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, 1998
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 31, 1998, was 606,903,541 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, 1998 and 1997 3
Consolidated Balance Sheets -
September 30, 1998 and
December 31, 1997 5
Consolidated Statements of Cash Flows -
Nine Months Ended September 30,
1998 and 1997 7
Notes to Consolidated Financial Statements 8
2. MediaOne Group, Inc. Management's Discussion and Analysis of
Financial Condition and Results of Operations 21
Consolidated Results of Operations 23
Liquidity and Capital Resources 34
Risk Management 39
Selected Proportionate Results of Operations 45
3. MediaOne Group, Inc. Quantitative and Qualitative
Disclosures About Market Risk 48
PART II - OTHER INFORMATION
1. Legal Proceedings 49
6. Exhibits and Reports on Form 8-K 49
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 1998 1997 1998 1997
- ----------------------------------------------------------- ------------- ------------ ------------ -------------
Sales and other revenues:
Cable and broadband $620 $590 $1,857 $1,735
Wireless communications - 373 361 1,071
Corporate and other 6 11 21 69
------------- ------------ ------------ -------------
Total sales and other revenues 626 974 2,239 2,875
Operating expenses:
Cost of sales and other revenues 225 314 783 945
Selling, general and admin. expenses 208 338 710 928
Depreciation and amortization 288 295 894 879
------------- ------------ ------------ -------------
Total operating expenses 721 947 2,387 2,752
------------- ------------ ------------ -------------
Income (loss) from operations (95) 27 (148) 123
Interest expense (86) (178) (379) (518)
Equity losses in unconsolidated ventures (68) (177) (273) (495)
Gain on sale of domestic wireless investment - - 3,869 -
Gains on sales of investments 3 13 42 108
Guaranteed minority interest expense (11) (22) (53) (66)
Other income (expense) - net 13 (5) 86 (16)
------------- ------------ ------------ -------------
Income (loss) from continuing operations before income
taxes (244) (342) 3,144 (864)
(Provision) benefit for income taxes 60 116 (1,376) 267
------------- ------------ ------------ -------------
Income (loss) from continuing operations (184) (226) 1,768 (597)
Income from discontinued operations - net
of income taxes (Note 11):
Results of operations - 420 747 1,256
Gain on Separation - - 24,461 -
------------- ------------ ------------ -------------
Income (loss) before extraordinary item (184) 194 26,976 659
Extraordinary item:
Early extinguishment of debt, net of tax - (3) (333) -
============= ============ ============ =============
NET INCOME (LOSS) $(184) $191 $26,643 $659
============= ============ ============ =============
Dividends on preferred stock (13) (14) (39) (39)
Loss on redemption of Preferred Securities - - (53) -
------------- ------------ ------------ -------------
EARNINGS (LOSS) AVAILABLE FOR
COMMON STOCK $(197) $177 $26,551 $620
- ----------------------------------------------------------- ============= ============ ============ =============
See Notes to Consolidated Financial Statements.
Form 10-Q - Part I
MediaOne Group, Inc.
Consolidated Statements of Operations
(Unaudited), continued
- ---------------------------------------------------------- ----------------------------- ---------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ---------------------------
In thousands (except per share amounts) 1998 1997 1998 (1) 1997
- ---------------------------------------------------------- -------------- -------------- ------------- -------------
MEDIAONE GROUP STOCK (Note 7)
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Income (loss) from continuing operations $(0.32) $(0.40) $2.75 $(1.05)
Income from discontinued operations (2) - 0.14 0.26 0.41
Gain on Separation - - 40.18 -
Extraordinary item - early extinguishment of debt - - (0.55) -
-------------- -------------- ------------- -------------
Basic earnings (loss) per common share $(0.32) $(0.26) $42.65 $(0.64)
============== ============== ============= =============
BASIC AVERAGE COMMON SHARES OUTSTANDING 608,793 606,729 608,730 606,568
============== ============== ============= =============
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Income (loss) from continuing operations $(0.32) $(0.40) $2.62 $(1.05)
Income from discontinued operations (2) - 0.14 0.24 0.41
Gain on Separation - - 37.42 -
Extraordinary item - early extinguishment of debt - - (0.51) -
-------------- -------------- ------------- -------------
Diluted earnings (loss) per common share $(0.32) $(0.26) $39.77 $(0.64)
============== ============== ============= =============
DILUTED AVERAGE COMMON SHARES OUTSTANDING 608,793 606,729 653,751 606,568
- ---------------------------------------------------------- ============== ============== ============= =============
(1) Column does not add due to rounding of individual components.
(2) Amounts represent the operations of U S WEST Dex, Inc., which were
discontinued as of June 12, 1998.
See Note 7 - Earnings Per Share - to the Consolidated Financial Statements
for a discussion of Communications stock earnings per share information.
See Notes to Consolidated Financial Statements.
Form 10-Q - Part I
MediaOne Group, Inc.
Consolidated Balance Sheets
(Unaudited)
- ----------------------------------------------------------------------- ------------------- -------------------
September 30, December 31,
Dollars in millions 1998 1997
- ----------------------------------------------------------------------- ------------------- -------------------
ASSETS
Current assets:
Cash and cash equivalents $52 $184
Accounts and notes receivable - net 310 604
Inventories and supplies 49 29
Deferred tax asset 80 102
Prepaid and other 99 48
Net investment in assets of discontinued operations - 4,367
------------------- -------------------
Total current assets 590 5,334
Gross property, plant and equipment 4,468 5,571
Accumulated depreciation 873 1,299
------------------- -------------------
Property, plant and equipment - net 3,595 4,272
Investment in Time Warner Entertainment 2,447 2,486
Investment in AirTouch Communications 5,025 -
Net investment in international ventures 913 742
Net investment in assets held for sale 436 419
Intangible assets - net 11,754 12,597
Other assets 551 933
------------------- -------------------
Total assets $25,311 $26,783
- ----------------------------------------------------------------------- =================== ===================
See Notes to Consolidated Financial Statements.
Form 10-Q - Part I
MediaOne Group, Inc.
Consolidated Balance Sheets
(Unaudited), continued
- ---------------------------------------------------------------------- -------------------- -------------------
September 30, December 31,
Dollars in millions 1998 1997
- ---------------------------------------------------------------------- -------------------- -------------------
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt $567 $735
Accounts payable 153 395
Employee compensation 76 109
Deferred revenues and customer deposits 86 108
Other 844 841
-------------------- -------------------
Total current liabilities 1,726 2,188
Long-term debt 4,637 8,228
Deferred income taxes 4,978 3,276
Deferred credits and other 606 587
Commitments and contingencies
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
Company-guaranteed debentures 561 1,080
Preferred stock subject to mandatory redemption 100 100
Shareowners' equity:
Preferred stock 925 923
Common shares 10,455 10,876
Retained earnings (deficit) 1,021 (359)
LESOP guarantee - (46)
Accumulated other comprehensive income (loss) 302 (70)
-------------------- -------------------
Total shareowners' equity 12,703 11,324
-------------------- -------------------
Total liabilities and shareowners' equity $25,311 $26,783
- ---------------------------------------------------------------------- ==================== ===================
See Notes to Consolidated Financial Statements.
Form 10-Q - Part I
MediaOne Group, Inc.
Consolidated Statements of Cash Flows (Unaudited)
- ------------------------------------------------------------------------------------ ------------- ------------
Nine Months Ended September 30, 1998 1997
- ------------------------------------------------------------------------------------ ------------- ------------
OPERATING ACTIVITIES Dollars in millions
Net income $26,643 $659
Adjustments to net income:
Discontinued operations (747) (1,256)
Gain on Separation (24,461) -
Extraordinary loss on debt extinguishment 333 -
Depreciation and amortization 894 879
Equity losses in unconsolidated ventures 273 495
Distribution from unconsolidated ventures 42 5
Gain on sale of domestic wireless investment (3,869) -
Gains on sales of investments (42) (108)
Deferred income taxes and amortization of investment tax credits 1,515 (117)
Provision for uncollectibles 35 53
Separation costs paid (115) -
Changes in operating assets and liabilities:
Accounts and notes receivable 87 (102)
Inventories, supplies and other current assets (20) (11)
Accounts payable and accrued liabilities (182) 78
Other - net 5 55
------------- ------------
Cash provided by operating activities 391 630
------------- ------------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment (1,157) (1,072)
Payment to Continental Cablevision shareowners - (1,150)
Investment in international ventures (157) (320)
Investment in domestic ventures (84) (173)
Purchase of miscellaneous assets (35) (25)
Proceeds from sales of investments 201 703
Cash from net investment in assets held for sale 47 242
Other - net 77 1
------------- ------------
Cash used for investing activities (1,108) (1,794)
------------- ------------
FINANCING ACTIVITIES
Net proceeds from (repayments of) short-term debt 679 (2,511)
Proceeds from issuance of long-term debt 1,642 4,124
Repayments of long-term debt (5,447) (377)
Repayments of Preferred Securities (582) -
Proceeds from issuance of common stock 138 65
Dividends paid on common stock (519) (733)
Dividends paid on preferred stock (39) (36)
Purchases of treasury stock (240) (53)
------------- ------------
Cash (used for) provided by financing activities (4,368) 479
------------- ------------
Cash provided by discontinued operations 4,953 630
------------- ------------
CASH AND CASH EQUIVALENTS
Decrease (132) (55)
Beginning balance 184 121
============= ============
Ending balance $52 $66
- ------------------------------------------------------------------------------------ ============= ============
See Notes to Consolidated Financial Statements.
Form 10-Q - Part I
MediaOne Group, Inc.
Notes to Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 1998
(Dollars in millions)
(Unaudited)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The Consolidated Financial Statements have been prepared
by MediaOne Group, Inc. ("MediaOne Group" or the "Company") pursuant to the
interim reporting rules and regulations of the Securities and Exchange
Commission ("SEC"). 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 only
normal recurring adjustments, necessary to present fairly the financial
information set forth therein. It is suggested that these Consolidated Financial
Statements be read in conjunction with the MediaOne Group Consolidated Financial
Statements and notes thereto filed on Form 8-K dated June 18, 1998. The MediaOne
Group Form 8-K filing restated the U S WEST, Inc. Consolidated Financial
Statements filed on Form 10-K/A dated April 13, 1998, and gave effect to the
classification of New U S WEST as a discontinued operation, as defined in Note 2
- - The Separation. It is also suggested that these Consolidated Financial
Statements and notes be read in conjunction with the MediaOne Group Consolidated
Financial Statements and notes thereto filed on Form 10-Q dated August 13, 1998.
The MediaOne Group Form 10-Q filing includes the actual effects of the
Separation and the refinancing of the indebtedness issued or guaranteed by Old
U S WEST, as defined in Note 2 - The Separation.
Certain reclassifications within the Consolidated Financial Statements have been
made to conform to the current year presentation.
NOTE 2: THE SEPARATION
Prior to June 12, 1998, MediaOne Group was known as "U S WEST, Inc." ("Old U S
WEST"). On June 12, 1998, Old U S WEST separated its businesses into two
independent public companies (the "Separation"). Until the Separation, Old U S
WEST conducted its businesses through two groups: U S WEST Media Group (the
"Media Group") and U S WEST Communications Group (the "Communications Group").
Upon Separation, Old U S WEST was renamed "MediaOne Group, Inc." and retained
the multimedia businesses of Media Group, except for U S WEST Dex, Inc. ("Dex"),
the domestic directory business. The telecommunications businesses of the
Communications Group became an independent public company and retained the "U S
WEST, Inc." name ("New U S WEST"). In addition, Dex was aligned with New U S
WEST (the "Dex Alignment").
Form 10-Q - Part I
MediaOne Group, Inc.
Notes to Consolidated Financial Statements
(Dollars in millions)
(Unaudited)
NOTE 3: ACQUISITIONS AND DISPOSITIONS
Telewest Communications plc. On September 1, 1998, Telewest Communications plc
("Telewest"), a cable and telecommunications provider in the United Kingdom,
acquired General Cable PLC ("General Cable"), a cable provider in the United
Kingdom, for approximately $1.1 billion in stock and cash. Holders of General
Cable received 1.243 new Telewest shares and 65 pence in cash for each General
Cable share. Telewest raised the cash for the acquisition through a rights
offering to its existing shareholders, including MediaOne Group. MediaOne Group
purchased 85 million new Telewest shares at a cost of $131. As a result of the
General Cable acquisition and taking into account MediaOne Group's participation
in the rights offering, the Company's ownership of Telewest decreased to 21.6
percent from 26.75 percent. In addition, MediaOne Group recorded an estimated
gain in equity of $39, net of deferred taxes of $25, related to Telewest's
acquisition of General Cable.
Time Warner Telecom. On July 14, 1998, Time Warner Entertainment Company, L.P.
("TWE"), Time Warner Entertainment-Advance/Newhouse Partnership ("TWE-A/N") and
Time Warner, Inc. ("Time Warner") contributed the assets and liabilities of the
Time Warner competitive local exchange business (the "Time Warner Telecom
Business") into a newly formed entity, Time Warner Telecom LLC ("TW Telecom").
The Time Warner Telecom Business had been jointly operated by the parties to
provide telephony services to business customers in their respective cable
markets. TWE and TWE-A/N distributed their ownership interest in TW Telecom on a
pro rata basis to Time Warner, MediaOne Group and Advance/Newhouse. As a result,
MediaOne Group now holds an 18.85 percent interest in TW Telecom. Since the
investment in TW Telecom resulted from a distribution by TWE, MediaOne Group's
investment balance in TWE was reduced by $48, the book value of the TW Telecom
investment attributable to MediaOne Group. The investment in TW Telecom is
included in Other Assets in the Consolidated Balance Sheet, as of September 30,
1998. The Company uses the cost method of accounting for its investment in TW
Telecom.
Form 10-Q - Part I
MediaOne Group, Inc.
Notes to Consolidated Financial Statements
(Dollars in millions)
(Unaudited)
NOTE 4: INVESTMENT IN AIRTOUCH PREFERRED STOCK
In conjunction with the sale of the domestic wireless businesses to AirTouch
Communications, Inc. ("AirTouch"), MediaOne Group received shares of AirTouch
preferred stock. The AirTouch preferred stock is stated at fair value on the
balance sheet, in accordance with Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." To minimize MediaOne Group's exposure to fluctuations in the fair
value of the AirTouch preferred stock, the Company entered into an interest rate
swap agreement in April 1998. At September 30, 1998, the Consolidated Balance
Sheet reflected a payable of $187 related to the interest rate swap agreement.
During the third quarter of 1998, the change in the value of the AirTouch
preferred stock and the interest rate swap did not achieve the required
correlation to continue deferral accounting. As of September 30, 1998, the
AirTouch preferred stock had increased in value by $147 and the interest rate
swap agreement had declined in value by $187. Consequently, in the third quarter
of 1998, MediaOne Group recognized a net loss of $25 ($40 net of income tax
benefits of $15) in other income for the change in the fair value of the
AirTouch preferred stock not offset by the fair value of the interest rate swap
agreement in accordance with SFAS No. 80, "Accounting for Futures Contracts."
NOTE 5: DEBT
Short-term Debt. MediaOne Group maintains a commercial paper program to finance
short-term cash flow requirements, as well as to maintain a presence in the
short-term debt market. The Company is permitted to borrow up to $4.0 billion of
commercial paper, backed by lines of credit, of which approximately $3.8 billion
was available at September 30, 1998.
Long-term Debt. In August and September 1998, MediaOne Group issued 29 million
shares of 6.25 percent Exchangeable Notes (the "Exchangeable Notes") for an
issuance price of $58.125 per note, or gross proceeds of $1.686 billion. The
notes mature on August 15, 2001 and are mandatorily redeemable at MediaOne
Group's option into (i) shares of AirTouch common stock held by MediaOne Group,
(ii) the cash equivalent, or (iii) a combination of cash and AirTouch common
stock. The number of shares of AirTouch common stock to be exchanged for each
Exchangeable Note, and/or the cash equivalent, varies based upon the fair value
of the AirTouch common stock, as follows:
Form 10-Q - Part I
MediaOne Group, Inc.
Notes to Consolidated Financial Statements
(Dollars in millions)
(Unaudited)
(a) If the fair value of the AirTouch common stock is greater than or equal
to $71.75 per share, each Exchangeable Note is equivalent to .8101 of a
share of AirTouch common stock;
(b) If the fair value of the AirTouch common stock is less than $71.75 per
share but greater than $58.125 per share, each Exchangeable Note is
equivalent to a fractional share of AirTouch common stock equal to the
percent of the initial issuance price per Exchangeable Note versus the fair
value of the AirTouch common stock per share; or
(c) If the fair value of the AirTouch common stock is less than or equal to
$58.125 per share, each Exchangeable Note is equivalent to one share of
AirTouch common stock.
The Exchangeable Notes are unsecured obligations of MediaOne Group, ranking
equally in right of payment with all other unsecured and unsubordinated
obligations of MediaOne Group. MediaOne Group used the proceeds from the debt
issuance to reduce outstanding commercial paper and for general corporate
purposes.
The Exchangeable Notes are being accounted for as an indexed debt
instrument since the maturity value of the Exchangeable Notes is
dependent upon the fair value of the underlying AirTouch common
stock. The Company has, therefore, eliminated the market risk on a
decline in the AirTouch common stock value below $58.125 per share on
29 million of the 53 million shares held by the Company. During the
third quarter of 1998, the maturity value of the Exchangeable Notes
was decreased by $33 to reflect the corresponding reduction in the
fair value of the underlying AirTouch common stock. As the AirTouch
common stock is a cost method investment being accounted for as
"available for sale" securities under SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," changes in the
maturity value of the Exchangeable Notes are being recorded in equity
as unrealized gains or losses.
Form 10-Q - Part I
MediaOne Group, Inc.
Notes to Consolidated Financial Statements
(Dollars in millions)
(Unaudited)
NOTE 6: SHAREOWNERS' EQUITY
- -------------------------------------------------- ----------- ----------- ----------- ------------ -----------------
Accumulated
Retained Other
Preferred Common Earnings LESOP Comprehensive
Stock Shares (Deficit) Guarantee Income (Loss)
- -------------------------------------------------- ----------- ----------- ----------- ------------ -----------------
Balance at December 31, 1997 $ 923 $ 10,876 $ (359) $ (46) $ (70)
Net income 26,643
Distribution of New U S WEST (421) (24,924)
Issuance of MediaOne Group stock 75
Issuance of Communications stock 24
Purchase of treasury stock (1) (240)
Common dividends declared ($0.535 per
Communications share) (260)
Preferred dividends (39)
Loss on redemption of Preferred Securities (53)
Market value adjustments for debt and equity
securities, and Exchangeable Notes, net of
reclassification adjustments and income taxes 351
Foreign currency translation, net of income taxes
21
Other 2 141 13 46
=========== =========== =========== ============ =================
Balance at September 30, 1998 $ 925 $ 10,455 $ 1,021 $ - $ 302
- -------------------------------------------------- =========== =========== =========== ============ =================
(1) Includes $31 of Communications stock share repurchases made prior to
the Separation. Communications stock treasury shares were canceled in
conjunction with the Separation.
The $141 of other activity under Common Shares includes $41 for tax
benefits on stock option exercises, a $39 gain related to the acquisition
of General Cable by Telewest in September 1998, a $39 gain on the exercise
of a call option on shares of the Company's stock during the second quarter
of 1998, and miscellaneous activity of $22.
Share Repurchase. On August 7, 1998, the Board of Directors of MediaOne
Group authorized the repurchase of up to 25 million shares of the Company's
common stock over the next three years, dependent on market and financial
conditions. During 1998, MediaOne Group purchased and placed into treasury
approximately 5 million shares of MediaOne Group stock at an average
purchase price of $41.43 per share, or a total cost basis of $209. Of the
total shares repurchased, 3,568,600 shares of MediaOne Group common stock
were repurchased during the third quarter of 1998 at an average purchase
price of $43.28 per share, or a total cost basis of $154.
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,
------------------------------ ------------------------------
1998 1997 1998 1997
- ------------------------------------------------------- --------------- -------------- --------------- --------------
Net income (loss) $(184) $191 $26,643 $659
Other comprehensive income (loss), before tax:
Foreign currency translation adjustment 19 (73) 27 (71)
Unrealized gains (losses) on debt
and equity securities, and
Exchangeable Notes (107) 121 583 188
Reclassification for gains realized in net
income - (29) (11) (45)
Income tax (provision) benefit related to
items of other comprehensive income 44 (7) (227) (36)
--------------- -------------- --------------- --------------
Total other comprehensive income (loss), net of tax (44) 12 372 36
=============== ============== =============== ==============
Total comprehensive income (loss) $(228) $203 $27,015 $695
- ------------------------------------------------------- =============== ============== =============== ==============
The majority of the unrealized gains and losses on debt and equity securities
during 1998 relate to the Company's investment in AirTouch common stock acquired
on April 6, 1998, in connection with the sale by the Company of its domestic
wireless businesses (the "AirTouch Transaction"). In addition, for the
nine-month period ended September 30, 1998, MediaOne Group recorded an
unrealized gain of $147 related to its investment in AirTouch preferred stock
acquired in the AirTouch Transaction. 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.
Form 10-Q - Part I
MediaOne Group, Inc.
Notes to Consolidated Financial Statements
(Dollars in millions)
(Unaudited)
NOTE 7: EARNINGS PER SHARE
The following table reflects the computation of basic and diluted earnings
(loss) per share for MediaOne Group stock and Communications stock. The dilutive
securities for the nine-month period ended September 30, 1998 represent the
incremental weighted average shares from potential share issuances associated
with stock options for MediaOne Group stock and Communications stock, and the
assumed conversion of the convertible Series D Preferred Stock for MediaOne
Group stock. The diluted earnings (loss) and related per share amounts for the
three months ended September 30, 1998 and for the periods in 1997 do not include
potential share issuances associated with stock options and the convertible
Series D Preferred Stock since the effect would have been antidilutive on the
loss from continuing operations.
- --------------------------------------------------------- ---------------------------- -------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -------------------------
1998 1997 1998 1997
- --------------------------------------------------------- ------------- -------------- ------------ ------------
MEDIAONE GROUP STOCK
Income (loss) from continuing operations $(184) $(226) $ 1,768 $(597)
Preferred stock dividends (13) (14) (39) (39)
Loss on redemption of Preferred Securities - - (53) -
------------- -------------- ------------ ------------
Income (loss) from continuing operations available for
common shareowners used for basic earnings per share $(197) $(240) $ 1,676 $(636)
Preferred stock dividends on assumed conversion - - 35 -
============= ============== ============ ============
Income (loss) from continuing operations used for
diluted earnings (loss) per share $(197) $(240) $ 1,711 $(636)
============= ============== ============ ============
Income from discontinued operations
Results of operations (1) $ - $ 84 $ 158 $ 249
============= ============== ============ ============
Gain on Separation $ - $ - $ 24,461 $ -
============= ============== ============ ============
Extraordinary item - early extinguishment of debt - net
of tax $ - $ (3) $ (333) $ -
- --------------------------------------------------------- ============= ============== ============ ============
(1) Represents the operations of Dex, which were discontinued on June 12, 1998.
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,
---------------------------- -------------------------
1998 1997 1998 1997
- --------------------------------------------------------- ------------- -------------- ------------ ------------
(Shares in thousands)
MEDIAONE GROUP STOCK
Weighted average number of shares used for basic
earnings (loss) per share 608,793 606,729 608,730 606,568
Effect of dilutive securities:
Stock options - - 6,312 -
Series D Preferred Stock - - 38,709 -
============= ============== ============ ============
Weighted average number of shares used for diluted
earnings (loss) per share 608,793 606,729 653,751 606,568
============= ============== ============ ============
BASIC EARNINGS (LOSS) PER SHARE:
Continuing operations $(0.32) $(0.40) $ 2.75 $(1.05)
============= ============== ============ ============
Discontinued operations - results of operations (1) $ - $ 0.14 $ 0.26 $ 0.41
============= ============== ============ ============
Discontinued operations - gain on Separation $ - $ - $40.18 $ -
============= ============== ============ ============
Extraordinary item - early extinguishment of debt - net
of tax $ - $ - $(0.55) $ -
============= ============== ============ ============
DILUTED EARNINGS (LOSS) PER SHARE:
Continuing operations $(0.32) $(0.40) $ 2.62 $(1.05)
============= ============== ============ ============
Discontinued operations - results of operations (1) $ - $ 0.14 $ 0.24 $ 0.41
============= ============== ============ ============
Discontinued operations - gain on Separation $ - $ - $37.42 $ -
============= ============== ============ ============
Extraordinary item - early extinguishment of debt - net
of tax $ - $ - $(0.51) $ -
============= ============== ============ ============
(1) Represents the operations of Dex, which were discontinued on June 12, 1998.
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,
-------------------------- -------------------------
1998 (1) 1997 1998 1997
- ----------------------------------------------------------- ----------- -------------- ------------ ------------
(Shares in thousands)
COMMUNICATIONS STOCK
Income from discontinued operations used for basic and
diluted earnings per share (2) $ - $ 336 $ 589 $ 1,007
============ ============== =========== ============
Weighted average number of shares used for basic earnings
per share - 483,218 484,972 482,374
Effect of dilutive securities:
Stock options - - 4,097 -
============ ============== =========== ============
Weighted average number of shares used for diluted
earnings per share - 483,218 489,069 482,374
============ ============== =========== ============
BASIC AND DILUTED EARNINGS PER SHARE:
Basic earnings per share from discontinued operations $ - $ 0.69 $ 1.21 $ 2.08
============ ============== =========== ============
Diluted earnings per share from discontinued operations $ - $ 0.69 $ 1.20 $ 2.08
- ----------------------------------------------------------- ============ ============== =========== ============
(1) The Communications stock was canceled on June 12, 1998, effective with
the Separation.
(2) Represents the operations of the Communications Group, which were
discontinued on June 12, 1998.
NOTE 8: COMMITMENTS AND CONTINGENCIES
Certain cable subsidiaries of the Company have been named as defendants in
various class action lawsuits in Florida, Michigan and Ohio challenging such
subsidiaries' policies for charging late payment fees when customers fail to pay
for subscriber services in a timely manner. MediaOne Group is currently
reviewing the lawsuits to determine what impact, if any, such lawsuits may have
on the operations of the Company.
Form 10-Q - Part I
MediaOne Group, Inc.
Notes to Consolidated Financial Statements
(Dollars in millions)
(Unaudited)
NOTE 9: SUBSEQUENT EVENTS
Cable Systems. On October 13, 1998, MediaOne Group and Tele-Communications, Inc.
("TCI") signed a definitive agreement to exchange certain of MediaOne Group's
cable television systems in Illinois and Michigan for certain of TCI's cable
television systems in South Florida and California. The cable systems each serve
approximately 500,000 subscribers. Consummation of the exchange is expected to
occur in mid-1999, subject to regulatory approvals.
Investment in Telewest Communications plc. On November 10, 1998, MediaOne Group
purchased an additional 175 million Telewest shares from Southwestern Bell
International Holdings at a price of $2.25 per share, or $394. The Company now
holds a 29.9 percent interest in Telewest.
Competitive Local Exchange Businesses. During November 1998, MediaOne Group
entered into a definitive agreement with Hyperion Communications to sell the
Company's investments in Continental Fiber Technologies, Inc. and Alternet of
Virginia, Inc., providers of business telephony services in Jacksonville,
Florida and Richmond, Virginia, respectively, for approximately $83. The sale is
expected to close in the first-quarter of 1999.
Preferred Securities. On October 28, 1998, MediaOne Finance Trust III, a wholly
owned subsidiary of MediaOne Group, issued $500 of 9.04 percent
Company-obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely Company-guaranteed debentures (the "Preferred Securities").
Proceeds from the issuance were used to redeem outstanding commercial paper and
for general corporate purposes.
NOTE 10: NET INVESTMENT IN ASSETS HELD FOR SALE
The capital assets segment is being accounted for in accordance with Staff
Accounting Bulletin No. 93, issued by the SEC, which requires discontinued
operations not disposed of within one year of the measurement date to be
accounted for prospectively in continuing operations as "net investment in
assets held for sale." The net realizable value of the assets is being evaluated
on an ongoing basis with adjustments to the existing reserve, if any, being
charged to continuing operations. No such adjustment has been required. Prior to
January 1, 1995, the entire capital
Form 10-Q - Part I
MediaOne Group, Inc.
Notes to Consolidated Financial Statements
(Dollars in millions)
(Unaudited)
assets segment was accounted for as 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 components of net investment in assets held for sale follow:
- -------------------------------------------------------------------- ------------------- --------------------
September 30, December 31,
1998 1997
- -------------------------------------------------------------------- ------------------- --------------------
ASSETS
Cash and cash equivalents $ 68 $ 54
Finance receivables - net 746 777
Investment in real estate - net of valuation allowance - 156
Bonds, at market value 102 119
Investment in FSA 387 365
Other assets 224 197
------------------- --------------------
Total assets $1,527 $1,668
=================== ====================
LIABILITIES
Debt $269 $372
Deferred income taxes 672 669
Accounts payable, accrued liabilities and other 138 197
Minority interests 12 11
------------------- --------------------
Total liabilities 1,091 1,249
------------------- --------------------
Net investment in assets held for sale $436 $419
==================================================================== =================== ====================
Building sales and operating revenues of the capital assets segment were $77 and
$199 for the three- and nine-month periods ended September 30, 1998,
respectively, and $13 and $91 for the three- and nine-month periods ended
September 30, 1997, respectively.
Revenues of MediaOne Financial Services, Inc. ("Financial Services"), a member
of the capital assets segment, were $5 and $15 for the three- and nine-month
periods ended September 30, 1998, respectively, and $5 and $16 for the three-
and nine-month periods ended September 30, 1997, respectively. Selected
financial data for Financial Services follows.
Form 10-Q - Part I
MediaOne Group, Inc.
Notes to Consolidated Financial Statements
(Dollars in millions)
(Unaudited)
- --------------------------------------------------------------------- ------------------ -------------------
September 30, December 31,
1998 1997
- --------------------------------------------------------------------- ------------------ -------------------
Net finance receivables $742 $ 824
Total assets 1,025 1,208
Total debt 218 363
Total liabilities 940 1,121
Equity 85 87
- --------------------------------------------------------------------- ------------------ -------------------
NOTE 11: DISCONTINUED OPERATIONS
The Company has accounted for the distribution of New U S WEST stock to the
holders of Communications stock, and to the holders of MediaOne Group stock for
the Dex Alignment, as a discontinuance of the businesses comprising New U S
WEST. The measurement date for discontinued operations accounting purposes was
June 4, 1998, the date upon which Old U S WEST's shareowners approved the
Separation. The effective date of the Separation was June 12, 1998. Because the
distribution of New U S WEST was non pro-rata, as compared with the businesses
previously attributed to Old U S WEST's two classes of shareowners, it was
accounted for at fair value. The distribution resulted in a gain of $24,461, net
of $114 of Separation costs (net of tax benefits of $37). Separation costs
included cash payments under severance agreements of $45 and financial advisory,
legal, registration fee, printing and mailing costs. Separation costs also
included a one-time payment to terminate the sale of the Minnesota cable
systems.
Summarized financial information for the discontinued operations is as follows:
- --------------------------------------------------------- -------------------------- ------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ------------------------------
Summarized Operating Results 1998 1997 1998 1997
- --------------------------------------------------------- ------------ ------------- -------------- ---------------
Revenues - $2,960 $5,454 $8,657
Operating income - 756 1,412 2,289
Income before income taxes - 674 1,187 2,011
Income tax expense - (251) (440) (752)
------------ ------------- -------------- ---------------
Income before extraordinary item - 423 747 1,259
Extraordinary item - debt extinguishment - (3) - (3)
============ ============= ============== ===============
Net income of discontinued operations - $420 $747 $1,256
========================================================= ============ ============= ============== ===============
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)
Some of the information presented in or in connection with this report
constitutes "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Although the Company believes that its
expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from its expectations. Factors that could
cause actual results to differ from expectations include: (i) greater than
anticipated competition from new entrants into the cable, and wireless
communications markets, (ii) changes in demand for the Company's products and
services, (iii) regulatory changes affecting the cable and telecommunications
industries, (iv) changes in economic conditions in the various markets served by
MediaOne Group operations, including international markets, that could adversely
affect the level of demand for cable, wireless, or other services offered by the
Company, (v) greater than anticipated competitive activity requiring new pricing
for services, (vi) higher than anticipated start-up costs associated with new
business opportunities, (vii) higher than anticipated employee levels, capital
expenditures, and operating 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.
The Separation
Prior to June 12, 1998, MediaOne Group was known as Old U S WEST. On June 12,
1998, Old U S WEST consummated a transaction in which it separated its
businesses into two independent public companies. Until the Separation, Old U S
WEST conducted its businesses through two groups: the Media Group and the
Communications Group. Upon Separation, Old U S WEST was renamed "MediaOne Group,
Inc." and retained the multimedia businesses of Media Group, except for Dex, the
domestic directory business. The telecommunications businesses of the
Communications Group became an independent public company and retained the "U S
WEST, Inc." name. In addition, Dex was aligned with New U S WEST.
The Company accounted for the distribution of New U S WEST stock to the
Communications Group stockholders, and to the MediaOne Group stockholders for
the Dex Alignment, as a discontinuance of the businesses comprising New U S
WEST. Because the distribution was non pro-rata, as compared with the businesses
previously attributed to Old U S WEST's two classes of stock, the distribution
was accounted for at fair value and resulted in a gain of $24,461, or $40.18
basic earnings per MediaOne Group share, net of $114 of Separation costs (net of
income tax benefits of $37). Separation costs included cash payments under
severance agreements of $45 and financial advisory, legal, registration fees,
printing and mailing costs.
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), continued
In conjunction with the Separation, Old U S WEST redeemed $4.9 billion of its
long term debt outstanding. The redemption resulted in an extraordinary loss of
$333, net of income tax benefits of $209, or $0.55 basic loss per MediaOne Group
share. The loss was the result of refinancing costs, including the difference
between the market and face value of the debt redeemed and a charge for
unamortized debt issuance costs. MediaOne Group financed the redemption with
short-term commercial paper at a weighted average interest rate of 5.85 percent.
In accordance with the Separation Agreement, New U S WEST funded to MediaOne
Group $3.9 billion related to the Dex Alignment. Such funds were used to repay
the commercial paper issued to refinance substantially all of the indebtedness
issued or guaranteed by Old U S WEST. MediaOne Group refinanced the indebtedness
through a combination of tender offers, prepayments, and consent solicitations
(the "Refinancing").
Proceeds from the issuance of the Exchangeable Notes in August and September
1998 were also used to repay commercial paper issued in connection with the
Refinancing.
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), continued
Results of Operations - Continuing Operations - Three and Nine Months Ended
September 30, 1998 Compared with 1997
- -----------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations:
- -----------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
---------------------- -------------------- ----------------------- --------------------
1998 1997 $ % 1998 1997 $ %
- ------------------------------ ---------- ----------- --------- ---------- ---------- ------------ --------- ----------
Income (loss) from
continuing operations $(184) $(226) $42 (18.6) $1,768 $(597) $2,365 -
Adjustments to reported
income (loss) from
continuing operations:
Domestic wireless
operations - (33) 33 - (20) (86) 66 (76.7)
Gain on sale of domestic
wireless investment - - - - (2,257) - (2,257) -
Gains on sales of
investments (2) (7) 5 (71.4) (26) (63) 37 (58.7)
========== =========== ========= ========== ========== ============ ========= ==========
Normalized loss from
continuing operations $(186) $(266) $80 (30.1) $(535) $(746) $211 (28.3)
============================== ========== =========== ========= ========== ========== ============ ========= ==========
- ----------------------------------------------------------------------------------------------------------------------
Basic Earnings (Loss) Per Share From Continuing Operations Available for MediaOne Group Common Stock:
- ----------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
--------------------- --------------------- --------------------- ---------------------
1998 1997 $ % 1998 1997 $ %
- ------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings (loss) from
continuing operations
available for common stock $(0.32) $(0.40) $0.08 (20.0) $2.75 $(1.05) $3.80 -
Adjustments to reported
earnings (loss) from
continuing operations:
Domestic wireless
operations - (0.05) 0.05 - (0.03) (0.14) 0.11 (78.6)
Gain on sale of domestic
wireless investment - - - - (3.71) - (3.71) -
Gains on sales of
investments - (0.01) 0.01 - (0.04) (0.10) 0.06 (60.0)
Loss on redemption of
Preferred Securities - - - - 0.09 - 0.09 -
========== ========== ========== ========== ========== ========== ========== ==========
Normalized loss from
continuing operations
available for common stock $(0.32) $(0.46) $0.14 (30.4) $(0.94) $(1.29) $0.35 (27.1)
============================== ========== ========== ========== ========== ========== ========== ========== ==========
During 1998, MediaOne Group experienced a reduction in normalized losses
from continuing operations due primarily to lower equity losses generated by
unconsolidated international ventures and decreased interest expense due to
lower debt levels at MediaOne Group.
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions), continued
Sales and Other Revenues
- -------------------------- ----------------------- ------------------- ---------------------- --------------------
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
----------------------- ------------------- ---------------------- --------------------
1998 1997 $ % 1998 1997 $ %
- -------------------------- ----------- ----------- --------- --------- ----------- ---------- ---------- ---------
Cable and broadband:
Domestic $614 $584 $30 5.1 $1,840 $1,721 $119 6.9
International 6 6 - - 17 14 3 21.4
----------------------------------------------------------------------------------------
620 590 30 5.1 1,857 1,735 122 7.0
Corporate 6 8 (2) (25.0) 20 21 (1) (4.8)
Other(1) - 3 (3) - 1 48 (47) (97.9)
----------------------------------------------------------------------------------------
Current operations 626 601 25 4.2 1,878 1,804 74 4.1
Domestic wireless(2) - 373 (373) - 361 1,071 (710) (66.3)
========================================================================================
Total $626 $974 $(348) (35.7) $2,239 $2,875 $(636) (22.1)
=================================================================================================================
(1) Primarily includes international directories which were sold in the
second and third quarters of 1997.
(2) The domestic wireless businesses were sold effective 4/6/98.
MediaOne Group sales and other revenues for the three- and nine-month periods
ended September 30, 1998, decreased primarily as a result of the sale of the
domestic wireless businesses in 1998, and the international directories
businesses during the second and third quarters of 1997. Normalized for
acquisitions and dispositions, total revenues increased 11.0 percent and 10.5
percent for the three- and nine-month periods ended September 30, 1998,
respectively.
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions), continued
Cable and Broadband - Domestic
- -------------------------- ----------------------- ---------------------- ---------------------- ---------------------
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
----------------------- ---------------------- ---------------------- ---------------------
REVENUES 1998 1997 $ % 1998 1997 $ %
- -------------------------- ---------- ------------ ---------- ----------- ---------- ----------- ---------- ----------
Domestic
Basic Cable $429 $388 $41 10.6 $1,276 $1,140 $136 11.9
Premium 81 82 (1) (1.2) 240 245 (5) (2.0)
Pay-per-view 16 12 4 33.3 40 42 (2) (4.8)
Advertising 37 33 4 12.1 108 91 17 18.7
Equipt. & Install. 46 40 6 15.0 130 113 17 15.0
Other (8) (3) (5) - (22) (1) (21) -
---------- ------------ ---------- ----------- ---------- ----------- ---------- ----------
Total core cable 601 552 49 8.9 1,772 1,630 142 8.7
New Products 13 3 10 - 34 13 21 -
PrimeStar - 29 (29) - 34 78 (44) (56.4)
========== ============ ========== =========== ========== =========== ========== ==========
Total revenues $614 $584 $30 5.1 $1,840 $1,721 $119 6.9
========================== ========== ============ ========== =========== ========== =========== ========== ==========
Domestic cable and broadband revenues increased during the three- and nine-month
periods ended September 30, 1998, due primarily to increased core cable
revenues, partially offset by the lack of PrimeStar direct broadcast services
("DBS") revenues in all but the first quarter of 1998. Normalized for the
one-time effects of cable system acquisitions and dispositions, and a change in
classification of late fee revenues, total domestic cable and broadband revenues
increased 11.6 percent and 10.5 percent during the three- and nine-month periods
in 1998, respectively.
Basic Cable. Basic cable services revenues increased during the three-
and nine-month periods in 1998 due primarily to a 10 percent increase
in revenue per average cable subscriber and increased basic
subscribers. At September 30, 1998, basic cable subscribers were
4,926,000, an increase of 1.3 percent compared with the same period in
1997, normalized for the effects of cable system acquisitions and
dispositions. The increase in revenue per subscriber is the result of
expanded channel offerings, repackaging of services and increased
rates.
Premium. Premium services revenues decreased during the three- and nine-month
periods of 1998 due primarily to discounting of premium service packages.
Pay-per-view. Pay-per-view revenues increased during the three-month
period of 1998 due to the airing of a boxing event in September, 1998,
and to modest growth in demand for movies. Pay-per-view revenues
decreased during the nine-month period of 1998 due to higher revenues
on a boxing event aired in June, 1997, versus a boxing event aired in
September, 1998.
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Dollars in millions), continued
Advertising. Advertising revenues increased during 1998 as a result of
expanded channel capacity, growth in local and national advertising
sales, and increased rates.
Equipment and Installation. Equipment and installation revenues increased
in 1998 due primarily to subscribers upgrading converter boxes.
Other. Other revenues include franchise fee payments, revenues received for
guides, miscellaneous revenues and late fee revenues in 1997. The decrease
in other revenues during the three- and nine-month periods of 1998 is due
primarily to the classification of late fee revenues in 1998; late fee
revenues were reflected in "other revenues" during 1997, whereas in 1998
these revenues are classified as an offset to "selling, general and
administrative expenses".
Core Cable. Core cable revenue per average cable subscriber was $40.73 per
month for the three-month period ended September 30, 1998, an increase of
7.6 percent, compared with $37.84 for the same period in 1997. For the
nine-month period ended September 30, 1998, core cable revenue per average
cable subscriber was $40.05 per month, an increase of 6.8 percent, compared
with $37.50 during the same period in 1997. Excluding the one-time effects
of cable system acquisitions and dispositions and a change in
classification of late fee revenues, core cable revenue per average cable
subscriber increased 8.8 percent and 7.9 percent for the three- and
nine-month periods of 1998, respectively. Core cable revenue per average
cable subscriber has increased as a result of expanded channel offerings,
repackaging of services and increased rates.
Core cable revenues increased 10.3 percent and 9.4 percent for the three-
and nine-month periods ended September 30, 1998, normalized for the
one-time effects of cable system acquisitions and dispositions, and for the
change in classification of late fee revenues.
New Products. New products revenues increased during 1998 due
primarily to the launch of high speed data ("HSD") Internet access
services in new markets and customer growth, and growth in business
dedicated telephony services.
As of September 30, 1998, MediaOne Group had approximately 55,000 HSD
customers compared with 13,000 HSD customers for the same period in 1997.
The overall penetration rate for HSD Internet access services in markets
launched for more than 18 months ranged from 6 to 8 percent. HSD Internet
access services are available in 11 metro areas in the following states:
California, Florida, Georgia, Illinois, Massachusetts, Michigan, Minnesota,
New Hampshire and Ohio.
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
In addition to business telephony services, during 1998 MediaOne Group
began offering residential telephony services to six metro areas within the
states of California, Florida, Georgia, Massachusetts, and Virginia, with
Virginia being launched in October, 1998. As of September 30, 1998,
residential telephony services were available to approximately 256,000
homes. The penetration rate for homes marketed over an eight-week period
averaged from 8 to 9 percent.
On June 15, 1998, MediaOne Group formed a joint venture with Time Warner,
TWE and TWE/AN (the "HSD Joint Venture") to deliver HSD services under the
"Road Runner" brand name. The HSD Joint Venture is responsible for
maintaining connections to the Internet, providing technical customer
support and developing national content. The parties to the joint venture
operate their respective HSD businesses and are responsible for their
respective customers' billing and customer service issues. Accordingly,
MediaOne Group continues to reflect HSD services revenues in its
consolidated results, as well as a service fee payable to the HSD Joint
Venture for services provided.
PrimeStar. Prior to April 1, 1998, MediaOne Group distributed PrimeStar DBS
services to subscribers in its service areas, and as a result, reflected
consolidated operating results with respect to such subscribers. On April
1, 1998, MediaOne Group contributed its interest in PrimeStar Partners,
L.P. ("Old PrimeStar"), as well as its PrimeStar subscribers and certain
related assets to PrimeStar, Inc. ("PrimeStar"). Consequently, subsequent
to April 1, 1998, MediaOne Group no longer reflects consolidated operating
results for PrimeStar DBS services.
Cable and Broadband - International. International cable and broadband
revenues represent the consolidated operations of Cable Plus a.s., a cable
operator in the Czech Republic.
Domestic Wireless. On April 6, 1998, MediaOne Group sold its domestic
wireless businesses to AirTouch.
Other. The decrease in other revenues is due primarily to the sale of
MediaOne Group's wholly owned international directory operations in the
United Kingdom and Poland during June and October 1997, respectively.
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Operating Income (Loss)
- -------------------------- ----------------------- ---------------------- ---------------------- ---------------------
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
----------------------- ---------------------- ---------------------- ---------------------
1998 1997 $ % 1998 1997 $ %
- -------------------------- ---------- ------------ ---------- ----------- ---------- ----------- ---------- ----------
Cable and broadband:
Domestic $(56) $(15) $(41) - $(114) $(30) $(84) -
International (1) (2) 1 (50.0) (5) (9) 4 (44.4)
---------- ------------ ---------- ----------- ---------- ----------- ---------- ----------
(57) (17) (40) - (119) (39) (80) -
International wireless (2) (3) 1 (33.3) (7) (12) 5 (41.7)
Corporate (1) (36) (53) 17 (32.1) (109) (104) (5) 4.8
Other - (7) 7 - (6) (24) 18 (75.0)
---------- ------------ ---------- ----------- ---------- ----------- ---------- ----------
Current operations (95) (80) (15) 18.8 (241) (179) (62) 34.6
Domestic wireless(2) - 107 (107) - 93 302 (209) (69.2)
========== ============ ========== =========== ========== =========== ========== ==========
Total $(95) $27 $(122) - $(148) $123 $(271) -
========================== ========== ============ ========== =========== ========== =========== ========== ==========
(1) Primarily includes headquarters expenses for shared services and
divisional expenses associated with equity investments.
(2) The domestic wireless businesses were sold effective 4/6/98.
During 1998, MediaOne Group's operating income decreased $122, to a loss of
$95, and $271, to a loss of $148, for the three- and nine-month periods
ended September 30, 1998, respectively, due primarily to the sale of the
domestic wireless businesses in April, 1998.
MediaOne Group's earnings before income taxes, depreciation and
amortization ("EBITDA") for the three-month period ended September 30, 1998
were $193, compared with $322 during the same period in 1997. Excluding the
effect of the domestic wireless operations, EBITDA would have been $169 in
the three-month period ended September 30, 1997. For the nine-month period
ended September 30, 1998, EBITDA was $746, compared with $1,002 during the
same period in 1997. Excluding the effect of the domestic wireless
operations, EBITDA would have been $598 during the nine month period of
1998, compared with $567 during the same period in 1997. 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.
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Cable and Broadband - Domestic. Domestic cable and broadband operating
losses increased during the three- and nine-month periods ended September
30, 1998, due primarily to increased depreciation and amortization expense.
As MediaOne Group continues to upgrade its cable networks, depreciation
expense will continue to increase. In addition, during the first quarter of
1998, there was a one-time increase to depreciation and amortization
expense of $28 related to the termination of the sale of cable systems in
Minnesota. Depreciation and amortization expense had been suspended on
these systems while it was held for sale in 1997.
EBITDA for domestic cable and broadband operations during the three- month
period ended September 30, 1998 was $227 compared with $228 for the same
period in 1997. EBITDA remained relatively flat as total revenue increases
of $30, or 5.1 percent, were offset by increased programming costs of $10,
or 7.6 percent, and increased operating, marketing and advertising, and
general and administrative costs of $21, or 9.3 percent. New products
contributed increased revenues of $10 and increased costs of $16 to total
domestic cable and broadband EBITDA during the three month period of 1998.
Normalized for the one-time effects of cable system acquisitions and
dispositions, and for costs incurred in 1998 in connection with the Year
2000 implementation program, domestic cable and broadband EBITDA increased
4.5 percent.
For the nine-month period ended September 30, 1998, EBITDA for domestic
cable and broadband operations was $706, an increase of $15, or 2.2
percent, compared with $691 for the same period in 1997. Revenue increases
of $119, or 6.9 percent, exceeded increased programming costs of $41, or
10.5 percent, and increased operating, marketing and advertising, and
general and administrative costs of $63, or 9.8 percent. New products
contributed revenue increases of $21 and increased costs of $33 to total
domestic cable and broadband EBITDA during the period. Normalized for the
one-time effects of cable system acquisitions and dispositions, and for
costs incurred in 1998 in connection with the Year 2000 implementation
program, domestic cable and broadband EBITDA increased 4.1 percent.
Core cable EBITDA was $263 for the three-month period ended September 30,
1998, an increase of $15, or 6.0 percent, compared with $248 for the same
period in 1997. Normalizing for acquisitions and dispositions, core cable
EBITDA increased 6.5 percent. During the nine-month period ended September
30, 1998, core cable EBITDA was $800, an increase of $60, or 8.1 percent,
compared with $740 for the same period in 1997. Normalizing for
acquisitions and dispositions, core cable EBITDA increased 7.7 percent.
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Programming costs were $141 for the three months of 1998, an increase of
$10, or 7.6 percent, over the same period in 1997. Excluding programming
costs related to PrimeStar services, programming costs increased 16.1
percent. The normalized increase was primarily a result of increased
programming costs per subscriber as a result of rate increases, expanded
channel offerings and growth in subscribers. During the nine-month period
ended September 30, 1998, programming costs were $431, an increase of $41,
or 10.5 percent, over the same period in 1997. Excluding programming costs
related to PrimeStar DBS services, programming costs increased 14.9 percent
during the nine-month period of 1998.
Operating, marketing and advertising, and general and administrative costs
were $246 for the three-month period ended September 30, 1998, an increase
of $21, or 9.3 percent, over the same period in 1997. During the nine-month
period ended September 30, 1998, operating, marketing and advertising, and
general and administrative costs were $703, an increase of $63, or 9.8
percent, over the same period in 1997. Increases in operating, marketing
and advertising, and general and administrative costs are primarily a
function of increases in employee costs due to improvements in customer
service, costs incurred to streamline the reporting and billing systems,
costs associated with the deployment of new products, such as high-speed
data and residential telephony, and Year 2000 implementation costs.
Incremental Year 2000 implementation costs were $6 and $7 during the three-
and nine-month periods of 1998, respectively.
International Wireless. International wireless operating losses represent
the consolidated operations of Russian Telecommunications Development
Corporation ("RTDC"), a Russian venture, which holds various wireless
investments.
Corporate. The decrease in corporate operating losses during the
three-month period ended September 30, 1998 is due primarily to a $30
charge in 1997 for management changes and moving costs related to
relocating MediaOne of Delaware, Inc.'s ("MediaOne of Delaware") operations
from Boston to Denver. The decrease was partially offset by increased
corporate costs during 1998. For the nine-month period ended September 30,
1998, operating losses increased due primarily to greater corporate costs,
including costs associated with international activities, partially offset
by the MediaOne of Delaware relocation charge discussed above.
Other. Other reflects operating losses associated with the international
directories operations during 1997 and costs incurred for the development
of internet content services. The international directories operations were
sold during the second and third quarters of 1997.
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Interest Expense and Other
- -------------------------------- ----------------------- ----------------- ---------------------- --------------------
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
----------------------- ----------------- ---------------------- --------------------
1998 1997 $ % 1998 1997 $ %
- -------------------------------- ----------- ----------- -------- -------- ---------- ----------- --------- ----------
Interest expense $(86) $(178) $92 (51.7) $(379) $(518) $139 (26.8)
Equity losses in
unconsolidated ventures (68) (177) 109 (61.6) (273) (495) 222 (44.8)
Gain on sale of domestic
wireless investment - - - - 3,869 - 3,869 -
Gains on sales of investments 3 13 (10) (76.9) 42 108 (66) (61.1)
Guaranteed minority interest
expense (11) (22) 11 (50.0) (53) (66) 13 (19.7)
Other income (expense)-net 13 (5) 18 - 86 (16) 102 -
- -------------------------------- ----------- ----------- -------- -------- ---------- ----------- --------- ----------
Interest Expense. Interest expense during the three-month period ended
September 30, 1998, decreased due primarily to the June 12, 1998 assumption
by New U S WEST of $3.9 billion of debt related to the Dex Alignment, and
the Refinancing which resulted in lower interest rate commercial paper
outstanding. The majority of the commercial paper was replaced with the
6.25 percent Exchangeable Notes issued in August and September 1998.
Interest expense for the nine-month period ended September 30, 1998
decreased due to the debt assumption and refinancing described above. The
reduction in interest expense was partially offset by a charge of $16
related to the termination of various interest rate swap agreements. The
swap agreements were terminated since the long term debt underlying the
instruments was refinanced.
Equity Losses in Unconsolidated Ventures. Equity losses during the three-
and nine-month periods ended September 30, 1998, decreased due
predominantly to decreased losses generated from international ventures and
the absence of losses from the domestic investment in PrimeCo Personal
Communications, L.P. ("PrimeCo") which was transferred to AirTouch on April
6, 1998 pursuant to the AirTouch Transaction. The decrease in international
losses relates to an increase in subscribers and improved operations at
Telewest, rapid subscriber growth experienced by the wireless ventures
located in the United Kingdom, Hungary, the Czech and Slovak Republics, and
Poland, and the absence of losses related to ventures in Malaysia and
Indonesia in the first nine months of 1998. In 1998, equity method
accounting was suspended on the Company's investments in Malaysia and
Indonesia in conjunction with a 1997 adjustment to write down the carrying
value of the investment in Malaysia to its fair value of zero and to
recognize probable funding commitments in connection with a shareholder
support agreement related to the investment in Indonesia.
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
The Company continues to monitor its investments in Malaysia and Indonesia.
During the first nine months of 1998, the Indonesian currency declined 48
percent as compared with the U. S. dollar and the Malaysian currency
increased slightly. During the first nine months of 1998, the Company
funded an additional $6 pursuant to the terms of the Indonesian venture
shareholder support agreement. After such fundings and those of the other
partners, the Company's contractual funding commitment is $13 and the
partners' commitments are $26, for which MediaOne Group is contingently
liable.
In July 1998, Westel 900, a digital wireless service company in Hungary,
repurchased shares of its stock. This repurchase resulted in an increase in
MediaOne Group's interest in Westel 900 to 49.0 percent from 46.6 percent.
On September 1, 1998, MediaOne Group's interest in Telewest decreased to
21.6 percent. See Note 3 - Acquisitions and Dispositions - to the
Consolidated Financial Statements for a detailed discussion.
On November 10, 1998, MediaOne Group purchased additional shares in
Telewest increasing its ownership interest to 29.9 percent. See "Liquidity
and Capital Resources - Investing" for additional information.
Gain on 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.
Gains on Sales of Investments. During 1998, MediaOne Group sold various
investments resulting in pretax gains of $3 and $42 during the three- and
nine-month periods. During 1997, MediaOne Group sold its shares of Teleport
Communications Group, (acquired in the acquisition of Continental
Cablevision, Inc. ("Continental")), for a pretax gain of $13 during the
third quarter, its shares of Time Warner, (acquired in the acquisition of
Continental), for a pretax gain of $44 during the second quarter, and its
five percent interest in a wireless venture in France, for a pretax gain of
$51 during the first quarter.
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Guaranteed Minority Interest Expense. Guaranteed minority interest expense
for the three- and nine-month periods ended September 30, 1998 has
decreased compared with similar periods in 1997 due to the cash redemption
on June 12, 1998, of $301 face value of 7.96 percent Preferred Securities
and $237 face value of 8.25 percent Preferred Securities. In October 1998,
MediaOne Group issued $500 face value of 9.04 percent Preferred Securities
which will result in increased guaranteed minority interest expense during
the fourth-quarter of 1998, compared with the second and third quarters of
1998.
Other Income (Expense) - Net. Other income for the three- and nine-month
periods ended September 30, 1998 was favorably impacted by decreased
foreign exchange transaction losses, dividend income earned on the AirTouch
preferred stock and the lack of minority interest expense from the domestic
wireless operations. Such improvements were partially offset by a $40 loss
recognized in the third quarter of 1998 related to an interest rate swap
associated with the AirTouch preferred stock received in the AirTouch
Transaction. See Note 4 - Investment in AirTouch Preferred Stock - to the
Consolidated Financial Statements for a detailed discussion.
In October, the Company entered into a series of transactions which in
effect resulted in a termination of the interest rate swap agreement and
the purchase of a new interest rate option agreement with a $1 billion
notional amount. Of the $1 billion notional amount, $800 of the interest
rate option contract is designated to protect a portion of the AirTouch
preferred stock value from increases in interest rates and qualifies for
deferral accounting. See "Risk Management" section. The remaining $200
notional amount was designated to protect the Company from interest rate
increases on the issuance of $500 of Preferred Securities and did not
qualify for deferral accounting. Accordingly, the $200 notional amount of
the interest rate option was terminated on October 23, 1998, in conjunction
with the issuance of the Preferred Securities.
The Company currently estimates that it will record a net charge of $18
(net of income tax benefits of $12) associated with interest rate contracts
in the fourth-quarter of 1998. The charge includes a net expense of $18
(net of income tax benefits of $11) for the purchase of the interest rate
option and a net loss of $6 (net of income tax benefits of $4) on the
interest rate swap prior to termination, offset by a net gain of $6 (net of
income tax expense of $3) on the portion of the interest rate option
associated with the Preferred Securities issuance.
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Liquidity and Capital Resources
Operating Activities
Cash provided by operating activities during the nine months ended
September 30, 1998, decreased $239 to $391 as compared with the same period
in 1997. The decrease was caused by the domestic wireless operations which
were sold on April 6, 1998, as well as from the timing of interest payments
and costs paid for the Separation. Partially offsetting the decrease in
cash provided by operating activities was $158 in increased tax payments
received from the Communications Group and the receipt in 1998 of $42 in
dividends, primarily from Westel 450 and Westel 900, the Company's European
wireless investments in Hungary.
During 1997, the domestic wireless businesses contributed operating cash
flow of approximately $360. As a result of the AirTouch Transaction,
MediaOne Group no longer has access to this operating cash flow. Operating
cash flows of MediaOne Group will consist primarily of the cash generated
by its domestic cable business. MediaOne Group expects that its future cash
needs, primarily associated with domestic cable capital expenditures, debt
service and the Year 2000 implementation program, will exceed cash
generated from operations during the next few years. Additional financing
will come primarily from a combination of new debt and the monetization of
the securities received from AirTouch in connection with the AirTouch
Transaction.
Effective June 12, 1998, New U S WEST was no longer part of the
consolidated tax return of MediaOne Group. MediaOne Group expects to
recover tax benefits for expected consolidated tax losses in 1998 and 1999
from the carryback of these losses to 1996 and 1997 consolidated tax
returns. MediaOne Group does not expect to be able to recover tax benefits
in the year 2000 if it incurs a tax loss for that year.
Investing Activities
Total capital expenditures at MediaOne Group, were $1,157 and $1,072 during
the nine months ended September 30, 1998 and 1997, respectively. The
majority of the capital expenditures were devoted to upgrading the domestic
cable network and preparing for the provision of new and enhanced services.
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
esults of Operations (Dollars in millions), continued
MediaOne Group holds various investments in international and domestic
ventures. For the nine- month period ended September 30, 1998 and 1997, the
Company invested $157 and $320, respectively, in international ventures,
net of a $45 repayment in 1998 from a wireless investment in the United
Kingdom. During 1998, MediaOne Group, as an existing shareholder of
Telewest, participated in a rights offering by investing $131 in Telewest.
Telewest offered the rights in connection with its acquisition of General
Cable in September 1998. The remaining investments made during 1998 were
capital contributions to cable investments in Belgium, Japan, and
Singapore, as well as to wireless ventures in India, Indonesia and the
Slovak Republic. Investments made during 1997 were primarily for an
additional 40 percent interest in Fintelco, S.A., a cable and
telecommunications venture located in Argentina, which was subsequently
sold, as well as capital contributions to a wireless venture in India.
Domestically, MediaOne Group invested $84 and $173 during the nine months
ended September 30, 1998 and 1997, respectively. Of such investments, $64
and $149 represented contributions to PrimeCo during 1998 and 1997,
respectively. The investment in PrimeCo was sold April 6, 1998, in
conjunction with the sale of the wireless businesses to AirTouch.
During 1998, MediaOne Group sold various investments resulting in net
proceeds of $201, comprised of the following: (a) an equity investment in
PrimeStar, for net proceeds of $77, (b) a cable programming investment, for
net proceeds of $38, (c) various cable systems, for net proceeds of $42,
and (d) miscellaneous investments, for net proceeds of $44. During 1997,
MediaOne Group sold international and domestic investments totaling $703,
as follows: (a) shares of Teleport Communications Group, for net proceeds
of $246, (b) shares of Time Warner, for net proceeds of $220, c) Thomson
Directories, the directory operation in the United Kingdom, for net
proceeds of $121, (d) a five percent interest in a French wireless venture,
for net proceeds of $81, and (e) miscellaneous investments, for net
proceeds of $35. In addition, during 1998, MediaOne Group received proceeds
of $71 on the sale of a note receivable and $6 for miscellaneous asset
sales.
During the first quarter of 1997, MediaOne Group paid $1,150 to the
shareowners of Continental for the cash portion of the acquisition of that
company.
As of September 30, 1998, the Company owed $187 associated with an
interest rate swap agreement which was entered into to protect the
Company from a decline in the value of the AirTouch preferred stock.
MediaOne Group paid $62 of the liability in October and an additional
$33 in a series of transactions which in effect resulted in a
termination of the interest rate swap agreement and the purchase of a
new interest rate option with a $1 billion notional amount. The
Company paid $17 on October 23, 1998 upon the termination of $200
notional amount of the interest rate option which was designated to
protect the Company from an increase in intrest rates on the issuance
of $500 of Preferred Securities. As of October 31, 1998, the amount
owed by the Company had declined to $79 as a result of the above
payments and an increase in interest rates. The Company intends to
fund the liability in the fourth quarter of 1998 with a portion of the
proceeds generated by the issuance of securities referenced to the
AirTouch preferred stock. The Company expects these proceeds to
fluctuate in an inverse relationship with the option liability. The
Company may alternatively use commercial paper to fund the liability.
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
On November 10, 1998, MediaOne Group purchased an additional 175 million
Telewest shares from Southwestern Bell International Holdings at a price of
$2.25 per share, or $394. MediaOne Group financed the purchase with
commercial paper.
Financing Activities
Dividends. The Company paid dividends on the Communications stock of $519
through the date of the Separation in 1998, and $733 during the nine-month
period ended September 30, 1997. MediaOne Group no longer pays dividends on
the Communications stock as all Communications stock has been canceled
effective June 12, 1998, as a result of the Separation.
Cash from Discontinued Operations. Cash from discontinued operations was
$4,953 through the date of the Separation and $630 during the nine month
period ended September 30, 1997. Such amounts consisted primarily of
fundings to MediaOne Group for common dividends paid to Communications
stock shareowners, dividends paid by Dex to MediaOne Group, proceeds from
the issuance of Communications stock, and debt fundings and repayments
between MediaOne Group and New U S WEST. Also included in the 1998 amounts
were the $3.9 billion of debt assumed by New U S WEST in connection with
the Dex Alignment, as well as $152 of net costs reimbursed to MediaOne
Group as a result of the Separation and the Refinancing. The $3.9 billion
payment by New U S WEST was used by MediaOne Group to repay the amount of
commercial paper issued in the Refinancing.
Debt Activity. Total debt at September 30, 1998 was $5,204, a decrease of
$3,759 compared with December 31, 1997. The decrease in debt outstanding
was due primarily to the assumption by New U S WEST of approximately $3.9
billion of indebtedness in connection with the Dex Alignment.
Excluding debt associated with the capital assets segment, MediaOne Group's
percentage of debt to total capital at September 30, 1998 was 28.0 percent
compared with 41.8 percent at December 31, 1997. Including debt associated
with the capital assets segment, Preferred Securities and mandatorily
redeemable preferred stock, MediaOne Group's percentage of debt to total
capital at September 30, 1998 was 32.6 percent compared with 48.1 percent
at December 31, 1997.
During August and September, 1998, MediaOne Group issued approximately
$1.686 billion of 6.25 percent Exchangeable Notes for net proceeds of
$1.642 billion. See Note 5 - Debt - to the Consolidated Financial
Statements for a detailed discussion.
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
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. The cash redemption amount
of $5.5 billion for the long term debt and $570 for the Preferred
Securities was financed with floating-rate commercial paper, with a
weighted average interest rate of 5.85 percent.
During the third quarter of 1997, MediaOne Group redeemed its zero coupon
subordinated notes, which had a recorded value of $268 attributable to the
Company. In addition, during the second quarter of 1997, MediaOne of
Delaware redeemed a 10-5/8 percent senior subordinated note with a recorded
value of $110, including a premium of $10. The Company financed the
redemptions with floating-rate commercial paper.
In October, 1998, MediaOne Group issued $500 of 9.04 percent Preferred
Securities. The proceeds from the issuance were used to redeem outstanding
commercial paper and for general corporate purposes.
Share Repurchase. On August 7, 1998, the Board of Directors of MediaOne
Group authorized the repurchase of up to 25 million shares of the Company's
common stock. See Note 6 - Shareowners' Equity - to the Consolidated
Financial Statements for a detailed discussion.
Other
Debt Guarantees. At December 31, 1997, a subsidiary of MediaOne Group
guaranteed debt, non-recourse to MediaOne Group, associated with its
international investment, in the principal amount of approximately $600. In
June 1998, the international investment refinanced its line of credit and
maintained the MediaOne Group subsidiary as guarantor on its debt,
non-recourse to MediaOne Group. As of September 30, 1998, the debt
guarantee was approximately $990.
Shelf Registrations. Under registration statements filed with the SEC as of
November 4, 1998, the Company is permitted to issue up to approximately
$400 of new debt securities.
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Investment in PrimeStar. In the third quarter of 1998, PrimeStar
terminated a proposed merger with American Sky Broadcasting, Inc.
("ASkyB") in response to an anti-trust suit by the United States
Department of Justice. PrimeStar management is in the process of
developing alternative business plans in light of the terminated ASkyB
merger. MediaOne Group will evaluate its investment in PrimeStar upon
finalization of PrimeStar's business plan. Upon completion of this
evaluation, management may conclude that the net realizable value of
its investment in PrimeStar is below its carrying value. Management
expects to conclude its review in the fourth quarter of 1998. As of
September 30, 1998, MediaOne Group held approximately 19.5 million
shares of PrimeStar, with a net book value of $158. MediaOne Group
also guaranteed letters of credit for PrimeStar totaling approximately
$100.
Investments in International Ventures. In the third quarter of 1998, Russia
experienced a political and economic crisis which had a significant
detrimental impact on the business climate. As a result of the crisis, the
Company conducted an evaluation of its investments in Russia which are held
by RTDC, a 66.5 percent owned subsidiary. The Company concluded that the
investments held by RTDC, although impacted by the crisis, were not
impaired at the present time. The future prospects for the Russian economy
are unknown. The Company believes that the political or economic climate of
Russia may decline further and could result in a change in the assessment
of its investments. As of September 30, 1998, the Company had a net
investment in RTDC of $13, a net receivable from the venture of $8, and an
outstanding guarantee of RTDC debt of $17.
The Company owns a 49 percent interest in a venture which provides cellular
telephone service in certain areas of India (the "India Venture"). In the
third quarter of 1998, the India Venture made a partial payment on its
cellular license payment due to the India government and received a
deferment on the unpaid balance until the fourth quarter of 1998. The India
Venture will require cash from external sources to fund it operations in
the fourth quarter. The India Venture is currently in negotiations with
banks regarding interim and long-term financing needs of the business. As
of September 30, 1998, the Company had a net investment in the India
Venture of a negative $62. The Company has recorded losses in excess of its
capital contributions due to outstanding loan guarantees of the India
Venture's debt of approximately $120. The Company also has an outstanding
receivable from the India Venture of $9.
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
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.
Risk Management
Interest Rate Risk Management. In the third quarter of 1988, MediaOne Group
issued 29 million shares of Exchangeable Notes for gross proceeds of $1.686
billion and used a portion of the proceeds to redeem outstanding commercial
paper. As of September 30, 1998, the Company had approximately $174 of
commercial paper exposed to changes in interest rates. A hypothetical 10
percent change in the weighted average commercial paper rate would result
in a $1 decrease in the annual reported earnings of the Company.
As of October 31, 1998, MediaOne Group had an $800 notional 5.039
percent interest rate option. The interest
rate option is designated and effective to protect
$1.0 billion of the $1.5 billion AirTouch preferred stock from a decline in
value associated with an increase in interest rates. As a result, a
hypothetical 25 basis point increase in interest rates from the October 31,
1998 rate of 5.268 percent would have an $18 effect on the combined market
value of the AirTouch preferred stock and the interest rate option. Conversely,
a hypothetical 25 basis point decrease in interest rates would have an $18
effect.
Equity Risk Management. MediaOne Group eliminated its exposure to a
decrease in the market value and limited its participation in an
increase in the market value on 29 million shares of the 53 million
shares of AirTouch common securities owned through the third quarter
issuance of the Exchangeable Notes. See Note 6 - Debt - to the
Consolidated Financial Statements. A hypothetical 10 percent decrease
in the September 30, 1998 AirTouch common stock price of $57.00 per
share would result in a decrease of $338 in the value of the AirTouch
common stock partially offset by a decrease in the liability under the
Exchangeable Notes of $165. Conversely, a hypothetical 10 percent
increase in the September 30, 1998 AirTouch common stock price would
result in an increase of $338 in the value of the AirTouch common
stock partially offset by an increase in the liability under the
Exchangeable Notes of $33.
Commitments and Contingencies
See Note 8 - Commitments and Contingencies - to the Consolidated Financial
Statements.
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Competitive and Regulatory Environment
In June, 1998, the Federal Communications Commission issued formal rules
providing for the retail sale of set-top television boxes designed to
integrate digital programming. On January 1, 2005, cable companies will no
longer be permitted to sell or lease new integrated boxes to their
subscribers. In addition, cable companies must provide subscribers with
related security modules that plug into set-top boxes that are purchased
from consumer electronics retailers by July 1, 2000. The Company is
currently reviewing the impact of this ruling.
Year 2000 Costs
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 is progressing through a comprehensive program to evaluate
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 all inventory
items will function properly, both as individual units and on an integrated
basis.
(V) Implementation - The final roll-out of fully tested components into an
operational unit.
MediaOne Group currently has activities underway in each of the five
phases. The current stage of activities varies based upon the type of
component, system, and/or service at issue.
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions), continued
MediaOne Group has identified three primary risk assessment levels for
various inventory items relative to the 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. 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.
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 following chart describes the status of the Company's Year 2000 program
with respect to Domestic Cable and Broadband operations in the four
critical business functions identified above.
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions), continued
- ------------------------ ---------------------------------- --------------------- ------------------- ---------------
Estimated
Date of
Business Functions Current Areas of Focus Operational Impact Current Status Completion
- ------------------------ ---------------------------------- --------------------- ------------------- ---------------
Customer Service Head End Controller Inability to Early Phase III Q2 1999
Digital Transmission provide video,
Equipment telephony & data
Switches service
Ad Insertion
Network Surveillance
Customer Care & Billing Subscriber Billings Loss of revenues Early Phase III Q3 1999
Ad Sales Billings
Call Center Operations
Data Communications
Desktop Computing
Cash Flow Financial Systems Interruption to Early Phase III Q2 1999
cash receipts &
disbursements cycle
Employees, Health & Payroll & Benefit Systems Loss of support Early Phase III Q2 1999
Safety Facilities Functions systems and
employee disruption
- ------------------------ ---------------------------------- --------------------- ------------------- ---------------
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 has
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 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.
Because of the aforementioned reliance placed on third party vendors,
MediaOne Group's estimate of costs to be incurred could change
substantially should one or more of the vendors be unable to timely deliver
Year 2000 compliant products.
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions), continued
Business continuity teams are being developed for the Year 2000 program
which include business contingency and disaster recovery management. The
contingency plans for high and medium risk inventory items are being
developed as part of the inventory and remediation process and will be in
place by the end of 1998. The contingency plans include trigger dates and
processes for implementation of any contingency plans where necessary.
There can be no assurance that the contingency plans developed by the
Company will eliminate all potential for service interruption.
Costs of Year 2000 Issues
MediaOne Group has incurred approximately $11 of costs to implement its
Year 2000 compliance program through the third quarter of 1998 and
currently expects to incur between $90 to $110 of costs in aggregate, of
which $30 to $40 represent capitalized expenditures. The funding of these
costs will be managed by the Company through its liquidity and capital
resources plan.
Investment in Unconsolidated Subsidiaries
MediaOne Group has significant investments in both domestic and
international cable and broadband operations as well as wireless
operations. Within this area MediaOne Group has separated the Year 2000
program between domestic and international investments for improved
analysis and program management.
(I) Domestic Investments
The domestic investments include an investment in TWE, the second-largest
provider of cable television services in the United States. MediaOne Group
also holds a significant cost basis investment in AirTouch as a result of
selling its domestic wireless businesses to AirTouch on April 6, 1998.
MediaOne Group influences Year 2000 efforts at TWE through the TWE Board of
Representatives. TWE has represented to MediaOne Group, that they continue
to be in the conversion phase of their Year 2000 program as of September
30, 1998. MediaOne Group is planning to continue its audit of TWE and its
progress relative to their Year 2000 program during 1999, as deemed
necessary. MediaOne Group will continue to monitor information provided to
the investor community by AirTouch to insure sufficient progress is being
made toward remediation of Year 2000 issues and that MediaOne Group's
investment value is maintained.
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions), continued
(II) International Investments
Internationally, MediaOne Group holds an investment in Telewest, the
largest provider of combined cable and broadband communications services in
the United Kingdom. MediaOne Group also holds interests in cable and
broadband properties in Singapore, the Netherlands, Belgium, the Czech
Republic and Japan. Additionally, MediaOne Group holds wireless interests
which include a 50 percent joint venture interest in Mercury Personal
Communications ("One 2 One"), a provider of PCS services in the United
Kingdom. MediaOne Group also owns interests in wireless properties in
Hungary, the Czech and Slovak Republics, Russia, India and Poland.
All of the key thirteen international ventures in which MediaOne Group has
an investment have completed their initial inventory of systems and related
technologies subject to Year 2000 exposure and activities are underway in
each of the five phases. The current stage of activities varies within each
venture as well as upon the type of component at issue. The ventures have
established remediation strategies for approximately 90 percent of the
inventory items, while having completed remediation on approximately 60
percent of the high to medium risk related items. Based upon current
information provided by the ventures to MediaOne Group, costs of addressing
potential problems are not expected to have a material adverse impact on
MediaOne Group's financial position.
Risks Associated with Year 2000 Issues
Due to the complexity of the issues presented by the Year 2000 and the
proposed solutions, and the interdependence of MediaOne Group on a global
list of third party suppliers, it is impossible to assess with any degree
of accuracy the impact of a failure in any one aspect or combination of
aspects of the Company's Year 2000 program in relation to the Company's
critical business function areas. MediaOne Group cannot provide assurance
that actual results will not differ from management's estimates due to the
complexity of correcting the systems and related technologies surrounding
the Year 2000 issue.
Failure by MediaOne Group to complete its Year 2000 project in a timely or
complete manner, within its estimate of projected costs, or failure by
third parties, such as financial institutions and related networks,
software providers, local telephone companies, long distance providers,
power providers, etc., to correct their systems, with which MediaOne
Group's systems interconnect, could have a material impact on future
results of operations and financial position. Other factors which might
cause a material difference from management's estimate would include, but
not be limited to, the availability and cost of personnel with appropriate
skills and abilities to locate and correct all relevant computer code and
similar uncertainties, as well as the collateral 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 Groups reasonable control.
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions), continued
Selected Proportionate Data
The following table and discussion is not required by GAAP or intended to
replace the Combined 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 Combined Financial Statements. The table does not reflect
financial data of the capital assets segment, which had net assets of $436
and $419 at September 30, 1998 and December 31, 1997, respectively. The
financial information included below departs materially from GAAP because
it aggregates the revenues and operating income of entities not controlled
by MediaOne Group with those of the consolidated operations of MediaOne
Group.
The following results reflect normalizing adjustments for acquisitions,
dispositions, other asset transactions and Year 2000 costs.
- ------------------------------------------------------------------------------------ ------------------------
Normalized Change
------------------------ ------------------------
Nine Months Ended September 30, 1998 1997 $ %
- ----------------------------------------------------------- ------------ ----------- ----------- ------------
Proportionate Revenues
Cable and broadband:
Domestic (1) $4,098 $3,721 $377 10.1
International 230 188 42 22.3
------------ ----------- ----------- ------------
4,328 3,909 419 10.7
International wireless 792 524 268 51.1
Corporate 15 12 3 25.0
Other (2) 42 44 (2) (4.5)
============ =========== =========== ============
Total proportionate revenues $5,177 $4,489 $688 15.3
=========================================================== ============ =========== =========== ============
Proportionate EBITDA (3)
Cable and broadband:
Domestic (1) $1,313 $1,186 $127 10.7
International 10 (6) 16 -
------------ ----------- ----------- ------------
1,323 1,180 143 12.1
International wireless 137 21 116 -
Corporate (50) (60) 10 16.7
Other (2) (11) 9 81.8
------------ ----------- ----------- ------------
Total proportionate EBITDA $1,408 $1,130 $278 24.6
=========================================================== ============ =========== =========== ============
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions, except subscribers), continued
Selected Proportionate Data, continued
- -------------------------------------------------------------------------------------------------------------
Normalized Change
-------------------------------------------------
Nine Months Ended September 30, 1998 1997 Amount %
- ----------------------------------------------------------- ------------ ----------- ----------- ------------
(in thousands)
Proportionate Subscribers
Cable and broadband:
Domestic (1) 7,472 7,305 167 2.3
International 912 875 37 4.2
International wireless 1,424 820 604 73.7
------------ ----------- ----------- ------------
Total proportionate subscribers 9,808 9,000 808 9.0
=========================================================== ============ =========== =========== ============
(1) The proportionate results are based on MediaOne Group's 25.51 percent
pro rata priority and residual equity interests in reported Time Warner
Entertainment Company L.P.("TWE") results. The reported TWE results are
prepared in accordance with GAAP and have not been adjusted to report
TWE results on a proportionate basis.
(2) Primarily includes international directories.
(3) Proportionate EBITDA represents MediaOne Group's equity interest in the
entities multiplied by the entity's EBITDA. As such, proportionate
EBITDA does not represent cash available to the MediaOne Group.
Proportionate Results of Operations - Nine Months Ended September 30, 1998
Compared with 1997
For the first nine months of 1998, normalized for the one-time effects of
acquisitions, dispositions, other asset transactions and Year 2000 costs,
proportionate revenues increased $688, or 15.3 percent, and EBITDA
increased $278, or 24.6 percent.
Cable and Broadband. During the first nine months of 1998, normalized for
the one-time effects of cable system acquisitions and dispositions, and a
change in classification of the domestic cable late fee revenues,
proportionate revenues increased $377, or 10.1 percent. 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 and
Year 2000 costs, proportionate EBITDA increased $127, or 10.7 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 services. Proportionate EBITDA related to TWE operations increased
19.1 percent. TWE's results benefited from improved cable, programming and
filmed entertainment operations, and gains realized by asset sales.
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in millions, except subscribers), continued
Selected Proportionate Data, continued
During the first nine months of 1998, normalized for asset dispositions and
the suspended proportionate reporting of the Malaysian and Indonesian
ventures in 1998, international cable and broadband proportionate revenues
increased due to customer growth at Telewest. During the same period,
normalized proportionate EBITDA increased due to improved operations at
Telewest, partially offset by an increase in MediaOne Group international
staff costs.
Proportionate international cable subscribers totaled 912,000 at September
30, 1998, a 4.2 percent increase over last year on a comparable basis.
Telewest's cable television subscribers increased 11.1 percent over last
year on a comparable basis.
International Wireless. During the first nine months of 1998, proportionate
revenues and EBITDA for the international wireless operations increased due
to the 73.7 percent increase in the international wireless subscriber base
to 1,424,000, on a comparable basis. The personal communications services
venture in the United Kingdom, One 2 One, and the digital wireless
operations in Hungary, Czech Republic, Slovakia, and Poland contributed
significantly to the increase. One 2 One added 337,000 proportionate
customers, an 83.4 percent increase from a year ago.
Corporate. During the first nine months of 1998, proportionate revenues for
corporate operations increased $3, or 25.0 percent, to $15. EBITDA losses
decreased $10, or 16.7 percent, to $(50) primarily due to a $30 charge in
1997 for management changes and moving costs related to relocating MediaOne
of Delaware's operations from Boston to Denver, partially offset by greater
corporate costs.
Other. Other reflects the results of the international directories
operations located in Brazil and development activities, which includes
development costs for Internet content services. The EBITDA increase of $9
is due primarily to the July 1998 transfer of an Internet content service
operation to domestic cable.
Form 10-Q - Part I
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Reference is made to the information set forth under "Risk Management"
beginning on page 38.
Form 10-Q - Part II
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
MediaOne Group, Inc. and its subsidiaries are subject to claims and
proceedings arising in the ordinary course of business. While complete
assurance cannot be given as to the outcome of any contingent liabilities,
in the opinion of MediaOne Group, any financial impact to which MediaOne
Group and its subsidiaries are subject is not expected to be material in
amount to MediaOne Group's operating results or its financial position.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number
12. Statement regarding computation of earnings to fixed charges ratio of MediaOne Group, Inc.
99. Unaudited Pro Forma Condensed Combined Statement of Operations of MediaOne Group, Inc.
(b) Reports on Form 8-K filed during the Third Quarter of 1998
(i) Form 8-K report dated July 29, 1998, regarding a Press Release by MediaOne Group, Inc. with
respect to the Company's second quarter earnings.
(ii) Form 8-K report dated July 30, 1998, concerning the registration of Premium Income
Exchangeable Securities ("PIES") with the Securities & Exchange Commission.
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
-------------------------------------------------
November 13, 1998 MediaOne Group, Inc.
Richard A. Post
Executive Vice President and
Chief Financial Officer