-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PM+mMkURmBF9+rr2MwU1xlMc2mvlkb1H2pa4vYfqjiM4/xwG4EQAibzFyxOlRzwv SsEAT92vcrM4v12TuDfMpA== 0000732718-99-000033.txt : 19990517 0000732718-99-000033.hdr.sgml : 19990517 ACCESSION NUMBER: 0000732718-99-000033 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDIAONE GROUP INC CENTRAL INDEX KEY: 0000732718 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 840926774 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08611 FILM NUMBER: 99623654 BUSINESS ADDRESS: STREET 1: 188 INVERNESS DRIVE WEST CITY: ENGLEWOOD STATE: CO ZIP: 80112 BUSINESS PHONE: 3037936500 MAIL ADDRESS: STREET 1: 188 INVERNESS DRIVE WEST STREET 2: 6TH FLOOR CITY: ENGLEWOOD STATE: CO ZIP: 80112 FORMER COMPANY: FORMER CONFORMED NAME: MEDIA ONE GROUP INC DATE OF NAME CHANGE: 19980616 FORMER COMPANY: FORMER CONFORMED NAME: US WEST INC DATE OF NAME CHANGE: 19920703 10-Q 1 FIRST QUARTER 1999 ============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission File Number 1-8611 MediaOne Group, Inc. A Delaware Corporation IRS Employer No. 84-0926774 188 Inverness Drive West, Englewood, Colorado 80112 Telephone Number 303-858-3000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X_ No __ The number of shares of MediaOne Group, Inc. common stock outstanding (net of shares held in treasury), at April 30, 1999, was 605,542,158 shares. ============================================================================== MediaOne Group, Inc. Form 10-Q TABLE OF CONTENTS
Item Page PART I - FINANCIAL INFORMATION 1. MediaOne Group, Inc. Financial Information Consolidated Statements of Operations - Three Months Ended March 31, 1999 and 1998 3 Consolidated Balance Sheets - March 31, 1999 and December 31, 1998 5 Consolidated Statements of Cash Flows - Three Months Ended March 31, 1999 and 1998 7 Notes to Consolidated Financial Statements 8 2. MediaOne Group, Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations Consolidated Results of Operations 18 Liquidity and Capital Resources 26 Risk Management 29 Selected Proportionate Data 33 3. MediaOne Group, Inc. Quantitative and Qualitative Disclosures About Market Risk 36 PART II - OTHER INFORMATION 1. Legal Proceedings 37 6. Exhibits and Reports on Form 8-K 37
2 Form 10-Q - Part I MediaOne Group, Inc. Consolidated Statements of Operations (Unaudited)
- ------------------------------------------------------------- ------------------------------- Three Months Ended March 31, -------------------------------
Dollars in millions 1999 1998 - ------------------------------------------------------------- ---------------- --------------- Sales and other revenues: Cable and broadband $ 661 $ 624 Corporate 4 7 Wireless communications - 341 ---------------- --------------- Total sales and other revenues 665 972 ---------------- --------------- Operating expenses: Cost of sales and other revenues 269 317 Selling, general and administrative expenses 185 307 Depreciation and amortization 250 348 ---------------- --------------- Total operating expenses 704 972 ---------------- --------------- Loss from operations (39) - Interest expense (96) (150) Equity losses in unconsolidated ventures (115) (136) Gains on sales of investments 194 17 Loss on PrimeStar investment (65) - Minority interest expense in Centaur Funding (25) - Guaranteed minority interest expense (24) (22) Other income (expense) - net 22 (37) ---------------- --------------- Loss from continuing operations before income taxes (148) (328) Benefit from income taxes 37 106 ---------------- --------------- Loss from continuing operations (111) (222) Income from discontinued operations - net of income taxes (Note 8) - 434 ================ =============== NET INCOME (LOSS) $ (111) $212 ================ =============== Preferred stock dividends and accretion (14) (13) ---------------- --------------- EARNINGS (LOSS) AVAILABLE FOR COMMON STOCK $ (125) $ 199 - ----------------------------------------------------------- ================ ===============
See Notes to Consolidated Financial Statements. 3 Form 10-Q - Part I MediaOne Group, Inc. Consolidated Statements of Operations (Unaudited)
- -------------------------------------------------------------- ------------------------------- Three Months Ended March 31, --------------------------------
In thousands, except per share amounts 1999 1998 - -------------------------------------------------------------- ---------------- --------------- MEDIAONE GROUP STOCK BASIC AND DILUTED LOSS PER COMMON SHARE: (1) Loss from continuing operations $ (0.21) $ (0.38) Income from discontinued operations (2) - 0.14 ================ =============== Basic and diluted loss per common share $ (0.21) $(0.24) ================ =============== Basic and diluted average common shares outstanding 603,813 608,295 - -------------------------------------------------------------- ================ ===============
(1) For 1998 earnings per share information of Communications Stock see Note 6 - Earnings Per Share - to the Consolidated Financial Statements. (2) Amounts represent the operations of U S WEST Dex, Inc., the domestic directory business, which were discontinued as of June 12, 1998. See Notes to Consolidated Financial Statements. 4 Form 10-Q - Part I MediaOne Group, Inc. Consolidated Balance Sheets
- ---------------------------------------------------------- -------------------- -------------------- March 31, December 31, Dollars in millions 1999 1998 - ----------------------------------------------------------- ------------------- -------------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 532 $ 415 Accounts and notes receivable - net 326 255 Income tax receivable 29 375 Current portion of deferred tax asset 74 74 Prepaid and other 29 33 Marketable securities 53 48 ------------------- -------------------- Total current assets 1,043 1,200 ------------------- -------------------- Property, plant and equipment - net 4,259 4,069 Investment in AirTouch Communications 7,250 5,919 Investment in Time Warner Entertainment 2,452 2,442 Net investment in international ventures 1,213 1,344 Intangible assets - net 11,522 11,647 Other assets 1,555 1,571 ------------------- --------------------- Total assets $ 29,294 $ 28,192 - ----------------------------------------------------------- =================== =====================
See Notes to Consolidated Financial Statements. 5 Form 10-Q - Part I MediaOne Group, Inc. Consolidated Balance Sheets (Continued)
- ----------------------------------------------------------- ------------------- -------------------- March 31, December 31, Dollars in millions 1999 1998 - ----------------------------------------------------------- ------------------- -------------------- (Unaudited) LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Short-term debt $ 422 $ 569 Accounts payable 303 332 Employee compensation 86 80 Deferred revenues and customer deposits 154 87 Other 598 546 ------------------- -------------------- Total current liabilities 1,563 1,614 ------------------- -------------------- Long-term debt 5,400 4,853 Deferred income taxes 6,293 6,035 Deferred credits and other 658 641 Commitments and contingencies Minority interest in Centaur Funding 1,102 1,099 Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Company-guaranteed debentures 1,061 1,061 Preferred stock subject to mandatory redemption 100 100 Shareowners' equity: Preferred stock 928 927 Common shares 10,328 10,324 Retained earnings 544 669 Accumulated other comprehensive income 1,317 869 ------------------- -------------------- Total shareowners' equity 13,117 12,789 ------------------- -------------------- Total liabilities and shareowners' equity $ 29,294 $ 28,192 - ----------------------------------------------------------- =================== ====================
See Notes to Consolidated Financial Statements. 6 Form 10-Q - Part I MediaOne Group, Inc. Consolidated Statements of Cash Flows (Unaudited)
- --------------------------------------------------------------- --------------- --------------- Three Months Ended March 31, 1999 1998 - --------------------------------------------------------------- --------------- --------------- Dollars in millions OPERATING ACTIVITIES Net income (loss) $ (111) $ 212 Adjustments to net income (loss): Discontinued operations - (434) Depreciation and amortization 250 348 Equity losses in unconsolidated ventures 115 136 Distribution from unconsolidated ventures - 3 Gains on sales of investments (194) (17) Loss on PrimeStar investment 65 - Deferred income taxes (18) (31) Provision for uncollectibles 7 22 Changes in operating assets and liabilities: Accounts and notes receivable (83) 75 Prepaid and other current assets 6 (2) Accounts payable and accrued liabilities 37 (249) Other - net 384 (11) --------------- --------------- Cash provided by operating activities 458 52 --------------- --------------- INVESTING ACTIVITIES Expenditures for property, plant and equipment (401) (355) Investment in international ventures (55) (45) Investment in domestic ventures - (64) Purchase of miscellaneous assets - (35) Proceeds from sales of investments 304 71 Cash from net investment in assets held for sale - 13 Other - net 11 2 --------------- --------------- Cash used for investing activities (141) (413) --------------- --------------- FINANCING ACTIVITIES Net proceeds from (repayments of) short-term debt (160) 388 Repayments of long-term debt (3) - Proceeds from issuance of common stock 23 30 Dividends paid on common stock - (259) Dividends paid on preferred stock (13) (13) Purchases of treasury stock (47) (35) --------------- --------------- Cash (used for) provided by financing activities (200) 111 --------------- --------------- Cash provided by discontinued operations - 214 --------------- --------------- CASH AND CASH EQUIVALENTS Increase (decrease) 117 (36) Beginning balance 415 184 =============== =============== Ending balance $ 532 $ 148 - --------------------------------------------------------------- =============== ===============
See Notes to Consolidated Financial Statements. 7 Form 10-Q - Part I MediaOne Group, Inc. Notes to Consolidated Financial Statements For the Three Months Ended March 31, 1999 (Dollars in millions) (Unaudited) NOTE 1: AT&T MERGER On May 6, 1999, MediaOne Group, Inc.("MediaOne Group{" or the "Company") entered into an agreement with AT&T Corp. ("AT&T") to merge its operations with those of AT&T, and terminated the merger agreement previously entered into with Comcast Corporation ("Comcast"). Under the terms of the AT&T definitive merger agreement, MediaOne Group shareowners will have the right to receive, for each share of MediaOne Group Stock, (i) 1.4912 shares of AT&T common stock, (ii) $85.00 in cash, or (iii) .95 of a share of AT&T common stock and cash of $30.85, in each case subject to possible proration. With respect to MediaOne Group shareowners who receive AT&T common stock, if the volume-weighted average sale price of the AT&T common stock for the 20 trading days ending three trading days prior to the effective date of the merger (the "AT&T Price") is between $51.30 and $57.00 per share, an additional amount in cash will be paid so that the total value of AT&T common stock (based on the AT&T Price) and cash received per share of MediaOne Group Stock will be $85.00. If the AT&T Price is less than $51.30 per share, the additional cash payment will be made based on an assumed AT&T Price of $51.30 per share, and the total value of cash and AT&T common stock (based on the AT&T Price) received per share of MediaOne Group Stock will be less than $85.00. If the AT&T Price is above $57.00 per share, the total value of cash and AT&T common stock (based on the AT&T Price) received per share of MediaOne Group Stock will be more than $85.00. The transaction is expected to close in the first quarter of 2000, subject to legal and regulatory approvals, as well as the approval of MediaOne Group shareowners. As a result of the termination of the Comcast merger, the Company paid Comcast a termination fee of $1.5 billion as outlined in the Comcast merger agreement. The termination fee was funded by AT&T and will be recorded on MediaOne Group's Consolidated Balance Sheet as a note payable to AT&T. The AT&T note bears interest at 3-month LIBOR plus 0.15 percent and matures on December 31, 2000. The note is due on demand at any time following consummation of the merger between the Company and AT&T. NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation. The Consolidated Financial Statements have been prepared by MediaOne Group pursuant to the interim reporting rules and regulations of the Securities and Exchange Commission ("SEC") and include the accounts of MediaOne Group and its consolidated subsidiaries. Certain information and footnote disclosures normally accompanying financial statements prepared in accordance with generally accepted accounting principles ("GAAP") have been condensed or omitted pursuant to such SEC rules and regulations. 8 Form 10-Q - Part I MediaOne Group, Inc. Notes to Consolidated Financial Statements (Dollars in millions) (Unaudited) In the opinion of MediaOne Group's management, the Consolidated Financial Statements include all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial information set forth therein. It is suggested that these Consolidated Financial Statements be read in conjunction with the 1998 MediaOne Group Consolidated Financial Statements and notes thereto included in MediaOne Group's proxy statement mailed to all shareowners on April 5, 1999. Certain reclassifications within the Consolidated Financial Statements have been made to conform to the current year presentation. New Accounting Standards. On January 1, 1999, MediaOne Group adopted Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," and SOP 98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-1 requires that certain costs of internal use software, whether purchased or developed internally, be capitalized and amortized over the estimated useful life of the software. SOP 98-5 requires, among other things, that the costs related to start-up activities of a new entity, facility, product or service be expensed. Adoption of SOP 98-1 and SOP 98-5 did not have a material impact on the financial position or results of operations of the Company. NOTE 3: ACQUISITIONS, DISPOSITIONS AND OTHER Optus Shares. During the first quarter of 1999, MediaOne Group received 13.6 million shares of Cable & Wireless Optus Limited ("Optus") as a result of having met certain performance measures at Optus, and purchased 5.6 million additional Optus shares related to the Company's anti-dilution rights. The Company has continued with its plan to dispose of its investment in Optus shares and as of March 31, 1999, has sold 55.1 million Optus shares, including the 50 million shares held as of year end 1998. The sales resulted in net proceeds of $133 and a pretax gain of $124. Cable System Sales and Trades. During the first quarter of 1999, MediaOne Group sold its cable television systems in Reno, Nevada and Mammoth and June Lake, California for total proceeds of $32, resulting in a pretax gain of $14. The cable systems served approximately 10,000 and 7,000 subscribers, respectively. 9 Form 10-Q - Part I MediaOne Group, Inc. Notes to Consolidated Financial Statements (Dollars in millions) (Unaudited) On February 2, 1999, MediaOne Group and Time Warner Cable, a division of Time Warner, Inc. and Time Warner Entertainment Company, L.P. ("TWE"), signed a definitive agreement to trade certain cable systems. MediaOne Group will trade cable systems in Ohio, Maine and California serving approximately 350,000 subscribers, while Time Warner Cable will trade cable systems in Massachusetts, New Hampshire and Georgia serving approximately 310,000 subscribers. MediaOne Group will also receive cash from the trade. The transaction is expected to close in the third quarter of 1999. During the three month period ended March 31, 1999, these cable systems contributed revenues of $43 and operating income of $19. In addition, on March 2, 1999, MediaOne Group and Cox Communications, Inc. ("Cox") signed a definitive agreement to trade certain cable systems. MediaOne Group will trade cable systems in Connecticut and Rhode Island serving approximately 51,000 subscribers, while Cox will trade cable systems in Massachusetts serving approximately 54,000 subscribers. MediaOne Group will also pay cash for the trade. The transaction is expected to close during the third quarter of 1999, subject to legal and regulatory approval. During the three month period ended March 31, 1999, these cable systems contributed revenues of $6 and operating income of $3. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company stopped depreciating and amortizing the systems held for sale. Other. Effective on March 31, 1999, MediaOne Group sold its investments in Continental Fiber Technologies, Inc. and Alternet of Virginia, Inc., providers of business telephony services, for net proceeds of $82. The sale resulted in a pretax gain of $44. In addition, the capital assets group sold various of its leveraged leases for net proceeds of $64 and a pretax gain of $12. PrimeStar Investment. On January 22, 1999, PrimeStar, Inc. ("PrimeStar") announced that it had reached an agreement to sell its high-power satellite assets and its direct broadcast services ("DBS") medium-power business and assets to Hughes Electronics Corporation ("Hughes"). Based on the estimated proceeds from these sales, MediaOne Group reduced the carrying amount of its investment in PrimeStar to zero at December 31, 1998. On March 31, 1999, certain PrimeStar shareholders, including MediaOne Group, signed a separate funding agreement to cover various operating and transition costs of the PrimeStar DBS medium-power business. On April 28, 1999, PrimeStar received required consents from lenders and closed the DBS medium-powered business sale. As a result of these transactions, MediaOne Group accrued $65 during the first quarter of 1999 to reflect its probable obligations, of which $36 was funded in April 1999. MediaOne Group is currently a guarantor of letters of credit for PrimeStar totaling approximately $100. 10 Form 10-Q - Part I MediaOne Group, Inc. Notes to Consolidated Financial Statements (Dollars in millions) (Unaudited) NOTE 4: OPERATING SEGMENTS In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," the following table presents selected information for MediaOne Group's operating segments for the three month periods ended March 31, 1999 and 1998. "Sales and Other Revenues" and earnings before interest, taxes, depreciation, amortization and other ("EBITDA") for each segment are presented on a proportionate basis. Proportionate results reflect the relative weight of MediaOne Group's ownership in each of its respective domestic and international equity ventures together with the consolidated results of its subsidiaries. The computation of EBITDA also excludes gains on asset sales, equity losses, guaranteed minority interest expense and minority interest expense in Centaur Funding. Adjustments made to Sales and Other Revenues and EBITDA to arrive at proportionate results are reversed in the column labeled "Eliminations and Adjustments," in conformity with SFAS No. 131, so that in total, Sales and Other Revenues and EBITDA reflect consolidated results.
- ----------------------------------------- --------------------------- --------------------------------------------------- Domestic Cable & Broadband --------------------------- ---------------------------
Eliminations MediaOne of Multimedia & Delaware(1) Ventures(2) International Other Adjustments Consolidated - ------------------------------------------------ ------------- ------------- -------------- ------ ------------ ------------- Three months ended March 31, 1999 Sales and other revenues $ 654 $ 748 $ 440 $ 4 $ (1,181) $ 665 EBITDA (3) 241 243 101 (19) (355) 211 Net income (loss) (74) 4 (14) (27) - (111) - ------------------------------------------------ -------------- ------------- -------------- ------- ------------ ------------ Three months ended March 31, 1998 Sales and other revenues $ 619 $ 742 $ 318 $ 351 $ (1,058) $ 972 EBITDA (3) 240 188 17 95 (192) 348 Net income (loss) (4) (125) (6) (79) 422 - 212 ---------------------------- -------------- ------------- --------------- ------- ----------- ------------
(1) MediaOne of Delaware represents the operations of the Company's domestic cable and broadband subsidiary. (2) Multimedia Ventures includes MediaOne Group's 25.51 percent equity interest in TWE, as well as related overheads. The reported TWE results are prepared in accordance with GAAP and have not been adjusted to report TWE investments accounted for under the equity method on a proportionate basis. (3) The Company believes EBITDA is an important indicator of the operating performance of its businesses and should not be considered an alternative to operating or net income as an indicator of the performance of MediaOne Group's businesses, or as an alternative to cash flows from operating activities as a measure of liquidity, in each case determined in accordance with GAAP. (4) Other net income during 1998 includes $434 related to discontinued operations. 11 Form 10-Q - Part I MediaOne Group, Inc. Notes to Consolidated Financial Statements (Dollars in millions) (Unaudited) Total assets are those assets and investments that are used in, or pertain to, each segment's operations, as follows:
- ------------------------------------------------- -------------------------------------------------------------------- Domestic Cable & Broadband ---------------------------- ----------------------------
MediaOne of Multimedia Delaware(1) Ventures(2) International Other Consolidated - ------------------------------------------------- ------------- ------------ -------------- -------- -------------- Total assets as of: March 31, 1999 $ 16,135 $ 2,558 $ 2,307 $ 8,294 $ 29,294 December 31, 1998 16,003 2,551 2,308 7,330 28,192 ----------------------------------------- ------------- ------------ -------------- -------- ---------------
(1) MediaOne of Delaware represents the operations of the Company's domestic cable and broadband subsidiary. (2) Multimedia Ventures includes MediaOne Group's 25.51 percent equity interest in TWE. The "Other" column includes primarily cash; debt and equity securities; investments in domestic interactive services; and other corporate assets. The increase in Other total assets of $964, or 13.2 percent, during 1999 is due primarily to the marking to market of the Company's investments in marketable equity securities, including AirTouch Communications, Inc. ("AirTouch") stock. The following table presents a geographic breakout for proportionate revenues and EBITDA and a reconciliation to consolidated amounts: - -------------------------------------------------------------------------------
Three Months Ended March 31, 1999 1998 - ------------------------------------------------------------------------------- Proportionate Revenue: United States (1) $ 1,403 $ 1,701 United Kingdom 275 189 Central Europe 143 106 Asia and other 25 34 ---------------------------- ---------------------------- Proportionate revenue 1,846 2,030 Less: Proportionate adjustment (1,181) (1,058) ============================ Consolidated revenues $ 665 $ 972 ============================ Proportionate EBITDA: United States (1) $ 468 $ 523 United Kingdom 64 4 Central Europe 43 28 Asia and other (9) (15) ---------------------------- Proportionate EBITDA 566 540 Less: Proportionate adjustment (355) (192) ============================ Consolidated EBITDA $ 211 $ 348 - ---------------------------------------------------============================
(1) Amounts include proportionate revenue of $335 and proportionate EBITDA of $108 for the domestic wireless operations during 1998. These operations were sold in April 1998. 12 Form 10-Q - Part I MediaOne Group, Inc. Notes to Consolidated Financial Statements (Dollars in millions) (Unaudited) NOTE 5: SHAREOWNERS' EQUITY Following is a rollforward of shareowners' equity since the end of 1998:
- -------------------------------------------------------- ----------- ------------ ---------- ------------------- Accumulated Other Comprehensive Preferred Common Retained Income Stock Shares Earnings - --------------------------------------------------------- ------------ ------------- ------------ ------------------- Balance at December 31, 1998 $ 927 $ 10,324 $ 669 $ 869 Net loss (111) Issuance of MediaOne Group stock 23 Purchase of treasury stock (47) Preferred stock dividends (14) Market value adjustments for debt and equity securities, and Exchangeable Notes, net of reclassification adjustments and income taxes 488 Foreign currency translation, net of income taxes (40) Other 1 28 ============ ============= ============ =================== Balance at March 31, 1999 $ 928 $ 10,328 $ 544 $ 1,317 - --------------------------------------------------------- ============ ============= ============ ===================
Share Repurchase. During the three month period ended March 31, 1999, MediaOne Group purchased and placed into treasury 830,000 shares of MediaOne Group Stock, at an average purchase price of $56.06 per share, and a total cost basis of $47. Comprehensive Income. Total comprehensive income and the components of comprehensive income follow:
- -------------------------------------------------------------------- -------------------------------------------- Three Months Ended March 31, ---------------------------------------------
1999 1998 - --------------------------------------------------------------------- ---------------------- ---------------------- Net income (loss) $ (111) $ 212 Other comprehensive income, before tax: Foreign currency translation adjustment (65) 16 Unrealized gains on debt and equity securities, and Exchangeable Notes 899 118 Reclassification for gains realized in net loss (105) - Income tax provision related to items of other comprehensive income (281) (53) ---------------------- ---------------------- Total other comprehensive income, net of tax 448 81 ====================== ====================== Total comprehensive income $ 337 $ 293 - --------------------------------------------------------------------- ====================== ======================
13 Form 10-Q - Part I MediaOne Group, Inc. Notes to Consolidated Financial Statements (Dollars in millions) (Unaudited) The majority of the unrealized gains and losses on debt and equity securities during 1999 relate to the Company's investment in common and preferred stock of AirTouch which was acquired on April 6, 1998, in connection with the sale by the Company of its domestic wireless businesses (the "AirTouch Transaction"). Shareholder Rights Plan. On February 9, 1999, the Board of Directors of the Company approved a new shareholder rights plan to replace the existing plan upon its expiration. The new rights expire on April 6, 2009. The new shareholder rights plan contains terms similar to the expired plan. NOTE 6: EARNINGS PER SHARE The following table reflects the computation of basic and diluted earnings (loss) per share in accordance with SFAS No. 128, "Earnings Per Share." The diluted earnings (loss) per share and related share amounts do not include potential share issuances associated with stock options and the Company's convertible Series D preferred shares since the effect would have been antidilutive on the loss from continuing operations. In 1998, the Company had outstanding two separate classes of common stock which reflected the performance of its two groups: the MediaOne Group Stock and the Communications Stock. The MediaOne Group Stock reflected the performance of the multimedia businesses of the Company, as well as the domestic directory business. The Communications Stock reflected the performance of the Company's telecommunications businesses. Effective on June 12, 1998, the telecommunications businesses and the domestic directory business were separated from MediaOne Group and became an independent public company. The Communications Stock was cancelled as of the effective date of the separation. 14 Form 10-Q - Part I MediaOne Group, Inc. Notes to Consolidated Financial Statements (Dollars in millions) (Unaudited)
- ----------------------------------------------------------------------------- ----------------------------------- Three Months Ended March 31, -----------------------------------
1999 1998 - ----------------------------------------------------------------------------- ----------------- ---------------- MEDIAONE GROUP STOCK: Loss from continuing operations $ (111) $ (222) Preferred stock dividends and accretion (14) (13) ================= ================ Loss from continuing operations available to MediaOne Group Stock shareowners used for basic and diluted loss per share $ (125) $ (235) ================= ================ Income from discontinued operations available to MediaOne Group Stock shareowners used for basic and diluted earnings per share (1) - $ 87 ================= ================ Weighted average number of shares used for basic and diluted earnings (loss) per share 603,813 608,295 ================= ================ Basic and diluted loss per share from continuing operations $ (0.21) $ (0.38) ================= ================ Basic and diluted earnings per share from discontinued operations (1) - $ 0.14 ================= ================ COMMUNICATIONS STOCK: (2) Income from discontinued operations available to Communications Stock shareowners used for basic and diluted earnings per share - $ 347 ================= ================ Weighted average number of shares used for basic and diluted earnings per share - 484,964 ================= ================ Basic and diluted earnings per share from discontinued operations - $ 0.72 - ----------------------------------------------------------------------------- ================= ================
(1) Represents the operations of the domestic directory business which were discontinued effective June 12, 1998. (2) Represents the operations of the telecommunications businesses which were discontinued effective June 12, 1998. 15 Form 10-Q - Part I MediaOne Group, Inc. Notes to Consolidated Financial Statements (Dollars in millions) (Unaudited) NOTE 7: SUBSEQUENT EVENTS Telewest. Shortly after the Company entered into its definitive merger agreement with AT&T, AT&T and Microsoft Corporation ("Microsoft") announced that they had entered into a series of agreements, which, among other things, involved the sale of the Company's interest in Telewest Communications plc ("Telewest") to Microsoft. The terms and conditions of any such sale will be subject to certain approvals, including, if the sale is to occur prior to the merger of the Company's operations with those of AT&T, the approval of the Company's Board of Directors. AirTouch/Vodafone Merger. On December 15, 1998, Centaur Funding Corporation ("Centaur"), a special purpose entity consolidated by MediaOne Group, issued Cumulative Preference Shares, Series B (the "Series B Preference Shares") and Preference Shares, Series C (the "Series C Preference Shares"). Dividend payments on the Series B Preference Shares and certain redemption payments on the Series B and Series C Preference Shares are to be determined by reference to the dividend and redemption activity of the AirTouch 5.143 percent Class D Cumulative Preferred Stock, Series 1998, (the "Class D ATI Shares") and 5.143 percent Class E Cumulative Preferred Stock, Series 1998, (the "Class E ATI Shares" and together with the Class D ATI Shares, the "ATI Shares"). On January 15, 1999, AirTouch entered into a preliminary agreement, as amended, with Vodafone Group Public Limited Company ("Vodafone") to merge its operations with a subsidiary of Vodafone. Under the terms of the Vodafone merger (a) the ATI Shares remain outstanding and represent AirTouch preferred shares, (b) the early redemption option on the Class D ATI Shares is eliminated, (c) the maturity date on the Class E ATI Shares is extended to April 1, 2020, and (d) the Class E ATI Shares pay an extraordinary dividend of $25.00 per share subsequent to the completion of the Vodafone merger. On May 13, 1999, Centaur mailed notices to the holders of the Series B and Series C Preference Shares that described the manner in which the terms of the Series B and Series C Preference Shares would be deemed modified to reflect the changes to the ATI Shares, pursuant to the Articles of Association of Centaur, without any action of the holders of such shares. 16 Form 10-Q - Part I MediaOne Group, Inc. Notes to Consolidated Financial Statements (Dollars in millions) (Unaudited) The extraordinary dividend payment on the Class E ATI Shares will be allocated to the Series B and Series C Preference Shares on a pro-rata basis based on the liquidation value of the Series B Preference Shares and on the accreted value of the Series C Preference Shares when the payment is made. The amount allocated to the Series B Preference Shares will be paid as a one-time extraordinary dividend together with the first regularly scheduled dividend following the payment on the Class E ATI Shares. Since the Series C Preference Shares do not pay dividends, the amount allocated to these shares will be invested by Centaur, in accordance with its Articles of Association, and will be added to the redemption amount of the Series C Preference Shares at maturity. Ariawest. On May 13, 1999, PT Ariawest International, ("Ariawest"), the Company's investment in Indonesia, reached an agreement to restructure its debt into a non-recourse debt facility. MediaOne Group is evaluating its probable funding commitments related to its investment in Ariawest as a result of the non-recourse facility. NOTE 8: DISCONTINUED OPERATIONS In accordance with 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 reflect the telecommunications businesses and the domestic directory business as discontinued operations since these businesses were separated from the Company effective on June 12, 1998. The revenues and expenses, and the cash flows of the discontinued operations have been separately classified in the Consolidated Statements of Operations and Cash Flows. Summarized operating results for the discontinued operations in 1998 were as follows:
- ----------------------------------------------------------------------------- ------------------------ Three Months Ended March 31, 1998 - ----------------------------------------------------------------------------- ------------------------ Revenues $ 3,009 Operating income 815 Income before income taxes 693 Income tax expense (259) ======================== Net income of discontinued operations $ 434 -------------------------------------------------------------------- ========================
17 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions) Some of the information presented in or in connection with this report constitutes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Although the Company believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results will not differ materially from its expectations. Factors that could cause actual results to differ from expectations include: (i) greater than anticipated competition from new entrants into the cable, and wireless communications markets, (ii) changes in demand for the Company's products and services, (iii) regulatory changes affecting the cable and telecommunications industries, (iv) changes in economic conditions in the various markets served by MediaOne Group operations, including international markets, that could adversely affect the level of demand for cable, wireless, or other services offered by the Company, (v) greater than anticipated competitive activity requiring new pricing for services, (vi higher than anticipated start-up costs associated with new business opportunities, (vii) higher than anticipated employee levels, capital expenditures, and operating xpenses (such as costs associated with Year 2000 remediation), (viii) consumer acceptance of broadband services, including telephony and data services, and wireless services, (ix) increases in fraudulent activity with respect to broadband and wireless services, or (x) delays in the development of anticipated technologies, or the failure of such technologies to perform according to expectations. Results of Operations - Continuing Operations - First Quarter 1999 Compared with First Quarter 1998 MediaOne Group Loss from Continuing Operations Normalized Loss from Continuing Operations
- ------------------------------------------------------------ ----------------------------- ------------------------ Three Months Ended March 31, Change ----------------------------- -------------------------
1999 1998 $ % - ------------------------------------------------------------- -------------- -------------- ------------ ------------ Loss from continuing operations $ (111) $ (222) $ 111 (50.0) Adjustments to reported loss from continuing operations: Domestic wireless operations (1) - (15) 15 - Gains on sales of investments (119) (10) (109) - Loss on PrimeStar investment 40 - 40 - Merger costs 15 - 15 - Separation costs - 35 (35) - ============== ============== ============ ============ Normalized loss from continuing operations $ (175) $ (212) $ 37 (17.5) - ------------------------------------------------------------- ============== ============== ============ ============
(1) The domestic wireless businesses were sold to AirTouch effective 4/6/98. 18 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts) Normalized Basic Loss Per Share from Continuing Operations Available for MediaOne Group Stock
- ------------------------------------------------------------- ----------------------------- ------------------------ Three Months Ended March 31, Change ----------------------------- -------------------------
1999 1998 $ % - ------------------------------------------------------------- -------------- -------------- ------------ ------------ Loss from continuing operations available for common stock $ (0.21) $ (0.38) $ 0.17 (44.7) Adjustments to reported loss from continuing operations: Domestic wireless operations (1) - (0.03) 0.03 - Gains on sales of investments (0.20) (0.02) (0.18) - Loss on PrimeStar investment 0.07 - 0.07 - Merger costs 0.03 - 0.03 - Separation costs - 0.06 (0.06) - ============== ============== ============ ============ Normalized loss from continuing operations available for common stock $ (0.31) $ (0.37) $ 0.06 (16.2) - ------------------------------------------------------------- ============== ============== ============ ============
(1) The domestic wireless businesses were sold to AirTouch effective 4/6/98. The decrease in normalized loss from continuing operations was primarily a result of decreased interest expense due to lower debt levels at MediaOne Group and the suspension of depreciation and amortization expense on domestic cable systems held for sale. The table above normalizes for significant one-time items and aids in the comparability of the Company's performance period over period. Routine acquisitions and dispositions are normalized within the discussion of revenues and operating income which follows. Sales and Other Revenues
- -------------------------------------------------------------- ---------------------------- ------------------------ Three Months Ended March 31, Change ----------------------------- ------------------------
1999 1998 $ % - --------------------------------------------------------------- ------------- --------------- ----------- ------------ Cable and broadband: Domestic $ 654 $ 619 $ 35 5.7 International 7 5 2 40.0 ------------- --------------- ----------- ------------ 661 624 37 5.9 Corporate 4 7 (3) (42.9) ------------- --------------- ----------- ------------ Current operations 665 631 34 5.4 Domestic wireless (1) - 341 (341) - ============= =============== =========== ============ Total $ 665 $ 972 $ (307) (31.6) - --------------------------------------------------------------- ============= =============== =========== ============
(1) The domestic wireless businesses were sold to AirTouch effective 4/6/98. 19 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions) MediaOne Group sales and other revenues decreased during the three month period ended March 31, 1999 primarily as a result of the sale of the domestic wireless businesses in April 1998. Normalized for acquisitions and dispositions, total revenues increased $66, or 11.0 percent, compared with total revenues of $599 for the same period in 1998. The normalized increase was due primarily to growth in domestic cable and broadband revenues. Cable and Broadband - Domestic
- --------------------------------------------------------------- ----------------------------- ------------------------ Three Months Ended March 31, Change ----------------------------- ------------------------
REVENUES 1999 1998 $ % - --------------------------------------------------------------- --------------- ------------- ----------- ------------ Basic Cable $ 439 $ 412 $ 27 6.6 Premium 82 79 3 3.8 Pay-per-view 22 13 9 69.2 Advertising 42 31 11 35.5 Equipment & Installation 46 40 6 15.0 Other 1 - 1 - --------------- ------------- ----------- ------------ Video 632 575 57 9.9 New Products 22 10 12 - PrimeStar - 34 (34) - =============== ============= =========== ============ Total revenues $ 654 $ 619 $ 35 5.7 - --------------------------------------------------------------- =============== ============= =========== ============
Domestic cable and broadband revenues increased during the three month period ended March 31, 1999 due primarily to greater video and new products revenues, partially offset by the lack of PrimeStar DBS revenues in 1999. Normalized for the one-time effects of cable system acquisitions and dispositions, total domestic cable and broadband revenues increased 11.4 percent during 1999. Basic Cable. Basic cable services revenues increased during 1999 due primarily to an approximate 5 percent increase in revenue per average cable subscriber and increased basic subscribers. At March 31, 1999, basic cable subscribers were 4,966,000, an increase of 1.1 percent compared with the same period in 1998, normalized for the effects of cable system acquisitions and dispositions. The increase in revenue per average cable subscriber is primarily the result of increased rates. Premium. Premium service revenues increased during 1999 due primarily to improved premium service customer growth as a result of the launch of "NexTV" in late 1998. NexTV is a repackaging of the Company's premium services into related premium channels. At March 31, 1999, premium units were 4,181,000, an increase of 5.4 percent compared with the same period in 1998, normalized for the effects of cable system acquisitions and dispositions. 20 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions) Pay-per-view. Pay-per-view revenues increased during 1999 due primarily to the offering of three major sporting events during the period compared with no comparable events in 1998. Increased movie revenues also contributed to the increase in pay-per-view revenues. Advertising. Advertising revenues increased during 1999 primarily as a result of growth in local and national advertising sales as compared with the same period in 1998. Equipment and Installation. Equipment and installation revenues increased in 1999 due primarily to subscribers upgrading converter boxes. Other. Other revenues include franchise fee payments, revenues received for guides and miscellaneous revenues. Video. Video revenue per average cable subscriber was $42.45 per month for the three month period ended March 31, 1999, an increase of 8.4 percent, compared with $39.17 for the same period in 1998. Adjusted for the one-time effects of cable system acquisitions and dispositions, video revenue per average cable subscriber increased 8.3 percent during 1999. Video revenue per average cable subscriber has increased as a result of increased rates and expanded channel offerings. Video revenues increased 9.5 percent during 1999, normalized for the one-time effects of cable system acquisitions and dispositions. New Products. New products revenues increased during 1999 due primarily to customer growth in high speed data Internet access services and business dedicated telephone services, as well as the launch of residential telephone services to six major metro areas throughout 1998. At March 31, 1999, MediaOne Group had approximately 113,600 high speed data customers compared with 29,100 high speed data customers for the same period in 1998. High speed data Internet services were available to over 3.7 million market-ready high speed data homes. At March 31, 1999, MediaOne Group had approximately 16,500 residential telephone customers with 22,400 telephone lines. Residential telephone services were available to over 700,000 market-ready homes. PrimeStar. Subsequent to April 1, 1998, MediaOne Group no longer reflects PrimeStar DBS services revenues as it contributed its PrimeStar subscribers and certain related assets (the "PrimeStar Contribution") to PrimeStar. 21 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions) Cable and Broadband - International. International cable and broadband revenues represent the consolidated operations of Cable Plus a.s., a cable operator in the Czech Republic. Domestic wireless. On April 6, 1998, MediaOne Group sold its domestic wireless businesses to AirTouch in the AirTouch Transaction. Operating Income (Loss)
----------------------------------------------- --------------------------------- -------------------------------- Three Months Ended March 31, Change --------------------------------- --------------------------------
1999 1998 $ % ----------------------------------------------- --------------- ----------------- --------------- ---------------- Cable and broadband: Domestic $ (3) $ (48) $ 45 (93.8) International (1) (2) 1 (50.0) --------------- ----------------- --------------- ---------------- (4) (50) 46 (92.0) International wireless (2) (3) 1 (33.3) Corporate (33) (31) (2) 6.5 Other - (3) 3 - --------------- ----------------- --------------- ---------------- Current operations (39) (87) 48 (55.2) Domestic wireless(1) - 87 (87) - =============== ================= =============== ================ Total $ (39) $ - $ (39) - ----------------------------------------------- =============== ================= =============== ================
(1) The domestic wireless businesses were sold to AirTouch effective 4/6/98. During the three month period ended March 31, 1999, MediaOne Group's operating loss decreased to a loss of $39, primarily a result of selling the domestic wireless businesses in April, 1998. Excluding the effects of the domestic wireless businesses, operating losses have decreased as a result of suspending depreciation and amortization expense on cable systems held for sale in 1999. MediaOne Group's EBITDA for the three month period ended March 31, 1999 was $211, compared with $348 during the same period in 1998. Excluding the effect of the domestic wireless operations, EBITDA would have been $210 in 1998. MediaOne Group considers EBITDA an important indicator of the operational strength and performance of its businesses. EBITDA, however, should not be considered an alternative to operating or net income as an indicator of the performance of MediaOne Group's businesses, or as an alternative to cash flows from operating activities as a measure of liquidity, in each case determined in accordance with GAAP. 22 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions) Cable and Broadband - Domestic. Domestic cable and broadband operating losses decreased during 1999 due primarily to the suspension of depreciation and amortization expense on cable systems held for sale in 1999, partially offset by $25 of increased depreciation expense on the continuing upgrade of the Company's cable networks. Also contributing to the decrease in depreciation expense was the one-time charge in the first quarter of 1998 of $28 for depreciation and amortization expense related to the termination of the sale of cable systems in Minnesota. Depreciation and amortization expense had been suspended on these systems in 1997 while they were held for sale. During the three month period ended March 31, 1999, EBITDA for domestic cable and broadband operations was $241, relatively flat compared with $240 in 1998. Revenue increases of $35, or 5.7 percent, were offset by increased programming costs of $10, or 6.7 percent, and increased operating, general and administrative costs of $24, or 10.4 percent. Of those amounts, the PrimeStar Contribution provided revenue decreases of $34 and cost decreases of $30, including $14 of programming costs, to total domestic cable and broadband EBITDA for the period. Normalized for the one-time effects of cable system acquisitions and dispositions, domestic cable and broadband EBITDA increased 0.4 percent. Video EBITDA was $260 for the three month period ended March 31, 1999, an increase of $14, or 5.7 percent, compared with $246 for the same period in 1998. Normalizing for acquisitions and dispositions, video EBITDA increased $10, or 4.0 percent, compared with video EBITDA of $250 for the same period in 1998. New products EBITDA was a loss of $(19) for the three month period ended March 31, 1999, an increase in losses of $(9), or 90.0 percent, compared with EBITDA losses of $(10) in the same period of 1998. New products revenue increases of $12 were offset by new products cost increases of $21 during the period, primarily for the offering of residential telephone services. Programming costs were $159 for 1999, an increase of $10, or 6.7 percent, over the same period in 1998. Excluding programming costs related to PrimeStar DBS services, programming costs increased $20, or 15.0 percent. The normalized increase was primarily a result of greater programming costs per subscriber as a result of programmer rate increases, expanded channel offerings and growth in subscribers. 23 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions) Operating, general and administrative costs were $254 during the three month period ended March 31, 1999, an increase of $24, or 10.4 percent, over the same period in 1998. Increases in operating, general and administrative costs were primarily a function of increases in employee costs due to improvements in customer service; marketing and advertising costs associated with the deployment of new products, such as high speed data services and residential telephone services, as well as NexTV; and spending on initiatives to improve the operations of the Company. These cost increases were partially offset by decreased costs of $16 related to the PrimeStar Contribution. During 1999, MediaOne Group incurred costs of $11 to improve reporting and billing systems, and to create customer databases to serve customers more effectively, and incurred incremental costs of $7 for Year 2000 remediation, for a total of $18. Initiatives spending and incremental Year 2000 costs have increased a total of $14 in 1999 compared with the same period in 1998. Other. Costs incurred for the development of domestic Internet content services have decreased during 1999 primarily as a result of aligning certain of these operations within the domestic cable and broadband operations. Interest Expense and Other
---------------------------------------------------------- ----------------------------- ---------------------------- Three Months Ended March 31, Change ----------------------------- ----------------------------
1999 1998 $ % ---------------------------------------------------------- -------------- -------------- -------------- ------------- Interest expense $ (96) $ (150) $ 54 (36.0) Equity losses in unconsolidated ventures (115) (136) 21 (15.4) Gains on sales of investments 194 17 177 - Loss on PrimeStar investment (65) - (65) - Minority interest expense in Centaur Funding (25) - (25) - Guaranteed minority interest expense (24) (22) (2) 9.1 Other income (expense) - net 22 (37) 59 - ---------------------------------------------------------- -------------- -------------- -------------- -------------
Interest Expense. Interest expense during the three month period ended March 31, 1999 decreased due primarily to the refinancing of debt in connection with the June 12, 1998 separation of the Company's businesses into two separate companies, as well as the assumption of $1.35 billion in debt by AirTouch in the AirTouch Transaction. The reduction in interest expense was partially offset by the issuance in the latter part of 1998 of $1.7 billion of debt exchangeable into AirTouch common stock (the "Exchangeable Notes"). 24 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions) Equity Losses in Unconsolidated Ventures. Equity losses during the three month period ended March 31, 1999 decreased compared with the same period in 1998 due predominantly to the absence of losses from the investment in PrimeCo Personal Communications, L.P. ("PrimeCo"), which was sold to AirTouch on April 6, 1998 pursuant to the AirTouch Transaction. Improved operations in the Company's investments in international wireless ventures were more than offset by increased losses in investments in international cable and broadband ventures. Gains on Sales of Investments. During the three month period ended March 31, 1999, MediaOne Group sold: (a) shares of Optus resulting in a pretax gain of $124 ($76 after tax), (b) investments in two providers of business telephony services resulting in a pretax gain of $44 ($27 after tax), (c) various cable systems resulting in a pretax gain of $14 ($9 after tax), and (d) miscellaneous assets from its capital assets group resulting in a pretax gain of $12 ($7 after tax). During 1998, MediaOne Group sold a cable programming investment resulting in a pretax gain of $17 ($10 after tax). Loss on PrimeStar Investment. During the three month period ended March 31, 1999, MediaOne Group recorded a pretax loss of $65 ($40 after tax) for probable obligations related to its investment in PrimeStar. See Note 3 - Acquisitions, Dispositions and Other - to the Consolidated Financial Statements for a detailed discussion. Minority Interest Expense in Centaur Funding. On December 15, 1998, Centaur, a special purpose entity consolidated by MediaOne Group, issued three series of preferred shares to external investors. The Series A was issued at its liquidation value of $100 with a variable interest rate; the Series B was issued at its liquidation value of $934 with a stated interest rate of 9.08 percent; and the Series C was issued at fair value of $96 and accretes over the life of the instrument to reach its liquidation value of $716 upon maturity. During the first quarter of 1999, the effective interest rate on the Series A and Series B preferred shares was 5.3 percent and 9.2 percent, respectively. The Series C accretes at an implied rate of 9.6 percent. Guaranteed Minority Interest Expense. Guaranteed minority interest expense has increased slightly during the three month period ended March 31, 1999, due primarily to the exchange of its 7.96 and 8.25 percent Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Company-guaranteed debentures ("Preferred Securities") for 9.30 and 9.50 percent Preferred Securities in mid-1998, and the issuance in October 1998 of 9.04 percent Preferred Securities. The exchange was a result of the separation of the Company's telecommunications businesses on June 12, 1998. 25 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions) Other Income (Expense) - Net. During the three month period ended March 31, 1999, other income increased $59, to income of $22, from a loss of $37 in the same period of 1998, due primarily to $49 of costs recorded in the first quarter of 1998 related to the separation of the Company's telecommunications businesses. Such costs were subsequently netted into the gain realized in the second quarter of 1998 upon the distribution of the Company's telecommunications businesses to the Communications Stock shareowners. Other income also increased $21 during 1999 for dividend income on the AirTouch preferred stock received by the Company in connection with the AirTouch Transaction, partially offset by increased foreign exchange transaction losses of $15 associated with loans to international ventures. During 1999, MediaOne Group also recorded costs of $15 related to merger activity of the Company, which were fully offset by the recognition of a $15 fee paid by Optus to the Company as a result of having met certain performance measures. Benefit from Income Taxes for Continuing Operations
- -------------------------------------------------------- -------------------------------- ------------------------------ Three Months Ended March 31, Change -------------------------------- -----------------------------
1999 1998 $ % ---------------------------------------------------- --------------- -------------- --------------- ----------- Benefit from income taxes $ 37 $ 106 $ (69) (65.1) Effective tax rate 25.0% 32.3% ------------------------------------------------------------------------------------------------------------------
The decrease in the effective tax rate is primarily a result of gains on the sales of investments, the loss on the PrimeStar investment, and merger costs. Excluding these unusual transactions, the effective tax rate would have been 32.5 percent for the 1999 period. Liquidity and Capital Resources Operating Activities Cash provided by operating activities during the three month period ended March 31, 1999 increased $406 to $458 as compared with the same period in 1998. The increase was due primarily to the receipt of $394 of income tax benefits related to the carryback of the 1998 taxable loss to the 1996 consolidated tax return. Cash provided from operating activities of the domestic wireless operations during 1998 was offset by increased interest payments on long-term debt outstanding during the period. MediaOne Group expects that cash from operations will not be adequate to fund future expected cash requirements. Additional funding will come from cash on hand, asset sales and new debt financing, including the monetization of AirTouch common stock. 26 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions) Investing Activities Capital expenditures at MediaOne Group, on a cash basis, were $401 and $355 during the three months ended March 31, 1999 and 1998, respectively. The majority of the capital expenditures were devoted to upgrading the domestic cable network and continuing the provision of new and enhanced services. For the three months ended March 31, 1999 and 1998, MediaOne Group invested $55 and $45, respectively, in international ventures. The investments were primarily capital contributions to cable investments in Belgium, the Netherlands, Japan and Singapore, as well as a wireless venture in India. Domestically, MediaOne Group invested $64 during the three months ended March 31, 1998 related to the Company's investment in PrimeCo, which was sold to AirTouch in April 1998. During 1999, MediaOne Group sold various investments resulting in net proceeds of $304, comprised of the following: (a) shares of Optus for net cash proceeds of $126, (b) two investments in providers of business telephony services for net proceeds of $82, (c) miscellaneous assets from the capital assets group for net proceeds of $64, and (d) various cable television systems for net proceeds of $32. During the three months ended March 31, 1998, the Company sold and purchased various cable television systems for net proceeds of $71 and $35, respectively. During the first quarter of 1999, MediaOne Group accrued $65 of estimated funding commitments pursuant to its investment in PrimeStar, of which $36 was funded in April 1999. The Company anticipates that the majority of additional funding will be made during the second and third quarters of 1999. Financing Activities Debt Activity. Total debt at March 31, 1999 was $5,822, an increase of $400 compared with December 31, 1998. The increase in debt outstanding was due to a $568 increase in the fair value of the Exchangeable Notes issued in August 1998 related to an increase in the fair value of the underlying AirTouch common stock. The value of the Exchangeable Notes reflects the corresponding changes in the fair value of the AirTouch common stock. The remaining change in debt outstanding was due primarily to the repayment of commercial paper using the income tax refund received and proceeds generated by asset sales. 27 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions) Dividends. During 1998, the Company paid $259 of common dividends on the Communications Stock. Effective June 12, 1998, MediaOne Group no longer pays dividends on the Communications Stock. Cash from Discontinued Operations. Cash from discontinued operations during 1998 consisted primarily of fundings to MediaOne Group for common dividends paid to Communications Stock shareowners, dividends paid by the domestic directory business to MediaOne Group, proceeds from the issuance of Communications Stock, and debt fundings and repayments between MediaOne Group and the discontinued operations of the telecommunications businesses and the domestic directory business. Other Financing Activities Share Repurchase. During 1999 and 1998, MediaOne Group purchased and placed into treasury approximately 830,000 and 415,000, shares of MediaOne Group Stock for a total cost basis of $47 and $14, respectively. In addition, during 1998, the Company purchased and placed into treasury Communications Stock shares for a total cost basis of $21. Debt Facilities. As of March 31, 1999, the Company had revolving bank credit facilities totaling $3.0 billion, of which $2.9 billion was available. In May 1999, MediaOne Group reduced its 364-day revolving bank credit facility to $500 from $1.5 billion. Credit Ratings. During March 1999, the Company's debt and Preferred Securities were placed on credit watch by Standard & Poor's with negative implications, and by Moody's with direction uncertain, as a result of the proposed merger with Comcast. Following the announcement in April 1999 of the proposed merger of MediaOne Group with AT&T, the Company's credit watch was modified by Standard & Poor's to developing and by Moody's to positive. See Note 1 - AT&T Merger - to the Consolidated Financial Statements. On May 11, 1999, Standard & Poor's placed the Centaur Series B and Series C Preference Shares on credit watch as a result of the proposed changes by AirTouch to the ATI Shares following the proposed merger with Vodafone. Upon execution of the proposed changes, Standard & Poor's expects it will adjust the ratings of the Centaur securities to reflect AirTouch's preferred stock rating. See Note 7 - Subsequent Events - to the Consolidated Financial Statements. 28 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions) Risk Management MediaOne Group is exposed to market risks arising from changes in interest rates, foreign exchange rates and equity prices. Derivative financial instruments are used to selectively manage these risks. MediaOne Group does not use derivative financial instruments for trading purposes. Equity-Price Risk Management. In the first quarter of 1999, an Internet related company in which MediaOne Group holds both common shares and warrants to buy additional common shares at a fixed price conducted an initial public offering. A hypothetical 50 percent decrease in the March 31, 1999 stock prices of MediaOne Group's Internet related investments would result in a $70 decrease in the fair market value of the Internet related portfolio. Year 2000 Readiness The statements made herein relating to the Year 2000 are designated as Year 2000 Readiness Disclosures for purposes of the Year 2000 Information and Readiness Disclosure Act. MediaOne Group uses software and related technologies throughout its business that may be affected by the date change in the year 2000. The inability of systems to appropriately recognize the year 2000 could disrupt Company operations. A full discussion of the Company's program to address issues related to an risks from the Year 2000 is included in the Management's Discussion and Analysis of Financial Condition and Results of Operations section (MD&A) of the Company's Form 10-K and included in MediaOne Group's proxy statement mailed to all shareowners on April 5, 1999. Domestic Cable and Broadband The Company continues to progress through its program to address the Year 2000 issues related to its Domestic Cable and Broadband operations. All four critical business functions used to manage the program continue to be in the testing phase with no change in the estimated dates of completion, as follows. 29 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions)
- ------------------------ ----------------------------- -------------------------- ------------------- --------------- Estimated Date of Business Functions Current Areas of Focus Operational Impact Current Status Completion - ------------------------ ----------------------------- -------------------------- ------------------- --------------- Customer Service Head End Controller Inability to provide Early Testing - Q2 1999 Digital Transmission video, telephony & Phase IV Equipment data service to Switches customers Ad Insertion Network Surveillance Customer Care & Billing Subscriber Billings Loss of revenues Early Testing - Q3 1999 Ad Sales Billings Loss of customer Phase IV Call Center Operations provisioning and Data Communications repair support Desktop Computing Cash Flow Financial Systems Interruption to cash Early Testing - Q2 1999 receipts & Phase IV disbursements cycle Employees, Health & Payroll & Benefit Systems Loss of support systems Early Testing - Q3 1999 Safety Facilities Functions and employee disruption Phase IV - ------------------------ ----------------------------- -------------------------- ------------------- ---------------
Investment in Unconsolidated Subsidiaries MediaOne Group has significant investments in both domestic and international operations. The Company's Year 2000 program includes plans to monitor the progress of these ventures in addressing the Year 2000 issues. The Company believes, based upon information provided by the ventures, that these ventures are progressing in their efforts to address the Year 2000 issues and continue to be in the conversion and/or testing phase of their programs. The Company continues to believe that the costs of addressing the Year 2000 issues by the ventures will not have a material adverse impact on MediaOne Group's financial position. Costs of Year 2000 Program MediaOne Group has incurred approximately $32 of costs to implement its Year 2000 compliance program through the first quarter of 1999 and expects to incur between $60 to $75 of costs in aggregate, of which $10 to $15 represent capitalized expenditures. Of the total costs being incurred, approximately $50 to $65 are incremental to MediaOne Group. The funding of these costs will be managed by the Company through its liquidity and capital resources plan. 30 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions) Risks Associated with Year 2000 Issues Due to the complexity of the issues presented by the Year 2000 and the proposed solutions, and the interdependence of MediaOne Group on a global list of third party suppliers, it is impossible to assess with any degree of accuracy the impact of a failure in any one aspect or combination of aspects of the Company's Year 2000 program in relation to the Company's critical business function areas. MediaOne Group cannot provide assurance that actual results will not differ from management's estimates due to the complexity of correcting the systems and related technologies surrounding the Year 2000 issue. Failure by MediaOne Group to complete its Year 2000 project in a timely or complete manner, within its estimate of projected costs, or failure by third parties, such as financial institutions and related networks, software providers, local telephone companies, long distance providers, power providers, etc., to correct their systems, with which MediaOne Group's systems interconnect, could have a material impact on future results of operations and financial position. Other factors which might cause a material difference from management's estimate would include, but not be limited to, the availability and cost of personnel with appropriate skills and abilities to locate and correct all relevant computer code and similar uncertainties, as well as the collateral effect on MediaOne Group of the Year 2000 problem on the economy in general, or on MediaOne Group's business partners and customers in particular. However, MediaOne Group believes that the Year 2000 issue can be mitigated through its planned repair, replacement, or retirement of the relevant systems and related technologies that are within MediaOne Group's reasonable control. International Business Outlook The Company owns a 49 percent interest in BPL Cellular Limited ("BPL Cellular"), a wireless venture which provides cellular telephone service in certain areas of India. In 1998 and the first quarter of 1999, BPL Cellular made only partial payments on its cellular license due to the government of India amid industry wide discussions on the regulations, including license fee structures, applicable to the cellular industry. On March 31, 1999, the government of India issued new rules related to the cellular industry, however, the regulations resulted in no change in the license fee structure of the existing cellular operators. In April 1999, the existing government of India lost a parliament confidence vote and was replaced with a caretaker government until a general election can be held. The Company's continuing equity commitment to BPL Cellular is contingent upon acceptable reform of the telecom regulations regarding license fee payments. External funding may be similarly dependent upon a license fee structure that improves the financial prospects for this business. Instability of the government of India increases the delay in achieving the necessary regulatory reform. As of March 31, 1999, the Company had a net investment in BPL Cellular of a negative $65. The Company has recorded losses in excess of its capital contributions due to outstanding loan guarantees of BPL Cellular's debt of approximately $88. The Company also has an outstanding receivable from BPL Cellular of $10. 31 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions) On March 22, 1999 the Company announced that it had retained Lehman Brothers to evaluate the company's strategic alternatives for divesting of its international wireless properties. * * * * * * * * * MediaOne Group from time to time engages in preliminary discussions regarding restructurings, dispositions and other similar transactions. Any such transaction may include, among other things, the transfer of certain assets, businesses or interests, or the incurrence or assumption of indebtedness, and could be material to the financial condition and results of operations of the Company. There is no assurance that any such discussions will result in the consummation of any such transaction. 32 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions) SELECTED PROPORTIONATE DATA Proportionate Results of Operations - First Quarter 1999 Compared With First Quarter 1998 The following table and discussion is not required by GAAP or intended to replace the Consolidated Financial Statements prepared in accordance with GAAP. It is presented supplementally because MediaOne Group believes that proportionate financial and operating data facilitate the understanding and assessment of its Consolidated Financial Statements. The financial information included below departs materially from GAAP because it aggregates a portion of the revenues and operating income of entities not controlled by MediaOne Group with those of the consolidated operations of MediaOne Group.
- ------------------------------------------------------------------------------------ ------------------------ Change ------------------------
Three Months Ended March 31, 1999 1998 $ % - ----------------------------------------------------------- ------------ ----------- ----------- ------------ Proportionate Revenues Cable and broadband: Domestic (1) $ 1,402 $ 1,361 $ 41 3.0 International 124 72 52 72.2 ------------ ----------- ----------- ------------ 1,526 1,433 93 6.5 International wireless 316 246 70 28.5 Corporate 1 5 (4) (80.0) Other (2) 3 11 (8) (72.7) ============ =========== =========== ============ Total proportionate revenues (3) $ 1,846 $ 1,695 $ 151 8.9 =========================================================== ============ =========== =========== ============ Proportionate EBITDA (4) Cable and broadband: Domestic (1) 484 $ 428 56 13.1 International 17 3 14 - ------------ ----------- ----------- ------------ 501 431 70 16.2 International wireless 84 14 70 - Corporate (16) (10) (6) 60.0 Other (2) (3) (3) - - ------------ ----------- ----------- ------------ Total proportionate EBITDA (3) $ 566 $ 432 $ 134 31.0 =========================================================== ============ =========== =========== ============
(1) The proportionate results are based on MediaOne Group's 25.51 percent pro rata priority and residual equity interests in reported TWE results. The reported TWE results are prepared in accordance with GAAP and have not been adjusted to report TWE investments accounted for under the equity method on a proportionate basis. (2) Primarily includes international directories. (3) For the three month period ended March 31, 1998, amounts exclude proportionate revenues of $335 and proportionate EBITDA of $108 for the domestic wireless operations which were sold in April 1998. (4) Proportionate EBITDA represents MediaOne Group's equity interest in the entities multiplied by the entities' EBITDA. As such, proportionate EBITDA does not represent cash available to MediaOne Group. 33 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions) SELECTED PROPORTIONATE DATA (Continued)
- ----------------------------------------------------------- ------------------------ ------------------------ For the Three Months Ended March 31, Change ------------------------ ------------------------
Proportionate Statistics (in thousands) 1999 1998 Amount % - ----------------------------------------------------------- ------------ ----------- ----------- ------------ Cable and broadband: Domestic video subscribers (1) 7,811 7,440 371 5.0 Domestic homes passed (1) 13,103 12,402 701 5.7 Domestic high speed data subscribers (1, 2) 152 39 113 - Domestic telephone lines 22 - 22 - International video subscribers 1,007 904 103 11.4 International homes passed 2,604 2,074 530 25.6 International telephone lines 509 293 216 73.7 International wireless: Subscribers 1,994 1,123 871 77.6 POPs 76,254 72,828 3,426 4.7 =========================================================== ============ =========== =========== ============
(1) The proportionate results are based on MediaOne Group's 25.51 percent pro rata priority and residual equity interests in reported TWE results. The reported TWE results are prepared in accordance with GAAP and have not been adjusted to report TWE investments accounted for under the equity method on a proportionate basis. (2) High speed data subscribers for 1998 have been restated to conform with the current year presentation. Normalized for the one-time effects of acquisitions, dispositions and other asset transactions, proportionate revenues increased $196, or 11.9 percent, and EBITDA increased $84, or 19.6 percent. Cable and Broadband - Domestic. Normalized for the one-time effects of cable system acquisitions and dispositions, proportionate revenues increased $114, or 8.9 percent during 1999. This is a result of increases in subscribers and revenue per subscriber mainly due to expanded channel offerings, repackaging of services and increased rates. Normalized for the one-time effects of cable system acquisitions and dispositions, proportionate EBITDA increased $13, or 3.1 percent. This increase is primarily a result of higher revenues, partially offset by higher programming fees, increased personnel costs related to customer service initiatives and costs associated with the deployment of high speed data and residential telephone services. Proportionate EBITDA related to TWE operations increased 29.6 percent. TWE's results benefited from improved cable, programming and filmed entertainment operations, and a one-time gain in 1999 on the early termination of a distribution agreement with a third-party. 34 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions) SELECTED PROPORTIONATE DATA (Continued) Cable and Broadband - International. Normalized for the one-time effects of acquisitions, international cable and broadband proportionate revenues increased $26, or 26.5 percent, during 1999 due primarily to customer growth at Telewest. During the same period, normalized proportionate EBITDA increased $8, or 88.9 percent, due primarily to reduced MediaOne Group international staff costs. Proportionate international cable subscribers totaled 1,007,000 at March 31, 1999, a 10.6 percent increase over last year on a comparable basis. Telewest's cable television subscribers increased 15.4 percent over last year on a comparable basis. International Wireless. During 1999, proportionate revenues and EBITDA for the international wireless operations increased due to the 78.5 percent increase in the international wireless subscriber base to 1,994,000, on a comparable basis. One 2 One added 526,000 proportionate customers, an 87.8 percent increase from a year ago. Corporate. During 1999, proportionate revenues for corporate operations decreased $4, or 80.0 percent, to $1. EBITDA losses increased $6, or 60.0 percent, to $(16 primarily due to a reduction in the amount of headquarter costs being allocated to the subsidiaries, partially offset by decreased employee costs due to a reduction in headcount. Other. Other reflects the results of the international directories operations located in South America and costs related to development activities, primarily for the development of Internet content services. Proportionate revenues decreased $8 during 1999, due to delays in publishing international directories. Proportionate EBITDA remained unchanged year over year. 35 Form 10-Q - Part I Item 3. Quantitative and Qualitative Disclosures About Market Risk Reference is made to the information set forth on page 29. 36 Form 10-Q - Part II PART II - OTHER INFORMATION Item 1. Legal Proceedings MediaOne Group, Inc. and its subsidiaries are subject to claims and proceedings arising in the ordinary course of business. While complete assurance cannot be given as to the outcome of any contingent liabilities, in the opinion of MediaOne Group, any financial impact to which MediaOne Group and its subsidiaries are subject is not expected to be material in amount to MediaOne Group's operating results or its financial position. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibits identified in parentheses below are on file with the Securities and Exchange Commission and are incorporated herein by reference. All other exhibits are provided as part of this electronic submission. Exhibit Number 12 Statement regarding computation of earnings to fixed charges ratio of MediaOne Group, Inc. (10) Agreement and Plan of Merger, dated as of May 6, 1999, by and among AT&T Corp., Meteor Acquisition Inc. and MediaOne Group, Inc. (Exhibit 2 to Current report on Form 8-K dated May 6, 1999, File No. 1-8611) (b) Reports on Form 8-K filed during the First Quarter of 1999 (i) Form 8-K current report dated February 9, 1999, regarding the execution of a Rights Agreement by and between the Company and its Rights Agent. (ii) Form 8-K current report dated February 18, 1999, concerning a Press Release by the Company announcing its 1998 earnings results. (iii) Form 8-K current report dated March 22, 1999, concerning a Press Release by the Company announcing an Agreement and Plan of Merger between the Company and Comcast Corporation. 37 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. /s/ Richard A. Post -------------------------------------------- May 14, 1999 MediaOne Group, Inc. Richard A. Post Executive Vice President and Chief Financial Officer 38 EX-12 2 RATIO OF EARNINGS TO COMBINED FIXED CHARGES MediaOne Group, Inc. RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (Dollars in Millions)
Quarter Ended 3/31/99 3/31/98 - - ---------- ----------- Income from continuing operations before income taxes $ (148) $ (328) Interest expense (net of amounts capitalized) 96 150 Interest factor on rentals (1/3) 1 4 Equity losses in unconsolidated ventures (less than 50% owned) 102 75 Minority interest expense 49 32 ----------- ----------- Earnings $ 100 $ (67) =========== =========== Interest expense $ 99 $ 160 Interest factor on rentals (1/3) 1 4 Minority interest expense 49 32 Preferred stock dividends (pre-tax equivalent) 23 23 ----------- ----------- Fixed charges $ 172 $ 219 =========== =========== Ratio of earnings to combined fixed charges and preferred stock dividends - # - # - - ----------- -----------
#) Earnings for the quarters ended March 31, 1999 and 1998 were insufficient to cover fixed charges by $72 and $286, respectively. MediaOne Group, Inc. RATIO OF EARNINGS TO FIXED CHARGES (Dollars in Millions)
Quarter Ended
3/31/99 3/31/98 - - ----------- ----------- Income from continuing operations before income taxes $ (148) $ (328) Interest expense (net of amounts capitalized) 96 150 Interest factor on rentals (1/3) 1 4 Equity losses in unconsolidated ventures (less than 50% owned) 102 75 Minority interest expense 49 32 ----------- ----------- Earnings $ 100 $ (67) =========== =========== Interest expense $ 99 $ 160 Interest factor on rentals (1/3) 1 4 Minority interest expense 49 32 ----------- ----------- Fixed charges $ 149 $ 196 =========== =========== Ratio of earnings to fixed charges - # - # - - ----------- -----------
#) Earnings for the quarters ended March 31, 1999 and 1998 were insufficient to cover fixed charges by $49 and $ 263, respectively. EX-27 3 FDS --
5 MediaOne Group, Inc. - Financial Data Schedule 0000732718 MediaOne Group, Inc. 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 532 53 326 0 0 1,043 5,385 1,126 29,294 1,563 5,400 2,263 928 10,328 1,861 29,294 665 665 0 0 704 0 96 (148) (37) (111) 0 0 0 (111) (0.21) (0.21)
-----END PRIVACY-ENHANCED MESSAGE-----