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HomeMy WebLinkAboutMINUTES - 02091999 - SD6 p P TO: BOARD a� SUPERVISORS , `�W Contra FROM: PHIL BATCHELOR, COUNTY ADMINISTRATOR Costa February 3, 1999 County STATE: SUBJECT: APPROVE THE TRANSFER OF CONTROL OF TCI SYSTEMS TO AT&T SPECIFIC REQUEST(S)OR RECOMMENDATION(S)&BACKGROUND AND JUSTIFICATION RECOMMENDATION: ADOPT either Option 1 or 2 as outlined below. Staff will be prepared on Tuesday, February 9, 1999 to make a recommendation on one of the options. OPTION 1 Subject to the fallowing conditions in an Agreement to be provided, CONSENT to the transfer of control of Tele-Communications, Inc. (TCI Cablevision of California, Inc.; Contra Costa Cable Company; Televents of East County, Inc.; Televents, Inc., Heritage Cablevision of Delaware, Inc.; UACC Midwest, Inc.; and Crockett Cable Systems, Inc. ('Transferee")) to AT&T Corp. ("Transferor"): (A) The Transferee agrees not to file a cost-of-service showing for a period of four (4) years ; (B) The Transferee agrees to pay franchise fees on the full subscriber prorated amount of gross advertising revenues less any fees or commissions not to exceed sixteen percent (16%) of the grass paid to any outside agency from July, 1991 through 1998 for all TCI systems. (C)The Transferee agrees to refund to its subscribers the Possessory Interest taxes refunded by the County. T ` f CONTINUED ON ATTACHMENT: �...�,,YES SICNATLRE: ti RECOMMENDATION OF COUNTY ADMINISTRATOR -RECOMMENDATION OF BOARD COMMITTEE APPROV€ OTHER Y449/ ,_ I'llSIGNATURE SJ:_ ACTION OF BOARD ON ---..._ APPROVED OTHER SEE ADDENDUM FOR BOARD ACTION VOTE OF SUPERVISORS I HEREBY CERTIFY THAI'THIS IS A TRUE UNANIMOUS(ABSENT ) AND CORRECT COPY OF AN ACTION TAKEN AYES: NOES: AND ENTERED ON THE MINUTES OF THE BOARD ABSENT. -- ABSTAIN: OF SUPERVISORS ON THE DATE SHOWN. ATTESTED Contact PHIL BATCHELOR,CLER F THE BC7ARC OF cc-. TCI Cablevision System Managers SUPERVISORS AND COUNTY ADMINISTRATOR Cable Television Administrator BY DEPUTY 2-9-99 Confirmation Report--Memory Send Time Jan-08-99 85:12pm Tel line 1 : + Tel line 2 : + Name : RUTAN & TUCKER LLP, Job number 839 Date Jan-08 05:89pm To 914159891853 Document Pages 86 Start time Jan-88 85:09pm End time Jan-08 85:12pm Pages sent 138 Jeb number 839 SEND SUCCESSFUL e.rrr,�Ri�ias�ri� ar caw +EC'4 1 Afar alit wC2Ut.21✓ae nM. Y4-rM MCNcsR =awrm mriwRi. Gi4LiicC3itN1.f4 sS'tBr"ts-le is ivlAti,.ilVU ^0930RWOM.- Qfilco gnx '1060. 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PHoNR KNo Avr"FtN.i rMd O taatNAL utt^'r rFfR�A aariVit xt5#NttesSt rslx rr,t qa.g, PaamrKa...saRNtyafaCaffi. rNxNK vou. tf ztxsraa or* prrstaNsn z rwC2o.vainq try«s FOX `rranAM.ttss "IMIse 0,11 (11 441 4541-61 CSO. sxtsr»slon 12x5. EXHIBIT K SD.6 ^''} ; f� �* jk2-9-99 aTAN & 1 u CKFes.R7 LL ATTC}RNSYS AT LAW ° A PARTNC.RSNIP INCLUDING potorCSSIONAL.CORPORATIONS JAMES R.Maa RC' ...M"b.KQNN 611 ANTON NOULEVARO, SUITE t400 ROMCAr 4,D.C. SCOf^T R.6AN TA# PhtJt fRE#ERtar MdRX Jot,D.%V+•ER.EA4 AQAN N.VQLKSRT ALtCN E.#6TEA#AR.14 RtCxdRO h CURN VTT MrcvEN A.Ntcx#ttl COSTA MESA, CALIFORNIA 92626-1098 JEM'a<AEY A.a#LErARs JENNsrER wN<YE-6pERtfN4 ,to NAR0 A."­CLiN#MA$#.6R0CK:N#YaM M.Kcv,.$RACft 6SEVEN J,b#QN JON.6.xUKtb VT.JR, w!LttAM W.WYNOER IAYx, N.*tso. Toco A. J.CiCNNtNOiQN Mic.ACL W,tMNEtL CVRt#SRI mcKtf#ALLA6 C?2R EC:Y ALL MAIL T{l: P. C). 90X SSSC) L.16.xARRt$ON YRS®A.Lim. R Mftrogo W.DAN!.JR. RXNDALL M.6A66U6x COSTA MESA, CALIFORNIA 024328-19150 ""R %.CAI rT1vv. Tao#S.O. AR A omotw AS f..vocft E,JR,• MARY M,$KERN CARat D.CARTY f CftiL.OUNN #N Jose.Y . AAAu! .1C.A AM6ER JOSSpp®.GARUYx M}CNAEL r.61TXER TELEPHONE (714) 64}-510C7 pATRiCR b.McGAtLA C$E# a.La c xo Rtc%.Rb p.SIM$ TECO-.$J.CRANC JS Mrs a K.NO'NSLL C."',Aa.. MENm JAMC6 0.of c^t M Xftx 6.rRATIER FACSIMILE (7141 4546-0036 JANE$L%-SI T JIANI Y Y. .111 N4 MICHAEL K,$Ulgoz Y MEAN -rPost AOSERY 4 SRAUN RpSNC1#pE rARMES A.►ATR5CK MVN#S MARLEME¢#6K YHOMAS S.SA4l"QZR` M.KATx2RI.0 JENS#N INTERNET t'1 WW-1i34SMC.`OM OEMRA OVNN iYSCt A0R1t LEt WALTZ* DAV`0 C.LARMEN` 43UXC r.WANLOU!ST CLRarV*D E.F.ISOEU AmtIARO 0.MO.YIEW o AN*N.N#CNNER KAREU EDSUICYN WALTER CAN MICNAEL 0.IgV6i to&,% NLA$.ITN OLATEA NATACfE St$SALD DVN#AS A IRA 0.At�iN' $kNESY W.KLATTS 111 A.W. AVYAN 11(60-f0YE1 0. J.STEVERS ALISON M.*AR$AK#6N JErrRCT M.ObERNAM° EL9L'LYETN U MARTIN JAMES 6.TUCKER.00.It066-106OI 6.OANIEt R6aYYL[ JOxN W.NAMt1YON.JR. STAN WOLCOTT' Kos b.TH#MPS#N M"rono w.DANL.SR.11$16.40661 KENT M.CLAYTON LYNN W6CN1N R86E4tT S.SOWS. JATNS TAYLOR KACSR N,Aa OOSR M#WELL IfOSS-406]1 losxp"L.*AOA III $1.1up J.SLANCNARD 0~0 J.ALE6NtAE DAVID$.CO666OVE AMfa C.KiLOER TSRSNCE J.aAfAAONEq 64nRC4A A,rOROYTN NANO VAN UQTEN .POe^ WILLIAM M.MARTICOAENA SYCPNSN h Ettt6 A1MAi.COM�'0RN'UON .14ME6 L.MORRI* MATTHEW It ROSE W1LLfAM J.CAPLAN 46"RCY WCAT"CiMER Or GOVNSYk MiCNAEL T.NORNAK EDW ID J. AAMALh in, II . DAVID J.0ARf6JttOt.tf4 January 13, 1999 Richard RM Patch Coblentz, Patch, Duffy Bass, LLP 222 Kearny St. , Seventh Floor San Francisco, CA 94108-4510 Re Cities of Arcadia, Santa Cruz, Berkeley, El Cerrito, Hercules, Richmond, . Santa Cruz County, and Contra Costa County (collectively, the "Franchising Authorities") ; FCC Forms 394 (collectively, the "Applications") filed by Telecommunications, Inc. ("TCI'!) Relating to Change in Control and Merger with AT&T Corp. ("AT&T") (the "Transfer" or the "Merger") Dear Richard: As you }snow, this office represents the Franchising Authorities in relation to the Merger. First, this letter will confirm that you have agreed, on behalf of TCI and AT&T, to extend the 121-clay review period to, and including, February 8, 1939. Unless further extended, each of the Franchising Authorities will be taking some form of action in relation to the 'Merger on or before that date. However, based partly on the information contained herein, another request for an extension until., at -the east, February 28, 1933 is hereby tendered. I am in receipt of an e-mail copy of the Proxy Statements/ Prospectus -- the Merger of AT&T and TCI, dated December 24, 1998 (the "Proxy Statement") . I received this document via a--mail on January 11, 1999. 1 have requested your office to provide a hard copy of this document, by Federal Express or ether overnight mail, to each. of the. Franchising Authorities. Over the 'last several months, I, on behalf of the Franchising Authorities, have requested !241011597-L1 1137'. 749. *41113!913 RUTAN & TUCKER, LLP 2-9-99 ATTORNEYS AT LAW A}qk'NGR$N,iP kNCwaK.*"Orft$40.N C0R0{)""0.$ Richard R. Patch January 13, 1999 Page 2 certain financial and other business plan information krelating to the merger by way of numerous written requests for information. As of this date, none of that Information has been provided based upon, in the alternative, that said financial information did not exist,,. that said financial information, if it existed, was not available for public distribution, and that said information, if it did exists and was available for public distribution, could not be so distributed until release of the Pro*y Statement. It was my understanding, based upon several discussions with you, that the Proxy Statement would provide at least some, if not all, of the requested information. Unfortunately, my review of -the Proxy + Statement, which was admittedly quite rushed based upon its late d receipt', reveals that said information is not includeA therein. However', based upon a review of various appendices to the Proxy Statement, it appears that said financial information, or at least a material portion thereof, does exist. This letter constitutes a formal request of the Franchising Authorities that TCI/AT&T provide the following documents, writings, and information within five (S) business days of receipt of this letter 1.. In the Fairness opinion of Credit Suisse/First Boston Corporation, dated June .23, 1998 (Proxy Statement, Appendix D) , Credit Suisse/First Boston makes reference to "certain other information relating to AT&T and TCI, including financial forecast, provided to or otherwise discussed with us by AT&T' and TCI . . .11 Credit Suisse/First Boston also states: ". . . with respect to the financial forecast, you have informed us, and we have assumed, that they have been reasonably prepared on basis reflecting the best currently available estimates and judgments of the managements of AT&T and TCI as to the future financial performance of AT&T and TCI and the potential strategic benefits and synergies (including the amount, timing, and achievability thereof) anticipate the result from the Merger. Please provide a copy of all such information and financial forecasts. Please provide, without limitation, any and all, materials reviewed by Credit Suisse/First Boston in relation "future financial performance of AT&T and TCI and the potential strategic benefits and synergies (including the amount, timing and achievability thereof) anticipate the result from the Merger. " 2 . In its Fairness Opinion (Proxy Statement, Appendix E) , Goldman Sachs & Co. makes reference to "certain internal financial analysis and forecast for AT&T and TCI prepared by their respective management; and certain analysis and forecast of costs savings and operating synergies anticipate to result from the Merger prepared 1241011597-DWI/349. &01113199 SD,6 99 RUTAN & TUCKER, LLP V ATTORNEYS AT LAW d FdRYNCR$NM fHC1.VS5ht3 aRpfbYiFi3'Nd4 GgAP6fld8kCN$ Richard R. Patch January 13, 1999 Page 3 by the management of AT&T (the "Synergies") . Goldman Sachs further states: ". . . with respect to the financial forecast for AT&T and TCI, . . . they have been recently prepared on the basis reflecting the best ' currently available estimates and judgments of the managements of AT&T and TCI as to the future financial performance of AT&T and. TCI on a combined basis and the potential strategic benefits and synergies (including the amount, timing and achievability thereof) anticipated to result from the. Merger." ;Tease ',provide copies of all such internal financial analysis, forecast, and analysis and forecasts of costs savings and operating synergies anticipate to result from the Merger prepared by the management of AT&T which were reviewed by Goldman Sachs & Co. in performance of due diligence relating to its Fairness Opinion. 3 . In the Fairness opinion of Donaldson, Lufkin & Jenrette, dated June 23, 1998 (Proxy Statement, Appendix F--3.) , Donaldson, Lufkin Jenrette makes reference to ". . . financial and other information . . . furnished to us by the company . . . included in the information provided during such discussions with management were certainfinancial analysis of the company prepared by the management of company. " Please provide copies of the financial and other information reviewed by Donaldson, Lufkin & Jenrette including, but not limited to, the financial analysis of the company prepared by the management of the company. 4. In the Fairness Opinion of Donaldson, Lufkin & Jenrette, dated June 24, 1998 (Proxy Statement, Appendix F-2) , Donaldson, Lufkin & Jenrette makes reference to ". . . financial and other information . . . furnished to us by the company and parent, including information provided during discussions with management of the company and parent. Included in the information provided during discussions with management were certain financial analysis of the company and parent, certain projections of the company (relating solely to the business of the company which is not tracked. by Liberty/Venture Stock) for the period beginning January 1, 1998 and ending on December 31, 2002 prepared by the management of the company and certain projections of parent for the period beginning January 1, 1998 and ending on December 31, 2002 prepared by the management of the parent. " Please provide copies of all such financial information, financial analyses, projections, and any ether financial documents reviewed and/or relied upon by Donaldson, Lufkin & Jenrette in preparing its Fairness Opinion. Expeditious provision of the above.-described information is essential' to the. Franchising Authorities due diligence review of 1a."r011597)0011323zras. a01113s99 rt+i t GSc I UCKER, LLP SD.5 ATTORNEYS AT LAW 2-9-99 ' x.xR:xs 2zwr sxcsvae>ua•+�+xFc.setsxxz GawPrrnxrea+vs Richard R. Patch January 13, 1999 Page 4 the Merger. If you have any questions, do not hesitate ',to contact me* Sincerely, RUTAN & TUCKER, LLP William M. Marticorena WMM/bpv cc: Michael Miller, Esq. , City Attorney, City of Arcadia Richard C. Wilson, City Manager, City of Santa Cruz Rama Murty, City of Berkeley Howard Stern, Esq. , City Attorney, City of El Cerrito Connie Jackson, City of Hercules Eric- Xavier, City of Richmond Pat Busch, Acting County Administrative Officer County of Santa Cruz .Patricia Burke, Contra Costa County John Risk, Communication Support Croup, Inc. 1241011597-"11323V49. 41113/99 _. . SD.6 -9-99 SD.6 ( a-9-99 UTAN eta TUCKER, L ATTORNEYS AT LAW A PARTNCRSSKSP INCLUDING PROFESSIONAL CORPORATIONS JAMES R.MOOAY• MICHAYL r. NDRNAK $t( ANTON BOULEVARD, SUITE 1406 ROSEAT o.DWtM ALLEN C.OSTCROAA f:t PAUk RC A,CU MARK PHtL1P D.KOWN A*AM..VOLKERT JY.NiFCA WHtTC-O"ft IjNO ,CCNARb A,CUR.UTT ✓OCL O.K NI HO" COSTA MESA, CALIFORNIA 02626-IGVOS J4FFRCY A. aOLDYAAS STEV€M J.**ON ,O-N 1C. A.WAMPYk STOVES A. NtItOCK F.'.KEVtN SAACtL COUO`iS J.OCMMS OTON ✓ICM 6...t 1M.Cf JR. THOMAS O.6AOCKSMOTON LAYNC M.MCLECA TACO A.JULLMOEA MICHAE4 W.O MCL4 CVRIOI W.WYWOCR DIRECT ALL MAIL TO: P, b. $i7X Ili Aub 1..SNI HARRISON TODD O.LtT'FiM MILFORO W.DANL,JR. RANDAK1 MI KIIOA DALLAS 943119 K.TRAYMUM W.RA 6.CARLSCii THCDDOAE i.RUG ACI,JR.' RANOALL M. ihaSUSM COSTA MESA, CALIFORNIA X2$2$-S>sISO LARRY A.CSRUTYI %RIC L DUNN Ot45CRY N.KAUOtR MARY M.ORtCN CAROL O.CApry "to OAttNTE JOSEPH D.CARRUTH Oftt OO AMOCO TELEPHONE (TI4) $+4t-5I00 PATRICK D.MCC-A:LLA CRtaTy O.LOMCMCO AiCHARD P.SIMS THO'MA1 J.CAANE RICHARD K.NOWCLk JYFFAty T. MELCHIMa ✓AME6 a.O�NEAL MAiK 0 FRAXfER FACSWILE (914) B!�$ JAI ACS JAES a.w€tsz SCAN P.FARACLL AOSERT C.ONAUH PCR. r PAAMt6 MtCNACL M.StATTIIRw MARLCNC POSC TH*MAS 6.SALIwOCp` K,K*TMCRiNC JCMSOH A.PATRICK MUAOt APRIL Litt WALTER DAVID C.LAA69M• OUKC F.WAMLOUIST INTERNET WWW.fUtAn.COM OCSRA DUNK sTCCL KAREN tLIXA.6tTN WALTER CLSFFOKD C.FMCOCM RICHARD a.MO.T9.1tto CAVI*N.HOCN.CR MATAUt 616SALD CURDA6 MICHAEL O.R.W. LOBS ILA NCR SMITH DAM aLATER AUSON M.6ApSwROS. IOA*,R—NY CpMtST W.KLATTi tit A. W. RUTAN(t480-tS71i PAUL J.6icy"s JON.W. HAMILTON,JA. JsPFAEY M.OOZO..M• RUXAStTH L. MARTYR JAMCa S.TUCKCR. OR.t156114060) 6.:DANIEL HARSOTTLC VLADIMIR P. SOLO STAN WOLCOTT- KIM:O.TMOMPSON Mt41000 W. DAN4. SA.91040-10001 RENT M.CLAYTON LT.. koaC.t. AO6YAT a.SOWCA ✓AV.9 TAYLOR KACYR M. AOOOtA HOWCtt OSXS-19611 JOStPH 4,HADA I}f PHtLiP J.SLA.C.ARO *AVID J.ALZ11 MIRK DAVIO 6.COSOROYC KRAIG C.KiLa€R TERCNCC J. aALLADHCA MARCIA A.FOASYTH MANA VAN LtOTEN SCOTT p.SA.TAMATA WIA.W.M M.MARTICORENw STCPHCM A C4.0a JAMCa L.MORRIS MATTMCW K.Ross •A IMDF'SSaCDiML*DAfM}AaT1W.f WILLIAM J.CAPLAN JCFFRCy WCRTNEIMCR EDWARD O,SYSCSMA.JA.- DAVID J.OARISALOt,tit October 12, 1998 Richard R. Patch Coblentz', Patch, Duffy & Bass, LLP 222 Kearny St. , Seventh Floor San Francisco, CA 94108-4510 Re: City of Santa Cruz and County of Santa Cruz (collectively, the "Franchising Authorities") ; FCC Forms 394, dated August 14, 1998, (collectively, the "Application") Relating to Transfer of Control of Tele- Communications, Inc. ("TCI") to AT&T Corp. (t$AT&T") (the "Transfer") Dear Mr. Patch: This letter constitutes a response to your letter to me dated October 7, 1998 relating to the above-described subject matter. Please be advised that your response; of October 7, 1998 to the Franchising Authorities' First Information Request dated September 16, 1998 (the "First Request") is not responsive and that failure to provide the information requested in the First Request, as well as such ad.di.tional, information which may be requested from time to time by the Franchising Authorities, may result in the denial of the Application. This letter constitutes notice of an information deficiency pursuant to 47 C.F.R. S 7.6.5032 (b) . Responses to Requests Nos. 1-15 are not adequate. Although the Franchising Authorities appreciate AT&T's certification that "based upon conditions known to it at this point in time the rates which can be charged by AT&T or any entity related thereto which will control the franchises in the Bay Area systems (as that term is defined in the Stipulation and Consent ,judgment filed on May 16, 1989) , together with all other fees and charges which are or may be assessed by said systems, will provide AT&T with a reasonable and adequate rate of return without the filing of a Form 1220 pursuant to the Cost of Service Rules with respect to such systems", specific responses must be provided to Requests Nos. 1-15. 1241011706-001013208740. a10,'M% 999 SDA 2.9-99 ATTORNEYS AT LAW A 1ARTNC#$MSP INCLU01.0 i*Ot,:ZSIO t COAP00A914N$ Richard R. Patch October 12, 1998 Pace 2 Detailed information is especially important given AT&T's exculpatory limitation that its certification is limited to "'conditions known to it at this point in timet'. Thus, the information requested in Requests Nos. 1- 15 is essential to the Franchising Authorities in conducting due diligence review of the financial and technical qualifications of AT&T. Given the fact that AT&T apparently possesses absolutely no experience in the operation of a cable system and has paid, by way of stock exchange, an amount per subscriber for the cable systems which may materially exceed comparable transactions occurring immediately prior to the execution of the Agreement and Plan of Restructuring and Merger, dated June 23, 1998 (the "Merger Agreement") , it is incumbent upon the Franchising Authorities to conduct independent due diligence to determine the economic and technical viabilities of the AT&T Business Flan which presumptively underscored its decision to undertake the Transfer upon the economic terms contained therein.; .1 The Federal Communications Commission (the "Commission") has specifically acknowledged that a franchising authority can request information beyond that information provided in the Form 394 if the information constitutes "additional information as is reasonably necessary to determine the qualifications of the proposed transferee. " (Ira the matter of Imnlementation of Sections 11, and 3 of t e Cablg Television Consumer otect'o a d m t o ct of 1992 HoriKo tal _and ygertigal Ownership Lim`t Cr s-O e a t ti ns -and Anti= traffigking provisions, RM Docket No. 92-264, Rel. No. 93-332, adopted 'June 24, 1333, Report & Order and Further Notice of Proposed Rulemaking (theora rt &ceder"} } . To the 'extent that the requested information concerns or relates to a financial analysis of the Transfer to determine its impact upon both regulated and unregulated rates, the Legislative History of the 1992 Cable Act makes it clear that Franchising Authorities are entitled to solicit and receive detailed financial information showing the effect of the transfer or sale on rate=s. In adopting Section 617 of the 1332 Cable Act, Congress made it abundantly clear through the Legislative History that franchising authorities will be rendered extreme latitude in requesting relevantinformation in this area.. In addition, to the extent that Congress has expressly sanctioned the solicitation of broad information regarding franchise transfers, broad review authority can be inferred. In the ep9_rt , 'the us+e copy ttee on Engrgy and Commerce dated lune 29 1 92, the House Report states. 1241041705-0010/3208740. iLiCV12198 9 2-9-999 ATTORNr-YS AT LAW Richard R. Watch October 12, 1998 Page 3 "The Committee intends that the FCC Regulations will be designed to endure that every franchising authority receive the information required to begin an evaluation of a request for approval of a sale or transfer. Such information may include detailed financial information showing the effect of a transfer or sale on rates and services; the contracts and agreements underlying the sale or transfer; informhtion concerning the legal, financial and technical qualifications of the transferor; information concerning the transferee's plan for expanding (or eliminating) services to subscribers. The amendment is not intended to limit, or give the. FCC authority to limit, local authority to require in franchises that cable operators provide additional information or guarantees with respect to a cable sale or transfer. " (Mousse Report, p. 120) . It should be noted that even Congress recognized the almost causal nexus between transfers and rate increases. The Legislative History of the 1992 Cable Act draws this causal connection expressly and concisely with the fallowing language: "One indicator of future rates is the prices for which cable systems sell. In the late 1980's, cable systems were selling for greater and greater amounts; the average sale price was increasing each year by hundreds of dollars per subscriber. In 1989, systems were regularly selling for well over $2,000 per subscriber, and sound systems were selling as high as almost $3,000 per subscriber. By determining the amount of debt usually involved in these transactions -- which for the cable television industry is generally a large percentage of the amount invested ---- it is possible to make a rough determination as to the cash flow needed to service this debt and what rates 'need to be to generate this cash flow. At the selling prices in 1989, it was evident, that at the very least,, rates were going to continue to increase to cover the debt .load, and that by the end of the decade, basic cable rates on average could be as high as $50.00 per subscriber, far more than double today's average, rate. It must be noted that these calculations are based on actual marketplace transactions; investors bought 1241011706-WIO/3209740. :za1s 9.99 ATTORNEYS AT LAW A P.4ty cpsMtf 444CW*i.3•PQF;ffielo—L C642P6.Am.2 Richard. R. Patch October 12, 1338 Rage 4 In relation to your responses to the additional inquiries identified as Requests Nos. 1 through 26 at pages 5 through 12 of the First Request, many of your responses are simply inadequate. In general, your refusal to provide documents relating to the Application or specifically. cited in the Merger Agreement cannot be justified based upon your vague and general claims that the information requested is "confidential and proprietary". It is incumbent upon the Franchising Authorities to determine the scope of information necessary, relevant, or material to the review of the Application and the qualifications of AT&T. Many of the requested documents were actually cited in the Merger' Agreement which was attached as an exhibit to the FCC .Form 394. An applicant to a public proceeding seeking the formal approval of legislative bodies to a financial transaction requiring their consent cannot pick and choose the information which it deems ' relevant and. disclosable. Although the Franchising Authorities are willing to discuss ' a mutually-acceptable confidentiality agreement which comports with the requirements of Federal and State law, they will not adept your generalized refusal to provide requested information based upon your determination as to the relevance, materiality, or proprietary nature of that information. Thus, your responses and objections to Requests Nos. 1, 2, 16, 18, 21, and 22 are hereby rejected and said information is once again respectfully requested by the Franchising Authorities. Failure to provide this information could be deemed a failure to reasonably ', cooperate in the analysis and investigation of the Application and could, on bath substantive and procedural grounds, constitute, grounds for denial of the Application. The responses to Requests Nos. 2, 3, 6, 8, 12, 13, 14, 15, and 21 are likewise unresponsive. The fact that the parties may have not formally prepared financial projections or a "Business Plan" underlying the Transfer or demonstrating how AT&T can recoup its investment in TCI and earn a reasonable return thereupon is not system believing they could raise rates to cover debt. Consequently, these calculations must be taken seriously. " (Footnotes omitted) . (amort of the e t tee Co e cScience, and_ Transp-ortgtion, June 28, 1991, pps. 7-8) . 124,'011706-001013209140, &10/12/98 sD.n TuCKER, n 2-4-99 RUTAN ATTORNEYS AT LAW .w*A*T%C"X0'INCLUOtHd aruaF"StCNAU Coarieas.MNS Richard R. Patch October 12, 1998 Page. 5 relevant even if it were true. Your response to Request No. 15 stating that the exchange rate or exchange price was based upon the negotiations conducted by representatives of the respective parties simply states the obvious and provides no substantive information to the Franchising Authorities to evaluate the appropriateness of the Transfer and the legal, financial, and technical qualifications of AT&T. The Transfer is highly problematic given the apparent lack of experience of AT&T in owning and operating', cable systems and the publicly-reported calculation of the exchange price stated in terms of dollars per subscriber. "finless AT&T can demonstrate, by wayof credible financial projections and data containing reasonable and non--speculative assumptions, how an entity which possesses absolutely no track record in the provision of multi- channel video services intends to do so and how the exchange price can be recouped short of significant rate increases relating to regulated services over and above that which can be expected with normal market conditions, it may be difficult for the elected bodies of the Franchising Authorities to justify an affirmative approval of this unique and potentially historic transaction. Finally, it appears to the Staff of the Franchising Authorities that your letter constitutes a statement of irrevocable intent on the part of TCI and AT&T that they, individually and collectively, intend to provide no additional information either in response to the First Request or subsequent requests. If this constitutes an accurate characterization of the intent of your letter, please so indicate to me in writing so that the Franchising Authorities can complete the processing of the Application based upon the information provided to date. 2 It is difficult for the Franchising Authorities to accept that sophisticated parties to a multi-billion dollar transaction have not prepared detailed financial pro formas, statements, and business plans demonstrating the economic viability of the transaction and justifying the exchange price based upon reasonable assumptions and projections as to anticipated .income and ultimately returns. In the case of publicly-traded companies such as TCI and AT&T, such an analysis would, in all likelihood, be required by the respective boards of directors in order to satisfy their fiduciary obligations to shareholders. Likewise, it is often typical in these types of transactions for the parties to obtain independent "fairness" opinions from .independent parties such as investment banking houses and accounting firms to demonstrate the economic Friability of the transaction to the respective shareholders. 124;011706-001013208740. alWI2198 5L99 A,rTORNEY5 .4T LAW A Y°ARTN ASHG MCLUWN0 fROMOVONAL CORfORATtONS Richard R. Patch October 1.2, 1998 Page 6 Your expeditious response to this Letter will be greatly appreciated. Sincerely, RUTAN & TUCKER, LLP William M. Marticorena WMMavjb cc: Richard Co Wilson, City Manager, City of Banta Cruz Pat 'Busch, Assistant County Administrative Officer, County of Santa Cruz 12410117 s 4a. 40112N8 SD.6 2-9-99 LAO% SD.6 a" TAN & TuCKER, LLVI 2-9-99 ATTORNEYS AT LAW A PARTNERSHIP I NCLUOINO PROFESSIONAL CORPORAIIONS JAMES ft.MOO.%. MICHAEL T. MOA.AK 611 ANTON BOULEVARD, SUITE 1400 AOSCRT O.OWEN ALLCM C.OSTCROAR 111 A..L FRILOCA C MARX PHILIP D.KOHN ADAM H.VOLKCRY JENNIFER WN'Tc.60cow"O JVFFACY A.OOLVOIARS sycVKH J�4001., RICHARD A.CURN." JO.4.O.KUPCR*%Ra COSTA MESA, CALIFORNIA 92626-ISDSS F.KCyW OAAXIL DOUGLAS J.VC%NiNOTOM "OMAMO A. AMP'rL arEVIIN,A.NICHOLS LAYNC".OAC"Cot T*CO A.JULA409ft JOHN a.NUALOUT.In. T140MAS 0.SOOCKINOTOh MICHAEL W.INNS" wJLLI^M W.WYNOCA DIRECT ALL MAIL TO: P. O. BOX t950 i.ext HARRISON TOO*O.WFIN ruse X.TNAvftu. NARA S.CARLSON MILFORD W.*..1'4%. CVRjQjKj fVICAt)PALLAS COSTA MESA. CALIFORNIA 92628-1-950 "A*Y A.CC&UTTt C"'It,DUNN 7.COOOAt I.WALLACC,J... R�k"ALL M,&ASSUS. CAROL D. CASTY rAC*a-LAHyt OMSCWT N. KRUSCR MARY M.QKCC. PATtcx 01 MOCAULA CAIS-y 0.UOUC.ZO 405CPH D.CARRV H ""Go U*Xft TELEPHONE j7tA) 4541-5100 RIC.ARO K. Nrrn"T. ."CNINO AIC4AAO I-.41,141, THOMAS J.CRANE 1A.96 S.WCISX' SCA14 A.rAA#qCLt, JAMES 0.O*hCt MARK S.FRAZIER FACSIMILE (714) 546-0035 MICHACL K.SLA�C*Y MARLENC POVC ftO*CftT C. PC.94OPC PARMCS A.PATRICK MVAOV AP-M LEE WALTER THOMAS S. M,KATHERINE JENSON INTERNET WWW.(UtSn-COM "ORA 0U.N ST9CL KARe-CUIxAaCTN WALTER OAVtO C.tA.SCN* 013.9 F.WA.LQUIST amno H. OCHMx" NAT^Ult StIINALO WL)NDAS C11"Ofto E.rAt OCN RIZHARM,O."O.TZ-OCO CAN SLATER ALISON M.s^rq*A%VsH MICHAEL O.RUSIN LORI SAftt.*MIT" PAU,J.SEVERS JOHN W. 'A. .A^Q.mm". CXNCGT W.KLATTC III A. AUTA. 110,60.10721 JCrrpCY V.OceftmAN'. CLIZA&CTH L.MARTY" dAM Sffi 0.TU£KEN. on. (tess-,111am C OANt9L"^ROOTYUt VLADIMIR P.OCLO YA.WOLCOTT. KINI O.THOMPSON WLI.W. ... RENT M.C YYOH LYNN %,0$CKI. ROBERT A,S.XOWK* 4AYNC TAYLOR XACCR H. COCA NOWeI.I.{{026-10641 JOSEPH L NAPA fit PHILIP J.SIAMC.A.O DAVID J, L96.1-C O.Vto S.Cosookova KAAIa C.W.0c" YCRCNCC J.Q.I'A*.C* MARCiA A-rofto H HAHS VAN LIOrt- SCOTT R.SAftY^QATA WILLIAM M. MARYtCOMENA silt-9141 A.ELLIS JAMES I. *A.,* M*TT.CW V.Ross WILLIAM J.CAPLAN ICYT.Cl WCATOtIMCA Co at, OW"O D.sys"..,in.- OXVIO J.OARIOALOI, III October 28, 1998 Richard R. Patch Coblentz, Patch, Duffy & Bass, LLP 222 Kearny St. , Seventh Floor San Francisco, CA 94108-4510 Re: Cities of Antioch, Berkeley, Richmond, El Cerrito, Santa Cruz, Contra Costa County, and Santa Cruz County (collectively, the "Franchising Authorities") ,• FCC Forms 394 (collectively, the "Applications") filed by Tele- communications, Inc. ("TCI") Relating to Change in Control and Merger with AT&T Corp. ("AT&T") (the "Transfer" or the "Merger") Dear Mr, Patch: This letter constitutes a response to your letter to me dated October 21, 1998 relating to the Cities of Antioch, Berkeley, Richmond, and Contra Costa County as well as your letter to me dated October 22, 1998 relating to the City of Santa Cruz and the County of Santa Cruz (the "Santa Cruz County Franchising Authorities") . Your October 21, 1998 letter constitutes a response to my letter dated September 30, 1998. Your October 21, 1998 letter relating to the City of Antioch, the City of Berkeley, the City of Richmond, and Contra Costa County (the "Contra Costa County Franchising Authorities") is substantially identical to your letter to me dated October 7, 1998 relating to the Santa Cruz County Franchising Authorities. Thus, please be advised that my letter to you dated October 12, 1998 relating to the Santa Cruz County Franchising Authorities is equally applicable to and shall hereafter constitute a response of the Contra Costa county Franchising Authorities to your letter of October 21, 1998. In relation to your October 21, 1998 letter, and on behalf of all of the Franchising Authorities, please be advised that the Franchising Authorities disagree with several of the fundamental tenets of your letter. First, the fact that the Franchising 124/01159r7-000113212964. &10128/98 9-99 RUTAN & TuCKER, LLP 2999 A'T'3ORNrZYS AT LAW A AARTNCRSWP INCLUDING RROOS#STOMAL CORPORATIONS Richard R. Patch October 28, 1998 Page 2 Authorities may request documents which do not exist in precisely the form requested, or which may not exist at all, dares not excuse TCI or AT&T from providing said information. To the extent that the information is relevant and necessary to adjudge the viability of the Transfer or the qualifications of the Transferee, the information must be provided whether or not its provision entails the creation of new information or new documents containing existing information. You have provided no citation to federal or state law which limit the right of a franchising authority to seek only information which is embodied in currently-existing documents. The burden of proof is upon the applicants to demonstrate the viability of the Transfer and the qualifications of the Transferee. If the demonstration of these qualifications requires the creation and provision of new information, or the memorialization of existing information in a farm different than that in which it is currently maintained or recorded, the applicants are required to utilize 'reasonable efforts to satisfy the information demands of the Franchising Authorities. Likewise, requests for information cannot be evaded based upon claims of "confidentiality" or that said information will. provide "an advantage to competitors". since the FCC Form 394 does not constitute the exclusive format for the collection of relevant information, the franchising Authorities dispute your claimed exemption :from production based upon the language of that form. Sime AT&T has chosen to provide a certification regarding its ability to earn a reasonable return upon investment absent the filing of a cost of service application and/or FCC Form 12203 based upon conditions known to it at this point in time, it is critical that the Franchising Authorities share AT&T's understanding of the, "condition known to it at this time." so that the viability and practical impact of that certification can be evaluated against bath AT&T's perceived set of facts as well as real world conditions as determined by the Franchising Authorities. Thus, the financial information requested by the Franchising Authorities, both in this letter and other letters sent in relation to the Transfer, is critical to the Franchising Authorities' continued review of the Transfer. ' In addition, since you have taken the position that, in essence, a. lesser degree of due diligence is necessitated since this is a 'change in control as opposed to transfer of ownership, it is especially important that you comply with Request No. 15 as found on page 5 of gay September 16, 1998 letter. The Franchising Authorities are particularly interested in knowing whether or not TCI has attempted to utilize changes in control to justify cost of service rates in excess of benchmark standards based upon the economic ,impact of that transaction upon the rate base either by 12410115974MI13212464. al=8/98 RU`t`AN & TUCKER, LLP l 2-9-99 ATTt7PNEY> AT LAW R PA—EASN"fMGLUOfNO..cIfCSS1ONAL caft".ATlo.% Richard R. Patch October 28, 1998 Pada 3 way of inclusion of transfer intangibles, asset step ups, or other ramifications of a change in control. Thus, your specific and comprehensive response to that request for information is respectfully re-requested. Once again, your expeditious response to this letter will facilitate processing of the Applications. Sincerely, RUTAN & TUCKER, LLP William M. Marticorena, WD M:vjb cc: Mama Murty, City of Berkeley Howard Stern, Esq. , City of El Cerrito Eric Xavier, City of Richmond Patricia Burke, Centra Costa County Richard C. Wilson, City of Santa Cruz Pat Busch, County of Santa Cruz 124101 359"7-000113212WA. *10/29198 t ?-9-99 Cern f 1 rma t 1 on €e"Po r t Time : Oct-28-88 05:16pm Tea €ine 1 . + Tel {ine 2 t Name RUTAN t TUCKER LLP, Mr. Job Date Time Duration pgs To Dept. Account diode Status 070 853 Oct-28 05:15pm 01/30 04 flUxdTIPAIIIIIIIII EC 502 OK P..1 SD.L 2-9-99 RuTAN & 'umm, LLP ATTORNEYS AT LAW 611 ANTON BOULEVARD, 14TH FLOOR COSTA MESA, CALIFORNIA 92626-1998 MAILING ADDRESS: Past Office Box 1950, Costal Mesa, California 92628-1950 TELEPHONE: (714) 641-5100 FACSIMILE: (714) 546-9035 FAX TRANSMITTAL COVED PAGE Date: October 28, 1998 Please Deliver to: Richard Patch, Esq. Telephone Number: 415-391-4800 Fax Number: 415-989-1663 Transmittal From: Bill Marticorena Number of Pages (including cover): 4 Document Title: Letter of today's elate Client/Matter Number: 011706-0010 Hard Copy to Fallow via Mail: YES Message: CONFIDENTIALITY NOTE: THE INFORMATION CONTAINED IN THIS FACSIMILE MESSAGE IS INTENDED FOR THE USE OF THE INDIVIDUAL OR ENTITY TO RICH IT IS ADDRESSED,AND MAY CONTAIN INFORMATION THAT IS PRIVILEGED AND CONFIDENTIAL. IF THE READER OF THIS MESSAGE IS NOT THE INTENDED RECIPIENT, OR THE EMPLOYEE OR AGENT RESPONSIBLE TO DELIVER THE MESSAGE TO THE INTENDED RECIPIENT, YOU ARE HEREBY NOTIFIED THAT ANY DISSEMINATION, DISTRIBUTION OR COPYING OF THIS COMMUNICATION IS STRICTLY PROHIBITED. IF YOU HAVE RECEIVED THIS COMMUNICATION IN ERROR, PLEASE NOTIFY US IMMEDIATELY BY TELEPHONE AND.RETURN THE ORIGINAL MESSAGE TO US AT THE ABOVE ADDRESS VIA THE U.S.POSTAL SERVICE. THANK YOU. If there are problems receiving this Fax Transmittal please call (714) 641-5100, extension 1235. 2-9-99 EXHIBIT F SD.6 2-9-99 COBL ENT'z, PA'T'CH, DUFFY & BASS, LLP ATTORNEYS AT LAW JONATHAN R.SASS N.ARRT O'SRI€H OF COUNSEL JEF FRY A.BERNSTEIN W1LLtAM H.$BRICK,ill 222 KEARNY STREET, 7TH FLOOR WI JAMES R.BLACK RICHARD R.PATCH LLIAM T.HUTTON WILLIAM K.COOLENTZ SA.RAY REO£R .A FRANCISCO, CALIFORNIA 94108-4510 _ VtROINIA A.CRISP CYNTHIA R.ROW-ANDSPECIAL COUNSEL PAMELA A.DUFFY JOSEPH C.SP£RO PAUL€SCOSOSA TELEPHONE: (415) 391-4800 JEFFREY A,MASO PHILIP 0.FELOMAN HANLEY CNCW JOSHUA R.STEINHAUER ALAN C.OENHtS KtRSTEH J.DAY FACSIMILE.* (415)989_1663 LOUIS L WRAUDO J.KEITH EVANS.ORVILLL TEVFS JACOSS(i0Obt9741 SUSAN K.JAM!SON or..J.FINE ANN E.JOHNSTON SCOTT C.RLfN£ WILLIAM F,MCCARC 003$-1983) JEFFREY O.KNOWLCS WXNOY L.MACFLWAINE ALLEN E.BROUSSARD(1380-1998) MICHAEL P.KVPP€RSMITH SETM E.MERMIN STEPHEN T.L4NCTOT JAYP,MORAN October 7, 99 }ADMITTED IN OEOROIA ONLY MtCNAtL L.METERS HOWARD A.SLAV+TT @IARSARA A.MILANOWCH TAY C.VIA JAMES P.MITCHELL C6.FFORO€.TIN 7233-x}26 Ilia Federal Express William Marticorena, Esq. Rutan & Tucker 611 Anton'Boulevard, Suite 1400 Costa Mesa, California 92626$1998 Re: City of Santa Cruz and County of Santa Cruz ("Franchising Authorities") FCC Farm 394 Filed by Tele-Communications, Inc. ("TCI') Dated August 14, 1998 Response toInformation Rest Dear Mr. Marticorena: This firm represents TCI in connection with its application for approval of the transaction'with AT&T Corp. and its affiliated entities ("AT&T"), which will result in a change of control of TCI. The purpose of this letter is to respond on behalf of TCI and AT&T to your letter dated September 16, 1998, which requests certain information concerning the transaction. With respect to the information requests designated as Requests 1 through 15 on pages 2'through 5 of your letter, we question whether any legitimate purpose will be served by providing the requested information. Under the terms of the Consent Decree, the Franchising Authorities specifically relinquished any and all rights which they might otherwise have under Federal or State law to regulate rates in Santa Cruz. Accordingly, TCI and AT&T formally object to Requests 1 through 15 on the,basis that the inquiries do not seek appropriate additional information under the applicable FCC Rules and on the further basis that the inquiries appear to solicit the responding parties' agreement to restrict or limit their rights under Federal rate regulations. However, without waiving these objections, AT&T is willing to, and does hereby, certify that based upon conditions known to it at this point in time the rates which can be charged by AT&T or any entity related thereto which will control the franchises in the Bay Area Systems (as that term is defined in the Stipulation and Consent Judgment filed on May 16, 1989), together with all other fees and charges which are or may be assessed M6 2-9-99 l e COBLENTZ, PATCH, DuFFY & BASS, LLP William Marticorena, Esq. October 7, 199€3 Page 2 by such systems, will provide AT&T with a reasonable and adequate rate of return without the filing of a Form 1220 pursuant to the Cost of Service Rules with respect to such systems. With respect to the additional inquiries identified as numbers 1 through 26 at pages 5 through 12 of your correspondence, TCI and AT&T respond as follows: Reuest No. 1: Under applicable Securities and Exchange laws, applications filed for approval pursuant to the Hart-Scott Rodino Act are confidential. In any event, we believe that all of the information that is necessary to an understanding of the transaction has been provided as a part of the Form 394 filing. Request No. 2: The Franchisee has provided and will continue to provide all financial information required by the Consent Decree and Franchise Agreements. It is our belief that the remaining information requested by bequest No. 2 is not necessary in order to understand the terms of the Merger Agreement nor is it relevant or material to the Franchising Authorities' review of the legal, technical and financial qualifications of AT&T. However, to avoid what we believe may be an unnecessary conflict, we have attached a copy of the most recent audited financial statements for UACC Midwest, Inc., which, as you know, is the immediate parent of the Franchisee. (Exhibit A.) Request NQ. : Financial projections have not been created for the Franchisee or for this transaction nor is there any expectation that they will be prepared in the future except as may be required for the Joint Proxy Statement Prospectus which is not complete at this time. A copy of the Prospectus will be provided to the Franchising Authorities'when it is complete and publicly available. Financial information related to the Franchisee has been previously provided to the Franchising Authorities as required by the Consent Decree and Franchise Agreements. Rest No. 4: As we understand this request, we do not believe that there are any agreements other than the Merger Agreement (which has already been provided as a part of the Form 394) which are responsive. Rust No. 5: At the present time, there is no formal plan or"commitment" to upgrade the Santa Cruz System. The Franchisee is, however, contemplating certain changes which would reduce the number of homes served by each node and would result In an increase in the system's capacity. Request No. 6: The transaction between AT&T and TC1 primarily contemplates an exchange of stack, not a cash purchase. While it is possible that certain aspects of the transaction'may be financed, no determination has been made at this time and, accordingly, there are no lenders or lending agreements related to the transaction. SD.6 2-9-99 OBLENTz, PATCH, DuFFY & LASS, LLP J William Marticorena, Esq. October 7, 1998 'age 3 The Merger Agreement, which has already been provided as a part of the Form 394, sets forth the specific terms of the Agreement between the parties with respect to the exchange of equity. The transaction will not result in any new financing relating to the system. Request No. 7: Other than the Consent Decree and Franchise Documents relating to Santa Cruz, we believe that the Merger Agreement, which has already been provided as part of the Form 394, is the only document which is responsive to this request. No trust agreements, trust indentures or management agreements presently exist regarding the system or the transaction other than the Merger Agreement. Request No. 8: The most recent statement of the information requested by Request No. 8 is set forth in AT&T's form 10-Q. A copy of the pertinent portions of the 10-Q reflecting AT&T's outstanding long term indebtedness is attached. (Exhibit B.) Request No. 9: Other than the Merger Agreement, there are no documents responsive to this request. Request No. 10: At the present time, neither AT&T nor any of its affiliated entities operate a cable system. Request No. 11: The proposed transaction is structured as a merger in which AT&T's Merger Sub, a newly-formed Delaware subsidiary of AT&T created specifically for the purpose of consummating the transaction, will merge with and into TCI, with TCI being the surviving entity and a wholly-owned subsidiary of AT&T. In connection with the merger, the assets and businesses of TCI and AT&T will be attributed to either of two groups: the Liberty Media Group or the Common Stock Group. The Common Stock Group initially will consist of what is now TCi's and AT&T's cable television, telephony, and Internet businesses. Subsequent to the merger, AT&T plans to create a third group, the AT&T Consumer Services Company (AT&T Consumer Co.), that will include the cable television, local residential telephone, domestic long-distance residential telephone, international residential telephone, and residential Internet businesses, along with AT&T's consumer residential wireless mobile communications business. The Common Stock Group will continue to reflect the remainder of AT&T's current network and business services. Also in connection with the merger, AT&T stockholders will be asked to approve amendments to the AT&T charter to authorize new"tracking stocks," one of which is intended to reflect the performance of the assets and businesses of the Liberty Media Group. Subsequent to the merger, AT&T plans to create another"tracking stock" to reflect the performance of AT&T Consumer Co. "Tracking stock," a device that has 9-99 COBLENTZ, PATCH, Du FFY & BASS, LLP William Marticorena, Esq. October 7, 1998 Page 4 been used for approximately 15 years, is typically issued by diversified corporations. Although it is common stock of the parent issuer, it is intended to reflect the businesses and assets of a distinct business segment or group of assets of the issuer. The underlying business or asset tracked by the stock is commonly referred to as a "group," as in the "Liberty Media Group." AT&T's use of tracking stock will allow the public to invest selectively, and to evaluate separately, the discrete businesses of the Liberty Media Group, AT&T Consumer Co., and the Common Stock group. At the time of the merger, AT&T will issue 0.7757 snare of AT&T common stock for each share of TCI Series A TCI Group Common Stock and 0.8533 share of AT&T common stock for each share of TCI Series B TCI Group Common Stock, as specified in the Agreement. Request No. 12: Please .see response to Request No. 6. Reauest est No. 13: Please see response to Request No. 3. Reauest No. 14: There are no documents responsive to this request. Reauest No. 15: The exchange rate was determined through negotiation of exchange ratios, which negotiations were conducted by representatives of TCI and AT&T at the direction of their respective Boards of Directors and in conjunction with legal and financial advisors. Request No. 16: AT&T and TCI object to Request No. 16. The Non-Disclosure Agreement dated as of May 26, 1998 is proprietary and contains confidential information of AT&T and TCI. Nothing contained in the Non-Disclosure Agreement is necessary in order to understand the terms of the Merger Agreement nor is it relevant or material to the Franchising Authorities' review of the proposed change of control. Request No. 17: A copy of the Joint Proxy Statement Prospectus will be provided to the Franchising Authorities when it is complete and publicly available. Reauest No. 18: The Voting Agreement is proprietary and contains confidential informationof AT&T and TCI. Nothing contained in the Voting Agreement is necessary in order to understand the terms of the Merger Agreement nor is it relevant or material to the Franchising Authorities' review of the proposed change of control. All information material to the decision of the shareholders, will be disclosed in the Joint Proxy Statement Prospectus, a copy of which will be provided to the Franchising Authorities when it is complete and publicly available. Reauest_No. 19: The requested charts are attached. (Exhibit C.) SD.& { 2-9-99 COBLENTZ, PATCH, DuF'F'Y & BASS, LLP William Marticorena, Esq. October 7, 1998 Page 5 ReauesLNo._20: AT&T's prior SEC filings are voluminous. However, they are all available at http:llnewsstand.cb.att.com/ir/reports.htm1. Reouest No. 21: The Capital Spending Plan is proprietary and contains confidential information of AT&T. Nothing contained in the Confidential Spending Plan is necessary in order to understand the terms of the Merger Agreement nor is it relevant or material to the Franchising Authorities' review of the proposed change of control. Reguest No. 22: The Parent Charter Amendment is proprietary and contains confidential information of AT&T and TCI. Nothing contained in the Parent Charter Amendment is necessary in order to understand the terms of the Merger Agreement nor is it relevant or material to the Franchising Authorities' review of the proposed change of control. beauest No. 23: AT&T stockholders will be asked to approve amendments to the AT&T Chatter to authorize new "tracking stocks" in connection with the Merger; one of which is intended to reflect the performance of the assets and businesses of the Liberty Media Group, Subsequent to the Merger, AT&T plans to create another"tracking stock"to reflect the performance of AT&T Consumer Co. "Tracking stock," a device which has been used for approximately 15 years, is typically issued by diversified corporations. Although it is common stock of the parent issuer, it is intended to reflect the businesses and assets of a distinct business segment or group of assets of the issuer. The underlying business or asset tracked by the stock is commonly referred to as a "group," as in the Liberty Media group." AT&T's use of tracking stock will allow the public to invest selectively, and to evaluate separately, the discrete businesses of the Liberty Media group, AT&T Consumer Co. and the Common Stock Group. bequest No.24: We are unaware of any reference to a "Firewall Agreement" in sections 7.14 or 7.18 of the Merger documentation as cited in bequest No. 24. Nevertheless, the terms of any subsequent agreements relating to the intercompany agreements and inter-group transactions are set forth in Schedules 7.14 and 7.18, respectively. These schedules were provided to you previously with the Merger documentation. bequest No. 25: Significant litigation challenging the validity of the Telecommunications Act of 1996 and the FCC Implementation of the Act to which AT&T is a party includes: Iowa Utilities Board et al v Federal Communications Commission. et al. (Docket 96-3321) (8th Circuit U.S. Court of Appeal) cert. granted. SDk 2-9-99 COBLE TZ, PATCH, DUFF-Y & BASS, LLP William Marticorena, Esq. October 7, 1995 Page 6 Southwestern Bell Communications et at. v. Federal Communications Commission (Docket 93-10140) (5th Circuit U.S. Court of Appeal). BellSouth v. Federal Communications Commission (Docket 93-1019) (D.C. Circuit Court of Appeal). Reeuest No. 25: Because the subject transaction was conducted at the parent level, the "Grantee'' has not at any time received a purchase offer to acquire the cable system or a majority in Grantee as contemplated by Paragraph 15(a) of the First Amendment to FranchiseAgreement. As more specifically set forth in response to the individual requests, AT&T and TCI do not agree that all the information requested by the Franchising Authorities is reasonable within the meaning of Section 3(n)(1) of the Cable Communications Franchise Ordinance of the City of Santa Cruz or Chapter 5.24.030(n)(1) of the Code of the County of Santa Cruz. However, we believe that the information provided with the Form 394 and the additional information provided with this letter does in fact comprise all of the information which the Grantor can reasonably request in connection with the proposed change of control, and further believe that the Franchising Authorities have all information which is relevant or material to the Franchising Authorities' review of the proposed change of control. Please do not hesitate to contact me if you have any questions. Very truly yours, Coblentz, Patch, Duffy & Sass, LLP Richard R. Patch RRP/kl Attachments cc: Robert Haehnel Michael Olsen Madie Gustafson SD.6 ` 2-9-99 HERITAGE COMMUNICATIONS, INC. AND UACC MIDWEST, INC. AND "SUBSIDIARIES' Combined Financial Statements December 31, 1997 and 1996 (With Independent Auditors' Report Thereon) SD.6 2-9-99 AMPeat' MarwickLLP 707 Seventeenth Street Suite 2300 Denver Co 80202 INDEPENDENT AUDITORS' REPORT, . The Boards of Directors of Heritage Communications, Inc. and UACC Midwest, Inc.: We have audited the , accompanying combined balance sheets of Heritage Communications, Inc. and UACC Midwest, Inc. and subsidiaries (a erect wholly- owned subsidiary and an indirect wholly-owned subsidiary of TCI Communications, Inc., respectively) as of December 31, 1997 and 1996, and the related combined statements of operations, equity, and cash flaws for the years then ended. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in. " all material respects, the financial position of Heritage Communications, Inc. and UACC Midwest, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic combined financial statements taken as awhole. The supplementary information included in the attached combining schedules is presented for purposes of additional analysis and is not a required past of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basicfinancial statements taken as a whole. Parch 20, 1998 KPs#G tmemavnnaE SD.5 2-9-99 HERITAGE COMMUNICATIONS, INC. AND UAC:C MIDWEST, INC. ANIS SUBSIDIARIES Combined Balance Sheets December 31, 1997 and 1996 1997 1996 amounts in thousands Assets Cash $ 7,077 7,565 Trade and other receivables, net 26,585 31,929 Investment in affiliates, accounted for under the equity method'(note 4) 178,049 34,128 Property and equipment, at cost: Land 4,386 4,560 Cable distribution systems 870,712 884,662 Support. equipment and buildings 110.199 116.0325 �987 1, 305,247 Less accumulated depreciation 460,359 436.817 524.938 568.430 Franchise costs 3,135,277 3,245,594 Less accumulated amortization 653.781 609.8:36 2,481,496 2,636.758 Other assets, at cost, net of amortization 13,881 15.791 Liabi.lities and Combined Equity ,232.026 3.294 Cash overdraft $ 12,365 -� Accounts payable and accrued expenses 46,249 43,297 Debt (note 5) 499,938 192,566 Referred income taxes (note 6) 858,475 897,503 Total liabilities 1_,417.027 1.133,366 Minority interests iii equity of consolidated subsidiaries 28,250 11.,5503 Combined equity: Common equity 952,395 952,395 Retained earnings (accumulated deficit) 23,874 (44,754) Due to TCI Communications, Inc. ("TCIC") (note 7) 1,262,241 1,693,805 Investment in preferred stock of United Artists Holdings, Inc. ("UAHI") (note 8) (451,7611 (451.761) 1,_786,749 2.1.49.685 Commitments and contingencies (note 9) 3 Q Oa 3,294.601 See accompanying notes to combined financial statements. 1 s 99 HERITAGE COMMUNICATIONS, INC. ANIS UACC MIDWEST, INC. ANIS SUBSIDIARIES Combined Statements of Operations Years ended December 31, 1997 and 1996 a 1997 1996 amounts in thousands Revenue $ 683,404 730,986 Operating cosh and expenses: Operating (mote 7) 234,294 241,692 Selling, general and administrative (note 7) 129,482 172,456 Depreciation 76,211 79,631 Amortization ' 319 82,977 525,306 576,756 Operating income 158,0398 154,230 Other income (expense). Interest expense (notes 5 and 7) (74,301) (108,851) Gain on exchange of assets (note 3) -- 21,028 Loss on early extinguishment of debt (note 5) -- (22,882) Share of earnings of affiliates (mote 4) 23,118 -- Minority interests in earnings of consolidated subsidiaries, net (642) -- Other, net _ ,41 1.508 (55,2401 (139,1971 Earnings before income tares 102,858 45,033 income tax expense (mote 6) (34,230) (15.895) Net earnings 68.628 29.138 See accompanying notes to combined financial statements. 2 S 99 2_q-99 HERITAGE COMMUNICATIONS, INC. AND UACC MIDWEST, INC. AND SUBSIDIARIES Combined Statements of Equity Years ended December 31, 1997 and 1996 Retained earnings Investment Total Common (accumulated Due to in preferred combined -couity deficitl TCIC stock of U'AHI _ .equity amounts in thousands Balance at January 1, 1996 $952,395 (73,892) 1,406,456 (451,761) 1,833,198 Net earnings -- 29,138 -- -- 29,138 Change in due to TCIC -- -- 287.349 287.349 Balance at December 31, 1996 952,395 (44,754) 1,633,805 (451.,761) 2,143,685 Net earnings -- 68,628 -- -_ 68,628 Change in due to TCIC _ (431.5, -1121...564 Balance at.Dece ber 31, 1997 ,451.7611 LZaa..7444 See accompanying nates to combined financial. statements. 3 s 99 HERITAGE COMMUNICATIONS, INC. AND UACC MIDWEST, INC. AND SUBSIDIARIES Combined Statements of Cash :Flows Years ended December 31, 1997 and 1996 1997 1990 amounts in thousands (see mite 2) Cash flows from operating activities: Net earnings $ 68,628 29,138 .Adjustments to reconcile net earnings to net cash provided by operating activities. Depreciation and amortization 161,530 162,508 Sham of earnings of mates 23,118) -- Deferred income tax benefit 39,906) (33,600) Minority interest in earnings of consolidated subsidiaries, net 642 -- Gain on exchange of assets -- (21,028) Toss on early extinguishment of debt -- 22,882 Other noncash amounts 1,289 (1,554) Changes in operating assets and liabilities, net of the effect of acquisitions and exchanges: Change in receivables 5,344 (10,330) Change in payables and accruals `_-- 2.952 2,935 Net cash provided by operating activities 177,361 151.251 Cash flows from investing activities: Capital expended for property and equipment (57,700) (91,1.55) Cash paid for acquisitions -- (60,583) Cash paid to purchase minority interest (9,399) -- Cash received in exchanges -- 50,050 Proceeds from sale of assets -- 2,0342 Other investing activities 53 (4,165) Net cash used in investing activities (67,04 5) (103.811) Cash flows from financing activities: Change in cash overdraft 12,365 (5,034) Borrowings of debt 646,000 188,000 Repayments of debt (338,377) (482,142) Prepament penalties -- (21,7'59) Distribution to minority interest holders -- (4,180) Change in amounts due to TCIC L430,79 1) 285.240 Net cash used in financing activities (11.13,803) 09,8751 Net increase (decrease) in cash (488) 7,565 Cash at beginning of year 7,565 -- Cash at end of year ZS77 7., See accompanying nates to combined financial statements. 4 23.6 2-9-99 HERITAGE COMMT NICATIONS, INC:. ANIS UACC MIDWEST, INC. AND SUBSIDIARIES Notes to Combined Financial Statements December 31, 1997 and 1996 �1� Suxb.�nary of Significant Accounting Policies Or anization and Basis of Presentation The accompanying combined financial statements include the accounts of Heritage Communications, Inc. ("HCI") and UACC Midwest, Inc. ("UACC") and their majority-owned subsidiaries (collectively, the "Company"). HCI and UACC are the borrowers under a bank credit facnlity (the "Credit Agreement"), and each is jointly and severally liable for all borrowings under the Credit Agreement. All significant intercompany accounts and transactions have been eliminated in combination. The Company, through its subsidiaries and abates, is principally engaged in the construction, acquisition, ownership, and operation of cable television systems. UACC is an, indirect wholly-owned subsidiary of UA.HI. UAIiI and ICI are wholly-owned subsidiaries of TCIC. TCIC is a subsidiary of Tele- Communications, Inc. ("TCI"). Receivables Receivables are reflected net of an allowance for doubtful accounts. Such allowance at December 31, 1997 and 1996 was not material. Investments For those investments in affiliates in which the Company's voting interest is 20% to 50%, the equity method of accounting is generally used. Under this " method, the investment, originally recorded at cost, is adjusted to recognize the Company's share of the net earnings or losses of the affiliates as they occur rather than as dividends or other distributions are received, limited to the extent of the Company's investment in, advances to and guarantees for the investee. The Company's share of net earnings or losses of affiliates includes the amortization of purchase adjustments. Property and Zc ioment Property and equipment is stated at cost, including acquisition casts allocated to tangible assets of cable television systems acquired. Construction costs, includung interest during construction and applicable overhead, are capitalized. Interest capitalized during the years ended December 31, 1997 and 1996 was not material. Depreciation is computed on a straight-.line basis using estimated useful lives of 3 to 15 years for distribution systems and 3 to 40 years for support e(T uipment and buildings. (continued) 5 S 2-9-99-9-999� HERITAGE COMMUNICATIONS, INC. AND UACC MIDWEST, INC. AND SUBSIDIARIES Nates to Combined Financial Statements Repairs and maintenance are charged to operations, and renewals and additions are capitalized. At the time of ordinary retirements, sales or other dispositions of property, the original cost and cost of removal of-such property are ch rged to accumulated apreciation, and salvage, if any, is credited thereto. Gains or losses are only recognized in connection with the sale of properties in their entirety. Franchise Costs Franchise costs include the difference between the cost of acquiring cable television systems and amounts assigned to the tangible assets. Such amounts are generally amortized on a straight-line basis over 40 years. Costs incurred by the Company in negotiating and renewing franchise agreements are amortized on a straight-line basis over the life of the franchise, generally 10 to 20 years. Imuairment ofLong-lived Assets The Company PSnodically reviews the carrying amounts of property, plant and equipment and its identifiable intangible assets to determine whether current events or circumstances warrant adjustments to such carr�ring amounts. If an impairment adjustment is deemed necessary, such loss is measured by the amount that the carrying value of such assets exceeds their fair value. Considerable management judgment is necessary to estimate the fair value of assets, accordingly, actual results could vary significantly from such estimates. Assets to be disposed of are carried at the lower of their financial statement carrying amount or fair value less costs to sell. Revenue Recognition " Cable revenue for customer fees, equipment rental, advertising, pay-per-view programming and revenue sharing agreements is recognized in the period that semces are delivered. Installation revenue is recognized in the period the installation services are provided to the extent of direct selling costs. Any remaining amount is deferred and recd ed over the estimated average period that customers are expected to remain connected to the cable television system. Statement of Cash Flows With the exception of certain asset transfers, transactions effected through the intercompany account due to TCIC have been considered constructive cash receipts and payments for purposes of the statement of cash flows. Estimates The preparation of financial statements in conformity with generally accepted accounting principlesrequires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. (continued) 6 S€).6 2-9-99 HERITAGE COMMUNICATIONS, INC. AND "UACC MIDWEST, INC. AND SUBSIDIARIES Notes to Combined Financial Statements (2) Suoolemental Disclosures to Combined Statements of Cash Flaws Cash paid for interest was $74,080,000 and $109,765,000 for 1997 and 1996, respectively. Also during this period, cash paid for income taxes was not material. Significant noncash investing and financing activities are as fellows. Years ended December 31 1997 199 amounts in thousands Cash paid for acquisitions; Fair value of assets acquired $ -- 60,154 Liabilities assumed, net of current assets «- 4,703 Minority interests in equity of acquired entities _14,274} Cash paid for acquisitions Cash received in exchanges: Aggregate cost basis of assets acquired $ -- 193,541 Historical cost of assets given..up -- (220,170) Increase in due to TCIC (2,000) Gain recorded on exchange of assets -- _-_- 4� {21,4211 Cash received in exchanges Exchange of consolidated subsidiaries for equity investment 22,45_1 Exchange of combined subsidiary for equity investment Contribution of cable television systems to joint ventures Net transfers of assets through due to TCIC, including deferred tax liabilities " 7' (continued) 7 HERITAGE COMMUNICATIONS, INC. AND UACC MIDWEST, INC. AND SUBSIDIARIES Nates to Combined Financial Statements (3) Exchange of Cable Television Assets Effective January 1, 1997, HCI contributed certain cable television systems, serving approximately 126,000 basic customers, to TCI American Cable Holdirip, I.P. CALM") in exchange for an approximate 36% investment in ACID, which is accounted for by the equity method. Other subsidiaries of TCI( own the remaining 64% interest in ACH. No gain. or loss was recognized in connection with such transaction. Effective May 31, 1997, UACC contributed a cable television system, serving approximately 33,800 basic customers, to TCI American Cable Holdings II, L.P. ("ACH2") in exchange for an approximate 61% ownership interest in ACH2. Other subsidiaries of TCIC sawn the remaining 39°10 interest in ACH2. In connection with this transaction the cable television systems initially contributed to ACH2 were exchanged for cable television systems of an unaffiliated third party. No gain or loss was recognized in connection with the above transactions. The financial condition and results of operations of ACH2 have been combined with the Company since the May 31, 1997 exchange date. Effective February 12, 1996, the Company exchanged its cable television assets in and around Wilmington, Delaware (which serve approximately 143,000 basic subscribers) for cable television assets located in and around Oakland, California (which serve approximately 1.27,000 basic subscribers) (the "Wilmington Exchange"). The Company received approximately $51 niiWon in cash and recorded an approximate $21 million gain in connection with the Wilmington Exchange. The Company used the proceeds from the Wilmington Exchange as partial consideration for the acquisition of cable television assets in and around Port Collins, Colorado on February 16, 1996 (which serve approximately 30,000 basic subscribers). The Company paid approximately $54 million in cash for the acquisition of the Fort Collins area system. (4) Investments in Affiliates The Company has certain investments in affiliates accounted for under the equity method. Summarized unaudited financial information for such affiliates is as follows: December 31 199Y 199b amounts in thous�`s Combined Financial Position Property and equipment, net $215,472 71,554 Franchise costs, net 274,343 85,300 Other assets, net 70,196 16.199 "dotal assets Debt -_ 740 Other liabilities $ 13,027 4,884 Owners' equity 546.984 167.429 Total liabilities and owners` equity 15=ui li3mu (continued) 8 SD.6 2-9-99 HERITAGE COluIIV TJWCATIONS, INC. AND UACC MIDWEST, INC. AND SUBSIDIARIES Notes to Combined Financial Statements Years ended Dec tuber 31.. 1997 1996 amounts in thousands Combined Operations Revenue $214,532 38,648 Operating expenses (112,1.90 (16,914) Depreciation and amortization (30,945) (7.50'71 Operating income 71,397 14,227 Other income (expense), net 12,489 (5,747} Net earnings LNIM At December 31, 1997, the Company's equity investees were comprised of three partnerships which operate in the cable television industry. The ownership of such investees ranges from 23% to 36%. The Company has generallypledged its affiliated partnership interests to secure such partnerships' indebtedness. Substantially all the assets of such affiliates are pledged as security for their indebtedness. (5) Debt Debt is summarized as follows; December 31. 1997 1996 amounts in thousands Credit Agreement (a) $496,400 188,044 Other 3,938 4,566 4 (a) At December 31 1997, unused borrowing availability under the Credit Agreement was 1504 million. The Credit Agreement, which matures on December 31, 2441, provides for interest to be accrued and paid quarterly at variable rates (weighted average rate of 7.29% at December 31, 1997). (continued) 9 S 2-9-5999 HERITAGE COMMUNICATIONS, INC. AND UACC MIDWEST, INC. AND SUBSIDES Notes to Combined Financial Statements The Credit Agreement contains certain provisions which require, among other items, the maintenance of certain financial ratios, and include limitations on additional indebtedness, -issuances of additional equity securities, payments of dividends and other distributions, and dispositions of assets. The Company pays fees, ranging from 1/8% to 1/5% per annum, on the average unborrowed portion of the total amount available for borrowings under the Credit Agreement. Based on current rates available for debt of the same maturity, the Company believes that the fair value of the debt at December 31, 1997 is approximately equal to its carrying value. Duan the year ended December 31, 1996, the Company redeemed notes payable which had wed interest rates of 9.8% and 101.44% (the "Redemption"). n connection with the Redemption the Coffipany recognized a loss on early extinguishment of debt of approximately $23 million. Such loss related to prepayment penalties amounting to approximately $22 minion and the retirement of deferred loan casts. Annual maturities of debt for each of the next five years are as follows (amounts in thousands): 1998 $ 612 1999 680} 2000 654 20071 496,680 2002 69'7 16) Income Taxes The Company is included in the consolidated federal income tax return of TCI. Income tax expense or benefit for the Company is based on those items in the consolidated calculation applicable to the Company. Intercompany tax allocation represents an apportionment of tax expense or benefit (other than deferred taxes) among the subsidiaries of TCI in relation to their respective amounts of taxable earnings or losses. The payable or receivable arising from the intercompany tax allocation is recorded as an increase or decrease in amounts due to TCIC. (continued) 10 2-9-99 HERITAGE COMMUNICATIONS, INC. AND UACC MIDWEST, INC. AND SUBSIDIARIES Notes to Combined Financial Statements Income tax benefit (expense) for the years ended December 31, 1997 and 1996 consists of; Current Deferred Tota_I amounts in thousands Year ended December 31, 1997: Intercompany tax allocation $(72,310) -- (72,31(? Federal _- 31,559 31,559 State and local t1 8251 8,347 6,521 'T4 + ( Q12 - Year ended December 31, 1996` Intercompany tax allocation $(47,853) -- (47,853) Federal -- 26,754 26,754 State and local 11.642 5,2014 Income tax expense differs from the amounts computed by applying the federal income tax rate of 35% as a result of the followings December 31 1997 19 6 amounts in thousands Computed "expected" tax expense $(36,000) (15,762) Amortization not deductible for tax purposes (21812) (3,220) Minority interest in earnings of consolidated subsidiaries 458 (178) State and local income takes, net of federal income tax benefit 4,239 3,383 Other LU-5i 11181 :- (continued) 11 2.99-99-99 . HERITAGE COMMLT ICATIONS, INC. AND UAC:C MIDWEST, INC. AND SUBSIDIARIES Notes to Combined Financial Statements The tax effects of temporarydifferences that dive rise to significant portions of the deferred tax assets andeferred tax liabilities at December 31, 1997 and 1996 are presented below: _ December 31, 1997 1996 amounts in t ands ' Deferred. tax assets. Net operating loss carryforwards $ 73,106 73,106 Investment tax credit carryforwards 1.3,779 13,779 Other 6.299 1.355 Total gross deferred tax assets 93,184 88,240 Loess m valuation allowance (3.428 (3.4281 Net deferred tax assets 89,756 84,812 Deferred tax liabilities: Property and equipment, principally due to differences in depreciation 104,183 108,071 Franchise costs, principally due to differences in amortization 780,254 859,396 Investment in affiliates, due principally to undistributed earnings of affiliates 601,912 11,900 Other 2.882 2.948 Total gross deferred tax liabilities 948,231 982,315 Net deferred tax liability JQLJ72Z,5Q2 The valuation allowance for deferred tax assets as of December 31, 1997 was $3,428,000. Such balance did not change from. December 31, 1996. Net,operating losses included in the consolidated income tax return. of TCI are allocated ,among subsidiaries of TCI that generated losses in relation to their respective amounts of losses generated. To the extent net operating losses or investment tax credit carryforwards are utilized by TCI, subsidiaries whose net operating losses or investment tax credits are utilized are allocated tax benefits on a, current basis. At December 31, 1997, the Company had net operating loss carryforwards for income tax purposes aggregating approximately $179,152,0010 which, if not utilized to reduce taxable income in future periods, will expire at various dates through 2009. At December 31, 1997, the Company had available investment tax credits of approximately $13,779,0300 which, if not utilized to offset future Federal income taxes payable, expire at various dates through 2005, (continued.) 12 sr 2-9-9999 HERITAGE COMMUNICATIONS, INC. AND UACC MIDWEST, INC. AND SUBSID ARIES Nates to Combined Financial Statements (7) Transactions with Delated Parties The amounts due to TCIC consist of various intercompany..advances and expense allocations. TCIC charges intercompany interest to the Company based upon the Company's proportionate share of intercompany debt. and TCIC's cost of borrowing. Interest on amounts due to TCIC aggregated $59,897,000 aiid $88,296,000 for the years ended December 31, 1997 and 1996, respectively. Such amounts are due upon demand. The Company =purchases, at TCIC's cost, certain pay televisions and other rogramxnmg from affiliates of TCIC. Charges for such programming were 153,460,000 and $150,305,000 for 1997 and 1996, respectively, and are. included in operating expenses in the accompanying combined financial statements. Certain subsidiaries of TCIC provide administrative services and have assumed managernal responsibility for certain of the Company's cable television system operations and construction. Fees for such services, calculated on a. per- subscriber basis, amounted to approximately $24,806,000 and $38,708,000 for 199 ' and 1996, respectively, and are included in selling, general and administrative expenses in the accompanying combined financial statements. (8) Investment in Preferred Stock of UAHI The Company owns 451.761 shares of UAHI's Series B Cumulative Preferred Stock ($.01 par value). The preferred stock has an a agate liquidation value .of $451,'761,000. Such preferred stock accrues dive et ends, if declared, at 12% per 'annum of such liquidation value. Dividends are cumulative and are payable in cash when and if declared by the UAHI Board of Directors. To date, there have been no dividends declared. All or part of the preferred stock is redeemable at the option of UAHI at a price equal to the liquidation value plus declared and unpaid dividends. The Company does not have the ability to sell this investment nor does it have any right to require redemption. (9) Commitments and Contingencies On 'October 5, 1992, Congress enacted the Cable Television Consumer Protections and Competition Act of 1992 (the "1992 Cable Act"). The Federal Communications Commission ("FCC") adopted certain rate regulations required by the 1992 Cable Act, and as a result, the Comany's basic and tier service rates and its equipment and installation charges (pthe "Regulated Services") are subject to the jurisdiction of local franchismi authorities and the FCC. The regulations established benchmark rates in 1995 which were further reduced in 1994, to which the rates charged by cable operators for Regulated Services were'requ=ed to conform. The regulations further provide for the methodology for increasing rates generally allowing for recovery of costs beyond the control of the cable operator (e.g. inflation and programming costs). (continued) 13 SD.c 2.9-99 HERITAGE COMMUNICATIONS, INC. AND UACC MIDWEST, INC. AND SUBSIDIARIES Notes to Combined Financial Statements The Company believes that they have complied in all material respects with the Iovisions of the 1992 Cable Act, including their rate setting provisions. owever, the Company's rates for Regulated Services are subject to review by the FCC, if a complaint has been fled by a customer, or by the appropriate franchise authority, if such authority has been certified. If, as a result of the review rocess, a system cannot substantiate their rates, they could be re wired to retroactively reduce their rates to the appropriate benc`nm.ark and re and the excess portion of rates received. The Company has been named in a number of purported class actions in vaxious jurischctxons concerning late fee charges and practices. Certain of the Company's cable systems, charge late fees to customers -who do not pky their cable bills on time. Plaintiffs generally allege that the late fees charged by such cable systems are not reasonably related to the costs incurred by thi cable systems as a result of the late payment. Plaintiffs seek to require cable systems to provide compensation for alleged excessive late fee charges for past periods. No discovery cut-off' or trial dates have been set in the case. Based upon the facts available management believes that, although no assurances car, be ;given as to the outcome of these actions, the ultimate disposition of these matters should not have a material adverse effect upon the financial condition of the Company. The Company has contingent liabilities related to legal proceedings and other matters arising in the ordinary course of business. Although it is reasonably Possible the Company may incur losses upon conclusion of such matters, an estimate of any loss or range of loss cannot be made. In the opinion of management, it is expected that amounts, if any, which may be required to satisfy such contingencies will not be material in relation to the accompanying combined financial statements.. The Company leases business offices, has entered into pole rental agreements and uses certain equipment under lease arrangements. lent expense under such agreements amounted to $11,315,000 and $9,700,000 for 1937 and 1996, respectively, including $4,058,000 and $4,739,0300 paid under pole rental agreements which are terminable on short notice by either party. Future minimum, lease ppayments under noncancelable leases are summarized as follows (amounts in thousands): 1998 4,827 1999 3,848 2000 3,277 2001 2,670 2002 2,114 Thereafter 101,106 It is expected that in the normal course of business, expiring leases will be renewed or replaced by leases on other properties, thus, it is anticipated that future minimum lease commitments will not be less than the mount shown for 1998. (continued) 14 �99 HERITAGE COMMUNICATIONS, INC. AND UACC MIDWEST, INC. AND SUBSIDIARIES Notes to Combined Financial Statements Dunn 1997, TCI began a comprehensive review of its computer systems and related software to ensure systems properly recognize the year 2000 and continue to process business -information. -The systems being evaluated include all internal use software and devices and those systems and devices that manage the distribution of the Compare 's Products. Additionally, TCI has initiated a program of communications with all of its significant suppliers to determine the readiness of these third parties and the impact on the Company if those third parties fail to remediate their own year 2400 issues. Management of the Company has not yet assessed the cost associated with its year 2000 readiness efforts and the relatedpotential impact on. the Company's results of operations. Amounts evaded to date have not been material, although there can be no assurance�at costs ultimately required to be paid to ensure the Company`s year 2000 readiness will not have an adverse effect on the.Company's fancial position. Additionally, there can be no assurance that the systems of the Company's suppliers will be converted in time or that any such failure to convert by such third parties will not have an adverse effect on the Company's fZnancial position. 15 5D.6 2-9-99 HERITAGE COMMUNICATIONS, INC. AND UACC MIDWEST, INC. AND SUBSIDIARIES Combining Balance Sheet Information December 31, 1997 Combined HCI UACC HCl/UACC amounts in thousands Assets Cash $ -- 7,077 7,077 Trade and other receivables, net 21,174 5,411 26,585 Investment in affiliates, accounted for under the equity method 178,049 -- 178,049 Property and equipment, at cost. Land 2,480 1,906 4,386 Cable distribution systems 547,898 322,814 870,712 Support equipment and buildings64,062 46.137 110.199 614,440 370,857 985,297 Less accumulated depreciation 288,680 1712679 460,359 325.760 199,1°78 Franchise casts 2,015,026 1,120,251 3,135,277 Less accumulated amortization 423.429 230.352 653.781 11591,597 889,89 2,481.496 Cather assets, at cost, net of amortization 9J25 4,755 13,881 $2,125.706 _1.11}6.3 0 3,232,026 Liabilities and Combined Equity Cash overdraft $ 12,365 -- 12,365 Accountspayable and accrued expenses 32,247 14,002 46,249 Debt 333,883 166,055 499,938 Deferred income taxes _541.361 _317,114 858,475 Total liabilities 919.856 497,171 1.417,027 Minority interests in equity of consolidated subsidiaries 11,216 17,034 28,250 Combined equity. Common equity 558,180 394,21.5 952,395 Retained earnings (accumulated deficit) (1,882) 25,756 23,874 Due to TCI Communications, Inc. 638,336 623,905 1,262,241 Investment in preferred stock of United Artists Holdings, Inc. -- (,451,761) r„451 761 1.19 634 592,1 5 1=78 .749 Commitments and contingencies � . 25.71)6 t Q 0 3 32.0 16 9 t 2- -99�5 HERITAGE COMMUNICATIONS, INC. AND UACC MIDWEST, INC. AND SUBSIDIARIES Combining Balance Sheet Information December 31, 1996 Combined HCI U'ACCHCIfUACC amounts Ni thousands Assets Cash $ 5,113 2,452 7,565 Trade and other receivables, net 25,860 6,069 31,929 Investment in affiliates, accounted for under the equity method 34,123 -- 34,123 Property and equipment, at cost. Land 3,259 1,301 4,560 Cable distribution systems 573,085 311,577 884,662 Support'equipment and buildings 69.516 46,509 116,025 --645,83U 359,357 1,005,247 Less accumulated depreciation 284 504 152.313 436.817 3firl 6 207.074 568,430 Franchise costs 2,124,671. 1,120,923 3,24 5,594 Less accumulated amortization 397.514 21 L322 6038.836 1,727.157 _ _ 909,601 2.636.758 Other assets, at cost, net of amortization 10,137 5.654 15,791 IIW.751 1.1.303.850 3.2 4 6Q 1 Liabilities and Combined Eguitv .Accounts payable and accrued expenses $ 29,548 13,749 43,297 Debt 128,054 64,512 192,566 Deferred income taxes 573.790 323,713 897.503 Total liabilities 731.392 - --401,974 1.1.33.366 Minority interests in equity of consolidated subsidiaries 11,550 -- 11,550 Combined equity: Common equity 558,180 394,215 952,395 Accumulated Xeficit (31,619) (13,135) (44,754) Due to TCI Communications, Inc. 894,248 799,557 1,693,805 Investment in preferred stock of United Artists Holdings, Inc. - 1451»7611 f451.761) 1.420,849 728.8761 2,149.685 Commitments and contingencies S2110251 Lial= $3.234. 17 SN.6 ( 2-9-99 HERITAGE COMMUNICATIONS, INC. AND UACC MIDWEST, INC. ANIS SUBSIDIARIES Combining Statement of Operations Information Year ended December 31, 1997 Combined HCI _ UACC_-- HCI/UACC amounts is-i thousands Revenue $ 426,725 256,679 683,404 Operating costs and expenses: Operating 148,646 85,648 234,294 Selling, general and administrative 83,443 46,039 129,482 Depreciation 48,760 27,451. 76,211 Amortization 56.818 28.501 85.319 "937,67 187,639 525306 Operating income 89,058 69,040 158,098 Other income (expense): - Interest expense (69,119) (5,182) (74,301.) Share of earnings of affiliates 23,118 -- 23,11.8 Minority interests in earnings of consolidated subsidiaries, net 333 (975) (642) Other, net (1..474} (1,9411 (3,415) (47,142) (8.098) (55,24031 Earnings before income takes 41,916 60,942 102,858 fncome tai. expense __.1.12,179) (22.051) (34,2301 Net earnings ,, 18 S 99 HERITAGE COMMUNICATIONS, INC. AND UACC MIDWEST, INC. ANIS SUBSIDIARIES Combining Statement of Operations Information Year ended December 31, 1996 Combined HCI UACC HCI UACC amounts-in thousand-s Revenue $ 484,097 245,889 730,986 Operating casts and expenses: Operating 151,457 80,235 241,692 Selling, general and administrative 11.7,545 54,911 172,456 Depreciation 49,590 30,041 79,631 Amortization 54.459 28.518 82.977 3`83 193,7035 57 756 Operating income 101,046 53,184 154,230 Other income (expense): Interest expense (88,523) (20,328) (108,851) {lain (lass) on exchange of assets 21,107 (79) 21,028 Loss on early extinguishment of debt -- (22,882) (22,882) � ) (43,300) (109.108 Other, net 1 519 (111 1,5 X37) Earnings before income taxes 35,149 9,884 45,033 Income tax expense X11,6241 (4,2711 (15,895) Net earnings ��, i6 29.138 19 SIa. • � 2-9999 NMWPeat Marwick LLP 707 Seventeenth Street Suite 2300 Denver,CO 80202 Independent Auditors' Report The Boards of Directors Heritage'Communications,Inco and UACC Midwest,Inc.: We have audited, in accordance with generally accepted auditing standards, the combinedbalance sheet of Heritage Communications, Inc. and UACC Midwest,Inc. and subsidiaries as of December 31, 1997, and the related combined statements of operations, equity, and cash flaws for the year then ended, and have issued our report thereon dated March 20, 1998. In connection with our audit,nothing came to our attention that caused us to believe that Heritage Communications, Inc. and. UACC Midwest, Inc. and subsidiaries failed to comply with the terms, covenants, provisions, or conditions of Sections 10.9, 10.10, 11.1, 11.2, 11.4, 11.6 and 11.13 of the Credit Agreement dated December 30, 1996, between Heritage Communications,Inc. and UACC Midwest, Inc. and the purchasers as listed on Schedule 1 annexed thereto, insofar as they relate to accounting matters. However, our audit was not directed primarily toward obtaining knowledge of such noncompliance. This report is intended solely for the information and use of the boards of directors and managements of Heritage Communications, Inc. and UACC Midwest, Inc. and subsidiaries and the purchasers as listed on Schedule 1 annexed to the Agreement and should not be used for any other purpose. March 20, 1998 ht bm F-m of �PMa intern¢tio+rx i (7) SD.6 2-5-9y AT&T Form 10-0 :- Pint WMAGEMENT I S DISCUSOION AND ANALY418 OF RESbLTS OF OPERATIONS 'D PjKMCXRL �Ot3I3l'TIOS F11E7MCTAL CONDITIOX r?mm 30, 1998 VERSUS DECE"ER 31, 1997 J 30, Decst4or 31, Change. $ in millions 998 !1997 $ t Total assets.... . .- .: .... . . . . .... .$S7 447 $5 ,835 $(1,388) (2.0)t Totalaacaasats-continuing operations.,,$57 447 $57,534 $ (87) (0.2)t Total `assets decreseed .,51,188 million, �or 3.0tt, priOiarily clue to our: afford to d�.•:�nr. noxa»strategic a►sssetv4 'these effort generated ;declines in other and long+t: °Y" receivables, net assets from diarcvzrt3ziue operations,,:investments and pxcsparty, lslxzst; me i eguipsslent, partially offset by an intro tie in Gash, !The decrease: in other ar;'d loner.!t rw receivables is due pzistiarily to ro a t of loans by, UCS as part of the ssofitlemen_L o. our April 2, 1998 sale to Citicorp. I The decrease in net aasssety from discont:i.n, "m1 operatibno also rcefle to the as a of UC The The decline in,investments is prim#"rily dian �to the sales of LIN*-TV and SmarTona, Two decrease in property, plant,, and � aipment °1,primarily duo to the first quarter lsas al asset inpaiirmeent charge and the &a Llee of r, Al!: Solutions Customer CAr*. The inareaas�a in cash is: mainly due to cash redceived r rim. Citibank in the second quarter 1999 real tatd to the casae of UCS. Total . liabilities decreased $3,429 aril 'i*n, or 6.8t,' primarily due tea declirk,s:s in deferred incometaxes, and payroll and refit liabiities, partially tat'faset iner,� in long-term bensatit-related liabilitie and other current l.i&bilitievi The ' ecreas"a izz both short-term and long-term $se'" rs;fl ct the lsayddrrtt of dasht with tYs zoce re�tma` .fir Bales 3 csf'`�,- h on �uBts3r►er ��e" s�z�as�e 'sn de me x M ,rc, taxes prit lVnyM reflects the i4act••.rs Beat "istspa t and reetructur rig rsha,t!x . The decline in payroll and benefit related liabilities primarily reflects 4'1=ual f I quarter payout of cstiployee bonuses an the reverasal of a portion of: thea 209s bus�'.4xr Ail restructuring reserve, The increase artlong.tarns besnofit-related liallAiti.es •3.a prim;!+ t.y due to the second quarter charges as ocirated withl the voluntary r6tiremees'it: incens tre< programa for.management e;�sr�sloyeem. The barge for pen ion special termination 16onefita ria other: costs resulted •in the estaablishme6t of d liabi4*ity for the management piszaiozi ;>.t ss. The increase in other current liabilities is mainly due to an incrseast in aac6ued inm-pmm*. taxes' primarily associated with the tali of UCs. Total sharecwnera' equity s R Y inereav ed $x.,241 million,; or 5.5#, primaari.ly du* to cs�z-x, ssC. yexrr X net incom partially offset by dividends desciared. The ratio of tectal debt to t:ota? csapitlsal, (defined in debt divided by total! capital) Jane 393, 1998, was ;2.9* compared t,d 32,3W at De esmber 31, 39.97. The Oecreasen �.Am4 primarily the result sat lower debt. � IE AT&T used its available cash to, retire -lie outstanding debt, there would be no debt remaining at4 +Tuns! 30, 2998, •'' SD.6 ` 2-9-99 CONS)LIDAT8 $ C8 SHRETS (CORTID3 Wollars in MilliOng fixcept Share knounts) {inn diced) June 34, 04iombe:r 31, . 1998 1997 LFASILZTYEB AcCS?"ta Sayable. .. . .. . ..+++.+,+„ S 5,754 $ 6,243 Payroi.3 and benefit-related liabilftie:s. .... . . .. . .. .. .. . .. . . . . . . . 1,570 3,348 Debt inaturing within one year.. .. .. . .. . 1,088 3,998 Dividends payable.+. . .. .. . ... ...... . . 53$ 538 Cther. current Liabilities.. . . . . . . ... . . . 5,213 3,515 Total current l.iabilities... ... .. . ... .. 14,163 16,942 Long-term debt.... . . . . 61009 6,826 Long-term benefit-related liabilities. . 5,419 3,142 Deferred income taxed..+... ,., .+ ., . . . 4,662 S,711 Other lung-term liabilities¢ and deferred credits. . .. . . . . . . . .. . . . .. .. . 3,307 3,367 Total: liabilities ,. . . . . .. .. .. . . . . ... 33,559 35,988 on=Ownits 8 RQUUITY i Commoh shares - par value S1 par phare. 1,625 1,624 Authorized shares: e,000.00D,000 Outstanding sharea: 1,624,564,000 at Jones 30, 1998; 1,624,213,SOS at December 31, 3997 Additional paid-in capital.. . . .... . . . . . 15,$47 35,753 Ouaranteod HSOP obligation. .... ... . . . . . (58) (70) Retained earnings. . . : . . . . . . . .. . . . . 6,526 5,380 Accumulated other cotprohensive . . . . . . . . . . .. ...... ... . .. {S2) (38) Total shareowners, equity. . . . . . .... . . . . 23,868 22,847 TOTAL, LIABILITISS & SHARZ3WMS° EQUITY $57,447 $581535 see Noted to Con8olid4ed Financial ystatements. E z } 2-9-9999 Sant. Cruz Cl*t,.v F23 s 7/CA0246 BEFORE Tele-Communications, Inc. TO Cable Investments, Inc. Liberty .holdings, Inc. Liberty Cable, Inc. TCI Communications, Inc. F- __Z LCNI, Inc. United Artists Entertainment United Artists Holdings, Inc, United Artists Cablesystems Corp. I UA.CC Midwest, Inc. United Cable Television of Santa Cruz 4 Cruz Cit S'-99 F23 87/CA0246 AFTER AT&T CORPORATION. Tole-Communiestions,Inc. Other AT&T Subsidiaries TCI Cable Investments,Inc. Liberty Holdings,Inc. Liberty Cable, Inc. TCI Cc►m ucnications,Itt LCNI,Inc. -i i United Artists Entertainment United Artists Holdings,Inc. United Artists Cablesystems Corp. UA+CC Midwest,lilt. United Cable Television of Santa Cruz S,-)nta Cruz Coun0y 51 .5 r�}}^�p(�f �^y r� 2-9-�9 F2388 CAil242 BEFORE Tele-Communications, Inc. TCI Cable Investments, Inc. .Liberty Holdings, Inc. Liberty Cable, Inc. TO Communications, Inc. LCNI, Inc. United Artists Entertainment United ,Artists .holdings, Inc. United Artists Cablesystems Corp. UACC Midwest, Inc, United Cable Television of Santa Cruz S-.Itnta Cruz CouQy 2-9-99 AFTER AT&T CORPORATION. Tete.-Communications,Inc. Other AT&T Subsidiaries TCI Cable Investments,Inc. Lherty Holdings,Inc. Liberty Cable,Inc. TCI Communications,file I,CNI,Inc. Uaited Artists Entertainment United Artists Holdings,Inc. _ United Artists Cablesystems Corp. UACC Midwest,Inc. United Cable Television of Santa Crux SD.6 2.9-99 SD.6 i-9-99 COBLENTZ, PATCH, DUFFY & BASS, LLP JONATHAN R.BASSHARRY ODY `9RtEN ATTORNEYS AT LA JEFFRY A.SERHBTEIN WILLIAM H,ORRtCK,I,, OF COUNSEL JAMES R.BLACK RICHARO R.PATCH 222 KEARNY STREET, 7TH FLOOR WILLIAM T.HUTTON WILLIAM K.COSLEMTB BARMY REOER VIAGINiA A.CRISP :CYNTHIA R.ROWLAND SAN FRANCISCO, CALIFORNIA 94108-45(0 PAMELA S.OU►FY JOSEPH C.SPERD SPECIAL COUNSEL PAULCSCOSOSA HAMLET CHEW TELEPHONE: (415)391-4800 ,IEFf REY S.MASO PHILIP S.FELDMAN KIRSTEN J.DAYd JOSHUA R.STEINHAUER ALAN C.DENNIS J.KEITH tVANS*ORVtLLE FACSIMILE: 44153 X989-1663 LOUIS J.OSRAUOC ADEN J.PINE TEVIS JACOBS 41905.1574) SUSAN K.JAMISON SCOTT C.KLINE ANN E.JOHNSTON wE HOY L.MAC:LWA3NE WILLIAM F.MCCASE(193S,J0S3) JEFFREY®.KNOWLES SETH E.MERMIN {'� [ ( ALLEN 2.BRCUSSARD(19*9A995) MICHAEL P STEPHEN T.LAKCTOSMSTH HOWARD A.SLAV)TT October ctober 21, 1998 *ADMITTED IN 6tOR0lA ONLY MICHAEL L.MEYERS TRAVIS R.PEARSON BARBARA A.MILAMOVICK YAY C.VSA JAMES P.MITCHELL CUFFORO Z.TIN 7233-026 Viae Federal Express William M rticorena, Esq. Rutatn & Tucker 611 AntonBoulevard, Suite 1400 Costa Mesa, California 92626-1998 Re: City of Berkeley, City of Richmond, and Centra Costa. County ("Franchising Authorities"); FCC Form 394 Filed by Tele- Communications, Inc. ("TCI") Dated August 14, 1998 Response to Information Request Dear Mr. articorena: This firm represents TCI in connection with its application for approval of the transaction'with AT&T Corp. and its affiliated entities ("AT&T"), which will result in a change of control of TCI. The purpose of this letter is to respond on behalf of TCI and AT&T to your letter dated September 30, 1998, which requests certain information concerning the transaction. Wth'respect to the information requests designated as Requests 1 through 15 on panes 2'through 5 of your letter, we question whether any legitimate purpose will be served by providing the requested information. We also are concerned that the inquiries appear to solicit the responding parties' agreement to restrict or limit their rights under federal rate regulations. however, without waiving these objections, AT&T is willing to, and does hereby, certify that based upon conditions known to it at this point in time the rates which can be charged by AT&T or an entity related thereto which will control the franchises in the City of Berkeley, City of Richmond and Contra Costa County, together with all,other fees and charges which are or maybe assessed by such systems, will provide AT&T with a reasonable and adequate rate of return without the ding of a Farm 1220 pursuant to the cost of service rules with respect to such systems, SD.6 2-9-99 COBL NTZ, PATCH, DuFFY & BASES, LLP William Marticorena, Esq. October 21, 1998 Page 2 With respect to the additional inquiries identified as numbers 1 through 25 at pages 5 through 12 of your correspondence, TCI and AT&T respond as follows: Re, a nest No. 1: Documents filed with the Department of Justice and Federal Trade Commission pursuant to the Hart-Scott-Rodino Act are not publicly mailable, are confidential and proprietary in accordance with DOJ and FTC policies and therefore are not included with this response. In any event, we believe that all of the information that is necessary to an understanding of the transaction has been provided as a part of the Form 394ding. Request No. 2: The Franchisee has provided and will continue to provide all financial information required by the Franchise Agreements. It is our belief that the remaining information requested by Request No. 2 is not necessary in order to understand the terms of the Merger Agreement nor is it relevant or material to the Franchising Authorities' review of the legal, technical and financial qualifications of AT&T. However, to avoid what we believe may be an unnecessary conflict, we have attached a copy of the most recent audited financial statements for UACC Midwest, Inc., Heritage Communications, Inc., TCI West, Inc., TCI Pacific Communications, Inc., and TC1, which, for the various franchisees, represent the first level of corporate entities for which TCI has audited financial statements. (Exhibit A.) Request No. 3: Financial projections have not been created for the Franchisee or for this transaction nor is there any expectation that they will be prepared in the future except as may be required for the Joint Proxy Statement Prospectus which is not final at this time. A copy of the Prospectus will be provided to the Franchising Authorities when it is final and publicly available. Financial information related to the Franchisee has been previously provided to the Franchising Authorities as required by the Franchise Agreements. Ruest No. 4: As we understand this request, we do not believe that there are any agreements other than the Merger Agreement (which has already been provided as a part of the Form 394) that are responsive. Request No. 5: At the present time, County areas of the Martinez and Concord systems that have not been upgraded in 1998 are scheduled to be upgraded by the end of 2000. Although the schedule is tentative and subject to change, the Brentwood system is scheduled to be upgraded by 2002. An upgrade to the Berkeley system is presently underway. The Pittsburg system has recently been upgraded and we do not anticipate any further changes to that system. No changes are anticipated for the Richmond system. SD,6 2-9.994 COBLENTZ, PATCH, DUFFY & BASS, LLP William Marticorena, Esq. October 21, 1998 Page Reauest No. 6. The transaction between AT&T and TCI primarily contemplates an exchange of stock, not a cash purchase. While it is possible that certain aspects of the transaction may be financed, no determination has been made at this time and, accordingly, there are no lenders or lending agreements related to the transaction. The Merger Agreement, which has already been provided as a part of the Form 394, sets forth the specific terms of the Agreement between the.parties with respect to the exchange of equity. The transaction will not result in any new financing relating to the subject systems. Rewest No. 7, Other than the Franchise Documents relating to Berkeley, Richmond, and Contra Costa County, we believe that the Merger Agreement, which has already been provided as part of the Form 394, is the only document which is responsive to this request. No trust agreements, trust indentures or management agreements presently exist regarding the subject systems or the transaction other than the Merger Agreement. Req est No. 8. The most recent statement of the information requested by Request No. 8 is set forth in AT&T's form 10-Q. A copy of the pertinent portions of the 104 reflecting AT&T's outstanding long term indebtedness is attached. (Exhibit B.) Reouest No. 9; Other than the Merger Agreement, there are no documents responsive to this request. Request No. 10: At the present time, neither AT&T nor any of its affiliated entities operates a cable system. Resluest No. 11: The proposed transaction is structured as a merger in which a newly-formed Delaware subsidiary of AT&T, created specifically for the purpose of consummating the transaction, will merge with and into TCI, with TCI being the surviving entity and a wholly-owned subsidiary of AT&T. In connection with the merger, the assetsand businesses of TCI and AT&T will be attributed to either of two groups: the Liberty Media Group or the Common Stock Group. The Common Stock group initially will consist of what is now TCI's and AT&T's respective cable television, telephony,'and Internet businesses. At the time of the merger, AT&T will issue 0.7757 share of AT&T common stock for each share of TCI Series A TCI Group Common Stock and 0.8533 share of AT&T common stock for each share of TCI Series S TCI Group Common Stock, as specified in the Agreement. Dk 7 2-9-99 COBLENTz, PA";CH, DUFFY & BASS, LLP William Marticorena, Esq. October 21, 1998 Page 4 Request No. 12: Please see response to Request No. 6. Reeuest No. 13: Please see response to Request No. 3. Request No. 14, There are no documents responsive to this request. Reguest leo. 16: The exchange rate was determined through negotiation of exchange',ratios, which negotiations were conducted by representatives of TCI and AT&T at the direction of their respective Boards of Directors and in conjunction with legal and financial advisors. Request No. 16: AT&T and TCI object to Request No. 16. The Non-Disclosure Agreement dated as of May 26, 1998 is proprietary and contains confidential information of AT&T and TCI. Nothing contained in the Non-Disclosure Agreement is necessary in order to understand the terms of the Merger Agreement nor is it relevant or material'to the Franchising Authorities' review of the proposed change of control. Request leo. 17: A copy of the Joint Proxy Statement Prospectus will be provided to the Franchising Authorities when it is finalized and publicly available. Request No. 18, The Noting Agreement is an agreement between AT&T Corp., a New York corporation, as "Parent," and Dr. John C. Malone and Leslie Malone, collectively, as "Stockholders." The Agreement is proprietary and contains confidential information. Nothing contained in the Voting Agreement is necessary in order to understand the terms of the Merger Agreement nor is it relevant or material to the Franchising Authorities' review of the proposed change of control. All information material to the decision of the shareholders will be disclosed in the Joint Proxy Statement Prospectus, a copy of which will be provided to the Franchising Authorities when it is final and publicly available. Reauest No. 19: The requested charts are attached. (Exhibit C.) Request No. 20: AT&T's prior SEC dings are voluminous. However, they are all available at http://newsstand.cb.att.com/ir/reports.htmi. Request No. 21: The Capital Spending Plan referenced on page 49 of the Merger Agreement does not contain information about current or proposed capital spending of TCI on a division, region, system or franchise area basis, nor does it contain details with respect to specific categories of capital spending. Therefore, the Plan would not provide any relevant or useful information to the franchising authorities with respect to the franchises or systems operated in the City of Berkeley, the City of Richmond, and Centra Costa County. The Capital Spending Flan consists of consolidated capital SD}6 i 1 i 2-9-99 CoaLENTZ, PATCH, DUFFY & BASS, LLP William Marticorena, Esq, October 21, 1998 Page 5 spendinginformation contained within a larger financial document that AT&T and TCI consider proprietary and highly confidential, disclosure of which would provide an advantage to competitors. However, AT&T and TCI have indicated publicly in their FCC application that they believe that TCI will need to expend approximately $1.8 billion to upgrade its current facilities to increase channel capacity, provide highspeed data, and pay-per-view video. Request No. 22: The Parent Charter Amendment is attached as Exhibit A to the Merger Agreement (which has already been provided as a part of the Farm 394). Request No. 23: Tracking stocks are separate classes or series of a company's common stock that are designed to reflect the economic performance of a group of assets or a specific business unit, division or subsidiary of the company. Molders of tracking stocks are shareholders of the parent company and not of the business or subsidiary whose performance the shares track. The terms of the tracking stock tie the economic value of the stock to the performance of the tracked business or subsidiary rather than to the performance of the entire parent company. In connection with the proposed transaction AT&T will create AT&T Liberty Media Group-tracking stack, which is intended to reflect the performance of the ATT Liberty Media Group. AT&T Liberty Media Group tracking stock will be a separate class of AT&T common stock. Holders of AT&T Liberty Media Croup tracking stock will be shareholders of AT&T. AT&T expects to list the AT&T Liberty Media group tracking stock on the New York Stock Exchange. Reauest No. 24: We are unaware of any reference to a "Firewall Agreement" in sections 7.14 or 7.18 of the Merger documentation as cited in Request No. 24. Nevertheless, the terms of any subsequent agreements relating to the intercompany agreements and inter-group transactions are set forth in Schedules 7.14 and 7.18, respectively, with certain confidential information that is not otherwise publicly available redacted. 'These schedules were provided to you previously with the Merger documentation. Reg uest_No. 25: Significant litigation challenging the validity of the Telecommunications Act of 1996 and the FCC Implementation of the Act to which AT&T is a party includes: Iowa Utilities Board. et al. v. Federal Communications Commission. et al. (Docket 96-3321) (8th Circuit U.S. Court of Appeal) cert. granted. .� sn.6 t 2-5-99 COBLEt,TZ, PATCH, DUFFY & BASS, LLP William Marticorena, Esq. October 21, 1998 Page 5 Southwestern Bell Communications et aL v. Federal Communications Commission (Docket 98-10140) (5th Circuit U.S. Court of Appeal). BellSouth v. Federal Communications Commission (Docket 98-1319) (DC. Circuit Court of Appeal). Please do not hesitate to contact me if you have any questions. Very truly yours, Coblentz, Patch, Duffy & Bass, LLP Richard R. Patch RRPIkl Attachments 817.6 2-9-99 HERITAGE COMMUNICATIONS, INC. AND UACC MID'%TST, INC. AND SUBSIDIARIES Combined Balance Shuts December 31, 1997 and 1996 1997 1996 - amounts in thousands Assets Cash $ 7,077 7,565 Trade and other receivables, net 26,585 31,929 Investment in affiliates, accounted for under the equity method (note 4) 178,049 34,128 Property and equipment, at cost: Land 4,386 4,550 Cable distribution systems 870,712 884,66+2 Supportequipment and buildings 110.199 116,0325 985,297 1,00 5,247 Less accumulated depreciation 460,359 �43,.-6,817 524,938 .403 Franchise costs 3,135,277 3,245,594 Less accumulated amortization 6+53,781. 60 83--- 2481,496 2 48 4 x.63 ,758 Other assets, at cost, net of amortization 13,881 15,791 3 2061221p tt Liabilities and Combined Eauitv Cash overdraft $ 12,365 -- Accounts payable and accrued expenses 46,249 43,297 Debt (note 5) 499,938 192,5661 Deferred income taxes (note 6) 858,475 897,53 Total liabilities 1,417.027 1,133,366 Minority interests in equity of consolidated subsidiaries 28,250 11,550 Combined equity: Common'equity 952,395 352,395 Retained earnings (accumulated deficit) 23,874 (44,754) Due to TCI Communications, Inc. ("TCIC") (note 7) 1,262,241 1,693,805 Investment in preferred stock of United Artists Moldings, Inc. ("UAHI") (nate 8) (451.761) (451,761) 1,786,749 2,149,685 Commitments and contingencies (note 9) 3.2. .294.601 See accompanying notes to combined financial statements. 1 EXHIBIT SD.6 2-9-99 HERITAGE COMMUNICATION'S, INC. AND UACC MIDWEST, INC. AND SUBSIDIARIES Combined Statements of Operations Years ended December 31, 1997 and 1996 1997 1996 amounts in thousands Revenue $ 683,404 730,986 Operatin.&coats and expenses: Operating (note 7) 234,294 241,692 Selling, general and administrative (note 7) 129,482 172,456 Depreciation 76,211 79,631 Amortization. 85.319 82.977 ��25,3116 576.756 Operating income 158,098 154,230 Other income (expense): Interest expense (notes 5 and 7) (74,301) (108,851) Gain on exchange of assets (note 3) -- 21,028 Loss on early extinguishment of debt (note 5) -- (22,882) Share of earnings of affiliates (nate 4) 23,118 Minority interests in earnings of consolidated subsidiaries, net (3,415 1,5081,508 Other, net ¢55, -1 1097) Earnings before income taxes 102,858 45,033 Incgm,e tax expense (note 6) __(34x2 0i (15.895 Net earnings 68&2a298 See accompanying notes to combined financial statements. 2 SD.6 2-9-99 TCI WEST, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of TCI Communications, Inc.) Consolidated Balance Sheets December 31, 1997 and 1996 Assets 1997 1996 amounts in thousands Cash $ 28,089 5,428 Trade and other receivables, net 25,636 23,645 Property and equipment, at cost: Land 15,036 10,009 Distribution systems 1,385,320 1,309,412 Support equipment and buildings - 140609 132.572 1,540,965 1,451,993 Less accumulated depreciation 544,977 430510 995.988 2=-1 -4�-3 Franchise costs 1,774,885 1,773,571 Less accumulated amortization 248,795 204,1AI 1 1 1,526,090 1,569,430 Other assets, at cost, net of amortization 14,486 15,317 $2,5-9Q282 Liabilities and Stockholder's Deficit Accounts payable $ 3,532 4,757 Accrued expenses 56,107 57,769 Debt (note 5) 2,046,231 2,187,685 Deferred income taxes (note 6) 529,167 513,047 Other liabilities 1.605 1.633 Total liabilities 2,636,542 2J64,841 Stockholder's deficit: Common stock, $1 par value. Authorized 50,000 shares; issued and outstanding 1,005 shares Additional paid-in capital 521,162 521,162 Retained earnings 488,266 399,874 1,009,429 921,037 Investment in Tele-Communications, Inc. ("TCI"), at cost (note 3) (53,492) (53,492) Due from TCI Communications, Inc. ("TCIC") (notes 6 and 7) _122Y,083 j Total stockholder's deficit (46,253 _J1229,538 Commitments and contingencies (note 8) $2,59 2&35aQ� See accompanying notes to consolidated financial statements. , 7 .. _E S17.6 2-9-99 TCI WEST, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of TCI Communications, Inc.) Consolidated Statements of Operations Years ended December 31, 1997 and 1996 1997 1996 amounts in thousands Revenue $898,175 827,082 Operating costs and expenses: Operating (note 7) 310,178 286,032 Selling, general, and administrative 160,738 182,490 Management fees, net (note 7) 29,247 36,216 Deprecation 125,868 119,521 Amortization 47,277 42.525 673, 08 66,'T84 Operating income 224,867 160,298 Other income (expense). Interest expense (140,994) (105,783) Interest and dividend income, principally from related parties (note 7) 58,934 28,580 Loss on early extinguishment of debt (note 5) -- 8,129) Other, net 2036 �1.302) 81854 (86,634) Earnings before income tax.expense 143,0913 73,664 Income tax expense (note 6) _J5 621 _(28,129 Net earnings i See accompanying notes to consolidated financial statements. 2 5D.6 f 2-9-99 TEL COMMUNICATIONS, INC. ANIS SUBSIDIARIES Consolidated Balance Sheets December 31, 1997 and 1935 946_ sse s amounts in rn=onA Cash and cash equivalents $ 284 4144 Trade and other receivables, net S29 448 Prepaid.menses 53 81 Prepaid program rights 104 61 Committed proms rights 115 136 Inv°cstm n.ta in affiliates accounted for under the equity thud, and;*-I tr receivables 3,048 2,985 Investment in Time Warner, Inc. 3,565 2,027 Prc erty' anal equipment, at coat:nd 96 77 Distribution systems 10,784 10,039 Support equipment and buildings 1,5-41, Less accumulated depreciation 4'.M 4.129 +� � Franchiac casts 1!,310 17,875 Lass eccau=ulated amortization 2,763 39 15,1475 Other assets, net of amr►r'ti anon 1.779 .32J23 39 (continued) 9-99 2-9-98 TELE-COMMUNICATIONS. INC. AND SUBSMIARIES ConeolW ted.Balance Sheets, continued December 31, 1997 and 1396 96 `` � Srx�c hcic ' ,. €n mMLOM Accounts payable $ 169 266 Accrued interest 25th 274 Accrue4 pragrs.:nming expense 399 347 Other accrued a pma3eas 997 812 Deferred option premium 306 -- Debt 15,260 14.926 Deferred income taxes 61108 5,962 Other liabilities g!k -263 ToW liabilities 24.151 M Mitior ty Interests in equity of conatolidated subsicliaaricaa I,S85 1,433 Redeemable securities: Preferred stock Common stock >�i56 658 Company-:obligated mandatorily redeemable preferred securities of subald trusts 4olding sal r subordinated dela securities of TCI mmunications, Inc. 1,500 1,000 Stockholders' aqui Series Prefarredltock, $.01 par value -- -- Class B 6%Cumulative Redeemable Exchangeable Junior preferred Stock, $,01 par eT 1ue •- -- Com=on stack, I pax viaue: Series A TCI up. Authorized 1 ash750,000 000 shares- issued 605,616,143 es in 1447 raid 996,325,476 sha xes in 1996 606 696 Series 9 TCI Group. Authorized 160,000,000 saa° issued 78,203 044 shares In 1997 and 84,64 ,063 shame in 1996 78 as Series A Liberty Media Group. Authorized 760,000,000 shams- issued 344,962,S21� shwas in. 1997 and 341 I is 665 as<haaa�res in 1996 345 342 Strises R Elberty Media Group.Authorized 75,000.000 shares; ssued 35180 385 shares in 1997 and 31,'784 053 sat}2ar*4 it x.996 3$ 32 Sasxie ASCI Ventures Qrou Authoril760,000,000 s aa; i s ed 377,3116,0 2 +chi its 997 37 7 -- Series �fentures Group.Authorized 75,000,000 shares;issued.32 532,8110 sham in 197 33 A44itional paid-in capital 5,043 3,547 Cumulative foreign curretxcy translation a4justruent, net tSrof s 4 26 holding gains for available-for-sale securities, net of taxes 774 1 s Accumulated deficit WE l Trea;�,sury stock and common stock hold by aubaidiaricaa, at Boatl.92 i - -1,3,x# Total stockholders' equity 4_+ 27 4,178 Committnents and contingencies SD,6 2-9-99 } .. a •aaa r•v TELECOMMUNICATIONS, INC. AND SUBSIDIARIES ConsoUdated Szate:mcnts of Operations Years ended Dece rater 31, 1997, 1996 &a.d 1995 1.99 -1995 a2mtun in millions, except per share amounts Communications and programming services $ 7,570) 7,438 5,586 Net sales from electronic retailing services -- 9§4 _ 92 '7.58,02? Gexra<t#%jS casts and expenses: peratmn 21850 2,917 2,161 Cost of aces from electronic retailing services 606 6033 Selling, general and admJniatretive 1,745 2,224 1°757 Stock co eneation Cost of di�tiaution agreement 173 -m - Impair=ent of in le assets 15 -- -W Restructuring charges -- 41 17 Depreciation 1,0377 1,0393 899 Amortisation 523 473 6-885 7,,3905 64 Operating income 68S 632 543 Other income-, Interest expense (1,1603) (1,096) (1,010) Intereat and dividend ixicomea 88 64 52 Share of losses of of Uistes, net (9301 (4503 (213 Dass on early extixn sltment of debt (39 (71 (6 Minorit interests r1osses (earnings) of cosecs 'datcd subsidiaries net (55) (56) 17 Gann on sale of stock by auQdiaries and egtnn dity' vestesas 1.'7'"2 12 288 Gagon spositiomn of assets 4031 1,593 49 Other, sect (22) _.._-tom} —0-0-1 .1 Earnings aosss) before income taxes (860) 563 (311) Income tax benefit (expenac) .� 2 _.L21.1) Net earnings (loss) (626) 292 (1.83) Dividend regatremernts on prefetrred stocks 42 134 Not earnings (less) attributable to common stockholders (Continued) -9 2_g-99-99 TELE-COMMUNICATIONS, INC. AND SU13SMIARIF Consolidated Statements of Oporatiosus, continucd. Yeara ended December 31, 1997, 1996 and 1995 7 _ ae'zzxoun in�aillona,-1995 except per share amounts Net estdeo1 s (loss) attributable to ce»ot% stockhoiers: TCI Mass A end Class 3 common stock $ __ — (78) TCI Oroup Series A and Series B common stock (537) (799) (1.12). I.ibe ty Ilodsa+Gxoup Series A and Series B coxe on stock 125 IIOS6 (27) TCI Ventures Group Series A and Series 8 comraon stock ._ —` - -•�-.-a� Basic earnings (loess attributable to ) ccs r�to:khola era per covarnon share- '1 T s A and Class B contmon stock TCI Group Series A and Series S ibex y Mediramon stock a Group Series A and Series C �reck TI VsGroup Series A and Series � Diluted can=* (io e1 attributable to common stoc�(oItf s per mon and potentw common sb4de. w TCI Claw A eL.d Clava B common stuck T co on Series A and Series B Lim) Liberty Media Group Series A and Series 9 common stock .... TCI Ventures Group Series A and Series B coram n stock ». i SB.S 2-9-99 I CT aROU (a combination ofcortain assets) Combined 13salance shtctss December 31, 1997 and 1996 1397Ingo Assets amounts in xni oMs Cash and cash equivalents $ 56 — Trade and ether receivables, ret 394 308 Prepaid expenses 75 77 COrrunitted program rights — 50 Investments in as lutea, accounted for 'under the equity method, and related receivables 414 361 Property and equipment, at cast:Land 77 69 Distribution systems 9,933 9,31.3 Support equipment and buildings L411 1 321 L,esss accumulated depreciation, 4 479 92{� 42 Pr .nchiae ccsssts 17,802 17,153 Less accumulated a ortization 2.725360 7 34. Other assaete, not of e►mo ttmtion _449 i (continued) sD.6 2-9-99 ""TCI GROUP" (a combination of certain assets( Combined f3L11ance Sheets, continued December 31, 1997 and 1996 Liabilities: axad Cc�mbizd l c=ounts in 1996 Accounts payable 137 194 Accruedinterest 250 266 Accrued'programming expense 243 31.3 Other a —aed expenses 726 376 Debt 14,106 1.4,313 Deferred i>;nciotsyea taxes 5,147 5,160 Other liabilities 563 .� 4 Total liabilities 21417-2 202.842 Miriori interests in equity of attributed suboiiaaziee 1,048 1,083 Fede moble securities: smock 65S 658 Common stock S Co pant'-obligated ms d�ttorily redeemablereferred securities of subsidiary trusts holding solely subordinated dent securities of"HCl Communications. Inc. 1,500 1,000 Combined deficit-, Combined eqquity (deficit), incl?udinj preferred stocks of Te es- n=x catxons, nc. (276) 1,789 U'nreraliaed holdin gams for evaUble-for-sae securities, net 0 taxes 4. TCI Ventures Group cumulative fore ign currency translation 4 us�tment, net of t es -- 26 TCI Ventures Gzrbu unrealiacd holding gains for available-for-sald secuhties, not of taxes Interest in'TCI Ventures Croup __ 7 Due to (from( related. pardem �53t3� 135 Total combined,deficit (764 - Commitments =d contingencies . � SD.6 2-9-99 "TCI GROUP" (a combination of certain assets) Combined Sta3tetn=tas of Operations Years ended December 31, 1997, 1996 and 1935 1997 `� ` a3Xn.Ls"�2X><xa3 rrullforag, except per share amounts Revenue $6,429 5,881 4,827 C?peratm casts and expenses: Operating 2,293 2,230 1,686 SeW4g, general and adninistratives 1,370 1,635 1,216 Stock compensation 1.92 (23) 40 Restructuring charg __ es 37 Depredation 950 987 825 Amortization 7 419 74 operaadag income 1,147 596 686 Other income (expense): Interest expense (1,127) (1,026) (969) Interest<I2icome 26 Intercompany interest, 16 14� 20 Share of +asses f a riliates. net j920 03 179 (3) Gain (lose) ori c >spoaition of assets not 29 2 Legs on earl S xmc n.t of deft 391 (71) (6) Minority interestearnings of attributed subsidiaries, net (168 82) (3 Other, net 1221 69 12 Loss before income taxes f254) (693) (259) Income tax benefit .s 104 1 _ 72 0 Looses before earrfirz as oss) of Liber Media Group an T I Ventures Gioup (150) (506) (187) Lass of Liberty Me"group through the date of the Libcrty Distribution -- -- (29) Earnings Paas of TCI Ventures Groupthrough the date of the TCI Ventures Exchange Net lose (4951 (764) (I56) Dividend requirements on preferred stacks �., � .,�� (3!U Net loris attributable to common stockholders9S1) Basic and diluted loan attributable to com on stockholders per toxramon share: SL 2-9-9999 TCI PACIFIC COMMUNICATIONS, INC. ANIS SUBSIDIARIES (see nates i and 2) Consolidated Balance Sheets December 31, 1997 and 1996 1.997_ __ ._ ,..�. 1 Anet smotlrita in thrsuasanda Cash " 2,966 Rcmtrictrd cash (note 1) 33,664 Tra AA and othor recti lvatiblea, net 11,930 18,986 Prepaid expenses 4,802 6,144 I,apetty and equipment,at coat: Land 5,8013 5,795 Distribution systeitis 39'7,142 348,9+13 Support equipment and building$ 42.21 36,512 445,1 390,556 L,ee&accumulated depreciation - ---50.043�3s 11.373 39„�..�3," 329,1$3 Franchise coasts 3,0135,057 3,015,246 Less accumulated wnertisatida 107.552 -- _-- 311173 2.,127,45 2.984.473 Other assets,at Casa, net of amortization _,- 16-614 ta.1 I 1 3.3 99202 2_440a961 li�s Gash overdraft $ -- 9,736 Accounts payable 3,609 3,490 Ace etrednse :, AcCrue fra:%*e fees AtCrue oo YMCIeZne n sa , � er 1, $ 30,008 08 Subscriber advance payments 2,670 2M7 Debt(note it 9$2.348 1,151,884 Deferred income taxes (note 10) 1,061.649 1,0173,340 Other liabilities __ __—IM 3110 Total liabilities 2,041.958 2.271,565 Exchangeable Praterred Stack(nates 1 and 81 629,739 629,6031 Common stockholdee"s equity: Claom A vowanon stock,81 par value. Authorized 6,257,961 shams; no shares issued an4 outstanding Class B common.stock,$.0 1,par value, aatuthor'ised 100 shares; issued and outstanding 100 shares Additions;paid-in capital 305,694 336,921 Accumulated deficit LA.1041 f2 4526 297,690 334,469 Due to TCO Cnrrtrr u4ications, In e.("TOIC") (note 11) 388,915 2 Total common stockholder's equity o 6a6.505 -gig-196 CornmirAnents (riots 12) -� 0 3_440.661 8>ae accomisa ,ging n0te8 to ilrsAnCial 8tas.tetrterttas. 11-13 SDA 2-9-99 TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES (see nates 1 and 2) Statements of operations Pacific VTI Cable rnatti 1 Irate 2 Five mr nths Seven'montha Year ended ended ended Year ended December 31, December 31, July 31, Uoceraber 31<, 1999 192& 1296 1995 amounts in thousa"ids Revenue $ 508,803 215,55O 280,630 448,206 Operating casts and expenses: Operating (note 1 f) 176,8199 74,516 108,652 170,521 Selling. gene m- 1 and a dmiwatx-ative (note 11) 117,920 58,589 68,132 108,849 Depreciation 43,299 12,765 40,681 63,292 A.mortixation 77,248 ...1.01.9..9 J8.682 116.9 177 ,7-48 228,304 Operating inco2am 02,817 37,802 52,266 86,862 Cather income (sense): Interest expense: Related party (note 11) (23,819) (3,079) (.30,009) (48,524) Cather (73,959) (40,487) Interest income 405 45t3 2,214 .- Gain on sale of marketable securities hold as available-for. sale — 26,902 Cather, net 4_2111 (1.31Z 'U0 ...1-293 497.5841 444. f20,329 Ra-mirsgls (less) ks *rw income taxes (4,7671, (6,626) 24,092 66,533 Income tax benefit (expense) (note 113) 1885( 4.174 t1 ,_(32 819 Net earnings(kiss) (5,652) (2,452) 1 23.Z14 Dividend requirement on Exchangeable Preferred Stock (31.2271 13.0179) Ket 1034 aEtrtbUtable to Common stockholder —4 .�..,..Lis s) See accompanying notes to flinancial statements. II-14 2.,3.99 9-9 TCI COMMUNICATIONS, INC. AND SUBSIDIAMES (A Suhsidiax3�of fief-Communications, Inc.) Consolidated Balance Sheets Dece=ber 31, 1997 and 1996 96* A.s+� is " ' ts in cis C aah and cash equivalents 36 — Tradc and tither receivables, net 319 308 Investments in aM"tes. accounted for under the : It method, and related,receivables (notes 4 231 287 Property and equipment, at cast: Land 70 74- Distribution 4Distribution systems 9,547 9,726 Support equipment and building 1.3si 1.423 a Lcss *=ucxrula e4 depreciation 4x 4'i131 Franchise costs 17,154 17,174 Less accumulated a=ortizati*n 2.711 3W 141-94 Other assets, net of amortization. .30 430 r x Restated • see nate 1.3, (continued) tIw 1 s 2-9-99 TCI COMMI.INICA'1I<7NS, INC. AND SUBSII3LkWES (A Subsidiary ofTcle-Con=un.icatirna, Inc.) Corlaolidated Balance Sheets, continued � Decc=har 31, 1397 and 19 +5 X997 6* bel ies and mmgn Stpg 1der's btficit amounts in million& Accounts payable $ 131 151 Accrued interest 248 2" Accrued progrtumnitig expense 242 232 Other accrued expenses 651 536 Debt(note 7) 13,526 14,318 Deferred'income tastes(noto 11) 5,215 5,4019 Other liabilities 1.23 84 Total liabilities 2!2,140 21,038 Minority interests in equity of eonsoliftted subsidiaries 787 S02 Redeemable preferred stock(note 8) 232 232 Cana -obi' te:d mandatorily redeemable referred sec��ties of subsidiary trusts Must Preferred Securities") holding solely e!ly subort ated debt securities of the Company(notes 9) 1,S00 1,000 Common stcackholder's deficit(nate 10). Class A common snack, $1 par value. Authorized 910,553 shares; issued and outatariding 811,655 shares 1 1 Class 5 common stock %$1 par values. Authorized, issued and outstant fxxg 94,447 shares Aclditianal -tri*apital 1,857 2,234 Unrealize hholldina for available- for-sale es. net of taws 4 _- Accumulated deficit 57' (8971 Investment ift fide-Communications, Inc. (TCI'), at 905 11339- cost(not asst(note 1) ( (1 1 3 Due Pram related parties (nato 12) 3 Total common stockholder's deficit 13 Commitments and contingencies(note 141 Restated - see note 13. Sea accompanying notes to consolidated finartcij4 etatamwnte. II-l9 .e 2-99-94-99 'SCI COMMUNICAT1tiNS, INC. ,AND SUBSIDIARIES (A Subsidiary of`fele-Com=unications, Inc.) Consolidated Statements of Operations Yeas ended December 31, 1997, 1996 and 1995 1997—. ... 1996* 1.995* amounts to millions Revenue ► 6,167 5,954 4,878 Operatting costs and expenses operating (note 12) 2,196 2,1I7 1,6ii Sell ti,'general anad=jWst mUve 1,236 1,607 1,224 Std compensation, (note 101 114 (12) 17 Restructuring charges -- 36 _ Depret iation 453 1, 029 848 Arttc�rttt+�n 424 Operating income 1,228 753 803 Other income (expense). Interest cerise (1,0641 (1,041) (962 34) Interest income (note 12) 26 Share of losses cif affiliates, net (notal 4 and 63 Loss on early lv extinneutishxzscnt of debt (5439) 215 71) ( (6) (note '7) ( ) Minoraty uYter0&ts In 108aea (carningal of 11 consolidated subsidiaries,net (note 9) (157) (72) Gain.(loss) ou disposition and exchange of"assets, net (13) 47 9 Gain on vale of stock by equity investee 12 (note 4) __ -- Other, net 26 (151 -IL-3221 a9Z Lose before Income tarxcs (99) (568) (189) Income tax benefit (note 11) 39 ___iw _ _ 5`7 Net loss (60) (438) (132) Dividend requirements on preferred stock ----J-1-0i,Net loss attributable to common stockholder �) � (1321 * Restated w see nate 13. See accorApanying Etches to consolidated financW statements, I1-20 SD,6 2_g- 9 7) AT&T Form 10-0 :- Part VAbYAGRMRNT-S DISCUS 1ON AND ANALYH18 Or. REStILTS OF OPEM*TION3 AVM FIU=IAL �*NPTTION f F$'NANCIAL CONDITION Julm 30, 199$ VEPSVS bECW.9z t 31, 1997 a 30, Decegbor 31, Change $ in millions 998 11997 � # 'Total Assets...... . .....�5: 447 $5 ,535 �{1.188) (2.0)3 Total sarscota-cont inuing operatriors...457 447 $51,534 $ (87) (0.1)e Total assets decreased 51,188 million, or 2.01k, pri:�Z'arily due to our: offort'* to dt,4-t non-stratesic asseates:. Theses etforti generated ideclinea in other an4 longs receivables* net assets from discontinual operations, *investments and pzopertyf plant; e. esluipnieent, partially affiet by an inCre sea izt Ca8h, 'The decreasein Esther asld long�t +n+ receivables is due primasrily to s:epa t of loans by UCS as part of then ase�tlemftnt t?t our April 2, 1998 sale to Citicorp. The decrease in net aesete from disconties� tvI operationa also reflebts the sale of VC The decline in.invesstmants isa prim#.ril.y due; to the salts of LM-TV and SmarTone. decrease in property, plant; and a quipmes r s.,- primarily due to the first quarterto al asset imp4irMaUt charge and the 8]hIft of ri-_ 91 Solutions Customer Catrt. The: increass in cash is: mainly due to baesh received e•. ram Citibank in the second quarter 1999 rel ted to the sate of MS. Total,liabilities decreased $2,429 mil. ion, car 8,93, primarily due to decl.ia#ea in isn't:. defeerted income taxes, and payroll and eneyfit liabMtiess. partially 6fteeot inerir+ two in long-terns baaneafit-relaatad liabilitie Band other c4rent liaabilitiensre The r�ecreaso. we= both short-term and long-teres debt re;fl ct the paydowth of debt with tth+e roceo a3 Ft .�"• sales of" , on Cushtomer �e. �.". �r sae efirre URI ,an(: taxes priry4 reflects the: isiract;. o the at� eitsai`rsaeRG' and reatrrsicturngr chain .+�. The decline: in payroll and benefit re ated liabil.iCies primarily reflects �iussua! N ++: quarter- payout of eVloye;e bonuses an the reversal of a portion of the 1i 95 burin a-e5tructuring reserve. The increase in long-term beon4fit-related liabAltiess Is primgt- 1.} dues to .the second quarter charges associated with} the voluntary retfremestt incezxs. .,t, program for.manasgemesnt employees. The harge for pension special termination #aesnefitas tilil. other,costs resulted-in the estsblisehment of a li,abi�ity for the Management p;enislon The increase in other current l.ia.bil.i't 'so is mainly Au.e to an iracreas* in accrued 11sW!i ^ taxea'primaarily associated with the ssal of UC&. i Total. shareowners' equity increased $1,241 million) or 5.54, primary dui to ClArle. Itt. yeaYri s net income partially offset by dividends declared. The ratio of total debt to total capital,, (defined �s debt divided bs tota2.I capital) June: 30, 19V8, Maas 22.9& compared to 32.3* at De Lembir 31, :1997. ' The Aecrease tea: primarily the result of lower debt. If AT&T used its available cash tt, rerire . 1s� outstanding debt, thirea would be no deb remaining at June 30, 1998, r EXHIBIT SD.6 z-9-99 C0NSOLIDATE', O C8 ORMETS (CONTID)_ (ballare it, Millions Except Share ;,mounts) (Una diced) June 30, December 31. 1990 1997 LIABILITIES Accou.t is payable« . . . ..0 ... . e.«a,a., . ii 5,754 � 6,243 Payroll and henofit-rel atesd li 4ilitieea..... . «. . .. ... . . .. .. . . . .. 1,570 2,346 Debt maturing within 'Otte year.. .... .... 11008 3,996 Dividends payable.. .. .. . . ....... ... 518 538 other current liabilities........ ..... . 5,213 3,61.5 Totatl current liabilities.. . ... ... ..... 1.4,163 16,942 Long-term debt...... . .. . . . .. ........... 61008 6,826 Long-terrti benefit-related liabilities.. 5,419 2,142 Deferred incomes taxon.. . . , s. .. .. . 4,662 5,711 other long-term liaabilitisss and deferred credits.. :. . .. .. . ..... ... . . . 3,307 3,367 Tot&& lieabilitiess . .. . r. . . . . . . .. . ... ... 33,5$0 35,988 t5ltt1�0$ R � RsrptXL1"Y' � { Commit sharett - par value $1 per share. 1,625 1,624 Authorized shares 6,000,000,000 outatsnd ng shares) 1,624,56+x,000 at June 30, 1998; 1,624,213,505 at: December 31, 1997 Additional paid-in capital . . . .... . . . . . . 15.97 15,7S1 Guara;iteed HSy�P obligation_ ........ . . (58) (70) Retsihed earnings. . . ;. . .. . . .... . ... .. . . 6,526 5,360 Accumulated other ccKtprasbeenaivea income.. .. . ..... . . . . . . . ... .. ... .... .. (52) (38) Total: shareowners' equity. .. . . . .... . . .. 23,086 22,647 TOTAL LIABILITIES & SHAREOMR5' EQUITY $S7,447 $S8,635 see notes to Convolid4ed Financial !:Statements. a City of Berkeley F7504/CA0006 BEFORE TCI Communications, Inc.. Heritage Communications, Inc. I Heritage Cablevision, Inc. Heritage Cablevue, Inc, Heritage Cablevision of Delaware, Inc. w EXHIBIT SD.6 i .a-9-9s Contra. Cost. County F7526ICA0062 BEFORE TO Development Corporation TO Development Corporation TCS Holdings, Inc. TCI West, Inc. TO Cablevision of California, Inc. sn.9 7) -2-,9-99 Contra Costa County F7754/CA0070 BEFORE TCI Paeifle Comunieations, Inc, Teles-Vue Systems, Inc. Centra Costa Cable Company SD.6 _.2r9-99 VV Contra Cost. County F2958/CA1233 BEFORE CI Development Corporation TO Development Corporation TCI holdings, Inc. TCI North Central, Inc. Westmarc Communications, Inc. T'elevents Group, Inc. Televents of East County, Inc. 9-99 Contra Costa C F2972/CA0243 F2973/CA0289 F32587/CA1507 BEFORE CI development Corporation TO Development Corporation TO Holdings, Inca TO North Central, Inc. Westmarc Communications, Inc. Televents Group, Inc. Televents, Inc. Contra Costa County F7752/GA.0365 BEFORE TCI Pacific Comunications, Inc. Tele-Vue Systems, Inc. SJ,b Contra. Costa County Unincorporated Richmond Area F7505/CA0747 BEFORE TCI Communications, Inca Heritage Communications, Inc. Heritage Cablevision, Inc. .Heritage Cablevue, Inc. Heritage Cablevision of:Delaware, Inc. Contra Costa County F4442f CA0346 -_ BEFORE `fele-Communications, Inc. TC I Cable Investments, Inc. ELiberty Holdings, Inc. Liberty Cable, Inc. TO Communications, Inc. LCV`I, Inc. United Artists Enterainment Cocas. United Artists Holdings, Inc. United Artists Cablesystems Corp. UACC Midwest, Inc. Contra Costs County F7755/CA0075 F7757/CA1533 F7756/CA0924 BEFORE TO Pacific Cumunlcations, Inc. Tele-Vue Systems, Inc. Crockett Cable Systems, Inc. } SD.s _i Z-9-99 CURRENTSTRUCTURE E E AT&T TO x I i � F 7 Existing , AT&T TCI Gaup ; Liberty Media TO Ventures Businesses ' Group Group 1 Subsidiaries/Partnerships 3 Holding Cable Franchises FRANCHFSMAT&RCURRENT STRUCTURE 2.9-99 _$ -9� TO RESTRUCTURING TGI TO � 3 f 111 E TCI Getup i Liberty Media ; TO Ventures { TCI Group I,lbertylVentures Group t"iresup Group 3 E _ i Subsidiaries/ ! Subsidiaries! Partnerships j Partnerships Holding Cable = Holding Cable Franchises Franchises i FRANCHISMAT&IACURREN'T STRUCTURE { SM k _.. 1-9-99 MERGER a AT&T AT&T ; 4 �t f Existing I AT&T Italy Merger Existing TCI � AVIT Businesses Corp. # TO AT&T i Group Liberty i a l � Businesses i Media Merger 3 Group t ff y f _ i i Subsidiaries/ Partnerships � Holding Cable! Franchises UkayfNentures TO Group j Group ! i I Subsidiaries/ Partnerships Holding Cable Franchises FRANCHISEIA T&niCURRENT STRUCTURE 2-9-99 EXHIBIT H SD.6 2-9-99 COBLEN-rz, PA-reH, DUFF BAss, LLP .dtfwavNAN x.*A" N,A.AAY s't►AtCN AF`YC)RNEYS AT LAWtta ,i[rrr<v A.ocat€t« weu.1i4 N,oaateg,t}, o.eau«sam wtee 222 FLOOR A.ai,Ac>e AfC.A!k0 a.rwT« IiEAltliY STREET, 7T7FLOOR wsu xa+e.NN47pN « AK L`@bAt. ♦wNar AE$CA Abw .1404NSAN FRANCISCO, CALIFORNIA 94iOS•4510 MIaOtSA A.ioA}1F CYNtNtx A. bA+tA a++NCLA&ffiUvIY JDtICrN C.&or," / 6rf:Ct C0"Sti, rgtA.940620" TELEPHONIC:EL,EPHONIC: (415) 391w4eOO WIC"acv r,NAdo A6Ax .KNAtCFACSIMILE.(415',)959-1563 -,AC�YNCaANa-att "C Lfitit{J.siwyJtaC o.oCN J.retic YCM JAc*ax tiOdJi.:rr.0 w"k>k?Aaiabw *="C'.*U"C Wt.~r.+AeCAiC tlsa eclat #A10 C.J6"#t3T41u YKMC1 6a NACf N"04c J"PacY a.XW&P CS ticytt t.mcomw ALUCN C.■A4t46Aa$1tVJ$g0Cat 60c"A96 0.NM14011M 3w V.w4au • UcNSN%LAK~ A.&."A" October 22, 19 L •A*(J"Ca tN*Cq*Aik**Uy WCIRAC6 L.tS#"" YfLAi+ti 0-VCAAX*k M.Ner RA.ts,MN.AM#w1GN YAY C.WA .PANCX A,i13YCNQbt, cu"046 t.Tim . 72U403 V16>F'aggiLmIle and Federal William M. Marticorena,-Esti. Rutan &'Tucker 611 Anton Boulevard, Suite 1400 Costa Mesa, California 92626-1998 Re. City of Santa Cruz, County of Santa Cruz C ranchising Authorities"), FCC Form 394 filed by Tele-Communications, Inc. Cl* Gated u ust 14 998 Dear Mr. Marticorrena. This letter is written in response to your letter to me dated 0 ober 12, 1998 (which we received on October 14, 1998) relating to the above-described subject matter. We note at the outset that we strongly disagree with your statement that our letter of October 7, 1998 to the First Information Request by the City and County of Santa Cruz was not responsive. Thus, for example, in your October 12 letter you claim that TCVs'response to Request Nos. 1-15 was not adequate and that,-despite AT&T's provision sof the requested certification, specific responses must be provided by TCI to each of Request Nos. 1-15. Directing your attention back to your own later dated September 16, you stated as follows: ... the Franchising Authorities hereby request that AT&T ... certify in writing that based upon conditions known to it at this paint in time, and taking into account the close of the Transfer and the economic burdens and benefits associated therewith, the rates which can be charged by AT&T, or any entity related thereto, which will control the Franchises or the Franchisees in Santa Cruz or any of the Say Area systems, pursuant to the Second Order on _reconsideration, and [4 OCT-22-1998 14:2S 415 9e9 1663 P.02 2-9-99-99 CoaLENTZ, PATCH, DUFF ° Sass, LLP William M. Marticorena, Esq. October 22, 1998 Page without any filing of the form 12211 pursuant to the Cost ofof Setyjce rules, will provide AT&T with a reasonable and adequate rate of return.. ff AT&T is not In the pos don to provide the certificate to the Franchising Authorities, or declines to do so, then AT&T is hereby requested to provide the fallowing information .... (Fmphasis added.) Thus, your letter expressly provided that AT&T could either provide the requested certification or respond to items tilos. 1-15. AT&T provided the requested certification, The language used regarding "conditions known to it at this paint In time"was not, a suggested in your letter, an "exculpatory limitation"but rather was the precise language you requested. Because the certification was given as requested, Individual responses to Nos. I1-13 were neither requested nor required. ltttith respect to the Franchising Authorities' other requests, marry of the specific requests as to which you seek further information call for the provision of information which simply does not exist. Thus, Request Mos. 3, 13 and 14 seek various pro forma financial statements and projections. As stated to our October 7 response, such documents do not exist and, therefore, cannot be provided to you. Similarly, Request Nos. 6 and 12 seek various documentation regarding lenders and loam agreements. Again, as stated in our October 7 response, there simply are no documents responsive to these requests because no leaders are currently Involved. Request No. 8 requests a summary of all of AT&T outstanding long-term indebtedness. The most current documentation responsive to this request was attached to our October 7 letter as Exhibit B. Frankly, we are unclear what-more information on this item you are requesting. .Request No. 2 seeks financial statements of United Cable Television of Banta Cruz ("UCT-Santa Cruz") for the past five years, as well as-an income statement for the operation',of UCT Banta Cruz in Banta Cruz for each of the past five years. As noted in our October 7 response, UCT-Banta Crux has provided and will continue to provide all financial information required by the Consent Decree and the franchise,agreements. The remaining information requested by Request No. 2 is Irrelevant to the Franchising Authorities' determination of the legal, technical and financial qualifications of AT&T. Nonetheless, in the spirit of compromise, we provided you with a copy of the most recent audited financial statements for UACC Midwest, Inc., the immediate parent of UCT--Banta Cruz. We believe this is more than sufficient to respond to this request. We also nate in this regard that FCC Form 394, Part 111, 2 requires financial statements only "if any such financial statements are routinely prepared." Thus, production of the regularly prepared audited statement was fully responsive. OCT-22-1998 14:29 415 989 1663 98% P.03 P.04/05 8D.6 2-9-99 COBLCNTZ, PATCH, DUFFY & BASS, LLP William M. Marticorena, Esq. October 22, 1998 Page 3 Request No. 15 simply asked us to describe how the sales price or exchange rate was calculated. The answer we gave you was both accurate and responsive. Moreover, we fall to understand your claim that the method by which the exchange price was established has some bearing on the legal, financial, and technical . qualifications of AT&T and candidly question whether you are serious when you suggest that this transaction is "highly problematic.` In fact, because this transaction involves a mere change of control, all of the existing legal,financial and technical expertise and qualifications of TCI will remain in place at the close of the transaction. Those existing qualifications will be substantially enhanced by AT&T's financial strength, its technical qualifications, as well as the breadth of its operating experience. With respect to Request No. 1, we can only repeat that documents filed with the Department of Justice ("DOX) and the Federal Trade Commission ("FTC") pursuant to the Hart-Scott-Rodino Act are not publicly available, are confidential and proprietary in accordance with DOJ and FTC policies and therefore were not provided with our previous response. As you know, FCC Form 394 Part 1, 2(a) specifically provides that "confidential trade, business, pricing or marketing information or other Information not otherwise publicly available" need not be provided. With respect to Request No. 18, regarding the Voting Agreement we are in a position to clarify that the Agreement is an Agreement between AT&T Corp., a New York Corporation, as "Parent," and Dr. John C. Malone and Leslie Malone, collectively, as "Stockholders." We continue to believe that this Agreement, as with the Non-Disclosure Agreement(Request No. 16), is not required. See, FCC Form 394 Part 1, 2(a). With respect to Request No. 21, regarding the"Capital Spending Plan"we must reiterate that because the information is not set forth on a division, region, system or franchise area basis, the plan would not provide any relevant or useful information to the Franchise Authorities with respect to the franchises or systems operated in the City of Santa Cruz or the County of Santa Cruz. We further believe that the disclosure of the requested information would provide an advantage to competitors. As for Request No. 22, we can clarify (as set forth in the definitions contained at page 7 of the Merger Agreement) the that Parent Charter Amendment Is attached to the Merger Agreement as Exhibit A (which has already been provided as a part of the Form 394). Finally, we object to the closing comments in your October 12 letter, that it appears that TCI and AT&T intend to provide'no additional Information either in response to the First Request or subsequent requests." This broad statement is both OCT-22-1998 14:29 415 gag 4663 9e% P.04 S15.b .. 2-9-99 COGLENTZ, PXTCH, C)t FFY �`x Bass. LLP Wiliam M. Marticorens, Fsq. October 22, 1993 Page 4 argumentative and untrue. TCI and AT&T are committed to working cooperatively with the Franchising Authorities can this issue, or any other Issue. We believe that the information provided in the Form 394 Is more than sufficient for the Franchising Authorities to assess the legal, technical and financial qualifications of AT&T. We have provided, and will continue to provide, information and documents that are necessary and appropriate to that inquiry. However, AT&T and TCI cannot provide documents: which do not exist nor should they be expected to provide highly sensitive and confidential documents which bear no reasonable relation to an assessment of AT&T's qualifications. 'lease call us if-you have any questions regarding the above. Very truly yours, Coblentz, Patch, Duffy & Bass, LLP Richard R. Patch RRPIA Jlkl TOTRL PAsE. 005 OCT 22-1998 14:29 415 989 1663 9?% P.05 SD.6 2-9-s9 99 � TAN & TuCKER, LLP ATTORNEYS AT LAW A PARTNERSHIP INCLUDING PROFESSIONAL CORPORAYtONS JAMKS R.MOD Kq• PNtiL4P O.KONN 611 AN'TON BOULEVARD, SUITE 4.$00 AOSCRT D.DAMN 9CDYT A.%ANTAGA<A PhUL FACOq RSC MAAA d$qt D.Ku1CRSC"O ADAM N.VOLKCAY ALLEN C.097CAOAR tti AtlCNAKD A CIlANt2TT $TCYC"A.N CNOLS COSTA MESA, CALIFORNIA 92626-COOS JEFFACY A.OOLOPARS dVNNIPCA WN:T9^SPEALINO LKO"AAO A...."EL TNONAS G.SAOC.i.GTON p,KEVIN SRArM $TEVC.J.GOON JON.S.NUALSUY,JA. Vf­I—W.WYNDCA (A1N9 N.MKLZCA DOUGLAS J,OC.NI"OTO. MICNAVL W,4MMCLL CVR$01K4(VICKI!OALLAS OIRECT ALL MAIL TO: P. O, BOX $950 L,SKI NA..,". "..9 A.JULA"OCA .Mro.O W.DANT,JA. "ANOALL M.SA4SVA. Cu$C K.T—V..M TODD O.Li 1. TNCODOAC t.WA.LACS,JR.- MARY M.ORCCN COSTA MESA. CALIFORNIA. 9262p-1950 LARRY A.CCRuTT: KANA$.CAALSON O4L$9RT N.KNUGKA GRgGG"SCA CAROL O.".YY CRTC L.Du.N d Scl.D.CA—u'. MICNACL P.$$TZKR TELEPHONE 4714) 641-5700 PATRICK D.MCCALLA I.C.OALANTC am—.O P.$4M4 TNOMA$J.CRANE PICNA"O K.NOWCLL CRI$TY G.LOM9.Z0 JAMES A.O'N9A6 MARK S.FRAZKR JAMES S.WCISV dCFFRKY T.MCL"ING ROSCAT C_ON uN Or. I LOPC PAAMC9 FACSIMILE {7}4) S4t3-f3C$ S MtCNACL X.4LATTCAY SCAN P.FAARCLL THOMAS S.CAGNOCR" N.NAYRCRINC JCNSON A.PATRICK MUROZ M.ALSHC POSC DAVIO C.LAASCN° DUKK Pr WA"LOUI4T INTERNET WWW.fUtSn.COM DEANA DUN"$TECL APRIL LCC WALTKA CLCFFOAO C.FAicDCN AtCMAAO O.MDNTCV1090 DAVtO R.NGCNNCA PARCH RLIZA49TR WALTCR M$CNACL D.A.Wu LORI SA"NKA SMITH DAN SLATCK NATAWC 1614$ALD OUNDAS $"A 4.01VSN" tAgSSY'W,KLATTC III A.W.AUYAN(4490-44741 PAUL J.41CYCAS ALISON N.SAAAARO9K JCFF"KY M.OOc"MAN. CUZ^091N L.MARTYN JAMES S,TUCKCA.4R.06664460t S.DAN49L RARSOTTLC JON"W.NAMILTON,JA. $TAN WOLCOTY° KIM O.TROMPSON MM"RO W. DANL. SA.itlDl$-19993 KENT M.CLAYTON LYNN LOSCNIN ROSCRT S.$DurER JAYMc TAYLOR KACCA Lt, AODOCA KOWCLL BONS-i4831 JOSCPN L.MASA ID PWUP J.SLANCNA"O DAVID J.AL98N C OAVy.S.COSORDYK KRAIG C.KOLOC" TC"CNCC J.OALLAGNCA MARCU6 A.FORSYTN NANS VAN UGTCN WILLIAM M.MART$CORCNA 9TK)+NCR A.9L.M9 i%, ConoOA Tsbi{ JAMCS L.MORRIS MATTHEW K."OAS WILLIAM J.CAPL4N Je".Kv WCRTN94M6K OF COUNSEL MICNACL T.NORNAK COWARD D.9Y4CSMh JR.` DAVID J•OAR14Ai.01,M November 12, 1998 Richard R. Rauh Coblentz, Patch, buffy & Bass, LLP 222 Kearny St. , Seventh Floor San Francisco, CA 94108-4510 Re: Cities of Antioch, Berkeley, Fl Cerrito, Hercules, Richmond, Santa Cruz, County of Santa Cruz and Contra Costa County (collectively, the "Franchising Authorities") ; FCC Forms 394 (collectively, the "Applications") filed by Tele-Communications, Inc. ("TCIII) Relating to Change in Control and Merger with AT&T Corp. ("AT&V') (the "'transfer" or the "Merger") Dear Richard: As you know, this office serves as Special Counsel for cable television matters to the above-described Franchising Authorities. The Franchising Authorities have, on numerous occasions in writing, requested that the Applicants provide detailed .information as to if and how AT&T intends to assimilate and incorporate the provision of Cable Services into its telephony-based legal., managerial, organizational, and technical infrastructure. You have, on several occasions in writing, declined to provide such information based upon various claims of irrelevancy, confidentiality, and lack of existence. Given the fundamentally different legal regime relating to the regulation of certificated telephony services pursuant to the California Public Utilities Code and the regulation of Cable Services ',pursuant to the Cable Communications Policy Act of 1984, as amended (the "Cable Act") , the Franchising Authorities possess concerns regarding the potential integration of those services and the impact of said partial or total integration upon the Franchising Authorities' ability to collect franchise fees and exercise regulatory jurisdiction over services currently within their regulatory domain. The Applicant-'s refusal to provide information regarding its plans in relation to this muter impedes the ability of the Franchising Authorities to analyze this critical 12410115W-"1132176'n. all/12M fiD.9 � 2-999 RUTAN & TUCKER, LLP ATTCJRNeYS AT LAW A 4 AT.E.5.4N 1HCIIG11S0 N1111$VO0 l CO"114AS 10 1 Richard R. Patch November 12, 1998 Page 2 issue and propose, if necessary, contractual mitigation measures. Continued refusal to provide this information may preclude the Franchising Authorities from providing consent to this transaction within the 120-day review period. In order to further analyze this issue, the Franchising Authorities posit the following questions: (1) Are the Applicants willing to contractually agree to treat high--speed broad band Internet access services, whether delivered by way of the existing cable system, an upgraded cable system, or a blend of a cable system/telephony system, as statutory Cable Service as defined by the Cable Act, .for the purposes of franchise fee and other regulatory purposes? (2) Are the Applicants willing to contractually commit not to utilize ',AT&T's status as a certificated telephone company subject to the regulatory jurisdiction of the PUC as a basis to escape franchise fee liability or local regulatory jurisdiction over any activity or service which if offered by an entity other than a certificated telephone company would be subject to the jurisdiction of the Franchising Authorities for the purposes of franchise fee collection and other regulatory purposes? (3)' Will the Applicants contractually agree that the valuation and assessment of the possessory interest in the public rights-of--way associated with the Franchise Agreement as well as these assets of the cable television system which constitute business', personal property, as defined in the. California Revenue & TaxationCode, will remain subject to the jurisdiction of the County Assessor and. the County Assessment Appeals Board, as opposed to the Sete Board of Equalization, notwithstanding any potential legal. or 'technical integration of the Applicants' cable television plant with its telephone plant? In ether words, will the Applicants contractually agree that AT&T's control of the Franchisee shall be transparent for the purpose of determining whether or not property tax jurisdiction lies with the County Assessor or the State Berard of Equalization? (4) What measures will the Applicants undertake to assure that AT&T's telephony operations, and the costs associated therewith, will not, directly or indirectly be transferred or allocated to the cable television system, or any portion thereof, for the purposes of determining regulated rates pursuant to the Rules and Regulations of the Federal. Communications Commission? 1241011597-MI/3217672. all/12/98 2-9-99 itt ,ra s '� cx, SLP ATTORNEYS AT LAW A IARY.EASMlI 1wCLUO1No".1t Bl9MAl G4kIOroARCkL Richard R. Patch November 12, 1598 Page 3 Finally, after consultation with staff for each of the Franchising Authorities, it is now apparent that those staffs may not be in the position to recommend affirmative approval of the Transfer prior to the conclusion of the 120-day review period based upon previously identified failures or refusals to provide additional information. Staffs have indicated a willingness to recommend an extension of the 120-day review period to allow the Franchising Authorities and the Applicants to work through issues which have been previously identified as well: as compliance issues which may arise during the scope of the various compliance audits now being undertaken by the Franchising Authorities. In the alternative, the Staffs of the Franchising Authorities are prepared to recommend a denial without prejudice if no extension is granted. It is my suggestion that we agree on a mutually-acceptable extension so as to avoid a premature action upon this matter by each of the Franchising Authorities. Given the fact that it is our understanding that the Applicants are several months away from closing this transaction, at a minimum, a thirty to sixty day extension does not appear to prejudice the interests of any party. An expeditious response to this request would be appreciated since 'agenda deadlines are often two weeks before the elate of the meeting at which a councilmanic action is taken and the 120-day review period closes, in most cases, in mid-December. Sincerely, R.UTAN & TUCKER, TLP moi; C✓"�,,''-�'`�___ .-`�, William M. Marticorena WIM:vj b ccs Bi EXHIBIT J 4 t (). UTAN & TuCKER, LM 2�9_99 SL,V ATTORNEYS AT LAW A PARTNCRSHiP INCLVOINO PROFCSStONAL CORPORATIONS JAM.Cs A..PORC° P"IL1P D.KDHN 611 A.NTON BOULEVARD, SUITE 4,400 RORER,P.DWEN fficaTr A.3A.TA0AYA PAUL,rACD€#tC..4. dO€L D.#UPCRRCRG -0-.N.VDI.Md RT xtLC.C.P3YCRPxR lie RICHARD-.CUA.J7T 3TCVCN A.NIC.OL3 COSTA MESA, CALIFORNIA 26269-t9SO it"."A,'JCLbFARB J6NNirdh WHttB-3�dRL.NP LEONARD A.HANP;I THOMAS 6.6RPC-e 0- r.KCY1.AAAYta 3T4.CV8. JO.N 3.HUML6UT.JA. v1-A.W.­DK. LAY.€K MCLZE. P0uGLX6 J�DCNNtHCTP. MICNA:L W.lMMCLL CVRID1.1(v C.0 bhl•.J.3 DIRECT ALL M.AtL T6; P. D. SOX 1950 t.6X1.-A#16PN M4LFO.b W.CA.L,JA. RA.OALL M.[A$3USW 8LF3[K T#hYNUM TODD O.LA. UtANp,A TMCODOMC t.WAUACZ,J#` "RAY M.GA€€N COSTA MESA, CALIFOrtN to 02828-1050 LAWAY A.CCAWrri MAR-8.CA#L4GN 41L3CRT N.XRUGCA DMCGa-At. CAROL D.CAATY C#iC L OV.N J0381Nt 0.CAAA.T. WC"A€L r.61TZC# TELEPHONE f7t4} 6-41-5100 PATRICK C,"OC LLA rABC GALA.,€ RICHARD P.almsTMOWAB J.CAA.€ RICNAKO#,NOWCLL CMIBTY G.LO.CHZP JAMES a.a`.CAL PYAM.8.PA"ttA FAC5t M3LC 4746} $$S"$i'�.' JAM CS a:WCMZ' dLrrRtfY T..ELCHIND RO48RT C.ORA.. rd.€LOrd Ph#MC3 MICHAEL W%ATMAY 38AN P. Y.Mx i TM0MA6 6.3ALt.GER° M,XA7NCRSMC JC.ffi O. Ar rATRtCR MWADZ $CA P. P038 INTERNET WWW.rUtan.COnt GAVIb C.L-Rs3R' Ric P. 12.O.Ii, C£3#A Dt3N.STdCi APitlt LCt WALrc. CL1rrOAD C r#1898. A{eHARb t$.MONTCVtDCP DAVia H,NOC.NC# KAREN CUZANCYN W,'TCA k,e.-CL D.RUM- LOM,3AR.CR AWTI4 OA.64ATCR "-TALK 618OAtD D"," IAA 0.M".. CA-CUT W.XL-TTC- A.W.RUT"06SO-19731 PAUL J°4MVIR8 ALMON M,6hA0.LRO$H JC"ACY W.DOCRMAN' CUCA68TN L.MAATYM JAM86 0.TVCKCA,3A.14666-14501 d.D-"ICL}tAR30YTld JON"W.HAMILTON.JA, $TAN V10"Ont- KIM C.THOMPSON MILrORD W. GANL. $R.N4t0.10661 "AT M.,;LAYTON LYH"LOSCHUi 0008RT W.6OWCA JAYWC TAYLO#MACCA ".ADDOCM MOWCLL 0083-40811} J068AH L.MAGA Iti ONIL10J.OWI€HARD DAWD J.ALC3HWX DAVtG 0.cose"V8 XAN6 G XILACR r TCA3NC8 J.0JE1,4LDNCR MAAC`IA A.r0ROTT. "A"8 VAM UG-M" WtLJAN M.MAOM-RCMA 078PM8N A.CL188 •A RMOrCf3MbrA.-GGY�Ow-t§ON 14AAM.L.MO#Rt6 W-TTMCW A.R03$ WtLWM J.CAPLA. ✓cPtACY WCATHtI..A OP GY9UN8[a MICMACL T.WORNAK COWARD D.4YOC844A,JR.' OAVID J.4AMI8AL04.1tt January 8, 1999 Richard R. Patch Coblentz, Patch, Duffy Sass, LLP 222 Kearny St. , Seventh Floor San Francisco, CA 941+ 8-4510 Re: Cities of Berkeley, El Cerrito, Hercules, Richmond, Santa Cruz, Contra Costa County and Santa Cruz County (collectively, the "Franchising Authorities") ; FCC Forms 194 (collectively, the "Applications") filed by Tele- Communications, Inc. ("TCItt) Relating to Change in Control and Merger with AT&T Corp. ("AT&T") (the "Transfer" or the "Merger") Dear Richard: As you knew, this office represents the above-described Franchising Authorities in relation to the pending ' Merger. This letter will confirm and follow-up a conversation which we had in relation to the above-described subject matter on January 7, 1999. During that conversation, I requested, for the reasons set forth below, that TCI and AT&T extend the 1.20-day review period established pursuant to Section 617 of the Cable Television Consumer Protection and. Competition Act of 1992, as amended (the 111.992 Cable Act") for a minimum of one additional month, so as to expire without prejudice as to further extensions, on February 28, 1999. n that conversation, you indicated a willingness to extend the review period until and including February 8, 1999 but communicated a current inability to extend the review period beyond that date. By this letter, the Franchising Authorities are formally re-requesting an additional extension so as to provide them sufficient time to review financial information relating to the Merger which has not been provided as of this date. The Franchising Authorities have, by way of numerous written communications, requested financial information .relating to the Merger so as to evaluate the legal, technical, and financial 124/011597-"1/3231977. 411081" SD.6 ` U i A N & T U C K E R, LL 2-9-99 ATTORNEYS AT LAW e A YwRTRCR8HIP{RC'sVYi1R0►RCFEq$i8Ri11 CORYgRATICab Richard R. Patch January 8, 1999 Pace 2 qualifications of the proposed transferee as well as th4i potential impact of the Merger upon the cable systems and the provision of cable service. You have repeatedly indicated, both orally and in writing, that said information did not exist, that if it existed it would be confidential and not available for inspection by the Franchising Authorities, and that TCI -and AT&T .are prohibited from providing financial information regarding the Merger prior to its dissemination to its shareholders and the marketplace based upon certain regulations of the Securities and Exchange Commission. You have also indicated that significant financial. information would be provided to the Franchising Authorities upon its release to shareholders and the public. As of this date, no such financial information has been provided. During our meeting yesterday, You indicated that the above--described financial information would be provided to you for redissemination to the Franchising Authorities on January 15, 1999 and that it would be retransmitted to the Franchising Authorities presumptively ' for delivery on or about January 18, 1999. As I understand your statements in our meeting, You are not in the position, based on your lack of familiarity with the format and content of this information, to represent, one way or another, whether the information would satisfy the financial questions raised by the Franchising Authorities. As '1 indicated to you during our meeting, and reassert today, it is not reasonable to assume that the Franchising Authorities can provide their af'f'irmative consent to a transaction of this magnitude which will potentially determine the size, shape, and quality of cable television and other telecommunications services for manyyears to come absent the receipt of meaningful financial information and the provision of adequate time to review and analyze said information for the purpose of making ' findings and recommendations to their legislative bodies. As a practical matter, it appears that no information will be received by the Franchising Authorities, or their representatives, until the agenda deadline'has passed for the last legislative meeting of January for each of these Franchising Authorities. Even the extension of the review period until. February 8, 1999 does not provide sufficient time for receipt, analysis, the delivery of potential additional questions, and the preparation of necessary agreements, documents, and staff reports. It must be recognized that the Franchising Authorities requested this information anv mor ago and it was the actions and inactions of TCI and AT&T which have caused the tardy receipt of said information assuming that it is ultimately provided on or about January 18, 1999. 12410115,97-"1/3231877. xO1118/99 S13.5 RUTAN & TuCKER, LLP(,.) 2-9-99 ATTORNEY'S AT LAW •a•ARTNCA%S 3HCW01-0 O*OrC%Z4ON L C**PYjrt TM-S Richard R. Patch January 8, 1999 Sage 3 Itis not the desire of the Franchising Authoritiest` or any of them, to delay or potentially prevent the timely closing of the Merger. Upon receipt of requested financial information and its analys=is, the Franchising Authorities may well be satisfied with the Merger as well as the legal, technical, and financial qualifications of the transferee. However, until that process has taken place, no commitment can be made one way or another. Unfortunately, your position regarding the lack of additional extensions beyond February 81 1999 may well force one or more of these Franchising Authorities to deny consent to the Merger without prejudic=e until it has received necessary information, negotiated appropriate provisions in the Transfer Agreement, and prepared appropri Sys-6 s`iU`rAN & TUCKER, L.LF 2-953 ATTORNEYS AT LAW a A iRATpitl3inti tN2kUD1Mb iiSDPLf91Df{AL CDMiDAATf0N8 Richard R. Patch January 8, 1999 Page 4 expenses, general, admi RU;°iAN & TuCKER, L.LP - SD.6 ATTORNEYS AT LAW 2-9-99 3A PAf YNCR4Ni►INCGUfliNQ y'iyQrC$g<8NX1,C[7MMWRX"ltON3 Richard R. Patch January 8, 1999 Page 5 of each of the Franchising Authorities,, that such a pr`6cess doe not result in a erosion of the constructive working r6lationship which currently exists among all parties. Sincerely, RUTAN & TUCKER, LLP William M. Marticor na WMM:vjb ' cc: Pat Busch, Assistant County Administrative officer,` County of Santa Cruz Richard C. Wilson, City Manager, City of Santa Cruz Rama Murty, City of Berkeley Howard Stern, Esq. , City of El Cerrito Eric Xavier, City of Richmond Patricia Burke, Contra Costa County . Connie Jackson, City of Hercules 124/011597-Oot/32318n. *01/091" io1-a40 r-MAI WHEREAS, pursuant to County Ordinance Code Section 584.028,the Change of Control cannot be concluded witbout the written consent of the County; and WHEREAS,based upon the evidence presented to the Beard, it has determined that it would be in the public interest to conditionally approve the Change of Control. NOW, THEREFORE,it is agreed by and between the parties as follows: l. The Beard hereby gives its consent and approval to the Change of Control as described in the Application, 2. The,granting of this consent to the Change of Control does not waive the right of the County to approve any subsequent change in the ownership and/or control of the Franchisees and there shall be no further material change, amendment or modification of the ownership or equity composition of the Transferee or Franchisees which requires prior consent of the County pursuant to the Franchises or the Ordinance without the further written consent of the Board.of Supervisors, 3, By executing this Agreement,the Franchisees and Transferee agree and acknowledge that(I)this Agreement and the approving resolution is not a.new franchise,the grwiting of'a franchise, or the renewal of the existing, franchise, but rather is exclusively an agreement to change control of the Franchisees and said Agreement neither affects nor prejudices in any way the County's rights therewider, (2) that compliance with the Franchises and Ordinance, as of the date of closing of the Change of Control, is neither commercially impracticable nor economically infeasible as those terms are used in Section 625(e)of the Cable Communications Policy Act of 1984 and/or the Cable Television Consumer Protection and, Competition Act of 1992 (collectively the "Cable Act"). Transferee agrees that in judging whether particular obligations are commercially impracticable, the parties will not consider the 2 economic burden of debt service,debt service coverage,or equity requirements incurred directly or indirectly to fund the Change of.Control to the extent such debt service, debt service coverage;, or equity exceeds the debt service, debt service coverage, or equity requirement of the Transferor, or any related entity, as they existed prior to the Change of Control. 4. By executing this Agreement, the Franchisees hereby unconditionally accept, acknowledge, and agree that, after the Proposed Transaction, they will continue to be bound by all the commitments,duties and obligations,present,continuing and future, of the Franchisees embodied In the Franchises,the Ordinance,the Transfer Agreements,the"Written Decision of the County of Contra Costa(the"County")Relating to Certain Refund Liability and the Prescription of Maximum Permitted Rates," dated as of January 23, 1996 (the"late Order"), any orders and directives of any administraiive agency relating to the Franchises or the Systems, including,but not limited to, the Federal Communications Commission(the"Commission") (collectively, the"Franchise Documents'), to the maximum extent required by law, and that the Proposed 'Transaction will have no effect on these obligations. The preceding sentence applies to all the Franchisees, including those that were not heretofore initially obligated under the Rate Order; provided,however,nothing herein shall authorize a rate increase or decrease beyond any regulated rate otherwise set, prescribed, or established by a lawful commission filing or other rate order. The Transferee acknowledges its review and understanding of the Franchise Documents and that its understanding is consistent with that of the Franchisees, The Transferee agrees and acknowledges that neither the Proposed Transaction nor the County's approval of the Application shall in any respect relieve the Franchisees or any of their successors-in-interest of responsibility for past acts or omissions,known or unknown, or for any obligations or.liabilities pursuant to the Franchise Documents, 3 To the extent that the Transferee, or any related person or entity, challenges the validity or interpretation of said above-listed documents in the future in any administrative proceeding or court of law, such a challenge shall be subject to all defenses which would have been available to the County had the Transferor,Franchisees, or any related person or entity, brought said challenges) including, but not limited to,waiver, estoppel, consent,unclean hands and accord and satis.l'action, as well as any and all defenses independently available against the Transferee. Transferee agrees that it shall take no action, or fail to take any action, which would cause a Franchisee not to comply fully with the provisions of the Franchise. 5. Any material violation of this Agreement shall be deemed to be a violation of the Ordinance end the Franchises, 6. The County hereby gives the Franchisees and Transferee notice that the grant or transfer of the Franchises may create a taxable possessory interest upon which the Francbisees and Transferee may be liable for the payment of certain tastes. The Transferee hereby acknowledges that it has received actual notice as required by Revenue and Taxation Code Section 107.6. 7. The parties hereto acknowledge that the County has issued a Rate Order dated anuary 23,',1 996, a copy of which is attached as Exhibit rA.(the"Rate Order"). The Franchisees, and each of them, whether or not initially bound by the Rate Order and/or the 1996'Transfer Agreement,',Transferor, and the Transferee hereby agree to accept the Rate Carder and those provisions of any transfer agreements relating thereto as a lawful and binding iRate Order, comply with its terms, agree not to appeal said Rate Order, and waive and relinquish any and all appeal rights which they possess in relation thereto and the right to challenge the legality of the 4 . :v S_S G.Li" S...h,1.1 S:f_7' '?.� S`f'C(.%4 i LvU>4}1\i'I 1vVJ i t" 4 LLLV 1.3:t,%SV S 4.5 ✓./L.S f Ls.J a iKJ/ lf.+ Rate Carder, on any grounds, in any judicial or administrative forum. The original terms of the Rate Ordor,and the 1996 Transfer Agreement are hereby at`nended as follows. (a) The original expiration date of the Forbearance Period as defined therein, shall be extended for four (4)years from the original expiration date so as now to expire on January 23, 2004, (b) The second sentence of Paragraph 7(b)of the 1996 Transfer Agreement is hereby mended to read: "During the Forbearance period, the Maximum Permitted:Rates for County Regulated Services shall be exclusively adjusted, it at all, pursuxit to the formula and methodology contained in the current FCC Forms 1210, 1.235, 1240 for basic services, and Fonn 1205 for equipment changes, or their successor forms (the "'Rate Adjustment Form' ) and the Operator hereby waives, relinquishes, and releases any right which it may possess to seek rate adjustments in excess of the amounts which would be allowed pursuant to the Adjustment Forms." 8, The. Transferor shall pay collectively to the County, the Cities of El Cerrito, Hercules, Richmond and Berkeley (collectively the "Franchising Authorities'), or the agents thereof designated by the Franchising Authorities in writing, within ten(10) days of the Board of Supervisors' approval of this Transfer Agreement the;sum of Forty ThousandDollars ($40,000.00)in full satisfaction of all costs in relation to this proceeding, The County,the Franchisees,the Transferor and the Transferee expressly agree and acknowledge that the payment is settlement of a good faith dispute and is not a `franchise fee"within the meaning of Section 622(,g)(1)of the Cable Act, and that said payment will not be offset or charged against any other franchise fee owing either prior paid or future owing, or other sunt due to the County, 5 and that said payment dues not constitute a franchise requirement or is, in any way, subject to "pass-through,"or externality treatment and will not, under any circumstances,be itemized upon any billing to any subscriber or added, for the purposes of collection,to any rather lawful rate. The Transferor agrees to bear the full and total economic burden of this payment. 9. This Agreement shall be deemed effective upon the closing of the Change of Control .so long as the Agreement has been executed and returned by all parties within tern (10) days after approval by the County (the"Effective Date"'). If it is not so executed and returned within.ten(10) days, it shall become null and void and the Change of Control shall be deemed disapproved as ofthe date of approval of this Agreement by the Board of Supervisors. 10. (a) The County acknowledges that Franchisees have paid $196,997 to the County, which Franchisees 7epresent and warranty is,except as provided below, hall and complete payments for all.Franchise Fee underpayments relating to the deduction of the Franchise Fee from Gross Annual Receipts for the purpose of calculation and payment of the Franchise Fee (tbe"5-can-5 Issue") for calendar years 1996 and 1997. The amount paid is the total of the following amounts owed for each of the Franchisees: $1,748 (GL#42702), $73 (GL # 72110 (Part Costa)), $2,775 (GL,# 72110 (Rodeo)), $1,284 (GL # 72110 (Crockett)); $5,930 (GL# 72110 (San Pablo and El Sobrante)), $5,294(GIS#72109), $53,366(OL#38102), $5,837 (GL #28154), and $120,659 (GL# 38101). The parties expressly agree that the County bas not completed its franchise fee audit and reserves the right to continue its audit in relation to franchise fee payments as to all issues unrelated to the"5-on-5 Issue." Franchisees agree to reasonably cooperate with said audit. Nothing herein shall release Transferor, Transferee and Franchisees from any liability relating to .franchise fee underpayments except as to the"5-on-5 Issue" for calendar years 1996 and 1997 and Transferor, Transferee, and Franchisees shall G remain liable for all lawfully determined franchise fee deficiencies. Each Franchisee represents and warrants that it has fully paid all franchise fee payments due and owing related to the "5-on-5 sue" for calendar year 1998. (b) If, and only if,Transfero ,Transferee, Franchisees,or any related entity, attempt; or actually pass-through, line-itemize, surcharge, or otherwise increase any otherwise lawbtl regulated maximum permitted rate to recover all or a portion of the amounts paid to the County pursuant to Paragraph(a.) above,the County may, if it so chooses,pursue actions, adin ini strative,judicial or otherwise, against Transferor, Transferee, and/or such Franchisce(s) for breach of Franchise, interest,penalties, or any other remedy available to the County, Nothing herein shall constitute an admission or evidence of liability on the part of the Transferor,the Transferee, or the. Franchisee(s). 11. The County's approval of any Change of Control in turn is subject to the condition that the shareholders and any ether regulatory agencies(e.g. the Commission,the Federal Tracie Commission, the Department of Justice, etc.)ultimately approve a merger not materially different from the one presented to the County in the Application. If this condition is not met for any reason, any prior approval by the County and this Agreement ll automatically be null and void and the Change in Control is deemed denied as of the date of the County's approval of this Agreement. 12. The Franchisees previously have installed a 75€1 mHz cable system in the City of Hercules and have committed to upgrade the Franchisee',system in the City of Richmond, Pursuant to Section 58-10.0.016 of the Centra.Costa County Ordinance Code,where the Franchisees upgrade, rebuild, or otherwise improve a system or services in any area contiguous to and served by the same headend as a system licensed by the County, the Franchisees are 7 '- L".SJ SFJ... 1.7.7.7 YJ.7`..JK+ F F�iJi F '..i✓,.Y x i ti'i �t... x}} t d...'.�.L:v:..:a wt`{ : x ..-....... ...A.. ..«.... ..,.-. required to make such upgrades or improvements concurrently or sequentially in the area licensed by,the County, except as specifically exempted by the Board of Supervisors. Accordingly, within twelve (12) months of the Effective bate of this Agreement, the Franchisees shall commence the installation of a 750 mHz system in the County-licensed area contiguous to Hercules, shall complete the installation no later than thirty-six (36) months ager the Effective Date of this .Agreement, and thereafter shall provide the same services in the contiguous County- licensed area as those provided in Hercules. In addition,within twelve(1 2)months of the date can which the Franchisees commence the upgrade of the Richmond system, the Franchisees shalI commence the installation ofthe same upgrade in the contiguous County-licensed area, shall complete the installation within thirty-six(36)months of commencing installation, and thereafter shall provide the same services in the contiguous County-licensed arca as these provided in p.iclumond. 13. (a) Beginning on the effective date of'this Agreement, arta throughout the remaining term of the Franchises, Franchisees shall include in Gross Annual Receipts reported to the County for the purpose of calculating franchise fee payments the full "subscriber prorated amount" of"Net.Advertising Revenue"received by Bay Cable Advertising C BCA"), which is engaged in the business of selling local or regional advertising on Franchisees' systems. "Net Advertising Revenue"shall be BCA's total gross receipts, less any fees or commissions not to exceed sixteen.percent(16%) of the gross revenues of BCA actarally paid to any advertising agency neither owned near controlled by the Franchisees, Transferor, Transferee, or any affiliated subsidiary, or parent thereof Nothing herein shall constitute a waiver or admission that the County is not entitled to collect franchi.,e fees on all rcvenues generated by the Frarmbisees or any affiliated subsidiary or parent thereof. The "Subscriber prorated amount" shall be a fraction, 8 the nurnerator of which is the number of active subscribers within the geographic boundaries of the County Franchises and the denominator of which is the total nwriber of active subscribers on the BCA interconnect(i.e.the subscribers served.by'IBCA in the Counties of Alameda, Contra Costa,Marin,Napa, San.Francisco, Sana Mateo, and Santa.Clara). Concurrently with paying franchise fees to the County,the Franchisees shall submit certification by an independent certified public accountant of the accuracy ofBCA's,gross receipts,the Net Advertising Revenue, and the calculation of the fees owing to the County from advertising revenue. (b) Within thirty (30) clays of the Effective Date of this Agreement,the Franchisee of each system affected by the Crowe, Chizek and Company audit(i.e., Televents of Fast County,Inc.; Televerzts, Inc,; and UACC Midwest, Inc.)sball calculate and pay to the County the amount due and owing to the County for franchise Fees on advertising revenue from June 30, 1994,through December 31, 1998, using the above-described formula. used upon, initial calculations, it is estimated that the franchise fees owing to the County for the foregoing systems are approximately $5.25 per subscriber. Within thirty(30) days of the Effective Date of this Agreement,the Franchisee-,of the remaining systems shall calculate and pay to the County the amount dine and awing to the County for franchise fees on advertising revenue from January 1, '1996,through December 31, 1998, using the above-described formula. In addition, each Franchi$ee shall cooperate with the County's audit of franchise fees owed by Franchisees on advertising revenue (as specified above) and other revenue from June 30, 1994,through December 31, 1998. The County shall complete a final audit report of franchise fees owed by the Franchisees within.sixty (60) days of the Effective late of this.Agreement. If the frs.mehise fee audit finds that a.Franchisee awes the County underpaid franchise fees under the franchise, and the difference between the amount calculated by the Franchisee as stated herein and the amount 9 determined by the County's audit is less than fire percent(5%)of the€mount,paid to the County, or if the Franchisee does not dispute the results of'the County's audit,then that Franchisee shall pay the County the difference in the amount determined to be owed by the County's audit and the amount calculated by the Franchisee. If the County's audit determines that the amount due and owing is more than five percent(5%)greater than the amount the Franchisee paid to the County and the Franchisee disputes the audit results,the dispute shall be submitted to a mutually agreed upon, independent certified public accountant("CPA"), whose determination of the amount of franchise fees duc shall be final and binding on the parties. The costs of hiring the CPA shall he borne by the Franchisee. Any amounts determined by the independent CFA to be owed to the County shall be promptly paid to the County within thirty(30) days of such determination.. 14. Each Franchisee, and only the Franchisee,acknowledges that it ha,45 received from the County a refund in the amount of$303,585.93 in possessory interest taxespaid(the "County Refund"). Franchisees will work with the County to develop and implement within sixty (60) days of the effective date of this Agreement a plan for refunding to subscribers the amount of the County Refund, less Franchisees` actual attorney fees and costs in an amount that shall not exceed teri percent of the County Refund (the "Net Refund"), The Net Refund shall be refunded or credited to County subscribers no later than ninety(90) days of the Effective Late. Further, the Franchisees agree to obtain from Viacom International, Inc. ("Viacom") a written statement of its subscriber refund plan that shall specify the possessory interest taxes re- untied to Viacom by the County which are to be repaid to subscribers. In the event that Viacom pays the:refund amount to the County or the Franchisees without refunding it directly to subscribers, they Franchisees agree to work jointly with the County to develop a plan for 10 distributing; the refund to subscribers and agree to promptly implement the plan at no cost to the County or the subscribers. 15. Based upon its investigation and analysis, Franchisees understand that: (1) any and all refunds on possessory interest taxes to LenComm., Inc. were paid prior to 1994, approximately two(2)years prior to the transfer of the Franchises owned by LenComm to the Franchisees; (2) except as provided in paragraph 14 above,neither Franchisees nor Transferor has received any possessory interest tax refunds, (3) except as provided in paragraph 14 above,LenComm, Inc., Franchisees, and.Transferor did not pass-through or externalize any possessory interest taxes to subscribers.. (4) no portion of the possessory interest refund received.by LenComm, Inc. was included in any FCC Farm rate filing subsequent to 1994 and that no amount of refunds received for possessory tax overpayments are due to customers in Centra Costa County. Each franchisee agrees that, in the event the foregoing statements prove to be untrue or inaccurate in any material respect, the Franchisee shall guarantee full payment by LenCom.m, Inc. of any undisputed subscriber refund liability or any subscriber refund liability which is established by a final order of the FCC or.a court of competent jurisdiction. 16. The parties agree jointly to withdraw the appeal currently pending before the Federal Communications Commission regarding the parties" dispute over the amount properly Oiarged for converters and other equipment. The joint withdrawal to be filed with the Federal Communication Commission wr.11 be prepared by counsel for the Franchisee then submitted promptly to the County for review and approval as to form. Bath parties release any claim II �" "'C�—.L�`�� S'3�%�., t"'3"�l.ft`I Lh.it`S t iC!`i L...t,lJ t H !CL:,:J 1�t sJl'4 ;LJ .s✓w s s svr.,. s i s yc,; arising out of the facts giving rise to the dispute and appeal. In settlement of this dispute, Franchisees collectively agree to refund to subscribers, a total amount of$18,600 and to work with the County to develop and implement the refund within sixty ( 0)days of the effective date of this Agreement. 17. Francbisees each represent that the letter of credit,insurance and bonding required by their Franchises and Ordinance have been obtained, and that there will be no gaps in required coverages or liabilities. Franchisees will continue to maintain the letters of credit and bonds that they were required to maintain under the Franchises so long as the Franchises were under the control of the Transferor, notwithstanding the Change of Control. 1$. Franchisees and Transferee agree to defend, indemnify and holes the County harmless against any lass, claim, damage, liability or expense (including, without limitation, reasonable attorneys' .tees) arising out of this Agreement and/or incurred as a result of any representation or warranty made by Transferor,Transferee, or Franchisees herein or in the Application or in connection with the County's Review of the Change of Control which proves to be untrue or inaccurate in any material respect. In the event the County receives any such notice of a less,claim,damage, liability or expense, the County shall promptly notify Franchisees and Transferee which shall, at the sale discretion of the County assume sole and direct responsibility for defending against any such loss, claim., damage, liability or expense. 19. Any consent given by the County in this Agreement and in any Resolution approving the Change of Control is not an affirmation that Franchisees, Transferor, or any predecessor in interest is in compliance with, or previously complied with the Franchises. Any consent i:�made without prejudice to, or,waiver of, the County's right to obtain full remedy for any past non-compliance. Any consent given by the County in this Agreement and.any 12 Resolution approving this Agreement is not a finding that, after the Change of Control, Franchisees, Transferor, or Transferee will be financially,technically or legally qualified, and no inference will be drawn,positively or negatively, as a result of the absence of a finding on this issue. Any consent is therefore made without prejudice to, or waiver of,the County's right to fully investigate and consider Franchisees', Transferor's,or Transferee's fznamial,technical and I egal qualifications and any other relevant considerations during any proceeding including by way of example and not limitation, any pending renewal proceeding. Without limiting the Boregoing, any approval of the Change of Control is not a finding or representation that the Franchises will be renewed or extended(anal approval shall not create an obligation to renew or C. the Franchises);that Franchisees, Transferor,or Transferee is"financially,technically or legally qualified to hold a renewed franchise;or that any other renewal issue that may arise with respect to part performance or future cable-related needs and interests will be resolved in a manner favorable to Franchisees,Transferor, or Transferee. Unless provided for within this agreement,nothing in this agreement shall constitute a waiver of any offranclusces', Transferor's, or'Transferee's'rights or remedies under federal, state or local law. 20.. Transferee represents and warrants that it does not bold a Certificate of Public Convenience and Necessity from the California Public Utilities Commission to provide telecommunications services or any other services in the Mate of California., 13 The signatories hereby affirm that this Transfer Agreement has been entered into on a voluntary basis without duress and has been undertaken in a manner consistent with federal, state and local law. The signatories to this agreement further represent and warrant that they possess full legal authority on behalf of their principals to enter into this Transfer Agreement. ATTEST: CONTRA COSTA COUNTY Phil batchelor l l Clerk of the Board.of Supervisors By: and County Administrator hair By: p,uty APPROVED: TELE-COMMUNICATIONS, INC. "Victor J. Westman County Counsel By f r/ Its: By: Deputy By: Its: TCI CABLEVISION OF CALIFORNIA, INC. Its: J /A Its: ..:,_ , 14 CONTRA COSTA CABLE COQ PANY By: � f; ✓� 4 r� Its. By: Its: TELEVENTS OP EA ST COUNTY INC By: Its. By: _ Its: TELEVENTS. INC Its: -'tee By: Its: 15 TELENUE SYSTEMS INC. By: iv r Its: ' ✓` ,� By: Its: HERITAGE CABLEVISIQN OF DELAWARE, INC. By. �t� Its: i By: a Its: a UACC MIDWEST, INC.,{>' s r % By: Its: s By: Its: �, �- 16 CROCKETT CABLE SYSTEMS, INC. By: a 4r t r u ` Its: �>,�• t*� By: Its: AT&T CORP. By: Its: a By: Its: R:\WD\7217233\028\BerkRichContra\C Contra Costa Transfer Acreernent.doc 17 CALIFORNIA ALL-PURPOSE ACKNOWLEDGMENT No.5907 State of - E - County of g., On before me,i i ° ' .L".g .5v A .s`t.�° s?,F St" _3 /�' NAME,TITLE OF OFFICER-E.da.,'JANE>DOE,NOTA.Y PUBLV personally appeared s 1 f p NAME(S)OF SIGNER(S) personally known to me - OR - proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and ac- knowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executedthe instrument. WITNESS my hand and official seal, '17t`U_RE OF NOTARY OPTIONAL Though the data below is riot required by law, it may gave valuable to persona relying on the document and could prevent y fraudulent reattachment of this fors. CAPACITY CLAIMED BY SIGNER DESCRIPTION OF ATTACHED DOCUMENT INDIVIDUAL CORPORATE OFFICER TITLE OR TYPE OF DOCUMENT TITLE(S) PARTNER(S) 0 LIMITED GENERAL _ ATTORNEY-IIS-FACT NUMBER OF MAGES TRUSTEE(S) GUARDIAN/CONS ERVATOR OTHER: BATE OF DOCUMENT SIGNER IS REPRESENTING- NAME OF PERSON(S)OR ENTITY(fES) SIGNER(S)OTHER THAN NAMED ABOVE 01993 NATIONAL NOTARY ASSMATiON+8236 Remmet Ave.,P.O.Box 71,84•Canoga Park,CA 91309-7184 CALIFORNIA ALL-PURPOSE ACKNOWLEDGMENT State of California ss. Countyof Sp n I `I `4. before rne.�ki(_IiA AQ0o10j0tAP_ 1. 011e,,, r-StA Nam and Title of Officer(e a,"Jane Doe Notary P r") personally appeared Lo ;° Naa(e)ofs.g,.e.(s) " ,personally known to me is 8k :4 �taa to be theQE�p� whose rf,�m. 9 subscribed to the within instrument and acknowledged to me that I^` xecuted z fire same ?n mer authorized �y{ �p S i 6y oil a ,}q {a�pndyq }t-hat� }by. +,+ e��y p 3�{}$'.1.FYI`L LFsSHANNON sViN Our j on th inst u5S"S nt the �sAt 9 o ;. COA .#1064 7� the entity upon behalf of which the er�on �p,,�,t" Ne ( $ t�fY executed 1: ¢� j C ytlyy��YY$ � 'C 11�o'tli :`iV:t'°`S�y'^°bD� v„y acted, the instrument, �. SAN FRAN0SX0 COU-INN My Comm.Exr*es AX 9119W WITNESS my hand and official seal. DR Place Notary seal Above Signator of tic"a y Public - - OPTIONAL Though the information beiow is not required by lair, it may prove valuable to parsons relying on the document and Gould prevent fraudulent removal and reattachment of this form to another document. Description of Attached Document + f tie or Tyke cat Cocur ent: ��. o . -AnuL or "" eX gOZ.;A � Vi$%o P «% ��0.�s ��'2� f�$�l�tta s ��°#spa � � A-rfT x tacu;nent Gate:_li: AD ,�.;�.. ot..� 1k 11;11�0, #ti:urnber o`Pages: ``` 36 gner(s) Cther'Than Named Above: r Capacity(les) Claimed by Signer Signe s Name: _ � `� : t3Q /Cf'u. : Top f thumb here Corporate Officer—Tt€e(s): %c� k�* r O 7 Foal ner--D °ed ❑ Ge,.era€ 4 LJ Attorney in Fact < [i Trustee1 Guardian or Conservator" w, s 7 Other: finer Is Representing:res€ming: t �}.. ?_ 0 1997 National NotaryAssoclaticn 9350 De Seto Ave.,P.O.Box 2402•Chatsworth,CA 913;3.2402 Prod,No.5907 Reorder:Cali Tail-Free 1-600-876-6827 CALIFORNIA ALL-PURPOSE ACKNOWLEDGMENT nam �J i� ,Mate of California f- ss. `voun-w Cel �ryy �y O n �,. . b ...._3 before m. � 3ar ,.j Date Neave andTitle of Officer e. ..".# ne Doe,Notd personaiiy appeared d persoraily known to me ll t to be theersor� , whose m_e 1 subscribed to the within €r strument and ' acknowledged to me the executed y: the same in tis authorized dbw *capacitV, and that by� # J< # ratun the it strurrent ti° e°" sr , orv v t the entity upon behalf of which the er'— N*fWV RAW �wy{yp"4� �t}t� acted, executed the instrument. SM FRANOWITNESS my hand and official seal, Puce Notary Sea;Above Signature 4 'ota y Auatio OPTIONAL T c�ugh Me i formation befog is r xot required bylaw, it,•,;ray prove valuable to,persons retying on the document and could prevent fraudulent removal and reattachment of this form to another document i sDescription f Attached Document �� = l� e s '°3 cc z6 SCi Title or Type of Document: a��-n'>��. 06-�A metes. A-�,A To `r"6�+-a�". €�Ps4* . o� -A-C �, 0 l4'C .4..e k.. 4 F `4i�i.?'SZ i v Y' 'a.S�f r�.. 5:..T✓P Flo mow.} �„ .i A-rfl- UP-9. Docurnent rate: x A ck cA Number of Pages: Signer(s) Other Than Named Above. N' Capacity(les) Claimed by Signer :gner°s Manse:` ' _ "a t �. =oNiZI CJds'sida a: Top of Thumb hors Corporate Officer—T tlefs): 4A Cji Partner°--C7 Limited ❑ General 24� AttoMey in F'Gct El I Trustee � i LJ fit`&:"dIcti^or uG?lSerJaYfl;` Otner: — iY ver!s Representing: 0 1997 Nationai Not Association•9350 De Soto Ave.,?.C.Box 2402 Chatsworth,CA 95313-2402 Prod,No.5907 Reorder Cati Toi-Frse i-KC-5378.6927 STATE OF COLORADO ss. COUNTY OF ARAPAHOE � The foregoing Agreement Relating to the Consent of Contra Costa County to the Transfer of Control of TCI Cablevision of California, Inc., Televents of East County, Inc., Televents, Inc., Tele-Vue Systems, Inc., Heritage Cablevision of Delaware, Inc, UACC Midwest, Inc., Contra Costa Cable Company, and Crockett Cable Systems, Inc. to AT&T Corp. was subscribed and sworn to before me on the 2nd day of March,1999 by: Stephen M. Brett as Executive Vice President of Tele-Communications, Inc. and as Vice President of TCI Cablevision of California, Inc.; Contra Costa Cable Company; Televents of East County, Inc.; Televents, Inc.; Tele-Vue Systems, Inc.; Heritage Cablevision of Delaware, Inc.; UACC Midwest, Inc.; and Crockett Cable Systems,Inc. Witness my hand and official seal. No ary Plic My commission expires: May 23, 2001 FEB 08 '99 18:07 Fly CQBLENTZ PATCH DUFFY 425 394 0387 TO 19253131185 P,02/16 a NJ AGREEjrI04T RELATING TO THE CONSENT OF ! v CONTRA COSTA COUNTY TO TIME TRANSFER OF CONTROL OF TCI CA13LEVISION OF CALIFORNIA,INC., TELEVENTS OF EAST COUNTY, INC.,TELEVENTS, INC.,TELE-VUE SYSTEMS, INC., HERITAGE Cr'BLEVISION OF DELAWARE, INC.,UACC MIDWEST,INC., AND CR.00KETT CABLE SYSTEMS, INC.TO AT&T CORP. This Agreement(the "Agreement"")entered into this day of; 1999, between and among Contra Costa County("County"),Tele-Communications, Inc. (the "Transferor'),TCI Cablevision of California, Inc.,Televents Of East County, Inc.,Televents, Inc.,Tele-Vase Systems,Inc., Heritage Cablevision Of Delaware,Inc., UACC Midwest,Inc.,and Crockett Cade Systems, Inc. (collectively, the"Franchisees'), and AT&T Corp. (the "Transferee.*'). WHEREAS,through various previous transfers, acquisitions and conveyances, all of which were duly approved by the County,the County granted franchises to operate a cable television system within the County (the"Systems")to Franchisees (the"Franchise Agreements")pursuant to the provisions of governing county codes(the"Ordinance"'). WHEREAS, the Transferor and Transferee filed a written application to the County, dated September 16, 1998, (the"Application) wherein they have requested the'consent of the County to the change of control of the Franchisees to Transferee (the"Change of Control");and WIIE EA , it is the intent of the County to approve the transaction whereby control of the Franchisees will be held by the Transferee;and "WIE E.AS,the Board of Supervisors of Contra Costa County has reviewed the Application as well as all relevant documents, staff reports and recommendations; and WHEREAS,pursuant to County Ordinance Code Section 58-4.028, the Change of I Control cannot be concluded without the written consent of the County; and 1 5�ltn FEB-08-2999 18<27 415 394 0387 99% FEB 06 199 18:08 Fly COBLENT2 PATCH DL.lFFY 415 394 0367 TO 19253131165 P.03/15 WHEREAS, based upon the evidence presented to the Board,it has deter-pined that it would be in the public Merest to conditionally approve the Change of Control. NOW, 'TIEREFORE, it is agreed by and between the parties as follows: I, The Board hereby gives its consent and approval to the Change of Control as described in the Application. 2. The granting of this consent to the Change of Control does not waive the right of the County to approve any subsequent change in the ownership and/or control of the Franchisees and there shall be no further material change,amendment or modification of the ownership or equity composition of the Transferee or Franchisees which requires prior consent of the County pursuant to the Franchise Agreements or the Ordinance without the farther written consent of the Council. s. By executing this Agreement, the Franchisees and Transferee agree and acknowledge that(1)this Agreement and the approving resolution is not a new franchise agreement,the granting of a franchise, or the renewal of the existing franchise, but rather is exclusively an agreement to change control of the Franchisees and said Agreement neither affects nor prejudices in any way the County's rights thereunder; (2)that compliance with the Franchise and Ordinance,as of the date of closing of the Change of Control, is neither commercially impracticable nor economically infeasible as those terms are used in Section 625(e)of the Cable Communications Policy Act of 1984 and/or the Cable Television Consumer.Protection and Competition Act of 1992 (collectively the"Cable Act's. Transferee agrees that in judging whether particular obligations are commercially impracticable,the parties will not consider the economic burden of debt service, debt service coverage, or equity requirements incurred directly or indirectly to fund the Change of Control to the extent such debt service, debt service coverage, 2 FEB-06-1999 16:27 415 394 036? 99% P.03 s :'I . FEB 08 '99 18:08 FR CGIBLENTZ PATCH D FFY 415 394 0387 TO 19253131185 P.04/16 XI 49 AF or equity exceeds the debt service,debt service coverage,or equity requirement of the Transferor,or any related entity,as they existed prier to the Change of Control. 4. By executing this Agreement, each ofthe Franchisees hereby unconditionally accept,acknowledge, and agree that,after the Proposed Transaction,they will continue to bound by all the commitments,duties and obligations,present, continuing and future,of the Franchisees embodied in the Franchise Agreements,the Ordinances,the Transfer Agreements,the"Written Decision of the County of Contra Costa.(the"County') Relating to Certain Refund Liability and the Prescription of Maximum Permitted Rates,"dated as of January 23, 1996(the"Rate Order'), any ordets and directives of any administrative agency relating to the Franchise Agreements or the System,'including,but not limited to,the Federal Communications Commission(the "Commission")(collectively,the"Franchise Docurrnents'),to the maximum extent required by law, and that the Proposed Transaction will have no effect on these obligations. The preceding sentence applies to all the Franchisees, including those that were not heretofore initially obligated sander the Rate Order;provided,however, nothing herein shall authorize a rate increase or decrease beyond any regulated rate otherwise set,prescribed,or established by a lawful commission filing or other rate order. The Transferee acknowledges its review and understanding of the Franchise Documents and that its understanding is consistent with that of the Franchisees. The Transferee agrees and acknowledges that neither the Proposed Transaction nor the County's approval of the Application shall in any respect relieve the Franchisees or any of their successors-in-interest of responsibility for past acts or:omissions, known or unknown,or for any obligations or liabilities pursuant to the Franchise Documents. To the extent that the Transferee, or any related person or entity, challenges the validity or interpretation of said above-listed documents in the future in any administrative proceeding or 3 FEB-08-1999 18>27 415 394 0387 98% P.04 :, FEB 06 '99 18 08 FR COBLENTZ„PATCH! DILFFY 415 394 0387 TO 19253131185 P.05/16 court of law,such a challenge shall be subject to all defenses which would have been available to the County had the Transferor,Franchisees, or any related person or entity, brought said challenge(s)including, but not limited to, waiver,estoppel,consent,unclean hands and accord and satisfaction,as well as any and all defenses independently available against the Transferee. Transferee agrees that it shall take no action,or fail to take any action,which would cause a Franchisee not to comply fully with the provisions of the Franchise. S. Any material violation of this Agreement shall be deemed to be a violation of the Ordinance and the Franchise Agreement. 6. The County hereby gives the Franchisees and Transferee notice that the grant or transfer of the Franchise Agreement may create a taxable possessory interest upon which the Grantee and Transferee may be liable for the payment of certain taxes. The Transferee hereby acknowledges that it has received actual notice as required by Revenue and Taxation Code Section 107.6. ?. The parties hereto acknowledge that the County has issued a Rate Order dated January 223, 1996, a copy of which is attached as Exhibit A(the"Rate Order"). The Franchisees, and each of them, whether or not initially bound by the Rate Order and/or the 1996 Transfer Agreement,`transferor, and the"transferee hereby agree to accept the Rate Order and those provisions of any transfer agreements relating thereto as a lawfi�l and binding Rate Order, comply with',its terms,agree not to appeal said Rate Order, and waive and relinquish any and all appeal rights',which they possess in relation thereto and the right to challenge the legality of the Rate Order, can any grounds, in any judicial or administrative forum. The original terms of the Rate Order and the 1996 Transfer Agreement are hereby amended as follows: 4 FEB-08--1999 18:28 415 394 0387 98% F , S FEB 08 199 '41e:08 FR COBL.EWTZ PAT0H DLFFY 415 394 038` TO 19253131185 P.0616 (a) The original expiration date of the Forbearance Period as defined therein, shall be extended for four(4)years from the original expiration date so as now to expire on January 23, 2004. (b) The second sentence of Paragraph 7(b)of the 1996 Transfer,agreement is hereby amended to read; "During the Forbearance period.,the Maximum Permitted Rates for County Regulated Services shalt be exclusively adjusted., if at all,pursuant to the formula and methodology contained in the current FCC Forms 1210, 1235, 1240 for basic sexvioesand Farm t 205 for eo�jymetzt.c11 ges, air their successor forms(the"Rate Adjustment Form")and the Operator hereby waives, relinquishes,and releases any right which it may possess to seek rate adjustments in excess of the amounts which would be allowed pursuant to the Adjustment Forms." (;dew language underlined.) 8. The Transferor shall pay collectively to the County,the Cities of El Cerrito, Hercules, Richmond and Berkeley (collectively the"Franchising Authorities"), or the agents thereof designated by the Franchising authorities in writing, within tern (10)days of the Council's approval of this Transfer.Agreement the sum of Forty Thousand Dollars($40,000.00) in full satisfaction of all and costs in relation to this proceeding. The County, the Franchisees, the Transfmr and the Transferee expressly agree and acknowledge that the payment is settlement of a good faith dispute and is not a"franchise fee„within the meaning of Section 62.2(g)(l)of the Cable Act, and that said payment will not be offset or charged against any other franchise fee owing either prior paid or future owing, or other sum dine to the County, and that said payment does not constitute a franchise requirement or is, in any way, subject to"Pass- through," or externality treatment and will not, under any circumstances,be itemized upon any 5 FEB-06-1999 18:2e 415 394 038? 98% x'.06 ��' FEB e8 '99 18.09 FR COBL.ENT3 PATCH DLJFPY 415 394 0387 TO 19253131185 P.07/16 � billing to any subscriber or added,for the purposes of collection,to any other lawful rate. The Transfearor agrees to bear the full and total economic burden of this payment. 9. This Agreement shall be deemed effective upon the closing of the Change of Control so long as the Agreement has been executed and returned by all parties within ten(10) days after approval by the County(the"Effective Date"). If it is not so executed and returned within ten(10)days,it small became null and void and the Change of Control shall be deemed disapproved as of the date of approval of this Agreement by the County Council. 10. (a) County acknowledges that Franchisees have' id$196,997 to the County, which FranoWsees represent and warranty is,except as provided below, hill and complete payments for all Franchise.Fee underpayments relating to the deduction of the Franchise Fee from Gross:Revenues for the purpose of calculation and payment of the Franchise Fee(the"5- on-5 Issue")for calendar years 1996 and 1997. The amount paid is the total of the following amounts owed for each Franchisees: $1,748 (GL#42702),$73 (GL# 72110(Port Costa)), $2,775 (GL#72110(Rodeo)),$1,284(GL#72110(Crockett)); $5,930 (GL #72110(San Pablo and El Sobri nte)),$.5,294(GL#72109), $53,366(GL # 38102),$5,837(GL. #28154),and $120,6$9(Cry..# 381€32). The parties expressly agree chat the County has not completed its franchise fee audit and reserves the right to continue its audit in relation to franchise fee payments as to all issues unrelated to the"5-on-5 Issue." Franchisees agrees to reasonably cooperate with said audit. Nothing herein small release Transferor,Transferee and Franchisees from any liability relating to franchise fee underpayments except as to the"5-on-5 issue"for calendar years 1996 and 1997 and Transferor, Transferee,and Franchisees shall remain liable for all lawfully determined franchise fee deficiencies. Each Franchisee represents and warrants that 6 FEB-08-1999 18:28 415 394 0387 9e% P.07 4 FEB 08 '99 ie:09 FP COP-LENTZ PRTCH DUFFY 415 394 0387 TO 19253131185 P>08 "16 �^ a OY it has fully paid all franchise fee payments due and owing relaxed to the"5-on- Issue"for calendar year 1998. (b) If, and only if,"Transferor,Transferee,Franchisees,or any related entity, attempt; or actually pass-through, line4ternize,surcharge, or otherwise increase any otherwise lawful regulated maximum permitted rate to recover all or a portion of the amounts paid to the County pursuant to Paragraph(a)above,the County may, if it so chooses,pursue actions, administrative,judicial or otherwise, against Transferor, Transferee,and/or�suc .Franchisee(s) for breach of Franchise, interest,penalties,or any other remedy available to the County. Nothing herein shall,constitute an admission or evidence of liability on the part of the Transferor,the Transferee,or the Franchisee(s). 11- The County's approval of any Change of Control in turn is subject to the condition that the shareholders and any other regulatory agencies (e.g. the Commission,the Federal Trade Commission,the Department of Justice, etc.)ultimately approve a merger not materially different from the one presented to the County in the Application. If this condition is not met for any reason, any prior approval by the County and this Agreement will automatically be null and void and the Change in Control is deemed denied as of the date of the County's approval of this.Agreement. 12. The Franchisees previously have installed a 750 mHz cable system in the City of Heroes and have committed to upgrade the Franchisees' system in the City of Richmond. Pursuant to lection 58-10.0.016 of the Contra Costa County Ordinance Code,where the Franchisees upgrade, rebuild,or otherwise improve a system or services in any area contiguous to and served by the same headend as a system licensed by the County, the Franchisees are required to make such upgrades or improvements concurrently or sequentially in the area 7 FEB--08-1.999 18:28 415 394 0387 98% Pao FEB 08 '99 18:09 FP COBLENTZ PATCH IFFY 415 394 0387 TO 19253131185 P.09/15 14 licensed by the County,except as specifically exempted by the Board of Supervisors. Accordingly,within twelve(12)months of the Effective Date of this Agreement,the Franchisees shall commence the installation of 750 mHz system in the County-licensed arca contiguous to Hercules,shall complete the installation no later than.thirty-six(36)months after the Efctive Date of this Agreement,and thereafter shall provide the same services in the c-ontiguous County_ licensed,area as those provided in Hercules. In addition,within twelve(12)months of the date on which the Franchisees commence the upgrade of the Richmond system,the Franchisees shall commence the installation within thirty-six(36)months of commencing installation,and thereafter shall provide the same services in the contiguous County-licensed area as those provided in Richmond. 13. (a) Beginning on the effective date of this Agreement,and throughout the remaining term of the Franchise,Franchisee shall include in gross revenues reported to the County for the purpose of calculating franchise fee payments the full"subscriber prorated amourif'of"Net Advertising Revenue"received by Bay Cable Advertising("`BCA'),which is engaged in the business of selling,local or regional advertising on Grantee's system. "NI et Advertising Revenue"shall be BCA's total gross receipts, less any fees or commissions not to exceed sixteen percent(16%)of the gross revenues of BCA actually paid to any advertising agency neither owned nor controlled by the Franchisees, Transferor,Transferee,or any taMiated subsidiary,or parent thereof. Nothing herein shall constitute a waiver or admission that the County is not entitled to collect franchise fees all revenues generated by the Franchisee or any Affiliate thereof. The"Subscriber prorated amount"shall be a fraction, the numerator of which is the number j of active subscribers within the geographic boundaries sof the Franchise and the denominator of which is the total number of active subscribers on the BCA interconnect(i.e.the FEB-08-1999 18:29 415 394 0387 98%; P.09 ; FEB 08 ' 18:10 FR COBLENTZ PATCH DUFFY 415 394 0387 TO 19253131185 P>10f18 subscribers served by BCA.in the Counties of Alameda,Contra Costa,Marin,Napa, San Francisco, San Mateo,and Santa.Clara). Concurrently with paying franchise fees to the County, Grantee shall submit certification by an independent certified public accountant of the accuracy of the calculation of the Contra Costa County Systems' advertising revenue. (b) Within thirty(30)nays of the Effective hate of this Agreement, each Franchisee shall pay to the County the amount that it calculates to be due and owing to the County based on franchise fees due on advertising revenue from January 1, 1996, through December 31, 1998,using the above-described formula. Based upon initial calculations, it is estimated that the franchise fees owing to the County for the foregoing period are 5110,000 for approximately 21,000 subscribers. Each Franchisee shall cooperate with the County's audit of franchise fees owed by Franchisees based on advertising revenue and other revenue from June 30, 1994 through December 31, 1998. The County shall complete a final audit report of franchise fees owed by Franchisees within sixty (60)days of the Effective Bate of'this Agreement. if the franchise fee audit finds that a Franchisee owes the County underpaid franchise fees under the franchise,and the difference between the amount determined by Franchisee as stated herein and the amount determined by the County's audit is less than five percent(5%)'ofthe amount paid to the County, or if a Franchisee does not dispute the results of the Counter's audit, then that Franchisee shall pay the County the difference in the amount determined to be awed by the County's audit and the amount determined by:Franchisee's audit. .If the County's audit determines that the amount due and owing is more than five percent(51/o) greater than the amount)Franchisee pain to the County and that Franchisee disputes the audit results, the dispute shall be submitted to a mutually agreed upon, independent certified public accountant("CFA")whose determination of amount of franchise fees due shall be final and, 9 FEB-08®1999 18129 415 394 0387 99% P.10 :..,, FEB 08 '99 18:10 FR COBL.EltiTZ PATCH, DLFFY 415 394 038? TO 19253131185 P.l /16 SP 4 '07, binding on the parties. The costs of hiring the CPA shall be borne by the Franchisee. Any amounts determined by the independent CPA to be owed to the County shall be promptly paid to the County'within thirty (30)days of such determination. 14. Each Franchisee,and only the Franchisee, acknowledges that it has received from the County',a refund in the amount of$303,585.93 in possessory interest taxes paid (the "County Refund"). Franchisees will work with.the County to develop and implement within sixty(60) days of the effective elate of this Agreement a plan for refunding to subscribers the amount of the County Refund,less Franchisees' actual attorney fees and assts in an amount that shall not exceed ten percent of the County Refund(the"Net Refund"). The Net Refund shall be refunded or credited to County subscribers no later than:ninety(90)days of the Effective,Date. Further,the Franchisees agree to obtain from Viacom International, Inc. ("Viacorn")a written statement of its subscriber refund plan that shall specify the possessory interest taxes refunded to Viacom by the County which are to be repaid to subscribers. In the event that Viacom pays the refund amount to the County or the Franchisees without refunding it directly to subscribers, the Franchisees agree to work jointly with the County to develop a,plan for distributing the refund to subscribers and agree to promptly implement the plan at no cost to the County or the subscribers. 15. used upon its investigation and analysis, Franchisees understand that: (l) any and all refunds on possessory interest taxes to LenComm,Inc.were paid prior to 1994,approximately two (2)years prior to the transfer of the of the Franchises owned by LenComm to the Franchisees, (2) except as provided in paragraph 14 above,neither Franchisees nor Transferor has received any possessory interest tax refunds; 10 FEB-Oe-1999 18:29 415 394 0387 9e% P.11 FEB 08 '99 18:10 FR COBLENTZ PATCH DLJF `,' 415 394 0387 TO 29253131185 P.12/16 i p3A4f? (3) except as provided in paragraph 14 above,LenComm, Inc., Franchisees, and Transferor did not pass-through or externalize any possessory interest taxes to subscribers; (4) no portion of the possessory interest refund received by LenComm,Inc. was included in any.FCC Form rate filing subsequent to 1994 and that no amount of refunds received for possessory tax overpayments are due to customers in Contra.Costa:County. Each Franchisee agrees that, in the event the foregoing statements prove to be untrue or inaccurate in any material respect,Franchisee shall guarantee full payment by LenComm, Inc. of any undisputed subscriber refund liability or any subscriber reed liability which is established by a final order of the FCC or a court of competent jurisdiction. 1E. The parties agree jointly to withdraw the appeal currently pending before the Federal Communications Commission regarding the parties' dispute over the amount properly charged for converters and other equipment. The joint withdrawal to be filed with the Federal Communication Commission will be prepared by counsel for the Franchisee triers submitted, promptly to the County for review and approval as to form. Both parties release any claire arising out of the facts giving rise to the dispute and appeal. In settlement of this dispute, Franchisees collectively agree to refund to subscribers a total amount of$13,500 and to work with the County to develop and implement the refund within sixty(60)days of the effective date of this Agreement- 17. greement_17. Franchisees each represent that the letter of edit, insurance and bonding required by their Franchise Agreement and Ordinance have been obtained, and that there will be no gaps in required coverages or liabilities. Franchisees will continue to maintain the letters of credit and bonds that they were required to maintain under the Franchise.Agreements so long as the 11 FE13- --2993 18:30 415 394 0387 96% P.12 hi, FEB 08 '99 18:11 FR COBL,E;"DTZ PATCH DLF Y 415 394 0387 TO 19253131185 P.13/16 Franchise Agreements were under the control of the Transferor,notwithstanding the Change of Control. 18., Franchisees and"transferee agree to defend,indemnify and hold the County harmless against any loss, claim,damage, liability or expense(including, without limitation, reasonable attorneys' fees)arising out of this Agreement and/or incurred as a result of any representation or warranty trade by Transferor,'transferee,or Franchisees herein or in the Application or in connection with the County's Review of the Change of Control which proves to be ung or inaccurate in any material respect. In the event the County receives any such notice of a loss,claim, damage, liability or expense,the County shall promptly notify Franchiseesand'transferee which shalt, at the sole discretion of the County assume sole and direct responsibility for defending against any such loss,claim,damage, liability or expense. 19. Any consent given by the County in this Agreement and in any Resolution approving the Change of Control is not an affirmation that Franchisees, Transferor,or any predecessor in interest is in compliance with, or previously complied with the Franchise Agreements.' Any consent is made without prejudice to, or, waiver of,the County's right to obtain full remedy for any past non-compliance. Any consent,given by the County in this Agreement and any Resolution approving this Agreement is not a finding that, after the Change of Control, Franchisor,Transferor, or Transferee will be financially, technically or legally qualified,and no inference will be drawn, positively or negatively, as a result of the absence of finding on this issue. Any consent is therefore made without prejudice to,or waiver of,the County"s right to fully investigate and consider Franchisees , Transferor's,or Transferee's financial, technical and legal qualifications and any other relevant considerations during any proceeding including by way of example and not limitation, any pending renewal'proceeding. 12 FEB-08-1999 18:30 41-5 394 038? 99% P.i 3 FEB 08 '99 18411 FR COBLENTZ PATCH DUFFY 415 384 0387 TO 19253131185 P.14/16 Without limiting the foregoing,any approval of the Change of Control is not a finding or representation that the Franchise Agreement will be mewed:or extended(and approval shall not create an obligation to renew or extend the Franchise Agreement), that Franchisor,Transferees, or Transferee is"financially,technically or legally qualified to hold a renewed franchise,or that any other renewal issue that may arise with respect to past performance or future cable-relaxed needs and interests will be resolved in a manner favorable to Franchisee,Transferor,or Transferee. Unless provided for within this agreement,nothing in this agreement shall constitute a waiver of any of Franchisees',Transferor's, or Transferee's rights or remedies under federal, state or local law. 0. Transferee represents and warrants that it does not held a Certificate of Public Convenience and Necessity from the California Public Utilities Commission to provide telecommunications services or any other services in the State of California. The signatories hereby affirm that this Transfer Agreement has been entered into on a voluntary basis with duress and has been undertaken in a manner consistent with federal, state and local law. The signatories to this agreement Further represent and warrant that they possess Bull legal authority on behalf of their principals to enter into this'Transfer Agreement. ATTEST: CONTRA_COST.A CO[J�7T Y' Counter Clerk 13 FEB-08-2888 18430 415 394 0387 99% P. 14 `: FEB 08 '99 18:11 FR COBLENTZ PATCH DUFFY 415 394 e387 TO 19253131183 F.15/18 ri APPROVED: TELE-COMMIJNICATIQNS INC. By: Special Comsel Its: TCI CA —YIS,IQ,N,– OF CALIEC7ItNIA.INCo By: Its: CONTRA CAR—LECOMP By: Its: MLEVENTV O EAST CQUNT By: Its: TBLBVENTS,INC.. By: Its: T LB-VUE SYSTEMS INC By: Its: 14 FEB-09-1999 1999 18:30 415 394 0387 98% P.25 FEB 08 '99 18:11 FFR COBLENTZ WATCH DLIFFY 415 394 0387 TO 19253131195 P.16/16 SID.e. HERITAGE CABLMSION QF DELA WARE, INtC. By: Its: UACC Ml3'EST, IN . By: Its: CROCK.ETT CABLE SYSTEMS.INC. By: Its: AT&T, GSC R-1 By: Its: _. P;%WD1?fit?233k02"6dAichCwVatC Contra C*SM Trbnafr Aarftr m Aot TOTAL PAGE.16 FEB-08-1999 18:30 415 394 e387 97% P.16 f� FEB-e8-1999 14:29 Contra Costa County 925 335 1098 P.02/03 v VfnYsf.a.a.+l;aflW}ViKYi "m6 •Ocam c9b6 xsR51fs3Cdway Viacernnhaa tainmant ep x 212 250 btbA vssac m Pxavrts Joho V.Berm V46 Pfesf&",'axes Februa7 8, 1999 IAa Centra Cosh County ,Agra: Patricia Burke ` Franchise Administrmor 651 Pine Street, 11*Floor Martinez, CA 94553-1229 Dear NU. Burke: As you know, Viacom Cable operated cable systems in Contra Costa-County during the 1980`s and 1990'x, until control of the systems was acquired by TCI Cablevision in 1996. In 3991, Contra Costa County imposed large property tax increases in connection with these systems, retroactively for 1987 through 1991 and continuing into the future to the date of TCI's acquisitiom In response to these increased tax expenses,Viacom Cagle increased cable rates in Contra. Costa County to recover a portion of thi additional tax expense. The increase was approximately $1.25 to$1.30 a mouth and was in effect for 22 months, for bills dated between October 1, 1991 and July 31, 1993. The additional amount collected during, Haat period reflected only a snsall fraction of the amount of the tax increase. At the time the rate increase was announced, Viacom Cable notified its customers of the rate increase resulting from the increased property takes and its intention to challenge the amount of the tart and seek a refund. Viacom Cable also stated that in the event it was successful in obtaining a refund, it would review the casts associated with the issue and the taxes atonally paid and make appropriate adjustments to customers'bills. Viacom Inc. is currently plarming to institute voluntarily a customer adjustment program in Contra Costa County and is in the process of finalizing the adjustment amounts and the details of program implementation. Viacom Inc, has contracted with Neodata of Sees Moines, Iowa to provide the fulfillment service for the Customer Adjustment Program in Contra Costa County. The main aspects of the prom as currently contemplated are: • A letter and survey form will be sent to each customer of record during the applicable 22-month period to verify the customer's status and potential payment, FF8-08-1995 14;48 925 335 1098 99% P.02 FEB-08-1999 14»29 Contra Costa County 925 335 10% P-03/03 V A NIs. pada Burke -2- 0 An 800 number will be provided for customers to call to answer any questions they may have about the survey,letter or program. * The adjustment payment will be scat by check to verified customers. The axnou t of the adjustment payment will include interest at an appropriate ratty from the date of settlement with Centra Cosmo County through the expected date of paymeat, Viacom Inc.desires to finalize and implement the prom as SOOn as practicable in 2999, and expel that program will be initiated with the next sax months. The proposed change of control over the Contra Costa County franchisees does not alter Viacom Int.'s present plan to implement the program nor will it alter any indemnity obligation "Viacom Inc. may have to the franchisees of TCI. It his consistently bem and remains,the position of Viacom Cable and Viacom Inc.,and its subsidiaries(collectively"Viacom'"},that Viacom has no legal obligation to pay any money to .any furter or trent cable customer. Sincerely, .Tohn � TOTAL P.03 FEB-09-1999 14:46 925 335 1098 99% P.03 1 . EXHIBIT A AGREEMENT RELATING TO THE CONSENT OF THE COUNTY OF CONTRA COSTA To THE ASSIGNMENT AM TRANSFER OF THE LICENSE GRANTED TO LENCOMM, INC. . This Agreement (the "Transfer Agreement") entered into this 30th dayof January, 1996, between and among the County of Contra. Costa ("County") , Lencomm, Inc. , dba B"k bl e " iro x1 ,t;, '(the "Transferor") and Heritage Cablev 'cion 'af aware, Inc. (the "Transferee") . WHETS, on July 12, 1994, the Board of Supervisors (the "Beard") ', of the County approved by Resolution No. 94/363 the granting of a community antenna. television (CATV) license (the "Licensed°) to the Transferor pursuant to the provisions of the County Ordinance Code (the "Ordinance") for a term of ten (10) years to operate a cable television system within the County (the "System") ; and WHEREAS, the Transferor has filed a written application to the County, dated October 3,1995 (the "Application") wherein it has requested the consent of the County to the transfer and assignment of the License to Transferee (the "Asset Transfer") ; and WHEREAS, it is the intent of the County to approve the transaction whereby ownership and control of the License and the System shall be held by the Transferee (said transaction shall be referred. to herein as the "Transfer") ; and WHEREAS, the Beard of the County has reviewed the Transfer as well as all relevant documents, staff, reports and recommendations; and WHEREAS,, pursuant to Section 58-4 . 028 of the Ordinance, the Transfer is subject. to the written consent of the County; and WHEREAS, based upon the evidence presented to the Board, it has determined that it would be in the public interest to conditionally approve the Transfer. NOW, THEREFORE, it is agreed by and between the parties as follows; 1. The Board of the County hereby gives its consent and approval to the Transfer whereby the License and the. System, including', all the assets thereof, shall be directly acquired and held by Transferee. 2 . The granting of this consent to the Transfer does not waive the right of the County to approve any subsequent change in the ownership of the License or the ownership or control of the Transferee and there shall be no further material change, amendment 1 or modification of the ownership or equity composition of the Transferee which requires prior consent of the County pursuant to the Ordinance without the further written consent of the Board. 3 . By executing this Transfer Agreement, the Transferee agrees and acknowledges that (1) this Transfer Agreement and the approving resolution- is not a new license agreement, the granting of a license, or the renewal of the existing license, but rather is exclusively an agreement to transfer and assign the License and said Transfer Agreement neither affects nor prejudices in any way the County's rights thereunder; (2) that compliance with the License and Ordinance, as of the date of closing of the Transfer, is neither commercially i independently available to the Transferee. . Any violation of this Transfer Agreement shall be deemed to be a violation of the Ordinance and the License. 6 . The County hereby gives the. Transferee notice that the grant or ',transfer of the License may create 'a taxable possessory upon which the Grantee and Transferee may be liable for the payment of certain taxes. . The Transferee hereby acknowledges that it has received 'actual notice as required by Revenue and Taxation Code Section 107.6. . 7. The parties hereto acknowledge that the County has issued a Rate Order dated January 23, 1995, a copy of which is attached as Exhibit B (the "Rate Order") . The Transferor and the Transferee hereby agree to accept the Rate Order as a lawful and binding rate carder, comply with its terms, agree not to appeal said Rate Order, and waive and relinquish any and all appeal rights which they possess in relation thereto and the right to challenge the legality of the Rate Order, on any grounds, in any judicial or administrative forum. Further, the parties hereto agree, in material consideration for approval of this Transfer Agreement by the Counter, as follows (a) If, and to the extent, the County, the Transferor, or the Transferee, violates any of the provisions of the Rate Order, the non-breaching party shall provide the allegedly breaching party with written notice detailing with speci<fiCoun.ty the alleged breach. The, allegedly breaching party shall, have 30 days following the provision of the notice to either cure the breach or respond in writing detailing with specificity why a breach has not occurred. At any time following this 30-day period, either party may seek relief in a court of competent jurisdiction. in addition, at any time following this 30-day period, the County may, at its option and in addition to any other remedy available to it pursuant to this Transfer Agreement or applicable law, recommence its review of the Cost. of Service Forms and nothing in the Rate Order shall prejudice either the County or the cable operator's rights with respect to said proceeding. Notwithstanding the date upon which written notice is provided by the County to the Transferor or Transferee, as the case may be, (the "Operator") that the Operator has breached any or all of the provisions of the Rate Order, refund liability based upon the determination of the Maximum Permitted Rates contained in the Resolution shall extend back to the dated date 'thereof and, to the extent the Commission upholds the determination of the County as to the Maximum Permitted Rates for County Regulated Rates, the Operator shall pay refunds, in 3 i1 a manner prescribed by the Rules of the Commission back to the dated date of. the Rate Order. (b) The Operator will not file new, amended, supplemented, or modified Cont of Service forms, by way of a . new, amended, supplemented or modified FCC Form 1.220 (with or without a related FCC Form 1205 and/or 1.21.0) , or any successor forms, for a period of four (4) years from, the dated date of the Rate Order (the "Forbearance Period") . During the Forbearance Period, the Maximum Permitted Rates for County Regulated Services shall be exclusively adjusted., if at all, pursuant to the formula and methodology contained in the current FCC Forms 121.0, 1235, and 1.240, or their successor forms (the "Rate Adjustment Forme") and the Operator hereby waives, relinquishes, and releases any right which it may possess to seek rate adjustments in excess of the amounts which would be allowed pursuant to the Adjustment Forms. (c) kept as expressly provided in the Rate Order and herein, the Operator and the County shall comply with all applicable Rules of the Commission including, without limitation, the timely filing and review of the various rate related forms of the Commission including, without limitation, the Rate adjustment Forms. (d) if the Transferor or Transferee, individually or collectively, or any affiliate or subsidiary or parent thereof, appeal or otherwise challenge the validity or enforceability of the Rate Order, as defined in; Paragraph 9 hereof, in any judicial or administrative forum, or otherwise dispute its legal validity or enforceability and is successful in its asserted position(s) , the Transferor and the Transferee, as the case may be, shall be deemedin material breach of the License. 8 . The Transferor shall pay collectively to the County, the Citie/s of Berkeley, El Cerrito, Emeryville and Richmond (collectively the "Franchising Authorities") or the agents thereof designated by the Franchising Authorities in writing, within ten (10) days', of the Board's approval of this Transfer Agreement the suit of Forty Thousand dollars {$40, 000) in full satisfaction of all attorney ' fees and professional consultant fees and costs in relation to this proceeding. if said amount is not sufficient to reimburse' the Fra.nchi.sing Authorities for all out-of-pocket expenses, the Franchising Authorities. shall provide written notice thereof to the Transferor and Transferee of the amount of the appropriate expense reimbursement (the "Full Amount") . The Transferor shall pay the Full .mount provided, however, that to the extent that the Full Amount exceeds $40, 000 .00, the obligation. of 4 the Transferor and Transferee to pay refunds pursuant to Section 2 of the Rate order shall decrease by an equivalent amount so that the total obligations pursuant to Section 2 of the Pate Order and this paragraph shall not exceed $340, 000.00. The County, the Transferor and the. Transferee expressly agree and acknowledge that the payment is settlement of a good faith dispute and is not a "frannchise fee" within the meaning of Section 622 ( ) (1) of the Cable Act, and that said payment will not be offset or charged against any other license fee owing either prior paid or future yawing, or other sum due to the County, and that said payment is a voluntary payment and not a tax, fee, or assessment imposed by a franchising authority on a cable operator or cable subscriber, or bath, solely because of their statue as such, and that said payment does not constitute a license requirement or is, in any way, subject to "pass-through" , or externality treatment and will not, under any circumstances, be itemized upon any billing to any subscriber or added, for the purposes of collection, to any other lawful rate. The Transferor agrees to bear the full and total economic burden of this payment. 9 . This Transfer Agreement shall be deemed effective upon the closing of the Transfer so lona as it has been executed and, returned by all parties within ten. (10) days after approval by the County (the "Effective Date") . If it is not so executed and returned 'within ten (10) days, it shall become null and void and the Transfer shall be deemed disapproved as of the date of approval of this Transfer Agreement by the County Board. The signatories hereby affirm that this Transfer Agreement has been entered into on a voluntary basis without duress and has been undertaken in a manner consistent with federal, state and local law. The signatories to this agreement further represent and warrant that they possess full legal authority on behalf of their principals to enter- into this Transfer Agreement. CC LJNTY OF CONTRA STA LENCOMM, INC. By By Its V , PML BATCHELOR, Clerk of the Board. of Supervisors and County t Administrator By Its By Depot �lek 5 34,x.+ SW RECOMENDEU FOR APPROVAL APPROVED AS TO FORM: VICTOR J. WESTMAN, County Counsel EERITA.G CABLEVI.SION OF I7ELAW INC. By. David Schmidt, Deputy County I � Counsel Phil Batchelor, County By Administrator Its V,c� By Patricia Burke, Cable TV Administrator 6 w{,Y tr o� STATE OF COLORADO ) ) ss. COUNTY OF ARAPAHOE ) On May 13, 1996, personally appeared before me, a Notary Public in and for the State and Countyaforesaid, Stephen M. Brett, Vice President/Secretary, and. Madonna Cuenthner, Vice President, of heritage Cablevision of Delaware, Inc., personally known to me to be the persons whose names are subscribed to the above instrument in such capacities, who acknowledged that they executed the same. My commission expires: .May 23, 1997. [SEAL] Notary blit •,• a ' `ate 3 r `(c WRITTEN DECISION OF THE COUNTY OF CONTRA COSTA (THE "COUNTY") RELATING TO CERTAIN REFUND LIABILITY AND THE PRESCRIPTION OF MAXIMUM PERMITTED RATES WHEREAS, the County of Contra Costa (the "County") has been certified by the Federal Communications Commission (the "Commission") to regulate rates for the Basic Service Tier ("BST") , associated equipment rates, and installation rates; and WHEREAS, the County provided written notice of said certification to Lencomm, Inc. , dba Bay Cablevision, Inc. (the "Operator") ; and WHEREAS, the County adopted procedural lags, and regulations applicable to rate regulation proceedings which provide a reasonable opportunity for consideration of the views of interested parties; and WHEREAS, the County delivered a written request to the Operator to file its schedule of rates for the BST, associated equipment and installation with the County; and WH IAS, the Operator filed with the County FCC Forms 12202 and 1205 dated November 24, 1994 and March 31, 1995 (the "Cost of Service Forms") ; and WHEREAS, the County timely issued an order pursuant to Section 76 .933 (b) of the Rules and Regulations (the "Rules") of the Commission stating that it was unable to determine based upon the materials 'submitted by the Operator that the existingor proposed rates were within the Commission's Maximum Permitted Rates and that the -County was tolling the thirty (30) day deadline found in Section 76.933 (a) of the Commission#s Rules for the, purpose of requesting, and./or considering additional information for one hundred fifty (150) days; and WHEREAS, the County timely issued an Accounting Carder pursuant to Section 76 .933 (c) of the Rules of the Commission requiring the Operator to keep an accurate account of all amounts received by the Operator by reason of the: rates and charges ,for the Basic Service Tier, associated equipment and installation in effect from July is, 1994 as found in the Cost of Service Farms and to keep full. and - A o accurate records indicating on whose behalf such amounts were paid, and WHETS, the County retained the services of Public Knowledge, Inc. ("PKI") to review the Cast of Service Farms; and WHEREAS, PKI produced a written report (the "PKI Report") to the County and WHEREAS, the PKI Report concluded that the Maximum Permitted Rate for the Basic Service Tier, equipment and installation as contained in the Cost of Service Farms, exceeded appropriate amounts as calculated under the Mules of the Commission; and WHEREAS, the Operator disputes the conclusions of the PKI Report as they relate to the Maximum Permitted Rates; and. WHEREAS, PKI concluded, without dispute from the operator, that the Operator was charging equipment and installation rates higher than the Maximum Permitted Rates specified in the Cast of Service Forms; and WHEREAS, a public hearing was held upon the Cost of Service Forms on January 23, 1996 (the "Public Hearing"} ; and WHEREAS, the operator was given the opportunity to present evidence oral and written, in relation to its Cost of Service Forms and did so present evidence at the Public Hearing; and WHEREM, the Public Hearing was closed and the County is now legally entitled to take final action upon the Cost of Service Forms; and NOW, THEREFORE, County dogs hereby order as of the date hereof, as ',follows S,- .s it* The Maximum Permitted Rates and Charges for the rates subject to the jurisdiction of the County ("County Regulated Rates") are as indicated on Mbit 1 to this Agreement. The Benchmark Adjustment Date shall be June 30, 1995 for the purpose of any future rate adjustment. isax � The operator shall identify all BST subscribers as of December 31, 1995 ("Subscribers of Record"} in the Cities of Berkeley, El Cerrito, Richmond and Contra Costa County -2- (collectively the "Franchising Authorities") . The operator shall pay to Subscribers of Record, by way of direct payment, credit, or refund and without offset or reduction for any alleged undercharge or underpayment of any rate whether or not the operator is or may be entitled to offset any such refund liability pursuant to the Rules of the Commission, an aggregate refund of $300, 000 .00 (the "Aggregate Refund") , as potentially adjusted pursuant to paragraph 6 of that Transfer Agreement, dated. as of January 23, 1996, among the Operator, the County, and Heritage Cablevision of Delaware, Inc. . (the "Transfer Agreement") . The amount to be credited to individual subscriber accounts shall be computed as the Aggregate Refund divided by the number of Subscribers of Record. Application of said refund credits to Subscribers of Record shall be made over 30 days commencing no later than March 1, 1996 and ending no later than April 1., 1996 . The Operator shall provide to the County written evidence of compliance with the requirements of this provision no later than May 1, 1996 . ctinn-3— The Operator shall adjust its existing rates for equipment and installation so as not to exceed the Maximum Permitted' Rates for those items as reflected in Exhibit 1 within sixty (60) days of the Operative Date hereof as defined herein. .octroi 4 . This Rate Order shall band any successor-in- interest to the Operator and shall be effective upon the Effective Date of the 'Transfer .Agreement (the "Operative Date") . , sY" Public notice shall be given of this decision by posting the attached notice in the County Administration Building and the text of this decision shall be released upon request to any interested member of the public, as required by Section 76. 936 (b) of the FCC Cable Regulations . Dated. January 23 , 1996 ATTEST: Phil Batchelor, Clerk BOARD OF SUPERVISORS, COUNTY of the Board of Supervisors and OF CONTRA COSTA County Administrator / I By: By: Dep Clerk a Chair -3- 4 SLN'T By �1,!� TUCKER 1-10-56 10:58 RUTAN & Mc-XER- 15106464OB8,# 21 2 H f5i T ( . thlbk 1 Say Ceabhtistan MunICIPOW" RaMOM United hoM 35.33 Rued fiats 14.13 AddVonsl connoWann at ifte of iniffai lnabWMon 14.13 G&Pamts trip addklonal corm #ion 21.20 0.Ie' � V♦ eaT I e eTk.st tot lrr+v.+� df: 3 � btd!.1123 4 1L T#; ;7- 1� Commonwealth of Pennsylvania ) ) ss. COUNTY OF U - (D On May � 996, personally appeared before me, a Notary Public in and for the Commonwealth and County aforesaid, Harry F. Brooks, Vice President, and Samuel W. Morris, Jr., Secretary; of LenComm, Inc., personally known to me to be the persons whose names are subscribed to the above instrument in such capacities, who acknowledged that they executed the same. My commission expires. d 4ffy01W1Vj [SEAL] NOL Pu r Noteed Seal Kra Rine,Wry Public Po tstovmrn 6oro,A gomaty Courdy Myco;'�IT,iC,q EX:jrtsAu.ti,1997 P7mTZ-.s,#'i i�r,y4vasziaP�ss x iatix3 ui vot aiu . 4 ` TO Cablevision of California, Inc. We're taking television into tomorrow. May 23, 1996 'SIA FEDERAL EXPRESS Patricia Burke Contra Costa County 651 Fine Street, 116 Floor Martinez, CA 94553 Dear Ms, Burke, Enclosed for your signature and the signature of the Deputy County Counsel, are three (3) copies of the Contra Costa Franchise Consents. These have been signed and notarized by all transfer parties. Once the remaining signatures have been obtained, phase forward an original signed copy to: Samuel W. Morris, Jr., The Lenfest Group 1332 Enterprise Drive West Chester, Pennsylvania 193801 TCf Terrace Tower II 5619 DTC Parkway Englewood, CO 80111-3000 Attn.: vladie D. Gustafson and a photo copy to: TCI Cablevision of California 2600 Technology Court Richmond, California 94806 Attn.: Mysti S, Knox If you have any questions, please contact ane at (510) 262-1833. Thank you, Sincerely,' tsKnox Administrative Assistant 3 enclosures TEL(5 10)262-1825 2900 Techno ogy Court Richmond, California 94806 FAX(5 i o) 262-1838 t "Equal Opportunity Employer" Request Speak Form (THREE ) MINUTE LIMN +amiate Ws f wW PIrce f In the box aw the weak* notrum a the board. ONE: 1 vAsh to on Agm& M*n , Mir will be: VnwW �.,... „ t wbh to WeA an the subject Of --- . I do not wish to weak but lave Owe smural'for t1w Board BOARD OF SUPERVISORS OF CONTRA COSTA COUNTY, CALIFORNIA Adapted this Order on , by the following vote: AYES: .. NOES, - -< ABSENT. ABSTAIN, SUBJECT: Deny without preiudice the application) Resolution leo. 99/ of Tele-Communications, Inc. (`PTCI") ) for a transfer of control to AT&T of ) their cable television licenses. ) WHEREAS, an affiliate and/or subsidiary of TCI (the "Franchisee") has been granted a franchise (the "Franchise") to construct and operate a cable television system within the County of Contra Costa(the "County")by action of this Board of Supervisors; and WHEREAS, there has been filed with the County an FCC Form 394 (the "Application") with the County requesting that the County approve a transfer of control of the Franchise and Franchisee to AT&T Corp. (the "Buyer") (the "Transfer"); and WHEREAS, pursuant to the Franchise and various regulatory ordinances, neither the Franchise nor control of the Franchise and/or Franchisee can be transferred to the Buyer without affirmative written consent of the County;and WHEREAS, the County requested certain information from Franchisee, TCI and/or the Buyer (collectively, the "Applicants") relating to the legal, technical, and financial qualifications of the Buyer, the impact, or potential impact, of the Transfer upon current and future rates and services, the financial ^bility of the Buyer to generate sufficient cash flow to meet debt and obligations, satisfy capital expenditure obligations, and provide a reasonable rew n of and on its investment(see.Exhibits A-E); and WHEREAS, the Applicants delayed or refused or failed to provide a material portion of the requested additional information(see Exhibits F-H); and WHEREAS, given the failure of the Applicants to provide all requested information, and mer given the existence of the various issues outlined in this resolution, the County, through its Staff and attorneys, has requested the Applicants to extend the 120-day review period specified in Section 617 of the Cable Communications Policy Act of 1984, as amended (the "Cable Act")(Exhibit 1); and WHEREAS, the Applicants have failed or refused to timely extend the 120-day review period(Exhibits J-K); and WHEREAS, the County has reviewed the Application, all supplemental information submitted in relation thereto, as well as information compiled in any compliance audit, and the various Staff reports and related documents; and WHEREAS, the County has determined that it would not be in the public interest to approve the Transfer at this point in time and has determined that it would be in the public interest to disapprove the Transfer without prejudice subject to future and further consideration. NOW, THEREFORE, the .Board of Supervisors of the County of Contra Costa does hereby resolve as follows: 1 i. The recitals above are hereby declared to be true,accurate, and correct. 2. The transfer of control of the Franchise and Franchisee from TCI to the Buyer,as described in the Application, is hereby disapproved without prejudice for the following reasons: (a) The Applicants have failed to timely provide all necessary additional information, as requested by the County in writing, relating to the Transfer's potential impact upon existing and future rates and services and the legal, technical and financial qualifications of the Buyer to own and operate the cable television system serving the County(the "System"). (b) The Applicants have refused or failed to reasonably cooperate with Staff, Special Counsel, and outside consultants retained by the County in undertaking the due diligence investigation of the Transfer. (c) The Buyer has failed to demonstrate that it is a technically and financially qualified applicant for the following reasons: (1) The burden of proof is upon the Buyer to demonstrate its legal, technical, and financial qualifications to assume control of the Franchise and the Franchisee. (2) The Buyer possesses absolutely no track record in the operation of cable television systems or the provision of cable television services. The Applicants have failed to present any affirmative evidence demonstrating the Buyer's technical and experience qualifications to own and operate cable systems. Although the Buyer may well possess significant experience and expertise in long distance telephony and related products and services, no evidence was presented by the Applicants demonstrating the Buyer's technical and experience qualifications to own and operate cable television systems on a limited or large scale basis. In addition, the Applicants have refused to provide a business plan or other document of the Buyer demonstrating, with specificity,how it intends to operate the cable system and provide cable service. (3) leo evidence has been presented by the Applicants as to the Buyer's contractual commitment,long-term, short-term,or otherwise,to maintain existing TCI management anchor operating policies and.procedures. (4) The lack of a track record in this case is even more problematic given the potential operational merger of cable and telephony services pursuant to an organization to be controlled by the Buyer. Once again, one cannot look to the track record of the Buyer in order to adjudge its ability to assimilate a large number of cable television subscribers into a telephony- based organizational structure within an extremely short period of time. The Buyer has failed to demonstrate, based upon the information provided to the County, that it possesses sufficient experience, organization, and business plans to assimilate a massive influx of subscribers within a short period of time into a single organizational structure and maintain a level of cable service equivalent or superior to that currently provided by the franchisee. (5) The lack of a track record on the part of the Buyer magnifies the financial concerns set forth herein since the Buyer cannot historically demonstrate how it will react to the need to generate significant increases in cable revenues from a relatively flat subscriber base. Although other large and small cable operators possess financial leverage ratios and other financial structures which could potentially impose significant upward pressure on rates or threaten the financial viability of the cable operator if revenues cannot be increased one way or another,the bulls of those operators possess significant operating histories and a long association with the debt and equity market. The performance of those operators can be constantly reviewed to determine their reactions, both from financial and operating viewpoints, to the financial pressures associated with this kind of transaction, On the other hand,the Buyer's absolute lack of operating experience poses a significant risk to the County and subscribers in that in a deregulated market the Buyer may not be able to meet its financial projections and thus be forced to expand the revenue base by way of aggressive rate increases, operational expenses decreases, reduction in service quality, and other 2 operating and financial practices which may or may not be consistent with generally accepted practices in the cable industry and the existing practices of the Franchisee. (6) The Buyer has failed to present any business plan or other documents indicating its short-term and long-term intent as to how it will operate the cable television system and how it intends to achieve an acceptable and reasonable return of and on its investment. (7) The County has carefully reviewed the financial qualifications of the Buyer. In order to determine the qualifications a buyer for a cable television system, or a series of cable television systems, it is necessary to not only review the net worth of the individual or entity assuming control of the franchise operations, but it is also necessary to evaluate the economic reasonableness of the transaction to determine whether the transaction will impose unreasonable financial burdens upon the purchaser which could result in material rate increases beyond that associated with normal operation of a cable system, reduction in service quality based upon cost cutting and expense minimalization, a combination thereof, a premature sale of the system, or financial insolvency. The lack of financial qualifications on the part of the Buyer can impose significant and serious financial consequences upon the County and its subscribers. These kinds of concerns should not be underestimated even in the case of a purchaser of substantial net worth who possesses absolutely no experience in the operation of cable television systems and the provision of cable television services. (8) The net worth of a proposed purchaser is only the starting point for the financial qualification analysis. Obviously, if the proposed purchaser does not possess sufficient cash or borrowing capacity to acquire necessary proceeds to close the transaction, financial unsuitability is established. In addition, if the proposed purchaser does not possess sufficient financial resources, by way of cash or reasonable and customary borrowing capacity, to operate the system, meet current and long-term liabilities when due including, but not limited to, capital expenditure requirements, financial unsuitability is the logical conclusion. However, even in the case of a proposed purchaser which possesses sufficient cash to close the transaction and operate the system consistent with franchise requirements, there are circumstances under which a buyer or proposed transferee may pay such a high acquisition price that it is financially impossible for that buyer, absent :passive influxes of additional equity investments, to operate that cable television system in a,manner which pays current and long-term liabilities, covers debt service, and provides a reasonable and adequate return of and on equity investment as prescribed by the Regulations of the Federal Communications Commission(the "Commission"). (9) The Commission has established presumptive financial standards pursuant to its Preliminary and Final Costs of Service Regulations (collectively, the "COS Regulations") to measure the financial performance of cable television systems. Pursuant to those CCS .Regulations, a cable television operator is presumptively entitled to earn a return of 11.25% on a post-tax:basis on its rate base. A cable operator is entitled to rebut this presumption and earn a higher rate of return based upon certain showings including the use of the cable operator's actual capital structure as opposed to a hypothetical capital structure. Pursuant to the COS Regulations, regulated rags are adjusted to reflect a revenge target based upon the application of the permitted rate of return to the permitted rate base. (10) The cable television industry, including but not limited to TCI, have utilized costs of service flings to justify regulated rates in excess of Benchmark Standards based upon the use of the acquisition price paid in a system sale as all or a portion of the permitted rate base. The cable industry, including TCI, has established linkage between transfer proceedings and regulated rates by affirmatively utilizing approved transfers as the purported legal justification for the adopting of regulated rates significantly in excess of Benchmark Standards. Although the COS Regulations have been recently modified by the Commission, the presumptive nature of the final CCAS Regulations do not preclude a relaunching of a frontal attack upon Benchmark .Pates through the inclusions of Transfer Intangibles in the permitted rate base. The COS Regulations continue to provide a useful yardstick to adjudge the financial feasibility of cable television transactions, and 3 thus the financial qualification of cable system's transferees and buyers, as one indice of reasonableness. (11) It is fair and reasonable to assume that a rational purchaser will attempt to recover its investment and a reasonable return thereon over a financially reasonable projection period. Irrespective of the net worth of a purchaser, it is not reasonable to assume that any purchaser is willing forsake investment recoupment and the attainment of a reasonable return. Although some purchasers may be willing to defer a return on a cash-flow basis for some reasonable period of time, that deferral will simply magnify the return that must be earned at a later period in order to allow the investor to achieve targeted returns over the projection period. ';otwithstanding numerous demands, the Buyer has reused to provide income projections as to how these financial goai6 will be achieved. (12) In evaluating initial franchisee awards, it is custom and practice in the industry for franchising authorities to consider the economic reasonableness of the franchise proposal in determining financial suitability in addition to the net worth of the applicant or the parent of the applicant. A proposed purchaser should not be adjudged under a lesser standard than: that applicable to the same entity if it was applying for a new franchise. (13) In evaluating the financial suitability of a proposed purchaser, it is appropriate to evaluate the reasonableness of the financial projections that underlay the calculations of the acquisition price. By definition, failure on the part of the Buyer to achieve the projected revenue and ultimately net income levels could produce a serious risk to the financial viability of the cable operation. To the extent that project income levels are not achieved, the proposed purchaser will not achieve the targeted rate of return. Serious deficiencies between projected and actual revenues and income can result in debt service coverage breaches, debt service payment breaches, capital expenditure reductions, operating deficiencies, and sizable rate increases in both regulated and unregulated rates. (14) The reported acquisition price is $2,923 per subscriber (the "Acquisition.Price"). The Cable TV Financial Data Book published by Paul Fagan Associates, Inc. ("Fagan Databook"), a respected industry financial publication, indicates that even in a period of rising subscriber values, this sale is significantly higher than any other transaction other than the 1998 Charter Communications, Inc/Paul Allen acquisition. Cather than the Charter/Paul Allen acquisition, all of the reported 1997-1998 transactions fall significantly below the Acquisition Priced for this Transfer. The Acquisition Price materially exceeds market values for 1997 and 1998 by a significant margin. (15) The Applicants have been requested by the County to provide an explanation and justification for the aggressive Acquisition Price but have failed to provide any independent corroboration or justification for its calculation. (lb) Based upon a review of relevant industry data and the information provided by the Applicants, it is reasonable to conclude that the attainment of revenue increases necessary to sustain the Acquisition. Price over the next 10 years, especially given the competitive pressures which will be caused by pending telco, DBS, and MMDS entry into the market, may be questionable. The Transfer poses a significant risk to both the County and cable television subscribers without offsetting subscriber benefits. (17) If revenues necessary to sustain the Acquisition Price cannot be attained, and the Buyer is not able to obtain a reasonable return of and on its investment by way of operation of the System.,there is a significant risk that the Franchise will be sold or transferred once again during its existing term, thus causing potential disruption of services and potentially forcing subscribers to bear the costs, including the transactional costs associated with this transaction and future transactions, without any offsetting subscriber benefits. (18) The Applicants have failed to provide evidence denying the existence of the various risks described above or demonstrating the potential benefits to the County 4 and subscribers which might justify the incurrence of the risks described above. The Applicants have been presented with numerous opportunities to do so. The Buyer is clearly less qualified to own and operate the cable system than the Franchisee. In addition, the Acquisition Price materially exceed industry standards and thus exposes the County and its subscribers to risks beyond those currently associated with the Franchisee. (19) To the extent that the Buyer cannot achieve sufficient revenues to support the Acquisition Price, the Applicants may be forced to increase Basic Service and Cable Programming Service Tier rates or reduce service levels to levels which exceed industry averages. (20) Given the risks associated with the Transfer, as identified above, if, will not be in the public interest for the County to unconditionally approve the Transfer at this time. This disapproval of the Transfer contained herein is without prejudice and may be reconsidered by the Board of Supervisors when and if the Applicants are able to present evidence demonstrating the Buyer's technical and financial suitability. (d) The County has requested in writing, on numerous occasions, information regarding the Buyer's business and operational plan relating to assimilation, if such is to exist, of the cable system into the Buyer's telephony managerial, organizational, and technical infrastructure. The Applicants have consistently refused to provide said information based either upon a claim as to the lack of its existence or claims of irrelevancy and confidentiality. The Proxy Statement/Prospectus, dated January 8, 1999, was not provided to the County until January 11, 1999, The Proxy Statement did not contain the financial and business plan information requested by the County. However, the Proxy Statement did indicate the existence of said information or reasonably equivalent information. A written request was resubmitted by the County on January 13, 1999. Based upon the Applicants refusal to provide requested additional information, the County can only speculate as to the Buyer's intent, or lack thereof, relating to the legal and/or practical merger of its telephony and cable operations assuming approval of the Transfer. Based upon the magnitude of the Acquisition Price and various statements of representatives of the Applicants in the popular and trade press, it is reasonable to assume that the Buyer projects some degree of convergence between its telephony operations and cable operations. Pursuant to relevant federal and state law, the Buyer's telephony operations, with the exception of certain right-of-way management functions, are regulated almost exclusively by the Commission and the California Public Utilities Commission (the "PUC"). On the other hand, TCPs cable operations are, with minor exceptions, not subject to the jurisdiction of the PUC and regulated Jointly by the Commission and the County. In addition, and by way of illustrative example as opposed to exhaustive inclusion, the County is legally authorized pursuant to federal and state law to collect a franchise fee upon cable service, as defined in the Cable Communications Policy Act of 1984, as amended (the "Cable Act"). On the other hand, state law currently precludes the imposition of a franchise fee upon services provided by a telephone corporation,as defined in the California Public Utilities Code. The blending of telephony and cable services within one legal, organizational, and/or technical infrastructure could conceivably result in a minimalization of the County's ability to collect compensation for the use of its rights-of-way and erode the legal jurisdiction of the County over the regulation of cable services below that which currently exists in relation to TCI and the Franchisee. Although many of these issues could well be addressed, by way of legal analysis and contractual provisions, if the Applicants were -willing to disclose their intentions or business plan, or lack thereof, relating to the assimilation of TCI's cable operations into the legal, managerial,operational,and technical infrastructure of the Buyer,the Applicant's refusal to provide this type of information, notwithstanding numerous requests, creates a risk to the County's revenue base and regulatory authority which cannot be mitigated nor justified based upon the state of the facts and the evidence contained in the record at this point in time. 3. An unauthorized transfer of the Franchise,transfer of actual or managerial control of the Franchise, and/or transfer of control of the Franchisee, shall constitute a material breach of the Franchise. 5 SD,6 2-9-99 RESOLUTION NO. A RESOLUTION OF THE BOARD OF SUPERVISORS OF THE COUNTY OF CONTRA COSTA, CALIFORNIA DENYING WITHOUT PREJUDICE THE APPLICATION OF TELE- COMMUNICATIONS, INC. ("TCI") FOR A TRANSFER OF CONTROL TO AT&T CORP. OF TIME FRANCAISE GRANTED BY THE COUNTY AND SETTING FORTH THE GROUNDS AND REASONS THEREFOR WHEREAS, an affiliate and/or subsidiary of TCI (the "Franchisee") has been granted a franchise (the "Franchise") to construct and operate a cable television system within the County of Contra Costa (the "County") by action of this Board of Supervisors; and WHEREAS, there has been filed with the County an FCC Form 394 (the "Application") with the County requesting that the County approve a transfer of control of the Franchise and Franchiseeto AT&T Corp. (the "Buyer") (the "Transfer"); and WHEREAS, pursuant to the Franchise and various regulatory ordinances, neither the Franchise nor control of the Franchise and/or Franchisee can be transferred to the Buyer without affirmative written consent of the County; and WHEREAS, the County requested certain information from. Franchisee, TCI and/or the Buyer(collectively, the "Applicants") relating to the legal, technical, and financial qualifications of the Buyer, the impact, or potential impact, of the Transfer upon current and future rates and services, the financial ability of the Buyer to generate sufficient cash flow to meet debt and obligations, satisfy capital expenditure obligations, and provide a reasonable return of and on its investment (see Exhibits A-E); and WHEREAS, the Applicants delayed or refused or failed to provide a material portion of the requested additional information (see Exhibits F-H); and WHEREAS, even the failure of the Applicants to provide all requested information, and further given the existence of the various issues outlined in this resolution, the County, through its Staff and attorneys, has requested the Applicants to extend the 120-day review period specified in Section 617 of the Cable Communications Policy Act of 1954, as amended (the "Cable Act")(:Exhibit I); and WHEREAS, the Applicants have failed or refused to timely extend the 120-day review period; and WH S, the County has reviewed the Application, all supplemental information submitted in relation thereto, as well as information compiled in any compliance audit, and the various Staff reports and related documents; and 124/062395-0001/3217968.1 all/13198 i s17.6 2-9-99 WHEREAS, the County has determined that it would not be in the public interest to approve the Transfer at this point in time and has determined that it would be in the public interest to disapprove the Transfer without prejudice subject to future and further consideration. NOW, THEREFORE, the Board of Supervisors of the County of Contra Costa does hereby resolve as follows: 1. The recitals above are hereby declared to be true, accurate, and correct. 2. The transfer of control of the Franchise and Franchisee from TCI to the Buyer, as described in the Application, is hereby disapproved without prejudice for the following reasons. (a) The Applicants have failed to timely provide all necessary additional information, as requested by the County in writing, relating to the Transfer's potential impact upon existing and future rates and services and the legal, technical and financial qualifications of the Buyer to own and operate the cable television system serving the County (the "System"). (b) The Applicants have refused or failed to reasonably cooperate with Staff, Special Counsel, and outside consultants retained by the County in undertaking the due diligence investigation of the Transfer. (c) The Buyer has failed to demonstrate that it is a technically and financially qualified applicant for the following reasons: (1) The burden of proof is upon the Buyer to demonstrate its legal, technical, and financial qualifications to assume control of the Franchise and the Franchisee. (2) The Buyer possesses absolutely no track recon in the operation of cable television systems or the provision of cable television services. The Applicants have failed to presentany affirmative evidence demonstrating the Buyer's technical and experience qualifications to own and operate cable systems. Although the Buyer may well possess significant experience and expertise in long distance telephony and related products and services, no evidence was presented by the Applicants demonstrating the Buyer's technical and experience qualifications to own and operate cable television systems on a limited or large scale basis. In addition, the Applicants have refused to provide a business plan or other document of the Buyer demonstrating, with specificity, how it intends to operate the cable system and provide cable service. (3) No evidence has been presented by the Applicants as to the Buyer's contractual' commitment, long-term, short-term, or otherwise, to maintain existing TCI management and/or operating policies and procedures. 1241062395-000113217968.1 a11113J98 2 SD.S 2-9-99 (4) The lack of a track record in this case is even more problematic given the potential operational merger of cable and telephony services pursuant to an organization to be controlled by the Buyer. Once again, one cannot look to the track record of the Buyerin order to adjudge its ability to assimilate a large number of cable television subscribers into a telephony-based organizational structure within an extremely short period of time. The buyer has failed to demonstrate, based upon the information provided to the County, that it possesses sufficient experience, organization, and business plans to assimilate a massive influx of subscribers within a short period of time into a single organizational structure and maintain a' level of cable service equivalent or superior to that currently provided by the Franchisee. (5) The lack of a track record on the part of the Buyer .magnifies the financial concerns set forth herein since the Buyer cannot historically demonstrate how it will react to the need to generate significant increases in cable revenues from a relatively flat subscriber base. Although other large and small cable operators possess financial leverage ratios and other financial structures which could potentially impose significant upward pressure on rates or threaten the financial viability of the cable operator if revenues cannot be increased one way or another, the bulk of those operators possess significant operating histories and a long association' with the debt and equity market. The performance of those operators can be constantly reviewed to determine their reactions, both from financial and operating viewpoints, to the financial pressures associated with this kind of transaction. On the other hand, the Buyer's absolute lack of operating experience poses a significant risk to the County and subscribers' in that in a deregulated market the Buyer may not be able to meet its financial projections'and thus be forced to expand the revenue base by way of aggressive rate increases, operational'expenses decreases, reduction in service quality, and other operating and financial practices which may or may not be consistent with generally accepted practices in the cable industry and the existing practices of the Franchisee. (6) The Buyer has failed to present any business plan or other documents 'indicating its short-term and long-term intent as to how it will operate the cable television system and how it intends to achieve an acceptable and reasonable return of and on its investment. (7) The County has carefully reviewed the financial qualifications of the Buyer. In order to determine the qualifications a buyer for a cable television system, or a series of cable television systems, it is necessary to not only review the net worth of the individual or entity assuming control of the franchise operations, but it is also necessary to evaluate the economic reasonableness of the transaction to determine whether the transaction will impose unreasonable financial burdens upon the purchaser which could result in material rate increases beyond that associated with normal operation of a cable system, reduction in service quality based upon cost cutting and expense minimalization, a combination thereof, a premature sale of the system, or financial insolvency. The lack of financial qualifications on the part of the Buyer can impose significant and serious financial consequences upon the County and its subscribers.' These kinds of concerns should not be underestimated even in the case of a 124M2395-000113217968.1 x11113198 3 sn,6 2-9-99 purchaser of substantial net worth who possesses absolutely no experience in the operation of cable television systems and the provision of cable television services. (S) The net worth of a proposed purchaser is only the starting point for the financial qualification analysis. Obviously, if the proposed purchaser does not possess sufficient cash or borrowing capacity to acquire necessary proceeds to close the transaction, financial unsuitability is established. In addition, if the proposed purchaser does not possess sufficient financial resources, by way of cash or reasonable and customary borrowing capacity, to operate the system, meet current and long-term liabilities when due including, but not limited to, capital expenditure requirements, financial unsuitability is the logical conclusion. However, even in the case of a proposed purchaser which possesses sufficient cash to close the transaction and operate the system consistent with franchise requirements, there are circumstances under which a buyer or proposed transferee may pay such a high acquisition price that it is financially impossiblefor that buyer, absent massive influxes of additional equity investments, to operate that cable television system in a manner which pays current and long-term liabilities, covers debt service, and provides a reasonable and adequate return of and on equity investment as prescribed by the Regulations of the Federal Communications Commission (the "Commission"). (9) The Commission has established presumptive financial standards pursuant to its Preliminary and Final Costs of Service Regulations (collectively, the "COS Regulations") to measure the fuiancial performance of cable television systems. Pursuant to those COS',Regulations, a cable television operator is presumptively entitled to earn a return of 1.1.25 on a post-tax basis on its rate base. A cable operator is entitled to rebut this presumption and earn a higher rate of return based upon certain showings including the use of the cable operator's actual capital structure as opposed to a hypothetical capital structure. Pursuant to the COS Regulations, regulated rates are adjusted to reflect a revenue target based upon the application of the permitted rate of return to the permitted rate base. (10) The cable television industry, including but not limited to TCI, have utilized costs of service filings to justify regulated rates in excess of Benchmark Standards based upon the use of the acquisition price paid in a system sale as all or a portion of the permitted rate base. The cable industry, including TCI, has established linkage between transfer proceedings and regulated rates by affirmatively utilizing approved transfers as the purported legal justification for the adopting of regulated rates significantly in excess of Benchmark Standards. 'Although the COS Regulations have been recently modified by the Commission, the presumptive nature of the final COS Regulations do not preclude a relaunching of a frontal attack upon Benchmark Rates through the inclusions of Transfer Intangibles in the permitted rate base. The COS Regulations continue to provide a useful yardstick to adjudge the financial feasibility of cable television transactions, and thus the financial qualification of cable system's transferees and buyers, as one indice of reasonableness. (11) It is fair and reasonable to assume that a rational purchaser will attempt to rover its investment and a reasonable return thereon over a financially reasonable projection period. Irrespective of the net worth of a purchaser, it is not reasonable to assume 124/062395-000113217968.1 a13113198 SD,6 2-9-99 that any purchaser is willing forsake investment recoupment and the attainment of a reasonable return. Although some purchasers may be willing to defer a return on a cash-flow basis for same reasonable period of time, that deferral will simply magnify the return that must be earned at a later period in order to allow the investor to achieve targeted returns over the projection period. Notwithstanding numerous demands, the Buyer has refused to provide income projections as to how these financial goals will be achieved. (12) In evaluating initial franchisee awards, it is custom and practice in the industry for franchising authorities to consider the economic reasonableness of the franchise proposal in determining financial suitability in addition to the net worth of the applicant or the parent of the applicant. A proposed purchaser should not be adjudged under a lesser standard than that applicable to the same entity if it was applying for a new franchise. (13) In evaluating the financial suitability of a proposed purchaser, it is appropriate to evaluate the reasonableness of the financial projections that underlay the calculationof the acquisition price. By definition, failure on the part of the Buyer to achieve the projected revenue and ultimately net income levels could produce a serious risk to the financial viability of the cable operation. To the extent that project income levels are not achieved, the proposed purchaser will not achieve the targeted rate of return. Serious deficiencies between projected and actual revenues and income can result in debt service coverage breaches, debt service payment breaches, capital expenditure reductions, operating deficiencies, and sizable rate increases in both regulated and unregulated rates. (14) The reported acquisition price is $2,923 per subscriber (the "Acquisition Price"). The Cle TV Financial Data Book published by Paul Fagan Associates, Inc. ("Kagan Databook"), a respected industry financial publication, indicates that even in a period of rising subscriber values, this sale is significantly her thanany other transaction other than the 1998 Charter Communications, Inc/Paul Allen acquisition. Other than the Charter/Paul Allen acquisition, all of the rued 1997=1998 tranagc tions fall'significantlylow the A4uisition Priced for this Transfer. The Acquisition Price materially exceeds market values for 1997 and 1998 by a significant margin. (15) The Applicants have been requested by the County to provide an explanation'and justification for the aggressive Acquisition Price but have failed to provide any independent corroboration or justification for its calculation. (16) Based upon a review of relevant industry data and the information provided by the Applicants, it is reasonable to conclude that the attainment of revenue increases necessary to sustain the Acquisition Price over the next 10 years, especially given the competitive pressures which will be caused by pending telco, DBS, and MMDS entry into the market, may be questionable. The Transfer poses a significant risk to both the County and cable television subscribers without offsetting subscriber benefits. 12$106245-0001/3217968.1 aW13799 5 SD,6 2-9-9R (17) If revenues necessary to sustain the Acquisition Price cannot be attained, and the Buyer is not able to obtain a reasonable return of and on its investment by way of operation of the System, there is a significant risk that the Franchise will be sold or transferrer/ once again during its existing term, thus causing potential disruption of services and potentiallyforcing subscribers to bear the costs, including the transactional costs associated with this transaction and future transactions, without any offsetting subscriber benefits. (18) The Applicants have failed to provide evidence denying the existence of the various risks described above or demonstrating the potential benefits to the County and subscribers which might justify the incurrence of the risks describers above. The Applicants'have been presented with numerous opportunities to do so. The Buyer is clearly less qualified to own and operate the cable system than the Franchisee. In addition, the Acquisition Price materially exceed industry standards and thus exposes the County and its subscribers to risks beyond those currently associated with the Franchisee. (19) To the extent that the Buyer cannot achieve sufficient revenues to support the,Acquisition Price, the Applicants may be forced to increase Basic Service and Cable Programming Service Tier rates or reduce service levels to levels which exceed industry averages. (20) Given the risks associated with the Transfer, as identified above, it will not be in the public interest for the County to unconditionally approve the Transfer at this time. This disapproval of the Transfer contained herein is without prejudice and may be reconsidered by the Board of Supervisors when and if the Applicants are able to present evidence demonstrating the Buyer's technical and financial suitability. (d) The County has requested in writing, on numerous occasions, information regarding the Buyer's business and operational plan relating to assimilation, if such is to exist, of the cable system into the Buyer's telephony managerial, organizational, and technical infrastructure. The Applicants have consistently refused to provide said information based either upon a claire as to the lack of its existence or claims of irrelevancy and confidentiality. Based upon the Applicants refusal to provide requested additional information, the County can only speculate as to the Buyer's intent, or lack thereof, relating to the legal and/or practical merger of its telephony and cable operations assuming approval of the Transfer. Based upon the magnitude of the Acquisition Price and various statements of representatives of the Applicants in the popular and trade press, it is reasonable to assume that the Buyer projects some degree of convergence between its telephony operations and cable operations. Pursuant to relevant federal and state law, the Buyer's telephony operations, with the exception of certain right-of- way management functions, are regulated almost exclusively by the Commission and the California Public Utilities Commission (the "PUC"). On the other hand, TCI's cable operations are, with minor exceptions, not subject to the jurisdiction of the PLIC and regulated jointly by the Commission and the County. In addition, and by way of illustrative example as opposed to exhaustive inclusion, the County is legally authorized pursuant to federal and state law to collect a franchise fee upon cable service, as defined in the Cable Communications Policy Act of 1984, 1241062395-000113217968.1 e11113/99 6 SD.6 2-9.99 as amended (the "Cable Act"). On the other hand, state law currently precludes the imposition of a franchise fee upon services provided by a telephone corporation, as defined in the California Public Utilities Code. The blending of telephony and cable services within one legal, organizational, and/or technical infrastructure could conceivably result in a minimalization of the County's ability to collect compensation for the use of its rights-of-way and erode the legal jurisdiction of the County over the regulation of cable services below that which currently exists in relation to TO and the Franchisee. Although many of these issues could well be addressed, by way of legal analysis and contractual provisions, if the Applicants were willing to disclose their intentions or business plan, or lack thereof, relating to the assimilation of TCI's cable operations into the legal, managerial, operational, and technical infrastructure of the Buyer, the Applicant's refusal to provide this type of information, notwithstanding numerous requests, creates a risk to the County's revenue base and regulatory authority which cannot be mitigated nor justified based upon the state of the facts and the evidence contained in the record at this point in time. 3. An unauthorized transfer of the Franchise, transfer of actual or managerial control of the Franchise, and/or transfer of control of the Franchisee, shall constitute a material breach of the Franchise. 2.24/462395-000113217969.1 111113198 7 SD.6 2-9-99 This Resolution is hereby approved and adapted by the Beard of Supervisors of the County of Contra. Costa, on this _ day of December, 1995, by the following vote and the Mayor is hereby authorized and instructed to execute this Resolution on behalf of the County. AYES: NOES: ABSTAIN, Mayor ATTEST: Clem of the Board of Supervisors 1241062395-CMI/3217958.2 all/13199 2-9-99 EXHIBIT A " A � t �� iT%./.it SENA. & TUCKER" LLP ATTORNEYS AT LAW A PARTNERSHIP INCLUDING PAO£CSS)ANAL CORPORATIONS JANE$A.MOOAC" Wi LU.M J.CAPLAN 611 ANTON SOULEVARO, SUITE 1600 J€F£REY WSKTWStMSA SGOYT R.BANTA9ATA 0 V FREOCAIC MAR% M:C"ACL T. .0R.A9 ROB CRT O.OWCN ALL€N C.09TCR&AR tt! RICHA"O A.CUANUTT .'LIP S.KOHN COSTA MESA, CALIFORNIA 92626-1996 ADAM N.VOLKCRT JCNNi£CR WHIT€�dPCALiNO LCONARO A.HAMPEL JOCL O.KUPCNSCRO JCF£ACY A COLOFAAS STCVCN J.oOo. JON"B.HURLOUT,JR. STCVCN A.MICHOLB DIRECT ALL MAIL 7CY: P. O. B®X i5i$CY R.KC-.*—K aOUaLAR J.*CNH#Novo. MICHAEL W.#NMCLL THOMAS a. AROCIUNGTO" 1A—Z N.MCLZ4R TACO A.JU1,ANOCK M4Xono W.*AHL,JR, wCLLIAM W.WYNOCR COSTA MESA, CALIFORNIA 98626-199C# L.RK)NARRSS*N KA. a.LIT£#N vM€OOORC t.WALLAC€.JR!' EVRSOIKt{vtCKf#aALIAB ELISE K.YtU4YNUM ]{ARA S.GiAL.SaM OILBCRT N.KAVOCR RANOALL M,SASBU$N LARRY A. GCA UVTI 'ZERIL.OVNN JaSCPH O.CARRUT. NARY M.oACCN TELEPHONE (714$ 641-51#7 tJ CAROL O.C:HCC FRCS oA. Lo RICNA.o P.CIMS GACao AMOCO PICHAR K0.MSC CLL CRLSTY o.LOMCNZO JAMES B.O.NCAL TY.OMAS J.CRAMS FAX (71+4) 546-97035 JAMES O K„ I SZ. SCF£RCY Y.NCLCNINo ROSCAT C.BAAU. MARK B.£RAZaCR JAMES S.W€#SZ" SCAN P.FAARSLL YHOMAS S.6^LH,i*ZK° M.:KAT"CR!NC JCNSO. MtCNACL K.SLAT'YERY MARLCNC PoBC OAVIS C.LAASCN' OUKC£.INA"LaU1ST A.PATRICK MURoz APRIL LCC WAL?%O CL#BPORo C.FRICOC" RICHAAO O.MONTCV!OCO A.W. RUTAN (MOO-to7x) *CORA SUN.STCCL KAREN CL#ZABCY"WALTCR M#CHACL a.AVS'. LCR:SAA.CR SMITH JAMC6 H.TUCKCR,SR.jYBjffi-taAOY OAWO R.NOCNNCR NATAMC SIBBALO DUNOAS MIL£OAa W. DAHL. 90. 0010-tO88t *AN BEATER AUS*"M.SAASAROS" JC££RCY V.OOCAMAN" S4:EASCTR L.MARTYN H. *009 C. NOWC44;tS88-#O439 PAUL J.BSEV€R'8 JOHN W.NAM#LYON,JR. STAN WOLCOTT" IHW O.TNOMPSON S.SANICL HARSOTTLC VLAa1MIR P,SCLo Aout^T S."4 KA JANKACCR KEN" M. C YC TAYLOR LAYTON LYNN LOSCH#N aAV$D J.ALCSR#AC OAY O B.CaSSROV€ JOSEPH L MAGA 1. PHILIP J.SILANCHARO MAACtA A.F*"SYTN "ANS VAN UOTCH KRAta C.K#L.ox" TCRCNCC J. OALLAOHCR T{ WILLIAM N.MARCOACNA STICPHSN A.CLLt6 JANE&L NoRms MATTHEW K.ROSS °A FKdPSiSKJNs#.EtiriIPOR�TfOtt *£COUNSEL COWARD O.BYBCSMA,./R..' OAVIO J.GAAtSALOI,III September 16, 1998 Bob Haehnel, General Manager United Cable Television of Santa Cruz, Inc. TCI Cablevision of Santa Cruz County 136 whispering Pines Drive Scotts Malley, CA 95066 AT&T Corp. Attn: Michael Olsen Roam 630 795 Folsom St. San Francisca, CA 94107 Re: City of Santa Cruz and County of Santa Cruz, California (collectively, the "Franchising Authorities") ; FCC Form 394 (the "Application") , filed by 'fele-Communications, Inc. ("TCI"") dated August 14, 1998 Relating to Change in Control (the "Transfer" or "Merger") Bear Messrs. Haehnel and Olsen: This Office represents the Franchising Authorities in relation to the application for approval of a transaction which results in a change in control of the cable television franchiseses (collectively, the "Franchises") franchisees for the Franchising Authorities (collectively, the "Franchisees") . In regard to said Application, the Franchising Authorities, through this office, request that TCI, and its affiliated and related entities = (collectively, ""TCI"") and AT&T Corp. and its affiliated and related entities, (collectively, "AT&T") , the designated Transferee, provide certain information regarding the potential economic impact of said Transfer, upon the rates which will be, or may be, charged for the provision of regulated and unregulated services within the Franchising .Authorities. More specifically, and without limitation, the Franchising Authorities are concerned whether the Transfer, considering the totality of its economic impacts, will preclude', or impede AT&T from realizing a reasonable rate of return pursuantto the Federal. Communications Commission's (the 1241011706-001013200310. 809/16198 SD.V 2-9-99 ATTORNEYS AT LAW A PARTNCASHIP tNCL4D$.B PW rxx1,0N-CO PQRAT26N'J Bob Haehnel Michael Olsen September 16, 1998 Page 2 "Commission") Benchmark Regulations, as currently found in the Second Order on Reconsideration, Fourth Reporting Order, and Fifth Notice of Proposed Rulemaking (MM Docket No. 92266, FCC 94-=38 , released March 30, 1994) (the "aecond Order on Rett>nsideratitan") , as amended and currently codified at 47 C.F.R. § 76.922 (i) , or whether the. Transfer may or will cause AT&T, or any entity related thereto, to File a new or amended Cost of Service submission pursuant to the Report and Order and Further Notice of Prgpgsed Rulemaking (MM Docket No. 93--215, CS Docket No. 94--28, FCC 94-•39, released March 30, 1994) (the "Cost of Service Report and Order") and. the Second Report and order, First Order on Reconsideration, and .further Notice of Proposed Rulemaking (MM Docket No. 93°215, CS Docket No. 94--28, FCC 95- 502, released January 26, 1996) (the "Final Cost of Service Report and Order") (collectively, the "Cost of Service Rules") in any of the jurisdictions which constitute the Hay Area Systems within the meaning of the Stipulation and Consent Judgment filed on May 16, 1989 (the "Consent Judgment") . More specifically, the Franchising Authorities hereby request that .AT&T, or any entity related thereto which will control the Franchises or the Franchisees, certify in writing that based upon conditions known to it at this point in time, and taking into accountthe close of the Transfer and the economic burdens and benefits associated therewith, the rates which can be charged by AT&T, or any entity related thereto which will control the Franchises or the Franchisees in Santa Cruz or any of the Day Area Systems, pursuant to the Second order on Reconsideration, and without any filing of a Farm 1.220 pursuant to the Cast of Service Rules, will provide AT&T with a reasonable and adequate rate of return. if AT&T is not in the position to provide this certificate to the Franchising Authorities, or declines to do so then AT&T is hereby requested to provide the following information relating to the cable system in Santa Cruz and/or the Bay , Area Systems (collectively, the "Cable Systems") in writing within fifteen (15) days of the date of this letter; (1) Has AT&T carefully read and considered the Commission' adoption of a presumptive original cost approach to system valuation, as fecund in the Cost of Service Report and Order, Paragraphs 53 -- 67, prior to its entry into this transaction? (2)' is AT&T willing to value its acquired Cable Systems on Form 1220 pursuant to the original cost approach specified by the Commission in Paragraphs 53 - 67 of the Cast of Service Report and 124/O11706-0010/3200310. 09/16198 F�UTAN & TUCKER, LLP 2-9-99 ATTORNEYS AT LAW A*RRTNLRS"1*MCLUM"a PROOIKSWON^i C..0044TICNS Bob Haehnel Michael Olsen September 16, 1998 Page 3 order or the limited "step-up" basis allowed pursuant to the FLnal Cost of Service Report and Order? (3) if AT&T values its rate base pursuant to a strict application of the original cost approach as specified in Paragraphs 53 - 67 of the Coast of Service Report aid Order or the limited' "step-up" basis allowed pursuant to the Final Cost of Service' Report and Order, and applying the other standards articulated by the Commission in said Cost of Service Report . and carder including, but not limited to, the targeted rate of return, will such an application produce an acceptable overall rate of return to AT&T or will the application of these criteria without modification result in a confiscatory or otherwise unlawful rate of return?' (4) Roes AT&T contend that all or any portion of the acquisition price for the Cable Systems constitutes "organizational costs" within the meaning of Paragraph 86 of the Cpst of service Renort and Order? if so, specify the amount or percentage that AT&T.'. contends constitutes organizational costs and provide a detailed and specific justification for said allocation. (5) Does AT&T contend that all or any portion of the acquisition price for the Cable Systems constitute ".franchise costs" within the meaning of Paragraph 87 of the Cost of Service ReDosrt and Order? if so, please specify the amount or percentage which AT&T contends should be allocated to franchise coasts and provide a detailed and specific justification for said allocation. (6) Does AT&T contend that all or any portion of the acquisition price for the Cable Systems constitutes consideration paid for "customer lists" within the meaning of Paragraph 88 of the Cost of Service Report and Order? if so, please specify the amount or percentage which AT&T contends should be allocated to customer lists and provide a detailed and specific justification for said allocation. (7)' Does AT&T maintain that all or any portion of the acquisition price for the Cable Systems constitute accumulated start-up losses within the meanings of Paragraphs 70 - 73 of the Cost of Service Rj��poart_ and order? If so., please specify the amount or percentage which AT&T contends constitutes accumulated start--up coasts and provide a detailed and specific justification for said allocation. 124/011706-0010/3200310. a09/16/98 FKUTAtel & TUCKER, LLQ 2-9-99 ATTORNEYS AT LAW NtCL.UD-0 PlNO4€3S#6N#:.€OR>Oe#TIONS Bob Haehnel Michael Olsen September 16, 1998 Page 4 (S) Does AT&T contend that all or any portion of the acquisition price for the Cable Systems constitutes consideration for "patent rights" within the meaning of Paragraph 99 of the Cost of Service Report and Order? If so, please specify the amount or percentage of the acquisition price which AT&T contends is consideration for patent rights and provide a detailed and specific justification for said allocation. (9) Does AT&T contend that the allowance of "goodwill, " as that term is defined in paragraph 99 of the Cost_of Service Report and_ Order, into the rate base would result in reasonable rates? if so, phase provide a specific and detailed explanation and justification for said contention. (lo) Does AT&T contend that any and all goodwill which it proposer to include within the rate base was the result of an arms- length transaction? If so, provide a specific and detailed justification for this contention. (11) noes AT&T contend that any and all goodwill which AT&T contends should be included in the rate base has produced or will produce for subscribers of the Cable Systems concrete benefits that would not have been realized otherwise? If so, please: provide a specific listing of said consumer benefits including a valuation for each benefit, a collective valuation, and a specific and detailed explanation as to why those benefits would have not been realized had the transaction not taken place. (12) What amount or percentage, if any, of the acquisition price as it relates to the Cable Systems constitutes goodwill? (1 ') Does AT&T contend that a strict application of the cost of service criteria as contained in the. Cost of Service Report and Order, including a complete disallowance of all goodwill as defined therein, would threaten the financial health of the operator and its continued ability to provide cable service as that phrase is utilized in Paragraph 292 of the Cost of service Re rt and order"? If so, goes AT&T contend that it would be eligible for hardship rate relief within the meaning of Article X of the Cost of service Report and Order? If so, provide a detailed and specific explanation and justification for this contention. (14) Please provide immediately preclosing and mediately post-closing pro forma balance sheets for each of the following entities': 124/01.706-001013200310. x09116/98 SD.6 2-9-99 RUTAN & TuCKER, LLP 1 ATTORNEYS AT LAW A PA.TNCXSp40 WCWD1k'0 PROM2510%8L CG*PORATIO.S Bob Maehnel Michael Olsen September 16, 1998 Page 5 a) UA, Midwest, Inc. b) UACC Midwest, Inc. c) United Cable Television of Santa Cruz, Inc. d) Tele--communications, Inc. e) AT&T Corp. f) Liberty Media Corporation g) Liberty Group LLC h) Italy Merger Corp. i) TCI Communications, Inc. j) TCI ventures Group LLC. (15) Has TCI and/or AT&T, or any parent, subsidiary, affiliate, or any entity that controls or is controlled by 'ICI and/or AT&T, filed an FCC Form 1220, or ether cost of service filing,', with any jurisdiction in which any cable television plant or system was valued, or attempted to be valued, in any manner other than the presumptive original cost standard as found in the Cost _cif,_Service Re wort and order, Paragraphs 53--67, or wherein any acquisition costs, of any kind, were included in the Rate Base valuations? If so, please provide copies of all such Farm 1220's, with exhibits and attachments, or substantively equivalent documents along with any other supporting documents filed with the relevant jurisdictions. I have had the opportunity to preliminarily review your FCC Form 394 along with its various attachments. Although my analysis of the tendered documents is not yet completed, given the need for prompt action upon your Application, the Franchising Authorities requests that you provide the following additional information specified in this letter as expeditiously as possible. Of course, the information requested in this letter is not necessarily exhaustive and the Franchising Authorities, either directly, through this office, or through other consultants, may request additional information during the review process. Phase provide the fallowing information and/or documents to me on behalf of the Franchising Authorities: 1. A complete and nonredacted copy of the application, with all exhibits, schedules, supplements and amendments thereto, relating to approval pursuant to the Hart-Scott-Rodino Act. 2 . Financial statements setting forth the financial position of the current franchisee for the past five (5) years including the current year-to-date. Also, please provide an income and financial. 124/01i706-0010/3200310. *09/16/98 sRvTAN & TuCKER, LLP J 99 ATTORNEYS AT LAW A PARTNCRSKIP iMCLVOINfO PROrTSSWNAL COOPCRAT'0N3 Bob Haehnel Michael. Olsen September 16, 1998 Page 6 statement for the operations of the current Franchisee in the Franchising Authorities together with the rationale for the allocation of joint or common costs, investment, revenues, etc. for each of the past f ive (5) years including the current year-to-date. 3 . Financial pro formas for the operations of the current franchisee and its control entities for the next ten (10) years including .income statements, balance sheets and cash flow projections for operations within the Franchising Authorities including the following information: as A ten-year projection of revenues cash flows with the following detail: Projected number of Basic and CPST Subscribers Each Year + Weighted average basic cable rates per year • Projected basic and CPST revenue per year 0 Projected Pay TV revenue per year Other projected revenue per year: Cable equipment rentals Advertising Telephone service (if applicable) Other revenue (Home Shopping, etc. ) b. A ten-year projection of Expense Cash Flows with details of the following: Operating expenses * Sales and administrative +� Debt service (principal and interest on all debt + Capital expenditures and infrastructure buildout with detailed support for this 124/011706-001013200310. &09/16/98 SD.6 2-9-99 +RUTAN & TUCKER, L.LPFJ) ATTORNEYS AT LAW R pARTN$M3 ktM IkCGYtd{NU P4dP£S$tdNAL CORPCRATtdkS Bob xaehnel Michael Olsen September 16, 1998 Pane 7 computation. A separate schedule should be prepared showing projected expenditures .for: -- Infrastructure (construction of cable plant) Land and Buildings - Remotes, Converters and other Equipment -t Telephone equipment (if applicable) • Income taxes C. The "proforma'" forecast must demonstrate the effects of' the Merger, for example, any debt, asset value adjustments, goodwill, etc. arising from the acquisition must be amortized in the projection. d. Finally, adjustments should be made to convert the cash flow projection to a financial reporting basis. Amortizatoin of goodwill shall be taken into account whether or not recorded can AT&T's books or the books of any related entity. e. All "assumptions" supporting the 10-year forecast should be documented in writing by AT&T. 4 . Any and all contractual and/or management agreements to which TCI, AT&T, or any related entity is a party relating to or concerning the Transfer or the Systems. 5. ', Any and all plans and commitment for upgrading the Systems.' 6. A summary, verified by any and all lenders, of the terms and conditions of any lending agreement or equity purchase agreement relating in any way to the Transfer or the Systems. 7 . Please provide, if they exist, any and all agreements, trust agreements, trust indentures, management agreements, or any Cather document which exists in the hands of TCI, AT&T, or any related entity, or both, regarding the Systems or the Transfer. 124/011706-001013200310, &09!16/98 SD,5 " 2-9_99 iRUTAN 15.. TUCKER, LLP j ATTORNEYS AT LAW A P..AY#€A##:V!#CIVC!#O PROF€ISIO#Al GOAPOAAPSO#S Bob Haehnel Michael Olsen September 16, 1998 Page 8 S. Please provide, 'as of the current date and the projected closing date, a summary of all of. AT&T's outstanding long-term indebtedness for borrowed money, including the current portion thereof, and including any accrued but unpaid interest thereon and any prepayment premium or penalty with respect thereto. 9 Please provide a complete copy of any and all partner agreements, shareholder agreements or member agreements concerning, directly or indirectly, the Systems. 10. Please provide a Listing of the cable systems operated by AT&T and its affiliates or related entities. Please provide or state as to each systems a. The initial channel capacity of the system (indicate dates) . b. The current channel capacity of the system (indicate dates where appropriate) . C. The number of PEG channels. d. The yearly budget for local origination programming. e. The yearly budget for PBG programming. f. Whether the operator has expanded channel capacity or services in excess of franchise requirements. g. Any franchise enforcement actions, the dates, the subject matters, and the resolution. h. Any fines, penalties, or other enforcement actions undertaken by the franchising authority. i. The operator's compliance, or lack thereof, with either federal minimum customer service standards or customer service standards adapted by the local franchising authority. j . The cable system's rate history from 1990 to the present. k. Any customer service service/satisfaction surveys conducted by the operator or the franchising authority since the inception of the franchise. 1241011706-001013200310. &09/16/98 2-9-99 RUTAN c'S5ti TUCKER, LLP ATTORNEYS AT LAW A PA.T.T.S 10 MCtU01.0 P00MIIO.At C0.00ftA1,..i Bob Haehnel Michael Olsen September 16, 1998 Page 9 11. Please provide a narrative summary of how the proposed financing of the Transfer, or any transaction relating thereto, will work. Indicate and describe each legal entity and credit facility involved. 12. Please provide copies of signed and completed lean documents or a signed loan commitment which contains the following information: a. All material terms of the financing commitment including, without limitation, maximum available loan proceeds, interest rates, repayment schedule, reserve or set- aside requirements, rate, covenants, operating covenants, revenue covenants, negative covenants, prepayment options, commissions, underwriting fees, points, costs, collateral or security requirements, and financing fee requirements. b. A statement of all conditions of closing or other conditions to the commitment of the .lender to close the transaction. C. A written commitment of the lender not to materially modify any of the terms and conditions of the lending commitment as set forth in the commitment letter subsequent to its submission to the Franchising Authorities without the written consent of the Franchising Authorities. d. A list of all lenders or participants in any lending syndicate (the ".Lenders") . e. A schedule of the amount of lean proceeds which each of the Lenders have committed pursuant to any lending syndication (the "Individual Lending Amounts") . f. Sufficient financial disclosure information upon each of the senders to demonstrate that each of those entities possesses sufficient monetary resources to fund, without the need to raise additional capital or further syndicate the lending, its Individual Lending Amount. g. A pro forma "Sources and Uses of Funds" which will shod the actual uses of loan proceeds as of the dosing Date. 124/012706-001013200310. &09/16198 5 t z-9-99 RUTeaN & TUCKER, LLP ATTORNEYS. AT LAW A YART4K*%N WCW01-0 RROPCSSIO4At C0RP0NAVO4g Bob Haehnel MichaelOlsen September 16, 1998 Page 10 h. A projected debt service schedule showing interest payments, sinking fund payments, if any, principal payments, and ether required payments. i. A schedule showing all required and/or projected capital expenditures from all of its existing franchises plus the projected rebuild casts for all of its franchises. j . A letter of representation from any Lender(s) addressed to the Franchising Authorities as to the following: i. The copies of any commitment letter and summary of lending conditions provided to the Franchising Authorities constitute full, complete and nonredacted copies of said documents without deletion, addition, or modification. ii. Any summary of lending conditions contains all of the material conditions of the borrowing. iii. The material terms and conditions of any borrowing as set forth in any summary of lending conditions will not be modified, amended, supplemented, or otherwise altered without prior written notice to and the written consent of the Franchising Authorities between the date hereof to the Closing Date of the Transfer. Although the Franchising Authorities will commence financial review upon the receipt of a commitment letter which meets the above--described qualifications, the Franchising Authorities will require, prior to any formal approval of the Transfer, complete and executed lending documents which are consistent with the material terns of the commitment letter. 13 . ' Pro forma financial projections which reveal, as underlying assumptions, any and all rate covenants or operating covenants which are or will be included in any loan or equity financing documents, for a period of five (5) years, demonstrati SD6 i 2-9-99 RUTAN & TUCKER, LLP ' ATTORNEYS AT LAW A PARTNCR3xiP WCWU HO✓`ROM 2510NA4 CbRPCRA!sCx9 Bob Haehnel Michael Olsen September 16, 1998 Page 11, 14 . Copies of all financial projections, pro formas, pro forma balance sheets, pro forma income statements, and other financial documents submitted to any and all buyers, purchasers, lenders:, lending institutions, institutional. investors, private investors, or other individuals which have been approached by TCI and/or AT&T to provide equity or debt financing in relation to the Transfer or in relation to a sale of the franchises or franchisees or equity .interests in the franchises or franchisees. 15'. Please describe how the sale price or Exchange Rate was calculated. 1.6. Please provide a copy of the Non-Disclosure Agreement, dated as of May 26, 1998, between AT&T and TCI. 17 Please provide a copy of any and all proxy statements, or drafts thereof, which will be utilized by TCI, AT&T, or any unrelated entity to solicit shareholder approval of the Transfer. 18 . Please provide a copy of the voting Agreement, dated the date thereof, by and among AT&T and each of the stockholders as these terms are utilized in the Agreement and Plan of Restructing and Merger among AT&T Corp. , Italy Merger Corp. , and Telecommunications, Inc. , dated as of June 23, 1998 (the "Merger Agreement") . 19. .Please provide a flow chart demonstrating the structure of TCI,, AT&T, and its related entities prior to the closing of the Merger and a flow chart demonstrating the legal structure of 'ICI, AT&T, and its related entities which are the subject of the Merger Agreement subsequent to the closing of the Merger. 20. Please provide a copy of the Company SEC Reports as that term is utilized on page 33 of the Merger Agreement. 21. Please provide a copy of the Company's Capital Spending Plan, dated June 2 , 1998 as that term is utilized on page 49 of the Merger Agreement. 22 . Please provide a copy of the Parent Charter Amendment as that term is utilized on pane 59 of the Merger Agreement. 23 . ' Please describe the purpose for the creation of the Parent Liberty Tracking Shares as that phrase term is utilized in the Merger Agreement. 124/011706-00 1 0/3 2 603.©. 49116/98 d SD.6 �''yy p y+�p ,{ °'�' .✓ ply i 2-9--99 ATTORNEYS AT LAW a f.ATpttRSktr»eta.aoeao rwortsuowwr,coreroxw-caws Bob Haehnel Michael Olsen September 16, 1998 Page 12 24 . Please provide a copy of the Firewall Agreement referenced in Sections 7 . 14 and 7.18 of the Merger Agreement. 25. Please provide a list of the "number of lawsuits challenging various aspects of the Telecommunications Act of 1986 that have been filed and are pending" which are referenced in Section ,6. 1(d) of the AT&T Corp. Disclosure Statement dated June 23, 1998 (the "AT&T Disclosure Statement") . 28 Please indicate the amount of the "Bona Fide Purchase Offerf° which was made by AT&T and/or TCI for the punccase of the majority', stock in the Grantee as those phrases are used in Paragrpa 1.5(a) of the First Amendment to Franchise Agreement beteen the City of Santa Cruz and Greater Santa Cruz Cable TV Associates, Inc. , and the First Amendment to Franchise Agreement beteen the County of Santa. Cruz and Greater Santa Cruz Cable TV Associates, Inc. (collectively, the "Franchise Agreements") , and provide to the Franchising Authorities copies of letters or other written correspondence satisfying the obligation of the franchisee to notify the Grantor within ten (10) days, in writing,, of any such Sona" Fide Purchase Offer for the purpose of the right to purchase or use the system as specified in Pargarph 1 (a) of the Franchise Agreements. The informatoin requested above shall be deemed to be "information as Grantor reasonably requests in connecion with such change of control" within the meaning of Section 3 (n) (1) of the Cable Communications Franchise Ordinance of the City of Santa Cruz and Chapter 5.24. 030(n) (1) of the 'Code of County of Santa. Cruz. Please deliver the above--requested information to me, on behalf of the Franchising Authorities, within fifteen (15) days of the date of this letter, and I will assure distribution to relevant Staff. Very truly yours, RUTAN & TUCKER, LLP William M. Marticorena WMM:mc.vjb cc; .Pat Busch, Assistant County Administrative Officer, County of Santa Cruz Richard Wilson, City Manager, City of Santa Cruz 1241011706-001013200310. zOW16t98 2-9-99 EXHIBIT B 6 i 2-9-99 H U TAN & T u V K E R j I LP ATTORNEYS AT LAW A PARTNERSHIPINCLUDING PROP£8$tONAL CORPORATIONS JAMCa R.MOORS° M;cNAEL r.NO3cxnK 613. ANTON BOULEVARD, SUITE 14O0 kOOCRT O.O-CH ALLCN C.O*TER$A,I, PAUL FRED.RIE MARX JO LtP. KONx AD..N,VOLKERT JENNIFER WNIT€-aMEkitNO RICNARO A.CURNUTT JOEL O,K wc.O a COSTA MESA, CALIFORNIA 92626'-tSISS JEPFRSY A.COLOPARS STENS.J.**ON LEONARD A.xAMPCL *TENS.A. &ROCI* F.KS N **AIDL "WOLAN J.*SNNtNOrCN .ICH 6.W. UT,JK. Tx$MAa 6,WYNOW NOP$. LAYMS N.Me zen TREE A.JULANDER k4tPNICNAEL W.C"LE W1:>L:AM W.WYNDER DIRECT ALL MA{L TO. P. D, 80X (!iffiO i.aat NARRIaON TODD o.VTFIM V"CO RO W.OAWL.JR. RANDAC"IMKt I M. MA OALtJAE CitaE a.TRAYNUM KARA a.CARLSON TNCOOORE{.WALF.ACE,JR? RANDAL M.pACaUaN COSTA MESA, CALIFORNIA 02628-1030 LARRY A.CCRUTY1 CSIC L.DUN. OMOCAT N.KRU$ER MAaY M.$RCE. - CARoi D.CARTY FRE$aALANTC JOSEPH D.CARRNTN O'Coo Amet* � TELCP{i CINE (714) 64t-{5100 PATRICK O.MCCAUA CRISTY D.LONENZO RfCNARO P.SINS TRO."J.CRANE RICKARD K.NOWCLL JEFFREY T,MELC.MtN$ JANE**.o°NEAL NARK a.C PARR FACSIMILE (7{4) 546-0095 JAMES a.wEfair SEAN P.PARRCLL rNOkAO C.xAuN MSWELOPC PAfi CN&MC6 NICNAEt.K.*IATYERY MARLCNC POSE rNOMAa S. HacN.N$ER° M.KA F.WA S JENaON A.PATRICK MUAOt APRIL LEC WALTCR CLIFF0DAVID.0C. C.rAfc DUKE F.W.MOUtaT INTERNET WWW.LU4Afl,C'OfIZ DPp*A DUN"STE.Ci WAREN ItUrA*ETH WALTCR .ICN^ l E. USEDEN LORI A $,MOMTCVtOE6 - ""to N.NOCNNCR NATALIC aIYRA%.D DUNG" MICHAEL 8.RUaiIA LORI aARNER MATTE DAN SUATCR ^1.1"M M.Z^AAAROS" JRA$,RJw ERtMAXE W.L. M.. ttI A.W. RUTAN fON.JI DTCt PAUL J,aICVCMS JONN W.NAMILTON,JR. JCFFRCY M,OOEKMANd Stt."..ARiLTN i.NARTYN JAMCE a.TU CKCR, $R.{Itl**-tlOaB{ a.DANiCL NAA*OTTLE VLAO,M,. P.OWL* *TAN WOLCOTT- Kt M-D,TWOMPaoN Ntt.FORO W. DAN L,aR,:;pip-t4**J KEMY N.CLAYTON LYNN LO*CNIN ROiCRT a,SOWER JAYNE TAYLOK KACCR N..00OCR NowSLL NLEa-tosal J06EPN L.MASA ttt PNIItP J. aLANCxARD DAVSb Jr ALEptttRG OA4I0 R.CoapROVE KRAla C.Ktl$C# TCRCNCE J.oAL'..AONSR MARCIA A.FORSYCN -ANS VAN UOTEN SCOT£R.MLO AdATA WILLIAM M.MAnT#CDRENA *TGPNCN A.FLUS ,AMC$L.MORRta MAYINEW K.Rosa WOULtAM J.CAPLAN JSPFRCY WCRTNCCMER OFCDUWOCL EDWARD D.pYpEaMA,JR.° DAVID J.OARMALDi,III September 30, 1998 TCI of California, Inc, Attn: Cheryl Blanchette, Government Affairs Director Fast Bay Regional office 41.31 Lakeside Drive, Suite B Richmond, CA 94806 AT&T Corp. Attn: Michael Olsen Room 630 795 Folsom St. San Francisca, CA 94107 Re: City of Berkeley, City of Richmond, and Contra Costa County, California. (collectively, the "Franchising Authorities") i FCC Form 394 (the "Application") , filed-by Tele-Communications, Inc. (s'TCI") dated August 14, 1998 Relating to Change in Control (the "Transfer" or "Merger") Dear Ms. Blanchette and Mr. Olsen: This Office represents the Franchising Authorities in relation to the application for approval of a transaction which results in a change in control of the cable television' franchises (collectively, the "Franchises ") and/or franchisees for the Franchising Authorities (collectively, the "Franchisees") . In regard to said Application, the Franchising Authorities, through this office, request that. TCI, and its affiliated and related entities ',(collectively, "TCI") and AT&T Corp. and .its affiliated and related entities (collectively, "AT&T") , the designated Transferee, provide certain information regarding the potential economic impact of said Transfer upon the rates which will be, or may be, charged for the provision of .regulated and 'unregulated services within the Franchising Authorities. More specifically, and without limitation, the Franchising Authorities are concerned whether the Transfer, considering the totality of its economic 8241011597-0001/3205131. *094"99 e 2-9-95�-99 ATTORNEYS AT LAVE A PARtftCRBN)P IMCWO�-O PROIVIVONAL CORPORAY10.8 Cheryl. Blanchette MichaelOlsen September 30, 1998 Fade 2 impacts, will preclude or impede AT&T from realizing a reasonable rate of return pursuant to the Federal Communications Commission's (the "Commission") Benchmark Regulations, as currently found in the Second order on Recur sideration, Fourth Reporting Order, and Fifth Notice of Proposed Rulemaking (MM Docket No. 92-266, FCC 94-38, released March 30, 1994) (the "Becond Order oxo Reconsideration"") as amended and currently codified at 47 C.F.R. 76.922 (1) , or whether the Transfer may or will cause AT&T, or any entity related thereto, to File a new or amended Cost of Service submission pursuant to the Report and Ore d Further Notige of Proposed Rulemaking (MM Rocket No. 93-215, CS Rocket No. 94-28, FCC 94^39, released March 30, 1994) (the "Cost of Service Repoj± aDd t7rder"} and the 'Second Report and Order, First Order on Reconsideration, and further Notice of Proposed Rulemaking (MM Docket No. 93--215, CS Docket No. 94-28, FCC 95-502, released January 26, 1996) (the "Final Cost of Servicec o t d O d r") (collectively, the ""C. ort of Servide Rules") in any of the jurisdictions which constitute the Franchising Authorities. More specifically, the Franchising Authorities hereby request that AT&T, or any entity related thereto which will control the Franchises or the Franchisees, certify in writing that based upon conditions known to it at this point in time, and taking into account the close of the Transfer and the economic burdens and benefits' associated therewith, the rates which can be charged by AT&T, or any entity related thereto which will control the Franchises or the Franchisees, pursuant to the Second Order cin R econsideration, and without any filing of a Form 1220 pursuant to the gost ,.gf Service Rules, will provide AT&T with a reasonable and adequate ,rate of return. if AT&T is not in the position to provide this certificate to the Franchising Authorities, or declines to do so, thea AT&T is hereby requested to provide the following information relating to the cable system in the Franchising Authorities (collectively, the "Cable Systems") in writing within fifteen (15) days of the date of this letter: (1) Has AT&T carefully read and considered the Commissionfs adaption of a presumptive original cost approach to system valuation, as found in the. Cast of Service Report and Order, Paragraphs 53 -- 67, prior to its entry into this transaction? (2) is AT&T willing to value its acquired Cable Systems on Form 1220 pursuant to the original cost approach specified by the commission in Paragraphs 53 67 of the Coast of Serplce amort and 1zar011597-OWI/3205131. x09/30198 AN �` RUT.AN & TUCKER, LLP 2_9-99 1 ATTORNEYS AT LAW A VAFYXC:1Y Hip tlNi:LUiSfYfH 1^RCC'CESfC'NAL CNVCKA.M.S Cheryl Blanchette Michael Olsen September 30, 1998 Page 3 2rder or the limited "step-up" basis allowed pursuant to the y°nal Cost of Service Report and order? (3) 1f AT&T values its rate base pursuant to a strict application of the original cast approach as specified in Paragraphs 53 - 67 of the Cast of—Service Report and Clyder or the limited "step-up" basis allowed pursuant to the Final Cast of Serviceepc, t and Oder, and applying the other standards articulated by the Commission in said Cost of Service deport and Carder including, but not .limited to, the targeted rate of return, will such an application produce an acceptable overall rate of return to AT&T or will the application of these criteria without modification result in a confiscatory or otherwise unlawful rate of return? (4) Does AT&T contend that all or any portion of the acquisition price for the Cable Systems constitutes "organizational costs" within the meaning of:Paragraph 86 of the Cogt2f ..Service Report and.-Order? if so, specify the amount or percentage that AT&T. contends constitutes organizational costs and provide a detailed', and specific justification for said allocation. (5) , Does AT&T contend that all or any portion of the acquisition price for the Cable Systems constitute "franchise costs" within the meaning of Paragraph 87 of the Cost of Agpvice Report end ar er? if so, please specify the amount or percentage which AT&T contends should be allocated to franchise casts and provide a detailed and specific justificati SDk 2-9-99 • ATTORNEYS AT LAW R pRFTNP«MSMi4+lNCLUgiNq PpgtCSSINAL GgNMORAS159Ni _ Cheryl Blanchette Michael Olsen September 30, 1998 Page 4 (8) Does AT&T contend that all or any portion of the acquisition price for the Gable Systems constitutes consideration for "patent rights" within the meaning of Paragraph 99 of the Cast of Service Report and Ord ? If so, please specify the amount or percentage of the acquisition price which AT&Tcontends is consideration for patent rights and provide a ' detailed and specific justification for said allocation. (9) noes AT&T contend that the allowance of "goodwill," as that term is defined in Paragraph 99 of the Costof Service Report and order, into the rate bane would result in reasonable rates? If so, phase provide a specific and detailed explanation and justification for said contention. (10) Roes AT&T contend that any and all goodwill which it proposes to include within the'rate bade was the result of an arms-- length transaction? If so, provide a specific and detailed justification for this contention. .(11.) Roes AT&T contend that any and all goodwill which AT&T contends', should be included in the rate base has produced or will produce for subscribers of the Cable Systems concrete benefits that would not have been realized otherwise? If so, please provide a specific listing of said consumer benefits including a valuation for each benefit, a collective valuation, and a specific and detailed explanation as to why these benefits would have not been realized', had the transaction not taken place. (12) What amount or percentage, if any, of the acquisition price as it relates to the Cable Systems constitutes goodwill? (13) Does AT&T contend that a strict application of the cost of service criteria as contained in the Cost of Service Report and Qrd. r, including a complete disallowance of all goodwill as defined therein, would threaten the, financial health of the 'operator and its continued ability to provide cable service as that phrase is utilized in Paragraph 292 of the Cost, of Srvice: g-,port and (te r? If so, does AT&T contend that it would be eligible for hardship rate relief within the meaning of Article X of the Cost of Service Report_ and Order? If so, provide: a de=tailed and specific explanation and justification for this contention. (14), Please provide immediately preclosing and immediately post-closing pro forma balance sheets for each of the following entities: saar0iz59r.rt OU32asz3s. 09M98 JdJ'.G RU"1-AN & TUCKER, LLP ATTORN MMS AT LAW b P'AdPNLNSNiM INCL,UOINE3 P.CIENWO L C0.00—t10N5 Cheryl Blanchette MichaelOlsen September 30, 1998 Page 5 a) Heritage Cablevision of Delawrae, Inc. b) Tele-Communications, Inc. c) AT&T Corp. d) Liberty Media Corporation e) Liberty Group LLC f) Italy Merger Corp. g) TCI Communications, Inc. h) `ICI ventures Group LLC. (15) Has 'TCI and/or AT&T, or any parent, subsidiary, affiliate, or any entity that controls or is controlled by TCI and/or .AT&T, filed an FCC Form 1220, or other cost of service filing, Iwith any jurisdiction in which any cable television plant or system was valued., or attempted to be valued., in any manner ether than the presumptive original cost standard as, found in the Cost of Service Report ,and order, Paragraphs 53-67, or wherein any acquisition costs, of any kind, were included in the Rate Base valuations? If so, please provide copies of all such. Form 1220rs, with exhibits and attachments, or substantively equivalent documents along with any other supporting documents filed with the relevant: jurisdictions. I have had the opportunity to preliminarily review your FCC Farm 394 along with its various attachments. Although my analysis of the tendered documents is not yet completed, given the need for prompt action upon your Application, the Franchising Authorities requests' that you provide the following additional information specified in this letter as expeditiously as possible. of course, the information requested in this letter is not necessarily exhaustive and the Franchising Authorities, either directly, through this office, or through other consultants, may request additional information during the review process. Please provide the following information and/or documents to me on behalf of the Franchising Authorities: 1. A complete and nonredacted Copy of the application, with all exhibits, schedules, supplements and amendments thereto, relating to approval pursuant to the Hart-Scott-Rodino Act. 2. Financial statements setting forth the financial position of the current franchisee for the past five (5) years including the current year-to--date. Also, please provide an income and financial statement for the operations of the current Franchisee in the Franchising Authorities together with the rationale for the 1241011597-DWI/3'205131. &0913MB 513.6 TAN & `3-U C K E R, �E P � � 2-9-99 ATTORNEYS AT LAW A VA9lTN lR84ftp lMCiUOtNd if10I£3$f0 b%C COWPbNAT:bH9 Cheryl Blanchette Michael Olsen September 30, 1998 Page 6 allocation of joint or common costs, investment, revenues, etc. for each of the past five (5) years including the current year-to-date 3. Financial pro formas for the operations of the current franchisee and its control entities .for the next ten (10) yearn including income statements, balance sheets and cash flaw projections for operations within the Franchising Authorities including the following information: a. A ten-year projection of revenues cash flows with the following detail: +� Projected number of Basic and CPST Subscribers Each Year + Weighted average basic cable rates per year ® Projected basic and CAST revenue per year 0 Projected Pay TV revenue per year • Other projected revenue per year: - Cable equipment rentals - Advertising - Telephone service (if applicable) A- Other revenue (Home Shopping, etc. ) b. A ten-year projection of Expense Cash Flows with details of the following: • operating expenses • Sales and administrative + Debt service (principal and interest ars all debt • Capital expenditures and infrastructure buildout with detailed support for this computation. A separate schedule should be prepared showing projected expenditures for.- 124/011597-000113205131. or:12410115'97-000113205131. aO9/30199 5D,5 2-9-99 RUTAN & TuCKrZ.R, LLP ATTORNEYS AT LAW A NAN'wpNSW!N[W CluoiWd FNF C'1SF43PtAl CpNf8NAT16W5 Cheryl Blanchette Michael Olsen September 30, 1998 Page 7 - Infrastructure (construction of cable plant) - Land and Buildings - Remotes, Converters and other Equipment Telephone equipment (if applicable) s Income taxes 0. The "proforma!' forecast must demonstrate the effects of the Merger, for example, any debt, asset value adjustments, goodwill, etc. arising from the acquisition must be amortized in ,the projection, d. Finally, adjustments should be made to convert the cash flow projection to a financial reporting basis. Amortizatoin of goodwill shall be taken into account whether . or not recorded on AT&T's books or the books of any related entity. e. All "assumptions" supporting the 10-year forecast should be documented in writing by AT&T. 4. Any and all contractual and/or management agreements to which TCi, AT&T, or any related entity is a party relating to or concerning the Transfer or the Cable Systems 5. Any and all plans and commitment for upgrading the Cable Systems. , 6. A summary, verified by any and all lenders, of the terms and conditions of any lending agreement or equity purchase agreement relating in any way to the Transfer or the Cable Systems. 7 . Please provide, if they exist, any and all agreements, trust agreements, trust indentures, management agreements, or any other document which exists in the hands of TCI, AT&T, or any related entity, or bath, regarding the Cable Systems or the Transfer. 8. Please provide, as of the current date and the projected closing date, a summary of all of AT&T's outstanding lona-term indebtedness for borrowed money, including the current portion 1241011597-00015205131. 09/30(98 513.6 +.. 2_g-gg RUTAN & TuCKER, LLP ATTORNEYS AT LAW A PARTI'6a4i<i9 iHC44p:W{p i'GtlFtSffiltl NAS.CUAVOFATfON! Cheryl Blanchette Michael Olsen September 30, 1598 Fuge 8 thereof and including any accrued but unpaid interest thereon and any prepayment premium or penalty with respect thereto. 9. Please provide a complete copy of any and all partner agreements, shareholder agreements or member agreements concerning, directly or indirectly, the Cable Systems. 10 Please provide a listing of the Cable Systems operated by AT&T and its affiliates or related entities. Please provide or state as to each Cable System. a. The initial channel capacity of the Cable System (indicate dates) . b. The current channel capacity of the Cable System (indicate dates where appropriate) . C. The number of PEG channels. d. The yearly budget for local origination programming. e. The yearly budget for PEG programming. f. Whether the operator has expanded channel capacity or services in excess of franchise requirements. g. Any franchise enforcement actions, the dates, the subject matters, and the resolution. h. Any fines, penalties, or other enforcement actions undertaken by the franchising authority. i. The operator's compliance, or lack thereof, with either federal minimum customer service standards or customer service standards adopted by the local franchising authority. j . The Cable System's rate history from 1990 to the present. k. Any customer service service/satisfaction surveys conducted by the operator or the franchising authority since the inception of the franchise. 11. Please provide a narrative summary of how the proposed financing of the Transfer, or any transaction relating thereto, 124M215V-000=0513E. *MW98 SD.6 RU°T°AN & TuCKERs LLP ' 2-9-99 ATTORNEYS AT LAW A PARTHCRSHlt iNCLU*#M*P*( SbbOHAL�OAYOAATIOHS Cheryl Blanchette Michael Olsen September 30, 1995 Page 9 will work. Indicate and describe each legal entity and credit facility involved. 12. please provide copies of sinned and completed loan documents or a signed loan commitment which contains the following information: a. All material terms of the financing commitment including, without limitation, maximum available .loan proceeds, interest rates, repayment schedule, reserve or set- aside requirements, rate covenants, operating covenants, revenue covenants, negative covenants, prepayment options, commissions, underwriting fees, points, costs, collateral or security requirements, and financing fee requirements. b. A statement of all, conditions of closing or other conditions to the commitment of the lender to close the transaction. C. A written commitment of the lender not to materially modify any of the terms and conditions of the lending commitment as set forth in the commitment letter 'subsequent to its submission to the Franchising Authorities without the written consent of the Franchising Authorities. d. A list of all lenders or participants .in any lending syndicate (the "Lenders") . e. A schedule of the amount of loan proceeds which each of the Lenders have committed pursuant to any lending syndication (the "Individual. Lending Amounts") . f. Sufficient financial disclosure information upon each of the Lenders to demonstrate that each of those entities possesses sufficient monetary resources to fund, without the need to raise additional capital or further syndicate the lending, .its Individual Lending Amount. g. A pro forma, "Sources and Uses of Funds" which will show the actual uses of Loan proceeds as of the Closing Date. h, A projected debt service schedule showing interest payments, sinking fund payments, if any, principal payments, and ,other required payments. M1011597-0001/3205131. 4913W 2-9-99-9�i RUTAN & TUCKER, LLP ATTORNEYS AT LAW A PAWiNBWS.,<Nt.V5,.Q PX,:,M%i0.A:C#]WPYlikdtlpNB Cheryl Blanchette MichaelOlsen September 30, 1998 Page 10 i. A schedule showing all required and/or projected capital expenditures from all of its existing franchises plus the projected rebuild costs for all of its franchises. j . A letter of representation from any Lender(s) addressed to the Franchising Authorities as to the following: i. The copies of any commitment letter and summary of lending conditions provided to the Franchising Authorities constitute full, complete and nonredacted copies of said documents without deletion, addition, or modification. ii. Any summary of lending conditions contains all of the material conditions of the borrowing. iii. The material terms and conditions of any borrowing as set forth in any summary of lending conditions will not be modified, amended, supplemented, or otherwise altered without prior written notice to and the written consent of the Franchising' Authorities between the date hereof to the Closing bate of the Transfer. Although the Franchising Authorities will commence financial review upon the receipt of a commitment letter which meets the above-described qualifications, the Franchising Authorities will require, prior to any formal approval of the Transfer, complete and executed lending documents which are consistent with the material terns of the commitment letter. 13 . Pro forma financial projections which reveal, as underlying assumptions, any and all rate covenants or operating covenants which are or will be included in any loan or equity financing documents, for a period of five (5) years, demonstrating the level, of rates and average subscriber revenues which must be earned by the Cable System in order for the cable operator to be in compliance with any and all operating covenants and/or rate covenants to which TCI and/or AT&T will be bound pursuant to the terms and conditions of its financing documents as well as required or anticipated rate of return on equity capital. 14. Copies of all financial projecti SD,6 �~ 2.9-99 ATTORNEYS AT LAW A 1—T.C.S.W W".0—MROressto—i.C0AP0*k1-tIIMi Cheryl Blanchette Michael Olsen September 30, 1998 Page 11 lenders, lending institutions, institutional investors, private investors, or other individuals which have been approached by TCI and/or AT&T to provide equity or debt financing in relation to the Transfer or in relation to a sale of the Franchises or Franchisees or equity interests in the Franchises or Franchisees. 15. Please describe how the sale price or Exchange Mate was calculated.. 16. Please provide a copy of the Ton-Disclosure Agreement, dated as of May 26, 1998, between AT&T and TCI. 17. Please: provide a copy of any and all proxy statements, or drafts thereof, which will be utilized by TCI, AT&T, or any unrelated entity to solicit shareholder approval of the Transfer. 18. Please provide a copy of the Voting Agreement, dated the date thereof, by and among AT&T and each of the stockholders as those terms are utilized in the Agreement and Plan of Restructing and Merger among AT&T Corp. , Italy Merger Corp. , and Telecbmmunications, Inc. , dated as of June 23, 1998 (the "Merger Agreement") . 19. Please provide a flow chart demonstrating the structure of TCI, AT&T, and its related entities prior to the closing of the Merger and a Mow chart demonstrating the legal structure of TCI, AT&T, and .its related entities which are the subject of the Merger Agreement subsequent to the closing of the Merger. 20. Please provide a copy of the Company SEC Reports as that term is utilized on page 33 of the Merger Agreement. 21. Please provide a. copy of the Company's Capital Spending Plan, dated June 2, 1998 as that term is utilized on page, 49 of the Merger Agreement. 22. Please provide a copy of the Parent Charter Amendment as that term is utilized on page 59 of the Merger Agreement. 23. Please describe the purpose for the creation of the Parent Liberty Tracking Shares as that phrase term is utilized in the Merger Agreement. 24. Please provide a. copy of the Firewall Agreement referenced in Sections 7. 14 and 7.18 of the Merger Agreement. 124t01t597-Oolr3xCL9x3t. &09r"98 SD,6 Ru- AN &. TuCKER, #,...LP r I-_0 2-9-99 ATTORNEYS AT LAW A YARTHtR kl.#kCLV2I-0 P OfXMOkAL CORPORATION$ Cheryl Blanchette Michael Olsen September 30, 1998 Page 12 25. please provide a list of the "number of lawsuits challenging various aspects of the 'Telecommunications Act of 1986 that have been filed and are pending" which are referenced in Section .1(d) of the AT&T Corp. Disclosure Statement dated June 23, 1998 (the "AT&T Disclosure Statement") . Please deliver the above-requested information to me, on behalf of the Franchising Authorities, within fi SD.6 M6 2-9-99 RUTAN & TUCKER, LLP ATTORNEYS AT LAW A PARTNERSHIP INCLSJOtNO PROFESSIONAL CORPORATIONS sAME>;s w.maaRE` rHttlm .KaxN 6I1 ANTON BOULEVARD, SUiTC :4407 AOaSwT o.DWKw SCPTT R.SANYAOATA PAUL FRCOERIC MAR% JOCL 0.KUPER&CR0 ACAM N.VO tKER4 ALLSN C.OSTCROAA tit RiCHARO A.CUR.UYY MY VZ.A.MIC.OLS COSTA MESA, CALIFOORWA 92626-1998 JK4FRKY X.AZIL wO JENNiI$w DO*.-BPSMLfNd tEO#ARD A.HAMPCL Y.G.AS O.BROCK:NDYO. 4,%KV!N BRAC/L ST$VSN J..OCN JOWN s.HURLSUT.JA. WILLIAM W.".OER LAYNE H.MCit£R DOUGLAS J.CCN NIN GTON MICHAEL W,Im INELL KVRIDt KI{ViCK11 DALLAS DIRECT ALL FAIL TO: P^ O. SOX 19154 L.s.1 H...160. TACO K.JUiANOCR MiLPORD W.DAWL,JR. RANDALL M.IIASSUSH ELISE K.TRAYNUM TODD a.41—:14 THCODONC I.WALLACE.JA.' MANY.M.GREEN COSTA MESA, CALIFORNtA 02620-1964 LARRY A.CK.L—I WAR.B.CARLSON OILSCAT N.KRUOKN ORCO$AMSC. CAAOL 0.CAAYY CRTC L.DUN. J08EPH D.CARAUYM M1CWASL F.SIT2CR TELEPHONE (714) 641-5144 PKTRtCK 0.MCCALI.A FRED OALANTC RICHARDP.Sims THOMAS J.CRANE RiC.ARO K. CWELL CRISYY O.tOMSNEO 3AMSs S.D'NCAL MARK:S.IRA25ERtrACSiMitE {7341 646^943 JAMES S.W9ts2` JSPPRCY T.MELCHINO ROSCRY C.BRAUN PE NCtOPC PAR MCS MYCHAKL K.$_`?TCRY SEAN P.YARRCLL THOMAS S.8AL1NOCA' M.KATHCRI.E JCMSON A.p—OUR. AtURO,R APRIL LE ,CSE DAVID C.LARSCM° OUKE'.F.WAHLOUISY INTERNET WWW.t4L&ft.COiYI DEBRA DUNK BTESL APRIL LEE WALTSR CLIFFORD E.FRICDCN RICHARD O,MO.TCV:000 CAVIC N.NOCHNER KAREN CLt2ASCTH WALT2p MICHAEL 0.RUSIN Low 8AR#CR sMtTH 0 N*LATS. NATAWC 6I88ALD CU.OAS IAA 0.ASVI.' SRNEi$T W.Kt YTC Ill A.W. RUT.. 11880-talc) PAUL J.SICVEwS ALISON M.8AASAR09W -JCiFREY M.OOCRMA." CLi2A8CT.4.WARTY. JAMCS S.TUCKER, SR. 11808-10001 S.DANIEL HARDOTTLC JOHN W.xA.ILT...JR. STAN WOLCOTT` K1.0.TH0-50. MILFORD W. DAxt.SR. (iS/8�f8S8. KC.T M.CLAYTON LYNN LOsCH.N ..&CAT S.SOWER JAYNK TAYLOR KACCA H. A'DOCR HOWELL IIBEO-ioss5 JOSEPH L.MAGA 111 PHILIP J.SLANCHARD DAVID J.ALESHIRE CA-0,S.C080ROVE KRAIO C.KiLOKA TCRCNCK J.DALLADHEA MARCIA A.#ORSYTN "ANIS VAN Uls4x% WILLIAM .MARTICORKNA ETCP.KN A.CLLIII °A MOP>Zfi81DNAL CDRPDRAhON JAMCS L.MORRIS MAYTYKW K.ROSS WILLIAM J.CAPLA,. JEI€'RCY WCRT.V.VA Ov CO..S., MtCHAKL T.HOANAK COWARD D.sy.cs.A,JR.• DAVIO J.0ARt8ALDt.,in October 12, 1998 Robert Haehnel General Manager TCI Cablevision of Santa Cruz County 106 Whispering Pines Drive Scotts Valley, CA 95066 TCI of California, Inc. Attn: Cheryl Blanchette Government Affairs Director East Bay Regional Office 4131 Lakeside Drive, Suite B Richmond, CA 94806 AT&T Corp. Attn: Michael Olsen Room 630 795 Folsom St. San Francisco, CA 94107 Re: Cities of Berkeley, Richmond., El Cerrito, Santa Cruz, Contra Costa County and Santa Cruz County (collectively, the "Franchising Authorities") / FCC Forms 394 (collectively, the "Applications") filed by Tele- communications, Inc. ("TCI") Relating to Change in Control and Merger with AT&T Corp. ("AT&T") (the "Transfer" or the "Merger") Ladies and Gentlemen: This office represents the Franchising Authorities in relation to the above--described Applications for approval of a transaction which results in an assignment and/or change of control of the cable television franchises (collectively, the "Franchises") and/or the franchisees (collectively, the "Franchisees") for each of the Franchising Authorities. This office is, among other things, coordinating the due diligence review of the Applications and has been empowered by the Franchising Authorities to request information on their behalf. 1241011597-CMI/3209780. &10112/98 9-99 ATTORNEYS AT LAW a.eAsxxartswo."CL.ot.0 P.GIC9840"AL eo.00nw ..s Bob Maehnel Cheryl Blanchette Michael Olsen October 12, 1998 Page 2 Thus, this letter constitutes a formal request for additional information required by the terms of the Franchises or applicable state or local law. (47 C.F.R. S 76.502(a) ) . The information requested in this letter is additive to prier requests tendered by either this office or the Franchising Authorities in relation to the Appli SU.6 RU`i'AN & TuCKER, LLP ATTORNEYS AT LAW w dwwru[ees+ad euewaeua dmapa'.sseanw>.cartdaawreaas Bob Haehnel Cheryl Blanchette Michael Olsen October 12, 1998 ]Page 3 so that the Hoard of Directors of AT&T can satisfy their Collective fiduciary responsibilities to post--verger shareholders.' ' The Federal Communications Commission (the "Commission") has specifically acknowledged that a franchising authority can request information beyond that information providedin the Form 394 if the information constitutes` "additional information as is reasonably necessary to determine the qualifications of the proposed transferee. " (Irk the Matter ofImplementationo e t o d of the Ca 'son C s er' o d C e t ACt, 2 a d ve C ,t Cross- i i tat` a tr4fiC q _ ovisions, MM Docket No. 92-264, Rel. No. 93-332, adopted June 24, 1.993, Report & Order and Further Notice of Proposed' Rulemaking (the Resort & Order") } . To the extent that the requested informati s9-.9 2-9-99 ATTORNEYS AT LAW A arra*nzxzar c4e4u0iwa rnna¢sSIO. .C*, POAAVOx3 Bob Haehnel Cheryl. Blanchette Michael Olsen October 12, 1998 Page 4 In order for the Franchisi 2- -999-9I RUTA.N & TUCKER, LL P ATTORNEYS AT LAW A PJ6RSXCaSxiP McLoome P'abT&&StOPIAi C"P'OxAit0.% Brea Haehnel Cheryl Blanchette Michael;. Olsen October 12, 1998 Page 5 independent financial consultant (the 'Independent Financial Consultant") , as defined below, which shall be prepared at the sole cost and expense of TCI and/or AT&T, which discusses, analyzes, and provides an opinion as to the reasonableness and fairness of the transaction to the parties and to consumers based on the criteria set forth below. The Independent Financial Consultant must meet the following criteria. (1) The Independent Financial Consultant shall possess experience and expertise in the cable television industry. (2) The Independent Financial. Consultant shall not have performed any services, directly or indirectly, for 'TCI, AT&T, or any affiliate, subsidiary, or related entity for aperiod of no less than ten (10) years prior to this engagement. (3)' The Independent Financial Consultant must agree, in writing,, not to perform any services for TCI, AT&T, any affiliate, subsidiary, or related entity for a period of no less than five (a) year's from the date of completion of the engagements (4) ' The Independent Financial Consultant shall not possess any economic interests in any party to the Transfer or in the Transfer' itself. (5) The fees payable to the Independent Financial. Consultant shall not be contingent upon any conclusion or result. (6) The Independent Financial Consultant shall deliver its report jointly and conterminously to the Franchising Authorities and TCI/AT&T and shall neither discuss its conclusions, reasoning, recommendations, or otherwise nor provide any draft report to the Franchising Authorities or TCI/AT&T prier to release of its final report. The Independent Financial Consultant report (the "Report$) shall, contain a discussion of the Business Plan, whether developed by way of pro forma projections, management interviews,' independent financial' modeling, or otherwise, by which (i) AT&T intends to operate the cable television enterprise prior held under the control of TCI; (ii) AT&T intends to incorporate the cable television enterprise previously controlled by TCI into its telephony' operations if such is the intent of AT&T; and (iii) AT&T IU/011597-OOO1132O678O. &10/12/98 517.6 R6.!TAN 614 F uC!tERy LLP ATTORNF-YS AT LAW K PRNTRCOSHIP MCW05"a PROMSSM—L CQRPCRAYdOxS Bob Maehnel Cheryl Blanchette Michael Olsen October 12, 1998 Page 5 intends to recoup its investment in and obtain a reasonable return on the. acquired TCI properties. 7�FMEHTS OF HE REPORT A. The Report shall include a ten year projection of cable service revenues and total revenues which are projected to be generated from the. TCI Properties located within the Franchising Authorities with the following details. ' (1) Projected number of Basic Service Tier and Cable Programming Service Tier subscribers year by year. (2) Weighted average Basic Cable Service Tier rates per year. (3) Projected Basic Service Tier revenue and Cable Programming Service Pier revenue per year. (4) Projected premium and pay-per-view revenue per year. (S) Other projected revenue per year including, but not limited to. (i) Cable equipment rentals; (ii) Advertising; (iii) Telephony; (iv) Other revenue. B. The Report shall include a ten year expense projection which includes, at a minimum, detailed projections as to the following within the jurisdictions . of the Franchising Authorities: (1) Operating expenses. (2) Sales and administrative expenses'. (3) Debt service (principal and interest on all debt) . 1241011597-000113208780. &10112/98 �-- � 2_9_99 RUTAN TUCKER, LLP ATTORNEYS AT LAW A PAIRNCRg N4P tN CLUDiHtD PAd{CfftDNl»GdAPOR.4T4DN# Bob Haehnel Cheryl Blanchette Michael Olsen October 12, 1998 Page '7 (4) Capital expenditures and infrastructure build out expenditures. A separate schedule should be prepared showing projected expenditures for: (i) Cable infrastructure construction. (ii) Land and buildings. (iii) Equipment. (iv) Telephone equipment if applicable. (s) Income taxes. (6) Dividends and ether equity distribution to shareholders. C. The pro forma forecasts must demonstrate the effects of the Merger; for example, any debt arising from the Merger must be amortized in the projection. D. Adjustments should be made to convert cash flow projections to a, financial reporting basis. Any inclusion or amortization of good will or other intangibles must be taken in to account.' E. The Report shall also compare the calculated acquisition price based upon the Exchange Ratio with comparable sales and current trends in the industry to demonstrate the reasonableness of the economics of the. Merger. F. The Report shall render an opinion as to whether or not, based upon the financial projections contained therein, a reasonable return of and on the investment can be achieved without increases in Basic service Tier rates and Cable programming service Tier rates in excess of the average increases over the past five (9) years imposed by TCT. The Franchising Authorities believe that the provision of the Report, as described above, can provide a strong analytical basis for the ',Franchising Authorities' consideration of the economic viability of the Transfer as well as the financial, legal, and technical qualifications of AT&T. Although the Franchising Authorities could commission such a study on their own and simply 124/011597-=1/37A780. x14.'12198 SI99 RU"T'AN TUCK R, LLP 2-9- ATTORNEYS AT LAW A PAft?tC,RSWP t CLUW$`Q P+ct1PC5$!$NAC.CGkfi$ltAP!$tl$ Bob Raehnel Cheryl Blanchette Michael Olsen October 12, 1998 Page request that TCI and AT&T provide the necessary information for such a' study and reimburse the Franchising Authorities for the expenses related thereto, we believe that it is in TCI and AT&V s interests to coordinate the facilitation of the. Report themselves so as to minimize public disclosure of allegedly confidential and proprietary information. Likewise, by allowing TCI and AT&T to select the consultant subject only to the reasonable approval of the Franchising Authorities, a fair and impartial result will hopefully be obtained. Y Finally, so that the Franchising Authorities can continue in their due diligence review of the Transfer, the following additional information is hereby requested to be provided to me on b4half of the Franchising Authorities within ten (10) days of receipt ',of this letter. (1) Copies of any and all internal memoranda, reports, analyses, correspondence, or other documents prepared by TCI, or any . agent thereof, relating to the determination, , calculation, negotiation, or method of determining the exchange ratio as defined in the Merger Agreement. (2), Copies of any and all internal memoranda, reports, analyses', correspondence, or other documents prepared by AT&T, or any agent thereof, relating to the determination, calculation, negotiation, or method of determining the exchange ratio as defined in the Merger Agreement. (3) Copses of any reports, studies, opinions, opinion letters, ' or other documents prepared by independent parties, including but not limited to any "fairness opinions' relating to the Merger, presented to, considered by, or available to the board of directors of TCI, AT&T, or any affiliate or subsidiary thereof, concerning the economic viability of the Merger, the fairness of the Merger, or which will be used, in whole or part, as the basis for any recommendation to the shareholders of TCI, AT&T, or any affiliate or subsidiary thereof, concerning a proposed action or vote upon the Merger. 124/0115974000113208780. a10f12198 SDS O RUTAN cox TUCKER, LLP i 2-9-99 ATTORNEYS AT LAW A PARTNCaswr WCIL MWG rKarassa«ani ear.aa.,nans Bob Haehnel Cheryl Blanchette MichaelOlsen October 12, 1998 Pace 9 Your expeditious response to this request for information will be sincerely appreciated. Very truly yours, RUTAN & TUCKER, LLP William M. Marticorena W :vjb cc: Rama Murty, City of Berkeley Roward Stern, Esq. , City of El Cerrito Eric Xavier, City of Richmond Richard C. Wilson, City of Santa Cruz Patricia Burke, Contra Costa County Pat Busch, County of Santa Cruz Richard R. Patch, Esq. 12A/011597-OW113209790. :10/12198 (D)The Transferee agrees to refund to its subscribers an amount to be agreed upon to resolve an outstanding basic service equipment rate order. (E) The Transferee provides a timeline for the deployment of new technology. (F) The Transferee represents that insurance and bonds required by their License Award Resolution have been obtained and there will be no gaps in coverage or liabilities. APPROVE an Agreement Relating to the transfer of control of Tele-Communications, Inc. (TCI Cablevision of California, Inc.; Contra Costa Cable Company; Televents of East County, Inc.; Televents, Inc., Heritage Cablevision of Delaware, Inc., UACC Midwest, Inc.; and Crockett Cable Systems, Inc.) to AT&T Corp. and AUTHORIZE the Chair of the Board to execute the agreement on behalf of the County. OPTION 2 ADOPT the resolution to deny without prejudice the application of Tele-Communications, Inc. for a transfer of control to AT&T Corp. of their cable television licenses. FINANCIAL. IMPACT: In the event a settlement is reached, monies from the franchise fee audit and advertising revenue settlement will be distributed consistent with franchise fee payments to the General Fund and the Community Access Trust Fund. Monies covering payment of costs in relation to this proceeding will be returned to the account from which payment was made. BACK, GRQUND: On or about August 14, '1998,Tele-Communications, Inc.,the parent of the franchise holders, UACC Midwest, Inc.(unincorporated Walnut Creep arch); Televent, Inc.(Clyde);TCI Cablevision of California, lnc.(unincorporated Y Heritage Cablevislon of Delaware, Inc.;Televue Systems, Inc. ("Transferor")filed with the County an FCC 394 requesting that the County consent to the transfer of control of the licenses from the above systems to AT&T Corp. ("Transferee"). Section 58-4.028 of the County Ordinance Code(Ordinance No. 93-55)requires that all proposed transfers of control of licenses be submitted to the County for review and decision by the Board of Supervisors. Pursuant to Section 617 of the federal Cable Act(47 U.S.C. Section 537),the County has 120 days to act upon any request for approval of a transfer. Fallowing receipt of the FCC Form 394, staff worked with the Cities of Berkeley, El Cerrito, Hercules and Richmond to hire a consultant to review the legal, technical and financialqualifications of the buyer.William Marticorena of Rutan&Tucker, LLP was hired and is in the process of finalizing an agreement with TCI to address concerns about rate increases resulting from the transfer , compliance issues (i.e. franchise fee payments including advertising revenues and the fee on fee payments) -2- 31 D. Another issue regarding availability of technology to all subscribers was discussed. It is anticipated that TCI will include language to allay staff: concerns about a city having all available services (cable, high speed data and telephone) and the contiguous unincorporated area not having those services available. TCI has agreed to give an extension through February 9, 1999 to finalize an agreement. Staff is currently waiting for a final agreement before making a recommendation about action. Staff believes the conditions stated in the proposed agreement are necessary to assure compliance with the County's cable television ordinance and FCC rate regulations. CONSEQUENCES OF NEGATIVE ACTION: If the Board does not take the action recommended above, the application for consent to transfer of control would be deemed automatically granted. This could potentially limit the County's ability to recover underpaid license fees and could possibly increase rates by inclusion of debt service or equity requirements for the citizens in the unincorporated areas. -3- SD.6 ADDENDUM February 9, 1999 On this date,the Board of Supervisors considered the transfer of control of Tele-Communications, Inc., (TCI,to AT&T. Copies of the Agreement were provided to the Board. However, it was noted by the Cable Television Administrator that the Agreement contained.clerical errors as well as certain changes in dates that the County staff deemed to be in error. At the request of the Board of Supervisors,the Cable Television Administrator and representative from Tele-Communications, lnc. agreed to confer and attempt to come to an agreement regarding revisions to the proposed Agreement,to resume consideration before the Board later in the day. As requested,the representatives returned with the following proposed clarifications to the Agreement. Page 6. Section 99 County Council shall be corrected to read Board of Supervisors. Page 8,Section 12, "In addition, within twelve (12)months of the date of which the Franchisee's commence the upgrade of the richmond system,the Franchisee's shall commence the installation of a similar system in the County-Licensed area contiguous to Richmond, and shall complete the installation within 36 months of commencing, and thereafter, shall provide the same services in the contiguous County- licensed area as those provided in Richmond." Page 9,Section 13,part(b? "Within 30 days of the Effective Date of this Agreement, each of the systems involved in the TCI audit(TCI Walnut Creek, TCI Martinez, and TCI of East County) shall pay to the County the amount that it calculates to be due and owing to the County based on franchise fees due on advertising revenue from June 30, 1994 through December 31, 1998, using the above-described formula. Based upon initial calculations, it is estimated that the franchise fees owing to the County for the audited systems for the foregoing period are approximately $5.25 per subscriber for approximately 21,000 subscribers." A paragraph will be added, to reads "Within 30 days of the Effective Date of this Agreement each of the remaining Franchisees sl-iall pay to the County the amount that it calculates to be due and awing to the County based on franchise fees due on advertising revenue from January 1, 1996 through December 31 1998." The Board of Supervisors APPROVED Option 1 with approval of the Agreement subject to the changes mentioned above, DECLARED that should the Agreement fail to be signed within 10 days, the Agreement becomes null and void, the change of control shall be deemed disapproved as of the date of approval of the Agreement by the Board, and the application of TCI to transfer control to AT&T will be DENIED without prejudice as of February 9, 1999. OFFICE OF THE COUNTY ADMINISTRATOR CONTRA COSTA COUNTY Administration Building 651 Fine Street, 11th Floor Martinez, CA 94553 DATE: January 15, 1999 TO: Board of Supervisors FROM: Patricia Burkd, County Administrator's Office SUBJECT: Deny Request to Transfer of TCI to AT&T Due to the volume of information provided in the Exhibits, they have not been attached to each resolution to deny without prejudice the application of Tele- communications, Inc. for a transfer of control of its cable licenses to AT&T. Copies of all exhibits are available in the Clerk of the Board's Office. ContraCosta County has been working with the Cities of Richmond, Hercules, El Cerrito and Berkeley through. Bill Marticorena of Itutan & Tucker to resolve concerns and compliance issues before approval. We have asked for a second extension of time to TCI and have been denied. Therefore we need to take this action. If you have any questions about this matter, please call me at 313-1183. AGREEMENT RELATING TO THE CONSENT OF CONI- 'RA COSTA,COLNTY TO THE TRANSFER OF CONTROL OF TCI CABLEVISION OF CALIFORNIA,INC., TELEVENTS OF EAST COUNTY, INC., TELEVENTS, INC., TL -VUE SYSTEMS, INC.,HERITAGE CABLEVISION OF DELAWARE, TNC., UACC MIDWEST, INC., CONTRA COSTA CABLE COMPANY, AND CR.00KETT CABLE SYSTEMS, INC. TO AT&T CORP. This Agreement(the "Agreement")cot")entered into this day of � , 1999, between and among Contra Costa County(`'County"),Tele-Communications, Inc. (the `°Transferor"°), TCI Cablevision of California, Inc., Televents Of East County Inc., Televents, Inc., Tele-Vue Systems,Inc.,heritage Cablevision Of Delaware,Inc., UACCrMidwest, Inc., Contra.Costa Cable Company, and Crockett Cable Systems,Inc. (collectively,the "Franchisees"), and.AT&T Corp. (the"Transferee"). WHEREAS,through various previous transfers, acquisitions and conveyances, all of which were duly approved by the County, the County granted franchises to operate a cable television system within the County(the "Systems'")to Franchisees (the "Franchises")pursuant to the provisions of governing county codes (the "Ordinance"). WHEREAS,the Transferor and Transferee filed a written application to the County(the "Application"), wherein they have requested the consent of the County to the change of control of the Franchisee-,to Transferee (the "Change of Control"), and WHEREAS, it is the intent of the County to approve the transaction whereby control of the Franchisees will be held by the Transferee, and WHEREAS, the Beard of Supervisors of Contra Costa County has reviewed the Application as well as all relevant documents, staff reports and recommendations; and 1