-----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, K5CU+hEJVAXKKQdNxHF+J3kK8BIwMmT8mlmGjXdhbZLSLdobc1DsF7+9ioIQ1OAh cefB1la2IdOUvkJOLWbGJQ== 0000732718-99-000048.txt : 19991115 0000732718-99-000048.hdr.sgml : 19991115 ACCESSION NUMBER: 0000732718-99-000048 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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: 99750421 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 FORM 10-Q ============================================================================== 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 September 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission File Number 1-8611 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 October 29, 1999, was 611,980,629 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 and Nine Months Ended September 30, 1999 and 1998 3 Consolidated Balance Sheets - September 30, 1999 and December 31, 1998 5 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 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 22 Liquidity and Capital Resources 34 Risk Management 38 Selected Proportionate Data 44 3. MediaOne Group, Inc. Quantitative and Qualitative Disclosures About 47 Market Risk
PART II - OTHER INFORMATION
1. Legal Proceedings 48 6. Exhibits and Reports on Form 8-K 48
2 Form 10-Q - Part I MediaOne Group, Inc. Consolidated Statements of Operations (Unaudited)
- ------------------------------------------------------------------------- -------------------------- -------------------------- Three Months Ended Nine Months Ended September 30, September 30, -------------------------- --------------------------
Dollars in millions 1999 1998 1999 1998 - ------------------------------------------------------------------------- ------------ ------------- ------------ ------------- Sales and other revenues: Cable and broadband $ 674 $ 620 $2,000 $ 1,857 Corporate and other 1 6 2 21 Wireless communications - - - 361 ------------ ------------- ------------ ------------- Total sales and other revenues 675 626 2,002 2,239 ------------ ------------- ------------ ------------- Operating expenses: Cost of sales and other revenues 270 225 804 783 Selling, general and administrative expenses 185 208 549 710 Depreciation and amortization 306 288 884 894 ------------ ------------- ------------ ------------- Total operating expenses 761 721 2,237 2,387 ------------ ------------- ------------ ------------- Loss from operations (86) (95) (235) (148) Interest expense (114) (86) (313) (379) Equity losses in unconsolidated ventures (89) (68) (291) (273) Gains (losses) on investments: Sales and redemption of domestic investments 418 3 510 42 Sales and exit costs of international investments - net 163 - 295 - Exchange of AirTouch investment - - 2,482 - Sale of domestic wireless investment - - - 3,869 PrimeStar investment - - (65) - Minority interest expense in Centaur Funding (26) - (97) - Guaranteed minority interest expense (24) (11) (71) (53) Merger costs (15) - (1,537) - Other income - net 48 13 116 86 ------------ ------------- ------------ ------------- Income (loss) from continuing operations before income taxes 275 (244) 794 3,144 (Provision) benefit for income taxes (127) 60 (933) (1,376) ------------ ------------- ------------ ------------- Income (loss) from continuing operations 148 (184) (139) 1,768 Income from discontinued operations - net of tax Results of operations (Note 12) - - - 747 Gain on separation - - - 24,461 ------------ ------------- ------------ ------------- Income (loss) before extraordinary item 148 (184) (139) 26,976 Extraordinary item: Gain (loss) on extinguishment of debt - net of tax - - 17 (333) ============ ============= ============ ============= NET INCOME (LOSS) $ 148 $ (184) $ (122) $ 26,643 ============ ============= ============ ============= Preferred stock dividends and accretion (14) (13) (42) (39) Loss on redemption of Series C Preferred Stock (28) - (28) - Loss on redemption of Preferred Securities - - - (53) ------------ ------------- ------------ ------------- EARNINGS (LOSS) AVAILABLE FOR COMMON STOCK $ 106 $ (197) $ (192) $ 26,551 - ------------------------------------------------------------------------- ============ ============= ============ =============
See Notes to Consolidated Financial Statements. 3 Form 10-Q - Part I MediaOne Group, Inc. Consolidated Statements of Operations (Continued) (Unaudited)
- ---------------------------------------------------------------------- ------------------------------- ---------------------------- Three Months Ended Nine Months Ended September 30, September 30, ------------------------------- ----------------------------
In thousands, except per share amounts 1999 1998 1999 (1) 1998(1) - ---------------------------------------------------------------------- ---------------- -------------- --------------- ------------ MEDIAONE GROUP STOCK (2) BASIC EARNINGS (LOSS) PER COMMON SHARE: Income (loss) from continuing operations $ 0.18 $ (0.32) $ (0.34) $ 2.75 Income from discontinued operations (3) - - - 0.26 Gain on separation - - - 40.18 Extraordinary item - early extinguishment of debt - - 0.03 (0.55) ================ ============== =============== ============ Basic earnings (loss) per common share $ 0.18 $ (0.32) $ (0.32) $ 42.65 ================ ============== =============== ============ BASIC AVERAGE COMMON SHARES OUTSTANDING 606,664 608,793 605,412 608,730 ================ ============== =============== ============ DILUTED EARNINGS (LOSS) PER COMMON SHARE: Income (loss) from continuing operations $ 0.18 $ (0.32) $ (0.34) $ 2.62 Income from discontinued operations (3) - - - 0.24 Gain on separation - - - 37.42 Extraordinary item - early extinguishment of debt - - 0.03 (0.51) ================ ============== =============== ============ Diluted earnings (loss) per common share $ 0.18 $ (0.32) $ (0.32) $ 39.77 ================ ============== =============== ============ DILUTED AVERAGE COMMON SHARES OUTSTANDING 654,481 608,793 605,412 653,751 - ---------------------------------------------------------------------- ================ ============== =============== ============
(1) Column does not add due to rounding of individual components. (2) For 1998 earnings per share information of Communications Stock see Note 10 - Earnings Per Share - to the Consolidated Financial State- ments. (3) 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
- -------------------------------------------------------------------------------- ------------------- --------------------- September 30, December 31, Dollars in millions 1999 1998 - -------------------------------------------------------------------------------- ------------------- --------------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 1,122 $ 415 Accounts and notes receivable - net 411 255 Income tax receivable 594 375 Current portion of deferred tax asset 67 74 Prepaid and other 119 33 Marketable securities 60 48 ------------------- --------------------- Total current assets 2,373 1,200 ------------------- --------------------- Property, plant and equipment - net 4,790 4,069 Investment in Vodafone Group /AirTouch Communications 8,490 5,919 Investment in Time Warner Entertainment 2,517 2,442 Net investment in international ventures held for sale 465 - Net investment in international ventures - 1,344 Intangible assets - net 11,684 11,647 Other assets 2,105 1,571 ------------------- --------------------- Total assets $ 32,424 $ 28,192 - -------------------------------------------------------------------------------- =================== =====================
See Notes to Consolidated Financial Statements. 5 Form 10-Q - Part I MediaOne Group, Inc. Consolidated Balance Sheets (Continued)
- -------------------------------------------------------------------------------- ------------------- -------------------- September 30, December 31, Dollars in millions 1999 1998 - -------------------------------------------------------------------------------- ------------------- -------------------- (Unaudited) LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Short-term debt $ 1,529 $ 569 Accounts payable 325 332 Employee compensation 95 80 Deferred revenues and customer deposits 171 87 Other 645 546 ------------------- -------------------- Total current liabilities 2,765 1,614 ------------------- -------------------- Long-term debt 7,441 4,853 Deferred income taxes 7,311 6,035 Deferred credits and other 144 641 Commitments and contingencies Minority interest in Centaur Funding 1,110 1,099 Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Company-guaranteed debentures 1,060 1,061 Preferred stock subject to mandatory redemption 50 100 Shareowners' equity: Preferred stock 930 927 Common shares 10,465 10,324 Retained earnings 478 669 Accumulated other comprehensive income 670 869 ------------------- -------------------- Total shareowners' equity 12,543 12,789 ------------------- -------------------- Total liabilities and shareowners' equity $ 32,424 $ 28,192 - -------------------------------------------------------------------------------- =================== ====================
See Notes to Consolidated Financial Statements. 6 Form 10-Q - Part I MediaOne Group, Inc. Consolidated Statements of Cash Flows (Unaudited)
- ------------------------------------------------------------------------------------- --------------- --------------- Nine Months Ended September 30, 1999 1998 - ------------------------------------------------------------------------------------- --------------- --------------- OPERATING ACTIVITIES Dollars in millions
Net income (loss) $ (122) $ 26,643 Adjustments to net income (loss): Discontinued operations - (747) Gain on Separation - (24,461) Extraordinary (gain) loss on debt extinguishment (17) 333 Depreciation and amortization 884 894 Equity losses in unconsolidated ventures 291 273 Merger costs 1,537 - Gains on investments - net (3,222) (3,911) Deferred income taxes 1,473 1,515 Distribution from unconsolidated ventures - 42 Separation costs paid - (115) Changes in operating assets and liabilities: Accounts and notes receivable (177) 87 Prepaid and other current assets (23) (20) Accounts payable and accrued liabilities 62 (182) Other - net (175) 40 --------------- --------------- Cash provided by operating activities 511 391 --------------- --------------- INVESTING ACTIVITIES Expenditures for property, plant and equipment (1,436) (1,157) Investment in international ventures (96) (157) Investment in domestic ventures (97) (84) Purchase of miscellaneous assets - (35) Proceeds from sales of investments 656 201 Proceeds on exchange of investment in AirTouch 534 - Cash from net investment in assets held for sale - 47 Other - net 28 77 --------------- --------------- Cash used for investing activities (411) (1,108) --------------- --------------- FINANCING ACTIVITIES Net (repayments of) proceeds from short-term debt (287) 679 Net proceeds from issuance of long-term debt 1,232 1,642 Repayments of long-term debt (333) (5,447) Repayments of Preferred Securities - (582) Proceeds from issuance of common stock 79 138 Dividends paid on common stock - (519) Dividends paid on preferred stock (38) (39) Purchases of treasury stock (46) (240) --------------- --------------- Cash provided by (used for) financing activities 607 (4,368) --------------- --------------- Cash provided by discontinued operations - 4,953 --------------- --------------- CASH AND CASH EQUIVALENTS Increase (decrease) 707 (132) Beginning balance 415 184 =============== =============== Ending balance $ 1,122 $ 52 - ------------------------------------------------------------------------------------- =============== ===============
See Notes to Consolidated Financial Statements. 7 Form 10-Q - Part I MediaOne Group, Inc. Notes to Consolidated Financial Statements For the Three and Nine Months Ended September 30, 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. The merger was approved by MediaOne Group's shareowners on October 21, 1999. The transaction is expected to close in the first quarter of 2000, subject to legal and regulatory approvals. As a result of the merger approval, certain change of control provisions have been triggered which require the recognition of compensation benefits payable to select employees. Such benefits will be accounted for as merger costs in the fourth quarter of 1999. 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 common stock ("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. Since AT&T has agreed to pay a set amount of AT&T common stock in the merger, MediaOne Group shareowners who elect to receive all AT&T common stock or all cash may be subject to proration in the event that the common stock to be issued is over or under subscribed. 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 the 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. If a shareowner chooses the AT&T stock plus cash election, the maximum additional cash payment would be $5.42 per share of MediaOne Group Stock. If a shareowner chooses the AT&T stock election, the maximum additional cash payment would be $8.50 per share of MediaOne Group Stock. MediaOne Group currently holds a 25.51 percent interest in Time Warner Entertainment Company, L.P. ("TWE"). The remaining interest in TWE is owned by Time Warner, Inc. ("Time Warner"). In order to avoid disputes as to whether the AT&T merger would violate the non-competition provisions of the TWE partnership agreement, on August 3, 1999, MediaOne Group sent a notice of termination to TWE which will terminate these non-competition 8 Form 10-Q - Part I MediaOne Group, Inc. Notes to Consolidated Financial Statements (Dollars in Millions) (Unaudited) provisions as to MediaOne Group. The non-competition provisions will continue to apply to Time Warner. Delivery of the notice of termination permitted TWE to terminate most of MediaOne Group's management rights in TWE, which it did on August 4, 1999. Most of these rights would have terminated in any event upon the change of control of MediaOne Group in the merger. The delivery of the termination notice and the resulting termination of management rights is irrevocable, however, even if the merger does not occur. The loss of these management rights may have a material adverse effect on the value of MediaOne Group's interest in TWE. Notwithstanding the notice of termination, MediaOne Group retains certain rights under the partnership agreement, including the right to approve such matters as the merger of TWE, TWE's entrance into new lines of business and the issuance of new partnership interests. In addition, Time Warner has expressed its view that, absent Time Warner's consent, completion of the AT&T merger will violate the TWE partnership agreement unless AT&T and MediaOne Group delay completion of the merger at least until August 3, 2000, one year following delivery of the termination notice. While AT&T and MediaOne Group disagree with this view, if Time Warner's view prevails and if Time Warner does not consent to an earlier closing, AT&T and MediaOne Group may have to delay completing the merger to August 3, 2000. Any such delay could delay our ability to realize the expected financial and operating benefits of the merger. NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation. The Consolidated Financial Statements have been prepared by the Company 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. 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. These Consolidated Financial Statements should 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, and MediaOne Group's Form 10-Q's for the three and six month periods ended March 31, 1999 and June 30, 1999 filed with the SEC. Certain reclassifications within the Consolidated Financial Statements have been made to conform to the current year presentation. 9 Form 10-Q - Part I MediaOne Group, Inc. Notes to Consolidated Financial Statements (Dollars in Millions) (Unaudited) NOTE 3: DOMESTIC ACQUISITIONS, DISPOSITIONS AND OTHER Cable System Trades. During third quarter of 1999, MediaOne Group, Time Warner Cable, a division of Time Warner and TWE, and Cox Communications, Inc., ("Cox") completed the exchange of certain cable systems previously announced. Effective July 31, 1999, MediaOne Group exchanged cable systems in Ohio and Maine, serving approximately 280,000 subscribers, for Time Warner Cable cable systems in Massachusetts and New Hampshire, serving approximately 240,000 subscribers, and $40 in cash. Effective August 31, 1999, MediaOne Group exchanged cable systems in California, serving approximately 67,000 subscribers, and $39 in cash for Time Warner Cable cable systems in Georgia, serving approximately 72,000 subscribers; and MediaOne Group cable systems in Connecticut and Rhode Island, serving approximately 51,000 subscribers, and cash of $10 for Cox cable systems in Massachusetts, serving approximately 54,000 subscribers. As a result of the cable system trades with Time Warner Cable and Cox, MediaOne Group recognized a pretax gain of $368 ($226 after tax). The pretax gain is net of a $26 deferred gain related to a cable system traded with TWE, of which MediaOne Group owns a 25.51 percent interest. The deferred gain will be amortized to earnings over 15 years. MediaOne Group accounted for the cable systems acquired in the trades under the purchase method of accounting. The excess of the purchase price over the fair market value of net tangible assets acquired totaled $436 and will be amortized over 25 years. The purchase price allocation is based on preliminary information and may be modified upon the receipt of final asset appraisals. NOTE 4: OPERATING SEGMENTS In accordance with Statement of Financial Accounting Standards ("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 and nine month periods ended September 30, 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. 10 Form 10-Q - Part I MediaOne Group, Inc. Notes to Consolidated Financial Statements (Dollars in Millions) (Unaudited) Operating Results: --------------------------- Domestic Cable & Broadband ---------------------------
MediaOne of Multimedia Eliminations of Delaware (1) Ventures (2) International Other & Adjustments Consolidated --------------------------------------------- --------------- ------------- ------------- ------ ------------- ------------ Three months ended September 30, 1999 Sales and other revenues $ 674 $ 886 $ 528 $ - $ (1,413) $ 675 EBITDA (3) 242 232 81 (13) (322) 220 Net income (loss) 122 40 8 (22) - 148 - ---------------------------------------------- -------------- -------------- ------ ------------ ------------ ------------ Three months ended September 30, 1998 Sales and other revenues $ 614 $ 822 $ 363 $ 15 $ (1,188) $ 626 EBITDA (3) 227 210 79 (22) (301) 193 Net income (loss) (103) 5 (56) (30) - (184) - ---------------------------------------------- -------------- -------------- ------- ------------- ----------- ------------ Nine months ended September 30, 1999 Sales and other revenues $ 1,993 $ 2,415 $ 1,424 $ 7 $ (3,837) $ 2,002 EBITDA (3) 731 868 280 (51) (1,179) 649 Net income (loss) (4) (30) 60 (110) (42) - (122) - ----------------------------------------------- -------------- -------------- ------- -------------- ---------- ------------ Nine months ended September 30, 1998 Sales and other revenues (5) $ 1,840 $ 2,292 $ 1,022 $ 411 $ (3,326) $ 2,239 EBITDA (3, 5) 706 604 147 62 (773) 746 Net income (loss) (5) (339) (3) (205) 27,190 - 26,643 - ------------------------------------------------ -------------- ------------- -------- -------------- ---------- ------------
(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's 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, 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. (4) MediaOne of Delaware's net income during the nine months ended September 30, 1999 includes an extraordinary gain of $17 on the early extinguishment of debt. (5) Other includes proportionate revenue of $354, proportionate EBITDA of $114, and net income of $20 for the nine months ended September 30, 1998 related to the domestic wireless operations which were sold in April 1998. Other net income during the nine month period of 1998 includes a gain of $24,461 on the separation of the telecommunications businesses and the domestic directory business from the Company, a gain of $2,257 on the sale of the domestic wireless businesses, $747 related to discontinued operations, and an extraordinary loss of $333 on the early extinguishment of debt in conjunction with the separation discussed above. 11 Form 10-Q - Part I MediaOne Group, Inc. Notes to Consolidated Financial Statements (Dollars in Millions) (Unaudited) The following table presents a geographic breakout for proportionate revenues and EBITDA and a reconciliation to consolidated amounts:
Three Months Ended Nine Months Ended September 30, September 30, ---------------------------- ------------------------ ---------------------------- ------------------------
1999 1998 1999 1998 -------------------------------------------- ------------ -------------- ------------- ---------- Proportionate Revenue: United States (1) $ 1,560 $ 1,441 $ 4,404 $ 4,502 United Kingdom 336 206 893 591 Central Europe 167 136 462 363 Asia and other 25 31 80 109 ------------ -------------- ------------ ----------- Proportionate revenue 2,088 1,814 5,839 5,565 Less: Proportionate adjustment (1,413) (1,188) (3,837) (3,326) ============= ============== ============ =========== Consolidated revenues $ 675 $ 626 $ 2,002 $ 2,239 ============= ============== ============ =========== Proportionate EBITDA: United States (1) $ 461 $ 416 $ 1,550 $ 1,368 United Kingdom 37 40 160 71 Central Europe 55 54 144 122 Asia and other (11) (16) (26) (42) ---------------------------------- ------------------------------ Proportionate EBITDA 542 494 1,828 1,519 Less: Proportionate adjustment (322) (301) (1,179) (773) ================================== ============================== Consolidated EBITDA $ 220 $ 193 $ 649 $ 746 --------------------------------------------==================================--------==============================
(1) Amounts include proportionate revenue of $354, and proportionate EBITDA of $114 for the domestic wireless operations during the nine months ended September 30, 1998. These operations were sold in April 1998. Total Assets: 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: September 30, 1999 $ 17,102 $ 2,916 $ 1,351 $ 11,055 $ 32,424 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. 12 Form 10-Q - Part I MediaOne Group, Inc. Notes to Consolidated Financial Statements (Dollars in Millions) (Unaudited) International assets decreased $957, or 41.5 percent, during 1999 due primarily to the reclassification of international investments, including investments classified as liabilities, to a net investment in international assets held for sale, and to the sale of the Company's investments in shares of Cable & Wireless Optus Limited ("Optus"). 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 $3,725, or 50.8 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") common stock which was exchanged in June 1999 into Vodafone Group Public Limited Company ("Vodafone") American Depository Receipts ("ADRs") and $9.00 per share cash proceeds. NOTE 5: INVESTMENT IN VODAFONE GROUP During September 1999, the Company contributed 3,600,000 shares of its investment in Vodafone ADRs to MediaOne SPC VI ("SPC VI"), a wholly-owned subsidiary of MediaOne Group. SPC VI subsequently entered into a series of purchased and written options (the "Collar") on its Vodafone ADRs and issued $717 in debt. See Note 7 - Debt - to the Consolidated Financial Statements. The Collar has been designated and is effective as a hedge of the market risk associated with the Company's investment in the Vodafone ADRs. The Collar is therefore carried at market value with gains or losses recorded in equity as a component of other comprehensive income together with any change in the fair value of the Vodafone ADRs. No gain or loss was recognized on the Collar as of September 30, 1999. At expiration of the Collar, the Company will receive cash if the market value of a Vodafone ADR is less than approximately $199.00 per share, effectively eliminating downside risk on the stock below $199.00. Conversely, if the market value of a Vodafone ADR is greater than approximately $288.00 per share, the Company will be required to pay cash which will be offset by the corresponding increase in the value of the Vodafone ADRs. MediaOne Group intends to use proceeds from the sale of the Vodafone ADRs to fund any cash obligations related to the Collar. The Collar expires quarterly, in equal installments, starting in the second quarter of 2003 and ending in the fourth quarter of 2005. The number of Vodafone ADRs and per share values indicated above are prior to a five for one stock split executed by Vodafone in October 1999. 13 Form 10-Q - Part I MediaOne Group, Inc. Notes to Consolidated Financial Statements (Dollars in Millions) (Unaudited) NOTE 6: INVESTMENT IN INTERNATIONAL VENTURES Investment Sales. On July 16, 1999, MediaOne Group sold WatchMark, a wholly owned wireless network management software operation, to Lucent Technologies for net proceeds of $5, resulting in a pretax loss of $1. On August 6, 1999, MediaOne Group agreed to sell its 50 percent ownership in Mercury Personal Communications ("One 2 One"), a wireless operation in the United Kingdom, to Deutsche Telekom for $5.7 billion, including approximately $190 for the repayment of shareholder loans owed to the Company. The sale was consummated on October 1, 1999. In connection with the sale of One 2 One, the Company entered into put options to minimize its exposure to declines in the exchange rate on the British Pound, for a cost of approximately $75. In September 1999, the Company unwound certain of the put options and entered into forward contracts related to the British Pound. The put options and forward contracts expired in October 1999. The cost of the put options and the settlement value on the forward contract will be included in the calculation of the gain on the sale of One 2 One. On September 3, 1999, United Pan-Europe Communications N.V. ("UPC") purchased MediaOne Group's interests in A2000, a cable operator located in the Netherlands, for proceeds of $229, including $14 for the repayment of shareholder loans and receivables owed to the Company. The sale resulted in a pretax gain of $154 ($94 after tax). On September 8, 1999, the Company sold its interest in Lyonnaise Communications, a cable operator in France, for proceeds of $22, which resulted in a pretax gain of $10 ($6 after tax). NOTE 7: DEBT In August 1999, MediaOne SPC IV ("SPC IV"), a wholly-owned subsidiary of MediaOne Group, redeemed approximately $105 of its floating rate debt issued in June 1999 for face value. The debt was redeemed with cash proceeds received in June 1999 on the exchange of the Company's investment in AirTouch common stock for Vodafone ADRs and $9.00 per share cash proceeds. In addition, the Company received proceeds of $30 upon the termination of the corresponding portion of an interest rate swap agreement entered into to fix and pre-fund interest payments on the debt issued by SPC IV. The terminated portion of the interest rate swap agreement had a carrying value of approximately $29. As a result of the partial redemption of SPC IV's floating rate debt and the corresponding reduction in the interest rate swap agreement, the fixed effective interest rate on the debt is approximately 5.91 percent. 14 Form 10-Q - Part I MediaOne Group, Inc. Notes to Consolidated Financial Statements (Dollars in Millions) (Unaudited) On September 23, 1999, SPC VI issued approximately $717 of floating rate debt at 3-month LIBOR plus 0.5 percent and paid $216 to fix and pre-fund interest payments on approximately $717 notional amount of the debt through an interest rate swap agreement (the "Zero Coupon Swap"). The debt and Zero Coupon Swap mature in equal quarterly installments starting in the second quarter of 2003 and ending in the fourth quarter of 2005. The index, maturity and notional amount of the Zero Coupon Swap match the terms of the floating rate debt issued by SPC VI. The Company has deferred the $216 cost of the Zero Coupon Swap and will amortize the cost as an adjustment of interest expense associated with the floating rate debt. As a result of the amortization and payments received under the Zero Coupon Swap, the Company expects the floating rate debt of SPC VI to have a fixed effective interest rate of approximately 6.02 percent. The assets of SPC VI, which are primarily the 3,600,000 Vodafone ADRs, are not available to pay the creditors of any member of the Company except the creditors of SPC VI. The number of Vodafone ADRs held by SPC VI is prior to a five for one stock split executed by Vodafone in October 1999. NOTE 8: PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION Beginning on September 2, 1999, MediaOne Group had the option to redeem the Company's Series C Cumulative Redeemable Preferred Stock (the "Series C Preferred Stock") for one thousand dollars per share plus unpaid dividends and a redemption premium. On September 2, 1999, holders of the Series C Preferred Stock exercised options to receive common shares of Financial Security Assurance Holdings Ltd. ("FSA") held by the Company with a fair market value of $96. As a result of the exercise of the FSA options, the Series C Preferred Stock was effectively redeemed, resulting in an after tax charge to equity of $28 (net of tax benefits of $18). The Company also recognized a pretax gain of $50 ($31 after tax) based upon the difference of the fair market value and carrying value of the FSA shares surrendered. In addition, since the Series C Preferred Stock holders exercised the option to receive FSA shares, the Company did not have to pay a redemption premium. 15 Form 10-Q - Part I MediaOne Group, Inc. Notes to Consolidated Financial Statements (Dollars in Millions) (Unaudited) NOTE 9: SHAREOWNERS' EQUITY Following is a rollforward of shareowners' equity since the end of 1998:
- --------------------------------------------------------- ------------ ------------- ------------ ------------------- Accum. Other Preferred Common Retained Comprehensive Stock Shares Earnings Income - --------------------------------------------------------- ------------ ------------- ------------ ------------------- Balance at December 31, 1998 $ 927 $ 10,324 $ 669 $ 869 Net loss (122) Issuance of MediaOne Group common stock 79 Purchase of treasury stock (46) Preferred stock dividends and accretion (42) Market value adjustments for debt and equity securities, and Exchangeable Notes, net of income taxes (188) Foreign currency translation, net of income taxes (11) Loss on redemption of Series C Preferred Stock (28) Other 3 108 1 ============ ============= ============ =================== Balance at September 30, 1999 $ 930 $ 10,465 $ 478 $ 670 - --------------------------------------------------------- ============ ============= ============ ===================
Other common shares activity during 1999 represents $77 of tax benefits on stock option exercises, $11 of gains on the exercise of a call option on MediaOne Group Stock, and other costs of $20. 16 Form 10-Q - Part I MediaOne Group, Inc. Notes to Consolidated Financial Statements (Dollars in Millions) (Unaudited) Comprehensive Income. Total comprehensive income and the components of comprehensive income follow:
- ------------------------------------------------------------------ ----------------------------- --------------------------- Three Months Ended Nine Months Ended September 30, September 30, ----------------------------- ---------------------------
1999 1998 1999 1998 - ------------------------------------------------------------------ -------------- -------------- ------------- ------------- Net income (loss) $ 148 $ (184) $ (122) $ 26,643 Other comprehensive income (loss), before tax: Foreign currency translation adjustment (5) 19 (39) 27 Unrealized gains (losses) on debt and equity securities, and Exchangeable Notes 606 (107) 1,951 583 Reclassification for gains realized in net income (loss) 20 - (2,232) (11) Income tax (provision) benefit related to items of other comprehensive income (loss) (242) 44 121 (227) -------------- -------------- ------------- ------------- Total other comprehensive income (loss), net of tax 379 (44) (199) 372 ============== ============== ============= ============= Total comprehensive income (loss) $ 527 $ (228) $ (321) $ 27,015 - ------------------------------------------------------------------ ============== ============== ============= =============
The majority of the unrealized gains on debt and equity securities during the three and nine month periods of 1999 relate to the Company's investment in AirTouch common and preferred stock, which were exchanged for Vodafone ADRs and preferred stock in June 1999. In addition, for the nine month period of 1999, the Company also recorded unrealized gains on its investment in Time Warner Telecom, Inc., a competitive local exchange business, which offered its shares in an initial public offering in May 1999. The reclassification in the three month period of 1999 relates to foreign currency translation adjustments on the sale of an international investment during the period. The reclassification in the nine month period of 1999 for gains realized in net loss is due primarily to gains realized upon the exchange and modification of AirTouch common and preferred stock for Vodafone ADRs and preferred stock. For the nine month period of 1998, MediaOne Group recorded an unrealized gain of $147 related to its investment in AirTouch preferred stock. This unrealized gain was fully offset by a loss on an interest rate swap agreement which was designed to minimize the Company's exposure to fluctuations in the fair value of the AirTouch preferred stock as a result of interest rate changes. 17 Form 10-Q - Part I MediaOne Group, Inc. Notes to Consolidated Financial Statements (Dollars in Millions) (Unaudited) NOTE 10: 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 loss per share and related share amounts for the three month period of 1998 and the nine month period of 1999 do not include potential share issuances associated with MediaOne Group stock options and the Company's 4.5 percent Series D Convertible Preferred Stock (the "Series D Preferred Stock") since the effect would have been antidilutive on the loss from continuing operations. Dilutive securities for the three month period of 1999 and the nine month period of 1998 represent the incremental weighted average shares from potential share issuances associated with stock options of MediaOne Group Stock and the conversion of the Series D Preferred Stock into MediaOne Group Stock, as well as the potential share issuances associated with stock options of Communications Stock in 1998.
- ---------------------------------------------------------------- ----------------------------- ----------------------------- Three Months Ended Nine Months Ended September 30, September 30, ----------------------------- -----------------------------
1999 1998 1999 1998 - ---------------------------------------------------------------- --------------- ------------- ------------- --------------- MEDIAONE GROUP STOCK : Income (loss) from continuing operations $ 148 $ (184) $ (139) $ 1,768 Preferred stock dividends and accretion (14) (13) (42) (39) Loss on redemption of Series C Preferred Stock (28) - (28) - Loss on redemption of Preferred Securities - - - (53) --------------- ------------- ------------- --------------- Income (loss) from continuing operations available to MediaOne Group Stock shareowners used for basic earnings (loss) per share $ 106 $ (197) $ (209) $ 1,676 Preferred stock dividends and accretion on assumed conversion 13 - - 35 =============== ============= ============= =============== Income (loss) from continuing operations available to MediaOne Group Stock shareowners used for diluted earnings (loss) per share $ 119 $ (197) $ (209) $ 1,711 =============== ============= ============= =============== Income from discontinued operations (1) Results of operations - - - $ 158 =============== ============= ============= =============== Gain on separation - - - $24,461 =============== ============= ============= =============== Extraordinary item - early extinguishment of debt - - $ 17 $ (333) - ---------------------------------------------------------------- =============== ============= ============= ===============
(1) Represents the operations of the domestic directory business, which were discontinued effective June 12, 1998. 18 Form 10-Q - Part I MediaOne Group, Inc. Notes to Consolidated Financial Statements (Dollars in Millions, Except Per Share Amounts) (Unaudited) - ------------------------------------------------------------------ ----------------------------- ---------------------------- Three Months Ended Nine Months Ended September 30, September 30, ----------------------------- ----------------------------
1999 1998 1999 1998 - ------------------------------------------------------------------ --------------- ------------- ------------- -------------- MEDIAONE GROUP STOCK : Weighted average number of shares used for basic earnings (loss) per share (in thousands) 606,664 608,793 605,412 608,730 Effect of dilutive securities: Stock options 8,228 - - 6,312 Series D Preferred Stock 39,589 - - 38,709 =============== ============= ============= ============== Weighted average number of shares used for diluted earnings (loss) per share 654,481 608,793 605,412 653,751 =============== ============= ============= ============== BASIC EARNINGS (LOSS) PER COMMON SHARE: Income (loss) from continuing operations $ 0.18 $ (0.32) $ (0.34) $ 2.75 =============== ============= ============= ============== =============== ============= ============= ============== Income from discontinued operations (1) - - - $ 0.26 =============== ============= ============= ============== =============== ============= ============= ============== Gain on separation - - - $ 40.18 =============== ============= ============= ============== =============== ============= ============= ============== Extraordinary item - early extinguishment of debt - - $ 0.03 $ (0.55) =============== ============= ============= ============== DILUTED EARNINGS (LOSS) PER COMMON SHARE: Income (loss) from continuing operations $ 0.18 $ (0.32) $ (0.34) $ 2.62 =============== ============= ============= ============== Income from discontinued operations (1) - - - $ 0.24 =============== ============= ============= ============== Gain on separation - - - $ 37.42 =============== ============= ============= ============== Extraordinary item - early extinguishment of debt - - $ 0.03 $ (0.51) =============== ============= ============= ============== COMMUNICATIONS STOCK: (2) Income from discontinued operations used for basic and diluted earnings per share (3) - - - $ 589 =============== ============= ============= ============== Weighted average number of shares used for basic earnings per share (in thousands) - - - 484,972 Effect of dilutive securities - stock options - - - 4,097 --------------- ------------- ------------- -------------- Weighted average number of shares used for diluted earnings per share - - - 489,069 =============== ============= ============= ============== BASIC AND DILUTED EARNINGS PER SHARE: Basic earnings per share from discontinued oper. (3) - - - $ 1.21 ============= ============= ============= ============== Diluted earnings per share from discontinued oper.(3) - - - $ 1.20 - -------------------------------------------------------------------- ============= ============= ============= ==============
(1) Represents the operations of the domestic directory business, which were discontinued effective June 12, 1998. (2) The Communications Stock was cancelled on June 12, 1998, effective with the separation of the telecommunications businesses from the Company. (3) Represents the operations of the telecommunications businesses which were discontinued effective June 12, 1998. 19 Form 10-Q - Part I MediaOne Group, Inc. Notes to Consolidated Financial Statements (Dollars in Millions) (Unaudited) NOTE 11: SUBSEQUENT EVENTS International Investment Sales. On October 4, 1999, the Company signed an agreement to sell its interest in Telewest Communications plc ("Telewest") to Microsoft Corporation ("Microsoft") for approximately 30 million shares of Microsoft common stock with a value of approximately $3 billion. The terms and conditions of the sale will be subject to certain approvals. This transaction is expected to close by year end. On October 22, 1999, MediaOne Group agreed to sell its interests in most of its Central European wireless ventures to Deutsche Telekom for $2 billion. These ventures include Polska Telefonia Cyfrowa, a wireless operator in Central Europe located in Poland, Westel 900 and Westel Radiotelefon, wireless operators located in Hungary, and Russian Telecommunications Development Corporation ("RTDC"), a Russian venture which holds various wireless investments. This transaction is expected to close early next year. On October 27, 1999, the Company sold its interest in Cable Plus a.s. ("Cable Plus"), a cable operator in the Czech Republic, to UPC for proceeds of $150. Series D Preferred Stock. On October 1, 1999, MediaOne Group issued redemption notices to its Series D Preferred Stock holders, with a conversion effective date of November 15, 1999. The number of shares of MediaOne Group Stock to be received for the Series D Preferred Stock will be based on the Series D Preferred Stock liquidation value of $50.00 per share, divided by 95 percent of the average of the daily closing price of MediaOne Group Stock for the ten consecutive trading days ending on November 10, 1999. Prior to November 15, 1999, the Series D Preferred Stock is convertible at the option of the holder into 1.98052 shares of MediaOne Group Stock per share of Series D Preferred Stock. As of September 30, 1999, MediaOne Group had outstanding 19,989,175 shares of Series D Preferred Stock. Debt Offering. On November 2, 1999, MediaOne Group sold 26 million Premium Income Exchangeable Securities(SM) (the "Exchangeable Notes") for gross proceeds of approximately $1.1 billion. The Exchangeable Notes mature on November 15, 2002, and are mandatorily redeemable into Vodafone ADRs, the cash equivalent, or a combination of cash and Vodafone ADRs, based upon a predetermined formula. In October 1999, Vodafone executed a five for one stock split of its Vodafone ADRs. The PIES offering was based on post-split shares. 20 Form 10-Q - Part I MediaOne Group, Inc. Notes to Consolidated Financial Statements (Dollars in Millions) (Unaudited) NOTE 12: 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 for the nine month period of 1998 were as follows: Revenues were $5,454; operating income was $1,412; income before income taxes was $1,187; income tax expense was $(440); and net income from discontinued operations was $747. 21 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, and from direct broadcast satellite systems, (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 expenses (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 - Three and Nine Months Ended September 30, 1999 Compared with 1998 MediaOne Group Income (Loss) from Continuing Operations Normalized Income (Loss) from Continuing Operations:
Three Months Ended Nine Months Ended September 30, Change September 30, Change --------------------- ------------------- --------------------- ---------------------
1999 1998 $ % 1999 1998 $ % - ----------------------------------- ---------- ---------- ---------- -------- ---------- ---------- ---------- ---------- Income (loss) from continuing operations $ 148 $ (184) $ 332 - $ (139) $ 1,768 $ (1,907) - Adjustments to reported income (loss) from continuing operations: (Gain) loss on investments: Domestic (257) (2) (255) - (314) (26) (288) - International - net (102) - (102) - (175) - (175) - Exchange of AirTouch - - - - (1,530) - (1,530) - PrimeStar - - - - 40 - 40 - Domestic wireless (1) - - - - - (2,257) 2,257 - Merger costs 9 - 9 - 1,521 - 1,521 - Minority interest - Centaur - - - - 13 - 13 - Domestic wireless operations(1) - - - - - (20) 20 - ========== ========== ========== ======== ========== ========== ========== ========== Normalized loss from continuing operations $ (202) $ (186) $ (16) 8.6 $ (584) $ (535) $ (49) 9.2 - ----------------------------------- ========== ========== ========== ======== ========== ========== ========== ==========
(1) The domestic wireless businesses were sold to AirTouch effective 4/6/98. 22 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) Basic Earnings (Loss) Per Share From Continuing Operations Available for MediaOne Group Stock:
Three Months Ended Nine Months Ended September 30, Change September 30, Change --------------------- ------------------ --------------------- ----------------
1999 1998 $ % 1999 1998 $ % - ---------------------------------------- ---------- ---------- --------- -------- ---------- ---------- ---------- ----- Earnings (loss) from continuing operations available for common stock $ 0.18 $ (0.32) $ 0.50 - $ (0.34) $ 2.75 $ (3.09) - Adjustments to reported earnings (loss) from continuing operations: (Gain) loss on investments: Domestic (0.42) - (0.42) - (0.51) (0.04) (0.47) - International - net (0.17) - (0.17) - (0.30) - (0.30) - Exchange of AirTouch - - - - (2.52) - (2.52) - PrimeStar - - - - 0.07 - 0.07 - Domestic wireless (1) - - - - - (3.71) 3.71 - Merger costs 0.01 - 0.01 - 2.51 - 2.51 - Minority interest - Centaur - - - - 0.02 - 0.02 - Domestic wireless operations (1) - - - - - (0.04) 0.04 - Loss on redemption of Series C Preferred Stock 0.04 - 0.04 - 0.04 - 0.04 - Loss on redemption of Preferred Securities - - - - - 0.09 (0.09) - Other - - - - - 0.01 (0.01) - ---------- ---------- --------- -------- ---------- ---------- ---------- ----- Normalized loss from continuing operations available for common stock $ (0.36) $ (0.32) $(0.04) 12.5 $ (1.03) $ (0.94) $ (0.09) 9.6 - ---------------------------------------- ========== ========== ========= ======== ========== ========== ========== =====
(1) The domestic wireless businesses were sold to AirTouch effective 4/6/98. 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 loss which follows. The increase in normalized loss from continuing operations during the three month period ended September 30, 1999 was primarily a result of increased interest expense, equity losses in unconsolidated ventures, minority interest expense in Centaur Funding and guaranteed minority interest expense. The increase was partially offset by a loss recognized in the third quarter of 1998 related to an interest rate swap on the Company's investment in AirTouch preferred stock. The increase in normalized loss from continuing operations during the nine month period of 1999 was primarily a result of increased depreciation and amortization expense, and minority interest expense in Centaur Funding. The increase was partially offset by decreased interest expense from lower debt levels at the beginning of 1999, and by the loss recognized in 1998 related to an interest rate swap discussed above. 23 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions) Sales and Other Revenues
- ----------------------------- ----------------------- -------------------- ------------------------- -------------------- Three Months Ended Nine Months Ended September 30, Change September 30, Change ----------------------- -------------------- ------------------------- --------------------
1999 1998 $ % 1999 1998 $ % - ----------------------------- ----------- ----------- --------- ---------- ------------ ------------ --------- ---------- Cable and broadband: Domestic $ 674 $ 614 $ 60 9.8 $ 1,993 $ 1,840 $ 153 8.3 International - 6 (6) - 7 17 (10) (58.8) -------------------------------------------------------------------------------------------- 674 620 54 8.7 2,000 1,857 143 7.7 Corporate 1 6 (5) (83.3) 2 20 (18) (90.0) Other - - - - - 1 (1) - -------------------------------------------------------------------------------------------- Current operations 675 626 49 7.8 2,002 1,878 124 6.6 Domestic wireless(1) - - - - - 361 (361) - ============================================================================================ Total $ 675 $ 626 $ 49 7.8 $ 2,002 $ 2,239 $ (237) (10.6) - -----------------------------============================================================================================
(1) The domestic wireless businesses were sold to AirTouch effective 4/6/98. MediaOne Group sales and other revenues increased during the three month period ended September 30, 1999, primarily as a result of growth in domestic cable and broadband revenues. Sales and other revenues decreased during the nine month period ended September 30, 1999 primarily as a result of the sale of the domestic wireless businesses in April 1998, partially offset by growth in domestic cable and broadband revenues. Normalized for acquisitions and dispositions, total revenues for the three and nine month periods of 1999 increased $59, or 9.6 percent, and $175, or 9.6 percent, respectively, compared with total revenues of $616 and $1,827, for the same periods in 1998, respectively. The normalized increases were due primarily to growth in domestic cable and broadband revenues. 24 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions) Domestic cable and broadband revenues increased during the three month period ended September 30, 1999 due primarily to greater basic cable, advertising and new products revenues. The increase during the nine month period of 1999 was due primarily to greater basic cable, pay-per-view, advertising and new products revenue, partially offset by the lack of PrimeStar, Inc. ("PrimeStar") direct broadcast services ("DBS") revenues in 1999. Normalized for the one-time effects of cable system acquisitions and dispositions, total domestic cable and broadband revenues for the three and nine month periods of 1999 increased 10.5 percent and 10.7 percent, respectively. Basic Cable. Basic cable services revenues increased during the three and nine month periods of 1999 due primarily to an approximate five percent increase in revenue per average cable subscriber and increased basic subscribers. At September 30, 1999, basic cable subscribers were 4,983,000, an increase of 1.7 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 September 30, 1999, premium units were 4,325,000, an increase of 6.9 percent compared with the same period in 1998, normalized for the effects of cable system acquisitions and dispositions. During the third quarter of 1999, the Company launched digital service in Pompano, Florida, bringing the Company to five digital markets launched. At September 30, 1999, digital subscribers were 23,600 and digital market-ready homes were 832,000. Advanced analog subscribers totaled 1,354,000 at September 30, 1999, with 5,091,000 advanced analog market-ready homes. Pay-per-view. Pay-per-view revenues increased during the three and nine month periods ended September 30, 1999 due primarily to the offering of various major sporting events in 1999 compared with one major sporting event in 1998. In addition, growth in advanced analog and digital subscribers during 1999, as well as higher impulse pay-per-view capability, has resulted in greater movie and other product purchases. During 1999, purchases of pay-per-view services have increased 11 percent on a normalized basis. 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, slightly offset by free installation programs offered during the second quarter of 1999. 25 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions) Other. Other revenues include revenues received for guides and miscellaneous revenues, offset by franchise fee payments. Video. Video revenue per average cable subscriber was $43.26 per month for the three month period ended September 30, 1999, an increase of 6.2 percent compared with $40.73 for the same period in 1998. For the nine month period ended September 30, 1999, video revenue per average cable subscriber was $42.85 per month, an increase of 7.0 percent compared with $40.05 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 5.9 percent and 6.8 percent during the three and nine month periods of 1999, respectively. Video revenue per average cable subscriber has increased as a result of increased rates and expanded channel offerings, as well as growth in advertising and pay-per-view revenues. Video revenues increased 7.3 percent and 8.1 percent during the three and nine month periods of 1999, respectively, 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 Internet access services, as well as the launch of residential telephone services during 1998 and 1999. Normalized for dispositions, new products revenues increased $20, or 222.2 percent, and $48, or 177.8 percent, during the three and nine month periods of 1999, respectively, compared with new products revenues of $9 and $27 for the same periods in 1998. At September 30, 1999, MediaOne Group had approximately 41,800 residential telephone customers with 56,400 telephone lines. Residential telephone services were available to 1,331,400 market-ready homes as of September 30, 1999, compared with 256,400 as of the same period in 1998. At September 30, 1999, MediaOne Group had approximately 173,200 high speed Internet customers compared with 53,400 high speed Internet customers for the same period in 1998. High speed Internet access services were available to 4,794,100 market-ready homes at September 30, 1999, compared with 3,166,300 as of the same period in 1998. 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. Cable and Broadband - International. International cable and broadband revenues represent the consolidated operations of Cable Plus. Effective April 1, 1999, MediaOne Group no longer consolidates the operations of Cable Plus as the entity was sold in October 1999. 26 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions) Corporate. Corporate revenues during the three and nine month periods of 1999 decreased due to adjustments associated with the discontinuance of insurance policies on cellular phones. Domestic Wireless. On April 6, 1998, MediaOne Group sold its domestic wireless businesses to AirTouch. Operating Loss
- ----------------------------- ----------------------- -------------------- ------------------------- -------------------- Three Months Ended Nine Months Ended September 30, Change September 30, Change ----------------------- -------------------- ------------------------- --------------------
1999 1998 $ % 1999 1998 $ % - ----------------------------- ----------- ----------- --------- ---------- ------------ ------------ --------- ---------- Cable and broadband: Domestic $ (61) $ (56) $ (5) 8.9 $ (141) $ (114) $ (27) 23.7 International - (1) 1 - (1) (5) 4 (80.0) -------------------------------------------------------------------------------------------- (61) (57) (4) 7.0 (142) (119) (23) 19.3 International wireless - (2) 2 - (2) (7) 5 (71.4) Corporate (24) (36) 12 (33.3) (89) (109) 20 (18.3) Other (1) - (1) - (2) (6) 4 (66.7) -------------------------------------------------------------------------------------------- Current operations (86) (95) 9 (9.5) (235) (241) 6 (2.5) Domestic wireless(1) - - - - - 93 (93) - ============================================================================================ Total $ (86) $ (95) $ 9 (9.5) $ (235) $ (148) $ (87) 58.8 - -----------------------------============================================================================================
(1) The domestic wireless businesses were sold to AirTouch effective 4/6/98. During the three month period ended September 30, 1999, MediaOne Group's operating loss decreased due primarily to a reduction in corporate costs. During the nine month period ended September 30, 1999, MediaOne Group's operating loss increased due primarily to the sale of its domestic wireless businesses in April 1998. Also contributing were increased depreciation and amortization charges on the continuing upgrade of the Company's cable network, partially offset by decreased corporate costs during 1999. MediaOne Group's EBITDA was $220 and $193 for the three month periods in 1999 and 1998, respectively, and $649 and $746 for the nine month periods in 1999 and 1998, respectively. Excluding the effect of the domestic wireless operations, EBITDA would have been $598 for the nine month period 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. 27 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 increased during the three month period ended September 30, 1999 due primarily to increased depreciation expense on the continuing upgrade of the Company's cable network, partially offset by the suspension of $18 in depreciation and amortization expense related to cable systems held for sale in the first half of 1999. The cable systems were traded for Time Warner Cable and Cox cable systems during the third quarter of 1999. Domestic cable and broadband operating losses increased during the nine month period ended September 30, 1999 due primarily to increased depreciation expense on the continuing upgrade of the Company's cable networks, as well as a one-time $25 depreciation and amortization charge related to the deferral of a cable system trade with Tele-Communications, Inc. (the {"TCI trade") until such time as the merger of MediaOne Group with AT&T is completed. Depreciation and amortization expense on the TCI trade properties had been suspended during 1998 pending the trade of these properties. Partially offsetting the increase in operating losses was the suspension of $48 in depreciation and amortization expense related to cable systems held for sale in 1999, and a one-time charge of $28 in the first quarter of 1998 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 the Minnesota systems in 1997 while they were held for sale. During the three month period of 1999, EBITDA for domestic cable and broadband operations was $242, an increase of $15, or 6.6 percent, compared with $227 for the same period in 1998. Revenue increases of $60, or 9.8 percent, were partially offset by increased programming costs of $25, or 17.7 percent, and increased operating, general and administrative costs of $20, or 8.1 percent. Normalized for the one-time effects of cable system acquisitions and dispositions, domestic cable and broadband EBITDA increased $17, or 7.6 percent. During the nine month period of 1999, EBITDA for domestic cable and broadband operations was $731, an increase of $25, or 3.5 percent, compared with $706 for the same period in 1998. Revenue increases of $153, or 8.3 percent, were partially offset by increased programming costs of $55, or 12.8 percent, and increased operating, general and administrative costs of $73, 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 $30, or 4.3 percent. 28 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions) Video EBITDA was $253, an increase of $11, or 4.5 percent, for the three month period of 1999, compared with $242 for the same period in 1998. For the nine month period of 1999, video EBITDA was $772, an increase of $31, or 4.2 percent, compared with $741 for the same period in 1998. Normalizing for acquisitions and dispositions, video EBITDA increased $12, or 5.0 percent, for the three month period of 1999, compared with video EBITDA of $241 for the same period in 1998, and increased $30, or 4.0 percent, for the nine month period of 1999 compared with video EBITDA of $742 for the same period in 1998. New products EBITDA was a loss of $(11) for the three month period of 1999, a decrease in losses of $4, or 26.7 percent, compared with EBITDA losses of $(15) in the same period of 1998. New products revenue increases of $16, or 123.1 percent, were partially offset by new products cost increases of $12, or 42.9 percent, during the period, primarily for the offering of residential telephone services. For the nine month period of 1999, new products EBITDA was a loss of $(41), an increase in losses of $(2), or 5.1 percent. New products revenue increases of $41, or 120.6 percent, were offset by new products cost increases of $43, or 58.9 percent, during the nine month period, primarily for the offering of residential telephone services. Normalizing for dispositions, new products EBITDA loss for the three month period of 1999 decreased $5, or 31.3 percent, compared with new products EBITDA loss of $(16) for the same period in 1998. Normalizing for dispositions, new products EBITDA was a loss of $(41) for both of the nine month periods in 1999 and 1998. Programming costs were $166 for the three month period in 1999, an increase of $25, or 17.7 percent, over the same period in 1998. For the nine month period of 1999, programming costs were $486, an increase of $55, or 12.8 percent, over the same period in 1998. Excluding programming costs related to PrimeStar DBS services, programming costs during the nine month period of 1999 increased $69, or 16.5 percent. The normalized increase was primarily a result of programmer rate increases, expanded channel offerings and growth in subscribers, as well as fees paid in 1999 to the Road Runner joint venture to provide high speed Internet services to MediaOne Group's customers. Operating, general and administrative costs were $266 during the three month period of 1999, an increase of $20, or 8.1 percent, over the same period in 1998. During the nine month period of 1999, operating, general and administrative costs were $776, an increase of $73, or 10.4 percent, over the same period in 1998, partially offset by decreased costs of $16 related to the PrimeStar Contribution. Increases in operating, general and administrative costs were primarily a function of adding customer service employees; spending on marketing and advertising to deploy new products, such as high speed Internet and residential telephone services, and to drive subscriber growth; and spending on specific initiatives to improve the operations of the Company. 29 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions) During the three and nine month periods of 1999, MediaOne Group incurred initiatives costs of $15 and $38, respectively, to improve reporting and billing systems and to create customer databases to serve customers more effectively, and incurred incremental costs of $4 and $16, respectively, for Year 2000 remediation, for a total of $19 and $54, respectively. Initiatives spending and incremental Year 2000 costs in the three and nine month periods of 1999 have increased a total of $9 and $36, respectively, compared with the same periods in 1998. International Wireless. International wireless operating losses represent the consolidated operations of RTDC. Effective April 1, 1999, MediaOne Group no longer consolidates RTDC's results as the entity is held for sale. Corporate. Corporate costs for the three and nine month periods of 1999 have decreased. Other. Costs incurred for the development of domestic Internet content services have decreased during the nine month period of 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 Nine Months Ended September 30, Change September 30, Change ----------------------- ------------------ ------------------------- ------------------
1999 1998 $ % 1999 1998 $ % - ------------------------------ ----------- ----------- --------- -------- ------------ ------------ --------- -------- Interest expense $ (114) $ (86) $ (28) 32.6 $ (313) $ (379) $ 66 (17.4) Equity losses in unconsolidated ventures (89) (68) (21) 30.9 (291) (273) (18) 6.6 Gains (losses) on investments: Domestic sales and redemption 418 3 415 - 510 42 468 - International sales and exit costs - net 163 - 163 - 295 - 295 - Exchange of AirTouch - - - - 2,482 - 2,482 - Domestic wireless sale - - - - - 3,869 (3,869) - PrimeStar - - - - (65) - (65) - Minority interest expense in Centaur Funding (26) - (26) - (97) - (97) - Guaranteed minority interest expense (24) (11) (13) - (71) (53) (18) 34.0 Merger costs (15) - (15) - (1,537) - (1,537) - Other income - net 48 13 35 - 116 86 30 34.9 - ----------------------------------------------------------------------------------------------------------------------
30 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions) Interest Expense. Interest expense during the three month period of 1999 increased due primarily to the issuance of: (a) $1.7 billion of debt in June and September 1999 associated with the monetization of Vodafone ADRs, (b) a $1.5 billion note payable to AT&T in May 1999 for the termination fee paid to Comcast Corporation ("Comcast") on behalf of MediaOne Group, and (c) $1.7 billion of Exchangeable Notes during the later part of 1998. Interest expense for the nine month period of 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 as a result of the sale of the Company's domestic wireless operations, partially offset by the issuance of the Exchangeable Notes during the latter part of 1998. Equity Losses in Unconsolidated Ventures. Equity losses during the three month period of 1999 increased due primarily to greater losses of $(67) from international ventures, partially offset by increased earnings of $46 from domestic ventures. For the nine month period of 1999, equity losses from international ventures have increased $(123), partially offset by increased earnings from domestic ventures of $105. Effective April 1, 1999, equity losses from international ventures include the results of operations of Cable Plus and RTDC as these investments are no longer consolidated with the Company's results of operations. Equity losses from international ventures during the three month period of 1999 increased due primarily to greater losses from the Company's investments in international wireless ventures and higher ownership in the equity losses of Telewest and other international cable and broadband ventures. MediaOne Group has a higher ownership in the equity losses of Telewest as a result of the Company's participation in a Telewest rights offering in 1998. During the nine month period of 1999, equity losses from international ventures increased due primarily to a higher ownership in the equity losses of Telewest and other international cable and broadband ventures, partially offset by improved results from the international wireless ventures. Equity earnings from domestic ventures have increased due to one-time gains recognized by TWE during the three and nine month periods of 1999, and the absence of losses from the investment in PrimeCo Personal Communications, L.P. ("PrimeCo") during the nine month period of 1999 as it was sold to AirTouch in April 1998. In addition, as of April 1, 1999, the Company suspended recording equity losses for its high speed data joint venture with Time Warner, TWE and Time Warner Entertainment/Newhouse Partnership as its investment was reduced to zero and the Company had no future funding commitments to the joint venture. 31 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions) Gains (Losses) on Investments Sales and Redemption of Domestic Investments. During the three month period of 1999, MediaOne Group finalized certain cable system trades with Time Warner Cable and Cox which resulted in pretax gains of $330 ($202 after tax) and $38 ($24 after tax), respectively. The Company also recognized a gain of $50 ($31 after tax) on the exercise of an option for FSA shares held by the Company which was exercised in conjunction with the redemption of the Series C Preferred Stock. In addition, during the nine month period of 1999, debt exchangeable into common stock ("DECS") matured and was redeemed for shares of FSA resulting in a pretax gain of $21 ($14 after tax), and MediaOne Group sold: (a) investments in two providers of business telephony services resulting in a pretax gain of $44 ($27 after tax), (b) various cable systems resulting in a pretax gain of $15 ($9 after tax), and (c) miscellaneous assets from its capital assets group resulting in a pretax gain of $12 ($7 after tax). During the three month period of 1998, MediaOne Group sold various investments, resulting in a pretax gain of $3. During the nine month period of 1998, MediaOne Group sold a cable programming investment and various other investments resulting in a pretax gain of $42 ($26 after tax). Sales and Exit Costs of International Investments - net. During the three month period of 1999, MediaOne Group sold its investment in A2000 for a pretax gain of $154 ($94 after tax), and various other international investments for a pretax gain of $9 ($8 after tax, including a correction to the tax provision on the sale of Listel). During the nine month period of 1999, MediaOne Group sold its investment in A2000 described above, as well as Optus shares resulting in a pretax gain of $155 ($95 after tax), its investment in Listel resulting in a pretax gain of $20 ($9 after tax), and various other international investments for a pretax gain of $9 ($5 after tax). In addition, during the nine month period of 1999, the Company recorded a charge of $43 ($28 after tax) related to its international exit plan. Exchange of AirTouch Investment. Effective on June 30, 1999, MediaOne Group exchanged and modified its investment in AirTouch common and preferred stock for Vodafone ADRs and preferred stock and $9.00 per share cash proceeds, resulting in a net pretax gain of $2,482 ($1,530 after tax). Sale of Domestic Wireless Investment. On April 6, 1998, MediaOne Group sold its domestic wireless businesses to AirTouch resulting in a pretax gain of $3,869 ($2,257 after tax). PrimeStar Investment. During the first quarter of 1999, MediaOne Group recorded a pretax loss of $65 ($40 after tax) for probable obligations related to its investment in PrimeStar, of which a total of $55 was funded in April, June and September 1999. 32 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions) Minority Interest Expense in Centaur Funding. Minority interest expense in Centaur Funding for the three and nine month periods of 1999 represents dividends and accretion on the $1.1 billion of preferred shares (the "Preference Shares") issued in December 1998 by Centaur Funding Corporation ("Centaur"), a special purpose entity consolidated by MediaOne Group. In addition, since the Preference Shares were referenced to the AirTouch preferred shares, Centaur recorded a $21 extraordinary dividend in June 1999 payable to the Preference Shares Series B and Series C holders to mirror the extraordinary dividend paid by AirTouch in August 1999 as a result of the Vodafone merger. This dividend amount is reflected as minority interest expense in Centaur Funding for the nine month period of 1999. Guaranteed Minority Interest Expense. Guaranteed minority interest expense has increased during the three and nine month periods of 1999, due primarily to the exchange of MediaOne Group's 7.96 and 8.25 percent Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding soley Company-guaranteed debentures (the "Preferred Securities") for 9.30 and 9.50 percent Preferred Securities in mid-June 1998, and the issuance in October 1998 of 9.04 percent Preferred Securities. The exchange of the Preferred Securities was a result of the separation of the Company's businesses into two separate companies effective on June 12, 1998. Merger Costs. Merger costs during the three month period of 1999 include severance costs, and miscellaneous legal and advisory fees of $15 ($9 after tax), related to merger activity of the Company. Merger costs for the nine month period of 1999 include a charge of $1,500 to terminate the Company's merger agreement with Comcast, as well as severance costs and miscellaneous legal and advisory fees of $37 related to merger activity of the Company, resulting in total pretax merger costs of $1,537 ($1,521 after tax). Other Income - Net. During the three and nine month periods of 1999, other income increased due primarily to the recognition in 1998 of a $40 loss related to an interest rate swap associated with the Company's investment in AirTouch preferred stock. For the nine month period of 1999, other income also increased as a result of dividend income from the Company's investment in AirTouch preferred stock, partially offset by increased foreign exchange transactions losses associated with loans to international ventures. The Company also recorded $15 of income in 1999 for a fee paid by Optus to the Company as a result of having met certain performance measures. 33 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions) (Provision) Benefit for Income Taxes for Continuing Operations
- ------------------------------ ----------------------- ----------------- ------------------------ ------------------ Three Months Ended Nine Months Ended September 30, Change September 30, Change ----------------------- ----------------- ------------------------ ------------------
1999 1998 $ % 1999 1998 $ % - ------------------------------ ----------- ----------- -------- -------- ------------- ---------- --------- -------- (Provision) benefit for income taxes $ (127) $ 60 $ (187) - $ (933) $ (1,376) $ 443 (32.2) Effective tax rate 46.2% 24.6% 117.5% 43.8% - --------------------------------------------------------------------------------------------------------------------
The increase in the 1999 effective tax rate is primarily a result of merger costs, gains on the sales of investments and the loss on the PrimeStar investment. Excluding these unusual transactions, the effective tax rate would have been 31.6 percent and 32.2 percent for the three and nine month periods of 1999, respectively. The increase in the 1998 effective tax rate is primarily a result of the gain on the sale of the domestic wireless businesses. Excluding the gain on the sale of the domestic wireless businesses, the domestic wireless operations and gains on the sales of investments, the effective tax rate would have been 26.5 percent and 29.7 percent during the three and nine month periods of 1998, respectively. Liquidity and Capital Resources Operating Activities Cash provided by operating activities during the nine month period ended September 30, 1999 increased $120 to $511 as compared with the same period in 1998. The increase was due to the receipt of $377 of net income tax benefits, due primarily to the carryback of the 1998 taxable loss to the 1996 consolidated tax return, partly offset by the lack of operating cash from the domestic wireless operations which were sold in April 1998. Cash provided during 1998 from operating activities of the domestic wireless operations was offset during the period by increased interest payments on long-term debt outstanding during the period, as well as costs paid for the separation. The Company also received $42 in dividends during 1998, primarily from Westel 450 and Westel 900, the Company's European wireless investments in Hungary. In August 1999, MediaOne Group received $21 from AirTouch as an extraordinary dividend related to the exchange of AirTouch preferred shares for Vodafone preferred shares. Since the Centaur Preference Shares were referenced to the AirTouch preferred shares, Series B Preference Shares holders received an $18 interest payment from Centaur in August 1999. The Series C Preference Shares holders will receive their share of the extraordinary dividend upon redemption of the Series C Preference Shares. 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 Vodafone ADRs. 34 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 $1,436 and $1,157 during the nine month periods ended September 30, 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 nine months ended September 30, 1999 and 1998, MediaOne Group invested $96 and $157, respectively, in international ventures, net of $19 and $45 repayments in 1999 and 1998, respectively, from a wireless investment in the United Kingdom. The investments made in 1999 were primarily capital contributions and shareholder loans to cable investments in Belgium, the Netherlands, Poland, Japan, and Singapore, as well as wireless ventures in India and Indonesia. During 1998, MediaOne Group invested $131 in Telewest as a result of the Company's participation in a rights offering by Telewest. Telewest offered the rights in connection with its acquisition of General Cable in September 1998. The remaining investments made in 1998 were capital contributions to cable investments in Belgium, Japan and Singapore, as well as to wireless ventures in the Slovak Republic, India and Indonesia. Domestically, MediaOne Group invested $97 and $84 during the nine month periods ended September 30, 1999 and 1998, respectively, including $55 funded in 1999 related to the Company's funding obligations of PrimeStar. The remaining investments in 1999 primarily represent ventures for the development of Internet content services. During 1998, the Company funded $64 related to its investment in PrimeCo which was sold to AirTouch in April 1998. During 1999, MediaOne Group sold various investments resulting in net proceeds of $656, comprised of the following:
---------------------------------------------------------------------------------- -------------------- Investment Description Cash Proceeds ---------------------------------------------------------------------------------- -------------------- International investments: A2000 $ 229 Listel 55 Lyonnaise 22 Optus shares 164 Two business telephony providers 82 Miscellaneous assets of capital assets group 64 Various cable television systems 32 Other assets 8 ==================== TOTAL $ 656 ---------------------------------------------------------------------------------- ====================
35 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions) In addition, MediaOne Group received cash proceeds of $534 upon the exchange of its investment in AirTouch common stock for Vodafone ADRs and $9.00 per share cash proceeds. During the nine month period ended September 30, 1998, the Company sold various investments resulting in net proceeds of $201, comprised of the following: (a) an equity investment in PrimeStar Partners, L.P. for $77, (b) a cable programming investment for $38, (c) various cable systems for $42, and (d) miscellaneous assets for $44. In addition, during 1999, MediaOne Group received net proceeds of $28 from various asset transactions, including a payment to Cox on the swap of cable systems totaling $10, a receipt of $16 on the maturity of an option for FSA shares held by the Company, a receipt of $10 on the maturity of an investment, and the receipt of $12 for miscellaneous transactions. During 1998, MediaOne Group received proceeds of $71 on the sale of a note receivable and $6 for miscellaneous asset sales. The Company also purchased various cable television systems during 1998 totaling $35. Financing Activities Debt Activity. Total debt at September 30, 1999 was $8,970, an increase of $3,548 compared with December 31, 1998. The increase in debt outstanding was due primarily to the issuance in June and September 1999 of $1.7 billion of debt associated with the monetization of Vodafone ADRs, the issuance of a $1.5 billion note payable to AT&T for the funding of the Comcast merger termination fee, and increases in the fair value of the Exchangeable Notes since the redemption value of the Exchangeable Notes is derived from the fair market value of Vodafone ADRs. Debt increases during the period were partially offset by the DECS maturity in May 1999, the early extinguishment of long-term debt, and the de-consolidation of debt related to Cable Plus and RTDC. 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. On September 2, 1999, holders of the Series C Preferred Stock exercised options to receive common shares of FSA held by the Company, resulting in the effective redemption of the Series C Preferred Stock. The Company did not have to pay a redemption premium since the Series C Preferred Stock holders exercised the option to receive FSA shares rather than redeeming their Series C Preferred Stock shares. On September 23, 1999, SPC VI issued $717 of floating rate debt a 3-month LIBOR plus 0.5 percent and paid $216 for a Zero Coupon Swap to fix and pre-fund interest payments on the debt. Net proceeds from the debt offering were invested in short term instruments, to be used for general corporate purposes. 36 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions) On June 3, 1999, MediaOne SPC IV ("SPC IV"), a wholly-owned subsidiary of MediaOne Group, issued $1,128 of floating rate debt at 3-month LIBOR plus 0.5 percent and paid $321 for a Zero Coupon Swap to fix and pre-fund interest payments on the debt. Net proceeds from the debt offering were used for general corporate purposes. As a result of the Vodafone merger, $105 of the debt issued by SPC IV was repaid in August using the cash proceeds from the exchange of AirTouch common stock into Vodafone ADRs and $9.00 per share cash proceeds. On June 1, 1999, MediaOne Group redeemed 11.0 percent senior subordinated debentures with a carrying value of $345, including a debt premium of $45. The debt extinguishment resulted in a net gain of $17 (net of income tax expense of $11). In addition, the Company redeemed a third-party note for its carrying value of $12. MediaOne Group financed the redemptions with cash on hand. On May 15, 1999, DECS originally issued in 1996 matured and were redeemed for FSA shares held by the Company. The redemption resulted in a pretax gain of $21 ($14 after tax). During August and September 1998, MediaOne Group issued approximately $1,686 of 6.25 percent Exchangeable Notes for net proceeds of $1,642. On June 12, 1998, MediaOne Group tendered $4.9 billion notional amount of long-term debt. Also on June 12, 1998, MediaOne Group tendered for cash $301 face value of the 7.96 percent Preferred Securities and $237 face value of the 8.25 percent Preferred Securities originally issued in 1995 and 1996, respectively. The cash redemption amount of $5.5 billion for the long-term debt and $582 for the Preferred Securities was financed with floating-rate commercial paper with a weighted average interest rate of 5.85 percent. In addition, in accordance with the terms of the separation agreement, the newly created entity upon the distribution of the telecommunications businesses of the Company funded to MediaOne Group $3.9 billion related to the transfer of U S WEST Dex, the domestic directory business previously owned by MediaOne Group. Such funds were used to repay a portion of the commercial paper issued to tender the debt discussed above. Dividends. During 1998, the Company paid $519 of common dividends on the Communications Stock. Effective June 12, 1998, MediaOne Group no longer pays dividends on the Communications Stock. 37 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions) 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 Commitments. During April 1999, the sale of PrimeStar's medium-powered business was closed. As a result, MediaOne Group was released as guarantor on a $75 letter of credit for PrimeStar. The Company remains a guarantor for PrimeStar on a $25 letter of credit. MediaOne Group increased its ownership in Titus Communications Corporation, a broadband network operation in Japan, during the second and third quarters of 1999, and its ownership in Chofu Cable Television, a cable operation in Japan, during the second quarter of 1999. As part of the acquisitions, MediaOne Group assumed outstanding debt guarantees of approximately $75. Debt Ratings. On October 20, 1999, Moody's Investor Service raised MediaOne Group's senior unsecured debt rating to Baa1 from Baa2, and the Preferred Securities rating to ba2 from ba3. In addition, the senior debt rating at MediaOne of Delaware, Inc. ("MediaOne"), the domestic cable and broadband subsidiary of the Company, was raised to Baa2 from Baa3. The credit ratings are investment grade and remain on credit watch with positive implications. MediaOne Group does not guarantee the outstanding senior debt of MediaOne. Shelf Registration. Under a registration statement filed with the SEC as of October 8, 1999, MediaOne Group is permitted to issue up to $3.9 billion of new debt securities. 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. MediaOne Group is exposed to market risks associated with equity security prices related to its investments in marketable equity securities and associated options to purchase marketable equity securities. In 1999, the Company's exposure to equity price risk has changed due to initial public offerings by various companies in which MediaOne Group has an investment, the AirTouch/Vodafone merger and the Collars established on some Vodafone shares. 38 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions) The table below presents the impact of hypothetical movements in the equity security prices related to MediaOne Group's combined position in marketable equity securities and derivative contracts:
- -------------------------------------------------- ------------------------------ ------------------- ---------------- Hypothetical Change in 9/30/99 Stock Price ------------------------------
Increase in Decrease in Fair Market Fair Market Investment Increase Decrease Value Value - -------------------------------------------------- -------------- --------------- ------------------- ---------------- Vodafone common stock, including Exchangeable Notes 30% 30% $ 825 $ 1,145 Internet related investments 50% 50% 94 93 All other investments 10% 10% 53 49 =================== ================ Total $ 972 $ 1,287 - -------------------------------------------------- -------------- --------------- =================== ================
The changes in the equity security prices are based on hypothetical movements in future market rates and are not necessarily indicative of actual results that may occur. Competitive and Regulatory Environment Cable and Broadband - Domestic. On October 8, 1999, the Federal Communications Commission (the "FCC") revised its rules on the number of cable subscribers that a company may reach and the method to identify cable ownership interests that would be attributable to a company. The revised rules maintained the original ruling that a cable operator may not own systems that reach more than 30 percent of United States homes. The calculation of the number of United States homes reached was modified, however, to include those households that subscribe to broadcast satellite and other multi-channel video programming distributors, effectively increasing the number of subscribers that a cable operator may serve. The FCC has voluntarily stayed the ownership rules pending the outcome of a court challenge to the original ownership rules. The Company believes that these new rules will allow the AT&T merger to close. 39 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions) 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 Act. MediaOne Group uses software and related technologies throughout its business that may be affected by the date change in the year 2000. MediaOne Group established a corporate-wide Year 2000 program in 1997, which in relation to other business projects and objectives has been assigned a high priority. The inability of systems to appropriately recognize the year 2000 could result in a disruption of Company operations. More specifically, such a failure could result in material operational impacts on various of the Company's business operations, as identified in more detail in the chart below. MediaOne Group continues its progress through a comprehensive program to evaluate, monitor and address the impact of the Year 2000 on its operations. MediaOne Group is utilizing both internal and external resources in implementing the program. The program consists of the following phases: Phase (I) Assessment - Structured evaluation, including a detailed inventory outlining the impact that the Year 2000 may have on current operations. (II) Detailed Plan - Establishment of priorities, development of specific action steps and allocation of resources to address the issues as outlined in Phase I. (III)Conversion - Implementation of the necessary changes, (i.e., repair, replacement or retirement) as outlined in Phase II. (IV) Testing - Verification that the conversions implemented in Phase III will be successful in resolving the Year 2000 problem so that inventory items used by the critical business processes will function properly. (V) Implementation - The final roll-out of selected and verified Year 2000 solutions into an operational unit. MediaOne Group identified three primary risk assessment levels for various inventory items relative to its Year 2000 program. These levels are high, medium and low, with high risk items being those that may have such an impact on the business, that if the risk is not appropriately managed and/or mitigated, the occurrence of the risk could have an adverse impact on the operations of the business, its customers and its employees. Medium risks are those that if they are not appropriately managed and/or mitigated, the occurrence of the risk may cause major difficulties in managing the day-to-day operations of the business, and/or have a significant impact on the ability to deliver acceptable service to customers. Low risks are those that if they are not appropriately managed and/or mitigated, the occurrence of the risk may cause difficulties in managing the business, however, should not severely impact service delivery, cash flow, or critical management activities. 40 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions) MediaOne Group has identified and prioritized four critical business functions across its business operations in order to manage its Year 2000 program. The critical business functions are (i) customer service, which includes service delivery, service disruption, network management and workforce management; (ii) customer care and billing, which includes bill issuance and access to functioning call centers; (iii) cash flow, which includes payment processing, general ledger, accounts payable and accounts receivable; and (iv) employees, health and safety, which includes payroll processing, pension fund issues, and building operations and security. MediaOne Group has identified two business areas that are subject to Year 2000 disclosures. These are Domestic Cable and Broadband, and Investments in Unconsolidated Subsidiaries. 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. As of September 30, 1999, all four critical business functions managed by the program were 98+ percent complete* relative to the high and medium priority projects. - ------------------------ ----------------------------- -------------------------- ------------------- --------------- Date of Business Functions Current Areas of Focus Operational Impact Current Status Completion - ------------------------ ----------------------------- -------------------------- ------------------- --------------- Customer Service Head End Controller Inability to provide Complete* Q3 1999 Digital Transmission video, telephony & Equipment data service to Switches customers Ad Insertion Network Surveillance Customer Care & Billing Subscriber Billings Loss of revenues Complete* Q3 1999 Ad Sales Billings Loss of customer Call Center Operations provisioning and Data Communications repair support Desktop Computing Cash Flow Financial Systems Interruption to cash Complete* Q3 1999 receipts & disbursements cycle Employees, Health & Payroll & Benefit Systems Loss of support systems Complete* Q2 1999 Safety Facilities Functions and employee disruption - ------------------------ ----------------------------- -------------------------- ------------------- ---------------
* Indicates ongoing Year 2000 compliant operations, which includes a process to identify inventory which will be continually updated with new items throughout 1999. 41 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions) 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 testing and/or implementation 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. Third Party Relationships MediaOne Group has significant relationships and dependencies with regard to systems and technology provided and supported by third party vendors and service providers. As part of its Year 2000 program, MediaOne Group established a vendor compliance group to obtain formal Year 2000 compliance representation from vendors who provide products and services to MediaOne Group. The scope of this group's focus includes vendors who provide information technologies, network switching and elements, infrastructure, electronic trading partners and other third party suppliers. The vendor compliance process is being performed concurrently with the regional/business unit Year 2000 remediation activities. In addition, the MediaOne Group Year 2000 legal team has established in parallel a vendor contract analysis program. Business Continuity Business continuity teams are now in place for the Year 2000 program and include business contingency and response and recovery management. Operational response and recovery plans are in place to quickly assess and repair service interruptions which may occur during the millennium rollover. Costs of Year 2000 Program MediaOne Group has incurred approximately $48 of costs to implement its Year 2000 compliance program through the third quarter of 1999 and currently expects to incur between $50 to $60 of costs in aggregate, of which $10 to $15 represent capitalized expenditures. Of the total costs being incurred, approximately $45 to $55 are incremental to MediaOne Group. The funding of these costs will be managed by the Company through its liquidity and capital resources plan. 42 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 collateral effects 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. * * * * * * * * * 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. 43 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 - Nine Months Ended September 30, 1999 Compared With 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.
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Nine Months Ended September 30, 1999 1998 $ % - ----------------------------------------------------------- ------------ ----------- ----------- ------------ Proportionate Revenues Cable and broadband: Domestic (1) $ 4,408 $ 4,132 $ 276 6.7 International 377 230 147 63.9 ------------ ----------- ----------- ------------ 4,785 4,362 423 9.7 International wireless 1,047 792 255 32.2 Corporate (4) 15 (19) - Other (2) 11 42 (31) (73.8) ============ =========== =========== ============ Total proportionate revenues (3) $ 5,839 $ 5,211 $ 628 12.1 =========================================================== ============ =========== =========== ============ Proportionate EBITDA (4) Cable and broadband: Domestic (1) $ 1,599 $ 1,310 $ 289 22.1 International 56 10 46 - ------------ ----------- ----------- ------------ 1,655 1,320 335 25.4 International wireless 224 137 87 63.5 Corporate (47) (50) 3 (6.0) Other (2) (4) (2) (2) - ------------ ----------- ----------- ------------ Total proportionate EBITDA (3) $ 1,828 $ 1,405 $ 423 30.1 =========================================================== ============ =========== =========== ============
(1) The proportionate results are based on MediaOne Group's 25.51 percent pro rata priority and residual equity interests in reported TWE results, less a $79 deferred gain in 1999 related to a cable system exchange between MediaOne Group and TWE. TWE's results are as reported and have not been adjusted to report TWE investments accounted for under the equity method on a proportionate basis. (2) Primarily includes international directories which were sold in June, 1999. (3) For the nine months ended September 30, 1998, amounts exclude proportionate revenues of $354 and proportionate EBITDA of $114 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. 44 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) Proportionate Statistics (in thousands)
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For the Nine Months Ended September 30, 1999 1998 Amount % - ----------------------------------------------------------- ------------ ----------- ----------- ------------ Cable and broadband: Domestic video subscribers (1) 4,983 4,926 57 1.2 Domestic homes passed (1) 8,496 8,438 58 0.7 Domestic high speed data subscribers (1, 2) 173 53 120 - Domestic telephone lines 56 5 51 - International video subscribers 782 912 (130) (14.3) International homes passed 2,629 2,202 427 19.4 International telephone lines 532 330 202 61.2 International wireless: Subscribers 2,749 1,424 1,325 93.0 POPs 76,254 72,754 3,500 4.8 =========================================================== ============ =========== =========== ============
(1) The proportionate statistics exclude MediaOne Group's 25.51 percent pro rata priority and residual equity interests in reported TWE statistics. (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 $672, or 13.0 percent, and EBITDA increased $196, or 14.3 percent. Cable and Broadband - Domestic. Normalized for the one-time effects of cable system acquisitions and dispositions, proportionate revenues related to MediaOne increased $192, or 10.7 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 for MediaOne increased $30, or 4.3 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 56.8 percent. TWE's results benefited from improved cable, programming and filmed entertainment operations; one-time gains in 1999 on cable system sales and swaps and the early termination of a distribution agreement with a third party. Proportionate EBITDA for domestic cable and broadband also includes a $79 deferred gain related to the 1999 cable system swap between MediaOne and TWE. 45 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 $60, or 18.9 percent, during 1999 due primarily to customer growth at Telewest. During the same period, normalized proportionate EBITDA increased $27, or 93.1 percent, due primarily to reduced MediaOne Group international staff costs and improved EBITDA results from Telewest. Proportionate international cable subscribers totaled 782,000 at September 30, 1999, a 7.4 percent increase over last year on a comparable basis. Telewest's cable television subscribers increased 13.6 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 93.0 percent increase in the proportionate international wireless subscriber base to 2,749,000, on a comparable basis. One 2 One added 886,000 proportionate customers, a 119.6 percent increase from a year ago. Corporate. During 1999, proportionate revenues for corporate operations decreased $19, to $(4), primarily due to adjustments associated with the discontinuance of insurance policies on cellular phones. EBITDA losses decreased $3, to $(47), primarily due to a decrease in corporate costs. Other. Other reflects the results of the international directories operations located in South America and costs related to development activities of Internet content services. During 1999, proportionate revenues decreased $31, to $11, and proportionate EBITDA losses increased $2, to $(4), primarily due to the sale of the international directories operations in June 1999. As a result of this sale, the Company no longer reflects international directories operations in the proportionate results. 46 Form 10-Q - Part I Item 3. Quantitative and Qualitative Disclosures About Market Risk Reference is made to the information set forth on page 38. 47 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. (b) Reports on Form 8-K filed during the Third Quarter of 1999 (i) Form 8-K Current Report dated July 27, 1999, concerning a Press Release by the Company announcing its second quarter 1999 earnings results. 48 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 ----------------------------------------------- MediaOne Group, Inc. November 12, 1999 Richard A. Post Executive Vice President and Chief Financial Officer 49 EX-12 2 RATIO OF EARNINGS MediaOne Group, Inc. RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (Dollars in Millions) Quarter Ended 9/30/1999 9/30/1998 - - --------- --------- Income from continuing operations before income taxes $ 275 $ (244) Interest expense (net of amounts capitalized) 114 86 Interest factor on rentals (1/3) 1 3 Equity losses in unconsolidated ventures (less than 50% owned) 6 38 Minority interest expense 50 11 --------- --------- Earnings $ 446 $ (106) ========= ========= Interest expense $ 117 $ 96 Interest factor on rentals (1/3) 1 3 Minority interest expense 50 11 Preferred stock dividends (pre-tax equivalent) 23 20 --------- --------- Fixed charges $ 191 $ 130 ========= ========= Ratio of earnings to combined fixed charges and preferred stock dividends 2.34 A - B --------- --------- A) Earnings for the quarter ended September 30, 1999 include gains on sales of investments of $581. Without these gains, earnings would be insufficient to cover fixed charges by $326. B) Earnings for the quarter ended September 30, 1998 were insufficient to cover fixed charges by $236. 50 MediaOne Group, Inc. RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (Dollars in Millions) Year-to-Date 9/30/1999 9/30/1998 --------- --------- Income from continuing operations before income taxes $ 794 $ 3,144 Interest expense (net of amounts capitalized) 313 379 Interest factor on rentals (1/3) 3 6 Equity losses in unconsolidated ventures (less than 50% owned) 147 176 Minority interest expense 168 53 --------- --------- Earnings $ 1,425 $ 3,758 ========= ========= Interest expense $ 324 $ 414 Interest factor on rentals (1/3) 3 6 Minority interest expense 168 53 Preferred stock dividends (pre-tax equivalent) 69 69 --------- --------- Fixed charges $ 564 $ 542 ========= ========= Ratio of earnings to combined fixed charges and preferred stock dividends 2.53 A 6.93 B - - --------- --------- A) Earnings for the period ended September 30, 1999 include a $2,482 gain from the exchange of Airtouch shares for Vodafone shares, as well as gains on sales of other investments of $805, partially offset by merger costs of $1,537. Without the net gain of $1,750, earnings would be insufficient to cover fixed charges by $889. B) Earnings for the period ended September 30, 1998 include a $3,869 gain from the sale of domestic wireless operations. Without the gain, earnings would be insufficient to cover fixed charges by $653. 51 MediaOne Group, Inc. RATIO OF EARNINGS TO FIXED CHARGES (Dollars in Millions) Quarter Ended 9/30/1999 9/30/1998 --------- --------- Income from continuing operations before income taxes $ 275 $ (244) Interest expense (net of amounts capitalized) 114 86 Interest factor on rentals (1/3) 1 3 Equity losses in unconsolidated ventures (less than 50% owned) 6 38 Minority interest expense 50 11 --------- --------- Earnings $ 446 $ (106) ========= ========= Interest expense $ 117 $ 96 Interest factor on rentals (1/3) 1 3 Minority interest expense 50 11 --------- --------- Fixed charges $ 168 $ 110 ========= ========= Ratio of earnings to fixed charges 2.65 A - B -------- --------- A) Earnings for the quarter ended September 30, 1999 include gains on sales of investments of $581. Without these gains, earnings would be insufficient to cover fixed charges by $303. B) Earnings for the quarter ended September 30, 1998 were insufficient to cover fixed charges by $216. 52 MediaOne Group, Inc. RATIO OF EARNINGS TO FIXED CHARGES (Dollars in Millions) Year-to-Date 9/30/1999 9/30/1998 --------- --------- Income from continuing operations before income taxes $ 794 $ 3,144 Interest expense (net of amounts capitalized) 313 379 Interest factor on rentals (1/3) 3 6 Equity losses in unconsolidated ventures (less than 50% owned) 147 176 Minority interest expense 168 53 --------- --------- Earnings $ 1,425 $ 3,758 ========= ========= Interest expense $ 324 $ 414 Interest factor on rentals (1/3) 3 6 Minority interest expense 168 53 --------- --------- Fixed charges $ 495 $ 473 ========= ========= Ratio of earnings to fixed charges 2.88 A 7.95 B --------- --------- A) Earnings for the period ended September 30, 1999 include a $2,482 gain from the exchange of Airtouch shares for Vodafone shares, as well as gains on sales of other investments of $805, partially offset by merger costs of $1,537. Without the net gain of $1,750, earnings would be insufficient to cover fixed charges by $820. B) Earnings for the period ended September 30, 1998 include a $3,869 gain from the sale of domestic wireless operations. Without the gain, earnings would be insufficient to cover fixed charges by $584. 53 EX-27 3 FDS --
5 (Replace this text with the legend) 0000732718 MediaOne Group, Inc. 3-MOS 9-MOS DEC-31-1999 DEC-31-1999 JUL-01-1999 JAN-01-1999 SEP-30-1999 SEP-30-1999 1,122 1,122 60 60 411 411 0 0 0 0 2,373 2,373 6,281 6,281 1,491 1,491 32,424 32,424 2,765 2,765 7,441 7,441 1,110 1,110 930 930 10,465 10,465 1,148 1,148 32,424 32,424 675 2,002 675 2,002 0 0 0 0 761 2,237 0 0 114 313 275 794 127 933 148 (139) 0 0 0 17 0 0 148 (122) 0.18 (0.32) 0.18 (0.32)
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