurred as
contemplated by Section 9.18 or (D) as approved by the Interim Finance
Committee;
(x) make any loan, advance or capital contributions to or investment
in any Person other than (A) loans, advances or capital contributions to or
investments in AT&T Broadband or any wholly owned AT&T Broadband Subsidiary
on terms set forth in Section 6.27(b) of the AT&T Disclosure Schedule, (B)
loans or advances to AT&T or any AT&T Subsidiary on terms set forth in
Section 6.27(b) of the AT&T Disclosure Schedule, (C) pursuant to agreements
in effect as of the date hereof, (D) any transactions by AT&T and its
wholly owned Subsidiaries that do not involve the AT&T Broadband Group,
AT&T Broadband and the AT&T Broadband Subsidiaries, or (E) loans,
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advances or capital contributions to joint ventures or Affiliates of the
AT&T Broadband Group as required by agreements currently in effect relating
to such joint ventures or Affiliates or as contemplated by Schedule
8.01(x);
(xi) except for capital expenditures in respect of the AT&T Broadband
Group, which shall be governed by Section 8.01(vi), engage in or enter into
any transaction or commitment, enter into any contract or agreement, or
relinquish or amend in any material respect any contract or other right, in
each case in respect of the AT&T Broadband Group, for the provision of
goods or services or the use of facilities (including any programming
agreement, any agreement with any vendor for the purchase of equipment, any
agreement for the provision by one or more third parties of telephone, data
or other services through the facilities of one or more of the Systems of
AT&T or any of the AT&T Subsidiaries or any agreement providing for access
to, or the right to use, the facilities of one or more of the Systems of
AT&T or any of the AT&T Subsidiaries) that is (A) material to the AT&T
Broadband Group, taken as a whole, or (B) that provides for payments in
excess of $50,000,000 per agreement (or $100,000,000 for all agreements for
similar goods or services);
(xii) enter into or amend in any material respect any joint venture,
partnership or other similar venture that is material to the AT&T Broadband
Group, taken as a whole;
(xiii) (A) enter into any material agreement or arrangement in
connection with or relating to its interest in TWE or amend or modify in
any material respect any of the TWE Contracts (other than incidental
agreements necessary to implement the transactions contemplated by clauses
(B) and (C) below of this Section 8.01(xiii) such as underwriting
agreements, engagement letters and similar agreements), (B) exercise (other
than on a cashless basis) the TWE Option under the TWE Option Agreement or
(C) sell all or part of its interest in TWE except solely for cash or
pursuant to Section 13.1 of the TWE Partnership Agreement; provided that
AT&T has kept Comcast reasonably apprised of the status of the related
process;
(xiv) enter into any agreement or arrangement that materially limits
or otherwise materially restricts the AT&T Broadband Group, AT&T (to the
extent relating to the AT&T Broadband Group), AT&T Broadband, any AT&T
Broadband Subsidiary or any of their respective Affiliates (other than AT&T
(to the extent not relating to the AT&T Broadband Group) and the AT&T
Subsidiaries other than AT&T Broadband and the AT&T Broadband Subsidiaries)
or any successor thereto, or that could, after the Effective Time,
materially limit or restrict Parent, Comcast, any Comcast Subsidiary or any
of their Affiliates, from engaging in any material business;
(xv) except as required pursuant to existing written, binding
agreements, as otherwise required by law or as expressly provided in the
Employee Benefits Agreement, (A) enter into any commitment to provide any
severance or termination pay to (or amend any existing arrangement with)
any director, officer or employee of AT&T, AT&T Broadband or any AT&T
Broadband Subsidiary, (B) increase the benefits payable under any existing
severance or termination pay policy or employment agreement (other than as
may be increased by function of the existing terms of any such policy or
agreement), (C) other than in the ordinary course of business consistent
with past practice, enter into any employment, deferred compensation or
other similar agreement (or amend any such existing agreement) with any
director or officer of AT&T, AT&T Broadband or any AT&T Broadband
Subsidiary, (D) establish, adopt or amend (except as required by applicable
law) any collective bargaining (except to the extent it would contain
economic terms that are not materially less favorable to AT&T, AT&T
Broadband or any AT&T Broadband Subsidiary than the terms of existing
arrangements), bonus, profit-sharing, thrift, pension, retirement, deferred
compensation, compensation, stock option, restricted stock or other benefit
plan or arrangement covering any director, officer or employee of AT&T,
AT&T Broadband or any AT&T Broadband Subsidiary, except that AT&T, AT&T
Broadband and the AT&T Broadband Subsidiaries may amend any such existing
agreement or plan or adopt a successor plan or arrangement to the extent
mandated by applicable law or to the extent that such amendment would not
result in more than a de minimis increase in the costs or liabilities under
such agreement or plan, (E) other than in the ordinary course
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of business consistent with past practice or as required by any agreement
in effect as of the date hereof, increase the compensation, bonus or other
benefits payable to any director, officer or employee of AT&T, AT&T
Broadband or any AT&T Broadband Subsidiary or (F) amend the terms of any
outstanding option to purchase AT&T Common Stock, stock appreciation right
with respect to AT&T Common Stock, AT&T restricted stock or equity award
based upon shares of AT&T Common Stock; provided that the foregoing shall
not in any way restrict AT&T or any of its wholly owned Subsidiaries from
entering into or amending commitments, contracts, plans or other
arrangements of the types referred to in clauses (A) through (F) above to
the extent that AT&T Broadband and the AT&T Broadband Subsidiaries are not
bound thereby and the AT&T Broadband Group is not affected thereby and
provided further that the foregoing shall not in any way restrict AT&T or
any of its Subsidiaries from taking any action (including granting any stay
bonuses and paying or providing other compensation pursuant to retention
plans or similar arrangements) on reasonable commercial terms that AT&T
determines is reasonably necessary or desirable in order to retain or
attract any officers or employees as set forth in Schedule 8.01(xv) to the
extent that the aggregate cost of such actions, grants or payments does not
exceed the amount set forth in Section 8.01(xv) of the AT&T Disclosure
Schedule;
(xvi) launch any new channels, except as necessary to comply with any
requirement of any Governmental Authority and except pursuant to pending
agreements in effect as of the date hereof;
(xvii) change (A) its methods of accounting or accounting practices in
any material respect, except as required by changes in GAAP or by law, or
(B) its fiscal year;
(xviii) except as set forth on Section 8.01(xviii) of the AT&T
Disclosure Schedule, enter into or engage in any transaction with, or
transfer any assets to, or assume any liabilities of, AT&T (in its capacity
other than as part of the AT&T Broadband Group) or any of the AT&T
Subsidiaries (other than AT&T Broadband or any of the AT&T Broadband
Subsidiaries) other than non-material transactions on arm's-length terms in
the ordinary course of business;
(xix) except as set forth on Section 8.01(xix) of the AT&T Disclosure
Schedule, settle any litigation, investigation, arbitration, proceeding or
other claim if the AT&T Broadband Group would be required to pay in excess
of $25,000,000 or such settlement would otherwise be material to the AT&T
Broadband Group;
(xx) other than in the ordinary course of business and consistent with
past practice, make any material Tax election or enter into any settlement
or compromise of any material Tax liability;
(xxi) fail to comply with its obligations under the Exchange
Agreement;
(xxii) amend or waive any provision of any of the PrISMs Contracts or
SAILS Contracts, make any payment in settlement of any of such contracts or
terminate any of such contracts; provided that immediately prior to the
Effective Time each of such contracts will be amended as set forth in
Section 8.01(xxi) of the AT&T Disclosure Schedule if the counterparty to
such contract consents to such amendment;
(xxiii) (A) permit T-Holdings or any of its Subsidiaries to incur any
liabilities or (B) take any action that would reasonably be expected to
make any representation or warranty of AT&T hereunder or of AT&T or any
AT&T Subsidiary under any of the other Transaction Agreements inaccurate in
any material respect at the Effective Time;
(xxiv) take any action that would, or would reasonably be expected to,
prevent, impair or materially delay the ability of AT&T or Comcast or any
of their respective Subsidiaries to consummate the transactions
contemplated by this Agreement and the other Transaction Agreements; or
(xxv) agree or commit to do any of the foregoing; provided that the
limitations set forth in Sections 8.01(i) through 8.01(xxii) shall not
apply to any transaction between AT&T Broadband and any wholly owned AT&T
Broadband Subsidiary or between AT&T (to the extent not relating to the
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AT&T Broadband Group) and any wholly owned AT&T Subsidiaries (other than
AT&T Broadband and any AT&T Broadband Subsidiaries) and provided, further,
that the limitations set forth in Sections 8.01(i) through 8.01(xxii) shall
not be deemed to in any way apply to or prohibit any Excepted Transaction
or any transaction by or involving AT&T and its wholly owned Subsidiaries
if AT&T (to the extent relating to the AT&T Broadband Group), the AT&T
Broadband Group, AT&T Broadband and the AT&T Broadband Subsidiaries are not
bound thereby, such transaction does not involve AT&T (to the extent
relating to the AT&T Broadband Group), the AT&T Broadband Group, AT&T
Broadband or any of the AT&T Broadband Subsidiaries and such transaction
would not otherwise adversely affect the transactions contemplated hereby
in any material respect. In no event will AT&T enter into, or permit the
AT&T Broadband Group, AT&T Broadband or any AT&T Broadband Subsidiary to
enter into, any agreement or contract that would bind or purport to bind,
Parent or any of its Affiliates (other than AT&T Broadband and the AT&T
Broadband Subsidiaries) after the Effective Time.
SECTION 8.02. AT&T Shareholders' Meeting; Proxy Material. (a) Subject to
applicable law, AT&T shall cause the AT&T Shareholders' Meeting to be duly
called and held as soon as reasonably practicable (taking into consideration all
relevant factors, including delays due to complications of preparing required
pro forma and other financial statements) for the purpose of voting on proposals
in respect of each of the AT&T Shareholders' Approvals; provided, however, that
if within five days of the time the parties are notified by the SEC that it is
willing to declare the Registration Statement effective any conditions shall
exist (such conditions, the "MANDATORY RESIDUAL CONDITIONS") such that, as a
result of the AT&T Transaction Approval being obtained, the holders of the
Senior Notes would be entitled to require AT&T or any of its Affiliates to
repurchase all or any portion of the Senior Notes, then AT&T shall be entitled
to delay the calling of the AT&T Shareholders' Meeting until such time as the
Mandatory Residual Conditions no longer exist. In connection with the AT&T
Shareholders' Meeting, AT&T will (i) subject to Section 8.02(b), use its
reasonable best efforts to obtain each of the AT&T Shareholders' Approvals and
(ii) otherwise comply with all legal requirements applicable to AT&T
Shareholders' Meeting.
(b) Except as provided below, AT&T's Board of Directors shall recommend
approval of each of the proposals in respect of the AT&T Shareholders' Approvals
by AT&T shareholders. AT&T's Board of Directors shall be permitted to withdraw,
or modify in a manner adverse to Comcast, its recommendations to AT&T
shareholders only if (i) AT&T has complied with the terms of Section 8.03,
including the requirement in Section 8.03(d) that it notify Comcast promptly
after its receipt of any AT&T Broadband Acquisition Proposal; (ii) AT&T's Board
of Directors determines in good faith by a majority vote, after consulting with
AT&T's outside counsel, that it must take such action to comply with its
fiduciary duties under applicable law; and (iii) AT&T shall have delivered to
Comcast a prior written notice advising Comcast that it intends to take such
action and describing its reasons for taking such action (such notice to be
delivered not less than two Business Days prior to the time such action is
taken). Unless this Agreement shall have been terminated in accordance with its
terms, subject to applicable law, AT&T shall submit proposals in respect of each
of the AT&T Shareholders' Approvals at the AT&T Shareholders' Meeting even if
AT&T's Board of Directors determines at any time after the date hereof that this
Agreement and the transactions contemplated hereby or the Parent Charter to be
implemented at the Effective Time, including the corporate governance provisions
included therein, are no longer advisable or recommends that AT&T shareholders
reject either of the proposals in respect of the AT&T Shareholders' Approvals.
SECTION 8.03. No Solicitation. (a) From the date hereof until the
termination hereof, AT&T will not, and will cause the AT&T Subsidiaries and the
officers, directors, employees, investment bankers, attorneys, accountants,
consultants or other agents, representatives or advisors of AT&T and the AT&T
Subsidiaries not to, directly or indirectly (i) take any action to solicit,
initiate, facilitate or encourage the submission of any AT&T Broadband
Acquisition Proposal; (ii) subject to Section 8.03(e), engage in any discussions
or negotiations with, or disclose any non-public information relating to AT&T
(to the extent relating to the AT&T Broadband Group), the AT&T Broadband Group,
AT&T Broadband or any AT&T
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Broadband Subsidiary or afford access to the properties, books or records of
AT&T (to the extent relating to the AT&T Broadband Group), the AT&T Broadband
Group, AT&T Broadband or any AT&T Broadband Subsidiary to, any Person who is
known by AT&T to be considering making, or has made, an AT&T Broadband
Acquisition Proposal; (iii)(A) amend or grant any waiver or release under any
standstill agreement, agreement restricting a party from engaging in
negotiations or discussions with other parties or any similar agreement with
respect to any class of equity securities of AT&T (other than in connection with
an Excepted Transaction) or with respect to the AT&T Broadband Group or any of
its material assets or (B) approve any transaction, or approve of any Person
becoming an "Interested Shareholder", under Section 912 of the NYBCL or Section
203 of the DGCL; or (iv) enter into any agreement with respect to an AT&T
Broadband Acquisition Proposal (other than a confidentiality agreement as
described below).
(b) Notwithstanding the provisions of Section 8.03(a) or any other
provision of this Agreement, prior to the AT&T Shareholders' Meeting, AT&T may,
in response to an unsolicited bona fide AT&T Broadband Acquisition Proposal that
AT&T's Board of Directors determines in good faith, by majority vote, after
consultation with its financial advisors and outside legal counsel, would
reasonably be expected to lead to an AT&T Superior Proposal, furnish
confidential or nonpublic information and access to, and engage in discussions
and negotiate with, such Person making such proposal; provided that prior to
taking any of such actions, (i) AT&T has complied with the terms of this Section
8.03, including the requirement in Section 8.03(d) that it notify Comcast
promptly after its receipt of any AT&T Broadband Acquisition Proposal, (ii) the
AT&T Board of Directors determines in good faith, by majority vote, after
consultation with AT&T's outside legal counsel that it must take such action to
comply with its fiduciary duties under applicable law and (iii) such Person
making such proposal executes a confidentiality agreement with terms no less
favorable in the aggregate to AT&T than those contained in the AT&T
Confidentiality Agreement. "AT&T SUPERIOR PROPOSAL" means an unsolicited, bona
fide AT&T Broadband Acquisition Proposal that AT&T's Board of Directors
determines in good faith, after consultation with its financial advisors and
outside legal counsel and taking into account all the terms and conditions of
the AT&T Broadband Acquisition Proposal, including the likelihood and timing of
consummation of the AT&T Broadband Acquisition Proposal (including, without
limitation, the likelihood of obtaining financing and receiving necessary
regulatory approvals), would be more favorable to the holders of AT&T Common
Stock than the transactions provided for in this Agreement.
(c) Nothing contained in this Agreement shall prevent AT&T's Board of
Directors from complying with Rule 14e-2 and Rule 14d-9 under the 1934 Act with
regard to an AT&T Broadband Acquisition Proposal; provided that AT&T's Board of
Directors shall not recommend that AT&T shareholders tender their shares in
connection with a tender offer, except to the extent AT&T's Board of Directors
by a majority vote determines in its good faith judgment that such a
recommendation is required to comply with the fiduciary duties of AT&T's Board
of Directors under applicable law, after consulting with outside legal counsel.
(d) AT&T will notify Comcast promptly (but in no event later than 24 hours)
after receipt by AT&T (or any of its advisors) of any AT&T Broadband Acquisition
Proposal, or of any request for non-public information relating to AT&T (to the
extent relating to the AT&T Broadband Group), the AT&T Broadband Group, AT&T
Broadband or any AT&T Broadband Subsidiary or for access to the properties,
books or records of AT&T (to the extent relating to the AT&T Broadband Group),
the AT&T Broadband Group, AT&T Broadband or any AT&T Broadband Subsidiary by any
Person who is known to be considering making, or has made, an AT&T Broadband
Acquisition Proposal. AT&T shall provide such notice orally and in writing and
shall identify the Person making, and the terms and conditions of, any such AT&T
Broadband Acquisition Proposal, indication or request. AT&T shall keep Comcast
fully informed, on a prompt basis (but in any event no later than 24 hours), of
the status and details of any such AT&T Broadband Acquisition Proposal,
indication or request. AT&T shall, and shall cause the AT&T Subsidiaries and the
directors, employees and other agents of AT&T and the AT&T Subsidiaries to,
cease immediately and cause to be terminated all activities, discussions or
negotiations, if any, with any Persons conducted prior to the date hereof with
respect to any AT&T Broadband Acquisition Proposal.
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This Section 8.03(d) shall not apply with respect to any Excepted Transaction;
provided that if an agreement is entered into with respect to an Excepted
Transaction that would reasonably be expected to delay the transactions
contemplated hereby, AT&T shall promptly thereafter notify Comcast of such
agreement and provide Comcast with information it may reasonably request
relating to such Excepted Transaction to the extent it is relevant to the
transactions contemplated hereby.
(e) Notwithstanding anything in Section 8.03 to the contrary, in connection
with discussions or negotiations relating to a proposed Excepted Transaction,
AT&T may (i) disclose non-public information relating to AT&T (to the extent
relating to the AT&T Broadband Group), the AT&T Broadband Group, AT&T Broadband
or any AT&T Broadband Subsidiary and (ii) afford access to the properties, books
or records of AT&T (to the extent relating to the AT&T Broadband Group), the
AT&T Broadband Group, AT&T Broadband or any AT&T Broadband Subsidiary, in the
case of (i) and (ii), to the Person or Persons with whom AT&T is engaged in such
discussions or negotiations relating to such proposed transaction; provided that
(x) such Person or Persons (A) are not known by AT&T to be considering making,
or to have made, an AT&T Broadband Acquisition Proposal and (B) execute a
confidentiality agreement with AT&T Broadband with confidentiality terms no less
favorable than those in the AT&T Confidentiality Agreement pursuant to which
such Person or Persons agree to hold any information relating to AT&T (to the
extent relating to the AT&T Broadband Group), the AT&T Broadband Group, AT&T
Broadband and any AT&T Broadband Subsidiary confidential and (y) such disclosure
and such access are limited to that reasonably necessary in connection with such
proposed transaction.
SECTION 8.04. Ancillary Agreements. Subject to the terms and conditions
of this Agreement, the Separation and Distribution Agreement and the other
Ancillary Agreements, AT&T shall, and shall cause each of its Subsidiaries
(which, after the Effective Time, shall not include any of the AT&T Broadband
Entities) to, comply with its respective obligations under the Separation and
Distribution Agreement and the other Ancillary Agreements pursuant to and in
accordance with the terms thereof. No provision of the Separation and
Distribution Agreement or any of the other Ancillary Agreements may be amended
or waived prior to the Effective Time without the prior written consent of
Comcast, except that the Primary Commercial Agreements and the Additional
Commercial Agreements may be amended or waived in the ordinary course of
business without the prior written consent of Comcast if such amendment or
waiver would not be adverse in any material respect to AT&T (to the extent
relating to the AT&T Broadband Group), the AT&T Broadband Group, AT&T Broadband
or any of the AT&T Broadband Subsidiaries. None of the Separation and
Distribution Agreement and the other Ancillary Agreements may be terminated
prior to the Effective Time without the prior written consent of Comcast. The
AT&T Broadband Group shall not grant any consent or approval under the
Separation and Distribution Agreement or any of the other Ancillary Agreements
prior to the Effective Time without the prior written concurrence of Comcast,
except that the AT&T Broadband Group may grant a consent or approval under any
Primary Commercial Agreement or Additional Commercial Agreement in the ordinary
course of business if such consent or approval would not be adverse in any
material respect to AT&T (to the extent relating to the AT&T Broadband Group),
the AT&T Broadband Group, AT&T Broadband or any of the AT&T Broadband
Subsidiaries. Any agreements entered into or documents executed pursuant to the
Primary Transaction Agreements shall be reasonably acceptable to Comcast. Prior
to the Effective Time, all determinations by the AT&T Broadband Group under the
Separation and Distribution Agreement or any of the other Ancillary Agreements
will be made for the benefit of the AT&T Broadband Group and, in the event of
any discretion as to terms, such terms shall be no less favorable to the AT&T
Broadband Group than arm's-length terms.
SECTION 8.05. Neutrality Agreement. Notwithstanding any other provision
of this Agreement, AT&T shall not renew, extend or modify the Neutrality and
Consent Election Agreement (the "NEUTRALITY AGREEMENT") among AT&T, the
Communications Workers of America and the International Brotherhood of
Electrical Workers, such that such agreement, as so renewed, extended or
modified, will apply to or otherwise bind or purport to apply to or otherwise
bind, after the Effective Time, AT&T Broadband, any of the AT&T Broadband
Subsidiaries, Parent, Comcast or any of the Comcast Subsidiaries, either as a
matter of contract or term or condition of employment. AT&T shall not enter into
any other agreement or
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arrangement with respect to the same or similar matters as the matters covered
by the Neutrality Agreement if such agreement or arrangement would apply to or
otherwise bind or purport to apply to or otherwise bind, after the Effective
Time, AT&T Broadband, any of the AT&T Broadband Subsidiaries, Parent, Comcast or
any of the Comcast Subsidiaries, either as a matter of contract or term or
condition of employment.
SECTION 8.06. Broadband Employees. Prior to the Effective Time, AT&T
shall, and shall cause each of its Subsidiaries to, use reasonable best efforts
so that, immediately prior to the Effective Time, (i) all individuals (other
than Broadband Transferees) who are then primarily employed (whether actively or
then on an approved leave of absence) in connection with the AT&T Broadband
Business will be employed, as of the Effective Time, by the AT&T Broadband Group
and (ii) the AT&T Broadband Group will employ no individuals other than those
referred to in clause (i) of this Section 8.06 and the Broadband Transferees;
provided that no transfers required to implement this Section 8.06 shall result
in any severance liabilities to AT&T Broadband.
SECTION 8.07. AT&T Post-Signing Equity Awards. With respect to any
options to purchase shares of AT&T Common Stock and any other equity-based
awards based upon shares of AT&T Common Stock granted by AT&T or any of its
Subsidiaries from the date hereof until the Effective Time, AT&T shall provide
in the agreements evidencing such awards that the transactions contemplated by
this Agreement or any of the other Transaction Agreements shall not constitute a
"Change in Control" for purposes of triggering accelerated vesting of the
awards; provided that if any employee who receives such an award is terminated
after the Effective Time under conditions entitling him to receive "Change in
Control Severance Benefits" under Appendix 2 of the AT&T Broadband Severance
Plan, the equity awards held by such employee shall become immediately vested
upon termination of employment and, if subject to exercise, shall remain
exercisable for the full extent of the original term of the award.
SECTION 8.08. Redemption of TCI Pacific Preferred Stock. Prior to the
Effective Time, AT&T shall cause TCI Pacific Communications, Inc. (i) to call
for redemption all of the outstanding shares of TCI Pacific Preferred Stock and
(ii) to the extent any of such shares are not exchanged for shares of AT&T
Common Stock prior to the applicable redemption date, to redeem all of such
shares remaining outstanding in exchange for shares of AT&T Common Stock, in the
case of each of (i) and (ii), in accordance with the terms of the certificate of
designation for the TCI Pacific Preferred Stock. The shares of AT&T Common Stock
used to effect the foregoing redemption or exchange shall be provided by AT&T to
TCI Pacific Communications, Inc. without payment of any consideration or charge
by TCI Pacific Communications, Inc. or the AT&T Broadband Group.
SECTION 8.09. Note Consent Process. AT&T will consult with Comcast in
connection with actions taken by AT&T in furtherance of satisfaction of the
condition specified in Section 10.01(l). AT&T will conduct such actions in a
manner reasonably designed to minimize the cost and expenses incurred in
connection with satisfaction of such condition. The parties agree that AT&T may
obtain Note Consents or otherwise satisfy the condition set forth in Section
10.01(l) by a one-time cash payment of a consent fee, through a coupon increase
or a combination thereof and that any costs and expenses incurred in connection
therewith (as calculated pursuant to Section 11.03) shall be shared pursuant to
Section 11.03(a)(iv). AT&T shall not be required to take any action other than
those referred to in the preceding sentence in order to satisfy the condition
set forth in Section 10.01(l) unless Comcast agrees that the costs and expenses
incurred in connection therewith shall be shared on the basis set forth in
Section 11.03(a)(iv).
ARTICLE 9
COVENANTS OF AT&T, COMCAST AND PARENT
SECTION 9.01. Best Efforts. (a) Subject to the terms and conditions of
this Agreement, each of the parties hereto will use its best efforts to promptly
(i) take, or cause to be taken, all actions and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations to
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consummate the Mergers and the other transactions contemplated hereby as soon as
practicable, including preparing and filing as promptly as practicable all
documentation to effect all necessary filings, notices, petitions, statements,
registrations, submissions of information, applications and other documents and
(ii) obtain and maintain all approvals, consents, registrations, permits,
authorizations and other confirmations required to be obtained from any third
Person that are necessary, proper or advisable to consummate the Mergers and the
other transactions contemplated hereby; provided, that the parties' obligations
to obtain the License Consents and the expiration (without either the Department
of Justice or the Federal Trade Commission obtaining any injunction or other
relief that prevents the consummation of the transactions contemplated hereby)
or termination of the applicable waiting periods under the HSR Act shall be
unconditional and shall not be qualified by best efforts. Consistent with its
obligations under the preceding sentence, Comcast and AT&T will commit to and
implement divestitures, hold separate or similar transactions or actions with
respect to assets or businesses of the Comcast Group and the AT&T Broadband
Group, which commitments and implementations may, at Comcast's or AT&T's option,
be conditioned upon and effective as of the Effective Time. No party hereto
shall, directly or indirectly, extend any waiting period under the HSR Act or
enter into any agreement with a Governmental Authority to delay or to not
consummate the Mergers or the other transactions contemplated by this Agreement,
except with the prior written consent of the other parties. The parties' actions
with respect to this paragraph shall be reasonable and reasonably calculated to
facilitate consummation of the Mergers by the End Date. Subject to applicable
law relating to the exchange of information, Comcast and AT&T shall have the
right to review in advance, and to the extent practicable each will consult the
other on, all the information relating to Comcast and the Comcast Subsidiaries
or AT&T and the AT&T Broadband Subsidiaries, as the case may be, that appears in
any filing made with, or written materials submitted to, any third party and/or
any Governmental Authority in connection with the Mergers and the other
transactions contemplated hereby. Prior to the date hereof, each of Comcast and
AT&T has provided to the other a list of all material Franchise Consents of such
party, all material License Consents of such party, all material PUC Consents of
such party and all rights that any Person may have under the terms of such
party's material Franchises to purchase all or any portion of a System owned and
operated by such party as a result of the transactions contemplated hereby
("PURCHASE RIGHTS").
(b) In furtherance and not in limitation of the foregoing, each of AT&T and
Comcast agrees to (i) make an appropriate filing of a Notification and Report
Form pursuant to the HSR Act with respect to the Mergers and the other
transactions contemplated hereby as promptly as practicable (and, in any event,
within 45 calendar days of the date of this Agreement), (ii) supply as promptly
as practicable any additional information and documentary material that may be
requested pursuant to the HSR Act and (iii) complete the review process under
the HSR Act to permit the consummation of the Mergers and the other transactions
contemplated hereby, including causing the expiration or termination of the
applicable waiting periods under the HSR Act as soon as practicable.
SECTION 9.02. Joint Proxy Statement; Registration Statement. (a) As
promptly as practicable after the date hereof (and, in any event, within 60
calendar days of the date of this Agreement) the parties hereto shall prepare
and file the Joint Proxy Statement and the Registration Statement (in which the
Joint Proxy Statement will be included) with the SEC. AT&T and Comcast shall use
their reasonable best efforts to cause the Registration Statement to become
effective under the 1933 Act as soon after such filing as practicable and to
keep the Registration Statement effective as long as is necessary to consummate
the Mergers. The Joint Proxy Statement shall include the recommendation of the
Board of Directors of Comcast in favor of approval of each of the proposals in
respect of the Comcast Shareholders' Approvals and the Preferred Structure
Approval and the recommendation of the Board of Directors of AT&T in favor of
approval of each of the proposals in respect of the AT&T Shareholders'
Approvals, except to the extent the Board of Directors of AT&T shall have
withdrawn or modified its approval or recommendation in favor of approval of
either of the proposals in respect of the AT&T Shareholders' Approvals as
permitted by Section 8.02(b). Comcast and AT&T each shall use its reasonable
best efforts to cause the Joint Proxy Statement to be mailed to its respective
shareholders as promptly as practicable after the Registration Statement becomes
effective. Each of Comcast and AT&T shall promptly provide copies, consult with
each other and prepare written responses with respect to any written comments
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received from the SEC with respect to the Joint Proxy Statement and the
Registration Statement and advise one another of any oral comments received from
the SEC. The Registration Statement and the Joint Proxy Statement shall comply
as to form in all material respects with the rules and regulations promulgated
by the SEC under the 1933 Act and the 1934 Act, respectively.
(b) AT&T and Comcast shall make all necessary filings with respect to the
Mergers and the transactions contemplated hereby under the 1933 Act and the 1934
Act and applicable state "blue sky" laws and the rules and regulations
thereunder. Each party hereto will advise the other parties, promptly after it
receives notice thereof, of the time when the Registration Statement has become
effective or any supplement or amendment has been filed, the issuance of any
stop order, the suspension of the qualification of the Parent Common Stock
issuable in connection with the Mergers for offering or sale in any
jurisdiction, or any request by the SEC for amendment of the Joint Proxy
Statement or the Registration Statement or comments thereon and responses
thereto or requests by the SEC for additional information. No amendment or
supplement to the Joint Proxy Statement or the Registration Statement shall be
filed without the approval of both AT&T and Comcast, which approval shall not be
unreasonably withheld or delayed. If, at any time prior to the Effective Time,
any information relating to AT&T or Comcast, or any of their respective
Affiliates, officers or directors should be discovered by AT&T or Comcast that
should be set forth in an amendment or supplement to the Registration Statement
or the Joint Proxy Statement so that such documents would not include any
misstatement of a material fact or omit to state any material fact necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading, the party hereto that discovers such information shall
promptly notify the other parties hereto and an appropriate amendment or
supplement describing such information shall be promptly filed with the SEC and,
to the extent required by law, disseminated to the shareholders of AT&T and
Comcast.
SECTION 9.03. Public Announcements. So long as this Agreement is in
effect, Comcast and AT&T will consult with each other before issuing any press
release or making any public statement with respect to this Agreement or the
transactions contemplated hereby and, except as may be required by applicable
law or any listing agreement with any national securities exchange or quotation
system, will not issue any such press release or make any such public statement
without the prior consent of the other, which consent shall not be unreasonably
withheld. Notwithstanding the foregoing, any such press release or public
statement that may be required by applicable law or any listing agreement with
any national securities exchange or quotation system may be issued without such
consent, if the party hereto making such release or statement has used its
reasonable best efforts to consult with the other parties.
SECTION 9.04. Further Assurances. At and after the Effective Time, the
officers and directors of the applicable Surviving Corporation will be
authorized to execute and deliver, in the name and on behalf of AT&T Broadband
or Comcast, as the case may be, any deeds, bills of sale, assignments or
assurances and to take and do, in the name and on behalf of AT&T Broadband or
Comcast, as the case may be, any other actions and things to vest, perfect or
confirm of record in such Surviving Corporation, any and all right, title and
interest in, to and under any of the rights, properties or assets of AT&T
Broadband or Comcast, as the case may be, acquired or to be acquired by such
Surviving Corporation, as a result of or in connection with the applicable
Merger.
SECTION 9.05. Access to Information. From the date hereof until the
Effective Time or earlier termination of this Agreement and subject to
applicable law and the Confidentiality Agreements, each of Comcast and AT&T
shall (a) give to the other and the other's legal counsel, financial advisors,
auditors and other authorized representatives reasonable access during normal
business hours to the offices, properties, books and records of such party and
its Subsidiaries, (b) furnish to the other and the other's counsel, financial
advisors, auditors and other authorized representatives such financial and
operating data and other information as such Persons may reasonably request and
(c) instruct its employees, legal counsel, financial advisors, auditors and
other authorized representatives to cooperate with the other in such other
party's investigation. Any investigation pursuant to this Section 9.05 shall be
conducted in a manner as not to interfere unreasonably with the conduct of the
business of the party being investigated. No information or knowledge obtained
in any investigation pursuant to this Section 9.05 shall affect or be
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deemed to modify any representation or warranty made by any party hereunder.
Each party hereto will hold such information that is non-public in confidence in
accordance with the provisions of the applicable Confidentiality Agreement.
SECTION 9.06. Tax-free Transactions. (a) Prior to the Effective Time,
each party hereto shall use its best efforts to cause the Mergers to qualify as
tax-free exchanges described in Section 351 of the Code ("351 TRANSACTIONS"),
and will not take any action reasonably likely to cause the Mergers not to so
qualify.
(b) Prior to the Effective Time, each party hereto shall use its best
efforts to (i) cause the Separation and Distribution to qualify as tax-free
transactions pursuant to Sections 355 and 368(a) of the Code, and will not take
any action reasonably likely to cause the Separation and Distribution not to so
qualify and (ii) ensure that the Mergers will not cause the Separation and
Distribution to fail to be qualified as tax-free transactions pursuant to
Sections 355 and 368(a) of the Code.
(c) Each party hereto shall use its best efforts to obtain (i) the ruling
or opinion referred to in Section 10.01(j) and (ii) the opinions referred to in
Sections 10.02(b) and 10.03(b).
SECTION 9.07. Affiliates. (a) Within 30 days following the date of the
AT&T Shareholders' Meeting, AT&T shall deliver to Comcast a letter identifying
all known Persons who may be deemed affiliates of AT&T Broadband under Rule 145
of the 1933 Act (an "AT&T RULE 145 AFFILIATE"). AT&T shall use its reasonable
best efforts to obtain and deliver to Comcast a written agreement from each AT&T
Broadband Rule 145 Affiliate as soon as practicable and, in any event, at least
30 days prior to the Effective Time, substantially in the form attached as
Exhibit B.
(b) Within 30 days following the date of the Comcast Shareholders' Meeting,
Comcast shall deliver to AT&T a letter identifying all known Persons who may be
deemed affiliates of Comcast under Rule 145 of the 1933 Act (an "COMCAST RULE
145 AFFILIATE"). Comcast shall use its reasonable best efforts to obtain and
deliver to AT&T a written agreement from each Comcast Rule 145 Affiliate as soon
as practicable and, in any event, at least 30 days prior to the Effective Time,
substantially in the form attached as Exhibit B.
SECTION 9.08. Governance and Other Matters. Parent shall take all actions
necessary so that at the Effective Time the Parent Board of Directors shall
consist of 12 directors, five (5) of whom shall be then-existing Comcast
directors designated by Comcast, five (5) of whom shall be then-existing AT&T
directors designated by AT&T and two (2) of whom shall be Independent Persons
jointly designated by Comcast and AT&T. Except as set forth on the Comcast
Disclosure Schedule or the AT&T Disclosure Schedule, the individuals designated
to be members of the Parent Board of Directors shall be mutually agreed by
Comcast and AT&T. The senior officers of Parent at the Effective Time shall be
designated by the chief executive officer of Comcast in consultation with the
chief executive officer of AT&T. Until Parent's 2005 annual meeting of
shareholders, Parent shall maintain an executive office in the New York City
metropolitan area. The headquarters for Parent shall initially be in
Philadelphia, Pennsylvania.
SECTION 9.09. Notices of Certain Events. Each of Comcast and AT&T shall
promptly notify the other of:
(a) any notice or other communication from any Person alleging that
the consent of such Person is or may be required in connection with the
transactions contemplated hereby;
(b) any notice or other communication from any Governmental Authority
in connection with the transactions contemplated hereby;
(c) the occurrence, or nonoccurrence, of any event the occurrence, or
nonoccurrence, of which would reasonably be expected to cause any
representation or warranty contained herein to be untrue or inaccurate in
any material respect at any time during the period commencing on the date
hereof and ending at the Effective Time; and
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(d) any failure of such party to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it hereunder;
provided, however, that the delivery of any notice pursuant to this Section
9.09 shall not limit or otherwise affect the remedies available hereunder
to the party receiving such notice.
SECTION 9.10. Section 16 Matters. Prior to the Effective Time, Comcast,
AT&T and AT&T Broadband shall take all such actions as may be required to cause
any (i) dispositions of AT&T Common Stock or AT&T Broadband Common Stock
(including derivative securities with respect to AT&T Common Stock or AT&T
Broadband Common Stock) or Comcast Common Stock (including derivative securities
with respect to Comcast Common Stock) or (ii) acquisitions of Parent Common
Stock (including derivative securities with respect to Parent Common Stock)
resulting from the transactions contemplated by this Agreement by each
individual who is subject to the reporting requirements of Section 16(a) of the
1934 Act with respect to AT&T, AT&T Broadband or Comcast, or will become subject
to such reporting requirements with respect to Parent, to be exempt under Rule
16b-3 promulgated under the 1934 Act.
SECTION 9.11. Director and Officer Liability. (a) Parent shall indemnify
and hold harmless and advance expenses to 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 Effective Time becomes an officer or director of AT&T, an AT&T
Subsidiary, AT&T Broadband, an AT&T Broadband Subsidiary, Comcast or a Comcast
Subsidiary (each an "INDEMNIFIED PERSON"), in respect of acts or omissions by
them in their capacities as such occurring at or prior to the Effective Time
(including for acts or omissions occurring in connection with this Agreement and
the consummation of the transactions contemplated hereby) to the maximum extent
permitted by law ("INDEMNIFIED LOSSES"); provided that notwithstanding the
foregoing Parent shall have no obligation to indemnify and hold harmless and
advance expenses to any Indemnified Person in respect of acts or omissions of
such Indemnified Person that occurred while such Indemnified Person was acting
in a capacity for AT&T and its Subsidiaries other than in connection with either
the AT&T Broadband Group or this Agreement and the transactions contemplated
hereby; provided, further, that AT&T shall indemnify and hold harmless Parent
for 50% of any Indemnified Losses arising out of acts or omissions of the AT&T
officers and directors in connection with this Agreement and the consummation of
the transactions contemplated hereby. Without limiting the generality of the
foregoing, the Indemnified Losses shall include reasonable costs of prosecuting
a claim under this Section 9.11(a). Parent shall periodically advance or
reimburse each Indemnified Person for all reasonable fees and expenses of
counsel constituting Indemnified Losses as such fees and expenses are incurred;
provided that such Indemnified Person shall agree to promptly repay to Parent
the amount of any such reimbursement if it shall be judicially determined by
judgment or order not subject to further appeal or discretionary review that
such Indemnified Person is not entitled to be indemnified by Parent in
connection with such matter. In the event that Parent sells, transfers or leases
all or substantially all of its assets or is not a surviving corporation in any
merger, consolidation or other business combination in which it may enter with
any Person, Parent shall, as a condition of any such transaction, cause such
purchaser or such surviving corporation, as the case may be, to assume Parent's
obligations under this Section 9.11 upon the consummation of any such
transaction.
(b) For six years after the Effective Time, Parent shall provide or shall
cause each of the Surviving Corporations to provide officers' and directors'
liability insurance in respect of acts or omissions occurring prior to the
Effective Time (including for acts or omissions occurring in connection with
this Agreement and the consummation of the transactions contemplated hereby),
covering each such Indemnified Person (but, in the case of officers and
directors of AT&T and its Subsidiaries, only in respect of acts or omissions of
such person acting in connection with the AT&T Broadband Group or this Agreement
and the transactions contemplated hereby) currently covered by the officers' and
directors' liability insurance policy of AT&T or Comcast, as the case may be, on
terms with respect to coverage and amount (including with respect to the payment
of attorneys' fees) no less favorable than those of such policy in effect on the
date hereof; provided that, if the aggregate annual premiums for such insurance
during such
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period shall exceed 300% of the per annum rate of premium paid by either AT&T or
Comcast as of the date hereof for such insurance, then Parent shall provide or
cause to be provided a policy for the applicable individuals with the best
coverage as shall then be available at 300% of such rate (it being agreed that
in the event that Parent or its Affiliate shall pay premiums in excess of such
rate in order to cover directors or officers of one such entity, it shall pay
premiums at such higher rate to cover directors or officers of the other such
entity).
(c) The rights of each Indemnified Person and his or her heirs and legal
representatives under this Section 9.11 shall be in addition to any rights such
Indemnified Person may have under the certificate of incorporation or bylaws of
AT&T, any AT&T Subsidiary, AT&T Broadband, any AT&T Broadband Subsidiary,
Comcast or any Comcast Subsidiary, or under the PBCL, the NYBCL, the DGCL or any
other applicable law.
SECTION 9.12. Listing of Stock. Comcast and Parent shall use their
respective reasonable best efforts to cause the shares of Parent Class A Common
Stock and the Parent Class A Special Common Stock (and, if applicable, Parent
Class C Common Stock) to be issued in connection with the Mergers and reserved
for issuance in connection with the AT&T Stock Options, the AT&T Equity Awards,
the Comcast Options and the Comcast Equity Awards to be approved for listing on
Nasdaq subject to official notice of issuance.
SECTION 9.13. Employee Matters. (a) Parent shall and shall cause its
Subsidiaries (including the AT&T Broadband Surviving Corporation and the Comcast
Surviving Corporation) to:
(i) honor the terms of all Broadband Employee Plans and Broadband
Benefit Arrangements, and to pay or provide, or cause its Subsidiaries to
pay or provide, the benefits required thereunder, recognizing that the
consummation of the transactions contemplated hereby will constitute a
"change in control" for purposes of the Broadband Employee Plans and
Broadband Benefit Arrangements that include a provision for modifications
to benefits in the event of a "change in control";
(ii) until December 31, 2003 (the "BENEFITS MAINTENANCE PERIOD"), with
respect to Broadband Employees (other than those subject to collective
bargaining obligations or agreements), provide a level of aggregate
employee benefits and compensation, taking into account all Employee Plans
and Benefit Arrangements and other programs sponsored or maintained by AT&T
and the AT&T Subsidiaries listed in Section 6.18(a) of the AT&T Disclosure
Schedule to the extent they remain in effect, but excluding any severance,
separation, or similar plan, program, policy or arrangement ("SEVERANCE
PLANS") that is substantially comparable in the aggregate to the aggregate
employee benefits and compensation provided, with respect to service to
AT&T Broadband or any of the AT&T Broadband Subsidiaries, to the Broadband
Employees immediately prior to the Effective Time (excluding benefits
provided under any Severance Plans); and
(iii) until December 31, 2003, continue, without any change adverse to
Broadband Employees, each severance plan identified in Section 6.18(a) of
the AT&T Disclosure Schedule (the "AT&T SEVERANCE PLANS").
(b) If Broadband Employees are included in any Employee Plan, Benefit
Arrangement or International Plan sponsored or maintained by Parent or any of
its Subsidiaries following the Effective Time, the Broadband Employees shall
receive credit for service with AT&T and the AT&T Subsidiaries and their
predecessors prior to the Effective Time to the same extent and for the same
purposes thereunder as such service was counted under similar predecessor
Employee Plans and Benefit Arrangements for all purposes (except that, with
respect to benefit accrual, such service shall not be counted to the extent that
it would result in a duplication of benefits and shall not be counted for
purposes of benefit accrual under any defined benefit plan); provided, however,
that service with respect to Broadband Employees subject to collective
bargaining agreements or obligations shall be determined under such collective
bargaining agreements or obligations. Notwithstanding the foregoing, as soon as
practicable after the Benefits Maintenance Period, Broadband Employees who
satisfy eligibility requirements shall be allowed to participate in any
retirement medical or life insurance benefit plan then sponsored or
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maintained by Parent or any of its Subsidiaries. If Broadband Employees or their
dependents are included in any medical, dental or health plan (a "SUCCESSOR
PLAN") other than the plan or plans in which they participated immediately prior
to the Effective Time (a "PRIOR PLAN"), any such Successor Plan shall not
include any restrictions or limitations with respect to pre-existing condition
exclusions or any actively-at-work requirements (except to the extent such
exclusions were applicable under any similar Prior Plan at the Effective Time)
and any eligible expenses incurred by any Broadband Employee and his or her
covered dependents during the portion of the plan year of such Prior Plan ending
on the date such employee's participation in such Successor Plan begins shall be
taken into account under such Successor Plan for purposes of satisfying all
deductible, coinsurance and maximum out-of-pocket requirements applicable to
such Broadband Employee and his or her covered dependents for the applicable
plan year as if such amounts had been paid in accordance with such Successor
Plan. Without limiting the generality of the foregoing, for purposes of
determining severance pay and benefits under any applicable Broadband Severance
Plan or other Severance Plan covering a Broadband Employee at or after the
Effective Time, each Broadband Employee shall receive credit for service prior
to the Effective Time with AT&T and the AT&T Subsidiaries and their predecessors
to the same extent and for the same purposes as such service was counted under
the applicable Broadband Severance Plans as in effect before the Effective Time,
as well as for service from and after the Effective Time with Parent and any of
its Subsidiaries (including the AT&T Broadband Surviving Corporation and the
Comcast Surviving Corporation).
(c) As soon as practicable after the Effective Time, Parent shall offer a
one-time grant of options to purchase a number of shares of Parent Common Stock
equal to 300 multiplied by the Exchange Ratio to each full-time employee of
Parent or any of its Subsidiaries (excluding any employee of a non-wholly owned
Comcast Subsidiary if the applicable subsidiary was a non-wholly owned Comcast
Subsidiary prior to the Effective Time, but including, for the avoidance of
doubt, each Broadband Employee).
(d) Except as otherwise specifically set forth above, nothing contained
herein shall be construed as requiring Parent or any of its Subsidiaries to
continue any specific Employee Plan or Benefit Arrangement, or to continue the
employment of any specific person; provided, however, that any changes that
Parent or any of its Subsidiaries may make to any such Employee Plan or Benefit
Arrangement are permitted by the terms of the applicable Employee Plan or
Benefit Arrangement and under any applicable law.
SECTION 9.14. Employment Agreements. Parent shall offer to enter into an
employment agreement, effective as of the Effective Time, with each of Mr. Brian
L. Roberts, Mr. Ralph J. Roberts and Mr. C. Michael Armstrong, in each case on
substantially the same terms as his existing employment agreement with Comcast
or AT&T, as the case may be, except that (a) "Parent" shall be substituted for
"Comcast" or "AT&T", as the case may be, wherever such term appears in his
existing employment agreement, (b) such additional concomitant adjustments as
may be necessary to reflect the foregoing shall be made, (c) such additional
changes to reflect the provisions with respect to governance set forth in the
Parent Charter shall be made and (d) the term of the employment agreement shall
be extended to terminate no earlier than the date of the annual meeting of
shareholders of Parent in 2005.
SECTION 9.15. Interim Finance Committee. (a) The parties agree promptly
to establish an Interim Finance Committee, comprised of Lawrence S. Smith (or if
he is unavailable to serve, another senior officer of Comcast appointed by
Comcast) and Charles Noski (or if he is unavailable to serve, another senior
officer of AT&T Broadband appointed by AT&T) for the purpose of engaging in
financial planning for AT&T Broadband. The Interim Finance Committee will seek
to arrange financing (the "FINANCING") in an amount sufficient to (a) pay to
AT&T at the Effective Time an amount equal to any Indebtedness owed by any AT&T
Broadband Entity to AT&T or any of its Subsidiaries (other than any AT&T
Broadband Entity) at such time (including, if applicable, the intercompany
Indebtedness referred to in Section 9.18), (b) refinance any of the TOPRS that
will be called for redemption at the Effective Time or shortly thereafter and
(c) provide appropriate cash reserves to fund the operations of AT&T Broadband
after the Effective Time, including the costs and expenses of AT&T Broadband
under Section 11.03(a). In the event the Interim Finance Committee agrees upon
the Financing, Comcast shall use its reasonable best efforts to arrange for the
Financing on the terms agreed by the Interim Finance Committee. In the event
Comcast is unable to obtain the Financing so agreed upon by the Interim Finance
Committee or the
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Interim Finance Committee does not agree upon the Financing, Comcast shall
arrange for a senior credit facility with a term not exceeding five years to
provide the Financing. The Interim Finance Committee may consult with financial
advisors to the extent it deems necessary or advisable.
(b) The Interim Finance Committee shall also have responsibility for
monitoring AT&T's progress in obtaining the Note Consents and in taking other
actions in furtherance of the satisfaction of the condition specified in Section
10.01(l). At the request of AT&T, the Interim Finance Committee shall give due
consideration to any request made by AT&T that Comcast share in costs and
expenses incurred by AT&T in connection with an exchange offer, a tender offer,
a defeasance or other action proposed by AT&T in furtherance of satisfaction of
the condition specified in Section 10.01(l). After such consideration, the
Interim Finance Committee shall deliver a recommendation to Comcast of the
portion (if any) of the costs and expenses that the Interim Finance Committee
reasonably believes represents Comcast's equitable share of the costs and
expenses that would be incurred in connection with such action. Comcast shall
give due consideration to the recommendation of the Interim Finance Committee
but shall have no obligation to pay AT&T for any of such costs and expenses
unless Comcast expressly consents thereto in writing. Any expenses that Comcast
so expressly consents to pay shall, to the extent incurred, be treated as costs
of obtaining Note Consents for purposes of this Section 9.15(b) and Section
11.03(a). The costs and expenses of obtaining the Note Consents shall be paid
for by AT&T except as provided in Section 11.03(a).
SECTION 9.16. TOPRS. (a) Subject to Section 9.16(d), at the Effective
Time, Parent shall (i) call for redemption each series of TOPRS that is
redeemable in accordance with its terms at the Effective Time and as to which
AT&T has guaranteed the obligations of the applicable Subsidiary Trust, issuer
or other obligor, (ii) cause AT&T to be released from any such guarantee of the
obligations of the applicable Subsidiary Trust, issuer or other obligor in
respect of such series or (iii) comply with Section 9.16(d) with respect to such
series.
(b) Subject to Section 9.16(d), with respect to any series of TOPRS that is
not redeemable in accordance with its terms at the Effective Time and as to
which AT&T has guaranteed the obligations of the applicable Subsidiary Trust,
issuer or other obligor, Parent shall (i) redeem, or cause to be redeemed, such
series of TOPRS on the earliest date on which such TOPRS may be redeemed in
accordance with their terms, (ii) cause AT&T to be released from any such
guarantee of the obligations of the applicable Subsidiary Trust, issuer or other
obligor on such date in respect of such series or (iii) comply with Section
9.16(d) with respect to such series on such date.
(c) The parties shall reasonably cooperate prior to the Effective Time in
connection with the transactions contemplated by this Section 9.16.
(d) If Parent does not comply with its obligations under Section 9.16(a)(i)
or (ii) or Section 9.16(b)(i) or (ii), then with respect to each series as to
which it has failed to so comply, it will post, or cause to be posted at the
applicable time set forth above, a letter of credit from a United States
financial institution reasonably acceptable to AT&T containing the terms
contemplated hereby and otherwise in form and substance reasonably acceptable to
AT&T (including any renewals thereof, the "LETTER OF CREDIT"). The term of the
initial Letter of Credit shall be no less than one year. Prior to the 60 days
prior to the expiration of any Letter of Credit, Parent shall renew or extend,
or cause to be renewed or extended, the Letter of Credit for at least one
additional year. AT&T shall be entitled to draw under any Letter of Credit if
AT&T makes any payment in respect of its guarantees relating to the TOPRS or if
any Letter of Credit is not renewed at least 60 days prior to the expiration
thereof on the terms contemplated by this Section. The face amount of each
Letter of Credit shall at all times be no less than the combined monetary
liabilities under guarantees with respect to the principal amount of notes held
by the applicable trust of all series of TOPRS as to which Parent has not
complied with Section 9.16(a)(i) or (ii) or Section 9.16(b)(i) or (ii) above and
as to which AT&T has guaranteed (A) the obligations of the applicable Subsidiary
Trust, issuer or other obligor with respect to such unredeemed TOPRS and (B) the
obligations of AT&T Broadband, LLC or MediaOne Group, Inc., as applicable, as
"Sponsor" pursuant to the declaration of trust applicable to the issuing
Subsidiary Trust. The obligation of Parent to
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post, or cause to be posted, the Letter of Credit shall terminate with respect
to any portion of the TOPRS with respect to which any guarantee of AT&T is
fully, irrevocably and unconditionally released and discharged, whether as a
result of refinancing or otherwise. Upon the posting, if any, of the Letter of
Credit, Parent shall provide AT&T with copies of all documentation relating to
such Letter of Credit and all such documentation shall be in form and substance
reasonably satisfactory to AT&T.
SECTION 9.17. Consideration. AT&T and Comcast acknowledge and agree that
the grant by AT&T Broadband of the rights pursuant to Section 2.11 of the
Separation and Distribution Agreement and the assumption by AT&T Broadband of
the deferred tax liability pursuant to Section 3.7(f) of the Tax Sharing
Agreement constitute a portion of the consideration payable in respect of the
AT&T Broadband Group's interest in TWE.
SECTION 9.18. QUIPS. (a) If on the date that would otherwise be the
Closing Date the QUIPS Exchange does not occur (such date, the "QUIPS FAILURE
DATE"), then subject to Section 9.18(c), the Closing Date shall be delayed as
provided in this Section 9.18. Following the QUIPS Failure Date, AT&T and
Comcast will use their commercially reasonable efforts to consummate the QUIPS
Exchange. If Microsoft thereafter agrees to consummate the QUIPS Exchange, then
subject to the QUIPS Exchange occurring on the Closing Date, the Closing Date
shall occur on the earliest date practicable or, if on such date all conditions
to the Mergers set forth in Article 10, other than conditions that by their
nature are to be satisfied at the Effective Time, are not satisfied or (to the
extent permissible) waived, on the earliest date after such date on which all
such conditions are satisfied or (to the extent permissible) waived unless this
Agreement is previously terminated in accordance with its terms.
(b) In the event that the Closing Date does not occur within thirty (30)
days of the QUIPS Failure Date, AT&T may for a period of fifteen (15) calendar
days commencing on such 30th day elect to terminate this Agreement by giving two
Business Days' written notice to Comcast of its intent to terminate this
Agreement pursuant to this Section 9.18(b). Notwithstanding the foregoing,
AT&T's notice to terminate this Agreement pursuant to this Section 9.18(b) shall
not be effective if, prior to the expiration of such two Business Day period,
Comcast delivers a written notice pursuant to and in accordance with the second
sentence of Section 9.18(c) (which notice complies with the proviso thereof),
unless Comcast fails to close within 60 days of the QUIPS Failure Date, in which
event AT&T shall be entitled to terminate this Agreement.
(c) If the Closing Date has not occurred pursuant to Section 9.18(a) and
AT&T has not effectively terminated this Agreement pursuant to Section 9.18(b),
Comcast shall have the right to delay the consummation of the Mergers and the
other transactions contemplated by this Agreement until the date that is one
hundred eighty (180) calendar days after the QUIPS Failure Date. At any time
prior to the expiration of the 180 calendar day period referred to in the
preceding sentence, Comcast may elect to consummate the Mergers and the other
transactions contemplated by this Agreement on ten (10) Business Days' written
notice to AT&T in which event the Closing Date shall occur on the date specified
by Comcast in its notice or, if on such date all conditions to the Mergers set
forth in Article 10, other than conditions that by their nature are to be
satisfied at the Effective Time, are not satisfied or (to the extent
permissible) waived, on the earliest date after such date on which all such
conditions are satisfied or (to the extent permissible) waived; provided that if
Comcast delivers a notice pursuant to this Section 9.18(c) prior to the second
Business Day occurring after the forty-fifth calendar day after the QUIPS
Failure Date, Comcast must specify a date in its notice that is no later than
the sixtieth day after the QUIPS Failure Date. Notwithstanding the foregoing,
the Closing Date shall occur no later than the date that is one hundred eighty
(180) calendar days after the QUIPS Failure Date or, if on such date all
conditions to the Mergers set forth in Article 10, other than conditions that by
their nature are to be satisfied at the Effective Time, are not satisfied or (to
the extent permissible) waived, on the earliest date after such date on which
all such conditions are satisfied or (to the extent permissible) waived.
(d) If at any time during the 180 calendar day period specified above, it
appears reasonably unlikely that the QUIPS Exchange shall occur, AT&T and
Comcast will use their commercially reasonable efforts to obtain, on terms
reasonably acceptable to Comcast and AT&T, the consent of Microsoft to the QUIPS
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Transfer. If Microsoft consents to the QUIPS Transfer in accordance with the
preceding sentence and on any Closing Date specified or determined pursuant to
Section 9.18(c) the QUIPS Exchange does not occur, the QUIPS Transfer shall be
effected on such Closing Date.
(e) On any Closing Date specified or determined pursuant to Section
9.18(c), if neither the QUIPS Exchange nor the QUIPS Transfer occurs, AT&T
Broadband will, immediately prior to the Separation on such Closing Date, issue
a note to AT&T representing Indebtedness in an amount equal to the QUIPS Fair
Market Value as determined as set forth below in Section 9.18(f) in exchange for
cash proceeds equal to such amount and AT&T Broadband will immediately after
receipt of such cash proceeds dividend such cash proceeds to AT&T, as holder of
all of the AT&T Broadband Common Stock.
(f) Within 10 (ten) Business Days after the QUIPS Failure Date, each of
AT&T and Comcast shall deliver to the other an appraisal conducted by an
investment banking firm of nationally recognized standing of the fair market
value of the QUIPS at such time. If the higher of the two appraisals is not
greater than 110% of the lower of the two appraisals, then the average of the
two appraisals shall be deemed to be the fair market value of the QUIPS. If the
higher of the two appraisals is greater than 110% of the lower of the two
appraisals, then the two investment banking firms shall promptly select a third
investment banking firm of nationally recognized standing acceptable to Comcast
and AT&T and shall cause such firm to deliver within ten (10) Business Days of
the delivery of the initial appraisals an appraisal of the fair market value of
the QUIPS. In the event such third appraisal is required pursuant to the
immediately preceding sentence, the fair market value of the QUIPS as determined
by such third appraisal shall be averaged with the initial appraisal that was
closer in value to such third appraisal and such average shall be deemed to be
the fair market value of the QUIPS. The fair market value of the QUIPS as
determined pursuant to this Section 9.18(f) is referred to herein as the "QUIPS
FAIR MARKET VALUE" and shall be determined without regard to accrued and unpaid
interest on the QUIPS.
(g) Notwithstanding any other provision of this Agreement, if the Closing
Date is delayed pursuant to this Section 9.18, the End Date shall be extended
for the aggregate period of the delay; provided that the End Date shall in no
event be extended pursuant to this Section 9.18(g) for a period exceeding one
hundred eighty-five (185) calendar days after the QUIPS Failure Date.
(h) In the event that the QUIPS Exchange and the QUIPS Transfer do not
occur, AT&T Broadband shall have no liability in respect of the QUIPS other than
as provided in Section 5.03(e) of the Separation and Distribution Agreement and
subject to Section 9.18(e).
(i) AT&T and Comcast acknowledge and agree that in the event of an Exchange
Closing (as defined in the Exchange Agreement), notwithstanding anything to the
contrary in the Indenture or in the Trust Agreement, interest in respect of the
Debentures and Distributions (as defined in the Exchange Agreement) in respect
of the QUIPS shall accrue up to and including the day immediately prior to, and
shall be payable on, the date of the Exchange Closing.
(j) For purposes of this Section 9.18, "QUIPS TRANSFER" means the following
actions: (i) the execution by AT&T Broadband of documents and agreements
identical in form, substance and economic effect to the holder of QUIPS to the
existing QUIPS transaction documents (including, but not limited to, the Trust
Agreement, the Trust Common Securities, the Indenture, the Debentures, the
Guarantee Agreement, the Expense Agreement and the Registration Rights Agreement
and any documents or agreements executed in connection therewith or delivered
pursuant thereto, but excluding any such documents or provisions of such
documents relating to the warrants issued to Microsoft in connection with the
sale of the QUIPS or relating to commercial transactions entered into in
connection with the issuance of the QUIPS), except such differences as are
required to reflect the identity of AT&T Broadband (rather than AT&T) as party
to each thereof and except that Article 12 of Indenture will provide that, prior
to the Mergers, the Debentures will be convertible into AT&T Broadband Common
Stock and following the Mergers, the Debentures will be convertible into shares
of Parent Common Stock, in each case, at a conversion price appropriately
adjusted for the Distribution and the Mergers, (ii) the delivery by AT&T
Broadband of all such replacement QUIPS transaction documents other than the
replacement Trust Common Securities to AT&T or its designee and retention by
AT&T Broadband of the replacement Trust
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Common Securities, (iii) the delivery by AT&T or AT&T's designee of all such
replacement QUIPS transaction documents received from AT&T Broadband to
Microsoft in exchange for transfer by Microsoft to AT&T of the existing QUIPS
transaction documents and the release of AT&T and its subsidiaries in full from
any obligations under any of such agreements and the termination of all rights
of Microsoft thereunder other than the documents and rights relating to the
warrants issued to Microsoft by AT&T in connection with the sale of the QUIPS
and (iv) the termination of any further liability of the AT&T Broadband Group in
respect of the QUIPS; all of the foregoing to be on terms reasonably
satisfactory to AT&T and AT&T Broadband.
SECTION 9.19. Index Stock. Each of Parent, Comcast and AT&T agrees to use
its reasonable best efforts to cause (i) if the Preferred Structure Approval is
obtained, the Parent Class A Common Stock to be included in the Index at the
Effective Time or as promptly thereafter as possible or (ii) if the Preferred
Structure Approval is not obtained, the Parent Class C Common Stock to be
included in the Index at the Effective Time or as promptly thereafter as
possible.
SECTION 9.20. Use of Name and Logo. (a) For a period of 180 calendar days
after the Closing Date, each of Parent and its Subsidiaries will be granted a
limited, non-exclusive, non-transferable, royalty-free license to use the
trademarks, trade names, service marks, service names, logos and other indicia
of origin of AT&T or any of its Subsidiaries (the "AT&T MARKS") to the same
extent, and in the same manner as, used at the Effective Time; provided that
each of Parent and its Subsidiaries will exercise commercially reasonable
efforts to remove all AT&T Marks from the AT&T Broadband Assets as soon as
reasonably practicable, and in any event within 180 calendar days, following the
Closing Date. After 180 calendar days following the Closing Date, Parent and its
Subsidiaries shall have no further rights or licenses to use any of the AT&T
Marks in connection with any products or services.
(b) During the 180 calendar day period provided above, Parent and its
Subsidiaries shall ensure that any products or services being provided in
connection with the AT&T Marks are provided in accordance with standards of
quality equal to or greater than the standards of quality relating to products
and services which AT&T and its Subsidiaries provided under the AT&T Marks
immediately prior to the Effective Time. AT&T may conduct during regular
business hours and with ten (10) calendar days prior notice an examination of
products and services being provided by Parent or its Subsidiaries under the
AT&T Marks at Parent's facilities to determine compliance of such products and
services with the applicable standards of quality. If such products and services
shall, in the reasonable opinion of AT&T, fail to conform with such standards of
quality AT&T shall so notify Parent. Upon such notification Parent and its
Subsidiaries shall have a reasonable time within which to conform with the
standards of quality.
(c) Notwithstanding the foregoing, nothing in this Section 9.20 will
require any of Parent and its Subsidiaries to remove or discontinue using any
such name or mark that is affixed to converters or other items already installed
in or to be used in customer homes or properties and neither Parent nor any of
its Subsidiaries will have any liability in respect thereof; provided that at
the first time Parent or its Subsidiaries shall have access to such converters
or other items (e.g., for repair or replacement), Parent or its Subsidiaries
shall completely obliterate or affix a label that completely obscures any AT&T
Mark on such converters or other items.
SECTION 9.21. Exchange Agreement. Concurrently with the execution of this
Agreement, AT&T and Parent are executing the Admission Agreement pursuant to
which AT&T and Parent are (i) agreeing to effect the Exchange and, if necessary,
the unwind of the QUIPS Exchange, as provided in the Exchange Agreement, (ii)
becoming parties to the Exchange Agreement and (iii) making the representations
and warranties referred to in Sections 9.01(b) and 9.01(c), respectively,
thereof. AT&T will provide information to Comcast in order to permit Comcast to
satisfy its obligations under Section 6.06(b) of the Exchange Agreement, subject
to applicable pre-existing third party confidentiality restrictions and subject
to applicable law. AT&T and Parent agree that Microsoft will be a third party
beneficiary of the first sentence of this Section 9.21.
SECTION 9.22. Significant Excepted Transactions. (a) AT&T may enter into
an agreement relating to a Significant Excepted Transaction but only if such
agreement would not reasonably be expected to
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result in a delay in the consummation of the transactions contemplated by this
Agreement past the End Date; provided that, in such event, at the request of
Comcast, the End Date shall be extended by the reasonably expected period of
delay in the consummation of the transactions contemplated by this Agreement
caused by such Significant Excepted Transaction up to 60 days.
(b) If AT&T proposes to enter into an agreement relating to a Significant
Excepted Transaction that would reasonably be expected to result in a delay in
the consummation of the transactions contemplated by this Agreement past the End
Date but which would not reasonably be expected to result in a delay in the
consummation of the transactions contemplated by this Agreement to a date that
is more than sixty (60) calendar days after the End Date, then at the request of
AT&T, AT&T and Comcast will use commercially reasonable efforts to obtain the
consent of Microsoft to extend the date specified in Section 10.01(c) of the
Exchange Agreement to the date after the End Date (which date shall be no later
than sixty (60) calendar days after the End Date) on which it is reasonably
anticipated that the transactions contemplated by this Agreement may be
consummated if AT&T were to enter into the proposed agreement relating to the
Significant Excepted Transaction. If Microsoft does not agree to so extend the
date specified in Section 10.01(c) of the Exchange Agreement, AT&T may not enter
into the proposed agreement relating to the Significant Excepted Transaction. If
Microsoft does agree to so extend such date, AT&T may enter into the proposed
agreement relating to the Significant Excepted Transaction; provided that AT&T
agrees to pay and be responsible for any costs, expenses or fees payable in
connection with obtaining the consent of Microsoft to so extend such date and to
indemnify AT&T Broadband from any such costs, expenses or fees. In the event
AT&T enters into the agreement relating to the Significant Excepted Transaction,
the End Date shall be extended to the same date that Microsoft has agreed to
extend the date specified in Section 10.01(c) of the Exchange Agreement but in
no event more than 60 days after the prior End Date.
(c) AT&T may not enter into any agreement relating to a Significant
Excepted Transaction that would reasonably be expected to result in a delay in
the consummation of the transactions contemplated by this Agreement to a date
that is more than sixty (60) calendar days after the End Date.
(d) For purposes of this Section 9.22, the reasonably expected delay in the
consummation of the transactions contemplated by this Agreement that would
result from a Significant Excepted Transaction shall be determined as of the
date that AT&T would propose to enter into an agreement relating to a
Significant Excepted Transaction.
SECTION 9.23. Comcast's AT&T Stock. (a) (i) Prior to the Distribution
Date, AT&T shall designate a series of preferred shares, par value $1.00 per
share, of AT&T as the "Series K Exchangeable Preferred Stock" (the "AT&T
EXCHANGEABLE PREFERRED STOCK"). The AT&T Exchangeable Preferred Stock issued in
accordance with Section 9.23(a)(ii) shall in the aggregate be mandatorily
exchangeable on the twenty-third (23rd) Combined Trading Day following the
Closing Date (the "EXCHANGE DATE") into a number of shares of AT&T Common Stock
equal to the Exchange Amount (as adjusted to account for any stock split,
dividend, reclassification, recapitalization, stock combination or similar event
the record date for which is after the Record Date and on or before the Exchange
Date; provided that, in the event AT&T declares a stock dividend the record date
for which is the Distribution Date (other than the Distribution), then (x) in
lieu of shares of AT&T Common Stock the AT&T Exchangeable Preferred Stock shall
instead be exchangeable into a combination of AT&T Common Stock and, for each
such share of AT&T Common Stock, such shares of stock as are distributed upon
each share of AT&T Common Stock in such stock dividend (the "DIVIDEND STOCK")
and (y) the number of shares of AT&T Common Stock and Dividend Stock for which
the shares of AT&T Exchangeable Preferred Stock shall be exchangeable shall be
determined according to a formula based upon the formula provided in the
definition of "Exchange Amount," appropriately adjusted to account for such
stock dividend by including the Trading Value or NYSE Trading Value, as the case
may be, of such Dividend Stock in such formula), it being understood that the
10% limitation set forth in the definition of Exchange Amount shall apply to
each class of stock to be issued in the exchange. Subject to the foregoing, the
AT&T Exchangeable Preferred Stock shall have such rights, preferences and
limitations as AT&T and Comcast shall mutually agree prior to the date that is
two Business Days prior to the Record Date.
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(ii) Immediately prior to the Record Date, Comcast shall exchange or cause
to be exchanged each share of AT&T Common Stock held by Comcast or by any
Comcast Subsidiary for one share of AT&T Exchangeable Preferred Stock and AT&T
and Comcast shall make customary representations and warranties in connection
therewith.
(b) If immediately after giving effect to the mandatory exchange on the
Exchange Date pursuant to Section 9.23(a)(i), Comcast and the Comcast
Subsidiaries own more than 5% of the outstanding shares of AT&T Common Stock,
Comcast agrees that it will sell or cause to be sold such excess shares within
one year after the Exchange Date. Prior to the time that such excess shares are
sold, Comcast agrees that it will vote or cause to be voted such excess shares
on all matters submitted to shareholders of AT&T in the same proportion as all
other holders of such stock vote on such matter. In the event that, as of the
Exchange Date, all of the excess shares could not be sold under Rule 144 under
the 1933 Act within three months of the Exchange Date, AT&T shall provide
customary registration rights in respect of such excess shares. The provisions
of this Section 9.23(b) shall also apply to any Dividend Stock.
(c) AT&T shall not effect any stock dividend the record date for which is
between the date following the Record Date and the Exchange Date, inclusive.
(d) The shares of AT&T Common Stock (and Dividend Stock, if any) issued on
exchange of the AT&T Exchangeable Preferred Stock shall be considered
Registrable Securities (as defined in the AT&T Registration Rights Agreement),
but subject to the last sentence of such definition.
ARTICLE 10
CONDITIONS TO THE MERGERS
SECTION 10.01. Conditions to the Obligations of Each Party. The
obligations of each party hereto to consummate the Mergers are subject to the
satisfaction of the following conditions:
(a) each of the Comcast Transaction Approval and the Comcast Parent
Charter Approval shall have been obtained;
(b) each of the AT&T Transaction Approval and the AT&T Parent Charter
Approval shall have been obtained;
(c) any applicable waiting period under the HSR Act relating to the
Mergers or the other transactions contemplated hereby shall have expired or
been terminated;
(d) no material provision of any applicable law or regulation and no
judgment, injunction, order or decree shall prohibit the consummation of
the Mergers or the other transactions contemplated hereby;
(e) the Registration Statement shall have been declared effective and
no stop order suspending the effectiveness of the Registration Statement
shall be in effect and no proceedings for such purpose shall be pending
before or threatened by the SEC;
(f) the shares of Parent Common Stock to be issued in the Mergers
(other than the shares of Parent Class B Common Stock) or reserved for
issuance in connection with the Mergers pursuant to Section 9.12 shall have
been approved for listing on Nasdaq, subject to official notice of
issuance;
(g) all License Consents, Franchise Consents, PUC Consents and other
consents and waivers, including waivers of all Purchase Rights, shall have
been obtained, be in effect and be subject to no limitations, conditions,
restrictions or obligations, except for such consents the failure of which
to obtain would not, and such limitations, conditions, restrictions or
obligations as would not, individually or in the aggregate, reasonably be
expected to have a Comcast Material Adverse Effect or an AT&T Broadband
Material Adverse Effect;
(h) no court, arbitrator or other Governmental Authority shall have
issued any order, and there shall not be any statute, rule or regulation
restraining or prohibiting the effective operation of the
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business of Parent or the AT&T Broadband Group, AT&T Broadband and the AT&T
Broadband Subsidiaries or Comcast and the Comcast Subsidiaries after the
Effective Time that would, individually or in the aggregate, reasonably be
expected to have a Comcast Material Adverse Effect or an AT&T Broadband
Material Adverse Effect;
(i) the Separation and the Distribution shall have been completed in
accordance in all material respects with the terms of the Separation and
Distribution Agreement such that, among other things, immediately prior to
the Effective Time, AT&T Broadband and the AT&T Broadband Subsidiaries are
no longer AT&T Subsidiaries;
(j) AT&T shall have obtained a supplemental private letter ruling or
rulings from the IRS, in form and substance reasonably satisfactory to AT&T
and Comcast, on the basis of submissions to the IRS which are reasonably
satisfactory to AT&T and Comcast (provided that Comcast shall not be
entitled to review those portions of any submission to the IRS that contain
(1) information that relates to the AT&T Communications Business (as
defined in the Separation and Distribution Agreement) or (2) information
disclosure of which to Comcast could (A) violate a confidentiality or
similar agreement between AT&T or one of the AT&T Subsidiaries and another
Person or (B) have a significant adverse effect on AT&T or any of its
businesses), which shall be in effect on the Closing Date, to the effect
that (x) the Separation and Distribution qualify as tax-free transactions
pursuant to Sections 355 and 368(a) of the Code, (y) the Mergers will not
cause the Separation and Distribution to fail to be qualified as a tax-free
transaction pursuant to Section 355 of the Code and (z) the Separation and
Distribution will not cause the distribution by AT&T of all of the common
stock of AT&T Wireless Services, Inc. or of Liberty Media Corporation to
fail to qualify as tax-free transactions pursuant to Sections 355 and
368(a) of the Code. In lieu of obtaining the supplemental private letter
ruling from the IRS described in the immediately preceding sentence, AT&T
and Comcast may 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 in form and substance reasonably satisfactory to AT&T and
Comcast, on the basis of certain facts, representations and assumptions set
forth in such opinion, dated the Closing Date. In rendering the opinion
described in the preceding sentence, such tax counsel may request and shall
be entitled to rely upon certain documentation, including customary
representations of officers of AT&T and Comcast;
(k) each of the Transaction Agreements shall have been executed and
delivered by each of the parties thereto; and
(l) AT&T shall (i) have obtained Note Consents (which shall be in full
force and effect), or defeased, purchased or acquired Indebtedness (or any
combination of the foregoing), in respect of at least 90% in aggregate
principal amount of the securities outstanding as of the date of this
Agreement issued under the Notes Indenture and (ii) not have issued after
the date of this Agreement any securities under the Notes Indenture if
consummation of the Distribution or the other transactions contemplated
hereby would or may require a consent of the holders of such securities.
SECTION 10.02. Conditions to the Obligations of AT&T. The obligations of
AT&T to consummate the AT&T Broadband Merger are subject to the satisfaction of
the following further conditions:
(a) (i) Comcast shall have performed in all material respects all of
its obligations hereunder required to be performed by it at or prior to the
Effective Time, (ii) the representations and warranties of Comcast
contained in Sections 5.02, 5.03, 5.05, 5.08, 5.22 and 5.25 shall be true
in all material respects at and as of the Effective Time, as if made at and
as of such time (other than representations and warranties that address
matters only as of a certain date, which shall be true and correct as of
such date), (iii) the other representations and warranties of Comcast
contained in this Agreement and in any certificate or other writing
delivered by Comcast pursuant hereto, disregarding all qualifications and
exceptions contained therein relating to materiality or a Comcast Material
Adverse Effect or any similar standard or qualification, shall be true and
correct at and as of the Effective Time, as if made at and as of such time
(other than representations or warranties that address matters only as of a
certain date, which shall be true and correct as of such date), with only
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such exceptions as, individually or in the aggregate, have not had and
would not reasonably be expected to have a Comcast Material Adverse Effect
and (iv) AT&T shall have received a certificate signed by an executive
officer of Comcast to the foregoing effect;
(b) AT&T shall have received an opinion of Wachtell, Lipton, Rosen &
Katz in form and substance reasonably satisfactory to AT&T, on the basis of
certain facts, representations and assumptions set forth in such opinion,
dated the Closing Date, to the effect that the Mergers will be treated for
United States federal income tax purposes as 351 Transactions. In rendering
such opinion, Wachtell, Lipton, Rosen & Katz may require and shall be
entitled to rely upon certain documentation, including customary
representations of officers of Comcast and AT&T; and
(c) Comcast Shareholder (or its successor) shall have performed in all
material respects its obligations under the Support Agreement, and the
Support Agreement shall be in full force and effect.
SECTION 10.03. Conditions to the Obligations of Comcast. The obligations
of Comcast to consummate the Comcast Merger are subject to the satisfaction of
the following further conditions:
(a) (i) AT&T shall have performed in all material respects all of its
obligations hereunder required to be performed by it at or prior to the
Effective Time, (ii) the representations and warranties of AT&T contained
in Sections 6.02, 6.03, 6.05, 6.06(b), 6.06(c), 6.08, 6.22, 6.26 and 6.27
of this Agreement shall be true in all material respects at and as of the
Effective Time, as if made at and as of such time (other than
representations and warranties that address matters only as of a certain
date, which shall be true and correct as of such date), (iii) the other
representations and warranties of AT&T contained in this Agreement and in
any certificate or other writing delivered by AT&T pursuant hereto
disregarding all qualifications and exceptions contained therein relating
to materiality or AT&T Broadband Material Adverse Effect or any similar
standard or qualification shall be true at and as of the Effective Time, as
if made at and as of such time (other than representations and warranties
that address matters only as of a certain date, which shall be true and
correct as of such date), with only such exceptions as, individually or in
the aggregate, have not had and would not reasonably be expected to have an
AT&T Broadband Material Adverse Effect and (iv) Comcast shall have received
a certificate signed by an executive officer of AT&T to the foregoing
effect; and
(b) Comcast shall have received an opinion of Davis Polk & Wardwell in
form and substance reasonably satisfactory to Comcast, on the basis of
certain facts, representations and assumptions set forth in such opinion,
dated the Closing Date, to the effect that the Mergers will be treated for
United States federal income tax purposes as a 351 Transactions, In
rendering such opinion, Davis Polk & Wardwell may require and shall be
entitled to rely upon certain documentation, including customary
representations of officers of Comcast and AT&T.
ARTICLE 11
TERMINATION
SECTION 11.01. Termination. This Agreement may be terminated and the
Mergers may be abandoned at any time prior to the Effective Time
(notwithstanding any approval of this Agreement and the transactions
contemplated hereby or the Parent Charter to be implemented at the Effective
Time, including the corporate governance provisions contained therein, by the
shareholders of Comcast or AT&T or AT&T Broadband):
(a) by mutual written agreement of Comcast and AT&T;
(b) by either Comcast or AT&T, if:
(i) the Mergers have not been consummated on or before March 1,
2003 (the "END DATE"); provided, further, that the right to terminate
this Agreement pursuant to this
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Section 11.01(b)(i) shall not be available to any party hereto whose
breach of any provision of this Agreement results in the failure of the
Mergers to be consummated by the End Date;
(ii) (A) there shall be any material law or regulation that makes
consummation of the Mergers or any of the other material transactions
contemplated hereby illegal or otherwise prohibited or (B) any judgment,
injunction, order or decree of any court or other Governmental Authority
having competent jurisdiction enjoining the parties hereto from
consummating the Mergers or any of the other material transactions
contemplated hereby is entered and such judgment, injunction, order or
decree shall have become final and non-appealable;
(iii) the Comcast Transaction Approval or the Comcast Parent
Charter Approval shall not have been obtained at the Comcast
Shareholders' Meeting (or any adjournment or postponement thereof); or
(iv) the AT&T Transaction Approval or the AT&T Parent Charter
Approval shall not have been obtained at the AT&T Shareholders' Meeting
(or any adjournment or postponement thereof);
(c) by AT&T if:
(i) Comcast's Board of Directors shall have failed to call the
Comcast Shareholders' Meeting in accordance with Section 7.02(a), or
shall have breached its obligation under Section 7.02(b);
(ii) a breach of any representation, warranty, covenant or
agreement on the part of Comcast set forth in this Agreement shall have
occurred that would cause the condition set forth in Section 10.02(a)
not to be satisfied, and such condition shall be incapable of being
satisfied by the End Date;
(iii) AT&T shall have failed to call the AT&T Shareholders' Meeting
pursuant to the exercise of its delay rights under Section 8.02(a) for a
period of 120 calendar days from the date the SEC has notified the
parties of its willingness to declare the Registration Statement
effective; or
(iv) AT&T shall have the right to terminate this Agreement pursuant
to Section 9.18(b), but subject to the provisions of Section 9.18(b);
(d) by Comcast if:
(i) AT&T's Board of Directors shall have failed to recommend or
withdrawn, or modified in a manner adverse to Comcast, its approval or
recommendation of either of the proposals in respect of the AT&T
Shareholders' Approvals, or shall have failed to call the AT&T
Shareholders' Meeting in accordance with Section 8.02(a) (or AT&T's
Board of Directors resolves to do any of the foregoing);
(ii) AT&T shall have willfully and materially breached any of its
obligations under Section 8.02(b) or 8.03;
(iii) a breach of any representation, warranty, covenant or
agreement on the part of AT&T set forth in this Agreement shall have
occurred that would cause the condition set forth in Section 10.03(a)
not to be satisfied, and such condition shall be incapable of being
satisfied by the End Date; or
(iv) AT&T shall have failed to call the AT&T Shareholders' Meeting
pursuant to the exercise of its delay rights under Section 8.02(a) for a
period of 90 calendar days from the date the SEC has notified the
parties of its willingness to declare the Registration Statement
effective.
The party hereto desiring to terminate this Agreement pursuant to this
Section 11.01 (other than pursuant to Section 11.01(a)) shall give notice of
such termination to the other parties.
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SECTION 11.02. Effect of Termination. If this Agreement is terminated
pursuant to Section 11.01, this Agreement shall become void and of no effect
without liability of any party hereto (or any shareholder, director, officer,
employee, agent, consultant or representative of such party) to the other
parties hereto, except that (a) the agreements contained in this Section 11.02,
in the Confidentiality Agreements (subject to the terms thereof), and in Section
11.03 shall survive the termination hereof and (b) no such termination shall
relieve any party hereto of any liability or damages resulting from any
intentional breach by such party of a covenant or other agreement included in
this Agreement or any knowing breach of a representation or warranty included in
this Agreement.
SECTION 11.03. Fees and Expenses. (a) Except as otherwise provided in
this Section 11.03, all costs and expenses incurred in connection with this
Agreement and the other Transaction Agreements shall be paid by the party
incurring such cost or expense whether or not the Mergers are consummated.
Notwithstanding the foregoing, (i) AT&T shall pay any costs and expenses
incurred by AT&T Broadband or any AT&T Broadband Subsidiary in connection with
this Agreement and the other Transaction Agreements that are in excess of $120
million (exclusive of any costs and expenses incurred by AT&T Broadband or any
AT&T Broadband Subsidiary as described in clauses (ii), (iii), (iv) and (v) of
this sentence), (ii) AT&T Broadband shall pay any costs and expenses incurred in
connection with any financing arrangements entered into by AT&T Broadband as
contemplated by Section 9.15 (other than any costs and expenses incurred in
connection with the financing arrangements entered into by AT&T Broadband and
Parent on April 26, 2002 or May 3, 2002, which shall be paid by Comcast), (iii)
AT&T Broadband shall pay any costs and expenses (to the extent not paid by
Parent) incurred in connection with the actions contemplated by Section 9.16,
(iv) AT&T Broadband shall pay 50% of any costs and expenses 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) that are in excess of $50 million, subject to and as
determined in accordance with Sections 11.03(b) and 11.03(c), and (v) AT&T
(other than any AT&T Broadband Entity) and Comcast each shall pay 50% of any
fees and expenses, other than attorneys' and accounting fees and expenses,
incurred in relation to the printing, filing and mailing of the Registration
Statement and the Joint Proxy Statement.
(b) The costs of obtaining the Note Consents shall include (i) any
transaction costs paid in obtaining the Note Consents (including, without
limitation, the costs, expenses and commissions of any solicitation agent,
counsel, financial advisors and underwriters, any printing and mailing costs,
any SEC filing fees, rating agency fees and any costs of the trustee under the
Notes Indenture for which AT&T or any Affiliate thereof is responsible) plus
(ii)(A) the amount of any one-time cash payment made to obtain a Note Consent,
and (B) with respect to an increase in the coupon on any of the series of
securities issued under the Notes Indenture in connection with obtaining a Note
Consent, the amount equal to the excess of the present value of the increased
coupon on such series of securities over the present value of the coupon on such
series of securities immediately prior to the increase of the coupon, in each
case calculated based on "market convention" (e.g., calculated on a 30/360 day
basis in the case of a domestic fixed rate note and on an actual/360 day basis
in the case of a floating rate note, etc.) using a discount rate equal to the
Market Rate (determined as specified below in Section 11.03(c)). The amounts
described in clauses (i) and (ii) of the immediately preceding sentence shall be
reduced by the amount of any present or future tax benefit to AT&T as a result
of making any payments of such amounts. Such tax benefit shall be calculated by
multiplying the payment giving rise to the tax benefit by the highest combined
federal, state and local marginal corporate tax rate in effect as of the
Effective Time and, in the case of any future tax benefit, by discounting such
future tax benefit at the Market Rate.
(c) The Market Rate shall be determined by mutual agreement of AT&T and
Comcast. In the event AT&T and Comcast cannot reach agreement within five (5)
calendar days of the date of determination (as set forth below), the Market Rate
shall be determined by a process in which AT&T and Comcast will mutually appoint
four broker/dealer firms of national reputation to determine the then-current
market yield for each impacted series of securities. After each firm has
determined the then-current market yield for each impacted series of securities,
the arithmetic average of the four rates will be the Market Rate. In determining
each such Market Rate, the impacted series of securities shall be deemed to be
securities of
A-74
AT&T, after giving effect to the Separation, Distribution and the Mergers. Any
determination of Market Rate pursuant to this Section 11.03(c) shall be final
and binding. Each of AT&T and Comcast shall bear the fees and expenses of the
broker/dealer firms which it appoints in making such determinations. The Market
Rate shall be determined in the case of clause (ii)(B) of Section 11.03(b) as of
the settlement date of the transaction.
(d) If this Agreement is terminated pursuant to Section 11.01(b)(iii) or
11.01(c)(i), Comcast shall pay to AT&T a termination fee of $1.5 billion in cash
(without duplication) (the "COMCAST TERMINATION FEE").
(e) If this Agreement is terminated pursuant to Section 11.01(d)(i) or
11.01(d)(ii), AT&T shall pay to Comcast (or a wholly owned subsidiary of Comcast
designated by Comcast) a termination fee of $1.5 billion in cash (without
duplication) (the "AT&T TERMINATION FEE").
(f) If (i) this Agreement is terminated pursuant to Section 11.01(b)(iv),
(ii) after the date hereof and prior to the AT&T Shareholders' Meeting, an AT&T
Broadband Acquisition Proposal is made or continued or renewed by any Person and
not withdrawn prior to the AT&T Shareholders' Meeting and (iii) within one year
of the AT&T Shareholders' Meeting, either (A) AT&T or any AT&T Subsidiary enters
into an agreement with any Person with respect to an AT&T Broadband Acquisition
Proposal, that provides for (I) transfer or issuance of securities representing
more than 50% of the equity or voting interests in AT&T or the AT&T Broadband
Group or 75% of the equity or voting interests in any AT&T Significant Broadband
Subsidiary, (II) a merger, consolidation, recapitalization or another
transaction resulting in the issuance of cash or securities of any Person (other
than a reincorporation or a holding company merger that results in the AT&T
shareholders owning all of the equity interests in the surviving corporation) to
AT&T shareholders in exchange for more than 50% of the equity or voting
interests in AT&T or the AT&T Broadband Group or 75% of the equity or voting
interests in any AT&T Significant Broadband Subsidiary or (III) transfer of
assets, securities or ownership interests representing more than 50% of the
consolidated assets or EBITDA generating power of AT&T or the AT&T Broadband
Group or 75% of the consolidated assets or EBITDA generating power of any AT&T
Significant Broadband Subsidiary or (B) any Person commences a tender offer that
results in the acquisition by the Person making the tender offer of a majority
of the AT&T Common Stock, then AT&T shall pay to Comcast (or a wholly owned
subsidiary of Comcast designated by Comcast) the AT&T Termination Fee.
(g) Any payment of the Comcast Termination Fee or AT&T Termination Fee
pursuant to this Section 11.03 shall be made within one Business Day after
termination of this Agreement, except that any payment of the AT&T Termination
Fee pursuant to Section 11.03(f) shall be paid within one Business Day after it
becomes payable. Any payment of the Comcast Termination Fee or AT&T Termination
Fee shall be made by wire transfer of immediately available funds. If any party
hereto fails to pay to the other parties promptly any fee or expense due
hereunder (including the Comcast Termination Fee or AT&T Termination Fee), the
defaulting party shall pay the costs and expenses (including legal fees and
expenses) in connection with any action, including the prosecution of any
lawsuit or other legal action, taken to collect payment, together with interest
on the amount of any unpaid fee at the publicly announced prime rate of The Bank
of New York in New York City from the date such fee was required to be paid to
the date it is paid.
(h) Notwithstanding any other provision of this Agreement, any payment by
AT&T of the AT&T Termination Fee or any payment by Comcast of the Comcast
Termination Fee, in each case pursuant to Section 11.03, shall relieve (i) AT&T
and AT&T Broadband or (ii) Comcast, as the case may be, from any further
liability or damages under any provision of this Agreement (other than Section
11.03(a)) or in connection with this Agreement and the transactions contemplated
hereby.
A-75
ARTICLE 12
MISCELLANEOUS
SECTION 12.01. Notices. All notices, requests and other communications to
any party hereto shall be in writing (including facsimile transmission) and
shall be given,
if to AT&T, to:
AT&T Corp.
295 North Maple Avenue
Basking Ridge, New Jersey 07920
Attention: Marilyn J. Wasser
Fax: (908) 953-8360
with a copy to:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Attention: Richard D. Katcher
Steven A. Rosenblum
Stephanie J. Seligman
Fax: (212) 403-2000
if to Comcast or Merger Sub, to:
Comcast Corporation
1500 Market Street
Philadelphia, Pennsylvania 19102
Attention: General Counsel
Fax: (215) 981-7794
with a copy to
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Attention: Dennis S. Hersch
William L. Taylor
Fax: (212) 450-4800
or such other address or facsimile number as such party hereto may hereafter
specify for such purpose by notice to the other parties hereto. All such
notices, requests and other communications shall be deemed received on the date
of receipt by the recipient thereof if received prior to 5 p.m. on a Business
Day, in the place of receipt. Otherwise, any such notice, request or
communication shall be deemed not to have been received until the next
succeeding Business Day in the place of receipt.
SECTION 12.02. Survival. The representations and warranties contained
herein and in any certificate or other writing delivered pursuant hereto shall
not survive the Effective Time or the termination of this Agreement. The AT&T
Confidentiality Agreement shall terminate at the Effective Time. The covenants
and agreements herein that relate to actions to be taken at or after the
Effective Time shall survive the Effective Time.
SECTION 12.03. Amendments; No Waivers. (a) Subject to applicable law, any
provision of this Agreement may be amended or waived prior to the Effective Time
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 hereto or, in the case of a waiver,
by each party against whom the waiver is to be effective; provided that, after
the adoption of this Agreement by the shareholders of Comcast or AT&T, no such
amendment or waiver shall
A-76
be made or given that requires the approval of the shareholders of Comcast or
AT&T, respectively, unless such required approval is obtained.
(b) No failure or delay by any party hereto in exercising any right, power
or privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or remedies
provided by law.
SECTION 12.04. Successors and Assigns. The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns; provided that no party hereto may assign,
delegate or otherwise transfer any of its rights or obligations under this
Agreement without the consent of the other parties hereto.
SECTION 12.05. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without regard
to the conflicts of law rules of the State of New York.
SECTION 12.06. Jurisdiction. Any suit, action or proceeding seeking to
enforce any provision of, or based on any matter arising out of or in connection
with, this Agreement or the transactions contemplated hereby shall be brought in
any federal court located in the State of New York or any New York state court,
and each of the parties hereto hereby consents to the exclusive jurisdiction of
such courts (and of the appropriate appellate courts therefrom) in any such
suit, action or proceeding and irrevocably waives, to the fullest extent
permitted by law, any objection that it may now or hereafter have to the laying
of the venue of any such suit, action or proceeding in any such court or that
any such suit, action or proceeding brought in any such court has been brought
in an inconvenient form. Process in any such suit, action or proceeding may be
served on either party hereto anywhere in the world, whether within or without
the jurisdiction of any such court. Without limiting the foregoing, each party
hereto agrees that service of process on such party as provided in Section 12.01
shall be deemed effective service of process on such party.
SECTION 12.07. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY
IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING
ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY.
SECTION 12.08. Counterparts; Effectiveness. This Agreement may be signed
in counterparts, each of which shall be an original, with the same effect as if
the signatures thereto and hereto were upon the same instrument. This Agreement
shall become effective when each party hereto shall have received a counterpart
hereof signed by the other parties hereto.
SECTION 12.09. Entire Agreement; No Third Party Beneficiaries. (a) This
Agreement, and the other Transaction Agreements, together with the
Confidentiality Agreements, constitute the entire agreement between the parties
hereto with respect to the subject matter of this Agreement and supersede all
prior agreements and understandings, both oral and written, between the parties
hereto with respect to the subject matter of this Agreement.
(b) This Agreement shall be binding upon and inure solely to the benefit of
each party hereto, and nothing in this Agreement, express or implied, is
intended to or shall confer upon any other Person any right, benefit or remedy
of any nature whatsoever under or by reason of this Agreement, other than
Sections 4.01(e), 9.08, 9.11 and 9.14, the first sentence of Section 9.21 and
the last sentence of Section 12.03(a) (which is intended to be for the benefit
of the Persons covered thereby). AT&T shall be entitled to enforce the
provisions of Sections 4.03, 4.04 and 4.05 after the Effective Time.
SECTION 12.10. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated
so long as the economic or legal
A-77
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party hereto. Upon such a determination, the parties
hereto shall negotiate in good faith to modify this Agreement so as to effect
the original intent of the parties as closely as possible in an acceptable
manner so that the transactions contemplated hereby be consummated as originally
contemplated to the fullest extent possible.
SECTION 12.11. Specific Performance. The parties hereto agree that
irreparable damage would occur if any provision of this Agreement were not
performed in accordance with the terms hereof and that the parties shall be
entitled to an injunction or injunctions to prevent breaches of this Agreement
or to enforce specifically the performance of the terms and provisions hereof in
any federal court located in the State of New York or any New York state court,
in addition to any other remedy to which they are entitled at law or in equity.
SECTION 12.12. Schedules. Each of Comcast and AT&T has set forth
information in its respective disclosure schedule in a section thereof that
corresponds to the portion of the Section of this Agreement to which it relates.
A matter set forth in one section of the disclosure schedule need not be set
forth in any other section of the disclosure schedule so long as its relevance
to the latter section of the disclosure schedule or Section of the Agreement is
apparent on the face of the information disclosed in the disclosure schedule.
The fact that any item of information is disclosed in a disclosure schedule
shall not be construed to mean that such information is required to be disclosed
by this Agreement. Such information and the dollar thresholds set forth herein
shall not be used as a basis for interpreting the terms "material" or "Material
Adverse Effect" or other similar terms in this Agreement, except as otherwise
expressly set forth in such disclosure schedules.
A-78
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
AT&T CORP.
By: /s/ C. MICHAEL ARMSTRONG
------------------------------------
Name: C. Michael Armstrong
Title: Chairman and Chief
Executive Officer
AT&T BROADBAND CORP.
By: /s/ RAYMOND E. LIGUORI
------------------------------------
Name: Raymond E. Liguori
Title: President
COMCAST CORPORATION
By: /s/ RALPH J. ROBERTS
------------------------------------
Name: Ralph J. Roberts
Title: Chairman
AT&T COMCAST CORPORATION
By: /s/ BRIAN L. ROBERTS
------------------------------------
Name: Brian L. Roberts
Title: President
AT&T BROADBAND ACQUISITION CORP.
BY: /s/ BRIAN L. ROBERTS
------------------------------------
Name: Brian L. Roberts
Title: President
COMCAST ACQUISITION CORP.
BY: /s/ BRIAN L. ROBERTS
------------------------------------
Name: Brian L. Roberts
Title: President
A-79
ANNEX B
SEPARATION AND DISTRIBUTION AGREEMENT
BY AND BETWEEN
AT&T CORP.
AND
AT&T BROADBAND CORP.
DATED AS OF
DECEMBER 19, 2001
TABLE OF CONTENTS
------------------------
PAGE
----
ARTICLE 1
DEFINITIONS
Section 1.01. Definitions................................................. B-1
ARTICLE 2
THE SEPARATION
Section 2.01. Transfer of Assets and Assumption of Liabilities............ B-16
Section 2.02. Disclaimer of Representations and Warranties................ B-17
Section 2.03. Other Ancillary Agreements.................................. B-18
Section 2.04. Termination of Agreements................................... B-18
Section 2.05. Documents Relating to Transfer of Real Property Interests
and Tangible Property Located Thereon....................... B-19
Section 2.06. Documents Relating to Other Transfers of Assets and
Assumption of Liabilities................................... B-20
Section 2.07. Governmental Approvals and Consents......................... B-20
Section 2.08. Novation of AT&T Broadband Liabilities...................... B-21
Section 2.09. Novation of AT&T Communications Liabilities................. B-21
Section 2.10. Joint Purchasing Arrangements............................... B-22
Section 2.11. TWE Arrangements............................................ B-22
ARTICLE 3
FINANCIAL RESTRUCTURING
Section 3.01. Liability Management........................................ B-23
Section 3.02. Repayment of Intracompany Indebtedness...................... B-23
Section 3.03. Note Consents............................................... B-23
ARTICLE 4
THE DISTRIBUTION
Section 4.01. The Distribution............................................ B-23
Section 4.02. Actions Prior to the Distribution........................... B-24
Section 4.03. Timing of the Distribution.................................. B-24
ARTICLE 5
MUTUAL RELEASES; INDEMNIFICATION
Section 5.01. Release of Pre-Closing Claims............................... B-25
Section 5.02. Indemnification by AT&T..................................... B-27
Section 5.03. Indemnification by AT&T Broadband........................... B-27
Section 5.04. Indemnification Obligations Net of Insurance Proceeds and
Other Amounts............................................... B-28
Section 5.05. Procedures for Indemnification of Third Party Claims........ B-29
Section 5.06. Additional Matters.......................................... B-30
Section 5.07. Remedies Cumulative......................................... B-30
Section 5.08. Survival of Indemnities..................................... B-30
ARTICLE 6
INSURANCE AND CERTAIN OTHER MATTERS
Section 6.01. Insurance Matters........................................... B-30
Section 6.02. Certain Post-Distribution Transactions and Related
Matters..................................................... B-31
Section 6.03. Procedure for Indemnification for Tax Liabilities........... B-33
B-i
PAGE
----
Section 6.04. Other Transactions.......................................... B-35
ARTICLE 7
EXCHANGE OF INFORMATION; CONFIDENTIALITY
Section 7.01. Agreement for Exchange of Information....................... B-36
Section 7.02. Ownership of Information.................................... B-37
Section 7.03. Compensation for Providing Information...................... B-37
Section 7.04. Record Retention............................................ B-37
Section 7.05. Limitation of Liability..................................... B-37
Section 7.06. Other Agreements Providing for Exchange of Information...... B-37
Section 7.07. Production of Witnesses; Records; Cooperation............... B-37
Section 7.08. Confidentiality............................................. B-38
Section 7.09. Protective Arrangements..................................... B-39
ARTICLE 8
FURTHER ASSURANCES AND ADDITIONAL COVENANTS
Section 8.01. Further Assurances.......................................... B-39
ARTICLE 9
TERMINATION
Section 9.01. Termination................................................. B-39
Section 9.02. Effect of Termination....................................... B-39
ARTICLE 10
DISPUTE RESOLUTION AND ARBITRATION
Section 10.01. Agreement to Arbitrate...................................... B-40
Section 10.02. Reasonable Best Efforts to Resolve Disputes; Mediation...... B-40
Section 10.03. Demand for Arbitration...................................... B-40
Section 10.04. Arbitration Panel........................................... B-41
Section 10.05. Commencement and Place of Arbitration....................... B-41
Section 10.06. Arbitration Hearings........................................ B-41
Section 10.07. Arbitration Decision........................................ B-41
Section 10.08. Discovery and Related Matters............................... B-41
Section 10.09. Arbitration Panel's Authority............................... B-41
Section 10.10. Confidentiality............................................. B-42
Section 10.11. Certain Additional Matters.................................. B-42
Section 10.12. Limited Court Actions....................................... B-42
Section 10.13. Continuity of Performance and Remaining Obligations......... B-43
Section 10.14. Law Governing Arbitration Procedures........................ B-43
Section 10.15. Non-applicability of Article................................ B-43
ARTICLE 11
MISCELLANEOUS
Section 11.01. Counterparts; Entire Agreement; Corporate Power............. B-43
Section 11.02. Governing Law............................................... B-44
Section 11.03. Jurisdiction................................................ B-44
Section 11.04. Waiver of Jury Trial........................................ B-44
Section 11.05. Assignability............................................... B-44
Section 11.06. AT&T Restructuring.......................................... B-45
B-ii
PAGE
----
Section 11.07. Third Party Beneficiaries................................... B-45
Section 11.08. Notices..................................................... B-45
Section 11.09. Severability................................................ B-46
Section 11.10. Expenses.................................................... B-46
Section 11.11. Headings.................................................... B-46
Section 11.12. Waivers of Default.......................................... B-46
Section 11.13. Specific Performance........................................ B-46
Section 11.14. Amendments.................................................. B-46
Section 11.15. Late Payments............................................... B-46
Section 11.16. Interpretation.............................................. B-47
EXHIBITS
Exhibit A AT&T Communications Financial Statements
Exhibit B Corporate Name Agreement
Exhibit C Employee Benefits Agreement
Exhibit D Intellectual Property Agreement
Exhibit E Interim Services and Systems Replication Agreement
Exhibit F Patent Assignment
Exhibit G Tax Sharing Agreement
Exhibit H Trademark and Service Mark Agreement
Annex I TWE Consideration
B-iii
SEPARATION AND DISTRIBUTION AGREEMENT
THIS SEPARATION AND DISTRIBUTION AGREEMENT, dated as of December 19, 2001,
is by and between AT&T Corp., a New York corporation ("AT&T"), and AT&T
Broadband Corp., a Delaware corporation ("AT&T BROADBAND"). Capitalized terms
used herein and not otherwise defined shall have the respective meanings
assigned to them in Article 1.
WHEREAS, the Board of Directors of AT&T has determined that it is in the
best interests of AT&T and its shareholders to separate AT&T's communications
and broadband businesses into independent businesses and to subsequently merge
AT&T Broadband with a wholly owned subsidiary of AT&T Comcast Corporation, a
Pennsylvania corporation, pursuant to the Merger Agreement (as defined below);
WHEREAS, in furtherance of the foregoing, upon the terms and subject to the
conditions set forth in this Agreement, AT&T will transfer the AT&T Broadband
Assets to AT&T Broadband and its Subsidiaries and cause AT&T Broadband and its
Subsidiaries to assume the AT&T Broadband Liabilities, all as more fully
described in this Agreement and the other Ancillary Agreements;
WHEREAS, upon the terms and subject to the conditions set forth in this
Agreement, following the Separation, AT&T will distribute all of the AT&T
Broadband Common Stock to shareholders of AT&T and, if the QUIPS Exchange is
completed (as defined below), to Microsoft Corporation, a Washington
corporation, or an affiliate thereof ("MICROSOFT"), all as more fully described
in this Agreement;
WHEREAS, for federal income tax purposes, it is intended that the
Separation and Distribution constitute a tax-free reorganization under the Code;
and
WHEREAS, it is appropriate and desirable to set forth the principal
corporate transactions required to effect the Separation and the Distribution
and certain other agreements that will govern certain matters relating to the
Separation and the Distribution and the relationship of AT&T and AT&T Broadband
and their respective Subsidiaries following the Distribution.
NOW, THEREFORE, the parties hereto, intending to be legally bound, agree as
follows:
ARTICLE 1
DEFINITIONS
SECTION 1.01. Definitions. For the purpose of this Agreement the following
terms shall have the following meanings:
"ACTION" means any demand, action, suit, countersuit, arbitration, inquiry,
proceeding or investigation by or before any federal, state, local, foreign or
international Governmental Authority or any arbitration or mediation tribunal.
"ADDITIONAL COMMERCIAL AGREEMENTS" has the meaning set forth in the
definition of Ancillary Agreements.
"AFFILIATE" of any Person means a Person that controls, is controlled by,
or is under common control with such Person; provided, however, that for
purposes of this Agreement, no member of either the AT&T Broadband Group or the
AT&T Communications Group shall be deemed to be an Affiliate of any member of
the other Group and no employee plan or employee plan trust shall be deemed an
Affiliate of any employer or of any Affiliate of any employer. As used herein,
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of such entity, whether
through ownership of voting securities or other interests, by contract or
otherwise.
"AGENT" means the distribution agent to be appointed by AT&T to distribute
to shareholders of AT&T the shares of AT&T Broadband Common Stock pursuant to
the Distribution.
"AGREEMENT" means this Separation and Distribution Agreement, including all
of the Schedules and Exhibits hereto, as amended from time to time.
B-1
"AMERICAN RIDGE" means American Ridge Insurance Company, a Vermont
corporation.
"ANCILLARY AGREEMENTS" means (i) this Agreement, the Corporate Name
Agreement, the Tax Sharing Agreement, the Employee Benefits Agreement, the
Intellectual Property Agreement, the Patent Assignment, the Trademark and
Service Mark Assignment (the agreements referred to in this clause (i), the
"PRIMARY TRANSACTION AGREEMENTS"), (ii) those agreements and documents listed in
Items 1-23 on Schedule 2.4(b)(ii)(A) (the agreements referred to in this clause
(ii), as they may be amended as provided in Schedule 2.4(b)(ii)(B), the "PRIMARY
COMMERCIAL AGREEMENTS") and (iii) any agreement, commitment or understanding
that any of the Primary Commercial Agreements contemplates will be entered into
or made after the date hereof; provided that the relevant Primary Commercial
Agreement specifically sets forth all material terms of such agreement,
commitment or understanding (the agreements, commitments and understandings
referred to in this clause (iii) are referred to herein as the "ADDITIONAL
COMMERCIAL AGREEMENTS").
"APPLICABLE DEADLINE" has the meaning set forth in Section 10.03.
"ARBITRATION DEMAND NOTICE" has the meaning set forth in Section 10.03.
"ARBITRATION PANEL" has the meaning set forth in Section 10.05.
"ASSETS" means assets, properties and rights (including goodwill), wherever
located (including in the possession of vendors or other third parties or
elsewhere), whether real, personal or mixed, tangible, intangible or contingent,
in each case whether or not recorded or reflected or required to be recorded or
reflected on the books and records or financial statements of any Person,
including the following:
(a) all accounting and other books, records and files whether in
paper, microfilm, microfiche, computer tape or disc, magnetic tape or any
other form;
(b) all apparatus, computers and other electronic data processing
equipment, fixtures, machinery, equipment, furniture, office equipment,
automobiles, trucks, aircraft, rolling stock, vessels, motor vehicles and
other transportation equipment, special and general tools, test devices,
prototypes and models and other tangible personal property;
(c) all inventories of materials, parts, raw materials, supplies,
work-in-process and finished goods and products;
(d) all interests in real property of whatever nature, including
easements and rights of way, whether as owner, mortgagee or holder of a
Security Interest in real property, lessor, sublessor, lessee, sublessee or
otherwise, and copies of all related documentation;
(e) all interests in any capital stock or other equity interests of
any Subsidiary or any other Person, all bonds, notes, debentures or other
securities issued by any Subsidiary or any other Person, all loans,
advances or other extensions of credit or capital contributions to any
Subsidiary or any other Person and all other investments in securities of
any Person;
(f) all license agreements, leases of personal property, open purchase
orders for raw materials, supplies, parts or services, unfilled orders for
the manufacture and sale of products and other contracts, agreements or
commitments;
(g) all deposits, letters of credit and performance and surety bonds;
(h) all written technical information, data, specifications, research
and development information, engineering drawings, operating and
maintenance manuals, and materials and analyses prepared by consultants and
other third parties;
(i) all domestic and foreign patents, copyrights, trade names,
trademarks, service marks and registrations and applications for any of the
foregoing, mask works, trade secrets, inventions, other proprietary
information and licenses from third Persons granting the right to use any
of the foregoing;
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(j) all computer applications, programs and other software, including
operating software, network software, firmware, middleware, design
software, design tools, systems documentation and instructions;
(k) all cost information, sales and pricing data, customer prospect
lists, supplier records, customer and supplier lists, records pertaining to
customers and customer accounts, customer and vendor data, correspondence
and lists, product literature, artwork, design, development and
manufacturing files, vendor and customer drawings, formulations and
specifications, quality records and reports and other books, records,
studies, surveys, reports, plans and documents;
(l) all prepaid expenses, trade accounts and other accounts and notes
receivable;
(m) all rights under contracts or agreements, all claims or rights
against any Person arising from the ownership of any Asset, all rights in
connection with any bids or offers and all claims, choices in action or
similar rights, whether accrued or contingent;
(n) all insurance proceeds and rights under insurance policies and all
rights in the nature of insurance, indemnification or contribution;
(o) all licenses (including radio and similar licenses), permits,
approvals and authorizations that have been issued by any Governmental
Authority;
(p) all cash or cash equivalents, bank accounts, lock boxes and other
deposit arrangements;
(q) copies of all documentation related to Insurance Policies; and
(r) interest rate, currency, commodity or other swap, collar, cap or
other hedging or similar agreements or arrangements.
"AT&T" has the meaning set forth in the Preamble.
"AT&T BROADBAND" has the meaning set forth in the Preamble.
"AT&T BROADBAND ACTION" has the meaning set forth in Section 6.02(d).
"AT&T BROADBAND ASSETS" means:
(a) except as set forth on Schedule 1.14(a), any Assets reflected in
the AT&T Broadband Balance Sheet, unless disposed of to third parties after
the date thereof (and, in the case of any such Assets disposed of after the
date thereof, the proceeds from such disposal);
(b) any Assets acquired after the date of the AT&T Broadband Balance
Sheet by AT&T or any of its Subsidiaries utilizing AT&T Broadband Assets;
(c) any AT&T Broadband Contracts;
(d) any capital stock or other ownership interests in AT&T Broadband
Entities;
(e) AT&T's interest in Western Range;
(f) any AT&T Broadband Real Property;
(g) any Assets that are expressly contemplated by this Agreement or
any other Ancillary Agreement (or the Schedules hereto or thereto) as
Assets to be retained by or assigned to any member of the AT&T Broadband
Group;
(h) any governmental licenses, permits, franchises, approvals,
certificates and other governmental authorizations held in the name of AT&T
or any of its Subsidiaries that are primarily related to the AT&T Broadband
Business (to the extent any of the foregoing would be required to be
transferred pursuant hereto, such items will be AT&T Broadband Assets only
to the extent they are transferable upon the receipt of any relevant
Consent), except for any intrastate telephony licenses, permits,
franchises, approvals, certificates or other governmental authorizations
that are used in the AT&T
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Communications Business; (i) the Assets of T-Holdings and its Subsidiaries
to be purchased by AT&T Broadband pursuant to Section 2.01(f);
(j) any Assets underlying any of the monetizations that are AT&T
Broadband Liabilities;
(k) any Assets listed or described on Schedule 1.14(k); and
(l) any Assets that are not AT&T Communications Assets specified in
clauses (a) through (k) of the definition of AT&T Communications Assets and
that are used or held for use primarily in connection with the AT&T
Broadband Business (it being agreed that (i) any Assets owned by AT&T or
any of its controlled Affiliates immediately prior to March 9, 1999 shall
be deemed primarily used or held for use in connection with the AT&T
Communications Business and (ii) Assets that were paid for, built or
otherwise directly or indirectly acquired for consideration (as reflected
in current and historic financial records, including subsidiary ledgers,
journals and other financial books and records) by a Group shall be deemed
to be primarily used or held for use by the Group that most recently so
paid for or so built or acquired them).
AT&T Broadband Assets shall not in any event include any (i) Assets reflected on
the AT&T Communications Balance Sheet, except for those Assets specified in
clauses (b), (d), (e), (f), (g), (i), (j) and (k) of the definition of AT&T
Broadband Assets or (ii) Assets that as of the Distribution Date are Leased
Assets (as defined in the Local Network Connectivity Services Agreement).
Subject to the foregoing sentence, in the event that any Asset is included
in both the definition of "AT&T Broadband Asset" and "AT&T Communications Asset"
then (i) if it is specifically referred to in a definition or schedule or
otherwise (including in any of the Ancillary Agreements), it shall be treated in
accordance with such specific reference and (ii) otherwise it shall be treated
as an AT&T Broadband Asset or AT&T Communications Asset based upon whether it is
used or held for use primarily in connection with the AT&T Broadband Business or
primarily in connection with the AT&T Communications Business; provided that for
purposes hereof Assets that were paid for, built or otherwise directly or
indirectly acquired for consideration (as reflected in current and historic
financial records, including subsidiary ledgers, journals and other financial
books and records) by a Group shall be deemed to be primarily used or held for
use by the Group that most recently so paid for or so built or acquired them.
"AT&T BROADBAND BALANCE SHEET" means the balance sheet dated as of December
31, 2000 included in the AT&T Broadband Financial Statements.
"AT&T BROADBAND BUSINESS" means the business of the AT&T Broadband Group.
"AT&T BROADBAND COMMON STOCK" means the common stock, par value $0.01 per
share, of AT&T Broadband.
"AT&T BROADBAND CONTRACTS" means the following contracts and agreements to
which AT&T or any of its Subsidiaries is a party or by which it or any of its
Subsidiaries or any of their respective Assets is bound, whether or not in
writing, except for any such contract or agreement that is expressly
contemplated to be assigned to or retained by AT&T or any member of the AT&T
Communications Group pursuant to any provision of this Agreement or any other
Ancillary Agreement:
(a) any contract or agreement entered into in the name of, or
expressly on behalf of, any AT&T Broadband Entity, except to the extent
clearly relating to the AT&T Communications Group and except for any At
Home Contract;
(b) any contract or agreement that relates primarily to the AT&T
Broadband Business other than any At Home Contract;
(c) any rights and obligations of the AT&T Broadband Group under any
At Home Contract;
(d) any note, indenture, contract, agreement, mortgage or other
instrument representing Indebtedness or other Liabilities that are in
either such case AT&T Broadband Liabilities;
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(e) any contract or agreement that is expressly contemplated pursuant
to this Agreement or any of the other Ancillary Agreements to be assigned
or transferred to or retained by AT&T Broadband or any member of the AT&T
Broadband Group;
(f) any guarantee, indemnity, representation, warranty or other
Liability of any member of the AT&T Communications Group in respect of any
other AT&T Broadband Contract, any AT&T Broadband Liability or the AT&T
Broadband Business;
(g) any contract or agreement listed or described on Schedule 1.18(g),
including in the case of commitment or similar contracts or agreements,
contracts or agreements to the extent indicated on such Schedule;
(h) any letter of credit, surety bond, swap, foreign exchange or other
instrument or contract primarily relating to the AT&T Broadband Group,
together with any letters of credit, surety bonds, swaps, foreign exchange
or other such instruments or contracts that were entered into in connection
with Indebtedness of the AT&T Broadband Group; and
(i) all monetizations listed or described on Schedule 1.18(i).
With respect to any contract or agreement that relates in material part to both
the AT&T Broadband Group and the AT&T Communications Group, the parties will
cooperate in good faith to apportion the rights and obligations thereunder to
the AT&T Broadband Group and the AT&T Communications Group, and to treat such
contract or agreement as an AT&T Broadband Contract to the extent relating to
the AT&T Broadband Group and an AT&T Communications Contract to the extent
relating to the AT&T Communications Group.
"AT&T BROADBAND ENTITIES" means AT&T Broadband and each of the AT&T
Broadband Subsidiaries.
"AT&T BROADBAND FINANCIAL STATEMENTS" has the meaning set forth in the
Merger Agreement.
"AT&T BROADBAND GROUP" means the direct or indirect interest of AT&T
(either itself or through direct or indirect Subsidiaries, or any of their
predecessors or successors) in (a) all of the businesses, Assets and Liabilities
reflected in the AT&T Broadband Financial Statements; (b) the other Assets and
Liabilities (contingent or otherwise) of AT&T and its Subsidiaries primarily
related to businesses, assets and liabilities described in clause (a) and all
net income, net losses, Assets and Liabilities arising in respect thereof after
the date of the AT&T Broadband Financial Statements; (c) all Assets, Liabilities
and businesses acquired after the date of the AT&T Broadband Financial
Statements by the AT&T Broadband Group or utilizing cash or other Assets
referred to in clauses (a) or (b); and (d) any business or operations that were
terminated, divested or discontinued by any AT&T Broadband Entity, including US
West, Inc. and its Subsidiaries (and their respective predecessors and
successors), or that are listed or described on Schedule 1.21(d); and (e) the
businesses, Assets and Liabilities listed or described on Schedule 1.21(e);
provided that the AT&T Broadband Group shall not include (x) any Assets disposed
of to any third party or otherwise transferred to any third party from the AT&T
Broadband Group after the date of the AT&T Broadband Financial Statements (but
it shall include any net proceeds thereof) or (y) any businesses, Liabilities or
Assets of, or the capital stock or other ownership interests in, T-Holdings and
its Subsidiaries, other than the Assets purchased pursuant to Section 2.01(f)
and any Liabilities of T-Holdings and its Subsidiaries as of the Distribution
Date. Notwithstanding the foregoing, when this Agreement refers to "a member of
the AT&T Broadband Group" or similar language clearly referring to a Person, it
means any one of the AT&T Broadband Entities.
"AT&T BROADBAND INDEMNITEES" has the meaning set forth in Section 5.02.
"AT&T BROADBAND LIABILITIES" means:
(a) any Liabilities reflected on the AT&T Broadband Balance Sheet,
subject to any discharge of such Liabilities subsequent to the date of the
AT&T Broadband Balance Sheet;
B-5
(b) any Liabilities that are expressly contemplated by this Agreement
or any other Ancillary Agreement (or the Schedules hereto or thereto) as
Liabilities to be retained or assumed by AT&T Broadband or any other member
of the AT&T Broadband Group, subject to discharge of such Liabilities
subsequent to the date of the AT&T Broadband Balance Sheet, and all
agreements, obligations and Liabilities of any member of the AT&T Broadband
Group under this Agreement or any of the other Ancillary Agreements;
(c) any Liabilities of any AT&T Broadband Entity and any Liabilities
as of the Distribution Date of T-Holdings or any of its Subsidiaries;
(d) any Liabilities relating to, arising out of or resulting from any
AT&T Broadband Contract, excluding, for the avoidance of doubt, any
Liabilities of any member of the AT&T Communications Group as a party (for
the benefit of the AT&T Communications Group) under any At Home Contract;
(e) any Liabilities incurred after the date of the AT&T Broadband
Balance Sheet by any AT&T Broadband Entity;
(f) except to the extent arising from any breach by any member of the
AT&T Communications Group after the Distribution Date of any covenant or
agreement entered into in connection with the separation, divestiture or
termination of LMC and its Subsidiaries, or as otherwise expressly
contemplated by any other Ancillary Agreement, any Liabilities to the
extent arising out of, relating to or resulting from LMC and its
Subsidiaries, any commercial or other agreements or arrangements primarily
relating to the AT&T Broadband Group and involving LMC or any of its
Subsidiaries or the ownership of any securities of any such entity;
(g) (i) any Liabilities relating to, arising out of, or resulting from
any Actions primarily related to, arising out of or resulting from the AT&T
Broadband Business, including those listed or described on Schedule
1.23(g), (ii) 50% of the excess of any Liability related to, arising out of
or resulting from any Specified Matter (including any legal or other fees
incurred as a result of, or with respect to, any Specified Matter) over any
amount AT&T receives from AWS in respect thereof, (iii) 50% of any
Liability related to, arising out of or resulting from any At Home Matter
(including any legal or other fees incurred as a result of, or with respect
to, any At Home Matter) and (iv) 50% of any Liability related to, arising
out of or resulting from the Separation or the Distribution or any proposed
transaction involving AT&T Broadband following the Distribution (including
any legal or other fees incurred as a result of, or with respect to, any
such Liability and including any Liability AT&T may have under Section 910
of the NYBCL in connection with the Distribution) (the transactions
specified in clause (iv), the "SPECIFIED TRANSACTIONS");
(h) any Liabilities, including any employee-related Liabilities and
Environmental Liabilities, primarily relating to, arising out of or
resulting from:
(i) the AT&T Broadband Group, including the operation of the AT&T
Broadband Business, as conducted at any time prior to, on or after the
Distribution Date (including any Liability relating to, arising out of
or resulting from any act or failure to act by any director, officer,
employee, agent or representative (whether or not such act or failure to
act is or was within such Person's authority));
(ii) the operation of any business conducted by any member of the
AT&T Broadband Group at any time after the Distribution Date (including
any Liability relating to, arising out of or resulting from any act or
failure to act by any director, officer, employee, agent or
representative (whether or not such act or failure to act is or was
within such Person's authority)); or
(iii) any AT&T Broadband Assets (including any AT&T Broadband
Contracts and any AT&T Broadband Real Property);
in any such case whether arising before, on or after the Distribution Date.
B-6
(i) any of the monetizations set forth on Schedule 1.23(i);
(j) any Liabilities listed or described on Schedule 1.23(j); and
(k) any Liability arising from or relating to any terminated, divested
or discontinued business (or the termination, divestiture or
discontinuation thereof) of the AT&T Broadband Group.
In the event that any Liability is included in both the definition of "AT&T
Broadband Liability" and "AT&T Communications Liability" then (i) if it is
specifically referred to in a definition or schedule or otherwise (including in
any of the Ancillary Agreements), it shall be treated in accordance with such
specific reference and (ii) otherwise it shall be treated as an AT&T Broadband
Liability or AT&T Communications Liability to the extent it relates to the AT&T
Broadband Business or the AT&T Communications Business, respectively.
"AT&T BROADBAND MATERIAL ADVERSE EFFECT" has the meaning set forth in the
Merger Agreement.
"AT&T BROADBAND MERGER" has the meaning set forth in the Merger Agreement.
"AT&T BROADBAND REAL PROPERTY" means all right, title and interest in real
property, wherever located, held in the name of AT&T Broadband or any AT&T
Broadband Entity; provided that AT&T Broadband Real Property does not include
rights, title or interests (whether fee, leasehold or otherwise) in any AT&T
Communications Real Property.
"AT&T BROADBAND SUBSIDIARIES" means those entities set forth on Schedule
1.19 and their respective Subsidiaries but excluding AT&T Broadband T-Holdings,
Inc. (formerly TCI Telephony Holdings, Inc.) and its Subsidiaries.
"AT&T BROADBAND'S SHARE" has the meaning set forth in Section 6.04(b).
"AT&T COMMON STOCK" means the common stock, par value $1.00 per share, of
AT&T.
"AT&T COMMUNICATIONS ACTION" has the meaning set forth in Section 6.02(d).
"AT&T COMMUNICATIONS ASSETS" means:
(a) any Assets reflected in the AT&T Communications Balance Sheet,
unless disposed of to third parties after the date thereof (and, in the
case of any such Assets disposed of after the date thereof, the proceeds
from such disposal);
(b) any Assets acquired after the date of the AT&T Communications
Balance Sheet by AT&T or any of its Subsidiaries utilizing AT&T
Communications Assets;
(c) any AT&T Communications Contracts;
(d) any capital stock or other ownership interests in any member of
the AT&T Communications Group (other than AT&T) (unless disposed of after
the date thereof);
(e) AT&T's interest in Concert and American Ridge;
(f) any AT&T Communications Real Property;
(g) any Assets that are expressly contemplated by this Agreement or
any other Ancillary Agreement (or any Schedule hereto or thereto) to be
retained by or assigned to AT&T or any other member of the AT&T
Communications Group;
(h) (i) any governmental licenses, permits, franchises, approvals,
certificates, consents and other governmental authorizations held in the
name of AT&T or any of its Subsidiaries that are primarily related to the
AT&T Communications Business and (ii) any intrastate telephony licenses,
permits, franchises, approvals, certificates or other governmental
authorizations that are used in the AT&T Communications Business (in the
case of (i) or (ii), to the extent any of the foregoing would be required
to be transferred pursuant hereto, such items will be AT&T Communications
Assets only to the extent they are transferable upon receipt of any
relevant Consent);
B-7
(i) AT&T's shares of AWS;
(j) any Assets listed or described on Schedule 1.28(j);
(k) any Assets that as of the Distribution Date are Leased Assets (as
defined in the Local Network Connectivity Services Agreement); and
(l) any Assets that are not AT&T Broadband Assets specified in clauses
(a) through (k) of the definition of AT&T Broadband Assets and that are
used or held for use primarily in connection with the AT&T Communications
Business (it being agreed that (i) any Assets owned by AT&T or any of its
controlled Affiliates immediately prior to March 9, 1999 shall be deemed
primarily used or held for use in connection with the AT&T Communications
Business and (ii) Assets that were paid for, built or otherwise directly or
indirectly acquired for consideration (as reflected in current and historic
financial records, including subsidiary ledgers, journals and other
financial books and records) by a Group shall be deemed to be primarily
used or held for use by the Group that most recently so paid for or so
built or acquired them).
AT&T Communications Assets shall not in any event include any Assets reflected
on the AT&T Broadband Balance Sheet, except for those Assets specified in
clauses (b), (d), (e), (f), (g), (i), (j) and (k) of the definition of AT&T
Communications Assets.
Subject to the foregoing sentence, in the event that any Asset is included in
both the definition of "AT&T Broadband Asset" and "AT&T Communications Asset"
then (i) if it is specifically referred to in a definition or schedule or
otherwise (including in any of the Ancillary Agreements), it shall be treated in
accordance with such specific reference and (ii) otherwise it shall be treated
as an AT&T Broadband Asset or AT&T Communications Asset based upon whether it is
used or held for use primarily in connection with the AT&T Broadband Business or
primarily in connection with the AT&T Communications Business; provided that for
purposes hereof Assets that were paid for, built or otherwise directly or
indirectly, acquired for consideration (as reflected in current and historic
financial records, including subsidiary ledgers, journals and other financial
books and records) by a Group shall be deemed to be primarily used or held for
use by the Group that most recently so paid for or so built or acquired them.
"AT&T COMMUNICATIONS BALANCE SHEET" means the consolidated balance sheet
dated as of December 31, 2000 included within the AT&T Communications Financial
Statements.
"AT&T COMMUNICATIONS BUSINESS" means the business of the AT&T
Communications Group.
"AT&T COMMUNICATIONS CONTRACTS" means any contract or agreements to which
AT&T or any of its Subsidiaries is a party or by which it or any of its
Subsidiaries or any of their respective Assets is bound, whether or not in
writing, except for any AT&T Broadband Contract, including (a) any contract or
agreement listed on Schedule 1.31(a), (b) any rights and obligations of any
member of the AT&T Communications Group as a party (for the benefit of the AT&T
Communications Group) under any At Home Contract, (c) any letter of credit,
surety bond, swap, foreign exchange or other instrument or contract not
primarily relating to the AT&T Broadband Group, together with any letters of
credit, surety bonds, swaps, foreign exchange or other such instruments or
contracts that were entered into in connection with Indebtedness of the AT&T
Communications Services Group, (d) any note, indenture, contract, agreement,
mortgage or other instrument representing Indebtedness or other Liabilities that
are in either such case AT&T Communications Liabilities, (e) any contract or
agreement that is expressly contemplated pursuant to this Agreement or any of
the other Ancillary Agreements to be assigned or transferred to or retained by
AT&T or any other member of the AT&T Communications Group, (f) any guarantee,
indemnity, representation, warranty or other Liability of any member of the AT&T
Broadband Group in respect of any other AT&T Communications Contract, any AT&T
Communications Liability or the AT&T Communications Business, and (g) any
contract or agreement entered into in the name of, or expressly on behalf of,
any member of the AT&T Communications Group (other than AT&T), except to the
extent clearly relating to the AT&T Broadband Group. With respect to any
contract or agreement that relates in material part to both the AT&T Broadband
Group and the AT&T Communications Group, the
B-8
parties will cooperate in good faith to apportion the rights and obligations
thereunder to the AT&T Broadband Group and the AT&T Communications Group, and to
treat such contract or agreement as an AT&T Broadband Contract to the extent
relating to the AT&T Broadband Group and an AT&T Communications Contract to the
extent relating to the AT&T Communications Group.
"AT&T COMMUNICATIONS FINANCIAL STATEMENTS" means the consolidated balance
sheets, income statements, statements of cash flow and other financial
statements of AT&T Communications as of and for the period ending December 31,
2000, attached hereto as Exhibit A.
"AT&T COMMUNICATIONS GROUP" means the direct or indirect interest of AT&T
(either itself or through direct or indirect subsidiaries, or any of their
predecessors or successors) in (a) all businesses (including terminated,
divested or discontinued businesses and operations), Assets and Liabilities
(contingent or otherwise), other than the AT&T Broadband Group, and (b) any
terminated, divested or discontinued businesses not specified in the definition
(or related schedules) of AT&T Broadband Group. Notwithstanding the foregoing,
when this Agreement refers to "a member of the AT&T Communications Group" or
similar language clearly referring to a Person, it means any one of AT&T or its
Subsidiaries other than the AT&T Broadband Entities.
"AT&T COMMUNICATIONS LIABILITIES" means (without duplication):
(a) any Liabilities reflected on the AT&T Communications Balance
Sheet, subject to any discharge of such Liabilities subsequent to the date
of the AT&T Communications Balance Sheet;
(b) any Liabilities that are expressly contemplated by this Agreement
or any other Ancillary Agreement (or the Schedules hereto or thereto) as
Liabilities to be retained or assumed by AT&T or any member of the AT&T
Communications Group, subject to discharge of such Liabilities subsequent
to the date of the AT&T Communications Balance Sheet, and all agreements,
obligations and Liabilities of any member of the AT&T Communications Group
under this Agreement or any of the other Ancillary Agreements;
(c) any Liabilities of any member of the AT&T Communications Group
(other than AT&T), excluding, for the avoidance of doubt, any Liabilities
as of the Distribution Date of T-Holdings or any of its Subsidiaries and
including, for the avoidance of doubt, any Liabilities of T-Holdings or any
of its Subsidiaries arising after the Distribution Date;
(d) any Liabilities relating to, arising out of or resulting from any
AT&T Communications Contract, excluding, for the avoidance of doubt, any
Liabilities under any At Home Contract except for Liabilities of any member
of the AT&T Communications Group as a party (for the benefit of the AT&T
Communications Group) under any At Home Contract;
(e) any Liabilities incurred after the date of the AT&T Communications
Balance Sheet by any member of the AT&T Communications Group;
(f) any Liabilities relating to, arising out of or resulting from any
Actions except (i) those primarily related to, arising out of or resulting
from the AT&T Broadband Business (including those listed on Schedule
1.23(g)) or as expressly set forth herein, (ii) 50% of the excess of any
Liability related to, arising out of or resulting from any Specified Matter
(including any legal or other fees incurred as a result of, or with respect
to, any Specified Matter) over any amount AT&T receives from AWS in respect
thereof, (iii) 50% of any Liability related to, arising out of or resulting
from any At Home Matter (including any legal or other fees incurred as a
result of, or with respect to, any At Home Matter) and (iv) 50% of any
Liability related to, arising out of or resulting from the Specified
Transactions (including any legal or other fees incurred as a result of, or
with respect to, any such Liability and including any Liability AT&T may
have under Section 910 of the NYBCL in connection with the Distribution);
B-9
(g) any Liabilities, including any employee-related Liabilities and
Environmental Liabilities, primarily relating to, arising out of or
resulting from:
(i) the AT&T Communications Group, including the operation of the
AT&T Communications Business, as conducted at any time prior to, on or
after the Distribution Date (including any Liability relating to,
arising out of or resulting from any act or failure to act by any
director, officer, employee, agent or representative (whether or not
such act or failure to act is or was within such Person's authority));
(ii) the operation of any business conducted by any member of the
AT&T Communications Group at any time after the Distribution Date
(including any Liability relating to, arising out of or resulting from
any act or failure to act by any director, officer, employee, agent or
representative (whether or not such act or failure to act is or was
within such Person's authority)); or
(iii) any AT&T Communications Assets (including any AT&T
Communications Contracts, any AT&T Communications Real Property and any
Leased Assets (except with respect to any Liabilities of the lessees
under the applicable leases));
in any such case whether arising before, on or after the Distribution Date;
(h) any Liability arising from or relating to any terminated, divested
or discontinued business (or the termination, divestiture or
discontinuation thereof) of the AT&T Communications Group;
(i) any Liability arising from any breach by any member of the AT&T
Communications Group after the Distribution Date of any covenant or
agreement entered into in connection with the separation, divestiture or
termination of LMC and its Subsidiaries; and
(j) any other direct or indirect Liabilities of AT&T or any of its
Subsidiaries that do not otherwise constitute AT&T Broadband Liabilities.
In the event that any Liability is included in both the definition of "AT&T
Broadband Liability" and "AT&T Communications Liability" then (i) if it is
specifically referred to in a definition or schedule or otherwise (including in
any of the Ancillary Agreements), it shall be treated in accordance with such
specific reference and (ii) otherwise it shall be treated as an AT&T Broadband
Liability or AT&T Communications Liability to the extent it relates to the AT&T
Broadband Business or the AT&T Communications Business, respectively.
"AT&T COMMUNICATIONS REAL PROPERTY" means all right, title and interest in
real property, wherever located, of AT&T or any of its Subsidiaries (other than
any AT&T Broadband Entity), including: (a) all land (the "LAND") owned by AT&T
or any of its Subsidiaries (other than any AT&T Broadband Entity), including all
buildings, structures and other improvements now or hereafter located thereon
(the "OWNED REAL PROPERTY"), (b) all real property leased, subleased or
otherwise occupied by AT&T or any of its Subsidiaries (other than any AT&T
Broadband Entity) (the "LEASED REAL PROPERTY" and together with the Owned Real
Property, the "REAL PROPERTY"), (c) all easements, licenses, permits, rights of
way, reservations, privileges and other estates and rights of AT&T or any of its
Subsidiaries (other than any AT&T Broadband Entity) either in gross or
appurtenant pertaining to such Real Property or to any other real property, (d)
all right, title and interest of AT&T or any of its Subsidiaries (other than any
AT&T Broadband Entity) in and to all strips and gores, all alleys adjoining
land, and the land lying in the bed of any street, road or avenue, opened or
proposed, in front of or adjoining the Land to the center line thereof, and all
right, title and interest of AT&T or any of its Subsidiaries (other than any
AT&T Broadband Entity) in and to any award made or to be made in lieu thereof
and in and to any unpaid award for any taking by condemnation or any damages to
the Owned Real Property by reason of any change of grade of any street, road or
avenue, (e) all right, title and interest of AT&T or any of its Subsidiaries
(other than any AT&T Broadband Entity) in and to the airspace above the Owned
Real Property (and the rights to use such airspace) and any transferable
development or similar rights appurtenant to the Owned Real Property by
allocation under applicable laws, by zoning lot merger or otherwise and (f) all
rights, licenses,
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easements, leases, indefeasible rights of use, title, attachment rights,
authorizations and other rights pertaining to poles, conduits and cable held by
AT&T or any of its Subsidiaries (other than any AT&T Broadband Entity).
"AT&T COMMUNICATIONS' SHARE" has the meaning set forth in Section 6.04(b).
"AT&T INDEMNITEES" has the meaning set forth in Section 5.03.
"AT&T MATERIAL ADVERSE EFFECT" means a material adverse effect on the
financial condition, assets or results of operations of the AT&T Communications
Group, taken as a whole, excluding any such effect resulting from or arising in
connection with (i) changes or conditions generally affecting the industries in
which the AT&T Communications Group operates, (ii) changes in general economic,
regulatory or political conditions, or (iii) the announcement of this Agreement
or of the transactions contemplated hereby.
"AT&T MEETING" has the meaning set forth in Section 4.02(a).
"AT&T SUBSIDIARY PREFERRED STOCK" has the meaning set forth in the Merger
Agreement.
"AT HOME" means At Home Corporation, a Delaware corporation and/or its
bankruptcy estate, as applicable.
"AT HOME CONTRACTS" means any contracts or agreements between At Home or
any of its Subsidiaries, on the one hand, and any member of the AT&T
Communications Group (for the benefit of the AT&T Communications Group), on the
other hand.
"AT HOME MATTERS" means (i) the currently pending lawsuits styled Linda
Ward, Brian Lewis and Donnie Doby, Jr. v. At Home Corporation, et al. (Case No.
418233, Superior Court of California, San Mateo County), and In re: At Home
Corporation Stockholders' Litigation (Master File No. 413094, Superior Court of
California, San Mateo County), and any other shareholder claims or lawsuits or
claims or lawsuits by At Home alleging any breach of fiduciary or contractual
duties by AT&T or any of its Affiliates relating to At Home or its Subsidiaries
prior to the Effective Time, including any such claim or lawsuit against any
officers, directors or employees of AT&T or any of its Subsidiaries whether in
their capacity as a director, officer or employee of At Home or its Subsidiaries
or otherwise, and (ii) any claims or lawsuits by At Home, creditors of At Home
or its Subsidiaries, either previously or subsequently filed, concerning
activities prior to the Effective Time, including any lawsuit or claim asserting
that AT&T or any of its Subsidiaries (other than At Home or its Subsidiaries)
breached contractual or fiduciary obligations to At Home or its Subsidiaries,
received a fraudulent conveyance from At Home or its Subsidiaries, or is liable
for any Liability of At Home or any of its Subsidiaries, and including any such
claim or lawsuit against any officers, directors or employees of AT&T or any of
its Subsidiaries whether in their capacity as a director, officer or employee of
At Home or its Subsidiaries or otherwise.
"AWS" means AT&T Wireless Services, Inc., a Delaware corporation.
"BUSINESS DAY" means a day other than a Saturday, Sunday or other day on
which commercial banks in New York City are authorized or required by law to
close.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMCAST" means Comcast Corporation, a Pennsylvania corporation.
"COMMISSION" means the Securities and Exchange Commission.
"CONCERT" means Concert B.V.
"CONSENTS" means any consents, waivers or approvals from, or notification
requirements to, any third parties, other than Governmental Approvals.
"CPR" means the Center for Public Resources.
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"CORPORATE NAME AGREEMENT" means the Corporate Name Agreement by and
between AT&T and AT&T Comcast Corporation, in the form attached hereto as
Exhibit B, as amended from time to time.
"DELAYED TRANSFER ASSETS" means any AT&T Broadband Assets that this
Agreement or any other Ancillary Agreement provides or contemplates are to be
transferred after the Distribution Date, including Assets that require a Consent
or Governmental Approval to transfer, which Consent or Governmental Approval is
not obtained on or prior to the Distribution Date.
"DELAYED TRANSFER LIABILITIES" means any AT&T Broadband Liabilities that
are expressly provided in this Agreement to be assumed after the Distribution
Date upon the removal of legal impediments or the receipt of Consents or
Governmental Approvals necessary for the transfer of such AT&T Broadband
Liabilities.
"DISPUTE DATE" has the meaning set forth in Section 6.03(c).
"DISTRIBUTION" means the distribution by AT&T to the holders of AT&T Common
Stock and, if the QUIPS Exchange is completed, to the holders of the QUIPS of
all of the outstanding shares of AT&T Broadband Common Stock on the Distribution
Date in accordance with Article 4.
"DISTRIBUTION DATE" means the date on which the Distribution occurs.
"DISTRIBUTION REGISTRATION STATEMENT" has the meaning set forth in Section
4.02(b).
"EFFECTIVE TIME" has the meaning set forth in the Merger Agreement.
"EMPLOYEE BENEFITS AGREEMENT" means the Employee Benefits Agreement by and
between AT&T and AT&T Broadband, in the form attached hereto as Exhibit C, as
amended from time to time.
"ENVIRONMENTAL LAW" has the meaning set forth in the Merger Agreement.
"ENVIRONMENTAL LIABILITIES" means all Liabilities relating to, arising out
of or resulting from any Environmental Law or contract or agreement relating to
environmental, health or safety matters (including all removal, remediation or
cleanup costs, investigatory costs, governmental response costs, natural
resources damages, property damages, personal injury damages, costs of
compliance with any settlement, judgment or other determination of Liability and
indemnity, contribution or similar obligations) and all costs and expenses
(including allocated costs of in-house counsel and other personnel), interest,
fines, penalties or other monetary sanctions in connection therewith.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
together with the rules and regulations promulgated thereunder.
"EXCHANGE AGREEMENT" has the meaning set forth in the Merger Agreement.
"GAAP" has the meaning set forth in the Merger Agreement.
"GOVERNMENTAL APPROVALS" means any notices, reports or other filings to be
made, or any consents, registrations, approvals, permits or authorizations to be
obtained from, any Governmental Authority.
"GOVERNMENTAL AUTHORITY" has the meaning set forth in the Merger Agreement.
"GROUP" means the AT&T Broadband Group or the AT&T Communications Group, as
the context requires.
"INDEBTEDNESS" means, with respect to any Person, (a) any obligation of
such Person (i) for borrowed money, (ii) evidenced by a note, debenture or
similar instrument (including a purchase money obligation) given in connection
with the acquisition of any property or assets, including securities, (iii) for
the deferred purchase price of property or services, except trade accounts
payable arising in the ordinary course of business, or (iv) under any lease or
similar arrangement that would be required to be accounted for by the lessee as
a capital lease in accordance with GAAP; (b) any guarantee (or keepwell
agreement) by such Person of any indebtedness of others described in the
preceding clause (a); and (c) all obligations to reimburse any bank or other
Person for amounts paid under a letter of credit or similar instrument. For
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purposes of clarification, (x) Indebtedness includes, without duplication,
obligations (or guarantees of obligations) related to preferred securities
issued by a wholly owned trust Subsidiary and (y) Indebtedness (in the case of
AT&T Broadband, any AT&T Broadband Entity or any member of the AT&T Broadband
Group) includes the monetizations set forth on Schedule 1.23(i).
"INDEMNIFYING PARTY" has the meaning set forth in Section 5.04(a).
"INDEMNITEE" has the meaning set forth in Section 5.04(a).
"INDEMNITY PAYMENT" has the meaning set forth in Section 5.04(a).
"INFORMATION" means information, whether or not patentable or
copyrightable, in written, oral, electronic or other tangible or intangible
forms, stored in any medium, including studies, reports, records, books,
contracts, instruments, surveys, discoveries, ideas, concepts, know-how,
techniques, designs, specifications, drawings, blueprints, diagrams, models,
prototypes, samples, flow charts, data, computer data, disks, diskettes, tapes,
computer programs or other software, marketing plans, customer names,
communications by or to attorneys (including attorney-client privileged
communications), memos and other materials prepared by attorneys or under their
direction (including attorney work product), and other technical, financial,
employee or business information or data.
"INSURANCE POLICIES" means the insurance policies written by insurance
carriers other than American Ridge or Western Range under which, prior to the
Distribution Date, AT&T and/or AT&T Broadband or one or more of their
Subsidiaries or Affiliates (or their respective officers or directors) are
insured parties, excluding insurance policies funding Benefit Plans (as defined
in the Employee Benefits Agreement) (which are addressed in the Employee
Benefits Agreement).
"INSURANCE PROCEEDS" means those monies:
(a) received by an insured from an insurance carrier other than
American Ridge or Western Range; or
(b) paid by an insurance carrier other than American Ridge or Western
Range on behalf of an insured;
in any such case net of any applicable premium adjustments (including reserves
and retrospectively rated premium adjustments) and net of any costs or expenses
(including allocated costs of in-house counsel and other personnel) incurred in
the collection thereof.
"INTELLECTUAL PROPERTY AGREEMENT" means the Intellectual Property Agreement
by and between AT&T and AT&T Broadband, in the form attached hereto as Exhibit
D, as amended from time to time.
"IRS" means the U.S. Internal Revenue Service.
"ISSUING PARTY" has the meaning set forth in Section 6.02(c).
"LIABILITIES" means any and all losses, claims, charges, debts, demands,
Actions, damages, obligations, payments, costs and expenses, bonds, indemnities
and similar obligations, covenants, controversies, promises, omissions,
guarantees, make whole agreements and similar obligations, and other
liabilities, including all contractual obligations, whether absolute or
contingent, inchoate or otherwise, matured or unmatured, liquidated or
unliquidated, accrued or unaccrued, known or unknown, whenever arising, and
including those arising under any law, rule, regulation, Action, threatened or
contemplated Action (including the costs and expenses of demands, assessments,
judgments, settlements and compromises relating thereto and attorneys' fees and
any and all costs and expenses (including allocated costs of in-house counsel
and other personnel), whatsoever reasonably incurred in investigating, preparing
or defending against any such Actions or threatened or contemplated Actions),
order or consent decree of any Governmental Authority or any award of any
arbitrator or mediator of any kind, and those arising under any contract,
commitment or undertaking, including those arising under this Agreement or any
other Ancillary Agreement (other than the Tax Sharing Agreement) or incurred by
a party hereto or thereto in connection with enforcing its rights to
indemnification hereunder or thereunder, in each case, whether or
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not recorded or reflected or required to be recorded or reflected on the books
and records or financial statements of any Person; provided, however, that
Liabilities shall not include any liabilities for (i) Taxes based on, measured
by or calculated with respect to net income or profits or (ii) Non-Income Taxes
covered by Section 3.6 of the Tax Sharing Agreement.
"LMC" means Liberty Media Corporation, a Delaware corporation.
"LOCAL NETWORK CONNECTIVITY SERVICES AGREEMENT" means the Local Network
Connectivity Services Agreement dated as of January 1, 2001, as amended, between
AT&T and AT&T Broadband, LLC, a Delaware limited liability company.
"MERGERS" has the definition set forth in the Merger Agreement.
"MERGER AGREEMENT" means the Agreement and Plan of Merger dated as of
December 19, 2001 by and among AT&T, Comcast and the other parties referred to
therein.
"MICROSOFT" has the meaning set forth in the Recitals.
"MICROSOFT QUIPS CLAIM" has the meaning set forth in Section 5.02(e).
"NON-INCOME TAXES" has the meaning set forth in the Tax Sharing Agreement.
"NOTIFIED ACTION" has the meaning set forth in Section 6.02(c).
"NYBCL" means the Business Corporation Law of the State of New York.
"OTHER PARTY" has the meaning set forth in Section 6.02(c).
"PARENT COMMON STOCK" has the meaning set forth in the Merger Agreement.
"PATENT ASSIGNMENT" means the Patent Assignment by and between AT&T and
AT&T Broadband, LLC, a Delaware limited liability company, in the form attached
hereto as Exhibit F, as amended from time to time.
"PERSON" means an individual, a general or limited partnership, a
corporation, a trust, a joint venture, an unincorporated organization, a limited
liability entity, any other entity and any Governmental Authority.
"PRIMARY COMMERCIAL AGREEMENTS" has the meaning set forth in the definition
of Ancillary Agreements.
"PRIMARY INDEMNITY CLAIM" has the meaning set forth in Section 6.04(b).
"PRIMARY TRANSACTION AGREEMENTS" has the meaning set forth in the
definition of Ancillary Agreements.
"PRIME RATE" means the rate that The Bank of New York (or any successor
thereto or other major money center commercial bank agreed to by the parties
hereto) announces from time to time as its prime lending rate, as in effect from
time to time.
"PROPOSED ACQUISITION TRANSACTION" has the meaning set forth in Section
6.02(b).
"PROXY STATEMENT" has the meaning set forth in Section 4.02(a).
"QUIPS" has the meaning set forth in the Merger Agreement.
"QUIPS EXCHANGE" has the meaning set forth in the Merger Agreement.
"QUIPS FAIR MARKET VALUE" has the meaning set forth in the Merger
Agreement.
"QUIPS TRANSFER" has the meaning set forth in the Merger Agreement.
"REAL PROPERTY INSTRUMENTS" has the meaning set forth in Section 2.05(a).
"RECORD DATE" means the close of business on such date as is mutually
agreed upon by the parties.
"REGISTRATION STATEMENT CLAIM" has the meaning set forth in Section
5.02(d).
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"REGISTRATION STATEMENTS" means the Distribution Registration Statement and
all other filings by AT&T, AT&T Broadband or any of their respective Affiliates
with the Commission or any comparable state or foreign body made in connection
with the transactions contemplated by this Agreement or any other Ancillary
Agreement.
"REPRESENTATION LETTER" means the representation letter and any other
materials (including the ruling request and the related supplemental submissions
to the IRS) delivered or deliverable by AT&T and others in connection with the
rendering by tax counsel and the issuance by the IRS of the Tax Opinions/
Rulings that shall be in form and substance reasonably satisfactory to AT&T and
AT&T Broadband.
"RESTRUCTURING TRANSACTION" has the meaning set forth in Section 2.01(h).
"SCHEDULED DEBT" has the meaning set forth in Section 3.01.
"SECURITIES ACT" means the Securities Act of 1933, as amended, together
with the rules and regulations promulgated thereunder.
"SECURITY INTEREST" means any mortgage, security interest, pledge, lien,
charge, claim, option, right to acquire, voting or other restriction,
right-of-way, covenant, condition, easement, encroachment, restriction on
transfer or other encumbrance of any nature whatsoever.
"SEPARATION" means the transfer of the AT&T Broadband Assets to AT&T
Broadband and the assumption by AT&T Broadband of the AT&T Broadband
Liabilities, all as more fully described in this Agreement and the other
Ancillary Agreements.
"SEPARATION TRANSACTIONS" has the meaning set forth in the Separation and
Distribution Agreement dated as of June 4, 2001 by and between AT&T and AWS.
"SPECIFIED MATTER" has the meaning set forth in the Separation and
Distribution Agreement, dated as of June 4, 2001, by and between AT&T and AWS.
"SPECIFIED TRANSACTIONS" has the meaning set forth in clause (g) of the
definition of AT&T Broadband Liabilities.
"SPIN-OFF DISQUALIFICATION" means (a) the Separation and Distribution
failing to qualify under the provisions of Sections 355, 361(c) and 368(a)(1)(D)
of the Code, or (b) the shares of AT&T Broadband failing to qualify as
"qualified property" for purposes of Section 355(c)(2) or 361(c) of the Code by
reason of Section 355(e) of the Code.
"SPLIT-OFF" has the meaning set forth in the Ninth Supplement to the
Inter-Group Agreement dated as of June 14, 2001 by and among AT&T and the
Liberty Media Parties (as defined therein).
"SUBSEQUENT TAX OPINION/RULING" has the meaning set forth in Section
6.02(c).
"SUBSIDIARY" has the meaning set forth in the Merger Agreement.
"SUBSIDIARY PREFERRED STOCK EXCHANGE" has the meaning set forth in Section
4.01(d).
"TAX OPINIONS/RULINGS" has the meaning set forth in Section 6.02(b).
"TAX RELATED LOSSES" has the meaning set forth in Section 6.02(d).
"TAX SHARING AGREEMENT" means the Tax Sharing Agreement by and between AT&T
and AT&T Broadband, in the form attached hereto as Exhibit G, as amended from
time to time.
"TAXES" has the meaning set forth in the Tax Sharing Agreement.
"THIRD PARTY CLAIM" has the meaning set forth in Section 5.05(a).
"THIRD PARTY TAX CLAIM" has the meaning set forth in Section 6.03(a).
"T-HOLDINGS" means AT&T Broadband T-Holdings, Inc. (f/k/a TCI Telephony
Holdings, Inc.), a Delaware corporation.
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"TOPRS" has the meaning set forth in the Merger Agreement.
"TRADEMARK AND SERVICE MARK AGREEMENT" means the Trademark and Service Mark
Agreement by and among AT&T, AT&T Broadband, LLC, a Delaware limited liability
company, and MediaOne Group, Inc., a Delaware corporation, in the form attached
hereto as Exhibit H, as amended from time to time.
"TRANSACTION DISQUALIFICATION" has the meaning set forth in Section
6.04(a).
"TWE OPTION" has the meaning set forth in the Merger Agreement.
"UNDERPAYMENT RATE" has the meaning set forth in Section 6.03(c).
"WESTERN RANGE" means Western Range Insurance Company, a Vermont
corporation.
ARTICLE 2
THE SEPARATION
SECTION 2.01. Transfer of Assets and Assumption of Liabilities. (a)
Subject to Section 4.03, on or prior to the Distribution Date, AT&T will assign,
transfer, convey and deliver to AT&T Broadband, and agrees to cause its
applicable Subsidiaries to assign, transfer, convey and deliver to AT&T
Broadband, and AT&T Broadband will accept from AT&T and its applicable
Subsidiaries, all of AT&T's and its applicable Subsidiaries' respective right,
title and interest in all AT&T Broadband Assets, other than the Delayed Transfer
Assets.
(b) Subject to Section 4.03, on or prior to the Distribution Date, AT&T
Broadband will assume and agree faithfully to perform and fulfill all the AT&T
Broadband Liabilities that are not already Liabilities of an AT&T Broadband
Subsidiary, other than the Delayed Transfer Liabilities, in accordance with
their respective terms. AT&T Broadband shall be responsible for all AT&T
Broadband Liabilities that are not already Liabilities of an AT&T Broadband
Subsidiary, regardless of when or where such Liabilities arose or arise, or
whether the facts on which they are based occurred prior to, on or subsequent to
the date hereof, regardless of where or against whom such Liabilities are
asserted or determined (including any AT&T Broadband Liabilities arising out of
claims made by AT&T's, or AT&T Broadband's, respective directors, officers,
employees, agents, Subsidiaries or Affiliates against any member of the AT&T
Broadband Group or the AT&T Communications Group) or whether asserted or
determined prior to the date hereof, and regardless of whether arising from or
alleged to arise from negligence, recklessness, violation of law, fraud or
misrepresentation by any member of the AT&T Broadband Group or the AT&T
Communications Group or any of their respective directors, officers, employees,
agents, Subsidiaries or Affiliates. For the avoidance of doubt, but subject to
Section 5.03 including the indemnification obligations thereunder with respect
to Liabilities described in clause (g) of the definition of AT&T Broadband
Liabilities, AT&T Broadband is not itself agreeing to assume any Liabilities of
At Home or its Subsidiaries.
(c) Subject to Section 4.03, on or prior to the Distribution Date, AT&T
will assume and agree faithfully to perform and fulfill all the AT&T
Communications Liabilities that are not already Liabilities of AT&T or any of
its Subsidiaries (other than any AT&T Broadband Entity) in accordance with their
respective terms. AT&T shall be responsible for all AT&T Communications
Liabilities that are not already Liabilities of an AT&T Subsidiary (other than
any AT&T Broadband Entity), regardless of when or where such Liabilities arose
or arise, or whether the facts on which they are based occurred prior to, on or
subsequent to the date hereof, regardless of where or against whom such
Liabilities are asserted or determined (including any AT&T Communications
Liabilities arising out of claims made by AT&T's, or AT&T Broadband's,
respective directors, officers, employees, agents, Subsidiaries or Affiliates
against any member of the AT&T Broadband Group or the AT&T Communications Group)
or whether asserted or determined prior to the date hereof, and regardless of
whether arising from or alleged to arise from negligence, recklessness,
violation of law, fraud or misrepresentation by any member of the AT&T Broadband
Group or the AT&T Communications Group or any of their respective directors,
officers, employees, agents, Subsidiaries or Affiliates.
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(d) Each of the parties hereto agrees that the Delayed Transfer Assets will
be assigned, transferred, conveyed and delivered, and the Delayed Transfer
Liabilities will be assumed, in accordance with the terms of the agreements that
provide for such assignment, transfer, conveyance and delivery, or such
assumption, after the date of this Agreement.
(e) In the event that at any time or from time to time (whether prior to or
after the Distribution Date) any party hereto (or any member of such party's
respective Group) shall receive or otherwise possess any Asset that is allocated
to any other Person pursuant to this Agreement or any other Ancillary Agreement,
such party shall promptly transfer, or cause to be transferred, such Asset to
the Person so entitled thereto. Prior to any such transfer, the Person receiving
or possessing such Asset shall hold such Asset in trust for any such other
Person.
(f) Prior to the transactions described in Section 2.01(a)-(c), (i) AT&T
shall contribute $18 million in cash to AT&T Broadband, (ii) AT&T shall cause
T-Holdings and its Subsidiaries to sell all of their respective Assets that are
used or held for use primarily in the AT&T Broadband Business to AT&T Broadband
for $18 million in cash and (iii) AT&T Broadband shall purchase from T-Holdings
and its Subsidiaries for $18 million in cash all of such Assets. Prior to the
time that AT&T Broadband LLC becomes a Subsidiary of AT&T Broadband, AT&T shall
cause AT&T Broadband LLC to distribute all of the outstanding shares of
T-Holdings to AT&T.
(g) The provisions of this Section 2.01 and the definition of AT&T
Broadband Asset do not apply to any intellectual property, including any
Software, Proprietary Information, Materials (as such terms are defined in the
Intellectual Property Agreement), copyrights, inventions, patents, patent
applications, trade secrets and other technology to the extent it is allocated
in the Intellectual Property Agreement, except for transfers made pursuant to
the Patent Assignment.
(h) Anything in this Agreement to the contrary notwithstanding, if either
AT&T or Comcast reasonably believes that the amount of income that would
otherwise be required to be recognized under Treasury Regulations Section
1.1502-13 or 1.1502-19 by reason of the Distribution may be reduced or
eliminated as a result of one or more restructuring transactions consummated
prior to the Distribution, then the parties shall negotiate in good faith to
reach agreement regarding such restructuring transaction. Notwithstanding
anything in the preceding sentence, AT&T shall be permitted to effect, at its
own expense, any restructuring transaction under this paragraph; provided that
(i) Comcast shall be afforded reasonable notice and opportunity to comment upon
plans to effect any such transaction, and (ii) such transaction shall not result
in the failure of any AT&T Broadband Asset that was intended under this
Agreement to be transferred to or held by any member of the AT&T Broadband Group
to be so transferred or held, unless (A) such asset consists of the capital
stock or other ownership interest in an AT&T Broadband Subsidiary the assets of
which will be transferred, on or prior to the Distribution Date, to another
member of the AT&T Broadband Group or (B) Comcast consents to such transaction,
such consent not to be unreasonably withheld; provided, further, that AT&T shall
indemnify Comcast for any increased Tax liability or other costs to Comcast or
any AT&T Broadband Entity resulting from such transactions. Comcast agrees to
reasonably cooperate with AT&T in connection with transactions described in this
paragraph (h).
SECTION 2.02. Disclaimer of Representations and Warranties. EXCEPT AS MAY
EXPRESSLY BE SET FORTH HEREIN, IN ANY OTHER ANCILLARY AGREEMENT OR REAL PROPERTY
INSTRUMENT OR IN THE MERGER AGREEMENT, (A) NONE OF AT&T, AT&T BROADBAND OR ANY
OTHER PERSON MAKES ANY REPRESENTATION OR WARRANTY OF ANY KIND WHATSOEVER,
EXPRESS OR IMPLIED, WITH RESPECT TO ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY
(INCLUDING ANY CONSENTS OR APPROVALS REQUIRED IN CONNECTION THEREWITH) OR THE
BUSINESS, ASSETS, CONDITION OR PROSPECTS (FINANCIAL OR OTHERWISE) OF, OR ANY
OTHER MATTER INVOLVING, THE ASSETS, BUSINESSES OR LIABILITIES OF AT&T, AT&T
BROADBAND, THE AT&T COMMUNICATIONS GROUP OR THE AT&T BROADBAND GROUP; (B) ALL OF
THE ASSETS TO BE RETAINED OR TRANSFERRED OR THE
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LIABILITIES TO BE RETAINED, ASSUMED OR TRANSFERRED IN ACCORDANCE WITH THIS
AGREEMENT SHALL BE TRANSFERRED OR ASSUMED ON AN "AS IS, WHERE IS BASIS," AND ALL
IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A SPECIFIC PURPOSE OR
OTHERWISE ARE HEREBY EXPRESSLY DISCLAIMED, AND (C) NONE OF AT&T, AT&T BROADBAND
OR ANY OTHER PERSON MAKES ANY REPRESENTATION OR WARRANTY WITH RESPECT TO ANY
INFORMATION, DOCUMENTS OR MATERIAL MADE AVAILABLE IN CONNECTION WITH THE
SEPARATION, THE DISTRIBUTION OR THE MERGER OR THE ENTERING INTO OF THIS
AGREEMENT OR THE MERGER AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY AND
THEREBY. EACH PARTY HERETO AGREES AND ACKNOWLEDGES THAT THE REPRESENTATIONS AND
WARRANTIES IN THE MERGER AGREEMENT SHALL NOT SURVIVE THE EFFECTIVE TIME. AT&T
UNDERSTANDS AND AGREES THAT NO AT&T BROADBAND ENTITY SHALL HAVE ANY LIABILITY TO
AT&T OR ANY OTHER PERSON FOR MONETARY DAMAGES FOR ANY BREACH BY SUCH AT&T
BROADBAND ENTITY PRIOR TO THE EFFECTIVE TIME OF THIS AGREEMENT OR ANY OTHER
ANCILLARY AGREEMENT OR REAL PROPERTY INSTRUMENT.
SECTION 2.03. Other Ancillary Agreements. On or prior to the Distribution
Date, each of AT&T and AT&T Broadband will execute and deliver or cause to be
executed and delivered all Ancillary Agreements to which it or any of its
Subsidiaries is a party. At the request of Comcast or AT&T, on or prior to the
Distribution Date, AT&T and AT&T Broadband will execute and deliver the Interim
Services and Systems Replication Agreement, in the form attached hereto as
Exhibit E. Pursuant to the terms of such agreement, AT&T or AT&T Broadband, as
the case may be, will provide to AT&T Broadband or AT&T, as the case may be,
such mutually agreed services as may be set forth on the schedules to such
Agreement, such schedules to be on terms mutually agreed between Comcast and
AT&T. If AT&T and AT&T Broadband enter into such agreement, such agreement will
be considered an Ancillary Agreement. Except to the extent set forth therein,
Article 11 of this Agreement shall apply to any Ancillary Agreement (other than
the Tax Sharing Agreement).
SECTION 2.04. Termination of Agreements. (a) Except as set forth in Section
2.04(b), as of the Distribution Date, AT&T and each member of the AT&T
Communications Group, on the one hand, and AT&T Broadband and each member of the
AT&T Broadband Group, on the other hand, shall terminate any and all agreements,
arrangements, commitments or understandings, whether or not in writing, between
or among AT&T and/or any member of the AT&T Communications Group, on the one
hand, and AT&T Broadband and/or any member of the AT&T Broadband Group, on the
other hand, effective as of the Distribution Date. No such terminated agreement,
arrangement, commitment or understanding (including any provision thereof that
purports to survive termination) shall be of any further force or effect after
the Distribution Date. Each party shall, at the reasonable request of any other
party, take, or cause to be taken, such other actions as may be necessary to
effect the foregoing.
(b) The provisions of Section 2.04(a) shall not apply to any of the
following agreements, arrangements, commitments or understandings (or to any of
the provisions thereof):
(i) this Agreement and the other Ancillary Agreements (and each other
agreement or instrument expressly contemplated by this Agreement or any
other Ancillary Agreement to be entered into by any of the parties hereto
or any of the members of their respective Groups);
(ii) any agreements, arrangements, commitments or understandings
listed or described on Schedule 2.04(b)(ii)(A); provided that the
agreements set forth in Schedule 2.04(b)(ii)(B) shall be amended on the
Distribution Date as set forth on such Schedule;
(iii) any agreements, arrangements, commitments or understandings
listed or described on Schedule 2.04(b)(iii) to which any Person other than
the parties hereto and their respective wholly owned Affiliates is a party
(it being understood that to the extent that the rights and obligations of
the parties and the members of their respective Groups under any such
agreements, arrangements,
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commitments or understandings constitute AT&T Broadband Assets or AT&T
Broadband Liabilities, they shall be assigned pursuant to Section 2.01);
(iv) any intercompany accounts payable or accounts receivable arising
in the ordinary course of business and accrued as of the Distribution Date
that are reflected in the books and records of the parties or otherwise
documented in writing in accordance with past practices (regardless of
whether such intercompany accounts payable or accounts receivable accrued
under an agreement, arrangement, commitment or understanding that
terminated pursuant to Section 2.04(a)); provided that, subject to Section
3.02, AT&T or AT&T Broadband, as the case may be, will pay or cause to be
paid such intercompany accounts payable promptly when due;
(v) except as otherwise provided in the Tax Sharing Agreement, any
written Tax sharing or Tax allocation agreements to which any member of any
Group is a party;
(vi) any agreements, arrangements, commitments or understandings
listed or described on Schedule 2.04(b)(vi) to which any non-wholly owned
Subsidiary or Affiliate of AT&T or AT&T Broadband, as the case may be, is a
party (it being understood that directors' qualifying shares or similar
interests will be disregarded for purposes of determining whether a
Subsidiary is wholly owned);
(vii) any agreements, arrangements, commitments or understandings that
(A) either any Ancillary Agreement or any other agreement, arrangement,
commitment or understanding that pursuant to the terms of this Section is
not to be terminated as of the Distribution Date contemplates will be
entered into or made on or after the date hereof or (B) are otherwise
necessary to implement the transactions contemplated by any of the
foregoing clauses or that implement term sheets contemplated by any of the
foregoing clauses on terms not materially less advantageous to any member
of the AT&T Broadband Group; provided that each of the agreements,
arrangements, commitments or understandings referred in this clause (vii)
must be in form and substance reasonably satisfactory to Comcast; and
(viii) any other agreements, arrangements, commitments or
understandings that this Agreement or any other Ancillary Agreement
expressly contemplates will survive the Distribution Date.
SECTION 2.05. Documents Relating to Transfer of Real Property Interests
and Tangible Property Located Thereon. (a) To the extent necessary, in
furtherance of the assignment, transfer and conveyance of AT&T Communications
Real Property and the assumption of the related AT&T Communications Liabilities
pursuant to Section 2.01(a) and 2.01(b), on or prior to the Distribution Date
each of AT&T and AT&T Broadband, or their applicable Subsidiaries, will execute
and deliver such deeds, lease assignments and assumptions, leases, subleases and
sub-subleases as may be necessary to effect the transactions contemplated by
this Agreement, including this Section 2.05 (collectively, the "REAL PROPERTY
INSTRUMENTS"). Real Property Instruments will be on mutually acceptable terms.
(b) Except as otherwise expressly provided in this Agreement or any other
Ancillary Agreement and except for AT&T Broadband Assets, all leasehold
improvements, fixtures, furniture, office equipment, servers, private branch
exchanges, artwork and other tangible property (other than equipment subject to
capital or operating equipment leases, which will be transferred or retained
based on whether the associated capital or operating equipment lease is or is
not an AT&T Broadband Contract or as otherwise provided herein) located as of
the date hereof on any AT&T Communications Real Property shall be transferred to
a member of the AT&T Communications Group.
(c) Schedule 2.05(c) sets forth a list of AT&T Communications Real Property
currently used in connection with both the AT&T Communications Business and the
AT&T Broadband Business and that following the Distribution Date will be leased
or subleased by members of the AT&T Communications Group to members of the AT&T
Broadband Group, on terms and for the transition period reflected in Schedule
2.05(c).
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(d) Schedule 2.05(d) sets forth a list of AT&T Broadband Real Property
currently used in connection with both the AT&T Communications Business and the
AT&T Broadband Business and that following the Distribution Date will be leased
or subleased by AT&T Broadband or any of the AT&T Broadband Entities to members
of the AT&T Communications Group, on terms and for the transition period
reflected in Schedule 2.05(d).
SECTION 2.06. Documents Relating to Other Transfers of Assets and
Assumption of Liabilities. In furtherance of the assignment, transfer and
conveyance of AT&T Broadband Assets and the assumption of AT&T Broadband
Liabilities pursuant to Sections 2.01(a) and 2.01(b), on or prior to the
Distribution Date, (a) AT&T shall execute and deliver, and shall cause its
Subsidiaries to execute and deliver, such bills of sale, stock powers,
certificates of title, assignments of contracts and other instruments of
transfer, conveyance and assignment as and to the extent necessary to evidence
the transfer, conveyance and assignment of all of AT&T's and its Subsidiaries'
right, title and interest in and to the AT&T Broadband Assets to AT&T Broadband
and (b) AT&T Broadband shall execute and deliver, to AT&T and its respective
Subsidiaries such bills of sale, stock powers, certificates of title,
assumptions of contracts and other instruments of assumption, as and to the
extent necessary to evidence the valid and effective assumption by AT&T
Broadband of the AT&T Broadband Liabilities that are not already Liabilities of
an AT&T Broadband Entity; provided that any instruments executed and delivered
pursuant to this Section 2.06 shall be in form and substance reasonably
satisfactory to Comcast.
SECTION 2.07. Governmental Approvals and Consents. (a) If and to the
extent that the valid, complete and perfected transfer or assignment to AT&T
Broadband of any AT&T Broadband Assets (or from the AT&T Broadband Group of any
AT&T Communications Assets held by any member of such Group) would be a
violation of applicable laws or require any Consent or Governmental Approval in
connection with the Separation or the Distribution, then the transfer or
assignment to or from the AT&T Communications Group, as the case may be, of such
AT&T Broadband Assets or AT&T Communications Assets, respectively, shall be
automatically deemed deferred and any such purported transfer or assignment
shall be null and void until such time as all legal impediments are removed
and/or such Consents or Governmental Approvals have been obtained.
Notwithstanding the foregoing, any such Transferred Asset shall be deemed an
Asset of the transferee AT&T Communications Group or the AT&T Broadband Group,
as applicable, for purposes of determining whether any Liability is a Liability
of the AT&T Communications Group or the AT&T Broadband Group.
(b) If the transfer or assignment of any Asset intended to be transferred
or assigned hereunder is not consummated prior to or at the Distribution Date,
whether as a result of the provisions of Section 2.07(a) or for any other
reason, then the Person retaining such Asset shall thereafter hold such Asset
for the use and benefit, insofar as reasonably possible, of the Person entitled
thereto (at the expense of the Person entitled thereto). In addition, the Person
retaining such Asset shall take such other actions as may be reasonably
requested by the Person to whom such Asset is to be transferred in order to
place such Person, insofar as reasonably possible, in the same position as if
such Asset had been transferred as contemplated hereby and so that all the
benefits and burdens relating to such AT&T Broadband Asset (or such AT&T
Communications Asset, as the case may be), including possession, use, risk of
loss, potential for gain, and dominion, control and command over such Asset, are
to inure from and after the Distribution Date to the AT&T Broadband Group (or
the AT&T Communications Group, as the case may be). To the extent permitted by
law and to the extent otherwise permissible in light of any required Consent
and/or Governmental Approval, the AT&T Broadband Group shall be entitled to, and
shall be responsible for, the management of any AT&T Broadband Asset not yet
transferred to it as a result of this Section 2.07(b) and the parties agree to
use reasonable commercial efforts to cooperate and coordinate with respect
thereto.
(c) If and when the Consents and/or Governmental Approvals, the absence of
which caused the deferral of transfer of any Asset pursuant to Section 2.07(a),
are obtained, the transfer of the applicable Asset shall be effected in
accordance with the terms of this Agreement and/or the other applicable
Ancillary Agreement.
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(d) The Person retaining an Asset due to the deferral of the transfer of
such Asset shall not be obligated, in connection with the foregoing, to expend
any money unless the necessary funds are advanced by the Person entitled to the
Asset, other than reasonable out-of-pocket expenses, attorneys' fees and
recording or similar fees, all of which shall be promptly reimbursed by the
Person entitled to such Asset.
SECTION 2.08. Novation of AT&T Broadband Liabilities. (a) Each of AT&T
and AT&T Broadband, at the reasonable written request of the other, shall use
its reasonable commercial efforts to obtain, or to cause to be obtained, any
release, consent, substitution, approval or amendment required to novate and
assign all obligations under agreements, leases, licenses and other obligations
or Liabilities of any nature whatsoever that constitute AT&T Broadband
Liabilities, or to obtain in writing the unconditional release of all parties to
such arrangements other than any member of the AT&T Broadband Group, so that, in
any such case, the members of the AT&T Broadband Group will be solely
responsible for such Liabilities; provided, however, that none of AT&T, AT&T
Broadband or any of their respective Subsidiaries shall be obligated to pay any
consideration or surrender, release or modify any rights or remedies therefor to
any third party from whom such releases, consents, approvals, substitutions and
amendments are requested except as specifically set forth in the Merger
Agreement or elsewhere in this Agreement.
(b) If AT&T or AT&T Broadband is unable to obtain, or to cause to be
obtained, any such required release, consent, substitution, approval or
amendment, the applicable member of the AT&T Communications Group shall continue
to be bound by such agreements, leases, licenses and other obligations and,
unless not permitted by law or the terms thereof, AT&T Broadband shall, as agent
or subcontractor for such member of the AT&T Communications Group, pay, perform
and discharge fully all the obligations or other Liabilities of such member of
the AT&T Communications Group thereunder from and after the date hereof. AT&T
Broadband shall indemnify each AT&T Indemnitee and hold it harmless against any
Liabilities arising in connection therewith. AT&T shall cause each member of the
AT&T Communications Group, without further consideration, to pay and remit, or
cause to be paid or remitted, to AT&T Broadband or the applicable member of the
AT&T Broadband Group promptly all money, rights and other consideration received
by it or any member of the AT&T Communications Group in respect of such
performance. If and when any such release, consent, substitution, approval or
amendment shall be obtained or such agreement, lease, license or other rights or
obligations shall otherwise become assignable or able to be novated, AT&T shall
promptly assign, or cause to be assigned, all its rights, obligations and other
Liabilities thereunder or any rights, obligations or other Liabilities of any
member of the AT&T Communications Group to AT&T Broadband or to another member
of the AT&T Broadband Group without payment of further consideration and AT&T
Broadband, without the payment of any further consideration, shall, or shall
cause such other member of the AT&T Broadband Group to, assume such rights and
obligations. Notwithstanding the foregoing, unless AT&T shall so elect, AT&T
Broadband shall assume all Liabilities of any nature whatsoever that would
constitute AT&T Broadband Liabilities as of the Distribution Date, except for
Liabilities of another member of the AT&T Broadband Group.
SECTION 2.09. Novation of AT&T Communications Liabilities. (a) Each of
AT&T and AT&T Broadband, at the reasonable written request of the other, shall
use its reasonable commercial efforts to obtain, or to cause to be obtained, any
release, consent, substitution, approval or amendment required to novate and
assign all obligations under agreements, leases, licenses and other obligations
or Liabilities of any nature whatsoever that constitute AT&T Communications
Liabilities, or to obtain in writing the unconditional release of all parties to
such arrangements other than any member of the AT&T Communications Group, so
that, in any such case, the members of the AT&T Communications Group will be
solely responsible for such Liabilities; provided, however, that none of AT&T,
AT&T Broadband or any of their respective Subsidiaries shall be obligated to pay
any consideration or surrender, release or modify any rights or remedies
therefor to any third party from whom such releases, consents, approvals,
substitutions and amendments are requested except as specifically set forth in
the Merger Agreement or elsewhere in this Agreement.
(b) If AT&T or AT&T Broadband is unable to obtain, or to cause to be
obtained, any such required release, consent, approval, substitution or
amendment, the applicable member of the AT&T Broadband
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Group shall continue to be bound by such agreements, leases, licenses and other
obligations and, unless not permitted by law or the terms thereof, AT&T shall,
as agent or subcontractor for such member of the AT&T Broadband Group, pay,
perform and discharge fully all the obligations or other Liabilities of such
member of the AT&T Broadband Group thereunder from and after the date hereof.
AT&T shall indemnify each AT&T Broadband Indemnitee and hold each of them
harmless against any Liabilities arising in connection therewith. AT&T Broadband
shall cause each member of the AT&T Broadband Group, without further
consideration, to pay and remit, or cause to be paid or remitted, to AT&T or the
applicable member of the AT&T Communications Group promptly all money, rights
and other consideration received by it or any member of the AT&T Broadband Group
in respect of such performance. If and when any such release, consent,
substitution approval or amendment shall be obtained or such agreement, lease,
license or other rights or obligations shall otherwise become assignable or able
to be novated, AT&T Broadband shall promptly assign, or cause to be assigned,
all its rights, obligations and other Liabilities thereunder or any rights,
obligations or other Liabilities of any member of the AT&T Broadband Group to
AT&T or to another member of the AT&T Communications Group without payment of
further consideration and AT&T, without the payment of any further
consideration, shall, or shall cause such other member of the AT&T
Communications Group to, assume such rights and obligations. Notwithstanding the
foregoing, unless AT&T Broadband shall so elect, AT&T shall assume all
Liabilities of any nature whatsoever that would constitute AT&T Communications
Liabilities as of the Distribution Date, except for Liabilities of another
member of the AT&T Communications Group.
SECTION 2.10. Joint Purchasing Arrangements. (a) In the case of existing
purchasing agreements that prior to the Distribution Date provide the AT&T
Broadband Group and the AT&T Communications Group with volume discounts, subject
to applicable law, the parties agree to use their respective reasonable best
efforts so that, to the extent permitted under the terms of such existing
agreements, after the Distribution Date, each Group shall continue to be able to
make purchases and obtain the benefits of the volume discounts. In the case of
any other such contracts, subject to applicable law, the parties will cooperate
reasonably in seeking modifications to such contracts or alternative or
substitute arrangements so that, to the extent practicable after the
Distribution Date, each Group shall continue to be able to make purchases and
obtain the benefits of the volume discounts. Notwithstanding the foregoing, but
subject to the terms of any AT&T Broadband Contract or AT&T Communications
Contract, none of AT&T, AT&T Broadband or their respective Subsidiaries shall be
required to commit to any additional purchases or other obligations, make any
payments or waive any rights in order to effect the foregoing. Each party hereby
agrees to indemnify and hold harmless the other party, and if applicable, the
other party's Subsidiaries, with respect to any losses or claims arising from
such first party's, or such first party's Subsidiaries', own purchases,
commitments or other obligations under any such contracts.
(b) Until December 31, 2003, subject to applicable law, the parties will
use reasonable commercial efforts to cooperate with each other and, as
applicable, with each other's Subsidiaries, to coordinate and combine their
purchases in cases where they purchase common supplies or use the same supplier,
in each case to the extent permitted by law from time to time. It is the intent
of the parties that this coordination and cooperation will be focused on
achieving more favorable pricing and terms for such supplies and from such
suppliers by aggregating the combined purchases of the parties and their
Subsidiaries. Notwithstanding the foregoing, no party shall be obligated to
make, or cause its Subsidiaries to make, any specific purchases or to use any
specific supplier except to the extent (i) it or one of its Subsidiaries has
previously committed to make a specific purchase or to use a specific supplier,
or (ii) subsequent to the date of this Agreement, it or one of its Subsidiaries
makes a commitment for a specific purchase or to use a specific supplier. Each
party will be responsible for its own and its Subsidiaries' commitments and its
own and its Subsidiaries' purchases and other obligations made under any common
or shared contracts with suppliers and will, in respect of such commitments,
purchases or other obligations, indemnify and hold harmless the other party and
the other party's Subsidiaries that use such contracts.
SECTION 2.11. TWE Arrangements. The parties agree to the terms set forth
in Annex I with respect to the partnership interests in TWE held, as of the date
hereof, by MediaOne TWE Holdings, Inc., an AT&T Broadband Entity, and the TWE
Option held by Media One of Colorado, Inc.
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ARTICLE 3
FINANCIAL RESTRUCTURING
SECTION 3.01. Liability Management. The Indebtedness included on the AT&T
Broadband Balance Sheet consists of the Indebtedness to third parties (the
"SCHEDULED DEBT") and Indebtedness to members of the AT&T Communications Group.
Prior to the Distribution Date, the Indebtedness of the AT&T Broadband Group
shall consist only of (i) the Scheduled Debt, Indebtedness to third parties
reflected on the September 30, 2001 balance sheet included in the AT&T Broadband
Financial Statements and the third party Indebtedness identified in Item 3 of
Schedule 6.11 to the Merger Agreement (unless any such Indebtedness shall have
been discharged) (ii) Indebtedness of the members of the AT&T Broadband Group to
members of the AT&T Communications Group and (iii) such other debt as shall have
been approved by the Interim Finance Committee. On the Distribution Date, the
AT&T Broadband Entities may incur additional Indebtedness to parties (other than
to members of the AT&T Communications Group) in an amount sufficient to (i) pay
in full at the Effective Time to AT&T an amount equal to the Indebtedness owed
by any member of the AT&T Broadband Group to any member of the AT&T
Communications Group, (ii) refinance the TOPRS that may be called for redemption
at the Effective Time or shortly thereafter and (iii) provide appropriate cash
reserves to fund the operations of the AT&T Broadband Entities after the
Effective Time. Such Indebtedness shall be incurred in accordance with Section
9.15 of the Merger Agreement.
SECTION 3.02. Repayment of Intracompany Indebtedness. AT&T Broadband
agrees that it will pay to AT&T, at the Effective Time and in connection with
the transfer of assets and liabilities hereunder to AT&T Broadband, an amount of
cash equal to the total Indebtedness of all members of the AT&T Broadband Group
to any member of the AT&T Communications Group, and AT&T agrees to contribute
(or cause its subsidiaries to contribute) such Indebtedness to the capital of
AT&T Broadband. AT&T agrees that it will repay or cause to repaid at the
Effective Time any Indebtedness of any member of the AT&T Communications Group
to any member of the AT&T Broadband Group. AT&T also agrees that it will repay
or cause to be repaid at the Effective Time any intercompany receivables owed by
AT&T or any AT&T Subsidiary (other than any AT&T Broadband Entity) to Western
Ridge.
SECTION 3.03. Note Consents. Subject to the terms and conditions of the
Merger Agreement, AT&T and AT&T Broadband shall each use its reasonable best
efforts to obtain the irrevocable consent to the transactions contemplated
hereby of the holders of at least a majority in aggregate principal amount of
each series of securities at the time outstanding issued under the Indenture,
dated as of September 7, 1990, between American Telephone & Telegraph Company
and The Bank of New York, as trustee.
ARTICLE 4
THE DISTRIBUTION
SECTION 4.01. The Distribution. (a) Subject to Section 4.03, on or prior
to the Record Date, AT&T will deliver to the Agent for the benefit of holders of
record of AT&T Common Stock on the Record Date, a single stock certificate,
endorsed by AT&T in blank, representing the shares of AT&T Broadband Common
Stock issuable in the Distribution (which, together with the shares to be issued
pursuant to the Exchange Agreement, shall constitute all of the shares of AT&T
Broadband Common Stock outstanding as of the Distribution Date), and shall cause
the transfer agent for the shares of AT&T Common Stock to instruct the Agent to
hold in trust (pending conversion of such shares of AT&T Broadband Common Stock
into shares of Parent Common Stock pursuant to the AT&T Broadband Merger) the
appropriate number of such shares of AT&T Broadband Common Stock (as set forth
in Section 4.01(b)) for each such holder or designated transferee or transferees
of such holder. For avoidance of doubt, AT&T will not be considered a holder of
record of AT&T Common Stock as of the Record Date with respect to any shares of
AT&T Common Stock held in its treasury.
(b) Subject to Section 4.03, each holder of AT&T Common Stock on the Record
Date (or such holder's designated transferee or transferees) will be entitled to
receive in the Distribution a number of
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shares of AT&T Broadband Common Stock equal to the number of shares of AT&T
Common Stock held by such holder on the Record Date; provided, that no holder of
AT&T Common Stock having purported to exercise rights pursuant to Section 910 of
the NYBCL in respect of such holder's shares of AT&T Common Stock shall be
entitled to receive AT&T Broadband Common Stock in the Distribution.
(c) AT&T Broadband and AT&T, as the case may be, will provide to the Agent
all share certificates and any information reasonably required in order to
complete the Distribution on the basis specified above.
(d) Immediately prior to the Record Date, each of the AT&T Broadband
Subsidiaries, in exchange (the "SUBSIDIARY PREFERRED STOCK EXCHANGE") for all of
the shares of AT&T Subsidiary Preferred Stock held by such AT&T Broadband
Subsidiary immediately prior to the Subsidiary Preferred Stock Exchange, will
receive from AT&T a number of shares of AT&T Broadband Common Stock (or, if AT&T
and AT&T Broadband agree, shares of another class of AT&T Broadband Stock) that
has a value equal to the value of the shares of AT&T Subsidiary Preferred Stock
so exchanged.
(e) At the time of the Distribution, AT&T and AT&T Broadband will comply
with their obligations under the Exchange Agreement, including through the
transfer of shares of AT&T Broadband Common Stock from AT&T to Microsoft as
described therein.
(f) If the QUIPS Transfer is to occur, AT&T Broadband and AT&T will effect
the QUIPS Transfer.
(g) Each of AT&T, and AT&T Broadband agrees that in the event that any
holder of shares of AT&T Common Stock purports to exercise any appraisal rights
pursuant to Section 910 of the NYBCL, the parties will cooperate to
appropriately adjust the provisions hereof.
SECTION 4.02. Actions Prior to the Distribution. (a) As promptly as
reasonably practicable after the execution of this Agreement, subject to the
provisions of the Merger Agreement, AT&T shall prepare and file with the
Commission a proxy statement (the "PROXY STATEMENT") to be sent to shareholders
of AT&T in connection with their meeting to consider the Distribution (the "AT&T
MEETING"), it being understood that the AT&T Meeting may be combined with any
other meeting of shareholders regarding a possible business combination
involving the AT&T Broadband Group.
(b) As promptly as reasonably practicable after the execution of this
Agreement, subject to the provisions of the Merger Agreement and if required by
applicable law to effect the Distribution, AT&T and AT&T Broadband shall
prepare, and AT&T Broadband shall file with the Commission a registration
statement on Form S-1 or S-4 or any amendment or supplement thereto pursuant to
which shares of AT&T Broadband issuable in the Distribution will be registered
with the Commission (the "DISTRIBUTION REGISTRATION STATEMENT"). If the
Distribution Registration Statement is required by applicable law to be filed
with the Commission to effect the Distribution, AT&T and AT&T Broadband shall
use their reasonable best efforts to cause the Distribution Registration
Statement to become effective under the Exchange Act as soon after such filing
as reasonably practicable and to keep the Distribution Registration Statement
effective as long as is necessary to consummate the Distribution.
(c) AT&T and AT&T Broadband shall take all such actions as are reasonably
necessary or appropriate under the federal or state securities or blue sky laws
of the United States (and any comparable laws under any foreign jurisdiction) in
connection with the Distribution.
SECTION 4.03. Timing of the Distribution. AT&T shall consummate the
Separation and Distribution as soon as practicable (and, in any event, within
five Business Days) after satisfaction (or waiver to the extent permissible) of
all of the conditions to the Separation and the Distribution specified below
(other than conditions that by their nature are to be satisfied at the time of
the Distribution or the Mergers and will in fact be satisfied at such time). The
Separation shall occur on the Distribution Date prior to the Distribution which
shall occur at a time to be mutually agreed on the Distribution Date. With the
consent of Comcast, which consent shall not be unreasonably withheld, AT&T may
effect the Separation and/or the Distribution on different dates or different
times than provided for in the preceding sentence. The obligation of AT&T to
consummate the Separation and the Distribution and the other
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transactions contemplated by this Agreement is subject to the satisfaction (or
waiver to the extent permissible) of the following conditions:
(a) If required by applicable law to effect the Distribution, the
Distribution Registration Statement shall have been filed and declared
effective by the Commission, and there shall be no stop-order in effect
with respect thereto;
(b) The actions and filings with regard to material federal or state
securities and blue sky laws of the United States (and any comparable laws
under any foreign jurisdictions) described in Section 4.02(c) shall have
been taken and, where applicable, become effective or been accepted;
(c) Any Governmental Approvals and Consents including those listed on
Schedule 4.03(c) necessary to consummate the Distribution in the manner
contemplated by this Agreement shall have been obtained and be in full
force and effect, except for such Governmental Approvals and Consents the
failure of which to obtain would not, individually or in the aggregate,
reasonably be expected to have an AT&T Broadband Material Adverse Effect or
an AT&T Material Adverse Effect;
(d) All conditions to permit the Distribution to qualify as a tax-free
distribution to AT&T, AT&T Broadband and shareholders of AT&T shall, to the
extent applicable as of the time of the Distribution, be satisfied and
there shall be no event or condition that is likely to cause any of such
conditions not to be satisfied as of the time of the Distribution or
thereafter;
(e) No order, injunction or decree issued by any court or agency of
competent jurisdiction or other material legal restraint or prohibition
preventing the consummation of the Separation or the Distribution or any of
the other transactions contemplated by this Agreement or any other
Ancillary Agreement shall be in effect and the Separation and Distribution
shall be in compliance in all material respects with applicable law;
(f) This Agreement shall not have been terminated;
(g) The supplemental private letter ruling or rulings from the IRS or
the opinion described in Section 10.01(j) of the Merger Agreement shall
have been obtained and shall continue in effect;
(h) The Distribution shall have been approved by the affirmative vote
of shareholders holding a majority of the voting power of the issued and
outstanding shares of AT&T Common Stock at the AT&T Meeting; and
(i) The conditions specified in Sections 10.01 and 10.02 (other than
Section 10.01(i)) of the Merger Agreement shall have been satisfied (or
waived to the extent permissible).
The foregoing conditions are for the sole benefit of AT&T and shall not give
rise to or create any duty on the part of AT&T or the Board of Directors of AT&T
to waive or not waive any such condition.
ARTICLE 5
MUTUAL RELEASES; INDEMNIFICATION
SECTION 5.01. Release of Pre-Closing Claims. (a) Except as provided in
Section 5.01(c), effective as of the Distribution Date, AT&T shall, for itself
and each other wholly owned member of the AT&T Communications Group (other than
any member of the AT&T Broadband Group) and their respective successors and
assigns, and all shareholders, directors, officers, members, agents or employees
of any wholly owned member of the AT&T Communications Group (in each case, in
their respective capacities as such), remise, release and forever discharge each
of AT&T Broadband and the respective wholly owned members of the AT&T Broadband
Group (other than any member of the AT&T Communications Group), their respective
successors and assigns, and all shareholders, directors, officers, members,
agents or employees of any wholly owned member of the AT&T Broadband Group (in
each case, in their respective capacities as such), and their respective heirs,
executors, administrators, successors and assigns, from any and all Liabilities
whatsoever, whether at law or in equity (including any right of contribution),
whether
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arising under any contract or agreement, by operation of law or otherwise,
existing or arising from any acts or events occurring or failing to occur or
alleged to have occurred or to have failed to occur or any conditions existing
or alleged to have existed on or before the Distribution Date, whether or not
known as of the Distribution Date, including in connection with the transactions
and all other activities to implement either the Separation or the Distribution.
(b) Except as provided in Section 5.01(c), effective as of the Distribution
Date, AT&T Broadband shall, for itself and each other wholly owned member of the
AT&T Broadband Group (other than any member of the AT&T Communications Group)
and their respective successors and assigns, and all shareholders, directors,
officers, members, agents or employees of any wholly owned member of the AT&T
Broadband Group (in each case, in their respective capacities as such), remise,
release and forever discharge each of AT&T and the respective wholly owned
members of the AT&T Communications Group (other than any member of the AT&T
Broadband Group), their respective successors and assigns, and all shareholders,
directors, officers, members, agents or employees of any wholly owned member of
the AT&T Communications Group (in each case, in their respective capacities as
such), and their respective heirs, executors, administrators, successors and
assigns, from any and all Liabilities whatsoever, whether at law or in equity
(including any right of contribution), whether arising under any contract or
agreement, by operation of law or otherwise, existing or arising from any acts
or events occurring or failing to occur or alleged to have occurred or to have
failed to occur or any conditions existing or alleged to have existed on or
before the Distribution Date, whether or not known as of the Distribution Date,
including in connection with the transactions and all other activities to
implement either the Separation or the Distribution.
(c) Nothing contained in Section 5.01(a) or 5.01(b) shall impair any right
of any Person to enforce this Agreement, any other Ancillary Agreement or any
agreements, arrangements, commitments or understandings that are specified in
Section 2.04(b) or the applicable Schedules thereto not to terminate as of the
Distribution Date, in each case in accordance with its terms. Nothing contained
in Section 5.01(a) or 5.01(b) shall release any Person from:
(i) any Liability provided in or resulting from any agreement among
any members of the AT&T Broadband Group or the AT&T Communications Group
that is specified in Section 2.04(b) or the applicable Schedules thereto as
not to terminate as of the Distribution Date, or any other Liability
specified in such Section 2.04(b) as not to terminate as of the
Distribution Date;
(ii) any Liability, contingent or otherwise, assumed, transferred,
assigned or allocated to the Group of which such Person is a member in
accordance with, or any other Liability of any member of any Group under,
this Agreement or any other Ancillary Agreement;
(iii) any Liability arising from or relating to the sale, lease,
construction, provision, or receipt of goods, property or services
purchased, obtained or used in the ordinary course of business by a member
of one Group from a member of any other Group prior to the Distribution
Date;
(iv) any Liability for payment for goods, services or property
purchased, obtained or used in the ordinary course of business by a member
of one Group from a member of any other Group prior to the Distribution
Date or any related refund claims; or
(v) any Liability the release of which would result in the release of
any Person other than a Person released pursuant to this Section 5.01;
provided that the parties agree not to bring suit or permit any of their
Subsidiaries to bring suit against any Person with respect to any Liability
to the extent that such Person would be released with respect to such
Liability by this Section 5.01 but for the provisions of this clause (v).
(d) AT&T shall not make, and shall not permit any member of the AT&T
Communications Group to make, any claim or demand, or commence any Action
asserting any claim or demand, including any claim of contribution or any
indemnification, against AT&T Broadband or any wholly owned member of the AT&T
Broadband Group, or any other Person released pursuant to Section 5.01(a), with
respect to any Liabilities released in respect of such Person pursuant to
Section 5.01(a). AT&T Broadband shall not make, and shall not permit any member
of the AT&T Broadband Group to make, any claim or demand,
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or commence any Action asserting any claim or demand, including any claim of
contribution or any indemnification, against AT&T or any wholly owned member of
the AT&T Communications Group, or any other Person released pursuant to Section
5.01(b), with respect to any Liabilities in respect of such Person released
pursuant to Section 5.01(b).
(e) At any time, at the request of any other party, each party shall cause
each member of its respective Group to execute and deliver releases reflecting
the provisions of this Section 5.01.
SECTION 5.02. Indemnification by AT&T. Except as provided in Section
5.04, following the Distribution Date, AT&T shall indemnify, defend and hold
harmless AT&T Broadband, each member of the AT&T Broadband Group, AT&T Comcast
(but only in respect of subsections (d) and (e)) and each of their respective
directors, officers and employees, and each of the heirs, executors, successors
and assigns of any of the foregoing (collectively, the "AT&T BROADBAND
INDEMNITEES"), from and against any and all Liabilities (or in the case of
subsection (d), 50% of any and all Liabilities) of the AT&T Broadband
Indemnitees relating to, arising out of or resulting from any of the following
items (without duplication):
(a) the failure of AT&T or any other member of the AT&T Communications
Group or any other Person to pay, perform or otherwise promptly discharge
any AT&T Communications Liabilities, or AT&T Communications Contract, in
accordance with their respective terms, whether prior to or after the
Distribution Date or the date hereof;
(b) the AT&T Communications Business, any AT&T Communications Asset or
any AT&T Communications Contract (except to the extent such Liabilities
arise out of any breach by AT&T or any of its Subsidiaries prior to the
Distribution Date of any AT&T Communications Contract entered into in
connection with the separation, divestiture or termination of LMC and its
Subsidiaries);
(c) any breach by AT&T or any member of the AT&T Communications Group
of this Agreement or any of the other Ancillary Agreements;
(d) any untrue statement or alleged untrue statement of a material
fact or omission or alleged omission to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading, with respect to all information contained in any Registration
Statement, except to the extent such information relates to AT&T's proposal
to create a tracking stock with respect to its consumer services business
as contemplated by Section 11.06, AT&T's proposal to authorize a reverse
stock split or any other AT&T 2002 annual meeting proposal other than the
AT&T proposal to approve and adopt the Merger Agreement and the
transactions contemplated by the Merger Agreement or the proposal in
respect of the AT&T Parent Charter Approval (as defined in the Merger
Agreement) (any Action relating to the matters set forth in this Section
5.02(d) or Section 5.03(d), a "REGISTRATION STATEMENT CLAIM"); and
(e) any untrue statement or alleged untrue statement of a material
fact or omission or alleged omission to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading, with respect to all information contained in any Registration
Statement to the extent such information relates to AT&T's proposal to
create a tracking stock with respect to its consumer services business as
contemplated by Section 11.06, AT&T's proposal to authorize a reverse stock
split or any other AT&T 2002 annual meeting proposal other than the AT&T
proposal to approve and adopt the Merger Agreement and the transactions
contemplated by the Merger Agreement or the proposal in respect of the AT&T
Parent Charter Approval (as defined in the Merger Agreement).
SECTION 5.03. Indemnification by AT&T Broadband. Except as provided in
Section 5.04, following the Distribution Date, AT&T Broadband shall indemnify,
defend and hold harmless AT&T, each member of the AT&T Communications Group and
each of their respective directors, officers and employees, and each of the
heirs, executors, successors and assigns of any of the foregoing (collectively,
the "AT&T INDEMNITEES"), from and against any and all Liabilities (or in the
case of subsection (d), 50% of any and
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all Liabilities) of the AT&T Indemnitees relating to, arising out of or
resulting from any of the following items (without duplication):
(a) the failure of AT&T Broadband or any other member of the AT&T
Broadband Group or any other Person to pay, perform or otherwise promptly
discharge any AT&T Broadband Liabilities, or AT&T Broadband Contract, in
accordance with their respective terms, whether prior to or after the
Distribution Date or the date hereof;
(b) the AT&T Broadband Business, any AT&T Broadband Asset or any AT&T
Broadband Contract;
(c) any breach by AT&T Broadband or any member of the AT&T Broadband
Group of this Agreement or any of the other Ancillary Agreements;
(d) any untrue statement or alleged untrue statement of a material
fact or omission or alleged omission to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading, with respect to all information contained in any Registration
Statement, except to the extent such information relates to AT&T's proposal
to create a tracking stock with respect to its consumer services business
as contemplated by Section 11.06, AT&T's proposal to authorize a reverse
stock split or any other AT&T 2002 annual meeting proposal other than the
AT&T proposal to approve and adopt the Merger Agreement and the
transactions contemplated by the Merger Agreement or the proposal in
respect of the AT&T Parent Charter Approval (as defined in the Merger
Agreement); and
(e) if neither the QUIPS Exchange nor the QUIPS Transfer occurs, any
Liabilities relating to, arising out of or resulting from any Actions
commenced by Microsoft claiming that the transactions contemplated hereby
or by the Merger Agreement violate the terms of the QUIPS; provided that
for purposes hereof, in the event that AT&T is required to repay the QUIPS
as a result of such Action, the indemnified Liability hereunder in respect
of such repayment shall be reduced by the amount of the QUIPS Fair Market
Value plus any accrued interest on the QUIPS since the date as of which the
QUIPS Fair Market Value was determined (any such Action, a "MICROSOFT QUIPS
CLAIM").
Notwithstanding the foregoing, AT&T Broadband shall have no obligation to
indemnify, defend and hold harmless any AT&T Indemnitee from and against any
Liabilities arising out of any breach by At Home or any of its Subsidiaries of
any At Home Contract.
SECTION 5.04. Indemnification Obligations Net of Insurance Proceeds and
Other Amounts. (a) The parties intend that any indemnification or reimbursement
obligation pursuant to this Article 5 will be net of Insurance Proceeds that
actually reduce the amount of the Liability. Accordingly, the amount which any
party (an "INDEMNIFYING PARTY") is required to pay to any Person entitled to
indemnification hereunder (an "INDEMNITEE") will be reduced by any Insurance
Proceeds theretofore actually recovered by or on behalf of the Indemnitee in
reduction of the related Liability. If an Indemnitee receives a payment (an
"INDEMNITY PAYMENT") required by this Agreement from an Indemnifying Party in
respect of any Liability and subsequently receives Insurance Proceeds, then the
Indemnitee will pay to the Indemnifying Party an amount equal to the excess of
the Indemnity Payment received over the amount of the Indemnity Payment that
would have been due if the Insurance Proceeds had been received, realized or
recovered before the Indemnity Payment was made.
(b) An insurer who would otherwise be obligated to defend or make payment
in response to any claim shall not be relieved of the responsibility with
respect thereto or, solely by virtue of the indemnification provisions hereof,
have any subrogation rights with respect thereto, it being expressly understood
and agreed that no insurer or any other third party shall be entitled to a
"windfall" (i.e., a benefit it would not be entitled to receive in the absence
of the indemnification provisions) by virtue of the indemnification provisions
hereof.
(c) With respect to all policies of insurance with insurance companies
other than American Ridge and Western Range, the parties agree to act in good
faith and to use their reasonable best efforts to
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preserve and maximize the insurance benefits due to be provided thereunder and
to cooperate with one another as necessary to permit each other to access or
obtain the benefits under those policies, provided, however, that nothing in
this Section 5.04 shall be construed to prevent any party or any other Person
from asserting claims for insurance benefits or accepting insurance benefits
provided by the policies. The parties agree to exchange information upon
reasonable request of the other party regarding requests that they have made for
insurance benefits, notices of claims, occurrences and circumstances that they
have submitted to the insurance companies or other entities managing the
policies, responses they have received from those insurance companies or
entities, including any payments they have received from the insurance companies
and any agreements by the insurance companies to make payments, and any other
information that the parties may need to determine the status of the insurance
policies and the continued availability of benefits thereunder.
SECTION 5.05. Procedures for Indemnification of Third Party Claims. (a)
If an Indemnitee shall receive notice or otherwise learn of the assertion by a
Person (including any Governmental Authority) who is not a member of the AT&T
Broadband Group or the AT&T Communications Group of any claim or of the
commencement by any such Person of any Action (collectively, a "THIRD PARTY
CLAIM") with respect to which an Indemnifying Party may be obligated to provide
indemnification to such Indemnitee pursuant to Section 5.02 or 5.03, or any
other Section of this Agreement or any Ancillary Agreement (except as otherwise
provided therein), such Indemnitee shall give such Indemnifying Party written
notice thereof promptly after becoming aware of such Third Party Claim. Any such
notice shall describe the Third Party Claim in reasonable detail.
Notwithstanding the foregoing, the failure of any Indemnitee to give notice as
provided in this Section 5.05(a) shall not relieve the related Indemnifying
Party of its obligations under this Article 5, except to the extent that such
Indemnifying Party is actually prejudiced by such failure to give notice.
(b) An Indemnifying Party may elect to defend (and, unless the Indemnifying
Party has specified any reservations or exceptions, to seek to settle or
compromise), at such Indemnifying Party's own expense (including allocated costs
of in-house counsel and other personnel) and by such Indemnifying Party's own
counsel, any Third Party Claim. Within 30 days after the receipt of notice from
an Indemnitee in accordance with Section 5.05(a) (or sooner, if the nature of
such Third Party Claim so requires), the Indemnifying Party shall notify the
Indemnitee of its election whether the Indemnifying Party will assume
responsibility for defending such Third Party Claim, which election shall
specify any reservations or exceptions. After notice from an Indemnifying Party
to an Indemnitee of its election to assume the defense of a Third Party Claim,
such Indemnitee shall have the right to employ separate counsel and to
participate in (but not control) the defense, compromise, or settlement thereof,
but the fees and expenses of such counsel shall be the expense of such
Indemnitee, except as set forth in the next sentence. In the event that the
Indemnifying Party has elected to assume the defense of the Third Party Claim
but has specified and continues to assert, any reservations or exceptions in
such notice, then, in any such case, the reasonable fees and expenses of one
separate counsel for all Indemnitees shall be borne by the Indemnifying Party.
(c) If an Indemnifying Party elects not to assume responsibility for
defending a Third Party Claim, or fails to notify an Indemnitee of its election
as provided in Section 5.05(b), such Indemnitee may defend such Third Party
Claim at the cost and expense (including allocated costs of in-house counsel and
other personnel) of the Indemnifying Party.
(d) Unless the Indemnifying Party has failed to assume the defense of the
Third Party Claim in accordance with the terms of this Agreement, no Indemnitee
may settle or compromise any Third Party Claim without the consent of the
Indemnifying Party.
(e) No Indemnifying Party shall consent to any settlement of the Third
Party Claim without the consent of the Indemnitee if the effect thereof is to
permit any injunction, declaratory judgment, other order or other nonmonetary
relief to be entered, directly or indirectly, against any Indemnitee.
(f) The provisions of Section 5.05 and Section 5.06 shall not apply to
Taxes (which are covered by the Tax Sharing Agreement) or to matters covered by
Sections 6.02 and 6.03.
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(g) Notwithstanding anything in this Agreement to the contrary, and subject
to any applicable provision of the AWS separation agreements, if either party is
named in any Action relating to any At Home Matter, Specified Matter, Specified
Transaction or Registration Statement Claim, that party shall be entitled to
assume and control its own defense and to employ its own counsel. Neither party
shall settle any such Action without the consent of the other party (which
consent will not be unreasonably withheld). All legal and other fees (including
allocated cost of in-house counsel and other personnel) incurred in connection
therewith shall be divided 50/50 between AT&T and AT&T Broadband.
SECTION 5.06. Additional Matters. (a) Any claim on account of a Liability
that does not result from a Third Party Claim shall be asserted by written
notice given by the Indemnitee to the related Indemnifying Party. Such
Indemnifying Party shall have a period of 30 days after the receipt of such
notice within which to respond thereto. If such Indemnifying Party does not
respond within such 30-day period, such Indemnifying Party shall be deemed to
have refused to accept responsibility to make payment. If such Indemnifying
Party does not respond within such 30-day period or rejects such claim in whole
or in part, such Indemnitee shall be free to pursue such remedies as may be
available to such party as contemplated by this Agreement and the other
Ancillary Agreements.
(b) In the event of payment by or on behalf of any Indemnifying Party to
any Indemnitee in connection with any Third Party Claim, such Indemnifying Party
shall be subrogated to and shall stand in the place of such Indemnitee as to any
events or circumstances in respect of which such Indemnitee may have any right,
defense or claim relating to such Third Party Claim against any claimant or
plaintiff asserting such Third Party Claim or against any other person but only
to the extent related to such payment. Such Indemnitee shall cooperate with such
Indemnifying Party in a reasonable manner, and at the cost and expense
(including allocated costs of in-house counsel and other personnel) of such
Indemnifying Party, in prosecuting any subrogated right, defense or claim.
(c) In the event of an Action in which the Indemnifying Party is not a
named defendant, if either the Indemnitee or Indemnifying Party shall so
request, the parties shall endeavor to substitute the Indemnifying Party for the
named defendant, if at all practicable. If such substitution or addition cannot
be achieved for any reason or is not requested, the named defendant shall allow
the Indemnifying Party to manage the Action as set forth in this Section 5.06
and the Indemnifying Party shall fully indemnify the named defendant against all
reasonable costs of defending the Action (including court costs, sanctions
imposed by a court, attorneys' fees, experts' fees and all other external
expenses, and the allocated costs of in-house counsel and other personnel), the
costs of any judgment or settlement, and the cost of any interest or penalties
relating to any judgment or settlement.
SECTION 5.07. Remedies Cumulative. The remedies provided in this Article
5 shall be cumulative and shall not preclude assertion by any Indemnitee of any
other rights or the seeking of any and all other remedies against any
Indemnifying Party.
SECTION 5.08. Survival of Indemnities. The rights and obligations of each
of AT&T, AT&T Broadband and their respective Indemnitees under this Article 5
shall survive the sale or other transfer by any party of any Assets or
businesses or the assignment by it of any Liabilities.
ARTICLE 6
INSURANCE AND CERTAIN OTHER MATTERS
SECTION 6.01. Insurance Matters. (a) The parties intend that both AT&T
and AT&T Broadband and each other member of the AT&T Communications Group and
the AT&T Broadband Group, after the Distribution Date, shall be
successors-in-interest to and retain all rights and interest (whether known,
unknown, contingent or otherwise) that each has as of the Distribution Date
under any Insurance Policy issued to and/or providing coverage to AT&T, as it
existed immediately prior to the Distribution Date, or any of its Subsidiaries
or Affiliates, and any agreements related to such Insurance Policies executed
and delivered prior to the Distribution Date, including any rights or interests
each has, as an insured, named insured, or additional named insured, Subsidiary,
Affiliate, division or department, to avail itself of any
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benefit under any such Insurance Policy or any such agreement related to such
policy as in effect prior to the Distribution Date. The provisions of this
Agreement are not intended to relieve any insurer of any Liability under any
policy. Notwithstanding the foregoing, no member of the AT&T Broadband Group or
the AT&T Communications Group shall be deemed to have made any representation or
warranty as to the availability of any Insurance Policy or the rights and
benefits provided thereunder.
(b) This Agreement shall not be considered as an attempted assignment (if
such an assignment would be prohibited or would otherwise adversely affect the
rights of the insured parties under such policies) of any rights or interest
under any policy of insurance or as a contract of insurance and shall not be
construed to waive any right or remedy of any member of the AT&T Broadband Group
or the AT&T Communications Group in respect of any Insurance Policy or any other
contract or policy of insurance.
(c) Each of AT&T and AT&T Broadband does hereby, for itself and each other
member of the AT&T Communications Group and the AT&T Broadband Group, agree
that, as and to the extent necessary to give effect to Section 6.01(a), it will
assign any chose in action, claim, right or benefit under an Insurance Policy.
(d) AT&T Broadband does hereby, for itself and each other member of the
AT&T Broadband Group, agree that from and after the Distribution Date, AT&T
Broadband and each other member of the AT&T Broadband Group releases any and all
insurance or other claims that it may have against American Ridge and
Subsidiaries of American Ridge, whether known or unknown.
(e) AT&T does hereby, for itself and each other member of the AT&T
Communications Group, agree that (i) no member of the AT&T Broadband Group or
any AT&T Broadband Indemnitee shall have any Liability whatsoever as a result of
the insurance policies and practices of AT&T and its Affiliates as in effect or
undertaken at any time prior to the Distribution Date, including as a result of
the level or scope of any such insurance, the creditworthiness of any insurance
carrier, the terms and conditions of any policy, the adequacy or timeliness of
any notice to any insurance carrier with respect to any claim or potential claim
or otherwise and (ii) from and after the Distribution Date, AT&T and each other
member of the AT&T Communications Group releases any and all insurance or other
claims that it may have against Western Range and Subsidiaries of Western Range,
whether known or unknown.
(f) Each of AT&T and AT&T Broadband does hereby, for itself and each other
member of the AT&T Communications Group and the AT&T Broadband Group, agree that
all duties and obligations under any Insurance Policy, including the fulfillment
of any conditions and the payment of any deductibles, retentions, co-insurance
payment or retrospective premiums, that correspond in any way with or may be
necessary to perfect, preserve or maintain an insuredIs right to obtain benefits
under that Insurance Policy, will be performed by the insured that is seeking
the benefits, subject to the indemnification provisions of Article 5. In the
event members of both Groups have claims under a given policy, any deductibles,
retentions, co-insurance payments, retrospective premiums, caps, limitations on
average and similar items will be appropriately allocated between such parties
based on the recoveries they would have obtained in the absence of such items.
SECTION 6.02. Certain Post-Distribution Transactions and Related
Matters. (a) Each of AT&T and AT&T Broadband agrees that, until 12 months after
the date of the Distribution, it will (i) maintain its status as a company
engaged in the active conduct of a trade or business and (ii) not engage in any
transaction that would result in it ceasing to be a company engaged in the
active conduct of a trade or business, as defined in Section 355(b) of the Code.
(b) Each of AT&T and AT&T Broadband further agrees that, until 25 months
after the date of the Distribution, it will not, except as expressly
contemplated by this Agreement or the Merger Agreement, (i) enter into any
Proposed Acquisition Transaction or, to the extent AT&T or AT&T Broadband, as
the case may be, has the right to prohibit any Proposed Acquisition Transaction,
permit any Proposed Acquisition Transaction to occur (whether by (A) redeeming
rights under a shareholders rights plan, (B) finding a tender offer to be a
"permitted offer" under any such plan or otherwise causing any such plan to be
inapplicable or neutralized with respect to any Proposed Acquisition
Transaction, or
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(C) approving any Proposed Acquisition Transaction, whether for purposes of any
interested shareholder statute, any "fair price" or other provision of its
respective charter or bylaws or otherwise), (ii) liquidate or partially
liquidate, (iii) in a single transaction or series of related transactions, sell
or transfer all or substantially all of the assets of AT&T or the assets of the
AT&T Broadband Group that were transferred to AT&T Broadband prior to the
Distribution, as the case may be, (iv) redeem or otherwise repurchase (directly
or through an Affiliate) any of its stock, (v) enter into any transaction or
series of transactions as a result of which any Person would acquire, or have
the right to acquire, from AT&T or AT&T Broadband, as the case may be, or one of
their respective Affiliates, a number of shares of stock that would comprise
more than 5% of (A) the value of all outstanding shares of stock of as of the
date of such transaction, or in the case of a series of transactions, the date
of the last transaction of such series, or (B) the voting power of the issued
and outstanding shares of stock as of the date of such transaction, or in the
case of a series of transactions, the date of the last transaction of such
series or (vi) take any other action or actions (including any action or
transaction that would be inconsistent with any representation made in the Tax
Opinions/Rulings) that in the aggregate (and taking into account any other
transactions described in this subparagraph (b)) 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 percent or greater interest (within the
meaning of Section 355(e) of the Code) in AT&T or AT&T Broadband or otherwise
jeopardize the non-recognition of taxable gain or loss for U.S. federal income
tax purposes to AT&T, AT&T Affiliates and shareholders of AT&T in connection
with the Separation and Distribution, unless prior to taking any such action set
forth in the foregoing clauses (i) through (vi), AT&T (with respect to AT&T
Broadband) and AT&T Broadband (with respect to AT&T) has determined, in its sole
and absolute discretion, which discretion shall be exercised in good faith
solely to preserve the tax-free status of the Separation and Distribution, that
such action or actions would not result in a Spin-Off Disqualification. Anything
in the preceding sentence to the contrary notwithstanding, a transaction
described in clauses (i) through (vi) of the preceding sentence shall not
require the determination of the other party in the event that as of the date
immediately preceding such transaction there has not been issued and, when taken
together with the shares to be issued pursuant to the transaction, there will
not be issued, directly or indirectly, pursuant to a Proposed Acquisition
Transaction or otherwise, including as a consequence of the Merger Agreement,
taking into account for such purpose all share transactions which would be taken
into account under Section 355(e) of the Code assuming all such issuances were
considered to be "part of a plan or series of related transactions" with the
Distribution number of shares in excess of 30 percent of (A) the value of all
outstanding shares of stock as of the date of such transaction, or in the case
of a series of transactions, the date of the last transaction of such series, or
(B) the voting power of the issued and outstanding shares of stock as of the
date of such transaction, or in the case of a series of transactions, the date
of the last transaction of such series. "PROPOSED ACQUISITION TRANSACTION" means
a transaction or series of transactions as a result of which AT&T or AT&T
Broadband would merge or consolidate with any other Person or pursuant to which
any Person or any group of related Persons would acquire, or have the right to
acquire, directly or indirectly, from one or more holders of outstanding shares
of stock of a number of shares of stock that would comprise more than 5% of (A)
the value of all outstanding shares of stock as of the date of such transaction,
or in the case of a series of transactions, the date of the last transaction of
such series, or (B) the voting power of the issued and outstanding shares of
stock as of the date of such transaction, or in the case of a series of
transactions, the date of the last transaction of such series. "TAX
OPINIONS/RULINGS" means, collectively, the opinions of tax counsel and the
rulings by the IRS deliverable to AT&T in connection with the transactions
contemplated by this Agreement.
(c) If one party (the "ISSUING PARTY") notifies the other (the "OTHER
PARTY") that it desires to take one of the actions described in clauses (i)
through (vi) of Section 6.02(b) (the "NOTIFIED ACTION") and the Other Party
declines to exercise its discretion pursuant to Section 6.02(b) to permit the
Issuing Party to take such Notified Action, the Issuing Party, in its reasonable
discretion, may elect to seek a Subsequent Tax Opinion/Ruling that would permit
the Issuing Party to take the Notified Action, and the Other Party shall
cooperate in connection with such efforts; provided, however, that the
reasonable costs and expenses of obtaining any such Subsequent Tax
Opinion/Ruling shall be borne by the Issuing Party.
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"SUBSEQUENT TAX OPINION/RULING" means either (i) an unqualified opinion of
counsel jointly selected by the Issuing Party and the Other Party confirming
that, as a consequence of the consummation of the Notified Action, no income,
gain or loss for U.S. federal income tax purposes will be recognized by AT&T,
the shareholders or former shareholders of AT&T, or any AT&T Affiliate with
respect to the Separation and Distribution or (ii) an IRS private letter ruling
to the same effect that, after reasonable due diligence conducted by the Other
Party, are in form and substance reasonably satisfactory to the Other Party.
(d) Notwithstanding anything to the contrary herein or any provision of the
Tax Sharing Agreement to the contrary, if there is a determination (as defined
in Section 1313 of the Code) that a Spin-Off Disqualification has occurred, then
AT&T Broadband shall indemnify and hold harmless AT&T and each member of the
consolidated group of which AT&T is a member from and against one half of all
Tax Related Losses imposed upon or incurred by AT&T or any member of its group
as a result of the Spin-Off Disqualification; provided, however, that AT&T
Broadband shall indemnify and hold harmless AT&T and each member of the
consolidated group of which AT&T is a member from and against any and all Tax
Related Losses imposed upon or incurred by AT&T or any member of its group as a
result of the Spin-Off Disqualification if such Spin-Off Disqualification would
not have occurred but for an AT&T Broadband Action and; provided, further, that
AT&T Broadband shall have no obligation to indemnify AT&T or any member of the
consolidated group of which AT&T is a member if the Spin-Off Disqualification
would not have occurred but for an AT&T Communications Action. "AT&T BROADBAND
ACTION" means (i) any transaction with respect to the stock or assets of AT&T
Broadband that occurs after the Distribution, (ii) AT&T Broadband's failure to
maintain its status as a company engaged in the active conduct of a trade or
business, and (iii) the failure of any representation made by AT&T Broadband
with respect to AT&T Broadband or the AT&T Broadband Business, and the plans,
proposals, intentions and policies of AT&T Broadband after the Separation and
Distribution in connection with a Subsequent Tax Opinion/ Ruling to be true and
correct in all material respects. "AT&T COMMUNICATIONS ACTION" means (i) any
transaction with respect to the stock or assets of AT&T that occurs after the
Distribution, (ii) AT&T's failure to maintain its status as a company engaged in
the active conduct of a trade or business, and (iii) the failure of any
representation made by AT&T with respect to AT&T or the AT&T Communications
Business and the plans, proposals, intentions and policies of AT&T after the
Separation and Distribution in connection with the Tax Opinions/Rulings or a
Subsequent Tax Opinion/Ruling to be true and correct in all material respects.
The delivery of any Subsequent Tax Opinion/Ruling shall not affect either
party's rights and obligations with respect to indemnification under this
Section 6.02(d). "TAX RELATED LOSSES" means (A) all federal, state and local
Taxes (including interest and penalties thereon) imposed pursuant to any
settlement, final determination, judgment or otherwise; (B) all accounting,
legal and other professional fees, and court costs incurred in connection with
such taxes; and (C) all costs and expenses that may result from adverse tax
consequences to AT&T (including all costs, expenses and damages associated with
shareholder litigation or controversies) payable by AT&T or AT&T Affiliates.
SECTION 6.03. Procedure for Indemnification for Tax Liabilities. (a) If
AT&T receives notice of the assertion of any claim, suit, arbitration, inquiry,
proceeding or investigation by or before any court, governmental or other
regulatory or administrative agency or commission or any arbitration tribunal
asserted by a Person other than AT&T or any AT&T Affiliate or AT&T Broadband or
any AT&T Broadband Affiliate that gives rise to a right of indemnification
hereunder (a "THIRD PARTY TAX CLAIM") with respect to which AT&T Broadband may
be obligated under Section 6.02(d) to provide indemnification, AT&T shall give
AT&T Broadband notice thereof (together with a copy of such Third Party Tax
Claim, process or other legal pleading) promptly after becoming aware of such
Third Party Tax Claim; provided, however, that the failure of AT&T to give
notice as provided in this Section shall not relieve AT&T Broadband of its
obligations under Section 6.02(d), except to the extent that AT&T Broadband is
actually prejudiced by such failure to give notice. Such notice shall describe
such Third-Party Tax Claim in reasonable detail.
(b) (i) Notwithstanding any provision to the contrary contained in the Tax
Sharing Agreement, AT&T and AT&T Broadband shall jointly control the defense of,
and cooperate with each other with
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respect to defending, any Third Party Tax Claim with respect to which AT&T
Broadband may be obligated under Section 6.02(d) to provide indemnification;
provided that AT&T Broadband shall forfeit such joint control right with respect
to a particular Third Party Tax Claim if AT&T Broadband or any AT&T Broadband
Affiliate makes any public statement or filing, or takes any action (including,
but not limited to, the filing of any submission or pleading, or the giving of a
deposition or production of documents, in any administrative or court
proceeding) in connection with such Third Party Tax Claim that is inconsistent
in a material respect with any representation or warranty made by AT&T Broadband
in the Agreement, the Tax Opinions/Rulings, the Representation Letter or a
Subsequent Tax Opinion/Ruling and; provided, further, that AT&T shall forfeit
such joint control right with respect to a particular Third Party Tax Claim if
AT&T or any AT&T Affiliate makes any public statement or filing, or takes any
action (including, but not limited to, the filing of any submission or pleading,
or the giving of a deposition or production of documents, in any administrative
or court proceeding) in connection with such Third Party Tax Claim that is
inconsistent in a material respect with any representation or warranty made by
AT&T in the Agreement, the Tax Opinions/Rulings, the Representation Letter or a
Subsequent Tax Opinion/ Ruling.
(ii) AT&T and AT&T Broadband shall exercise their rights to jointly control
the defense of any such Third Party Tax Claim solely for the purpose of
defeating such Third Party Tax Claim and, unless required by applicable law,
neither AT&T nor AT&T Broadband shall make any statements or take any actions
that could reasonably result in the shifting of liability for any Tax Related
Losses arising out of such Third Party Tax Claim from the party making such
statement or taking such action (or any of its Affiliates) to the other party
(or any of its Affiliates).
(iii) Statements made or actions taken by either AT&T or AT&T Broadband in
connection with the defense of any such Third Party Tax Claim shall not
prejudice the rights of such party in any subsequent action or proceeding
between the parties.
(iv) If either AT&T or AT&T Broadband fails to jointly defend any such
Third Party Tax Claim, the other party shall solely defend such Third Party Tax
Claim and the party failing to jointly defend shall use commercially reasonable
efforts to cooperate with the other party in its defense of such Third Party Tax
Claim; provided, however, that neither party may compromise or settle any such
Third Party Tax Claim without the prior written consent of the other party,
which consent shall not be unreasonably withheld or delayed. All costs and
expenses of either party in connection with, and during the course of, the joint
control of the defense of any such Third Party Tax Claim shall be initially paid
by the party that incurs such costs and expenses. Such costs and expenses shall
be reallocated and reimbursed in accordance with the respective indemnification
obligations of the parties at the conclusion of the defense of such Third Party
Tax Claim.
(c) (i) If there is a determination (as defined in Section 1313 of the
Code) that a Spin-Off Disqualification has occurred, AT&T and AT&T Broadband
shall attempt in good faith to resolve any disagreement with respect to whether
there is an indemnification obligation pursuant to Section 6.02(d). If the
parties cannot agree by the tenth Business Day following the determination (the
"DISPUTE DATE"), then the liability shall initially be determined as follows:
Within 20 days of the Dispute Date, AT&T and AT&T Broadband shall each appoint
one arbitrator. The two arbitrators so appointed shall appoint a third
arbitrator within 30 days of the Dispute Date. If either party shall fail to
appoint an arbitrator within such 20-day period, the arbitration shall be
conducted by the sole arbitrator appointed by the other party. Whether selected
by AT&T, AT&T Broadband or otherwise, each arbitrator selected to resolve such
dispute shall be a tax attorney who is generally recognized in the tax community
as a qualified and competent tax practitioner with experience in the tax area
involved in the issue to be resolved. Such arbitrators shall be empowered to
determine initially whether or not AT&T Broadband is required to indemnify AT&T
pursuant to Section 6.02(d) hereunder. Each of AT&T and AT&T Broadband shall
bear 50% of the aggregate expenses of the arbitrators (or sole arbitrator). The
decision of the arbitrators shall be rendered no later than 90 days from the
Dispute Date.
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(ii) On the tenth Business Day following the determination that there has
been a Spin-Off Disqualification, if AT&T Broadband agrees that it has an
indemnification obligation, AT&T Broadband shall pay in full any amount due and
payable to AT&T pursuant to Section 6.02(d), together with interest calculated
at the Underpayment Rate from the date of the determination that there was a
Spin-Off Disqualification through the date of payment. If AT&T Broadband and
AT&T disagree as to whether an indemnity obligation is due, and the arbitration
process concludes that AT&T Broadband is liable, AT&T Broadband shall pay any
amount that would be due and payable to AT&T if AT&T were entitled to indemnity
pursuant to Section 6.02(d), together with interest on such amount calculated at
the Underpayment Rate from the date of the determination that there was a
Spin-Off Disqualification through the date of the payment. "UNDERPAYMENT RATE"
shall mean the annual rate of interest described in Section 6621(c) of the Code
for large corporate underpayments of income Tax (or similar provision of state
or local income Tax law, as applicable), as determined from time to time.
(iii) If pursuant to a final nonappealable order of a court of competent
jurisdiction, it is determined that AT&T Broadband is obligated to pay and has
not paid amounts payable to AT&T pursuant to Section 6.02(d) or that amounts
paid by AT&T Broadband to AT&T should not have been paid, AT&T Broadband shall
pay to AT&T the balance due, or AT&T shall repay to the excess amount paid, in
either event within five days of the final determination of liability or
overpayment, together with interest at the Underpayment Rate calculated (A) from
the date of the determination that there was a Spin-Off Disqualification in the
case of a payment to be made by AT&T Broadband or (B) from the date of payment
by AT&T Broadband to AT&T in the case of a repayment to be made by AT&T. All
payments pursuant to this Section 6.03(c) shall be made by wire transfer to the
bank account designated by AT&T or AT&T Broadband, as the case may be, for such
purpose.
SECTION 6.04. Other Transactions. (a) Notwithstanding any provision of
the Tax Sharing Agreement to the contrary, AT&T Broadband shall indemnify and
hold harmless AT&T and each member of the consolidated group of which AT&T is a
member from and against one half of all Tax Related Losses imposed upon or
incurred by AT&T or any member of its group as a result of (i) the Separation
Transactions or the Split-Off failing to qualify as tax-free transactions under
the provisions of Sections 355, 361(c) and 368(a)(1)(D) of the Code, or (ii) the
shares of AWS or LMC failing to qualify as "qualified property" for purposes of
Section 355(c)(2) or 361(c) of the Code by reason of the application of Section
355(e) of the Code (each such failure, a "TRANSACTION DISQUALIFICATION");
provided, however, AT&T Broadband shall indemnify and hold harmless AT&T and
each member of the consolidated group of which AT&T is a member from and against
any and all Tax Related Losses imposed upon or incurred by AT&T or any member of
its group as a result of the Transaction Disqualification if such Transaction
Disqualification would not have occurred but for an AT&T Broadband Action and;
provided, further, that, AT&T Broadband shall have no obligation to indemnify
AT&T or any member of the consolidated group of which AT&T is a member if the
Transaction Disqualification would not have occurred but for an AT&T
Communications Action.
(b) Any indemnity payment required to be made by AT&T Broadband under
Section 6.04(a) as a result of a Transaction Disqualification shall be net of
AT&T Broadband's Share of any indemnification that AT&T is entitled to receive
from AWS or LMC, as the case may be, as a result of such Transaction
Disqualification (a "PRIMARY INDEMNITY CLAIM"). AT&T, at AT&T Broadband's
direction and expense, shall use reasonable efforts to pursue and collect AT&T
Broadband's Share of a Primary Indemnity Claim from AWS or LMC, as the case may
be, prior to seeking indemnification from AT&T Broadband for such amount. In the
event that AT&T has not received indemnification with respect to AT&T
Broadband's Share of a Primary Indemnity Claim at least five days prior to the
date on which AT&T is required to make a payment that gives rise to such claim,
AT&T shall be entitled to demand payment of AT&T Broadband's Share of a Primary
Indemnity Claim from AT&T Broadband, provided that AT&T Broadband shall have no
obligation to pay AT&T Broadband's Share of a Primary Indemnity Claim unless
AT&T has (i) provided AT&T Broadband with information in reasonable detail
describing its efforts to pursue and collect such Primary Indemnity Claim and
(ii) afforded AT&T Broadband the opportunity to take reasonable efforts on
behalf of AT&T, at AT&T Broadband's expense, to pursue and collect such
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Primary Indemnity Claim. "AT&T BROADBAND'S SHARE" means (i) 100% in the event
the Transaction Disqualification is attributable to an AT&T Broadband Action or
(ii) 50% otherwise. If AT&T Broadband makes payment to AT&T in respect of an
amount for which AT&T has a Primary Indemnity Claim, AT&T shall assign AT&T
Broadband's Share of such Primary Indemnity Claim to AT&T Broadband and shall
cooperate, at AT&T Broadband's direction and expense, with AT&T Broadband in
prosecuting such claim. If AT&T receives a payment required by Section 6.04(a)
from AT&T Broadband and subsequently receives a payment with respect to a
Primary Indemnity Claim that was not previously taken into account, in whole or
in part, in determining the amount of AT&T Broadband's payment to AT&T, then
AT&T will pay to AT&T Broadband an amount equal to the excess of the payment
made by AT&T Broadband over the amount of the payment that AT&T Broadband would
have been required to make if payment under the Primary Indemnity Claim had been
received by AT&T before payment was made by AT&T Broadband.
(c) If there is a determination (as defined in Section 1313 of the Code)
that a Transaction Disqualification has occurred and the parties cannot agree
whether such a Transaction Disqualification would not have occurred but for an
AT&T Communications Action or an AT&T Broadband Action, as the case may be, the
procedures set forth in Section 6.03(c) shall apply.
(d) In the event that, in connection with a Transaction Disqualification
that is attributable to an AT&T Broadband Action, AT&T has any rights against or
obligations to AWS or LMC that are substantially similar to those set forth in
Section 6.03, (i) AT&T shall assign such rights and obligations to AT&T
Broadband, if at all practicable, or (ii) if such assignment cannot be achieved
for any reason, AT&T shall exercise such rights and perform such obligations at
the direction of AT&T Broadband and AT&T Broadband shall indemnify AT&T for all
associated costs. Such costs shall be reallocated and reimbursed in accordance
with the respective indemnification obligations as determined under Section
6.04(c). If a Transaction Disqualification is not attributable to an AT&T
Communications Action or an AT&T Broadband Action, such rights and obligations
shall, to the extent practicable, be exercised and performed jointly and all
associated costs shall be shared equally.
ARTICLE 7
EXCHANGE OF INFORMATION; CONFIDENTIALITY
SECTION 7.01. Agreement for Exchange of Information. (a) Each of AT&T and
AT&T Broadband, on behalf of the AT&T Communications Group and the AT&T
Broadband Group, respectively, agrees to provide, or cause to be provided, to
each other Group, at any time before or after the Distribution Date, as soon as
reasonably practicable after written request therefor, any Information in the
possession or under the control of such respective Group that the requesting
party reasonably needs (i) to comply with reporting, disclosure, filing or other
requirements imposed on the requesting party (including under applicable
securities or Tax laws) by a Governmental Authority having jurisdiction over the
requesting party, (ii) for use in any other judicial, regulatory,
administrative, Tax or other proceeding or in order to satisfy audit,
accounting, claims, regulatory, litigation, Tax or other similar requirements,
or (iii) to comply with its obligations under this Agreement or any other
Ancillary Agreement; provided, however, that in the event that any party
determines that any such provision of Information could be commercially
detrimental, violate any law or agreement, or waive any attorney-client
privilege, the parties shall take all reasonable measures to permit the
compliance with such obligations in a manner that avoids any such harm or
consequence. AT&T and AT&T Broadband intend that any transfer of Information
that would otherwise be within the attorney-client privilege shall not operate
as a waiver of any potentially applicable privilege.
(b) After the date hereof, each of AT&T and AT&T Broadband shall maintain
in effect adequate systems and controls to the extent necessary to enable the
members of the other Group to satisfy their respective reporting, accounting,
audit and other obligations.
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SECTION 7.02. Ownership of Information. Any Information owned by one
Group that is provided to a requesting party pursuant to Section 7.01 shall be
deemed to remain the property of the providing party. Unless specifically set
forth herein, nothing contained in this Agreement shall be construed as granting
or conferring rights of license or otherwise in any such Information.
SECTION 7.03. Compensation for Providing Information. The party
requesting such Information agrees to reimburse the other party for the
reasonable costs, if any, of creating, gathering and copying such Information,
to the extent that such costs are incurred for the benefit of the requesting
party. Except as may be otherwise specifically provided elsewhere in this
Agreement or in any other agreement between the parties, such costs shall be
computed in accordance with the providing party's standard methodology and
procedures.
SECTION 7.04. Record Retention. To facilitate the possible exchange of
Information pursuant to this Article 7 and other provisions of this Agreement
after the Distribution Date, the parties agree to use their reasonable best
efforts to retain all Information in their respective possession or control on
the Distribution Date in accordance with their respective record retention
policies. No party will destroy, or permit any of its Subsidiaries to destroy,
any Information that the other party may have the right to obtain pursuant to
this Agreement prior to the third anniversary of the date hereof without first
using its reasonable best efforts to notify the other party of the proposed
destruction and giving the other party the opportunity to take possession of
such information prior to such destruction; provided, however, that in the case
of any Information relating to Taxes or to Environmental Liabilities, such
period shall be extended to the expiration of the applicable statute of
limitations (giving effect to any extensions thereof). Moreover, no party will
destroy, or permit any of its Subsidiaries to destroy, any policies of insurance
(or records related to such insurance policies) without first using its
reasonable best efforts to notify the other party of the proposed destruction
and giving the other party reasonable opportunity to take possession of such
information prior to such destruction, if it is possible that the other party
may be able to obtain coverage under such policies. (The foregoing includes
"occurrence"-based liability policies, which continue to cover liability for
alleged harm during their policy period, even if no claim is made based on such
alleged harm until after the end of the policy period.)
SECTION 7.05. Limitation of Liability. No party shall have any liability
to any other party in the event that any Information exchanged or provided
pursuant to this Agreement that is an estimate or forecast, or that is based on
an estimate or forecast, is found to be inaccurate, in the absence of willful
misconduct by the party providing such Information. No party shall have any
liability to any other party if any Information is destroyed after reasonable
best efforts by such party to comply with the provisions of Section 7.04.
SECTION 7.06. Other Agreements Providing for Exchange of Information. The
rights and obligations granted under this Article 7 are subject to any specific
limitations, qualifications or additional provisions on the sharing, exchange or
confidential treatment of Information set forth in any Ancillary Agreement.
SECTION 7.07. Production of Witnesses; Records; Cooperation. (a) After
the Distribution Date, except in the case of an adversarial Action by one party
against the other party (which shall be governed by such discovery rules as may
be applicable thereto), each party hereto shall take all reasonable steps to
make available to the other party, upon written request, the former, current and
future directors, officers, employees, other personnel and agents of its
respective Group (whether as witnesses or otherwise) and any books, records or
other documents within its control or which it otherwise has the ability to make
available, to the extent that any such person (giving consideration to business
demands of such directors, officers, employees, other personnel and agents) or
books, records or other documents may reasonably be required in connection with
any Action (including preparation for such Action) in which the requesting party
may from time to time be involved, regardless of whether such Action (or
preparation for such action) is a matter with respect to which indemnification
may be sought hereunder. The requesting party shall bear all costs and expenses
(including allocated costs of in-house counsel and other personnel) in
connection therewith.
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(b) If an Indemnifying Party chooses to defend or to seek to compromise or
settle any Third Party Claim, or if any party chooses or is required to
prosecute, pursue, otherwise evaluate or defend any Action, the other parties
shall cooperate in such defense, settlement or compromise, or such prosecution,
evaluation or pursuit, as the case may be.
(c) Without limiting the foregoing, the parties shall cooperate and consult
to the extent reasonably necessary with respect to any Actions.
(d) Without limiting any provision of this Section 7.07, each of the
parties agrees to cooperate, and to cause each member of its respective Group to
cooperate, with each other in the defense of any infringement or similar claim
with respect to any intellectual property and shall not claim to acknowledge, or
permit any member of its respective Group to claim to acknowledge, the validity
or infringing use of any intellectual property of a third Person in a manner
that would hamper or undermine the defense of such infringement or similar
claim.
(e) The obligation of the parties to make available former, current and
future directors, officers, employees, other personnel and agents pursuant to
this Section 7.07 is intended to be interpreted in a manner so as to facilitate
cooperation and shall include the obligation to make available inventors and
other officers without regard to whether such individual or the employer of such
individual could assert a possible business conflict (subject to the exception
set forth in the first sentence of Section 7.07(a)). Without limiting the
foregoing, each party agrees that (i) neither it nor any member of its
respective Group will take adverse action against any employee of its Group
based on such employee's provision of assistance or information to the other
party pursuant to Section 7.07(a) and (ii) to the extent relevant and necessary,
neither it nor any member of its respective Group will enforce any
confidentiality agreement against an employee of its Group that would otherwise
prevent or hinder such employee from cooperating or providing information to a
requesting party pursuant to Section 7.07(a).
(f) In connection with any matter contemplated by this Section 7.07, the
parties will enter into a mutually acceptable joint defense agreement so as to
maintain to the extent practicable any applicable attorney-client privilege or
work product immunity of either Group.
SECTION 7.08. Confidentiality. (a) Subject to Section 7.09, each of AT&T
and AT&T Broadband, on behalf of itself and its respective Group, agrees to
hold, and to cause its respective directors, officers, employees, agents,
accountants, counsel and other advisors and representatives to hold, in strict
confidence, with at least the same degree of care that applies to its own
confidential and proprietary information pursuant to policies in effect at the
relevant time, all Information concerning the other Group that is either in its
possession (including Information in its possession prior to any of the date
hereof, or the Distribution Date) or furnished by the other Group or its
respective directors, officers, employees, agents, accountants, counsel and
other advisors and representatives at any time pursuant to this Agreement, any
other Ancillary Agreement or otherwise, and shall not use any such Information
other than for such purposes as shall be expressly permitted hereunder or
thereunder, except, in each case, to the extent that such Information has been
(i) in the public domain through no fault of such party or such party's Group or
any of their respective directors, officers, employees, agents, accountants,
counsel and other advisors and representatives, (ii) later lawfully acquired
from other sources by such party (or such party's Group), which sources are not
themselves bound by a confidentiality obligation, or (iii) independently
generated without reference to any proprietary or confidential Information of
the other party.
(b) Each party agrees not to release or disclose, or permit to be released
or disclosed, any such Information concerning the other Group to any other
Person, except its directors, officers, employees, agents, accountants, counsel
and other advisors and representatives who need to know such Information (who
shall be advised of their obligations hereunder with respect to such
Information), except in compliance with Section 7.09. Without limiting the
foregoing, when any Information is no longer needed for the purposes
contemplated by this Agreement or any other Ancillary Agreement, each party will
promptly after request of the other party either return to the other party all
Information in a tangible form (including all copies thereof and all notes,
extracts or summaries based thereon) or certify to the other
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party that it has destroyed such Information (and such copies thereof and such
notes, extracts or summaries based thereon).
SECTION 7.09. Protective Arrangements. In the event that any party or any
of its Subsidiaries either determines on the advice of its counsel that it is
required to disclose any Information concerning the other Group pursuant to
applicable law or receives any demand under lawful process or from any
Governmental Authority to disclose or provide Information concerning the other
Group that is subject to the confidentiality provisions hereof, such party shall
notify the other party of such disclosure at least five days prior to disclosing
or providing such Information and shall cooperate at the expense of the
requesting party in seeking any reasonable protective arrangements requested by
such other party. Subject to the foregoing, after a court of competent
jurisdiction has had an opportunity to rule on such protective arrangements, the
Person that received such request may thereafter disclose or provide Information
to the extent required by such law (as so advised by counsel) or by lawful
process or such Governmental Authority.
ARTICLE 8
FURTHER ASSURANCES AND ADDITIONAL COVENANTS
SECTION 8.01. Further Assurances. (a) In addition to the actions
specifically provided for elsewhere in this Agreement, the other Ancillary
Agreements and the Merger Agreement, but subject to the provisions hereof and
thereof, each of the parties hereto shall use its reasonable best efforts, prior
to, on and after the Distribution Date, to take, or cause to be taken, all
actions, and to do, or cause to be done, all things, reasonably necessary,
proper or advisable under applicable laws, regulations and agreements to
consummate and make effective the transactions contemplated by this Agreement,
the other Ancillary Agreements and the Merger Agreement.
(b) Without limiting the foregoing, prior to, on and after the Distribution
Date, each party hereto shall cooperate with the other party, and without any
further consideration, to execute and deliver, or use its reasonable best
efforts to cause to be executed and delivered, all instruments, including
instruments of conveyance, assignment and transfer, and to make all filings
with, and to obtain all consents, approvals or authorizations of, any
Governmental Authority or any other Person under any permit, license, agreement,
indenture or other instrument (including any Consents or Governmental
Approvals), and to take all such other actions as such party may reasonably be
requested to take by any other party hereto from time to time, consistent with
the terms of this Agreement, the other Ancillary Agreements and the Merger
Agreement, in order to effectuate the provisions and purposes of this Agreement,
the other Ancillary Agreements and the Merger Agreement and the transfers of the
AT&T Broadband Assets and the assignment and assumption of the AT&T Broadband
Liabilities and the other transactions contemplated hereby and thereby.
(c) On or prior to the Distribution Date, AT&T and AT&T Broadband in their
respective capacities as direct and indirect shareholders of their respective
Subsidiaries, shall each ratify any actions that are reasonably necessary or
desirable to be taken by AT&T and AT&T Broadband or any other Subsidiary of
AT&T, as the case may be, to effectuate the transactions contemplated by this
Agreement.
ARTICLE 9
TERMINATION
SECTION 9.01. Termination. This Agreement may be terminated by AT&T prior
to the Distribution Date at any time following termination of the Merger
Agreement in accordance with its terms.
SECTION 9.02. Effect of Termination. In the event of any termination of
this Agreement prior to the Distribution Date, no party to this Agreement (or
any of its directors or officers) shall have any Liability or further obligation
to any other party with respect to this Agreement.
B-39
ARTICLE 10
DISPUTE RESOLUTION AND ARBITRATION
SECTION 10.01. Agreement to Arbitrate. Except as otherwise specifically
provided in this Agreement (including, without limitation, in Article 6,
concerning Third Party Tax Claims) or in any other Ancillary Agreement, the
procedures set forth in this Article 10 shall apply to all disputes,
controversies or claims (whether sounding in contract, tort or otherwise) that
may arise out of or relate to, or arise under or in connection with this
Agreement or any other Ancillary Agreement, or the transactions contemplated
hereby or thereby (including all actions taken in furtherance of the
transactions contemplated hereby or thereby on or prior to the date hereof), or
the commercial or economic relationship of the parties relating hereto or
thereto, between or among any member of the AT&T Broadband Group, or the AT&T
Communications Group. Each party agrees on behalf of itself and each member of
its respective Group that the procedures set forth in this Article 10 shall be
the sole and exclusive remedy in connection with any dispute, controversy or
claim relating to any of the foregoing matters and irrevocably waives any right
to commence any Action in or before any Governmental Authority, except as
expressly provided in Sections 10.11(c) and 10.12 and except to the extent
provided under the Federal Arbitration Act in the case of judicial review of
arbitration results or awards. Each party on behalf of itself and each member of
its respective Group irrevocably waives any right to any trial by jury with
respect to any claim, controversy or dispute set forth in the first sentence of
this Section 10.01. The parties agree that claims filed pursuant to this Article
10 may seek direct damages but in no event for such claims shall either party be
liable to the other for any incidental, special, reliance, consequential or any
other indirect damages or losses (including lost profits or revenues).
SECTION 10.02. Reasonable Best Efforts to Resolve Disputes; Mediation. It
is the intent of the parties to use their respective reasonable best efforts to
negotiate and resolve expeditiously any dispute, controversy or claim between or
among them that may arise from time to time on a mutually acceptable negotiated
basis. The parties may, by mutual consent, retain a mediator to aid in any
attempt to informally negotiate resolution of any dispute, although any opinion
expressed by a mediator shall be strictly advisory and shall not be binding on
the parties, nor shall any opinion expressed by the mediator be admissible in
any arbitration proceedings. Costs of a mediation shall be borne equally by the
parties involved in the matter, except that each party shall be responsible for
its own expenses. Mediation is not a prerequisite to a demand for arbitration
under Section 10.03.
SECTION 10.03. Demand for Arbitration. At any time before the Applicable
Deadline, any party involved in the dispute, controversy or claim may make a
written demand (the "ARBITRATION DEMAND NOTICE") that the dispute be resolved by
binding arbitration, which Arbitration Demand Notice shall be given to the
parties to the dispute, controversy or claim in the manner set forth in Section
11.08. Such Arbitration Demand Notice shall describe in reasonable detail the
facts surrounding such dispute, controversy or claim and the basis of such
party's claim for relief pursuant to this Article. Except as may be expressly
provided in any Ancillary Agreement, any Arbitration Demand Notice must be
asserted within one year after the later of the occurrence of the act or event
giving rise to the underlying claim or the date on which such act or event was,
or should have been, in the exercise of reasonable due diligence, discovered by
the party asserting the claim (as applicable and as it may in a particular case
be specifically extended by the parties in writing, the "APPLICABLE DEADLINE";
provided that in no event will the Applicable Deadline occur with respect to any
matter before the first anniversary of the Distribution). Any discussions,
negotiations or mediations between the parties pursuant to this Agreement or
otherwise will not toll the Applicable Deadline unless expressly agreed in
writing by the parties. Each of the parties agrees on behalf of itself and each
member of its Group that if an Arbitration Demand Notice with respect to a
dispute, controversy or claim is not given prior to the expiration of the
Applicable Deadline, as between or among the parties and the members of their
Groups, such dispute, controversy or claim will be barred. Subject to Sections
10.11(c) and 10.12, upon delivery of an Arbitration Demand Notice prior to the
Applicable Deadline, the dispute, controversy or claim shall be decided by an
Arbitration Panel in accordance with the rules set forth in this Article 10.
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SECTION 10.04. Arbitration Panel. When an Arbitration Demand Notice is
given, the parties involved in the dispute, controversy or claim shall attempt
to select a sole arbitrator satisfactory to all such parties. In the event the
parties are not able jointly to select a sole arbitrator, such parties shall
each appoint an arbitrator within 30 days after delivery of the Arbitration
Demand Notice. Only one arbitrator may be appointed for the AT&T Broadband Group
and the AT&T Communications Group, respectively. In the event that a sole
arbitrator is not selected, the two chosen arbitrators, within 30 days after the
appointment of the later of them to be appointed, will in turn choose a third
arbitrator, and the three arbitrators thus chosen will constitute the
arbitration panel.
SECTION 10.05. Commencement and Place of Arbitration. The sole arbitrator
or arbitration panel (as applicable, the "ARBITRATION PANEL") will meet within
30 days of the last appointment to commence the arbitration, which period may be
extended upon the agreement of the arbitrators. The Arbitration Panel will set a
time for the hearing of the matter, which will commence no later than 90 days
after the date of the last appointment. The place of any arbitration hereunder
will be as agreed upon by the parties, or, if the parties are unable to agree,
as set by the Arbitration Panel.
SECTION 10.06. Arbitration Hearings. The matter shall be presented to the
Arbitration Panel at a hearing by means of written submissions of memoranda and
verified witness statements, filed simultaneously, and responses, if necessary
in the judgment of the arbitrator or both the parties. If the Arbitration Panel
deems it to be appropriate for a fair resolution of the dispute, live
cross-examination or direct examination may be permitted. The Arbitration Panel
shall actively manage the arbitration with a view to achieving a just, speedy
and cost-effective resolution of the dispute, claim or controversy. The
arbitration hearing will be no longer than 30 full hearing days, unless in the
judgment of the Arbitration Panel the matter is complex and sophisticated and
thereby requires a longer time; provided, however, that such hearing shall in
any event be completed within 180 calendar days. The Arbitration Panel may set
time and other limits on the presentation of each party's case, its memoranda or
other submissions, and may refuse to receive any proffered evidence, that the
Arbitration Panel finds to be cumulative, unnecessary, irrelevant or of low
probative nature. Except as otherwise set forth herein, any arbitration
hereunder will be conducted in accordance with the CPR Rules for
Non-Administered Arbitration of Business Disputes then prevailing (except that
the arbitration will not be conducted under the auspices of the CPR and the fee
schedule of the CPR will not apply). To the extent that the provisions of this
Agreement and the prevailing rules of the CPR conflict, the provisions of this
Agreement shall govern.
SECTION 10.07. Arbitration Decision. The final decision of the
Arbitration Panel will be rendered in writing to the parties not later than 60
days after the last hearing date, unless otherwise agreed by the parties in
writing. The decision of the Arbitration Panel will be final and binding on the
parties, and judgment thereon may be had and will be enforceable in any court
having jurisdiction over the parties. Arbitration awards will bear interest at
an annual rate of the Prime Rate plus 2% per annum.
SECTION 10.08. Discovery and Related Matters. Any party involved in the
applicable dispute may request limited document production from the other party
or parties of specific and expressly relevant documents. Any such discovery
shall be conducted expeditiously, and it is intended that discovery shall be
limited as compared to the provisions of the Federal Rules of Civil Procedure.
Depositions shall not occur except by consent of the parties or by order of the
Arbitration Panel. Disputes concerning the document production or other
discovery will be determined by written agreement of the parties involved in the
applicable dispute or, failing such agreement, will be referred to the
Arbitration Panel for resolution. All discovery requests will be subject to the
proprietary rights and rights of privilege of the parties, and the Arbitration
Panel will adopt procedures to protect such rights and to maintain the
confidential treatment of the arbitration proceedings (except as may be required
by law). Subject to the foregoing, the Arbitration Panel shall have the power to
issue subpoenas to compel the production of documents relevant to the dispute,
controversy or claim.
SECTION 10.09. Arbitration Panel's Authority. The Arbitration Panel shall
have full power and authority to determine issues of arbitrability and to
interpret or construe the applicable provisions of this Agreement or any other
Ancillary Agreement and to fashion appropriate remedies for breaches of this
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Agreement (including interim or permanent injunctive relief); provided that the
Arbitration Panel shall not have any right or authority (i) in excess of the
authority a court having jurisdiction over the parties and the controversy or
dispute would have absent these arbitration provisions; (ii) to award
incidental, special, reliance, consequential, or other indirect damages
(including lost profits or revenues); (iii) to award punitive or treble damages;
or (iv) to modify the terms of this Agreement. It is the intention of the
parties that in rendering a decision, the Arbitration Panel give effect to the
applicable provisions of this Agreement and the other Ancillary Agreements and
follow applicable law (it being understood and agreed that this sentence shall
not give rise to a right of judicial review of the arbitrator's award).
SECTION 10.10. Confidentiality. Except as required by law, the parties
agree that the existence and contents of the entire arbitration, including the
award, shall be deemed a compromise of a dispute under Rule 408 of the Federal
Rules of Evidence, shall not be discoverable in any proceeding, shall not be
admissible in any court (except for the enforcement thereof) or arbitration and
shall not bind or collaterally estop either party with respect to any claim or
defense asserted by any third party. Except as required by law, the parties
shall hold, and shall cause their respective officers, directors, employees,
agents and other representatives to hold, the existence, content and result of
the arbitration or any mediation in confidence in accordance with the provisions
of Article 7 and except as may be required in order to enforce any award. Each
of the parties shall request that any mediator or arbitrator comply with such
confidentiality requirement.
SECTION 10.11. Certain Additional Matters. (a) If a party fails or
refuses to appear at and participate in an arbitration hearing after due notice,
the arbitrator may hear and determine the controversy upon evidence produced by
the appearing party.
(b) Arbitration costs will be borne equally by each party involved in the
matter, except that each party will be responsible for its own attorneys' fees
and other costs and expenses, including the costs of witnesses selected by such
party.
(c) Prior to the time at which the Arbitration Panel are appointed, any
party may seek one or more temporary restraining orders in a court of competent
jurisdiction if necessary in order to preserve and protect the status quo.
Neither the request for, or grant or denial of, any such temporary restraining
order shall be deemed a waiver of the obligation to arbitrate as set forth
herein and the Arbitration Panel may dissolve, continue or modify any such
order.
(d) In the event that at any time any member of the Arbitration Panel shall
fail to serve as an arbitrator for any reason, the appropriate party or the two
party-selected arbitrators, as the case may be, shall select a new arbitrator,
in accordance with the procedures set forth in Section 10.04. The extent, if
any, to which testimony previously given shall be repeated or may be relied upon
based on the stenographic record (if there is one), shall be determined by the
replacement arbitrator.
SECTION 10.12. Limited Court Actions. (a) Notwithstanding anything herein
to the contrary, in the event that any party reasonably determines the amount in
controversy in any dispute, controversy or claim (or any series of related
disputes, controversies or claims) under this Agreement or any other Ancillary
Agreement is, or is reasonably likely to be, in excess of $100 million and if
such party desires to commence an Action in lieu of complying with the
arbitration provisions of this Article 10, such party shall so state in its
Arbitration Demand Notice. If the other parties to the arbitration disagree
about whether the amount in controversy exceeds $100 million, the Arbitration
Panel selected pursuant to Section 10.04 shall decide the issue. The Arbitration
Panel shall set a date no later than ten days after the date of its appointment
for submissions by the parties with respect to such issue. There shall be no
discovery in connection with such issue. The Arbitration Panel shall render its
decision on such issue within five days of such date so set by the Arbitration
Panel. The parties agree that any statute of limitations applicable to the
dispute, controversy or claim before the Arbitration Panel shall be tolled
during the pendency of the decision described in the immediately preceding
sentence. In the event that the Arbitration Panel determines that the amount in
controversy is or is reasonably likely to be in excess of $100 million, the
provisions of Sections 10.05, 10.06, 10.07, 10.08, and 10.14 shall not apply,
and within 15 days of such decision, any party to the arbitration may elect in
lieu of arbitration, to commence an
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Action with respect to such dispute, controversy or claim (or such series of
related disputes, controversies or claims) in any court of competent
jurisdiction returned to in Section 11.03. If the Arbitration Panel does
determines that the amount in controversy is not in excess of $100 million, the
provisions of this Article 10 (including with respect to time periods) shall
apply as if no determinations were sought or made pursuant to this Section
10.12(a).
(b) In the event that an arbitration award in excess of $100 million is
issued in any arbitration proceeding commenced hereunder, any party may, within
60 days after the date of such award, submit the dispute, controversy or claim
(or series of related disputes, controversies or claims) giving rise thereto to
a court of competent jurisdiction, regardless of whether such party or any other
party sought to commence an Action in lieu of proceeding with arbitration in
accordance with Section 10.12(a). In such event, the applicable court may elect
to rely on the record developed in the arbitration or, if it determines that it
would be advisable in connection with the matter, allow the parties to seek
additional discovery or to present additional evidence. Each party shall be
entitled to present arguments to the court with respect to whether any such
additional discovery or evidence shall be permitted and with respect to all
other matters relating to the applicable dispute, controversy or claim (or
series of related disputes, controversies or claims).
SECTION 10.13. Continuity of Performance and Remaining
Obligations. Unless otherwise agreed in writing, the parties will continue to
provide service and honor all other commitments under this Agreement and each
other Ancillary Agreement during the course of dispute resolution pursuant to
the provisions of this Article 10 with respect to all matters not subject to
such dispute, controversy or claim.
SECTION 10.14. Law Governing Arbitration Procedures. The interpretation
of the provisions of this Article 10, only insofar as they relate to the
agreement to arbitrate and any procedures pursuant thereto, shall be governed by
the Federal Arbitration Act and other applicable federal law. In all other
respects, the interpretation of this Agreement shall be governed as set forth in
Section 11.02.
SECTION 10.15. Non-applicability of Article. Notwithstanding anything
herein to the contrary, this Article 10 shall not apply to any dispute,
controversy or claim or to any other matter whatsoever arising under Section
6.02 or 6.03, the Tax Sharing Agreement, any other Tax sharing agreement or any
Third Party Tax Claims or to any other matter relating to Taxes. This Article
similarly shall not apply to the extent provided in any other Ancillary
Agreement.
ARTICLE 11
MISCELLANEOUS
SECTION 11.01. Counterparts; Entire Agreement; Corporate Power. (a) This
Agreement and each other Ancillary Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party.
(b) This Agreement, and the other Ancillary Agreements and the Exhibits,
Schedules and Appendices hereto and thereto contain the entire agreement between
the parties with respect to the subject matter hereof or thereof, supersede all
previous agreements, negotiations, discussions, writings, understandings,
commitments and conversations with respect to such subject matter and there are
no agreements or understandings between the parties other than those set forth
or referred to herein or therein.
(c) AT&T represents on behalf of itself and each of its Subsidiaries (other
than the AT&T Broadband Entities) and AT&T Broadband represents on behalf of
itself and each other AT&T Broadband Entity:
(i) each such Person is a corporation or other entity duly
incorporated or formed, validly existing and in good standing under the
laws of the state of its incorporation or formation, has all corporate or
other similar powers required to carry on its business as currently
conducted and is duly qualified to
B-43
do business and is in good standing in each jurisdiction where such
qualification is necessary, except for those jurisdictions where failure to
be so qualified, individually or in the aggregate, has not had and would
not reasonably be expected to have an AT&T Material Adverse Effect or an
AT&T Broadband Material Adverse Effect, respectively;
(ii) each such Person has the requisite corporate or other power and
authority and has taken all corporate or other similar action necessary in
order to execute, deliver and perform each of this Agreement and each other
Ancillary Agreements to which it is a party and to consummate the
transactions contemplated hereby and thereby; and
(iii) this Agreement and each other Ancillary Agreement to which any
such Person is a party has been duly executed and delivered by such Person
and constitutes a valid and binding agreement of such Person enforceable in
accordance with the terms thereof.
(d) Each party hereto acknowledges that it and each other party hereto is
executing certain of the Ancillary Agreements by facsimile, stamp or mechanical
signature. Each party hereto expressly adopts and confirms each such facsimile,
stamp or mechanical signature made in its respective name as if it were a manual
signature, agrees that it will not assert that any such signature is not
adequate to bind such party to the same extent as if it were signed manually and
agrees that at the reasonable request of any other party hereto at any time it
will as promptly as reasonably practicable cause each such Ancillary Agreement
to be manually executed (any such execution to be as of the date of the initial
date thereof).
SECTION 11.02. Governing Law. This Agreement and, unless expressly
provided therein, each other Ancillary Agreement, shall be governed by and
construed and interpreted in accordance with the laws of the State of New York,
irrespective of the choice of laws principles of the State of New York, as to
all matters, including matters of validity, construction, effect,
enforceability, performance and remedies.
SECTION 11.03. Jurisdiction. Except as otherwise expressly provided in
this Agreement, the parties hereto agree that any suit, action or proceeding
seeking to enforce any provision of, or based on any matter arising out of or in
connection with, this Agreement, any of the other Ancillary Agreements or the
transactions contemplated hereby or thereby shall be brought in the United
States District Court for the Southern District of New York or any New York
State court sitting in New York City, so long as one of such courts shall have
subject matter jurisdiction over such suit, action or proceeding, and that any
cause of action arising out of this Agreement or out of any of the other
Ancillary Agreements shall be deemed to have arisen from a transaction of
business in the State of New York, and each of the parties hereby irrevocably
consents to the jurisdiction of such courts (and of the appropriate appellate
courts therefrom) in any such suit, action or proceeding and irrevocably waives,
to the fullest extent permitted by law, any objection that it may now or
hereafter have to the laying of the venue of any such suit, action or proceeding
in any such court or that any such suit, action or proceeding which is brought
in any such court has been brought in an inconvenient forum. Process in any such
suit, action or proceeding may be served on any party anywhere in the world,
whether within or without the jurisdiction of any such court. Without limiting
the foregoing, each party agrees that service of process on such party as
provided in Section 11.06 shall be deemed effective service of process on such
party.
SECTION 11.04. Waiver of Jury Trial. EACH OF THE PARTIES HERETO HEREBY
IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING
ARISING OUT OF OR RELATED TO THIS AGREEMENT, ANY OF THE OTHER ANCILLARY
AGREEMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.
SECTION 11.05. Assignability. Except as set forth in any Ancillary
Agreement, this Agreement and each other Ancillary Agreement shall be binding
upon and inure to the benefit of the parties hereto and thereto, respectively,
and their respective successors and assigns; provided, however, that no party
hereto or thereto may assign its respective rights or delegate its respective
obligations under this Agreement or any other Ancillary Agreement without the
express prior written consent of each of the other parties hereto or thereto.
B-44
SECTION 11.06. AT&T Restructuring. AT&T and AT&T Broadband recognize that
AT&T is contemplating creating a tracking stock with respect to its consumer
services business. Subject to AT&T's obligations under the Merger Agreement,
including Section 9.06(b) thereof, nothing in this Agreement shall prevent the
creation by AT&T of any tracking stock with respect to such business or
otherwise. In the event of the creation of such a tracking stock, (i) references
in this Agreement to AT&T Common Stock shall be adjusted as necessary to
accommodate the existence of such tracking stock and (ii) AT&T may, but is not
required to, distribute all or a portion of the shares of such tracking stock in
the Distribution. In the event any such tracking stock is distributed in
connection with the Distribution, Article 4 shall be revised to appropriately
account for such distribution. Any adjustment or revision pursuant to the
preceding sentence shall be reasonably satisfactory to Comcast.
SECTION 11.07. Third Party Beneficiaries. Except for Comcast, which prior
to any termination of this Agreement shall be a third party beneficiary of AT&T
Broadband's rights under to this Agreement and each other Ancillary Agreement,
and except for the indemnification rights under this Agreement of any AT&T
Indemnitee or AT&T Broadband Indemnitee in their respective capacities as such,
and except as specifically provided in the Employee Benefits Agreement, (i) the
provisions of this Agreement and each other Ancillary Agreement are solely for
the benefit of the parties and are not intended to confer upon any Person except
the parties any rights or remedies hereunder, and (ii) there are no third party
beneficiaries of this Agreement or any other Ancillary Agreement and neither
this Agreement nor any other Ancillary Agreement shall provide any third person
with any remedy, claim, liability, reimbursement, claim of action or other right
in excess of those existing without reference to this Agreement or any other
Ancillary Agreement.
SECTION 11.08. Notices. All notices or other communications under this
Agreement or any other Ancillary Agreement shall be in writing and shall be
deemed to be duly given when (a) delivered in person or (b) deposited in the
United States mail or private express mail, postage prepaid, addressed as
follows:
If to AT&T, to:
AT&T Corp.
295 North Maple Avenue
Basking Ridge, New Jersey 07920
Attention: Marilyn J. Wasser
Fax: (908) 953-8360
with a copy to:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Attention: Richard D. Katcher
Steven A. Rosenblum
Stephanie J. Seligman
Fax: (212) 403-2000
If to AT&T Broadband, to:
AT&T Broadband Corp.
295 North Maple Avenue
Basking Ridge, New Jersey 07920
Attention: Marilyn J. Wasser
Fax: (908) 953-8360
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with a copy to:
Comcast Corporation
1500 Market Street
Philadelphia, Pennsylvania 19102
Attention: General Counsel
Fax: (215) 981-7794
and:
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Attention: Dennis S. Hersch
William L. Taylor
Fax: (212) 450-4800
Any party may, by notice to the other party, change the address to which such
notices are to be given.
SECTION 11.09. Severability. If any provision of this Agreement or any
other Ancillary Agreement or the application thereof to any Person or
circumstance is determined by a court of competent jurisdiction to be invalid,
void or unenforceable, the remaining provisions hereof or thereof, or the
application of such provision to Persons or circumstances or in jurisdictions
other than those as to which it has been held invalid or unenforceable, shall
remain in full force and effect and shall in no way be affected, impaired or
invalidated thereby, so long as the economic or legal substance of the
transactions contemplated hereby or thereby, as the case may be, is not affected
in any manner adverse to any party. Upon such determination, the parties shall
negotiate in good faith in an effort to agree upon such a suitable and equitable
provision to effect the original intent of the parties.
SECTION 11.10. Expenses. The provisions of Sections 11.03(a)-(c) of the
Merger Agreement are hereby incorporated by reference.
SECTION 11.11. Headings. The Article, Section and paragraph headings
contained in this Agreement and in the other Ancillary Agreements are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement or any other Ancillary Agreement.
SECTION 11.12. Waivers of Default. Waiver by any party of any default by
the other party of any provision of this Agreement or any other Ancillary
Agreement shall not be deemed a waiver by the waiving party of any subsequent or
other default, nor shall it prejudice the rights of the other party.
SECTION 11.13. Specific Performance. In the event of any actual or
threatened default in, or breach of, any of the terms, conditions and provisions
of this Agreement or any other Ancillary Agreement, the party or parties who are
or are to be thereby aggrieved shall have the right to specific performance and
injunctive or other equitable relief of its rights under this Agreement or such
other Ancillary Agreement, in addition to any and all other rights and remedies
at law or in equity, and all such rights and remedies shall be cumulative. The
parties agree that the remedies at law for any breach or threatened breach,
including monetary damages, are inadequate compensation for any loss and that
any defense in any action for specific performance that a remedy at law would be
adequate is waived. Any requirements for the securing or posting of any bond
with such remedy are waived.
SECTION 11.14. Amendments. No provisions of this Agreement or any other
Ancillary Agreement shall be deemed waived, amended, supplemented or modified by
any party, unless such waiver, amendment, supplement or modification is in
writing and signed by the authorized representative of the party against whom
such waiver, amendment, supplement or modification it is sought to be enforced.
SECTION 11.15. Late Payments. Except as expressly provided to the
contrary in this Agreement or in any other Ancillary Agreement, any amount not
paid when due pursuant to this Agreement or any other
B-46
Ancillary Agreement (and any amounts billed or otherwise invoiced or demanded
and properly payable that are not paid within 30 days of such bill, invoice or
other demand) shall accrue interest at a rate per annum equal to the Prime Rate
plus 2%.
SECTION 11.16. Interpretation. Words in the singular shall be held to
include the plural and vice versa and words of one gender shall be held to
include the other genders as the context requires. The terms "hereof," "herein,"
and "herewith" and words of similar import herein (or in any Ancillary
Agreement) shall, unless otherwise stated, be construed to refer to this
Agreement (or the applicable other Ancillary Agreement) taken as a whole
(including all of the Schedules, Exhibits and Appendices hereto and thereto) and
not to any particular provision of this Agreement (or such other Ancillary
Agreement). Article, Section, Exhibit, Schedule and Appendix references are to
the Articles, Sections, Exhibits, Schedules and Appendices to this Agreement (or
the applicable other Ancillary Agreement) unless otherwise specified. The word
"including" and words of similar import when used in this Agreement (or the
applicable other Ancillary Agreement) means "including, without limitation,"
unless the context otherwise requires or unless otherwise specified. The word
"or" shall not be exclusive. Unless expressly stated to the contrary in this
Agreement or in any other Ancillary Agreement, all references to "the date
hereof," "the date of this Agreement," "hereby" and "hereupon" and words of
similar import shall all be references to December 19, 2001 (or the date of
which the relevant Ancillary Agreement is first entered into, as the case may
be) regardless of any amendment or restatement hereof (or thereof). References
to a "member" of either Group shall be held to include any corporation or other
Person within the definition of such Group. References to "legal fees" shall
include allocated costs of in-house counsel. The parties hereto have
participated jointly in the negotiation and drafting of this Agreement, and in
the event an ambiguity or question of intent or interpretation arises, this
Agreement shall be construed as if drafted jointly by the parties hereto, and no
presumption or burden of proof shall arise favoring or disfavoring any party
hereto by virtue of the authorship of any provisions of this Agreement.
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IN WITNESS WHEREOF, the parties have caused this Separation and
Distribution Agreement to be executed by their duly authorized representatives.
AT&T CORP.
By: /s/ MARILYN J. WASSER
------------------------------------
Name: Marilyn J. Wasser
Title: Vice President -- Law and
Secretary
AT&T BROADBAND CORP.
By: /s/ ROBERT S. FEIT
------------------------------------
Name: Robert S. Feit
Title: Vice President and
Assistant Secretary
B-48
ANNEX I
The following provisions set forth the parties' understandings with respect
to the disposition of all or any portion of the interest in TWE (the "TWE
INTEREST") held, as of the date hereof, by MediaOne TWE Holdings, Inc. and its
affiliates at any time or from time to time whether prior to or after the
Closing Date:
(a) The following terms, as used in this Annex I, have the following
meanings:
"CLOSING DATE" has the meaning set forth in the Merger Agreement.
"CONTINGENT PAYMENT" means (i) 50% of the excess, if any, of (A) the
Determined Value over (B) the Threshold Amount, reduced by (ii) an amount equal
to the product of 50% of such excess and the rate set forth in subparagraph (e)
hereof.
"DETERMINED VALUE" means the Fair Market Value of the TWE Interest or
portion thereof disposed of, as the case may be; provided, however, that if all
or any portion of the TWE Interest is disposed of within the TWE Disposition
Period under Article XIII of the TWE Partnership Agreement or pursuant to one or
more negotiated dispositions or public or private market dispositions, then the
Determined Value with respect to such portion shall be the Proceeds from such
disposition(s).
"FAIR MARKET VALUE" means with respect to all or any portion of the TWE
Interest, the Proceeds that would be received in a public offering of such
interest (or corresponding equity securities of a corporation into which TWE is
converted or that holds the TWE interest) (after deducting (i) reasonable
expenses, including underwriters' discounts and commissions and (ii) in the
event such offering is an initial public offering, an appropriate initial public
offering discount) based on the then prevailing market conditions.
"PARENT" has the meaning set forth in the Merger Agreement.
"PROCEEDS" means (subject to clause (d) below) (a) if the proceeds are paid
in cash, the amount of the cash actually received;
(b) if the proceeds are paid in securities, assets or rights:
(i) in the case of securities, assets or rights listed on any
established stock exchange or a national market system including the
National Market System of the National Association of Securities Dealers,
Inc. Automated Quotation ("NASDAQ") System, Proceeds means the average of
the closing sales price for such item (or the closing bid, if no sales were
reported) reported in the Wall Street Journal for the 20 consecutive
trading day period prior to such date;
(ii) in the case of securities, assets or rights quoted on the NASDAQ
System (but not on the National Market System thereof) or regularly quoted
by a recognized securities dealer but selling prices are not reported,
Proceeds means the average of the means between the high and low asked
prices for the item for the 20 consecutive trading day period prior to such
date; or
(iii) in the absence of an established market for the securities,
assets or rights (including the rights embodied in this Annex I), Proceeds
means the fair value thereof as determined in good faith by a mutually
acceptable investment banking firm.
"THRESHOLD AMOUNT" means at any given time, an amount, which will initially
be $10.2 billion and shall be reduced by the aggregate Proceeds of previous
dispositions of the TWE Interest received from time to time, provided that from
the date the Merger Agreement is entered into, the outstanding balance of the
Threshold Amount from time to time shall bear simple interest at a rate of 7%
per annum and such interest shall be added to the Threshold Amount.
"TWE DISPOSITION PERIOD" has the meaning set forth in clause (b) of this
Annex I.
(b) If all or any part of the TWE Interest is disposed of by AT&T
Broadband, Parent or their respective successors during the period beginning on
the date the Merger Agreement is signed and ending on the last day of the 54th
month after the Closing Date (the "TWE DISPOSITION PERIOD"), and the
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Closing occurs, AT&T Broadband shall pay to AT&T on behalf of the AT&T
Communications Group, an amount equal to the Contingent Payment. Any Contingent
Payment shall be paid in the same proportion of cash, securities, assets and
rights as was received in the disposition and no Contingent Payment shall be
made until amounts equal to the Threshold Amount have been received as Proceeds.
For the avoidance of doubt, the transactions contemplated by the Merger
Agreement and this Agreement shall not be considered a disposition for purposes
hereof.
(c) If the TWE Interest has not been fully disposed of within the TWE
Disposition Period, the remaining interest shall be appraised by a mutually
acceptable investment banking firm on the basis of Fair Market Value. To the
extent that the Proceeds that would be received if such remaining interest were
disposed of for Fair Market Value exceeds the Threshold Amount, AT&T Broadband
shall pay to AT&T on behalf of the AT&T Communications Group an amount in cash
equal to 50% of such excess, reduced by an amount equal to the product at 50% of
such excess and the tax rate set forth in subparagraph (e) hereof, and AT&T
Broadband shall have no further obligations under this Annex I. If no payment is
required to be made pursuant to the preceding sentence, AT&T Broadband shall
have no further obligations under this Annex I.
(d) In the event that, before the Closing Date, AT&T (subject to Section
8.01(xii) of the Merger Agreement), or after the Closing Date, Parent, effects a
disposition of the TWE Interest on a Tax deferred basis, the payment to be made
to AT&T (taking into account the present value of the deferred Tax, the direct
and indirect costs of executing the transaction (including the detriment of any
guarantees required to be given) and the risk of the transaction) shall be
determined in good faith by the Board of Directors of AT&T Broadband or Parent,
as applicable.
(e) For purposes of this Annex I, the Tax rate will be assumed to be the
highest combined federal, state and local marginal corporate Tax rate in effect
at the relevant time.
(f) For all Tax purposes (unless required by a change in applicable Tax law
or resolution of a contest conducted in good faith and not settled, compromised
and/or conceded without the other party's consent, which shall not be
unreasonably withheld), the parties hereto agree to treat, and to cause their
respective affiliates to treat any payment hereunder as a distribution by AT&T
Broadband to AT&T, as the case may be, occurring immediately prior to the
Distribution and in connection with the Distribution.
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ANNEX C
FORM OF AMENDED AND RESTATED ARTICLES OF INCORPORATION OF AT&T COMCAST
CORPORATION
The Articles of Incorporation of the Corporation shall be amended and
restated in their entirety so as to read as follows:
FIRST: The name of the Corporation is AT&T Comcast Corporation (the
"CORPORATION").
SECOND: The location and post office address of the Corporation's current
registered office in this Commonwealth is:
1500 Market Street, 35th floor
Philadelphia, PA 19102-2148
THIRD: The Corporation is incorporated under the provisions of the
Business Corporation Law of 1988. The purpose or purposes for which the
Corporation is organized are:
To have unlimited power to engage in and to do any lawful act concerning
any or all lawful business for which corporations may be incorporated under the
Business Corporation Law.
FOURTH: The term of its existence is perpetual.
FIFTH: A. The aggregate number of shares which the Corporation shall have
authority to issue is SEVEN BILLION FIVE HUNDRED MILLION (7,500,000,000) shares
of Class A Common Stock, par value $0.01 per share, SEVEN BILLION FIVE HUNDRED
MILLION (7,500,000,000) shares of Class A Special Common Stock, par value $0.01
per share, SEVENTY FIVE MILLION (75,000,000) shares of Class B Common Stock, par
value $0.01 per share, and TWENTY MILLION (20,000,000) shares of Preferred
Stock, which the Board of Directors may issue, in one or more series, without
par value, with full, limited, multiple, fractional, or no voting rights, and
with such designations, preferences, qualifications, privileges, limitations,
restrictions, options, conversion rights and other special or relative rights as
shall be fixed by the Board of Directors.
B. The descriptions, preferences, qualifications, limitations,
restrictions and the voting, special or relative rights in respect of the shares
of each class of Common Stock are as follows:
1. (a) Subject to paragraph (B)(1)(c) of this Article FIFTH, each
share of Class A Common Stock shall entitle the holder thereof to the
number of votes equal to a quotient the numerator of which is the excess of
(i) the Total Number of Votes (as defined below) over (ii) the sum of (A)
the Total Number of B Votes (as defined below) and (B) the Total Number of
Other Votes (as defined below) and the denominator of which is the number
of outstanding shares of Class A Common Stock (provided that if at any time
there are no outstanding shares of Class B Common Stock, each share of
Class A Common Stock shall entitle the holder thereof to one (1) vote) and
each share of Class B Common Stock shall entitle the holder thereof to
fifteen (15) votes. Holders of shares of Class A Special Common Stock shall
not be entitled to vote for the election of Directors (as defined below in
Article SIXTH) or any other matter except as may be required by applicable
law, in which case each share of Class A Special Common Stock shall entitle
the holder thereof to the same number of votes to which each holder of
Class A Common Stock is entitled for each of such holder's shares of Class
A Common Stock. "TOTAL NUMBER OF VOTES" on any record date is equal to a
quotient the numerator of which is the Total Number of B Votes on such
record date and the denominator of which is the B Voting Percentage (as
defined below) on such record date. "TOTAL NUMBER OF B VOTES" on any record
date is equal to the product of (i) 15 and (ii) the number of outstanding
shares of Class B Common Stock on such record date. "TOTAL NUMBER OF OTHER
VOTES" on any record date means the aggregate number of votes to which
holders of all classes of capital stock of the Corporation other than
holders of Class A Common Stock and Class B Common Stock are entitled to
cast on such record date in an election of Directors. "B VOTING PERCENTAGE"
on any record date means the portion (expressed as a percentage) of the
total number of votes entitled to be
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cast in an election of Directors by the holders of capital stock of the
Corporation to which all holders of Class B Common Stock are entitled to
cast on such record date in an election of Directors, as specified and
determined pursuant to paragraph (B)(1)(c) of this Article FIFTH.
(b) Except as provided in Article SEVENTH or required by applicable
law, only the holders of Class A Common Stock, the holders of Class B
Common Stock and the holders of any other class or series of Common Stock,
Preferred Stock or other class of capital stock of the Corporation (if any)
with voting rights shall be entitled to vote and shall vote as a single
class on all matters with respect to which a vote of the shareholders of
the Corporation is required or permitted under applicable law, these
Articles of Incorporation, or the By-Laws of the Corporation. Whenever
applicable law, these Articles of Incorporation or the By-Laws of the
Corporation provide for a vote of the shareholders of the Corporation on
any matter, approval of such matter shall require the affirmative vote of a
majority of the votes cast by the holders entitled to vote thereon unless
otherwise expressly provided under applicable law, these Articles of
Incorporation or the By-Laws of the Corporation.
(c) Notwithstanding any other provision of these Articles of
Incorporation, including paragraph (B)(1)(a) of this Article FIFTH, but
subject to Article SEVENTH, with respect to any matter on which the holders
of Class B Common Stock and the holders of one or more classes or series of
Common Stock, Preferred Stock or any other class of capital stock of the
Corporation (if any) vote as a single class, each share of Class B Common
Stock shall entitle the holder thereof to the number of votes necessary so
that, if all holders of Class B Common Stock and all holders of each such
other class or series of Common Stock, Preferred Stock and other class of
capital stock of the Corporation (if any) were to cast all votes they are
entitled to cast on such matter, the holders of the Class B Common Stock in
the aggregate would cast thirty three and one-third (33 1/3) per cent of
the total votes cast by all such holders, subject to reduction as set forth
in the following sentence. If at any time after the Effective Time for any
reason whatsoever the number of shares of Class B Common Stock outstanding
at such time is reduced below the number of shares of Class B Common Stock
outstanding at the Effective Time (appropriately adjusted for any stock
dividend paid in Class B Common Stock, stock splits or reverse stock splits
of the Class B Common Stock or combinations, consolidations or
reclassifications of the Class B Common Stock), the percentage specified in
the preceding sentence shall be reduced to a percentage equal to the
product of (i) thirty three and one-third (33 1/3) and (ii) the fraction
obtained by dividing the number of shares of Class B Common Stock
outstanding at such time by the number of shares of Class B Common Stock
outstanding at the Effective Time (appropriately adjusted for any stock
dividend paid in Class B Common Stock, stock splits or reverse stock splits
of the Class B Common Stock or combinations, consolidations or
reclassifications of the Class B Common Stock). No reduction in the
percentage of the voting power of the Class B Common Stock pursuant to the
preceding sentence shall be reversed by any issuance of Class B Common
Stock that occurs after such reduction.
2. The holders of Class A Common Stock, the holders of Class A
Special Common Stock and the holders of Class B Common Stock shall be
entitled to receive, from time to time, when and as declared, in the
discretion of the Board of Directors, such cash dividends as the Board of
Directors may from time to time determine, out of such funds as are legally
available therefor, in proportion to the number of shares held by them,
respectively, without regard to class.
3. The holders of Class A Common Stock, the holders of Class A
Special Common Stock, and the holders of Class B Common Stock shall be
entitled to receive, from time to time, when and as declared by the Board
of Directors, such dividends of stock of the Corporation or other property
as the Board of Directors may determine, out of such funds as are legally
available therefor. Stock dividends on, or stock splits of, any class of
Common Stock shall not be paid or issued unless paid or issued on all
classes of Common Stock, in which case they shall be paid or issued only in
shares of that class; provided, however, that stock dividends on, or stock
splits of, Class B Common Stock may be paid or issued in shares of Class A
Special Common Stock. Any decrease in the number of shares of any class of
Common Stock resulting from a combination or consolidation of shares or
other capital reclassification shall not be permitted unless parallel
action is taken with respect to each other class of
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Common Stock, so that the number of shares of each class of Common Stock
outstanding shall be decreased proportionately. Notwithstanding anything to
the contrary contained herein, in the event of a distribution of property,
plan of merger or consolidation, plan of asset transfer, plan of division,
plan of exchange, or recapitalization pursuant to which the holders of
Class A Common Stock, the holders of Class A Special Common Stock and the
holders of Class B Common Stock would be entitled to receive equity
interests of one or more corporations (including, without limitation, the
Corporation) or other entities, or rights to acquire such equity interests,
then the Board of Directors may, by resolution duly adopted, provide that
the holders of Class A Common Stock, the holders of Class A Special Common
Stock, and the holders of Class B Common Stock, respectively and as
separate classes, shall receive with respect to their Class A Common Stock,
Class A Special Common Stock, or Class B Common Stock (whether by
distribution, exchange, redemption or otherwise), in proportion to the
number of shares held by them, equity interests (or rights to acquire such
equity interests) of separate classes or series having substantially
equivalent relative designations, preferences, qualifications, privileges,
limitations, restrictions and rights as the relative designations,
preferences, qualifications, privileges, limitations, restrictions and
rights of the Class A Common Stock, Class A Special Common Stock and Class
B Common Stock. Except as provided above, if there should be any
distribution of property, merger, consolidation, purchase or acquisition of
property or stock, asset transfer, division, share exchange,
recapitalization or reorganization of the Corporation, the holders of Class
A Common Stock, the holders of Class A Special Common Stock, and the
holders of Class B Common Stock shall receive the shares of stock, other
securities or rights or other assets as would be issuable or payable upon
such distribution, merger, consolidation, purchase or acquisition of such
property or stock, asset transfer, division, share exchange,
recapitalization or reorganization in proportion to the number of shares
held by them, respectively, without regard to class.
4. Each share of Class B Common Stock shall be convertible at the
option of the holder thereof into one share of Class A Common Stock or one
share of Class A Special Common Stock. Each share of Class B Common Stock
shall be cancelled after it has been converted as provided herein.
5. Subject to Article SEVENTH and except as otherwise permitted by
applicable law, each and any provision of these Articles of Incorporation
may from time to time, when and as desired, be amended by a resolution of
the Board of Directors and the affirmative vote of a majority of the votes
cast by all shareholders entitled to vote thereon, as determined in
accordance with the provisions of this Article FIFTH. There shall be no
class voting on any such amendments or on any other matter except as shall
be required by Article SEVENTH or by applicable law, in which case there
shall be required the affirmative vote of a majority of the votes cast by
the holders of the outstanding shares of each class entitled to vote by
Article SEVENTH or by applicable law, voting as a separate class.
6. If there should be any merger, consolidation, purchase or
acquisition of property or stock, separation, reorganization, division or
share exchange, the Board of Directors shall take such action as may be
necessary to enable the holders of the Class B Common Stock to receive upon
any subsequent conversion of their stock into Class A Common Stock or Class
A Special Common Stock (as the case may be), in whole or in part, in lieu
of any shares of Class A Common Stock or Class A Special Common Stock (as
the case may be) of the Corporation, the shares of stock, securities, or
other assets as would be issuable or payable upon such merger,
consolidation, purchase, or acquisition of property or stock, separation,
reorganization, division or share exchange in respect of or in exchange for
such share or shares of Class A Common Stock or Class A Special Common
Stock (as the case may be).
7. In the event of any liquidation, dissolution or winding up (either
voluntary or involuntary) of the Corporation, the holders of Class A Common
Stock, the holders of Class A Special Common Stock and the holders of Class
B Common Stock shall be entitled to receive the assets and funds of the
Corporation in proportion to the number of shares held by them,
respectively, without regard to class.
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8. At all times the Board of Directors shall take such action to
adjust the conversion privileges of the Class B Common Stock and the number
of shares of Class B Common Stock to be outstanding after any particular
transaction to prevent the dilution of the conversion rights of the holders
of Class B Common Stock.
9. Except as expressly set forth in these Articles of Incorporation
(including, without limitation, this Article FIFTH and Article SEVENTH),
the rights of the holders of Class A Common Stock, the rights of the
holders of Class A Special Common Stock and the rights of the holders of
Class B Common Stock shall be in all respects identical.
10. Neither the holders of the Class A Common Stock nor the holders
of the Class B Common Stock nor the holders of any other class or series of
Common Stock, Preferred Stock or other class of capital stock of the
Corporation, whether issued prior to or after the Effective Time, shall
have cumulative voting rights.
SIXTH: Governance
A. Definitions
1. "AT&T" means AT&T Corp., a New York corporation.
2. "AT&T DIRECTORS" means (i) those five (5) Directors designated by
AT&T to serve as members of the Board of Directors pursuant to a
contractual right of AT&T to designate such Directors, (ii) any Replacement
AT&T Director and (iii) any Director elected to replace an AT&T Director at
the 2004 annual meeting of shareholders of the Corporation or designated as
an AT&T Director pursuant to the last sentence of paragraph (E)(2) of this
Article SIXTH.
3. "BOARD OF DIRECTORS" means the Board of Directors of the
Corporation.
4. "CEO" means the Chief Executive Officer of the Corporation.
5. "CHAIRMAN" means the Chairman of the Board of Directors.
6. "COMCAST" means Comcast Corporation, a Pennsylvania corporation.
7. "COMCAST DIRECTORS" means (i) those five (5) Directors designated
by Comcast to serve as members of the Board of Directors pursuant to a
contractual right of Comcast to designate such Directors, (ii) any
Replacement Comcast Director and (iii) any Director elected to replace a
Comcast Director at the 2004 annual meeting of shareholders of the
Corporation or designated as a Comcast Director pursuant to the last
sentence of paragraph (E)(2) of this Article SIXTH.
8. "DIRECTOR" means a director of the Corporation.
9. "DIRECTORS NOMINATING COMMITTEE" has the meaning specified in
paragraph (E) of this Article SIXTH.
10. "EFFECTIVE TIME" means the date and time at which these Amended
and Restated Articles of Incorporation become effective with the Department
of State of the Commonwealth of Pennsylvania.
11. "HOLIDAY" has the meaning specified in paragraph (B)(4) of this
Article SIXTH.
12. "INDEPENDENT DIRECTOR" means (i) those two (2) Independent
Persons jointly designated by AT&T and Comcast to serve as members of the
Board of Directors pursuant to a contractual right of AT&T and Comcast to
designate such Directors, (ii) any Replacement Independent Director and
(iii) any Director elected to replace an Independent Director at the 2004
annual meeting of shareholders of the Corporation or designated as an
Independent Director pursuant to the last sentence of paragraph (E)(2) of
this Article SIXTH.
13. "INDEPENDENT PERSON" means a disinterested, independent person
(determined in accordance with customary standards for independent
directors applicable to U.S. public companies), it being
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understood that (i) each individual who was a member of the Board of
Directors of AT&T as of December 19, 2001 (other than Mr. C. Michael
Armstrong) was deemed to be an Independent Person as of December 19, 2001,
(ii) subject to clauses (iii) and (iv) of this definition, none of the
members of the Board of Directors of Comcast as of December 19, 2001 was
deemed to be an Independent Person as of December 19, 2001, (iii) Mr.
Decker Anstrom was deemed to be an Independent Person as of December 19,
2001, (iv) for any period during which Mr. Decker Anstrom is not a
Director, one person (other than Mr. Ralph J. Roberts, Mr. Brian L.
Roberts, Mr. Julian A. Brodsky or Mr. Sheldon M. Bonovitz) designated by
the CEO (which designation may be changed at any time by the CEO) who was a
member of the Board of Directors of Comcast on December 19, 2001 and who
would qualify as an Independent Person under this definition not taking
into account clause (ii) of this definition shall be deemed to be an
Independent Person; provided that such person shall not be eligible to be
an AT&T Director or an Independent Director (any such designee, a "COMCAST
INDEPENDENT DESIGNEE") and (v) none of the spouse, parents, siblings,
lineal descendants, aunts, uncles, cousins and other close relatives (or
their respective spouses) of Mr. Brian L. Roberts will be deemed
Independent Persons at any time.
14. "INITIAL TERM" means the period beginning at the Effective Time
and ending at the 2004 annual meeting of shareholders of the Corporation.
15. "REPLACEMENT AT&T DIRECTOR" has the meaning specified in
paragraph (B)(2) of this Article SIXTH.
16. "REPLACEMENT COMCAST DIRECTOR" has the meaning specified in
paragraph (B)(2) of this Article SIXTH.
17. "REPLACEMENT DIRECTOR" has the meaning specified in paragraph
(B)(2) of this Article SIXTH.
18. "REPLACEMENT INDEPENDENT DIRECTOR" has the meaning specified in
paragraph (B)(2) of this Article SIXTH.
19. "SPECIFIED PERIOD" means the period beginning at the Effective
Time and ending at the 2005 annual meeting of shareholders of the
Corporation or, if earlier, the date on which Mr. C. Michael Armstrong
ceases to be the Chairman.
20. "2004 TERM" means the period beginning at the 2004 annual meeting
of shareholders of the Corporation and ending at the 2005 annual meeting of
shareholders of the Corporation.
B. Directors
1. From the Effective Time until the expiration of the 2004 Term, the
Board of Directors shall consist of twelve (12) Directors. From the
Effective Time until the expiration of the 2004 Term, the Board of
Directors shall consist of the Comcast Directors, the AT&T Directors and
the Independent Directors. At all times, the Board of Directors shall
consist of a majority of Independent Persons.
2. From the Effective Time until the expiration of the 2004 Term, the
Board of Directors shall take all action necessary to ensure that any seat
on the Board of Directors held by (i) a Comcast Director which becomes
vacant is filled promptly by a person designated by a majority of the
Comcast Directors remaining on the Board of Directors (such person, a
"REPLACEMENT COMCAST DIRECTOR"); provided that at all times one of the
Comcast Directors must be an Independent Person, (ii) an AT&T Director
which becomes vacant is filled promptly by a person designated by a
majority of the AT&T Directors remaining on the Board of Directors (such
person, a "REPLACEMENT AT&T DIRECTOR") and (iii) an Independent Director
which becomes vacant is filled promptly by an Independent Person designated
by the Independent Director remaining on the Board of Directors or, if at
such time, there is no Independent Director remaining on the Board of
Directors, by the Board of Directors (such person, a "REPLACEMENT
INDEPENDENT DIRECTOR" and, together with any Replacement Comcast Director
and any Replacement AT&T Director, a "REPLACEMENT DIRECTOR"); provided that
the designation of any Replacement Independent Director by the Independent
Director
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remaining on the Board of Directors shall be subject to the approval of the
Board of Directors prior to such person becoming a Replacement Independent
Director.
3. Each of the Comcast Directors, AT&T Directors and Independent
Directors at the Effective Time, and each Replacement Director elected to
the Board of Directors in accordance with this Article SIXTH during the
Initial Term, shall hold office until the expiration of the Initial Term
and until such Director's successor has been selected and qualified or
until such Director's earlier death, resignation or removal.
4. Each of the Comcast Directors, AT&T Directors and Independent
Directors immediately after the annual meeting of shareholders of the
Corporation in 2004, and each Replacement Director elected to the Board of
Directors in accordance with this Article SIXTH during the 2004 Term, shall
hold office until the expiration of the 2004 Term and until such Director's
successor has been selected and qualified or until such Director's earlier
death, resignation or removal.
5. The first (or in the event the Board of Directors calls an annual
meeting of shareholders pursuant to the last sentence of this paragraph
(B)(5), the second) annual meeting of shareholders of the Corporation after
the Effective Time shall occur on such date and at such time in April 2004
as the Board of Directors may determine, or if the Board of Directors fails
to set a date and time, on the second Thursday of April 2004 at 9:00
o'clock a.m., if, in either case, not a holiday on which national banks are
or may elect to be closed ("HOLIDAY"), and if such day is a Holiday, then
such meeting shall be held on the next business day at such time. The
second (or in the event the Board of Directors calls an annual meeting of
shareholders pursuant to the last sentence of this paragraph (B)(5), the
third) annual meeting of shareholders of the Corporation after the
Effective Time shall occur on such date and at such time in April 2005 as
the Board of Directors may determine, or if the Board of Directors fails to
set a date and time, on the second Thursday of April 2005 at 9:00 o'clock
a.m., if, in either case, not a Holiday, and if such day is a Holiday, then
such meeting shall be held on the next business day at such time. The
Corporation may, at the election of the Board of Directors, call an annual
meeting of shareholders of the Corporation in 2003 for the purpose of
conducting such business, other than the election of Directors, as the
Board of Directors shall determine.
C. Office of the Chairman
1. At the Effective Time and during the Specified Period, there shall
be an Office of the Chairman which shall be comprised of the Chairman and
the CEO.
2. The Office of the Chairman shall be the Corporation's principal
executive deliberative body with responsibility for corporate strategy,
policy and direction, governmental affairs and other matters of
significance to the Corporation. The Chairman and the CEO shall advise and
consult with each other with respect to each of the foregoing matters.
D. Officers
1. Chairman.
(a) At the Effective Time and during the Specified Period, the
Chairman shall be Mr. C. Michael Armstrong if he is willing and available
to serve; provided that from and after April 1, 2004, if the Specified
Period has not expired, Mr. C. Michael Armstrong shall be non-executive
Chairman for the remainder of the Specified Period. After the Specified
Period, the Chairman shall be Mr. Brian L. Roberts if he is willing and
available to serve.
(b) The Chairman shall preside at all meetings of the shareholders of
the Corporation and of the Board of Directors. In the absence of the
Chairman, if the Chairman and the CEO are not the same person, the CEO
shall chair such meetings.
(c) The Chairman shall have the authority to call special meetings of
the Board of Directors, in the manner provided by the By-Laws of the
Corporation.
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(d) Removal of the Chairman shall require the affirmative vote of at
least 75% of the entire Board of Directors until the earlier to occur of
(i) the date on which neither Mr. C. Michael Armstrong nor Mr. Brian L.
Roberts is the Chairman and (ii) the sixth anniversary of the expiration of
the Initial Term.
2. Chief Executive Officer and President.
(a) At the Effective Time, the CEO shall be Mr. Brian L. Roberts if he
is willing and available to serve. For so long as Mr. Brian L. Roberts
shall be the CEO, he shall also be the President of the Corporation.
(b) The powers, rights, functions and responsibilities of the CEO
shall include, without limitation, the following, subject to the control
and direction of the Board of Directors:
(i) the supervision, coordination and management of the
Corporation's business, operations, activities, operating expenses and
capital allocation;
(ii) matters relating to officers (other than the Chairman) and
employees, including, without limitation, hiring, terminating, changing
positions and allocating responsibilities of such officers and
employees; provided that, if the Chairman and the CEO are not the same
person, the CEO shall consult with the Chairman in connection with the
foregoing as it relates to the senior executives of the Corporation;
provided, further, that following the initial designation of officers by
the CEO (in consultation with the Chairman) as provided herein, the
election of officers shall be as provided in the By-Laws of the
Corporation;
(iii) all of the powers, rights, functions and responsibilities
typically exercised by a chief executive officer and president of a
corporation; and
(iv) the authority to call special meetings of the Board of
Directors, in the manner provided by the By-Laws of the Corporation.
(c) Removal of the CEO shall require the affirmative vote of at least
75% of the entire Board of Directors until the earlier to occur of (i) the
date on which Mr. Brian L. Roberts ceases to be the CEO and (ii) the sixth
anniversary of the expiration of the Initial Term.
E. Directors Nominating Committee.
1. The Directors Nominating Committee (the "DIRECTORS NOMINATING
COMMITTEE") shall have the power to nominate individuals for election by
the shareholders of the Corporation as Directors at the 2004 annual meeting
of shareholders of the Corporation and thereafter. During the Initial Term,
the Directors Nominating Committee shall consist of Mr. Brian L. Roberts,
if he is the Chairman or the CEO, one (1) Comcast Director who is an
Independent Person selected by the Comcast Directors and two (2) Directors
who are Independent Persons selected from the AT&T Directors by the AT&T
Directors who are Independent Persons and the Independent Directors after
consultation with Mr. Brian L. Roberts. During the Initial Term, if Mr.
Brian L. Roberts is not the Chairman or the CEO, the Directors Nominating
Committee shall consist of two (2) Comcast Directors selected by the
Comcast Directors one of whom shall be an Independent Person and two (2)
Directors who are Independent Persons selected from the AT&T Directors by
the AT&T Directors who are Independent Persons and the Independent
Directors after consultation with a Comcast Director selected by the two
(2) Comcast Directors selected to serve on the Directors Nominating
Committee. During the 2004 Term, the Directors Nominating Committee shall
consist of Mr. Brian L. Roberts, if he is the Chairman or the CEO, one (1)
Comcast Director who is an Independent Person selected by the Comcast
Directors and three (3) Directors who are Independent Persons selected from
the AT&T Directors and the Independent Directors by the Comcast Directors.
During the 2004 Term, if Mr. Brian L. Roberts is not the Chairman or the
CEO, the Directors Nominating Committee shall consist of two (2) Comcast
Directors selected by the Comcast Directors one of whom shall be an
Independent Person and three (3) Independent Persons selected from the AT&T
Directors and the Independent Directors by the Comcast Directors. After the
2004 Term, the Directors Nominating
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Committee shall consist of Mr. Brian L. Roberts, if he is the Chairman or
CEO, and four (4) Directors who are Independent Persons selected by Mr.
Brian L. Roberts; provided that no more than one (1) person who was a
Comcast Director or a Comcast Independent Designee may be selected by Mr.
Brian L. Roberts as a member of the Directors Nominating Committee pursuant
to this sentence prior to the seventh anniversary of the date that such
Director was initially elected to the Board of Directors. After the 2004
Term, if Mr. Brian L. Roberts is not the Chairman or CEO, the Directors
Nominating Committee shall be constituted as determined by the Board of
Directors. At any time that Mr. Brian L. Roberts is a member of the
Directors Nominating Committee, he shall be the Chairman of the Directors
Nominating Committee. Subject to paragraph (E)(2) of this Article SIXTH,
all powers otherwise held by the Board of Directors to nominate individuals
for election by the shareholders of the Corporation as Directors shall
reside exclusively in the Directors Nominating Committee, no such
nominations shall be made by the Board of Directors and all nominations of
the Directors Nominating Committee shall be submitted directly to the
shareholders of the Corporation without any requirement that such
nominations be submitted to the Board of Directors for its approval or
ratification.
2. If the Directors Nominating Committee is able to reach agreement
on a full slate of nominations for the 2004 annual meeting of shareholders
of the Corporation, each of the individuals selected as a nominee who is a
Director then in office will maintain the status of a "Comcast Director,"
"AT&T Director" or "Independent Director," 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," five (5) of the
nominees have the status of an "AT&T Director" and two (2) of the nominees
have the status of an "Independent Director." If the Directors Nominating
Committee is unable to reach agreement on a full slate of nominations for
the 2004 annual meeting of shareholders of the Corporation, each of the
Directors then in office shall be nominated for election as a Director at
the 2004 annual meeting of shareholders of the Corporation and shall
maintain the status of a "Comcast Director," "AT&T Director" or
"Independent Director," 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 shareholders of the Corporation, a replacement nominee will be
selected by (i) if the Director declining to stand for election is a
Comcast Director, a majority of the Comcast Directors then in office (other
than the Comcast Director declining to stand for election), (ii) if the
Director declining to stand for election is an AT&T Director, a majority of
the AT&T Directors then in office (other than the AT&T Director declining
to stand for election) and (iii) if the Director declining to stand for
election is an Independent Director, the other Independent Director then in
office, subject to the prior approval of the Board of Directors (other than
the Independent Director declining to stand for election); provided that if
each of the Independent Directors declines to stand for election as a
Director at the 2004 annual meeting of shareholders of the Corporation,
replacement nominees will be selected by the Board of Directors (other than
the Independent Directors). 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," "AT&T Director" or "Independent Director," as the case
may be. If a person is elected as a Director at the 2004 annual meeting of
shareholders who was not nominated pursuant to the provisions of this
paragraph (E), 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 shareholders who were not
nominated pursuant to the provisions of this paragraph (E) and it is not
possible to determine whom they were elected in lieu of, their status as
"Comcast Directors," "AT&T Directors" or "Independent Directors" shall be
determined by the entire Board of Directors; provided that there shall be
five (5) Comcast Directors, five (5) AT&T Directors and two (2) Independent
Directors and the status of the other Directors shall not be affected as a
result of such determination.
3. Any action of the Directors Nominating Committee shall require the
approval of a majority of the entire Directors Nominating Committee. If any
provision of this paragraph (E) provides for a selection or determination
to be made by any given group of Directors, such selection or
C-8
determination shall require the approval of a majority of the Directors in
such entire group, and (except as otherwise specifically provided) not the
approval of any given subset of such group.
F. Executive Committee. If the Board of Directors decides to establish an
Executive Committee, if he is willing and able to serve and for so long as he
shall be a member of the Board of Directors, Mr. Ralph J. Roberts shall be the
Chairman of the Executive Committee.
G. Amendment. Subject to paragraph (H) of this Article SIXTH, until the
earlier to occur of (i) the date on which Mr. Brian L. Roberts is no longer
serving as the Chairman or the CEO and (ii) the sixth anniversary of the
expiration of the Initial Term, the provisions of this Article SIXTH and the
provisions of Article 9 of the By-Laws may not be amended, altered, repealed or
waived in any respect without the prior approval of at least 75% of the entire
Board of Directors.
H. Termination. If Mr. Brian L. Roberts is no longer serving as the
Chairman or the CEO, the provisions of this Article SIXTH (other than paragraphs
(A) and (E) and the last sentence of paragraph (B)(1), in each case of this
Article SIXTH) shall terminate automatically without any further action of the
Board of Directors or the shareholders of the Corporation; provided that
notwithstanding the foregoing, in the event that Mr. Brian L. Roberts ceases to
serve as the Chairman or the CEO prior to the 2005 annual meeting of
shareholders of the Corporation, the provisions of paragraphs (A), (B), (C),
(D)(1)(a)-(c) and (E) of this Article SIXTH shall survive through the close of
such annual meeting.
SEVENTH: In addition to any other approval required by law or by these
Articles of Incorporation, and notwithstanding any provision of Article FIFTH,
the approval of the holders of Class B Common Stock, voting separately as a
class, shall be necessary to approve (i) any merger or consolidation of the
Corporation with another entity or any other transaction, in each case that
requires the approval of the shareholders of the Corporation pursuant to the law
of the Commonwealth of Pennsylvania or other applicable law, or any other
transaction that would result in any person or group (as such term is defined in
Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) owning
shares representing in excess of 10% 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
shareholder approval under the applicable rules and regulations of any stock
exchange or quotation system, (ii) any issuance of shares of Class B Common
Stock or any securities exercisable or exchangeable for or convertible into
shares of Class B Common Stock or (iii) any amendment to these Articles of
Incorporation (including, without limitation, any amendment to elect to have any
of Subchapters E, F, G, H, I and J or Section 2538 of Subchapter D, in each case
of Chapter 25 of the Business Corporation Law of 1988, be applicable to the
Corporation or any amendment to this Article SEVENTH) or the By-Laws of the
Corporation or any other action (including, without limitation, the adoption,
amendment or redemption of a shareholder rights plan) that would, in any such
case, limit the rights of the holders of Class B Common Stock or any subsequent
transferee of Class B Common Stock to transfer, vote or otherwise exercise
rights with respect to capital stock of the Corporation. In addition to any
other approval required by law or by these Articles of Incorporation, and
notwithstanding any provision of Article FIFTH, the approval of the holder of
any class or series of shares of the Corporation shall be necessary to approve
any amendment to these Articles of Incorporation which would make any change in
the preferences, limitations or rights of the shares of such class or series
adverse to such class or series.
EIGHTH: Special meetings of shareholders may be called only by the Board
of Directors and may not be called by shareholders of the Corporation.
NINTH: The shareholders of the Corporation shall not be permitted to act
by written consent in lieu of a meeting; provided that notwithstanding the
foregoing, the holders of a majority of the Class B Common Stock shall be
permitted to act by written consent in lieu of a meeting in the exercise of
their approval rights under Article SEVENTH.
TENTH: The Board of Directors shall have the power to amend the By-Laws to
the extent provided therein, subject only to applicable law. Any amendment to
the By-Laws approved by the shareholders of
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the Corporation shall not be deemed to have been adopted by the Corporation
unless it has been previously approved by the Board of Directors.
ELEVENTH: No person who is or was a Director shall be personally liable,
as such, for monetary damages (other than under criminal statutes and under
federal, state and local laws imposing liability on directors for the payment of
taxes) unless the person's conduct constitutes self-dealing, willful misconduct
or recklessness. No amendment or repeal of this Article ELEVENTH shall apply to
or have any effect on the liability or alleged liability of any person who is or
was a Director for or with respect to any acts or omissions of the Director
occurring prior to the effective date of such amendment or repeal. If the
Business Corporation Law of 1988 is amended to permit a Pennsylvania corporation
to provide greater protection from personal liability for its directors than the
express terms of this Article ELEVENTH, this Article ELEVENTH shall be construed
to provide for such greater protection.
TWELFTH: No person who is or was an officer of the Corporation shall be
personally liable, as such, for monetary damages (other than under criminal
statutes and under federal, state and local laws imposing liability on directors
for the payment of taxes) unless the person's conduct constitutes self-dealing,
willful misconduct or recklessness. No amendment or repeal of this Article
TWELFTH shall apply to or have any effect on the liability or alleged liability
of any person who is or was an officer of the Corporation for or with respect to
any acts or omissions of the officer occurring prior to the effective date of
such amendment or repeal. If the Business Corporation Law of 1988 is amended to
permit a Pennsylvania corporation to provide greater protection from personal
liability for its officers than the express terms of this Article TWELFTH, this
Article TWELFTH shall be construed to provide for such greater protection.
THIRTEENTH: Any or all classes and series of shares of the Corporation, or
any part thereof, may be represented by uncertificated shares to the extent
determined by the Board of Directors, except that shares represented by a
certificate that is issued and outstanding shall continue to be represented
thereby until the certificate is surrendered to the Corporation. Within a
reasonable time after the issuance or transfer of uncertificated shares, the
Corporation shall send to the registered owner thereof a written notice
containing the information required to be set forth or stated on certificates.
The rights and obligations of the holders of shares represented by certificates
and the rights and obligations of the holders of uncertificated shares of the
same class and series shall be identical.
FOURTEENTH: Subchapters E, F, G, H, I and J and Section 2538 of Subchapter
D, in each case of Chapter 25 of the Business Corporation Law of 1988, shall not
be applicable to the Corporation.
FIFTEENTH: Henceforth, these Articles supersede the original Articles and
all amendments filed thereto.
C-10
ANNEX D
TERM SHEET FOR AMENDED AND RESTATED ARTICLES OF INCORPORATION
(ALTERNATIVE STRUCTURE)
The Articles of Incorporation of AT&T Comcast Corporation (the
"CORPORATION"; each term used but not defined herein shall have the meaning
assigned to such term in the Agreement and Plan of Merger dated as of December
19, 2001, as amended, among Comcast Corporation, AT&T Corp., the Corporation and
the other parties referred to therein) if the Preferred Structure Approval is
not obtained will be identical in all respects to the Articles of Incorporation
of the Corporation if the Preferred Structure Approval is obtained, except that:
- Paragraph (A) of Article FIFTH shall provide the Corporation with the
authority to issue two hundred million (200,000,000) shares of Parent
Class A Common Stock and seven billion five hundred million
(7,500,000,000) shares of Parent Class C Common Stock (in addition to the
seven billion five hundred million (7,500,000,000) shares of Parent Class
A Special Common Stock, the seventy-five million (75,000,000) shares of
Parent Class B Common Stock and the twenty million (20,000,000) shares of
Parent Preferred Stock).
- Paragraph (B)(1)(a) of Article FIFTH shall provide that each share of
Parent Class A Common Stock shall entitle the holder to one (1) vote,
each share of Parent Class C Common Stock shall entitle the holder to the
number of votes equal to a quotient the numerator of which is the excess
of (i) the Total Number of Votes (as defined below) over (ii) the sum of
(A) the Total Number of A and B Votes (as defined below) and (B) the
Total Number of Other Votes (as defined below) and the denominator of
which is the number of outstanding shares of Parent Class C Common Stock
(provided that if at any time there are no outstanding shares of Parent
Class A Common Stock and no outstanding shares of Parent Class B Common
Stock, each share of Parent Class C Common Stock shall entitle the holder
thereof to one (1) vote) and, when entitled to vote by applicable law,
each share of Parent Class A Special Common Stock shall entitle the
holder to the same number of votes to which each holder of Parent Class C
Common Stock is entitled for each of such holder's shares of Parent Class
C Common Stock. Paragraph (B)(1)(a) of Article FIFTH shall include the
following defined terms (and shall not include any other defined terms):
"TOTAL NUMBER OF VOTES" on any record date is equal to a quotient the
numerator of which is the Total Number of A and B Votes on such record
date and the denominator of which is the Combined A and B Voting
Percentage (as defined below) on such record date.
"TOTAL NUMBER OF A AND B VOTES" on any record date is equal to the sum
of (i) the number of outstanding shares of Parent Class A Common Stock
on such record date and (ii) the product of (A) 15 and (B) the number of
outstanding shares of Parent Class B Common Stock on such record date.
"TOTAL NUMBER OF OTHER VOTES" on any record date means the aggregate
number of votes to which holders of all classes of capital stock of the
Corporation other than holders of Parent Class A Common Stock, Parent
Class B Common Stock and Parent Class C Common Stock are entitled to
cast on such record date in an election of Directors (as defined below
in Article SIXTH).
"COMBINED A AND B VOTING PERCENTAGE" on any record date means the
portion (expressed as a percentage) of the total number of votes
entitled to be cast on such record date in an election of Directors by
the holders of capital stock of the Corporation to which all holders of
Parent Class A Common Stock and Parent Class B Common Stock are entitled
to cast on such record date in an election of Directors, as specified
and determined pursuant to paragraph (B)(1)(c) of Article FIFTH.
D-1
- Paragraph (B)(1)(b) of Article FIFTH shall provide that the holders of
Parent Class C Common Stock shall vote as a single class with the holders
of the other classes of capital stock of the Corporation with voting
rights.
- Paragraph (B)(1)(c) of Article FIFTH shall provide that the holders of
Parent Class A Common Stock and Parent Class B Common Stock will
initially hold 5.14%(1) and 33 1/3%, respectively, of the combined voting
power of Parent's capital stock. Paragraph (B)(1)(c) of Article FIFTH
shall also provide that the voting interests of Parent Class A Common
Stock and Parent Class B Common Stock will remain at 5.14% and 33 1/3%,
respectively, regardless of any future issuances of Parent voting stock,
subject to the following two exceptions. First, if the number of shares
of either class outstanding at the Effective Time is reduced for any
reason after the Effective Time (e.g., by repurchase or, in the case of
the Parent Class B Common Stock only, by conversion) (appropriately
adjusted for any stock dividends paid in the relevant class, stock splits
or reverse stock splits or combinations, consolidations or
reclassifications of the relevant class), the voting interest of that
class will be proportionately reduced. Second, if the number of shares of
either class outstanding at the Effective Time is increased by additional
issuances after the Effective Time (appropriately adjusted for any stock
dividends paid in the relevant class, stock splits or reverse stock
splits or combinations, consolidations or reclassifications of the
relevant class), the voting interest of the applicable class will
increase relative to the other class (based on the principle that each
share of Parent Class B Common Stock will be entitled to 15 times the
vote of each share of Parent Class A Common Stock), but both classes in
the aggregate will still hold, subject to any previous reduction as
described in the immediately preceding sentence, 38 47/100% of the
combined voting power of Parent's capital stock.
- Paragraph (B)(2) of Article FIFTH shall provide holders of Parent Class C
Common Stock with the same right to receive cash dividends as the holders
of each other class of Parent Common Stock.
- Paragraph (B)(3) of Article FIFTH shall provide that holders of Parent
Class C Common Stock, like the holders of each other class of Parent
Common Stock, may receive dividends of stock or other property. Paragraph
(B)(3) of Article FIFTH shall further provide the holders of Parent Class
C Common Stock with the same relative rights as the holders of each other
class of Parent Common Stock upon the occurrence of the transactions
specified in the last two sentences of Paragraph (B)(3) of Article FIFTH.
- Paragraph (B)(4) of Article FIFTH shall provide that each share of Parent
Class B Common Stock shall be convertible into one share of Parent Class
A Common Stock, Parent Class A Special Common Stock or Parent Class C
Common Stock.
- Paragraph (B)(6) of Article FIFTH shall provide, in addition to the other
provisions thereof, that in the event of a merger or any similar
fundamental transaction, the Board of Directors shall take action to
enable holders of Parent Class B Common Stock who subsequently convert
their Parent Class B Common Stock into Parent Class C Common Stock to
receive, in lieu of shares of Parent Class C Common Stock, the stock,
securities or other property that holders of Parent Class C Common Stock
receive in such merger or other transaction.
- Paragraph (B)(7) of Article FIFTH shall provide that upon any liquidation
or other similar event, the holders of Parent Class C Common Stock, like
the holders of each other class of Parent Common Stock, shall be entitled
to receive any distributions in proportion to the number of shares they
hold, without regard to class.
---------------
(1) Subject to adjustment if any shares of Parent Class A Common Stock or Parent
Class B Common Stock are issued or cease to be outstanding after the date of
the Merger Agreement and prior to closing.
D-2
- Paragraph (B)(9) of Article FIFTH shall provide that, except as otherwise
provided in the Articles of Incorporation, the rights of the holders of
Parent Class C Common Stock shall be in all respects identical to the
rights of the holders of each other class of Parent Common Stock.
- Paragraph (B)(10) of Article FIFTH shall provide that the holders of
Parent Class C Common Stock shall not have cumulative voting rights.
- Article SEVENTH shall provide that, except as provided in the last
sentence thereof regarding separate class or series votes, the approval
by a majority of the votes cast by the holders of Parent Class A Common
Stock and the holders of Parent Class B Common Stock, voting together as
a separate class, will be necessary to approve the actions specified in
Article SEVENTH. In addition, the holders of Parent Class A Common Stock
and the holders of Parent Class B Common Stock, voting together as a
separate class, will have an approval right over the issuance of shares
of Parent Class A Common Stock or any securities exercisable or
exchangeable for or convertible into shares of Parent Class A Common
Stock. Article SEVENTH shall also provide that in any such vote the
voting interest of the holders of Parent Class B Common Stock relative to
that of the holders of Parent Class A Common Stock will be the percentage
obtained by dividing (x) the voting interest of the Parent Class B Common
Stock at such time by (y) the sum of the voting interests of the Parent
Class B Common Stock and the Parent Class A Common Stock at such time
(each such voting interest as determined by, and subject to, the
provisions of paragraph (B)(3)(c) of Article FIFTH). Likewise, Article
SEVENTH shall also provide that in any such vote the voting interest of
the holders of Parent Class A Common Stock relative to that of the
holders of Parent Class B Common Stock will be the percentage obtained by
dividing (x) the voting interest of the Parent Class A Common Stock at
such time by (y) the sum of the voting interests of the Parent Class B
Common Stock and the Parent Class A Common Stock at such time (each such
voting interest as determined by, and subject to, the provisions of
paragraph (B)(3)(c) of Article FIFTH).
- Article NINTH shall provide that the holders of a majority of the voting
power of the Parent Class A Common Stock and the Parent Class B Common
Stock shall be permitted to act by written consent in the exercise of
their approval rights under Article SEVENTH.
D-3
ANNEX E
Microfilm Number ---------------
Filed with the Department of State on --------------------
Entity Number 74263
------------------------------------------------
Secretary of the Commonwealth
ARTICLES OF AMENDMENT -- DOMESTIC BUSINESS CORPORATION
DSCB:15-1915 (Rev 90)
In compliance with the requirements of 15 Pa.C.S. sec. 1915 (relating to
articles of amendment), the undersigned business corporation, desiring to amend
its Articles, hereby states that:
The name of the corporation is: Comcast Corporation
----------------------------------------------
The (a) address of this corporation's current registered office in this
Commonwealth or (b) name of its commercial registered office provider and the
county of venue is (the Department is hereby authorized to correct the following
information to conform to the records of the Department):
(a) 1500 Market Street, 35th Floor Philadelphia Pennsylvania 19102
--------------------------------------------------------------------------------
Number and Street City State Zip
Philadelphia
----------------------
County
(b) c/o:
---------------------------------------------------------------------------
Name of Commercial Registered Office Provider County
For a corporation represented by a commercial registered office provider,
the county in (b) shall be deemed the county in which the corporation is
located for venue and official publication purposes.
The statute by or under which it was incorporated is: Pennsylvania Business
Corporations Law
The date of its incorporation is: March 5, 1969
(Check, and if appropriate complete, one of the following):
--------- The amendment shall be effective upon filing these Articles of
Amendment in the Department of State.
X The amendment shall be effective on: at
--- ------ ------
Date Hour
(Check one of the following):
X The amendment was adopted by the shareholders (or members) pursuant to
--- 15 Pa.C.S. sec. 1914(a) and (b).
The amendment was adopted by the board of directors pursuant to 15
Pa.C.S. sec. 1914(c).
---
(Check, and if appropriate complete, one of the following):
X The amendment adopted by the corporation, set forth in full, is as
---- follows:
The following words are inserted immediately prior to the period in
the penultimate sentence of Article 5(c): ", except as provided in the
Agreement and Plan of Merger dated as of December 19, 2001, as
amended, by and among the Corporation, AT&T Corp., AT&T Broadband
Corp., AT&T Comcast Corporation and the other parties referred to
therein (the full text of which is on file at the principal place of
business of the Corporation, 1500 Market Street, 35th Floor,
Philadelphia, Pennsylvania 19102) if the Preferred Structure Approval
(as defined therein) is obtained".
--- The amendment adopted by the corporation is set forth in
full in Exhibit A attached hereto and made a part hereof.
E-1
(Check if the amendment restates the Articles):
___ The restated Articles of Incorporation supersede the original
Articles and all amendments thereto.
IN TESTIMONY WHEREOF, the undersigned corporation has caused these Articles
of Amendment to be signed by a duly authorized officer thereof this ______ day
of , .
Comcast Corporation
--------------------------------------
(Name of Corporation)
BY:
------------------------------------
--------------------------------------
(Signature)
TITLE:
----------------------------------
--------------------------------------
E-2
ANNEX F
FORM OF BY-LAWS OF AT&T COMCAST CORPORATION
The By-Laws of the Corporation shall be amended and restated in their
entirety so as to read as follows:
ARTICLE 1
OFFICES
SECTION 1.01. Registered Office. The registered office of the Corporation
shall be located within the Commonwealth of Pennsylvania at such place as the
Board of Directors (hereinafter referred to as the "BOARD OF DIRECTORS" or the
"BOARD") shall determine from time to time.
SECTION 1.02. Other Offices. The Corporation may also have offices at
such other places, within or without the Commonwealth of Pennsylvania, as the
Board of Directors may determine from time to time.
ARTICLE 2
MEETINGS OF SHAREHOLDERS
SECTION 2.01. Place of Meetings of Shareholders. Meetings of shareholders
may be held at such geographic locations, within or without the Commonwealth of
Pennsylvania, as may be fixed from time to time by the Board of Directors. If no
such geographic location is so fixed by the Board of Directors or the Board of
Directors does not determine to hold a meeting by means of electronic technology
(as provided in the next sentence) rather than at a geographic location,
meetings of the shareholders shall be held at the executive office of the
Corporation. If a meeting of the shareholders is held by means of the Internet
or other electronic communications technology in a fashion pursuant to which the
shareholders have the opportunity to read or hear the proceedings substantially
concurrently with their occurrence, vote on matters submitted to the
shareholders and pose questions to the Directors, the meeting need not by held
at a particular geographic location.
SECTION 2.02. Annual Meetings of Shareholders.
(a) Time. Subject to Article SIXTH of the Articles of Incorporation, a
meeting of the shareholders of the Corporation shall be held in each calendar
year, on such date and at such time as the Board of Directors may determine, or
if the Board of Directors fails to set a date and time, on the second Thursday
of June at 9:00 o'clock a.m., if not a holiday on which national banks are or
may elect to be closed ("HOLIDAY"), and if such day is a Holiday, then such
meeting shall be held on the next business day at such time.
(b) Election of Directors. At each such annual meeting commencing with the
annual meeting held in 2004, there shall be held an election of Directors to
serve for the ensuing year and until their successors shall have been selected
and qualified or until their earlier death, resignation or removal.
SECTION 2.03. Special Meetings of Shareholders. Special meetings of the
shareholders may be called at any time by the Board of Directors. Special
meetings of the shareholders may not be called by shareholders. Upon the written
instruction of the Board of Directors, which instruction specifies the general
nature of the business to be transacted at such meeting as well as the date,
time and place of such meeting, it shall be the duty of the Secretary to give
due notice thereof as required by Section 2.04 hereof.
SECTION 2.04. Notices of Meetings of Shareholders. Written notice,
complying with Article 6 of these By-Laws, of any meeting of the shareholders,
shall be given to each shareholder of record entitled to vote at the meeting,
other than those excepted by Section 1707 of the Pennsylvania Business
Corporation Law of 1988, as amended (the "PENNSYLVANIA BCL"), at least twenty
days prior to the day named for the meeting, except as provided in Section 6.07.
Such notices may be given by, or at the direction of, the Secretary or other
authorized person.
F-1
SECTION 2.05. Quorum of and Action by Shareholders.
(a) General Rule. A meeting of shareholders duly called shall not be
organized for the transaction of business unless a quorum is present, in person
or by proxy, as to at least one of the matters to be considered. Except as
provided in subsections (c), (d) and (e) of this Section 2.05, the presence, in
person or by proxy, of shareholders entitled to cast at least a majority of the
votes that all shareholders are entitled to cast on a particular matter to be
acted upon at the meeting shall constitute a quorum for the purpose of
consideration of and action on the matter. To the extent that a quorum is
present with respect to consideration of and action on a particular matter or
matters but a quorum is not present as to another matter or matters,
consideration of and action on the matter or matters for which a quorum is
present may occur, and, after such consideration and action, the meeting may be
adjourned for purposes of the consideration of and action on the matter or
matters for which a quorum is not present.
(b) Action by Shareholders. Except as otherwise specifically provided by
law, all matters coming before a meeting of shareholders shall be determined by
a vote of shares. Except as otherwise provided by a resolution adopted by the
Board of Directors, by the Articles of Incorporation, by the Pennsylvania BCL or
by these By-Laws, whenever any corporate action is to be taken by vote of the
shareholders of the Corporation at a duly organized meeting of shareholders, it
shall be authorized by a majority of the votes cast at the meeting by the
holders of shares entitled to vote with respect to such matter; provided that in
no event may the required shareholder vote be reduced below that provided above.
(c) Continuing Quorum. The shareholders present at a duly organized
meeting can continue to do business until adjournment, notwithstanding the
withdrawal of enough shareholders to leave less than a quorum.
(d) Election of Directors at Adjourned Meetings. Those shareholders
entitled to vote who attend a meeting called for the election of Directors that
has been previously adjourned for one or more periods aggregating at least 5
days for lack of a quorum (whether with respect to a particular matter or all
matters to be considered and acted upon at such meeting), although less than a
quorum as fixed in subsection (a), shall nevertheless constitute a quorum for
the purpose of electing Directors at such reconvened meeting.
(e) Conduct of Other Business at Adjourned Meetings. Those shareholders
entitled to vote who attend a meeting of shareholders that has been previously
adjourned for one or more periods aggregating at least 15 days because of an
absence of a quorum (whether with respect to a particular matter or all matters
to be considered and acted upon at such meeting), although less than a quorum as
fixed in subsection (a), shall nevertheless constitute a quorum for the purpose
of acting upon any matter set forth in the notice of meeting if the notice
states that those shareholders who attend the adjourned meeting shall
nevertheless constitute a quorum for the purpose of acting upon the matter.
SECTION 2.06. Adjournments.
(a) General Rule. Adjournments of any regular or special meeting of
shareholders, including one at which Directors are to be elected, may be taken
for such periods as the shareholders present and entitled to vote shall direct.
(b) Lack of Quorum. Without limiting the generality of Section 2.06(c), if
a meeting cannot be organized because a quorum has not attended, those present
may, except as otherwise provided in the Pennsylvania BCL, adjourn the meeting
to such time and place as they may determine. To the extent, as set forth in
Section 2.05(a), that a quorum was not present with respect to consideration of
and action on a particular matter at a duly called and organized meeting,
consideration of and action on such matter may be adjourned to such date, time
and place as those present may determine, and the balance of the matters to be
considered at such meeting for which a quorum was present may be considered and
acted upon at the initial meeting.
(c) Notice of an Adjourned Meeting. When a meeting of shareholders is
adjourned, it shall not be necessary to give any notice of the adjourned meeting
or of the business to be transacted at an adjourned meeting, other than by
announcement at the meeting at which the adjournment is taken, unless the Board
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fixes a new record date for the adjourned meeting or the Pennsylvania BCL
requires notice of the business to be transacted and such notice has not been
previously given.
SECTION 2.07. Voting List, Voting and Proxies.
(a) Voting List. The officer or agent having charge of the transfer books
for shares of the Corporation shall make a complete list of the shareholders
entitled to vote at any meeting of shareholders, arranged in alphabetical order,
with the address of and the number of shares held by each. The list shall be
produced and kept open at the date, time and place of the meeting and shall be
subject to the inspection of any shareholder during the whole time of the
meeting for the purposes thereof except that, if the Corporation has 5,000 or
more shareholders, in lieu of the making of the list the Corporation may make
the information therein available at the meeting by any other means.
(b) Method of Voting. At the discretion of the presiding officer of a
meeting of shareholders, (i) in elections for directors voting need not be by
ballot but may be taken by voice, show of hands or such other method determined
by the presiding officer unless it is required by vote of the shareholders,
before the vote begins, that the vote be taken by ballot and (ii) with respect
to any other action to be taken by vote at the meeting, as set forth in Section
2.05(b), voting need not be by ballot but may be taken by voice, show of hands
or such other method determined by the presiding officer to the fullest extent
permitted by applicable law (including the Pennsylvania BCL).
(c) Proxies. At all meetings of shareholders, shareholders entitled to
vote may attend and vote either in person or by proxy. Every proxy shall be
executed or authenticated by the shareholder or by such shareholder's duly
authorized attorney-in-fact and shall be filed with, or transmitted to, the
Secretary of the Corporation or its designated agent. A shareholder or such
shareholder's duly authorized attorney-in-fact may execute or authenticate in
writing or transmit an electronic message authorizing another person to act for
such shareholder by proxy. A proxy, unless coupled with an interest (as defined
in Section 1759(d) of the Pennsylvania BCL), shall be revocable at will,
notwithstanding any other agreement or any provision in the proxy to the
contrary, but the revocation of a proxy shall not be effective until notice
thereof has been given to the Secretary of the Corporation or its designated
agent in writing or by electronic transmission. An unrevoked proxy shall not be
valid after three years from the date of its execution unless a longer time is
expressly provided therein. A proxy shall not be revoked by the death or
incapacity of the maker unless, before the vote is counted or the authority is
exercised, notice of the death or incapacity is given to the Secretary of the
Corporation or its designated agent in writing or by electronic transmission.
(d) Judges of Election. In advance of any meeting of shareholders of the
Corporation, the Board of Directors may appoint one or three Judges of Election,
who need not be shareholders and who will have such duties as provided in
Section 1765(a)(3) of the Pennsylvania BCL, to act at the meeting or any
adjournment thereof. If one or three Judges of Election are not so appointed,
the presiding officer of the meeting may, and on the request of any shareholder
shall, appoint one or three Judges of Election at the meeting. In case any
person appointed as a Judge of Election fails to appear or refuses to act, the
vacancy may be filled by appointment made by the Board of Directors in advance
of the convening of the meeting or at the meeting by the presiding officer. A
person who is a candidate for office to be filled at the meeting shall not act
as a Judge of Election. Unless the Pennsylvania BCL permits otherwise, this
Section 2.07(d) may be modified only by a By-Law amendment adopted by the
shareholders.
(e) No Action by Written Consent in Lieu of a Meeting. Subject to Article
NINTH of the Articles of Incorporation, the shareholders shall not be permitted
to act by written consent in lieu of a meeting.
SECTION 2.08. Participation in Meetings by Electronic Means. The Board of
Directors may permit, by resolution with respect to a particular meeting of the
shareholders, or the presiding officer of such meeting may permit, one or more
persons to participate in that meeting, count for the purposes of determining a
quorum and exercise all rights and privileges to which such person might be
entitled were such person personally in attendance, including the right to vote,
by means of conference telephone or other electronic means, including, without
limitation, the Internet. Unless the Board of Directors so
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permits by resolution, or the presiding officer of such meeting so permits, no
person may participate in a meeting of the shareholders by means of conference
telephone or other electronic means.
SECTION 2.09. Business at Meetings of Shareholders. Except as otherwise
provided by law (including but not limited to Rule 14a-8 promulgated under the
Securities and Exchange Act of 1934, as amended, or any successor provision
thereto) or in these By-Laws, the business which shall be conducted at any
meeting of the shareholders shall (a) have been specified in the written notice
of the meeting (or any supplement thereto) given by the Corporation, or (b) be
brought before the meeting at the direction of the Board of Directors, or (c) be
brought before the meeting by the presiding officer of the meeting unless a
majority of the Directors then in office object to such business being conducted
at the meeting, or (d) in the case of any matters intended to be brought by a
shareholder before an annual meeting of shareholders for specific action at such
meeting, have been specified in a written notice given to the Secretary of the
Corporation, by or on behalf of any shareholder who shall have been a
shareholder of record on the record date for such meeting and who shall continue
to be entitled to vote thereat (the "SHAREHOLDER NOTICE"), in accordance with
all of the following requirements:
(i) Each Shareholder Notice must be delivered to, or mailed and
received at, the principal executive offices of the Corporation (A) in the
case of an annual meeting that is called for a date that is within 30 days
before or after the anniversary date of the immediately preceding annual
meeting of shareholders, not less than 60 days nor more than 90 days prior
to such anniversary date, and (B) in the case of an annual meeting that is
called for a date that is not within 30 days before or after the
anniversary date of the immediately preceding annual meeting, not later
than the close of business on the tenth day following the day on which
notice of the date of the meeting was mailed or public disclosure of the
date of the meeting was made, whichever occurs first; and
(ii) Each such Shareholder Notice must set forth: (A) the name and
address of the shareholder who intends to bring the business before the
meeting; (B) the general nature of the business which such shareholder
seeks to bring before the meeting and the text of the resolution or
resolutions which the proposing shareholder proposes that the shareholders
adopt; and (C) a representation that the shareholder is a holder of record
of the stock of the Corporation entitled to vote at such meeting and
intends to appear in person or by proxy at the meeting to bring the
business specified in the notice before the meeting. The presiding officer
of the meeting may, in his or her sole discretion, refuse to acknowledge
any business proposed by a shareholder not made in compliance with the
foregoing procedure.
SECTION 2.10. Conduct of Meetings of Shareholders.
(a) Presiding Officer. There shall be a presiding officer at every meeting
of the shareholders. Subject to Article SIXTH of the Articles of Incorporation,
the presiding officer shall be appointed by the Board of Directors or in the
manner authorized by the Board of Directors; provided that if a presiding
officer is not designated by the Board of Directors or in the manner authorized
by the Board of Directors, the Chairman of the Board shall be the presiding
officer.
(b) Authority of Presiding Officer. Except as prescribed by the Board of
Directors, the presiding officer shall determine the order of business and shall
have the authority to establish rules for the conduct of the meeting of the
shareholders.
(c) Procedural Standard. Any action by the presiding officer in adopting
rules for, and in conducting, a meeting of the shareholders shall be fair to the
shareholders. The conduct of the meeting need not follow Robert's Rules of Order
or any other published rules for the conduct of a meeting.
(d) Closing of the Polls. The presiding officer shall announce at the
meeting of the shareholders when the polls close for each matter voted upon. If
no announcement is made, the polls shall be deemed to have closed upon the final
adjournment of the meeting. After the polls close, no ballots, proxies or votes,
nor any revocations or changes thereto, may be accepted.
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ARTICLE 3
BOARD OF DIRECTORS
SECTION 3.01. Board of Directors.
(a) General Powers. Except as otherwise provided by law, the Articles of
Incorporation or these By-Laws, all powers of the Corporation shall be exercised
by or under the authority of, and the business and affairs of the Corporation
shall be managed under the direction of, the Board of Directors. Unless the
Pennsylvania BCL permits otherwise, this Section 3.01(a) may be modified only by
a By-Law amendment adopted by the shareholders.
(b) Number. Subject to Article SIXTH of the Articles of Incorporation, the
number of Directors shall be as determined by the Board of Directors from time
to time.
(c) Vacancies. Each Director shall hold office until the expiration of the
term for which such person was selected and until such person's successor has
been selected and qualified or until such person's earlier death, resignation or
removal. Subject to Article SIXTH of the Articles of Incorporation, any
vacancies on the Board of Directors, including vacancies resulting from an
increase in the number of Directors, may be filled by a majority vote of the
remaining members of the Board of Directors, though less than a quorum, or by a
sole remaining Director, or, if there are no remaining Directors, by the
shareholders, and each person so selected shall be a Director to serve for the
balance of the unexpired term.
(d) Removal. The entire Board of Directors or any individual Director may
be removed from office only for cause by the vote of the shareholders entitled
to elect directors.
(e) Qualification. A Director must be a natural person at least 18 years
of age.
SECTION 3.02. Place of Meetings. Meetings of the Board of Directors may be
held at such place within or without the Commonwealth of Pennsylvania as the
Board of Directors may appoint from time to time or as may be designated in the
notice of the meeting.
SECTION 3.03. Regular Meetings. A regular meeting of the Board of
Directors shall be held immediately following each annual meeting of the
shareholders, at the place where such meeting of the shareholders is held or at
such other place and time after the annual meeting of shareholders as the Board
of Directors may designate. Subject to Article SIXTH of the Articles of
Incorporation, at such meeting, the Board of Directors shall elect officers of
the Corporation. In addition to such regular meeting, the Board of Directors
shall have the power to fix by resolution the place, date and time of other
regular meetings of the Board of Directors.
SECTION 3.04. Special Meetings. Special meetings of the Board of
Directors shall be held whenever ordered by the Chairman of the Board, the Chief
Executive Officer, by the Board of Directors or by any officer of the
Corporation authorized by Article SIXTH of the Articles of Incorporation to call
special meetings of the Board of Directors for so long as such officer is also a
Director of the Corporation.
SECTION 3.05. Participation in Meetings by Electronic Means. Any Director
may participate in any meeting of the Board of Directors or of any committee
(provided such Director is otherwise entitled to participate), be counted for
the purpose of determining a quorum thereof and exercise all rights and
privileges to which such Director might be entitled were such Director
personally in attendance, including the right to vote, or any other rights
attendant to presence in person at such meeting, by means of conference
telephone or other electronic technology by means of which all persons
participating in the meeting can hear each other.
SECTION 3.06. Notices of Meetings of Board of Directors.
(a) Regular Meetings. No notice shall be required to be given of any
regular meeting, unless the same is held at other than the place, date or time
for holding such meeting as fixed in accordance with Section 3.03 of these
By-Laws, in which event 48 hours' notice shall be given of the place and time of
such meeting complying with Article 6 of these By-Laws.
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(b) Special Meetings. Written notice stating the place, date and time of
any special meeting of the Board of Directors shall be sufficient if given at
least 48 hours, as provided in Article 6, in advance of the date and time fixed
for the meeting.
SECTION 3.07. Quorum; Action by the Board of Directors. A majority of the
Directors in office shall be necessary to constitute a quorum for the
transaction of business and, subject to Article SIXTH of the Articles of
Incorporation and these By-Laws, the acts of a majority of the Directors present
and voting at a meeting at which a quorum is present shall be the acts of the
Board of Directors. If there is no quorum present at a duly convened meeting of
the Board of Directors, the majority of those present may adjourn the meeting
from place to place and from time to time.
SECTION 3.08. Informal Action by the Board of Directors. Any action
required or permitted to be taken at a meeting of the Board of Directors may be
taken without a meeting if, prior or subsequent to the action, a written consent
or consents thereto by all of the Directors in office is filed with the
Secretary of the Corporation. In addition to other means of filing with the
Secretary, insertion in the minute book of the Corporation shall be deemed
filing with the Secretary regardless of whether the Secretary or some other
authorized person has actual possession of the minute book. Written consents by
all the Directors, executed pursuant to this Section 3.08, may be executed in
any number of counterparts and shall be deemed effective as of the date set
forth therein.
SECTION 3.09. Committees.
(a) Establishment and Powers. The Board of Directors of the Corporation
may, by resolution adopted by a majority of the Directors in office, establish
one or more committees to consist of one or more Directors of the Corporation.
Any committee, to the extent provided in the applicable resolution of the Board
of Directors or in the By-Laws, shall have and may exercise all of the powers
and authority of the Board of Directors, except that a committee shall not have
any power or authority as to the following:
(i) The submission to shareholders of any action requiring approval of
shareholders under the Pennsylvania BCL.
(ii) The creation or filling of vacancies in the Board of Directors.
(iii) The adoption, amendment or repeal of the By-Laws.
(iv) The amendment or repeal of any resolution of the Board of
Directors that by its terms is amendable or repealable only by the Board of
Directors.
(v) Action on matters committed by the Articles of Incorporation, the
By-Laws or resolution of the Board of Directors to another committee of the
Board of Directors.
(b) Alternate Members. The Board of Directors may designate one or more
Directors otherwise eligible to serve on a committee of the Board as alternate
members of any committee who may replace any absent or disqualified member at
any meeting of the committee or for the purpose of any written action by the
committee. In the absence or disqualification of a member and alternate member
or members of a committee, the member or members thereof present at any meeting
and not disqualified from voting, whether or not such member or members
constitute a quorum, may unanimously appoint another Director to act at the
meeting in the place of the absent or disqualified member.
(c) Term. Each committee of the Board of Directors shall serve at the
pleasure of the Board of Directors.
(d) Status of Committee Action. The term "BOARD OF DIRECTORS" or "BOARD",
when used in any provision of these By-Laws relating to the organization or
procedures of or the manner of taking action by the Board of Directors, shall be
construed to include and refer to any committee of the Board of Directors. Any
provision of these By-Laws relating or referring to action to be taken by the
Board of Directors or the procedure required therefor shall be satisfied by the
taking of corresponding action by a committee of the Board of Directors to the
extent authority to take the action has been delegated to the committee in
accordance with this Section.
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SECTION 3.10. Nomination. Nominations for the election of Directors may
be made only (A) on behalf of the Corporation by the Directors Nominating
Committee pursuant to Article SIXTH of the Articles of Incorporation or, if
Article SIXTH of the Articles of Incorporation shall have terminated, by the
Board of Directors or (B) by any shareholder of record entitled to vote in the
election of Directors generally at the record date of the meeting and also on
the date of the meeting at which Directors are to be elected. However, any
shareholder entitled to vote in the election of Directors generally may nominate
one or more persons for election as Directors at a meeting only if written
notice of such shareholder's intention to make such nomination or nominations
has been delivered personally to, or been mailed to and received by the
Corporation at, the principal executive offices of the Corporation, addressed to
the attention of the President, (a) with respect to an election to be held at an
annual meeting that is called for a date that is within 30 days before or after
the anniversary date of the immediately preceding annual meeting of
shareholders, not less than 90 days nor more than 120 days prior to such
anniversary date, and (b) with respect either to an election to be held at an
annual meeting that is called for a date that is not within 30 days before or
after the anniversary date of the immediately preceding annual meeting, or to a
special meeting of shareholders called for the purpose of electing Directors,
not later than the close of business on the tenth day following the day on which
notice of the date of the meeting was mailed or public disclosure of the date of
the meeting was made, whichever occurs first. Each such notice shall set forth:
(i) the name and address of the shareholder intending to make the nomination and
of the person or persons to be nominated; (ii) a representation that the
shareholder is a holder of record of shares of the Corporation entitled to vote
at such meeting and intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice; (iii) a description of
all arrangements or understandings between the shareholder and each nominee and
any other person or persons (naming such person or persons) pursuant to which
the nomination or nominations are to be made by the shareholder; (iv) such other
information regarding each nominee proposed by such shareholder as would have
been required to be included in a proxy statement filed pursuant to the proxy
rules of the Securities and Exchange Commission had the nominee been nominated
by the Board of Directors; and (v) the written consent of each nominee to serve
as a Director of the Corporation if so elected. The presiding officer of the
meeting may, in his or her sole discretion, declare invalid or refuse to
acknowledge any nomination not made in compliance with the foregoing procedure.
ARTICLE 4
OFFICERS
SECTION 4.01. Election and Office. The Corporation shall have a Chairman
of the Board, a Chief Executive Officer, a President, a Secretary and a
Treasurer who, subject to Article SIXTH of the Articles of Incorporation, shall
be elected by the Board of Directors. Subject to Article SIXTH of the Articles
of Incorporation, the Board of Directors may create the positions of, define the
powers and duties of and elect as additional officers one or more Vice Chairmen
of the Board, one or more Vice Presidents, and one or more other officers or
assistant officers. Any number of offices may be held by the same person. The
Chairman of the Board and any Vice Chairman of the Board must be a Director of
the Corporation. The initial officers of the Corporation (other than the
Chairman of the Board) shall be selected by the Chief Executive Officer in
consultation with the Chairman of the Board.
SECTION 4.02. Term. Each officer of the Corporation shall hold office
until his successor is selected and qualified or until his earlier death,
resignation or removal. Subject to Article SIXTH of the Articles of
Incorporation, any officer may be removed by a vote of a majority of the
Directors then in office. The terms of the Chairman of the Board and the Chief
Executive Officer are fixed pursuant to Article SIXTH of the Articles of
Incorporation.
SECTION 4.03. Powers and Duties of the Chairman of the Board. The
Chairman of the Board shall have such powers and shall perform such duties as
are provided in Article SIXTH of the Articles of Incorporation.
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SECTION 4.04. Powers and Duties of the Chief Executive Officer. The Chief
Executive Officer shall have such powers and shall perform such duties as are
provided in Article SIXTH of the Articles of Incorporation.
SECTION 4.05. Powers and Duties of the President. The President shall
have such powers and shall perform such duties as may, subject to Article SIXTH
of the Articles of Incorporation, from time to time be assigned to the President
by the Board of Directors.
SECTION 4.06. Powers and Duties of the Secretary. Unless otherwise
determined by the Board of Directors, the Secretary shall be responsible for the
keeping of the minutes of all meetings of the shareholders, the Board of
Directors, and all committees of the Board, in books provided for that purpose,
and for the giving and serving of all notices for the Corporation. The Secretary
shall perform all other duties ordinarily incident to the office of Secretary
and shall have such other powers and perform such other duties as may be
assigned to the Secretary by the Board of Directors. The minute books of the
Corporation may be held by a person other than the Secretary.
SECTION 4.07. Powers and Duties of the Treasurer. Unless otherwise
determined by the Board of Directors, the Treasurer shall have charge of all the
funds and securities of the Corporation. When necessary or proper, unless
otherwise determined by the Board of Directors, the Treasurer shall endorse for
collection on behalf of the Corporation checks, notes and other obligations, and
shall deposit the same to the credit of the Corporation to such banks or
depositories as the Board of Directors may designate and may sign all receipts
and vouchers for payments made to the Corporation. The Treasurer shall be
responsible for the regular entry in books of the Corporation to be kept for
such purpose of a full and accurate account of all funds and securities received
and paid by the Treasurer on account of the Corporation. Whenever required by
the Board of Directors, the Treasurer shall render a statement of the financial
condition of the Corporation. The Treasurer shall have such other powers and
shall perform the duties as may be assigned to such officer from time to time by
the Board of Directors. The Treasurer shall give such bond, if any, for the
faithful performance of the duties of such office as shall be required by the
Board of Directors.
SECTION 4.08. Powers and Duties of the Vice Chairmen, Vice Presidents and
Assistant Officers. Unless otherwise determined by the Board of Directors and
subject to Article SIXTH of the Articles of Incorporation, each Vice Chairman,
Executive Vice President, Senior Vice President, Vice President and each
assistant officer shall have the powers and perform the duties of his or her
respective superior officer, except to the extent such powers and duties are
limited by such superior officer or by the Board of Directors. Executive Vice
Presidents, Senior Vice Presidents, Vice Presidents and assistant officers shall
have such rank as may be designated by the Board of Directors, with Executive
Vice Presidents serving as superior officers to Senior Vice Presidents and
Senior Vice Presidents serving as superior officers to Vice Presidents.
Executive Vice Presidents, Senior Vice Presidents and Vice Presidents may be
designated as having responsibility for a specific area of the Corporation's
affairs, in which event such Executive Vice Presidents, Senior Vice Presidents
or Vice Presidents shall be superior to the other Executive Vice Presidents,
Senior Vice Presidents or Vice Presidents, respectively, in relation to matters
within his or her area. The President shall be the superior officer of the
Executive Vice Presidents, Senior Vice Presidents, Vice Presidents and all other
officer positions created by the Board of Directors unless the Board of
Directors provides otherwise. The Treasurer and Secretary shall be the superior
officers of the Assistant Treasurers and Assistant Secretaries, respectively.
SECTION 4.09. Vacancies. Subject to Article SIXTH of the Articles of
Incorporation, the Board of Directors shall have the power to fill any vacancies
in any office occurring for any reason.
SECTION 4.10. Delegation of Office. Subject to Article SIXTH of the
Articles of Incorporation, the Board of Directors may delegate the powers or
duties of any officer of the Corporation to any other person from time to time.
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ARTICLE 5
CAPITAL STOCK
SECTION 5.01. Share Certificates.
(a) Execution. Except as otherwise provided in Section 5.05, the shares of
the Corporation shall be represented by certificates. Unless otherwise provided
by the Board of Directors, every share certificate shall be signed by two
officers and sealed with the corporate seal, which may be a facsimile, engraved
or printed, but where such certificate is signed by a transfer agent or a
registrar, the signature of any corporate officer upon such certificate may be a
facsimile, engraved or printed. In case any officer who has signed, or whose
facsimile signature has been placed upon, any share certificate shall have
ceased to be such officer because of death, resignation or otherwise, before the
certificate is issued, it may be issued with the same effect as if the officer
had not ceased to be such at the date of its issue. The provisions of this
Section shall be subject to any inconsistent or contrary agreement at the time
between the Corporation and any transfer agent or registrar.
(b) Designations, Voting Rights, Preferences, Limitations and Special
Rights. To the extent the Corporation is authorized to issue shares of more
than one class or series, every certificate shall set forth upon the face or
back of the certificate (or shall state on the face or back of the certificate
that the Corporation will furnish to any shareholder upon request and without
charge) a full or summary statement of the designations, voting rights,
preferences, limitations and special rights of the shares of each class or
series authorized to be issued so far as they have been fixed and determined and
the authority of the Board of Directors to fix and determine the designations,
voting rights, preferences, limitations and special rights of the classes and
series of shares of the Corporation.
(c) Fractional Shares. Except as otherwise determined by the Board of
Directors, shares or certificates therefor may be issued as fractional shares
for shares held by any dividend reinvestment plan or employee benefit plan
created or approved by the Corporation's Board of Directors, but not by any
other person.
SECTION 5.02. Transfer of Shares. Transfer of shares shall be made on the
books of the Corporation only upon surrender of the share certificate, duly
endorsed or with duly executed stock powers attached and otherwise in proper
form for transfer, which certificate shall be canceled at the time of the
transfer.
SECTION 5.03. Determination of Shareholders of Record.
(a) Fixing Record Date. The Board of Directors of the Corporation may fix
a time prior to the date of any meeting of shareholders as a record date for the
determination of the shareholders entitled to notice of, or to vote at, the
meeting, which time, except in the case of an adjourned meeting, shall be not
more than 90 days prior to the date of the meeting of shareholders. Only
shareholders of record on the date fixed shall be so entitled notwithstanding
any transfer of shares on the books of the Corporation after any record date
fixed as provided in this subsection. The Board of Directors may similarly fix a
record date for the determination of shareholders of record for any other
purpose. When a determination of shareholders of record has been made as
provided in this Section 5.03 for purposes of a meeting, the determination shall
apply to any adjournment thereof unless the Board of Directors fixes a new
record date for the adjourned meeting.
(b) Determination when No Record Date Fixed. If a record date is not
fixed:
(i) The record date for determining shareholders entitled to notice of
or to vote at a meeting of shareholders shall be at the close of business
on the day next preceding the day on which notice is given or, if notice is
waived, at the close of business on the day immediately preceding the day
on which the meeting is held.
(ii) The record date for determining shareholders for any other
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
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(c) Certification by Nominee. The Board of Directors may adopt a procedure
whereby a shareholder of the Corporation may certify in writing to the
Corporation that all or a portion of the shares registered in the name of the
shareholder are held for the account of a specified person or persons. The
resolution of the Board of Directors may set forth:
(i) the classification of shareholder who may certify;
(ii) the purpose or purposes for which the certification may be made;
(iii) the form of certification and information to be contained
therein;
(iv) if the certification is with respect to a record date, the time
after the record date within which the certification must be received by
the Corporation; and
(v) such other provisions with respect to the procedure as are deemed
necessary or desirable.
Upon receipt by the Corporation of a certification complying with the
procedure, the persons specified in the certification shall be deemed, for the
purposes set forth in the certification, to be the holders of record of the
number of shares specified in place of the shareholder making the certification.
SECTION 5.04. Lost Share Certificates. Unless waived in whole or in part
by the Board of Directors or any of the Chairman, any Vice Chairman, the
President, any Senior Vice President, Secretary or Treasurer, unless the Board
of Directors prohibits such waiver by such officer, any person requesting the
issuance of a new certificate in lieu of an alleged lost, destroyed, mislaid or
wrongfully taken certificate shall (a) give to the Corporation his or her bond
of indemnity with an acceptable surety, and (b) satisfy such other requirements
as may be imposed by the Corporation. Thereupon, a new share certificate shall
be issued to the registered owner or his or her assigns in lieu of the alleged
lost, destroyed, mislaid or wrongfully taken certificate; provided that the
request therefor and issuance thereof have been made before the Corporation has
notice that such shares have been acquired by a bona fide purchaser.
SECTION 5.05. Uncertificated Shares. Notwithstanding anything herein to
the contrary, any or all classes and series of shares, or any part thereof, may
be represented by uncertificated shares to the extent determined by the Board of
Directors, except that shares represented by a certificate that is issued and
outstanding shall continue to be represented thereby until the certificate is
surrendered to the Corporation. Within a reasonable time after the issuance or
transfer of uncertificated shares, the Corporation shall send to the registered
owner thereof a written notice containing the information required to be set
forth or stated on certificates. The rights and obligations of the holders of
shares represented by certificates and the rights and obligations of the holders
of uncertificated shares of the same class and series shall be identical.
Notwithstanding anything herein to the contrary, the provisions of Section 5.02
shall be inapplicable to uncertificated shares and in lieu thereof the Board of
Directors shall adopt alternative procedures for registration of transfers.
ARTICLE 6
NOTICES; COMPUTING TIME PERIODS
SECTION 6.01. Contents of Notice. Whenever any notice of a meeting of the
Board of Directors or of shareholders is required to be given pursuant to these
By-Laws or the Articles of Incorporation of the Corporation, as the same may be
amended from time to time, or otherwise, the notice shall specify the geographic
location, if any, date and time of the meeting; in the case of a special meeting
of shareholders or where otherwise required by law or the By-Laws, the general
nature of the business to be transacted at such meeting; and any other
information required by law.
SECTION 6.02. Method of Notice. Any notice required to be given to any
person under the provisions of the Articles of Incorporation or these By-Laws
shall be given to the person either personally or by sending a copy thereof (i)
by first class or express mail, postage prepaid, or courier service, charges
prepaid, to such person's postal address appearing on the books of the
Corporation, or, in the case of a Director, supplied by such Director to the
Corporation for the purpose of notice or (ii) by facsimile
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transmission, e-mail or other electronic communication to such person's
facsimile number or address for e-mail or other electronic communication
supplied by such person to the Corporation for purposes of notice. Notice
delivered pursuant to clause (i) of the preceding sentence shall be deemed to
have been given to the person entitled thereto when deposited in the United
States mail or with a courier service for delivery to that person, and notice
pursuant to clause (ii) of the preceding sentence shall be deemed to have been
given to the person entitled thereto when sent. Except as otherwise provided in
these By-Laws, or as otherwise directed by the Board of Directors, notices of
meetings may be given by, or at the direction of, the Secretary.
SECTION 6.03. Computing Time Periods.
(a) Days to be Counted. In computing the number of days for purposes of
these By-Laws, all days shall be counted, including Saturdays, Sundays and any
Holiday; provided, however, that if the final day of any time period falls on a
Saturday, Sunday or Holiday, then the final day shall be deemed to be the next
day which is not a Saturday, Sunday or Holiday. In computing the number of days
for the purpose of giving notice of any meeting, the date upon which the notice
is given shall be counted but the day set for the meeting shall not be counted.
(b) One Day Notice. In any case where only one day's notice is being
given, notice must be given at least 24 hours in advance of the date and time
specified for the meeting in question by delivery in person or by telephone,
telex, telecopier or similar means of communication.
SECTION 6.04. Waiver of Notice. Whenever any notice is required to be
given under the provisions of the Pennsylvania BCL or other applicable law or
the Articles of Incorporation or these By-Laws, a waiver thereof in writing,
signed by the person or persons entitled to the notice, whether before or after
the time stated therein, shall be deemed equivalent to the giving of the notice.
Except as otherwise required by law or the next sentence, neither the business
to be transacted at, nor the purpose of, a meeting need be specified in the
waiver of notice of the meeting. In the case of a special meeting of
shareholders, the waiver of notice shall specify the general nature of the
business to be transacted. Attendance of a person at any meeting shall
constitute a waiver of notice of the meeting except where a person attends a
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting was not lawfully called
or convened.
SECTION 6.05. Modification of Proposal Contained in Notice. Whenever the
language of a proposed resolution is included in a written notice of a meeting
required to be given under the provisions of the Pennsylvania BCL or the
Articles of Incorporation or these By-Laws, the meeting considering the
resolution may without further notice adopt it with such clarifying or other
amendments as do not enlarge its original purpose.
SECTION 6.06. Bulk Mail. Notice of any regular or special meeting of the
shareholders, or any other notice required by the Pennsylvania BCL or by the
Articles of Incorporation or these By-Laws to be given to all shareholders or to
all holders of a class or a series of shares, may be given by any class of
post-paid mail if the notice is deposited in the United States mail at least 20
days prior to the day named for the meeting or any corporate or shareholder
action specified in the notice.
SECTION 6.07. Shareholders Without Forwarding Addresses. Notice or other
communications need not be sent to any shareholder with whom the Corporation has
been unable to communicate for more than 24 consecutive months because
communications to the shareholder have been returned unclaimed or the
shareholder has otherwise failed to provide the Corporation with a current
address. Whenever the shareholder provides the Corporation with a current
address, the corporation shall commence sending notices and other communications
to the shareholder in the same manner as to other shareholders.
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ARTICLE 7
LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION OF DIRECTORS,
OFFICERS AND OTHER PERSONS
SECTION 7.01. Limitation of Directors' Liability. No Director of the
Corporation shall be personally liable for monetary damages as such for any
action taken or any failure to take any action unless: (a) the Director has
breached or failed to perform the duties of his or her office under Subchapter B
of Chapter 17 of the Pennsylvania BCL (relating to standard of care and
justifiable reliance), and (b) the breach or failure to perform constitutes
self-dealing, wilful misconduct or recklessness; provided, however, that the
provisions of this Section shall not apply to the responsibility or liability of
a Director pursuant to any criminal statute, or to the liability of a Director
for the payment of taxes pursuant to local, state or federal law.
SECTION 7.02. Indemnification and Insurance.
(a) Indemnification of Directors and Officers.
(i) Each Indemnitee (as defined below) shall be indemnified and held
harmless by the Corporation for all actions taken by him or her and for all
failures to take action (regardless of the date of any such action or
failure to take action) to the fullest extent permitted by Pennsylvania law
against all expense, liability and loss (including without limitation
attorneys fees, judgments, fines, taxes, penalties, and amounts paid or to
be paid in settlement) reasonably incurred or suffered by the Indemnitee in
connection with any Proceeding (as defined below). No indemnification
pursuant to this Section shall be made, however, in any case where the act
or failure to act giving rise to the claim for indemnification is
determined by a court to have constituted wilful misconduct or
recklessness.
(ii) The right to indemnification provided in this Section shall
include the right to have the expenses incurred by the Indemnitee in
defending any Proceeding paid by the Corporation in advance of the final
disposition of the Proceeding to the fullest extent permitted by
Pennsylvania law; provided that, if Pennsylvania law continues so to
require, the payment of such expenses incurred by the Indemnitee in advance
of the final disposition of a Proceeding shall be made only upon delivery
to the Corporation of an undertaking, by or on behalf of the Indemnitee, to
repay all amounts so advanced without interest if it shall ultimately be
determined that the Indemnitee is not entitled to be indemnified under this
Section or otherwise.
(iii) To the extent that an Indemnitee has been successful on the
merits or otherwise in defense of any Proceeding or in defense of any
claim, issue or matter therein, the Corporation shall indemnify such person
against expenses (including attorneys' fees) actually and reasonably
incurred by such person in connection therewith.
(iv) Indemnification pursuant to this Section shall continue as to an
Indemnitee who has ceased to be a Director or officer and shall inure to
the benefit of his or her heirs, executors and administrators.
(v) For purposes of this Article, (A) "INDEMNITEE" shall mean each
Director and each officer of the Corporation who was or is a party to, or
is threatened to be made a party to, or is otherwise involved in, any
Proceeding, by reason of the fact that he or she is or was a Director or
officer of the Corporation or is or was serving in any capacity at the
request or for the benefit of the Corporation as a Director, officer,
employee, agent, partner, or fiduciary of, or in any other capacity for,
another corporation or any partnership, joint venture, trust, employee
benefit plan, or other enterprise; and (B) "PROCEEDING" shall mean any
threatened, pending or completed action, suit or proceeding (including
without limitation an action, suit or proceeding by or in the right of the
Corporation), whether civil, criminal, administrative or investigative.
(b) Indemnification of Employees and Other Persons. The Corporation may,
by action of its Board of Directors and to the extent provided in such action,
indemnify employees and other persons, and
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provide for advancement of expenses to such persons in the manner set forth in
(a)(ii), above, as though they were Indemnitees, except that, if Pennsylvania
law continues to so require, to the extent that an employee or agent of the
Corporation has been successful on the merits or otherwise in defense of any
Proceeding or in defense of any claim, issue or matter therein, the Corporation
shall indemnify such person against expenses (including attorneys' fees)
actually and reasonably incurred by such person in connection therewith.
Directors and officers of entities that have merged into, or have been
consolidated with, or have been liquidated into, the Corporation shall not be
Indemnitees with respect to Proceedings involving any action or failure to act
of such Director or officer prior to the date of such merger, consolidation or
liquidation, but such persons may be indemnified by the Board of Directors
pursuant to the first sentence of this Section 7.02(b).
(c) Non-Exclusivity of Rights. The rights to indemnification and to the
advancement of expenses provided in or pursuant to this Article shall not be
exclusive of any other rights that any person may have or hereafter acquire
under any statute, provision of the Articles of Incorporation or By-Laws,
agreement, vote of shareholders or Directors, or otherwise.
(d) Insurance. The Corporation may purchase and maintain insurance, at its
expense, for the benefit of any person on behalf of whom insurance is permitted
to be purchased by Pennsylvania law against any expense, liability or loss,
whether or not the Corporation would have the power to indemnify such person
under Pennsylvania or other law. The Corporation may also purchase and maintain
insurance to insure its indemnification obligations whether arising hereunder or
otherwise.
(e) Fund For Payment of Expenses. The Corporation may create a fund of any
nature, which may, but need not be, under the control of a trustee, or otherwise
may secure in any manner its indemnification obligations, whether arising
hereunder, under the Articles of Incorporation, by agreement, vote of
shareholders or Directors, or otherwise.
SECTION 7.03. Amendment. The provisions of this Article 7 relating to the
limitation of Directors' and officers' liability, to indemnification and to the
advancement of expenses shall constitute a contract between the Corporation and
each of its Directors and officers which may be modified as to any Director or
officer only with that person's consent or as specifically provided in this
Section. Notwithstanding any other provision of these By-Laws relating to their
amendment generally, any repeal or amendment of this Article 7 which is adverse
to any Director or officer shall apply to such Director or officer only on a
prospective basis, and shall not reduce any limitation on the personal liability
of a Director of the Corporation, or limit the rights of an Indemnitee to
indemnification or to the advancement of expenses with respect to any action or
failure to act occurring prior to the time of such repeal or amendment.
Notwithstanding any other provision of these By-Laws, no repeal or amendment of
these By-Laws shall affect any or all of this Article so as either to reduce the
limitation of Directors' liability or limit indemnification or the advancement
of expenses in any manner unless adopted by (a) the unanimous vote of the
Directors of the Corporation then serving, or (b) the affirmative vote of
shareholders entitled to cast at least eighty percent (80%) of the votes that
all shareholders are entitled to cast in the election of Directors; provided
that no such amendment shall have retroactive effect inconsistent with the
preceding sentence.
SECTION 7.04. Changes in Pennsylvania Law. References in this Article to
Pennsylvania law or to any provision thereof shall be to such law, as it existed
on the date this Article was adopted or as such law thereafter may be changed;
provided that (a) in the case of any change which expands the liability of
Directors or limits the indemnification rights or the rights to advancement of
expenses which the Corporation may provide, the rights to limited liability, to
indemnification and to the advancement of expenses provided in this Article
shall continue as theretofore to the extent permitted by law; and (b) if such
change permits the Corporation without the requirement of any further action by
shareholders or Directors to limit further the liability of Directors (or limit
the liability of officers) or to provide broader indemnification rights or
rights to the advancement of expenses than the Corporation was permitted to
provide prior to such change, then liability thereupon shall be so limited and
the rights to indemnification and the advancement of expenses shall be so
broadened to the extent permitted by law.
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ARTICLE 8
FISCAL YEAR
SECTION 8.01. Determination of Fiscal Year. Determination of Fiscal Year.
The Board of Directors shall have the power by resolution to fix the fiscal year
of the Corporation. If the Board of Directors shall fail to do so, the Chief
Executive Officer shall fix the fiscal year.
ARTICLE 9
ARTICLES OF INCORPORATION
SECTION 9.01. Inconsistent Provisions. In the event of any conflict
between the provisions of these By-Laws and the provisions of the Articles of
Incorporation, including, but not limited to, Article SIXTH of the Articles of
Incorporation, the provisions of the Articles of Incorporation shall govern and
control.
ARTICLE 10
AMENDMENTS
SECTION 10.01. Amendments. Except as otherwise provided in these By-Laws
or in the Articles of Incorporation, including Article SIXTH, Article SEVENTH
and Article TENTH of the Articles of Incorporation:
(a) Shareholders. The shareholders entitled to vote thereon shall have the
power to alter, amend or repeal these By-Laws, by the vote of a majority of the
votes cast at a duly organized meeting of shareholders by the holders of shares
entitled to vote thereon, at any regular or special meeting, duly convened after
notice to the shareholders of such purpose. In the case of a meeting of
shareholders to amend or repeal these By-Laws, written notice shall be given to
each shareholder that the purpose, or one of the purposes, of the meeting is to
consider the adoption, amendment or repeal of the By-Laws.
(b) Board of Directors. The Board of Directors (but not a committee
thereof) shall have the power to alter, amend and repeal these By-Laws,
regardless of whether the shareholders have previously adopted the By-Law being
amended or repealed, subject to the power of the shareholders to change such
action; provided, however, that the Board of Directors shall not have the power
to amend these By-Laws on any subject that is expressly committed to the
shareholders by the express terms hereof, by the Pennsylvania BCL or otherwise.
ARTICLE 11
INTERPRETATION OF BY-LAWS; SEPARABILITY
SECTION 11.01. Interpretation. All words, terms and provisions of these
By-Laws shall be interpreted and defined by and in accordance with the
Pennsylvania BCL.
SECTION 11.02. Separability. The provisions of these By-Laws are
independent of and separable from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other or others of them may be invalid or unenforceable in whole or in part.
ARTICLE 12
DETERMINATIONS BY THE BOARD
SECTION 12.01. Effect of Board Determinations. Any determination
involving interpretation or application of these By-Laws made in good faith by
the Board of Directors shall be final, binding and conclusive on all parties in
interest.
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ANNEX G
1585 Broadway
New York, NY 10036
tel 212 761 4000
[Morgan Stanley Logo]
December 19, 2001
Board of Directors
Comcast Corporation
1500 Market Street
Philadelphia, PA 19102-2148
Ladies and Gentlemen:
We understand that AT&T Corp. (along with its subsidiaries, "AT&T"), AT&T
Broadband Corp., a wholly-owned subsidiary of AT&T (along with its subsidiaries,
"AT&T Broadband"; references to AT&T Broadband hereinafter relate to such entity
after giving effect to the actions provided for in the Separation and
Distribution Agreement), Comcast Corporation (along with its subsidiaries,
"Comcast"), AT&T Comcast Corporation, a newly-formed corporation ("Parent"),
AT&T Broadband Acquisition Corp., a newly-formed corporation that is a
wholly-owned subsidiary of Parent ("AT&T Broadband Merger Sub"), and Comcast
Merger Acquisition Corp., a newly-formed corporation that is a wholly-owned
subsidiary of Parent ("Comcast Merger Sub"), propose to enter into an Agreement
and Plan of Merger to be dated as of December 19, 2001 (the "Agreement"; unless
otherwise indicated, capitalized terms in this opinion have the meaning ascribed
to them in the Agreement), which provides, among other things, that:
(i) AT&T Broadband will hold, directly or indirectly, all of the
assets and liabilities of the AT&T Broadband Group in accordance with the
terms and conditions of the Separation and Distribution Agreement, being
entered into contemporaneously with the Agreement;
(ii) AT&T will, prior to the Mergers (as defined below), issue shares
of Common Stock, par value $0.01 per share, of AT&T Broadband ("AT&T
Broadband Common Stock") to the holders of the QUIPS in exchange for the
QUIPS pursuant to the QUIPS Exchange, in accordance with the terms and
conditions of the Exchange Agreement, and will distribute to the holders of
the Common Stock, par value $1.00 per share, of AT&T ("AT&T Common Stock")
one share of AT&T Broadband Common Stock for each AT&T Common Stock so
held, in accordance with the terms and conditions of the Separation and
Distribution Agreement;
(iii) Comcast Merger Sub will merge with and into Comcast (the
"Comcast Merger") in a transaction in which each issued and outstanding
share of Class A Common Stock, par value $1.00 per share, of Comcast
("Comcast Class A Common Stock"), Class B Common Stock, par value $1.00 per
share, of Comcast ("Comcast Class B Common Stock"), and Class A Special
Common Stock, par value $1.00 per share, of Comcast ("Comcast Class A
Special Common Stock", and, together with Comcast Class A Common Stock and
Comcast Class B Common Stock, "Comcast Common Stock"), other than shares of
Comcast Common Stock owned by Comcast (which will be canceled), will be
converted into the right to receive one share (collectively, the "Comcast
Conversion Ratios") of Class A Common Stock, par value $0.01 per share, of
Parent ("Parent Class A Common Stock"), Class B Common Stock, par value
$0.01 per share of Parent ("Parent Class B Common Stock") and Class A
Special Common Stock, par value $0.01 per share, of Parent ("Parent Class A
Special Common Stock"), respectively (such securities having terms as
contemplated by the Agreement); and
(iv) AT&T Broadband Merger Sub will be merged with and into AT&T
Broadband (the "AT&T Broadband Merger", together with the Comcast Merger,
the ("Mergers" and, after giving effect to the Separation and Distribution
Agreement, the "Transaction") in a transaction in which each outstanding
share of AT&T Broadband Common Stock, other than shares of AT&T Broadband
G-1
Common Stock owned by AT&T Broadband (which will be canceled), will be
converted into the right to receive:
(a) if the A Shareholder Approval has been obtained, the Exchange
Ratio of a share of Parent Class A Common Stock, or if the A Shareholder
Approval has not been obtained, the Exchange Ratio of a share of Class C
Common Stock, par value $0.01 per share, of Parent having terms as
contemplated by the Agreement ("Parent Class C Common Stock", and,
together with Parent Class A Common Stock, Parent Class B Common Stock
and Parent Class A Special Common Stock, "Parent Common Stock");
(b) solely under the circumstances set forth in Section 4.03 of the
Agreement, the additional shares of Parent Common Stock, if any,
contemplated by such Section (the "Section 355(e) Top-up"); and
(c) solely under the circumstances set forth in Section 4.04 of the
Agreement, the K/A Security or the K/C Security, as the case may be,
entitling such holder under circumstances enumerated in such Section to
a number of shares, if any, of Parent Class A Common Stock or Parent
Class C Common Stock, as the case may be, not exceeding the Exchange
Ratio multiplied by 0.03.
The terms and conditions of the Transaction are more fully set forth in the
Agreement and the Separation and Distribution Agreement.
You have asked for our opinion as to whether the Comcast Conversion Ratios
in the Comcast Merger, in the aggregate, are fair, from a financial point of
view, to the holders of Comcast Common Stock, taken together.
For purposes of the opinion set forth herein, we have, among other things:
(i) reviewed certain publicly available financial statements and other
business and financial information of or relating to Comcast, AT&T and AT&T
Broadband;
(ii) reviewed certain internal financial statements and other
financial and operating data concerning Comcast prepared by the management
of Comcast;
(iii) reviewed certain financial forecasts, including information
relating to certain strategic, financial and operational benefits
anticipated from the Transaction, prepared by the management of Comcast;
(iv) discussed the past and current operations and financial condition
and the prospects of Comcast, including the strategic, financial and
operational benefits anticipated from the Transaction, with the management
of Comcast;
(v) 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;
(vi) 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
Transaction, prepared by the managements of AT&T and AT&T Broadband and of
Comcast;
(vii) 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 Transaction, with
the managements of AT&T, AT&T Broadband and Comcast;
(viii) reviewed the reported prices and trading activity for Comcast
Common Stock and AT&T Common Stock;
G-2
(ix) 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;
(x) 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 securities;
(xi) reviewed the financial terms, to the extent publicly available,
of certain comparable transactions;
(xii) participated in discussions and negotiations among
representatives of Comcast, AT&T, AT&T Broadband and their financial and
legal advisors;
(xiii) reviewed final drafts of each of the Agreement and the
Separation and Distribution Agreement; and
(xiv) considered such other factors and performed such other analyses
as we have deemed appropriate.
We have 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 us by Comcast, AT&T or AT&T Broadband or otherwise reviewed by or for us for
the purposes of this opinion. With respect to the financial forecasts, including
information relating to certain strategic, financial and operational benefits
anticipated from the Transaction, prepared and furnished to or discussed with us
by Comcast, AT&T or AT&T Broadband, we have assumed that they have been
reasonably prepared on bases reflecting the best currently available estimates
and 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 Parent, as
the case may be, and the strategic, financial and operational benefits
anticipated from the Transaction. We express no view as to such financial
forecast information, including the strategic, financial and operational
benefits anticipated from the Transaction, or the assumptions on which they were
based. In addition, we have assumed that the Mergers will qualify as tax-free
exchanges under Section 351 of the Internal Revenue Code of 1986, as amended
(the "Code"), and that the Separation and Distribution 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 will not
occur. We have not made any independent valuation or appraisal of the assets or
liabilities of Comcast, AT&T or AT&T Broadband, nor have we been furnished with
any such appraisals. In addition, we have not assumed any obligation to conduct
any inspection of the properties or facilities of Comcast, AT&T or AT&T
Broadband. Our opinion is necessarily based on financial, economic, market and
other conditions as in effect on, and the information made available to us as
of, the date hereof. It should be understood that subsequent developments may
affect this opinion and that we do not have any obligation to update, revise, or
reaffirm this opinion.
For purposes of rendering our opinion, we have assumed, in all respects
material to our analysis, that the Transaction will be consummated as described
in the Agreement and the Separation and Distribution Agreement, that all the
representations and warranties of each party contained in the Agreement and the
Separation and Distribution Agreement are true and correct, that each party to
the 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, and that all conditions to
the consummation of the Transaction will be satisfied without waiver thereof,
and that if the parties elect to consummate the Transaction by means of the
alternative structure contemplated by Section 3.05 of the Agreement, such
alternative structure will not differ from the structure reflected in the
Agreement and the Separation and Distribution Agreement in any respect material
to our analysis. We note that we are not legal, tax or regulatory experts and
have 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 Transaction. We
G-3
have also assumed that the definitive Agreement and the definitive Separation
and Distribution Agreement will not differ in any material respects from the
drafts thereof furnished to and reviewed by us. We have further assumed that all
governmental, regulatory or other consents and approvals (contractual or
otherwise) necessary for or in connection with the consummation of the
Transaction will be obtained without any adverse effect on Comcast, AT&T
Broadband or Parent, or on the contemplated benefits of the Transaction, in any
respect material to our analysis.
In arriving at our opinion, we were not authorized to solicit, and did not
solicit, interest from any party with respect to a business combination or other
extraordinary transaction involving Comcast.
We have acted as financial advisor to Comcast in connection with this
transaction and will receive a fee for our services. In the past, Morgan Stanley
& Co. Incorporated and its affiliates have provided financial advisory and
financing services for Comcast and AT&T and their affiliates and have received
fees for the rendering of these services. Furthermore, Morgan Stanley & Co.
Incorporated and its affiliates may also provide financial advisory and
financing services to Comcast, Parent and AT&T, and their affiliates, in the
future for which they would expect to receive fees. In the ordinary course of
its businesses, Morgan Stanley & Co. Incorporated and its affiliates may
actively trade the debt and equity securities of Comcast or AT&T or, after the
Transaction, Parent for its own account or for the accounts of customers and,
accordingly, may at any time hold long or short positions in such securities.
It is understood that this letter is for the information of the Board of
Directors of Comcast and may not be used for any other purpose without our prior
written consent, except that this opinion may be included in its entirety in any
proxy or information statement filed with the Securities and Exchange Commission
and mailed to shareholders of Comcast. In addition, this opinion does not in any
manner address the underlying decision by Comcast to engage in the Transaction
or the prices at which Comcast Common Stock or Parent Common Stock will trade
after the announcement or consummation of the Transaction, and Morgan Stanley
expresses no opinion or recommendation as to how the shareholders of Comcast
should vote at the shareholders' meetings held in connection with the
Transaction or any other matter.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Comcast Conversion Ratios in the Comcast Merger, in the
aggregate, are fair, from a financial point of view, to the holders of Comcast
Common Stock, taken together.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By: /s/ PAUL J. TAUBMAN
------------------------------------
Paul J. Taubman
Managing Director
G-4
ANNEX H
[JPMORGAN LOGO]
December 19, 2001
The Board of Directors
Comcast Corporation
1500 Market Street
Philadelphia, PA 19102-2148
Members of the Board of Directors:
You have requested our opinion as to the fairness, from a financial point
of view, of the Comcast Conversion Ratios (as defined below) in the Comcast
Merger (as defined below), in the aggregate, to the holders of Comcast Common
Stock (as defined below), taken together.
You have informed us that AT&T Corp. (along with its subsidiaries, "AT&T"),
AT&T Broadband Corp., a wholly-owned subsidiary of AT&T (along with its
subsidiaries, "AT&T Broadband"; references to AT&T Broadband hereinafter relate
to such entity after giving effect to the actions provided for in the Separation
and Distribution Agreement), Comcast Corporation (along with its subsidiaries,
"Comcast"), AT&T Comcast Corporation, a newly-formed corporation ("Parent"),
AT&T Broadband Acquisition Corp., a newly-formed corporation that is a
wholly-owned subsidiary of Parent ("AT&T Broadband Merger Sub"), and Comcast
Acquisition Corp., a newly-formed corporation that is a wholly-owned subsidiary
of Parent ("Comcast Merger Sub"), propose to enter into an Agreement and Plan of
Merger to be dated as of December 19, 2001 (the "Agreement"; unless otherwise
indicated, capitalized terms in this opinion have the meaning ascribed to them
in the Agreement), which provides, among other things, that:
(i) AT&T Broadband will hold, directly or indirectly, all of the
assets and liabilities of the AT&T Broadband Group in accordance with the
terms and conditions of the Separation and Distribution Agreement, being
entered into contemporaneously with the Agreement;
(ii) AT&T will, prior to the Mergers (as defined below), issue shares
of Common Stock, par value $0.01 per share, of AT&T Broadband ("AT&T
Broadband Common Stock") to the holders of the QUIPS in exchange for the
QUIPS pursuant to the QUIPS Exchange, in accordance with the terms and
conditions of the Exchange Agreement, and will distribute to the holders of
the Common Stock, par value $1.00 per share, of AT&T ("AT&T Common Stock")
one share of AT&T Broadband Common Stock for each share of AT&T Common
Stock so held, in accordance with the terms and conditions of the
Separation and Distribution Agreement;
(iii) Comcast Merger Sub will merge with and into Comcast (the
"Comcast Merger") in a transaction in which each issued and outstanding
share of Class A Common Stock, par value $1.00 per share, of Comcast
("Comcast Class A Common Stock"), Class B Common Stock, par value $1.00 per
share, of Comcast ("Comcast Class B Common Stock"), and Class A Special
Common Stock, par value $1.00 per share, of Comcast ("Comcast Class A
Special Common Stock", and, together with Comcast Class A Common Stock and
Comcast Class B Common Stock, "Comcast Common Stock"), other than shares of
Comcast Common Stock owned by Comcast (which will be canceled), will be
converted into the right to receive one share (collectively, the "Comcast
Conversion Ratios") of Class A Common Stock, par value $0.01 per share, of
Parent ("Parent Class A Common Stock"), Class B Common Stock, par value
$0.01 per share of Parent ("Parent Class B Common Stock") and Class A
Special Common Stock, par value $0.01 per share, of Parent ("Parent Class A
Special Common Stock"), respectively (such securities having terms as
contemplated by the Agreement); and
(iv) AT&T Broadband Merger Sub will be merged with and into AT&T
Broadband (the "AT&T Broadband Merger", together with the Comcast Merger,
the "Mergers" and, after giving effect to the Separation and Distribution
Agreement, the "Transaction") in a transaction in which
H-1
each outstanding share of AT&T Broadband Common Stock, other than shares of
AT&T Broadband Common Stock owned by AT&T Broadband (which will be
canceled), will be converted into the right to receive:
(a) if the A Shareholder Approval has been obtained, the Exchange
Ratio of one share of Parent Class A Common Stock, or if the A
Shareholder Approval has not been obtained, the Exchange Ratio of one
share of Class C Common Stock, par value $0.01 per share, of Parent
having terms as contemplated by the Agreement ("Parent Class C Common
Stock", and, together with Parent Class A Common Stock, Parent Class B
Common Stock and Parent Class A Special Common Stock, "Parent Common
Stock");
(b) solely under the circumstances set forth in Section 4.03 of the
Agreement, the additional shares of Parent Common Stock, if any,
contemplated by such Section (the "Section 355(e) Top-up"); and
(c) solely under the circumstances set forth in Section 4.04 of the
Agreement, the K/A Security or the K/C Security, as the case may be,
entitling such holder under circumstances enumerated in such Section to
a number of shares, if any, of Parent Class A Common Stock or Parent
Class C Common Stock, as the case may be, not exceeding the Exchange
Ratio multiplied by 0.03.
In arriving at our opinion, we have, among other things, (i) reviewed the
final drafts of each of the Agreement and the Separation and Distribution
Agreement, provided to us by Comcast; (ii) reviewed certain publicly available
business and financial information concerning Comcast, AT&T and AT&T Broadband
and the industries in which they operate; (iii) 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 Transaction (the
"Estimated Synergies") furnished to us by Comcast, AT&T and AT&T Broadband; (iv)
compared the proposed financial terms of the Transaction with the publicly
available financial terms of certain transactions involving companies we deemed
relevant; (v) compared the financial and operating performance of Comcast and
AT&T Broadband with publicly available information concerning certain other
companies we 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; (vi) participated in certain discussions and
negotiations among representatives of Comcast, AT&T and AT&T Broadband and their
financial and legal advisors; and (vii) performed such other financial studies
and analyses and considered such other information as we deemed appropriate for
the purposes of this opinion.
In addition, we have held discussions with certain members of the
management of Comcast, AT&T and AT&T Broadband with respect to certain aspects
of the 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 Transaction, including the Estimated Synergies, on the financial
condition and future prospects of Comcast, AT&T Broadband and Parent, and
certain other matters we believed necessary or appropriate to our inquiry.
In giving our opinion, we have 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
us by Comcast, AT&T or AT&T Broadband or otherwise reviewed by or for us. We
have not conducted any valuation or appraisal of any assets or liabilities of
Comcast, AT&T or AT&T Broadband, nor have any such valuations or appraisals been
provided to us. In addition, we have not assumed 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 us, including the
Estimated
H-2
Synergies, we have assumed that they have 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
Parent and as to such other matters, including the Estimated Synergies, to which
such analyses or forecasts relate. We express no view as to such analyses or
forecasts, including the Estimated Synergies, or the assumptions on which they
were based. We have also assumed that the Mergers will qualify as tax-free
exchanges under Section 351 of the Internal Revenue Code of 1986, as amended
(the "Code"), and that the Separation and Distribution 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 will not
occur.
For purposes of rendering our opinion, we have assumed, in all respects
material to our analysis, that the Transaction will be consummated as described
in the Agreement and the Separation and Distribution Agreement, that all the
representations and warranties of each party contained in the Agreement and the
Separation and Distribution Agreement are true and correct, that each party to
the 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, and that all conditions to
the consummation of the Transaction will be satisfied without waiver thereof,
and that if the parties elect to consummate the Transaction by means of the
alternative structure contemplated by Section 3.05 of the Agreement, such
alternative structure will not differ from the structure reflected in the
Agreement and the Separation and Distribution Agreement in any respect material
to our analysis. We note that we are not legal, tax or regulatory experts and
have 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 Transaction. We have also assumed that the definitive Agreement
and the definitive Separation and Distribution Agreement will not differ in any
material respects from the drafts thereof furnished to and reviewed by us. We
have further assumed that all governmental, regulatory or other consents and
approvals (contractual or otherwise) necessary for or in connection with the
consummation of the Transaction will be obtained without any adverse effect on
Comcast, AT&T Broadband or Parent, or on the contemplated benefits of the
Transaction, in any respect material to our analysis.
Our opinion is necessarily based on economic, market and other conditions
as in effect on, and the information made available to us as of, the date
hereof. It should be understood that subsequent developments may affect this
opinion and that we do not have any obligation to update, revise, or reaffirm
this opinion. Our opinion is limited to the fairness, from a financial point of
view, to the holders of Comcast Common Stock, taken together, of the Comcast
Conversion Ratios in the Comcast Merger, in the aggregate, and we express no
opinion as to the underlying decision by Comcast to engage in the Transaction.
We are expressing no opinion herein as to the price at which Comcast Common
Stock or Parent Common Stock will trade at any future time.
In arriving at our opinion, we were not authorized to solicit, and did not
solicit, interest from any party with respect to a business combination or other
extraordinary transaction involving Comcast.
We have acted as financial advisor to Comcast with respect to the proposed
Transaction and will receive a fee from Comcast for our services. We will also
receive an additional fee if the proposed Transaction is consummated. In
addition, Comcast has agreed to indemnify us for certain liabilities arising out
of our engagement. We have also provided financial advisory and financing
services from time to time to Comcast and AT&T and their respective affiliates.
We may also provide financial advisory and financing services to Comcast, Parent
and AT&T, and/or their affiliates, in the future. In the ordinary course of our
businesses, we and our affiliates may actively trade the debt and equity
securities of Comcast or AT&T or, after the Transaction, Parent for our own
account or for the accounts of customers and, accordingly, we may at any time
hold long or short positions in such securities.
H-3
On the basis of and subject to the foregoing, it is our opinion that, as of
the date hereof, the Comcast Conversion Ratios in the Comcast Merger, in the
aggregate, are fair, from a financial point of view, to the holders of Comcast
Common Stock, taken together.
This letter is provided to the Board of Directors of Comcast in connection
with and for the purposes of its evaluation of the Transaction. This opinion
does not constitute a recommendation to any shareholder of Comcast as to how
such shareholder should vote with respect to the Transaction or any other
matter. This opinion may not be disclosed, referred to, or communicated (in
whole or in part) to any third party for any purpose whatsoever except with our
prior written approval. This opinion may be reproduced in full in any proxy or
information statement mailed to shareholders of Comcast but may not otherwise be
disclosed publicly in any manner without our prior written approval.
Very truly yours,
/s/ J.P. MORGAN SECURITIES INC.
J.P. MORGAN SECURITIES INC.
H-4
ANNEX I
Investment Banking
Corporate and Institutional
Client Group
World Financial Center
North Tower
New York, New York 10281-1330
212 449 1000
[Merrill Lynch Logo]
December 19, 2001
Board of Directors
Comcast Corporation
1500 Market Street
Philadelphia, PA 19102-2148
Members of the Board of Directors:
You have informed us that AT&T Corp. (along with its subsidiaries, "AT&T"),
AT&T Broadband Corp., a wholly-owned subsidiary of AT&T (along with its
subsidiaries, "AT&T Broadband"; references to AT&T Broadband hereinafter relate
to such entity after giving effect to the actions provided for in the Separation
and Distribution Agreement), Comcast Corporation (along with its subsidiaries,
"Comcast"), AT&T Comcast Corporation, a newly-formed corporation ("Parent"),
AT&T Broadband Acquisition Corp., a newly-formed corporation that is a
wholly-owned subsidiary of Parent ("AT&T Broadband Merger Sub"), and Comcast
Merger Acquisition Corp., a newly-formed corporation that is a wholly-owned
subsidiary of Parent ("Comcast Merger Sub"), propose to enter into an Agreement
and Plan of Merger to be dated as of December 19, 2001 (the "Agreement"; unless
otherwise indicated, capitalized terms in this opinion have the meaning ascribed
to them in the Agreement), which provides, among other things, that:
(i) AT&T Broadband will hold, directly or indirectly, all of the
assets and liabilities of the AT&T Broadband Group in accordance with the
terms and conditions of the Separation and Distribution Agreement, being
entered into contemporaneously with the Agreement;
(ii) AT&T will, prior to the Mergers (as defined below), issue shares
of Common Stock, par value $0.01 per share, of AT&T Broadband ("AT&T
Broadband Common Stock") to the holders of the QUIPS in exchange for the
QUIPS pursuant to the QUIPS Exchange, in accordance with the terms and
conditions of the Exchange Agreement, and will distribute to the holders of
the Common Stock, par value $1.00 per share, of AT&T ("AT&T Common Stock")
one share of AT&T Broadband Common Stock for each share of AT&T Common
Stock so held, in accordance with the terms and conditions of the
Separation and Distribution Agreement;
(iii) Comcast Merger Sub will merge with and into Comcast (the
"Comcast Merger") in a transaction in which each issued and outstanding
share of Class A Common Stock, par value $1.00 per share, of Comcast
("Comcast Class A Common Stock"), Class B Common Stock, par value $1.00 per
share, of Comcast ("Comcast Class B Common Stock"), and Class A Special
Common Stock, par value $1.00 per share, of Comcast ("Comcast Class A
Special Common Stock", and, together with Comcast Class A Common Stock and
Comcast Class B Common Stock, "Comcast Common Stock"), other than shares of
Comcast Common Stock owned by Comcast (which will be canceled), will be
converted into the right to receive one share (collectively, the "Comcast
Conversion Ratios") of Class A Common Stock, par value $0.01 per share, of
Parent ("Parent Class A Common Stock"), Class B Common Stock, par value
$0.01 per share of Parent ("Parent Class B Common Stock") and Class A
Special Common Stock, par value $0.01 per share, of Parent ("Parent Class A
Special Common Stock"), respectively (such securities having terms as
contemplated by the Agreement); and
I-1
(iv) AT&T Broadband Merger Sub will be merged with and into AT&T
Broadband (the "AT&T Broadband Merger", together with the Comcast Merger,
the "Mergers" and, after giving effect to the Separation and Distribution
Agreement, the "Transaction") in a transaction in which each outstanding
share of AT&T Broadband Common Stock, other than shares of AT&T Broadband
Common Stock owned by AT&T Broadband (which will be canceled), will be
converted into the right to receive:
(a) if the A Shareholder Approval has been obtained, the Exchange
Ratio of a share of Parent Class A Common Stock, or if the A Shareholder
Approval has not been obtained, the Exchange Ratio of a share of Class C
Common Stock, par value $0.01 per share, of Parent having terms as
contemplated by the Agreement ("Parent Class C Common Stock", and,
together with Parent Class A Common Stock, Parent Class B Common Stock
and Parent Class A Special Common Stock, "Parent Common Stock");
(b) solely under the circumstances set forth in Section 4.03 of the
Agreement, the additional shares of Parent Common Stock, if any,
contemplated by such Section (the "Section 355(e) Top-up"); and
(c) solely under the circumstances set forth in Section 4.04 of the
Agreement, the K/A Security or the K/C Security, as the case may be,
entitling such holder under circumstances enumerated in such Section to
a number of shares, if any, of Parent Class A Common Stock or Parent
Class C Common Stock, as the case may be, not exceeding the Exchange
Ratio multiplied by 0.03.
You have asked us whether, in our opinion, the Comcast Conversion Ratios in
the Comcast Merger, in the aggregate, are fair, from a financial point of view,
to the holders of Comcast Common Stock, taken together.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed certain publicly available business and financial
information relating to Comcast, AT&T and AT&T Broadband that we deemed to
be relevant;
(2) 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 Transaction (the
"Expected Synergies") furnished to us by Comcast, AT&T and AT&T Broadband;
(3) Conducted discussions with members of management and
representatives of Comcast, AT&T and AT&T Broadband concerning the matters
described in clauses 1 and 2 above, as well as their businesses and
prospects before and after giving effect to the Transaction and the
Expected Synergies;
(4) 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 we deemed to be relevant;
(5) Reviewed the results of operations of Comcast and AT&T Broadband
and compared them with those of certain publicly traded companies that we
deemed to be relevant;
(6) Compared the proposed financial terms of the Transaction with the
financial terms of certain other transactions that we deemed to be
relevant;
(7) Participated in certain discussions and negotiations among
representatives of Comcast, AT&T and AT&T Broadband and their financial and
legal advisors;
(8) Reviewed the potential pro forma impact of the Transaction;
I-2
(9) Reviewed the final drafts of each of the Agreement and the
Separation and Distribution Agreement, respectively; and
(10) Reviewed such other financial studies and analyses and took into
account such other matters as we deemed necessary, including our assessment
of general economic, market and monetary conditions.
In preparing our opinion, we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us,
discussed with or reviewed by or for us, or publicly available, and we have not
assumed any responsibility for independently verifying such information or
liability therefor, or undertaken an independent evaluation or appraisal of any
of the assets or liabilities of Comcast, AT&T or AT&T Broadband or been
furnished with any such evaluation or appraisal. In addition, we have not
assumed 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
us by Comcast, AT&T or AT&T Broadband, we have 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 Parent, as the case
may be, and the Expected Synergies. We express no view as to such financial
forecast information, including the Expected Synergies, or the assumptions on
which they were based. We have further assumed that will qualify as tax-free
exchanges under Section 351 of the Internal Revenue Code of 1986, as amended
(the "Code"), and that the Separation and Distribution 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 will not
occur. We have also assumed that the final form of the Agreement and the
Separation and Distribution Agreement will be substantially similar to the last
draft reviewed by us.
Our opinion is necessarily based upon market, economic and other conditions
as they exist and can be evaluated on, and on the information made available to
us as of, the date hereof. It should be understood that subsequent developments
may affect this opinion and that we do not have any obligation to update,
revise, or reaffirm this opinion. We have assumed that all governmental,
regulatory or other consents and approvals (contractual or otherwise) necessary
for or in connection with the consummation of the Transaction will be obtained
without any adverse effect on Comcast, AT&T Broadband or Parent or on the
contemplated benefits of the Transaction, in any respect material to our
analysis. For purposes of rendering our opinion, we have assumed, in all
respects material to our analysis, that the Transaction will be consummated as
described in the Agreement and the Separation and Distribution Agreement, that
all the representations and warranties of each party contained in the Agreement
and the Separation and Distribution Agreement are true and correct, that each
party to the 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, and
that all conditions to the consummation of the Transaction will be satisfied
without waiver thereof, and that if the parties elect to consummate the
Transaction by means of the alternative structure contemplated by Section 3.05
of the Agreement, such alternative structure will not differ from the structure
reflected in the Agreement and the Separation and Distribution Agreement in any
respect material to our analysis. We note that we are not legal, tax or
regulatory experts and have 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 Transaction.
In arriving at our opinion, we were not authorized to solicit, and did not
solicit, interest from any party with respect to a business combination or other
extraordinary transaction involving Comcast.
We are acting as financial advisor to Comcast in connection with the
Transaction and will receive a fee from Comcast for our services, a significant
portion of which is contingent upon the consummation of the Transaction. In
addition, Comcast has agreed to indemnify us for certain liabilities arising out
of our engagement. We have, in the past, provided financial advisory and
financing services to Comcast and AT&T and/or their affiliates and may continue
to do so (including, after the Transaction, to Parent and its
I-3
affiliates) and have received, and may receive, fees for the rendering of such
services. In addition, in the ordinary course of our business, we may actively
trade the shares of Comcast Common Stock and other securities of Comcast, as
well as shares of AT&T Common Stock and other securities of AT&T and, after the
Transaction, the securities of Parent, for our own account and for the accounts
of customers and, accordingly, may at any time hold a long or short position in
such securities.
This opinion is for the use and benefit of the Board of Directors of
Comcast. Our opinion does not address the merits of the underlying decision by
Comcast to engage in the Transaction and does not constitute a recommendation to
any shareholder of Comcast as to how such shareholder should vote on the
proposed Transaction or any matter related thereto.
We are not expressing any opinion herein as to the prices at which the
shares of Comcast Common Stock or Parent Common Stock will trade following the
announcement or consummation of the Transaction, as the case may be.
On the basis of and subject to the foregoing, we are of the opinion that,
as of the date hereof, the Comcast Conversion Ratios in the Comcast Merger, in
the aggregate, are fair, from a financial point of view, to the holders of
Comcast Common Stock, taken together.
Very truly yours,
/s/ MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
I-4
ANNEX J
[LETTERHEAD OF CREDIT SUISSE FIRST BOSTON CORPORATION]
December 19, 2001
Board of Directors
AT&T Corp.
295 North Maple Avenue
Basking Ridge, New Jersey 07920
Members of the Board:
You have asked us to advise you with respect to the fairness, from a
financial point of view, to the holders of the common stock of AT&T Broadband
Corp. ("AT&T Broadband") immediately prior to the Merger (as defined below),
other than Comcast Corporation ("Comcast") and its affiliates, of the AT&T
Broadband Exchange Ratio (as defined below) set forth in the Agreement and Plan
of Merger, dated as of December 19, 2001 (the "Merger Agreement"), among AT&T
Corp. ("AT&T"), AT&T Broadband, Comcast, AT&T Comcast Corporation ("AT&T
Comcast"), AT&T Broadband Acquisition Corp., a wholly owned subsidiary of AT&T
Comcast ("AT&T Broadband Merger Sub"), and Comcast Acquisition Corp., a wholly
owned subsidiary of AT&T Comcast ("Comcast Merger Sub").
As more fully described in the Merger Agreement, AT&T Broadband Merger Sub
will be merged with and into AT&T Broadband (the "AT&T Broadband Merger")
pursuant to which (A) if the requisite approval of the Merger Agreement and
related transactions is obtained by the holders of Class A Common Stock of
Comcast (the "Comcast Shareholder Approval"), each outstanding share of the
Common Stock, par value $0.01 per share, of AT&T Broadband ("AT&T Broadband
Common Stock") will be converted into the right to receive (i) that number of
shares of Class A Common Stock, par value $0.01 per share, of AT&T Comcast
("AT&T Comcast Class A Common Stock") equal to the Exchange Ratio (as defined
below) and (ii) if AT&T Comcast has not received prior to the effective time of
the Merger (the "Effective Time") a commitment from Standard and Poors' that the
AT&T Comcast Class A Common Stock will be included in the Standard and Poors'
500 Index (the "Index") immediately after the Effective Time, a non-transferable
security of AT&T Comcast which, under certain circumstances as more fully
described in the Merger Agreement, will entitle the holder thereof to receive up
to a number of shares of AT&T Comcast Class A Common Stock (the "K/A Exchange
Ratio") equal to the product of (x) the Exchange Ratio and (y) the K/A Price
Differential (as defined in the Merger Agreement), which K/A Price Differential
will in no event be less than zero or more than 0.03; and (B) if Comcast
Shareholder Approval is not obtained, each outstanding share of AT&T Broadband
Common Stock will be converted into the right to receive (i) that number of
shares of Class C Common Stock, par value $0.01 per share, of AT&T Comcast
("AT&T Comcast Class C Common Stock" and, together with AT&T Comcast Class A
Common Stock, "AT&T Comcast Common Stock") equal to the Exchange Ratio and (ii)
if AT&T Comcast has not received prior to the Effective Time a commitment from
Standard and Poors' that the AT&T Comcast Class C Common Stock will be included
in the Index immediately after the Effective Time, a non-transferable security
of AT&T Comcast which, under certain circumstances as more fully described in
the Merger Agreement, will entitle the holder thereof to receive up to a number
of shares of AT&T Comcast Class C Common Stock (the "K/C Exchange Ratio") equal
to the product of (x) the Exchange Ratio and (y) the K/C Price Differential (as
defined in the Merger Agreement), which K/C Price Differential will in no event
be less than zero or more than 0.03 (the number of shares of AT&T Comcast Common
Stock into which each outstanding share of AT&T Broadband Common Stock will be
so converted in the AT&T Broadband Merger as specified in clause (A)(i) or
(B)(i) above, as applicable, the "AT&T Broadband Common Stock Exchange Ratio"
and, together with the K/A Exchange Ratio or the K/C Exchange Ratio, as
applicable, the "AT&T Broadband Exchange Ratio"). The Merger Agreement also
provides for the merger of Comcast Merger Sub with and into Comcast (the
"Comcast Merger" and, together with the AT&T Broadband Merger, the "Merger")
pursuant to which each outstanding share of Class A Common Stock of Comcast,
Class B Common Stock of Comcast and
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Board of Directors
AT&T Corp.
295 North Maple Avenue
Basking Ridge, New Jersey 07920
Page 2
Class A Special Common Stock of Comcast will be converted into one share of AT&T
Comcast Class A Common Stock, Class B Common Stock of AT&T Comcast and Class A
Special Common Stock of AT&T Comcast, respectively. "Exchange Ratio" is defined
and more fully described in the Merger Agreement as a fraction (A) the numerator
of which is the difference between (i) 1,235,000,000 and (ii) the value of
certain outstanding but unexercised options to purchase shares of AT&T Broadband
Common Stock divided by the average stock price of Class A Common Stock of
Comcast for the five consecutive trading days preceding the date of the
Distribution (as defined below), and (B) the denominator of which is the sum of
(i) the number of shares of AT&T Broadband Common Stock outstanding immediately
prior to the AT&T Broadband Merger, excluding shares issued pursuant to the
QUIPS Exchange (as defined below) and shares held by certain affiliates of AT&T
Broadband, and (ii) the number of shares of Common Stock of AT&T in respect of
which statutory appraisal rights have been exercised but not withdrawn.
The Merger Agreement further provides that if, but for a disparity in the
per share value of AT&T Comcast Class A Common Stock or AT&T Comcast Class C
Common Stock, as applicable, and Class A Special Common Stock of AT&T Comcast,
the Qualified Holders (as defined in the Merger Agreement) would have received a
number of shares of AT&T Comcast Common Stock at the Effective Time that
represents more than 50% of the total value of all shares of AT&T Comcast Common
Stock, AT&T Comcast will issue additional shares of AT&T Comcast Common Stock to
such holders of AT&T Broadband Common Stock in an amount sufficient to ensure
that such holders will be treated as holding at the Effective Time more than 50%
of the value of all shares of AT&T Comcast Common Stock.
Representatives of AT&T have advised us that, in connection with the
transactions contemplated by, and as more fully described in, the Merger
Agreement and the Separation and Distribution Agreement, dated as of December
19, 2001, between AT&T and AT&T Broadband (the "Separation and Distribution
Agreement"), the following transactions (the "Ancillary Transactions"), among
other things, will occur: (A)(i) AT&T will contribute $18 million to AT&T
Broadband which will be used to purchase certain AT&T Broadband Assets (as
defined in the Separation and Distribution Agreement) from an affiliate of AT&T,
(ii) AT&T will transfer to AT&T Broadband the AT&T Broadband Assets and AT&T
Broadband will assume the AT&T Broadband Liabilities (as defined in the
Separation and Distribution Agreement) (the "Separation") and (iii) shares of
AT&T Broadband Common Stock will be distributed, on a pro rata basis, to holders
of Common Stock of AT&T (the "Distribution" and, together with the Separation,
the "Spin-Off"); (B) AT&T Comcast will redeem (or post letters of credit
reasonably acceptable to AT&T with respect to) each redeemable series of TOPRS
(as defined in the Merger Agreement); (C)(i) All outstanding 5% Convertible
Quarterly Income Preferred Securities ("QUIPS") of AT&T Finance Trust I, a
subsidiary of AT&T, will be exchanged for shares of AT&T Broadband Common Stock
(the "QUIPS Exchange"), (ii) the QUIPS Transfer (as defined in the Merger
Agreement) will occur or (iii) AT&T Broadband will issue a note to AT&T in the
amount of the QUIPS Fair Market Value (as defined in the Merger Agreement) in
exchange for an amount of cash equal to such amount and will dividend such cash
amount to AT&T; (D)(i) Shares of Common Stock of AT&T held by Comcast and its
affiliates will be exchanged for an equal number of shares of Series K
Exchangeable Preferred Stock of AT&T and (ii) shares of Subsidiary Exchangeable
Preferred Stock of AT&T held by certain affiliates of AT&T Broadband will be
exchanged for a number of shares of AT&T Broadband Common Stock of equal value;
and (E) AT&T will cause the Class A Senior Cumulative Exchangeable Preferred
Stock of TCI Pacific Communications, Inc. to be called for redemption in
exchange for shares of Common Stock of AT&T.
In arriving at our opinion, we have reviewed the Merger Agreement, the
Separation and Distribution Agreement and certain related documents, as well as
certain publicly available business and financial
J-2
Board of Directors
AT&T Corp.
295 North Maple Avenue
Basking Ridge, New Jersey 07920
Page 3
information relating to AT&T Broadband and Comcast. We also have reviewed
certain other information and data 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 us by AT&T, AT&T Broadband and
Comcast, and have met with the managements of AT&T, AT&T Broadband and Comcast
to discuss the businesses and prospects of AT&T Broadband and Comcast. We also
have considered certain financial data of AT&T Broadband and certain financial
and stock market data of Comcast, and we have compared those data with similar
data for publicly held companies in businesses similar to AT&T Broadband and
Comcast, and we have considered, to the extent publicly available, the financial
terms of certain other business combinations and other transactions which have
been announced or effected. We also considered such other information, financial
studies, analyses and investigations and financial, economic and market criteria
which we deemed relevant.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied on
such information being complete and accurate in all material respects. With
respect to the financial forecasts (including adjustments thereto) and other
information and data, we have been advised, and have assumed, that they have
been 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 thereof) and strategic benefits anticipated by the managements of
AT&T, AT&T Broadband and Comcast to result from the Merger and related
transactions and the other matters covered thereby. We have assumed, with your
consent, that in the course of obtaining the necessary regulatory and third
party approvals and consents for the Merger and related transactions, no
modification, delay, limitation, restriction or condition will be imposed that
will have an adverse effect on AT&T, AT&T Broadband or Comcast or the
contemplated benefits of the proposed Merger or related transactions in any
respect meaningful to our analyses. We also have assumed, with your consent,
that the Merger and related transactions (including, without limitation, the
Spin-Off and other Ancillary Transactions) 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 Spin-Off, laws relating to
insolvency and fraudulent conveyance and to the payments of dividends). In
addition, we have assumed, with your consent, that the Merger will be treated as
a tax-free exchange, and the Spin-Off will qualify as a tax-free distribution,
for federal income tax purposes. We have not been requested to make, and have
not made, an independent evaluation or appraisal of the assets or liabilities
(contingent or otherwise) of AT&T, AT&T Broadband or Comcast, nor have we been
furnished with any such evaluations or appraisals. Our opinion is necessarily
based upon information available to us, and financial, economic, market and
other conditions as they exist and can be evaluated, on the date hereof. We are
not expressing 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
such securities will trade at any time. In connection with our engagement, we
were requested to approach third parties to solicit indications of interest in
the possible acquisition of all or a part of AT&T Broadband and held preliminary
discussions with certain of these parties prior to the date hereof. Our opinion
does not address any aspect of the Merger, other than the AT&T Broadband
Exchange Ratio to the extent specified herein, or any related transactions
(including, without limitation, the Spin-Off and other Ancillary Transactions)
or the relative merits of the Merger or any related transactions as compared to
other business strategies that might be available to AT&T or
J-3
Board of Directors
AT&T Corp.
295 North Maple Avenue
Basking Ridge, New Jersey 07920
Page 4
AT&T Broadband, nor does it address the underlying business decision of AT&T to
proceed with the Merger or any related transactions.
We have acted as financial advisor to AT&T in connection with the Merger
and will receive a fee for our services, a significant portion of which is
contingent upon the consummation of the Merger. We and our affiliates in the
past have provided, and currently are providing, financial and investment
banking services to AT&T and certain of its affiliates, and in the past have
provided financial and investment banking services to Comcast and certain of its
affiliates unrelated to the proposed Merger, for which services we have received
and expect to receive compensation. In the ordinary course of business, we and
our affiliates may actively trade the securities of AT&T, Comcast and certain of
their respective affiliates and in the future may actively trade the securities
of AT&T Comcast for our own and such affiliates' accounts and for the accounts
of customers and, accordingly, may at any time hold long or short positions in
such securities.
It is understood that this letter is for the information of the Board of
Directors of AT&T in connection with its evaluation of the Merger and does not
constitute a recommendation to any stockholder as to how such stockholder should
vote or act on any matter relating to the Merger or any related transactions.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the AT&T Broadband Exchange Ratio is fair, from a financial point
of view, to the holders of AT&T Broadband Common Stock immediately prior to the
Merger (other than Comcast and its affiliates).
Very truly yours,
CREDIT SUISSE FIRST BOSTON CORPORATION
J-4
[LETTERHEAD OF GOLDMAN, SACHS & CO.]
ANNEX K
PERSONAL AND CONFIDENTIAL
December 19, 2001
Board of Directors
AT&T Corp.
295 North Maple Avenue
Basking Ridge, NJ 07920
Ladies and Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to the holders (other than Comcast Corporation and its affiliates) of the
Common Stock, par value $.01 per share (the "AT&T Broadband Common Stock"), of
AT&T Broadband Corp. ("AT&T Broadband") immediately before the Merger (as
defined below) of the Exchange Ratio (as defined below) pursuant to the
Agreement and Plan of Merger, dated as of December 19, 2001 (the "Merger
Agreement"), by and among AT&T Corp. (the "Company" or "AT&T"), AT&T Broadband,
Comcast Corporation ("Comcast"), AT&T Comcast Corporation ("Parent"), AT&T
Broadband Acquisition Corp., a wholly owned subsidiary of Parent ("AT&T
Broadband Merger Sub"), and Comcast Acquisition Corp., a wholly owned subsidiary
of Parent ("Comcast Merger Sub"). Undefined capitalized terms used herein shall
have the meanings assigned to them in the Merger Agreement and in the Separation
and Distribution Agreement, dated as of December 19, 2001 (the "Separation and
Distribution Agreement"), by and between the Company and AT&T Broadband.
Pursuant to the Merger Agreement, AT&T Broadband Merger Sub will merge (the
"AT&T Broadband Merger") with and into AT&T Broadband, with AT&T Broadband as
the surviving corporation in the AT&T Broadband Merger, and, pursuant to the
AT&T Broadband Merger, (a) in the event that the approval, by a majority of the
votes cast, of the holders of Class A Common Stock, par value $1.00 per share
(the "Comcast Class A Common Stock"), of Comcast (the "Comcast A Shareholder
Approval") has been obtained at the Effective Time, (i) each outstanding share
of AT&T Broadband Common Stock will be converted into the right to receive the
Basic Exchange Ratio (as defined below) of a share of Class A Common Stock, par
value $.01 per share (the "Parent Class A Common Stock"), of Parent (the "Class
A Exchange Ratio"), and (ii) in the event that prior to the Effective Time
Standard and Poors' has not committed that the Parent Class A Common Stock will
be included in the Index immediately after the Effective Time, each holder of
shares of AT&T Broadband Common Stock will also be entitled to receive, in
exchange for each of such holder's shares, under certain circumstances, a number
of shares of Parent Class A Common Stock equal to the product of (i) the Basic
Exchange Ratio and (ii) the K/A Price Differential as defined in the Merger
Agreement; such number of additional shares of Parent Class A Common Stock will
be reduced by the number of shares of Parent Class A Common Stock previously
issued pursuant to the Top-up (as defined below) (the "K/A Exchange Ratio,"
together with the Class A Exchange Ratio, the "Preferred Exchange Ratio"); and
(b) in the event that the Comcast A Shareholder Approval has not been obtained
at the Effective Time, (i) each outstanding share of AT&T Broadband Common Stock
will be converted into the right to receive the Basic Exchange Ratio of a share
of Class C Common Stock, par value $.01 per share (the "Parent Class C Common
Stock"), of Parent (the "Class C Exchange Ratio"), and (ii) in the event that
prior to the Effective Time Standard and Poors' has not committed that the
Parent Class C Common Stock will be included in the Index immediately after the
Effective Time, each holder of shares of AT&T Broadband Common Stock will also
be entitled to receive, in exchange for each of such holder's shares, under
certain circumstances, a number of shares of Parent Class C Common Stock equal
to the product of (i) the Basic Exchange Ratio and (ii) the K/C Price
Differential as defined in the Merger Agreement; such number of additional
shares of Parent Class C Common Stock will be reduced by the number of shares of
Parent Class C Common Stock previously issued pursuant to the Top-up (the "K/C
Exchange Ratio," together with the Class C
K-1
Board of Directors
AT&T Corp.
295 North Maple Avenue
Basking Ridge, NJ 07920
Page 2
Exchange Ratio, the "Alternative Exchange Ratio") (the Preferred Exchange Ratio
and the Alternative Exchange Ratio, taken as a whole, depending on whether the
Comcast A Shareholder Approval has been obtained, collectively, the "Exchange
Ratio"). The "Basic Exchange Ratio" is defined in the Merger Agreement as the
number resulting from the fraction (i) the numerator of which is the difference
between (x) 1,235,000,000 and (y) the value of certain unexercised AT&T Stock
Options held by Broadband Employees and Former Employees divided by the average
stock price of Comcast Class A Common Stock for the five consecutive trading
days preceding the Distribution (as defined below), and (ii) the denominator of
which is the sum of (x) the number of shares of AT&T Broadband Common Stock
outstanding immediately prior to the AT&T Broadband Merger, excluding shares
issued pursuant to the QUIPS Exchange (as defined below) and shares held by
certain affiliates of AT&T Broadband, and (y) the number of shares of Common
Stock, par value $1.00 per share (the "AT&T Common Stock"), of AT&T in respect
of which statutory appraisal rights have been exercised and not withdrawn. We
note that if, but for a disparity in the per share value of the Parent Class A
Common Stock, the Parent Class A Special Common Stock (as defined below) or the
Parent Class C Common Stock (collectively, the "Parent Common Stock"), as
applicable, the holders of AT&T Broadband Common Stock qualified pursuant to the
Merger Agreement would have received a number of shares of Parent Common Stock
that at the Effective Time is more than 50% of the total value of all shares of
Parent Common Stock, Parent will issue additional shares of Parent Common Stock
to such holders of AT&T Broadband Common Stock in an amount sufficient to ensure
that such holders will be treated as holding at the Effective Time more than 50%
of the value of all shares of Parent Common Stock (the "Top-up").
The Merger Agreement also provides for the merger of Comcast Merger Sub
with and into Comcast (the "Comcast Merger" and, together with the AT&T
Broadband Merger, the "Merger") pursuant to which each outstanding share of
Comcast Class A Common Stock, Class B Common Stock, par value $1.00 per share,
and Class A Special Common Stock, par value $1.00 per share, of Comcast will be
converted into the right to receive one share of Parent Class A Common Stock,
Class B Common Stock, par value $.01 per share, of Parent and Class A Special
Common Stock, par value $.01 per share (the "Parent Class A Special Common
Stock"), of Parent, respectively.
You have informed us that prior to the Effective Time, among other things,
AT&T will effect the Spin-Off (as defined below) of the AT&T Broadband Business
in the following manner (the following transactions are referred to herein
collectively as the "Preliminary Transactions"): (a) AT&T will issue shares of
AT&T Broadband Common Stock to Microsoft Corporation ("Microsoft") in exchange
for all outstanding 5% Convertible Quarterly Income Preferred Securities issued
by AT&T Finance Trust I, a subsidiary of AT&T (the "QUIPS Exchange"), or, unless
Microsoft consents to the QUIPS Transfer (as defined in the Merger Agreement)
and upon the occurrence of certain circumstances set forth in the Merger
Agreement, AT&T Broadband will issue a note to AT&T representing the QUIPS Fair
Market Value (as defined in the Merger Agreement) in exchange for cash proceeds
equal to such amount and dividend such cash proceeds to AT&T; (b) AT&T will
contribute $18 million in cash to AT&T Broadband and AT&T Broadband will
purchase assets used in the AT&T Broadband Business from AT&T Broadband
T-Holdings, Inc., a wholly owned subsidiary of AT&T Broadband, in exchange for
$18 million in cash; (c) AT&T will transfer all AT&T Broadband Assets to AT&T
Broadband and AT&T Broadband will assume all AT&T Broadband Liabilities (the
"Separation"); (d) the shares of AT&T Common Stock held by Comcast and its
affiliates will be exchanged pro rata for shares of Series K Exchangeable
Preferred Stock, par value $1.00 per share, of AT&T; (e) the shares of AT&T
Subsidiary Preferred Stock held by AT&T Broadband Subsidiaries will be exchanged
for a certain number of shares of AT&T Broadband Common Stock as determined
pursuant to the Separation and Distribution Agreement; (f) AT&T will distribute
to the record holders of AT&T Common Stock pro rata shares of
K-2
Board of Directors
AT&T Corp.
295 North Maple Avenue
Basking Ridge, NJ 07920
Page 3
AT&T Broadband Common Stock (the "Distribution," together with the Separation,
the "Spin-Off"); (g) Parent will call for redemption (or post letters of credit
reasonably acceptable to the Company with respect to) each redeemable series of
TOPRS (as defined in the Merger Agreement); and (h) TCI Pacific Communications,
Inc. will call for redemption and exchange the TCI Pacific Preferred Stock for
shares of AT&T Common Stock.
Goldman, Sachs & Co., 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 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. We are familiar with the Company
having provided certain investment banking services to the Company from time to
time, including (a) having acted as financial advisor to the Company 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 certain cable assets to Cox Communications, Inc.
in March 2000, (v) its acquisition of MediaOne Group in June 2000, (vi) its
acquisition of certain assets from Cablevision Systems Corporation in January
2001, (vii) its analysis, consideration and negotiation of revisions to the
Company'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. ("AT&T Wireless") held by AT&T to
the holders of AT&T Common Stock in July 2001, (ix) its debt-for-equity exchange
offer involving AT&T's remaining stake in AT&T Wireless in July 2001, and (x)
its transaction with BT Group plc relating to the unwinding of the Concert joint
venture announced in October 2001; (b) having acted as joint lead arranger in
connection with the loan syndication of the Company'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); (c) having acted as joint bookrunner in connection with (i) the
initial 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 the Company 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 the Company in multiple tranches and currencies in
November 2001; (d) 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 the Company due July 2000 in July 1999 and (ii) $6.0 billion
of aggregate principal amount of Notes of the Company in multiple tranches due
July 2001 in July 2000; (e) having acted as dealer with respect to the Company's
commercial paper program; (f) having acted as financial advisor to the Company
in connection with the restructuring announced by the Company in 2000; and (g)
having acted as financial advisor to the Company in connection with, and having
participated in certain of the negotiations leading up to, the Merger Agreement,
the Distribution and Separation Agreement and the agreements referred to
therein. We also have provided investment banking services to Comcast and its
affiliates from time to time, including (a) having acted as co-manager with
respect to the public offering of PHONES in March 1999 (aggregate principal
amount $870 million); (b) 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 (c) 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,
K-3
Board of Directors
AT&T Corp.
295 North Maple Avenue
Basking Ridge, NJ 07920
Page 4
Sachs & Co. may provide investment banking and advisory services to the Company,
Comcast and their respective affiliates in the future. Goldman, Sachs & Co.
provides a full range of financial, advisory and securities services and, in the
course of its normal trading activities, may from time to time effect
transactions and hold positions in securities, including derivative securities,
of the Company, AT&T Broadband, Comcast, or their respective affiliates, for its
own account or the accounts of customers.
In connection with this opinion, we have reviewed, among other things, the
Merger Agreement; the Separation and Distribution Agreement; Annual Reports to
Shareholders and Annual Reports on Form 10-K of the Company and Comcast for the
five years ended December 31, 2000; the Preliminary Proxy Statement on Form 14A
of AT&T dated July 3, 2001; certain other communications from the Company and
Comcast to their respective shareholders; certain internal financial analyses
and forecasts for Comcast prepared by its management, as adjusted by AT&T
Broadband management and reviewed by AT&T management (the "Adjusted Comcast
Forecasts"); certain internal financial forecasts and analyses for AT&T
Broadband prepared by AT&T Broadband management and reviewed and/or adjusted by
AT&T management (the "AT&T Broadband Forecasts"; together with the Adjusted
Comcast Forecasts, the "Forecasts"); and certain 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 (the
"Synergies"). We also have held discussions with members of the senior
management of the Company, AT&T Broadband and Comcast regarding their assessment
of the strategic rationale for, and the potential benefits 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, we have 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 certain financial information for AT&T
Broadband and certain financial and stock market information for Comcast with
similar information for certain other companies the securities of which are
publicly traded, reviewed the financial terms of certain recent business
combinations in the cable industry specifically and in other industries
generally and performed such other studies and analyses as we considered
appropriate.
We have relied upon the accuracy and completeness of all of the financial,
accounting and other information and data discussed with or reviewed by us and
have assumed the accuracy and completeness thereof for purposes of this opinion.
In that regard, we have assumed, with your consent, that the Forecasts and the
Synergies have been reasonably prepared on a basis reflecting the best currently
available judgments and estimates of the managements of AT&T and AT&T Broadband.
We also have assumed, with your consent, that all governmental, regulatory and
other consents and approvals necessary for the consummation of the transactions
contemplated by the Merger Agreement and the Separation and Distribution
Agreement (collectively, the "Transactions") will be obtained without any
adverse effect on the Company, AT&T Broadband and Comcast or the combined
company following the Merger or the contemplated benefits of the Transactions in
any respect meaningful to our analyses. In addition, we have not made an
independent evaluation or appraisal of the assets and liabilities of the
Company, AT&T Broadband or Comcast or any of their subsidiaries and we have not
been furnished with any such evaluation or appraisal. Our advisory services and
the opinion expressed herein are provided for the information and assistance of
the Board of Directors of the Company in connection with its consideration of
the AT&T Broadband Merger.
For purposes of our analyses, we have been advised and have assumed, with
your consent, that the Merger 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
K-4
Board of Directors
AT&T Corp.
295 North Maple Avenue
Basking Ridge, NJ 07920
Page 5
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 Spin-Off, laws relating to insolvency and fraudulent conveyance and to the
payment of dividends). You also have advised us, and we have assumed, with your
consent, that, for federal income tax purposes, the Spin-Off will qualify as a
tax-free distribution and the Merger will be treated as a tax-free
reorganization. Our opinion necessarily is based upon information available to
us and financial, economic, market and other conditions as they exist and can be
evaluated on the date hereof, and we assume no duty to update or revise our
opinion based on circumstances or events after the date hereof. Our opinion is
directed only to the fairness from a financial point of view of the Exchange
Ratio, and as such does not in any respect address AT&T's underlying business
decision to effect the Merger or any related transactions or constitute a
recommendation concerning how holders of shares of AT&T Common Stock or of AT&T
Broadband Common Stock should vote with respect to the Transactions. We also
express no opinion herein as to the prices at which the shares of AT&T Broadband
Common Stock or of Parent Class A Common Stock, Parent Class A Special Common
Stock or Parent Class C Common Stock may trade at any time if and when they are
issued and trade publicly.
Our opinion does not address any aspect of the Merger other than the
Exchange Ratio to the extent provided in this opinion, and we express no opinion
as to any Preliminary Transaction (including the Spin-Off) or the relative
merits of the Transactions as compared to any alternative business transaction
that might be available to the Company or to AT&T Broadband.
Based upon and subject to the foregoing and based upon such other matters
as we consider relevant, it is our opinion that as of the date hereof and based
on current market conditions the Exchange Ratio pursuant to the Merger Agreement
is fair from a financial point of view to the holders of AT&T Broadband Common
Stock immediately prior to the Merger (other than Comcast and its affiliates).
Very truly yours,
/s/ GOLDMAN, SACHS & CO.
--------------------------------------
(Goldman, Sachs & Co.)
K-5
ANNEX L
FORM OF
CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION
UNDER SECTION 805 OF THE NEW YORK STATE
BUSINESS CORPORATION LAW
We, the undersigned, being a Vice President and an Assistant Secretary
respectively, of AT&T Corp., do hereby certify as follows:
FIRST: The name of the corporation is AT&T Corp.
SECOND: The Certificate of Incorporation of the corporation was filed
by the Department of State on March 3, 1885.
THIRD: (a) The Certificate of Incorporation of the corporation is
hereby amended to create one new class of common stock, AT&T Consumer
Services Group common stock, having the number, designation, relative
rights, preferences, and limitations as set forth herein.
(b) The Certificate of Incorporation of the corporation is hereby
amended to remove all references to the AT&T Wireless Group tracking stock,
to each class of Liberty Media Group tracking stock, to the AT&T Wireless
Group preferred tracking stock and AT&T Series E convertible preferred
stock.
(c) To effect the foregoing, and certain related technical changes,
ARTICLE THIRD is hereby amended as set forth in Exhibit A hereto.
FOURTH: The manner in which the foregoing amendment of said
Certificate of Incorporation of the corporation was authorized was by the
vote of the holders of a majority of all outstanding shares of the
corporation entitled to vote thereon at a meeting of shareholders,
subsequent to the unanimous vote of our board of directors.
IN WITNESS WHEREOF, we have subscribed this document on , 2002
and do hereby affirm, under the penalties of perjury, that the statements
contained herein have been examined by us and are true and correct.
By
------------------------------------
Name: Marilyn J. Wasser
Title: Vice President -- Law and
Secretary
By
------------------------------------
Name: Robert S. Feit
Title: Assistant Secretary
L-1
ARTICLE THIRD
CAPITAL STOCK
PART A of ARTICLE THIRD is hereby amended to read in its entirety as
follows(1):
The aggregate number of shares which the corporation is authorized to
issue is three billion one hundred million (3,100,000,000) shares,
consisting of one hundred million (100,000,000) preferred shares having a
par value of $1.00 per share ("Preferred Stock") and three billion
(3,000,000,000) common shares, of which two billion five hundred million
(2,500,000,000) common shares shall be Common Stock having a par value of
$1.00 per share ("Common Stock") and five hundred million (500,000,000)
common shares shall be Consumer Services Group Common Stock having a par
value of $1.00 per share ("Consumer Services Group Common Stock").
PART B of ARTICLE THIRD is hereby amended to read in its entirety as set
forth below, and PART C of ARTICLE THIRD is hereby deleted in its entirety. PART
D of ARTICLE THIRD shall remain unchanged, except that it shall be redesignated
as PART C of ARTICLE THIRD.
PART B -- COMMON STOCK AND CONSUMER SERVICES GROUP COMMON STOCK
1. VOTING RIGHTS.
(a) Subject to paragraph 1(c) of this Part B of this Article Third, holders
of Common Stock shall be entitled to one vote for each share of such stock held
and holders of Consumer Services Group Common Stock shall be entitled to one
vote per share of such stock held; provided however that if a Broadband
Separation shall have occurred (whether prior to or after the date of issuance
of any shares of Consumer Services Group Common Stock), holders of Consumer
Services Group Common Stock shall be entitled to 2.5 votes per share of such
stock held, in each case, on all matters presented to such shareholders.
---------------
(1)The text of Part A of Article Third above assumes that the Consumer Services
Group tracking stock and reverse stock split amendments are both effected.
These amendments may become effective at separate times, in which case the
applicable portions of these amendments to AT&T's certificate of
incorporation will be adopted at such separate times.
If the Consumer Services Group tracking stock amendment is effective but the
reverse stock split amendment is not effective, Part A of Article Third will
be amended to read as follows:
The aggregate number of shares which the corporation is
authorized to issue is six billion six hundred million
(6,600,000,000) shares, consisting of one hundred million
(100,000,000) preferred shares having a par value of $1.00
per share ("Preferred Stock") and six billion five hundred
million (6,500,000,000) common shares, of which six
billion (6,000,000,000) common shares shall be Common
Stock having a par value of $1.00 per share ("Common
Stock") and five hundred million (500,000,000) common
shares shall be Consumer Services Group Common Stock
having a par value of $1.00 per share ("Consumer Services
Group Common Stock").
If the Consumer Services Group tracking stock amendment is not effective but
the reverse stock split amendment is effective, Part A of Article Third will
be amended to read as follows:
The aggregate number of shares which the corporation is
authorized to issue is two billion six hundred million
(2,600,000,000) shares, consisting of one hundred million
(100,000,000) preferred shares having a par value $1.00 per
share ("Preferred Stock") and two billion five hundred
million (2,500,000,000) common shares, of which two billion
five hundred million (2,500,000,000) common shares shall be
Common Stock having a par value of $1.00 per share ("Common
Stock").
L-2
(b) Except as may otherwise be required by the laws of the State of New
York or, with respect to additional or special voting rights (which may include,
without limitation, rights of any such holders of any such class or series to
elect one or more directors voting separately as a class) of any class or series
of Preferred Stock or any other class of common shares, except as may be
required by this Certificate of Incorporation of the corporation, as the same
may be amended from time to time (this "Certificate") (including the terms of
any class or series of Preferred Stock and any resolution or resolutions
providing for the establishment of such class or series pursuant to authority
vested in the Board of Directors by this Certificate and the terms of any other
class of common shares), the holders of shares of Common Stock, the holders of
shares of Consumer Services Group Common Stock, the holders of shares of each
other class of common shares, if any, entitled to vote thereon, and the holders
of shares of each class or series of Preferred Stock, if any, entitled to vote
thereon, shall vote as one class with respect to all matters to be voted on by
shareholders of the corporation, and no separate vote or consent of the holders
of shares of Common Stock, the holders of shares of Consumer Services Group
Common Stock, or the holders of shares of any such class of common shares or any
such class or series of Preferred Stock shall be required for the approval of
any such matter.
(c) If the corporation shall in any manner subdivide (by stock split or
otherwise) or combine (by reverse stock split or otherwise) the outstanding
shares of Common Stock, Consumer Services Group Common Stock or any other class
of common stock, or pay a stock dividend in shares of any class to holders of
that class or shall otherwise effect a share distribution (as defined in
paragraph 3 of this Part B of this Article Third) of Common Stock, Consumer
Services Group Common Stock or any other class of common stock, the per share
voting rights of Common Stock specified in paragraph 1(a) of this Part B of this
Article Third, the per share voting rights of Consumer Services Group Common
Stock specified in paragraph 1(a) of this Part B of this Article Third and the
per share voting rights of any other class of common stock shall be
appropriately adjusted so as to avoid any dilution in the aggregate voting
rights of any one class relative to the other classes. The provisions of this
paragraph 1(c) shall apply (and the per share voting rights of the applicable
securities will be accordingly adjusted) with respect to any such transactions
occurring on or after May 31, 2002, regardless of whether any shares of Consumer
Services Group Common Stock were then issued.
2. DIVIDENDS.
(a) Dividends on Common Stock. Dividends on Common Stock may be declared
and paid only to the extent of (i) the assets of the corporation legally
available therefor minus (ii) the Consumer Services Group Available Dividend
Amount. (Such amount available for the payment of dividends on Common Stock is
referred to in this Part B of this Article Third as the "Common Stock Available
Dividend Amount.")
(b) Dividends on Consumer Services Group Common Stock. Dividends on
Consumer Services Group Common Stock may be declared and paid only out of the
lesser of (i) the assets of the corporation legally available therefor and (ii)
the sum of (A) Consumer Services Group Available Dividend Amount and (B) the net
income available to common shareowners of the AT&T Consumer Services Group for
the year in which the applicable dividend is declared and/or the prior year.
Concurrently with the payment of any dividend on shares of Consumer Services
Group Common Stock, at the election of the Board of Directors, either (x) the
Common Stock Group shall receive from the Consumer Services Group an aggregate
payment of the same kind of cash and/or property that is the subject of such
dividend, which payment shall be equal to the excess, if any, of (i) the
quotient obtained by dividing (A) the aggregate amount of such dividend, as
determined by the Board of Directors, by (B) the Consumer Services Group
Allocation Fraction, over (ii) the aggregate amount of such dividend, as so
determined, or (y) the Consumer Services Group Allocation Fraction will be
adjusted as described in paragraph 8 of this Part B of this Article Third. The
payment to be made to the Common Stock Group pursuant to the preceding sentence
may, at the discretion of the Board of Directors, be reflected by an allocation
or by a direct transfer of cash or other property.
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(c) Discrimination Between or Among Classes of Common Shares. The Board of
Directors, subject to the provisions of paragraphs 2(a) and 2(b) of this Part B
of this Article Third, shall have the sole authority and discretion to declare
and pay dividends (or to refrain from declaring or paying the same) exclusively
to the holders of Common Stock, exclusively to the holders of Consumer Services
Group Common Stock, exclusively to the holders of any other class of common
shares or to the holders of any two or more of such classes in equal or unequal
amounts, notwithstanding the relationship between the Common Stock Available
Dividend Amount, the Consumer Services Group Available Dividend Amount, the
respective amounts of prior dividends declared on, or the liquidation rights of,
Common Stock, Consumer Services Group Common Stock or any other factor.
3. SHARE DISTRIBUTIONS.
The corporation may declare and pay a distribution consisting of shares of
Common Stock, Consumer Services Group Common Stock or any other securities of
the corporation, any Subsidiary of the corporation or any other Person
(hereinafter sometimes called a "share distribution") to holders of Common Stock
or Consumer Services Group Common Stock in accordance with this paragraph 3 of
this Part B of this Article Third.
(a) Distributions on Common Stock or Consumer Services Group Common
Stock. The corporation may declare and pay a share distribution to holders of
Common Stock, Consumer Services Group Common Stock or any other class of common
shares consisting of any securities of the corporation, any Subsidiary of the
corporation, or any other Person, including, without limitation, a share
distribution consisting of shares of any class or series of Preferred Stock or
shares of Common Stock, Consumer Services Group Common Stock or any other class
of common shares (or Convertible Securities convertible into or exercisable or
exchangeable for shares of any class or series of Preferred Stock or shares of
Common Stock, Consumer Services Group Common Stock or any other class of common
shares).
Concurrently with the making of any share distribution with respect to
Consumer Services Group Common Stock, at the election of the Board of Directors,
either (x) the Common Stock Group shall receive from the Consumer Services Group
an aggregate payment of the same kind of property that is the subject of such
distribution, which payment shall be equal to the excess, if any, of (i) the
quotient obtained by dividing (A) the aggregate amount of such distribution, as
determined by the Board of Directors, by (B) the Consumer Services Group
Allocation Fraction, over (ii) the aggregate amount of such dividend, as so
determined, or (y) the Consumer Services Group Allocation Fraction shall be
adjusted as described in paragraph 8 of this Part B of this Article Third. Any
payment to be made to the Common Stock Group pursuant to the preceding sentence
may, at the discretion of the Board of Directors, be reflected by an allocation
or by a direct transfer of cash or other property.
(b) Discrimination Between or Among Classes of Common Shares. The Board of
Directors, subject to the foregoing provisions of this paragraph 3 of this Part
B of this Article Third, shall have the sole authority and discretion to declare
and pay (or to refrain from declaring or paying) share distributions exclusively
to holders of Common Stock, exclusively to holders of Consumer Services Group
Common Stock, exclusively to the holders of any other class of common shares or
to holders of any two or more of such classes in equal or unequal amounts,
notwithstanding the relationship between the Common Stock Available Dividend
Amount, the Consumer Services Group Available Dividend Amount, the respective
amounts of prior share distributions declared on, or the liquidation rights of,
Common Stock, Consumer Services Group Common Stock or any other factor.
4. EXCHANGE OF CONSUMER SERVICES GROUP COMMON STOCK.
(a) Exchange at Option of Board of Directors. (I) At any time, the Board
of Directors may exchange all outstanding shares of Consumer Services Group
Common Stock for shares of a new class of common stock or preferred stock of
another Person or entity ("Rollover Shares") that owns, holds or is subject to,
directly or indirectly, all or substantially all of the assets and liabilities
of the Consumer
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Services Group as of immediately prior to the date fixed for the redemption,
provided that (A) this new class of common stock or preferred stock has
substantially the same terms (except as may arise as a result of different law
governing the other Person or as a result of provisions of the other Person's
governing documents of general applicability to all classes of common stock) as
those governing Consumer Services Group Common Stock as provided for in this
Part B of this Article Third, including with regard to the definition of
"Consumer Services Group," (B) the number of shares of this new class of common
stock or preferred stock issued per share of Consumer Services Group Common
Stock is intended to represent the same proportionate interest in the Consumer
Services Group as a share of Consumer Services Group Common Stock and (C) the
per share voting rights of this new class of common stock or preferred stock
shall be based on the ratio of the initial trading prices of this new class of
common stock or preferred stock to the trading prices of the common stock of
such other entity over a fixed number of Trading Days (not to exceed 25), such
number of Trading Days to be determined by the Board of Directors prior to or at
the time of such redemption. If the Board of Directors determines to exercise
its option pursuant to this clause (I), such transaction shall be referred to as
a "Rollover Transaction."
(II) At any time the Board of Directors, in its sole discretion, may effect
a recapitalization of the corporation (a "Board Required Exchange") by declaring
that all of the outstanding shares of Consumer Services Group Common Stock shall
be exchanged for fully paid and nonassessable shares of Common Stock in
accordance with the Exchange Rate. In addition, at any time, as long as all of
the assets and liabilities included in the Consumer Services Group are held,
directly or indirectly, by one or more Qualifying Subsidiaries of the
corporation that hold no other material assets or liabilities (the "Consumer
Services Group Subsidiaries"), the Board of Directors may, subject to the
availability of assets of the corporation legally available therefor, effect a
Board Required Exchange by exchanging, on a pro rata basis, all of the
outstanding shares of Consumer Services Group Common Stock in exchange for an
aggregate number of outstanding fully paid and nonassessable shares of common
stock of such Consumer Services Group Subsidiary or Subsidiaries at the
applicable Exchange Rate, provided that no such exchange may occur unless the
exchange is tax free to the holders of Consumer Services Group Common Stock
(except with respect to any cash received by such holders in lieu of fractional
shares).
(III) For purposes of this paragraph 4 of this Part B of this Article
Third, the term "Exchange Shares" shall mean the shares of Common Stock or
shares of the one or more Consumer Services Group Subsidiaries, as the case may
be, into which shares of Consumer Services Group Common Stock may be exchanged
pursuant to paragraph (II) above. With regard to any redemption or exchange
pursuant to paragraph (I) or (II) above, the Board of Directors may, in its sole
discretion, condition the redemption or exchange on the occurrence or failure to
occur of certain events, and the Board of Directors may, in its sole discretion,
waive any of these conditions.
(b) Exchange in Connection with Certain Significant Transactions. In the
event of a Disposition (other than a Rollover Transaction, a Consumer Services
Group Related Business Transaction or a transaction as a result of which the
corporation or its successor continues to hold directly or indirectly all or
substantially all the properties and assests (as defined below) of the Consumer
Services Group) by the corporation in a transaction or series of related
transactions of all or substantially all of the properties and assets of the
Consumer Services Group to any Person(s) or group(s) of which the corporation is
not a majority owner (whether by merger, consolidation, sale of assets or stock,
liquidation, dissolution, winding up or otherwise) (a "Significant
Transaction"), effective upon the consummation of such sale, transfer,
assignment or other disposition and automatically without any action on the part
of the corporation or the Board of Directors or on the part of the holders of
shares of Consumer Services Group Common Stock, the corporation shall be
recapitalized (a "Significant Transaction Exchange") by exchanging all
outstanding shares of Consumer Services Group Common Stock for, at the sole
discretion of the Board of Directors, either (i) fully paid and nonassessable
shares of Common Stock at the Exchange Rate or (ii) other consideration, as
described in paragraph 4(c) of this Part B of this Article Third.
Notwithstanding the preceding sentence, the corporation shall be under no
obligation to effect a Significant Transaction Exchange that it might otherwise
be required to effect pursuant to such sentence (and the Exchange Rate shall not
apply) if (i) the underlying Significant Transaction is conditioned upon the
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affirmative vote of a majority of the holders of Consumer Services Group Common
Stock, voting as a separate class, (ii) in connection with a spin-off or similar
distribution of the corporation's entire interest in the Consumer Services Group
to the holders of Consumer Services Group Common Stock, including any such
distribution that is made in connection with a Board Required Exchange, (iii) in
connection with the liquidation, dissolution or winding up of the corporation,
whether voluntary or involuntary, or (iv) in connection with the underlying
Significant Transaction, the Board of Directors determine to exercise its option
pursuant to paragraph 4(a)(I) of this Part B of this Article Third.
(c) Alternate Consideration in Connection with Significant Transaction
Exchange. In connection with any Significant Transaction Exchange, the
corporation may, at the sole discretion of the Board of Directors, (i) in lieu
of issuing shares of Common Stock in exchange for shares of Consumer Services
Group Common Stock, either (x) subject to the limitations described in paragraph
2(b) of this Part B of this Article Third and to the other provisions described
in this paragraph 4(c) of this Part B of this Article Third, declare and pay a
dividend in cash and/or in securities or other property (determined as provided
below) to holders of the outstanding shares of Consumer Services Group Common
Stock equally on a share for share basis in an aggregate amount equal to the
Consumer Services Group Net Proceeds of such Significant Transaction; or (y)
provided that there are assets of the corporation legally available therefor and
to the extent the Consumer Services Group Available Dividend Amount plus the
amount set forth in paragraph 2(b)(ii)(B) of this part B of this Article Third
would have been sufficient to pay a dividend in lieu thereof as described in
clause (x) of this paragraph 4(c) of this Part B of this Article Third, then (A)
if such Significant Transaction involves the Disposition of all (not merely
substantially all) of the properties and assets of the Consumer Services Group,
redeem all outstanding shares of Consumer Services Group Common Stock in
exchange for cash and/or securities or other property (determined as provided
below) in an aggregate amount equal to the Consumer Services Group Net Proceeds;
(B) if such Significant Transaction involves the Disposition of substantially
all (but not all) of the properties and assets of the Consumer Services Group,
apply an aggregate amount of cash and/or securities or other property
(determined as provided below) equal to the Consumer Services Group Net Proceeds
to the redemption of outstanding shares of Consumer Services Group Common Stock,
the number of shares to be redeemed to equal the lesser of (1) the whole number
nearest the number determined by dividing the aggregate amount so allocated to
the redemption of Consumer Services Group Common Stock by the average Market
Value of one share of Consumer Services Group Common Stock during the 10
Trading-Day period beginning on the 15th Trading Day following the consummation
of such Disposition, and (2) the number of shares of Consumer Services Group
Common Stock outstanding; and (ii) in lieu of issuing solely shares of Common
Stock in exchange for shares of Consumer Services Group Common Stock, subject to
the limitations described in paragraph 2(b) of this Part B of this Article Third
and to the other provisions described in paragraph 4(c) of this Part B of this
Article Third, combine the issuance of shares of Common Stock in exchange for
shares of Consumer Services Group Common Stock with the payment of a dividend on
or the redemption of shares of Consumer Services Group Common Stock for cash
and/or other securities or other property as described below.
In the event that the Board of Directors elects the option described in
(ii) of the preceding paragraph, the outstanding shares of Consumer Services
Group Common Stock exchanged for fully paid and nonassessable shares of Common
Stock shall be exchanged at the Exchange Rate and a dividend shall be paid on
all the remaining shares of Consumer Services Group Common Stock equally on a
share for share basis, or some or all of the remaining outstanding shares of
Consumer Services Group Common Stock shall be exchanged for cash and/or other
securities or other property, as follows. The aggregate amount of such dividend,
in the case of a dividend, or the portion of the Consumer Services Group Net
Proceeds to be applied to such an exchange, in the case of an exchange, shall
equal (A) an amount equal to the total Consumer Services Group Net Proceeds
multiplied by (B) one minus a fraction, the numerator of which shall be the
number of shares of Consumer Services Group Common Stock exchanged for shares of
Common Stock and the denominator of which shall be the total number of
outstanding shares of Consumer Services Group Common Stock. In the event of an
exchange, if the Significant Transaction involves the Disposition of all (not
merely substantially all) of the properties and assets of the
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Consumer Services Group, then all remaining outstanding shares of Consumer
Services Group Common Stock will be redeemed in exchange for cash and/or
securities or other property in an aggregate amount equal to the portion of the
Consumer Services Group Net Proceeds to be applied to the exchange. If the
Significant Transaction involves the Disposition of substantially all (but not
all) of the properties and assets of the Consumer Services Group, then the
portion of the Consumer Services Group Net Proceeds to be applied to the
exchange will be used to redeem a number of shares equal to the lesser of (1)
the whole number nearest the number determined by dividing the aggregate amount
so allocated to the redemption of Consumer Services Group Common Stock by the
average Market Value of one share of Consumer Services Group Common Stock during
the 10-Trading Day period beginning on the 15th Trading Day following
consummation of the Disposition, and (2) the number of shares of Consumer
Services Group Common Stock outstanding.
For purposes of this paragraph 4 of this Part B of this Article Third, in
the case of a Significant Transaction involving a Disposition of properties and
assets in a series of related transactions, such Disposition shall not be deemed
to have been consummated until the consummation of the last of such
transactions. Any exchange described in this paragraph 4 of this Part B of this
Article Third shall be effected in accordance with the applicable provisions set
forth in paragraph 5 of this Part B of this Article Third. In the event that, at
the time of any Significant Transaction, there are outstanding any Convertible
Securities convertible into or exercisable for shares of Consumer Services Group
Common Stock that would give the holders rights to receive any dividend or
exchange consideration related to the Significant Transaction upon exercise,
conversion or otherwise, or would adjust as a result of such dividend or
exchange to give the holder equivalent economic rights, then the shares of
Consumer Services Group Common Stock underlying such Convertible Securities will
be taken into account for purposes of determining the terms of any dividend
payment or exchange effected in lieu of a Significant Transaction Exchange.
(d) Payment to Common Stock Group. Concurrently with the payment of any
dividend referred to in paragraph 4(c) of this Part B of this Article Third, at
the election of the Board of Directors, either (A) the Common Stock Group shall
receive from the Consumer Services Group an aggregate payment of the same kind
of property that is the subject of such dividend, which payment shall be equal
to the excess of (i) the quotient obtained by dividing (x) the aggregate amount
of such dividend, as determined by the Board of Directors, by (y) the Consumer
Services Group Allocation Fraction, over (ii) the aggregate amount of such
dividend, as so determined, or (B) the Consumer Services Group Allocation
Fraction will be adjusted as described in paragraph 8 of this Part B of this
Article Third. Any payment to be made to the Common Stock Group pursuant to the
preceding sentence may, at the discretion of the Board of Directors, be
reflected by an allocation or by a direct transfer of cash or other property.
(e) Exchange Rate. For purposes of this paragraph 4 of this Part B of this
Article Third, the term "Exchange Rate" shall mean the number of Exchange Shares
for which each share of Consumer Services Group Common Stock shall be
exchangeable pursuant to a Board Required Exchange or a Significant Transaction
Exchange, determined as follows. If the shares of Consumer Services Group Common
Stock are to be exchanged for shares of Common Stock, each share of Consumer
Services Group Common Stock shall be exchangeable for such number of shares of
Common Stock (calculated to the nearest 1/10,000), subject to paragraph 5 below,
equal to 110% of the ratio of the Average Market Price Per Share of such
Consumer Services Group Common Stock to the Average Market Price Per Share of
Common Stock. For purposes of computing the Exchange Rate, the "Average Market
Price Per Share" of Common Stock or Consumer Services Group Common Stock, as the
case may be, shall mean (i) in the case of a Board Required Exchange, the
average of the daily Market Value per share for such Common Stock or Consumer
Services Group Common Stock for the 40 consecutive Trading Days ending on the
15th Trading Day prior to the date the corporation makes a public announcement
of its intention to engage in the applicable Board Required Exchange; provided
that, if the Board Required Exchange is conditioned on the occurrence of any
other transaction or event and the Board of Directors determines that the other
transaction or event is not likely to occur within 90 days, then the Board of
Directors may determine, at the time of announcement of the intention to engage
in the applicable Board Required
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Exchange, that the measurement period for purposes of this calculation will be
the 40 consecutive Trading Days ending on the 15th Trading Day prior to mailing
of the applicable Exchange Notice and (ii) in the case of a Significant
Transaction Exchange, the average of the daily Market Value per share for such
Common Stock or Consumer Services Group Common Stock for the 10 consecutive
Trading Days beginning on the 15th Trading Day prior to consummation of the
Significant Transaction. If the Board of Directors makes the determination
described in clause (i) above, the corporation will announce it at the same time
as it announces the intention to engage in the applicable Board Required
Exchange. If the shares of Consumer Services Group Common Stock are to be
exchanged for shares of one or more Consumer Services Group Subsidiaries, such
shares of Consumer Services Group Common Stock shall be exchanged, on a pro rata
basis, for an aggregate number of outstanding fully paid and nonassessable
shares of common stock of each such Consumer Services Group Subsidiary equal to
the number of outstanding shares of common stock of such Subsidiary held by the
corporation multiplied by the Consumer Services Group Allocation Fraction and,
if the Board of Directors so determines, some or all of the remaining shares of
such Subsidiary shall be distributed on a pro rata basis to the holders of
shares of Common Stock (or shares of Common Stock shall be exchanged for such
remaining shares of such Subsidiary); provided that no such distribution (or
mandatory exchange) may occur unless the distribution (or mandatory exchange) is
tax free to the holders of Common Stock (except with respect to any cash
received by such holders in lieu of fractional shares). If at the time of such
an exchange for shares of one or more Consumer Services Group Subsidiaries,
there are outstanding any Convertible Securities convertible into or exercisable
for shares of Consumer Services Group Common Stock that would become exercisable
or convertible for shares of one or more Consumer Services Group Subsidiaries as
a result of such exchange, and the obligation to issue such shares under such
options, warrants, convertible securities or similar rights is not assumed or
otherwise provided for by one or more Consumer Services Group Subsidiaries, then
the shares of Consumer Services Group Common Stock underlying such Convertible
Securities will be taken into account for purposes of determining the Exchange
Rate for such exchange.
For purposes of this paragraph 4 of this Part B of this Article Third,
"substantially all of the properties and assets" of the Consumer Services Group
as of any date shall mean a portion of such properties and assets that
represents at least 80% of the Fair Value of the properties and assets
attributed to the Consumer Services Group as of such date.
5. CERTAIN PROCEDURES RELATING TO EXCHANGES
(a) The Board of Directors may, in its sole discretion, elect to issue
fractional Rollover Shares or Exchange Shares or to make a cash payment in lieu
of fractional shares, as described below. If the Board of Directors elects not
to issue fractional Rollover Shares or Exchange Shares, then no such fractional
shares shall be issued in connection with the exchange or redemption of shares
of Consumer Services Group Common Stock into Rollover Shares or Exchange Shares,
as the case may be, and, in lieu thereof, each holder of Consumer Services Group
Common Stock who would otherwise be entitled to a fractional interest of a
Rollover Share or an Exchange Share shall, upon surrender of such holder's
certificate or certificates representing shares of Consumer Services Group
Common Stock, receive a cash payment (without interest) (the "Fractional
Payment") equal to (i) in the case of an exchange for shares of Common Stock,
the product resulting from multiplying (A) the fraction of a share of Common
Stock to which such holder would otherwise have been entitled by (B) the Average
Market Price Per Share of Common Stock on the Exchange Date, or (ii) in the case
of an exchange or redemption for Rollover Shares or shares of one or more
Consumer Services Group Subsidiaries, such value as is determined by the Board
of Directors.
(b) No adjustments in respect of dividends shall be made upon the exchange
of any shares of Consumer Services Group Common Stock; provided, however, that,
if the Exchange Date with respect to Consumer Services Group Common Stock shall
be subsequent to the record date for the payment of a dividend or other
distribution thereon or with respect thereto but prior to the payment or
distribution thereof, the registered holders of such shares at the close of
business on such record date shall be entitled
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to receive the dividend or other distribution payable on such shares on the date
set for payment of such dividend or other distribution, notwithstanding the
exchange of such shares or the corporation's default in payment of the dividend
or distribution due on such date.
(c) At such time or times as the corporation exercises its right to cause
an exchange pursuant to paragraph 4(a)(I) or 4(a)(II) of this Part B of this
Article Third or to cause a Board Required Exchange, and at the time of any
Significant Transaction Exchange, the corporation shall give notice of such
exchange to the holders of Consumer Services Group Common Stock whose shares are
to be exchanged, by mailing by first-class mail a notice of such exchange (an
"Exchange Notice"), in the case of an exchange at the discretion of the Board of
Directors, not less than 15 nor more than 90 days prior to the date fixed for
such exchange (which date may be a specified date or a date determined by
reference to the occurrence of specified events) (the "Exchange Date"), and, in
the case of any other required exchange, as soon as practicable before or after
the Exchange Date, in either case, to their last addresses as they appear upon
the corporation's books. Each such Exchange Notice shall specify 1) the Exchange
Date, 2) the Exchange Rate applicable to, or a description of the consideration
to be received in, such exchange, and 3) any conditions to the occurrence of
such exchange as set forth by the Board of Directors (which conditions may be
waived by the Board of Directors in its sole discretion), and shall state that
issuance of certificates representing the applicable type of Rollover Shares or
Exchange Shares to be received upon exchange of shares of Consumer Services
Group Common Stock shall be upon surrender of certificates representing such
shares of Consumer Services Group Common Stock. Without limiting the
alternatives available to the corporation, in the case of any Rollover
Transaction, the redemption of the Consumer Services Group Common Stock
contemplated hereby may be effected pursuant to the terms of any merger,
business combination or similar transaction and/or the Board of Directors may
elect to make the date of consummation of such transaction the Exchange Date.
(d) Before any holder of shares of Consumer Services Group Common Stock
shall be entitled to receive certificates representing such Rollover Shares or
Exchange Shares, such holder must surrender, at such office as the corporation
shall specify, certificates for such shares of Consumer Services Group Common
Stock duly endorsed to the corporation or in blank or accompanied by proper
instruments of transfer to the Corporation or in blank, unless the corporation
shall waive such requirement. The corporation shall, as soon as practicable
after such surrender of certificates representing such shares of Consumer
Services Group Common Stock, issue and deliver, at the office of the transfer
agent representing Rollover Shares or Exchange Shares, to the holder for whose
account such shares of Consumer Services Group Common Stock were so surrendered,
or to such holder's nominee or nominees, certificates representing the number of
Rollover Shares or Exchange Shares to which such holder shall be entitled,
together with the Fractional Payment, if any.
(e) From and after any Exchange Date, all rights of a holder of shares of
Consumer Services Group Common Stock shall cease except for the right, upon
surrender of the certificates representing such shares of Consumer Services
Group Common Stock, to receive certificates representing Rollover Shares or
Exchange Shares together with a Fractional Payment, if any, as described in
paragraph 5(a) of this Part B of this Article Third and rights to dividends as
described in paragraph 5(b) of this Part B of this Article Third. No holder of a
certificate that immediately prior to the applicable Exchange Date represented
shares of Consumer Services Group Common Stock shall be entitled to receive any
dividend or other distribution with respect to Rollover Shares or Exchange
Shares, as the case may be, until surrender of such holder's certificate for a
certificate or certificates representing Rollover Shares or Exchange Shares, as
the case may be. Upon surrender, the holder shall receive the amount of any
dividends or other distributions (without interest) that were payable with
respect to a record date after the Exchange Date, but that were not paid by
reason of the foregoing with respect to the number of Rollover Shares or
Exchange Shares, as the case may be, represented by the certificate or
certificates issued upon such surrender. From and after an Exchange Date
applicable to Consumer Services Group Common Stock, the corporation shall,
however, be entitled to treat certificates for Consumer Services Group Common
Stock that have not yet been surrendered for exchange as evidencing the
ownership of the number of Rollover Shares or Exchange Shares for which the
shares of Consumer Services Group
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Common Stock represented by such certificates have been exchanged,
notwithstanding the failure to surrender such certificates.
(f) If any certificate for Rollover Shares or Exchange Shares, as the case
may be, is to be issued in a name other than that in which the certificate
representing shares of Consumer Services Group Common Stock surrendered in
exchange therefor is registered, it shall be a condition of such issuance that
the person requesting the issuance pays any transfer or other taxes required by
reason of the issuance of certificates for such Rollover Shares or Exchange
Shares, as the case may be, in a name other than that of the record holder of
the certificate surrendered, or establishes, to the satisfaction of the
corporation or its agent, that such tax has been paid or is not applicable.
Under no circumstances shall the corporation be liable to a holder of shares of
Consumer Services Group Common Stock for any Rollover Shares or Exchange Shares
or dividends or distributions thereon delivered to a public official pursuant to
any applicable abandoned property, escheat or similar law.
(g) At the time an Exchange Notice is delivered with respect to any shares
of Consumer Services Group Common Stock, or at the time of the Exchange Date, if
earlier, the corporation shall have reserved and kept available, solely for the
purpose of issuance upon exchange of the outstanding shares of Consumer Services
Group Common Stock, such number of Exchange Shares as shall be issuable upon the
exchange of the number of shares of Consumer Services Group Common Stock
specified or to be specified in the applicable Exchange Notice, provided that
the corporation shall not under any circumstances be precluded from satisfying
its obligation in respect of the exchange of the outstanding shares of Consumer
Services Group Common Stock by delivery of purchased Exchange Shares that are
held in the treasury of the corporation.
6. LIQUIDATION
In the event of a liquidation, dissolution or winding up of the
corporation, whether voluntary or involuntary, after payment or provision for
payment of the debts and other liabilities of the corporation and subject to the
prior payment in full of the preferential amounts to which any class or series
of Preferred Stock is entitled, (a) the holders of the shares of Common Stock
shall share in the aggregate, on a share for share basis, in a percentage of the
funds of the corporation remaining for distribution to its common shareholders
equal to 100% multiplied by the average daily ratio (expressed as a decimal) of
X/Z for the 20-Trading Day period ending on the Trading Day prior to the date of
the public announcement of such liquidation, dissolution or winding up, (b) the
holders of the shares of Consumer Services Group Common Stock shall share in the
aggregate in a percentage of the funds of the corporation remaining for
distribution to its common shareholders equal to 100% multiplied by the average
daily ratio (expressed as a decimal) of C/Z for such 20-Trading Day period, and
(c) if applicable, the holders of the shares of any other class of common shares
of the corporation (other than Common Stock and Consumer Services Group Common
Stock), on the basis that may be set forth in this Certificate with respect to
any such shares, shall share in the aggregate in a percentage of the funds of
the corporation remaining for distribution to its common shareholders equal to
100% multiplied by the average daily ratio (expressed as a decimal) of Y/Z for
such 20-Trading Day period, where X is the aggregate Market Capitalization of
the Common Stock, C is the aggregate Market Capitalization of Consumer Services
Group Common Stock, Y is the aggregate Market Capitalization, if applicable, of
any other class of common shares (other than Common Stock and Consumer Services
Group Common Stock), and Z is the aggregate Market Capitalization of (i) the
Common Stock, (ii) the Consumer Services Group Common Stock, and (iii) any other
class of common shares of the corporation (other than Common Stock and Consumer
Services Group Common Stock). Neither the consolidation or merger of the
corporation with or into any other corporation or corporations nor the sale,
transfer or lease of all or substantially all of the assets of the corporation
shall itself be deemed to be a liquidation, dissolution or winding up of the
corporation within the meaning of this paragraph 6 of this Part B of this
Article Third. Notwithstanding the foregoing, any transaction or series of
related transactions that results in all of the assets and liabilities included
in the Consumer Services Group being held by one or more Consumer Services Group
Subsidiaries, and the
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distribution of some or all of the shares of such Consumer Services Group
Subsidiaries (and no other material assets or liabilities) to the holders of the
outstanding Consumer Services Group Common Stock shall not constitute a
voluntary or involuntary liquidation, dissolution or winding up of the
corporation for purposes of this paragraph 6 of this Part E of this Article
Third, but shall be subject to paragraph 4 of this Part B of this Article Third.
7. DETERMINATIONS BY THE BOARD OF DIRECTORS
Any determinations made by the Board of Directors under any provision of
this Part B of this Article Third shall be final and binding on all shareholders
of the corporation, except as may otherwise be required by law. The corporation
shall prepare a statement of any determination by the Board of Directors,
respecting the fair market value of any properties, assets or securities, and
shall file such statement with the Secretary of the corporation. Without
limiting the generality of the foregoing, each holder of shares of Common Stock
and/or shares of Consumer Services Group Common Stock, by acquiring or holding
either such security, shall be deemed to acknowledge and agree to the maximum
extent permitted by law, that (a) the terms of the Consumer Services Group
Common Stock grant to the Board of Directors 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,
including without limitation a Rollover Transaction, a Board Required Exchange
(whether for Common Stock or stock of the specified other entities) or a
Significant Transaction Exchange (whether for Common Stock or other
consideration), (b) that the selection of an alternative, if any, shall be a
matter solely within the discretion of the Board of Directors and that the Board
of Directors has no duty to select the alternative that will result in the best
economic treatment for holders of either the Consumer Services Group Common
Stock or the Common Stock, and (c) that no holder of any shares of Consumer
Services Group Common Stock or Common Stock will have any claim based on which
alternative the Board of Directors may elect, even if the holders of the classes
of stock are not treated equally.
8. ADJUSTMENT OF THE CONSUMER SERVICES GROUP ALLOCATION FRACTION
(a) The denominator of the Consumer Services Group Allocation Fraction
shall be adjusted from time to time as deemed appropriate by the Board of
Directors (i) to reflect subdivisions (by stock split or otherwise) and
combinations (by reverse stock split or otherwise) of Consumer Services Group
Common Stock and stock dividends payable in shares of Consumer Services Group
Common Stock, (ii) to reflect the fair market value of contributions or
allocations by the corporation of cash or property or other assets or
liabilities from the Common Stock Group to the Consumer Services Group (or vice
versa), or of cash or property or other assets or liabilities of the Common
Stock Group to, or for the benefit of, employees of the Consumer Services Group
in connection with employee benefit plans or arrangements of the corporation or
any of its subsidiaries (or vice versa), (iii) to reflect the number of shares
of capital stock of the corporation contributed to, or for the benefit of,
employees of the Consumer Services Group in connection with benefit plans or
arrangements of the corporation or any of its Subsidiaries, (iv) to reflect
repurchases by the corporation of shares of Consumer Services Group Common Stock
for the account of the Consumer Services Group, (v) to reflect issuances of
Consumer Services Group Common Stock for the account of the Consumer Services
Group, (vi) to reflect dividends or other distributions to holders of the
Consumer Services Group Common Stock to the extent no payment is made to the
Common Stock Group, and (vii) under such other circumstances as the Board of
Directors determines appropriate to reflect the economic substance of any other
event or circumstance, provided that, in each case, the adjustment shall be made
in a manner that is fair and equitable to holders of Common Stock and Consumer
Services Group Common Stock. Any adjustment made by the Board of Directors
pursuant to the preceding sentence shall, subject to the foregoing, be at the
sole discretion of the Board of Directors, and all such determinations shall be
final and binding on all shareholders of the corporation. For purposes of this
paragraph 8 of this Part B of this Article Third, the consideration paid by the
Common Stock Group to acquire any assets or other property or contributed or
allocated to the Consumer Services Group shall be presumed to be the "fair
market value" as of its acquisition.
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(b) Without duplication of any adjustment pursuant to paragraph 8(a) of
this Part B of this Article Third, in the event that the corporation shall issue
shares of Consumer Services Group Common Stock for the account of the Consumer
Services Group, then the denominator of the Consumer Services Group Allocation
Fraction shall be increased by the number of shares of Consumer Services Group
Common Stock so issued.
(c) Without duplication of any adjustment pursuant to paragraph 8(a) of
this Part B of this Article Third, if, in connection with any share issuance
described in paragraph 8(b) of this Part B of this Article Third, or otherwise,
the corporation contributes or allocates cash or other property or assets from
the Common Stock Group to the Consumer Services Group, the denominator of the
Consumer Services Group Allocation Fraction shall be increased (or further
increased) by an amount obtained by dividing (i) the fair market value of such
cash, property or assets (as determined by the Board of Directors) by (ii) the
net per share offering price of the Consumer Services Group Common Stock.
9. CERTAIN DEFINITIONS.
Unless the context otherwise requires, the terms defined in this paragraph
9 of this Part E of this Article Third shall have, for all purposes of this Part
B of this Article Third, the meanings herein specified:
"Broadband Separation" shall mean the distribution of one or more
entities holding all or substantially all of the assets of the
corporation's broadband business to security holders of the corporation.
"Common Stock Group" shall mean, as of any date, the interest of the
corporation in all of the businesses in which the corporation is or has
been engaged, directly or indirectly (either itself or through direct or
indirect subsidiaries, affiliates, joint ventures or other investments or
any of their predecessors or successors), and the respective assets and
liabilities of the corporation therein, other than the Consumer Services
Group Allocated Portion of the Consumer Services Group.
"Consumer Services Group" shall mean, as of any date that any shares
of Consumer Services Group Common Stock have been issued and continue to be
outstanding, without duplication, the direct or indirect interest of the
corporation (either itself or through direct or indirect subsidiaries,
affiliates, joint ventures or other investments, or any of their
predecessors or successors) (a) in all of the businesses, assets and
liabilities reflected in the financial statements of the Consumer Services
Group dated December 31, 2001, publicly filed by the corporation, including
any successor to the Consumer Services Group by merger, consolidation or
sale of all or substantially all of its assets (whether or not in
connection with a Consumer Services Group Related Business Transaction),
(b) (x) the other assets and liabilities (contingent or otherwise) of the
corporation and its Subsidiaries primarily related to the businesses,
assets and liabilities described in clause (a) and all net income and net
losses arising in respect thereof after such date and (y) a percentage of
the other contingent liabilities of the corporation that do not primarily
relate to the business, assets and liabilities of either the Common Stock
Group or the Consumer Services Group (such percentage to be determined by
the Board of Directors of the corporation in its sole discretion prior to
the initial issuance of any shares of Consumer Services Group Common Stock
and which such percentage may differ in the case of different categories of
contingent liabilities), (c) all assets, liabilities and businesses
acquired by the Consumer Services Group or acquired by the corporation or
any of its Subsidiaries for the account of, or contributed, allocated or
otherwise transferred to, the Consumer Services Group (including the net
proceeds of any new issuance for the account of the Consumer Services Group
of any new shares of Consumer Services Group Common Stock or Convertible
Securities), in each case, after the date of such financial statements and
as determined by the Board of Directors in accordance with the provisions
of paragraphs 7 and 8 of this Part B of this Article Third, and (d) the
proceeds of any Disposition of any of the foregoing; provided, however,
that the Consumer Services Group shall not include (a) any assets,
liabilities or businesses disposed
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of after the date of such financial statements or (b) any assets,
liabilities or businesses allocated to the Common Stock Group or otherwise
distributed or otherwise transferred from the Consumer Services Group,
whether to the Common Stock Group, to holders of shares of Consumer
Services Group Common Stock or otherwise, in each case after the date of
such financial statements and as determined by the Board of Directors in
accordance with the provisions of paragraphs 7 and 8 of this Part B of this
Article Third.
"Consumer Services Group Allocated Portion" shall mean, with respect
to the Consumer Services Group as a whole, or any dividend, distribution,
payment, consideration or other amount or allocation requiring
apportionment between the holders of Consumer Services Group Common Stock
(other than the corporation and its Subsidiaries), on the one hand, and the
Common Stock Group, on the other hand, the following: (a) in the case of
the Consumer Services Group as a whole, the proportion of such Group
represented by the Consumer Services Group Allocation Fraction, and (b) in
the case of any other amount or allocation, the product of (i) such amount
or allocation and (ii) the Consumer Services Group Allocation Fraction.
"Consumer Services Group Allocation Fraction" shall mean, as of any
date of determination, a fraction, the numerator of which shall be the
number of shares of Consumer Services Group Common Stock outstanding on
such date and the denominator of which shall be a number initially
determined by the Board of Directors, in its sole discretion, prior to the
date of the initial issuance of any shares of Consumer Services Group
Common Stock, subject to adjustment from time to time as described in
paragraph 8 of this Part B of this Article Third, provided that such
fraction shall in no event be greater than one. If the holders of any
securities of the corporation or any other Person that are convertible into
or exercisable or exchangeable for shares of Consumer Services Group Common
Stock are entitled to participate in any dividend or other distribution
with respect to the Consumer Services Group Common Stock, such shares so
issuable upon such conversion, exercise or exchange shall be taken into
account in calculating the Consumer Services Group Allocation Fraction and
any amount payable to the Common Stock Group in such manner as the Board of
Directors determines to be appropriate.
"Consumer Services Group Available Dividend Amount" shall mean, as of
any date, the Consumer Services Group Allocated Portion of the excess of
(a) the amount by which the total assets of the Consumer Services Group
exceed the total liabilities of the Consumer Services Group as of such date
over (b) the sum of (i) the par value of all issued shares of Consumer
Services Group Common Stock and each class or series of Preferred Stock
attributed to the Consumer Services Group, (ii) the amount of the
consideration received for any shares of Preferred Stock attributed to the
Consumer Services Group without par value that have been issued, except
such part of the consideration therefor as may have been allocated to
surplus in a manner permitted by law, and (iii) any amount not included in
subclauses (i) and (ii) above that the corporation (by appropriate action
of the Board of Directors) has transferred to stated capital specifically
in respect of Consumer Services Group Common Stock, minus (c) all
reductions from such sums set forth in clauses (i), (ii) and (iii) above as
have been effected in a manner permitted by law; provided, however, that,
in the event that the law governing the corporation changes from that
governing the corporation on the date the adoption of the Amendment to this
Certificate pursuant to which the Consumer Services Group Common Stock was
authorized (whether because of amendment of the applicable law or because
of a change in the jurisdiction of incorporation of the corporation through
merger or otherwise), the Consumer Services Group Available Dividend Amount
shall mean the amount of dividends, as determined by the Board of
Directors, that could be paid by a corporation (governed under such
applicable law) having the assets and liabilities of the Consumer Services
Group, an amount of outstanding common stock (and having an aggregate par
value) equal to the amount (and aggregate par value) of the outstanding
Consumer Services Group Common Stock and of each class or series of
Preferred Stock attributed to the Consumer Services Group and having an
amount of earnings or loss or other relevant corporate attributes as
reasonably determined by the Board of Directors in light of all factors
deemed relevant by the Board of Directors.
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"Consumer Services Group Net Proceeds" shall mean, as of any date,
with respect to any Disposition of any of the properties and assets of the
Consumer Services Group, an amount, if any, equal to the Consumer Services
Group Allocated Portion of the gross proceeds of such Disposition after any
payment of, or reasonable provision for, (a) any taxes payable by the
corporation or any other member of the Common Stock Group in respect of
such Disposition or in respect of any mandatory dividend or redemption
resulting from such Disposition (or that would have been payable but for
the utilization of tax benefits attributable to the Common Stock Group),
(b) any transaction costs borne by the Common Stock Group in connection
with such Disposition, including, without limitation, any legal, investment
banking and accounting fees and expenses borne by the Common Stock Group in
connection with such Disposition, (c) any liabilities and other obligations
(contingent or otherwise) of the Consumer Services Group borne by the
Common Stock Group in connection with such Disposition, including, without
limitation, any indemnity or guarantee obligations incurred by the Common
Stock Group in connection with the Disposition or any liabilities assumed
by the Common Stock Group for future purchase price adjustments, and (d)
any preferential amounts, accumulated and unpaid dividends and other
obligations in respect of Preferred Stock attributed to the Consumer
Services Group. To the extent the proceeds of any Disposition include any
securities or other property other than cash, the Board of Directors shall
determine the value of such securities or property; provided that the value
of any marketable securities included in such proceeds shall be the average
of the daily Market Value of such securities for the 10 consecutive Trading
Days beginning on the 15th Trading Day following consummation of the
Disposition.
"Consumer Services Group Related Business Transaction" shall mean any
Disposition of all or substantially all the properties and assets
attributed to the Consumer Services Group in a transaction or series of
related transactions that results in the corporation or one or more of its
Subsidiaries receiving in consideration of such properties and assets
primarily equity securities (including, without limitation, capital stock,
debt securities convertible into or exchangeable for equity securities or
interests in a general or limited partnership or limited liability company,
without regard to the voting power or other management or governance rights
associated therewith) of any entity that (a) acquires such properties or
assets or succeeds (by merger, formation of a joint venture or otherwise)
to the business conducted with such properties or assets or controls such
acquiror or successor, and (b) which the Board of Directors determines is
primarily engaged or proposes to engage primarily in one or more businesses
similar or complementary to the businesses conducted by the Consumer
Services Group prior to such Disposition.
"Convertible Securities" shall mean any securities of the corporation
or any Subsidiary of the corporation that are convertible into,
exchangeable for or evidence the right to purchase any shares of Common
Stock, Consumer Services Group Common Stock, whether upon conversion,
exercise or exchange, or pursuant to anti-dilution provisions of such
securities or otherwise.
"Disposition" shall mean the sale, transfer, assignment or other
disposition (whether by merger, consolidation, sale or contribution of
assets or stock, or otherwise) by the corporation (or its successors) or
any of its Subsidiaries or properties or assets. Disposition shall not
include a merger, consolidation, exchange of shares or other business
combination transaction involving the corporation in which the corporation
(or its successors) continues, immediately following such transaction, to
hold the same, direct and indirect, interest in the business, assets and
liabilities comprising the Consumer Services Group that it held immediately
prior to such transaction (other than as a result of any action by any
Person included in the Consumer Services Group).
"Fair Value" shall mean, in the case of equity securities or debt
securities of a class that has previously been publicly traded for a period
of at least three months, the Market Value thereof (if such Market Value,
as so defined, can be determined) or, in the case of an equity security or
debt security that has not been publicly traded for at least such period,
means the fair value per share of stock or per other unit of such other
security, on a fully distributed basis, as determined by an independent
investment banking firm experienced in the valuation of securities selected
in good faith
L-14
by the Board of Directors; provided, however, that, in the case of property
other than securities, the "Fair Value" thereof shall be determined in good
faith by the Board of Directors based upon such appraisals or valuation
reports of such independent experts as the Board of Directors shall in good
faith determine to be appropriate in accordance with good business
practice. Any such determination of Fair Value shall be described in a
statement filed with the records of the actions of the Board of Directors.
"Group" shall mean the Common Stock Group or the Consumer Services
Group.
"Market Capitalization" of any class or series of capital stock of the
corporation on any Trading Day shall mean the product of (a) the Market
Value of one share of such class or series on such Trading Day and (b) the
number of shares of such class or series outstanding on such Trading Day.
"Market Value" of any class or series of capital stock of the
corporation on any day shall mean the average of the high and low reported
sales prices regular way of a share of such class or series on such day (if
such day is a Trading Day, and, if such day is not a Trading Day, on the
Trading Day immediately preceding such day), or, in case no such reported
sale takes place on such Trading Day, the average of the reported closing
bid and asked prices regular way of a share of such class or series on such
Trading Day, in either case, on the New York Stock Exchange or, if the
shares of such class or series are not quoted on the New York Stock
Exchange on such Trading Day, on the Nasdaq National Market, or, if the
shares of such class or series are not quoted on the Nasdaq National Market
on such Trading Day, the average of the closing bid and asked prices of a
share of such class or series in the over-the-counter market on such
Trading Day as furnished by any New York Stock Exchange member firm
selected from time to time by the corporation, or, if such closing bid and
asked prices are not made available by any such New York Stock Exchange
member firm on such Trading Day (including, without limitation, because
such securities are not publicly held), the market value of a share of such
class or series as determined by the Board of Directors; provided that, for
purposes of determining the ratios set forth in paragraph 6 of this Part B
of this Article Third, (a) the "Market Value" of any share of Common Stock
or Consumer Services Group Common Stock on any day prior to the "ex" date
or any similar date for any dividend or distribution paid or to be paid
with respect to Common Stock or Consumer Services Group Common Stock, as
applicable, shall be reduced by the fair market value of the per share
amount of such dividend or distribution as determined by the Board of
Directors, and (b) the "Market Value" of any share of Common Stock or any
share of Consumer Services Group Common Stock on any day prior to (i) the
effective date of any subdivision (by stock split or otherwise) or
combination (by reverse stock split or otherwise) of outstanding shares of
Common Stock or Consumer Services Group Common Stock, as applicable, or
(ii) the "ex" date or any similar date for any dividend or distribution
with respect to the Common Stock or Consumer Services Group Common Stock in
shares of Common Stock or Consumer Services Group Common Stock, as
applicable, shall be appropriately adjusted to reflect such subdivision,
combination, dividend or distribution.
"Person" shall mean any individual, corporation, partnership, limited
liability company, joint venture, association, joint stock company, trust,
unincorporated organization, government or agency or political subdivision
thereof, or other entity, whether acting in an individual, fiduciary or
other capacity.
"Qualifying Subsidiary" of a Person shall mean a Subsidiary of such
Person in which such Person's ownership and voting interest is sufficient
to satisfy the ownership and voting requirements of the Internal Revenue
Code of 1986, as amended, and the regulations thereunder, for a
distribution of such Person's interest in such Subsidiary to the holders of
Consumer Services Group Common Stock and, in the event that the Consumer
Services Group Allocation Fraction is less than one, the holders of Common
Stock (or any such securities into which the Consumer Services Group Common
Stock or the Common Stock may have been converted, reclassified or changed
or for which they may have been exchanged), as the case may be, to be tax
free to such holders.
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"Subsidiary" shall mean, with respect to any Person, any corporation,
limited liability company or partnership 50% or more of whose outstanding
voting securities or membership or partnership interests, as the case may
be, are, directly or indirectly, owned by such Person.
"Trading Day" shall mean each weekday other than any day on which any
relevant class or series of capital stock of the corporation is not
available for trading on the New York Stock Exchange or the Nasdaq National
Market or in the over-the-counter market.
10. CERTAIN TRANSACTIONS INVOLVING THE CORPORATION AS A WHOLE.
Notwithstanding anything to the contrary, in the event of a Disposition of
all or substantially all of the properties and assets of the corporation to an
entity not directly controlled by the corporation or shareholders of the
corporation, the provisions of paragraph 4(b) of this Part B of this Article
Third shall not apply if, as part of such Disposition, each share of Consumer
Services Group Common Stock is entitled to receive the same consideration (both
in type and amount) as such share of Consumer Services Group Common Stock would
have received had it been exchanged for Common Stock.
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ANNEX M
FORM OF BY-LAW AMENDMENT
[NOTE: THE AT&T GROUPS CAPITAL STOCK COMMITTEE BY-LAW WILL REPLACE THE LAST TWO
PARAGRAPHS OF THE BY-LAW PROVISION ESTABLISHING STANDING COMMITTEES SUCH AS THE
AUDIT COMMITTEE AND THE COMPENSATION COMMITTEE. THESE PARAGRAPHS CURRENTLY
RELATE TO THE LIBERTY MEDIA GROUP CAPITAL STOCK COMMITTEE AND THE AT&T WIRELESS
GROUP CAPITAL STOCK COMMITTEE.]
AT&T Groups Capital Stock Committee. The Board of Directors shall form an
AT&T Groups Capital Stock Committee, the members of which shall be selected by
the Board of Directors of the company. The Board of Directors of the company
shall delegate to the AT&T Groups Capital Stock Committee the authority to, and
the AT&T Groups Capital Stock Committee will have the authority to, (i)
interpret, make determinations under, and oversee the implementation of the
policies set forth in the Policy Statement Regarding AT&T Groups Tracking Stock
Matters; (ii) review the policies, programs and practices of the company
relating to (a) the business and financial relationships between the company or
any of its units and AT&T Consumer Services Group, and (b) any matters arising
in connection therewith, all to the extent the AT&T Groups Capital Stock
Committee may deem appropriate; and (iii) recommend such changes in such
policies, programs and practices as the AT&T Groups Capital Stock Committee may
deem appropriate. In performing this function, the AT&T Groups Capital Stock
Committee's role shall not be to make decisions concerning matters referred to
its attention, but, rather, to oversee the process by which decisions concerning
such matters are made. The AT&T Groups Capital Stock Committee shall have and
may exercise such other powers, authority and responsibilities as may be
determined from time to time by the Board of Directors of the company.
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ANNEX N
AT&T CORP.
BOARD OF DIRECTORS
POLICY STATEMENT REGARDING
AT&T GROUPS TRACKING STOCK MATTERS
1. GENERAL POLICY.
It is the policy of the Board of Directors (the "Board") of AT&T Corp.
("AT&T") that:
(a) all material matters as to which the holders of the Common Stock
and the holders and/or Consumer Services Group Common Stock may have
potentially divergent interests shall be resolved in a manner that the
Board (or the Groups Capital Stock Committee) determines to be in the best
interests of AT&T and all of its common shareholders as a whole, after
giving fair consideration to the potentially divergent interests and all
other relevant interests of the holders of the separate classes of common
stock of AT&T; and
(b) a process of fair dealing will govern the relationship between the
Common Stock Group and the Consumer Services Group and the means by which
the terms of any material transaction between them will be determined.
2. RELATIONSHIP BETWEEN THE GROUPS.
AT&T will seek to manage the AT&T Groups in a manner that maximizes the
operational performance and value of all Groups taken as a whole even though in
certain circumstances actions could disproportionately impact an individual
Group; provided, however, that such disproportionate actions will not, in the
aggregate, have an adverse material impact on the results of operations or
financial position of either Group.
(a) General. Subject to special arrangements or existing commercial
arrangements in effect at the time this policy statement is adopted (and
renewals or extensions thereof), except as otherwise provided in this policy
statement, all material commercial transactions between the Common Stock Group
and the Consumer Services Group will be on commercially reasonable terms taken
as a whole and will be subject to the review and approval of the Groups Capital
Stock Committee.
(b) Inter-group Borrowing. The Groups may make loans to each other on
terms and conditions substantially equivalent to the interest rates and terms
and conditions that the groups would be able to obtain from third parties
without the benefit of support or guarantee by AT&T.
(c) Allocation of Corporate Overhead and Support Services. With respect to
shared corporate services that arise as a result of being part of a combined
entity (e.g., securities filing and financial reporting services), costs
relating to such services will be directly attributed to the Group utilizing
such services, and to the extent such costs are not directly attributable,
allocated between the Groups on a fair and reasonable basis as determined by the
Board. With respect to other support services, the Groups will seek to achieve
enterprise efficiencies to reduce the aggregate costs incurred by the Groups on
a combined basis.
(d) No Inter-Group Interest in Common Stock Group. The Consumer Services
Group shall not acquire an Inter-Group Interest in the Common Stock Group.
3. CORPORATE OPPORTUNITIES.
The Board will allocate any business opportunities and operations, any
acquired assets and businesses and any assumed liabilities between the Groups,
in whole or in part, as it considers to be in the best interests of AT&T and its
shareholders as a whole and as contemplated by the provisions of these policies.
To the extent a business opportunity or operation, an acquired asset or
business, or an assumed liability
N-1
would be suitable to be undertaken by or allocated to more than one Group, it
will be allocated by the Board in its business judgment or in accordance with
procedures adopted by the Board from time to time to ensure that decisions will
be made in the best interests of AT&T and its shareholders as a whole. Any such
allocation may involve the consideration of a number of factors that the Board
determines to be relevant, including, without limitation, whether the business
opportunity or operation, the acquired asset or business, or the assumed
liability is principally within the existing scope of a Group's business and
whether a Group is better positioned to undertake or have allocated to it such
business opportunity or operation, acquired assets or business or assumed
liability.
4. DIVIDEND POLICY.
Subject to the limitations set forth in the Charter, including any
preferential rights of any series of preferred stock of AT&T, and to the
limitations of applicable law, holders of shares of Common Stock and/or Consumer
Services Group Common Stock will be entitled to receive dividends on such stock
when, as and if authorized and declared by the Board. The payment of dividends
on the Common Stock will be a business decision to be made by the Board from
time to time based upon the results of operations, financial condition, capital
requirements and future prospects of AT&T and such other factors as the Board
considers relevant. Payment of dividends on the Common Stock may be restricted
by loan agreements, indentures and other transactions entered into by AT&T from
time to time.
With respect to the Consumer Services Group Common Stock, it is currently
expected that one-third of the current regular dividend payable on the Common
Stock will be allocated to the Common Stock and that two-thirds of that dividend
will be allocated to the Consumer Services Group Common Stock. The declaration
of dividends by AT&T and the amount thereof will, however, be in the discretion
of the Board and will depend upon each of our groups' financial performance, the
dividend policies and capital structures of comparable companies and each
group's ongoing capital needs. If and when the Board does determine to pay any
dividends on shares of Consumer Services Group Common Stock, any such
determination will also be subject to factors similar to those described above
with respect to the payment of dividends on the Common Stock.
5. AT&T GROUPS CAPITAL STOCK COMMITTEE.
AT&T's by-laws will provide for a standing committee of the Board to be
known as the AT&T Groups Capital Stock Committee. The Groups Capital Stock
Committee will have and exercise such powers, authority and responsibilities as
the Board may delegate to such Committee, which will initially include authority
to (a) interpret, make determinations under, and oversee the implementation of
these policies, other than as they relate to dividends, with respect to which
all determinations will be made solely by the Board, (b) adopt additional
general policies governing the relationship between the Groups, and (c) engage
the services of accountants, investment bankers, appraisers, attorneys and other
service providers to assist it in discharging its duties. In making
determinations in connection with these policies, the members of the Board and
the AT&T Groups Capital Stock Committee will act in a fiduciary capacity and
pursuant to legal guidance concerning their respective obligations under
applicable law. The delegation of responsibilities to the AT&T Groups Capital
Stock Committee will be subject to such changes as may be determined by the
Board.
6. DEFINITIONS.
Capitalized terms not defined in this policy statement shall have the
meanings set forth in the Charter. References throughout this policy statement
to "ARTICLES," set in all capital letters, are references to ARTICLES in the
Charter.
6.1 Charter.
"Charter" means the Restated Certificate of Incorporation of AT&T, as
amended from time to time.
N-2
6.2 Common Stock.
"Common Stock" means the Common Stock as defined in Part A of ARTICLE
THIRD of the Charter.
6.3 Common Stock Group.
"Common Stock Group" means the Common Stock Group as defined in Part B
of ARTICLE THIRD of the Charter.
6.4 Consumer Services Group.
"Consumer Services Group" means the Consumer Services Group as defined
in Part B of ARTICLE THIRD of the Charter.
6.5 Consumer Services Group Common Stock.
"Consumer Services Group Common Stock" means the Consumer Services
Group Common Stock as defined in Part A of ARTICLE THIRD of the Charter.
7. AMENDMENT AND MODIFICATION OF THESE POLICIES.
These policies and any resolution implementing the provisions hereof may at
any time and from time to time be amended, modified or rescinded by the Board,
and the Board may adopt additional or other policies or make exceptions with
respect to the application of these policies in connection with particular facts
and circumstances, all as the Board may determine, consistent with its fiduciary
duties to AT&T and all of its common shareholders as a whole.
N-3
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Indemnification under Pennsylvania Law and AT&T Comcast Charter and
Bylaws. Sections 1741 through 1750 of Subchapter D, Chapter 17, of the
Pennsylvania Business Corporation Law ("PBCL") contain provisions for mandatory
and discretionary indemnification of a corporation's directors, officers and
other personnel, and related matters.
Under Section 1741 of the PBCL, subject to certain limitations, a
corporation has the power to indemnify directors and officers under certain
prescribed circumstances against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
in connection with an action or proceeding, whether civil, criminal,
administrative or investigative (other than derivative actions), to which any
such officer or director is a party or is threatened to be made a party by
reason of such person being a representative of the corporation or serving at
the request of the corporation as a representative of another domestic or
foreign corporation for profit or not-for-profit, partnership, joint venture,
trust or other enterprise, so long as the director or officer acted in good
faith and in a manner reasonably believed to be in, or not opposed to, the best
interests of the corporation and, with respect to any criminal proceeding, such
officer or director had no reasonable cause to believe his/her conduct was
unlawful.
Section 1742 of the PBCL permits indemnification in derivative and
corporate actions if the appropriate standard of conduct is met, except in
respect of any claim, issue or matter as to which the person has been adjudged
to be liable to the corporation unless and only to the extent that the proper
court determines upon application that, despite the adjudication of liability
but in view of all the circumstances of the case, the person is fairly and
reasonably entitled to indemnity for the expenses that the court deems proper.
Under Section 1743 of the PBCL, indemnification is mandatory to the extent
that the officer or director has been successful on the merits or otherwise in
defense of any action or proceeding referred to in Section 1741 or 1742 of the
PBCL.
Section 1744 of the PBCL provides that, unless ordered by a court, any
indemnification under Section 1741 or 1742 of the PBCL shall be made by the
corporation only as authorized in the specific case upon a determination that
the representative met the applicable standard of conduct, and such
determination will be made by (i) the board of directors by a majority vote of a
quorum of directors not parties to the action or proceeding, (ii) if a quorum is
not obtainable, or if obtainable and a majority of disinterested directors so
directs, by independent legal counsel in a written opinion, or (iii) by the
shareholders.
Section 1745 of the PBCL provides that expenses (including attorneys' fees)
incurred by an officer, director, employee or agent in defending any action or
proceeding referred to in Subchapter D of Chapter 17 of the PBCL may be paid by
the corporation in advance of the final disposition of such action or proceeding
upon receipt of an undertaking by or on behalf of such person to repay such
amount if it shall ultimately be determined that he is not entitled to be
indemnified by the corporation. Except as otherwise provided in the
corporation's bylaws, advancement of expenses must be authorized by the board of
directors.
Section 1746 of the PBCL provides generally that the indemnification and
advancement of expenses provided by Subchapter D of Chapter 17 of the PBCL shall
not be deemed exclusive of any other rights to which a person seeking
indemnification or advancement of expenses may be entitled under any bylaw,
agreement, vote of shareholders or disinterested directors or otherwise, both as
to action in his official capacity and as to action in another capacity while
holding that office. In no event may indemnification be made in any case where
the act or failure to act giving rise to the claim for indemnification is
determined by a court to have constituted willful misconduct or recklessness.
II-1
Section 1747 of the PBCL grants a corporation the power to purchase and
maintain insurance on behalf of any director or officer against any liability
incurred by him in his capacity as officer or director, whether or not the
corporation would have the power to indemnify him against that liability under
Subchapter D of Chapter 17 of the PBCL.
Sections 1748 and 1749 of the PBCL extend the indemnification and
advancement of expenses provisions contained in Subchapter D of Chapter 17 of
the PBCL to successor corporations in fundamental changes and to representatives
serving as fiduciaries of employee benefit plans.
Section 1750 of the PBCL provides that the indemnification and advancement
of expenses provided by, or granted pursuant to, Subchapter D of Chapter 17 of
the PBCL shall, unless otherwise provided when authorized or ratified, continue
as to a person who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of the heirs and personal representatives of such
person.
Upon completion of the transactions described in the joint proxy
statement/prospectus included in this registration statement, Article Eleventh
of the AT&T Comcast charter and Article VII of the AT&T Comcast bylaws will
provide that no director of AT&T Comcast will be personally liable, as such, for
monetary damages (other than under criminal statutes and under laws imposing
such liability on directors or officers for the payment of taxes) unless such
person's conduct constitutes self-dealing, wilful misconduct or recklessness.
Article Eleventh of the AT&T Comcast charter will also extend such protection to
officers.
In addition, upon completion of the transactions described in the joint
proxy statement/prospectus included in this registration statement, Article VII
of the AT&T Comcast bylaws will provide that each officer and director of AT&T
Comcast will be indemnified and held harmless by AT&T Comcast for all actions
taken by him or her and for all failures to take action (regardless of the date
of any such action or failure to take action) to the fullest extent permitted by
Pennsylvania law against all expense, liability and loss (including, without
limitation, attorneys' fees, judgements, fines, taxes, penalties and amounts
paid or to be paid in settlement) reasonably incurred or suffered by such
officer or director in connection with any threatened, pending or completed
action, suit or proceeding (including, without limitation, an action, suit or
proceeding by or in the right of AT&T Comcast), whether civil, criminal,
administrative or investigative.
The foregoing statements are subject to the detailed provisions of the PBCL
and to the applicable provisions of the AT&T Comcast charter and bylaws that
will be in effect upon completion of the transactions described in the joint
proxy statement/prospectus included in this registration statement.
Merger Agreement Provision Relating To AT&T and Comcast Directors and
Officers. AT&T Comcast has agreed in the merger agreement 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
transactions described in the joint proxy statement/prospectus included in this
registration statement becomes such an officer or director, from their acts or
omissions in those capacities occurring at or prior to the completion of such
transactions to the maximum extent permitted by law; provided, however, no such
indemnification will be required for officers or directors acting in a capacity
for AT&T and its subsidiaries other than in connection with either AT&T's
broadband business or the merger agreement and the transactions contemplated by
the merger agreement.
AT&T (and not AT&T Broadband) will indemnify and hold harmless AT&T Comcast
for 50% of any losses described in the preceding paragraph arising out of acts
or omissions of the AT&T officers and directors in connection with the merger
agreement and the transactions contemplated by the merger agreement.
For six years after completion of the transactions described in the joint
proxy statement/prospectus included in this registration statement, AT&T Comcast
will provide officers' and directors' liability insurance in respect of acts or
omissions occurring prior to completion of the such transactions covering each
officer and director identified in the second preceding paragraph (for officers
and directors of AT&T
II-2
and its subsidiaries, only for acts or omissions of such person acting in
connection with either AT&T's broadband business or the merger agreement 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.
ITEM 21. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 Agreement and Plan of Merger dated as of December 19, 2001,
as amended, among AT&T Corp., AT&T Broadband Corp., Comcast
Corporation, AT&T Broadband Acquisition Corp., Comcast
Acquisition Corp. and AT&T Comcast Corporation (included as
Annex A to the joint proxy statement/prospectus contained in
this registration statement and incorporated herein by
reference).
2.2 Separation and Distribution Agreement dated as of December
19, 2001, as amended, between AT&T Corp. and AT&T Broadband
Corp. (included as Annex B to the joint proxy statement/
prospectus contained in this registration statement and
incorporated herein by reference).
2.3 Support Agreement dated as of December 19, 2001, as amended,
AT&T Corp., Comcast Corporation, AT&T Comcast Corporation,
Sural LLC and Brian L. Roberts.
2.4* Tax Sharing Agreement dated as of December 19, 2001 between
AT&T Corp. and AT&T Broadband Corp.
2.5** Employee Benefits Agreement dated as of December 19, 2001
between AT&T Corp. and AT&T Broadband Corp.
2.6* Exchange Agreement dated as of December 7, 2001, as amended,
between Microsoft Corporation and Comcast Corporation.
2.7* Instrument of Admission dated as of December 19, 2001, as
amended, between AT&T Comcast Corporation and AT&T Corp.
3.1(a) Form of Amended and Restated Articles of Incorporation of
AT&T Comcast Corporation (Preferred Structure) (included as
Annex C to the joint proxy statement/prospectus contained in
this registration statement and incorporated herein by
reference).
3.1(b) Term Sheet for Amended and Restated Articles of
Incorporation of AT&T Comcast Corporation (Alternative
Structure) (included as Annex D to the joint proxy
statement/prospectus contained in this registration
statement and incorporated herein by reference).
3.2 Form of AT&T Comcast Corporation Bylaws (included as Annex F
to the joint proxy statement/prospectus contained in this
registration statement and incorporated herein by
reference).
4.1 Credit Agreement dated as of April 26, 2002 among AT&T
Comcast Corporation, AT&T Broadband Corp., the Financial
Institutions Party Thereto, JPMorgan Chase Bank, as
Administrative Agent, Swing Line Lender and Issuing Lender,
Citibank, N.A., as Syndication Agent, and Bank of America,
N.A., Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated and Morgan Stanley Senior Funding, Inc.,
as Co-Documentation Agents.
4.2 Bridge Credit Agreement dated as of April 26, 2002 among
AT&T Comcast Corporation, AT&T Broadband Corp., the
Financial Institutions Party Thereto, JPMorgan Chase Bank,
as Administrative Agent, Citibank, N.A., as Syndication
Agent, and Bank of America, N.A., Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Morgan Stanley Senior Funding, Inc., as Co-Documentation
Agents.
5.1 Opinion of Wolf, Block, Schorr and Solis-Cohen LLP regarding
the validity of the securities being registered.
5.2 Opinion of Drinker Biddle and Reath LLP regarding the
validity of the securities being registered.
8.1 Opinion of Davis Polk & Wardwell regarding material federal
income tax consequences.
II-3
EXHIBIT
NUMBER DESCRIPTION
------- -----------
8.2 Opinion of Wachtell, Lipton, Rosen & Katz regarding material
federal income tax consequences.
23.1 Consent of Deloitte & Touche LLP with respect to Comcast
Corporation.
23.2 Consent of Deloitte & Touche LLP with respect to AT&T
Comcast Corporation.
23.3 Consent of PricewaterhouseCoopers LLP with respect to AT&T
Corp.
23.4 Consent of PricewaterhouseCoopers LLP with respect to the
AT&T Broadband Group.
23.5 Consent of PricewaterhouseCoopers LLP with respect to the
AT&T Consumer Services Group.
23.6 Consent of KPMG LLP with respect to Liberty Media
Corporation.
23.7 Consent of KPMG LLP with respect to AT&T Canada Inc.
23.8 Consent of PricewaterhouseCoopers LLP with respect to
Concert, B.V.
23.9 Consent of Wolf, Block, Schorr and Solis-Cohen LLP (included
in the form of opinion filed as Exhibit 5.1 to this
registration statement and incorporated herein by
reference).
23.10 Consent of Drinker Biddle and Reath LLP (included in the
form of opinion filed as Exhibit 5.2 to this registration
statement and incorporated herein by reference).
23.11 Consent of Davis Polk & Wardwell (included in the form of
opinion filed as Exhibit 8.1 to this registration statement
and incorporated herein by reference).
23.12 Consent of Wachtell, Lipton, Rosen & Katz (included in the
form of opinion filed as Exhibit 8.2 to this registration
statement and incorporated herein by reference).
24* Powers of Attorney.
99.1 Opinion of Morgan Stanley & Co. Incorporated (included as
Annex G to the joint proxy statement/prospectus contained in
this registration statement and incorporated herein by
reference).
99.2 Opinion of J.P. Morgan Securities Inc. (included as Annex H
to the joint proxy statement/ prospectus contained in this
registration statement and incorporated herein by
reference).
99.3 Opinion of Merrill Lynch, Pierce, Fenner & Smith
Incorporated (included as Annex I to the joint proxy
statement/prospectus contained in this registration
statement and incorporated herein by reference).
99.4 Opinion of Credit Suisse First Boston Corporation (included
as Annex J to the joint proxy statement/prospectus contained
in this registration statement and incorporated herein by
reference).
99.5 Opinion of Goldman, Sachs & Co. (included as Annex K to the
joint proxy statement/ prospectus contained in this
registration statement and incorporated herein by
reference).
99.6 Form of Comcast Proxy Card.
99.7 Form of AT&T Proxy Card.
99.8 Additional solicitation material for AT&T shareholders.
99.9 Form of Comcast Corporation Charter Amendment (included as
Annex E to the joint proxy statement/prospectus contained in
this registration statement and incorporated herein by
reference).
99.10 Consent of Morgan Stanley & Co. Incorporated.
99.11 Consent of J.P. Morgan Securities Inc.
99.12 Consent of Merrill Lynch, Pierce, Fenner & Smith
Incorporated.
99.13* Consent of Credit Suisse First Boston Corporation.
99.14 Consent of Goldman, Sachs & Co.
99.15* Consent of Ralph J. Roberts to be named a director of AT&T
Comcast Corporation.
---------------
* Previously filed.
** Incorporated by reference to AT&T's Annual Report on Form 10-K for the year
ended December 31, 2001.
II-4
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(2) That every prospectus (i) that is filed pursuant to paragraph
(a)(1) immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Securities Act of 1933 and is used
in connection with an offering of securities subject to Rule 415, will be
filed as a part of an amendment to the registration statement and will not
be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act of 1933, each such post-
effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the registrant's annual report
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934
(and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Securities Exchange Act of 1934)
that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(4) To respond to requests for information that is incorporated by
reference into the joint proxy statement/prospectus pursuant to Item 4,
10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration
statement through the date of responding to the request.
(5) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Philadelphia, the
Commonwealth of Pennsylvania, on May 14, 2002.
AT&T COMCAST CORPORATION
(registrant)
By: /s/ ARTHUR R. BLOCK
------------------------------------
Name: Arthur R. Block
Title: Senior Vice President,
Assistant Secretary and
Assistant Treasurer
------------------
Pursuant to the requirements of the SEC, this registration statement has
been signed below by the following persons in the capacities and on the dates
indicated.
SIGNATURE TITLE DATE
--------- ----- ----
* Co-President May 14, 2002
--------------------------------------------------- (co-principal executive officer)
(Brian L. Roberts)
* Co-President May 14, 2002
--------------------------------------------------- (co-principal executive officer)
(C. Michael Armstrong)
* Executive Vice President and Co- May 14, 2002
--------------------------------------------------- Treasurer (co-principal financial
(John R. Alchin) officer)
* Executive Vice President and Co- May 14, 2002
--------------------------------------------------- Treasurer; Director (co-principal
(Charles H. Noski) financial officer)
* Executive Vice President; Director May 14, 2002
--------------------------------------------------- (co-principal accounting officer)
(Lawrence S. Smith)
* Executive Vice President May 14, 2002
--------------------------------------------------- (co-principal accounting officer)
(Nicholas Cyprus)
* Executive Vice President and May 14, 2002
--------------------------------------------------- Co-Secretary; Director
(Stanley Wang)
* Executive Vice President and May 14, 2002
--------------------------------------------------- Co-Secretary; Director
(James Cicconi)
* Senior Vice President, Assistant May 14, 2002
--------------------------------------------------- Secretary and Assistant Treasurer;
(Arthur R. Block) Director
II-6
SIGNATURE TITLE DATE
--------- ----- ----
* Senior Vice President, Assistant May 14, 2002
--------------------------------------------------- Secretary and Assistant Treasurer;
(Marilyn J. Wasser) Director
*By: /s/ ARTHUR R. BLOCK
---------------------------------------------
Arthur R. Block
(Attorney-in-fact)
May 14, 2002
II-7
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 Agreement and Plan of Merger dated as of December 19, 2001,
as amended, among AT&T Corp., AT&T Broadband Corp., Comcast
Corporation, AT&T Broadband Acquisition Corp., Comcast
Acquisition Corp. and AT&T Comcast Corporation (included as
Annex A to the joint proxy statement/prospectus contained in
this registration statement and incorporated herein by
reference).
2.2 Separation and Distribution Agreement dated as of December
19, 2001, as amended, between AT&T Corp. and AT&T Broadband
Corp. (included as Annex B to the joint proxy statement/
prospectus contained in this registration statement and
incorporated herein by reference).
2.3 Support Agreement dated as of December 19, 2001, as amended,
among AT&T Corp., Comcast Corporation, AT&T Comcast
Corporation, Sural LLC and Brian L. Roberts.
2.4* Tax Sharing Agreement dated as of December 19, 2001 between
AT&T Corp. and AT&T Broadband Corp.
2.5** Employee Benefits Agreement dated as of December 19, 2001
between AT&T Corp. and AT&T Broadband Corp.
2.6* Exchange Agreement dated as of December 7, 2001, as amended,
between Microsoft Corporation and Comcast Corporation.
2.7* Instrument of Admission dated as of December 19, 2001, as
amended, between AT&T Comcast Corporation and AT&T Corp.
3.1(a) Form of Amended and Restated Articles of Incorporation of
AT&T Comcast Corporation (Preferred Structure) (included as
Annex C to the joint proxy statement/prospectus contained in
this registration statement and incorporated herein by
reference).
3.1(b) Term Sheet for Amended and Restated Articles of
Incorporation of AT&T Comcast Corporation (Alternative
Structure) (included as Annex D to the joint proxy
statement/prospectus contained in this registration
statement and incorporated herein by reference).
3.2 Form of AT&T Comcast Corporation Bylaws (included as Annex F
to the joint proxy statement/prospectus contained in this
registration statement and incorporated herein by
reference).
4.1 Credit Agreement dated as of April 26, 2002 among AT&T
Comcast Corporation, AT&T Broadband Corp., the Financial
Institutions Party Thereto, JPMorgan Chase Bank, as
Administrative Agent, Swing Line Lender and Issuing Lender,
Citibank, N.A., as Syndication Agent, and Bank of America,
N.A., Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated and Morgan Stanley Senior Funding, Inc.,
as Co-Documentation Agents.
4.2 Bridge Credit Agreement dated as of April 26, 2002 among
AT&T Comcast Corporation, AT&T Broadband Corp., the
Financial Institutions Party Thereto, JPMorgan Chase Bank,
as Administrative Agent, Citibank, N.A., as Syndication
Agent, and Bank of America, N.A., Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Morgan Stanley Senior Funding, Inc., as Co-Documentation
Agents.
5.1 Opinion of Wolf, Block, Schorr and Solis-Cohen LLP regarding
the validity of the securities being registered.
5.2 Opinion of Drinker Biddle and Reath LLP regarding the
validity of the securities being registered.
8.1 Opinion of Davis Polk & Wardwell regarding material federal
income tax consequences.
8.2 Opinion of Wachtell, Lipton, Rosen & Katz regarding material
federal income tax consequences.
23.1 Consent of Deloitte & Touche LLP with respect to Comcast
Corporation.
23.2 Consent of Deloitte & Touche LLP with respect to AT&T
Comcast Corporation.
23.3 Consent of PricewaterhouseCoopers LLP with respect to AT&T
Corp.
23.4 Consent of PricewaterhouseCoopers LLP with respect to the
AT&T Broadband Group.
23.5 Consent of PricewaterhouseCoopers LLP with respect to the
AT&T Consumer Services Group.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
23.6 Consent of KPMG LLP with respect to Liberty Media
Corporation.
23.7 Consent of KPMG LLP with respect to AT&T Canada Inc.
23.8 Consent of PricewaterhouseCoopers LLP with respect to
Concert, B.V.
23.9 Consent of Wolf, Block, Schorr and Solis-Cohen LLP (included
in the form of opinion filed as Exhibit 5.1 to this
registration statement and incorporated herein by
reference).
23.10 Consent of Drinker Biddle and Reath LLP (included in the
form of opinion filed as Exhibit 5.2 to this registration
statement and incorporated herein by reference).
23.11 Consent of Davis Polk & Wardwell (included in the form of
opinion filed as Exhibit 8.1 to this registration statement
and incorporated herein by reference).
23.12 Consent of Wachtell, Lipton, Rosen & Katz (included in the
form of opinion filed as Exhibit 8.2 to this registration
statement and incorporated herein by reference).
24* Powers of Attorney.
99.1 Opinion of Morgan Stanley & Co. Incorporated (included as
Annex G to the joint proxy statement/prospectus contained in
this registration statement and incorporated herein by
reference).
99.2 Opinion of J.P. Morgan Securities Inc. (included as Annex H
to the joint proxy statement/ prospectus contained in this
registration statement and incorporated herein by
reference).
99.3 Opinion of Merrill Lynch, Pierce, Fenner & Smith
Incorporated (included as Annex I to the joint proxy
statement/prospectus contained in this registration
statement and incorporated herein by reference).
99.4 Opinion of Credit Suisse First Boston Corporation (included
as Annex J to the joint proxy statement/prospectus contained
in this registration statement and incorporated herein by
reference).
99.5 Opinion of Goldman, Sachs & Co. (included as Annex K to the
joint proxy statement/ prospectus contained in this
registration statement and incorporated herein by
reference).
99.6 Form of Comcast Proxy Card.
99.7 Form of AT&T Proxy Card.
99.8 Additional solicitation material for AT&T shareholders.
99.9 Form of Comcast Corporation Charter Amendment (included as
Annex E to the joint proxy statement/prospectus contained in
this registration statement and incorporated herein by
reference).
99.10 Consent of Morgan Stanley & Co. Incorporated.
99.11 Consent of J.P. Morgan Securities Inc.
99.12 Consent of Merrill Lynch, Pierce, Fenner & Smith
Incorporated.
99.13* Consent of Credit Suisse First Boston Corporation.
99.14 Consent of Goldman, Sachs & Co.
99.15* Consent of Ralph J. Roberts to be named a director of AT&T
Comcast Corporation.
---------------
* Previously filed.
** Incorporated by reference to AT&T's Annual Report on Form 10-K for the year
ended December 31, 2001.