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DOCUMENTS DISTRIBUTED TO COUNCIL
COLE, RAYWID & BRAVERMAN, L.L.P December 2, 2002 Honorable Jeffrey M. Thomas, Mayor and Members of the City Council City of Tustin 300 Centennial Way Tustin, CA 92780 WASH1 M D.O. omce 1919 PENNSY V/MIA AVENUE. N.W. WA IwQ . D.C. 200069750 Tee .z (202) 6519750 F. (202) 452-0067 Re: RESOLUTION NO. 02115 -- A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF TUSTIN, CALIFORNIA WITHOLDING CONSENT TO THE MERGER OF AT &T CORPORATION AND COMCAST CORPORATION TO FORM AT &T COMCAST CORPORATION AS A PARENT OF THE CITY'S CABLE TELEVISION SYSTEM FRANCHISEE, MEIDIA ONE OF LOS ANGELES, INC. ( "Merger Resolution ") Dear M iyor Thomas and Members of the City Council: I am writing to provide AT &T Comcast Corporation's objection to the Merger Resolution that is scheduled to be considered at tonight's meeting of the City Council. As AT &T Broadband ( "AT &T ") has informed the City on several occasions, the City's consent to the merger was not required. In particular, the franchise agreement requires consent only for a transfer or assignment, not a change of control. Even if the City's consent was required, AT &T Comcast possesses the requisite financial, legal and technical qualifications. In fact, the surrounding communities, including the Cities of Costa Mesa, Corona and Covina and Los Angeles have all approved the merger, and 98 % of the communities nationwide have also approved of the merger. The City has raised no valid reasons for denying consent. To the contrary, they have alleged two compliance issues regarding customer service statistics and the City's technical audit that are factually and legally flawed. They have also cited to streamlining of jobs at the , corporate level, even though the workforce at the local level has been increased by 15% for 158471_1 ATTORNEYS AT LAW 2361 ROSECRANS AVENUE, SUITE 110 WILLIAM F. BLY EL SEGUNDO, CALIFORNIA 90245 -4290 DIRECT DIAL TELEPHONE (310) 643-7999 310-843-7999 x 102 FAX (310) 643-7997 S8LY@CR5LAW.COM WWW.CRBLAW.COM December 2, 2002 Honorable Jeffrey M. Thomas, Mayor and Members of the City Council City of Tustin 300 Centennial Way Tustin, CA 92780 WASH1 M D.O. omce 1919 PENNSY V/MIA AVENUE. N.W. WA IwQ . D.C. 200069750 Tee .z (202) 6519750 F. (202) 452-0067 Re: RESOLUTION NO. 02115 -- A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF TUSTIN, CALIFORNIA WITHOLDING CONSENT TO THE MERGER OF AT &T CORPORATION AND COMCAST CORPORATION TO FORM AT &T COMCAST CORPORATION AS A PARENT OF THE CITY'S CABLE TELEVISION SYSTEM FRANCHISEE, MEIDIA ONE OF LOS ANGELES, INC. ( "Merger Resolution ") Dear M iyor Thomas and Members of the City Council: I am writing to provide AT &T Comcast Corporation's objection to the Merger Resolution that is scheduled to be considered at tonight's meeting of the City Council. As AT &T Broadband ( "AT &T ") has informed the City on several occasions, the City's consent to the merger was not required. In particular, the franchise agreement requires consent only for a transfer or assignment, not a change of control. Even if the City's consent was required, AT &T Comcast possesses the requisite financial, legal and technical qualifications. In fact, the surrounding communities, including the Cities of Costa Mesa, Corona and Covina and Los Angeles have all approved the merger, and 98 % of the communities nationwide have also approved of the merger. The City has raised no valid reasons for denying consent. To the contrary, they have alleged two compliance issues regarding customer service statistics and the City's technical audit that are factually and legally flawed. They have also cited to streamlining of jobs at the , corporate level, even though the workforce at the local level has been increased by 15% for 158471_1 COLE, RAYWID & BRAVERMAN, L.L.P. Honorable Jeffrey M. Thomas, Mayor, and Members of the City Council December 2, 2002 Page 2 installation and service. None of the these reasons provide a basis for denying consent to the merger. Finally, the City Staff has recommended passage of the Resolution at a hearing scheduled immediately after the Holiday weekend and with minimal notice to the company. This is fundamentally unfair. We have done our best given the limited time frame to put together the enclosed objections; however, the short notice and the nature of the hearing has severely prejudiced AT &T Comcast's rights. In short, we believe that due process requires the City to conduct a formal administrative hearing, following adequate notice, at which the company is given the opportunity to introduce evidence, including testimony from its own expert witnesses regarding issues such as the technical audit. We believe that the City's failure to do so is a violation of AT &T Comcast's due process rights. We therefore urge the Council to continue the item so that a full administrative hearing can be conducted. I. The City's Consent to the Merger Was Not Required. The transfer of a franchise and a change of control of a franchisee are distinct and different occurrences, either or both of which may require a franchising authority's prior consent, depending on the terms of the franchise. It is typical for cable ordinances and franchise agreements to address the two issues in the same or sequential sections, if both are addressed.] The Tustin Municipal Code addresses both in Section 7418(d). In many cases, however, a franchising authority's consent is required only for a transfer of the franchise and not for a change of control of the franchisee, in which case the document is generally silent on the issue of change of control. That is the case with Ordinance No. 1002, which states the terms on which a cable franchise was granted to MediaOne of Los Angeles, Inc. (formerly known by the name American Cablesystems of California, Inc.). Section 5 of Ordinance No. 1002 states that the City's prior consent is required if the franchise is "transferred, leased, or assigned or disposed of', but the ordinance does not require the City's consent for a change of control of the franchisee. Under the principle of contract and statutory construction known as expressly unius est exclusio alterius — the expression of one thing is the exclusion of another — the inclusion of transfer of franchise language and the exclusion of change of control language reflects the intention of the parties that prior consent is not required for parent level mergers that result in a change of control of the franchisee but not a transfer of the franchise. Section 27 of Ordinance No. 1002 expressly states that the franchise is a contract between the City and the Franchisee, and that the express terms of the franchise prevail over any conflicting or inconsistent provisions in Article 7, Chapter 4 of the Tustin Municipal Code. Accordingly, the terms of Section 5 of Ordinance No. 1002 prevail over Section 7418(d) of the Tustin Municipal Code. The City's prior consent is not required for a change in control of the Franchisee. r This reflects a general understanding in the industry that the two concepts are related, but distinct For example, FCC Form 394 is designed to be used both for a transfer, or assignment, of a franchise, and for a change of control of a franchisee. The form provides separate boxes to be checked depending on which applies. 158471_1 COLT., RAYWID & BRAVERMAN, L.L.P. 1 ionorable Jeffrey M. Thomas, Mayor, and Members of the City Council December 2, 2002 Page 3 Furthermore the merger did not constitute a transfer or assignment and did not amount to a transfer of the franchise. In fact, the same entity Media One of Los Angeles, Inc. continues to hold the franchise after the merger as held it before the merger. The only change as a result of the transaction was a change in the stock ownership of the ultimate parent company that owns the franchisee. Such a change in ownership does not amount to an assignment or transfer. Under well - established principles of corporate law, each corporation, including a corporate subsidiary such as the franchisee , is a legal entity having an existence separate and distinct from direct and indirect corporate parents and that of its shareholders. See, e.g., Merco Constr. Eng'rs, Inc. v. Municipal Court, 21 Cal.3d 724, 729 (1978); Say & Say, Inc. v. Ebershof, 20 Cal.AppAth 1759, 1767 (1993); 9 Witkin, Summary of California Law (9th ed. 1989) Corporations §1, at 511. A corporation, for example, can sue and be sued, hold property and enter into contracts. 15 Cal.Jur.3d, Corporations, § 13 (1983), citing Deering's Cal. Corp. Code § 18 (1985). A corporation is an independent legal entity that continues after the sale of its stock. See, e.g., 12 Fletcher, Cyclopedia of Corporations, § 5480 (1985). When shareholders purchase stock in a corporation, they do not acquire an ownership interest in the property of the corporation. Kohl v. Lilienthal, 81 Cal. 378, 385 (1889); Corp. Code § 184. Corporate shareholders do not have legal title to the assets or capital of the corporation, have no right to possession thereof, and may not transfer or assign the properties or assets of the corporation. In re Mercantile Guaranty Co., 263 Cal.App.2d 346, 352 (1968); Union Bank v. Anderson, 232 Cal.App.3d 941, 949 (1991). Consistent with these principles, it is well settled in California that a change in stock ownership of a corporation does not amount to an assignment or transfer of a contract held by the corporation. See, e.g., United States Cellular Investment Co. of Los Angeles v. GTE Mobilnet, Inc., 281 F.3d 929, 935 (9th Cir. 2002) (sale of stock not barred by restriction against transfer in partnership agreement); Richardson v. La Rancherita of La Jolla, Inc., 98 Cal. App. 3d 73, 79 (1979) (provision barring assignment of a lease did not bar transfer of shares of common stock in a corporation that held the lease); Ser -Bye Corp. v. C.P. & G. Markets, Inc., 78 Cal. App. 2d 915, 920 1947 ( "When plaintiff chose to deal with a corporation as its tenant it must have also known that shares of stock therein might be owned by different stockholders and were subject to assignment by others ... The inhibitions against assignment run to the lease itself and not to the stock in the lessee corporation..... .. ); Randal v. Scott, 110 Cal. 590, 594 -595 (1895) (transfer of a 50 percent interest in a lease to a third party by one of two tenants in common did not violate anti - transfer provision of lease ").2 ` See also, Capital Parks, Inc. v. Southeastern Advertising and Sales Sys., Inc., 30 F.3d 627, 629 (5th Cir. 1994) (purchase of stock and assets of parent corporation does not constitute a purchase or transfer of subsidiary's assets); Olympia Equip. Leasing Co, v. Western Union Telegraph Co., 786 F.2d 794 (7th Cir. 1986) (ownership of assets of parent does not constitute ownership of assets of subsidiary); Engel v. Teleprompter Corp., 703 F.2d 127, 134 (5" Cir. 1983) (transfer of stock of a parent corporation does not affect subsidiary's ownership of cable system or franchise); 18A Am. Jur. 2d Corporations § 692 (1985) ( "[tlhe sale of stock of a parent corporation does not come within the restrictions on the transfer of stock of the wholly -owned subsidiary"). 158471_1 COLE, R4YWID & BRAVERMAN, L.L.P. Honorable Jeffrey M. Thomas, Mayor, and Members of the City Council December 2, 2002 Page 4 California cases recognize that "when a party enters into an agreement with a corporation, it is presumed to do so with an understanding of the nature of the corporate form." United States Cellular, 281 F.3d at 935. Thus, "the law presumes that if the parties intend to limit the corporation's ability to engage in a legitimate and normal corporate transaction [i.e., the sale of stock], such a limitation will be specified." Id. As can be seen, under well- settled law, the merger does not amount to a transfer or assignment of the franchise by the Franchisee. As stated above, the same entity, Media One of Los Angeles, Inc., continues to hold the franchise after the merger. The only change as a result of the merger was a sale of stock at the ultimate parent company level. Yet under California law, even a sale of stock by Media One of Los Angeles, Inc., the franchisee, would not amount to a transfer or assignment of the franchise unless the franchise agreement expressly provided otherwise, which it does not. H. AT &T Comcast Possesses the Requisite Financial Legal and Technical Qualifications to Own and Operate the Franchise. As stated above, the City's consent to the merger of AT &T Broadband and Comcast corporation was not required under the express terms of the franchise agreement. Even if the City's consent was required, however, there is no basis for the City to deny its consent to the merger. A. Standard of Review An application for consent to a change of control is initiated by filing an FCC Form 394. A Local Franchise Authority ( "LFA ") shall have 120 days from the date of submission of a completed FCC Form 394 to act upon a transfer request. "If the franchise authority fails to act upon [a] transfer request within 120 days, such request shall be deemed granted unless the franchise authority and the requesting party otherwise agree to an extension.i4 FCC Form 394 was designed to include "the information necessary to establish the legal, technical and financial qualifications of the proposed transferee." and to "ensure that the franchise authorities are provided with sufficient information to evaluate and render prompt decisions with respect to such transfer requests. "5 Moreover, FCC Form 394 is intended to 3 47 U.S.C. § 537; 47 C.F.R § 76.502(a). 4 47 U.S.C. § 537; 47 C.F.R § 76.502(c). ' Implementation of Sections 1 I and 13 of the Cable Television and Competition Act of 1992. Report and Order, 8 F.C.C.R. 6828, ¶¶ 85 -86 (1993) (emphasis added) ( "1993 FCC Order "). 156471_1 COLE, RAYwiD S BRAVERMAN, L.L.P. Honorable Jeffrey M. Thomas, Mayor, and Members of the City Council December 2, 2002 Page 5 "provide cable operators some degree of assurance and certainty that local franchise authorities will act promptly and not unduly delay consummation of proposed transactions.s6 Federal law also limits the scope of review and information that may be required as part of the change of control approval process.7 Beyond the information required by the FCC Form 394 franchise or applicable local law, an LFA may only request "such additional information as may be reasonably necessary to determine the qualifications of the proposed transferee. "6 B. Financial Qualifications On the financial front, AT &T Comcast will be a financially vibrant and stable company following the Merger. With projected revenues of $18 billion, 9 and approximately $141 billion in assets10 as of the closing of the Merger, the company will have the financial strength and flexibility needed to maximize broadband's growth opportunities and enhance the company's profitability potential and ability to serve customers. Comcast has a long history of successfully integrating new cable systems into its operations, and in doing so raising the profit margins of the acquired properties. For example, in January 2001, Comcast acquired 1.4 million AT &T Broadband customers. At the time of acquisition, the average system had a margin of between 31% and 31.6 %. In 2001 Comcast brought things up to 37.7 %, and this year Comcast projects that these systems will see margins of 40.6%.11 Moreover, as the third largest cable operator in America, Comcast brings to the Merger a remarkably stable balance sheet and financial position. The company had a terrific 1Q 2002 wherein it established an investment grade rating for its bonds, that the debt -to-cash -flow ratio for AT &T Broadband will actually be significantly reduced by virtue of the Merger, and that Comcast has secured significant financing for AT &T Comcast following the close of the transaction. In addition, Comcast is generating high "free cash flow" that will be a significant non -debt source of funding for 6 Implementation of Sections 11 and 13 of the Cable Television Consumer Protection and Competition Act of 19�2 Memorandum Opinion and Order on Reconsideration, 10 F.C.C.R. 4654, 4676, ¶ 52 (1995) ( "1995 FCC Order "). 7 See, e.g., Charter Communications, Inc. v. County of Santa Cruz, 133 F.Supp.2d 1184, 1201 (N.D.Cal. 2001) (Federal law imposes "certain outer limits on the LFAs' power to request information over and above that required by Form 394 "). 6 1993 FCC Order, 186. See also Id. at 185; 1995 FCC Order IN 50 -53. 9 Seethe financial statements that were provided as an attachment to Exhibit 9 of the FCC Form 394. 10 Id. N AT &T Comcast Corporation: Synergies at Rork, p. 8 (May 8, 2002) ( "Synergies Report"). A copy of this report is provided at Tab A. 156471_1 COLE, RAYWID S, BRAVERMAN, L.L.P. Honorable Jeffrey M. Thomas, Mayor, and Members of the City Cowlcil December 2, 2002 Page 6 the company's operations and expansion. Let me provide you some additional detail relating to these factors: 1. Debt to Operating Cash Flow This is a common industry metric for determining the financial strength of a cable television company. Comcast currently enjoys a significantly stronger balance sheet than AT &T Broadband and has a ratio of debt to 2001 operating cash flow ( "OCF ") of less than 4 to 1.12 AT &T Broadband's ratio, on the other hand is currently over 8 to 1.13 Following the merger, the new company will have a combined first -year debt/OCF ratio of less than 5 to 1.14 2. Investment Grade Rating AT &T Comcast will be a solid, investment -grade company. In fact, on March 4, 2002, Fitch Ratings assigned indicative ratings of BBB to the senior unsecured debt obligations of AT &T Comcast Corp.15 Moody's and Standard and Poor's are currently reviewing the combined entities' rating position. Both firms, however, have suggested that the new company will maintain its investment grade status. 16 3. Funding for Future Growth AT &T Comcast will have superior financial resources to ensure that it has adequate financing to meet its expected needs. For example, earlier this month, Comcast's Treasurer announced that the company had signed agreements with JP Morgan Chase, Citibank and a syndicate of other banks to provide the $12.80 billion in financing. This new credit, coupled with existing lines of credit available to Comcast, ensures that the company will have more than adequate financing available to meet expected needs. 4. Free Cash Flow Comcast is also generating high "free cash flow" from its operations and this is a significant non -debt source of funding expansion. Because Comcast's system upgrades are 95% complete, its related capital expenditures are also decreasing. This means that more of the 13 Synergies Report, p. 8. 13 Id 14 Id 15 Id 16 Id. Information concerning ratings of AT &T Comcast by Moody's and Standard and Poor can be found on their respective websites, located at wwW r000dvs.com and www.standardpoor.com. 156471_1 COLE, RAYWID S BRAVERMAN, L.L.P. Honorable Jeffrey M. Thomas, Mayor, and Members of the City Council December 2, 2002 Page 7 company's free cash flow can be deployed to accelerate the upgrades for AT &T Broadband's systems. 5. No Off Balance Sheet Debt Given the dynamics in today's complicated financial markets, I wanted to allay any concerns that the City Council my have regarding off balance sheet financing. First, Comcast has no off -the -book subsidiaries.] Indeed, a municipal consultant representing Berkeley and other Northern California communities sent AT &T Broadband a Request For Information ( "RFI ") asking: "Has Comcast Corporation, or any affiliated entity, engaged in the past ten (10) years in "Off- Balance Sheet" borrowings whereby obligations were incurred by an entity related to or controlled by Comcast Corporation, or any officer, director, or controlling shareholder or group of shareholders, which obligation(s) could, pursuant to any contingency regardless of its remoteness or lack thereof, become the obligation of Comcast Corporation ?" The Company's response was straightforward and direct: "No such borrowings have occurred.s18 Second, AT &T Broadband has identified all guarantees of debt of its subsidiaries and unconsolidated joint ventures.19 6. Synergies In addition to a very positive balance sheet, the Merger will create synergies that will help the new entity to compete in the marketplace for broadband services. Comcast estimates that the combined companies could achieve synergies and efficiencies worth approximately $1.25 billion to $1.95 billion annually in increased earnings before interest, tax, depreciation and amortization, and approximately $200 million to $300 million a year in capital expenditure savings. Let's take a closer look at where these savings will come from PROGRAMMING COST SAv/NGs. For both Comcast and AT &T Broadband, programming costs represent the single largest expenditure made annually by our cable operations. And, we foresee programming costs continuing to climb by double digits over the next five years. Currently, AT &T Broadband enjoys more favorable programming rates than Comcast because of the sheer number of its customers. The merger of the companies, however, " See Philadelphia Inquirer, Comcast says it doesn't have any off -the -books subsidiaries, April 17, 2002. A copy of this article is attached at Tab C. 16 See Letter dated June 12, 2002 from F. Kent Leacock to William Marticorena, Esq. ( "Leacock Letter ") A copy of this letter is attached hereto at Tab D. 19 As of December 31, 2001, the total potential amount of such obligations was $1.461 billion. See Proxy, page XII -111. The company has also advised that it would not be required to meet its obligations under such guarantees. Proxy, page XII -111. Furthermore, in April 2002, the company took a non - revocable step to terminate its connection to one of the joint ventures, which reduces the guarantee obligations by $710 million. See, e.g., htto: / /www. sec. ¢ov /Archives/edgar/data/1091667/ 00009501 4802001387 /v8l4O3a4exl0- 19.htm ; 158471_1 COLE, RAYwID & BRAVERMAN, L.L.P. Honorable Jeffrey M. Thomas, Mayor, and Members of the City Council December 2, 2002 Page 8 will result in the nation's largest cable system operator and will position AT &T Comcast to receive the best available rates offered by programmers. As such, we project a range of $250 to $450 million in programming cost savings annually. 20 OPERATING EFmcIENcIE& When you bring two organizations together, you certainly can achieve some significant operating efficiencies. And we believe that within a one- to three - year period, operational synergies for AT &T Comcast will result in $200 to $300 million in savings. Reduction in corporate overhead costs, elimination of duplicate operations, company wide implementation of best practices and systems, and other internal initiatives will streamline overall operations and result in a fiscally leaner and financially stronger company. 21 NATIONAL AnvERTmNG. AT &T Comcast will operate in eight of the top ten DMAs, and will be the major cable provider in fourteen of the top twenty markets. Our footprint will actually be bigger than the station footprints of the major broadcast networks. So when we speak to an advertiser, we will effectively be representing roughly a third of the cable viewing population in the United States." NEw PRODUCTS A key benefit of the Comcast —AT &T Broadband merger is that the new company's scale will afford it the opportunity to assume a true leadership position when it comes to introducing new products. Comcast and AT &T Broadband are already two companies very much oriented toward new product development. Comcast has had its focus on video and data, while AT &T has emphasized telephony. Essential to both companies' strategies, however, has been the layering of new products into their existing infrastructures. The scale and leadership position of the new AT &T Comcast will create the kind of synergies we believe will allow us to move forward even more vigorously in our development efforts and will help us realize the potential of interactive television, video on demand, new high -speed data applications, and other broadband possibilities more quickly. 23 TELEPHONY. Although broadband telephony has always been considered part of Comcast's long -term vision for the future, it was not included in Comcast's current five -year plan. We believe that overlaying AT &T Broadband's expertise, financial investment, commitment in people and systems, and learning onto Comcast's existing footprint creates a very significant opportunity to expand the telephony business over the next five years. So, we have included this broadband application in our synergy calculations as well.24 20 Synergies Report, page 4. 21 Synergies Report, page 5. 22 Id. 20 Id 24 Id 156471_1 COLE, RAYwID S BRAVI.RMAN, L.L.P. I Ionorable Jeffrey M. Thomc;, Mayor, and Members of the City Council December 2, 2002 Page 9 The following table summarizes the savings that we expect to arise from the synergies of the merger. Summary of Cost Savings Through Synergies 25 Category Annual EBITDA Impact Timing Programming Cost Savings $250 -450 1 -3 yrs Continued Operating Efficiencies $200 -300 1 -3 yrs National Advertising Platform $100 -200 1 -3 yrs New Products $100 -200 3 yrs Comcast Telephony $600 -800 5 yrs Total $1,250- 1,950 Net Present Value $13,500 7. Other Municipal Consultants Have Concluded that AT &T Comcast has the Requisite Financial Qualifications Based on the positive financial benefits that will accrue from the Merger, municipal consultants representing other communities have concluded that AT &T Comcast has the financial qualifications to assume control of the Franchisee. In an April 5, 2002 report to the Mount Hood Cable Regulatory Commission, which includes the City of Portland,26 Mike Katz had this to say about the merger: "Comcast is relatively strong financially, compared to other cable operators, and appears stronger than AT &T Broadband currently. Thus, the combined AT &T Comcast should be stronger than AT &T Broadband standing alone, as evidenced by the following indicators: 2001 Revenues Operating Cash Flow As % of Revenue Net Income (Loss) Interest Expense 25 Synergies Report, page 4. AT &T Broadband $10.1 Billion $ 2.1 Billion 20.6% ($ 4.2 Billion) $ 1.7 Billion Comcast AT &T Comcast $ 9.7 Billion $ 19.7 Billion $ 2.7 Billion $ 4.8 Billion 27.9% 24.2% $ .2 Billion ($ 3.0 Billion) $ .7 Billion $ 2.3 Billion 36 A copy of this report (hereinafter "Katz Report") is attached at Tab E. 158471_1 COLE, RAYWID & BRAVERMAN, L.L.P. Honorable Jeffrey M. Thomas, Mayor, and Members of the City Council December 2, 2002 Page 10 Capital Expenditures $ 3.4 Billion Total Assets $ 103.2 Billion Total Debt $ 23.3 Billion Debt _ Cash Flow 11.1 Cable Debt _ Cable CF 11.1 Cable Debt per Subscriber $ 1,717 Recent Credit Ratings Baal (Moody's) $ 2.2 Billion $ 5.6 Billion $ 38.1 Billion $140.8 Billion $ 12.2 Billion $ 35.8 Billion 4.5 7.5 4.2 7.8 (est.) $ 1,021 $ 1,457 Baa3 (Moody's) BBB (Fitch) BBB (Fitch) Dr. Barry Orton, a professor at the University of Wisconsin and prominent consultant representing multiple communities in the Chicago Metropolitan Area and Midwest opined: Franchise authorities' financial concerns are primarily those of whether the new entity controlling their franchisee has the minimal qualifications necessary to back the franchisee's commitments and requirements as delineated in the franchise documents, whether the new entity has adequate financing to complete the transaction and meet its near -term capital and operational needs, and whether its overall business plan has a reasonable chance of success so that the company will have the resources to operate, maintain, and develop the systems serving the franchise authorities communities. It is the Consultants' opinion that from the Form 394 documents, the various subsequent SEC filings, and the responses to our Requests for Further Information, that AT &T Comcast will more than meet these minimum qualifications. Franchise authorities should be assured that AT&T Comcast has the financial qualifications to assume control 9f the parent company of the entity holding each LFA's cable television franchise.2 Similarly, a report by Adrian E. Herbst, Esq., a prominent consultant hired by communities in the Minneapolis, Minnesota metropolitan area concluded that "[AT &T Comcast] does have the financial qualifications to assume control of the Franchisee and the operation of the cable system serving the NWSCCC.,,28 27 AT &T- Comcast Due Diligence Project: Final Report, prepared by Dr. Barry Orton, page 12 (May 20, 2002) ( "Orton Report") (emphasis added). A copy of this report was attached at Tab F. 2' Report Regarding Review Of The Legal, Financial And Technical Qualifications OfAT &T Comcast Corporation In Connection With The Application For Franchise Authority Consent To Transfer Of Control Of The Cable Television Franchise From AT &T Corp. To AT &T Comcast Corporation, prepared by Adrian E. Herbst, Esq. for the Northwest Suburbs Cable Communications Commission, page 47 (May 28, 2002). ( "Herbst Report ") A copy of this report is attached at Tab G. 158471_1 COLE, RAYWID & BRAVERMAN, L.L.P. Honorable Jeffrey M. Thomas, Mayor, and Members of the City Council December 2, 2002 Page 11 C. Legal Qualifications AT &T Comcast has the necessary legal qualifications to own and operate the AT &T Broadband franchises in the City of Los Angeles. As AT &T Broadband noted in its Form 394, AT &T Comcast is a Pennsylvania corporation qualified to do business in all states where it is required to be qualified, including California. As a result of the proposed transaction, there will be a change of control at the ultimate parent corporation level of the Franchisee and AT &T Comcast will become the indirect parent of the Franchisee. Subject to its receipt of any required state or federal approvals, AT &T Comcast is qualified under state and federal law to acquire AT &T Broadband, and, indirectly become the parent of Franchisee. Indeed, various municipal consultants that have reviewed the transaction have reached this conclusion. For example, Brian Grogan, Esq., who represents communities in the Midwest, reached the following conclusion: "Based on our review of the legal qualifications of AT &T Broadband Corp. as proposed to be controlled by AT &T Comcast Corporation upon consummation of the separation, spin -off, and Mergers, we conclude it would be unreasonable for the City to find that upon closing the transaction contemplated under the Merger Agreement (including the Separation Agreement), the Transferee and AT &T Broadband Corp. will not be legally qualified to own and operate the System. "29 D. Technical Qualifications AT &T Comcast has the necessary technical qualifications to assume control of the AT &T Broadband Franchise Entities. AT &T Comcast will be formed by combining two companies that each brings over 30 years of experience and expertise in the cable industry to the combined company. 1. Background on Comcast Comcast is a top -tier provider of cable television service, high -speed Internet service, electronic commerce, video programming and other services. With over 8.4 million analog cable subscribers, over 2.3 million digital cable customers and nearly 1 million high -speed Internet service customers, the company is the third largest cable operator in America. To deliver exceptional video and data services to its subscribers, Comcast operates approximately 182,000 miles of plant. Nearly 95 percent of its network plant has been upgraded to advanced cable system architectures. 29 Report to the City of Hastings, Minnesota Regarding the Proposed Transfer of Control ofAT &T Corporation to AT &T Comcast Corporation, prepared by Brian T. Grogan, et al., page 29 (May 16, 2002) ( "Grogan Report'). A copy of this report is attached at Tab H. 158471_1 COLE, RAYWID S, BRAVERMAN, L.L.P. Honorable Jeffrey M. Thomas, Mayor, and Members of the City Council December 2, 2002 Page 12 Comcast was one of the early pioneers in the community antenna television business. Since Comcast's Chairman and Founder, Ralph J. Roberts, acquired its first system in Tupelo, Mississippi in 1963, the company has grown to become the third largest cable television company, serving 8.4 million cable customers and nearly 1 million high speed data customers in 26 states. In addition to its cable system operations, Comcast also owns major stakes in two prominent programming networks — E! Entertainment and QVC — and is developing strong regional programming operations to serve its cable communities. These and other programming investments, such as The Golf Channel, provide Comcast with a diverse and well - integrated media operation. Comcast has a rich history of providing top -notch customer and technical service, and in September 2000 Cablevision Magazine named it Cable Operator of the Year. 30 We believe that Comcast is a fantastic company, and will make a great merger partner for AT &T Broadband. 2. Background on AT &T Broadband AT &T entered the cable television business in March 1999 with its acquisition of Tele- Communications, Inc. d/b /a TCI. It expanded its cable footprint in June 2000 with the acquisition of MediaOne Group, d/b /a MediaOne. Together, the combined companies represent AT &T's Broadband business unit, which is the largest cable company in America. AT &T Broadband's wholly owned cable systems serve 13.44 million subscribers in 21 states as of December 31, 2001. AT &T Broadband has over 3.5 million digital cable customers, 1.5 million high -speed Internet service customers and over one million cable telephony customers. AT &T Broadband currently operates over 250,000 plant miles in its cable systems. 3. AT &T Comcast will be a Leading Provider of Broadband Services The combination of these two entities will make AT &T Comcast the world's leading provider of broadband video, voice and data services, with a presence in 41 states and approximately 22 million subscribers. Given the depth of experience of each merger partner, there can be no doubt that together they possess the requisite technical qualifications to control the Franchise Entities. Following is a glimpse at some of testimonials that Comcast has earned reflecting its clear technical qualifications as a leading cable operator: • In September 2000, Cablevision Magazine honored Comcast as its Operator of the Year. " See Cablevision Magazine, September 11, 2000, attached at I. 31 id 158471_1 COLE, RAYWID S BRAVERMAN, L.L.P. Honorable Jeffrey M. Thomas, Mayor, and Members of the City Council December 2, 2002 Page 13 • Philadelphia Mayor, John F. Street, who wrote: "Comcast has grown nationally, but it has not lost focus on the local communities it serves.... I am proud of Philadelphia and feel fortunate to have a great company like Comcast as a partner in our community. Thank you and the employees of Comcast "3Z In December 2000, as part of a different transaction, Comcast transferred its Sacramento franchise to AT &T Broadband. Now that AT &T and Comcast are set to merge, Sacramento is welcoming Comcast back with open arms. In March 2002, Richard E. Esposto, the Executive Director of the Sacramento Metropolitan Cable Television Commission, wrote Comcast's Brian Roberts: "Sacramento is saying: `Welcome Back' to you and the Comcast Family. The Comcast years of the late 1990s were the best in our cable television history.... We look forward to working toward those goals and invite you to make Sacramento an AT &T Comcast showcase "33 • Another example of the good will extended to Comcast by another jurisdiction is found in the letter dated March 20, 2002, from the Honorable Gary E. Johnson, the Governor of New Mexico who commends Comcast for its commitment to community service which "exemplifies Comcast's dedication to the entire state. "34 • Senator Richard Shelby from Alabama extended his personal appreciation to Comcast for: "... the continued support, commitment and community spirit Comcast displays in its Alabama cable systems. I appreciate that Comcast continues to provide new products and services to residents in Alabama while also maintaining strong bonds with the local communities. Comcast's commitment in Alabama has enabled many communities to better recruit new industry and create jobs. "35 32 See City of Philadelphia, Pennsylvania letter from Hon. John F. Street, Esq., dated April 16, 2002, attached at Tab J. 33 See Sacramento Metropolitan Cable Television Commission letter from Richard Esposto, Executive Director, dated March 4, 2002, attached at Tab K. 34 See Office of the Governor, New Mexico, letter from Hon. Gary E Johnson, Governor, dated March 20, 2002, attached at Tab L. 35 See City of Huntsville, Alabama letter from Hon. Loretta Spencer, Mayor, dated April 10, 2002, attached at Tab M. 158471_1 COLE, RAYwID & BRAVERMAN, L.L.P. Honorable Jeffrey M. Thomas, Mayor, and Members of the City Council December 2, 2002 Page 14 Given the remarkably rich history of both AT &T Broadband and Comcast Corp. in the cable industry, AT &T Comcast Corp. will undoubtedly possess the requisite technical qualifications to control the Franchise Entities following the conclusion of the Merger. Not surprisingly, other municipal consultants concur: `Based on our review of the technical capabilities of AT &T Comcast, we conclude it would be unreasonable for the City to find that, upon closing of the transaction, AT &T Comcast, Ail] not be technically qualified to own and operate the System. "36 111. The City Has Raised No Valid Reasons For Denying Consent to the Merger. A. Customer Service Issues The Resolution references alleged customer service standard violations as grounds for denying consent to the merger. The Resolution and the accompanying Staff Report, however, fail to articulate any specific violations, and we are aware of none that would give rise to a denial. We suspect, however, that the Resolution is referencing AT &T customer response times. As we have informed the City on numerous occasions, the company recently invested millions of dollars in constructing and staffing a brand new, state -of -the -art customer service center. As a result of this investment, AT &T's response times have been within FCC standards, with one exception. You will notice we experienced a set back in our September Call Center performance. This was due to an unexpectedly high number of calls to our Inbound Sales Queue in response to a promotional offer. Although we forecasted and staffed for a 12 % increase in volume customer response was 30% higher than forecasted. Additionally, the September 14th De La Hoya pay - per -view event drove 25,000 calls into the Call Center. The record number was the largest consumer demand for a fight that we've experienced in the last five years. October call volume is back to normal levels and we are currently training eleven new inbound professionals to meet the higher demand for our upcoming November and December promotions. Despite the higher call volume, we maintained Percentage Trunks Busy at below I% and the Quarter Average Speed to Answer did not exceed 1 minute. At any rate, FCC rules require compliance with customer response times measured on a quarterly basis. In addition, the franchise agreement requires that the franchisee be given notice and an opportunity to cure any franchise violations. Thus, to the extent that AT &T was in violation of telephone response times for the third quarter of this year, they must be given an " Orton Report, page 34. 1584'71_1 COLE, RAYWID S BRAVERMAN, L.L.P. Honorable Jeffrey M. Thomas, Mayor, and Members of the City Council December 2, 2002 Page 15 opportunity to cure those violations in the fourth quarter, which has not yet expired. Moreover, any violations in the first quarter were cured by compliance in the second quarter. B. Technical Audit The Resolution also alleges various physical plant issues as grounds for denying consent to the merger. The City hired Kramer.Firm, Inc. to perform a technical audit on AT &T's physical plant. AT &T investigated each of the 174 alleged violations cited in the report prepared by Kramer.Firm Inc. ( "Report"). Attached at Tab N is a written summary explaining and categorizing AT &T Broadband's findings and the corrective action that was taken when called for. Our investigation revealed that approximately half of the drop deficiencies cited in the Report either: (a) did not exist; (b) were at addresses outside of AT &T Broadband's cable system; or (c) were at addresses where the drop had been disconnected because AT &T Broadband is not currently providing service at the address. AT &T Broadband has voluntarily repaired or modified cable drops at the remaining addresses so that they comply with current electrical codes. Thus, to the extent there were any code violations, they have been cured. However, I want to take care to point out that this work was not necessarily required as a matter of law or franchise obligations. The applicable electrical codes have complicated grandfathering provisions that were not addressed in the Report. While a particular drop may not have met the requirements of the 2002 version of the National Electrical Code, that drop may have been installed years ago and be governed by a different standard under the old code, or even a different code." In addition to curing any code violations identified by the City's consultant, the company has commenced a comprehensive program for reviewing all of the drops in its plant in Tustin. A copy of this plan, which we previously provided to the city is attached at Tab O. Finally, to help you understand better understand the nature of the drop issues discussed in the report prepared by Kramer.firm, I would like to first explain the dynamic nature of cable systems and some important aspects of AT &T Broadband's drop replacement and maintenance procedures. 37 The Report indicates that the consultant relied on "National Electrical Code/California Electrical Code" without specifying which versions. The NEC has complicated grandfathering provisions that apparently were not taken into account. In addition, the consultant may have analyzed a particular drop and found it to be out of compliance with the NEC when the appropriate analysis should have been conducted under the NESC. The distinctions are apparent in the grandfathering protections, which are generally more favorable in the NESC. While both the NEC and NESC are concerned with safety, the NEC is primarily concerned with inside premises wiring; the NESC addresses outside utility wiring. Thus, if a particular "grounding" problem was found on the utility side of the "service point," i.e., beyond the "demarcation point," it may very well be that consultant should have analyzed the issue under the NESC. Again, because of the NESC's more favorable grandfathering provisions, the drop may not have been in `Violation" of the applicable version of the NESC. There is a much more complicated analysis behind this issue, which I have attempted to summarize here only in order to clarify that the work performed by AT &T Broadband is not an indication that a code violation existed. 158471_1 COLE, RAYWID & IIRAVI:RMAN, L.L.P. Honorable Jeffrey M. T1wniats, Mayor, and Members of the City Council December 2, 2002 Page 16 A cable system is dynamic, subject to both the forces of nature and actions of a variety of people who come into contact with the system. A cable system that is constantly subjected to these outside forces will regularly develop problems. Responsible operators like AT &T Broadband regularly correct these problems, but it is entirely predictable that at any given time there will be a certain number of newly developed problems that have not been discovered and corrected Common sense suggests that it could not be otherwise unless the cable system were entirely static — a clear impossibility. As a specific example of this, cable drops that were properly installed to begin with can be disturbed not only by weather, but by property owners, tenants, their contractors and other service providers in the course of performing work at the service locations. Drops, including grounding, can be damaged, modified, moved or removed without notice to the cable operator. As described below, AT &T Broadband has procedures in place that result in regular detection and correction of these problems over time. We believe that these ongoing procedures, rather than the one -time, system -wide inspection recommended in the Report, are the most appropriate and cost - effective way to manage drops in a dynamic cable system. In the ordinary course of conducting business there are at least four opportunities for AT &T Broadband to evaluate and correct drop deficiencies. They are: 1) routine service calls; 2) service upgrades or cross grades; 3) new service installation; and 4) signal leakage testing. Our construction crews and technicians, who are extensively trained in proper installation procedures that include grounding, take advantage of each opportunity to ensure that the customer drops are properly maintained. For instance, during routine service calls, whether we have been asked to provide instruction on using the digital boxes, or to check signal quality, our installation technicians are instructed to examine the drop and to replace it if necessary. In addition to routine service calls and service upgrades, we usually upgrade drops whenever we provide an advanced service to customers, such as cable modem service and digital video. We replace about 85% of the drops for subscribers who receive cable modem service or digital video services. Another aspect of our routine plant maintenance program involves rigorous testing for signal leakage that is consistent with the FCC's regulations on Cumulative Signal Leakage Index ( "CLI "). Signal leakage is the main cause of picture quality degradation. In order to locate problems before they become noticeable to the customer, we perform what is known as a CLI fly -over, which includes testing the plant with a radio frequency meter to determine if there is any signal leakage emanating from the cable system physical plant. Signal leakage problems can occur if there are loose couplings or fittings, or if there are damaged cables, among other reasons. We perform this type of testing on an ongoing basis throughout the year. In addition, our technical staff performs what is referred to as a "CLI drive -out" on all of our outside plant on a quarterly basis, complete with documentation of RF leakage levels and repairs made in accordance with FCC guidelines. Finally, each installation technician is instructed to test the drop during a home visit for signal leakage. When signal leakage is detected, it is corrected. Taken together, these procedures mean that the plant is continuously inspected and repaired. 15947_1 COLE, RAYWID & BRAVERMAN, L.L.P. Honorable Jeffrey M. Thomas;, Mayor, and Members of the City Council December 2, 2002 Page 17 In addition to these procedures, AT &T Broadband treats any potential safety problem as a top priority. Whenever a safety issue is identified, either by AT &T Broadband technicians, customers or third parties, such as other utilities, AT &T Broadband field crews respond within 24 hours of receiving the notice. Other deficiencies that come to our attention are generally corrected within five business days. We do not believe that AT &T Broadband's cable system in Tustin has more than the typical or expected amount of drop deficiencies when compared to similar cable systems. Nor do we believe that the signal quality delivered to our subscribers is negatively affected by the overall quality of our cable drops compared to other cable systems. The Report does not suggest otherwise. In fact, the Report provides no comparative data by which the City can gauge the findings about AT &T Broadband's system. C. Corporate Streamlining Finally the proposed Resolution would deny consent to the merger based on alleged reductions in the merged companies' labor force. You should know that all planned reduction are at the corporate level and that the labor force at the local level, which will impact the residents of Tustin, is actually increasing. For example, the total number of customer care representatives serving the Southern California region will increase in the next year from 227 to 241. Likewise, the number of field representatives in the region will increase from 92 to 94, and the number of engineering employees will increase from 22 to 29. This will result in a larger work force serving the residents of Tustin and a better overall commitment to service. A breakdown of the staffing increases is attached at Tab P. 158471_1 COLE, RAYwID & BRAVERMAN, L.L.P. Honorable Jeffrey M. Thomas, Mayor, and Members of the City Council December 2, 2002 Page 18 V. Conclusion The City's consent to the merger of AT &T and Comcast is not required under the terms of the franchise agreement. Even it were, however, AT &T Comcast has the necessary financial, legal and technical qualifications to own and operate the franchise. Moreover, the City has raised no valid reason to deny its consent. The City has also failed to provide AT &T with a full administrative hearing and adequate notice thereof. Such failure is a violation of AT &T Comcast's due process rights. Therefore we urge the City Council not to adopt the Resolution, and at a minimum, continue the matter pending a full administrative hearing. Very truly yours, �] -- �L William F. Bly� Mr. William A. Huston, City Manager Del J. Heintz, Director, Government Affairs Perry Parks, Vice President, Government Affairs +l 158471_1 Based on the foregoing and limited strictly to the Financial Statements reviewed by Moss & Barnett in conducting this review, we do not believe that AT &T Corp.'s request for assignment of the franchisees to operate the Systems serving the City can reasonably be denied based on the financial qualifications of AT &T Comcast Corporation. In the event the City elects to proceed with approving the transaction contemplated under the Merger Agreement (including the Separation Agreement), the assessment of AT &T Comcast Corporation's financial qualification should not be construed in any way to constitute an opinion as to the financial capability or stability of AT &T Comcast Corporation to (i) operate its existing franchise operation; (ii) to operate the Systems; or (iii) successfully consummate the transactions contemplated by the Merger Agreement or future acquisitions upon which we express no opinion. The efficiency of the procedures used in making an assessment of AT &T Comcast Corporation's financial qualifications and the capability to become the successor operator of the Systems is solely the responsibility of the City. Consequently, we make no representation regarding this efficiency of the procedures used either for the purpose for which this analysis of financial capability and qualifications was requested or for any other purpose. 503725/1 47 SECTION S.. INTERVIEWS WITH CITY OFFICIALS We contacted a total of twelve (12) communities in April and May 2002 with cable systems currently operated by Comcast entities in order to ascertain the following: The nature and quality of the relationship between Comcast and the community; 2. Whether Comcast worked well with the community in resolving cable service problems; 3. Whether subscribers appear to be satisfied with the services they received from Comcast; and 4. The extent that Comcast supports public access programming and local programming. These twelve (12) communities were selected in order to obtain a response from communities with different characteristics. We contacted communities in four (4) of the states that Comcast now serves which includes, Alabama, Delaware, Mississippi and Pennsylvania. The number of subscribers in these cities ranged from approximately 30 subscribers in Penn Township, Pennsylvania to 35,569 subscribers in Huntsville, Alabama. (The subscriber numbers used in this report were provided by AT &T Broadband and Comcast Corporation on April 1, 2002.) A summary of the responses to our questions follows, as does specific responses from each community. Twelve (12) Communities Contacted in April and May 2002 1. Now many years has Comcast been operating the cable system? Comcast has operating systems for periods ranging from approximately one (1) year to twenty (20) years. Did Comcast build the cable system? Comcast acquired all of the cable systems with the exception of two (2) 3. Is there a local office for Comcast? If not, how far away is the closest office? Seven (7) of the communities interviewed had a local office in their community. The distance of Comcast's local office to the other five (5) communities ranged from ten (10) to sixty -seven (67) miles. 50372517 46 4. Are most subscribers satisfied with the.cable service? Most communities felt the subscribers are generally happy with Comcast. One (1) community indicated Internet problems with @home, but Comcast's support was great with the switch to a new provider. One (1) community, where Comcast has been operating the system for twenty (20) or more years, indicated that subscribers have been unhappy with the rates for the last ten (10) years even with though Comcast has added more services. 5. Has the City received many complaints? Most of the communities receive very few complaints. Although, two (2) communities have received complaints regarding rates, and one (1) community received complaints regarding Comcast's new policy. This new policy requires a certain number of calls regarding the same complaint before they will dispatch a truck. Another community has received complaints that when dialing Comcast's local number the calls are answered at a location in another state. 6. Does Comcast satisfactorily resolve subscriber complaints? Nearly all communities interviewed responded that Comcast's satisfactorily resolves subscriber's complaints. 7. How many basic cable channels are there? The number of basic channels ranges from twelve (12) to seventy -eight (78). B. What are the current subscriber rates? The subscriber rates for the basic package range from approximately $13.48 to $35.00. — 9. Has Comcast made any changes in subscriber rates? Eight (8) communities indicated that they have experienced increases in subscriber rates. Many of these communities stated that they received an increase in the number of channels at the same time. One (1) community indicated that the increases have been well communicated by Comcast. 503725i 1 49 10. Does Comcast•support,public access programming? Is there public access programming? Eight (8) communities stated that Comcast provides public access programming. Four (4) communities indicated that they do not have public access programming. 11. Does Comcast provide any local programming?' Eleven (11) communities indicated that Comcast does provide local programming. 12. Do the schools use the cable system? Eight (8) of the communities indicated that the schools use the cable system. Four (4) communities were not sure if the schools used the system or had access to it. 13. What are your franchise fees? Are they paid on time? i Five (5) communities collect five percent (5 %) of Comcast's gross revenues; one (1) community collects four percent (4 %); two (2) communities collect three percent (3 %); and four (4) communities were unsure of the amount. All communities indicated that Comcast pays its franchise fees on time. 14. Does Comcast provide any high -speed data services via the cable system to cities or subscribers? Eight (8) communities responded that they are receiving high -speed data services and four (4) responded they were not yet receiving high -speed data services. — 15. How would you describe the City's relationship with Comcast? The responses to this question ranged from "Excellent" to "Good." 16. What types of problems has the City experienced with Comcast? Many communities indicted that they have had no problems with Comcast. However, one (1) community discussed an issue regarding the local phone 503725/1 50 r number listed for Comcast. When dialing this number subscribers are connected to someone in another state. After stating their complaint the subscribers are told that Comcast must receive a certain number of calls regarding the same complaint before they will dispatch a truck. Another community responded that they have the same problems with Comcast they would with any cable operator regarding cost and selection. While another commented on problems with service to residents where Comcast responds there are not enough people per square mile to provide service. 17. Would you grant a new franchise to Comcast? Why or why not? All communities indicated that they felt they would grant a new franchise to Comcast. Three (3) communities indicated that have recently renewed their franchise with Comcast and three (3) communities indicated that they are currently in the renewal process with Comcast. Specific Responses for each of the Eleven (11) Communities The following responses cannot completely reflect the attitudes that city officials had toward Comcast. This is a very short synopsis of the information they conveyed. ALABAMA City: Florence Contact Person: Steve Eason, Clerk Phone No.: (256) 760 -6679 Subscribers: 14,263 1. 20 or more. 2. Yes, possibly. 3. Yes. 4. Over the last 10 years subscribers have been dissatisfied with the rates even Dith more services provided. 5. Very few. 6. Yes, Comcast provides the channels people want. 7. 60 basic channels. 8. Unknown. 9. Unknown. 10. Unsure. 11. Yes. 12. Yes. 13. 5 %; yes, monthly. 14. Not yet. 503725/1 51 r l 15. Good. 16. None. 17. Yes, just renewed franchise with Comcast. It was a very amicable process. City: Huntsville Contact Person: Greg Gray, City Cable Administrator Phone No.: (256) 427 -6708 Subscribers: 35,569 1. 5 years. 2. Yes. 3. Yes. 4. Yes. 5. Few. 6. Yes, complaints cleared up quickly. 7. 78 channels. 8. $29.95 full basic. 9. Yes, February 2002 10. Yes. 11. Yes. 12. Unsure. 13. Unsure; yes. 14. Yes. 15. Very good - good company. 16. No problems, always responsive. 17. Yes. City: Muscle Shoals Contact Person: Ricky Williams, City Clerk Phone No.: (256) 383 -5675 Subscribers: 4,596 1. 15+ _ 2. Unsure. - 3. No; 10 minutes away in Florence. 4. Yes. 5. Very little. 6. Yes. 7. 15 basic channels; 60 standard -no premium channels. 8. Unsure of basic; $35 - standard basic. 9. Yes, one year ago. Added channels and raised rates 51.00. 10. Unsure. 11. Yes. 12. Yes. 503725/1 52 13. 5 %; yes 14. No, but talking about it. 15. Very good. 16. None. 17. Yes, just renewed one year ago. DELAWARE City: Newark Contact Person: Susan Lamblack, City Administrator Phone No.: (302) 366 -7070 Subscribers: 7,895 1. 6 years. 2. No, but Comcast rebuilt the system. 3. No, 10 miles away. 4. Yes. 5. No. 6. Yes. 7. 12 channels. 8. Unsure. 9. Annually in February. 10. Yes. 11. Yes. 12. Yes. 13.5 %; yes. 14. Yes. 15. Excellent. 16. None. 17. Yes, just completed renewal. It was a smooth process. City: Wilmington Contact Person: Lynn Howard, Chiefof Staff Phone No.: (302) 571 -4180 Subscribers: 23,179 1. Unsure. 2. No. 3. Yes. 4. Yes. 5. No. 6. Yes. 7. Unknown. 8. Unknown. 503725/1 53 11 9. No, not of any significant. 10. Yes. 11. Yes. 12. Yes. 13. Unknown; yes 14. Yes. 15. Good. 16. None. 17. Yes, have not identified any issues to date to indicate-they would not grant a new or renew its existing franchise with Comcast. MISSISSIPPI City: Hattiesburg Contact Person: Willie Horton, Board Member Phone No.: (601) 545 -4501 Subscribers: 13,966 1. 4 years. 2. No. 3. Yes. 4. Yes. 5. No. 6. Yes. 7. 12 channels. 8. Unsure. 9. Annually in January. 10. No. 11. No. 12. No. 13.4 %; yes. 14. Unsure. 15. Good. 16. None. 17.Yes. PENNSYLVANIA City: Carlisle Borough Contact Person: Chris Moonis, Assistant Manager Phone No.: (717) 249 -4422 Number of Subscribers: 6,102 1. Since 1999. 503725/1 54 2. No. 3. Yes. 4. Yes. 5. Very few. Those received are related to the following two customer service issues: 1) when calling Comcast's local number someone in New Jersey answers and 2) Comcast has a new policy that requires a certain number of calls regarding the same complaint before they will dispatch a truck. 6. Yes. 7. $13.48 basic and $24.02 standard. 8. 18 basic channels. 9. Yes, effective 4/1/02. Recently completed upgrade. 10. Yes. 11. Yes. 12. No, but in the works - within 1 to 2 years. 13.5 %; yes, quarterly. 14. Yes. 15. Good. 16. Local number transferring to New Jersey and new policy regarding receiving a certain number of calls regarding the same complaint before a truck/technician is dispatched. 17. Yes, currently under franchise renewal now. Comcast is .offering many upgraded services. City: Lancaster City Contact Person: Charlie Smithgall, Mayor Phone No.: (717) 291 -4701 Number of Subscribers: 15,172 1. 1 -2 years. 2. No. 3. No - 67 miles away. 4. Most are happy. 5. Yes, related to rates. 6. Yes, with the exception of rates. _ 7. Unsure. 8. Unsure, but very high. 9. Unsure. 10. No. 11. Yes. 12. Not available. 13. Unsure; yes, quarterly. 14. Not yet. 15. Good. 16. Service to residents - not enough people per square mile. 17. Yes, but would send out to bid - still have 4 -5 years left on current franchise. 503725/1 55 City: Penn Township, PA Contact Person: Sharon Harrison, Township Manager Phone No.: (610) 488 -1160 Number of Subscribers: 30 1. Just under 1 year. 2. No. 3. No; 15 miles away. 4.. Yes. 5. None. 6. Unknown. 7. Unknown. 8. $45 for basic. 9. Yes, 2 -3 months ago there was a minor increase. 10. Yes. 11. Yes: out of Redding. 12. Yes. 13.3 -4 %; yes. 14. Yes. 15. So far so good. 16. No problems. 17. Yes, they will. City: Pottsville Contact Person: Thomas Palamar, City Administrator Phone No.: (570) 628 -4417 Number of Subscribers: 5,591 1. 2 years. 2. No. 3. Yes. 4. Generally, yes. 5. Yes, regarding cost and selection. 6. Yes, technical complaints resolved quickly. 7. 40 basic channels. 8. Approximately $35.00 for basic. 9. Yes, one month ago increased $3.00 10.Yes, no local studio. 11. Yes 12. Yes. 13. Unknown; yes. 14. Yes, just starting this month. 15. Good. 503725/1 56 16. The same problems they would have with any. cable operator regarding cost and selection. 17. Yes, currently under renewal negotiations. The recent technical review had good results. City: Steelton Contact Person: Mike Musser, Manager Phone No.: (717) 939 -6561 Number of Subscribers: 2,204 1. 3 -4 years. 2. No, but just finished upgrade to 750 MHz system. 3. Yes. 4. Yes, Internet problems with @home. Comcast's support was great during switch to new provider. 5. None. 6. Yes. 7. Over 75 and under 100 channels. 8. $35.00 basic cable rate. 9. Yes. More than annually, but well communicated and additional services. 10. Yes. 11. Yes. 12. Unsure. 13.5 %; yes. 14. Yes. 15. Good. 16. No, community- oriented. 17. Yes. City: Waynesboro Borough Contact Person: Lloyd Hamberger, Manager Phone No.: (717) 762 -2101 Number of Subscribers: 3,477 1. 1 -2 years. 2. No. 3. No, 12 miles away. 4. Yes. 5. Very few. 6. Relatively responsive. 7. Unknown. 8. Unknown. 9. Yes, standard increases. 10. Yes, not used. 503725/1 57 11. Yes, not used. 12. Yes. 13.3 %; yes. 14. Just started; a great service when it works. 15. Working relationship. 16.Very little; standard irritating complaints. All in all no worse than any other giant company. 17.Yes, in the middle of negotiating franchise renewal now. 1. 503725/1 58 e SECTION 3. ADDITIONAL FRANCHISE ISSUES No issues noted for the City of Hastings, Minnesota. 503725/1 59 SECTION 9. RECOMMENDATIONS Based specifically on the foregoing information and evaluations, we believe AT &T Comcast, possesses the necessary legal and technical qualifications based on the standards of review identified in applicable local, state, and federal laws as described within this report, subject to the aforementioned conditions referenced in this report with respect to AT &T Comcast's financial qualifications, we refer the City to Section 7 of this report for our analysis. Based on these findings we recommend that the City review this report, listen to any additional public comment or information, as necessary or appropriate, and assuming the City determines AT &T Comcast, to be financially qualified, undertake all necessary action to pass and adopt a Resolution similar in form and content to the document following these recommendations. 503725/1 60 EXHIBIT A TRANSFER QUESTIONNAIRE 503725/1 A_1 AT &T COMCAST CORPORATION TRANSFER QUESTIONNAIRE March 22, 2002 Preoared bv: Brian T. Grogan, Esq, Michael R. Nixt, Esq. Yuri Berndt, Esq. MOSS & BARNETT A Professional Association 4800 Wells Fargo Center 90 South Seventh Street Minneapolis, MN 55402 -4129 (612) 347 -0300 (telephone) (612) 339 -6686 (facsimile) _ 503725/1 INTRODUCTION Moss & Barnett, A Professional Association, has, as of this date, been retained to represent the below - listed cities (hereinafter "City ") regarding the proposed transfer of control ( "transfer ") of the cable television systems and franchises to AT &T Comcast Corporation ( "Applicant'). This list of Cities may be modified and /or increased if additional communities seek our assistance. Pursuant to 47 C.F.R. § 76.502(b) a franchising authority that questions the accuracy of the information provided in FCC Form 394 must notify the cable operator within thirty (30) days of the filing of Form 394. This Transfer Questionnaire ( "Questionnaire ") will serve as a request on behalf of the City for supplemental information with respect to FCC Form 394. Cities represented by Moss & Barnett 1. Atherton, CA 2. Belmont, CA 3. Brisbane, CA 4. Burlingame, CA 5. Daly City, CA 6. Foster City, CA 7. Hillsborough, CA 8. Millbrae, CA 9. Portola Valley, CA 10. Redwood City, CA 11. San Carlos, CA 12. South San Francisco, CA 13. San Mateo, CA 14. County of San Mateo, CA 15. Woodside, CA 16. Hastings, MN 17. Inver Grove Heights, MN 18. Lilydale, MN 19. Mendota, MN 20. Mendota Heights, MN 21. South St. Paul, MN 22. Sunfish Lake, MN 23. West St. Paul, MN 24. Watertown, SD 503725/1 z Please provide four (4) copies of Applicant's response to this Questionnaire to: Brian T. Grogan Moss & Barnett 4800 Wells Fargo Center 90 South Seventh Street Minneapolis, MN 55402 -4129 Please also provide one (1) copy of the Applicant's.rresponse to the following contact persons: Vs. Jodie M. Miller, Executive Director Northern Dakota County Cable Communications Commission 5845 Blaine Avenue East Inver Grove Heights, MN 55076 Representative on behalf of Inver Grove Heights, Lilydale, Mendota, Mendota Heights, South St. Paul, Sunfish Lake, and West St. Paul, Minnesota. Mr. Brian Moura, Chairman SAMCAT 600 Elm Street San Carlos, CA 94070 -3085 Representative on behalf of Atherton, Belmont, Brisbane, Burlingame, Daly City, Foster City, Hillsborough, Millbrae, Portola Valley, Redwood City, San Carlos, South San Francisco, San Mateo, County of San Mateo, and Woodside, California. Mr. David M. Osberg, City Administrator City of Hastings 101 4th Street East Hastings, MN 55033 Mr. Stanton Fox, City Attorney City of Watertown 23 Second Street, NE Watertown, SD 57201 In answering these questions please identify each City to which your response applies. 1. Current Franchises Please provide a list of fifty (50) cable communications systems owned, operated or controlled by Comcast Corporation. This list will be used as a reference to solicit information from cities presently served by Comcast. When preparing the list, please provide the following information. 50372511 3 A. Name of Franchise Holder (Municipality /State); B. Contact Person and Phone Number; C. Date of Franchise Award; D. Date on which Comcast Began Providing Service to the Community; E. Number of Current Subscribers; and F. Legal Name of Franchisee. 2. Changes to the System Is the Applicant proposing or will the Applicant undertake any technical changes in the system. 3. Changes in the Operation of the System Is the Applicant proposing, or will the Applicant undertake any changes in the operation of the system including, but not limited to, the following areas: rate increases, programming, customer service practices, billing practices, personnel, etc.? Please describe in detail. 4. Future Plans Please provide any applicable information to help explain any future plans Applicant may have regarding the implementation of new technologies into the system serving the City. How will the introduction of these new technologies impact the growth of the system in the City? 5. New Services Does the Applicant have any plans to add new services to the existing system? Please describe any potential services which Applicant may consider providing ovar the system. — 6. Programming Line -up Will Applicant make any changes to the programming line -up in the City? 7. Billing System Please describe any changes Applicant will make in the current billing system. Will subscribers see a new billing system and if so, what modifications or improvements will result due to a change in the billing format? 503725/1 4 t 8. Binding Arbitration Will AT &T's mandatory arbitration process, contained in AT &T's "Consumer Service Agreement" be imposed upon subscribers by Applicant? 9. Customer Service A. Since quality of service depends on adequate staffing and training of career professionals: (1) How many technicians and customer service employees are currently employed by the existing franchisee to service customers in each City referenced in this Questionnaire? (2) Will the Applicant, at a minimum, maintain this employment level after the merger? (3) What is the average length of service of technicians and customer service employees? (4) Will there be any planned cutbacks in staff, operations or locations for customer service centers? B. What customer service phone numbers will be used, e.g., will they change from existing numbers? C. Will customer service be centralized, and if so, where and how will it accommodate any increase in telephone traffic? D. Identify the internal, AT &T Broadband and Comcast national benchmarks for customer service performance. 10. Technical and Managerial Employees Please explain whether Applicant will retain emplcyees currently providing technical and managerial services for the system servinc the City. 11. System Upgrade Please describe any and all plans to upgrade and or rebuild the system serving the City. Will these plans be altered or in any way impacted by the transfer? 503725/1 5 12. High Speed Data Please describe Applicant's plans regarding implementation of high speed data services in the system serving the City. 13. Financial Qualifications Please provide the following financial information: A. The annual financial forecasts for a five (5) year period from the effective date of the merger, relating to the business, earnings, cash flow, capital expenditures, assets, liabilities and prospects of the AT &T Comcast Corporation, including projected income statements, balance sheets and statements of cash flow with an explanation of the appropriate assumptions and estimates. The explanation should include a list of potential sources of cash for capital expenditures and operating cash flow. B. A detailed schedule of expected synergies of the merger transaction including amounts and timing of cost savings as well as expenses expected to be incurred as a result of the merger (severance, contract termination costs, etc.). C. A detailed schedule of long and short debt to be held or projected to be secured by AT &T Comcast Corporation at the time of the formation and merger including debt service schedules, interest rates, restrictive covenants and other related fees. D. A detailed schedule of all substantial debt guarantees including amount guaranteed, entity incurring the guaranteed debt and their relationship to AT &T Comcast Corporation, and the payment schedule. E. A detailed schedule of substantial investments including name of entity (including trusts and joint ventures), amount of investment and a description of each entity's activities. F. A detailed schedule of all substantial fixed fee arrangements including name of entity, type of service, amount of fixed fee, and payment schedule. G. AT &T and Comcast have told Wall Street that the merged AT &T Comcast will boost AT &T's current profit margins from 22% to Comcast's 39 %. This is a 44% increase in profit margins. How will AT &T Comcast meet these higher profit margins without cutting service or infrastructure investment? Will the price of service go up to meet these higher profit targets? 50372511 %I H. AT &T and Comcast in their joint proxy statement to the Securities and Exchange Commission state that the merged AT &T Comcast will realize $1 to $2 billion annually in reduced expenditures. Where will these cuts come from? According to Comcast and AT &T's financial statements for 2001, Comcast spent $20 less per subscriber on capital expenditures than AT &T (AT &T: $240 compared to Comcast: S219). Does this mean that after the merger there will be less money spend on cable infrastructure? How will the merged AT &T Comcast be able to meet its infrastructure commitments to this community? J. Please comment on any projected cost increases to the current services offered by Applicant over the next two (2) years. Each of the Cities referenced on page 1 of this Questionnaire hereby specifically reserve of all of their rights to seek additional information with respect to FCC Form 394. In addition, each of the Cities also reserve the right to seek additional information and /or clarification regarding AT &T Corp.'s compliance with existing franchise obligations and technical performance requirements of AT &T's systems. - END OF QUESTIONNAIRE - 503725/1 ] EXHIBIT B RESPONSE TO TRANSFER QUESTIONNAIRE 503725/1 B -1 EXHIBIT C RESOLUTION APPROVING TRANSFER 503725,1 C_ CITY OF- HA.iTING,1j, MINNLOOTA RlI ' ;OLUTION No. AI'PI:OVING THE PROPOSED CHANGE OF CONTROL OF GRANTEE RECITALS: 1. On or about October 1, 2001, the City of Hastings, Minnesota ( "City ") granted a Cable Television Franchise Ordinance ( "Franchise ") to MediaOne of the Upper Midwest, Inc., d /b /a AT &T Broadband ( "Grantee "). 2. Grantee is an indirect subsidiary of AT &T Corp. ( "AT &T "). 3. Pursuant to an Agreement and Plan of Merger dated as of December 19, 2001 by and among AT &T, AT &T Broadband Corp., Comcast Corporation ( "Comcast), AT &T Broadband Acquisition Corp., Comcast Acquisition Corp, and AT &T Comcast Corporation and a Separation and Distribution Agreement dated December 19, 2001 by and between AT &T and AT &T Broadband Corp. (collectively, the "Merger Agreement') AT &T and Comcast intend to create a new company to be known as AT &T Comcast Corporation ( "AT &T Comcast). 4. As a result of the Merger Agreement, Grantee and AT &T Comcast have requested consent by City to change of control of Grantee. 5. Under the Franchise and applicable law, the proposed change of control requires consent from the City. 6. The City has reviewed the proposed change of control and the legal, technical, and financial qualifications of AT &T Comcast to be the new parent company of Grantee following the proposed change of control. 7. Based on information obtained and on the reports and information received by City, including the report prepared by Moss & Barnett, a Professional Association, which is hereby incorporated by reference, City has elected to approve the proposed change of control. NOW, THEREFORE, the City of Hastings, Minnesota hereby resolves as follows: 1. The Franchise is in full force and effect, and Grantee is the lawful holder of the Franchise. 503725/1 YY Y 2. Grantee will remain the lawful holder of the Franchise after consummation of the transaction contemplated under the Merger Agreement. 3. The City hereby consents and approves of the proposed change of control of Grantee as contemplated under the Merger Agreement, subject to: a. Closing of the transaction described in information provided to the City by Grantee, AT &T and AT &T Comcast. b. AT &T Comcast, within thirty (30) days of the date of closing, notifying the City in writing of the completion of the transaction. 4. In the event the change of control of Grantee to AT &T Comcast contemplated by the foregoing resolutions is not completed, for any reason, the City's consent shall not be effective. This Resolution shall take effect and continue and remain in effect from and after the date of its passage, approval, and adoption. A motion to approve the foregoing Resolution No, was made by City Council Member and duly seconded by City Council Member The following City Council Members voted in the affirmative: The following City Council Members voted in the negative: Passed and adopted by the City this _ day of 2002. ATTEST: CITY OF HASTINGS, MINNESOTA By: By 503725/1 2 ACCEPTANCE AND AGREEMENT MediaOne of the Upper Midwest, Inc., d /b /a AT &T Broadband, as controlled by AT &T Comcast Corporation, hereby accepts this Resolution No. ( "Resolution ") and agrees to be bound by the terms and conditions of this Resolution and the lawful terms and conditions of the Franchise referenced within the Resolution. Dated this day of , 2002 STATE OF ) ) ss. COUNTY OF ) MEDIAONE OF THE UPPER MIDWEST, INC., D /B /A AT &T BROADBAND 0 The foregoing instrument was subscribed and sworn to before me this day of 2002, by , the of MediaOne of the Upper Midwest, Inc., d /b /a AT &T Broadband. SEAL 503725/1 3 Notary Public 1934 288 iled to comply with such 11 'legationa. I immission shall af- present data, views, _)le operator has com- ments of this section. — Within 120 days after this subsection, the Com- cable operator has com- action. If the Commission las failed to comply with shall state with particu- 1 order the cable operator necessary to meet such =ines that the cable op- aquirements, the Commis- :able operator shall iden- signals carried in fulfill- section — EDUCATIONAL TELEVISION nmercial educational tele- broadcast station which - ,gulations of the Commis- , is licensed by the Com- cational television broad - and operated by a public rporation, or association; ity which is eligible to re- t, or any successor grant r 'ic Broadcasting, or :o, the basis of the fo-- or a municipality and mercial programs for edu- or of any noncommercial ve watts or higher power 1- service station or trans - licensed to a channel re- .1 use pursuant to section Regulations, or any suc- such stations and trans- rese-ved as the Commis - incommercial educational RCL�I. EDUCATIONAL TELE- local noncommercial edu- qualified noncommercial inapal community whose ;ion 76.53 of title 47, Code .Iln COMMUNICATIONS ACT OF 1934 Sec 617 of Federal Regulations (as in effect on March 29, 1990), or any successor regulations thereto, is within 50 miles of the principal headend of the cable system; or (B) whose Grade B service contour, as defined in sec- tion 73.683(a) of such title (as in effect on March 29, 1990), or any successor regulations thereto, encompasses the principal headend of the cable system. SEC. 616. f47 U.S.C. 6961 REGULATION OF CARRIAGE AGREEMENTS, (a) REGULATIONS. Within one year after the date of enactment of this section, the Commission shall establish regulations gov- erning program carriage agreements and related practices between cable operators or other multicha uibl video programming distribu- tors and video programming vendors. Such regulations shall - (1) include provisions designed to prevent a cable operator or other multichannel video programming distributor from re- quiring a financial interest in a program service as a condition for carriage on one or more of such operator's systems; (2) include provisions designed to prohibit a cable operator or other multichannel video programming distributor from co- ercing a video programming vendor to provide, and from retali- ating against such a vendor for failing to provide, exclusive rights against other multichannel video programming distribu- tors as a condition of carriage on a system; (3) contain provisions designed to prevent a multichannel video programming distributor from engaging in conduct the effect of which is to unreasonably restrain the ability of an un- affiliated video programming vendor to compete fairly by dis- criminating in video programming distribution on the basis of affiliation or nonaffiliation of vendors in the selection, terms, or conditions for carriage of video programming provided by such vendors; (4) provide for expedited review of any complaints made by a video programming vendor pursuant to this section; (5) provide for appropriate penalties and remedies for vio- lations of this subsection, including carriage; and (6) provide penalties to be assessed against any person fil- 'A; a frivolous complaint pursuant to this section. (b) DEFINITION. —As used in this section, the term `,video pro - tmming vendor" means a person engaged in the production, cre- ation, or wholesale distribution of video programming for sale. SEC. 617. (47 U.S.C. 6371 SALES OF CABLE SYSTEMS. A franchising authority shall, if the franchise requires fran- chising authority approval of a sale or transfer, have 120 days to act upon any request for approval of such sale or transfer that con- tains or is accompanied by such information as is required in oi accordance with Commission regulations and by the franchisinu- thority. 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. i i t 72 7� FL Y-AL z- L LL- VNI -c'. J il-HL;� T �T 7 Y_io Operator of the Year: And all this was accomplished without sacrificing credit worthiness. Comcast now owns 100 percent of its cable Sys terns, which carry a relatively painless 54.35 billion in debt, all of which enjoy investment -grade ratings. Comcast also owns major stakes in two high - flying net works —El Entertainment Television and QVC —and is forging a regional sports - network powerhouse.These and other con tent investments (The Golf Channel. for example) provide additional lucrative programming opportunities that the cable operating company can land often does) leverage for revenue enhancement. That, in a nutshell, is Comcast Cable in 2000. And that is why the company has been chosen by the editors of Copley, slon to receive this year's Bill Daniels ,'Cablevision Operator of theyear Award. BURKE'S LAW Comcast is more focused on d,gital caobe than most cable operators. Because so much of its plant is upgraded, the cable subsidiary, under Steve Burke (who is both president of Comcast Cable and an executive VP of parent Comcast Corp.), has attained huge success in gaining customer acceptance of digital services. "I've never seen anyone take charge of an organization as effectively as Steve has done:' says his boss, Comcast Corp. CEO Brian Roberts. "We had reached a point in our business h., :re we needed to augment and turbo- charge the company. :nxe fortunate to have the core executives from our cellu r ousmess, all of whom were expert in new products, mar. keting and retail. Steve created an executive committee that meshed ail those talents in a unified manner" Knowing that "you can't run a business the same as you did a decade ago :' Burke set out last year, with cons,deroble. input from employees, to create a "credo" for the company. It's based on three foundations: :A ' :•i?(. is `.' "'_ ;'PTEMBER 2000 -concentrating on new products: • providing superb customer service, • maintaining strong financial performance. Brian Rooerts embraced Burke's set of goals because "it was highly focused without scattering ideas in all directions. It's reflective of the best practices of America's best compa- n,es— bus : necs,:c like Jack'Nelch's GE, and Disney'. To wmm,,, r;wate these goals, Burke has established Com- cast Vnivers:ry, a unique training program for every senior manager in rrr.: company About 50 people dome to Ph,ladel- ph,n twice ea :h month for a three -day course focusing on the company's n.story, its core values, and Burke's "credo.' "The bes' evay to yet our message out quickly and effec. tively is to —ewe it clear to those who have the hi direct cull y conta.n„ rh the larger cm p to Y ec base:' Burke vd ains, Comcast _mvers,ty is rrn -ating ads :zonal prrgr3.rns for first -line s,._: ^nsp r:; and employees. st.-crcin.- :- P .-non Lopez, prey .-ant of the burgeoning, ,n�::w ::on. _I and ourselves a_ a center for performance improvem.e-r a, ^,d human de,.- opment in partnership .v r,h every s-c^ : of the Cowin he Says. Trainir•.;. ; course, is a prelude to no is who: E _,.:e and his p.,ople have cc -z. Codices: gital -cable plan is simple and stra.o ^.t• :•'.• ;aid For an acc,: _pal S9.95 a month, the customer get= a a gi:al box with a^ electronic programming ;tide and _a � ;ter Depending what analog services he's currently pura s- ing, he also cots as many as 100 additional channe'. s.ndlud- ing 35 prem.:m channels. "It's beer. so popular that our biggest challenge has been executing to meet demand" says Burke. Burke's digital strategy is both defensive and offensive. Defensively, �-Is's keeping Comcast's best customers attached to their cable company, and holding the line against cefec- tions to sat=_, .te or other competitive offerings. 0"ensively, he's accompll;hing three things: 1. increasinc - =venues and cash flow from existing cusomers; adding ne:. customers through the attractiveness c .he digital offer-;; 3. getting c )31 set -tops into customer homes, so !nor will be easy for s:omers to expand on the!, sprier: sa- :b: aa. as new proc_r.s and offerings are added in the fur_-e. In fact, e has already begun to capitalize on :-e _:zess of the dtgrta :tole product. He's doing this in a couc e c; e :a• ;s: On a :r:; rasis. he's introducing personal videc-ec ;ding r�stems to :_;tamers in Cherry Hill and Burinc:_- n,w, '.;o G.a D)I.�,) dpein't _et a Ivan Ha'.: _. .l • )n ers,,)r of the 5-- _ :.)I aervice For :- Iccuional S5 a month (tom) S1495,, can order 3. ; .",(�onal digital channels. Burke cki ;mss q,ve digrtoi :_stnmers "the widem orrov of program cI •,cas available ce,� product roday "Th,) 33 channe' - inCludoe 1" inne lc of cornmerr,..,l- fr.,e, ,incut %Fti% PROOLCTS. OLD PRINCIPLES 1.___`ssful as Cumcact's dngiln,table )He ., '•.aea barn �nov, - •e than one million subs), they an: : _ ; l reason for .-- cable company's 11 percent pr)..cr :na cash flow yrov :r• th,! most recent quarter of this year ',i �!c.:Lle Operator of the Year: digit trend, incidentally, that has been consistent for several years) The 4PHOme high -speed data service has also been phenomenally successful for Comcast. At the beginning of last month, Comcast serviced more than 260Q.000 •u Home customer; and was add,nq new ones at the rate of •1,200 per we,!k. Between J,gital .:able and sHome, file bottom line for Comcast is that, during the second quarter alone of this year, the company added nearly 1.2 million new revenue. generating units (RCUs), the ne.w standard of measurement for customer revenue enhancement. On an apples -to. apples basis, Camrast ended the second quarter of 2000 with 2.5 times as many RGUs as it had as of June 30, 1993. "It's true Brian Roberts admit,. 'that we've probably lost about 20,000 customers to satellitc, But .while that was happGinmg, we've added one m ,on new RGUs That's a 50 to -' ra:iu of good :o bad, An,' be the first to admit that the presence of competition w 4 a huge stimulus to us to make this happen:' This strong growth rate was, of course, enabled by upgraded platform. Over the past several years, Comcast has pursued one of the industry's most aggressive plant upgrade programs. More than 85 percent of the properties it owned prior to a recent acquisition spate have been upgraded. In addition, newly acquired properties (from Lenfest, MediaOne and AT &T, for example) are being rapid- ly upgraded at a rate of about 250,000 homes per month. Comcast has also been a leader using Internet - protocol telephony.Though the company has an agreement in princi. ple to offer switched telephony in conjunction with AT &T, it has moved more aggressively on the IP- telephony front. Comcast was the first cable operator (Time Warner and Charter followed later) to launch an IP- telephony trial —in Union Township, N.J, "We'd still like to do something with AT &T," says Brian Roberts, "but it's not on the hot burner right now:' Other cable - related Comcast ventures have been equally successful. Majority investments in QVC, E! c"nterainment Television and the Comcast- Soectator regional sports net. work have all shown double -digit cash flow gro•.vth. Given this excellent track record, it's hardly surprising that 13 of the 18 'Nail Street analysts wile cover Comcast have rated its stock "strong buy," the highest possible rating (the other five, ncidentally, all rate the stock as "buy "). That ,rives C cm,r. ;t one of the best coma rating sc^' s all _ic_ll!1 n`,niration ;; i:pmpar'� +" in .1m•,•i:n :-r: d; h.•l('r.: '_npl. o wny ComCa_R pure•.,' ;a up to S5130 :.anion at .a own stor4 Both Bnan and Ralph Rota ,!.-, ,:rcdit Sur'.0 torn. 'rrom- perform.anr.e. "Steve.'; stYIH )ne of real inclusiveness. Everyone wants to be led, but :'!ey want to be led by som.! one they respect," Brian says. Adds Ralph Robert.; preu,:!v "Not marry cortpani? ;; starter in one generation, adho'eu to their pnnciples, never allowed themselves IO become bureaucratic and — through all the turmoil —moved aggressively to change .with the times I suppose every corporation would !ike to do soarer thing lA,2 n,atL We :hink vm'v,: Iccomplish, ,! it 'Ne're now and dot,, ;rant, but the spirit of Comcast is still strong. Th.! people are making it happen "" 6A ,', ii!.: f SEPTEMBER 2000 r 0 t 1 r-. s t� 1 "171 be the first admit theft the pressure of competition has been a huge stimulus [far] us.- -- -Brian RoberTS, Comcast Corp. president fia CITY OF OFFICE OF THE MAYOR ROOM 215 CITY HALL PHILADELPHIA, PENNSYLVANIA 1 ?1073295 (215) 666.2161 FAX ;215) 6862180 April 16, 2002 Brian Roberts, President Comcast Corporation 1500 Market Street Philadelphia, PA 19102 Dear Mr. Roberts, PHIL AD E LP H I A JOHN F STREET ESQUIRE MAYOR Like most mayors, I am proud of my hometown: the people who live and work here and the institutions that make our city great. Philadelphia is fortunate to have many of this country's important treasures: Independence Hall, the Liberty Berl and the Philadelphia Museum of Art to name a few. I include Comcast Corporation on that list of treasures — not only for your national leadership in the cable communications industry but also for your civic leadership in the greater Philadelphia region and throughout the country. Comcast has grown nationally, but it has not Ies: focus on the local communities it serves. While bringing exciting new video and high speed da_ technology to the citizens of Philadelphia, you also bring something more: leaders and employe: who are willing to roll up their sleeves and pitch in to get thejob done! Whether it is throue .. %aiunteer work Comcast Cares Day, work with Philadelphia Reads or promoting the region, I kn._w I can count on Comcast to lead the way. I am proud of Philadelphia and feel fortunate t, nave a yeat cornpam like Comcast as a_ partner in our community. Thank you and the empler• gas of Comcast With kind regards, l am Sinc Johi Fol"m- E1ACv;AMENTE3 ME ---FRO- •OLITCkN ITEM -5 Lo3rene able ATT�— elevision Gm _ FICHAFU F. I_ ;' ;(35T0 . OMMISsion O'IVC Oia of JF °2d I STREET, ROOM 5Z7 - SACnAMENTO. CA 95E'4 • (916) 874.6551 March 4, 2002 VIA Fed EX Brian L. Roberts, Pres'.d Comcast Ccrporat;a ana Soon to be President and CEO o` AT&T Comcas: Corps: ation 1500 Market Street Phi'ade!phia, PA 151 C2 Dear Brian: Sacramento is saying: "We!come Back" to you and tne Comcast Family. The Ccrncast years or the'ate 1990's were the bes' ;n our ca'--!e television history. There are challenges and opportunities ahead to celiver more and better telecommunications and technology to this Region. We !ook forward to working toward those goals and invite you to make Sacramento an AT &T Comcast showcase. Sincerely, I-ell RICHARD E. ESPOSTO, Execut ve Director Sacramento Metropo'ita'1 Carle T e!ev151o7. Comm ss'Or Enail' rescost @yahco.com Private Line: 916- 874 -7374 F.=._, a2 -a.s .,T OFFICE OF THE GOVERNOR ,ran l rnl,l G.M' V. JOHNSON `[arch 20, 2002 82 -.301)1) ,o 1% 1 IC'.11k Mr. Scott Binder Comcast Cable 4 ,'611 Montbel Place NE Albuquerque, NM 87 107 Dear Scott, I would like to take this opportunity to extend my appreciation for the many ways that Comcast supports the people and communities in the state of New Mexico. As a former businessman, I can appreciate when a company makes the kind of investment that Comcast has made in New :Mexico. With your recently completed S100 million upgrade in Albuquerque, and recently announced 520 million upgrade in Santa Fe, our state capitol, you not only bring our residents new products and services, like high -speed Internet, that will provide tremendous benefits now and in the future, but cable systems that are among the most advanced in the country . I would also like to thank you for Comcast's commitment to community service throughout the state. Your continued support of numerous community organizations and events, such as Comcast Cares Day October 13, where more than 550 Comcast employees volunteered their time to improve the communities in which they live and work, exemplifies Comcast's dedication to the entire state of New Mexico. In addition, I would like to commend Comcast for your support of education for New Mexico's children by providing free cable service and over 560 hours a month of commercial -tree educational programming to our schools as an enhancement to the classroom setting. You have also been of great assistance to me by producing and airing public service announcements that have gi%en me the opportunity to convey important messages to the residents of.New i0exicu, for which l am very appreciative. I wish you continued success us you grow and develop throughout our great state. Sincerely, Gury E. Johnson Governor Loretta Spencer Mayor K?_; April 10, 2002 Mr. Stephen Burke, President Comcast Cable Communications, Inc. 1500 Market Street Philadelphia, PA 19102 Dear Mr. Burke: "The Space to be in the 21st Ccntury° I would to express my gratitude for the continued support and commitment that Comcast has given the City of Huntsville. Comcast made a very strong commitment to our city a few years ago by upgrading the cable system and adding more channels, better quality, and high speed - internet service. You may be aware that Huntsville is a very technological area, and many residents have lived all over the world. Because Comcast offers such a broad range of services, we are able to meet the needs and expectations of our citizens. I would also like to let you know how much we appreciate the local team. You have a very dedicated group of people working in Huntsville. They are always willing to go above and beyond for our community. Last year Comcast put together a wonderful program with Cable in the Classroom for our educators. I was very pleased to be able to participate in this program. It truly showed Comcast's commitment to the value of our education system. I also had the wonderful opportunity to participate in Comcast Cares Day. Our park was in great need of a facelift and the Comcast employees did a fantastic job of cleaning and planting and gave the park a much - needed new look. Again, I appreciate the commitment and dedication that Comcast provides the City of Huntsville. It is a pleasure to work with the local team and I look forward to working with them on any future endeavors. Sincerely, - Loretta Spencer Mayor P. O. Box 308 . Huntsville. AL 35804 . Phone (256) 427 -5000 . FAX (256) 427 -5257 E -Mail w .a.huntsville.al.us 18W9,sU Broad band CITY Off' TUSTIN PLANT INSPECTION /REPAIRS Compiled by JD Pinckney, July 13, 2002 CITY OF TUSTIN PLANT INSPECTION /REPAIRS AT &T'S INVESTIGATION We at AT &T recently received a list of 173 alleged code violations in the City of Tustin. Since then we have examined and dealt with each of these items. This report illustrates detailed information regarding the inspection and resolution of these items. The items are categorized by type of violation and/or resolution: 1) Not in AT &T's system; 2) Not in violation; 3) Not an AT &T customer (drop removed); 4) Grounding issues; 5) Wiring issues; 6) MDU issues; 7) Construction issues. TYPES OF ALLEDGED VIOLATIONS AND /OR RESOLUTIONS Here, we examine the number of resolutions by category. (Note: There were three items that had no address listed and 6 duplicate listings, which left 164 remaining locations to inspect.) 1) Not in AT &T's system. These items were either not found, or were found to be outside of AT &T's cable plant. 22 2) Not in violation. These items were not in violation of code. They were grounded in the.garage or the back yard, which was not visible from the street; or the investigator was simply mistaken. 17 3) Not an AT &T customer. These items were found to be either satellite customers or non -AT &T customers. (We removed any existing cable drop.) 45 4) Wiring issues. We found that these items were wired improperly. We repaired or replaced the wiring. (One item is pending customer contact.) 5) MDU Issues. Improperly or ungrounded MDU taps were grounded. 6) Grounding issues. We found that these items were either not grounded, or improperly grounded, so we repaired the ground. (Two items are pending customer contact) 39 7) Construction issues. These items were referred to our construction department for repair. 30 Total 164 RESOLUTION DETAILS This section illustrates resolution details by location. 1) Not in AT &T's System 2) Not in Violation 1 Address 13711 Farmington Rd Description Not grounded 1 Odress 14, s V « i Description of Alleged Violation No ground to MDU, unsecured wiring Resolution Address not in system 2 2345 llaliha Ground wire not protected where it emerges Address not in system 3 14192 Raintree Ground wire not protected where it emerges Address not in system 4 2311 Dahlia Same as above Address not in system 5 2322 Dahlia Same as above Address not in system 6 13516 Pecan MDU not grounded Address not in system 7 2305 Boxwood Ground wire crushed by lid on prewire box Address not in system 8 2292 Boxwood MDU not grounded Address not in system 9 13515 Holly Insufficient clearance from Telco wiring Address not in system 10 12186 Tustin Ranch Power supply lid open Address not in system 11 1631 Brookshire No ground Address not in system 12 533 South C Street No ground Address not in system 13 1615 Sherbrook Dr No ground Address not in system 14 14452 Riverbrook No ground Address not in system 15 14281 Sandwood No ground Address not in system 16 14261 Sandwood No ground Address not in system 17 1148 C Street No ground, hits power mast, workmanship Address not in system 18 14191 Galy Street No ground Address not in system '9 17482 Via Coma No ground Address not in system 20 17486 Via Coma No ground Address not in System 21 17472 Via Coma No ground Address not in system 22 1631 Brookshire No ground Address not in system 2) Not in Violation 1 Address 13711 Farmington Rd Description Not grounded Was grounded in backyard 2 530 South B St Cable interferes /rubs against street light arm There is no street light 3 17722 Miller Dr No ground Was grounded in backyard 4 17741 Miller Dr No ground Was grounded in garage 5 17751 Miller Dr No ground, wiring run on roof Antenna cable on roof, 6 17752 Miller Dr No ground, cable on top of ground OK, not on ground 7 17521 Sherbrook Dr No ground Was grounded in garage 8 13181 Wickshire Not grounded Was grounded in garage 9 17351 ]ackarand No ground Was grounded in backyard 10 270 Myrtle Drop hits power mast Drop hits the eve 11 1642 Amhurst No ground Was grounded in garage 12 Across from 1782 Brookshire OTN dog house pedestal not secured and not set to grade Pedestal was properly set 13 17661 Miller Do house ped not set to grade Pedestal was properly set 14 17662 Miller I �.touse ped not set to grade Pedestal was properly set 15 17401 Norwood Park t i ,, cured pedestals Pedestal was secure 16 17491 Norwood Park Unsecured Pedestals Pedestal was secure 17 14342 Cloverbrook Pedestal not secure, not set to grade Pedestal was properly set 3) Not an AT &T Customer A) Satellite Customers B) Non- rustonicrs Address 14311 Heather Me Description of Alleged Violation Not grounded Resolution Satellite customer, no cable 1 2 13731 Farmington Rd Grounded to ground rod, loose wiring Satellite customer, no cable 3 13165 Wickshire Not grounded Has satellite, removed drop 4 210 B Street No ground Has satellite, removed drop 5 143 C Street No ground, workmanship issues Has satellite, removed drop 6 140 North B Street Attachment point too close to power Has satellite, removed drop 7 155 North B Street No ground, loose wiring Has satellite, removed drop 8 183 North B Street No ground Has satellite, removed drop B) Non- rustonicrs 11 .001ress --1-11 Description of Alleged Violation Resolution Not a customer, removed drop 9 1361 W indemere Not grounded, unsecured wiring workmanship 10 1342 W indemere Not grounded, unsecured wiring workmanship Not a customer, removed drop 11 1321 Penrith Not properly grounded Not a customer, removed drop 12 14461 Denbigh Lane Not grounded, loose wiring, workmanship Not a customer, removed drop 13 14481 Denbigh Lane Not grounded, loose wiring, workmanship Not a customer, removed drop 14 1625 Copperfield Not grounded Not a customer, removed drop 15 14282 Heatherfield Not grounded, trip hazard where wire exits Not a customer, removed drop 16 1961 Mitchell Drop runs across roof of house, not grounded Not a customer, removed drop 17 13166 Wickshire Not grounded Not a customer, removed drop 18 333 El Camino Real Drop hits power mast, not ground Not a customer, removed drop 19 500 South B Street No ground, drop too close to power Not a customer, removed drop 20 1642 Roanoke Ave No ground Not a customer, removed drop 21 14772 Devonshire No ground Not a customer, removed drop 22 14771 Devonshire Ground to ground rod Not a customer, removed drop 23 1652 Brookshire No ground Not a customer, removed drop 24 1682 Brookshire Grounded to ground rod Not a customer, removed drop 25 1721 Brookshire Drop goes directly into garage, not grounded Not a customer, removed drop 26 1732 Brookshire Drop goes directly into garage, not grounded Not a customer, removed drop 11 27 1752 Brookshire No ground visible Not a customer, removed drop 28 1762 Brookshire Grounded to ground rod Not a customer, removed drop 29 1761 Brookshire No ground Not a customer, removed drop 30 1832 Brookshire No ground Not a customer, removed drop 31 138 North B Street No ground Not a customer, removed drop 32 165 North B Street Too close to power Not a customer, removed drop 33 17731 Miller Dr No ground Not a customer, removed drop 34 17721 Miller Dr No ground Not a customer, removed drop 35 17732 Miller Dr No ground Not a customer, removed drop 36 17691 Miller Dr Grounded to ground rod Not a customer, removed drop 37 17711 Miller Dr Grounded to ground rod Not a customer, removed drop 38 17692 Miller Dr No ground Not a customer, removed drop 39 17482 Via Calma No Ground Not a customer, drop in molding 40 17486 Via Calma No ground Not a customer, drop in molding 41 17472 Via Calma No Ground Not a customer, drop in molding 42 270 Myrtle Street Drop hits power mast Not a customer, moved drop 43 1701 Amhurst No ground Not a customer, removed drop 44 1722 Amhurst No ground Not a customer, removed drop 45 14291 Cloverbrook No ground Not a customer, removed drop 4) Wiring Issues 5) MDU Issues „ Address DescriptibilMAIliAged Violation Resolution Reattached drop higher, repaired ground 1 1971 Mitchell Low drop over pedestrian area, 7.5 ". Grounded to 4' g round rod, not straight 2 13702 Farmington Rd No ground, wiring on roof Redid install 3 13661 Farmington Rd Grounded to ground rod, poor workmanship. Redid install 4 148 C Street No ground, hits power mast, loose wiring, etc. Relocated drop, grounded 5 14392 Rosewood Dr No ground, workmanship issues Redid install 6 225 Myrtle St Drop hits power mast, too close to power Relocated drop 7 250 Pacific St Low drop Pending customer contact 5) MDU Issues 1 Address 337 Preble Description MDU not grounded Grounded MDU 2 329 Preble MDU not grounded Grounded MDU 3 225 Preble MDU not grounded Grounded MDU 4 237 Preble MDU not grounded Grounded MDU 6) Grounding Issues 1 Address 1412 Windemere Description of Alleged Violation Not properly grounded Resolution Grounded 2 1371 Windemere Not properly grounded Grounded 3 1321 Windemere Not properly grounded Grounded 4 1371 Penrith Not properly grounded Grounded 5 1611 Copperfield Not properly grounded Grounded 6 1601 Copperfield Not properly grounded Grounded 7 1642 Copperfield Not properly grounded Grounded 8 14312 Heatherfield Not properly grounded Grounded 9 13692 Farmington Not properly grounded Grounded 10 13661 Farmington Not properly grounded Grounded 11 13151 Wickshire Not properly grounded Grounded 12 570 South C Street Not properly grounded Grounded 13 3052 n St Not properly grounded Grounded 14 240 Pacific St Not properly grounded Grounded 15 1641 Roanoke Not properly grounded Grounded 16 14821 Devonshire Not properly grounded Grounded 17 1722 Brookshire Not properly grounded Grounded 18 1742 Brookshire Not properly grounded Grounded 19 1751 Brookshire Not properly grounded Grounded 20 1822 Brookshire Not properly grounded Grounded 21 17551 Sherbrook Dr Not properly grounded Grounded 22 17682 Miller Dr Not'properly grounded Grounded 22 17681 Miller Dr Not properly grounded Grounded 23 178 North B Street Not properly grounded Grounded 24 260 Myrtle Not properly grounded Grounded 25 1662 Amhurst Not properly grounded Grounded 26 1602 Amhurst Not properly grounded Grounded 27 1732 Amhurst Not properly grounded Grounded 28 14401 Cloverbrook Not properly grounded Grounded 29 14391 Cloverbrook Not properly grounded Grounded 30 14262 Cloverbrook Not properly grounded Grounded 31 1852 Sandwood Not properly grounded Grounded 32 17752 Miller Dr Not properly grounded Grounded 33 14451 Denbigh Not properly grounded Grounded 34 14401 Wildeve Ln Not properly grounded Grounded 35 14391 Wildeve Ln Not properly grounded Grounded 36 14451 Deneigh Not properly grounded Grounded 37 1651 Copperfield Not properly grounded Grounded 38 Complex on Via Posada No visible ground, Cable drop in garage Pending customer contact 39 17521 Sherbrook Dr No visible ground, Cable drop in garage Pending customer contact 7) Construction L,sucs Xdd _1 t 1 1 16031 Bliss Broken down guy guard Referred to construction 2 14731 Newport No ground to MDU Referred to construction 3 Alley adj to 15981 Missing down guy guard, loose wiring on Referred to construction Myrtle MDU adjacent 4 16001 Pasadena Missing down guy guard Referred to construction 5 16002 Pasadena Missing down guy guard Referred to construction 6 Intersection of Pole #2249673 — down guy disconnected, Referred to construction Newport and etc. Low trunk crossing street. Sycamore Ave 7 1122 Sycamore Pole # 1509838, improper riser guard Referred to construction material. 8 Sycamore at School No down guy at end of span, Broken down Referred to construction Ln guy stapled to pole 9 MDU across from iv1DU Grounded to water, unknown bond Referred to construction 1961 Mitchell to common electrical ground 10 Comer of Mitchell Missing down guy guard Referred to construction and Browning Ave I I Intersection of Cable interference with light standard Referred to construction Farmington and Bryan Ave 12 Bryan Ave north of Interference with Telco, etc. Referred to construction Browning Ave 13 1209 1" St Open pedestal not set Referred to construction 14 1203 1" St %IDU not grounded Referred to construction 15 Rear of 245 Preble, Conflict with power at service head, Drop Referred to construction behind City Hall, not grounded MDU 16 178 Preble Drop attached to power riser, grounded to Referred to construction ower riser above roof line 17 Across from 178 Down guy not guarded Referred to construction Preble Dr 18 Alley behind 360 El No down guy guard Referred to construction Camino Dr 19 305 2" St No down guy guard Referred to construction 20 T4 O—F St UG drop not in riser Referred to construction 21 Intersection of Pacific Broken lashing wire Referred to construction St and 2nd St 22 1611 Darcy Pedestal not set correctly Referred to construction 23 1782 Brookshire Dog house pedestal not secured Referred to construction 24 Office building corner Dead end distribution cable, no down guy Referred to construction of 2 "d St and C Street 25 Comer of B Street Missing down guy guard Referred to construction and Irvine 26 Corner of W Burre Ln and B Street Down guy with no down guy guard Referred to construction 29 Comer of Acacia and Underground Pedestals not set to grade, Referred to construction Norwood Park PI unsecured, lids dislodged 30 Hickory Branch Whole apartment complex wired with Referred to construction Apartments, hardline cable, but no visible ground at Sandwood Dr drop control box. CONCLUSION According to our investigation, 93 of the 173 items in question were either not in violation, were not customers, were duplicated items, had no address listed, or were not in AT &T Broadband's system. We removed any existing cable drop from non - customers' dwellings to eliminate any confusion. Of the remaining 80 items, our field services department has repaired 47, three are pending customer contact and 30 were referred to our construction department for immediate repair. We at AT &T Broadband hold ourselves accountable to high standards of professionalism. We appreciate and welcome any opportunity to improve our system and enhance our customer's experience. 1 [17NUNIIIN AT &T Broadband Subscriber Drop Project in the City of Tustin • As we explained at the City Council meeting on October 7, 2002, AT &T Broadband has commenced inspection of the subscriber drops in its cable system in the City of Tustin, and will perform work as necessary to comply with current electrical code standards. This work is well underway and is scheduled for completion by December 31, 2002. The AT &T Broadband teams inspecting the subscriber drops will schedule work on a fiber node basis, completing work in one node area before proceeding to the next. Work will be performed Tuesday through Saturday, with the exception of holidays recognized by AT &T Broadband. AT &T Broadband will provide the city with a map showing the area covered by each fiber node for its cable system in the City. When the work in a node area is complete, AT &T Broadband will provide the City with a list of street address within that area. The address list will be delivered to the City no later than Saturday of the week following the week in which the work in the node area is completed. AT &T Broadband will begin sending the address lists when the City provides written notice of the contact name and address to which the lists should be sent. AT &T Broadband will coordinate with City staff to allow inspection of subscriber drops as, or after, the AT &T Broadband team completes its work in each node area. The City's inspector may use the address lists provided by AT &T Broadband to inspect subscriber drops after the work in a node area is completed. Alternatively, the City's inspector may contact AT &T personnel responsible for the subscriber drop project on their cell phones, or via pager, to learn where the teams are working at a particular time. The inspector may then go to those locations for an inspection. In order to meet the deadline for completing the subscriber drop project, the AT &T Broadband teams will continue with their work during such inspections. The cell phone and pager numbers for members of the AT &T Broadband teams will be provided under separate communication. • If the City's inspector requires contact with a manager responsible for the subscriber drop project, he or she may contact: Jeff Noffsinger, Manager 909 - 270 -3370 Doug Shuttleworth, Supervisor 714 -549 -7590 extension 218 10/29/2002 • AT &T Broadband will help fund the cost of an independent inspector retained by the City, up to a maximum contribution of $5,000. The inspector may invoice AT &T Broadband directly on a monthly basis, providing documentation reasonably required for processing payment through AT &T Broadband's accounts payable department. Invoices should be sent to: Del J. Heintz Director, Government Affairs AT &T Broadband 200 Paularino Avenue Costa Mesa, California 9262E (714) 549 -7590 extension 213 AT &T Broadband will provide written notification of completion of the subscriber drop project on or before January 3, 2003. Submitted via email and Fax on October 29 "i, 2002 Del J. Heintz Director, Government Affairs AT &T Broadband (714) 549 -7709 Private Line STAFFING FORECAST TOTAL 341 364 Notes: "Actual Positions Filled YTD 2002 and Excludes Sales and other support functions (e.g., dispatch, finance, training, etc.) 2002* 2003 Customer Care Customer Care Rep 152 169 Customer Care Support Positions 32 26 Customer Care Management 16 16 Lobby (Retail) Positions 27 30 Sub -Total 227 241 Field Operations Installer /Service Tech 80 80 Field Support Positions 10 10 Field Management 2 4 Sub -Total 92 94 Engineering Maintenance /Network /Construction /Fiber Tech 19 25 Technical Support Positions 2 2 Technical Management 1 2 Sub -Total 22 29 TOTAL 341 364 Notes: "Actual Positions Filled YTD 2002 and Excludes Sales and other support functions (e.g., dispatch, finance, training, etc.) 3. Determining Whether to Approve or Disapprove The Cable Act does not specify how a franchising authority should decide to approve or disapprove the transfer. A 1993 FCC Report and Order issued in July 1993 states that a franchising authority should review the legal, technical, and financial qualifications of the transferee. These are the same qualifications that the franchising authority reviews when granting a new franchise or renewing a franchise. A 1995 FCC Order states that a franchising authorit� may also review the effect of the proposed transfer on rates and services. B. LOCAL LAW Minnesota cities are required to comply with the following provisions of the state law and a franchise. Section 15.1 of the NWSCCC Franchise provides as follows: Sale or Transfer of Franchise. (a) Grantee shall not sell, transfer, lease, assign, sublet, or dispose of, in whole or in part, the Franchise or Cable System of any of the rights or privileges granted by the Franchise, without the prior consent of the Grantor, which consent shall not be unreasonably denied or delayed and may be denied only upon a good faith finding by the Grantor that the proposed transferee lacks the legal, technical, or financial qualifications to consummate the transaction and operate the System so as to perform its obligations under this Franchise, given the obligation to complete the System Upgrade as provided for in Article 5 of the Franchise. This provision shall not apply to sales of property or equipment in the normal course of business. Consent from the Grantor shall not be required for a transfer in trust, mortgage, or other instrument of hypothecation, in whole or in part, to secure an indebtedness, or for a pro forma transfer to a corporation, partnership or other entity controlling, controlled by, or under common control with Grantee. (b) The following events shall be deemed to be a sale, assignment or other transfer of the Franchise or Cable System requiring compliance with this section: (i) the sale, assignment or other transfer of all or a majority of Grantee's assets; (ii) the sale, assignment or other transfer of capital stock or partnership, membership or other equity interests in Grantee by one (1) or more of its existing shareholders, partners, members or other 7 First Report and Order and Further Notice of Proposed Rulemaking, MM Docket No. 92 -264, 8 FCC Rcd No. 19 (released July 23, 1993). e Order on Reconsideration of First Report and Order, MM Docket No. 92 -264, FCC 95 -21 (released Jan. 30, 1995) ¶ 55. IN equity owners so as to create a new controlling interest in Grantee; (iii) the issuance of additional capital stock or partnership membership or other equity interest by Grantee so as to create a new controlling interest in Grantee; and (iv) the Grantee's agreement to transfer management or operation of the Grantee or the System to an unaffiliated entity. The term .,controlling interest" as used herein means majority equity ownership of the Grantee. (c) In the case of any sale or transfer of ownership of the Franchise or Cable System, the Commission shall have one hundred twenty (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 FCC Regulations, and the requirements of this Franchise. If the Commission fails to render a final decision on the request within one hundred twenty (120) days after receipt by the Commission of all required information, such request shall be deemed granted unless the requesting party and the Commission agree to an extension of time. (d) Grantee shall notify the Commission in writing of any foreclosure or any other judicial sale of all or a substantial part of the Cable System, or upon the termination of any lease or interest covering all or a substantial part of the Cable System. Such notification shall be considered by Grantor as notice that a change in control of ownership of the Franchise has taken place and the provisions under this section governing the consent of Grantor to such change in control of ownership shall apply. (e) Any financial institution having a pledge of the Grantee or its assets for the advancement of money for the construction or operation of the Franchise shall have the right to notify the Commission that it or its designee satisfactory to the Commission, shall take control of and operate the Cable System in the event of a Grantee default in its financial obligations. Further, said financial institution shall submit a plan for such operation within thirty (30) days of assuming such control that will ensure continued Service and compliance with all Franchise requirements during the term of the financial institution exercise control over the System. The financial institution shall not exercise control over the System for a period exceeding one (1) year unless such term is extended by the Commission in its discretion. During this period of time the financial institution shall have the right to petition the Commission to transfer the Franchise to another Grantee. (f) Grantor reserves the rights it may have to require Grantee to pay all costs and expenses incurred by Grantor and Cities in connection with the sale, assignment or transfer of this Franchise, including but not limited to the Grantor's costs of reviewing the qualifications of any proposed transferees. Grantor shall provide an itemized statement to Grantee. 19 Minnesota Statutes Section 238.083, Sale or Transfer of Franchise provides: Subd. 1 - Fundamental Corporate Change Defined. For purposes of this section, "fundamental corporate change" means the sale or transfer of a majority of a corporation's assets; merger, including a parent and its subsidiary corporation; consolidation or creation of a subsidiary corporation. Subd. 2 — Written Approval of Franchising Authority. A sale or transfer of a franchise, including a sale or transfer by means of a fundamental corporate change, requires the written approval of the franchising authority. The parties to the sale or transfer of a franchise shall make a written request to the franchising authority for its approval of the sale or transfer. The franchising authority shall reply, in writing, within 30 days of the request and shall indicate its approval of the request or its determination that a public hearing is necessary if it determines that a sale or transfer of a franchise may adversely affect the company's subscribers. The franchising authority shall conduct a public hearing on the request within 30 days of that determination. Subd. 3 — Notice of Hearing. Unless otherwise already provided for by local law, notice of the hearing must be given 14 days before the hearing by publishing notice of it once in a newspaper of general circulation in the area being served by the franchise. The notice must contain the date, time, and place of the hearing and must briefly state the substance of the action to be considered by the franchising authority. Subd. 4— Approval or Denial of Sale or Transfer Request. Within 30 days after the public hearing, the franchising authority shall approve or deny, in writing, the sale or transfer request. The approval must not be unreasonably withheld. Subd. 5 — Sale or Transfer of Franchise Without System. The parties to the sale or transfer of a franchise only, without the inclusion of a cable communications system in which at least substantial construction has commenced, shall establish that the sale or transfer of only the franchise will be in the public interest. 20 VI. LEGAL QUALIFICATIONS OF AT &T COMCAST CORPORATION Legal qualifications concern the organization and whether or not it is legally formed and authorized to do business in the state. An analysis of an applicant's legal qualifications includes a review of the background and experience of the applicant with respect to complaints, violations of other franchises, or other matters that may positively or adversely affect the applicant's qualifications. Legal qualifications also consider the applicant's compliance with the procedural requirements under both state and federal law and its past record of meeting federal, state, and local law requirements. The Application asks seven questions regarding the legal qualifications of the Transferee. Provided below is a summary of the answers to those questions provided in the Application. In response to question 1, the Transferee (AT &T Comcast Corporation) is a Pennsylvania corporation formed on December 7, 2001. In response to question 2, the principal place of business for AT &T Comcast Corporation is 1500 Market Street, Philadelphia, PA 19102. A list of the officers, directors, stockholders beneficially holding more than 5% of the outstanding voting shares, general partners, and limited partners holding an equity interest of more than 5% is also provided in the Application. Shares of AT &T Comcast Corporation stock will be publicly traded. Question 3: If the applicant is a corporation or a limited partnership, is the Transferee formed under the laws of, or duly qualified to transact business in, the State or other jurisdiction in which the system operates? Answer: No, see Exhibit 4. According to Exhibit 4 of the Application: "Transferee is a Pennsylvania corporation and, as of the effective time of the closing, will be the indirect parent company of the legal entity holding the franchise ( "Franchisee'). To the extent required by applicable law, Franchisee is duly qualified to transact business in the State or Commonwealth in which this system is operated." Question 4: Has the Transferee had any interest in or in connection with an applicant which has been dismissed or denied by a franchise authority? Answer: No, see Exhibit 5. 21 According to Exhibit 5 of the Application: ' ... Other than similar applications made to other franchise authorities in connection with this transaction, Transferee has not made any previous applications to any franchise authorities and, therefore, has not had any dismissals or denials." Also provided in Exhibit 5 is information about denials /dismissals with respect to AT &T and Comcast cable businesses. The Exhibit refers to approximately ten denials /dismissals. Apparently all but two of the denials /dismissals have been resolved. Question 5: Has an adverse finding been made or an adverse final action been taken by any court or administrative body with respect to the Transferee in a civil, criminal, or administrative proceeding, brought under the provisions of any law or regulation relating to the following: any felonies; revocation; suspension or voluntary transfer of any authorization (including cable franchises) to provide video programming services, mass media related anti -trust or unfair competition; fraudulent statements to another government unit; or employment discrimination? Answer: No, see Exhibit 6. According to Exhibit 6 of the Application: "No adverse findings have been made and no final actions have been taken with respect to Transferee related to any of the items listed in Question 5." Also provided in Exhibit 6 is information about two cases with respect to AT &T's and Comcast's cable businesses in the last ten years. Question 6: Are there any documents, instruments, contracts or understandings relating to ownership or future ownership rights with respect to any attributable interest as described in Question 2 (including, but not limited to, non - voting stock interests, beneficial stock ownership interests, options, warrants, debentures)? Answer: Yes, see Exhibit 7. Exhibit 7 of the Application provides summaries of documents relating to ownership or future ownership rights. Question 7: Do documents, instruments agreements or understandings for the pledge of the Transferee, as security for loans or contractual performance, provide that: (a) voting rights will remain with the applicant, even in the event of default on the obligation; (b) in the event of default, there will be either a private or public sale of the stock, and (c) prior to the exercise of any ownership rights by a purchaser at a sale described in (b), any prior consent of the FCC and /or the franchising authority, if required pursuant to federal, state or local law or pursuant to the terms of the franchise agreement will be obtained? 22 Answer: No, see Exhibit 8. According to Exhibit 8 of the Application: "Not applicable. There are no documents, instruments, agreements, or understandings for the pledge of stock of the Transferee as security for loans or contractual performance." Additional information regarding the Transferee's legal qualifications was requested. A copy of the response is attached to this Report. We found more information regarding the proposed Transferee's legal qualifications on the AT &T Corp. and Comcast Corporation web sites and from various other sources. Some of that information is attached to this Report. Based upon the review as outlined in this Report, it is our conclusion that AT &T Comcast Corporation has the legal qualifications to control the operation of the cable television system, which is the subject of the Application. 23 VII. FINANCIAL QUALIFICATIONS OF AT &T COMCAST CORPORATION PREPARED BY CHARLES GRAMLICH & ASSOCIATES Financial qualifications include general financial strength, corporate ownership, structure, organization, willingness of a parent company to guaranty obligations, references, the willingness to pay any application fee, willingness to provide security or construction bonds necessary for completion of the cable system, willingness to provide a performance bond, evidence of availability of funds for development, construction, and operation of a system as proposed, the sources of funding, commitment of funds to the project that is proposed, and the strength of any partners or vendors having an ownership or share in the ownership or operation. This Report is not intended to be an audit or verification of representations made by the Transferee or the Transferor. CGA did not conduct market surveys, develop economic forecasts, or prepare independent financial projections. In reviewing the financial qualifications of a Transferee, CGA normally looks for information on the following factors, if available: All financing documents particularly those that identify the type and amount of debt and the debt to subscriber and debt to cash flow ratios. 2. The current and historical audited financial statements of the Transferee. Filings with the Securities and Exchange Commission ( "SEC') 4. Financial pro forma for the Transferee and the system. Financial analyses and reports regarding the Transferee. Section III -1 of Form 394 asks the Transferee to certify that it has sufficient net liquid assets on hand or available from committed resources to consummate the transaction and operate the system for three months. Transferee answered "yes." Section III -2 of Form 394 requests that the Transferee attach as an exhibit the most recent financial statements, prepared in accordance with generally accepted accounting principles, including balance sheet and income statement for at least one full year, for the Transferee or parent entity that has been prepared in the ordinary course of business, if any such financial statements are routinely prepared. In response, an Exhibit 9 was provided in the Application. Exhibit 5 states: "Because Transferee is a new entity formed by AT &T Corp. and Comcast Corporation, no financial statements have been prepared in the ordinary course for Transferee and Transferee has no historical financial information. The Pro Forma Financial Statements for AT &T Comcast Corporation included in the Preliminary 24 Joint Proxy Statement/Prospectus filed with the SEC on February 11, 2002 are attached to this Exhibit. The Annual Report on Form 10 -K for the year ended December 31, 2000 and Form 10 -Q for the quarterly period ended September 30, 2001 for each of AT &T Corp. and Comcast Corporation are included in the CD ROM attached to Exhibit 2." The following tables present selected summary pro forma data for AT &T Comcast Corporation. This data was taken from the above - mentioned documents: 11 Selected Summary Pro Forma Data — AT &T Comcast Corporation (Dollars in Millions) Assets (as of September 30, 2001): Total Current Assets $ 4,881.8 Investments $ 25,971.5 Property & Equip. net $ 21,293.7 Total Intangible Assets $ 84,986.6 Other Non - Current Assets $ 4,067.3 Total Assets $141,200.9 Liabilities & Stockholders' Equity (as of September 30, 2001): Total Current Liabilities $ 12,637.7 Long -Term Debt $ 30,573.5 Deferred Income Taxes $ 32,388.8 Other Non - Current Liabilities $ 1,347.3 Minority Interest $ 2,155.2 Total Stockholder's Equity $ 62,098.4 Total $141,200.9 Miles of plant 432,000 Homes passed 38 million Subscribers 22 million Revenues (as of December 31, 2000) $ 17,923.5 Operating Costs & Expenses (as of December 31, 2000) $ 13,381.2 Cash flow (as of December 31, 2000) $ 4,542.3 " The first quarter 2002 financial results of AT &T Broadband showed an increase in pro forma revenue, a decrease in cash flow margins and a decrease in subscribers. At Comcast, the first quarter 2002 financial results showed increases in revenue, cash flow and subscribers. Perhaps more importantly, AT &T Broadband announced that it continues to commit more than $1.1 billion in 2002 on plant upgrades, and Comcast announced that its plant upgrades are almost complete. Comcast expects to generate $200 million plus of free cash flow in 2002. In the cable television industry, it is not uncommon for a cable television operator to have a net loss. This is because of the large amounts of interest expense and depreciation inherent in the industry. Cable television systems are valued on cash flow or EBITDA 25 (defined as earnings before interest, taxes, depreciation and amortization). The moss common financial ratios used to get an understanding of a company's financial profile are: Cash Flow or EBITDA Margin - Earnings before interest, taxes, depreciation, amortization and management fees /Revenues; and 2. Debt to Cash Flow Ratio - Adjusted Total Debt (defined as total debt adjusted for certain credits, for certain debt and preferred instruments) /Cash Flow. The debt to cash flow ratio is the common industry ratio used for measuring the financial strength and leverage of a cable company. Additional information regarding the Transferee's financial qualifications was requested. This request included specific forward- looking information regarding the debt to cash flow ratio. A copy of the response is attached to this Report. As outlined in the attached response, some of the additional information regarding the financial qualifications of the Transferee that was requested has not been provided. Instead, a four -page document was enclosed with the response. The document is entitled "AT &T Comcast Corporation Financing Considerations ". According to this document: "Assumed Debt Under the proposed terms of the merger transaction, it was initially projected that approximately $25 billion in debt from AT &T Broadband and $10 billion in debt from Comcast would be assumed by AT &T Comcast. This total assumed debt amount will be immediately reduced by $5 billion, however, with Microsoft Corporation's conversion of its holdings in AT &T Broadband convertible debt into shares of equity in AT &T Comcast. This translates into an adjusted total debt at closing for AT &T Comcast of $30 billion. It should be noted, too, that any merger - related debt will be assumed by the specific parent company of a franchisee, not by any individual community. As such, debt will be assumed by the parent of the franchisee. " "Debt to Cash Flow "Debt to Cash Flow Ratio" is the common industry metric for measuring the financial strength of an MSO. Comcast currently enjoys a significantly stronger balance sheet than AT &T Broadband, with a ratio of debt to 2001 operating cash flow of less that 4 to 1, compared to AT &T Broadband's ratio of over 8 to 1. The merged company will have a first year combined debt to operating cash flow ratio of less than 5 to 1. This number de- leverages with very conservative assumptions to an excellent ratio of 2.5 to 1 by 2004. " "Investment Grade Rating Given the above, AT &T Comcast Corporation will be a solid, investment -grade company. In fact, on March 4, 2002, Fitch Ratings assigned indicative ratings of BBB to the senior unsecured debt obligations of AT &T Comcast Corporation. Moody's and Standard and Poor's are currently reviewing the combined entities FM rating position, although both firms have suggested that the new company will maintain its investment grade status. " 11 Working Capital Successful facilities -based providers of broadband services, such as Comcast, require cash reserves and working capital in order to invest in their infrastructure and business development. We have estimated that somewhere between $1 billion and $2 billion in funding will be required at the merger transaction's closing to provide appropriate cash reserves to fund the operations and the capital expenditures of AT &T Comcast. We are currently seeking financing for: this working capital; the retirement of AT &T Broadband's inter - company loans to its current parent AT &T Corp.; and refinancing of a portion of the debt AT &T Comcast will assume with the acquisition of AT &T Broadband. As of March 1, 2002, approximately 80% of the projected amount needed has already been secured from five leading underwriters, including Morgan Stanley, Merrill Lynch, J.P. Morgan Chase, B of A Securities, and Citicorp SSB. This early interest in loan syndication remains high, strengthening our expectation that a total $12.5 billion commitment will be in place by May 2002. In addition, Comcast Cable maintains significant funding availability from external liquidity sources. Comcast Cable currently has an available credit facility of $4.5 billion, and funds from this facility will be available to provide additional liquidity, as needed. With a very strong balance sheet, Comcast is also currently generating high "free cash flow" from its operations, which provides a significant non -debt source of funding for capital expenditures. Over 95% of Comcast's customers are served by upgraded /rebuilt systems. With most of this important investment already made, capital expenditures are decreasing resulting in more free cash flow that can be deployed to accelerate the upgrade of AT &T Broadband cable systems. " "Cost Synergies It is estimated that within five years the merger should result in synergies and efficiencies worth approximately $1.25 to $1.95 billion. This estimate includes cost savings due to the elimination of corporate overhead costs, moderation of programming expenditures and improved operating margins. The merged company is also expected to save $200 -300 million annually from lower prices due to the increased scale of capital expenditures. " "Franchise Commitments to Local Communities Our existing commitments to our local franchises remain intact. Planned system rebuilds and upgrades, scheduled service rollouts, and other financial commitments already made to our local communities will continue. " 27 The following chart was also provided in the above - mentioned document: "Summary Credit Statistics of Selected Cable Companies Consolidated Results Source Merrill Lynch & Co (Dollars in Billions) AT&T Comcast Adelphia As of 12/31/02 AOL Cox Cablevlslon Comm. Charter Insight Mediacom Ratings With Synergies TimeWarner Comm. Systems (Ex -ASIZ) Comm. Comm LLC Senior Financials (2) Baa2/BBS 01 Baaa2/BBB Baa2/BBB Ba2/B3+ B2/B+ S3/8+ 831B. Caal /B+ Subscribers 22.0 12.8 6.2 3.0 5.8 7.0 1.3 1.8 2001E EBITDA $6.5(3) $9.3 $1.6 $0.8 $1.4 $1.8 $0.3 $0.3 Total Debt & Convertible Debt $30.8 $29.6 $5.2 $5.4 $11.6 $16.3 $2.5 $2.8 Leverage Ratio Total Debt & Conv't./EBITDA 4.7x 3.2x 3.3x 6.5x 8.0x 8.9x 8.0X 8.5x (1) currently under review (2) Pro forma for all announced transactions (3) Based on 2002E EBITDA. Includes $500 mllion in synergies is CGA notes that the projected Leverage Ratio of AT &T Comcast Corporation as of December 31, 2002 (with Synergies) is 4.7 and compares favorably with the other large cable television operators. Dividing $30.8 billion in debt by $6.5 billion in EBITDA produces the 4.7 ratio. According to information provided in the Application and in responses to requests for additional information, the most recent cash flow margin for Comcast is in the range of 42 %, and the most recent cash flow margin for AT &T Broadband is in the range of 20 %. AT &T Comcast Corporation indicates that it expects to take AT &T Broadband's cash flow margins to the levels that are currently enjoyed by Comcast. Additional information was requested regarding AT &T Comcast Corporation's financial qualifications. Copies of the responses (including an expanded 13 -page update of the "AT &T Comcast Corporation Financing Considerations" document) are attached to this Report. This document provides more detail regarding AT &T Comcast Corporation's business plan, especially in the area of "cost synergies ". Provided below are excerpts from that document. Please refer to the entire document to view the slides referenced in the following: 11 Value Creation Through Synergies -Three Buckets of Synergies There's really three major types of value creation or synergy effects by putting these two companies together: • Cost Savings and Operating Efficiencies; • Taking AT &T Broadband's Margin Levels up to Comcast's Margin Levels; and • Ability to Roll Out New Products and Services.'' W. "Bucket One — Cost Savings and Operating Efficiencies The first area is programming cost savings. For both of our companies, the single largest expenditure in our business is programming costs. Our programming costs are going up in a double digit fashion over the next five years. We believe that we can take the Comcast programming prices to the AT &T rates, which are better than ours because AT &T has larger scale, and further believe that as a combined entity, we can get further enhancements. And when you look at the range here of $250 -450 million, if you go out a few years, the combined company's Annual programming costs will be about $5 billion and the annual increase in programming costs will be about $750 million. So this kind of programming savings is less than the annual increase in just one year and we think it's a very achievable range. Operating efficiencies; the kind of efficiencies you get when you put two organizations together, we feel that there should be, within a one to three year time period, $200 -300 million of synergies. That would be: elimination of corporate overhead costs; elimination of duplication; adoption of best practices and systems that we could leverage between the two companies.; etc. National advertising; we'll be in eight of the top ten DMA's. We will be the major cable provider in 14 of the top 20 markets. Our footprint will actually be bigger than the station footprints of the major networks. In effect, we'll be able to go to an advertiser and speak for roughly a third of the United States. New products; one of the advantages of the kind of scale of the new company is the ability to take a real leadership position in terms of developing new products. AT &T Broadband and Comcast are very much new product development, new product focused companies. We've been more focused on video and data, AT &T has been more focused on phone than we have, but key to our strategies is taking the infrastructure and layering in new products. We will be able to really develop our vision of interactive television, video on demand, new high speed data applications, etc. with the scale and leadership position that will result from this merger. Our feeling is that scale and a leadership position lead to real synergies. Then finally, telephony; always part of our future and part of our vision, but has never been part of our five -year plan. We spent a lot of time with our colleagues at AT &T and believe that if we overlay their expertise, financial investment, investment in people and systems, and learning on our existing footprint, and roll out telephony to our footprint, it could represent a very significant opportunity over the next five years. So we've included that in the synergy calculations as well. If you take the midpoint of that range of $1.25 to 1.95 billion, then do a net present value; you come up with $13.5 billion worth of synergy. If you then divide that by the roughly 13.5 million AT &T subscribers, you come up with approximately $1,000 per subscriber of synergy, if you attribute it all to the AT &T subscriber base. So when you're thinking through how this transaction works and how the two companies come together and how we create value, we think 29 there's a significant amount from the classic way of looking at synergies. But that's not the end of the story. " "Bucket Two — Taking the AT &T Broadband Levels Up to the Levels that are Currently Enjoyed by Comcast In addition to creating synergies by putting the two companies together the way just described, we became increasingly convinced that AT &T Broadband was well on its way to achieving industry standard margins. We think that together we'll have more management depth, and that together it will happen more quickly. Let's do the math. If you take our margin of 42 %, the AT &T Broadband margin most recently of 25 %, and then the differential of 17 %, then you apply that differential to '01 revenue of close to $10 billion, you get an opportunity in the year we're in of $1.6 billion if you can bring that margin all the way up to our level. What's particularly exciting about that is that opportunity is going to grow very dramatically because the AT &T Broadband revenue side of the equation is going to grow in the 12 -15% range. When you start to compound that, that $1.6 billion worth of opportunity compounds very dramatically. First area, the $13.5 billion worth of net present value; second area, taking the AT &T Broadband levels up to the levels that are currently enjoyed by Comcast. This slide shows Comcast's experience in terms of integrating new systems. Comcast has added about 3.6 million new customers in the last two years. This chart illustrates that as a company you can integrate systems and still perform strong financially. The blue bar shows our EBITDA and the green line graph across shows our margin. Over this two year period, we launched close to a million high -speed data customers, over 2 million digital customers and integrated 3.6 million new customers and did it all at the same time. So our focus as a combined company will be to continue performing financially while continuing to roll out the new products and continuing to integrate with the kind of discipline that we've always demonstrated. " "Bucket Three — Ability to Roll Out New Products and Services - More Services to More People, More Quickly The third segment of synergies is really in some ways the hardest to quantify, but in some ways the most exciting, and that is "what can you do in terms of bringing new products and services to customers when you have the kind of footprint that we're going to have ?" With 22 million customers, and with 38 million homes passed, we will have not only the ability to create new cable channels, but we also have the ability to create new data applications. We will have the ability to do new things in terms of video on demand, and really create entirely new businesses as a result of this scale. While it's very difficult to quantify this third segment of synergies, five or ten years from now if you were to look back on today and say, "Well what upside did we underestimate ?" The answer will very likely be on this slide. We think one of the exciting things about this deal is when you run the numbers, if you look at these three buckets of synergies, the synergy value of each of these three buckets can be enormous, but the economics of the deal don't depend on realizing the synergies from each of the three buckets. In fact, if you get any one of the three buckets, you can pretty well justify the economics of this deal and we're going to try our best, of course, to try to get as much of all three as we possibly can. So we couldn't be more excited, we couldn't be more happy to be putting these two companies together and trying to go and make something better than we could have done, either of us, alone. Comcast has a long history of successfully integrating acquisitions. Whenever we take over new cable systems what we try to do is follow the same roadmap. The first thing we try to do is set clear priorities: improve financial performance, roll out new products and keep our eye on the day -to -day basics of the business. It's fairly simple but it's one that's worked for us time and time again. The slide above indicates the 1.4 million AT &T Broadband subscribers that we acquired in January '00. So we've had these systems for a little over a year, about fourteen months. The average system that we acquired had a 31 % margin - 31.6% margin. In 2001 we brought that up to 37.7% and this year our budgets and our estimates would be to bring those systems up to 40.6% margins. Thus far we're tracking right on this margin. Looking to the AT &T Broadband merger, what we're giving ourselves here is additional time to complete what we've already done any number of times in other deals. To be more conservative, what we're saying to ourselves is rather than achieving the operational parity in a matter of 12 to 24 months, we'll achieve operational parity in a three year period following closing through the end of '05, and achieve margins that are more industry-like by the end of '05. (This is not to say we can't do it any faster.) For example, if we were to grow the combined companies' cable base at a very, very conservative number, e.g. 11 %, and if we were also able to achieve over that period of time through the end of 2005 synergies that scaled in over that time of only $500 million, then we would have managed to grow cash flow each year - '02, '03, '04 and '05 -at least 20% across that entire period for each and every year. We think this is a very, very doable scenario. " Comcast Corporation hosted a conference call with the financial community to discuss its first quarter 2002 financial results on May 1, 2002. A transcript of the conference call is available at www.cmcsk.com. During that conference call and in subsequent written releases, representatives of Comcast stated that: "... the company had signed agreements with JP Morgan, Citibank and a syndicate of other banks for $12.85 billion in financing necessary for the merger. This, coupled with existing lines of credit available to Comcast, ensures that the company has more than adequate financing available for expected needs. " 31 CGA found more information regarding the proposed Transferee's financial qualifications on the AT &T Corp. and Comcast Corporation web sites and from various other sources. Some of that information is attached to this Report. According to information obtained from Comcast's web site, including the audio web cast of a presentation on March 4, 2002 by representatives of Comcast to the Bear Sterns 15`h Annual Media, Entertainment and Information Conference (replay of conference available at www.twst.com /econf /mm /bsc2 /cmcsk.html) and an audio web cast of a presentation on May 1, 2002 by representatives of Comcast to the Banc of America Securities Growth Telecom Media & Entertainment Conference (reply of presentation and a transcript of the presentation is available at www.cmcsk.com): • "AT &T Comcast Corporation expects to rapidly reduce its leverage through growth in operating cash flow and asset monetization (the selling of assets). • Comcast believes that it can continue the integration success that it has achieved in the past few years, and significantly increase operating cash flow over the next three years as it integrates AT &T Broadband. • Although some of the AT &T cable plant still needs upgrading, essentially all of the Comcast cable plant has been upgraded, which will result in a significant generation of free cash flow beginning in 2002 for Comcast, which, along with the operating cash flow growth and asset monetization, will decrease the leverage profile to 2.5 times by 2004." Similar information was provided in the response to our requests for additional information. That information is attached to this Report. Among the other information reviewed by CGA was the Preliminary Proxy Statement filed on April 10, 2002 (and amended on April 30, 2002) with the Securities and Exchange Commission. This document is commonly called the S-4. The S-4 filed on April 30, 2002 contains approximately 800 pages and can be viewed at www.cmcsk.com. Attached is a copy of the table of contents of the S -4 that was filed on April 30, 2002. According to this document, there are several risk factors relating to the combination of AT &T Broadband and Comcast Corporation. Some of those risk factors are listed below: • "AT &T Comcast May Fail to Realize the Anticipated Benefits of the AT &T Comcast Transaction. The AT &T Comcast transaction will combine two companies that have previously operated separately. Comcast and AT &T Broadband expect to realize cost savings and other financial and operating benefits as a result of the AT &T Comcast transaction. However, Comcast and AT &T Broadband cannot predict with certainty when these cost savings and benefits will occur, or the extent to which they actually will be achieved. There are a large number of systems that must be integrated, including management information, purchasing, accounting and finance, sales, billing, payroll and benefits and regulatory compliance. The integration of Comcast and AT &T Broadband will also require substantial attention from management. The diversion of management attention and any difficulties associated with integrating Comcast and AT &T Broadband 32 could have a material adverse effect on AT &T Comcast's operating results and on the value of AT &T Comcast common stock. " • "AT &T Comcast and its Subsidiaries May Not Be Able to Obtain the Necessary Financing At All or on Terms Acceptable to it. " "AT &T Comcast and its Subsidiaries Will Have Significant Debt and Debt -like Obligations and May Not Obtain Investment -Grade Credit Ratings. After completion of the AT &T Comcast transaction, AT &T Comcast and its subsidiaries will have a significant amount of debt and debt -like obligations. Although this amount will be reduced by $5 billion if the Microsoft transaction described in this document is completed, the credit ratings of AT &T Comcast and its subsidiaries after completion of the AT &T Comcast transaction may be lower than the existing credit ratings of Comcast, AT &T's principal broadband subsidiaries and their respective subsidiaries. In addition, it is possible that neither AT &T Comcast nor any of its subsidiaries that issue debt may obtain an investment -grade credit rating. " • "Actual Financial Position and Results of Operations of AT &T Comcast May Differ Significantly and Adversely From the Pro Forma Amounts Reflected in this Document. Assuming completion of the AT &T Comcast transaction, the actual financial position and results of operations of AT &T Comcast may differ, perhaps significantly and adversely, from the pro forma amounts reflected in the AT &T Comcast Corporation Unaudited Pro Forma Combined Condensed Financial Statements included in this document due to a variety of factors, including access to additional information, changes in value not currently identified and changes in operating results between the date of the pro forma financial data and the date on which the AT &T Comcast transaction is completed. " "In addition, in many cases each of Comcast and AT &T Broadband Group has long- term agreements, in some cases with the same counterparties, for the same services and products, such as programming, billing services and interactive programming guides. Comcast and AT &T Broadband Group cannot disclose the terms of many of these contracts to each other because of confidentiality provisions included in these contracts or other legal restrictions. For this and other reasons, it is not clear, in the case of certain services and products, whether after completion of the AT &T Comcast transaction each of the existing agreements will continue to apply only to the operations to which they have historically applied or whether instead one of the two contracts will apply to the operations of both companies and the other contract will be terminated. Since these contracts often differ significantly in their terms, resolution of these contractual issues could cause the actual financial position and results of operations of AT &T Comcast to differ significantly and adversely from the pro forma amounts reflected in the AT &T Comcast Corporation Unaudited Pro Forma Combined Condensed Financial Statements included in this document. " "Programming Costs Are Increasing and AT &T Comcast May Not Have the Ability to Pass These Increases on to Its Customers, Which Would Materially Adversely Affect Its Cash Flow and Operating Margins. Programming costs are expected to be AT &T Comcast's largest single expense item. In recent years, the cable and satellite video industries have experienced a rapid increase in the cost of programming, particularly 33 sports programming. This increase is expected to continue, and AT &T Comcast may not be able to pass programming cost increases on to its customers. The inability to pass these programming cost increases on to its customers would have a material adverse impact on its cash flow and operating margins. In addition, as AT &T Comcast upgrades the channel capacity of its systems and adds programming to its basic, expanded basic and digital programming tiers, AT &T Comcast may face increased programming costs, which, in conjunction with the additional market constraints on its ability to pass programming costs on to its customers, may reduce operating margins. " • "AT &T Comcast also will be subject to increasing financial and other demands by broadcasters to obtain the required consent for the transmission of broadcast programming to its subscribers. Comcast and AT &T cannot predict the financial impact of these negotiations or the effect on AT &T Comcast's subscribers should AT &T Comcast be required to stop offering this programming. " • "AT &T Comcast Will Face a Wide Range of Competition in Areas Served by its Cable Systems, Which Could Adversely Affect its Future Results of Operations. AT &T Comcast's cable communications systems will compete with a number of different sources which provide news, information and entertainment programming to consumers. AT &T Comcast will compete directly with program distributors and other companies that use satellites, build competing cable systems in the same communities AT &T Comcast will serve or otherwise provide programming and other communications services to AT &T Comcast's subscribers and potential subscribers. In addition, federal law now allows local telephone companies to provide directly to subscribers a wide variety of services that are competitive with cable communications services. Some local telephone companies provide, or have announced plans to provide, video services within and outside their telephone service areas through a variety of methods, including broadband cable networks. " • "Additionally, AT &T Comcast will be subject to competition from telecommunications providers and ISPs in connection with offerings of new and advanced services, including telecommunications and Internet services. This competition may materially adversely affect AT &T Comcast's business and operations in the future. " • "AT &T Comcast Will Have Substantial Capital Requirements Which May Require It to Obtain Additional Financing that May Be Difficult to Obtain. AT &T Comcast expects that its capital expenditures will exceed, perhaps significantly, its net cash provided by operations, which may require it to obtain additional financing. Failure to obtain necessary financing could have a material adverse effect on AT &T Comcast. " • " Comcast and AT &T anticipate that AT &T Comcast will upgrade a significant portion of its broadband systems over the coming years and make other capital investments, including with respect to its advanced services. In 2002, Comcast and AT &T anticipate that AT &T Broadband and Comcast's cable division will incur capital expenditures of approximately $4.3 billion and $1.3 billion, respectively. AT &T Comcast is expected to incur substantial capital expenditures in the years following completion of the AT &T Comcast transaction. However, the.actual amount of the funds required for capital 34 expenditures cannot be determined with precision at this time. Capital expenditures are expected to be used to acquire equipment, such as set -top boxes, cable modems and telephone equipment, and to pay for installation costs for additional video and advanced services customers. In addition, capital is expected to be used to upgrade and rebuild network systems to expand bandwidth capacity and add two -way capability so that it may offer advanced services. There can be no assurance that these amounts will be sufficient to accomplish the planned system upgrades, equipment acquisitions and expansion. >> • "Comcast and AT &T Broadband Group also have commitments under certain of their franchise agreements with local franchising authorities to upgrade and rebuild certain network systems. These commitments may require capital expenditures in order to avoid default and /or penalties. "Historically, AT &T Broadband Group's capital expenditures have significantly exceeded its net cash provided by operations. For the year ended December 31, 2001, AT &T Broadband Group's capital expenditures exceeded its net cash provided by operations by $3.5 billion. In addition, for the year ended December 31, 2001, Comcast's capital expenditures exceeded its net cash provided by operating activities by $952 million. " "After completion of the AT &T Comcast transaction, AT &T and Comcast expect that for some period of time AT &T Comcast's capital expenditures will exceed, perhaps significantly, its net cash provided by operating activities. This may require AT &T Comcast to obtain additional financing. AT &T Comcast may not be able to obtain or to obtain on favorable terms the capital necessary to fund the substantial capital expenditures described above that are required by its strategy and business plan. A failure to obtain necessary capital or to obtain necessary capital on favorable terms could have a material adverse effect on AT &T Comcast and result in the delay, change or abandonment of AT &T Comcast's development or expansion plans. " • "AT &T Comcast Will Be Subject to Regulation by Federal, State and Local Governments Which May Impose Costs and Restrictions. " • "AT &T Comcast, Through AT &T Broadband, Will Have Substantial Economic Interests in Joint Ventures in Which It Will Have Limited Management Rights. Additional Risk Factors. " "For a description of additional risk factors, see "The AT &T Comcast Transaction -- Comcast's Reasons for the AT &T Comcast Transaction" and "The AT &T Comcast Transaction -- AT &T's Reasons for the AT &T Comcast Transaction" and other parts of the above - mention Proxy Statement. " 35 The Transferee has stated: "The merged company will have a first year combined debt to operating cash flow ratio of less than 5 to 1. This number de- leverages with very conservative assumptions to an excellent ratio of 2.5 to 1 by 2004. " For reasons outlined in these risks factors, CGA is concerned that the leverage ratio could be more than is projected by AT &T Comcast Corporation. Both parts of the leverage ratio are of concern, i.e. total amount of debt that will ultimately be required and the actual amount of cash flow that will be produced in the future to fund the debt service and the other needs of the merger operations. That is why additional information was requested regarding pro forma financial projections to include assumptions and a sources and uses of cash statement. According to representatives of AT &T Comcast Corporation, the requested detail information does not exist. CGA notes that there is considerable room between the projected leverage ratios of between 5 and 2.5 over the next three years and the higher leverage ratios that have been acceptable in the industry in the past of between 5 and 8 +. Also, CGA also notes that AT &T Comcast Corporation will have other opportunities to meet its projected debt to cash flow ratios and cash needs. These other opportunities could be very significant. These opportunities include the selling of certain non - strategic assets (also referred to as asset monetization) such as shares of AT &T, shares of Sprint PCS and the investment in Time Warner Entertainment. During the meeting held by Comcast Corporation at Banc of America Securities' Growth Telecommunications, Media & Entertainment Conference on May 1, 2002, John Alchin, Executive Vice President and Treasurer of Comcast Corporation said: "... We have about $700 million in cash that will be derived from the sale recently of systems with about 300 thousand subscribers, another $1.7 billion of assets on our balance sheet. So we have said all the way along these are shares of AT &T and Sprint PCS that are available for sale and will be monitized. And then within a 3 year timeframe or if not well before that there is the incremental opportunity to monitize the TWE asset that we have said again categorically is not strategically aligned with us or with the new merged entity. " On a slide used in his presentation, John Alchin valued the TWE asset at $6.5 billion, after tax. According to representatives of AT &T Comcast Corporation, the interest in TWE is simply an investment, and the debt and cash flow associated with that investment is not a part of the estimated debt to cash flow ratio at the closing of the transaction anticipated in the Application. Therefore, the proceeds of a sale of the TWE asset could go directly to debt reduction. An audio web cast and the slides used in the meeting held by Comcast Corporation at Banc of America Securities' Growth Telecommunications, Media & Entertainment Conference on May 1, 2002, are available at www.cmcsk.com. 36 CGA looked to other analyses regarding this matter. For example, the following chart shows the ratings of Comcast Corporation by approximately 25 stock brokerage analysts. The average brokerage recommendation for Comcast Corporation is a Moderate Buy. ;,,�,Q"o,;x,. Comc,3:,t Corporation MSN ,N. Mono �y I:o port Generated: 412212002 9:10:37 AM ET Ratings Comcast Corporation: Analyst Ratings 15 Zacks average 10 brokerage recommendation 5 is Moderate Buy. 7 Recommendations Strong Buy Moderate Buy Hold Moderate Sell Strong Sell Mean Recommendation Conversion Table 1.0 = Strong Buy 1.1 thru 2.0 = Moderate Buy 2.1 thru 3.0 = Hold 3.1 thru 4.0 = Moderate Sell 4.1 thru 5.0 = Strong Sell Quotes supplied by Standard & Poor's Comstock, Inc. Stock data provided by Media General Financial Services. Earnings Estimates data provided by Zacks Investment Research. Data Source: CSI http7//www.csidata.com TtaOMSON © Copyright 2002 Thomson Financial. pINANCIAL 37 Strong Buy 13 13 14 16 Moderate Buy 10 11 8 6 Hold 2 2 2 2 Moderate Sell 0 0 0 0 Strong Sell 1 1 1 1 Mean Rec. 1.73 1.69 1.63 1.55 Mean Recommendation Conversion Table 1.0 = Strong Buy 1.1 thru 2.0 = Moderate Buy 2.1 thru 3.0 = Hold 3.1 thru 4.0 = Moderate Sell 4.1 thru 5.0 = Strong Sell Quotes supplied by Standard & Poor's Comstock, Inc. Stock data provided by Media General Financial Services. Earnings Estimates data provided by Zacks Investment Research. Data Source: CSI http7//www.csidata.com TtaOMSON © Copyright 2002 Thomson Financial. pINANCIAL 37 Additionally, the following is taken from a Merrill Lynch Cable Television Report dated May 2, 2002 (copy attached): "Comcast: Investment Conclusion Maintain Strong Buy rating. Our pro forma price objective is $45, based on 16x our CY03 cable EBITDA estimate of $6.7 billion (assuming $550 million in cost saving synergies and $270 million in capex cost savings) adjusted for net debt and other assets, representing upside of 57 %. On a proforma basis, Comcast is trading at 14.5x our CY02E cable EBITDA estimate (assuming no synergies), slightly above the industry average of 12.5x. However, we believe this relative premium is deserved given the strength of the combined assets, well above industry average EBITDA growth rate (27% over next 3 -5 years) and the security of investing in such a high quality company. On CY03, the proforma trading multiple is 10.2x, a low level based on historical standards. In our view, the main overhang on Comcast' stock remains the near term operating performance of AT &T Broadband, which continues to be weak. AT &T Broadband essentially halted its plant upgrade in CY01, particularly in top markets. This is significantly negatively impacting the core video business: AT &T Broadband lost 189,000 basic subscribers in Q1, partly due to the disconnection of non -pay subscribers and also due to satellite competition in non - upgraded markets. We note that historically, Comcast's stock has traded down 5 % -10% from the time a major cable deal was announced to its closing. In the 12 months following the close of a major cable deal, however, Comcast's stock traded up an average 20 %. If we include all deals for Comcast (cable, content and commerce), Comcast's stock traded up an average 9% from the time of deal announcement to close and up an average 24% 12 months after close. In our view, this highlights Comcast's skill at making strategic acquisitions that enhance value. The acquisition of AT &T Broadband is a transforming deal for Comcast, which will nearly triple the size of the company as well as significantly increase its clusters and presence in top metropolitan markets. We believe this merger creates significant value, highlighted by extensive cost and scale synergies and incremental revenue opportunities. AT &T Comcast will be the only cable operator with a national footprint. Comcast has one of the best management teams in the industry, the best balance sheet, and a successful track record of acquisitions /integration, particularly of AT &T systems. Comcast's management team is smart, aggressive and entrepreneurial and we believe it is likely to use its newfound size to become even bigger. There is always some risk with an acquisition that the integration process will be slower or more difficult than expected. However, we believe there is little execution risk as Comcast's management team is highly experienced. W-_� Financials Comcast generated $212 million in free cash flow in Q1, divided roughly 50 %- 50% between cable and QVC. Comcast is the only cable operator currently generating positive free cash flow, roughly two years ahead of its peers. This is even more impressive in light of capex being somewhat accelerated and relatively more front -end loaded this year. During the quarter, Comcast upgraded a record 3,800 miles of plant, or nearly half of its 8,000 target for the year. At the end of the quarter, 83.5% of the plant was fully upgraded to at least 750 MHz. The company expects to end 2002 with 87% of its homes upgraded to at least 750 MHz. We project cable capex in 2002 will be $1.3 billion with $225 million for upgrades, $625 million for new service deployment and $450 million for recurring capital projects. We forecast $1.6 billion total capital spending in 2002. We project Comcast will generate $636 million in positive free cash flow in CY02. Comcast has the best balance sheet in the industry, with estimated net debt to EBITDA of 3.1x by YE02. Comcast has a $4.5 billion credit facility, of which only $1.25 billion is currently drawn. Comcast is also free cash flow positive. We estimate Comcast is well over fully funded. Management announced it has secured $12.8 billion in bank financing, which in addition to its existing facility, will more than handle the closing of the AT &T Broadband deal and the assumption of debt. Comcast anticipates that after the closing of the deal it will have over $3 billion in credit facilities left to fund its operations. " Also, note that the following footnote was included in the above - mentioned Merrill Lynch report: "Merrill Lynch is currently acting as financial advisor and has rendered a fairness opinion to Comcast Corporation in connection with its proposed acquisition of AT &T Broadband, which announced on December 19, 2001. Comcast Corporation has agreed to pay a fee to Merrill Lynch for its financial advisory services, a significant portion of which is contingent upon the consummation of the proposed transaction. " Additionally, the following is taken from an USBancorp Report dated May 2, 2002 (copy attached): "INVESTMENT RECOMMENDATION: Comcast reported solid results across its entire business as the cable business model continues to prove out and Comcast executes effectively. We believe Comcast's results, in conjunction with those from its peers, demonstrate the cable business model is alive and prospering. Digital video continues to slow but remains a consistent grower and should be positively impacted by VOD's commercialization during the second half of 2002. We remain very bullish on Comcast's business long -term and believe management has demonstrated its propensity to effectively manage a large subscriber base and diverse business. 39 While the AT &T transaction remains an overhang on CMCSK and the group, we believe Comcast's valuation is compelling given the Company's future business prospects and its ability to generate double -digit revenue and OCF growth with limited leverage. We like shares of Comcast at current levels as Comcast's core cable business is strong and momentum growing. We believe investors should take advantage of the overhang created by the AT &T Broadband ( #) acquisition and the contraction in cable multiples YTD. With the stock currently trading at EV =10x CY /02 Cable OCF, a 10% discount to the group, an attractive valuation given Comcast's highly clustered markets, upgraded systems and solid management team. While the near term could be choppy, long term we believe shareholders will be rewarded with or without AT &T Broadband, albeit we believe the deal will be consummated. We remain convinced that Comcast is very well positioned to be the primer residential broadband provider in the markets it serves. We reiterate our Outperform rating and $36 price target (EV =12.5x CY /02 Cable OCF). " On April 29, 2002, the Comments of the Communications Workers of America (the "CWA ") were filed with the FCC. A copy of the filing can be found at the FCC web site. The portion of the filing having to do with the financial qualifications of AT &T Comcast Corporation is provided below: "AT &T Comcast Financial Structure Raises Questions as to Whether AT &T Comcast Will Be Able to Deliver Accelerated Deployment of Broadband Services The financial structure of the AT &T Comcast transaction also raises questions as to whether the merged AT &T Comcast will be able to deliver on its claims of post- merger accelerated deployment of broadband services. Contrary to the claims of the Applicants, the merged AT &T Comcast will be more highly leveraged than pre- merger AT &T Corp. and pre- merger Comcast. This may limit investment. Further, AT &T and Comcast project $4 billion in merger - related economic benefits from lower operating margins, operating synergies, and reductions in capital expenditures. Will the merged AT &T Comcast be able to meet these financial targets and accelerate deployment of new broadband services without raising rates or cutting back on customer service and employment? The apparent inconsistencies between these claims makes it all the more important for this Commission to require that AT &T and Comcast provide verifiable and demonstrable evidence of their post- merger investment and deployment plans. " "A. The Merged AT &T Comcast Will Be More Highly Leveraged Than Pre - Merger AT &T Or Comcast The Applicants claim that the merger will enhance significantly AT &T Broadband's "access to capital required to underwrite an aggressive plan for deploying new broadband services." 34 The Applicants state that the merged entity will have a first year combined debt; to operating cash flow EN ratio of less than 5 to 1, representing a substantial improvement over AT &T Broadband's ratio of debt to 2001 operating cash flow of over 8 to 1. 35 The Applicants' debt analysis is incomplete and therefore flawed. Pre - merger, AT &T Broadband operates as one business unit within the larger AT &T Corp. As such, AT &T Broadband has been able to finance a portion of its capital expenditures from internal cash generated by other lines of business of AT &T Corp. 36 After this instant transaction is completed, this internal source of cash will no longer be available. As of Dec. 31, 2001, the debt coverage ratio of AT &T Group (which includes AT &T Broadband, AT &T Consumer, and AT &T Business) was 6.8 to 1. At the same date, Comcast's debt coverage ratio was 3.4 to 1. After the merger, the debt coverage ratio will be 2.6 to 1. (The debt coverage ratio is calculated as Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) over debt service.) In other words, the merged AT &T Comcast will be more highly leveraged, with less internal capacity to generate earnings to cover its debt. 37 As a result, as the Applicants themselves acknowledge in their merger proxy, the merged AT &T Comcast will have less internal capacity to generate cash. Given the merged AT &T Comcast's level of debt, the cost of capital is likely to increase. The Applicants themselves acknowledge in the merger proxy that this may cause delay in deployment plans. AT &T Comcast may not be able to obtain or obtain on favorable terms the capital necessary to fund the substantial capital expenditures —that are required by its strategy and business plan. A failure to obtain necessary capital or to obtain necessary capital on favorable terms could have a material adverse effect on AT &T Comcast and result in the delay, change or abandonment of AT &T Comcast's development or expansion plans (emphasis added) 38 The debt rating company Moody's recognizes that the merged AT &T Comcast will have higher capital costs. It downgraded AT &T Broadband's debt rating on Dec. 20, 2001, the day that AT &T and Comcast provided investors with a financial overview of the transaction. 39 34 Public Interest Statement, 30. 35 Id., 30. 36 In 2001, AT &T Broadband generated $2.196 billion in cash (EBITDA) and spent $3.621 billion on capital expenditures. That same year, AT &T consumer generated $4.929 billion in cash (EBITDA) and spent only $37 million on capital expenditures; AT &T business generated $8.447 billion in cash and spent $4.847 billion on capital expenditure. AT &T Earnings Commentary, Quarterly Update - First Quarter 2002, April 24, 2002. 37 AT &T Corp. 2001 EBITDA of $15.7 billion divided by $2.3 billion debt service = 6.8 debt coverage ratio. Comcast 2001 EBITDA of $2.7 billion divided by $0.8 billion debt service = 3.4 debt coverage ratio. AT &T Comcast will have net debt of $28.8 billion (AT &T is transferring $17.0 billion in debt plus Comcast's $2.7 billion debt). AT &T Comcast pro -forma EBITDA of $4.9 billion divided by $1.9 billion debt service = 2.6 coverage ratio. CWA calculations based on AT &T Earnings Commentary, Quarterly Update (E First Quarter 2002, April 24, 2002 and "Comcast Reports Record Revenue of $9.7 and Operating Cash Flow of $2.7 Billion For 2001, "Feb. 6, 2002. 38 AT &T and Comcast Preliminary Merger Proxy Statement, Risk Factors, Feb. 11, 2002, 1 -30. 39 Monody's Lowers Long Term Ratings of AT &T Broadband and Subsidiaries (Senior Unsecured to Baal from Baal), Dec. 20, 2001. AT &T Comcast Investor Presentation, Dec. 20, 2001. " 41 B. Promised Economic Benefits May Lead to Pricing Pressures or Cutbacks in Customer Service AT &T and Comcast have told this Commission and investors that they anticipate the merger should result in synergies, efficiencies, reduced capital expenditures, and operating margin improvements totaling $4 billion a year. The $4 billion is the sum of three different calculations. First, AT &T and Comcast estimate approximately $1.25 to $1.95 billion a year in increased Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) synergies and efficiencies five years after the merger. 40 Second, AT &T and Comcast expect to reduce capital expenditures by an additional $200 -300 million annually. 41 Third, the merging parties project an additional $1.6 billion in EBITDA margin improvement (based on third quarter 2001 data), over and above the aforementioned synergies and capital expenditure reductions. 42 AT &T and Comcast state that they will be able to boost AT &T Broadband's much lower operating margin to that of Comcast's. CWA has re- calculated the projected margin improvement at $1.7 billion, using end of year 2001 data. This calculation is based on boosting AT &T Broadband's 2001 operating margin of 22.4 percent to Comcast's 2001 operating margin of 39.9 percent. 43 AT &T and Comcast have not explained in public documents how they will achieve the projected "margin improvements ". According to AT &T and Comcast, these margin improvements are "in addition to synergies" 44 which have already been identified as reduced programming costs, operating efficiencies, national advertising, new products, rollout of Comcast cable telephony, and reduced capital expenditures. Where then will these improved margins come from? The Commission must verify the source of these "margin improvements" to ensure that they will not come from actions that would not serve the public interest, such as rate hikes, service cuts, or delays in deployment of broadband networks and services. 40 AT &T and Comcast calculate these $1.25 to $1.95 billion in synergy savings as follows: Programming cost savings $250 -450 million; Operating efficiencies $200 -300 million; National advertising platform $100 -200 million; New products $100 -200 million; Comcast telephony $600 -800 million. Public Interest Statement, 31 -35 and Declaration of Robert Pick ( "Pick Declaration'), 3 -13. See also AT &T Comcast Investor Presentation Dec. 20, 2001 (available at http://asp01 sea. activate.neticcbn/t/011220 /index. htm). 41 "These benefits are not included in the estimated $1.25 to $1.95 in EBITDA. " Public Interest Statement, 32 -22, M.55. 42 AT &T Comcast Investor Presentation, 29 -30. This information inexplicably is not included in the Public Interest Statement or Pick Declaration provided to this Commission. 42 43 Based on 2001 figures, AT &T Broadband had a 22.4 percent operating margin ($2.196 EBITDA divided by $9.799 billion revenue). Comcast had a 39.9% operating margin ($2.112 billion EBITDA divided by $5.289 revenue). The difference 17.5 percent (39.9 minus 22.4) times $9.799 billion AT &T 2001 revenue = $1.7 billion. CWA calculations based on AT &T Earnings Commentary, Quarterly Update CE First Quarter 2002, April 24, 2002 and "Comcast Reports Record Revenue of $9.7 and Operating Cash Flow of $2.7 Billion For 2001," Feb. 6, 2002. 44 Id., 29. " In its comments, the CWA offered the following conclusion: 11 Conclusion The Applicants have not yet met the burden of proof to demonstrate that the merger is in the public interest. The past record of AT &T Broadband of non - compliance with commitments and agreements and the financial structure of the transaction raise troubling questions as to whether the Applicants will be able to deliver on their promise to provide new broadband services to more Americans faster. Therefore, the Commission should require AT &T and Comcast to provide detailed infrastructure investment and deployment plans for review to verify the Applicants claims. Second, as a condition of merger, the Commission should require AT &T Comcast to provide to the Commission for public reporting quarterly service quality data by local franchise area. " Regarding the Comments of the CWA, which were filed with the FCC on April 29, 2002, CGA notes that the CWA does not take the position that AT &T Comcast Corporation will lack the legal, the financial and /or the technical qualifications to control the cable television franchises that its related entities will hold. The FCC may very well place conditions on the merger, as it has with other mergers in the past. These conditions may address the concerns outlined in the "Conclusion" section of the Comments of the CWA, i.e., that the FCC should (1) should require AT &T and Comcast to provide detailed infrastructure investment and deployment plans for review to verify the Applicants claims, and (2), as a condition of merger, the Commission should require AT &T Comcast to provide to the Commission for public reporting quarterly service quality data by local franchise area. Historically, AT &T Broadband (TCI, Media One and the other cable companies that AT &T acquired) and Comcast Corporation have achieved cash flow margins, debt levels, and other indicators such as debt coverage ratio and interest coverage ratio, which are within industry standards. The publicly traded stocks of AT &T Corp. and Comcast Corporation have been relatively stable compared to the industry and the overall stock market. !� Although CGA has concerns regarding AT &T Comcast Corporation's ability to overcome the risks inherent in this transaction, produce operating results as anticipated by AT &T Comcast Corporation and others and to meet its franchise obligations, based upon the review as outlined in this Report, it is CGA's opinion that AT &T Comcast Corporation has the financial qualifications to control the operation of the cable television system, which is the subject of the Application. This statement should not be construed in any way to constitute an opinion as to the future financial success of AT &T Comcast Corporation or any related entities. 44 VIII. TECHNICAL QUALIFICATIONS OF AT &T COMCAST CORPORATION PREPARED BY CHARLES GRAMLICH & ASSOCIATES Technical qualifications include consideration of the experience of an applicant with similar projects, the experience and strength of its management, including its experience in cable television and telecommunications, financial management, and experience in efficiency of staffing, adequacy of system designs to meet the Commission's needs, and who its partners /vendors are. Section IV of the FCC Form 394 requests a narrative account of the transferee's/Transferee's technical qualifications, experience and expertise regarding cable television systems, including, but not limited to, summary information about appropriate management personnel that will be involved in the system's management and operations. Also a representative sample of cable systems currently or formerly owned or operated by the Transferee is requested. In response to Section IV of FCC Form 394 the following statement was provided as Exhibit 10: Transferee, AT &T Comcast Corporation, will be the world's leading provider of broadband video, voice and data services and will have a presence in 41 states with approximately 22 million subscribers. AT &T Comcast Corporation each bring over 30 years of experience and expertise in the cable industry to the combined company. AT &T Comcast will become the indirect parent company of AT &T and Comcast subsidiaries operating cable systems throughout the United States, including the franchisee that owns and operates your cable system. You have previously considered and approved the technical qualifications, experience and expertise of your current franchisee, and the combined company will further strengthen the current franchisee's technical qualifications, experience and expertise. Mr. Brian Roberts, President of Comcast, will be President and Chief Executive Officer of the new company with all day -to -day authority over the operation of the business. Mr. Roberts, as CEO, will also be responsible for all matters relating to other officers and employees of the new company, and will consult with the Chairman with respect to senior officers. Mr. Roberts and the management team he selects will be responsible for the full operational control of the merged company. Mr. Roberts plans to continue Comcast's demonstrated track record in system upgrades, deployment of new services and customer care. 45 Preliminary Joint Proxy Statement/Prospectus filed with the SEC on February 11, 2002, the Annual Report on Form 10 -K for the year ended December 31, 2000 and Form 10 -Q for the quarterly period ended September 30, 2001 for each of AT &T Corp. and Comcast Corporation are included in the CD ROM attached to Exhibit 2. These documents contain extensive descriptions of the technical qualifications, experience and expertise of the two companies. Additional information regarding the Transferee's technical qualifications was requested. A copy of the response is attached to this Report. CGA found more information regarding the proposed Transferee's technical qualifications on the AT &T Corp. and Comcast Corporation web sites and from various other sources. Some of that information is attached to this Report. Sometimes CGA conducts a detailed written survey that contains questions about the performance of a Transferee in communities similar to the one considering a franchise transfer /assignment. A survey has not been conducted by CGA in connection with this matter. Based upon the review as outlined in this Report, it is CGA's opinion that AT &T Comcast Corporation has the technical qualifications to control the operation of the cable television system, which is the subject of the Application. ,, IX. RECOMMENDATIONS A. Transferee Qualifications 1. Legal Qualifications. We have no reason, based on our review, to conclude that Transferee is not legally qualified to become the controlling corporate entity of the Franchisee and responsible for the performance of the Franchise held by Franchisee. 2. Technical Qualifications. Charles Gramlich's review of Transferee provided information regarding the technical expertise of Transferee. The review consisted of an analysis of numerous documents, articles, and news accounts relating to both AT &T and Comcast. It also considered the qualifications and experience of the current leadership of Comcast. Comcast leadership, as a result of the Transaction, will be primarily responsible for the management and operation of the Transferee, the parent of the Franchisee. Based upon the review of information that has been provided, it is Charles Gramlich's conclusion that the change in control will not adversely affect the operation of the cable system in the NWSCCC. 3. Financial Qualifications. Charles Gramlich reviewed Form 394 and responses to the requests for additional information, as well as numerous materials identified in this Report in his analysis of the financial qualifications of Transferee. Based on his review of all the information made available to him, Charles Gramlich concluded that even though there are risks and concerns about the potential change in control, the Transferee does have the financial qualifications to assume control of the Franchisee and the operation of the cable system serving the NWSCCC. B. Impact on Services and Rates Minnesota law includes the requirement that the NWSCCC evaluate and determine whether or not there may be an adverse impact to subscribers as a result of a transfer. To assist the NWSCCC with this determination, it conducted a public hearing, as well as directed us to develop this Report on its behalf. On behalf of the NWSCCC, we have participated in a considerable amount of evaluation concerning the impact of this transfer. Despite our thorough review, we cannot state with any degree of certainty that there will not be any adverse impact to subscribers. There is a great amount of national interest concerning the 47 Transaction and, in particular, questions have been raised about the amount of debt that the merged entity must absorb and whether or not the changes will indeed improve cable service operations and the financial viability of not only the Franchisee, but its parent and controlling entity. AT &T Broadband has experienced difficulties since it assumed responsibility and ownership for numerous cable systems throughout the country. It has not been able to complete upgrades, and in many instances, there have been complaints concerning its customer service. By contrast, Comcast has been a stable cable business since its inception and has upgraded and improved cable systems and developed a management organization that is well regarded. Section IV of this report provides a more thorough discussion regarding Comcast management. The information we have reviewed in Form 394, the RFI, and in oral discussions with company representatives includes representations by AT &T and Comcast that there will not be an adverse impact to subscribers. It is claimed that the merger will provide a greater amount of leverage to reduce programming costs, which are the single largest costs for cable operators, improve efficiencies in operations, and create other benefits that would suggest that the Transfer will in fact benefit subscribers. C. Recommendations The NWSCCC may adopt a Resolution, which should include, at least, the following provisions: 1. The provision for the Franchise between the NWSCCC and MediaOne, when Transferee assumes control and based upon the written acceptance by Transferee and MediaOne, shall remain in full force and affect. 2. The NWSCCC will provide a written notice to MediaOne and Transferee, after adoption of the Resolution, including a request for written acknowledgment and acceptance by the Transferee and Franchisee. Further, the approval should be conditioned upon the representations to the NWSCCC by the Franchisee and Transferee, and as described in the 394 filing and the written responses to the requests for additional information, that the Transfer will not have an adverse impact on the operation of local cable services within the NWSCCC, including any adverse impact on rates or services. 3. The approval of the transfer must ensure that Transferee will be responsible for an ensuring that Franchisee will have the capability and the financial and technical support of the Transferee to perform all obligations in the Franchise. 4. The Resolution approving the transfer should include a provision that the transfer approval is conditioned upon Transferee receiving all required lE federal and state required approval, and the closing of the Transaction between AT &T Corp. and Comcast is concluded without conditions or requirements contrary to what has been included by way of information made available to support the approval of a transfer and contained within the 394 filing and other information furnished to the NWSCCC. 5. The Resolution should clearly provide that the approval of the change in ownership applies to the change resulting in the Transferee and that any subsequent changes in ownership or control of ownership of Transferee, including any swaps made by the Transferee or another provider, will require approval by NWSCCC. m EXHIBITS 1. The official files in the Commission office contain the complete 394 filing. Because of the size of this filing, it is not duplicated herein. The filing received by the Commission is available for inspection in the Commission offices. 2. Response from AT &T Broadband to Request for Additional Information, dated April 8, 2002 and Amended Response from AT &T. 3. Resolution approving transfer of control. 4. Acknowledgment and Acceptance Agreement. 50 Exhibit 1 FCC FORM 394 The filing received by the Commission is available for inspection in the Commission offices. 51 Exhibit 2 RESPONSE TO REQUEST FOR ADDITIONAL INFORMATION 52 Exhibit 3 RESOLUTION 53 RESOLUTION NO. A RESOLUTION OF THE NORTHWEST SUBURBS CABLE COMMUNICATIONS COMMISSION APPROVING THE CHANGE: OF CONTROL OF THE CABLE COMMUNICATIONS FRANCHISE WHEREAS, MediaOne of the Upper Midwest, Inc. ( "Franchisee "), a wholly -owned subsidiary of AT &T Corp., is duly authorized to operate and maintain a cable communications system in Northwest Suburbs Cable Communications Commission ( "NWSCCC "), by Franchisee ( "the System ") pursuant to a franchise (the "Franchise ") granted by the NWSCCC; and WHEREAS, pursuant to the Separation and Distribution Agreement between AT &T Corp. ( "AT &T ") and AT &T Broadband Corp. and the Agreement and Plan of Merger between AT &T and Comcast Corporation ( "Comcast"), a newly formed entity, AT &T Comcast Corporation ('Transferee "), will assume ultimate parent company ownership and control of the Franchisee (the 'Transaction "); and WHEREAS, Franchisee will continue to hold the Franchise after consummation of the Transaction; and WHEREAS, FCC Form 394 and supplemental information in response to NWSCCC inquiry with respect to the Transaction has been filed with the NWSCCC; and WHEREAS, the Franchisee and AT &T and Transferee have requested consent by the NWSCCC to the Transaction; and WHEREAS, the Franchisee has provided supplemental information in support of the Application, including representations that in the terms of the Transaction do not require an increase in cable television subscriber rates in the NWSCCC Member Cities or a reduction in the quality of customer service or cable service in the NWSCCC Member Cities; and WHEREAS, after review of FCC Form 394, and evaluation of a report prepared by consultants for the NWSCCC, and the review by the Executive Committee of the NWSCCC, the NWSCCC consents to the Transaction subject to the written Acknowledgment and Acceptance and their filing an executed copy of the Acknowledgement and Acceptance with the NWSCCC within 30 days of the closing of the Transaction between AT &T and Comcast. The Acknowledgment and Acceptance is part of this Resolution. 54 NOW, THEREFORE, BE IT RESOLVED AS FOLLOWS: SECTION 1. The NWSCCC hereby consents to and approves the Transaction, subject to execution of the attached written Acknowledgment and Acceptance by Transferee and Franchisee and filing the same with the NWSCCC within thirty (30) days of closing of the Transaction between AT &T and Comcast. SECTION 2. This Resolution is conditioned on Transferee obtaining all required federal and state approvals, licenses, and permits required with respect to the Transaction. SECTION 3. The approval granted by this Resolution is limited to the change of control resulting from the Transaction. Any subsequent change of control or transfer to another entity shall be subject to the transfer provisions in the Franchise and applicable state and federal law. SECTION 4. This Resolution shall be deemed effective in accordance with applicable law, and upon receipt by NWSCCC from Franchisee within 30 days after the closing of the Transaction an executed copy of the Acknowledgment and Acceptance, attached and which is made part of this Resolution by reference. SECTION 5. The NWSCCC Executive Director shall mail a certified copy of this Resolution and the attached draft Acknowledgment and Acceptance to Franchisee and Transferee the next day after passage of this Resolution. PASSED, ADOPTED, AND APPROVED this _ day of 2002. ATTEST: Executive Director APPROVED AS TO FORM: NWSCCC Attorney 55 Exhibit 4 ACKNOWLEDGMENT AND ACCEPTANCE AGREEMENT 50 [DATE] David G. Seykora John F. Gibbs, Esq. Vice President, Law and Public Policy Robins, Kaplan, Miller & Ciresi AT &T Broadband 2800 LaSalle Plaza 10 River Park Plaza 800 LaSalle Avenue St. Paul, MN 55107 Minneapolis, MN 55402 -2015 RE: Notice of Resolution Approving Transfer of Control (Northwest Suburbs Cable Communications Commission) Dear David and John: Attached to this letter is a copy of the Resolution adopted by the Commission on the 6`h day of June, 2002. Please note the requirement that the Franchisee and Transferee (AT &T Comcast Corporation) provide written acknowledgement of the terms and conditions of the Resolution and furnish written acknowledgement by signing the attached Acknowledgment and Acceptance and filing with Greg Moore, the Commission Executive Director, at 6900 Winnetka Avenue North, Brooklyn Park, Minnesota 55428. The Acknowledgment and Acceptance must be filed with the Commission Executive Director, as required by the Resolution, to ensure that the Resolution adopted by the Commission shall be effective. If you have any questions regarding the Resolution or the requirements of your Acknowledgement and Acceptance, kindly contact Greg Moore, Executive Director, at the above address. cc: Commission Adrian Herbst Sincerely, Gregory Moore, Executive Director 57 ACKNOWLEDGMENT AND ACCEPTANCE: In consideration of the Resolution dated June 6, 2002, by the NWSCCC, MediaOne of the Upper Midwest, Inc. ( "Franchisee ") and AT &T Comcast Corporation ( "Transferee ") agree as follows: A. Transferee and Franchisee acknowledge the Northwest Suburbs Cable Communications Commission ( "NWSCCC" or "Commission" herein), Resolution, dated June 6, 2002, ( "Resolution ") approving the change of control of ownership of the Franchisee resulting from the transaction set forth in the Agreement and Plan of Merger between AT &T Corp., Franchisee's ultimate corporate parent, and Comcast Corporation ( "Comcast ") and the Separation and Distribution Agreement between AT &T and AT &T Broadband Corp. (the "Transaction "). B. Transferee hereby acknowledges the terms and conditions of the Franchise and Resolution and agrees that Franchisee will continue to be bound by all lawful and applicable provisions of the Franchise between NWSCCC and the Franchisee (the "Franchise ") upon the closing of the Transaction. C. Transferee assures that, from and after the closing of the Transaction, it will not take any action inconsistent with the promises contained in this Acknowledgment and Acceptance Agreement, which prevents the Franchisee's performance of the terms and conditions of the Franchise and Resolution. D. Transferee and Franchisee acknowledge that Franchisee has provided supplemental information in support of the Application to NWSCCC, including representations that the terms of the Transaction do not require an increase in cable television subscriber rates in the NWSCCC Member Cities or a reduction in the quality of customer service or cable service in the NWSCCC Member Cities. E. Franchisee agrees that, as of the closing of the Transaction, it will continue to bound by the Franchise and the Resolution and will timely and fully perform all of its duties and obligations thereunder, including any and all requirements thereunder with respect to customer service. F. Franchisee agrees that, as of the closing of the Transaction, it will be able to meet its obligations under the Franchise. G. Transferee and Franchisee acknowledge that the Commission does not waive its right to receive compliance by Franchisee with any provisions of the Franchise relating to past or future performance of any obligations in the Franchise. l H. Transferee and Franchisee agree that, as of the closing of the Transaction, the Franchise will be subject to lawful regulatory authority of the Commission as set forth in the Franchise. Franchisee represents and warrants as follows: 1. On the date of the closing of the Transaction, Franchisee, under the control of Transferee, will have the legal, technical, and financial ability to operate and maintain the cable system serving the Commission pursuant to the terms of the Franchise. 2. On the date of the closing of the Transaction, Franchisee, under the control of Transferee, will be qualified to conduct business in Minnesota and has authority necessary to fully perform all of the duties and obligations of the Franchise. 3. Franchisee will take all actions necessary to authorize the execution and delivery of this Acceptance and to perform all obligations and duties under the Franchise. J. Franchisee agrees that all representations, warranties, and agreements contained herein and in the Franchise, shall be binding upon its lawful successors and assigns. K. Franchisee agrees to provide the following within 30 days after the closing of the change of control. 1. A copy of the written instrument evidencing the change of control of the Franchise; 2. Evidence of Franchisee's authority to conduct business in Minnesota. 3. An executed copy of this Acknowledgment and Acceptance. Dated: MEDIAONE OF THE UPPER MIDWEST, INC. Dated: AT &T COMCAST CORPORATION By: Its: 59 APPENDIX SELECTED ARTICLES AND INFORMATION The following selected articles and information are included in the Appendix, which is on file in the Commission offices: • Table of Contents and selected portions of the Amended Proxy Statement of AT &T Comcast Corporation filed with the Securities and Exchange Commission on April 30, 2002. The entire document in approximately 900 pages and can be viewed at www.cmcsk.com. Federal Communications Commission —AT&T— Comcast Merger Page. • Please see the Comcast web site at www.comcast.com, in particular, About Us and Family of Companies. • Please see the AT &T web site at www.att.com, in particular, about AT &T, AT &T Fact Sheet and Stock Chart. • Copy of press release dated December 19, 2001 that announces the agreement to combine AT &T Broadband and Comcast Corporation. • Copies of the AT &T Corp. News Release dated April 24, 2002 regarding first - quarter 2002 financial results. • Copies of the Comcast Corporation News Release dated May 1, 2002 regarding first - quarter 2002 financial results. • Copies of various news articles regarding the proposed transaction between AT &T and Comcast. • Copies of analyses and reports regarding Comcast by Merrill Lynch, USBancorp and MH Lafferty Associates, Inc. are available. 60 w, REPORT TO THE CITY OF HASTINGS, MINNESOTA REGARDING THE PROPOSED TRANSFER OF CONTROL OF AT&T CORPORATION To AT &T COMCAST CORPORATION MAY 16, 2002 Prepared by: Brian T. Grogan, Esq. Michael R. Nixt, Esq. Yuri B. Berndt, Esq. Moss & Barnett A Professional Association 4800 Wells Fargo Center 90 South Seventh Street Minneapolis, MN 55402 -4129 _ (612) 347 -0340 (phone) (612) 339 -6686 (facsimile) �w. REPORT TO THE CITY OF HASTINGS, MINNESOTA REGARDING THE PROPOSED TRANSFER OF CONTROL OF AT &T CORPORATION To AT &T COMCAST CORPORATION MAY 16, 2002 Table of Contents Section 1. Executive Summary ..................................................... ..............................1 Section2. Introduction ................................................................... ..............................4 Section3. Applicable Law ............................................................. ..............................5 Section 4. Description of the Transaction ..................................... .............................10 Section 5. Legal Qualifications ..................................................... .............................22 Section 6. Technical Qualifications ............................................... .............................34 Section 7. Financial Qualifications ................................................ .............................35 Section 8. Interviews With City Officials ....................................... .............................48 Section 8. Additional Franchise Issues ....................................... ...............................59 Section9. Recommendations ...................................................... .............................60 Exhibit A Transfer Questionnaire ............................................ ............................... A -1 Exhibit B Response to Transfer Questionnaire ....................... ............................... B -1 Exhibit C Resolution Approving Transfer ................................ ............................... C -1 503725 11 i REPORT TO THE CITY OF HASTINGS, MINNESOTA REGARDING THE PROPOSED TRANSFER OF CONTROL OF AT &T CORPORATION To AT &T COMCAST CORPORATION MAY 16, 2002 SECTION 1. EXECUTIVE SUMMARY This report has been provided by Moss & Barnett, a Professional Association, for the express purpose of evaluating a request from MediaOne of the Upper Midwest, Inc., d /b /a AT &T Broadband ( "Grantee "), the current holder of the City of Hastings, Minnesota ( "City ") cable television franchise ( "Franchise ") and an indirect subsidiary of AT &T Corp., ( "AT &T ") to approve a proposed transfer of control of Grantee to AT &T Comcast Corporation ( "AT &T Comcast "). Pursuant to the Franchise, this proposed transfer of control to AT &T Comcast is prohibited without the written consent of the City. Both Federal and State law govern, to varying degrees, the transfer of the Franchise. Federal law provides the City with a period of 120 days to examine the legal, technical and financial qualifications of the proposed transferee. Description of the Transaction. As described in further detail in Section 4 of this report, AT &T, Comcast Corporation, ("Comcast "), and related subsidiaries entered into an Agreement and Plan of Merger dated December 19, 2001, ( "Merger Agreement ") pursuant to which AT &T Comcast will become the new parent corporation of Comcast and AT &T's newly created cable television subsidiary. AT &T will contribute its cable television assets to a new subsidiary in a tax -free transaction prior to the Merger. AT &T Comcast will also enter into a Support Agreement with Sural LLC, aR entity controlled by Mr. Brian L. Roberts which holds approximately 86.7% of the voting power of Comcast, to provide various management services. AT &T Comcast has entered into an Exchange Agreement with Microsoft Corporation that will provide for a conversion of $5 billion of indebtedness to 115 million shares of AT &T Comcast common stock. AT &T Comcast will be the largest cable operator with $19 billion in annual revenues and in excess of 22 million subscribers. Legal Qualifications. As discussed in Section 5 of this report, the legal qualifications standard relates primarily to an analysis of whether entities within this transaction are authorized to proceed with the transactions contemplated by the Merger Agreement and are authorized to control the cable television franchises. 503725/7 1 ,V AT &T and Comcast, according the to Merger Agreement, have the corporate power to execute, deliver and perform the Merger transaction, which is a valid and binding agreement on its terms. All of the entities involved with the merger transaction are in good standing with their State of incorporation except for one subsidiary of AT &T, which is not in good standing in Delaware due to its failure to pay franchise taxes. Certain AT &T shareholders have expressed concerns regarding AT &T Comcast's atypical governance rights. Some of these atypical rights include Board of Director's terms that will not expire until 2005; no annual shareholder meetings until 2005; the shareholders will not have the right to call special meetings or acquire more than 10% of the voting power without the approval of the AT &T Comcast board; removal of the AT &T Comcast Chairman and CEO prior to April 2010 only with the approval of 75% of the AT &T Comcast board; and the creation of a dual class of stock whereby Sural LLC will hold a non - dilutable 33.3% combined voting power of AT &T Comcast stock despite holding less than 1.5% of the economic interest in AT &T Comcast. In addition, Sural LLC will have a substantial amount of control of AT &T Comcast due to the fact that it will hold a 33.3% nondilutable voting interest in AT &T Comcast. The effect of the atypical governance arrangement on the overall business operations of AT &T Comcast is uncertain, but it is appropriate for the City to consider the adverse impact of the governance structure affecting AT &T Comcast on its ability to fulfill its respective legal obligations under the franchise. Technical Qualifications. As discussed in Section 6 of this report, AT &T Comcast will provide cable services in 41 states with approximately 22 million subscribers passing 38 million homes passed. AT &T Comcast will become the indirect parent company of AT &T Corp. which is the ultimate parent of the Grantee. The City previously considered and approved the technical qualifications, experience and expertise of the Grantee at the time the Franchise was renewed and the transfer of control does not present any immediate impact on the Grantee's ability to continue to operate and fulfill its Franchise obligations. However, as with any transfer of control at the highest level, it is possible that the management philosophy and overall management approach of the company may be altered with the creation of AT &T Comcast. It is impossible to predict, given the information presently before the City, the ultimate impact of this transaction. . . The concerns raised by the transfer of control with respect to technical qualifications are also mitigated by the fact that the City's cable system has already been upgraded and the recently renewed Franchise contains adequate protections to ensure compliance with applicable standards and customer service obligations. Based on the foregoing there does not appear to be a basis on which to deny the proposed transfer of control due to a lack of technical qualifications. Financial Qualifications. As discussed in Section 7 of this report, we reviewed the historical financial information of AT &T and Comcast as provided in AT &T Comcast's securities registration statement. AT &T Comcast will require significant cash 503725/1 2 flow to continue to operate in the competitive cable television environment, service its current outstanding debt and continue to provide the necessary capital expenditures. AT &T Comcast is projected to have in excess of 830 billion of debt at the date of the merger and its management is in the process of securing approximately 812.85 billion of financing to replace some of its current debt and to provide cash for operations and capital expenditures. Comcast currently has 86.5 billion of cash and lines of credit available to fund operations. Based upon proforma 2001 data, AT &T Comcast's EBITDA or Cash Flow Percentage would be below industry'averages. However, AT &T Comcast hopes to improve the cash flow percentage by increasing AT &T's gross margins that are currently at 23% to Comcast's 42% by incorporating 1) Comcast's management and the merger synergies; and 2) cost savings and efficiencies in i) programming, ii) general operating, iii) advertising, iv) new products, and v) telephony areas. AT &T Comcast believes these steps will result in an estimated 81.25 to 81.95 billion of annual cash savings and should improve AT &T Comcast's cash flow percentage. Recommendation. Based specifically on the information and evaluations contained within this report, we believe AT &T Comcast possesses the necessary legal and technical qualifications based on the standards of review identified in applicable local, state, and federal laws and subject to the conditions referenced in Section 7 of this report with respect to AT &T Comcast's financial qualifications. We recommend that the City review this entire report, listen to any additional public comment or information, and assuming the City determines AT &T Comcast to be financially qualified, undertake all necessary action to pass and adopt a Resolution with the recommendation that the City will follow -up to ensure that AT &T Comcast submits the required documents, including confirming AT &T Broadband's good standing status prior to the approval being effective. 507725/1 3 SECTION 2. INTRODUCTION The City of Hastings, Minnesota ( "City ") has before it a request from MediaOne of the Upper Midwest, Inc., d /b /a AT &T Broadband ( "AT &T" or "Grantee "), the current Grantee of the cable television franchise serving the City, to approve a proposed transfer of control of AT &T to AT &T Comcast Corporation ( "AT &T Comcast"). Pursuant to the cable television franchise ( "Franchise ") held in the City, this proposed transfer of control of AT &T to AT &T Comcast is prohibited without the written consent of the City. In light of the request by AT &T and AT &T Comcast and the procedural requirements outlined in the Franchise, Moss & Barnett, A Professional Association, has been retained by the City and was asked to provide this report. In preparing this report, Moss & Barnett has relied upon information submitted by AT &T, including: 1. FCC Form 394 -- Application for Franchise Authority Consent to Assignment or Transfer of Control of Cable Television Franchise received by the City on or about February 25, 2002. 2. Transfer Questionnaire /Application dated March 22, 2002 and Response of AT &T dated April 1, 2002. 3. Agreement and Plan of Merger dated as of December 19, 2001 by and among AT &T Corp._, AT &T Broadband Corp., Comcast Corporation, AT &T Broadband Acquisition Corp., and Comcast Acquisition Corp. and a Separation and Distribution Agreement dated December 19, 2001 by and between AT &T Corp. and AT &T Broadband Corp. 4. Selected financial information as described in the "Financial Qualifications" section of this report. The report has been prepared with Brian T. Grogan, Esq. serving as project manager, Terri L. Hammer assisting with due diligence and document preparation, Michael R. Nixt, Esq. performing the legal review of AT &T Comcast Corporation, l iri B. Berndt, Esq. and a former CPA, performing the financial review of AT &T Comcast Corporation and Jonathan L. Kramer of Kramer.Firm. Incorporated of Los Angeles, California performing the technical review of AT &T Comcast. 509725/1 4 SECTION 3. APPLICABLE LAW The following provisions of federal law, Minnesota law, and the Franchise govern the action of the City in acting on the request of AT &T for approval of the transfer of control of the Franchise to AT &T Comcast. FEDERAL LAW The Cable Communications Policy Act of 1984, as amended by the Cable Consumer Protection and Competition Act of 1992 and the Telecommunications Act of 1996 ( "Cable Act "), provides at Section 617 (47 U.S.C. § 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 City 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. The Cable Act also provides at Section 613(d) (47 U.S.C. § 533(d)) as follows: (d) Regulation of ownership by States or franchising authorities Any State or franchising authority may not prohibit the ownership or control of a cable system by any person because of such person's ownership or control of any other media of mass communications or other media interests. Nothing in this section shall be construed to prevent any State or franchising authority from prohibiting the ownership or control of a cable system in a jurisdiction by any person (1) because of such person's ownership or control of any other cable system in such jurisdiction, or (2) in circumstances in which the State or franchising authority determines that the acquisition of such a cable system may eliminate or reduce competition in the delivery of cable service in such jurisdiction. Further, the Federal Communications Commission ( "FCC ") has promulgated regulations governing the sale of cable systems. Section 76.502 of the FCC's regulations (47 C.F.R. § 76.502) provides: 47 C.F.R. § 76.502 Time Limits Applicable to Franchise Authority Consideration of Transfer Applications (a) A franchise authority shall have 120 days from the date of submission of a completed FCC Form 394, together with all exhibits, and any additional information required by the terms of the franchise agreement or 503725/1 t applicable state or local law to act upon an application to sell, assign, or otherwise transfer controlling ownership of a cable system. (b) A franchise authority that questions the accuracy of the information provided under paragraph (a) must notify the cable operator within 30 days of the filing of such information, or such information shall be deemed accepted, unless the cable operator has failed to provide any additional information reasonably requested by the franchise authority within 10 days of such request. (c) If the franchise authority fails to act upon such transfer request within 120 days, such request shall be deemed granted unless the franchise authority and the requesting party otherwise agree to an extension of time. STATE LAW Minnesota Statutes Section 238.083 Sale or Transfer of Franchise provides: Subd. 1. Fundamental corporate change defined. For purposes of this section, "fundamental corporate change" means the sale or transfer of a majority of a corporation's assets; merger, including a parent and its subsidiary corporation; consolidation or creation of a subsidiary corporation. Subd. 2. Written approval of franchising authority. A sale or transfer of a franchise, including a sale or transfer by means of a fundamental corporate change, requires the written approval of the franchising authority. The parties to the sale or transfer of a franchise shall make a written request to the franchising authority for its approval of the sale or transfer. The franchising authority shall reply, in writing, within 30 days of the request and shall indicate its approval of the request or its determination that a public hearing is necessary if it determines that a sale or transfer of a franchise may adversely affect the company's subscribers. The franchising authority shall conduct a public hearing on the request within 30 days of that determination. _ Subd. 3. Notice of hearing. Unless otherwise already provided for by local law, notice of the hearing must be given 14 days before the hearing by publishing notice of it once in a newspaper of general circulation in the area being served by the franchise. The notice must contain the date. time, and place of the hearing and must briefly state the substance of the action to be considered by the franchising authority. Subd. 4. Approval or denial of sale or transfer request. Within 30 days after the public hearing, the franchising authority shall approve or deny, in writing, the sale or transfer request. The approval must not be unreasonably withheld. 503725/1 Subd. 5. Sale or transfer of franchise without system. The parties to the sale or transfer of a franchise only, without the inclusion of a cable communications system in which at least substantial construction has commenced, shall establish that the sale or transfer of only the franchise will be in the public interest. Subd. 6. Sale or transfer of stock. Sale or transfer of stock in a corporation so as to create a new controlling interest in a cable communication system is subject to the requirements of this section. The term "controlling interest ", as used herein, is not limited to majority stock ownership, but includes actual working control in whatever manner exercised. LOCAL LAW The City's Franchise at Section 10, provides: 10.5 Sale or Transfer of Franchise. a. No sale or transfer of the Franchise, or sale, transfer, or fundamental corporate change of or in Grantee, including, but not limited to a fundamental corporate change in Grantee's parent corporation or any entity having a controlling interest in Grantee, the sale of a controlling interest in the Grantee's assets, a merger, including the merger of a subsidiary and parent entity, consolidation, or the creation of a subsidiary or affiliate entity, shall take place until a written request has been riled with City requesting approval and such approval has been granted or deemed granted; provided, however, that said approval shall not be required where Grantee grants a security interest in its Franchise and /or assets to secure an indebtedness. Upon notice to City, Grantee may undertake legal changes necessary to consolidate the corporate or partnership structures of its Minnesota/Wisconsin Systems provided there is no change in the controlling interests which could materially alter the financial responsibilities for the Grantee and such changes do not otherwise trigger review under Minn. Stat. § 238.083. b. Any sale, transfer, exchange or assignment of stock in Grantee, or Grantee's parent corporation or any other entity having a controlling interest in Grantee, so as to create a new controlling interest therein, shall be subject to the requirements of this Section 10, Paragraph 5. The term "controlling interest" as used herein is not limited to majority stock ownership, but includes actual working control in whatever manner exercised. C. The Grantee shall file, in addition to all documents, forms and information required to be filed by Applicable Law, the following: i. All contracts, agreements or other documents that constitute the proposed transaction and all exhibits, attachments, or other documents 50972511 referred to therein which are necessary in order to understand the terms thereof (Confidential, trade, business, pricing or marketing information, or information not otherwise publicly available may be redacted) pursuant to the Procedures for Handling Trade Secret and Privileged Data to be adopted by the City. ii. A list detailing all documents filed with any state or federal agency related to the transaction including, but not limited to, the MPUC, the FCC, the FTC, the FEC, the SEC or MNDOT. Upon request, Grantee shall provide City with a complete copy of any such document. d. City shall have such time as is permitted by federal law in which to review a transfer request. Approval of the request shall not be unreasonably withheld. e. As agreed to by Grantee in its previous Franchise with City, Grantee shall reimburse City for all the legal, administrative. and consulting costs and fees associated with City's review of any request to transfer. Nothing herein shall prevent Grantee from negotiating partial or complete payment of such costs and fees by the transferee. Grantee may not itemize any such reimbursement on Subscriber bills, but may recover such expenses in its Subscriber rates if permitted by Applicable Laws. f. In no event shall a sale, transfer, corporate change, or assignment of ownership or control pursuant to this Section 10, Paragraph 5(a) or (b), be approved without the transferee becoming a signatory to this Franchise and assuming all rights and obligations thereunder, and assuming all other rights and obligations of the transferor to the City including, but not limited to, any adequate guarantees or other security instruments provided by the transferor. g. In the event of any proposed sale, transfer, corporate change, or assignment pursuant to this Section 10, Paragraph 5(a) or (b), City shall have the right to purchase the System in accordance with all Applicable Laws. h. City shall be deemed to have waived its right to purchase the System pursuant to this Section in the following circumstances: i. If City does not indicate to Grantee in writing, within sixty (60) days of receipt of written notice of a proposed sale, transfer, corporate change, or assignment as contemplated in Section 10, Paragraph 5(g) above its intention to exercise its right of purchase; or ii. It approves the assignment or sale of the Franchise as provided within this section. i. No Franchise may be transferred if City determines Grantee is in noncompliance with the Franchise unless an acceptable compliance program has been approved by City. The approval of any transfer of ownership pursuant to this section shall not be deemed to waive any rights of City to subsequently 503725!1 8 enforce noncompliance issues relating to this Franchise even if such issues predated the approval, whether known or unknown to City. i. The City has determined that the Grantee, as presently structured, possesses the sufficient assets and resources so that no Corporate Guaranty is required at the time of acceptance of this Franchise. 507725/1 SECTION 4. DESCRIPTION OF THE TRANSACTION AT &T Corp., a New York corporation ( "AT &T "), AT &T Broadband Corp., a Delaware corporation and wholly owned subsidiary of AT &T ( "AT &T Broadband "), Comcast Corporation, a Pennsylvania corporation ( "Comcast "), AT &T Comcast Corporation, a Pennsylvania corporation ( "Transferee" or "AT &T Comcast "), AT &T Broadband Acquisition Corp., a Delaware corporation and wholly owned subsidiary of Transferee ( "AT &T Broadband Merger Sub ") and Comcast Acquisition Corp., a Pennsylvania corporation and wholly owned subsidiary of•Transferee ( "Comcast Merger Sub ") entered into an Agreement and Plan of Merger dated December 19, 2001 (the "(Merger Agreement "), pursuant to which Transferee will become the new parent company of AT &T Broadband.' The transaction contemplated by the Merger Agreement also is affected by the provisions of other material agreements, which include the Separation and Distribution Agreement by and between AT &T and AT &T Broadband dated December 19, 2001 (the 'Separation and Distribution Agreement "), a Support Agreement between, among other parties, Sural LLC and AT &T (the "Support Agreement ") and an Exchange Agreement between Microsoft Corporation and Comcast (the "Exchange Agreement "). The assets of AT &T Broadband are valued for purposes of the Mergers at $72 billion2, subject to certain adjustments as provided for in the Merger Agreement'. The Mergers will create the nation's largest cable operation with $19 billion in revenues for the period ended December 31, 20014 and in excess of 22 million subscribers and 38 ' Agreement and Plan of Merger between AT &T and Comcast and related entities dated December 19, 2001 as provided in Annex A of the AT &T Comcast Corp. Form S -4 filed with the Securities and Exchange Commission ( "SEC ") on February 11, 2002, as amenced by Form S -4 Amendment 1 filed with the SEC on April 10, 2002. Z AT &T Comcast Corporation Investor Presentation dated December 20, 2001, at p.8. ' The Merger Agreement provides for two events upon which "Potential Additional Payments" of shares of AT &T Comcast common stock would be required to be issued. These events require the issuance of additional shares of AT &T Comcast common stock to the AT &T Broadband shareholders if (i) the AT &T Comcast common stock issued as a result of the consummation of the AT &T Broadband Merger do not have a value in excess of 50% of the total value of all AT &T Comcast shares issued in consummation of the Mergers, then an additional number of shares of AT &T Comcast common stock will be issued.to- ensure that the AT &T Broadband shareholders receive shares representing more than 50.0% of the value of all shares issued by AT &T Comcast in consummacon of the Mergers (referred to in the Merger Agreement as the "Section 355(e) Top -up adjustment"); and (ii) additional shares of AT &T Comcast common stock may be issued to the AT &T Broadband shareholcers in the event that prior to the completion of the Mergers, Standard & Poors has not committed to include the class of AT &T Comcast common stock to be received by the AT &T Broadband shareholders upon consummation of the AT &T Broadband Merger in the Standard & Poors 500 Index immediately after the consummation of the Mergers (referred to in the Merger Agreement as the K/A Security or K/C Security based on whether the Mergers are consummated under the Preferred or Alternate Methods: provided, however, the price differential adjustment described in this section (ii) is capped at a maximum of 3% and is subject to reduction by the number of shares issued as a result of the Section 355(e) Top -up Adjustment. The parties to the Merger Agreement do not anticipate being required to issue the additional shares described in this footnote. ' AT &T Comcast Corporation, Form S -4 Amendment No. 1 filed April 10, 2002 with the Securities and Exchange Commission ( "AT &T Comcast S -4 Amendment 1 "), at p. III -7. 50372511 10 million homes passed.5 The transaction contemplated by the Merger Agreement is scheduled to close by the end of 2002.6 The closing is subject to satisfaction of several contingencies including approval by the shareholders of Comcast and AT &T, various state and federal regulatory agencies, note holders,' and all other conditions as described in the Merger Agreement, all of which contingencies are in all material respects customary for a transaction of this magnitude. MERGER AGREEMENT Pursuant to the Merger Agreement, AT &T Broadband Merger Sub will merge with and into AT &T Broadband, with AT &T Broadband continuing as the surviving corporation in the merger and, as a result of such merger, becoming a wholly owned subsidiary of AT &T Comcast (the "AT &T Broadband Merger ").9 On the same effective date as the AT &T Broadband Merger, Comcast Acquisition Corp. will merge with and into Comcast, with Comcast continuing as the surviving corporation in the merger and, as a result of such merger, becoming a wholly owned subsidiary of AT &T Comcast (the "Comcast Merger "). The AT &T Broadband Merger and the Comcast Merger are referred to herein collectively as the "Mergers "). AT &T Comcast AT &T Broadband Holdings, LLC AT &T "°'s° AT &T Broadband Comcast Broadband Merger Sub I Acquisition Group RESULTING STRUCTURE AT &T Comcast AT &T Broadband Comcast Holdings, LLC Corporation AT &T Broadband 5 AT &T Comcast Investor Presentation dated December 20, 2001. 6 AT &T Comcast S -4 Amendment 1, at page 1 -4. 'AT&T Comcast S -4 Amendment 1, at p. 1 -33. 6 Merger Agreement, Article 10, at pp. 109 -112. 9 AT &T Comcast S -4 Amendment 1, at page V -1. 50725/1 11 Comcast Corporation t• The closing date for the Mergers will occur as soon as practicable following the satisfaction or waiver of conditions to the Mergers set forth in the Merger Agreement, The Mergers will be effective on the same effective date. but after the completion of the separation and distribution by AT &T of certain assets and the corresponding assumption of certain liabilities of AT &T's Broadband business operations by AT &T Broadband, in a transaction described as an internal restructuring and "spin -off' of the Broadband operations. For a description of the internal restructuring and spin -off, see description of the Separation and Distribution Agreement infra. The consideration to be issued in the Mergers will be shares of various classes of AT &T Comcast common stock. The rights of the classes of AT &T Comcast common stock to be issued in the Mergers is dependent upon whether the holders of Comcast Class A common stock and Class B common stock approve what is referred to in the Merger Agreement as the "Preferred Structure ". If the Preferred Structure is not approved by the holders of Comcast Class A common stock and Class B common stock, the Mergers, if approved by the AT &T and Comcast shareholders, generally, will be completed under what is described as the "Alternative Structure ". Under either the Preferred Structure or Alternative Structure, the Comcast Class B shareholders, who own approximately 86.6% of the Comcast's voting power, will own 33 -1/3% of AT &T Comcast voting power upon completion of the AT &T Comcast transaction10. A description of the securities to be exchanged in the Preferred Structure and Alternative Structure follows: Preferred Structure. If the Preferred Structure is approved by the applicable holders of Comcast Class A common stock and Class B common stock, the AT &T Broadband shareholders and the holders of Comcast Class A common stock will receive shares of AT &T Comcast Class A common stock based on applicable exchange ratios set forth in the Merger Agreement; the holders of Comcast Class B common stock will receive shares of AT &T Comcast Class B common stock; and the holders of Comcast Class A special common stock will receive shares of AT &T Comcast Class A special common stock." Alternative Structure. In the event the Mergers are consummated under circumstances where the Alternative Structure is implemented, the holders of Comcast Class B common stock will receive AT &T Comcast Class 3 common stock; the holders of AT &T Broadband common stock will receive shares of AT &T Comcast Class C common stock; the holders of Comcast Class A common stock will receive shares of AT &T Comcast Class A common stock; and the holders of Comcast Class A special common stock will receive shares of AT &T Comcast Class A special common stock. The applicable exchange ratios for the shares of common stock are set forth in the Merger Agreement and will be determined based on the number of outstanding shares of common stock as of the closing date of the Mergers. If the Mergers were consummated as of April 10, 2002, and without giving effect to the issuance of any 10 AT &T Comcast S -4 Amendment 1, at page 1 -2. It AT &T Comcast S -4 Amendment 1, at p. 1 -9. 503725/1 12 additional shares of common stock that may be required to be issued under the Merger Agreement, the tables below describe the relative economic and voting interest of the AT &T Broadband and Comcast shareholders upon the consummation of the Mergers under the Preferred Structure and Alternative Structure, including the effect of the Microsoft Quips transfer described in the section entitled "Exchange Agreement" infra. TABLE OF ECONOMIC INTEREST PERCENTAGES SHAREHOLDERS OF AT &T BROADBAND AND COMCAST CORPORATION (giving effect to the Mergers using assumptions set forth in, the AT &T Comcast S-4A) Based on AT &T Comcast S-4 Amendment No. 1 filed with Securities and Exchange Commission on April 10, 2002 (see pages 1 -1 and 1 -2) AT &T Broadband Shareholders Comcast — Class A Shareholders Comcast — Class B Shareholders Comcast — Class A Special Shareholders Microsoft TOTALS 54.80% 1.00% 0.40% 38.60 %'Z 5.30% 99.30%'j TABLE OF VOTING POWER HIP PERCENTAGE 57.70% 1,00% 0.40% 40.60% 0% 99.700/6 14" SHAREHOLDERS OF AT &T BROADBAND AND COMCAST CORPORATION (giving effect to the Mergers using assumptions set forth in the AT &T Comcast S-4A) AT &T Broadband 60.60% 65.55% 56.60% 61.55% Shareholders's Comcast — Class A 1.10% 1.10% 5.14% 5.14% Shareholders Comcast — Class B 33.33% 33.33% 33.33% 33.33% Shareholders Comcast — Class A 0.00% 0.00% 0.00% 0.00 %. _ Special Shareholders — Microsoft 4.95% 4.95% 0.00% TOTALS 99.98 %� 99.98 / 100 T% 10 0 0 " Assumes that AT &T Comcast is not required to make any of the potential additional payments described in the Merger Agreement. " Difference of .70% due to rounding and use of estimates. " Difference cf .30% due to rounding and use of estimates. 's Assumes that AT &T Comcast is not required to make any of the potential additional payments described in the Merger ,agreement. ' If the Preferred Structure is adopted, shares will be AT &T Comcast Class A voting commdn stock and. If the Alternate Structure is adopted, shares will be AT &T Comcast Class C voting common stock. 'r Difference of +x..02% attributable to rounding and use of estimates. 503725/1 13 Summary of Certain Provisions of AT &T Comcast Stock Issued in Mergers — Voting Power. Class A Special Common Stock. Under either the Preferred Structure or the Alternative Structure, each share of AT &T Comcast Class A special common stock will have no voting rights. Class B Common Stock. Under either the Preferred Structure or the Alternative Structure, each share of AT &T Comcast Class B commcn.Stock will have 15 votes and all shares in the aggregate will have 33-1/3% of the combined voting power of all classes of issued and outstanding shares of AT &T Comcast common stock, and, except where the shares of AT &T Comcast Class B common stock are reduced following the completion of the Mergers, for any reason (as described in the Merger Agreement), or upon the occurrence of other events resulting in an increase or decrease in the number of issued and outstanding shares of Class B common stock will be non - dilutable in voting power as a result of the increase in the number of outstanding shares of any other class of voting securities of AT &T Comcast. Class A Common Stock. The terms of AT &T Comcast Class A common stock will vary depending on which capital structure for the Mergers is approved. Preferred Structure. AT &T Comcast Class A common stock issued in the Preferred Structure will initially have approximately .2094 of one vote per share and all shares in the aggregate will have 66 2/3's% of the voting power of the AT &T Comcast stock'8. However, the AT &T Comcast Class A common stock which is issued in the Preferred Structure is subject to voting power dilution on a per share basis upon the issuance of other shares of Class A common stock or on a per share and aggregate basis upon the issuance of another class of AT &T Comcast voting stock. Alternative Structure. AT &T Comcast Class A common stock issued in the Alternative Structure will be issued to holders of Comcast Class A common stock and will have one vote per share, with all shares in the aggregate having 5.14% of the combined voting power of AT &T Comcast stock. Except under certain circumstances, a disproportionate adjustment in the shares of Class — or Class B voting stock issued in consummation of the Mergers under the — Alternative Structure which occurs after the completion of the Mergers, will result in an adjustment of the relative voting power of each such class, but the combined voting percentage of those two classes of stock will remain constant at approximately 38.47 %, except where the number of shares are reduced below the number of shares outstanding at the completion of the Mergers, in which event a reduction in voting power of the applicable class of common stock (A or B) will occur and an increase in the voting power of Class C common stock (described below) will also occur (unless there is another class of voting securities outstanding). 15 Id 507725/1 14 Class C Common Stock. AT &T Comcast Class C common stock will only be issued in the event the Mergers are consummated under the Alternative Structure. All shares of Class C common stock will be issued in the Mergers to the AT &T Broadband shareholders and will initially have approximately 61- 53/100% of the combined voting power of AT &T Comcast stock, with a per share voting power of approximately .1953 of one vote.19 Under the Alternative Structure, the issuance of additional shares of voting securities of AT &T Comcast, other than Class A or Class B common stock, will result in a dilution of the voting power of the Class C common stock. As a result of the capital structure of AT &T Comcast under either the Preferred Structure or the Alternative Structure, the former Comcast shareholders will have significant control over the control of AT &T Comcast. Selected Material Provisions of Merger Agreement. AT &T and Comcast are undertaking certain covenants in the Merger Agreement, which include the following: Interim Operations. Comcast and AT &T have agreed to conduct their business consistent with past practices and to refrain from engaging in any material transactions pending the completion of the Mergers, subject to consent of the other party, which covenant restricts what actions AT &T may take with respect to contracts with Time Warner Entertainment. Regulatory Approvals. Comcast and AT &T have agreed to use their best efforts to obtain applicable governmental approvals necessary to the Mergers. No Solicitation of Other Offers. AT &T is prohibited from soliciting other offers for the Broadband operations, subject to certain exceptions. QUIPS Failure. In the event the QUIPS transaction does not occur on the closing date of the Mergers (see description infra), the closing of the Mergers may be extended by up to 180 days to facilitate the QUIPS transaction. Comcast Exchange of AT &T Common Stock. Comcast has agreed to exchange all of its shares of AT &T common stock for shares of a new class=of preferred stock prior to the completion of the spin off of the Broadband operations, which preferred shares will be mandatorily exchangeable after completion of the Mergers into shares of AT &T common stock, giving Comcast an interest in AT &T's communications operations. AT &T Redemption of Debt and Equity. AT &T has agreed to call for redemption of certain AT &T Broadband debt which is then redeemable and will redeem certain shares of preferred stock. t9 AT &T Comcast S -4 Amendment 1, at page 9. 50372511 15 Sural LLC. Sural LLC, controlled by Brian L. Roberts, may be merged with and into AT &T Comcast or a subsidiary immediately prior to the Mergers, in which event, the members of Sural LLC would receive the consideration (Shares of AT &T Comcast common stock) that Sural LLC would have received in the Mergers, pro -rata based on their membership interest. Conditions to Completion of the Mergers. The following conditions, among others which are customary for transactions of this nature and magnitude, must be satisfied or waived by the parties to the Merger Agreement' Shareholders of AT &T and Comcast must approve the Mergers; 2. Receipt of all required regulatory approvals, including expiration or termination of applicable waiting period under the Hart- Scott- Rodino Antitrust Improvement Act of 1976; 3. Completion of the transaction contemplated by the Separation and Distribution Agreement; 4. Receipt of rulings or tax counsel opinions to the effect that the separation and AT &T Broadband spin -off will be tax -free and the Mergers and certain other distributions to be made by AT &T to fail to qualify as tax -free transactions; 5. Receipt of separate options of tax counsel that the combination of AT &T Broadband and Comcast will qualify as a tax -free transaction. Termination of Merger Agreement/Consequences of Termination. The Merger Agreement is subject to termination upon, among other events, the following: By Comcast or AT &T if: a. either party's shareholders do not approve the Mergers; Mergers have not been completed by March 1, 2003 (as limited) C. Material breach by other party not curable by March 1, 2003 2. By AT &T upon certain circumstances if the QUIPS transaction is not completed prior to the date set for completion 3. By Comcast if the AT &T Board withdraws or modifies adversely to Comcast the Board's recommendations of the Mergers. A termination fee of $1.5 billion in cash is payable by AT &T to Comcast if the Merger Agreement is terminated because of (i) willful or material breach by AT &T of certain material covenants; (ii) the AT &T board withdraws or adversely modifies its recommendations of the Mergers; or (iii) with respect to the consummation of an 503725/1 16 o� acquisition proposal pending at the time of the AT &T shareholder meeting which is subsequently consummated within one year of the meeting. A termination fee of $1.5 billion in cash is payable by Comcast to AT &T if (i) the Merger Agreement is terminated because the Comcast board withdraws or adversely modifies its recommendations of the Mergers; or (ii) if the Comcast shareholders fail to approve the Mergers. See also the analysis of the "atypical" governance structure of AT &T Comcast in the Section 4 entitled "Legal Qualifications ". SEPARATION AND DISTRIBUTION AGREEMENT Pursuant to the Separation and Distribution Agreement, AT &T will assign and transfer to AT &T Broadband all of AT &T's and its subsidiaries right, title and interest in all of the assets of the AT &T's Broadband business which are not then held by AT &T Broadband or an AT &T Broadband subsidiary, subject to the obligation on the part of AT &T Broadband to assume all of the liabilities of AT &T's Broadband business that are not already liabilities of AT &T Broadband or an AT &T Broadband subsidiary. The foregoing process of the assignment of AT &T Broadband assets and the assumption liabilities is referred to as the "separation ". Following the separation, AT &T will "spin -off' AT &T Broadband by distributing to the shareholders of record of AT &T common stock meeting certain criteria who hold shares of AT &T common stock designated by NYSE "T" on the record date for the AT &T Broadband spin -off, one share of AT &T Broadband common stock for each share of AT &T common stock held. The record date for the AT &T Broadband spin -off will be-the close of business on the date of completion of the Mergers, subject to the right of AT &T and Comcast to modify that date by mutual agreement. The separation and spin -off are each scheduled to occur on the closing date of the Mergers, with the separation occurring before the spin -off and the spin -off prior to the Mergers. The shares of AT &T Broadband common stock issued in the spin -off will be retained by the distribution agent pending delivery of certificates of various classes of AT &T Comcast common stock described above under the description of the Merger Agreement. Repayment of Indebtedness. AT &T Broadband has agreed to repay at the completion of the Mergers any debt that it or any of its subsidiaries owes to AT &T or any of AT &T's subsidiaries and AT &T has agreed to repay at the completion of the Mergers any debt that it or any of its subsidiaries owes to AT &T Broadband or any of AT &T Broadband's subsidiaries. Comcast has made arrangements for sufficient financing to accomplish the obligation of AT &T Broadband to complete the foregoing. The amount of the indebtedness owed by AT &T Broadband and its subsidiaries to AT &T and its subsidiaries is expected. to exceed $3.96 ,billion. 503725/1 17 Disposition of Time Warner Entertainment Interest. AT &T Broadband has agreed to pay to AT &T 50% of the proceeds or value in excess of a threshold amount (net of tax effect) with respect to its interest in Time Warner Entertainment. The threshold amount is a base amount of $10.2 billion, increased by 7% simple interest on the balance until paid. If the Time Warner Entertainment interest has not been fully disposed of within 54 months of the Mergers, then the value of the interest will be determined by appraisal, and AT &T Broadband will pay 50% of the value in excess of the threshold amount on a tax adjusted basis. Material conditions to the Separation and Distribution. The following conditions, among others constitute conditions precedent to the separation and distribution: 1. Receipt of required regulatory approvals; 2. Satisfaction of conditions necessary to enable the spin -off to qualify as a tax -free distribution to affected parties and shareholders; 3. Approval by the AT &T Shareholders; and 4. Satisfaction of the conditions to the Mergers. Indemnification Obligations of AT &T Broadband. AT &T Broadband has agreed to indemnify AT &T from certain liabilities and obligations. including: 1. Failure to perform liabilities or obligations of the AT &T Broadband business; 2. If the QUIPS transaction is not consummated, AT &T's repayment obligations to Microsoft, as reduced by increases in value of the QUIPS from a specified date; 3. Some or all of the taxes and costs, if any, incurred by AT &T resulting from any disqualification of the AT &T Broadband spin -off (as well as certain other spin -off's) as tax -free, the percentage of which liability is to be determined based on the cause for such disqualification; Termination. The Separation and Distribution Agreement is subject to termination by AT &T if the Merger Agreement has terminated. SUPPORT AGREEMENT Sural LLC, which is controlled by Brian L. Roberts. president of Comcast, and holder of approximately 86.7% of the combined voting power of Comcast common stock, has entered into a support agreement with, among other parties, AT &T, pursuant to which Surral LLC has agreed to vote its shares of Comcast common stock in favor of the AT &T Comcast transaction. Surral LLC's vote in favor of the AT &T Comcast transaction will be sufficient to approve the AT &T Comcast transaction without the vote of any other Comcast shareholder20; however, the form of the transaction as being consummated under the Preferred Structure or Alternative Structure requires the . AT &T Comcast S -4 Amendment 1, at p. 1 -12. 507725/1 18 approval of the holders of Comcast Class A common stock in addition to Surral LLC, which holds all of the Comcast Class B common stock. Pursuant to the Support Agreement, Surral LLC has agreed as follows: 1. Prior to the completion of the Mergers it will not transfer ownership of Comcast shares except to certain permitted transferees who agree to be bound by the restrictions of the Support Agreement; 2. After completion of the Mergers, until the tenth anniversary of the effective date of the Mergers, Surral LLC will not transfer ownership of any of its shares of AT &T Comcast Class B common stock except to certain permitted transferees who agree to be bound by the transfer restrictions except for transactions that either permit AT &T Comcast other shareholders to dispose of their of AT &T Comcast stock on an equivalent basis and for the highest amount of consideration on a per share basis as Surral LLC receives for any of its shares of AT &T Comcast common stock in a transaction which is approved by the disinterested holders of AT &T Comcast's voting stock. 3. Brian L. Roberts has also agreed to a similar restriction in the preceding paragraph with respect to his equity interest in Surral LLC, subject to similar exceptions. 4. A general prohibition exists which prevents AT &T Comcast and its subsidiaries from entering into any material transaction with Brian L. Roberts, any associate or permitted transferee of Roberts unless the transaction is approved by AT &T Comcast plus the its disinterested directors. 5. Compensation arrangements between Roberts and AT &T Comcast including any of its subsidiaries require the approval of the disinterested directors of the compensation committee of AT &T Comcast. 6. Until the 2005 annual meeting Surral LLC will vote its shares of AT &T Comcast Class B common stock against any proposed amendment to the governance arrangements set forth in the AT &T Comcast charter. (See discussion in Legal Qualification section regarding "atypical governance — structure".) 7. In the event of Brian L. Roberts death or incapacity prior to the fifth anniversary of the Mergers, unless Ralph J. Roberts has sole voting power with respect to the election of directors with respect to all outstanding shares of AT &T Comcast Class B common stock, then Surral LLC will vote such shares in the same proportion as the holders of other voting common stock of AT &T Comcast vote, which restriction applies until the fifth anniversary of the consummation of the Mergers. 50372511 19 k• 8. The Support Agreement terminates one day following the tenth anniversary of the consummation of the Mergers or upon termination of the Merger Agreement. EXCHANGE AGREEMENT As part of the transactions contemplated by the Mergers, AT &T, Comcast, AT &T Comcast Corporation and Microsoft Corporation, a Washington corporation, have entered into an Exchange Agreement, which provides for the terms of the conversion of $5 billion of AT &T debt currently in the form of 5% Convertible Quarter Income Preferred Securities ( "QUIPS ") into 115 million shares of AT &T Comcast Common Stock .21 The purpose and effect of the Exchange Agreement, if consummated, will be to substantially reduce the outstanding debt held by AT &T Comcast Corporation after the Mergers. Microsoft Corporation currently holds the QUIPS, a security issued by the AT &T Finance Trust I, a Delaware business trust. The QUIPS are convertible into 5 billion aggregate face amount of 5% junior convertible subordinated debentures due 2029 of AT &T, which debentures are in turn convertible into AT &T common stock. In connection with the AT &T Broadband spin -off, Microsoft has agreed, subject to the satisfaction of certain terms and conditions, to exchange the QUIPS for a number of shares of AT &T Broadband common stock that will be converted in the AT &T Broadband Merger into 115 million shares of AT &T Comcast Class A common stock under the Preferred Structure or AT &T Comcast Class C common stock under the Alternative Structure; provided, however, so that Microsoft and its affiliates will not hold more than 4.95% of AT &T Comcast's voting power as a result of the Mergers, Microsoft has agreed to accept shares of non - voting AT &T Comcast Class A special common stock in lieu of shares of voting common stock (Class A or Class C, depending on the structure of the Merger) to the extent of the surplus voting shares. In the event that Microsoft's aggregate voting interest in AT &T Comcast is diluted below 4.95 %, Microsoft will have the right to cause AT &T Comcast to exchange shares of the non- voting Class A special common stock received in the AT &T Broadband Merger for shares of Class A or Class C voting AT &T Comcast stock (depending on the structure of the Mergers) subject to the limitation that Microsoft's aggregate voting interest cannot exceed 4.95% following the exchange. Certain limitations also apply to the ability 94 Microsoft to complete the foregoing- described exchange of special common for voting common shares. As part of the QUIPS exchange transaction, AT &T Comcast agreed that, if at any time prior to the fifth anniversary of the QUIPS exchange transaction (assuming the transaction is consummated) AT &T Comcast offers a high speed internet access agreement to any third party, then AT &T Comcast will also be obligated to offer an agreement on non - discriminatory terms with respect to the same cable systems for Microsoft's Internet service provider, The Microsoft Network. " AT &T Comcast S -4 Amendment 1, at p. 1 -15. 503725/1 20 Microsoft has agreed fora period of six months following completion of the QUIPS exchange, with certain exceptions, that Microsoft or any of its wholly -owned subsidiaries will not sell or enter into any agreement, arrangement or negotiations for the sale of the AT &T Comcast common stock received by Microsoft in the QUIPS exchange transaction. Comcast has agreed to indemnify Microsoft against certain acts arising out of the failure of the spin -off or the Mergers to qualify as tax -free, except where such failure results from a breach of a covenant by Microsoft. The consummation of the transactions contemplated by the Exchange Agreement is conditioned upon consummation of the Mergers, but the Mergers are not conditioned upon consummation of the transaction contemplated by the Exchange Agreement. 507725/1 21 K• SECTION 5. LEGAL QUALIFICATIONS STANDARD OF REVIEW The legal qualifications standard relates primarily to an analysis of whether AT &T Comcast, AT &T Broadband, AT &T Broadband Merger Sub, Comcast and Comcast Merger Sub are (i) authorized to proceed with the transactions contemplated by the Merger Agreement and, to the extent parties thereto, the Separation and Distribution Agreement; and (ii) with respect to AT &T Comcast and AT &T Broadband, are authorized to control the cable television system serving the City (the "System "). The .applicable standard of review is that the City's consent shall not be unreasonably withheld. BRIEF SUMMARY OF TRANSACTION As stated earlier in the Section 3 entitled "Description of the Transaction ", the transactions contemplated by the Merger Agreement will occur in several steps, all of which are anticipated to occur on the same effective date. First, AT &T will transfer the assets and liabilities of AT &T's Broadband business operations to AT &T Broadband to the extent same are not already held as assets or constitute liabilities of AT &T Broadband 22. Following the internal restructuring of the Broadband operations, AT &T will spin -off AT &T Broadband to the AT &T shareholderS23. Finally, AT &T Broadband and Comcast will merge with AT &T Merger Sub and Comcast Merger Sub, respectively, with AT &T Broadband and Comcast constituting the surviving corporations in their respective Mergers24. As a result, each of AT &T Broadband and Comcast will become direct or indirect wholly -owned subsidiaries of AT &T Comcast25. The Merger Agreement provides for all of the above - described steps to occur on the closing date for the Mergers .26 GOOD STANDING STATUS With respect to the foregoing- described entities, we have concluded as follows: 1. AT &T Broadband Corp. is a Delaware corporation, formed on December 14, 2001, and, based on a verbal confirmation with the Delaware Secretary-af State on April 30, 2002, is active but not in good standing due to its failuFe to 22 See charts labeled "Step #1" attached hereto which illustrates the internal restructuring of certain subsidiary legal entities and the contribution of entities that own or control cable franchisees to AT &T Broadband. See also AT &T Comcast S -4 Amendment 1 at Page 1 -9. 23 See chart labeled "Step #2" attached hereto illustrating the post separation and distribution ownership of AT &T Broadband by the AT &T shareholders. zi See chart labeled "Step #3" attached hereto illustrating the Mergers. 25 See chart labeled "Final Structure" illustrating the structure of AT &T Comcast following the Mergers, after giving effect to the separation and distribution of the AT &T Broadband operations contemplated by the Separation Agreement. 26 AT &T Comcast S -4 Amendment 1 at Page 1 -9. 503725/1 22 pay an unspecified amount of franchise taxes to the Delaware Secretary of State '27 2. AT &T Comcast Corporation is a Pennsylvania corporation formed on December 7, 2001 and, based on a verbal confirmation with the Pennsylvania Secretary of State on April 30, 2002, is in good standing; 3. AT &T Broadband Merger Sub, is a Delaware corporation formed on December 7, 2001, and, based on a verbal confirmation with the Delaware Secretary of State on April 30, 2002, is in good standing; 4. Comcast Corporation, a Pennsylvania corporation, was formed on March 5, 1969, and based on a verbal confirmation with the Pennsylvania Secretary of State on April 30, 2002, is in good standing; and 5. Comcast Merger Sub, a Pennsylvania corporation, was formed on December 4, 2001, and based on a verbal confirmation with the Pennsylvania Secretary of State on April 30, 2002, is in good standing. Based solely upon the representations of the parties to the Merger Agreement: 1. With respect to Comcast: (A) the execution, delivery and performance by Comcast of the Merger Agreement and the consummation of the transactions contemplated by the Merger Agreement are within Comcast's corporate powers and except for the approval of the Comcast shareholders, the Merger Agreement has been duly authorized by all necessary corporate action on the part of Comcast28; (B) the Merger Agreement constitutes the valid and binding obligation of Comcast enforceable against Comcast in accordance with its terms, subject to limitations imposed by laws limiting creditor's rights generally and general equitable principles29; and (C) Comcast has all corporate powers required to carry on its business as conducted as of the date of the Merger Agreement and is qualified to do business as a foreign corporation and is in good standing in each jurisdiction where qualification is necessary and material to the conduct of Comcast's operation s30; and 2. With respect to the AT &T entities: (A) The execution, delivery and performance by AT &T, AT &T Broadband and AT &T Merger Sub of the Merger Agreement, Separation and Distribution Agreement and such other agreements contemplated by the Merger Agreement to which they are a party are within the respective AT &T entities corporate or other powers and, except for the affirmative vote of a majority of the outstanding shares of AT &T common stock, 27 Upon notification or this issue, AT &T representatives, on May 16, 2002, indicated that the franchise taxes had been paid in full and a Certificate of Good Standing will be provided to the City for verification. 29 Merger Agreement at Section 5.02. 2e Id. 30 Merger Agreement at Section 5.01. Note: An analysis of the jurisdictions in which Comcast is currently required to be qualified is beyond the scope of this report. 503725/1 23 have been duly authorized by all necessary corporate action on the part of such entity 31; (B) the Merger Agreement, Separation and Distribution Agreement and such other agreements contemplated by the Merger Agreement constitutes a valid and binding agreement of AT &T and the AT &T subsidiary, party thereto, enforceable in accordance with its terms, subject to limitations imposed by laws limiting creditor's rights, generally, and general equitable principles 32; and (C) Each of AT &T and each AT &T subsidiary which is a party to the Merger Agreement, Separation and Distribution Agreement and other agreements contemplated by the Merger Agreement has all corpbrate or other powers required to carry on its business as conducted as of the date of the Merger Agreement and is qualified to do business as a foreign corporation and is in good standing in each jurisdiction where qualification is necessary and material to the conduct of its respective business33 The foregoing representations and warranties are to be true and correct in all material respects as of the closing date of the Merger Agreement and constitute waivable conditions to the actual closing of the transactions contemplated by the Merger Agreement34 DISMISSALIDENIAL OF APPLICATION BY FRANCHISE AUTHORITIES In response to the request as to whether the Transferee has had any interest in or in connection with an application which has been dismissed or denied by any franchise authority, AT &T Comcast, having not made any previous applications to any franchise authorities, indicated that it has not had any dismissals or denials. However, with respect to AT &T and Comcast, the following is a summary of various denials /dismissals with respect to their respective business operations disclosed by the Transferee: 1. The City of Portland, Oregon and Multnomah County, Oregon, denied consent to the merger of TCI into AT &T Corp. in March, 1999 ( "TCI Merger ") because AT &T and TCI would not accept the communities conditions requiring non- discriminatory access to the cable modem platform. The Ninth Circuit Court of Appeals subsequently held that the City and the County had no lawful authority to impose such access obligations in the transfer process. 2. The Village of Rhinebeck, New York, Town of Rhinebeck, New York, and Village of Red Hook, New York, denied consent to the TCI Merger; however, these communities consented to the TCI Merger in connection with the June, 1999 exchange of certain cable systems owned by Time Warner, Inc. 11 Merger Agreement at Section 6.02. 32 Id. 73 Merger Agreement at Section 6.01. Note: An analysis of the jurisdictions in which Comcast is currently required to be qualified is beyond the scope of this report. 34 See Sections 10.02(a) and 10.03(a) of the Merger Agreement. 503725/1 24 3. In connection with the May, 1999 merger of MediaOne Group into AT &T ( "MediaOne Merger "), Cambridge, Massachusetts denied transfer of control based on issues related to forced access alleging that AT &T did not possess requisite managerial ability, and further alleging lack of benefit to the community and further speculating that AT &T was unlikely to adhere to the terms and conditions of the franchise. The Massachusetts Department of Telecommunications and Energy subsequently ruled that the City's denial based on forced access was outside the appropriate standard for review of a transfer of control of a cable franchise and was therefore unlaMul, further finding that the City could not unilaterally alter the existing cable license by requiring AT &T to provide open access to non - affiliated ISPs and further finding that no specific benefit was required to be shown by the applicant. This dispute has subsequently settled and consent to the transfer followed. 4. Mentor, Ohio, in connection with the MediaOne Merger, also denied transfer of control based on allegations of MediaOne's non - compliance with the franchise and AT &T's unwillingness to agree to additional terms and conditions. The City's decision was subsequently appealed and consent was obtained as part of the settlement process. 5. In connection with the Time Warner exchange, Township of Middletown, PA denied consent based on a dispute over a cable right appeal. Following a settlement of the dispute, the franchise transfer approval was granted. 6. Moreno Valley, California initially denied the request to transfer the franchise to a partnership with affiliates of AT &T and Century Communications Corporation, which dispute was subsequently settled, including approval of the transfer as part of the settlement. 7. A transfer of the franchise for the Borough of Blawnox, Pennsylvania from a subsidiary of Comcast to AT &T in December, 2000 remains pending. 8. The City of Hoover, Alabama denied the request to transfer the franchise for the City of Hoover to Charter Communications Holding, LLC in June, 2001. No reasons for the denial were included as part of the resolution supporting the denial. -~ ADVERSE FINDINGS/ADMINISTRATIVE ACTIONS AT &T Comcast has also stipulated that no adverse findings have been made and no final actions have been taken with respect to AT &T Comcast with respect to actions taken by any court or administrative body in a civil, criminal or administrative proceeding, brought under the provisions of any law or regulation related to the following: any felony; revocation, suspension, or involuntary transfer of any authorization (including cable franchises) to provide video programming services, mass media related anti -trust or unfair competition; fraudulent statements to another 503725/1 25 governmental unit; or employment discrimination. However, the following information was provided with respect to AT &T: 1. In Rosemary Santos v. TCI Cablevision, Case No. 150982016, EEOC of Florida, the Plaintiff, a former employee of the Plantation Call Center in Florida, filed a charge against TCI Cablevision on April 14, 1998 alleging discrimination under the ADA. The EEOC subsequently determined on July 21, 1998 that TCI Cablevision violated the statute. 2. In Fred Roberts v. AT &T Broadband, Case No. 01 -CV -699, in the District Court of Arapaho County, Colorado, Courtroom 5, Mr. Roberts, a former employee, filed a disability discrimination retaliation suit on March 15, 2001, with a default judgment being entered on September 20, 2001, including prejudgment interest. Based on motions filed by AT &T Broadband, the execution has been stayed and the motion to set aside is pending. LEGAL CHALLENGES In response to what is described by AT &T Comcast as an "Atypical governance structure for a large publicly held corporation ,,35 certain AT &T shareholders have expressed their concerns to the Securities and Exchange Commission regarding what is described by these shareholders as a "controversial proposal" under which AT &T will spin -off AT &T's Broadband operations and subsequently merger with Comcast Corporation to form a new Pennsylvania corporation, AT &T Comcast36. The Letters of Opposition raise concerns regarding the nature and effect of the "atypical" governance structure and also challenge the bundling of the separation and merger transaction with the approval of significant corporate governance changes as constituting a potential violation of the Securities and Exchange Commission's 1992 Amendment to Section 14(a) of the Securities Exchange Act of 1934, which has the effect of eliminating the ability of companies to group related matters into a single proposal, requiring that the form of the proxy provide for a separate vote on each matter presented. The position taken in the Letters of Opposition is that the various material corporate governance matters, most of which will appear in AT &T Comcast's Articles of Incorporation, require a separate vote on each matter presented .37 The "atypical" governance provisions referenced in the Letters of Opposition, include the following: 35 AT &T Comcast S -4 Amendment 1 at 1 -30. 76 See February 21, 2002 correspondence from Sarah A. B. Teslik. Executive Director of Counsel of Institutional Investors to Alan L. Beller, Director, Division of Corporate Finance, Securities and Exchange Commission; See also March 20, 2002 correspondence from Richard L. Trumka, Secretary- Treasurer of the AFL -CIO to Alan L. Beller;; See also correspondence dated April 10, 2002 from William C. Thompson, Jr., Comptroller of the City of New York to Mr. Harvey L. Pitt, Chairman of the Securities and Exchange Commission, (herein collectively the "Letters of Opposition "). " As of the date of this report, it is unknown how the Securities and Exchange Commission will address the concerns raised in the Letters of Opposition. 503725/1 26 1. The Board of Directors of AT &T Comcast will not expire until the 2005 annual meeting of shareholders and that no annual meeting will be held until 200538; 2. AT &T Comcast shareholders will not have the right to call special meetings of shareholders or act by written consent; 3. AT &T Comcast will adopt a shareholder rights plan upon consummation of the Mergers that will prevent any holder of AT &T Cpmcast stock from acquiring more than 10% of the voting power without the approval of the AT &T Comcast board39; 4. AT &T Comcast Chairman and CEO can only be removed from their positions prior to April 2010 with the approval of 75% of the entire AT &T Comcast board; 5. The AT &T Comcast charter is not subject to amendment except upon the approval of 75% of the entire AT &T Comcast board until the earlier of the date on which Brian L. Roberts is no longer serving as Chairman of the Board or CEO or April 2010; and 6. The creation of dual class stock whereby the Roberts Family, as holders of AT &T Comcast Class B common stock will hold a non - dilutable 33 -1/3% combined voting power of AT &T Comcast stock despite holding less than 1.5% of the economic interest in AT &T Comcast. Moreover, the Letters of Opposition further indicate that the governance changes could adversely affect AT &T Comcast, including making it virtually impossible for: 1. Shareholders to hold AT &T Comcast Board members, either individually or as a group, accountable to this Shareholder's interests and concerns (which are not necessarily analogous to the interests and concerns of the City in all instances); and 2. The Board to replace executive management of AT &T Comcast for up to eight years (which could have an effect on the operation of the System due-to policy decisions established at the executive management level of the Transferee). AT &T and Comcast also advised their respective shareholders to carefully consider a variety of risk factors in deciding whether to vote for approval and adoption of the Merger Agreement and the transactions contemplated by the Merger Agreement.40 78 See Section regarding Description of the Transaction, supra, regarding apparent changes which will now result in AT &T Comcast holding elections of the Board or Directors in April, 2004. 39 Sural LLC, which will hold the AT &T Comcast Class B common stock (or any of its affiliates which hold such stock), is not subject to this restriction. i0 S4A at 1 -27. 503725/1 27 \ Selected risk factors rdlate to the atypical governance structure outlined above and include the following: 1. Voting power of AT &T Comcast's principal shareholder may discourage third party acquisitions of AT &T Comcast at a premium. After completion of the AT &T Comcast transaction, Brian L. Roberts will have significant control over the operations of AT &T Comcast through his control of Sural LLC, which as a result of its ownership of all outstanding shares of AT &T Comcast Class B common stock will hold a non - dilutable 33 -1/3% of the combhied voting power of AT &T Comcast stock will also have separate approval rights over certain material transactions involving AT &T Comcast, which include right to approve any merger of AT &T Comcast with another company or any other transaction that requires AT &T Comcast shareholder approval under applicable law or any other transaction that would result in any person or group owning shares representing in excess of 10% of the combined voting power of the resulting or surviving entity or any issuance of securities requiring AT &T Comcast shareholder approval over applicable rules and regulations of any stock exchange or quotation system; 2. Any issuance of AT &T Comcast Class B common stock or which are convertible into Class B common stock; and 3. Charter amendments and other actions that limit the rights of holders of AT &T Comcast Class B common stock to transfer, vote or otherwise exercise rights with respect to AT &T Comcast Capital stock. Atypical governance arrangements may make it more difficult for shareholders to act. Since AT &T Comcast shareholders will not have the right to call special meetings of shareholders or act by written consent and AT &T Comcast directors will be able to be removed only for cause, AT &T Comcast shareholders will not be able to replace the initial AT &T Comcast board members prior to the first annual meeting to be set in the charter of AT &T Comcast (currently April 2005).41 Even after the expiration of the initial term of the board of directors, it will be difficult for an AT &T Comcast shareholder, other than Sural LLC or a successor entity controlled by Brian L. Roberts, to elect a slate of directors of its own choosing to the AT &T Comcast board due to the fact that Brian L. Roberts, through his control of Sural.LLC or a successor entity, will hold all of the.,ST &T Comcast Class B common stock with the aggregate nondilutable voting interest of-33 1/3%. 41 In addition to the governance arrangements relating to the AT &T Comcast board, Comcast and AT &T have agreed to a number of governance arrangements which make it difficult to replace the senior management of AT &T Comcast which are summarized above.a3 " Id. at 1 -30. 32 Id. 41 Id. at 1 -31. 503725/1 28 The effect of the above - referenced atypical governance arrangement on the overall business operations of AT &T Comcast is uncertain, however, it is appropriate for the City to consider the adverse impact of the governance structure affecting AT &T Comcast on its ability to fulfill, or cause the applicable subsidiary operating entity to fulfill its respective legal obligations under the Franchise. OTHER LEGAL CHALLENGE In a separate matter, the New York State Supreme,Court recently dismissed a shareholder suit seeking to prevent the AT &T Broadband Merger. AT &T shareholders have alleged that applicable provisions of the Pennsylvania Business Corporation Law, which governs AT &T Comcast, requires an annual election of directors and, as a result, AT &T Comcast's proposed governance plan, pursuant to which the Board of Directors of AT &T Comcast would not be subject to re- election until the annual meeting in 2005" violated applicable provisions of Pennsylvania corporate law. The New York State Supreme Court, finding in favor of AT &T (applying Pennsylvania law) found that the provisions of Section 1306 of the Pennsylvania Business Corporation Law (which permits terms of directors to be more than one year despite another legal provision mandating one -year terms) was permitted and therefore AT &T Comcast's plan is legal .45 An appeal of the ruling may be filed. CONCLUSION Based on our review of the legal qualifications of AT &T Broadband Corp. as proposed to be controlled by AT &T Comcast Corporation upon consummation of the separation, spin -off, and Mergers, we conclude it would be unreasonable for the City to find that upon closing of the transaction contemplated under the Merger Agreement (including the Separation Agreement), the Transferee and AT &T Broadband Corp. will not be legally qualified to own and operate the System. 34 But see Note 16. a5 [ case site]. 503725/1 29 STEP #1 Public Shareholders AT &T Corp. p AT &T Broadband Corp. AT &T Broadband Media One Group, LLC I Inc. Existing Cable Existing Cable Franchise Holders Franchise Holders (direct and indirect) (direct and indirect) 503725/1 30 AT &T Broadband of Southern Cal, Inc. AT &T CSC, Inc. District Cablevision, Inc. Novato Cable Company South Chicago Cable, Inc. Existing Cable Franchise Holders (direct and indirect) AT &T Corp. AT &T Broadband LLC Existing Cable Franchise Holders (direct and indirect) STEP #2 Public Shareholders AT &T Broadband Carp. Media One Group, Inc. Existing Cable Franchise Holders (direct and indirect) 503725/1 31 AT &T Broadband of Southern Cal, Inc. AT &T CSC, Inc. District Cablevision, Inc. Novato Cable Company Existing Cable Franchise Holders (direct and indirect) Public Shareholders AT &T Broadband Corp. AT &T Broadband LLC Existing Cable Franchise Holders (direct and indirect) STEP #3 AT &T Comcast Corporation AT &T Broadband Holdinqs, 0 AT &T Comcast nd I Acquisition Merqer Sub Company Media One Group, Inc. Existing Cable Franchise Holders (direct and indirect) 503725/1 32 Public Shareholders Comcast Corporation AT &T Broadband of Southern Cal, Inc. AT &T CSC, Inc. District Cablevision, Inc. Novato Cable Company Existing Cable Franchise Holders (direct and indirect) 6 FINAL STRUCTURI Public Shareholders AT &T Comcast Corp. AT &T Broadband Holdings. L.L.C. AT &T Broadband Corp. AT &T Broadband LLC Existing Cable Franchise Holders (direct and indirect) Comcast Corporation Media One Group, Inc. Existing Cable Franchise Holders (direct and indirect) 503725/1 33 AT &T Broadband of Southern Cal, Inc. AT &T CSC, Inc. District Cablevision, Inc. Existing Cabre Franchise Holders (direct and indirect) 0 SECTION-6. TECHNICAL QUALIFICATIONS The technical qualifications standard relates to AT &T Comcast's technical expertise and experience in operating and maintaining cable television systems. In such a review, the standard is once again that the City's consent shall not be unreasonably withheld. Jonathan L. Kramer of Kramer.Firm Incorporated provides the following analysis in evaluating the AT &T and Comcast cable systems. Mr. Kramer has relied on assertions made by AT &T and Comcast in the standardized FCC Form 394 filings tendered to franchisors, including the City of Hastings, Minnesota. Independently, AT &T and Comcast are before the proposed merger "Top 5" cable television multiple system operators. Presuming the merger is completed, the combined AT &T Comcast will be the largest U.S. cable operator. While it is virtually impossible to suggest that the merged entity will lack the technical qualifications to be a cable franchisee in the City, there are legitimate issues that should be addressed in connection with any transfer approval. Specifically, the entity controlling the local franchisee will not be AT &T or Comcast, but rather an entirely new entity which will control the assets of the present AT &T systems and the present Comcast systems. Comcast has stated that its present technical management team, supplemented by some of the existing AT &T technical managers, will provide the technical oversight of the new entity. If there is an exodus of technical management in or supervising the franchise area, the City should be concerned as Comcast does not presently have cable systems in or near the City (and, presumably, no local technical management team to step in to the recently vacated shoes). The City may wish to seek assurances from AT &T Comcast that at the time of the transfer of control, if approved, it will have a full and competent technical staff that will insure uninterrupted technical operations without reduction in present service levels. In summary, while the proposed new AT &T Comcast entity that is to control the local franchisee will be presumptively qualified to conduct the technical operations in the City, adequate assurances satisfactory to the City should be required of the proposed new controlling entity. Based on our review of the technical capabilities of AT &T Comcast, we conclude it would be unreasonable for the City to find that, upon closing of the transaction, AT &T Comcast, will not be technically qualified to own and operate the System. 503725/1 34 , SECTION 7. FINANCIAL QUALIFICATIONS SCOPE OF REVIEW We have reviewed selected financial information provided by AT &T Broadband, a division of AT &T Corp., a New York corporation ( "AT &T "), in conjunction with AT &T's request for consent to the change in ownership of the cable television systems (the "Systems ") serving the City. The selected financial information, which was provided or obtained and to which our review has been limited, consists solely of the following financial information (hereinafter referred to collectively as the "Financial Statements "): 1. Combined unaudited pro forma condensed balance sheet of AT &T Comcast Corporation as of December 31, 2001 and September 30, 2001, and the related combined unaudited pro forma statements of operations for the years ending December 31, 2001 and 2000, together with the footnotes and additional information, as published in AT &T Comcast Corporation's Form S -4 and Form S- 4 Amendment No. 1, and filed with the Securities and Exchange Commission on February 11, 2002 and April 10, 2002, respectively; 2. Consolidated balance sheet of AT &T and subsidiaries as of December 31, 2001, 2000 and 1999, and a related consolidated statements of operations, changes in shareholders' equity and cash flows for the years ended December 31, 2001, 2000, and 1999, together with the footnotes and additional information, as the same were published in AT &T Corp.'s Form 10 -K for the year ending December 31, 2001, and filed with the Securities and Exchange Commission on April 1, 2002; 3. Consolidated balance sheet of Comcast Corporation and subsidiaries ( "Comcast ") as of December 31, 2001 and 2000, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for the years ended December 31, 2001 and 2000, together with the footnotes and additional information, as the same were published in Comcast's Form 1C -K-for the year ending December 31, 2001, and filed with the Securities and Exchange Commission on March 29, 2002; 4. Financial information provided in the AT &T Comcast Corporation Investor Presentation dated December 20, 2001; 5. Financial information included as part of a presentation entitled "AT &T Broadband and Comcast Merger Financial Issues" dated March 18, 2002 presented by Mr. Sumanta Ray of the Communications Workers of America; and 6. Financial information provided from AT &T with Form 394 and in response to our questionnaire provided April 1, 2002. 503725/1 35 AT &T, in response to our. transfer questionnaire dated April 1, 2002, failed to provide us with requested information regarding certain financial forecasts, financial projections, potential cost savings, and synergies. On April 15, 2002, we again requested such information as was used as a basis by Credit Suisse First Boston Corporation and Goldman Sachs & Co., in their opinions to the AT &T Board of Directors dated December 19, 2001. AT &T provided us, in response to our second request, with a declaration to the Federal Communications Commission dated February 27, 2002 of Mr. Robert Pick, Senior Vice President of Corporate Development at Comcast. As such, our review of the financial information with respect to'AT &T Comcast Corporation does not include any analysis with respect to the projected financial information, except as provided in Mr. Pick's declaration or as otherwise noted within this report. Our procedure was limited to providing a summary of our analysis of the Financial Statements and additional financial information to facilitate the Cities' assessment of the financial capabilities of AT &T Comcast Corporation to become the successor operator of the Systems serving the Cities currently operated by AT &T. OVERVIEW OF TRANSACTION AT &T, Comcast and their subsidiaries have entered into an Agreement and Plan of Merger dated. December 19, 2001 (the "Merger Agreement "), pursuant to which AT &T Comcast Corporation will become the new parent company of AT &T Broadband Corp., and Comcast Corporation. AT &T Comcast Corporation will be a newly formed corporation that will hold the Systems previously owned by AT &T or one of its subsidiaries and Comcast and its subsidiaries.° The value of the assets of AT &T Broadband and Comcast are valued for purposes of this transaction at $72 billion, subject to adjustments, both increases and decreases, as provided for in the Merger Agreement.` The merger will create the nation's largest cable operations with $19 billion in revenues for the period ended December 31, 200148, in excess of 22 million subscribers and 38 million homes passed.49 The transaction contemplated by the Merger Agreement is scheduled to close by the end of 2002.50 The closing is subject to satisfaction of several contingencies including approval by the shareholders of Comcast and AT &T, various state and federal regulatory agencies, note holders ,51 and all other conditions as described in the Merger Agreement, all of which contingencies are in all material respects customary for a transaction of this magnitude.52 46 Agreement and Plan of Merger between AT &T and Comcast and related entities dated December 19, 2001 as provided in Annex A of the AT &T Comcast Corp. Form S -4 for the year ending December 31, 2001, filed February 11, 2002 with the Securities and Exchance Commission ( "2001 S -4 "). 4' AT&T Comcast Corporation Investor Presentation dated December 20, 2001, at p.8. " AT &T Comcast Corporation, Form S -4 Amendment No. 1 filed April 10, 2002 with the Securities and Exchange Commission ("2001 S -4A") at p. III -7. a9 AT &T Comcast Investor Presentation dated December 20, 2001. so 2001 S -4 at p. 1-4. 51 2001 S -4 at p. 1 -33. 52 Agreement and Plan of Merger between AT &T and Comcast dated December 19, 2001 Article 10, at pp. 109-112. 503725/1 36 In the event AT &T or Comcast terminates the Merger Agreement on the account of a breach by the other party, as defined in the Merger Agreement, Article 11 of the Merger Agreement entitles the nonbreaching party to a termination fee in the amount of $1.5 bllllon.53 As part of the merger transaction, AT &T, Comcast, AT &T Comcast Corporation and Microsoft Corporation, a Washington corporation, have entered into an Exchange Agreement, which provides for the conversion of $5 billion of AT &T debt currently in the form of Quarter Income Preferred Securities ( "QUIPS ") intD 115 million shares of AT &T Comcast Common Stock .54 The result of this Exchange Agreement will be to substantially reduce the outstanding debt held by AT &T Comcast Corporation after the Merger. OVERVIEW OF AT &T CORP. 1. Summary of AT &T. AT &T Corp., a New York Corporation, was incorporated in 1885." AT &T provides voice, data and video communication services to consumers worldwide, including international, regional and local communication services, cable television and Internet services.56 AT &T Broadband is a separating operating unit of AT &T, and is one of the largest broadband communications companies by customer in the United States as of December 31, 2001.57 AT &T Broadband provides cable television, high- speed cable Internet services and broadband telephone services .58 As of December 31, 2001, AT &T Broadband served approximately 13.6 million basic subscribers and passed in excess of 24 million homes.59 AT &T's geographical market includes the cities of Chicago, San Francisco, and Boston. ° Almost 80% of AT &T Broadband's markets are located in larger metropolitan areas. 61 A substantial portion of the assets of AT &T Broadband were acquired by AT &T through the acquisitions of the assets of Tele- Communications, Inc. on March 9, 1999, and MediaOne Group, Inc. on June 15, 2000. AT &T Broadband also holds investments in Time Warner Entertainment Company L.P., Insight Midwest, L.P., and Texas Cable Partners, L. p.62 2. Management and Operations. AT &T Broadband is an integrated — operating unit of AT &T and has relied on AT &T for its management direction and 5' Id. at p. 116. 5' 2001 S -4A, at p. 1 -15. 55 AT &T Corp. Form 10 -K for the year ended December 31, 2001 filed with the Securities and Exchange Commission on April 1, 2002 ( "AT &T 10 -K "), at p. 1. 56 Id. 57 Id. at p. 16. 5e Id. 5e Id. 60 Id. 61 Id. 62 Id, 503725/1 37 a 0 operations. 63 AT &T Broadband's financial statements reviewed in this report are based upon management's accounting assumption and allocations, which may not accurately reflect the balance sheet and statement of operations of AT &T Broadband as a stand alone company.6a 3. Acquisition and Divestures. AT &T Broadband has increased its cable capacity through a number of acquisitions in 1999, 2000 and 2001. The chart below shows the significant acquisitions including the purchase prices, the basic number of subscribers and cost per basic subscriber.6 Predecessor Owner Acquisition Purchase Basic Approx. Per Comcast Corporation Month Price Subscribers Subscriber Cost Tele- Communications, March 1999 $52.0 billion 10.7 million $4,837 Inc. $3,103 Comcast Corporation June 2001 ! $510 million 1 115,000 MediaOne Group, Inc. June 2000 $45.0 billion 5 million $9,028a Cablevision Systems January 2001 51.075 billion 228,000 (net) $4,715 Corporation a. incwoes a eo io interest in i ime warner tntertamment company, Lr. AT &T Broadband has also completed in a number of divestures and joint venture activities. The chart below shows the significant divestures including the sales prices, the basic number of subscribers and the approximate cost per basic subscriber.se Buyer Month of Sale S a Fes--T Price Basic I Subscribers Approx. Per Subscriber Cost Comcast Corporation Aril 2001 I $1,423 million 1 590,000 $2,412 MediaOne Communications Corp. June 2001 $295 million 94,000 $3,138 Charter Communications, Inc. June 2001 $1,719 million 1 554,000 net $3,103 Comcast Corporation June 2001 ! $510 million 1 115,000 $4,434 MediaCom Communications Corp. July 2001 $1,724 million 710,000 $2,428 Adelphia Communications Corp. December $318 million 2001 128,000 $2,484 4. Competitive Environment. The financial performance of cable televtslon operators is subject to many factors, including the competitive environment in which they operate. Competition from multiple services, which provide and distribute video programming and other sources of news, information, entertainment, programming, telecommunication and Internet services. 67 The growth and success of these competitors could have a material adverse impact on AT &T Comcast Corporation's prospective financial results from operations. " 2001 S -4A at p. 1 -30. 6< Id. " AT &T 10 -K at pp. 21- 22. fib Id. 67 2001 S -4 at p. 1 -36. 503725/1 38 The principal source of such alternative entertainment includes television broadcast programming, direct broadcast satellite programming, newspapers, movie theaters, live sportin�q events, overbuilds of exclusive franchise systems and home video products .62 In addition, new technology advances and regulatory promulgations also affect AT &T.69 Principal competition comes from national high - powered DBS services, such as those that are currently being provided by DirecTV, Inc. and EchoStar Communications Corp .70 5. Financing. The cable television business is inherently capital intensive and requires substantial cash infusion for construction, maintenance, improvements and expansion of cable, plant, and distribution equipment as well as to fund acquisitions. AT &T Broadband has relied extensively on cash infusions from AT &T to fund its operations and growth .71 At the current time, AT &T Broadband is managed by AT &T on a centralized basis,72 but for purposes of AT &T Broadband's pro forma financial statements reviewed in this report, the terms, conditions and interest rates of the AT &T Broadband debt are equal to an independent third party lender's terms, conditions and interest rates. The failure of AT &T Broadband to receive the substantial amounts of capital previously supplied by AT &T would have a debilitating effect on AT &T Broadband. The contemplated merger transaction would be the largest transaction in the cable television systems operating business. At the current time, AT &T Broadband has in excess of $22.3 billion of debt .73 Of this total amount of AT &T Broadband debt, $5 billion would be reduced to capital in the Microsoft Exchange Agreement discussed in this report. AT &T Broadband, as part of its debt management activities, has liquidated some of its operations (see Acquisition and Divestures above) and is in the process of trying to liquidate its Time Warner Entertainment Company, L.P. holdings.74 OVERVIEW OF COMCAST CORPORATION 1. Summary of Comcast Corporation. Comcast Corporation, a Pennsylvania corporation, was organized in 1969' and is in the business of development, management and operation of broadband communication networks in the .United States.76 Comcast, the third largest cable operator in the United States, provides 66 Id. at p. VII -12. 6' Id. at p. 1 -38. 70 AT &T 10 -K at p. 37. 71 2001 S -4A at p. VII -24. 72 Id. at p. VII -33. 77 AT &T Comcast Corporation Investor Presentation dated December 20, 2001, at p. 34. 74 AT &T 10 -K at pp 25 -26. 76 Comcast 10 -K at p. 1 76 Id. at p. 43. 503725/1 39 0 services to approximately 8.5 million subscribers in the United States as of December 31, 2001.77 Comcast also provides, through its subsidiary, QVC, Inc. and its subsidiaries, an electronic retail outlet for customers through its television programming .78 Additionally, Comcast provides programming content, including E! Entertainment Television Inc., the Golf Channel and other Comcast networks.79 Comcast currently employs approximately 38,000 individuals, with one - half of the individuals working within the cable communications area.80 2. Management and Operations. Mr. Brian L. Roberts is the President of Comcast and controls the corporation.81 Mr. Roberts, through a related entity, Sural, LLC, owns approximately 87% of the voting power of Comcast.82 As part of the merger transaction, Mr. Roberts will vote for and endorse the merger transaction as well as be given atypical governance rights with respect to AT &T Comcast Corporation.83 3. Acquisitions. Comcast acquisitions have provided growth in its cable operations unit. In 2001, Comcast exchanged approximately 440,000 subscribers with Adelphia Communications Corporation and had the following acquisitions: 84 (Number of basic subscribers and purchase price varies slightly from amounts shown on AT &T Acquisitions and Divestures above) Predecessor Owner 2001 Acquisition Purchase Basic Approx. Per Month Price Subscribers Subscriber Cost AT &T Aril 1 $1.423 billion i 585,000 $2,432 AT &T Aril 1 $518.7 million 1 112,000 $4.631 4. Competitive Environment. As stated in this report, the financial performance of cable system operations are subject to a variety of factors including competition from many different sources, including direct broadcast satellite services, such as EchoStar and DirecTV, local television, program distribution, satellite master antenna systems, online computer services, newspapers, magazines, book stores, movie theatres, live events and home- 77 Id. at p. 1. 78 Id. 79 Id. " Id. at p. 17. B' Id. at p. 19. e2 Id. "2001 S -4A at p. 1- 31 -33. 84 Comcast 10 -K at pp. 2 -3. 503725/1 40 video products.B5 Additionally, regulatory agencies may limit Comcast's ability or allow other operators to compete in Comcast's markets.86 The competitive environment in the retail and programming content areas also can have a substantial impact on the financial performance of Comcast. Competition from all types of retail outlets effects Comcast's electronic retail programming.87 5. Financing. As is the case for AT &T Broadband, capital is vital for the constant maintenance, system upgrades and operations of its cable system. As a stand -alone entity, Comcast's management believes that it can meet its liquidity and capital requirements through cash flow from operations, existing cash and credit facilities.88 Historically, Comcast has maintained high profit margins, which has resulted in positive working capital.89 The Comcast positive working capital as of December 31, 2001, if maintained, could bridge the short- term cash needs of AT &T Comcast Corporation until its operations provide positive cash flow. FINDINGS 1. Analysis of AT &T Comcast Corporation's Financial Statements. Neither federal law nor FCC regulations provide franchising authorities with any guidance concerning the evaluation of the financial qualifications of a transfer applicant for a cable franchise.90 In certain circumstances, it is appropriate to consider the performance of an applicant based on the applicant's historical performance in relation to the recognized industry standards. Given the fact that AT &T through AT &T Broadband and Comcast and its subsidiaries have a history of cable system operations, such combined statistical information and analysis is relevant with respect to the transaction contemplated by the Merger Agreement. We have based our analysis in part on industry standards, which are generally recognized in making such a determination. These industry standards are more precisely described below. 91 Based on the selected financial information, which we reviewed, the following is a summary of varipus financial factors as compared to applicably industry standards for operations for the 12 -month periods ending December 31, 2001 and 2000 and balance sheet dates of December 31 and September 30, 2001. AT &T Comcast Corporation management recognizes that the financial. as Id. at p 6. e6 Id. B7 Id. at pp. 9 -10. ea Id. at p. 24. 69 AT &T Comcast Corporation Investor Presentation dated December 20, 2001, at p. 29. go FCC Form 394 does reference whether the proposed transferee "has sufficient liquid assets on hand or available from committed resources to consummate the transaction and operate the facilities for three months:' This reference, however, does not necessarily constitute the definitive standard for financial qualifications. 9' In this data based on information compiled by Paul Kagan & Associates. 503725/1 41 information in these pro forma statements may differ substantially from the financial results if AT &T Broadband and Comcast were actually one corporation throughout the pro forma period.92 AT &T CORP. AND COMCAST CORP. COMBINED FINANCIAL DATA INDUSTRY DESCRIPTION STANDARD 2001 2000 1. EBITDA/revenue(1)' Cash flow percentage) 39.09% to 54.83% 24.1% 22.9% 2. Operating Income Percentage` (Operating Income /Revenue) +11 % 15.6% ( ) ° (37.3 /0) 3. Debt/Equity Ratio' (long-term debt/total equity) 2.20:1 51:1 .49:1(2) 4. Current Ratio' current assets /current liabilities) 1.0:1 .58:1 .39'1(2) 5. EBITDA (in Billions) N/A 4.7 4.1 (1) Range based on a Domestic SuburbaniRural Wireline Cable Comparisons prepared by CISC Oppenheimer. Data has not been independently verified by the reviewer. (2) Ratio determined as of September 30, 2001. Data based on Financial Information in 2001 S-4 and 2001 S -4A. 2. Specific Financial Statement Data and Analysis. a. Assets. According to the combined AT &T Comcast Corporation financial information, AT &T Comcast Corporation had (i) current assets of $6,256 and $4,882 million; (ii) working capital of a negative $4,551 million and a negative $7,756 million; and (iii) total assets of $140,775 million and $141,201 million as of December 31, 2001 and September 30, 2001, respectively.93 Working capital, which is the excess of current assets over current liabilities, is a short-term analytical tool used to assess the ability of a particular entity to meet its current financial obligations in the ordinary course of business. The negative working capital balance of $4,551 million as of December 31, 2001, suggests that AT &T Comcast Corporation may experience a short-term deficiency in available working capital resources that will be needed to pay transaction costs and debt service in the next year. This will need to be overcome by AT &T Comcast Corporation drawing on other capital resources including additional borrowings, liquidation of current investments regarding Time Warner Entertainment Company, LP investment) and operating cash flows. AT &T Comcast Corporation current ratio (current assets divided by current liabilities) as of December 31, 2001, of .58:1 is below recognized industry standards of 1.0:1, but this rate has improved over the September 30, 2001 ratio of 39:1. " 2001 S -4A at p. 1 -35. 93 Id. at pp. 111 4-7 and Id. at pp. 111 4-8. 503725/1 42 y i b. Liabilities. According to the combined AT &T Comcast Corporation financial information, AT &T Comcast Corporation had (i) current liabilities of $10,807 million and $12,638 million; (ii) long -term debt net of current maturities of $31,528 million and $30,574 million; and (iii) equity of $61,742 million and $62,098 million as of December 31, 2001 and September 30, 2001, respectively.94 As of December 31, 2001, AT &T Comcast Corporation's debt to equity ratio, which is a measure of the amount of debt in relation to total equity, was approximately .51:1. Generally, a low debt to equity ratio is consid6red favorable. AT &T Comcast Corporation's debt to equity ratio is more favorable than the industry standard. This is largely the result of AT &T's previous stock equity acquisitions. The Tele- Communications, Inc. stock acquisition in 1999 has contributed significantly to AT &T Comcast Corporation's favorable debt to equity ratio. 95 C. Income and Expense. According to the combined AT &T Comcast Corporation financial information, the combined entity would have: (i) revenue of $19,697 million and $17,924 million; (ii) operating expenses of $22,767 million and 524,604 million; and (iii) net loss of $3,070 million and $6,680 million for the years ending December 31, 2001 and 2000, respectively.96 AT &T Comcast Corporation, based on December 31, 2001 proforma data, would have had an operating cash flow percentage for the 12 months ending December 31, 2001 of 24.1 %, which is lower than the industry average of 40% to 55 %. Cash flow and the cash flow percentage provide a measure of the ability of a business entity to generate cash. AT &T Comcast Corporation believes that as a result of the merger of the two entities and cost savings and synergies, the cash flow percentage should improve greatly as a result of improved margins .97 3. AT &T and Comcast Management Discussion and Analysis of Financial Results. Both AT &T Broadband and Comcast may recognize potential benefits and cost savings related to the merger of the AT &T Broadband operations and Comcast. As noted previously, we requested additional information verifying these projected revenue increases and cost savings, and AT &T provided us with a declaration from Mr. Pick, a Comcast Senior Vice President of Corporate —. Development, regarding the potential cost savings and benefits. The following information is a summary of some of the pertinent projected financial benefits and costs management believes will result from the merger transaction. a. Revenue. The creation of a larger subscriber base through the combination of AT &T Broadband and Comcast will allow for the 94 Id. 95 AT &T 10 -K at p. 107. 96 2001 S -4A at pp. 111 4-7 and 2001 S -4 at pp. 111 4-8. 97 AT &T Comcast Corporation Investor Presentation dated December 20, 2001 at p. 29. 503725/1 43 deployment of a greater range of services and products, which should have a positive impact on revenues. 98 As a result of the merger transaction, AT &T and AT &T Comcast Corporation may compete in the same market, including the cable and digital subscriber line ( "DSL), which may result in a decrease in potential revenue for AT &T Comcast Corporation from the amounts shown in their pro forma financial statements.9 No estimated revenue loss was provided by management with respect to this potentiatltem. b. Expenses. The AT &T Comcast Corporation management believes the merger of the AT &T Broadband and Comcast will result in a substantial reduction in overall operating costs. Mr. Pick, in his statement to the Federal Communications Commission suggested numerous areas where cost savings would result in a reduction in the AT &T Comcast Corporation's overall costs. These projected cost savings and efficiencies in the programming, general operating, advertising, new products and telephony areas will result in cost savings of approximately $1,250 to $1,950 million a year.100 The net present value of these projected savings in $13,500 million.101 These projected savings and synergies do not include additional transaction costs of the merger and issues with respect to AT &T Broadband's utilization of AT &T's centralized management services, which have not been fully described in management's discussion. C. Gross Margins. Management believes that the combination of the two operations will increase AT &T Broadband's operating margins, to a level that Comcast currently enjoys, which is approximately 42% through three quarters of 2001.102 AT &T Broadband's gross margin through three quarters of 2001 was approximately 23 %.1C3 The potential increase in AT &T Broadband's gross margin could result in up to $1.6 billion of annual additional earnings from the AT &T Broadband's operation S.104 d. Capital Expenditures. In 2001, AT &T and Comcast anticipate spending approximately S4.3 billion and $1.3 billion, respectively, on capital expenditures.10 Management, according to its registration — statement, states that it has not determined the actual amount of capital 99 Id. at pp. 7, 12, 17 and 19. 99 2001 S -4A at p. 1 -33. 100 Id. at p. 11 8-9. 101 AT &T Comcast Corporation Investor Presentation dated December 20, 2001 at p. 28. 102 Id. at p. 29 and 2001 S -4A p. II -9. 103 Id. 103 Id. 10e 2001 S -4A at p. 1 -36. 503725/1 44 expenditures for the period after the, merger, but expects that the capital expenditures will be substantial.'os Notwithstanding the above paragraph, management believes the transaction will result in an overall reduction in capital expenditures through economies of scale of $200 -$300 million annually.107 In 2000 and 2001, Comcast invested less in capital expenditures than AT &T Broadband.108 A continued decrease in the amount of capital expenditures may result in a reduction in the,quality of products and services provided by AT &T Comcast Corporation. Additionally, capital expenditures for both AT &T Broadband and Comcast have outpaced net cash provided by operations in the amount of $3.5 billion and $952 million for AT &T Broadband and Comcast in 2001, respectively. 109 Management believes this trend may continue in the years to come after the merger transaction .t10 As such, this substantial use of cash could potentially have an adverse effect on AT &T Comcast Corporation's continued operations. e. Dividends. As part of the merger transaction, AT &T Comcast Corporation does not intend to pay dividends in order to preserve cash for operations.' 11 f. Long Term Contracts /Investments. Both AT &T Broadband and Comcast are subject to exclusive long -term contracts for video programming, audio programming, electronic program guides, billing and other services.' 12 These contracts may limit the economies of scale and cost savings projected to be realized as a result of the merger. Some of these long -term contracts are with Starz Encore Group, TV Guide and CSG Systems, Inc.' 13 for programming, interactive programming guides and billing.' 14 Due to the proprietary nature of the agreements, the terms of these agreements are not disclosed, which may have a direct impact on the potential cost savings from this merger transaction.' 15 AT &T Broadband's substantial investments, including a noncontrolling 25% ownership interest in Time Warner Entertainment Company L.R., will limit AT &T Comcast Corporation's ability to manage these investments 105 Id. 107 Id. at p. 11-8. 108 "AT &T Broadband and Comcast Merger Financial Issues" S. Ray March 18, 2002, at p. 7. 109 2001 S -4A at p. 1 -36. n° Id. "' Id. at p. 1 -32. "Z Id. at p. 1 -37. 'u Id. "' Id. at p. 1 -35. n5 Id. 503725/1 45 and pass. through its synergies and cost savings.7t6 In addition, AT &T's controlling ownership in At Home Corporation, which filed bankruptcy in September of 2001, may subject AT &T Comcast Corporation to suit from the other shareholders or creditors of At Home Corporation.' 17 The financial impacts of this suit are not evaluated within the report. g. Labor. The merger transaction may result in a substantial reduction in the workforce of AT &T Broadband and Comcast. The loss of current employees working with or providing services-on the Cities' Systems may result in a decline in the current level of system and customer service. The cost of this workforce reduction has not been provided in management's reports. Less than 10% of AT &T Broadband employees are represented by unions affiliated with the AFL- CIO.18 h. Financing. Management realizes that AT &T Comcast Corporation will have significant debt obligations in excess of S30 billion as of the date of the merger. "" Management has secured approximately $12.85 billion of financing, which will be used to replace obligations to AT &T (S9 - $10 billion), redeem certain AT &T shareholders ($1 - $2 billion) and to provide cash for operating funds and capital expenditures ($1 - $2 billion)."') Comcast has obtained commitments for $12.85 billion from various lenders as of May 13, 2002. Management realizes that the failure to secure these additional funds will have a direct impact on the AT &T Comcast Corporation's ability to fund its operation in the short-term, and may require the sale of a portion of its assets. 121 In addition, the cost of obtaining the financing may be materially higher than the cost incurred by AT &T Broadband on its debt previously held by AT&T. 122 Comcast has cash, cash equivalents and short term investments of $3.0 billion and available lines of credit from its subsidiaries of $3.5 billion as of December 31, 2001.723 Thus, based on the financial information supplied by the management of AT &T Broadband and Comcast, AT &T Comcast Corporation should have sufficient liquid assets for short-term operations and capital expenditures, and sufficient assets available to collateralize or sell to obtain additional financing through the initial period after the _ merger. — SUMMARY 16 Id. at p. 1 -38. Id. 1e Id. p. VII -14. 19 Id. p. 1 -29. ''0 Id. 12' Id. at pp. 29 -30. 22 Id. at p. 1 -34. 'Z' Comcast 10 -K at p. 25. 503725/1 46 AT &T C01MCAS L CORPC oAT ON Comcast's merger with AT &T Broadband will cr oate one of the leading entertainment, communications, and information companies in the United States. AT &T Comcast Corporation's cable systems will pass 38 million homes and serve 22 million customers, making the company the nation's largest cable operator and providing a solid base for the introduction of a wide range of new and innovative products and services. With projected revenues of $18 billion and an operating earnings growth rate approaching 20 %, AT &T Comcast will have the financial strength and flexibility needed to maximize broadband's growth opportunities and enhance the company's profitability potential. Powerful Platform for Growth MORE SERVICES TO MORE PEOPLE, MORE QUICKLY AT &T Comcast Corporation will be a financially strong company that will provide the synergies needed to bring the promise of broadband to our customers sooner. . Realization of the Broadband Vision MI.Tc/a'�eNcm Rev ..... :418.08 1V��V�/161V�1e7y EBrrDA: 64.69 + 38M homes posted. with 22M subscribers e PotentL-d for scoling new and Innovative products and services to consumers + Beat value Proposdion to the consumer . Experienced management and employees • Projected EBITDA growth approaching 20% • Financial strength and flextAlly a� Utilizing revenues and EBITDA numbers from both Comcast's and AT &T Broadband's previous twelve- month operating period, we project that EBITDA growth for our combined operations will approach 20% as we move ahead into the future. AT&T Comcast Corporation: Synergy at Work May 8, 2002 /Page 1 AT &T Comcast's cable system network will provide a strong foundation for growth. About 80% of our plant will be 550 MHz or greater. And, we will have 38 million homes that are digital video — ready. In addition, at the end of 2002 we will have over 30 million data -ready homes, and we will be well positioned to grow that number to 38 million in the next few years. Powerful Platform for Growth At its inception, AT &T Comcast will have nearly 5 million digital subscribers, 2 million plus data customers, and about 1 million telephony customers. So if the introduction of new products and services is the engine essential to driving new growth, then we are confident that AT &T Comcast will offer that critical difference. Powerful Platform for Growth „ O. emot wa rrrmcex INN J fl uw J II I(q I 'I AT &T Comcast Corporation: Synergy at Work May 8, 2002 /Page 2 I� s 11m /I Nlw I al 7:StS!O MHt �•sso NN{ �� — - _ 7 ..... IW'. iflYWsI:NY�NYYd,p.�lh:stl dll {1 i.Jtll,gYny Nl %n.lar�.Mb� �4Tri .n At its inception, AT &T Comcast will have nearly 5 million digital subscribers, 2 million plus data customers, and about 1 million telephony customers. So if the introduction of new products and services is the engine essential to driving new growth, then we are confident that AT &T Comcast will offer that critical difference. Powerful Platform for Growth „ O. emot wa rrrmcex INN J fl uw J II I(q I 'I AT &T Comcast Corporation: Synergy at Work May 8, 2002 /Page 2 Comcast Corporation has always been committed to long -term shareholder growth. And since Comcast's IPO almost 30 years ago, the company has had a 24% compounded return on its stock. Powerful Platform for Growth 1 Year 3Ynn 5Yom 10 Y"M r' Cable ComposteM (21 %) 4% 32% 13% Nasdaq (211.) (2 %) 9% 14% 5 &P 500 ('129e'; 11 %) 9% '11% lir aMfbr��r�IaXYYXYS6p NX 21 c�.aup..our can.lfu The night that AT &T accepted Comcast's proposal to merge cable operations, Ralph Roberts commented to Brian Roberts, "There's no better opportunity that we've seen in all these years than putting these two companies together." We believe strongly in the special opportunity presented by the proposed merger, and we look forward to working to fully maximize all the promise that the new AT &T Comcast offers. AT &T Comcast Corporation: Synergy at Work May 8, 2002112age 3 Value Creation Through Gynergaes THREE BUCKETS OF SYNERGIES There are three major types of synergy effects by bringing Comcast and AT &T Broadband together: 1. Cost savings and operating efficiencies 2. Taking AT &T Broadband margin levels up to Comcast margin levels 3. New product and service rollout If you look at these areas closely you see that the combined value of their synergies is enormous. But the economics of the proposed deal is not dependent on realizing the synergies from all three. In fact, achievement of the synergies from even just one of these areas goes a long way to support the economics of the merger. Our goal, of course, is to maximize the synergies from all three as much as we possibly can. Bucket One: Cost Savings and Operating Efficiencies PROGRAMMING COST SAVINGS. For both Comcast and AT &T Broadband, programming costs represent the single largest expenditure made annually by our cable operations. And, we foresee programming costs continuing to climb by double digits over the next five years. Currently, AT &T Broadband enjoys more favorable programming rates than Comcast because of the sheer number of its customers. The merger of our companies, however, will result in the nation's largest cable system operator and will position AT &T Comcast to receive the best available rates offered by programmers. As such, we project a range of $250 to $450 million in programming cost savings annually. AT&T Comcast Corporation: Synergy at Work May 8, 2002/Page 4 Annual EBITOA Impact 13111 Typing, Programming Cost savings 32.50450 1.3 years conllnua00paraling Ellklencies $200.370 1 -3 years National Advertising Platform $100 -200 1.3 years Nnv Products $100.200 3years Comcast Telephony $600.800 5yaors Total $1,2304,930 Net Present Value 513.500 PROGRAMMING COST SAVINGS. For both Comcast and AT &T Broadband, programming costs represent the single largest expenditure made annually by our cable operations. And, we foresee programming costs continuing to climb by double digits over the next five years. Currently, AT &T Broadband enjoys more favorable programming rates than Comcast because of the sheer number of its customers. The merger of our companies, however, will result in the nation's largest cable system operator and will position AT &T Comcast to receive the best available rates offered by programmers. As such, we project a range of $250 to $450 million in programming cost savings annually. AT&T Comcast Corporation: Synergy at Work May 8, 2002/Page 4 OPERATING EFFICIENCIES. When you bring two organizations together, you certainly can achieve some significant operating efficiencies. And we believe that within a one- to three -year period, operational synergies for AT &T Comcast will result in $200 to $300 million in savings, Reduction in corporate overhead costs, elimination of duplicate operations, companywide implementation of best practices and systems, and other internal initiatives will streamline overall operations and result in a fiscally leaner and financially stronger company. NATIONAL ADVERTISING. AT &T Comcast will operate in eight of the top ten DMAs. And, we will be the major cable provider in fourteen of the top twenty markets. Our footprint will actually be bigger than the station footprints of the major broadcast networks. So when we speak to an advertiser, we will effectively be representing roughly a third of the cable viewing population in the United States. NEW PRODUCTS. A key benefit of the Comcast —AT &T Broadband merger is that the new company's scale will afford it the opportunity to assume a true leadership position when it comes to introducing new products. Comcast and AT &T Broadband are already two companies very much oriented toward new product development. Comcast has had its focus on video and data, while AT &T has emphasized telephony. Essential to both companies' strategies, however, has been the layering of new products into their existing infrastructures. The scale and leadership position of the new AT &T Comcast will create the kind of synergies we believe will allow us to move forward even more vigorously in our development efforts and will help us realize the potential of interactive television, video on demand, new high -speed data applications, and other broadband possibilities more quickly. TELEPHONY. Although broadband telephony has always been considered part of Comcasts long -term vision for the future, it was not included in our current five -year plan. After working with our colleagues at AT &T, however, we believe that by overlaying their expertise, financial investment, commitment in people and systems, and learning onto our existing footprint that the rollout of telephony could represent a very significant opportunity over the next five years. So, we have included this broadband application in our synergy calculations as well. Bucket Two: Taking AT &T Broadband Margin Levels Up to Comcast Margin Levels We are sure that AT &T Broadband is well on its way to achieving industry- standard margins. And, we think the management depth of the new AT &T Comcast will allow this to happen even more quickly. The graphic on the following page illustrates how margin improvement enhances the overall value of the proposed merger. If you take Comcast's margin of 42% and AT &T Broadband's recent margin of 25% and apply the differential of 17% to 2001 revenue of almost $10 billion, you have the opportunity to realize $1.6 billion for 2002 if AT &T's margin is brought up to Comcast's level. With AT &T Broadband's revenue expected to grow in the 12% to 15% range, this $1.6 billion worth of opportunity clearly will compound dramatically. AT &T Comcast Corporation: Synergy at Work May 8, 2002/Page 5 MMM .. sue•tan4al F9rttlw., m inpoeement opportunity ina diG to eyn•agi•a nmga abMa v Covanal bhrgh 42% �. � AT&T BnarJbund Rblgin 25w. DB nee• "% A y AT&T BmodWrd'O1 Revenudr a SUB pet•mlvl Manin lmprevem•m 51.68 lo- � iiin � AT@T� a C rn w %,ter. heiia��.ree�_ A /iR'�CO:i10OtL The chart below shows how Comcast has successfully integrated almost 3.6 million new customers in the past two years and has done so while still performing in a financially strong manner (N.B., the blue bars show our EBITDA, and the green line graph tracks our margin). Over this two -year period, as Comcast Value Creation Through Synergies ' -:most ntegnted 1.7mifim eubuftgm in 2000 and 1.9 rnbon aubwben in flit M•o QWRdR of 2001 '.E07DA 'J'1'. NagU Sri O.C'. } c'. cx ox a m 0 m xoo0 20001 ��: u.oeamrna,.,se.awenom.� integrated our new cable customers, we also simultaneously launched close to 1 million high -speed data customers and over 2 million digital customers. Comcast's focus as we merge our operations with those of AT &T Broadband will be to maintain the same kind of fiscal and operational discipline we have always demonstrated. We are confident that this will enable us to continue to perform well financially as we integrate even more systems and roll out additional products and services. AT&T Comcast Corporation: Synergy at Work May 8, 20021Page 6 In looking today at the Comcast —AT &T Broadband merger, we are taking a conservative approach by factoring in more time to achieve what we have done so many times before in other deals. Rather than saying that operational parity will be accomplished in 12 to 24 months, we are instead projecting operational parity by end of the three -year period following merger closing in 2002 and the realization of more industrylike margins by year -end 2005, This is not to say, of course, that we will not do things faster. For instance, if the combined companies' cable base is forecast to grow at a very conservative rate of 11% and we can achieve synergies that scale in at $500 million over the period from 2002 through year -end 2005, then cash flow in each year from 2002 through 2005 will increase 20 %. We see this as a very achievable scenario. AT &T Comcast Corporation: Synergy at Work May 8, 2002 /Page 9 Bucket Three: New Product and Service Rollout The obvious question is, "What can AT &T Comcast do when it comes to bringing new products and services to customers?" Well, with 38 million homes passed and 22 million customers, AT &T Comcast will not only have the reach to offer additional cable channels, we will also have the resources needed to develop a whole range of new video and data applications. Value Creation Through Synergies ... . .... . • Scale enables cost -effective and profitable content creation 22 million subscribers — Reduced risk in start-up phase Access to quolity programming More attraclive to advertising sponsors • Leverages Comcast's success in content development to date a Launch of additional channels will create significant value AT &T Comcast will be able to do exciting things in terms of video on demand, interactive television, and high -speed broadband, And we foresee the creation of entirely new businesses just as a result of the synergies generated from the bringing together of our companies. And while it may be difficult to quantify right now exactly how the synergies will play out in regard to specific new products and services, we think that when we look back five or ten years from now this will be the one area where perhaps we did not allow for as much potential as we might have. AT&T Comcast Corporation: Synergy at Work May 8, 2002 /Page 7 Integration of Systems COMCAST'S RECORD OF SUCCESS Comcast has a long history of successfully integrating new cable systems into our operations. What we try to do when we acquire a new system is to follow our tried - and -true roadmap, which enables us to set clear priorities: Improve financial performance; Roll out new products and services; Keep a close eye on the day -to -day basics of the business. The plan is simple, but it has worked well for us time and time again. In January 2001, Comcast acquired 1.4 million AT &T Broadband customers. At the time of acquisition, the average system had a margin of between 31 % and 31.6 %. In 2001 we brought things up to 37.7°/x, and this year we project that these systems will see margins of 40.6 %. So, to date we are tracking just right. AT &T Comcast Corporation: Synergy at Work May 8, 2002IPage 8 Working Capi-ra.'. FUNDING FUTURE GROWTH TODAY Successful facilities -based providers of broadband services, such as Comcast, require cash reserves and working capital in order to invest in their infrastructure and business development. We have estimated that somewhere between $1 billion and $2 billion in funding will be required at the merger transaction's closing to provide the appropriate cash reserves necessary to underwrite the operations and capital expenditures of AT &T Comcast. The chart below illustrates the organizational structure adopted to secure the financing needed. The objective is to equalize all credits, both Comcast's and those of the entities being acquired under AT &T Broadband (i.e., MediaOne and AT &T Broadband LLC), with cross - guarantees, upstream guarantees, and downstream guarantees from the new issuer —AT &T Comcast Corporation. On May 1, 2002, John R. Alchin, executive vice president and treasurer of Comcast, announced that the company has signed agreements with JP Morgan Chase, Citibank, and a syndicate of other banks that provide the $12.85 billion in financing necessary for the merger's completion. This, coupled with existing lines of credit available to Comcast, ensures that the company has more than adequate financing available to meet expected needs. We feel especially good that we have been able to put this financing in place so quickly in a marketplace that has been relatively tight for new issuers. With its very strong balance sheet, Comcast is also currently generating high "free cash flow" from its operations, providing a significant nondebt source of funding for capital expenditures. Over 95% of Comcast's customers are already served by upgraded /rebuilt systems, and so related capital expenditures are decreasing. This means that more of our free cash flow can be deployed to accelerate the upgrading of AT &T Broadband cable systems. AT&T Comcast Corporation: Synergy at Work May 8, 2002 1Page 10 Debt to Cash Flow A STRONG BALANCE SHEI_T "Debt to cash flow ratio" is the common industry metric for determining the financial strength of an MSO. Comcast currently enjoys a significantly stronger balance sheet than AT &T Broadband and has a ratio of debt to 2001 operating cash flow of less that 4 to 1. AT &T Broadband's ratio, on the other hand, is currently over 8 to 1. The merged company will have a first -year combined debt to operating cash flow ratio of less than 5 to 1. Using very conservative assumptions, this number deleverages to an excellent ratio of 2.5 to 1 by 2004. Investment Grade Rating A SOLID COMPANY As illustrated in the table below, AT &T Comcast Corporation will be a solid, investment -grade company. In fact, on March 4, 2002, Fitch Ratings assigned indicative ratings of BBB to the senior unsecured debt obligations of AT &T Comcast Corporation. Moody's and Standard and Poor's are currently reviewing the combined entities' rating position; both fines, however, have suggested that the new company will maintain its investment grade status. Summary credit Statistics of Selected Cable Companies Consobdated Results • Source Merrill Lynch & Co. (Dollars in Billions) AMT Co .,4 AEm,m, A.012A M2 AOl mm, Go. pple Wd.. Cbmm. Mark I"tl011T Not.... YNt a5mnl,c '/wlMr C,mm. IgcYmc (EM9] Cmmm. Comm llC M1nec NNE. 911111-1 etoosa9e9 9ollz'ees emee. me. tae. 121. 0.119. ,ol rs E➢ 12A fit an sm = :;. I'm 13 1m �fE d itm 408 K. ilm 702 003 Totl R9lECal,erle, 9991 ia5 052 05.. film f 11E3 025 1128 hone, MI" Totl hela.Ca,eNOel ®Rllt .,T. 32. 33x 65. ED. 115x E ➢x BE. lam.w..r •r��ro..a.m Mor...zunvx. r,rtoo.,r.. r,ro. A 1 s. r Comcast Corporation: Synergy at Work May 8, 2002/Page 11 comcast PRESS RELEASE Contact: Kelley L. Claypool, Director, Investor Relations (215) 981 -7729 Marlene S. Dooner, Vice President, Investor Relations (215) 981 -7392 William E. Dordelman, Vice President, Finance (215) 981 -7550 FOR IMMEDIATE RELEASE COMCAST REPORTS STRONG FIRST QUARTER RESULTS Reports Consolidated Pro Forma Operating Cash Flow Growth of 18.3% .nx COMCAST CABLE REPORTS PRO FORMA REVENUE GROWTH OF 12.3% AND PRO FORMA OPERATING CASH FLOW GROWTH OF 13.5% New Digital and High -Speed Internet Services Drive Recurd Performance QVC ACHIEVES OPERATING CASH FLOW GROWTH OF 11.4% Philadelphia, PA — May 1, 2002 ... Comcast Corporation today reported results for the three months ended March 31, 2002. The Company reported consolidated revenues of $2.673 billion, a 19.7% increase from the $2.232 billion reported in the first quarter of 2001. Consolidated operating cash flow increased 27.5% to $808.2 million from the $634.2 million reported in the first quarter of 2001. On a pro forma basis, the Company's consolidated revenues and operating cash flow for the quarter ended March 31, 2002 increased 12.0% and 18.3 %, respectively, over the first quarter of 2001. Brian L. Roberts, president d Comcast Corporation said, "We delivered another quarter of outstanding operating and financial results, laying the groundwork to comfortably meet our previously stated year -end 2002 guidance for each of our businesses." "The cable division reported one of its best quarters ever, accelerating revenue and operating cash flow growth and delivering new digital and high -speed Internet customers, even as we completed the huge task of transitioning almost one million customers to our new high -speed Internet service. We are more excited than ever about the opportunities for growth in the cable business and look forward to completing our merger with AT &T Broadband. We believe our strong track record of operating performance, successful system integration and balance sheet strength will help support accelerated growth rates and provide a whole new range of opportunities for the new company." Cable Division Results Cable division results are presented on a pro forma basis, which only adjusts for the timing of acquisitions. Pro forma results assume that all acquisitions were effective on January 1, 2001. Pro forma results include the acquisition from AT &T Corp, of 585,000 and 112,000 cable subscribers in April 2001 and June 2001, respectively, and the acquisition of Home Team Sports in February 2001. Cable division revenues for the quarter ended March 31, 2002 were $1.469 billion, representing a pro forma 12.3% increase from the $1.309 billion in the first quarter of 2001. Operating cash flow for the quarter was $597.5 million, a pro forma increase of 13.5% over the $526.3 million for the same period of 2001. Cable subscribers grew to 8.512 million, a pro forma twelve -month trailing growth rate of 0.9 %. Continuing strong demand for Comcast Digital Cable contributed to a 7.0% increase in pro forma video revenues in the first quarter. High -speed Internet service revenue more than doubled over the first quarter of 2001 reflecting significant growth in the customer base and rate increases. Together, Comcast Digital Cable and High Speed Internet services contributed more than half of the cable division's revenue growth in the first quarter. Operating cash flow margins improved to 40.7% from 40.2% reflecting the successful integration and improved operating performance of recently acquired cable properties. The cable division added 203,700 Digital Cable subscriptions in the first quarter, a weekly average of more than 15,600. Comcast Cable finished the quarter with 2.540 million Digital Cable subscriptions, representing a 51% pro forma increase over 2001 and a subscription penetration rate of over 30 %. Comcast Digital Cable is now available to nearly 99% of Comcast's cable subscribers. During the quarter, the cable division added 92,400 high -speed Internet customers, a weekly average of more than 7,100 net additions. Comcast Cable finished the quarter with 1.041 million high -speed Internet customers, representing an 81 % pro forma increase over 2001 levels, and a penetration rate of over 9% of marketable homes. Comcast Cable continued to expand the availability of high -speed Internet service. At quarter end nearly 11.3 million homes, or more than 81% of the homes in Comcast's footprint, had access to Comcast's high -speed Internet service. Mr. Roberts said, "With our cable system rebuild virtually complete, the power of our upgraded cable systems is evident in the significant contribution to growth by our new digital cable and high -speed Internet services. Building on our success in rolling out new products, we will expand our offering of video -on- demand (VOID) to a broader range of markets this year." Commerce: QVC QVC's consolidated revenues for the quarter ended March 31, 2002 were $993.5 million, representing a 12.4% increase from the $884.0 million reported in the first quarter of 7001. Consolidated operating cash flow for the quarter was $192.3 million, an increase of 11.4% over the $172.7 million reported in the prior year quarter. Mr. Roberts said, "QVC continues to build its position as the leading global electronic retailer. In the U. S. it is, by far, the largest electronic retailer, with the most consistent financial performance. In the first quarter, QVC's domestic business continued to drive QVC's performance with revenue growth of 11.5°/x, operating cash flow growth of 11.6% and a stable cash flow margin of 22.6 %. At the same time, QVC is continuing to expand its international businesses in QVC- Germany, which is now operating with breakeven cash flow. We are also pleased with the early progress of our new channel, QVC -Japan which has just celebrated its first year of operation." Content Comcast's content businesses include E! Networks, ComcastSpectacor, The Golf Channel, Outdoor Life Network, and G4. Results are presented on a pro forma basis, assuming that the consolidation of The Golf Channel, effective June 2001, and the acquisition of Outdoor Life Network, effective in October 2001, occurred on January 1, 2001. Solid growth in carriage continued to drive the results of E! Networks, Outdoor Life Network and The Golf Channel, contributing to double -digit increases in revenue and operating cash flow. Comcast's content business segment reported pro forma revenue and operating cash flow growth of 11.8% and 33.6 %, respectively, in the first quarter. Consolidated Results The Company's consolidated results include all acquisitions as of the dates of their closing. For the quarter ended March 31, 2002, the Company's consolidated results include the acquisition from AT &T of 585,000 and 112,000 cable subscribers in April 2001 and June 2001, respectively, the acquisition of Home Team Sports in February 2001, the consolidation of The Golf Channel, effective in June 2001, and the acquisition of Outdoor Life Network, in October 2001. Pro forma results assume that all acquisitions were effective on January 1, 2001. For the three months ended March 31, 2002, the Company reported consolidated revenues of $2.673 billion, a 19.7% increase from the $2.232 billion reported in the first quarter of 2001. Consolidated operating cash flow increased 27.5% to $808.2 million from the $634.2 million reported in the first quarter of 2001. On a pro forma basis, the Company's consolidated revenues and operating cash flow for the quarter ended March 31, 2002 increased 12.0% and 18.3 %, respectively, over the first.quarter of 2001. For the three months ended March 31, 2002, the Company reported a consolidated net loss of $88.9 million or $0.09 per share as compared to net income of $1.001 billion or $1.04 per share in the same prior year period. The consolidated loss reported for the first quarter of 2002 includes depreciation and amortization of $387.1 million or $0.41 per share and non - operating loss items of $320.6 million or $0.33 per share. The non - operating items were primarily the net non -cash losses due to the mark -to- market adjustments on trading securities, derivatives and hedged items of $243.9 million or $0.26 per share. Net income in the first quarter of 2001 included depreciation and amortization of $734.7 million or $0.76 per share and tax expense of $485.6 million or $0.50 per share as well as non - operating income items of $1.770 billion or $1.83 per share. The non - operating items were primarily income related to the gain from the systems exchange with Adelphia Communications of $1.199 billion or $1.24 per share and income related to the change in accounting for derivative financial instruments of $384.5 million or $0.40 per share. New Accounting Statement On January 1, 2002, the Company adopted a new accounting statement (FAS 142) that addresses how intangible assets, including goodwill, are accounted for in financial statements upon and subsequent to their acquisition. In connection with this adoption the Company completed an assessment of goodwill and other indefinite lived intangible assets, which consist primarily of our cable franchise operating rights. Based on this assessment, the Company determined that no impairment charge resulted from adopting this new accounting statement. This press release contains forward- looking statements. Readers are cautioned that such forward- looking statements involve risks and uncertainties that could significantly affect actual results from those expressed in any such forward- looking statements. Readers are directed to Comcast's Quarterly Report on Form 10 -Q for a description of such risks and uncertainties. Comcast Corporation will hold its quarterly conference call with the financial community today, May 1, 2002, at 10:30 a.m. Eastern Time (ET). The conference call will be broadcast live via the Internet at the Company's Investor Relations website at www.cmcsk.com. A recording of the call will be available on this website from 12:30 p.m. ET on May 1, 2002 through midnight ET on May 8, 2002. Those parties interested in participating via telephone should dial (847) 413 -3149. A telephone replay will begin immediately following the call until May 2, 2002 at midnight ET. To access the rebroadcast, please dial (630) 652 -3000 and enter code 5605377. To automatically receive Comcast financial news by email, please visit www.cmcsk.com and subscribe to e-mail Alerts. Comcast Corporation (www.comcast.com) is principally involved in the development, management and operation of broadband cable networks, and in the provision of electronic commerce and programming content. Comcast Cable is the third largest cable company in the United States serving more than 8.5 million cable subscribers. Comcast's commerce and content businesses include majority ownership of QVC, Comcast - Spectacor, Comcast SportsNet, The Golf Channel, Outdoor Life Network, G4, a controlling interest in E! Networks, and other programming investments. Comcast's Class A Special and Class A Common Stock are traded on The Nasdaq Stock Market under the symbols CMCSK and CMCSA, respectively. Comcast. Condensed Consolidated Statement of Operations (Unaudited) (In millions, except per share data) Three Months Ended March 31, 2002 2001 Service revenues $1,679.0 $1,348.0 Net sales from electronic retailing 993.5 884.0 2,672.5 2,232.0 Cost of goods sold from electronic retailing 631.2 556.6 Operating, selling, general and administrative expenses 1,233.1 1,041.2 Operating cash flow 808.2 634.2 Depreciation expense 333,8 240.8 Amortization expense 53.3 493.9 Operating income (loss) 421.1 (100.5) Interest expense (186.7) (182.3) Investment income (expense) (248.0) 214.7 Equity in net income (losses) of affiliates (5.4) 2.9 Other income (expense) (23.6) 1,194.2 (463.7) 1,229.5 Income (loss) before income taxes, minority interest and cumulative effect of accounting change (42.6) 1,129.0 Income tax expense (2.7) (485.6) Minority interest (43.6) (26.7) Income (loss) before cumulative effect of accounting change (88.9) 616.7 Cumulative effect of accounting change 384.5 Net income (loss) $88.9) $1,001.2 Basic earnings (loss) per common share Income (loss) before cumulative effect of accounting change ($0.09) $0.65 Cumulative effect of accounting change 0,41 Net income (loss) ($0.09) $1.06 Basic weighted average number of common shares outstanding 951.4 945.3 Diluted earnings (loss) per common share Income (loss) before cumulative effect of accounting change (§0.09) $0.64 Cumulative effect of accounting change 0.40 Net income (loss) ( §0.09) $1.04 Diluted weighted average number of common shares outstanding 951.4 965.0 Comcast. Condensed Consolidated Balance Sheet (Unaudited) (in millions) March 31, December 31, 2002 2001 CURRENT ASSETS $794.7 $698.2 Cash and cash equivalents $543.1 $350.0 Investments 2,087.4 2,623.2 Accounts receivable, net 979.9 967.4 Inventories, net 426.1 454.5 Other current assets 193.3 153.7 Total current assets 4,229.8 4,548.8 INVESTMENTS 1,065.3 1,679.2 PROPERTY AND EQUIPMENT, net of accumulated depreciation 926.6 880.2 of $2,991.0 and $2,725.7 7,034.0 7,011.1 GOODWILL 6,441.2 6,289.4 CABLE FRANCHISE OPERATING RIGHTS 16,491.1 16,486.4 OTHER INTANGIBLE ASSETS, net of accumulated amortization 9.4 9.4 of $745.4 and $664.6 1,534.2 1,733.5 OTHER NONCURRENT ASSETS, net 349.8 383.4 Accumulated other comprehensive income (loss) $37,145.4 $38,131.8 LIABILITIES AND STOCKHOLDERS' EQUITY 14,249.0 14,473.0 CURRENT LIABILITIES Accounts payable $794.7 $698.2 Accrued expenses and other current liabilities 1,637.0 1,695.5 Deferred income taxes 89.9 275.4 Current portion of long -term debt 267.5 460.2 Total current liabilities 2,789.1 3,129.3 LONG -TERM DEBT, less current portion 11,356.0 11,741.6 DEFERRED INCOME TAXES 6,406.7 6,375.7 OTHER NONCURRENT LIABILITIES 1,418.0 1,532.0 MINORITY INTEREST 926.6 880.2 STOCKHOLDERS' EQUITY Class A special common stock 914.5 913.9 Class A common stock 21.8 21.8 Class 8 common stock 9.4 9.4 Additional capital 11,769.9 11,752.0 Retained earnings 1,541.4 1,631.5 Accumulated other comprehensive income (loss) (8.0) 144.4 Total stockholders' equity 14,249.0 14,473.0 $37,145.4 $38,131.8 Comcast. Pro Forma Financial Oat. by Business Segment (U dit d) Ii) (in millions, except margin data) Supplemental Information - Cable & Content Segments 12) (3) (4) Pro Forma Historical Data Cable Commerce Content Other Total Three Months Ended March 31, 2002 FY'01 4001 3001 2001 1001 Revenues $1,469.4 $993.5 $218,9 ($9.3) $2,672.5 Operating Cash Flow (Deficit) $597.5 5192.3 $55.9 (877. 5808.2 Operating Cash Flow Margin 40.7% 19.4% 25.5% NM J0.2X Capital Expenditures (5) 5358.1 531.8 $6.0 $3.2 5399.1 Total Debt (6) $81007 $246.2 5374.4 $2,302.2 $11.623.5 Three Months Ended March 31, 2001 $701.1 $191.9 $138.3 $175.2 $195.7 Revenues $1,308.9 $884.0 $195.7 ($3.1) $2,385.5 Operating Cash Flow (Deficit) 5526.3 5772.7 542.0 ($57. 5683.5 Operating Cash Flow Margin 40.2% 79.5% 21.5% NM 28.7X Capital Expenditures (5) 5437.7 526.1 $9.1 544.0 $516.9 Total Debt (6) $8,195.0 $451.7 $435.5 $1,703.8 $10,786.0 Supplemental Information - Cable & Content Segments Pro Forma Historical Data FY'01 4001 3001 2001 1001 Cable (2) Revenue 55,4881 $1,424.6 $1.378.1 $1,376.5 $1,308.9 Operating Cash Flow (7) $2,251.2 $583.3 5575.0 $566.6 5526.3 Operating Cash Flow Margin (7) 41.0% 40.9% 41.7% 41.2% 40.2% Content (3) Revenue $701.1 $191.9 $138.3 $175.2 $195.7 Operating Cash Flow $152.7 $30.9 $30.7 549.1 542.0 ,Operating Cash Flow Margin 21.8% 16.1% 22.1% 28.0% 21.5% M Pro forma financial data is presented as if acquisitions occurred at the beginning of 2001. The Information presented above is not necessarily indicative of what the results would have been had the Company operated the acquired businesses since the beginning of 2001. Historical financial data by business segment, as required under generally accepted accounting principles, is available in the Company's Quarterly Report on Form 10 -0. (21 In February 2001, the Company acquired Home Team Sports and in April 2001 and June 2001, the Company acquired cable systems serving 585,000 and 112,000 subscribers, respectively, from AT&T Corp. In connector, with the adoption of a new accounting standard related to the income statement characterization of reimbursements (EITF No. 01 -14), the Company reclassified its franchise lees collected from cable subscribers from a reduction of selling, general and administrative expenses to service revenue for all periods presented. (3) Content includes El Networks, Comcast-Spectacor, The Golf Channel, Outdoor Life Network and G4. The Company consolidated The Golf Channel and acquired Outdoor Life Network in June 2001 and October 2001, respectively. In connection with the adoption of a new accounting standard related to the consideration paid to customers (EITF No. 01 -09), the Company reclassified the amortization of distribution fees paid by certain content subsidiaries to cable television and satellite broadcast systems for carnage of their programming from expense to a revenue reduction for all periods presented. (4) Other includes the Company's domestic wirelire telecommunications business. international wireless operations, Corporate and elimination entries related to the segments presented. (5) Far acquired businesses, includes capital expenditures made by the Company subsequent to the data of acquisition by the Company. (6) Total debt includes both current and long -term portions as reported in the Company's consolidated balance sheet. Total Cable debt as of March 31, 2001 Includes 51.152 bAlion of intercompany borrowings due to parent. (7) Excludes the incremental expenses of $140 million incurred in the fourth quarter of 2001 related to toe transition of Comcast High -Speed Internet customers from Excile@Home to Comcasfs network. r comcall . Pro Forma Data - Cable Segment (Unaudited) ('1) (2) (5) Franchise Fees Total $51.2 $1.469.4 $2.01 $57.68 $47.6 $1,308.9 $1.89 $5187 Comcast Growth Growth (3) 1Q02 High -Speed (4) vs. 4 O1 Vi 12 Advertising Internet th r Three Months Ended March 31, 2002 Homes Passed (000's) 13,921.0 Revenue (millions) $1,149.6 581.1 '$119.6 $67.9 Monthly average revenue per cable subscriber $45.13 53.18 $4.69 $2.67 Three Months Ended March 31, 2001 61.1% 61.2% 61.9% (0.1) pis Revenue (millions) $1,074.8 $71.4 $58.4 $56.7 Monthly average revenue per cable subscriber $42.60 $2.83 $2.31 $2.24 (5) Franchise Fees Total $51.2 $1.469.4 $2.01 $57.68 $47.6 $1,308.9 $1.89 $5187 Digital Cable (6) "Digital Ready" Subscribers (000's) 8,400.2 8.375.3 7,696.4 0.3% 9.1% Subscriptions (000's) (7) 2,539.5 2,335.8 1,678.3 8.7% 51.3% Penetration (8) 30.2% . 27.9% 21.8% 2.3 pts 8.4 pis Quarterly Net Subscription Additions (000's) 203.7 213.8 158.4 (4.7 %) 28.6% Monthly Average Revenue per Subscription $10.61 $10.53 $10.46 0.8% 1.4% Comcast High -Speed Internet "Marketable" Homes Passed (000's) 11,299.0 10,399.6 7,913.0 8.6 %, 42.8% Subscribers (000's) 1,040.5 948.1 574.3 9.7% 81.2% "Marketable" Homes Penetration 912% 9.1% 7.3% 0.1 pts 1.9 pts Quarterly Net Subscriber Additions (000's) 92.4 155.4 94,9 (40.5 %) (2.6 %) Monthly Average Revenue per Subscriber 54010 $35.08 $36.95 14.3% 8.5% (1) Pro forma data is presented as if acquisitions occurred at the beginning of 2001, The information presented above is not necessarily indicative of what the results would have been had the Company operated the acquired businesses since the beginning of 2001. (2) In February 2001, the Company acquired Home Team Sports and in April 2001 and June 2001, the Company acquired cable systems serving 585,000 and 112,000 subscribers, respectively, from AT&T Corp. (3) Video revenues consist of our basic, expanded basic, premium, pay -per -view, equipment, and digital services. (4) Other Cable subscriber revenues include installation revenues, guide revenues, commissions from electronic retailing, other product offerings and revenues of our regional sports programming networks. (5) In connection with the adoption of a new accounting standard related to the income statement characterization of reimbursements (EITF No. 01-14), the Company reclassified its franchise fees collected from cable subscribers from a reduction of selling, general, and administrative expenses to service revenue for all periods presented. (6) 1002 4001 1001 Digital Subscribers (000's) 1,856 1,742 1,321 Digital Subscriber Penetration 22.1% 20.8% 17.2 %, Average Revenue per Digital Subscriber $14,38 $13.95 $13.25 (7) Each digital converter box counts as one digital cable subscription. (8) Digital cable subscriptions as a percentage of "digital ready" subscribers. Certain subscribers may have multiple digital cable subscriptions. Growth Growth 1Q02 4 O1 10101 vs. 4 O1 vs. 1G01 Cable Homes Passed (000's) 13,921.0 13,836.3 13,625.7 0.6% 2.2% Subscribers (000's) 8,511.7 8,471.1 8,434.5 0.5% 0.9% Penetration 61.1% 61.2% 61.9% (0.1) pis (0.8) pis Quarterly Net Subscriber Additions (000's) 40.6 34.1 47.7 19.1% (14.9 %) Digital Cable (6) "Digital Ready" Subscribers (000's) 8,400.2 8.375.3 7,696.4 0.3% 9.1% Subscriptions (000's) (7) 2,539.5 2,335.8 1,678.3 8.7% 51.3% Penetration (8) 30.2% . 27.9% 21.8% 2.3 pts 8.4 pis Quarterly Net Subscription Additions (000's) 203.7 213.8 158.4 (4.7 %) 28.6% Monthly Average Revenue per Subscription $10.61 $10.53 $10.46 0.8% 1.4% Comcast High -Speed Internet "Marketable" Homes Passed (000's) 11,299.0 10,399.6 7,913.0 8.6 %, 42.8% Subscribers (000's) 1,040.5 948.1 574.3 9.7% 81.2% "Marketable" Homes Penetration 912% 9.1% 7.3% 0.1 pts 1.9 pts Quarterly Net Subscriber Additions (000's) 92.4 155.4 94,9 (40.5 %) (2.6 %) Monthly Average Revenue per Subscriber 54010 $35.08 $36.95 14.3% 8.5% (1) Pro forma data is presented as if acquisitions occurred at the beginning of 2001, The information presented above is not necessarily indicative of what the results would have been had the Company operated the acquired businesses since the beginning of 2001. (2) In February 2001, the Company acquired Home Team Sports and in April 2001 and June 2001, the Company acquired cable systems serving 585,000 and 112,000 subscribers, respectively, from AT&T Corp. (3) Video revenues consist of our basic, expanded basic, premium, pay -per -view, equipment, and digital services. (4) Other Cable subscriber revenues include installation revenues, guide revenues, commissions from electronic retailing, other product offerings and revenues of our regional sports programming networks. (5) In connection with the adoption of a new accounting standard related to the income statement characterization of reimbursements (EITF No. 01-14), the Company reclassified its franchise fees collected from cable subscribers from a reduction of selling, general, and administrative expenses to service revenue for all periods presented. (6) 1002 4001 1001 Digital Subscribers (000's) 1,856 1,742 1,321 Digital Subscriber Penetration 22.1% 20.8% 17.2 %, Average Revenue per Digital Subscriber $14,38 $13.95 $13.25 (7) Each digital converter box counts as one digital cable subscription. (8) Digital cable subscriptions as a percentage of "digital ready" subscribers. Certain subscribers may have multiple digital cable subscriptions. LC���II Pro Forma Data - Commerce Segment (QVC) (Url_lufl?t! Silj Three Months Ended March 31, 2002 Revenue (millions) Gross Margin Operating Cash Flow (Deficit) (millions) Operating Cash Flow Margin Average Homes (millions) (3) Revenue per Average Home (in local currency) Three Months Ended March 31, 2001 Revenue (millions) Gross Margin Operating Cash Flow (Deficit) (millions) Operating Cash Flow Margin Average Homes (millions) (3) Revenue per Average Home (in local currency) Base 1 UK Germany Uther Z Total $841.9 $67.6 $60.5 $23.5 $993.5 36.9% 35.2% 31.1% 38.7% 36.5% $190.4 $5.8 $0.5 ($4.4) $192.3 22.6% 8.5% 0.8% (18.4 %) 19.4% 73.5 9.6 24.2 N/A N/A $11.46 £4.82 E 2.84 N/A N/A $755.1 $68.7 $46.1 $14.1 $884.0 37.5% 34.9% 28.9% 48.9% 37.0% $170.6 $5.5 ($0.8) ($2.6) $172.7 22.6% 8.0% (1.7 %) (18.4 %) 19.5% 70.8 8.9 23.1 N/A N/A $10.67 £5.31 E 2.15 N/A N/A (1) Base Business includes domestic channel and QVC.com. (2) Other includes domestic and international infomercial businesses and QVC Japan. (3) Note that while QVC has the potential to serve this many homes in Germany, it is estimated that only approximately 40% of the homes in Germany are programmed to receive the QVC channel. _ c Omcas [. Reconciliation of Diluted EPS to OCF per share (Unaudited) (dollars in millions, except per share data) Net income (loss) as reported Items to reconcile net Income (loss) to operating cash flow: Depreciation & amortization Interest expense Income tax expense Ncn•operating items (1) Operating Cash Flow as reported Diluted weighted average shares outstanding (1) Detail of nonoperating items: Investment (income) expense - mark to market adjustments on trading securities, derivatives and hedged items, net Investment expense - investment impairment losses (2) Investment Income - reclassification of unrealized gains (3) Other income - gain on Adelphia systems exchange (4) Cumulative effect of accounting change, net of tax (5) All other, net (6) Total non - operating items Three Months Ended March 31, 2002 2001 per per $ share $ share ($88.9) .($0.09) $1.,001.2 $1,04 387.1 0.41 734.7 0.76 186.7 0.20 182.3 0.19 2.7 485.6 0.50 320.6 0.33 (1,769.6) (1.83) $808.2 $0.85 $634.2 $0.66 $243.9 12.6 951.4 $0.26 0.01 64.1 0.06 $320.6 $0.33 965.0 12.8 $0.01 894.1 0.93 (1,092.4) (1.13) (1,198.6) (1.24) (384.5) (OAO) (1.0) ($1,769.6) (51.83) (2) The Company records losses on its investments for which the Company has determined that a decline in value of the investment was considered other than temporary. The loss for 2001 relates principally to the Company's investment in AT&T, a portion of which was exchanged on April 30, 2001. (3) In connection with the adoption of a new accounting standard for the accounting of derivative instruments and hedging activities in the first quarter of 2001, the Company reclassified its investment in Sprint PCS from an available for sale security to a trading security. (4) Represents the gain recognized upon the completion of the Company's cable systems exchange with Adelphia Communications Corporation in January 2001, (5) Represents the effect of adopting the new accounting standard for the accounting of derivative instruments and hedging activities. (6) Includes investment, interest and dividend income, equity in net (income) losses of affiliates, other income (expense) and minority interest. V Comcast says it doesn't have any off - the -books subsidiaries By Miriam Hill Inquirer Staff Writer As investors increase scrutiny of corporate financial reporting, Comcast Corp. said it consolidated all its results on its own books. That means no off - the -books subsidiaries that could borrow money or cover losses that shareholders do not know about, said John Alchin, treasurer of the Philadelphia -based cable company. The question has arisen because debt at off - the -books subsidiaries triggered the downfall of Houston energy trader Enron Corp. and has raised questions at Adelphia Communications Corp., the Coudersport, Pa., cable company. Adelphia revealed in late March that it had co- signed loans for at least $2.3 billion in debt at entities controlled by the Rigas family, which founded the company. The debt was taken on by Highland Holdings and related entities that the Rigases used to buy Adelphia stock. Comcast president Brian Roberts controls shares in Comcast through Sural L.L.C. That entity has no debt, Comcast said. Contact Miriam Hill at 215- 854 -2212 or hillmbgphillynews.com <mailto:hillmb @phillynews.ccm> u6: 1•H uz rni i•i:oa rnn ai., --,- o -„ �AT6 " Broad ban a PO 80, '4r San gam, ,. CA z45e3 June 12, 2002 VT:' FACSIMILE AND OVERNIGHT NIATL William M. Marticorena, Esq. Rutan and Tucker, LLP 611 Anton Boulevard, 14`h Floor Costa Mesa, California 92626 Re: City of Berkeley, California; City of Richmond, California; Ci i of Santa Cruz, California; Contra Costa County, California; and the Count! of Santa Crte, California (the "Franchising Communities"): Supplements Questionnaire Relating to AT&T Broadband/Comcast Corporation Merger (tl " Supplementai Questionnaire ") Dear Mr.lvlarticorena: We are writing in response to your letter dated May 29, 2002 on behalf o: the Franchising Communities regarding the Supplemental Questionnaire. As you know, federal and state laws limit the scope of review and information .i local franchise authority ( "LFA ") may require as part of the change of control approval prow ';s. Beyond the information required by the FCC Form 394 application, franchise or applica le local law, an LFA may only request "such additional information as may be reasonal y necessary to determine the qualifications of the proposed transferee." A federal court-has re early confirmed that a cable operator need not answer any requests for information that are out! de this scope or are otherwise unreasonable, and such refusal may not b:: used as a basis for & tying consent to .an FCC Form 394 application. Notwithstanding the foregoing but reserving all rights, in an effort to ac .ommodate any reasonable and lawful need for information that the Franchising Communitic may have, we provide, for informational purposes only, the attached responses to & ; Supplemental Questionnaire. Your questions are restated followed by our response in bo Iface type. By responding, the companies do not waive any arguments regarding the re !vane of such information or the Franchising Communities' authority to mane such requests. In addition; we note that we do not believe there is any legal basis for your arbitrarily imposed '0 day period to respond to the Supplemental Questionnaire. r� .. .. ., ... . .. .... ..... ..... _.... ....... ♦�i -.._mac 1Q 003 Page 2 of 2 William Marticorena, Esq. June 12, 2002 We hope you find the attached information helpful. We look forward to work ng with you and the Franchising Communities to successfully complete the review of our ?CC Form 393 application. As always, please feel free to contact us with any additional questir is or concerns. Sin erely, F. K nt LeacoClc Vice President Franchising & Govcrnment Affairs Bay Area Markets Attachments k... r,,, AT &T COMCAST CORPORATION SUPPLEMENTAL QUESTIONNAIRE A. OT)-ESTIONS RELATING TO INTERVAL /EXTERNAL COP TROLS OF CONFL[CTS OF INTEREST AiND.OR SELF - DEALINGS BETWEEN A -M AyIONG AT &T COivICAST CORPORATION OR AW, RELATED ENTITY . THEREOF, A'N'D /OR ANY OFFICER DIRECTOR OR 5% OR GREATER SHARES ALDER, OR ANY RELATED ENTITY THEREOF. (1) Describe, in detail, any and all procedures which are current j in place, or which will be in place as of the date of closing of the vlerger, which are dd :,igned and/or intended to prevent and. %or minimize the ability of any officer, director, or :o or greater shareholder of AT &T Comcast Corporation to eneage in acts or omission with AT &T Comcast Corporation which constitute Self - Dealing Transactions or Conflic s of Interest. Response: AT &T Comcast Corporation ( "AT &T Comcast ") wi I utilize an appropriate system of internal checks and balances, including the ap :,ointment of independent, outside directors that will constitute a majority of the B -ard and the utilization of an independent auditing committee, to prevent self dealing and conflicts of interest. Moreover, as described in Exhibit 7 of the FC C Form 394 Application, AT &T Comcast has agreed that, except as described in the next sentence, after the completion of the AT &T Comcast transaction neitt .:r it nor any of its subsidiaries will enter into any material transaction with Brian 1 Roberts or any of his associates or any permitted transferee unless such trausactio, is approved by AT &T Comcast's disinterested directors. Compensation arrangem :nts between Brian L. Roberts or any of his associates on the one hand and AT &I Comcast or any of its subsidiaries on the other hand will require the app oval of the disinterested directors of the compensation committee of the AT &T Co ncast Board. In addition, specific examples of Comeast's methods are illustrativ, . First and foremost, over the 40 -year history of Comcast, Ralph Roberts and the management of Comcast have demonstrated their personal integrity, which is part of the company culture that will continue in AT &T Comcast. Second, C mcast has a Board of Directors with a majority of independent, outside directors. "he Board of Directors has a very active audit committee and utilizes an internal au( :t group that reports to the committee. In connection with preparation of Com, act's annual report and proxy statement, each director certifies that he or she is i compliance with all conflict of interest laws and knows of no incident of self - deaii g or conflict of interest by himself or herself or an officer or director. Third, all m: jor decisions are reviewed and approved by a Finance committee consistin ;; of senior management, Fourth, Comcast has an Ethics Code which is made part of the basic training received by every employee and with which empl !gees certify compliance every year. Finally, Comcast has an open door policy the encourages any employee to approach management at any level with all concei as they may have. (2) Do any of the documents relating to the Nferger, including b it not limited to the APM, any shareholder agreement, or any other form of agreemen , sanction or allow any Conflict of Interest or Self - Dealing Transaction between any of: cer, director, or shareholder of AT &T Comcast Corporation, or any related entity, and A' &T Comcast Corporation, or any related entity, which would otherwise be barred r prohibited pursuant to applicable law in the absence of said provision. Response: None of the documents relating to the Merger sanction ,r allow any conflict of interest or self- dealing transaction between any officer, director, or shnrebolder of AT &T Comcast, or any related entity, Ind AT&T Cor cast, or any related entity, which would otherwise be barred or prohibited tursuant to applicable law. (3) Subsequent to the closing of the Merger, would an office . director, or shareholder of more than five percent (5 0/0) of the outstanding shares of A' &T Comcast be prohibited from acquiring, for his/her own account, cable systems whi h, at least in theory, could have been acquired by AT &T Comcast Corporation? Response: Generally, any such transaction would not be allowed, as t would be a violation of the Ethics Code, which prohibits such conflict of interest ransactions. Such an acquisition would also violate the non- compete provis ors of the employment agreement each officer is required to execute. (4) Are there any arrangements, written, oral or otherwise, eitht • currently in existence or contemplated to exist subsequent to the closing of the Merl :r, by which AT &T Comcast Corporation, or any entity affiliated therewith, may or will perform services for any officer, director, or shareholder of more than five percen (5 %) of the outstanding shares of AT &T Comcast Corporation, or vice- versa. Response: This question is extraordinarily broad as drafted, partic tlarly in the failure to define "services." This response excludes de minimus "sery ':es" such as the provision of cable service to an individual's home. There are no al -angements, written, oval or otherwise, either currently in existence or contempl ted to exist subsequent to the closing of the Merger by which AT &T Comcast, ( 'r any entity affiliated therewith, may or will perform services for any officer, director, or shareholder of more than five percent of the outstanding shares of AT, :T Comcast, or vice- versa, except the services that the officers and directors will rovide as a result of holding such positions. B. QUESTIONS RELATING TO INCURRENCE OF )EBT BY AT &T /COMCAST CORPORATION. (1) As of the date of closing of the Nferger, please describe it dollars how much total debt will be incurred and carried by AT &T Comcast Corpoi .tion, or any direct or indirect subsidiary thereof. Response: Comcast has advised that the starting debt of AT &'1 Comcast is expected to be approximately 330.8 billion. See, for example, Brian L.' loberts press conference held 12/20101, as well as statements of Comcast representa ives made at Bear Stearns presentation 3/4/02; Banc of America Securities Confe ence 5 /1 /02; and Deutsche Bank Media Conference 6/4/02. Copies of each of these : resentations and announcements have been posted on the Comcast web site at wrvvv..mcsk.com. (2) As of the date of closing of the Merger, what will be the lebt -to- equity ratio of AT &T Comcast Corporation? Said debt -to- equity ratio should :e stated as a function of both book equity and market capitalization equity. Response: Debt to cash flow ratio is the common industry metric I :r measuring the financial strength of a cable operator. Please see the attached t 'tart (source: Merrill Lynch & Co.) showing AT&T Comcast's debt to cash flow ra .o. It should be noted that even without any major reduction in debt from the abov stated level, the company's debt to cash flow ratio would be lower than all but twc of the major NISOS. (3) What assurances, if any, can the Applicam provide to tl _- Franchising Authorities that either the absolute amount of debt and/or the debt- to -equir. ratio will not be materially increased subsequent to the closing of the Merger? Response: The record shows the ability of the company to de- levers a its balance sheet through the sale of some of its noo- strategic investments whic t have either already occurred this year, are in the process of occurring or which are likely to occur in the future.' Specifically, on May 21, Comcast liquidated S! 41 million of AT &T stock which it held from a prior transaction, and there is a p ading sale of cable systems by AT &T to Bresnan Broadband Holdings for 3735 mi 4.iou that was publicly announced on April 5, 2002. In addition, Comcast mat agement has repentedly stated that it will be selling an additional S1.1 billion in tublic equity stakes in the coming year to further reduce its debt balances. Finall AT &T and Comcast have publicly stated that they do not view the interest in ' 'ime Warner Entertainment ( "TWE ") as a long -term investment and are committe f, to divesting the asset as quickly as can be efficiently accomplished. Indeed, t e companies advised the FCC in a public filing that the process of attempting to sell the interest is already undertvay.2 Richard Parsons, chief executive officer of AOL ime Warner, has been widely quoted in recent months as saying that his corn ,)any, too, is 3 committed to completing such a transaction as soon as reasonably p :ssible. The effect of the first three items reduces the company's starting del t balance to approximately 528.4 billion. The consensus of analysts who have issu d reports on The pro forma balance sheet of the combined company contains 523.7 billion in i rvcstmcrts. S -4 at III -4. Scc, Public Interest Statement filed on behalf of ATB:T Corp. and Comcast Cc:r. ration with the Federal Communications Commission on Febtv.-uy 28, 2002. 3 Reuters, bisy 2, 2002. this merger is that the company can expect to realize from a sale )f the TWE interest, net, after -tax proceeds of between S6 to 7 billion. If accural , this would lower the company's debt to approximately S22 billion and a debt to c: :;b flow ratio well below current industry averages. (4) Would the Applicant agee in an appropriately wor ed Transfer Agreement to limit the amount of debt which it carves on a going Jrward basis subsequent to the closing of the :vferger to an amount not to exceed 105% f the amount of debt carried as of the date of closing of the Nfereer? Response: Such an agreement is neither necessary nor approp iate for the reasons stated above. (5) Would the Applicant agree, as part of an appropriately wt ded Transfer Agreement, not to increase the debt -to- equity ratio on a going forward ba s subsequent to the closing of the Merger to a level in excess of that which existed as if the date of closing of the Merger? Response: Such an agreement is neither necessary nor approp date for the reasons stated above. C. QUESTIONS RELATNG TO "OFF- BALANCE SHEET" BORRC WINGS. (1) Has Comcast Corporation, or any affiliated entity, engaged a the past ten (10) years in "Off- Balance Sheet" borrowings whereby obligations were : Icurred by an entity related to or controlled by Comcast Corporation, or any office . director, or controlling shareholder or group of shareholders, which obligation(s) cou' .1, pursuant to any contingency regardless of its remoteness or lack thereof, become the obligation of Comcast Corporation? Response: do such borrowings have occurred. (2) What assurances, if any, can be provided by the. Api ;icant to the Franchising Authorities that sufficient intental/ex:emal controls exist :ithin AT &T Comcast Corporation to prevent the type of "Off- Balance Sheet" borrowin .s which have apparently been utilized by entities affiliated with Enron Corporatiol and entities affiliated with Adelphia Communications Corporation? Please describe, n detail, slid intemal /external controls or limitations and whether or not the Applicar. is willing to covenant, as a condition of transfer approval, to the creation and/or contit .iation of said controls and limitations subsequent to the closing of :he Merger. Response: The response to Question A.I. answers this question. Al ?licant is not willing to covenant, as a condition of transfer approval, to the cr ation and /or continuation of said controls and limitations subsequent to the c )sing of the Merger. Applicant, however, is in compliance and AT &T Comcast wil comply with all provisions of state law and rules and regulations of the SEC, which :overnmental agencies have jurisdiction over these matters. Summary Credit Statistics of Selected Cable Companies Consolidated Results ` Source Merrill Lynch u Co. (Dollars in Billions) AT&T Comcast Adolphia As or 12/31/02 AC1L Tlma Cox Cablevlsion Comm. C .irter Insight Mcdlacom With Synergies Warner Comm. Systems (Ex -ABIZ) C mm. Comm LLC ahngs Semor Baa2J686 nl Beaa2/BBB eaavess Ba2;88- inancialsnl 1.3 1.6 S1.4 1.8 Subsalbers 22.0 12.8 6.2 3.0 200. E ESITDA S6.5 ', S91 S1.6 30.3 Total Debt & Convertible Debt S208 $29.8 $5.2 S5.s everage Ratio Kie+ E ^B+ 83 /5. CaaVB- 5.9 '.0 1.3 1.6 S1.4 1.8 SC 3 S0.3 $11.6 1 6.3 32.5 52.8 Tote Debt & Convenible/EBITOA 4.7 x 3.2 x 3.3 x 55 x 8.0 x t ax 6.0 x 6.5 x ('I C.r Atly LMar niviKv (2) Pm ruma for ell announced nnsaalons (1) Bated on 2CO2E EBITOP, Incwoes SSCO mnlion m cynergles M nionmdum To: David Olson, NIHCRC From: Mike Katz, KFA Services Date: April 25. 2002 Re: AT &T Comcast Meyer This is to summarize our observations re_arding financial issues in the proposed merger of AT &T's cable television and related broadband operations ( "AT &T Broadband ") with Comcast Corporation ( "Comcast ") into a new entity, AT &T Comcast Corporation ( "AT &T Comcast "). These are based on: • The FCC Form 3.94 provided by AT &T, • Responses to questions submitted to them regarding the merger, • SEC filings of both AT &T and Comcast, and • Press releases and reports regarding the merger As you are aware, the proposed merger calls for some preliminary restructuring of AT &T and then merger of both AT &T Broadband and Comcast into AT &T Comcast. The restructuring primarily involves separating AT &T's cable television and related broadband operations, assets, and liabilities from AT &T's more traditional telephone and related service operations. The new cable /broadband entity, AT &T Broadband Corporation, will then become a subsidiary of AT &T Comcast', as will Comcast itself. On completion of the merger, all of the subsidiaries of AT &T Broadband Corporation will remain separate and intact. This implies that whichever AT &T subsidiary is currently the franchisee for a community will remain the franchisee after the merger — only the parent companies at theiFtghest levels will be new entities. Current owners of AT &T and Comcast stock will simply receive new AT &T Comcast stock in exchange for their AT&T Broadband3 and Comcast3 stock, respectively, and, together, the existing This entity will be o%rted by the existing shareholders of AT &T and will be a parent entity to AT &T Broadband LLC, which is a current parent entity to the franchise holders in the MHCRC jurisdictions (TCI Cablevision of Oregon. Inc., AT &T Broadband of Ohio, LLC, and TCI of Southem Washington, Inc.). It will also include other cable assets of AT &T obtained from Media One Group and others in the past couple of years. AT &T Broadband Corporation will be owned by AT &T Broadband Holdings. LLC, which will, in turn, be owned by AT &T Comcast. } AT &T shareholders are expected to receive approximately .35 shares of AT &T Comcast stock for every share of AT &T they currently own. Comcast shareholders will receive I share of AT &T Comcast stock for every share of Comcast they currently own. April 25, 2002 Page 2 of 4 AT &T and Comcast stockholders will own the combined AT &T Comcast. The exact type, i.e. voting class, and number of AT &T Comcast shares to be received by each AT &T shareholder will depend upon shareholder votes regarding alternative proposed stock class structures, and upon a formula to be applied at the time of the merger closing'. In any case, however, Brian Roberts, who is the current president of Comcast and who currently controls' 371,1n of the voting shares of Comcast, will own or control about 33% of the voting control of AT &T Comcast at the time of the merger closing. ivlr. Roberts will also be the president and chief executive officer of AT &T Comcast. No other shareholder will own more than 5% of the voting control of AT &T Comcast at that time. Both AT &T Broadband and Comcast are very lame entities in their own right. AT &T Broadband is the largest cable operator in the country with approximately 13.6 million subscribers as of December 31, 2001, penetrating about 55% of the homes passed by its cable systems. At that time, it also served about 1_5 million high -speed cable modem subscribers. AT &T Broadband also o%%ns interests in other cable systems and related ventures, particularly an approximately 251,/0 interest in Time `rVamer Entertainment°. Comcast is the third largest cable operator in the country with approximately 3.5 million cable subscribers as of December 31, 2001, penetrating about 61% of the homes passed by its cable systems, and with about 950,000 high -speed cable modem subscribers. Comcast also owns QVC, a home shopping network and retailing operation, as well as interests in a number of programming providers and professional sports operations. From a financial perspective, there are some positives to this transaction • Since AT &T Broadband and Comcast are simply combining all of their assets and liabilities while exchanging shares of existing stock for shares of stock in the new combined AT &T Comcast, there are no net new borrowings? required or reductions in cash reserves to pay existing owners. • One aspect of this proposed transaction is expecteds to be the conversion of about S5 billion in preferred stock/quasi -debt securities of AT &T Broadband, owned by Microsoft. into ordinary common stock, thereby relieving AT &T Comcast of possible future cash dividend obligations. ' This is currently expected to occur around the end of this year, but could be as late as March 1. 2003 under the current merger agreement. s Brian Roberts' controlling ownership is via Sural LLC, a Roberts family investment holding company he controls. AT &T has been exploring a possible sale of its Time Warner Entertaitunent interest for some time. If and when such a transaction occurs, funds from a sale could be used to significantly reduce AT &T Comcast's debt burden. ' Some existing debt will be refinanced at the time of the merger and AT &T Comcast may choose to borrow some additional amounts to fund near term capital requirements, but the total amount of AT &T Comcast debt outstanding should remain approximately the same as existed in the individual AT &T Broadband and Comcast entities prior to the merger. ' This aspect of the transaction is apparently not required for the merger to proceed.. Thus, if for some unexpected reason, the conversion does not take place, the preferred stock obligations will remain. There are a variety of conditions, however, that could allow AT &T Comcast to defer the dividend obligations and, thus, the obligation should still be manageable. April 25, 2002 Page 3 of 4 • Comcast is relatively strong financially, compared to other cable operators, and appears stronger than AT &T Broadband currently. Thus, the combined AT &T Comcast should be stronger than AT &T Broadband standing alone, as evidenced by the following indicators: 2001 Revenues Operating Cash Flow As 0/0 of Revenue Net Income (Loss) 12 Interest Expense Capital Expenditures Total Assets Total Debt Debt _ Cash Flow Cable Debt - Cable CF Cable Debt per Subscriber Recent Credit Ratings AT &T Broadband Comcast AT &T Comcast' S 10.1 Billion S 9.7 Billion S 19.7 Billion S 2.1 Billion S 2.7 Billion "' S 4.8 Billion 20.6% 27.9%" 24.20,/0 (S 4.2 Billion) 5.2 Billion (S 3.0 Billion) S 1.7 Billion S.7 Billion S 2.3 Billion S 3.4 Billion S 2.2 Billion S 5.6 Billion S 103.2 Billion S 38.1 Billion S 140.8 Billion S 23.3 Billion S 12.2 Billion S 35.8 Billion 11.1 4.5 7.5 11.1 4.2 7.8 (est.) S 1,717 S 1,021 S 1,457 (est.) Baa_ (Moody's) Baa313 (Moody's) BBB (Fitch) BBB'' (Fitch) The primary financial negative of this transaction, is that the new AT &T Comcast entity will not initially be as strong as the current AT &T Corporation, with its historically substantial telephone and related services revenues available, in theory, to support AT &T's broadband operations: 2001 Revenues Operating Cash Flow As % of Revenue Net Income` Interest Expense Capital Expenditures Total Assets Total Debt Debt - Cash Flow Recent Credit Ratings AT &T Corporation[- S 52.6 Billion S 15.6 Billion 29.7% S 6.8 Billion 5 3.2 Billion S 9.3 Billion S 165.3 Billion S 53.5 Billion 3.4 A3 (Moody's) A- (Fitch) ' Pro forma consolidation, i.e., as if AT&T Broadband and Comcast had been merged throughout 2001. About $5 billion of Comcast's revenue and about $2 billion of its operating cash flow is related to its cable ystems with the rest related to its programming, retail, and sports operations. Operating cash flow from Comcast's cable operations as a percent of cable revenue was about 40.5 %. ' Excluding cumulative effects of accounting changes. " Comcast Cable Communications, the subsidiary of Comcast that holds all of its cable and broadband operations, has slightly higher credit ratings from both Moody's and Fitch, Baal and BBB+ respectively. Note that all of these credit ratings are at the low end of "investment grade" ratings, but stronger than "junk bond ", highly speculative or distressed bond ratings. " Anticipated by Fitch, as of March 2002. 3 Including AT&T Broadband. April 25, 2002 Page 4 of 4 However, AT &T's telephone revenues have been declining and are expected to continue to decline, which, over time, may weaken AT &T Corporation's historical financial strength. Thus, the loss of AT &T support may ultimately be less important than it may have been in the past. Another Financial negative is the relatively high leverage that AT &T Comcast may initially have. its pro forma 2001 debt -to -cash flow ratio 16 of 7.5 (or estimated 7.3, excluding retail and other operations) is at the high end of industry norms, and the estimated pro forma cable debt per subscriber of about S 1,450 is in the middle of the range 17. However, these statistics may improve daring 2002, prior to the actual closing of the merger, as each company acts to reduce debt or improve cash flows". Moreover, AT &T Comcast can be expecfeti to take actions to improve its operating cash flows after the merger, which, on a percentage of revenue basis, are well below typical cable industry results — normally in the 35% - 459110 range. Such steps may include elimination of duplicative corporate functions and costs, rate increases, continued expansion of cable modem and digital service offerings, and/or reductions of other operating costs I9. Success in increasing its cash flow would likely reduce the debt -to -cash flow margin over time and make the debt more manageable. Note also that both Comcast and AT &T Broadband have completed system upgrades, necessary to provide advanced services. in a majority of their systems; 95% and 74% of Comcast's and AT &T Broadband's systems, respectively, have 550 MHz capacity or greater; 32% and 59 %, respectively, have 750 MHz capacity or greater. Thus, capital expenditure requirements in the near future may be lower than in the recent past, potentially reducing the need for additional debt burdens over time. Finally, we would not expect that the financial structure of this transaction, in and of itself, would directly affect subscriber rates. With respect to regulated rates, the FCC Forms 1240 (basic service tier rates) will be unaffected and, while there may eventually be changes to the methodologies and data used for the Form 1205 (equipment and installation rates), it is impossible to predict whether such changes would have a positive or negative impact. With respect to unregulated rates, AT &T currently, and AT &T Comcast in the future, can raise or lower those rates as they choose based on theirjudgments of what the market will bear. We expect that there will be continuing pressure on local cable system management to raise rates as fast as is practicable, regardless of whether or not this merger occurs. ° Note that lower debt -to -cash flow ratios (equivalent to higher cash flow -to -debt ratios) generally indicate a stronger financial condition; more cash available to make potential interest and principal payments on the debt. " Based on year 2000 data for large publicly -owned cable operations. s AT &T and Comcast declined to provide pro forma financial projections for 2002 or subsequent periods, but various public documents and statements suggest the companies are expecting improvements in operating margins and reductions in debt -to -cash flow ratios in the next several years. Of course, while operating cost reductions may help the company Financially, some possible reductions may be undesirable from a subscriber viewpoint, e.,., reductions in customer service levels. At this time, however, it is not known what changes in operations, if any, might occur. AT &T — CONICAST DUE DILIGENCE PROJECT: FINAL REPORT TRANSFER OF CONTROL FROM AT &T BROADBAND TO AT &T CONICAST CORPORATION MAY 20, 2002 Dr. Barry Orton . Stuart Chapman, Municipal Services Associates, Inc. EXECUTIVE SUMMARY INTRODUCTION In March 2002, the Metropolitan Mayors Caucus, a regional organization of elected officials, retained Dr. Barry Orton and Mr. Stuart Chapman (hereafter "Consultants ") to direct a due diligence study of the legal, technical, and financial qualifications of AT &T Comcast Corporation, a new company to be formed out of the spinning -off of AT &T Broadband by its parent company, AT &T Corporation, and the immediate acquisition of AT &T Broadband by Comcast Corporation. The purpose of the AT &T Comcast Due Diligence Project is to provide a generic base of information for the participating Local Franchise Authorities ( "LFAs ") to utilize in making an informed decision on.approval of the change of control of the parent company of the entity holding each municipality's cable television franchise. Section 617 of the Cable Act (47 U.S.C. §537) provides a timetable and procedure by which franchising authorities have 120 days to consider the transfer of ownership or control of a cable system from an incumbent cable operator to an acquiring operator. The AT &T Comcast Due Diligence Project has been able to obtain isuffuicient nformation regarding the legal, financial, and technical qualifications of the proposed corporation within this time frame. In addition, the Due Diligence Project is providing participating LFAs with template transfer Resolutions, Transfer Agreements, and Ordinances.. _ LEGAL, FINANCIAL AND TECHNICAL QUALIFICATIONS On December 19, 2001, AT &T announced the acceptance of a bid offer worth $72 billion from Comcast for AT &T Broadband. A formal request for consent of transfer of control of AT &T Broadband to AT &T Comcast Corporation (FCC Form 394) was distributed to Chicago -area municipalities in early March 2002. The Consultants reviewed the FCC Form 394 and multiple related Federal Securities and Exchange Commission Form 10 -K, S -4, S -4A, and 425 filings. Consultants sent AT &T Broadband two successive Requests For Information (RFI) seeking a focused range of 1 , AT &T — COMCAST DUE DILIGENCE PROJECT: FINAL REPORT information pertaining to financial, legal, and technical issues arising from the FCC 394 filing, and reviewed two sets of detailed responses. These documents are provided in the Appendix. Dr. Barry Orton also reviewed confidential exhibit and schedule documents related to the merger. Consultants also had consulting engineer David Devereaux - Weber, PE review the state of the Chicago -area cable system architecture. Adam Simon and Stewart Diamond of Ancel, Glink, Diamond, Bush, DiCianni, and Rolek, Chicago, provided legal review of the Form 394, RFIs, and RFI responses and drafting assistance with the Resolution, Ordinance and Agreement documents. This range of information, has, in total, provided a sufficient level of information needed in order to advise the participating LFAs regarding the legal, financial, and technical qualifications of AT &T Comcast Corporation. Overall, AT &T Broadband and Comcast Corporation have adequately demonstrated that AT &T Comcast Corporation will satisfy legal, financial, and technical qualifications required by the municipalities and counties participating in the AT &T- Comcast Regional Due Diligence Project. The participants should be confident that the creation of AT &T Comcast Corporation will have the resources and the commitment to correct system deficiencies and improve service. Therefore, it is recommended that the LFAs approve the transfer of control from AT &T Broadband to AT &T Comcast Corporation. We recommend that LFAs now served by AT &T Broadband approve the transfer of control, and utilize the template Resolutions, Transfer Agreements, and Ordinances that follow. 2 AT &T — COMCAST DUE DILIGENCE PROJECT: FINAL REPORT TRANSFER OF CONTROL FROM AT &T BROADBAND TO AT &T COMCAST CORPORATION MAY 20, 2002 Dr. Barry Orton , Stuart Chapman, Municipal Services Associates, Inc. INTRODUCTION In March 2002, the Metropolitan Mayors Caucus, a regional organization of elected officials, retained Dr. Barry Orton and Mr. Stuart Chapman (hereafter "Consultants ") to direct a due diligence study of the legal, technical, and financial qualifications of AT &T Comcast Corporation, a new company to be formed out of the spinning -off of AT &T Broadband by its parent company, AT &T Corporation, and the immediate acquisition of AT &T Broadband by Comcast Corporation. This AT &T Comcast Due Diligence Project reprises the format conducted for a similar effort organized by the Consultants in 1998 -1999 when Tele- Communications, Inc. (TCI) acquired several cable operators serving the Chicago Metropolitan Area: Jones Intercable, Time -Wamer Cable, Multimedia Cablevision, and MediaOne and then was itself acquired by AT &T. The purpose of the current Due Diligence Project is to provide a generic base of information for the participating municipalities to utilize in making an informed decision on approval of the change of control of the parent company of the entity holding each municipality's cable television franchise. Section 617 of the Cable Act (47 U.S.C. §537) provides a timetable and procedure by which franchising authorities have 120 days to consider the transfer of ownership or control of a cable system from an incumbent cable operator to an acquiring operator.I The AT &T Comcast Due Diligence Project has been able to obtain information regarding the legal, financial, and technical qualifications of the proposed corporation within this time frame. In addition, the Due Diligence Project is providing participating municipalities with template resolutions, transfer agreements, and ordinances which may be used for the memorialization of the transfer. I Section 617 of the Cable Act states "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 parry and the franchising authority agree to an extension of time." AT &T — COMCAST DUE DILIGENCE PROJECT: FINAL REPORT At this point, it should be noted that the Due Diligence Project has provided a generic platform for use by the municipalities in their decision - making process pertaining to the transfer. A number of municipalities have indicated that they require discussion of specific issues with AT &T Broadband prior to the consideration of the merger. To that end, the Consultants have advised these communities to pursue issues not directly germane to the legal, financial, and technical qualifications of the change of control in a separate process. Therefore, this report will consider only the legal, financial, and technical qualifications of AT &T Comcast Corporation and no other issues. HISTORY OF THE TRANSACTION AND THE DUE DILIGENCE PROJECT The beginning of this process can be traced back to October 2000 when AT &T Corporation announced the proposed separation of its major units — AT &T Business, AT &T Consumer, AT &T Wireless, and AT &T Broadband — into four separately traded companies. This announcement triggered a valuation of AT &T Broadband as a cable company. Such a valuation had not taken place since AT &T acquired TCI, MediaOne, and several other cable operators in 1999. The subsequent valuation of AT &T Broadband unleashed an unanticipated takeover attempt by Comcast Corporation in July 2001. Prior to that time, AT &T and Comcast had been involved in discussions over acquisition of AT &T Broadband assets. AT &T rebuffed the initial Comcast takeover attempt and in August 2001, AT &T Broadband indicated that it would accept proposals from other potential acquirers. By November 2001, AT &T received proposals from Cox Communications and AOL Time -Warner as well as Comcast. On December 19, 2001, AT &T announced the acceptance of a bid offer worth $72 billion from Comcast. A formal request for consent of transfer of control of AT &T Broadband to AT &T Comcast Corporation (FCC Form 394) was distributed to Chicago -area municipalities during the period from March 1, 2002 to March 7, 2002. In January 2002, the Consultants prepared a proposal for consideration by the Metropolitan Mayors Caucus for a regional Due Diligence Project. The proposal was accepted by the Caucus and representatives of seven Regional Councils of Governments on March 5, 2002. From March 5, 2002 through March 27, 2002, the Consultants reviewed the FCC Form 394 and multiple related Federal Securities and Exchange Commission Form 10 -K, S -4, S -4A and 425 filings. On March 28, 2002, the Consultants sent AT &T Broadband an initial Request For Information (RFI) seeking a focused range of information pertaining to financial, legal, and technical issues arising from the FCC 394 filing. In addition, a request was made to AT &T Broadband to review information deemed by AT &T Broadband and Comcast as confidential or proprietary in nature. AT &T Broadband responded to the March 28 request on April 8, and after preparation of a confidentiality agreement, AT &T Broadband allowed Dr. Barry Orton to view confidential exhibit and schedule documents related to the merger on April 17, 2002. 0 , AT &T — COMCAST DUE DILIGENCE PROJECT: FINAL REPORT The April 8 response of AT &T Broadband sought to answer some of the questions of the initial request. However, after review of the response, it was determined by the Consultants that some questions remained substantially unanswered or required further clarification, particularly in light of AT &T's interpretation of the Charter Communications, Inc. v. County of Santa Cruz ruling as very narrowly defining the scope of requests for information during the transfer of control or ownership of a cable system.2 A second Request For Information was sent to AT &T Broadband on April 18, 2002. This request - focused on information not previously provided to franchising authorities, changes to services or operations, litigation matters of Comcast, discussions of AT &T and Comcast with unions, technical management changes, binding arbitration in customer disputes, and provision of an organizational chart. AT &T's response, received on April 30, 2002, provided additional information which largely addressed April 18 RFI. Both responses, which were restrained due to SEC disclosure limitation requirements, were subsequently supplemented by several additional S -4A and 425 SEC filings, and have, in total, provided a sufficient level of information needed in order to advise the participating municipalities regarding the legal, technical and financial qualifications of AT &T Comcast Corporation. 3 2 Charter Communications, Inc. v. County of Santa Cruz, 133 F.Supp. 1184, 1205, 1208 -1209. 3 Disclosure limitations of the Hart- Scott- Rodino Antitrust Improvements Act,( 15 U.S.C.§ 18A). Also, restrictions on disclosures are placed by Section 1 of the Sherman Act (15 U.S.C. §1) and Section 5 of the Federal Trade Commission Act (15 U.S.C. §45). Technical consultation for this report was provided by David Devereaux - Weber, PE, Senior Member, SCTE, Madison, Wisconsin. Consultation on the financial RFI questions was provided by Garth Ashpaugh, CPA, Ashpaugh and Sculco, Winter Park, Florida. Adam Simon and Stewart Diamond of Ancel, Glink, Diamond, Bush, DiCianni, and Rolek, Chicago, provided legal counsel and assistance with the Resolution, Ordinance and Agreement documents. ATT Broadband officials Bob Ryan and Carlo Cavallaro were responsible for ATT Broadband involvement in the Project, and Comcast's portion was managed by Sheila Willard. John Gibbs, of Robins, Kaplan, Miller & Ciresi, Minneapolis handled legal issues for ATT Broadband. LEGAL QUALIFICATIONS Corporate Structure Unlike many previous transfers affecting Chicago -area municipalities which were transfers of ownership of specific franchises, the AT &T- Comcast merger involves a transfer of control between individual stockholders and stockholder groups. The actual ownership of individual franchises is not directly affected by this transaction at this time. AT &T — COMCAST DUE DILIGENCE PROJECT: FINAL REPORT Currently, AT &T Broadband is one of the largest publicly traded corporations in the world, with more than six billion shares of stock in the hands of an extremely wide variety of individual and institutional investors. AT &T is traded on the New York Stock Exchange (NYSE). Comcast Corporation, is also publicly traded, on the NASDAQ exchange. The primary control of Comcast lies in the hands of the Roberts family and a small number of close associates through a holding company called Surat, LLC. , a Pennsylvania, Corporation. Through "supervoting" stock, Surat, LLC presently controls 86.6 percent of Comcast stock. A further discussion of Comcast's control and ownership interests can be found in the Financial Qualifications section of this report. Two capital structures of AT &T Comcast are being proposed. However the "preferred" structure, which is likely to prevail, is described below. If this structure prevails after AT &T and Comcast stockholder proxy votes, the corporate ownership structure of AT &T Comcast Corporation will be as follows: AT &T Stockholders will own 56% of AT &T Comcast stock. 2. Comcast Stockholders will own 44% of AT &T Comcast stock. A. Of this 44 %, the Roberts family through Surat, LLC, will control a 33 1/3 percent voting stake of the AT &T Comcast stock, although they will own approximately 1 percent of the stock. B. Microsoft will own a 5.3% economic interest in AT &T Comcast and will hold 4.95% voting power with its ownership stake. Brian Roberts, Chief Executive Officer of Comcast Corporation, will be the President and Chief Executive Officer of AT &T Comcast Corporation. An organization chart of the ownership and control of AT &T Comcast Corporation is included in the Appendix to this report. The overall effect of the change of control is that the new company will be under direct control of the Roberts family and Comcast. Some of the current AT &T Broadband staff are expected to stay in positions with AT &T Comcast, although it is not yet known which or how many. Qualifications to Conduct Business in Illinois (and Indiana) Technically, AT &T Comcast Corporation will not formally exist until after the spinoff of AT &T Broadband from AT &T Corporation and the immediate acquisition of AT &T Broadband by Comcast Acquisition Corporation, which will disappear upon the formation of AT &T Comcast Corporation. The disconnection, or "spin -off' and subsequent acquisition are expected to occur at the closing of the transaction which may occur late in the fourth quarter of 2002. In their ri , AT&T — COMCAST DUE DILIGENCE PROJECT: FINAL REPORT response to the March 28, 2002 letter to AT &T Broadband by the Consultants, asking for an explanation of" ... how or through which subsidiary entities it plans to provide cable services in Illinois and (to) state whether such entities are entitled to conduct business in the State of Illinois." AT &T responded: "As noted in the application, AT &T Comcast is a Pennsylvania corporation qualified to do business in all states where it is required to be so qualified. As also explained in the application and above, AT &T Comcast will be the ultimate parent of the franchisees. The current franchisees will remain in place and continue to hold all necessary licenses and authorizations to provide cable service in the State of Illinois. The respective franchisee will remain the entity responsible for all franchise and other compliance to which all notices regarding such issues should be addressed." The same answer applies for Indiana. Franchise Issues In examining issues affecting AT &T Broadband and Comcast franchises generally, the Due Diligence Project, has found that guarantors of franchises will not be affected by the merger. Neither AT &T Broadband nor Comcast has had a franchise denied or revoked between 1990 and 1999. To the best of the Consultants' knowledge no AT &T Broadband or Comcast franchise has been denied or revoked from 2000 to the present day. Arbitration: The use of mandatory binding arbitration to settle customer disputes has been identified as a potential issue affecting franchises which contain provisions for the addressing of customer disputes. AT &T Broadband and Comcast utilize mandatory binding arbitration. The Consultants' asked in their correspondence of March 28 and April 18 if AT &T Comcast will modify or restructure its current policy regarding customer complaint rights and mandatory binding arbitration, and that if AT &T Comcast will continue to utilize this provision going forward. In its reply of April 29, 2002, AT &T responded: "As stated in our prior response, no changes to such types of operational policies are expected as a direct result of the Transaction. However, after the Transaction, AT &T Comcast will assess and evaluate this and all such policies and make changes as company and customer needs dictate." It appears that at this time, no plans have been set in motion to change mandatory binding arbitration policies which are currently in effect. Franchise Compliance: The merger between AT &T Broadband and Comcast Corporation does not affect the terms and conditions of individual franchises. In their response of April 7, 2002, AT &T Broadband addressed the status of franchise compliance through the following statement: "...the Franchisees for the LFAs' communities will remain in place and .7 AT&T — COMCAST DUE DILIGENCE PROJECT: FINAL REPORT unchanged; the respective franchise agreements between the LFAs and the franchisees will remain in place and unchanged.; the franchisees' legal obligations under their respective franchises will remain in place and unchanged. As a result, the rights of the LFAs and the franchisee are not affected by this Transaction." As a part of this report, a template Transfer Agreement has been included which would bind AT &T Comcast Corporation, as parent to the franchisee, to comply with all of the commitments, and current, continuing, and future duties and obligations set forth in the franchise. The Transfer _Agreement will also require AT &T Comcast, as parent to the franchisee, to assume liability and accept consequences for franchise commitments and obligations which have not yet been completed. Litigation In the RFIs of March 28 and April 18, the Consultants queried AT &T Broadband and Comcast about two aspects of litigation which were not directly addressed in the FCC 394 Form submission. The companies were asked to identify any civil or criminal litigation during the last 10 years or which is pending or expected to be commenced within the next 12 months in which AT &T Broadband or Comcast would be a plaintiff, defendant, or intervening party which related to an alleged breach or enforcement of a cable franchise. In its response of April 8, AT &T replied: "There are no such matters pending or threatened against AT &T Comcast since it is a new corporation. However, AT &T Comcast will be the world's leading provider of broadband services with approximately 22 million subscribers in 41 states. In the normal course of its business, its proposed subsidiaries have had a wide variety of legal and administrative proceedings to address. Nonetheless, there are no such matters pending that may be considered relevant or material to the proposed Transaction or that will affect the franchise performance of the franchisees or the ability or capacity of AT &T Comcast to become the ultimate parent of the franchisees." In the RFI of April 18, the Consultants sought further clarification of the aforementioned reply by asking if there had been any legal actions in which Comcast or its affiliated franchisees have been found in either a material breach of franchise obligations, a revocation of franchise for cause, or a non - renewal of a franchise for cause. On April 29, AT &T responded: "We confirm that there has been no final legal determination in the last five years in which Comcast or any of its affiliate franchisees have either been found in material breach of franchise obligations, had a franchise revoked for cause, or had a franchise non - renewed for cause." The Consultants also requested further clarification regarding a significant financial obligation between AT &T Broadband and the cable movie channel STARZ! that arose out of litigation. AT &T Broadband was unable to directly address the clarification due to the existence of a AT &T — COMCAST DUE DILIGENCE PROJECT: FINAL REPORT standstill agreement between AT &T Broadband and STARZ! that restricts public statements to those made in the S -4 filing by AT &T to the Securities and Exchange Commission. AT &T Broadband stated in its response of April 29 that: "Notwithstanding the foregoing, as indicated in our prior response, the Starz litigation will not impact the ability of any franchisee to meet its franchise obligations or change the fact that AT &T Comcast is financially qualified to become the ultimate parent of the franchisees." -The Consultants agree. Overall, the Consultants find that AT &T Comcast will be legally qualified to assume control of the parent company of the entity holding each municipality's cable television franchise, and found no legal disqualifications. FINANCIAL QUALIFICATIONS Comcast's merger with AT &T Broadband will create the nation's largest cable television provider, with approximately 22 million subscribers and projected revenue of $18 billion per year. After the merger, AT &T Comcast will have the premier collection of urban and suburban market clusters in the industry and be worth about $72 billion in total. The new merged company will be.controlled and run largely by the ownership and management of Comcast Corporation, currently the nation's third - largest cable company. Based in Philadelphia, Comcast is publicly- traded, but closely controlled by the Roberts family, its founders, through their holding company, Sural, LLC, which holds approximately 86.6% of the combined voting power of Comcast stock. Comcast currently owns or controls QVC, the Golf Channel, a regional sports network, the Philadelphia Flyers and 76ers hockey and basketball teams, the E! Entertainment channel, Outdoor Life network, and a variety of related programming and electronic commerce ventures. Comcast has about 8.4 million cable subscribers and generated about $8.2 billion in revenues in 2001. The deal is a highly complex stock - for -stock transaction which includes the assumption or refinancing of substantial existing AT &T Broadband debt. At closing, the new ATT Comcast Corporation will assume about $30 billion in debt, with $20 billion coming from AT &T and $10 billion from Comcast. With the need for working capital and retirement and refinancing of some of the existing debt, AT &T Comcast has assembled commitments for the underwriting of about $12.8 billion to complete the transaction and meet AT &T Comcast's capital needs for the next 24 months. Comcast's current available credit facility of about $4.4 billion is also available should additional liquidity be needed. 0 AT&T — COMCAST DUE DILIGENCE PROJECT: FINAL REPORT The merger's financial rationale rests on the ability of the new company to take economic advantage of both its size and of Comcast's operational efficiency and quality. The size benefits include significant cost savings for programming and capital goods bought in bulk, opportunities for selling new services and products on a larger scale, a larger platform to sell national advertising, and the opportunity to broadly ramp up telephony via cable. The efficiency benefits include combining duplicative functions and decreasing AT &T:s several layers of expensive and notoriously incompetent management. -Of all these potential benefits, the ones most likely to provide significant economic advantages are the programming cost savings and the efficiency of replacing AT &T's management structure. Comcast estimates savings of $250 — 450 million/year in programming costs, $200 — 300 million per year from elimination of corporate overhead and duplication, and S 1.6 billion per year from potentially increasing cash flow margins from AT &T Broadband's industry-low 20- 25% to Comcast's 42 %. Industry observers agree that AT &T Broadband was broken, and that Comcast has the potential to fix it. As Cable and Broadcasting's John Higgins wrote in a recent cover story: "President Brian Roberts and his team see AT &T's operation as so damaged by mismanagement that they can readily boost the unit's woeful cash -flow margins up to industry standards. Comcast executives blame layers of management so tangling that decisions are made slowly and badly, bleeding away cash flow." In fairness, AT &T Broadband had already begun to reverse its key operational problems. In the same story, Higgins wrote: "...(New AT &T Broadband CEO William) Schleyer has indeed moved quickly, first focusing on decentralizing functions like marketing to let the systems and regions make the first call on pricing, packaging and promotion. He has particularly worked to energize the customer - service operation, which in some ways was worse than even when the notoriously lax Tele - Communications Inc. owned many of the properties. `AT &T was running it as a national business. What it really is an aggregation of local businesses," Schleyer said. "We've accomplished some very significant things. We put the company on a path to be a real cable company. "' Nevertheless, concerns about AT &T Comcast's financial health going forward have validity for a number of reasons. Higgins points out that "... there's a growing cloud of skepticism that Comcast's journey is not going to be quite as easy as it seemed ... last July. No one seems to doubt that Comcast can turn the systems around: Comcast's senior team is well- respected, and, for years, that company has led the industry in increasing efficiency. But AT &T Broadband is big, and it is broken. No one has ever done a cable acquisition on this scale before, ...and the properties aren't being fixed as quickly as Comcast executives had expected." (For complete story, see: "More Than It Can Swallow ?" in the Appendix.) 10 AT &T — COMCAST DUE DILIGENCE PROJECT: FINAL REPORT ATT Comcast itself listed several significant financial concerns in its SEC S -4A filing of 4/29/02. They are: 1. Programming Costs. "AT &T Comcast may not have the ability to pass... increases on to its customers, which would materially adversely affect its cash flow and operating margins." 2. Competitors. " AT &T Comcast will compete directly with program distributors and other companies that use satellites, build competing cable systems in the same communities AT &T Comcast will serve or otherwise provide programming and other communications services to AT &T Comcast's subscribers and potential subscribers. Additionally, AT &T Comcast will be subject to competition from telecommunications providers and ISPs in - connection with offerings of new and advanced services, including telecommunications and Internet services." 3. Caoital Requirements . "AT &T Comcast's capital expenditures will exceed, perhaps significantly, its net cash provided by operating activities. This may require AT &T Comcast to obtain additional financing. AT &T Comcast may not be able to obtain or to obtain on favorable terms the capital necessary to fund the substantial capital expenditures described above that are required by its strategy and business plan. A failure to obtain necessary capital or to obtain necessary capital on favorable terms could have a material adverse effect on AT &T Comcast and result in the delay, change or abandonment of AT &T Comcast's development or expansion plans." 4. Existing Agreements . "Entities ... which will be subsidiaries of AT &T Comcast, may be subject to long -term agreements ...for video programming, audio programming, electronic program guides, billing and other services. If one or more of these arrangements continue to apply to AT &T Broadband after completion of the AT &T Comcast transaction, they may materially adversely impact the financial performance of AT &T Comcast." 5. Government Regulation. "Comcast and AT &T expect that court actions and regulatory proceedings will refine the rights and obligations of various parties ... The results of these judicial and administrative proceedings may materially affect AT &T Comcast's business operations. Local authorities grant Comcast and AT &T Broadband franchises that permit them to operate their cable systems. AT &T Comcast will have to renew or renegotiate these franchises from time to time. Local franchising authorities often demand concessions or other commitments as a condition to renewal or transfer, which concessions or other commitments could be costly to obtain." 6. Joint Ventures. "AT &T Broadband Group is a partner in several large joint ventures, such as Time Warner Entertainment, Texas Cable Partners and Kansas City Cable Partners, in which it has a substantial economic interest but does not have substantial control with regard to management policies or the selection of management. These joint ventures may be managed in a manner contrary to the best interests of AT &T Comcast, and the value of AT &T Comcast's investment, through AT &T Broadband, in these joint ventures may be affected by management policies that are determined without input from AT &T Comcast or over the objections of AT &T Comcast." While these financial concerns are real and significant, the risks they pose will largely bome by AT &T Comcast stockholders. For example, there is no doubt that the new AT &T Comcast entity will be more highly leveraged than either Comcast or AT &T is today. There is no doubt that the Time Warner Entertainment investment must be liquidated. There is no doubt that AT &T Comcast will have to generate more revenue more effectively than the combined pro forma of both companies at present show. All this will have to be accomplished in a more competitive environment, with uncertain economic conditions, with unproven new products and services, and with the weight of more debt. But these challenges are those of a free enterprise in a capitalist system. Financial rewards go to those who take such risks, which in this case are the 11 AT &T — COMCAST DUE DILIGENCE PROJECT: FINAL REPORT stockholders of AT &T and Comcast, who must vote to approve the merger, and the companies' lenders. Franchise authorities' financial concerns are primarily those of whether the new entity controlling their franchisee has the minimal qualifications necessary to back the franchisee's commitments and requirements as delineated in the franchise documents, whether the new entity has adequate financing to complete the transaction and meet its near -term capital and operational needs, and whether its overall business plan has a reasonable chance of success so that the company will have the resources to operate, maintain, and develop the systems serving the franchise authorities' communities. It is the Consultants' opinion that from the Form 394 documents, the various subsequent SEC filings, and the responses to our Requests for Further Information, that AT &T Comcast will more than meet these minimum qualifications. Franchise authorities should be assured that AT &T Comcast has the financial qualifications to assume control of the parent company of the entity holding each LFA's cable television franchise. TECHNICAL QUALIFICATIONS In 1998, as part of its consolidation of the Chicago area's balkanized cable systems, TCI began the process of rebuilding the region's cable systems to support the addition of cable telephone service, digital cable television, and high - speed Internet service using cablemodems. AT &T Broadband then designated Mount Prospect and 5711 Western Avenue in Chicago as its regional "super headends," and began consolidating its numerous smaller local headend facilities. This meant that the headends would each serve a significantly larger geographic area, and would therefore have to reach significantly higher standards for quality and reliability. The equipment to support digital cable television, cable telephony and high -speed data was added to the headends. AT &T is also developing a third headend in West Chicago to serve the Fox Valley area. In another major technical development, TCI adopted the hybrid- fiber -coax (HFC) design concept for the Chicago metropolitan area. Since 1999, AT &T Broadband has rebuilt much of the Chicago area outside plant as HFC. Both the Mount Prospect and Western Avenue headends use an equipment layout AT &T Technicians call the Pod System. The television layout hasn't changed much. It used to be that a group of modulators served a community. Now, except for advertising insertion, a group of modulators serve the entire metropolitan area. For channels like ESPN that offer cable companies time slots for insertion of local commercials, AT &T divides the metropolitan area into advertising zones, where different commercials can be played in different areas. Television signals are delivered over a high -speed uncompressed digital fiber optic ring that covers the entire metropolitan area. Since the fiber is configured as a ring, the fiber can experience a cut, and signals can be re- routed over the second connection. Redundant optical 12 AT&T — COMCAST DUE DILIGENCE PROJECT: FINAL REPORT retransmission nodes allow such rerouting to minimize signal outages when there is a cable failure. The two "superheadends" also allow for redundancy of video signal sources. Usually, the Mount Prospect video feed is the primary source, with Western Avenue as the backup. If something happens to the primary headend, signals from the backup headend will be distributed to the ring. High speed Intemet and cable telephone service are serviced differently than television. In these cases, there is dedicated equipment for each node (an area of around 5,000 homes). The headend equipment is arranged in clusters to serve larger groups of subscribers and multiple nodes. Telephony service is still circuit - switched technology. From our headend inspections, it was obvious that the quality of construction and workmanship had improved significantly since 1998. Much of the headend equipment is now powered by dual 48 Volt direct current systems, affording better reliability and redundancy. AT &T is in the process of installing Scientific Atlanta Continuum analog television signal processing equipment. This is the top of Scientific Atlanta's line, and is the most flexible equipment with the highest signal quality that Scientific Atlanta makes. AT &T has installed more redundant fiber paths between the Mount Prospect headend and intermediate nodes, offering increased reliability. AT &T has installed significantly higher capacity data circuits for Internet service, and there are multiple data circuit connections, improving the speed and reliability of Internet service. In addition, it was clear from interactions with headend personnel that the level of understanding of the technical staff has improved. In 2002, more staff had a clear understanding of the interrelationship of telephone, digital cable and Internet technology than in 1998. The AT &T Broadband technical staff is proud that the headend systems now meet the grounding and DC power specifications of Bellcore. This is significant, since the cable industry used to take pride that it did things differently than the telephone industry. The implication was that the expense of telephone industry designs was more than was needed for cable television. However, as the cable television industry begins to offer telephone service, compliance with Bellcore standards makes sense. (Bellcore, now called Telcordia, acts as the standards organization for the telephone industry.) The addition of telephone, digital cable and Internet services requires AT &T to maintain much higher quality control of their signal quality. In addition, automated digital systems like telephone, digital cable and Internet are two -way in nature, and return status information, including signal quality measurements, to the headend. As a result, AT &T often becomes aware of technical problems before customers call repair service. In summary, the AT &T Broadband systems serving the Chicago area have been continually upgraded as new services have been introduced. The significantly higher technical quality and reliability necessary to provide voice and data services have been built into the system infrastructure and the quality of the technical staff has improved as well. Subscribers to cable 13 AT &T — COMCAST DUE DILIGENCE PROJECT: FINAL REPORT service in the area can only benefit from these improvements regardless of whether they purchase voice and data services. AT &T Comcast will benefit from the greatly improved system architecture that AT &T Broadband has built in the Chicago region in the last three years. Most of the region has been technically integrated, with most of the core systems upgraded to 750 MHz of bandwidth. The furthest ring of suburbs and outlying communities has yet to be.fully upgraded, and that will be the biggest task left for AT &T Comcast. As described in the financial section, Comcast is known in the industry to run a significantly less hierarchical and more efficient organization than AT &T Broadband, which should allow technical operations and improvements to happen quicker and more effectively. Thus, the Consultants find that AT &T Comcast would be technically qualified to assume control of the parent company of the entity holding each municipality's cable television franchise. DENIAL OF TRANSFERS OF OWNERSHIP OR CONTROL Franchising authorities have the right to deny a transfer of ownership or control based on the franchising authority's determination that the buyer of the cable system does not meet the financial, legal, or technical qualifications to operate a cable system, or does not meet other qualifications that may be required under state or local laws. Although there are elaborate regulations regarding the process of franchise renewal, there is very little regulation or law regarding the responsibility of the various parties under a request for transfer. Clearly, LFAs can deny a transfer if the transferee refuses to provide data regarding its financial, legal, or technical qualifications to operate a cable system. What is less clear is the standard by which a franchising authority evaluates whether the transferee is qualified. If a LFA refused to grant a transfer, both the transferee and the transferor would likely take the LFA to court. Such a case would be heard in either the state circuit court or the federal district court of the local county where the principal office of the LFA was located. The court would very likely focus on the language of the existing franchise agreement. In March 2001, the U.S. Federal District Court for the Northern District of California (9`h Circuit) released a ruling involving franchise transfers. Charter Communications, Inc. V. County of Santa Cruz (13 F.Supp. 1184) placed major restrictions on the scope of information requests made by a franchising authority regarding assessment of financial, legal, and technical qualifications of transferees. The Court ruled that franchising authorities, in submitting requests for information, must state their need for further information based upon the need for completeness and accuracy, and that such requests must be reasonable. Most importantly, the Court also placed an emphasis on requesting information that was specifically focused on the particular transfer. The Court also ruled that a franchising authority may also use other criteria to judge a franchise transfer besides financial, legal, and technical qualifications. The Santa Cruz ruling did not prohibit denials of transfers, however, the Court did state that a franchising authority must meet "...its burden of showing that any substantial government interest would be 14 , AT&T — COMCAST DUE DILIGENCE PROJECT: FINAL REPORT achieved less effectively absent the information demands" and that there must be some level of standards that could be utilized and relied upon to support denial of a transfer. Clearly, any request for a transfer would need to satisfy any of the procedural requirements set forth in the franchise agreement. A court would evaluate the effectiveness of the municipality's decision based largely upon the standards set forth within the franchise agreement. If the franchise agreement requires the municipality to exercise "reasonable discretion ", then a court would determine whether the community had acted in an arbitrary manner. If a franchise agreement gave a municipality the right to reject a franchise, unless the new owner was as financially secure as the predecessor, this factor would be carefully evaluated by the court. This was a major factor in Charter Communications, Inc. v. County of Santa Cruz. Similarly, if the transferor failed to fulfill obligations under the franchise and/or the transferee refused to take on the obligations of the current franchise, the court would likely support a rejection of the transfer. Any LFA which did not make its determination within 120 days or within any such extended period of time as the transferor had granted in writing, would likely lose its right to object to the transfer. Because of a potential for breach of contract claim, especially one seeking damages, which might be filed by a rejected transferor, no LFA should casually reject the transfer without carefully evaluating the practical and legal effect of that action. LFA's legal counsel should be deeply involved in any final decision regarding transfer. SECURING FUTURE PERFORMANCE LFAs faced with the problem of assuring quality customer service and franchise compliance must, first and foremost, rely on the provisions of their local franchise documents. The ability to notice operators of breaches of local customer service standards, or of electrical safety or construction codes, afford opportunity to cure, impose sanctions for non - performance, and possibly initiate revocation proceedings, are the most powerful means of assuring compliance. Local Ordinances and Agreements should contain specific customer service performance standards and specific procedures for violations, as do most municipal codes for electrical safety. Responsibility for enforcement falls directly on each municipality or franchising authority_ Each franchising authority should also be certain to review and resolve any outstanding franchise compliance issues with its current operator and work with its municipal legal counsel to follow all provisions of the franchise regarding transfer. FINAL CONCLUSIONS AND RECOMMENDATIONS 15 AT &T — COMCAST DUE DILIGENCE PROJECT: FINAL REPORT The Consultants have analyzed the legal qualifications of AT &T Comcast Corporation. The proposed legal structure of the company will place control in the hands of Comcast executives and create a cable company operated by personnel experienced in efficient management of cable system operations. There is no major litigation involving either AT &T Broadband or Comcast pending or currently in process that will significantly affect the financial vitality of the new corporation. Also, the transaction will not affect the obligations of the franchisees owned by AT &T Comcast Corporation to their respective franchising autborities. The merger of AT &T Broadband and Comcast Corporation into AT &T Comcast Corporation is a complex transaction which is designed to combine the strengths of two of the nation's largest cable, high -speed data, and digital telephony providers into a national broadband service company. The Consultants believe that while AT &T Comcast will acquire a considerable amount of debt as a result of the merger, the new company can be a more financially agile company than AT &T Broadband, particularly through programming cost savings, the efficiency of replacing AT &T's management structure, and the potential sale of its Time -Warner Entertainment investment. The technical infrastructure located in the Chicago metropolitan area has been vastly improved since the 1998 evaluation of TCI by the Consultants, particularly in the area of voice, video, and data signal generation. Two superheadends have been developed which can deliver digital video, high -speed intemet service, and digital telephone service efficiently and effectively in the Chicago market using top -of -the -line equipment and highly skilled technical staff. The Consultants believe that AT &T is taking a highly positive step by continuing to expand its delivery infrastructure. The construction of a regional headend in West Chicago serving the rapidly - growing Fox Valley corridor is an important demonstration of AT &T's commitment to the upgrading and elimination of "classic" cable systems. The Consultants recommend that AT &T Comcast Corporation complete the task of developing a total broadband footprint in the Chicago metropolitan area by continuing to rapidly upgrade the remaining aging cable systems acquired first by TCI, and then by AT &T Broadband. Overall, AT &T Broadband and Comcast Corporation have adequately demonstrated that AT&T Comcast Corporation will satisfy legal, financial, and technical qualifications required _ by the cities and counties participating in the AT &T- Comcast Regional Due Diligence Project. The participants should be confident that the creation of AT &T Comcast Corporation will have the resources and the commitment to correct system deficiencies and improve service. Therefore, it is recommended that the local franchise authorities approve the transfer of control from AT &T Broadband to AT &T Comcast Corporation. We recommend that LFAs now served by AT &T Broadband approve the transfer of control, and utilize the template documents that follow. 16 AT &T — COMCAST DUE DILIGENCE PROJECT: FINAL REPORT These conclusions are the opinions of the authors, and the recommendations and suggested template Resolution, Agreement, and Ordinance are for municipalities' information only, and do not constitute legal advice. Questions or comments should be addressed to: Stuart Chapman: 3 Golf Center, # 311 Hoffman Estates, Illinois 60195 847- 882 -7773 Fax: 847 - 310 -9275 Email: MSASchapmanacompuserve.com Barry Orton: 4718 Lafayette Drive, Madison, WI 53705 608 - 347 -1970 Email: bmorton @facstaff.wisc.edu The sponsor of this report was: Metropolitan Mayors Caucus Dave Bennett, Executive Director 177 N. State St. #500 Chicago, IL 60601 312- 201 -4505 dbennett @mayorscaucus.org 17 >. VA. REPORT TO THE CITY OF HASTINGS, MINNESOTA REGARDING THE PROPOSED TRANSFER OF CONTROL OF AT&T CORPORATION To AT&T COMCAST CORPORATION MAY 16, 2002 Prepared by: Brian T. Grogan, Esq. Michael R. Nixt, Esq. Yuri B. Berndt, Esq. Moss & Barnett A Professional Association 4800 Wells Fargo Center 90 South Seventh Street Minneapolis, MN 55402 -4129 ` (612) 347 -0340 (phone) (612) 339 -6686 (facsimile) ,k. REPORT TO THE CITY OF HASTINGS, MINNESOTA REGARDING THE PROPOSED TRANSFER OF CONTROL OF ATtAT CORPORATION To AT&T COMCAST CORPORATION MAY 16, 2002 Table of Contonts Section 1. Executive Summary ..................................................... ..............................1 Section2. Introduction ................................................................... ..............................4 Section3. Applicable Law ............................................................. ..............................5 Section 4. Description of the T�ansaction ...................................... .............................10 Section 5. Legal Qualifications ..................................................... .............................22 Section 6. Technical Qualifications ............................................... .............................34 Section 7. Financial Qualifications ................................................ .............................35 Section 8. Interviews With City Officials ....................................... .............................48 Section 8. Additional Franchise Issues ...................................... ...............................59 Section 9. Recommendations ...................................................... .............................60 Exhibit A Transfer Questionnaire ............................................ ............................... A -1 Exhibit B Response to Transfer Questionnaire ....................... ............................... B -1 Exhibit C Resolution Approving Transfer ................................ ............................... C -1 503725/1 REPORT REGARDING A REVIEW OF THE LEGAL, FINANCIAL AND TECHNICAL QUALIFICATIONS OF AT &T COMCAST CORPORATION IN CONNECTION WITH THE APPLICATION FOR FRANCHISE AUTHORITY CONSENT TO TRANSFER OF CONTROL OF THE CABLE TELEVISION FRANCHISE FROM AT &T CORP. TO AT &T COMCAST CORPORATION PREPARED FOR THE NORTHWEST SUBURBS CABLE COMMUNICATIONS COMMISSION May 28, 2002 Prepared by: Adrian E. Herbst, Esq. The Baller Herbst Law Group, P.C. 953E Grain Exchange Building 400 South Fourth Street Minneapolis, Minnesota 55415 Telephone: (612) 339 -2026 Telecopier: (612) 339 -4789 With assistance from: Charles Gramlich Charles Gramlich & Associates 8105 Chardonnay Cove Austin, Texas 78750 Telephone: (512) 342 -7848 Telecopier: (512) 342 -7844 TABLE OF CONTENTS Paqe INTRODUCTION ....................................................................... ............................... 1 II. SUMMARY OF REPORT ........................................................ ............................... 10 III. RESPONSE FOR ADDITIONAL INFORMATION .................. ............................... 13 IV. BRIEF OVERVIEW OF COMCAST MANAGEMENT EXPERIENCE ................... 15 V. FEDERAL, STATE, AND LOCAL LAW APPLICABLE TO CABLE FRANCHISE TRANSFERS ..................................................... ............................... 17 A. FEDERAL LAW ............................................................... ............................... 17 1. Cable Act and FCC Rules ......................................... ............................... 17 2. Form 394 ................................................................... ............................... 17 3. Determining Whether to Approve or Disapprove ...... ............................... 18 B. LOCAL LAW ................................................................... ............................... 18 VI. LEGAL QUALIFICATIONS OF AT &T COMCAST CORPORATION ..................... 21 VII. FINANCIAL QUALIFICATIONS OF AT &T COMCAST CORPORATION PREPARED BY CHARLES GRAMLICH & ASSOCIATES ..... ............................... 24 VIII. TECHNICAL QUALIFICATIONS OF AT &T COMCAST CORPORATION PREPARED BY CHARLES GRAMLICH & ASSOCIATES ..... ............................... 45 IX. RECOMMENDATIONS ............................................................. .............................47 A. TRANSFEREE QUALIFICATIONS ................................. ............................... 47 1. Legal Qualifications ................................................... ............................... 47 2. Technical Qualifications ............................................. ............................... 47 3. Financial Qualifications .............................................. ............................... 47 B. Impact on Services and Rates ........................................ ............................... 47 C. Recommendations ............................................................ .............................48 EXHIBITS........................................................................................... ............................... 50 1 — FCC FORM 394 ........................................................................ ............................... 51 2 — RESPONSE TO REQUEST FOR ADDITIONAL INFORMATION .......................... 52 3 — RESOLUTION ........................................................................... ............................... 53 4 — ACKNOWLEDGMENT AND ACCEPTANCE AGREEMENT .. ............................... 56 APPENDIX— SELECTED ARTICLES AND INFORMATION ............. ............................... 60 I. INTRODUCTION Pursuant to a Franchise Agreement Ordinance (the "Franchise Agreement" or the "Franchise "), Northwest Suburbs Cable Communications Commission ( "NWSCCC ") Members are provided cable television service by MediaOne of the Upper Midwest, Inc., known as AT &T Broadband ( "AT &T ", the "Franchisee" or the "Cable Operator "). An Application For Franchise Authority Consent To Transfer of Control Of Cable Television Franchise (the "Application ") was submitted to the NWSCCC. The Application is also known as the FCC 394 Form or Form 394. The Application is dated February 25, 2002. The Application is for a transfer of control of the Franchise. The Transferor is AT &T Corp. The Transferee (also referred to as the "proposed Transferee" herein) is AT &T Comcast Corporation. Enclosed with the Application is a letter dated February 25, 2002 from AT &T Broadband. According to this letter: "AT &T Corp., the parent corporation of your franchisee, and Comcast Corporation have announced their intention to combine their cable systems into a new public company, AT &T Comcast Corporation. .... Under the terms of the agreements governing the transaction, following an internal restructuring, AT &T Corp. will spin off its cable system assets and simultaneously merge them with Comcast, forming a new company to be called AT &T Comcast Corporation. We have attached a description of each step of the process, including "before" and "after' charts, to assist you in understanding the transaction. Subject to the internal restructuring, the transaction will not change the holder of the franchise; the franchise will continue to be held by the same legal entity after the merger is complete. However, the transaction will result in a new indirect parent company for the Franchisee — AT &T Comcast Corporation." According to information obtained from the Federal Communications Commission's AT &T- Comcast Merger Page (see www.fcc.gov /mb /attcomcastl): "The proposed transfer of control will result from the spin -off of AT &T Broadband Corp. ( "AT &T Broadband "), a holding company for AT &T's broadband division, to AT &T's shareholders, and the subsequent merger of AT &T Broadband and Comcast into wholly -owned subsidiaries of AT &T Comcast. After the merger is consummated, existing AT &T shareholders will hold 53 percent of the economic interest and between 54 and 58 percent of the voting interest of AT &T Comcast; existing Comcast shareholders will hold 41 percent of the economic interest and between 3 and 7 percent of the voting interest of AT &T Comcast; and Brian L. Roberts will directly or indirectly hold 1 percent of the economic interest and 33 percent of the voting interest of AT &T Comcast." We have included charts following the introductory discussion which provides an illustration of the change in control of ownership. AT &T Broadband is a major provider of cable television service, serving 13.44 million customers through cable systems in which AT &T Broadband holds more than a 50 percent interest. AT &T Broadband also holds a 50 percent or less interest in cable systems serving in the aggregate 16,585,000 additional customers. The latter group includes AT &T Broadband's 25.51 percent limited partnership interest in Time Warner Entertainment, which serves 12.8 million cable subscribers on systems that it owns or manages. AT &T Broadband also provides cable modem services and cable telephony services and holds attributable interests in certain national and regional video programming services. Comcast also is a major provider of cable television service, serving 8,481,500 million subscribers through cable systems in which it holds an attributable interest. Additionally, it holds a general partnership interest in high -speed Internet access service, electronic commerce, video programming and other services. Comcast offers a number of services that it characterizes as "interactive TV services," provides telephone service to over 40,000 customers, and offers integrated broadband communications services to over 4,000 business and governmental customers. Additionally, Comcast holds attributable interests in several regional and national video programming networks, and owns various sports teams and arenas. The Applicants assert that the proposed transaction will accelerate the deployment of facilities -based broadband and cable telephony services, as well as digital video services. The Applicants submit that this will occur because the greater scale and scope economies, cost savings, and financial standing of the combined company would better enable it to make new investments in these technologies and services. The Applicants also assert that the combined company would be in a better position to leverage AT &T Broadband's expertise in providing cable telephony on the Comcast cable systems. Interested parties were to file comments or petitions to deny the applications no later than April 29, 2002. Oppositions or responses to these comments and petitions were due no later than May 14, 2002. Numerous petitions have been filed with the FCC regarding this matter. These petitions can be viewed by visiting the above - mentioned FCC website. Most of the petitions and comments made to the FCC address issues that do not relate to the legal, financial and technical qualifications of the Transferee. At the request of the Commission, The Baller Herbst Law Group, PC ( "BHLG "), together with Charles Gramlich & Associates ( "CGA "), reviewed the Application and the legal, financial and technical qualifications of the Transferee, AT &T Comcast Corporation. rJ Attached to the Application as Exhibit 2 is a CD ROM containing unredacted copies of the Agreement and Plan of Merger and the Separation and Distribution Agreement. These documents are dated as of December 19, 2001. According to the Application, certain exhibits and schedules relating to these documents have been omitted as they are not necessary in order to understand the terms of the documents or contain confidential information. The Application requests that the Transferee indicate on an exhibit any plans to change the current terms and conditions of service and operations of the system as a consequence of the transaction for which approval is sought. In response, an Exhibit 3 was provided in the Application. According to Exhibit 3: "Transferee has no current plans to change the terms and conditions for the service and operations of the cable system that is the subject matter of this FCC Form 394 as a consequence of this transaction. The cable system will be operated pursuant to the current franchise and applicable law after the consummation of the proposed transaction. Transferee reserves the right to make service and operational changes in accordance with applicable law." Neither federal law nor FCC regulations provide franchising authorities with any guidance concerning evaluation of the legal, financial and technical qualifications of an applicant for a cable television franchise or transfer /assignment of a cable television franchise. The analysis contained in this Report is meant to assist in deciding whether to approve or disapprove the proposed transfer of control of the cable television franchise. The Report includes a review of the following: 1. Information provided in the Application. 2. Information provided by representatives of AT &T Comcast Corporation in response to requests for additional information (copies attached). 3. Information that was obtained from various sources including the Internet. 4. We reviewed at the Transferee's attorney's office confidential exhibits and schedules that had not been included with the FCC Form 394. The Transferee certifies the following in the Application: (a) Transferee has a current copy of the FCC's Rules governing cable television systems. 91 (b) Transferee has a current copy of the franchise that is the subject of this application, and of any applicable state laws or local ordinances and related regulations. (c) Transferee will use its best efforts to comply with the terms of the franchise and applicable state laws or local ordinances and related regulations, and to effect changes, as promptly as practicable, in the operation of the system, if any changes are necessary to cure any violations thereof or defaults thereunder presently in effect or ongoing. M N S, I �kV !'I 'T C HA R T '- I 51',E"f R FCAHAR'l "'i I CHAFF " zU I I � I � I- I I �,[Z T 'C' Hi � � � 4,, j H. SUMMARY OF REPORT Although we have concerns regarding AT &T Comcast Corporation's ability to overcome the risks inherent in this transaction, to produce anticipated operating results and to meet its franchise obligations, based upon the review as outlined in this Report, we have concluded that AT &T Comcast Corporation has the legal, financial and technical qualifications to control the operation of the cable television system, which is the subject of the Application. This statement should not be construed in any way to constitute an opinion as to the future financial success of AT &T Comcast Corporation or any related entities. Our conclusion is based on the information as outlined in this Report. In addition to the Application and the Transferee's responses to the Requests For Information, a significant amount of additional detailed information from numerous other sources regarding AT &T Broadband, Comcast Corporation and the proposed Transferee has been reviewed. Provided below is a partial list of the information sources used primarily by CGA in the preparation of this Report. A copy of much of this information is included in the Appendix to this Report. • Comcast Corporation's web site — www.cmcsk.com. • AT &T's web site — www.att.com. • The Investor Presentation of December 20, 2001 by AT &T Comcast Corporation (see www.twst.com /econf /mm /bsc2 /cmcsk.html). • The Preliminary Proxy Statement filed with the Securities and Exchange Commission (the "SEC ") on April 10, 2002 (amended on April 30, 2002) and various other documents available at the SEC (see www.cmcsk.com). • Various analyses of Comcast Corporation by financial institutions such as USBancorp, Merrill Lynch, MSN Money and JM Lafferty Associates, Inc. • Various publications such as The Wall Street Journal, Multichannel News and Cable World. • An audio web cast of a presentation on March 4, 2002 by representatives of Comcast to the Bear Sterns 15`" Annual Media, Entertainment and Information Conference (replay of presentation is available at www.twst.com/econf/mm/bsc2/cmcsk.html). • A conference call, which Comcast Corporation hosted on May 1, 2002 for representatives of the financial community and other interested people to discuss its first quarter 2002 financial results. A transcript of the conference call is available at www.cmcsk.com. 10 • An audio web cast of a presentation on May 1, 2002 by representatives of Comcast to the Banc of America Securities Growth Telecom Media & Entertainment Conference (reply of presentation and a transcript of the presentation is available at www.cmcsk.com). • A conference call held on April 25, 2002 with the Virtual Study Group, which is a group of people representing franchising authorities reviewing similar applications. • The FCC's AT &T- Comcast Merger Page (see www.fcc.00v /mb /attcomcast/): Provided below is a brief summary of some of the information that was reviewed by CGA: • In October 2000, AT &T announced a restructuring plan to create a family of four businesses, each operating under the "AT &T" brand, and one of the brands was to be AT &T Broadband. • On December 19, 2001, AT &T and Comcast Corporation announced a definitive agreement to combine AT &T Broadband with Comcast in a transaction that, at that time, valued AT &T Broadband at an aggregate value of $72 million. • It was estimated that the new company, to be called AT &T Comcast Corporation, would have total assets of approximately $141 billion. • AT &T Comcast Corporation will have approximately 432,000 plant miles that passes approximately 38 million homes and provides broadband video, voice and data services to approximately 22 million subscribers (including 5 million digital video subscribers, 2.2 million high -speed data customers and one million cable telephony customers). • AT &T Comcast Corporation will operate in 41 states and have a major presence in 17 of the United States' 20 largest metropolitan areas. • AT &T Comcast Corporation's assets will consist of cable television systems, as well as AT &T's interests in cable television joint ventures and its 25.5 percent interest in Time Warner Entertainment, and Comcast's interests in QVC, E! Entertainment, The Golf Channel, and other entertainment properties. • AT &T Comcast Corporation will assume nearly $20 billion in debt and other liabilities from AT &T and its subsidiaries, as well as $5 billion of AT &T subsidiary trust convertible preferred securities held by Microsoft Corporation. AT &T Comcast Corporation will have approximately $30 billion in total debt at closing. 11 • AT &T and Comcast will each contribute five Board members to the new company, and they will jointly select two additional members who have no current affiliation with either company. • AT &T Comcast Corporation projects $18 billion in revenues and an operating earnings growth rate approaching 20 %. • AT &T Comcast Corporation projects that it will have a first year combined debt to operating cash flow ratio of less than 5 to 1, and this number de- leverages to a ratio of 2.5 to 1 by 2004 according to certain assumptions made by the new company. • On March 4, 2002, Fitch Ratings assigned ratings of BBB to the senior unsecured debt obligations of AT &T Comcast Corporation. • AT &T Comcast Corporation estimates that between $1 billion and $2 billion in funding will be required at the merger transaction's closing to provide adequate cash reserves to fund the operations and the capital expenditures of AT &T Comcast Corporation. According to representatives of Comcast Corporation, the projected working capital needs has been secured. • Over 95% of Comcast's customers are served by upgraded /rebuilt systems. The combined company will have a physical plant that is 80% upgraded to 550 MHz and 67% upgraded to 750 MHz. • Planned system rebuilds and upgrades, scheduled service rollouts, and other financial commitments already made to local communities will continue. • AT &T Comcast Corporation estimates that within five years the merger should result in synergies and efficiencies worth approximately $1.25 to $1.95 billion. 12 III. RESPONSE TO REQUEST FOR ADDITIONAL INFORMATION We have included in Exhibit 2 the written response to a Request for Information. In this Section, we have included a summary of some of the answers furnished to us. Prior to addressing the specific questions propounded by the NWSCCC in the Request For Information ( "RFI "), AT &T Broadband provided commentary on several preliminary issues. The RFI includes our questions and AT &T's responses. As an initial matter, AT &T Broadband disputed NWSCCC's contention that their FCC Form 394 was incomplete. Instead, AT &T Broadband submitted that the instructions to Form FCC state that the schedules and attachments at issue need not be included. AT &T Broadband then provided a short explanation of the Transaction. In short, AT &T describes the change of control as occurring strictly at the top parent company level. AT &T also stated that the Transaction will be accomplished by a straight stock for stock transfer and the assumption of debt. In addressing the permissible scope of review and information requests, AT &T relied upon Charter Communications, Inc. v. County of Santa Cruz, 133 F. Supp. 2d 1184, 1201 (N.D. Cal. 2001), in support of their claim that several of the information requests were beyond the scope of the Commission review. First, Santa Cruz does not govern the scope of review of local franchise authorities in Minnesota. That case was decided by the district court for the Northern District of California. Furthermore, the case is presently on appeal to the Ninth Circuit federal court of appeals and has been briefed and argued. Further, the Santa Cruz decision is highly fact specific and was based upon the unique and distinguishable circumstances present in that case. AT &T asserted that the Franchisee, the respective agreements with the LFA, and the Franchisee's legal obligations pursuant to its Franchise will remain in place and unchanged after the merger. Because of this assertion, AT &T specifically objected to the NWSCCC's inquiries regarding the following: ten year pro forma projections regarding the merged entity, preparation of detailed material regarding the levels of debt of the merged entity in comparison to other MSO's, specific projections and time frames for future profitability, and compilation of any and all franchise - related adverse decisions involving either company. With regard to the specific responses to the RFI, AT &T generally provided that the enforceability of the Franchises would not be affected by the merger. While it stated that no managerial changes were expected at the local level, AT &T reserved the right to make such changes as may be needed. AT &T further asserted that the Transaction required no changes to be made with regard to technical or customer services and that the Transaction would not alter any technical or customer services obligations under the franchise or applicable law. AT &T responded that it did not expect programming or service offering changes to occur as a result of the merger, but it did reserve the right to make such decisions as 13 necessitated by market factors or applicable law. When specifically requested to provide the Exhibits and Schedules omitted from its Application, AT &T stated that the material was either not necessary in order to understand the terms of the agreement or contained confidential information not otherwise publicly available. AT &T also cited federal law as limiting the scope of the information that may be requested by a LFA. AT &T maintained that the merged corporation will be financially stable, and it cited the March 4, 2002 Fitch Rating of BBB to the senior unsecured debt obligations of the merged corporation. With regard to inquiries about specific policies and practices, AT &T claimed that it was "currently prohibited from discussing operational matters of this nature." When asked to provide written confirmation that subscribers in the NWSCCC will not be adversely affected by this change in control, AT &T provided the following statement: The companies believe there will be significant public benefits as a result of this Transaction. These include greater innovation in products and services, and more choices for consumers. The AT &T Broadband /Comcast alliance means that customers will benefit from the combined experience and expertise of both of the companies. In any event, the Transaction will not affect the cable - related obligations of the Franchisee or the rights of subscribers under the franchises and applicable law; such rights and obligations will remain the same as before the Transaction. Moreover, no changes in the operations of the cable system are being proposed at this time as a direct result of the Transaction, but the companies reserve the right to make such changes as customer and company needs may dictate. 14 IV. BRIEF OVERVIEW OF COMCAST MANAGEMENT EXPERIENCE We are briefly highlighting in this section Comcast management. The Appendix includes additional and more detailed information. The Transaction will result in the creation of a new entity that will include as its day -to -day management team, the current Comcast management. Brian Roberts will be the CEO. Our work on behalf of municipalities has provided us with the opportunity to witness the past performance of Comcast and its management. We believe a positive result of the transaction, especially for municipalities currently served by AT &T Broadband, is that the Transferee will be primarily managed by the current Comcast management team. Comcast Cable, a division of Comcast Corporate, is the third largest cable company in the United States. Comcast Cable serves approximately 8.4 million subscribers in six geographic regions. Comcast Corporate is headed by Brian Roberts, the son of Comcast founder Ralph Roberts. In a recent statement to a Senate subcommittee, Roberts attested to the fact that Comcast was an innovator with regard to the provisioning of cable modem service and digital cable. He stated that the company is now looking to introduce high- definition television and video on demand services. Roberts also stated that one of Comcast's strengths was that its business is primarily cable focused. Recent articles have described Stephen Burke, President of Comcast Cable. As president of Comcast Cable, Stephen Burke has been considered largely responsible for promoting what will be the largest cable merger in history. We understand that Stephen Burke will be president of the Transferee and will report to Brian Roberts. Accordingly, Brian Roberts will be the primary person in charge of the Transferee. Comcast Corporate is presently headquartered in Philadelphia, which will also serve as headquarters for the newly formed AT &T Comcast Corp. Unlike Brian Roberts, whose father was a co- founder of Comcast, Stephen Burke is a relative outsider to the cable business. Prior to joining Comcast, he worked at Disney during the Disney and Capitol Cities /ABC merger. Hiring Stephen Burke was part of a larger strategy at Comcast to bring in a relatively new generation of people in order to create a vision for the future. Stephen Burke brings to Comcast an open door policy where employees find their supervisors to be accessible and hands -on leaders. It is this openness between management and employees that Comcast hopes to retain post- merger. Comcast University, the company's training institute, was founded by Stephen Burke. He plans to use Comcast University as a management tool after the merger by increasing the number of courses available and by taking a traveling version of the University to all of the Transferee's major markets. Recently, Comcast reported higher than expected cash flow and revenues for the first quarter. Advertising sales rose 13% after a dismal fourth quarter reporting. Stephen Burke has indicated that 95 % of Comcast's networks are upgraded. Further, the Transferee will be in a better position to.concentrate on subscriber expansion and the 15 developing and launching of new services. When questions have arisen regarding how and if Comcast can cure an ailing AT &T Broadband, Burke and others at Comcast point to systems the company has previously acquired from AT &T where Comcast has been able to dramatically increase margins. Brian Roberts, in his Senate testimony expressed his goal of providing a clear focus to the merged company by implementing Comcast's past successes in the newly acquired AT &T markets. This includes upgrading AT &T networks to meet current standards in a more efficient manner. It also includes creating strong balance sheets, in contrast to the financial pressures currently crippling AT &T Broadband. In short, Comcast executives are optimistic that they can build upon the best practices and philosophies of both companies in order to increase investment and innovation, as well as improve operations and finances. 16 V. FEDERAL, STATE, AND LOCAL LAW APPLICABLE TO CABLE FRANCHISE TRANSFERS A. FEDERAL LAW 1. Cable Act and FCC Rules The Cable Television Consumer Protection and Competition Act of 1992, as amended by the Telecommunications Act of 1996 ( "Cable Act'), regulates the transfer and sale of cable systems.' The Cable Act states that if a franchise requires franchising authority approval of a sale or transfer, the franchising authority has 120 days to act upon the request for approval that is accompanied by such information as is required by FCC regulations and by the franchising authority.2 In addition, if the franchising authority fails to render a final decision on the request within 120 days, the request will be deemed granted unless the requesting party and the franchising authority agree to extend the time periods In response to the transfer provision contained in the Cable Act, the FCC promulgated rules regarding transfers and sales of cable systems.4 If a franchising authority does not act within 120 days, the request for transfer is automatically granted unless the parties have agreed upon an extension of the 120 -day deadlines 2. FCC Form 394 FCC rules require that the proposed transferor and transferee submit Form 394 to the franchising authority.6 The FCC created Form 394 to assist franchising authorities in obtaining information regarding proposed transfers and the legal, technical, and financial qualifications of transferees. The filing of the completed form, together with exhibits and any additional information required by the Franchise, state law, and local law, commences the running of the 120 -day time period for approval or disapproval of the proposed transfer. 1 47 U.S.C.§ 537. 2 Id. 3 Id. 4 First Report and Order and Further Notice of Proposed Rule Making, MM Docket No. 92 -264, 8 FCC Rcd No. 19, (released July 23, 1993); 47 C.F.R. § 76.502. 5 47 C.F.R. § 76.502. 6 47 C.F.R. § 76.502(a). 17