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Extemsion and Transfer of Franchise Agreement Cable
INTEROFFICE MEMORANDUM CITY OF PALM DESERT DATE: JUNE 24, 1999 TO: HONORABLE MAYOR, AND MEMBERS OF THE CITY COUNCIL FROM: RAY L. JANES SUBJECT: MEDIA ONE'S REQUEST FOR AN EXTENSION OF OUR FRANCHISE AGREEMENT AND TRANSFER OF OWNERSHIP TO TIME WARNER Recommendation: 1. That the City Council approve Media One's request to extend our franchise agreement until June 30, 2000. 2. That the City Council approve Media One's transfer of ownership to Time Warner with the condition that they reimburse the City $2,200 for the transfer review fee. Background: Our current franchise agreement with Media One will expire on October 11, 1999. Therefore, since it will take a significant amount of time for them to resolve all of the details related to their acquisition by Time Warner,we mutually agreed to a time extension of June 30, 2000; they have also done this with many of the other cities that they serve. Regarding the transfer of ownership to Time Warner, our City joined Rancho Mirage and Indio in a review which was conducted by Telecommunications Management Corporation(TMC)to evaluate the transfer request. This allowed us to be able to share the expense of the report. A summary of their conclusions is on page nine of the attached report. Items one through three were the primary areas to consider for this request, and four through six relate to AT&T. Regarding item one, Media One is currently in full compliance with the terms of our agreement; and item two confirms that neither company has requested a change to the franchise agreement. In item three TMC has declared Time Warner financially/technically qualified to operate the cable television system. Concerning items four through six, staff recommends that we not deny the transfer of ownership simply because AT&T may someday become the parent company. / RAY L. JANES RAMON A. DIAZ MANAGEMENT ANALYST CITY MANAGER Resolution No. 1999- RESOLUTION OF THE CITY COUNCIL OF THE CITY OF PALM DESERT, CALIFORNIA EXTENDING THE EXPIRATION OF ITS CABLE TELEVISION FRANCHISE FROM OCTOBER 11, 1999 THROUGH JUNE 30, 2000 WHEREAS, the cable television franchise granted to MediaOne Enterprises, Inc. ("MediaOne") is scheduled to expire on October 11, 1999; and WHEREAS, the City and MediaOne have bene in negotiations to renew that franchise in a manner consistent with federal law and beneficial to both parties; and WHEREAS, the City and MediaOne will need additional time to properly conclude negotiations; NOW THEREFORE, IT IS RESOLVED BY THE CITY COUNCIL OF THE CITY OF PALM DESERT AS FOLLOWS: The City of Palm Desert does hereby extend the expiration date of its cable television franchise from the current date of October 11, 1999, to no later than June 30, 2000, for the purpose of concluding negotiations for a renewal of such franchise to the mutual satisfaction of the parties; IT IS FURTHER RESOLVED as follows: Neither the City nor MediaOne waive or alter any rights of renewal of the franchise that either party may have in law, including, but not limited to, 47 U.S.C. Section 546, nor shall either party be bound by any draft franchise renewal negotiation documents as a result of the adoption of this Resolution. PASSED, ADOPTED and APPROVED this day of , 1999, by the following vote: AYES: NOES: ABSENT: ABSTAIN: Mayor City of Palm Desert, California , 1999 ATTEST: APPROVED AS TO FORM: City Clerk City Attorney City of Palm Desert, California City of Palm Desert, California MediaOneM This is Broadband. This is the way. April 27, 1999 Ray Janes Management Analyst City of Palm Desert 73-510 Fred Waring Dr. Palm Desert, California 92260 Dear Mr. Janes: This letter follows up on conversations that we have had regarding the impending expiration of the franchise between MediaOne and the City of Palm Desert, set to expire on November 11, 1999. As you know, MediaOne and Time Warner have signed a definitive agreement under which Time Warner will acquire our Desert area system, including the Palm Desert franchise. Both parties believe that it is in the City's interest, as well as that of Time Warner, to allow the franchise to transfer to Time Warner and then begin renewal discussions with the new owner. Under federal law, franchising authorities and cable operators typically have three years in which to negotiate a renewal. Given that the City and Time Warner are just beginning their relationship, we think it is reasonable to request that the City extend the current MediaOne franchise until December 31, 2000. While considerably less than the time usually afforded parties under the law, extending the franchise until the end of next year will allow both parties ample opportunity to become acquainted and conduct thorough and productive negotiations, to the benefit of the residents of Palm Desert. Thus, MediaOne formally requests that the City extend its current franchise until December 31, 2000. Attached is a sample resolution to that effect. Meanwhile, please do not hesitate to call me if I can provide further information or answer any questions you might have. Yours truly, Robert H. Rubery 41725 Cook Street General Manager Palm Desert, CA 92211 cc: Jim Fellhauer, President, San Diego Division/Time Warner tel/760-340-1312 fax/ 760-340-2384 41D) TELECOMMUNICATIONS MANAGEMENT CORP. 5757 Wilshire Blvd. •Suite 635•Los Angeles,CA 90036• (323)931-2600•Fax(323)931-7355 CITY OF PALM DESERT EVALUATION OF REQUEST TO TRANSFER CONTROL OF CABLE SYSTEM FRANCHISE May 1999 C:\TMC\CLIENTS\TRANSFERS\MediaOne-Time W arner\Reports\PalmOesert\0599(pd).doc TABLE OF CONTENTS I. INTRODUCTION 1 II. EVALUATION OF PROPOSED TRANSFER 2 A. Transfer and Ownership Structure 2 B. Transferee Qualifications 4 (1) Legal Qualifications 4 (2) Financial Qualifications 4 (3) Technical Qualifications 6 C. Compliance with Existing Franchise 6 D. Other Issues 6 (1) Impact upon Subscribers and the City 6 (2) City's Reservation of Rights 8 (3) Reimbursement of Costs 8 III. CONCLUSIONS 9 IV. TRANSFER RESOLUTION 10 APPPENDICES A 120-DAY LIMITATION ON TRANSFER ACTION B AT&T ACQUISITION OF MEDIAONE C TIME WARNER FINANCIAL STATEMENTS (FROM FORM 10-Q, @9/30/98) D TIME WARNER TECHNICAL QUALIFICATIONS E PENDING REGULATORY APPROVAL OF AT&T ACQUISITION OF MEDIAONE F DRAFT TRANSFER RESOLUTION SUBMITTED WITH FORM 394 I. INTRODUCTION The City of Palm Desert (the City) currently is provided with cable television service by MediaOne Enterprises, Inc. (MediaOne). Recently, the City received a request to grant consent to a transfer of control of its cable franchise from MediaOne to Time Warner Cable (Time Warner). The request was submitted on Federal Communications Commission Form 394, which is the form officially designated as "Application for Franchise Authority Consent to Transfer Control of Cable Television Franchise." The Form 394 provides specific information to local franchise authorities to assist them in evaluating the transfer request. The City has retained Telecommunications Management Corp. (TMC) to evaluate the requested transfer. TMC's evaluation is provided in this report. The Form 394 is dated March 1, 1999. The date is of some significance, since the 1992 Cable Act requires a local franchising authority to take action on a franchise within 120 days (see Appendix A). Consequently, if March 1, 1999 is used as the starting date, the deadline for taking action (usually by means of a Council resolution) would be June 29, 1999. It should also be noted that the 120-day deadline depends on the receipt of"such information as is required in accordance with Commission regulations and by the franchising authority" (emphasis added). Consequently, if a franchising authority requests relevant information regarding the transfer and does not receive it, or the operator fails to provide all franchise-required transfer documentation, the deadline for review may be extended. Many cable operators dispute this position, however, and claim that the 120-day period cannot be "tolled." A somewhat unusual aspect is that the Form 304 was submitted to the City by Time Warner, and not by MediaOne. Since the City currently has no franchise relationship with Time Warner, its consent to transfer its franchise from MediaOne, in the absence of an official request from MediaOne, may have some legal deficiency. TMC has not pursued this issue in this report. A second factor has arisen, however, that may complicate the proposed transfer. AT&T Corp. (AT&T) has announced that it is acquiring MediaOne (see Appendix B). While regulatory approvals of this acquisition may take some time, there may be some impact on the proposed transfer to Time Warner. This issue is reviewed in Section II.D.(1) below. 1 II. EVALUATION OF PROPOSED TRANSFER In any franchise transfer, a number of considerations must be taken into account, including the following: • Whether the transferor has been, and currently is, in compliance with the requirements of the existing franchise. • Whether the transferee agrees to comply with the requirements of the existing franchise, or wishes to change any of the franchise terms. • Whether the transferee is legally, financially and technically qualified to operate the cable system. • What impact the transfer may have on cable subscribers and the franchising municipality (e.g., the impact upon subscriber rates or quality of service). • What conditions, if any, the franchisor can legitimately impose upon the transfer. These issues are reviewed in this report. A. Transfer and Ownership Structure The FCC Form 394 lists the transferor of the franchise as: MediaOne Enterprises, Inc. dba MediaOne 188 Inverness Drive West Englewood, Colorado 80112. The transferee is listed as: Time Warner Cable 75 Rockefeller Plaza New York, New York 10019. The proposed transaction is described in the "Asset Exchange Agreement" (the Agreement) dated February 1, 1999, between MediaOne Enterprises, Inc., and Summit Cable Services of Georgia, Inc., a subsidiary of Time Warner Cable. Essentially the Agreement is an exchange of cable systems and their related assets, which is designed to be a "like-kind" exchange which would be tax-free under the Internal Revenue Service Code. The exhibits to the 2 Agreement, which list the specific cable systems to be exchanged, have not been included in the Form 394. Relevant portions of the Agreement include: Section 2.3 Time Warner will assume all franchise obligations and liabilities after the closing date. If there are any pending obligations of MediaOne, Time Warner will assume them only if there is an adjustment in the closing price. Time Warner will accept responsibility to continue meeting the obligations of MediaOne's "Social Contract" with the Federal Communications Commission (FCC), including any liability "due to Time Warner's failure to fully and timely perform the infrastructure upgrade requirements of the MediaOne Social Contract." Section 2.5 The closing price will be adjusted based on the number of cable subscribers as of the last business day of the calendar month preceding the closing. Section 2.7 There will be capital budget reimbursement, presumably based on system upgrades in progress. This section is redacted. Section 3.1 Time Warner "will make written offers of employment to certain MediaOne employees" (not identified). Time Warner will determine the terms and conditions of such offers. Time Warner "may, but is not required to, make employment offers to (MediaOne's) Senior Managers." Section 4.11(e) The Agreement states that as of December 1997, under its Social Contract, "MediaOne has completed the upgrade of 612.61 miles of the MediaOne Systems to 550 MHz and 682.64 miles of the MediaOne Systems to 750 MHz." Section 6.16 With respect to Internet services, each company will transfer Internet access customers to its own offering. Time Warner offers the "Road Runner" service. Section 6.19 Time Warner will attempt to apply its own Social Contract to the acquired MediaOne systems. If the FCC objects, Time Warner will fulfill the conditions of the MediaOne Social Contract. Section 7.3(b) The transaction requires municipal consents to transfer the franchises of communities aggregating at least 95% of the total affected cable subscribers in order to close. 3 If the City consents to transfer the franchise, its cable system franchisee will be Summit Cable Services of Georgia, Inc., a 100% owned subsidiary of Time Warner, as indicated in Figure 1. B. Transferee Qualifications (1) Legal Qualifications If the transferee is legally qualified to do business in the State of California, and gains the City's consent to assume the cable franchise and, further, is not subject to media cross-ownership prohibitions, it can operate the cable system. Exhibit III of the Form 394 states that "Summit Cable Services of Georgia, a Delaware corporation, is in the process of qualifying to transact business in the State of California." (2) Financial Qualifications The Form 394 contained Time Warner's corporate Form 10-K (the annual report filed with the Securities and Exchange Commission) for the year 1997, and also the Form 10-Q (the quarterly report) for the quarter ended September 30, 1998. Thus, corporate financial information is available through September 30, 1998. No financial information is provided, however, for the subsidiary, Summit Cable Services of Georgia, Inc., which would be the City's franchisee, if consent is granted. Appendix C contains the Time Warner balance sheet, operating statement and cash flow statement, extracted from the Form 10-Q. The statements indicate the following: Balance Sheet at 9/30/98 Figures Rounded Current Assets $ 4,700,000,000 Total Assets 31,700,000,000 Current Liabilities 4,200,000,000 Total Liabilities 22,600,000,000 Total Shareholders' Equity 9,100,000,000 The nine months operating statement indicates $3,600,000,000 in revenues, with a net loss of $39,000,000. The cash and "equivalent cash" available at September 30, 1998 totaled $393,000,000, which was a decrease of $252,000,000 from the beginning of the year. 4 FIGURE 1 FRANCHISEE OWNERSHIP TIME WARNER INC. 100% TIME WARNER COMPANIES, INC. 100% TWI CABLE,INC. (f(a CABLEVISION INDUSTRIES CORP.) 100% SUMMIT COMMUNICATIONS GROUP, INC. 100% SUMMIT CABLE,INC. 100% SUMMIT CABLE SERVICES OF GEORGIA,INC. 5 Obviously, with resources of this magnitude, Time Warner has the financial capability to operate the MediaOne systems that it will acquire. Of greater relevance will be whether the financial commitments to the City's system will differ significantly from the current MediaOne level. The Form 394 is silent on this point. (3) Technical Qualifications Appendix D contains Exhibit V of the Form 394, which briefly summarizes Time Warner's technical qualifications. At this point in time, Time Warner is the largest cable operator in the United States, although AT&T will take over this position when its acquisition of MediaOne is complete. After the acquisition, AT&T will serve approximately 16,000,000 subscribers to Time Warner's 12,600,000. As in (2) above, the capability of Time Warner to operate the City's cable systems is not in question, and the more important issue is how the local system will be managed. Appendix D states that "The office staff who are now responsible for the management and operations of the franchise will continue to operate as heretofore," but as the new owner, Time Warner would have the capability to make personnel and budget changes as it deemed appropriate. C. Compliance with Existing Franchise It is beyond the scope of this report to determine whether issues exist with respect to possible MediaOne non-compliance with the requirements of the existing franchise. If, in the City's opinion, any significant non-compliance issue exists, this should be settled prior to or concurrent with, the City's granting of consent. A less desirable option is for the City, in the transfer resolution, to specifically reserve all rights to determine whether a non-compliance issue has existed, and resolve the issue with Time Warner later. D. Other Issues A number of other issues are related to the transfer, including the following: (1) Impact upon Subscribers and the City The legislative history of the 1992 Cable Act, which established the current franchise transfer procedures, indicates that franchising authorities, in considering whether to grant their consent, can take into account any potential negative impact that the transfer may have on cable subscribers or the community. 6 The Report of the House Committee on Energy and Commerce (June 29, 1992) contains the legislative history of Congressional intent with regard to the 1992 Cable Act. The portion of the Report addressing Section 617 (Sales of Cable Systems) states: "The Committee intends that the FCC Regulations will be designed to ensure that every franchising authority receive the information required to begin an evaluation of a request for approval of a sale or transfer. Such information may include detailed financial information showing the effect of the transfer or sale on rates and services, the contracts and agreements underlying the sale or transfer; information concerning the legal, financial and technical qualifications of the transferee, and information concerning the transferee's plans for expanding (or eliminating) services to subscribers. This amendment is not intended to limit, or give the FCC the authority to limit, local authority to require cable operators provide additional information or guarantees with respect to a cable sale or transfer" (emphasis added). This language appears to give municipalities broad authority to evaluate the potential impact, beneficial or adverse, of a franchise transfer, including the "transferee's plans for expanding (or eliminating) services to subscribers." In this context, the pending acquisition of MediaOne by AT&T is relevant. This acquisition is not likely to receive federal regulatory approval for some time. Appendix E indicates that the FCC, at least, will examine the transaction in comprehensive detail, and some issues (such as the FCC's rule that no cable operator can own systems that serve more than 30% of the U.S. cable homes) already are being argued. Consequently, it is not expected that the acquisition will close soon. Even if regulatory approvals are forthcoming, there may be some conditions attached. For example, approval may be conditional upon AT&T selling some cable systems. Although a closing date may be months away, the City may wish to consider one or both of the following options: (1) Request information from MediaOne and Time Warner, prior to acting upon the franchise transfer request, as to how the City's system would be affected by the AT&T acquisition of MediaOne. (2) Assuming the answer to (1) is unclear, the City may wish to consider whether the best interests of the cable subscribers and the City would be served by ownership of the system by Time Warner or by AT&T. If the latter, the City may wish to deny consent to this transfer, pending clarification of the situation. The second option may carry some legal liability, and therefore should be pursued only with the advice of legal counsel. (2) City's Reservation of Rights Even if it appears that MediaOne is in substantial compliance with the terms of the current franchise, there could be some contingent liabilities that are not immediately apparent. For example, there may be some franchise fee underpayment. Since the transfer consent request contains timetables that are primarily for the convenience of the transferor and transferee, if the City accommodates these timetables, it should not be expected to waive its rights to recover any monies due. Consequently, a reservation of rights, as part of the transfer consent, appears to be appropriate. Alternatively, if Time Warner will agree to assume any potential liability, this would resolve the issue. (3) Reimbursement of Costs As is very evident, franchise transfers are becoming much more frequent than in the past, and probably will be even more frequent in the foreseeable future, because of rapidly changing technology and regulation, and the development of new services that are aimed at large "clusters" of subscribers, rather than individual communities. There is an ongoing trend for the larger cable companies (or new entrants) to acquire smaller systems that can enhance their coverage in selected geographic areas, and also for the large companies to "swap" systems that they own, that might be located away from their major service areas, for other systems that are closer, as in this case. Furthermore, even a very large cable operator, such as MediaOne, may be acquired. Since a transfer is primarily for the benefit of the buyer and seller, and since municipalities have no control over when such a transaction may occur, or how many times it occurs during a franchise term, this process can hardly be termed a normal regulatory function, whose costs would be absorbed by franchise fee revenue. Because of this, it appears perfectly justifiable for the City to require reimbursement of reasonable out-of-pocket costs to evaluate and process the transfer, as a condition of the transfer. 8 III. CONCLUSIONS Based on the preceding evaluation, the following conclusions are reached: (1) The City should confirm that the current franchisee, MediaOne, is in full compliance with the requirements of the existing franchise. If any significant non-compliance is perceived, this should be resolved prior to the City granting consent to the transfer. (2) Neither MediaOne (the transferor) nor Time Warner (the transferee) has requested any change to the existing franchise agreement. (3) Time Warner is financially and technically qualified to operate the MediaOne cable systems. (4) The announced acquisition of MediaOne by AT&T has confused the issue of ultimate ownership and management of the City's cable system. The City should request both MediaOne and Time Warner for any information that would clarify the situation. (5) The City is entitled, in its consideration of a franchise transfer, to take into account the potential impact upon the cable subscribers and the City. In this case, that might mean making a decision, according to the City's best judgment, as to whether AT&T or Time Warner would offer the broadest array of services and benefits. (6) If the City believes that AT&T is the preferred choice, this may lead to denial of the transfer request. This option, however, should be carefully considered from a legal liability basis. (7) If consent is granted, the City should require reimbursement of its processing and evaluation costs connected with the transfer. A recommended approach is to make the transfer consent contingent upon such reimbursement. 9 IV. TRANSFER RESOLUTION The Form 394 included a draft Council resolution consenting to the franchise transfer (see Appendix F). TMC's comments on the draft are as follows: (a) Paragraph 1 states that "Time Warner shall assume the obligations of the Transferor under the franchise that relate to periods from and after the date on which Time Warner acquires the System" (emphasis added). As noted previously, the City should reserve its rights with respect to remedying any unfulfilled obligations that may have occurred prior to the closing date. (b) In Paragraph 3, (e) and (f) should be deleted, for the same reason as in (a) above. (c) In Paragraph 4, the words, "which it controls, is controlled by or is under common ownership with" should be deleted and replaced by "which is a wholly owned subsidiary of Time Warner." A blanket approval should not be given to transfer the franchise to an entity that may have other ownership interests. (d) A requirement for reimbursement of the City's processing costs should be added. 10 APPENDIX A 120-DAY LIMITATION ON TRANSFER ACTION Cable Communications Policy Act of 1984 §617 [47 USC 537] Sales of Cable Systems A franchising authority shall, if the franchise requires franchising authority approval of a sale or transfer, have 120 days to act upon any request for approval of such sale or transfer that contains or is accompanied by such information as is required in accordance with Commission regulations and by the franchising authority. If the franchising authority fails to render a final decision on the request within 120 days, such request shall be deemed granted unless the requesting party and the franchising authority agree to an extension of time. APPENDIX B AT&T ACQUISITION OF MEDIAONE Multichannel News: Search F is Page 1 of 4 Multichannel ONLINE Document 2 of 2: [Previous Document] [Return to Results List] [New Query'. AT&T WINS BATTLE FOR MEDIAONE Comcast Signs Off, Buys 2M Subs By MIKE FARRELL May 10, 1999 Comcast Corp. and AT&T Corp. managed to avoid a melee in their battle for MediaOne Group Inc., fashioning a deal that will put the Englewood, Colo.-based MSO in AT&T's hands and transfer about 2 million subscribers to Comcast. Comcast Gets: •Net 750,000 subscribers for about$3 billion,or$4,500 per subscriber. •Option on 1.25 million more subscribers for about$5.6 billion. •Right to manage 1.5 million subscribers in Lenfest Communications Inc.systems. •Favorable terms for AT&T telephony venture. •Breakup fee of$1.5 billion. AT&T Gets: •Media0ne and several smaller systems. •Access to Comcast customers for telephony. •Much of its own stock from Comcast in system deals. •Total control of Lenfest for$2.2 billion in stock. The deal ends what could have escalated into an ugly fight for MediaOne, which,with 5 million subscribers, was considered one of the cable industry's last remaining jewels. MediaOne said last Thursday that it signed a definitive merger agreement to sell out to AT&T for about$56.4 billion in cash, stock and assumed debt. The Comcast deal is a complicated one, involving system swaps and management agreements for another MSO, Lenfest Communications Inc. In a separate move, AT&T purchased the half-interest in Lenfest it didn't already own for about$2.2 billion in stock. All in all, Comcast gets a group of highly clustered cable systems along the lucrative Philadelphia-to- Washington, D.C., corridor, as well as a $1.5 billion deal-breakup fee from MediaOne. AT&T gets the prize it has long coveted: MediaOne. The addition of that MSO vaults AT&T to the top of the cable heap and furthers its strategy to provide bundled video, voice and data services to a vast number of consumers. Once the MediaOne deal is closed, which is expected by the first quarter of next year, AT&T will have access to roughly 35 percent of the nation's cable customers. Including MediaOne and Lenfest, AT&T will have about httt'://www.multichannel.com/weekly/1999/20/media20.htm 5/10/99 Multichannel News: Search ilts Page 2 of 4 16.6 million subscribers, and its cable systems will pass 25 million homes. Considering the prize, AT&T didn't give up much. According to AT&T Broadband & Internet Services president Leo J. Hindery Jr., AT&T will part with a net of about 800,000 subscribers upfront. The other 1.25 million customers will be delivered to Comcast over time, and they could be comprised of both existing subscribers and new acquisitions, including Lenfest. "This is not emasculating at all to the MediaOne opportunity," Hindery said in a conference call with analysts and reporters last week. "This will have a very strong and positive impact on our balance sheet. We are disposing of nonstrategic assets at very effective pricing." Comcast president Brian Roberts was equally pleased with the outcome. "This is a marvelous resolution for Comcast and our shareholders, as well as for AT&T," Roberts said in the conference call. "This is a very elegant win-win outcome." Roberts added that the deal would increase the size of Comcast's clusters, enabling the company to accelerate the rollout of new services. SG Cowen Securities Corp. media analyst Gary Farber said the deal appears to be quite a coup for Comcast. "Comcast walks away with a great deal," Farber said. "They get more cable customers at a similar valuation [for MediaOne], they get a cable-telephony agreement and they walk away with some cash. They are substantially better off." Farber added that the deal also shows the intelligence of both AT&T's and Comcast's management teams in not wanting to get involved in a bitter, protracted battle for MediaOne. Insight Communications Co. chairman Michael Willner agreed: "This had the potential [to be a bitter fight]. Level heads prevailed. Everybody got what they wanted." • The fight for MediaOne began last month, when AT&T made an unsolicited $56.4 billion cash, stock and debt bid, besting Comcast's all-stock offering by an estimated 17 percent. In the time since the AT&T offer, Comcast was rumored to be pairing with Microsoft Corp. and America Online Inc. to come up with a counteroffer. AOL was then reported to have dropped out of the running early. Comcast needed to ally with a partner mainly to come up with a sweeter cash component than AT&T's, which was about$20 billion. According to one source familiar with the deal, Microsoft and Comcast were deep in negotiations when Hindery made a call to Roberts. "The call [from AT&T] didn't come until Sunday night [May 2],"the source said. "Sunday and Monday leaves them all going down parallel paths. Obviously, on Monday night and Tuesday morning, Comcast decided the AT&T path was the better one to follow." One sticking point in the negotiations between Microsoft and Comcast was Microsoft's insistence on receiving exclusive rights to provide software for digital set-top boxes. "That was pretty hard to swallow," the source said. "The notion of exclusivity is a tough concession to accept as an operator." In contrast, AT&T and Comcast were able to hammer out a compromise at a lightning-fast pace, complicated by the fact that AT&T was negotiating with Microsoft and Lenfest at the same time. http://www.multichannel.com/weekly/1999/20/media20.htm 5/10/99 Multichannel News: Search - zits Page 3 of 4 Microsoft agreed May 6 to invest about$5 billion in AT&T stock and to expand a previous relationship with AT&T to provide software for digital set-top boxes in between 2.5 million and 5 million cable homes. That deal is not exclusive. Hindery,AT&T chief financial officer Daniel Somers and Roberts hunkered down for a series of closed-door, round-the-clock meetings until an agreement could be reached, the source said. What resulted from those discussions was a complicated deal that will bring Comcast about 750,000 to 800,000 subscribers in markets in Michigan; Naples, Fla.; New Jersey; Baltimore-Washington, D.C.; and New Mexico. Comcast has agreed to exchange systems in Pittsburgh; Richmond,Va.; Atlanta; Sacramento, Calif.; Broward County, Fla.; Chicago; and Colorado, as well as about$4,550 per subscriber, or between $3 billion and $3.5 billion. Comcast also received the right to purchase another 1.25 million subscribers from AT&T at the same $4,550- per-customer price, or$5.7 billion. And Comcast gets to manage systems with about 1.5 million subscribers in Pennsylvania and New Jersey formerly owned by Lenfest. The addition of the Lenfest properties may have made the deal too good to resist for Comcast. By getting management control of those systems, Comcast essentially consolidates the Philadelphia market-- its hometown --and it gains access to other properties near its own major mid-Atlantic clusters. Bear, Stearns & Co. analyst Raymond Katz noted that the deal makes Comcast the dominant operator in the mid-Atlantic region, especially when the Lenfest properties are added to the mix. "Lenfest is the 'hole in the donut'of[Comcast's] mid-Atlantic supercluster," Katz wrote. Comcast has had its eye on the Lenfest systems for a while, and it was close to landing a deal with Lenfest chairman H.F. "Gerry" Lenfest, but the deal fell through. That falling out also created some bad blood between Lenfest and the Roberts family-- so bad that many analysts believe a deal between the two could not have happened without a third party. Although Comcast will only manage the Lenfest systems, many analysts believe Comcast will eventually gain control of the company as part of the AT&T agreement. Comcast can finance the deal in several ways: by exchanging 26.6 million shares of AT&T stock it already owns as a result of its 20 percent investment in Teleport Communications Group, a private-line telephony carrier purchased by AT&T in 1998; through issuing its own nonvoting class-A shares; or through a combination of its own shares, AT&T shares and shares it owns in At Home Corp. (parent of @Home Network). Aside from the additional subscribers--which could boost Comcast to more than 8 million customers once all of the deals go through -- Comcast also gets favorable status in a future telephony deal with AT&T. That piece will kick in after two other non-AT&T-affiliated MSOs reach similar telephony agreements with AT&T. That part of the deal was of utmost importance to Comcast, as it had feared it would receive less-than-stellar terms compared with Time Warner Inc., which is in the middle of closing a 20-year telephony agreement with AT&T. "That was a huge plus for Comcast," said the source, who asked not to be named. "Brian Roberts had been looking for ways to do a deal with AT&T, but it didn't sit well with Comcast to be treated in a way that was not as good as what someone else might get." http://www.multichannel.com/weekly/1999/20/media20.htm 5/10/99 Multichannel News: Search— ilts Page 4 of 4 Time Warner is in the middle of closing a 20-year telephony agreement with AT&T. The Comcast/AT&T pact does not assure that a Comcast telephony deal will be better than Time Warner's -- it just won't be worse. "Comcast will be on a parity with Time Warner,"AT&T Broadband executive vice president of wireline telephony Gerald DeFrancisco said. Another MSO -- Cox Communications Inc. -- is separately negotiating a telephony deal with the long-distance giant. Cox had been part of a consortium, also including Comcast and MediaOne, that was planning to jointly negotiate with AT&T. But while that triumvirate has been disbanded, Cox does not believe the Comcast deal will have any effect on its future telephony negotiations. Cox spokeswoman Amy Porter said her company has been pursuing its own circuit-switched digital-telephony strategy with about 42,000 subscribers. And although it is looking for other telephony partners, signing a deal with AT&T is not as critical to Cox as it is to other MSOs. "We continue to look for other[telephony] partnerships," Porter said. "This [AT&T/Comcast agreement] doesn't make us any more or less likely to do that." Document 2 of 2: [Previous Document' [Return to Results List] [New Query] http://www.multichannel.com/weekly/1999/20/media20.htm 5/10/99 APPENDIX C TIME WARNER FINANCIAL STATEMENTS (FROM FORM 10-Q, @9/30/98) TIME WARNER INC. CONSOLIDATED BALANCE SHEET (Unaudited) September 30,December 31, 1998 1997 (millions,except per share amounts) ASSETS Current assets Cash and equivalents $ 393 $ 645 Receivables, less allowances of$926 and $991 million 2,240 2,447 Inventories 862 830 Prepaid expenses 1,208 1,089 Total current assets 4,703 5,011 Noncurrent inventories 1,902 1,766 Investments in and amounts due to and from Entertainment Group 5,360 5,549 Other investments 791 1,495 Property, plant and equipment 2,010 2,089 Music catalogues, contracts and copyrights 867 928 Cable television and sports franchises 3,127 3,982 Goodwill 12,023 12,572 Other assets 905 771 Total assets $31.688 $3_ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 843 S 912 Participations, royalties and programming costs payable 1,112 1,072 Debt due within one year 19 8 Other current liabilities 2 759 2,379 Total current liabilities 4,233 4,371 Long-term debt 9,064 11,833 Borrowings against future stock option proceeds 1,015 533 Deferred income taxes 3,609 3,960 Unearned portion of paid subscriptions 720 672 Other liabilities 1,473 1,006 Company-obligated mandatorily redeemable preferred securities of a subsidiary holding solely subordinated debentures of a subsidiary of the Company 575 575 Series M exchangeable preferred stock, $.10 par value, 1.9 million shares outstanding and $1.903 billion liquidation preference 1,859 1,857 Shareholders' equity Preferred stock, $.10 par value, 27.3 and 35.4 million shares outstanding, $2.730 and $3.539 billion liquidation preference 3 4 Series LMCN-V Common Stock, $.01 par value, 57.1 million shares outstanding 1 1 Common stock, $.01 par value, 547.9 and 519.0 million shares outstanding (excluding 10.4 and 39.4 million treasury shares) 5 5 Paid-in capital 12,878 12,680 Accumulated deficit (3,747) (3,334) Total shareholders' equity 9,140 9,356 Total liabilities and shareholders' equity $31,68888 $34,1ass�63 See accompanying notes. 21 r TIME WARNER INC. CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) Three Months Nine Months Ended September 30, Ended September 30, 1998 1997 1998 1997 (millions,except per share amounts) Revenues (a) $3578 $3,231 $10,387 $9,458 Cost of revenues (a)(b) 2,052 1,964 6,016 5,417 Selling, general and administrative (a)(b) 1211 1,004 3,502 3,239 Operating expenses 3.263 2,968 9,518 8,656 Business segment operating income 315 263 869 802 Equity in pretax income of Entertainment Group (a) 164 96 437 522 Interest and other, net (a) (311) (309) (877) (904) Corporate expenses (a) (20) (17) (58) (60) Income before income taxes 148 33 371 360 Income tax provision (109) (61) (293) (306) Income (loss) before extraordinary item 39 (28) 78 54 Extraordinary loss on retirement of debt, net of$5 million and $16 million income tax benefits in 1997 _- (7) (24) Net income (loss) 39 (35) 78 30 Preferred dividend requirements (76) (81) (236) (238) Net loss applicable to common shares 1....(.37) $ 116 $ 158 Los) Basic and diluted loss per common share: Loss before extraordinary item $�06) $ .1 q S 27 EX..) Net loss $ .06 Lu0) $ .27 Average common shares 601.3 573.3 592.0 564.4 (a) Includes the following income(expenses)resulting from transactions with the Entertainment Group and other related companies for the three and nine months ended September 30,1998,respectively,and for the corresponding periods in the prior year:revenues-S 120 million and S334 million in 1998,S94 million and$241 million in 1997;cost of revenues-S(70)million and S(207)million in 1998,S(67)million and S(188) million in 1997;selling, general and administrative-S(8)million and$(28)million in 1998,S12 million and S20 million in 1997;equity in pretax income of Entertainment Group-S72 million and S52 million in 1998,S 11 million and S35 million in 1997;interest and other,net-S(2) million and S(8)million in 1998,S(9)million and S(30)million in 1997;and corporate expenses-S18 million and S54 million in 1998,S18 million and S54 million in 1997. (b) Includes depreciation and amortization expense of: $295 $320 $884 $935 See accompanying notes. 22 TIME WARNER INC. CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) Nine Months Ended September 30, I998 1997 OPERATIONS (millions) Net income $ 78 $ 30 Adjustments for noncash and nonoperating items: Extraordinary loss on retirement of debt - 24 Depreciation and amortization 884 935 Noncash interest expense 29 75 Excess (deficiency) of distributions over equity in pretax income of Entertainment Group 168 (168) Changes in operating assets and liabilities 35 (257) Cash provided by operations 1,194 639 INVESTING ACTIVITIES Investments and acquisitions (86) (98) Capital expenditures (348) (424) Investment proceeds 458 156 Proceeds received from distribution of Senior Capital contributed to TWE 455 455 Cash provided by investing activities 479 89 FINANCING ACTIVITIES Borrowings 1,669 1,945 Debt repayments (2,300) (2,243 Borrowings against future stock option proceeds 1,015 ) Repayments of borrowings against future stock option proceeds (533) (185) Repurchases of Time Warner common stock (1,944) (37) Dividends paid (394) (253) Proceeds received from stock option and dividend reinvestment plans 599 328 Other, principally financing costs (37) (36) Cash used by financing activities (1,925) (481) INCREASE (DECREASE) IN CASH AND EQUIVALENTS (252) 247 CASH AND EQUIVALENTS AT BEGINNING OF PERIOD (a) 645 514 CASH AND EQUIVALENTS AT END OF PERIOD $393 $761 (a) Includes current and noncurrent cash and equivalents at December 31, 1996. See accompanying notes. 23 r APPENDIX D TIME WARNER TECHNICAL QUALIFICATIONS EXHIBIT V TECHNICAL QUALIFICATIONS Summit Cable Services of Georgia, Inc. is an indirectly owned subsidiary of Time Warner Inc. ("Time Warner"). Time Warner Cable is the cable management arm of Time Warner, which manages cable systems serving a total of approximately 12.6 million customers, geographically concentrated in 35 groupings of more than 100,000 subscribers each. Time Warner owns and manages the worlds most advanced, best clustered cable television operations, with 80 percent of its 12.6 million customers in systems of 100,000 subscribers or more. Through a network of coaxial and fiber-optic cables, Time Warner's cable television system subscribers generally receive 50 or more channels of video programming, including local broadcast television signals, locally produced or originated video programming, distant broadcast television signals, advertiser-supported video programming (such as ESPN and CNN) and premium programming services (such as HBO, Cinemax, Show-time and The Movie Channel). In some systems, Time Warner also offers audio and other entertainment and information services. Time Warner's record in developing technology to expand the entertainment, information and communications options available on its cable systems is unsurpassed in the industry. The significant achievements of Time Warner's highly regarded staff in areas of technical quality and innovation have been widely recognized and have been the basis for numerous awards. Time Warner is committed to giving its customers not only an array of entertainment and information choices but also high quality customer service. Time Warner representatives helped to develop the National Cable Television Association's customer service standards and strive to meet and exceed those standards. Though all Time Warner systems may draw on the expertise of the corporate staff, we recognize that providing a quality product and good customer service must be accomplished locally. The subject system will be managed by experienced and qualified personnel at the local level. The office staff who are now responsible for the management and operations of the franchise will continue to operate as heretofore DENVER 0901584 01 APPENDIX E PENDING REGULATORY APPROVAL OF AT&T ACQUISITION OF MEDIAONE Multichannel News: Search — alts Page 1 of 3 Mo Ifichanne I ONLINE Document 3 of 1300: [Previous Document] [Next Document] [Return to Results List] JNew Quervl Still Faces Reg ulatory ulat r g o y Hoops By TED HEARN May 10, 1999 Washington --AT&T Corp.'s buyout of Tele-Communications Inc. breezed past federal regulators. However, its buyout of MediaOne Group Inc. might not be so easy. Federal Communications Commission chairman William Kennard --who withheld comment on AT&T's proposed buyout until the deal was definite --said last Friday: "This is a complex transaction. Because of its size and reach and the many novel legal and policy issues involved, this proposed merger warrants very careful scrutiny." Compare that with Kennard's statement last June that AT&T's plan to buy TCI was"eminently thinkable." Other officials here reacted swiftly to AT&T's accord with Comcast Corp., which paved the way for AT&T to acquire MediaOne. Sen. Mike DeWine (R-Ohio) announced that his Subcommittee on Antitrust, Business Rights and Competition would hold a hearing on the merger in June. In a statement with Sen. Herb Kohl (D-Wis.), DeWine outlined a concern shared by others that the impact of the merger might mean more competition in local phone markets but less competition in cable markets. • "The jury is still out on how it will affect the cable/video market. We need to closely examine all competitive aspects of this proposal to ensure that competition is preserved and consumers are protected," the DeWine- Kohl statement read. Ken Johnson, spokesman for House Telecommunication Subcommittee chairman Billy Tauzin (R-La.), said the panel would hold a hearing if House Commerce Committee chairman Tom Bliley (R-Va.) authorizes it. "Billy and others are clearly concerned about the chilling effect this deal could have on competition to cable," Johnson said. "The big players are getting bigger, and that may scare off competition." Also, Sen. John McCain (R-Ariz.), chairman of the Senate Commerce Committee and an opponent of the Telecommunications Act of 1996, said he would examine AT&T's entry into the cable industry at a June 17 hearing. "The act has failed miserably, and it has resulted in mergers instead of competition," McCain spokeswoman Pia Pialorsi said. AT&T chairman C. Michael Armstrong said the acquisition of MediaOne was necessary to compete with the Baby Bells for local phone customers, adding that the competitive clash would help consumers. Armstrong, in a conference call with reporters, said he was confident that AT&T would not wind up in violation http://www.multichannel.com/weekly/1999/20/wash20.htm 5/20/99 Multichannel News: Search "--ults Page 2 of 3 of FCC rules that prohibit cable companies from reaching more than 30 percent of households. AT&T would pass only 23 percent of homes through wholly owned systems, Armstrong added, and 35 percent of homes through wholly owned and partially owned systems. The FCC is not enforcing its 30 percent rule, but it could win judicial authorization to do so at some point. The commission is also considering changing its rule from one based on a percentage of homes passed to one based on a percentage of subscribers to multichannel-video-programming services, including cable and direct- broadcast satellite. "If the old rules actually did come back--which we don't think they will --they'll be studied and redefined probably much more in terms of competition,"Armstrong said. Bruce Leichtman, director of media and entertainment strategies at The Yankee Group, said his figures showed AT&T passing 43 million homes, based on 16 million wholly owned subscribers and 9.9 million partially owned subscribers through joint ventures and partnerships. AT&T breaks the 60 million-homes-passed barrier through its 25 percent stake in Time Warner Entertainment or its 10 percent stake in Time Warner Inc. through Liberty Media Group. Leichtman said the verdict on whether AT&T has gotten too big will depend on the perspective of the regulators and whether they see the benefits of local phone competition outweighing any potential anti-competitive effects in the multichannel-video-programming-distribution market. "I think it comes down to the how the regulators want to view this," he added. Leichtman said the burden is on AT&T to fulfill its promise to take on the Baby Bells. "They have got to execute. They have a few years to do it, though," he added. A key goal of Armstrong's strategy is to use cable facilities to provide high-speed Internet access. But that strategy is coming under attack from companies like America Online Inc., which alleged that cable- modem subscribers are denied equal access to the Internet-service providers of their choice. One day after AT&T and Comcast announced their settlement, Reps. Rick Boucher(D-Va.)and Bob Goodlatte (R-Va.)introduced a pair of bills (H.R. 1685 and H.R. 1686)designed to undermine Armstrong's Internet strategy. The bills--the first ones to surface on the controversial subject of Internet access over cable--would bar cable operators with "market power" in the broadband Internet-access arena from discriminating against unaffiliated ISPs. The bills, for example, would prevent cable operators from bundling access and high-speed transport in one package, and they would allow unaffiliated ISPs to file antitrust suits against cable companies that violate the bundling prohibition under the Sherman Act. The bills track the policy goals of the OpenNet coalition,which is headed by AOL. Boucher said a new law was necessary to block the cable industry from destroying the Internet's most compelling feature -- its open-network architecture. "For the first time now, we are seeing a major threat develop to that openness, and that is the practice of the cable industry, in rolling out its cable-modem service, to insist upon a bundling of its transport along with affiliated Internet-access service," Boucher said. http://www.multichannel.com/weekly/1999/20/wash20.htm 5/20/99 Multichannel News: Search r Its Page 3 of 3 Both lawmakers said the bill was not timed to coincide with the AT&T-MediaOne announcement. "We have been developing this measure for many months, and what we are doing is not related to the activities of AT&T," Boucher said. Although the United States Telephone Association and GTE Corp. hailed the bills, the National Cable Television Association slammed them as brakes on the industry's deployment of high-speed Internet services. "This legislation will spawn significant, costly new litigation and inevitably result in inappropriate common- carrier-like regulation," NCTA president Decker Anstrom said in a prepared statement. Document 3 of 1300: [Previous Document] [Next Document] [Return to Results List] [New Queryl http://www.multichannel.com/weekly/1999/20/wash20.htm 5/20/99 FCC, AT&T at Odds Over C ,trship Cap Page 1 of 4 Multichannel 4-z , pltiousscARIEsmoNs.7.51Tk .1 , LY 14 ONLINErealmers Home Weekly Preview for May 17, 1999 Weekly Preview FCC AT&T at Odds Over Search The Archive DTop Stories 9 DThrough The Wire Ownership Cap DProgramming DPay Per View GO DMarketing By TED HEARN May 17, 1999 Dlnternational Search Tips DOp-Ed Washington --AT&T Corp. has some damage control ahead of it here, beginning with convincing Broadband Week the Federal Communications Commission that it DTop Stories won't have access to two-thirds of American Top Stories homes in the wake of its $56.4 billion MediaOne Industry Group Inc. acquisition. Cox Keeps Pace,Buys DEvents TCA for$4B DPeople Under FCC rules that have been stayed, no cable DAssociations operator can own systems that reach more than FCC,AT&T at Odds Over DOperators 30 percent of U.S. cable homes. The FCC is not Ownership Cap DNetworks enforcing the cap, but it could win judicial DVendors authorization to do so as soon as early next year. Insight Goes Public Services Although AT&T maintained that it is complying, or DBS Eyes Another Strong DSi be very close to complying, with the ownership limit Year DAdvertdvertise -- even after tossing in MediaOne and a 25 DEditorial Calendar percent stake in Time Warner Entertainment's AOL Signs Up Partners for DCustomer Service 10.8 million cable subscribers-- FCC numbers TV Product DMasthead show otherwise. DContact Us 0 'Sopranos'Hooks HBO DFeedback Viewers In fact, according to the FCC, AT&T has attributable ownership interests in cable systems Forum Nets PEG Plans that pass about 67 percent of U.S. homes. Draw Fire FCC officials said they were irritated that AT&T (aHome Gets Another chairman and CEO C. Michael Armstrong failed to AT&T Launch be more frank about the conflict in his comments to analysts and reporters in recent weeks. After Deal Dies, Diller Seeks Portal According to a cable-industry source, Kennard was upset, but he declined to be critical of Comcast May See Armstrong in public. Instead, Kennard authorized Telephony This Year his chief of staff, Kathy Brown, to get his message out to AT&T and the media. MORE>> "If there was some miscommunication there, I am certainly sorry they feel that way,"said Jim Cicconi, AT&T's general counsel and chief Washington lobbyist. AT&T's ownership rules are just one facet of a transaction that regulators expect to examine http://www.multichannel.com/2.shtml 5/20/99 FCC, AT&T at Odds Over C ership Cap Page 2 of 4 closely. Y Other issues that will get FCC attention include AT&T's ownership stakes in high-speed-data services Road Runner and @Home Network; the impact of Microsoft Corp.'s $5 billion AT&T investment on the electronic-programming-guide market; and programming-ownership- concentration levels with regard to Time Warner Inc. and AT&T's Liberty Media Group. For now, however, the sharpest division between the FCC and AT&T hangs over the appropriate method for counting partial ownership interests. AT&T claimed that the FCC's method produces unreasonable results,while the commission said its method accomplishes the goal for which it was designed: to measure one cable operator's ability to create a distribution bottleneck that would be fatal to new cable networks attempting to gain carriage. Under FCC rules, a 5 percent voting stake or 10 percent passive interest is enough to trigger attribution. This means the cable systems involved are deemed as commonly owned for the purpose of measuring things like the number of homes a cable operator is reaching with its wires. "How you count minority interests is a big part of the question,"Cicconi said. "Any rule that treats a 5 percent interest the same as a 100 percent interest is going to have problems on judicial review." With the purchase of MediaOne, AT&T said it would wholly own systems with about 16 million subscribers, with access to around 25 percent of U.S. homes. But AT&T inherited from Tele-Communications Inc. seven joint ventures and five partnerships with companies like Time Warner Cable, Cablevision Systems Corp. and Falcon Cable TV Corp., which include 9.9 million subscribers. That total excludes AT&T's future stake in TWE. Under AT&T's counting methodology, its minority interests would take its homes-passed total from 25 percent to between 35 percent and 39 percent. But Armstrong has said AT&T could restructure some of its joint ventures and partnerships to get to 30 percent. "We feel we have the flexibility to trade ownership http://www.multichannel.com/2.shtml 5/20/99 FCC, AT&T at Odds Over C rship Cap Page 3 of 4 levels to accommodate whatever the redefinition of attribution is,"Armstrong said last month. AT&T and the FCC have arrived at widely different figures because AT&T's formula backs out about 14 million subscribers represented by TWE and by AT&T's existing 33 percent stake in 3.4 million-subscriber Cablevision. Cablevision had previously suggested to the FCC that TCI's ownership should not be attributable because voting control of Cablevision was firmly in the hands of chairman Charles Dolan, CEO James Dolan and other family members. AT&T contended that it would have only a passive economic interest in TWE --except that AT&T could block a sale of the partnership or of partnership assets amounting to more than 10 percent of the total value. "It would not be a totally passive interest, but we would have very limited rights in that ownership. In fact, we would have fewer rights than MediaOne,"Cicconi said. The FCC stayed its 30 percent-ownership cap in 1993, after a federal court said the underlying statute was unconstitutional. The commission's rule and the statute are being appealed, with oral arguments expected in December and a decision perhaps coming in the first quarter of 2000. U.S. Supreme Court review could extend the litigation by another year, or longer. "Ultimately, if the statute is not constitutional, none of this matters as far as the ownership rules go," said cable analyst Paul Glenchur, director of Schwab Washington Research Group. If the courts uphold the law, the FCC could decide to raise the 30 percent cap and modify the attribution rules to avoid a massive restructuring or divestiture by AT&T. The FCC expects to complete action on new attribution rules by the end of September. It is also considering shifting the ownership- measurement test from homes passed to either a percentage of cable subscribers or a percentage of all multichannel-video subscribers, including direct-broadcast satellite. Government sources said adopting a subscriber- based test would not help AT&T because its homes-passed percentage and subscriber http://www.multichannel.com/2.shtml 5/20/99 FCC, AT&T at Odds Over C a-ship Cap Page 4 of 4 percentage were roughly proportional. So in the end, what AT&T really needs from the FCC is a change in the attribution rules. "They are working on the rules as we speak," Glenchur said. "My guess is that there will be some flexibility." NEXTD HBO PRESENTS ROMANCE "` ° _ LASSI( Home Weekly Preview Broadband Week Industry Services All contents©1999 Cahners Business Information. All rights reserved. Multichannel News is a registered trademark of Cahners Business Information. Last Updated:05/19/99 05:16 PM http://www.multichannel.com/2.shtml 5/20/99 Feds Focus on Complex Ow ;hip Rules Page 1 of 2 media (Central 3140 Feds Focus on Complex Ownership Rules AT&T's acquisitions, unions spark debate over telco's insatiable appetite By Eric Glick There's potential trouble brewing between government officials and the ravenous AT&T Corp., whose latest acquisition has set off alarm bells inside the Capital Beltway. According to some insiders, AT&T might encounter stone walls on at least a couple of levels Congress and the FCC in its quest to buy out MediaOne Group. For the FCC's part, officials there are busily scrambling to rewrite the attribution and ownership rules that govern how much controlling interest a cable operator can have in another. Those rules ultimately determine the sway the top 10 or so MSOs have over the entire U.S. cable market. But there's a difference between what AT&T chairman Michael Armstrong would like the attribution rules to look like as opposed to what they actually will look like, say some observers. Armstrong recently commented that he was confident that AT&T's proposal to buy MediaOne wouldn't violate the commission's attribution standards, which have been stayed indefinitely. Those rules had prohibited an MSO from passing more than 30% of all homes in the U.S. Tied to that are rules prohibiting cable operators from having more than a 5% stake in other systems that cross the 30% threshold. The complex rules came under fire last year when a federal court told the commission the statute was unconstitutional. The commission voluntarily stayed the rules and said it will issue new ones by the third quarter of this year, at the very latest. Meantime, an appeals court in Washington, D.C., will hear fresh arguments on the case in December. But even if the commission loosens the slack a little, AT&T may still have a lot of hoops to jump through, say observers. According to documents on record, AT&T currently passes about 40% of homes in the U.S., depending on its stake in other systems. If the MediaOne deal goes through, AT&T will pass two-thirds of all U.S. homes, not counting what it spins off to Comcast Corp. Additionally, because it recently purchased Tele-Communications Inc., AT&T has its widespread fingers in a number of other systems. That includes a 33% stake in Cablevision Corp., about 5% in Adeiphia Cable Communications, and a 100% stake in Lenfest Group. http://www.cableworld.com/Articles/News99/1999051708.htm 5/20/99 Feds Focus on Complex Ow hip Rules Page 2 of 2 Since the commission hasn't even begun the comment period on its proposed rules, it makes the crystal ball even hazier for AT&T. In a conference call with reporters recently, AT&T's top lobbyist Jim Cicconi said the long-distance giant has "to try to predict or at least anticipate what type of new regulation (the FCC) would put in place .... No one can fully predict that." Cicconi and other AT&T officials have pegged the homes passed after it acquires MediaOne at about 25%. But that's "on an owned and operated control basis," he said. It was unclear where a number of issues stood as of late last week. The FCC hasn't yet received an official proposal from AT&T and MediaOne. Nor was it clear whether the U.S. Department of Justice's antitrust division would be reviewing the merger or the Federal Trade Commission, though some sources said it would likely be Justice. Some questions those agencies would likely ask would be over how MediaOne's stake in Road Runner would affect AT&T's majority stake in @home, two of the top high-speed modem services available. Meantime, several key lawmakers including Senate Commerce Committee chairman John McCain (R-Ariz.) and Senate Antitrust Subcommittee Mike DeWine (R-Ohio) have said they'll hold hearings next month to discuss their concerns over the merger. (May 17, 1999) More Cable World a Search I Contact Us I Home Copyright 1999 Intertec Publishing Corporation, A PRIMEDIA Company http://www.cableworld.com/Articles/News99/1999051708.htm 5/20/99 APPENDIX F DRAFT TRANSFER RESOLUTION SUBMITTED WITH FORM 394 RESOLUTION NO. A RESOLUTION PROVIDING FOR THE TRANSFER AND ASSIGNMENT OF A CABLE TELEVISION FRANCHISE WHEREAS, the City of Rancho Mirage, California ("Franchising Authority") has granted to MediaOne Enterprises, Inc. ("Transferor") or its predecessor in interest, a franchise to operate a cable television system (the "System") pursuant to Ordinance No. 0-521 dated February 6, 1992 and Franchise Agreement dated December 17, 1992 (the "Franchise"); WHEREAS, Transferor has entered into an Asset Exchange Agreement with Summit Cable Services of Georgia, Inc., d/b/a Time Warner Cable ("Time Warner"), pursuant to which Transferor will transfer substantially all of the assets of the System, including its rights under the Franchise, to Time Warner as transferee; and WHEREAS, Transferor and Time Warner have requested Franchising Authority's consent to the transfer and assignment of the Franchise by Transferor to Time Warner, and have filed a FCC Form 394 with Franchising Authority relating to such transfer; NOW, THEREFORE, BE IT RESOLVED BY FRANCHISING AUTHORITY: 1. Franchising Authority authorizes and consents to the transfer and assignment of the Franchise from Transferor to Time Warner. Time Warner shall assume the obligations of Transferor under the Franchise that relate to periods from and after the date on which Time Warner acquires the System. 2. The foregoing consent to the transfer and assignment of the Franchise shall be effective upon Time Warner's acquisition of the System, at which time Transferor shall be deemed released from all obligations and liabilities under the Franchise that relate to periods from and after such date. Notice of the date of Time Warner's acquisition of the System shall be given to Franchising Authority. 3. Franchising Authority confirms that: (a) the Franchise was properly granted or transferred to Transferor; (b) the Franchise currently is in full force and effect and expires on December 30, 2007; (c) Transferor is recognized as the present holder and owner of the Franchise; (d) the Franchise supersedes all other agreements between Franchising Authority and Transferor and represents the entire understanding between Franchising Authority and Transferor with respect to the System and Transferor's provision of cable television and other telecommunications services within the areas covered by the Franchise; (e) Transferor is in compliance in all material respects with the Franchise; and (f) no event has occurred or exists that would constitute a material default or breach under the Franchise or that would permit Franchising Authority to revoke or terminate the Franchise. 4. Time Warner maytransfer the Franchise or control related o e ated thereto to any entity which it controls, is controlled by or is under common control with, upon notice to Franchising Authority. 5. This Resolution shall have the force of a continuing agreement among Transferor, Time Warner and Franchising Authority, and Franchising Authority shall not amend or otherwise alter this Resolution without the consent of Transferor and Time Warner. PASSED, ADOPTED AND APPROVED this day of 1999. By: Title: ATTESTATION AND CERTIFICATION: By: Title: 2