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AMENDMENT NO. 1 TO
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
AT&T CORP.
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(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(4) Date Filed:
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SUBJECT TO COMPLETION; DATED JULY 3, 2001
PRELIMINARY PROXY MATERIAL
[AT&T LOGO]
[LETTERHEAD OF C. MICHAEL ARMSTRONG]
July , 2001
Dear AT&T Shareholder:
As part of our previously announced plan to restructure AT&T, our board of
directors requests your approval:
(1)to create a tracking stock that is intended to reflect the financial
performance and economic value of our Broadband business;
(2)to create a second tracking stock that is intended to reflect the
financial performance and economic value of our Consumer Services
business; and
(3)to separate and spin off a separate company owning our Business Services
and Consumer Services businesses. We refer to this separate company as
"AT&T Communications Services, Inc."
These proposals would allow us to split into two independent companies, one
holding our Broadband business and the other holding our Communications Services
businesses, and to issue the two new tracking stocks pending the separation. If
you approve the proposals, we plan to sell shares of AT&T Broadband Group
tracking stock in a public offering for cash later this year. We also plan to
distribute some or all of the shares of AT&T Consumer Services Group tracking
stock to our common shareholders as a dividend later this year. Thereafter, we
plan to complete the separation into two independent companies by distributing
shares of AT&T Communications Services, Inc. to our common shareholders. In this
step, we would also exchange shares of AT&T Consumer Services Group tracking
stock into shares of tracking stock of the consumer services business of AT&T
Communications Services, Inc.
Our board could, however, decide not to proceed with one or more of the
proposals, or could proceed at a time or in a manner different from our current
intentions. We do not plan to seek new shareholder approval for any change that
our board may approve in the timing or manner of issuing shares of either
tracking stock, in the timing of the separation into two independent companies,
or in the terms of the separation unless the change fundamentally alters the
nature of AT&T Communications Services, Inc. or the tax consequences of the
transaction to shareholders. If you do not want to give our board this authority
with respect to any of the three proposals, you should not vote for that
proposal.
We will hold a special meeting of shareholders to consider the proposals at
on September , 2001, at a.m., local time. Approval of each of these
three proposals requires the approval of the holders of a majority of the
outstanding shares of AT&T common stock. We will also ask you to approve two new
incentive plans and an amended employee stock purchase plan that will allow us
to issue options and other stock awards based on the new tracking stocks and
allow our employees to purchase shares of the new tracking stocks.
Whether or not you plan to attend the special meeting, please let us vote
your shares by returning the enclosed proxy card or following the instructions
on the proxy card for voting by telephone or via the Internet.
OUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR EACH PROPOSAL.
FOR A DISCUSSION OF THE MATERIAL RISKS INVOLVED IN CONNECTION WITH THE
PROPOSALS, SEE THE DISCUSSION OF RISK FACTORS THAT BEGINS ON PAGE 14 OF THE
ACCOMPANYING PROXY STATEMENT.
I look forward to seeing you at the special meeting.
Sincerely,
C. MICHAEL ARMSTRONG
Chairman of the Board and
Chief Executive Officer
This proxy statement is dated July , 2001 and was first mailed to AT&T
shareholders on July , 2001.
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AT&T CORP.
32 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10013-2412
-------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON , SEPTEMBER , 2001
-------------------------
We will hold a special meeting of shareholders of AT&T Corp. at
a.m., local time, on , September , 2001, at , for
the following purposes:
- to approve and adopt an amendment to our charter to authorize the
creation of AT&T Broadband Group tracking stock,
- to approve and adopt an amendment to our charter to authorize the
creation of AT&T Consumer Services Group tracking stock,
- to approve two new incentive plans to enable us to grant incentive awards
based on shares of AT&T Broadband Group tracking stock and AT&T Consumer
Services Group tracking stock to officers and employees of AT&T and its
subsidiaries,
- to approve an amendment to our employee stock purchase plan to permit the
issuance of AT&T Broadband Group tracking stock and AT&T Consumer Services
Group tracking stock under the plan,
- to ratify and approve the separation and spin-off of AT&T Communications
Services, Inc. from AT&T (including the subsequent name changes of AT&T
Corp. to "AT&T Broadband Corp." and of AT&T Communications Services, Inc.
to "AT&T Corp."), and
- to act upon such other matters as may properly come before the special
meeting or any adjournment or postponement thereof.
We describe these items of business more fully in the accompanying proxy
statement.
Only holders of record of AT&T common stock at the close of business on
, 2001 are entitled to notice of, and to vote at, the special meeting or
any adjournment or postponement thereof.
BY ORDER OF THE BOARD OF
DIRECTORS
MARILYN J. WASSER
Vice President -- Law and Secretary
New York, New York
July , 2001
WE URGE YOU TO VOTE BY TELEPHONE OR VIA THE INTERNET, OR TO COMPLETE, DATE
AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE POSTAGE-PAID ENVELOPE
PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON. YOU
CAN WITHDRAW YOUR PROXY, OR CHANGE YOUR VOTE AT ANY TIME BEFORE IT IS VOTED. YOU
CAN DO THIS BY EXECUTING A LATER-DATED PROXY, BY VOTING BY BALLOT AT THE SPECIAL
MEETING, BY TELEPHONE OR VIA THE INTERNET, OR BY FILING AN INSTRUMENT OF
REVOCATION WITH THE INSPECTORS OF ELECTION IN CARE OF OUR VICE PRESIDENT -- LAW
AND SECRETARY AT THE ABOVE ADDRESS.
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QUESTIONS AND ANSWERS ABOUT THE PROPOSALS
Q:WHAT IS THE PURPOSE OF THE PROPOSALS?
A:The proposals will allow us:
- to offer three separate investment vehicles -- our existing common stock
plus two new tracking stocks intended to track the performance of our
Broadband business and our Consumer Services business, and
- to follow this with the actual separation of AT&T into two distinct
companies, one holding our Broadband business and the other holding our
Business Services and Consumer Services businesses.
The separation will let us convert the Broadband tracking stock into a single
class of stock in the company holding our Broadband business. At the same
time, we will be able to convert the investment vehicle represented by the
Consumer Services tracking stock into an equivalent tracking stock of the
company holding our Business Services and Consumer Services businesses.
Q:WHAT STEPS DO YOU PLAN TO TAKE TO IMPLEMENT THE PROPOSALS?
A:If our shareholders approve the proposals, we plan to take the following
steps:
- We will create AT&T Broadband Group tracking stock -- a new class of AT&T
common stock intended to track the performance of our Broadband
business -- and offer a portion of the shares of this tracking stock to
the public for cash.
- We will create AT&T Consumer Services Group tracking stock -- a separate
new class of AT&T common stock intended to track the performance of our
Consumer Services business -- and distribute some or all of the shares of
this tracking stock as a dividend to our current shareholders.
- Within about a year later, we will spin off a new company -- called AT&T
Communications Services, Inc. -- that holds our Business Services and
Consumer Services businesses.
- AT&T Communications Services, Inc. will issue two classes of common
stock: one intended to track the performance of the Consumer Services
business and the other intended to track the performance of the rest of
the company -- in effect tracking the performance of the Business Services
business. We will distribute the new consumer services tracking shares in
exchange for all the AT&T Consumer Services Group tracking stock, and we
will distribute the other class of AT&T Communications Services, Inc.
shares as a dividend to holders of AT&T common stock.
- Following this spin-off, we will then change our name to AT&T Broadband
Corp. AT&T Communications Services, Inc. will assume the name AT&T Corp.
- At this point, we expect AT&T Broadband Corp. will hold only our
Broadband business. We will exchange all the AT&T Broadband Group tracking
stock for new shares of AT&T Broadband Corp. common stock. This will
complete the restructuring.
Q:WHAT IS A TRACKING STOCK AND HOW DOES IT WORK?
A:A tracking stock is a separate class or series of a company's common stock
that is intended to reflect the financial performance and economic value of a
group of assets or a specific business unit, division, subsidiary or equity
investment of the company. You should note that:
- Holders of our tracking stock are shareholders of AT&T and not of the
underlying business or subsidiary. Thus, holders of AT&T Broadband Group
tracking stock and of AT&T Consumer Services Group tracking stock will
have no direct interest in the assets, subsidiaries or businesses whose
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performance the tracking stock is intended to reflect.
- We intend the terms of our tracking stock to link the economic value of
the tracking stock to the performance of the tracked business rather than
to the performance of AT&T as a whole. However, there may not always be a
linkage between the market value of the tracking stock and the financial
performance and economic value of the tracked business.
- The market value of the tracking stock may be adversely affected not only
by factors that adversely affect the tracked business, but also by factors
that adversely affect AT&T generally.
Q:WHO WILL RECEIVE WHAT SECURITIES IN THE RESTRUCTURING?
A:If we complete the restructuring as we plan:
- We will distribute shares of AT&T Consumer Services Group tracking stock
to holders of AT&T common stock as a dividend.
- We will sell shares of AT&T Broadband Group tracking stock to new
purchasers for cash.
- Then, following the spin-off of AT&T Communications Services, Inc., we
will issue additional shares of common stock of AT&T, which will then be
called AT&T Broadband Corp., in exchange for all the outstanding shares of
AT&T Broadband Group tracking stock. Only shareholders who own AT&T
Broadband Group tracking stock will participate in this exchange.
- Also, as part of the spin-off of AT&T Communications Services, Inc., we
will distribute shares of consumer services tracking stock of AT&T
Communications Services in exchange for all the outstanding shares of AT&T
Consumer Services Group tracking stock. Shareholders who do not own AT&T
Consumer Services Group tracking stock -- i.e., who own only AT&T
Broadband Group tracking stock and/or AT&T common stock -- will not
participate in this exchange.
- As part of the spin-off, we will also distribute the other class of
shares of AT&T Communications Services, Inc. -- that is intended to track
the performance of the rest of the company -- as a dividend to holders of
AT&T common stock. Shareholders who own only AT&T Broadband Group tracking
stock and/or AT&T Consumer Services Group tracking stock will not
participate in this distribution.
- Shareholders with AT&T common stock will keep their shares, but they will
be shares of AT&T Broadband Corp. after AT&T Corp. changes its name to
AT&T Broadband Corp.
Q:IF I CONTINUE TO HOLD ALL MY SHARES OF AT&T COMMON STOCK, WHAT WILL I RECEIVE
IN THE RESTRUCTURING?
A:If you continue to hold your shares of AT&T common stock and shares you
receive as dividends, and we complete the restructuring as we plan, you will
end up with shares of:
- Common stock of AT&T Broadband Corp. These will be your existing shares
of AT&T common stock. AT&T Broadband Corp. will simply be the new name for
AT&T Corp. after the spin-off of AT&T Communications Services, Inc.
- Common stock of AT&T Corp. As part of the spin-off, you will receive
shares of common stock of AT&T Communications Services, Inc. as a dividend
on your existing shares of AT&T common stock. Following the spin-off, AT&T
Communications Services, Inc. will change its name to AT&T Corp., and
these shares will be shares of common stock of AT&T Corp.
- Consumer services tracking stock of AT&T Corp. You will receive shares of
AT&T Consumer Services Group tracking stock as a dividend on your
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existing shares of AT&T common stock. Then, as part of the spin-off, you
will receive shares of consumer services tracking stock of AT&T
Communications Services, Inc. in exchange for all your shares of AT&T
Consumer Services Group tracking stock. After the change of name from AT&T
Communications Services, Inc. to AT&T Corp., these shares will be shares
of consumer services tracking stock of AT&T Corp.
Q:WILL THE AT&T BROADBAND GROUP TRACKING STOCK AND THE AT&T CONSUMER SERVICES
GROUP TRACKING STOCK BOTH BE INTENDED TO REFLECT 100% OF THE VALUE AND
PERFORMANCE OF THE BUSINESSES THEY TRACK?
A:We intend to reflect only a portion of the value and performance of our
Broadband business in the shares of AT&T Broadband Group tracking stock that
we plan to offer to the public for cash. The AT&T Consumer Services Group
tracking stock that we plan to distribute to our existing shareholders may be
intended to reflect some or all of the value and performance of our Consumer
Services business. To the extent that we do not intend to reflect all of the
value and performance of the tracked business in the shares of tracking stock
we issue, we intend the remaining portion of this value and performance to be
reflected in the AT&T common stock. We refer to the portion that we intend to
reflect in the AT&T common stock as AT&T's "retained portion" of the value of
the AT&T Broadband Group or the AT&T Consumer Services Group.
Q:WHY ARE YOU CREATING THE TRACKING STOCKS NOW INSTEAD OF WAITING FOR THE
SPIN-OFF OF AT&T COMMUNICATIONS SERVICES, INC.?
A:We believe the creation of the tracking stocks will accomplish several
important goals, and we do not want to wait for the separation of AT&T
Communications Services, Inc. to accomplish these goals. In particular, we
believe the tracking stocks will:
- Allow us to offer three separate investment vehicles, intended to track
separately the performance of our Broadband business, our Consumer
Services business, and our other businesses. We believe this will benefit
shareholders and investors by focusing attention on the separate values of
these businesses and giving investors a choice among the three classes of
stock.
- Allow us to raise new equity capital and repay debt with the proceeds of
the offering of AT&T Broadband Group tracking stock.
- Allow us to create better management incentive programs through the use
of options and other stock-based awards using the different classes of
stock.
Q:WHY ARE YOU SEEKING SHAREHOLDER APPROVAL FOR THE SPIN-OFF OF AT&T
COMMUNICATIONS SERVICES, INC. NOW WHEN THAT SPIN-OFF MAY NOT OCCUR FOR OVER A
YEAR?
A:We believe that it will be helpful to investors, particularly potential
purchasers of the AT&T Broadband Group tracking stock, to know that we have
satisfied the major conditions to the spin-off of AT&T Communications
Services, Inc. Two of the most significant conditions to the spin-off are
receipt of a tax ruling from the Internal Revenue Service and shareholder
approval. We received the tax ruling with respect to the spin-off on June 27,
2001.
Q:IS APPROVAL OR COMPLETION OF ANY PROPOSAL A CONDITION TO ANY OF THE OTHER
PROPOSALS?
A:No. You may vote on each proposal separately, and we may implement any
proposal that receives shareholder approval whether or not we receive approval
for or implement any other proposal.
Q:IF SHAREHOLDERS APPROVE ALL THE PROPOSALS, WILL YOU DEFINITELY IMPLEMENT THEM
ALL?
A:No. There are a number of factors that could cause our board to decide not to
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proceed with all or a portion of the restructuring plan, such as future market
conditions, financial performance or superior alternatives that may arise. Other
events or circumstances, including litigation, could occur that affect the
timing or terms of the restructuring plan or our ability to complete it.
While we describe our current plans in this proxy statement, our board could
decide not to proceed with one or more of the proposals, or could proceed in
a manner different from our current intentions.
The two charter amendment proposals give us the authority to amend our charter
to create AT&T Broadband Group tracking stock and AT&T Consumer Services Group
tracking stock. The amendments, however, do not mandate the manner in which we
may issue these shares. Rather, these shares will be new classes of common
stock that the board may issue from time to time as it determines appropriate,
up to the total number of authorized shares and subject to stock exchange
rules with respect to shareholder approval of share issuances. We do not plan
to seek new shareholder approval for any change that our board may approve in
the timing or manner of issuing shares of either tracking stock.
Similarly, approval of the spin-off proposal will give our board the authority
to spin off AT&T Communications Services, Inc. from AT&T at the time and in
the manner the board decides is appropriate. We do not plan to seek new
shareholder approval for any change in our current plans that our board may
approve in the timing of the spin-off or in the terms of the spin-off, unless
the change fundamentally alters the nature of AT&T Communications Services,
Inc. or the tax consequences of the transaction to shareholders.
Q:WHAT DO I NEED TO DO NOW?
A:To vote, just mail your signed proxy card in the enclosed return envelope as
soon as possible so that we may vote your shares at the special meeting. You
also may vote by telephone or via the Internet, as we describe in this
document and on the proxy card. Our directors unanimously recommend that you
vote in favor of each of the proposals we describe in this document. If you
sign and return your proxy card without specifying your choices, we will vote
your shares in favor of each proposal.
If you plan to join us at the special meeting of shareholders, you will need
to bring the admission ticket, which is attached to the proxy card. For your
convenience, we have printed a map of the area and directions to the special
meeting on the back of the proxy card.
Q:CAN I CHANGE MY VOTE?
A:Yes. Just deliver a later-dated, signed proxy card to our Vice
President -- Law and Secretary before the special meeting or attend the
special meeting in person and vote. You also may change your vote prior to the
special meeting by telephone, via the Internet or by filing an instrument of
revocation with the inspectors of election in care of our Vice
President -- Law and Secretary.
Q:AM I ENTITLED TO APPRAISAL RIGHTS IN CONNECTION WITH THE RESTRUCTURING?
A:Yes. Please see "Appraisal Rights" beginning on page .
Q:WHOM CAN I CALL WITH QUESTIONS?
A:If you have any questions about any of the proposals, please call us at (800)
. Information regarding AT&T is also available on the AT&T
Investor Relations Home Page on the Internet at www.att.com/ir.
If you would like copies of any of the documents we refer to or that we
incorporate by reference in this document, you should call us at (800)
.
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TABLE OF CONTENTS
Questions and Answers about the
Proposals......................... i
Summary............................. 1
Risk Factors Relating to AT&T's
Restructuring Plan................ 14
Risk Factors Relating to the
Tracking Stock Amendments......... 18
Risk Factors Relating to the
Spin-off of AT&T Communications
Services, Inc. ................... 26
Risk Factors Relating to AT&T
Broadband Group................... 29
Risk Factors Relating to AT&T
Consumer Services Group and AT&T
Business Services Group........... 38
The Special Meeting................. 44
AT&T Corp. Management's Discussion
and Analysis of Financial
Condition and Results of
Operations........................ 47
Reasons for the Restructuring
Proposals......................... 90
The Broadband Charter Amendment
Proposal.......................... 94
Description of AT&T Broadband
Group............................. 105
AT&T Broadband Group Management's
Discussion and Analysis of
Financial Condition and Results of
Operations........................ 136
The Consumer Services Charter
Amendment Proposal................ 152
Description of AT&T Consumer
Services Group.................... 161
AT&T Consumer Services Group
Management's Discussion and
Analysis of Financial Condition
and Results of Operations......... 176
Relationship among AT&T Groups...... 187
The Incentive Plan Proposals........ 196
Employee Stock Purchase Plan
Proposal.......................... 201
The Spin-off Proposal............... 204
Description of AT&T Communications
Services, Inc. ................... 212
Selected Historical Financial Data
of AT&T Communications Services,
Inc. ............................. 221
AT&T Communications Services, Inc.
Management's Discussion and
Analysis of Financial Condition
and Results of Operations......... 222
Description of Capital Stock of AT&T
Communications Services, Inc.
Following the Spin-off............ 249
Comparison of Rights of Holders of
AT&T Common Stock and AT&T
Communications Services, Inc.
Common Stock Following the
Spin-off.......................... 255
Appraisal Rights.................... 266
Stock Ownership of AT&T Management
and Directors..................... 270
Ownership of Voting Securities in
Excess of Five Percent by
Beneficial Owners................. 274
Board Compensation Committee Report
on Executive Compensation......... 278
AT&T Executive Compensation......... 283
Management of Groups and AT&T
Communications Services, Inc. .... 298
Other Matters to Come before the
Special Meeting................... 298
Shareholder Proposals............... 298
Other Information................... 299
Form of Certificate of Amendment of
the Certificate of Incorporation
Relating to Broadband Charter
Amendment......................... A-1
Form of Certificate of Amendment of
the Certificate of Incorporation
Relating to Consumer Services
Charter Amendment................. B-1
Form of By-Law Amendment............ C-1
Index to Financial Statements....... D-1
Section 623 and 910 of The New York
Business Corporation Law.......... E-1
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The following diagrams are intended to help explain the various steps of
our restructuring proposals.
CURRENT STRUCTURE
After we complete the Liberty Media and AT&T Wireless Services split offs,
AT&T will have one class of common stock outstanding.
[Diagram of Current Structure]
AFTER ISSUANCE OF TRACKING STOCKS
If the tracking stock proposals are approved and implemented as expected,
AT&T will have three classes of common stock outstanding.
[Diagram of Structure After Issuance of Tracking Stocks]
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AFTER THE SPIN-OFF
If all the proposals are approved and implemented as expected, AT&T will be
split into two separate companies. The old AT&T will be renamed AT&T Broadband
Corp. and the new company will be renamed AT&T Corp.
[DIAGRAM OF STRUCTURE AFTER THE SPIN-OFF]
The following diagram shows what you will receive as a result of the
restructuring if you hold your shares of AT&T common stock and any shares you
receive as a dividend. In addition, if you were a holder of shares of AT&T
common stock on June 22, 2001, you will receive .3218 of a share of AT&T
Wireless Services, Inc. common stock for each share of AT&T common stock.
Holders of AT&T common stock will not receive shares of Liberty Media
Corporation common stock as a distribution on AT&T common stock.
EFFECT OF THE RESTRUCTURING ON A SHARE OF AT&T CORP. COMMON STOCK
[DIAGRAM OF THE EFFECT OF THE RESTRUCTURING ON A SHARE OF AT&T CORP. COMMON
STOCK]
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SUMMARY
THE CHARTER AMENDMENT PROPOSALS
Approval of the charter amendment proposals will authorize us to amend our
charter to create two new classes of our common stock -- AT&T Broadband Group
tracking stock and AT&T Consumer Services Group tracking stock. Each of the
charter amendment proposals requires the affirmative vote of the holders of a
majority of the outstanding shares of AT&T common stock.
AT&T Broadband Group tracking stock is intended to reflect the separate
performance of AT&T Broadband Group, which includes the assets and liabilities
shown in the combined balance sheets of AT&T Broadband Group. We will include
within AT&T Broadband Group all net income or net loss generated by the assets
that comprise AT&T Broadband Group and all net proceeds from any disposition of
these assets.
Similarly, AT&T Consumer Services Group tracking stock is intended to
reflect the separate performance of AT&T Consumer Services Group, which includes
the assets and liabilities shown in the combined balance sheets of AT&T Consumer
Services Group. We will include within AT&T Consumer Services Group all net
income or net losses generated by the assets that comprise AT&T Consumer
Services Group and all net proceeds from any disposition of these assets.
AT&T BROADBAND GROUP
AT&T Broadband Group is of one of the nation's largest broadband
communications businesses, providing cable television, high-speed cable Internet
services and communications services over one of the most extensive broadband
networks in the country. At or for the year ended December 31, 2000, AT&T
Broadband Group had:
- owned and operated cable systems aggregating approximately 16 million
analog video subscribers;
- approximately $8.4 billion in combined revenues;
- approximately $5.4 billion in net loss, and
- investments in companies, joint ventures and partnerships, including
Excite@Home, Time Warner Entertainment Company, L.P., Cablevision Systems
Corporation, Insight Midwest, L.P., and Texas Cable Partners, L.P.
AT&T CONSUMER SERVICES GROUP
AT&T Consumer Services Group is the leading provider of domestic and
international long distance service to residential consumers in the United
States. AT&T Consumer Services Group provides a broad range of communications
services to consumers, including:
- inbound and outbound domestic and international long distance;
- a variety of transaction-based services, such as calling cards and
prepaid phone cards;
- local toll calling and in limited geographic areas local exchange
service; and
- dial-up Internet service and telephone services over the Internet through
AT&T WorldNet Service.
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AT&T Consumer Services Group provides these services individually and in
combination with other services. At and for the year ended December 31, 2000,
AT&T Consumer Services Group had:
- approximately 60 million customers;
- approximately $18.9 billion in combined revenue; and
- approximately $4.1 billion in combined net income.
AT&T CORP.
AT&T Corp. consists primarily of AT&T Broadband Group, AT&T Consumer
Services Group and AT&T Business Services Group. AT&T formerly also included
AT&T Wireless Group, which will be split off from AT&T on July 9, 2001, and
Liberty Media Group, which will be split off from AT&T on August 10, 2001. In
the split-off of AT&T Wireless Group, each share of AT&T Wireless Group tracking
stock will be exchanged for one share of AT&T Wireless Services, Inc. common
stock, and holders of AT&T common stock will receive .3218 of a share of AT&T
Wireless common stock as a dividend for each share of AT&T common stock they
hold. In the split-off of Liberty Media Group, each share of Class A or Class B
Liberty Media Group tracking stock will be exchanged for one share of Class A or
Class B common stock of Liberty Media Corporation. The principal executive
offices of AT&T are located at 32 Avenue of the Americas, New York, New York
10013-2412. The telephone number is (212) 387-5400.
AT&T Business Services Group is one of the nation's largest business
services telecommunications businesses, providing a variety of global
communications services to large domestic and multinational businesses,
small-and medium-sized businesses, and government agencies. Business units
within AT&T Business Services Group provide regular and custom voice services
(including local, long distance, and international outbound, 800, 877, and 888
and 900 services), data and Internet Protocol, or IP, services (including
private line, frame relay, asynchronous transfer mode, or ATM, services), as
well as hosting, managed connectivity services and outsourcing. AT&T Business
Services Group operates one of the largest telecommunications networks in the
country. At or for the year ended December 31, 2000, AT&T Business Services
Group had more than 5 million customers.
AT&T Business Services Group also includes a number of joint ventures and
investments, including Concert Communications Company, AT&T Latin America Corp.,
and AT&T Canada Corp. In addition, AT&T Business Services Group will hold shares
of AT&T Wireless common stock that we are keeping in connection with the
split-off of AT&T Wireless Services Group but that we expect to sell or
otherwise dispose of within six months after the split-off.
The table below sets forth the approximate percentage of consolidated
revenue, net income, assets and indebtedness of AT&T, without giving effect to
the split-offs of AT&T Wireless Group and Liberty Media Group, that were
attributable to each of AT&T Broadband Group, AT&T Consumer Services Group and
AT&T Communications Services, Inc. at or for the year ended December 31, 2000
and at or for the three months ended March 31, 2001. In the future, these
percentages will vary with the relative performance of the different groups. In
addition, the actual debt levels of each of the groups in the future will depend
on a variety of other factors, including the progress we make on our various
debt reduction activities and the allocation of the proceeds of the public
offering of the AT&T Broadband Group tracking stock among the groups. The table
should also be read in the context of the financial and other information set
forth in this document.
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AT OR FOR YEAR ENDED DECEMBER 31, 2000 AT OR FOR THREE MONTHS ENDED MARCH 31, 2001
----------------------------------------- -------------------------------------------
% OF % OF NET % OF % OF % OF % OF NET % OF % OF
AT&T AT&T AT&T AT&T AT&T AT&T AT&T AT&T
REVENUE INCOME ASSETS DEBT REVENUE LOSS ASSETS DEBT
-------- --------- ------- ----- --------- ---------- ------ ------
AT&T Broadband Group...... 12.8% (115.0)% 48.5% 43.7% 15.4% 291.0% 48.1% 51.2%
AT&T Consumer Services
Group................... 28.6% 88.1% 1.5% 6.2% 23.9% (146.1)% 1.3% 5.1%
AT&T Communications
Services, Inc.* ........ 72.0% 172.5% 23.5% 47.8% 66.4% (260.2)% 23.1% 47.3%
-------------------------
* Includes AT&T Business Services Group and AT&T Consumer Services Group
TERMS OF THE TRACKING STOCKS
The proposed charter amendments would authorize us to issue up to
billion shares of AT&T Broadband Group tracking stock and up to billion
shares of AT&T Consumer Services Group tracking stock. We describe some of the
most significant terms of the tracking stocks below, but we include a more
detailed description of the tracking stocks later in this document.
Voting Rights. Holders of AT&T Broadband Group tracking stock will
initially be entitled to of a vote per share and holders of shares of AT&T
Consumer Services Group tracking stock will initially be entitled to of a
vote per share. Except as required by law or by any special voting rights of any
other class or series of AT&T stock, holders of shares of AT&T Broadband Group
tracking stock and holders of shares of AT&T Consumer Services Group tracking
stock will vote together with all other AT&T shareholders on matters presented
to the shareholders.
Dividends. Holders of AT&T Broadband Group tracking stock and AT&T
Consumer Services Group tracking stock will only be entitled to dividends to the
extent declared by the AT&T Board of Directors. Our charter will define an
available dividend amount with respect to each tracking stock. The available
dividend amount is designed to be equivalent to the amount that would legally be
available for the payment of dividends by AT&T Broadband Group or AT&T Consumer
Services Group as if the relevant group were a separate legal entity.
Dividends on each tracking stock may only be paid up to the applicable
available dividend amount and will also be subject to the legal capacity of AT&T
as a whole to pay dividends after deducting the available dividend amount of the
other group. Subject to these limitations, and to the discretion of our board,
we currently expect to pay quarterly dividends on the AT&T Consumer Services
Group tracking stock equal in the aggregate to two-thirds of the dividend we
currently pay on the AT&T common stock, and to pay quarterly dividends on the
AT&T common stock equal to one-third of the current dividend. Regardless of the
available dividend amount, we do not expect to pay dividends on AT&T Broadband
Group tracking stock for the foreseeable future.
Redemption. We may redeem shares of AT&T Broadband Group tracking stock or
AT&T Consumer Services Group tracking stock under a number of circumstances:
- Following the anniversary of issuance or the occurrence of tax
related events, we may redeem the shares of either tracking stock for
shares of AT&T common stock having a market value equal to % of the
market value of the tracking stock.
- At any time, we may redeem shares of either tracking stock for shares of
one or more subsidiaries that hold all material assets and liabilities
allocated to the tracked group, so long as the redemption is tax-free to
shareholders. This would result in a spin-off of the applicable tracked
group.
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14
- In the event of a disposition of all or substantially all the assets of a
tracked group, we may redeem shares of the relevant tracking stock for
cash and/or property in an amount equal to the net proceeds of the
disposition that are allocable to the tracking stock.
- If we complete the spin-off of AT&T Communications Services, Inc., we may
redeem the outstanding shares of AT&T Broadband Group tracking stock for
shares of AT&T common stock without the payment of any premium.
- At any time, we may redeem shares of either tracking stock for a
comparable tracking stock of any company that owns the assets and
liabilities allocated to the applicable tracked group.
- For example, if we complete the spin-off of AT&T Communications Services,
Inc., we may redeem the outstanding shares of AT&T Consumer Services Group
tracking stock for a comparable tracking stock of AT&T Communications
Services, Inc. without the payment of any premium.
Liquidation. In the event of a liquidation, holders of AT&T Broadband
Group tracking stock, AT&T Consumer Services Group tracking stock and AT&T
common stock will be entitled to share in the funds available for distribution
to common shareholders in proportion to the relative market capitalization of
the outstanding shares of each class of stock.
ISSUANCE OF AT&T BROADBAND GROUP TRACKING STOCK
If shareholders approve the creation of AT&T Broadband Group tracking
stock, we currently intend to issue shares of the stock for cash in an
underwritten public offering later this year. The shares we issue in this
offering will be intended to reflect only a portion of the financial performance
and economic value of AT&T Broadband Group. The remaining portion will be AT&T's
retained portion of the financial performance and economic value of AT&T
Broadband Group, which we intend to reflect in the AT&T common stock. We expect
to list AT&T Broadband Group tracking stock on a national securities exchange or
quotation system.
We will determine the amount of AT&T Broadband Group tracking stock to
issue based on the capital requirements of AT&T Broadband Group and AT&T, market
conditions at the time of the public offering and other factors. We will
allocate the proceeds of the public offering among our groups based on the
determination of our board of directors. We have not yet decided how to allocate
these proceeds because we want to wait until the offering to determine which of
our businesses has the greatest need for the proceeds at that time. Thus, some
or all of the proceeds of the offering may not go to the benefit of AT&T
Broadband Group tracking stock holders.
Our plan to complete the public offering of shares of AT&T Broadband Group
tracking stock later this year is subject to market conditions and other
factors. Our board of directors could decide to issue shares in a different
manner or at a different time, or could decide not to create or issue shares of
AT&T Broadband Group tracking stock at all, if the board decides that a change
in our plans is appropriate.
ISSUANCE OF AT&T CONSUMER SERVICES GROUP TRACKING STOCK
If shareholders approve the creation of AT&T Consumer Services Group
tracking stock, we currently intend to distribute shares of this stock as a
dividend to holders of AT&T common stock later this year. The shares we issue as
a dividend to our existing shareholders may be intended to reflect all or a
portion of the financial performance and economic value of AT&T Consumer
Services Group. If these shares are intended to reflect only a portion, the
remaining portion will be AT&T's retained portion of the financial performance
and economic value of AT&T Consumer Services Group, which we intend to reflect
in the AT&T common stock. We expect to list AT&T Consumer Services Group
tracking stock on a national securities exchange or quotation system.
Notwithstanding our current plans, our board of directors could decide to issue
these shares in a different manner or at
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a different time, or could decide not to create or issue shares of AT&T Consumer
Services Group tracking stock at all, if the board decides that a change in our
plans is appropriate.
AT&T'S RETAINED PORTION
As we describe above, we intend that only a portion of the financial
performance and economic value of AT&T Broadband Group will be reflected in the
shares of AT&T Broadband Group tracking stock that we sell in the public
offering. In addition, we may decide that we intend only a portion of the
financial performance and economic value of AT&T Consumer Services Group to be
reflected in the shares of AT&T Consumer Services Group tracking stock that we
distribute to our existing shareholders.
Whenever we intend to reflect only a portion of the financial performance
and economic value of a group in the outstanding shares of the relevant tracking
stock, we will create an allocation fraction that will represent the fraction of
the performance and value of the group that we intend to reflect in the
outstanding shares of tracking stock. In determining available dividend amounts
and entitlement to dividends, net proceeds of dispositions, liquidation payments
or any other relevant amount, we will multiply the amount attributable to the
group by the allocation fraction to determine the amount allocable to the
outstanding shares of the relevant tracking stock. We intend to reflect any
remaining portion of the financial performance and economic value of the group
in the outstanding shares of AT&T common stock. We refer to the portion that we
intend to reflect in AT&T common stock as AT&T's "retained portion of the value
of the Group."
THE SPIN-OFF PROPOSAL
Approval of the spin-off proposal will allow us to spin off AT&T
Communications Services, Inc., which consists of our Business Services and
Consumer Services businesses. Approval of the spin-off requires the affirmative
vote of the holders of a majority of the outstanding shares of AT&T common
stock.
If we obtain shareholder approval, we plan to complete the spin-off within
about one year following the public offering of AT&T Broadband Group tracking
stock. First, we would distribute shares of AT&T Communications Services, Inc.
common stock as a dividend to holders of AT&T common stock. Second, at the same
time, we would redeem all of the shares of AT&T Consumer Services Group tracking
stock for shares of an equivalent tracking stock of AT&T Communications
Services. We expect to list the shares of AT&T Communications Services common
stock and the consumer services tracking stock of AT&T Communications Services
following the spin-off on a national securities exchange or quotation system.
After the spin-off, AT&T Communications Services will consist of the assets
and liabilities of AT&T Business Services Group and AT&T Consumer Services
Group. For the year ended December 31, 2000, AT&T Communications Services had:
- approximately $47.5 billion in combined revenue, and
- approximately $8.1 billion in combined net income.
We expect that AT&T will change its name after the spin-off to "AT&T
Broadband Corp." and that AT&T Communications Services will assume the name
"AT&T Corp." In this document, we may refer to AT&T following the spin-off as
"AT&T Broadband Corp." C. Michael Armstrong is currently Chairman of the Board
and Chief Executive Officer of AT&T. David Dorman is currently President of
AT&T, with responsibilities that include the consumer, business and network
services groups, international ventures and AT&T Labs. Betsy J. Bernard is
president and chief executive officer of our Consumer Services business. Daniel
E. Somers is president and chief executive officer of our Broadband business. We
have not yet determined who will constitute the management of
5
16
AT&T Corp. or AT&T Broadband Corp. following the spin-off, but we have no
current plans to change the existing management of AT&T or our Business
Services, Consumer Services or Broadband businesses.
While we currently plan to complete the spin-off as we describe above, our
board of directors could decide to spin off AT&T Communications Services, Inc.
in a different manner or at a different time, or could decide not to go forward
with a spin-off at all, if the board decides that a change in our plans is
appropriate. We do not plan to seek new shareholder approval for any change in
our current plans that our board may approve in the timing of the spin-off or in
the terms of the spin-off, unless the change fundamentally alters the nature of
AT&T Communications Services, Inc. or the tax consequences of the transaction to
shareholders. In addition, we could decide to propose additional transactions
involving the spun-off company or the remaining AT&T following the spin-off. If
any of these additional transactions requires separate shareholder approval, we
would seek such approval at that time.
REASONS FOR THE RESTRUCTURING PROPOSALS
We believe that the overall restructuring will improve shareholder value by
enhancing the operations and funding of our businesses and by creating separate
investment vehicles. Our businesses should be better able to serve their
customers by having greater freedom, focus and flexibility to respond to
customers and to adapt to marketplace and technology changes. We expect the
restructuring plan to permit each business to set its own capital priorities, to
invest in its own growth and to target a debt and equity profile consistent with
its own needs and comparable companies in its industry. We also believe that the
separation of AT&T Communications Services, Inc. from AT&T Broadband Group in
the spin-off will more fully allow the management of each of the AT&T Business
Services Group, AT&T Consumer Services Group, and AT&T Broadband Group to focus
on and enhance the operations of their business, as well as tailor funding and
management incentives to each business.
We expect the restructuring plan to allow shareholders to view more clearly
the performance of each of our groups and to evaluate each group's results
against those of its competitors. We also expect that the restructuring plan
will enable AT&T shareholders and other investors to invest in the securities
that fit their needs and investment profiles without the requirement of
simultaneously investing in other businesses. In addition, if we complete the
planned AT&T Broadband Group tracking stock public offering, this will provide
funds to AT&T and/or AT&T Broadband Group to reduce outstanding indebtedness or
to fund operations.
We expect the issuance of each of the new tracking stocks to:
- assist its respective group by creating an additional publicly traded
equity security that it can use to raise capital for operating purposes
and/or for acquisitions and investments,
- increase market awareness of the performance and value of its respective
business by creating a separate investment vehicle intended to reflect the
performance and value of its respective business, and
- permit the creation of more effective management incentive and retention
programs, with the ability to direct business-specific options and
securities to employees of each of our groups.
For additional reasons for, and more detail on the reasons for, the
restructuring proposal, see "Reasons for the Restructuring Proposals" on page
.
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U.S. FEDERAL INCOME TAX CONSIDERATIONS
We expect the issuance of AT&T Broadband Group tracking stock to be tax
free to AT&T, and we expect the distribution of AT&T Consumer Services Group
tracking stock to holders of AT&T common stock to be tax free to AT&T and to the
holders of AT&T common stock. AT&T has received a private letter ruling from the
Internal Revenue Service to the effect that, for U.S. federal income tax
purposes, the spin-off is tax free to AT&T and to stockholders to the extent
that they receive either AT&T Communications Services, Inc. common stock as a
distribution with respect to AT&T common stock or consumer services tracking
stock of AT&T Communications Services, Inc. in exchange for AT&T Consumer
Services Group tracking stock. The continued effectiveness of this ruling in all
material respects is a non-waivable condition to the spin-off.
RISK FACTORS
When evaluating the charter amendments and the spin-off, you should be
aware of the risk factors we describe under:
- "Risk Factors Relating to AT&T's Restructuring Plan" starting on page ;
- "Risk Factors Relating to the Tracking Stock Amendments" starting on page
;
- "Risk Factors Relating to the Spin-off of AT&T Communications Services,
Inc." starting on page ;
- "Risk Factors Relating to AT&T Broadband Group" starting on page ; and
- "Risk Factors Relating to AT&T Consumer Services Group and AT&T Business
Services Group" starting on page .
INCENTIVE PLANS PROPOSAL AND EMPLOYEE STOCK PURCHASE PLAN PROPOSAL
We are also asking you to vote upon a proposal to adopt two new incentive
plans and a proposal to approve an amended employee stock purchase plan. The new
incentive plans would enable us to grant incentive awards based on shares of
AT&T Broadband Group tracking stock and/or shares of AT&T Consumer Services
Group tracking stock to officers and employees of AT&T and its subsidiaries,
including AT&T Broadband Group, AT&T Consumer Services Group and AT&T Business
Services Group. The amended employee stock purchase plan would allow the
issuance of AT&T Broadband Group tracking stock and AT&T Consumer Services Group
tracking stock under the employee stock purchase plan. Approval of the proposed
incentive plans and the amended employee stock purchase plan requires the
affirmative vote of a majority of the votes cast by holders of shares of AT&T
common stock.
RECOMMENDATION OF AT&T'S BOARD OF DIRECTORS
Our board of directors has approved each of the charter amendment
proposals, the spin-off proposal, the incentive plan proposal and the employee
stock purchase plan proposal, and recommends that you vote FOR each of them.
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SELECTED HISTORICAL FINANCIAL DATA
This information is only a summary and you should read it together with the
financial information we include elsewhere in this proxy statement or that we
incorporate by reference in this proxy statement. For copies of the financial
information we incorporate by reference, see "Other Information -- Where You Can
Find More Information" on page .
AT&T CORP. AND SUBSIDIARIES
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
FOR THE THREE
MONTHS ENDED FOR THE YEARS ENDED
MARCH 31, DECEMBER 31,
------------------- ----------------------------------------------------
2001 2000 2000(1) 1999(2) 1998 1997 1996
-------- -------- -------- -------- -------- -------- --------
RESULTS OF OPERATIONS
Revenue................................... $ 16,763 $ 15,901 $ 65,981 $ 62,600 $ 53,223 $ 51,577 $ 50,688
Operating income.......................... 977 2,402 4,277 10,859 7,487 6,836 8,709
(Losses) income from continuing operations
before cumulative effect of accounting
change.................................. (1,248) 2,683 4,669 3,428 5,235 4,249 5,458
AT&T Common Stock Group:
(Losses) income from continuing
operations before cumulative effect of
accounting change..................... (544) 1,741 3,105 5,450 5,235 4,249 5,458
(Losses) earnings per basic share....... (0.19) 0.55 0.89 1.77 1.96 1.59 2.07
(Losses) earnings per diluted share..... (0.19) 0.54 0.88 1.74 1.94 1.59 2.07
Dividends declared per share............ 0.0375 0.22 0.6975 0.88 0.88 0.88 0.88
AT&T Wireless Group(3):
(Losses) income......................... (7) N/A 76 -- -- -- --
(Losses) earnings per basic and diluted
share................................. (0.02) N/A 0.21 -- -- -- --
Liberty Media Group(3, 4):
(Losses) income......................... (152) 942 1,488 (2,022) -- -- --
(Losses) earnings per basic and diluted
share................................. (0.06) 0.37 0.58 (0.80) -- -- --
ASSETS AND CAPITAL
Property, plant and equipment, net........ $ 52,265 $ 51,161 $ 39,618 $ 26,903 $ 24,203 $ 20,803
Total assets - continuing operations...... 242,223 169,406 59,550 59,994 55,838
Total assets.............................. 241,141 242,223 169,406 59,550 61,095 57,348
Long-term debt............................ 39,004 33,092 23,217 5,556 7,857 8,878
Total debt................................ 56,229 65,039 35,850 6,727 11,942 11,351
Mandatorily redeemable preferred
securities.............................. 2,380 2,380 1,626 -- -- --
Company-obligated convertible quarterly
income preferred securities............. 4,713 4,710 4,700 -- -- --
Shareowners' equity....................... 103,963 103,198 78,927 25,522 23,678 21,092
Debt ratio(5)............................. 39.5% 46.2% 43.0% 20.9% 33.5% 35.0%
Gross capital expenditures................ 3,289 14,566 13,511 7,981 7,714 7,084
OTHER INFORMATION
Operating income as a percent of
revenue................................. 5.8% 6.5% 17.3% 14.1% 13.3% 17.2%
Income from continuing operations
attributable to AT&T Common Stock Group
as a percent of revenue................. (2.2)% 4.8% 8.7% 9.8% 8.2% 10.8%
Return on average common equity(6,7)...... (0.5)% 6.2% 15.2% 25.3% 19.7% 27.1%
Employees - continuing operations(6)...... 162,000 165,600 147,800 107,800 130,800 128,700
Data at year end:
AT&T stock price per share.............. 21.30 17.25 50.81 50.50 40.87 27.54
AT&T Wireless Group stock price per
share................................. 19.18 17.31 -- -- -- --
Liberty Media Group A stock price per
share(4).............................. 14.00 13.56 28.41 -- -- --
Liberty Media Group B stock price per
share(4).............................. 15.00 18.75 34.38 -- -- --
8
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-------------------------
1. On April 27, 2000, AT&T issued 15.6% of AT&T Wireless Group (AWE) tracking
stock. AT&T Common Stock Group results exclude the portion of AT&T Wireless
Group that is represented by the tracking stock and exclude Liberty Media
Group (LMG). In addition, on June 15, 2000, AT&T completed the acquisition of
MediaOne Group, Inc.
2. In connection with the March 9, 1999, merger with Tele-Communications, Inc.,
AT&T issued separate tracking stock for LMG. LMG is accounted for as an
equity investment.
3. No dividends have been declared for AWE or LMG tracking stocks.
4. LMG earnings per share amounts and stock prices have been restated to reflect
the June 2000 two-for-one stock split.
5. Debt ratio reflects debt as a percent of total capital (debt plus equity,
excluding LMG). For purposes of this calculation, equity includes convertible
quarterly trust preferred securities as well as redeemable preferred stock of
subsidiary.
6. Data provided excludes LMG.
7.Amounts for the three months ended March 31, 2001 and 2000, are based on
annualized income.
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AT&T COMMUNICATIONS SERVICES, INC.
SUMMARY OF SELECTED FINANCIAL DATA
(UNAUDITED)
(DOLLARS IN MILLIONS)
FOR THE THREE
MONTHS ENDED FOR THE YEARS ENDED
MARCH 31, DECEMBER 31,
----------------- ---------------------------
2001 2000 2000 1999 1998
------- ------- ------- ------- -------
RESULTS OF OPERATIONS
Revenue...................................... $11,127 $12,227 $47,521 $50,152 $47,890
Operating income(1).......................... 2,502 2,534 12,960 12,702 7,683
Income before extraordinary loss and
cumulative effect of accounting change..... 1,236 1,524 8,054 8,124 5,084
ASSETS AND CAPITAL
Property, plant and equipment, net........... $26,032 $26,083 $25,587 $21,780
Total assets................................. 55,591 57,013 49,893 40,136
Long-term notes payable to AT&T.............. 8,093 8,603 9,040 2,056
Total notes payable to AT&T.................. 26,454 30,749 16,205 3,139
Combined attributed net assets............... 8,339 4,415 12,560 15,112
Debt ratio(2)................................ 76.2% 87.5% 56.3% 17.2%
Gross capital expenditures................... 1,145 6,207 7,807 6,871
OTHER INFORMATION
Operating income as a percent of revenue..... 22.5% 27.3% 25.3% 16.0%
Return on average equity(3).................. 85.7% 94.9% 58.7% 41.2%
Employees.................................... 83,378 81,971 96,777 95,765
-------------------------
(1) Operating income includes $0.8 billion of net restructuring and other
charges for the three months ended March 31, 2000. Operating income includes
$0.8 billion, $0.3 billion and $2.5 billion of net restructuring and other
charges in 2000, 1999 and 1998, respectively.
(2) Debt ratio reflects debt as a percent of total capital (debt plus equity).
The increase in 2000 compared with 1999 and 1999 compared with 1998 was due
primarily to higher debt payable to AT&T.
(3)Amount for the three months ended March 31, 2001, is based on annualized net
income.
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CONSOLIDATING CONDENSED FINANCIAL INFORMATION
In conjunction with the issuance of AT&T Wireless Group and Liberty Media
Group tracking stocks, and the proposed issuance of AT&T Broadband Group and
AT&T Consumer Services Group tracking stocks, AT&T has separated for financial
reporting purposes in all periods the AT&T Common Stock Group, Liberty Media
Group, AT&T Consumer Services Group, AT&T Broadband Group and AT&T Wireless
Group. Below is the consolidating financial information reflecting the
businesses of these individual groups, including the allocation of expenses
between the groups in accordance with our allocation policies, as well as other
related party transactions such as sales of services between groups and interest
income and expense on intercompany borrowings. The AT&T Common Stock Group
presented below excludes its retained portion of the value of AT&T groups. AT&T
does not have a controlling financial interest in Liberty Media Group for
financial accounting purposes; therefore, our ownership in Liberty Media Group
is reflected as an investment accounted for under the equity method and is
reflected as such in the consolidating financial statements below.
AT&T Wireless Group, AT&T Consumer Services Group and AT&T Broadband Group
purchase long distance and other network-related services from AT&T at
market-based prices and accordingly such amounts are eliminated. Prior to the
offering of AT&T Wireless Group tracking stock, the capital structure of AT&T
Wireless Group had been assumed based upon AT&T's historical capital ratio
adjusted for certain items. Intercompany interest rates are intended to be
substantially equivalent to the interest rate that AT&T Wireless Group would be
able to obtain or receive if it were a stand-alone entity. Debt has been
allocated to AT&T Consumer Services Group and AT&T Broadband Group, based on the
future view of AT&T's debt position after taking into account the significant
deleveraging activities of AT&T. This allocation took into account the following
factors: prospective financing requirements, desired standalone credit profile,
working capital and capital expenditure requirements and comparable company
profiles. At or before the time of the spin-off, when AT&T Communications
Services, Inc. is separated from historical AT&T, we plan to seek to transfer
the indebtedness allocated to AT&T Business Services Group and AT&T Consumer
Services Group from historical AT&T to AT&T Communications Services, Inc. We may
seek to accomplish this through a variety of measures that may result in
increased costs and additional covenants on AT&T Communications Services, Inc.
The historical interest expense on the allocated debt was calculated based on a
rate intended to be equivalent to the rate AT&T Consumer Services Group and AT&T
Broadband Group would have received if each was a stand-alone entity. General
corporate overhead related to AT&T's corporate headquarters and common support
divisions has been allocated to the groups based on the ratio of each group's
external costs and expenses to AT&T's consolidated external costs and expenses,
adjusted for any functions that any group performs on its own. The consolidated
income tax provision, related tax payments or refunds, and deferred tax balances
of AT&T have been allocated to the group based principally on the taxable income
and tax credits directly attributable to each group.
Pursuant to the Inter-Group agreement, AT&T does not allocate general
overhead expenses to Liberty Media Group and only charges Liberty Media Group
for specific services that Liberty Media Group receives from AT&T pursuant to
service agreements or similar arrangements. Additionally, as Liberty Media Group
operates independent of AT&T, there is no cash or debt allocated to them.
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CONSOLIDATING SELECTED FINANCIAL DATA
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
AT&T AT&T
COMMON AT&T CONSUMER AT&T LIBERTY
STOCK WIRELESS SERVICES BROADBAND MEDIA ELIMINATIONS/ CONSOLIDATED
GROUP GROUP GROUP GROUP GROUP RECLASSIFICATIONS AT&T CORP.
------- -------- -------- --------- ------- ----------------- ------------
AT MARCH 31, 2001
Cash and cash equivalents................ $ 36 $ 34 $ 2 $ 64 $ $ $ 136
Property, plant & equipment, net......... 25,895 10,725 137 15,508 52,265
Total assets............................. 66,893 47,039 3,036 115,985 34,072 (25,884) 241,141
Debt maturing within one year............ 14,552 103 2,570 17,225
Short-term debt due to related party..... 10,588 6,707 (17,295)
Long-term debt........................... 12,991 6,487 19,523 3 39,004
Long-term debt due to related party...... 1,800 2,871 (4,671)
Total debt............................... 38,131 8,390 2,871 28,800 (21,963) 56,229
Total shareowners' equity................ 125 30,937 (2,120) 43,866 34,072 (2,917) 103,963
AT DECEMBER 31, 2000
Cash and cash equivalents................ $ 3 $ 62 $ $ 61 $ $ $ 126
Property, plant & equipment, net......... 25,912 9,892 170 15,187 51,161
Total assets............................. 67,709 35,302 3,543 117,534 34,290 (16,155) 242,223
Debt maturing within one year............ 28,752 109 13 3,073 31,947
Short-term debt due to related party..... 638 5,830 (6,468)
Long-term debt........................... 13,572 19,517 3 33,092
Long-term debt due to related party...... 1,800 4,000 (5,800)
Total debt............................... 42,324 2,547 4,013 28,420 (12,265) 65,039
Total shareowners' equity................ 6,218 24,877 (2,541) 43,317 34,290 (2,963) 103,198
AT DECEMBER 31, 1999
Cash and cash equivalents................ $1,013 $ 5 $ 6 $ $ $ $ 1,024
Property, plant & equipment, net......... 25,454 6,349 132 7,780 (97) 39,618
Total assets............................. 55,428 23,512 4,072 58,228 38,460 (10,294) 169,406
Debt maturing within one year............ 11,511 154 36 932 12,633
Short-term debt due to related party..... 4,297 (4,297)
Long-term debt........................... 13,542 9,671 4 23,217
Long-term debt due to related party...... 3,400 900 (4,300)
Total debt............................... 25,053 3,554 936 14,900 (8,593) 35,850
Total shareowners' equity................ 11,377 13,997 1,070 14,889 38,460 (866) 78,927
FOR THE THREE MONTHS ENDED MARCH 31, 2001
Revenue.................................. $7,181 $ 3,212 $ 4,007 $ 2,587 $ $ (224) $ 16,763
Operating income (loss).................. 1,208 141 1,295 (1,667) 977
Income (loss) before cumulative effect of
accounting change...................... 481 767 (1,757) (697) (42) (1,248)
FOR THE THREE MONTHS ENDED MARCH 31, 2000
Revenue.................................. $7,260 $ 2,198 $ 5,037 $ 1,557 $ $ (151) $ 15,901
Operating income (loss).................. 903 26 1,631 (170) 12 2,402
Net income............................... 523 26 1,006 196 942 (10) 2,683
FOR THE YEAR ENDED DECEMBER 31, 2000
Revenue.................................. $28,917 $10,448 $18,894 $ 8,445 $ $ (723) $ 65,981
Operating income (loss).................. 6,218 (38) 6,741 (8,656) 12 4,277
Net income............................... 3,908 658 4,112 (5,370) 1,488 (127) 4,669
FOR THE YEAR ENDED DECEMBER 31, 1999
Revenue.................................. $28,726 $ 7,627 $21,753 $ 5,080 $ $ (586) $ 62,600
Operating income (loss).................. 5,365 (666) 7,335 (1,177) 2 10,859
Net income............................... 3,521 (405) 4,633 (2,200) (2,022) (99) 3,428
FOR THE YEAR ENDED DECEMBER 31, 1998
Revenue.................................. $25,407 $ 5,406 $22,763 $ $ $ (353) $ 53,223
Operating income (loss).................. 1,579 (343) 6,104 147 7,487
Income from continuing operations........ 1,314 164 3,807 (50) 5,235
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SELECTED PRO FORMA FINANCIAL DATA
This information is only a summary and you should read it together with the
financial information we include elsewhere in this proxy statement or that we
incorporate by reference in this proxy statement. For copies of the financial
information we incorporate by reference, see "Other Information -- Where You Can
Find More Information."
AT&T
The unaudited pro forma financial information set forth below for AT&T
gives effect to
- the AT&T Wireless Group exchange offer,
- the AT&T Wireless Group distribution,
- the Liberty Media Group distribution, and
- the AT&T Communications Services distribution
as if those events had been completed on January 1, 1998 for income statement
purposes, and on March 31, 2001 for balance sheet purposes. The unaudited pro
forma financial information set forth below for AT&T also give effect to the
March 9, 1999 Tele-Communications Inc., or TCI, merger and the June 15, 2000
MediaOne Group, Inc. acquisition as if they had been completed on January 1,
1998 for income statement purposes. The unaudited selected pro forma financial
information does not necessarily represent what AT&T's financial position or
results of operations would have been had the TCI merger, MediaOne acquisition,
the AT&T wireless events, the Liberty Media Group distribution and the AT&T
Communications Services, Inc. distribution occurred on such dates.
We have included detailed unaudited pro forma financial statements at the
end of this document.
SUMMARY PRO FORMA CONDENSED FINANCIAL INFORMATION
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
AT AND
FOR THE
THREE MONTHS ENDED AT AND FOR THE YEARS ENDED
MARCH 31, DECEMBER 31,
------------------ -----------------------------
2001 2000 1999 1998
------------------ -------- ------- ------
INCOME STATEMENT DATA:
Revenue............................... $ 2,587 $ 9,771 $ 8,715 $9,085
Operating income (loss)............... (1,666) (9,090) (2,279) (1,002)
Income (loss) from continuing
operations -- attributable to AT&T
common stock group.................. (1,961) (4,586) 840 (1,310)
Weighted average AT&T common
shares -- diluted................... 3,433 3,390 3,412 3,388
Earnings per AT&T common
share -- basic...................... (0.57) (1.35) 0.25 (0.39)
Earnings per AT&T common share --
diluted............................. (0.57) (1.35) 0.25 (0.39)
Cash dividends declared per AT&T
common share........................ $ 0.0375 $ 0.6975 $ 0.88 $ 0.88
BALANCE SHEET DATA:
Total assets.......................... $145,415
Long-term debt........................ 32,416
Total shareowners' equity............. 45,323
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RISK FACTORS RELATING TO AT&T'S RESTRUCTURING PLAN
AT&T'S RESTRUCTURING PLAN IS SUBJECT TO CHANGE AND MAY NOT BE COMPLETED AS
PLANNED OR AT ALL
At the special meeting, we are seeking your approval to authorize us to
implement various steps of our restructuring plan. There are a number of factors
that could cause our board to decide not to proceed with all or a portion of the
restructuring plan, such as future market conditions, financial performance or
superior alternatives that may arise. Other events or circumstances, including
litigation, could occur that affect the timing or terms of the restructuring
plan or our ability to complete it. While we describe our current plans in this
proxy statement, our board could decide not to proceed with one or more of the
proposals, or could proceed in a manner different from our current intentions.
Even if the proposals are approved and all conditions satisfied, we will not be
required to proceed with any or all of the steps of the restructuring plan.
By way of example:
- our board of directors may decide to issue one or both of the tracking
stocks but not complete the proposed spin-off;
- our board of directors may decide to complete the proposed spin-off
without issuing any of the tracking stocks;
- our board of directors could also decide to abandon the entire
restructuring plan;
- our board of directors has the ability to alter parts of the overall
restructuring plan and to make determinations that will impact key aspects
of the overall restructuring plan;
- our board of directors can materially impact the relative capital
structures of the various groups by allocating all or a portion of the net
proceeds of the planned public offering of the AT&T Broadband Group
tracking stock to either AT&T Broadband Group or to the other Groups; or
- our board of directors could decide to propose additional transactions
involving AT&T Communications Services, Inc. or AT&T Broadband Corp.
The two charter amendment proposals give us the authority to amend our
charter to create AT&T Broadband Group tracking stock and AT&T Consumer Services
Group tracking stock. The amendments, however, do not mandate the manner in
which we may issue these shares or that we issue them at all. Rather, these
shares will be new classes of common stock that the board may issue from time to
time as it determines appropriate, up to the total number of authorized shares
and subject to stock exchange rules with respect to shareholder approval of
share issuances. We do not plan to seek new shareholder approval for any change
that our board may approve in the timing or manner of issuing shares of either
tracking stock.
Similarly, approval of the spin-off proposal will give our board the
authority to spin off AT&T Communications Services, Inc. from AT&T at the time
and in the manner the board decides is appropriate. We do not plan to seek new
shareholder approval for any change in our current plans that our board may
approve in the timing of the spin-off or in the terms of the spin-off, unless
the change fundamentally alters the nature of AT&T Communications Services, Inc.
or the tax consequences of the transaction to shareholders.
If you do not want to give our board this broad authority with respect to
any of these three proposals, you should not vote for that proposal.
IF WE DO NOT COMPLETE AT&T'S RESTRUCTURING PLAN, THERE MAY BE MATERIAL ADVERSE
CONSEQUENCES ON AT&T'S BUSINESSES AND SHARE PRICE
AT&T's restructuring plan is complicated, and involves a substantial number
of steps and transactions. The implementation of AT&T's restructuring plan will
require various approvals and be subject to various conditions.
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If we are unable to complete AT&T's restructuring plan as we expect, or the
implementation of AT&T's restructuring plan is more complex than we expect, this
could have a material adverse effect on AT&T, its businesses or the trading
prices of its securities. Any or all of the elements of AT&T's restructuring
plan may not occur as we currently expect or in the time frames that we
currently contemplate, or at all. Alternative forms of restructuring, including
sales of interests in these businesses, would reduce what is available for
distribution to shareholders in the restructuring.
AT&T'S RESTRUCTURING PLAN REQUIRES FUNDAMENTAL CHANGES TO AT&T AND AT&T'S
BUSINESSES THAT MAY BE HARD TO IMPLEMENT
If we complete AT&T's restructuring plan, each of AT&T's current businesses
will need to make changes in its operations that will require substantial effort
and involve substantial risks and costs. These include risks relating to
operating as less diversified businesses compared to operating as part of a
fully integrated communications company. These changes may materially adversely
affect each business's competitive position, operations and financial condition.
If any of these businesses is unable to make this transition smoothly or is not
able to operate as effectively after the restructuring, the financial position
and results of operations of that business could suffer and cause the trading
value of securities intended to reflect the financial performance and economic
value of that business to decline materially.
THE TOTAL VALUE OF THE SECURITIES ISSUED IN AT&T'S RESTRUCTURING PLAN MIGHT BE
LESS THAN THE VALUE OF AT&T COMMON STOCK WITHOUT AT&T'S RESTRUCTURING PLAN
If we complete AT&T's restructuring plan as we currently contemplate,
holders of AT&T common stock who do not dispose of those shares of AT&T common
stock eventually will own a mix of new securities. The aggregate value of these
securities could be less than what the value of AT&T common stock would be
without AT&T's restructuring. The trading price of AT&T common stock may decline
as a result of the implementation of AT&T's restructuring plan or as a result of
other factors.
As we complete the restructuring, these new securities will begin trading
publicly for the first time. Until orderly trading markets develop for each of
these new securities, and after that time as well, there may be significant
fluctuations in price. Also, we have not yet determined many of the details of
AT&T's restructuring plan, and these details could materially adversely impact
the value of AT&T common stock, AT&T Broadband Group tracking stock, AT&T
Consumer Services Group tracking stock and/or AT&T Communications Services, Inc.
common stock.
AT&T'S RESTRUCTURING MAY MATERIALLY ADVERSELY IMPACT THE COMPETITIVE POSITION OF
AT&T'S BUSINESS UNITS
In connection with the restructuring, there is a risk that AT&T's separated
business units may not be able to create effective intercompany agreements to
facilitate effective cost sharing or enter into mutually desirable bundling
arrangements. Competition between AT&T's business units in overlapping markets,
including consumer markets where cable telephone and digital subscriber lines,
or DSL, solutions may be available at the same time, could result in more
downward price pressure. It is expected that the different businesses and
companies will share the AT&T brand after the restructuring, which will likely
increase this level of competition. In addition, any incremental costs
associated with implementing AT&T's restructuring plan may materially adversely
affect the different businesses and companies. Additionally, synergies resulting
from cooperation and joint ownership among AT&T's groups may be lost due to the
restructuring.
AT&T'S GROUPS WILL COMPETE WITH EACH OTHER AND EACH GROUP'S RESULTS MAY BE
MATERIALLY ADVERSELY IMPACTED BY CONFUSION IN THE MARKETPLACE DUE TO MULTIPLE
USES OF THE AT&T BRAND
AT&T Broadband Group, AT&T Business Services Group and AT&T Consumer
Services Group all are in the communications business and may compete with each
other under some circumstances. None of the groups is prohibited from competing
with the other groups, although their use of the
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AT&T brand in these circumstances may be restricted. All groups' use of the AT&T
brand in many of these circumstances will be subject to guidelines intended to
reduce customer confusion. Nevertheless, the multiplicity of AT&T-branded
offerings may lead to confusion in the marketplace concerning the groups,
resulting in potential competitive disadvantage and/or devaluation of the AT&T
brand.
FOLLOWING THE SPIN-OFF, AT&T BROADBAND CORP. COULD INCUR MATERIAL TAX
LIABILITIES IN CONNECTION WITH CERTAIN TRANSACTIONS
AT&T Broadband Corp. may incur material federal income tax liabilities as a
result of certain issuances of shares or change of control transactions with
respect to AT&T Broadband Corp., Liberty Media Corporation, AT&T Wireless
Services, Inc. or AT&T Communications Services, Inc. Under the Code, a
split-off/spin-off that is otherwise tax-free may be taxable to the distributing
company (i.e., AT&T Broadband Corp.) if, as a result of certain transactions
occurring generally within a two-year period after the split-off/spin-off,
non-historic shareholders acquire 50% or more of the distributing company or the
spun-off company. Transactions with respect to AT&T Broadband Corp. could cause
all three split-offs/spin-offs to be taxable to AT&T Broadband Corp. Under
separate intercompany agreements between AT&T Broadband and each of Liberty
Media Corporation, AT&T Wireless Services, Inc. and AT&T Communications
Services, Inc., AT&T Broadband Corp. generally will be entitled to
indemnification from the spun-off company for any liability that results from
the split-off/spin-off failing to qualify as a tax free transaction, unless, in
the case of AT&T Wireless Services, Inc. and AT&T Communications Services, Inc.,
such liability was caused by post split-off/spin-off transactions with respect
to the stock or assets of AT&T Broadband Corp.
If a subsequent transaction were to cause one or more of the
split-offs/spin-offs to be taxable to AT&T Broadband Corp., such tax liability
could have a material adverse effect on AT&T Broadband Corp. To the extent AT&T
Broadband Corp. is entitled to an indemnity with respect to such liability, AT&T
Broadband Corp. would be required to collect such claim on an unsecured basis.
Furthermore, these rules could effectively delay or prevent a merger, change of
control, or other strategic or capital raising transactions involving the
issuance of equity by AT&T Broadband Corp.
FOLLOWING THE SPIN-OFF, AT&T BROADBAND CORP. WILL BE LIABLE FOR HISTORICAL AT&T
LIABILITIES FROM WHICH AT&T BROADBAND CORP. IS NOT RELEASED, EVEN IF NOT
ALLOCATED TO AT&T BROADBAND GROUP
Following the spin-off, AT&T Broadband Corp., as historical AT&T, will be
burdened with any AT&T liabilities from which AT&T Broadband Corp. is not
released, even if not allocated to AT&T Broadband Group. For example, AT&T has a
number of contractual obligations and liabilities, as well as agreements
governing financial instruments, such as long-term indebtedness, guarantees and
letters of credit. To the extent these agreements do not permit the transfer and
assumption of the underlying liabilities and the release of AT&T Broadband
Corp., AT&T will have to seek the consents of the counterparties to effectuate
such transfer, assumption and release. AT&T will not be required to obtain these
consents. Also, the counterparties may be unwilling to provide such consents on
acceptable terms, in which case AT&T Broadband Corp. would remain liable for
these liabilities to third parties. AT&T Broadband Corp. will be indemnified by
AT&T Communications Services, Inc. for liabilities that are allocated to AT&T
Communications Services, Inc. but not transferred. However, to the extent AT&T
Broadband Corp. is entitled to an indemnity with respect to these liabilities,
AT&T Broadband Corp. would be required to collect these claims on an unsecured
basis.
THE FINANCIAL CONDITION AND PROSPECTS OF AT&T AND ITS GROUPS MAY BE MATERIALLY
ADVERSELY AFFECTED BY AT&T'S INCREASED OVERALL DEBT LEVELS
AT&T currently is pursuing various measures to seek to reduce its debt
level. However, AT&T's financial condition and prospects could be materially
adversely affected:
- if these efforts cannot be completed successfully or at levels, on the
terms and within the time frame contemplated,
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- if AT&T's liquidity needs increase as a result of further revenue or
margin deterioration, or
- if there is an overall credit market weakening or a ratings downgrade.
AT&T's current debt level itself may materially adversely affect the
company and each of its groups by:
- impairing their respective financial flexibility,
- impairing their ability to pursue acquisitions or make capital
expenditures, and
- otherwise impacting investment decisions that could materially impair
each group's growth and ability to compete.
AT&T and its groups may not be able to obtain financing on terms that are
acceptable to it. AT&T's debt ratings have been under review by rating agencies.
As a result of this review, AT&T's ratings have been either downgraded and/or
put on credit watch with negative outlook. These actions could result in an
increased cost of future borrowings and can limit access to financing. AT&T's
failure to complete the restructuring plan as contemplated may impact its
liquidity.
At March 31, 2001, AT&T had total indebtedness of approximately $56.2
billion with the short-term portion of that at $17.2 billion. AT&T's ability to
meet these obligations depends upon its credit ratings, market conditions and
business results. AT&T continues to investigate and negotiate other financing
alternatives. In addition, AT&T plans to retire a portion of the short-term debt
with all or a part of the funds from the proposed offering of AT&T Broadband
Group tracking stock although that offering may not occur as expected.
THE FINANCIAL CONDITION AND PROSPECTS OF AT&T AND ITS GROUPS MAY BE MATERIALLY
ADVERSELY AFFECTED BY FURTHER RATINGS DOWNGRADES
AT&T's senior debt ratings and two of its short-term debt ratings were
reduced in late 2000 and remain under review for further downgrade. Further
ratings actions could occur at any time. If AT&T were to be further downgraded,
access to capital could be disrupted and the cost of capital would likely
increase. AT&T has access to the commercial paper market today which is
sufficient to satisfy its short-term borrowing needs. In the event of a further
short-term rating downgrade or downgrades, the level of issuance capacity
available to AT&T would likely contract and could be exceeded by our short-term
borrowing needs. In this case, AT&T could access its short-term bank credit
facilities. The cost of any short-term borrowing under the bank facilities would
likely be higher.
To the extent that the combined outstanding short-term borrowings under the
bank credit facilities and AT&T's commercial paper program were to exceed the
market capacity for such borrowings at the expiration of the bank credit
facilities, AT&T's continued liquidity would depend upon our ability to reduce
such short-term debt through a combination of capital market borrowings, asset
sales, operational cash generation, capital expenditure reduction and other
means. Our ability to achieve such objectives is subject to a risk of execution
and such execution could materially impact AT&T's operational results. In
addition, the cost of any capital market financing could be significantly in
excess of AT&T's historical financing costs. Also, AT&T could suffer negative
banking, investor, and public relations repercussions if we were to draw upon
the bank facilities, which are intended to serve as a back-up source of
liquidity only. Such impacts could cause further deterioration in our cost and
access to capital.
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RISK FACTORS RELATING TO THE TRACKING STOCK AMENDMENTS
THE MARKET PRICE OF AT&T BROADBAND GROUP TRACKING STOCK AND/OR AT&T CONSUMER
SERVICES GROUP TRACKING STOCK MAY NOT REFLECT THE FINANCIAL PERFORMANCE AND
ECONOMIC VALUE OF THE APPLICABLE GROUP AS WE INTEND AND MAY NOT EFFECTIVELY
TRACK THE SEPARATE PERFORMANCE OF THE APPLICABLE GROUP
The market price of AT&T Broadband Group tracking stock and/or AT&T
Consumer Services Group tracking stock may not in fact reflect the financial
performance and economic value of AT&T Broadband Group or AT&T Consumer Services
Group as we intend. Holders of AT&T Broadband Group tracking stock and AT&T
Consumer Services Group tracking stock will continue to be common shareholders
of AT&T and, as such, will be subject to all risks associated with an investment
in AT&T and all of its businesses, assets and liabilities. The performance of
AT&T as a whole may affect the market price of either or both of AT&T Broadband
Group tracking stock and AT&T Consumer Services Group tracking stock or the
market price could more independently reflect the performance of the business of
AT&T Broadband Group and/or AT&T Consumer Services Group. Investors may discount
the value of AT&T Broadband Group tracking stock or AT&T Consumer Services Group
tracking stock because these groups are part of a common enterprise with the
rest of the operations of AT&T rather than stand-alone entities.
THE COMBINED MARKET PRICES OF AT&T COMMON STOCK, AT&T BROADBAND GROUP TRACKING
STOCK AND AT&T CONSUMER SERVICES GROUP TRACKING STOCK MAY NOT EQUAL OR EXCEED
THE MARKET PRICE OF AT&T COMMON STOCK BEFORE THE OFFERING OR DISTRIBUTION OF THE
TRACKING STOCKS, AND NO MARKET CURRENTLY EXISTS FOR EITHER OF THE PROPOSED
TRACKING STOCKS
Investors may not assign values to AT&T common stock, AT&T Broadband Group
tracking stock or AT&T Consumer Services Group tracking stock based on the
reported financial results and prospects of their respective groups, or the
dividend policies established by our board of directors with respect to that
class of our common shares.
Because there has been no prior market for AT&T Broadband Group tracking
stock or AT&T Consumer Services Group tracking stock, we do not know how either
tracking stock will trade or if an active market for either tracking stock will
be maintained. In addition, we cannot predict the market impact of some of the
terms of either tracking stock, such as:
- redemption for stock of AT&T Broadband Corp. in the event AT&T completes
the spin-off of AT&T Communications Services, Inc.,
- the relative voting rights of AT&T common stock and the two tracking
stocks,
- the discretion of AT&T's board of directors to make determinations
affecting the tracking stocks, and
- in the case of each tracking stock, the creation and issuance of the
other tracking stock.
THE COMPLEX NATURE OF THE TERMS OF AT&T BROADBAND GROUP TRACKING STOCK AND AT&T
CONSUMER SERVICES GROUP TRACKING STOCK, OR CONFUSION IN THE MARKETPLACE ABOUT
WHAT A TRACKING STOCK IS, COULD MATERIALLY ADVERSELY AFFECT THE MARKET PRICES OF
AT&T BROADBAND GROUP TRACKING STOCK AND AT&T CONSUMER SERVICES GROUP TRACKING
STOCK
Tracking stocks, like AT&T Broadband Group tracking stock and AT&T Consumer
Services Group tracking stock, are more complex than traditional common stock
and are not directly or entirely comparable to common stock of companies that
have been spun off by their parent companies. The complex nature of the terms of
AT&T Broadband Group tracking stock and AT&T Consumer Services Group tracking
stock, and the potential difficulties investors may have in understanding these
terms, may materially adversely affect the market price of AT&T Broadband
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Group tracking stock and AT&T Consumer Services Group tracking stock. Examples
of these terms include:
- the discretion of AT&T's board of directors to make determinations
affecting AT&T Broadband Group tracking stock and AT&T Consumer Services
Group tracking stock,
- AT&T's rights in the event of a proposed spin off or disposition of
substantially all the assets of a group, or
- the ability of AT&T to convert shares of AT&T Broadband Group tracking
stock into shares of AT&T common stock.
Confusion in the marketplace about what a tracking stock is and what it is
intended to represent, and/or investors' reluctance to invest in tracking
stocks, could also materially adversely affect the market price of AT&T
Broadband Group tracking stock and AT&T Consumer Services Group tracking stock.
HOLDERS OF AT&T COMMON STOCK, AT&T BROADBAND GROUP TRACKING STOCK AND AT&T
CONSUMER SERVICES GROUP TRACKING STOCK ALL WILL BE SHAREHOLDERS OF ONE COMPANY
AND, THEREFORE, FINANCIAL IMPACTS ON ONE GROUP COULD AFFECT THE OTHER GROUPS
Holders of AT&T common stock, AT&T Broadband Group tracking stock and AT&T
Consumer Services Group tracking stock all will be common shareholders of AT&T.
As such, they will be subject to various risks associated with an investment in
a single company and all of AT&T's businesses, assets and liabilities. Financial
effects arising from one group that affect AT&T's consolidated results of
operations or financial condition could, if significant, affect the combined
results of operations or financial position of the other groups or the market
price of the class of common shares relating to the other groups.
In addition, if AT&T or any of its subsidiaries were to incur significant
indebtedness on behalf of a group, including indebtedness incurred or assumed in
connection with an acquisition or investment, it could affect the credit rating
of AT&T and its subsidiaries. This, in turn, could increase the borrowing costs
of the other groups and AT&T as a whole. Net losses of any group and dividends
or distributions on shares of any class of common or preferred stock will reduce
the funds of AT&T legally available for payment of future dividends on each of
AT&T common stock, AT&T Broadband Group tracking stock and AT&T Consumer
Services Group tracking stock. For these reasons, you should read AT&T's
consolidated financial information together with the financial information of
AT&T Broadband Group and AT&T Consumer Services Group.
HOLDERS OF EACH OF AT&T BROADBAND GROUP TRACKING STOCK AND AT&T CONSUMER
SERVICES GROUP TRACKING STOCK WILL HAVE LIMITED SEPARATE SHAREHOLDER RIGHTS, AND
WILL HAVE NO ADDITIONAL RIGHTS SPECIFIC TO THEIR GROUP, INCLUDING DIRECT VOTING
RIGHTS
Holders of AT&T Broadband Group tracking stock and AT&T Consumer Services
Group tracking stock will not have any direct voting rights in their respective
group, except to the extent required under AT&T's charter or by New York law. We
will not hold separate meetings for holders of AT&T Broadband Group tracking
stock or AT&T Consumer Services Group tracking stock. When a vote is taken on
any matter as to which all of our common shares are voting together as one
class, any class or series of our common shares that is entitled to more than
the number of votes required to approve the matter being voted upon will be in a
position to control the outcome of the vote on that matter.
Each share of AT&T common stock has one vote. Each share of AT&T Broadband
Group tracking stock will have of a vote per share and each share
of AT&T Consumer Services Group tracking stock will have of a
vote per share.
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HOLDERS OF EACH OF AT&T BROADBAND GROUP TRACKING STOCK AND AT&T CONSUMER
SERVICES GROUP TRACKING STOCK MAY HAVE POTENTIALLY DIVERGING INTERESTS FROM
HOLDERS OF OTHER CLASSES OF AT&T CAPITAL STOCK
The existence of separate classes of our common stock could give rise to
occasions when the interests of the holders of AT&T common stock, AT&T Broadband
Group tracking stock and/or AT&T Consumer Services Group tracking stock diverge,
conflict or appear to diverge or conflict. Examples include determinations by
AT&T's board of directors to:
- set priorities for use of capital and debt capacity,
- pay or omit the payments of dividends on AT&T common stock, AT&T
Broadband Group tracking stock or AT&T Consumer Services Group tracking
stock,
- approve dispositions of assets attributed to any group,
- formulate public policy positions for AT&T,
- establish material commercial relationships between groups, and
- make operational and financial decisions with respect to one group that
could be considered to be detrimental to another group.
A DECISION BY OUR BOARD OF DIRECTORS TO DISPOSE OF ASSETS ATTRIBUTED TO AT&T
BROADBAND GROUP OR AT&T CONSUMER SERVICES GROUP COULD HAVE A MATERIAL ADVERSE
IMPACT ON THE TRADING PRICE OF AT&T BROADBAND GROUP TRACKING STOCK OR AT&T
CONSUMER SERVICES GROUP TRACKING STOCK
Assuming AT&T Broadband Group's assets or AT&T Consumer Services Group's
assets represent less than substantially all of the assets of AT&T as a whole,
our board of directors could, in its sole discretion and without shareholder
approval, approve sales and other dispositions of any amount of the assets of
AT&T Broadband Group or AT&T Consumer Services Group.
However, in the event of a disposition of all or substantially all of the
properties and assets attributed to either AT&T Broadband Group or AT&T Consumer
Services Group, generally defined as 80% or more of the fair value of that
group, AT&T will be required under its charter to:
- convert each outstanding share of the affected tracking stock into shares
of AT&T common stock at a % premium, or
- distribute cash and/or securities, other than AT&T common stock, or other
property equal to the fair value of the net proceeds from that
disposition allocable to the affected tracking stock, or
- take a combination of the actions described in the preceding bullet
points.
Our board of directors is not required to select the option that would
result in the distribution with the highest value to the holders of AT&T
Broadband Group tracking stock or AT&T Consumer Services Group tracking stock.
In addition, under New York law, our board of directors could decline to
dispose of AT&T Broadband Group assets or AT&T Consumer Services Group assets
even if a majority of the holders of the respective tracking stocks request such
a disposition.
AT&T MAY TAKE POSITIONS ON PUBLIC POLICY OR REGULATORY MATTERS THAT BENEFIT ONE
GROUP MORE THAN ANOTHER
Because of the nature of the different businesses of AT&T Broadband Group,
AT&T Consumer Services Group and AT&T Business Services Group, the various
groups may have diverging interests as to the position AT&T should take with
respect to various regulatory issues. For example, Federal Communications
Commission, or FCC, regulations that may advance the interests of one group may
not advance or be adverse to the interests of the other groups. Under the AT&T
Groups policy statement, we will resolve material matters involving potentially
divergent interests in a manner that
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our board of directors, or the AT&T Groups capital stock committee, determines
to be in the best interests of AT&T and all of our common shareholders after
giving fair consideration to the potentially divergent interests and all other
relevant interests of the holders of the separate classes of our common shares.
Nevertheless, AT&T's board of directors could take positions on any given issue
that may benefit one group more than another or that may be adverse to another
group.
AT&T MAY MAKE OPERATIONAL AND FINANCIAL DECISIONS THAT BENEFIT ONE GROUP MORE
THAN ANOTHER
Our board of directors could, in its sole discretion, from time to time,
make operational and financial decisions or implement policies that affect
disproportionately the businesses of a group. These decisions could include:
- allocation of financing opportunities in the public markets or the
refinancing of existing indebtedness,
- allocation of business opportunities, resources and personnel, and
- transfers of services, funds or assets between groups and other
inter-group transactions
that, in each case, may be suitable for one or more groups. Any of these
decisions may benefit one group more than the other groups. For example, the
decision to obtain funds for one group may materially adversely affect the
ability of the other groups to obtain funds sufficient to implement their
respective growth strategies or may increase the cost of those funds.
In addition, AT&T Broadband Group and AT&T Consumer Services Group are
subject to AT&T's existing agreements or arrangements with third parties. These
agreements or arrangements currently may benefit those groups, as in the case of
purchasing arrangements, or may have the effect of limiting or impairing their
respective business opportunities.
All of these decisions will be made by our board of directors in its good
faith business judgment and in accordance with procedures and policies adopted
by our board of directors from time to time, including the AT&T Groups policy
statement described under "Relationship among AT&T Groups -- The AT&T Groups
Policy Statement."
AT&T'S BOARD OF DIRECTORS WILL HAVE THE ABILITY TO CONTROL LOANS AND ASSET
TRANSFERS BETWEEN AT&T'S GROUPS
AT&T's board of directors may decide to transfer funds or other assets
between groups. Transfers of assets among the groups that AT&T's board of
directors designates as an equity contribution or repayment will result in a
change in AT&T's retained portion of the value of that group. Any change in the
retained portion of the value of a group would be determined by reference to the
then-current market value of the affected tracking stock as determined by our
board of directors. Such an increase or decrease, however, could occur at a time
when those shares are considered undervalued or overvalued.
Under the AT&T Groups policy statement, the groups may make loans to each
other at interest rates and on terms and conditions substantially equivalent to
the interest rates and terms and conditions that the groups would be able to
obtain from third parties without the benefit of support or guarantee by AT&T.
The actual rates of interest charged or paid by any of the groups in the future
is uncertain and will depend on a variety of factors including the credit
profile of the group and market conditions. As a result, future interest rates
charged or paid by any of the groups may materially exceed those reflected in
the financial statements included elsewhere in this document.
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AT&T'S BOARD OF DIRECTORS MAY CHANGE THE AT&T GROUPS POLICY STATEMENT OR BY-LAW
AMENDMENT RELATED TO THE GROUPS WITHOUT SHAREHOLDER APPROVAL
Our board of directors intends to adopt the AT&T Groups policy statement
that we describe in this document to govern the relationship among AT&T groups
and to amend our by-laws to create the AT&T Groups capital stock committee that
will oversee the interaction between the groups. Our board of directors may
supplement, modify, suspend or rescind the policies set forth in the AT&T Groups
policy statement or related by-law amendment or make additions or exceptions to
them, in the sole discretion of our board of directors, without approval of our
shareholders, although there is no present intention to do so. Our board of
directors would make any of these determinations, including any decision that
would have disparate impacts upon holders of AT&T common stock, AT&T Broadband
Group tracking stock and/or AT&T Consumer Services Group tracking stock, as
applicable, in a manner consistent with its fiduciary duties to AT&T and all of
our common shareholders. See "-- The fiduciary duties of AT&T's board of
directors to more than one class of common stock are not clear under New York
law" for more information regarding our board of directors' fiduciary duties to
our shareholders. See "Relationship among AT&T Groups" for a description of the
AT&T Groups policy statement and by-law amendment.
IT WILL BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE AT&T BROADBAND GROUP OR AT&T
CONSUMER SERVICES GROUP WITHOUT AT&T'S CONSENT
If either AT&T Broadband Group or AT&T Consumer Services Group were an
independent entity, any person interested in acquiring either entity without
negotiation with our management could seek control of the outstanding stock of
that entity by means of a tender offer or proxy contest. Although the tracking
stock amendments will create new classes of our common shares that are intended
to reflect the separate financial performance and economic value of AT&T
Broadband Group and AT&T Consumer Services Group, a person interested in
acquiring only AT&T Broadband Group or AT&T Consumer Services Group without
negotiation with our management still would be required to seek control of the
voting power represented by all of the outstanding capital stock of AT&T
entitled to vote on that acquisition, including the classes of common shares
related to the other groups. As a result, this may discourage potential
interested bidders from seeking to acquire either AT&T Broadband Group or AT&T
Consumer Services Group. See "-- Holders of each of AT&T Broadband Group
tracking stock and AT&T Consumer Services Group tracking stock will have limited
separate shareholder rights, and will have no additional rights specific to
their group, including direct voting rights" for more information on the rights
of holders of tracking stocks. This inability of third parties directly to
acquire control of AT&T Broadband Group and/or AT&T Consumer Services Group may
materially adversely affect the market price of AT&T Broadband Group tracking
stock and/or AT&T Consumer Services Group tracking stock.
THERE WILL BE NO BOARD OF DIRECTORS OR COMMITTEE THAT OWES ANY SEPARATE
FIDUCIARY DUTIES TO HOLDERS OF AT&T BROADBAND GROUP TRACKING STOCK OR AT&T
CONSUMER SERVICES GROUP TRACKING STOCK, APART FROM THOSE OWED TO AT&T
SHAREHOLDERS GENERALLY
Each of AT&T's board of directors and the AT&T Groups capital stock
committee owes fiduciary duties to AT&T and its shareholders as a whole. AT&T
Broadband Group and AT&T Consumer Services Group will not have separate boards
of directors to represent solely the interests of the holders of AT&T Broadband
Group tracking stock and AT&T Consumer Services Group tracking stock.
Consequently, there is no separate board of directors or committee that owes any
separate duties to the holders of AT&T Broadband Group tracking stock or AT&T
Consumer Services Group tracking stock.
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THE FIDUCIARY DUTIES OF AT&T'S BOARD OF DIRECTORS TO MORE THAN ONE CLASS OF
COMMON STOCK ARE NOT CLEAR UNDER NEW YORK LAW
Although we are not aware of any legal precedent under New York law
involving the fiduciary duties of directors of corporations having two or more
classes of common stock, or separate classes or series of capital stock,
principles of Delaware law established in cases involving differing treatment of
two classes of capital stock or two groups of holders of the same class of
capital stock provide that a board of directors owes an equal duty to all
stockholders regardless of class or series, and does not have separate or
additional duties to either group of stockholders. Under these principles of
Delaware law and the related principle known as the "business judgment rule,"
absent abuse of discretion, a good faith business decision made by a
disinterested and adequately informed board of directors, or a committee of the
board of directors, with respect to any matter having disparate impacts upon
holders of AT&T common stock, AT&T Broadband Group tracking stock or AT&T
Consumer Services Group tracking stock would be a defense to any challenge to a
determination made by or on behalf of the holders of any class of our common
shares. Nevertheless, a New York court hearing a case involving this type of a
challenge may decide to apply principles of New York law different from the
principles of Delaware law discussed above, or may develop new principles of
law, in order to decide that case. Any future shareholder litigation over the
meaning or application of the terms of AT&T Broadband Group tracking stock, AT&T
Consumer Services Group tracking stock or our board's policies may be costly and
time consuming to AT&T, AT&T Broadband Group and AT&T Consumer Services Group.
CHANGES IN THE TAX LAW OR IN THE INTERPRETATION OF CURRENT TAX LAW MAY RESULT IN
REDEMPTION OF AT&T BROADBAND GROUP TRACKING STOCK AND/OR AT&T CONSUMER SERVICES
GROUP TRACKING STOCK, OR MAY PREVENT US FROM ISSUING FURTHER SHARES OF EITHER
STOCK
From time to time, there have been legislative and administrative proposals
that, if effective, would have resulted in the imposition of corporate level or
shareholder level tax upon the issuance of tracking stock. As of the date of
this document, no such proposals are outstanding.
If there are adverse tax consequences associated with the issuance of AT&T
Broadband Group tracking stock and/or AT&T Consumer Services Group tracking
stock, it is possible that we would cease issuing additional shares of AT&T
Broadband Group tracking stock and/or AT&T Consumer Services Group tracking
stock. This could affect the value of shares of AT&T Broadband Group tracking
stock and/or AT&T Consumer Services Group tracking stock then outstanding.
Furthermore, we are entitled to convert AT&T Broadband Group tracking stock
and AT&T Consumer Services Group tracking stock into AT&T common stock at a
premium of % if, based on the opinion of tax counsel, adverse U.S.
federal income tax law developments related to AT&T Broadband Group tracking
stock or AT&T Consumer Services Group tracking stock, respectively, occur after
the issuance of that tracking stock.
If we did convert AT&T Broadband Group tracking stock and/or AT&T Consumer
Services Group tracking stock into AT&T common stock at a premium, the interests
of holders of AT&T common stock would be diluted as a result of the redemption
premium paid for AT&T Broadband Group tracking stock and/or AT&T Consumer
Services Group tracking stock.
IN SOME INSTANCES, WE MAY OPTIONALLY REDEEM AT&T BROADBAND GROUP TRACKING STOCK
AND/OR AT&T CONSUMER SERVICES GROUP TRACKING STOCK, INCLUDING AS A RESULT OF AN
ADVERSE TAX LAW CHANGE
Our board of directors may, at any time after either the occurrence of
tax-related events, such as the ones described above, or the
anniversary of the date we initially issue shares of AT&T Broadband Group
tracking stock or AT&T Consumer Services Group tracking stock, respectively,
redeem all outstanding shares of AT&T Broadband Group tracking stock or AT&T
Consumer Services Group tracking stock, respectively, for shares of AT&T common
stock at a %
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premium. We could decide to redeem the tracking stock(s) at a time when any or
all of the AT&T common stock and the tracking stocks may be considered to be
overvalued or undervalued. In addition, a redemption at any premium would
preclude holders of both AT&T common stock and the redeemed tracking stock from
retaining their investment in a security intended to reflect separately the
financial performance and economic value of the relevant group. It would also
give holders of shares of the redeemed tracking stock an amount of consideration
that may differ from the amount of consideration a third-party buyer pays or
would pay for all or substantially all of the assets of the respective group.
For further details, see "The Broadband Charter Amendment Proposal -- Broadband
Group Tracking Stock Amendment" and "The Consumer Services Charter Amendment
Proposal -- Consumer Services Group Tracking Stock Amendment."
Additionally, at any time, if the businesses, assets and liabilities of
AT&T Broadband Group are substantially equivalent to the businesses, assets and
liabilities of AT&T, our board of directors may mandatorily redeem shares of
AT&T Broadband Group tracking stock for AT&T common stock without a premium as
described under "The Broadband Charter Amendment Proposal -- Terms of the
Broadband Group Tracking Stock Amendment -- AT&T Broadband Group Allocation
Fraction." If we complete the spin-off of AT&T Communications Services, Inc. in
the manner we contemplate, our board of directors will use this redemption right
to redeem all shares of AT&T Broadband Group tracking stock for shares of AT&T
common stock.
WE HAVE THE RIGHT TO REQUIRE THE EXCHANGE OF SHARES OF AT&T BROADBAND GROUP
AND/OR AT&T CONSUMER SERVICES GROUP TRACKING STOCK FOR TRACKING STOCK OF ANOTHER
ENTITY
In the event of a disposition or other transfer by AT&T of all of the
properties and assets of AT&T Broadband Group or AT&T Consumer Services Group,
the Broadband Group charter amendment and the Consumer Services Group charter
amendment generally allow us to redeem all outstanding shares of AT&T Broadband
Group tracking stock or AT&T Consumer Services Group tracking stock in exchange
for a new tracking stock of the entity that owns materially all of the assets
and liabilities of AT&T Broadband Group or AT&T Consumer Services Group, as the
case may be. In the event of such a redemption, the voting rights of the new
tracking stock will be set based on the ratio, over a fixed measurement period,
of the initial trading prices of the new tracking stock to the trading prices of
the common stock of the entity of which the new tracking stock is a part.
This new entity may have different businesses and a different capital
structure and be subject to different risks than AT&T generally. Holders of the
new tracking stock will become equity holders of this new entity and become
subject to risks affecting this new entity generally. Additionally, adverse
fluctuations in market valuations at and after the time of issuance of the new
tracking stock could materially adversely affect the relative voting power of
the new tracking stock with respect to the voting power of this new entity as a
whole.
If we complete the spin-off of AT&T Communications Services, Inc. in the
manner we contemplate, our board of directors will use this redemption right to
redeem all shares of AT&T Consumer Services Group tracking stock for shares of a
comparable tracking stock of AT&T Communications Services, Inc. In this case,
shareholders of AT&T Consumer Services Group tracking stock no longer would be
shareholders of AT&T but would be shareholders of AT&T Communications Services,
Inc.
AT&T'S BOARD OF DIRECTORS MAY REDEEM AT&T BROADBAND GROUP TRACKING STOCK OR AT&T
CONSUMER SERVICES GROUP TRACKING STOCK IN EXCHANGE FOR STOCK OF ONE OR MORE
QUALIFYING SUBSIDIARIES OF AT&T
AT&T's charter provides that AT&T may, at any time, redeem all outstanding
shares of AT&T Broadband Group tracking stock or AT&T Consumer Services Group
tracking stock in exchange for shares of common stock of a subsidiary of AT&T
that holds all of the assets and liabilities of the applicable tracked group.
This type of redemption must be tax free to the holders of the applicable
tracking stock, except with respect to any cash in lieu of fractional shares.
For more information, see
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"The Broadband Charter Amendment Proposal -- Terms of the Broadband Group
Tracking Stock Amendment -- Redemption" and "The Consumer Services Charter
Amendment Proposal -- Terms of the Consumer Services Group Tracking Stock
Amendment -- Redemption."
FUTURE SALES OF AT&T BROADBAND GROUP TRACKING STOCK, AT&T CONSUMER SERVICES
GROUP TRACKING STOCK AND AT&T COMMON STOCK COULD MATERIALLY ADVERSELY AFFECT
THEIR RESPECTIVE MARKET PRICES AND THE ABILITY TO RAISE CAPITAL IN THE FUTURE
Sales of substantial amounts of AT&T Broadband Group tracking stock, AT&T
Consumer Services Group tracking stock and AT&T common stock in the public
market could hurt the market price of each of those classes of stock. These
sales also could hurt AT&T's ability to raise capital in the future. Virtually
all the shares that we plan to sell to the public in the public offering of AT&T
Broadband Group tracking stock and any shares of either class of tracking stock
that we distribute to holders of AT&T common stock will be freely tradable
without restriction under the Securities Act of 1933, as amended, by persons
other than "affiliates" of AT&T, as defined under the Securities Act. Any sales
of substantial amounts of AT&T Broadband Group tracking stock, AT&T Consumer
Services Group tracking stock or AT&T common stock in the public market, or the
perception that those sales might occur, could materially adversely affect the
respective market prices of AT&T Broadband Group tracking stock, AT&T Consumer
Services tracking stock or AT&T common stock, as applicable.
Shareholder approval will not be solicited by AT&T for the issuance of
authorized but unissued shares of AT&T Broadband Group tracking stock, AT&T
Consumer Services Group tracking stock or AT&T common stock, unless these
approvals are deemed advisable by our board of directors or are required by
applicable law, regulation or stock exchange listing requirements. The issuance
of those shares could dilute the value of shares of AT&T Broadband Group
tracking stock, AT&T Consumer Services Group tracking stock or AT&T common
stock, as the case may be.
WE DO NOT EXPECT TO PAY DIVIDENDS ON AT&T BROADBAND GROUP TRACKING STOCK
Determinations as to the future dividends on AT&T Broadband Group tracking
stock primarily will be based upon the financial condition, results of
operations and business requirements of AT&T Broadband Group, and AT&T as a
whole. We currently do not expect to pay any dividends on AT&T Broadband Group
tracking stock for the foreseeable future. Following any issuance of AT&T
Consumer Services Group tracking stock, it is currently expected that one-third
of the current dividend payable on AT&T common stock will be allocated to AT&T
common stock and that two-thirds of the dividend will be allocated to AT&T
Consumer Services Group tracking stock. The declaration of dividends by AT&T and
the amount thereof will, however, be in the discretion of our board of directors
and will depend upon each of our group's financial performance, the dividend
policies and capital structures of comparable companies, each group's ongoing
capital needs, and AT&T's results of operations, financial condition, cash
requirements and future prospects and other factors deemed relevant by our board
of directors. Payment of dividends also may be restricted by loan agreements,
indentures and other transactions that AT&T enters into from time to time.
IF WE LIQUIDATE AT&T, AMOUNTS DISTRIBUTED TO HOLDERS OF EACH CLASS OF COMMON
STOCK MAY NOT REFLECT THE VALUE OF THE ASSETS ATTRIBUTED TO THE GROUPS
Under our charter, we would determine the liquidation rights of the holders
of the respective classes of stock in accordance with each group's respective
market capitalization at the time of liquidation. However, the relative market
capitalization of each group may not correctly reflect the value of the net
assets remaining and attributed to the groups after satisfaction of outstanding
liabilities.
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RISK FACTORS RELATING TO THE SPIN-OFF OF AT&T COMMUNICATIONS SERVICES, INC.
THE SPIN-OFF WILL REQUIRE AT&T TO RESTRUCTURE A SUBSTANTIAL AMOUNT OF
INDEBTEDNESS, WHICH MAY INVOLVE MATERIAL COSTS AND MAY BE DIFFICULT TO COMPLETE
A substantial portion of AT&T's indebtedness, including its long-term
indebtedness, will be allocated to AT&T Business Services Group and AT&T
Consumer Services Group. This indebtedness currently is an obligation of AT&T.
At or before the time of the spin-off, when AT&T Communications Services, Inc.
is separated from historical AT&T, we plan to seek to transfer the indebtedness
allocated to AT&T Business Services Group and AT&T Consumer Services Group from
historical AT&T to AT&T Communications Services, Inc. We may seek to accomplish
this through a variety of measures that may result in increased costs and
additional covenants on AT&T Communications Services, Inc.
IF WE COMPLETE THE SPIN-OFF, EACH OF AT&T COMMUNICATIONS SERVICES, INC. AND AT&T
BROADBAND CORP. WILL NEED TO OBTAIN FINANCING ON A STAND-ALONE BASIS
Historically, all financing for AT&T Communications Services, Inc. and AT&T
Broadband Corp. was done by AT&T at the parent level. AT&T was able to use its
overall balance sheet to finance the operations of AT&T Communications Services,
Inc. and AT&T Broadband Corp. If we complete the spin-off, each company will
have to raise financing on a stand-alone basis without reference to AT&T's new
overall balance sheet. Following the spin-off, neither company may be able to
secure adequate debt or equity financing on desirable terms. If concerns
generally affecting the communications services industry or the broadband
industry arise, each company will lose the benefit of the other's current
diverse business profile to support its debt. The cost to each company of stand-
alone financing may be materially higher than the cost of financing as part of
AT&T.
The credit ratings of AT&T Communications Services, Inc. and AT&T Broadband
Corp. following the spin-off may be different than the historical ratings of
AT&T. After the spin-off, AT&T Communications Services, Inc.'s and AT&T
Broadband Corp.'s credit ratings may be different from what they will be prior
to the spin-off. Differences in credit ratings affect the interest rate charged
on financings, as well as the amounts of indebtedness, types of financing
structures and debt markets that may be available to AT&T Communications
Services, Inc. and AT&T Broadband Corp. following the spin-off. AT&T
Communications Services, Inc. and AT&T Broadband Corp. may not be able to raise
the capital they require on desirable terms following the spin-off.
IF WE COMPLETE THE SPIN-OFF, AT&T COMMUNICATIONS SERVICES, INC. AND AT&T
BROADBAND CORP. MAY BE UNABLE TO MAKE THE CHANGES NECESSARY TO OPERATE AS
INDEPENDENT ENTITIES AND MAY INCUR GREATER COSTS
If we complete the spin-off, the separation of AT&T Communications
Services, Inc. from the Broadband businesses of AT&T may materially adversely
affect both AT&T Communications Services, Inc. and AT&T Broadband Corp.
In particular, following the spin-off, AT&T Communications Services, Inc.
and AT&T Broadband Corp. will have no obligation to provide financial,
operational or organizational assistance to each other, other than limited
services. Each of AT&T Communications Services, Inc. and AT&T Broadband may not
be able to implement successfully the changes necessary to operate
independently. Each of AT&T Communications Services, Inc. and AT&T Broadband
Corp. also may incur additional costs relating to operating independently that
would cause its cash flow and results of operations to decline materially. In
addition, their supplier arrangements may not be as favorable as has
historically been the case.
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Agreements to be entered into in connection with the spin-off may provide
that the businesses of AT&T Communications Services, Inc. and AT&T Broadband
Corp. will be conducted differently and that their relationship will be
different from that which has historically been the case. These differences may
have a detrimental effect on the results of operations or financial condition of
AT&T Communications Services, Inc. or AT&T Broadband Corp.
THE HISTORICAL FINANCIAL INFORMATION OF EACH OF AT&T COMMUNICATIONS SERVICES,
INC. AND AT&T BROADBAND GROUP MAY NOT BE REPRESENTATIVE OF ITS RESULTS AS AN
INDEPENDENT ENTITY, AND, THEREFORE, MAY NOT BE RELIABLE AS AN INDICATOR OF ITS
HISTORICAL OR FUTURE RESULTS
The historical financial information we have included and incorporated in
this document may not reflect what the results of operations, financial position
and cash flows of AT&T Communications Services, Inc. and AT&T Broadband Group
would have been had they been independent entities during the periods presented.
The combined financial statements reflect allocations for services provided to
AT&T Communications Services, Inc. and AT&T Broadband Group by AT&T, which
allocations may not reflect the costs AT&T Communications Services, Inc. and
AT&T Broadband Corp. will incur for similar or incremental services as
independent entities. In addition, among other things, the historical financial
information we have included does not reflect transactions that are expected to
occur in connection with the spin-off. See "Summary -- Consolidating Condensed
Financial Information" and "Selected Historical Financial Data of AT&T
Communications Services, Inc."
This historical financial information also is not reliable as an indicator
of future results.
IF WE COMPLETE THE SPIN-OFF, AT&T COMMUNICATIONS SERVICES, INC. WILL GENERALLY
BE RESPONSIBLE FOR TAX LIABILITY IF THE SPIN-OFF IS TAXABLE
Under the separation and distribution agreement to be entered into between
AT&T and AT&T Communications Services, Inc., subject to limited exceptions, AT&T
Communications Services, Inc. will be responsible for any liability that results
from the spin-off failing to qualify as a tax-free transaction. If the spin-off
fails to qualify as a tax-free transaction, this liability could have a material
adverse effect on AT&T Business Services Group and AT&T Consumer Services Group.
IF WE COMPLETE THE SPIN-OFF, VARIOUS FACTORS MAY INTERFERE WITH AT&T
COMMUNICATIONS SERVICES, INC.'S ABILITY TO ENGAGE IN DESIRABLE STRATEGIC
TRANSACTIONS AND EQUITY ISSUANCES
AT&T Communications Services, Inc. may be prevented from engaging in some
strategic transactions after the spin-off. The Code restricts the ability of a
company that has undergone a tax-free spin-off from certain issuances of shares
generally within a two-year period after the spin-off. In addition, the
separation and distribution agreement will prohibit AT&T Communications
Services, Inc., for a period of months to be agreed following the spin-off, from
entering into certain transactions that could render the spin-off taxable. This
may discourage, delay or prevent a merger, change of control, or other strategic
or capital raising transaction involving the issuance of equity by AT&T
Communications Services, Inc. Provisions of AT&T Communications Services, Inc.'s
charter and by-laws, its rights plan, if one is adopted, and applicable law also
may have the effect of discouraging, delaying or preventing change of control
transactions that its shareholders find desirable.
IF WE COMPLETE THE SPIN-OFF, EACH OF AT&T COMMUNICATIONS SERVICES, INC. AND AT&T
BROADBAND CORP. MAY LOSE RIGHTS UNDER AGREEMENTS WITH EACH OTHER IF A CHANGE OF
CONTROL OCCURS
We expect that some of the agreements that AT&T Communications Services,
Inc. and AT&T Broadband Corp. expect to enter into in connection with the
spin-off, including the brand license agreement, intellectual property
agreement, network services agreement and other commercial agreements, will
contain provisions that give one party rights in the event of a change of
control of
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the other party. These provisions may deter a change of control. In the event of
a change of control, the exercise of these rights could have a material adverse
effect on AT&T Communications Services, Inc. or AT&T Broadband Corp.
THE MARKET PRICE AND TRADING VOLUME OF AT&T COMMUNICATIONS SERVICES, INC. COMMON
STOCK, THE NEW CONSUMER SERVICES GROUP TRACKING STOCK AND AT&T BROADBAND CORP.
COMMON STOCK FOLLOWING THE SPIN-OFF MAY BE VOLATILE AND MAY FACE NEGATIVE
PRESSURE
Before the spin-off, there will be no trading market for shares of AT&T
Communications Services, Inc. common stock that holders of AT&T common stock
will receive in the spin-off or shares of the new Consumer Services Group
tracking stock that holders of AT&T Consumer Services Group tracking stock will
receive in exchange for their shares in the spin-off. Investors' interest may
not lead to a liquid trading market and the market price of AT&T Communications
Services, Inc. common stock, the new Consumer Services Group tracking stock and
AT&T Broadband Corp. common stock may be volatile. Following the spin-off, there
may be confusion due to the additional shares of stock that represent interests
in AT&T Broadband Group, which could materially adversely affect the market
price of AT&T Broadband Corp. common stock.
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RISK FACTORS RELATING TO AT&T BROADBAND GROUP
AT&T BROADBAND GROUP HAS A HISTORY OF NET LOSSES AND NEGATIVE CASH FLOW AND
EXPECTS TO CONTINUE TO EXPERIENCE NET LOSSES AND NEGATIVE CASH FLOW.
CONSEQUENTLY, AT&T BROADBAND GROUP MAY NOT HAVE THE ABILITY TO FINANCE FUTURE
OPERATIONS
AT&T Broadband Group (including its predecessor entities, TCI and MediaOne)
has had a history of net losses and negative cash flow and expects to continue
to report net losses and negative cash flow for the next few years. AT&T
Broadband Group reported net losses of $5.4 billion for the year ended December
31, 2000 and $1.8 billion (before cumulative effect of accounting change) for
the three months ended March 31, 2001. AT&T Broadband Group reported negative
earnings before income, taxes, depreciation and amortization, or EBITDA, of $2.3
billion for the year ended December 31, 2000 and $0.5 billion for the three
months ended March 31, 2001. Continued losses and negative cash flows may have a
materially adverse impact on AT&T Broadband Group's ability to finance
operations in the future.
AT&T BROADBAND GROUP'S PROGRAMMING COSTS ARE INCREASING AND IT MAY NOT HAVE THE
ABILITY TO PASS THESE INCREASES ON TO ITS CUSTOMERS, WHICH WOULD MATERIALLY
ADVERSELY AFFECT ITS CASH FLOW AND OPERATING MARGINS
Programming costs have been, and are expected to continue to be, AT&T
Broadband Group's largest single expense item. In recent years, the cable and
satellite video industries have experienced a rapid escalation in the cost of
programming, particularly sports programming. This escalation is expected to
continue, and AT&T Broadband Group may not be able to pass programming cost
increases on to its customers. The inability to pass these programming cost
increases on to its customers would have a material adverse impact on its cash
flow and operating margins. In addition, as AT&T Broadband Group upgrades the
channel capacity of its systems and adds programming to its basic, expanded
basic and digital programming tiers, AT&T Broadband Group may face increased
programming costs, which, in conjunction with the additional market constraints
on its ability to pass programming costs on to its customers, may tighten
operating margins.
While AT&T Broadband Group has some investments in programming companies,
unlike some of its competitors it has no meaningful participation with regard to
programming, and consequently AT&T Broadband Group's exposure to programming
costs may be greater than that of some of its competitors.
AT&T BROADBAND GROUP FACES SUBSTANTIAL COMPETITION
The broadband communications industry in which AT&T Broadband Group
operates is highly competitive. In some instances, AT&T Broadband Group competes
against companies with fewer regulatory burdens, easier access to financing,
greater personnel resources, greater brand name recognition and long-standing
relationships with regulatory authorities. The following businesses offer some
or all of the services currently offered by AT&T Broadband Group, and mergers,
joint ventures and alliances among any of the following businesses could result
in providers capable of offering a combination of cable television, Internet and
other telecommunications services in direct competition with AT&T Broadband
Group:
- cable television operators,
- direct broadcast satellite providers,
- regional telephone companies,
- long distance telephone service providers,
- utilities and municipalities,
- providers of local area telephone services and access to long distance
services to customers,
- providers of cellular and other wireless communications services,
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- digital subscriber line, or DSL, resellers, and
- Internet service providers, or ISPs.
AT&T Broadband Group faces competition within the subscription television
industry. This industry includes providers of paid television service employing
technologies other than cable, but excludes broadcast companies that transmit
their signal to customers without assessing a subscription fee. AT&T Broadband
Group also faces competition from broadcast companies distributing television
broadcast signals without assessing a subscription fee and from other
communications and entertainment media, including the following:
- conventional off-air television and radio broadcasting services,
- direct broadcast satellite providers,
- newspapers,
- movie theaters,
- Internet,
- live sports events, and
- home video products.
Even if AT&T Broadband Group upgrades its broadband facilities and related
infrastructure, it may not be able to compete effectively. Additionally, AT&T
Broadband Group is subject to competition from telecommunications providers and
ISPs in connection with offerings of new and advanced services, including
telecommunications and Internet services. Additionally, evolving DSL, wireless
IP and consumer electronic technologies (such as digital video recorders) may
present an opportunity for AT&T Broadband Group subscribers alternatively to
obtain premium media content and erode anticipated digital and advanced services
revenues. This competition may materially adversely affect AT&T Broadband
Group's business and operations in the future.
AT&T BROADBAND GROUP HAS SUBSTANTIAL EXISTING DEBT, WHICH COULD MATERIALLY
ADVERSELY AFFECT ITS FINANCIAL CONDITION, COMPETITIVE POSITION AND STRATEGIC
FLEXIBILITY AND ITS ABILITY TO OBTAIN FINANCING IN THE FUTURE
AT&T Broadband Group has a significant amount of debt. As of March 31,
2001, its total debt was approximately $28.8 billion. This debt could have
important consequences to investors. For example, it could:
- make it more difficult for AT&T Broadband Group to satisfy its
obligations under its credit facilities and to its noteholders;
- increase AT&T Broadband Group's vulnerability to general adverse economic
and broadband industry conditions, including interest rate fluctuations;
- require AT&T Broadband Group to dedicate a substantial portion of its
cash flow from operations to payments on its debt, which will reduce
funds available for working capital, capital expenditures, acquisitions
of additional broadband systems and other general corporate expenses;
- limit AT&T Broadband Group's flexibility in planning for, or reacting to,
changes in its business and the broadband industry generally;
- place AT&T Broadband Group at a disadvantage compared to its competitors
that have proportionately less debt; and
- limit AT&T Broadband Group's ability to borrow additional funds in the
future, if needed.
Additionally, following the spin-off, AT&T Broadband Corp., as historical
AT&T, will be burdened with any AT&T liabilities, including indebtedness, from
which AT&T Broadband Corp. is not released, even if not allocated to AT&T
Broadband Group. See "Risk Factors Relating to
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AT&T's Restructuring Plan -- Following the spin-off, AT&T Broadband Corp. will
be liable for historical AT&T liabilities from which AT&T Broadband Corp. is not
released, even if not allocated to AT&T Broadband Group."
AT&T BROADBAND GROUP MAY SUBSTANTIALLY INCREASE ITS DEBT LEVEL IN THE FUTURE,
WHICH COULD SUBJECT IT TO VARIOUS RESTRICTIONS AND HIGHER INTEREST COSTS AND
DECREASE ITS CASH FLOW AND EARNINGS
AT&T Broadband Group may substantially increase its debt level in the
future to fund the expansion, maintenance and upgrade of its systems and develop
new services, as well as to finance acquisitions. Any increase in debt could
subject it to various restrictions and higher interest costs and decrease its
cash flow and earnings. It also may be difficult for AT&T Broadband Group to
obtain all the financing it needs to fund its business and growth strategy on
desirable terms. AT&T Broadband Group may require substantial additional
financing in the future to fund capital expenditures and costs and expenses in
connection with funding its operations, investments and its growth strategy.
AT&T and AT&T Broadband Group are exploring and evaluating the relative
advantages and disadvantages of various funding mechanisms for AT&T Broadband
Group. The alternatives being considered include a long-term debt offering, a
bank credit line, commercial paper, and other forms of public and private debt
facilities. The decision on debt composition is dependent on, among other
things, the business and financial plans of AT&T Broadband Group and the market
conditions at the time of financing. The agreements governing this indebtedness
may contain financial and other covenants that could impair the flexibility of
AT&T Broadband Group and restrict its ability to pursue growth opportunities.
AT&T BROADBAND GROUP HAS SUBSTANTIAL CAPITAL REQUIREMENTS
AT&T Broadband Group intends to continue to upgrade a significant portion
of its broadband systems over the coming years and make other capital
investments, including with respect to its advanced services. AT&T Broadband
Group expects to incur substantial capital expenditures in 2001 and in future
years. The actual amount of the funds required for capital expenditures may vary
materially from management's estimate. The majority of these amounts is expected
to be used to acquire customer premises equipment (such as set-top boxes, cable
modems and telephone equipment) and to pay for installation costs for additional
video and advanced services customers. In addition, capital is expected to be
used to upgrade and rebuild most network systems to expand bandwidth capacity
and add two-way capability so that it may offer advanced services. There can be
no assurance that these amounts will be sufficient to accomplish the planned
system upgrades, customer premises equipment acquisitions and expansion.
AT&T Broadband Group also has commitments under its "Social Contract" with
the FCC and under certain of its franchise agreements with local franchising
authorities to upgrade and rebuild certain network systems. These commitments
may require capital expenditures in order to avoid default and/or penalties,
which expenditures may divert funds from other AT&T Broadband Group priorities.
AT&T Broadband Group's strategy and business plan will continue to require
substantial capital, which AT&T Broadband Group may not be able to obtain or to
obtain on favorable terms. A failure to obtain necessary capital would have a
material adverse effect on AT&T Broadband Group, and result in the delay, change
or abandonment of AT&T Broadband Group's development or expansion plans.
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THE ACTUAL AMOUNT OF FUNDS NECESSARY TO IMPLEMENT AT&T BROADBAND GROUP'S
STRATEGY AND BUSINESS PLAN MAY MATERIALLY EXCEED CURRENT ESTIMATES, WHICH COULD
HAVE A MATERIAL ADVERSE EFFECT ON AT&T BROADBAND GROUP'S FINANCIAL CONDITION AND
RESULTS OF OPERATIONS AND ITS COMPETITIVENESS
The actual amount of funds necessary to implement AT&T Broadband Group's
strategy and business plan may materially exceed AT&T Broadband Group's current
estimates in the event of various factors including:
- departures from AT&T Broadband Group's current business plan,
- unforeseen delays,
- cost overruns,
- unanticipated expenses,
- regulatory developments,
- engineering design changes,
- unforeseen competitive developments,
- changes in labor requirements, and
- technological and other risks.
If actual costs do materially exceed AT&T Broadband Group's current
estimates for these or other reasons, this would have a material adverse effect
on AT&T Broadband Group's financial condition and results of operations and its
competitiveness.
POTENTIAL ACQUISITIONS MAY REQUIRE AT&T BROADBAND GROUP TO INCUR SUBSTANTIAL
ADDITIONAL DEBT AND INTEGRATE NEW TECHNOLOGIES, OPERATIONS AND SERVICES, WHICH
MAY BE COSTLY AND TIME CONSUMING
An element of AT&T Broadband Group's strategy is to further consolidate its
network geographically, which AT&T Broadband Group may do through the
acquisition of broadband providers or exchanges of systems with other providers.
These acquisitions may cause AT&T Broadband Group to incur substantial
additional indebtedness to finance the acquisitions or to assume indebtedness of
the entities that are acquired. In addition, AT&T Broadband Group may encounter
difficulties in integrating those acquired operations into its own operations,
including as a result of different technologies, franchising authority
requirements, systems, services or service offerings. These actions could prove
costly or time consuming or divert management's attention from other business
matters.
FAILURE TO DEVELOP FUTURE BUSINESS OPPORTUNITIES MAY HAVE A MATERIAL ADVERSE
EFFECT ON AT&T BROADBAND GROUP'S GROWTH POTENTIAL
AT&T Broadband Group intends to pursue a number of new growth opportunities
beyond its core video service, high-speed cable Internet service and telephone
services, such as video-on-demand, and interactive television. These
opportunities involve new services for which there are no proven markets. In
addition, the ability to deploy and deliver these services relies, in many
instances, on new and unproven technology. AT&T Broadband Group's existing
technology may not perform as expected and AT&T Broadband Group may not be able
to successfully develop new technology to effectively and economically deliver
these services.
In addition, these opportunities require substantial capital outlays and
network capacity availability to deploy on a large scale. This capital or
capacity may not be available to support these services.
Furthermore, these services may not be widely introduced and fully
implemented in a timely fashion or at all. These services may not be successful
when they are in place, and customers may not purchase the services offered. If
these services are not successful or costs associated with implementation and
completion of the roll-out of these services materially exceed those currently
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estimated by AT&T Broadband Group, AT&T Broadband Group's financial condition
and prospects could be materially adversely affected.
AT&T BROADBAND GROUP MAY NOT BE ABLE TO KEEP PACE WITH TECHNOLOGICAL
DEVELOPMENTS OR CUSTOMERS' DEMAND FOR ADVANCED SERVICES, WHICH COULD LIMIT ITS
ABILITY TO COMPETE EFFECTIVELY
The broadband business is characterized by rapid technological change and
the introduction of advanced services. AT&T Broadband Group may not be able to
keep pace with technological developments, or successfully anticipate the demand
of customers for services requiring new technology. This type of rapid
technological change could materially adversely affect its plans to upgrade or
expand its systems and respond to competitive pressures. AT&T Broadband Group's
inability to upgrade, maintain and expand its systems and provide advanced
services in a timely manner, or to anticipate the demands of the marketplace,
could materially adversely affect its ability to compete. Consequently, growth,
results of operations and financial condition could suffer materially.
AT&T BROADBAND GROUP MAY BE UNABLE TO NEGOTIATE CONSTRUCTION CONTRACTS ON
FAVORABLE TERMS AND ITS CONSTRUCTION COSTS MAY INCREASE SIGNIFICANTLY, WHICH
COULD MATERIALLY ADVERSELY AFFECT ITS GROWTH, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The continued expansion and upgrade of AT&T Broadband Group's existing
systems will require it to hire contractors and enter into a number of
construction agreements. AT&T Broadband Group may have difficulty hiring
contractors, and the contractors AT&T Broadband Group hires may encounter cost
overruns or delays in construction. Moreover, municipalities place restrictions
and have requirements relating to the time and manner in which construction
projects may be undertaken. Construction costs may increase significantly over
the next few years as existing contracts expire and as demand for cable
construction services continues to grow. AT&T Broadband Group may not be able to
construct new systems or expand or upgrade existing or acquired systems in a
timely manner or at a reasonable cost. This may materially adversely affect its
growth, financial condition and results of operations.
ENTITIES INCLUDED IN AT&T BROADBAND GROUP ARE SUBJECT TO LONG-TERM EXCLUSIVE
AGREEMENTS THAT MAY LIMIT THEIR FUTURE OPERATING FLEXIBILITY AND MATERIALLY
ADVERSELY AFFECT AT&T BROADBAND GROUP'S FINANCIAL RESULTS
Entities attributed to AT&T Broadband Group may be subject to long-term
agreements relating to significant aspects of AT&T Broadband Group's operations,
including long-term agreements for video programming, audio programming,
electronic program guides and other services. For example, TCI Communications,
Inc. and Satellite Services, Inc., both affiliates of TCI, are parties to an
affiliation term sheet with Starz Encore Group, an affiliate of Liberty Media
Group, which extends to 2022 and provides for a fixed price payment (subject to
adjustment for various factors, including inflation) and may require AT&T
Broadband Group to pay two-thirds of Starz Encore Group's programming costs
above levels designated in the term sheet. Satellite Services, Inc. also entered
into a ten-year agreement with TV Guide in January 1999 for interactive program
guide services, which designates TV Guide Interactive as the exclusive
interactive programming guide for AT&T Broadband Group systems. The price, terms
and conditions of such term sheet may not reflect the current market and if they
continue to apply to AT&T Broadband Group, one or more of them may materially
adversely impact the financial performance of AT&T Broadband Group. By letter
dated May 29, 2001, AT&T Broadband Group indicated that in its view the Starz
Encore term sheet as a whole is unenforceable and reserved its right to
terminate the term sheet. AT&T Broadband Group indicated to Starz Encore Group
that it would not pay the excess programming costs requested to date and
disputed the enforceability of the excess programming costs pass through
provisions of the term sheet, among other provisions. The letter further
suggests that the parties meet to discuss a new
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affiliation arrangement. Starz Encore Group has stated publicly that it views
AT&T Broadband Group's position on the term sheet to be without merit.
AT&T BROADBAND GROUP'S BUSINESS IS SUBJECT TO EXTENSIVE GOVERNMENTAL LEGISLATION
AND REGULATION, WHICH COULD MATERIALLY ADVERSELY AFFECT ITS BUSINESS BY
INCREASING ITS EXPENSES OR LIMITING ITS PRICING FLEXIBILITY
Regulation of the broadband communications industry has increased the
administrative and operational expenses and limited the revenues of cable
systems. Broadband operators are subject to, among other things:
- limited rate regulation,
- requirements that, under specified circumstances, a cable system carry a
local broadcast station or obtain consent to carry a local or distant
broadcast station,
- rules for franchise renewals and transfers, and
- other requirements covering a variety of operational areas, such as
technical standards and customer service requirements.
Additionally, many aspects of these regulations currently are the subject
of judicial proceedings and administrative or legislative proposals. There also
are ongoing efforts to amend or expand the state and local regulation of some
cable systems, which may compound the regulatory risks AT&T Broadband Group
already faces. In response to these efforts, any of the states or localities in
which AT&T Broadband Group now operates may expand regulation of its cable
systems in the future.
AT&T BROADBAND GROUP MAY BE REQUIRED TO PROVIDE ACCESS TO ITS NETWORKS TO OTHER
ISPS, WHICH COULD MATERIALLY ADVERSELY AFFECT THE UPGRADE OF ITS SYSTEMS OR ITS
ABILITY TO PROVIDE NEW PRODUCTS AND SERVICES
Although there is at present no significant federal regulation of cable
system delivery of Internet services, and the FCC recently issued several
reports finding no immediate need to impose such regulation, this situation may
change as cable systems expand their broadband delivery of Internet services. In
particular, proposals have been advanced at the FCC and Congress that would
require cable operators to provide access to unaffiliated ISP and online service
providers. Some states and local franchising authorities are considering the
imposition of mandatory Internet access requirements as part of cable franchise
renewals or transfers.
AT&T Broadband Group believes that, should specific technological solutions
and/or specific pricing mechanisms be imposed on the industry, it:
- would impair its ability to use its bandwidth in ways that would generate
maximum revenues; and
- may cause it to decide not to upgrade systems, which would prevent it
from introducing its planned new services.
In addition, AT&T Broadband Group believes that if there were governmental
imposition of mandatory Internet access requirements on the industry, it could:
- increase the expenses AT&T Broadband Group incurs to enhance and maintain
its information and network systems;
- increase the expense of upgrading and/or expanding its hybrid
fiber/coaxial and data systems;
- limit profit margins to a prescribed level; and/or
- further reduce the value of AT&T Broadband Group's investment in
Excite@Home.
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AT&T BROADBAND GROUP'S CABLE SYSTEMS ARE OPERATED UNDER FRANCHISES THAT ARE
SUBJECT TO NON-RENEWAL OR TERMINATION; THE FAILURE TO RENEW A FRANCHISE COULD
MATERIALLY ADVERSELY AFFECT ITS BUSINESS IN A KEY MARKET
AT&T Broadband Group's cable systems generally operate pursuant to
franchises, permits or licenses typically granted by a municipality or other
state or local government controlling the public rights-of-way. Many franchises
establish comprehensive facilities and service requirements, as well as specific
customer service standards and establish monetary penalties for non-compliance.
In many cases, franchises are terminable if the franchisee fails to comply with
material provisions set forth in the franchise agreement governing system
operations. Franchises generally are granted for fixed terms and must be
periodically renewed. Local franchising authorities may resist granting a
renewal if either past performance or the prospective operating proposal is
considered inadequate. More than 1,500 of AT&T Broadband Group's franchises
expire within the next three years, representing more than 35% of the franchises
held by AT&T Broadband Group and involving over 4 million basic service
customers. Local franchising authorities often demand concessions or other
commitments as a condition to renewal, which concessions or other commitments
have been and may continue to be costly to obtain. In some instances, franchises
have not been renewed at expiration, and AT&T Broadband Group has operated under
either temporary operating agreements or without a license while negotiating
renewal terms with the local franchising authorities.
AT&T Broadband Group may not be able to comply with all material provisions
of its franchise agreements and may not be able to renew its franchises in the
future. A termination of and/or a sustained failure to renew a franchise could
materially adversely affect its business in the affected geographic area.
AT&T BROADBAND GROUP OPERATES CABLE SYSTEMS UNDER FRANCHISES THAT ARE
NONEXCLUSIVE; LOCAL FRANCHISING AUTHORITIES CAN GRANT ADDITIONAL FRANCHISES AND
CREATE COMPETITION IN MARKET AREAS WHERE NONE EXISTED PREVIOUSLY
AT&T Broadband Group's cable systems are operated under franchises granted
by local franchising authorities. These franchises are nonexclusive.
Consequently, these local franchising authorities can grant additional
franchises to competitors in the same geographic area. As a result, competing
operators may build systems in areas in which AT&T Broadband Group holds
franchises. In some cases municipal utilities may legally compete with AT&T
Broadband Group without obtaining a franchise from the local franchising
authority. The existence of more than one cable system operating in the same
territory is referred to as an "overbuild." These overbuilds could materially
adversely affect AT&T Broadband Group's growth, financial condition and results
of operations by increasing competition or creating competition where no
non-satellite competition existed previously.
LOCAL FRANCHISING AUTHORITIES HAVE THE ABILITY TO IMPOSE ADDITIONAL REGULATORY
CONSTRAINTS ON AT&T BROADBAND GROUP'S BUSINESS, WHICH CAN FURTHER INCREASE
EXPENSES
In addition to the franchise document, cable authorities also have adopted
in some jurisdictions cable regulatory ordinances that further regulate the
operation of cable systems. This additional regulation increases AT&T Broadband
Group's expenses in operating its business. There can be no assurance that the
local franchising authorities will not impose new and more restrictive
requirements.
Local franchising authorities also have the power to reduce rates and order
refunds of basic service and associated equipment rates paid in the previous
12-month period determined to be in excess of the maximum permitted rates.
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AT&T BROADBAND GROUP IS SUBJECT TO ADDITIONAL REGULATORY BURDENS IN CONNECTION
WITH THE PROVISION OF TELECOMMUNICATIONS SERVICE, WHICH CAUSES IT TO INCUR
ADDITIONAL COSTS
AT&T Broadband Group is required to obtain U.S. federal, state and local
licenses or other authorizations in connection with its offering
telecommunications services. AT&T Broadband Group may not be able to obtain
these authorizations in a timely manner, or at all, and conditions could be
imposed upon these licenses or authorizations that may not be favorable to it.
Specific risks are also associated with the regulatory regime established by the
Telecommunications Act of 1996. These include risks related to AT&T Broadband
Group's interconnection agreements with local exchange carriers and whether AT&T
Broadband Group will be able to obtain these agreements or obtain them on
favorable terms. Also, AT&T Broadband Group is subject to risks associated with
the regulation of its telecommunications services by the FCC and state public
utilities commissions, or PUCs. Furthermore, telecommunications companies,
including IP telephone companies, generally are subject to significant
regulation as well as higher fees for pole attachments. IP telephone companies
are companies that have the ability to offer telephone services over the
Internet, and pole attachments are cable wires that are attached to poles.
AT&T BROADBAND GROUP IS RELIANT UPON EXCITE@HOME FOR THE DEVELOPMENT,
MAINTENANCE AND DISTRIBUTION OF ITS HIGH-SPEED CABLE INTERNET SERVICE; AND THE
GROWTH OF ITS HIGH-SPEED CABLE INTERNET SERVICE IS DEPENDENT ON THE RELIABILITY,
AVAILABILITY AND STABILITY OF EXCITE@HOME'S NETWORK AND SERVICES
AT&T Broadband Group has made a significant investment and commitment to
Excite@Home. It has a contractual arrangement that allows Excite@Home to be the
exclusive provider of high speed cable Internet services to residential
subscribers in AT&T Broadband Group cable systems (other than those previously
affiliated with Road Runner LLC) through June 4, 2002. While AT&T Broadband
Group may distribute other residential Internet services after this period of
exclusivity has expired, it has committed to use Excite@Home as its provider of
platform connectivity services in its residential high-speed cable Internet
services and to make Excite@Home's content services a featured portal for AT&T
Broadband Group's residential Internet services. The impact of this agreement
cannot be accurately determined. If Excite@Home is not able to maintain its
financial viability while improving its current network and ISP performance and
scaling its network and services for anticipated growth, this could materially
adversely impact the expansion of AT&T Broadband Group's high-speed cable
Internet service and the financial performance of AT&T Broadband Group.
AT&T BROADBAND GROUP FACES RISKS RELATING TO ITS INVESTMENT IN EXCITE@HOME,
INCLUDING RISKS RELATING TO EXCITE@HOME'S LIQUIDITY
On April 17, 2001, Excite@Home issued a press release announcing that, due
to recent deterioration of the market for online advertising and marketing
services, it expected to report significantly lower revenues, greater operating
losses, and more rapid use of cash than previously forecasted for the balance of
2001. As a result, Excite@Home recorded in its first quarter results an
impairment charge associated with its media business. Because AT&T owns
approximately 23% of the outstanding shares of capital stock of Excite@Home,
AT&T recorded an impairment charge in its first quarter results of $739 million,
which had a net income impact, after minority elimination, of $279 million.
After giving effect to the charge, AT&T's carrying value of Excite@Home was
approximately $490 million.
AT&T BROADBAND GROUP HAS SUBSTANTIAL ECONOMIC INTERESTS IN JOINT VENTURES IN
WHICH IT HAS LIMITED MANAGEMENT RIGHTS
AT&T Broadband Group is a partner in several large joint ventures, such as
Time Warner Entertainment, Texas Cable Partners and Kansas City Cable Partners,
in which it has a substantial economic interest but does not have substantial
control with regard to management policies or the selection of management. These
joint ventures may be managed in a manner contrary to the best
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interests of AT&T Broadband Group, and the value of AT&T Broadband Group's
investment in these joint ventures may be affected by management policies that
are determined without input from AT&T Broadband Group or over the objections of
AT&T Broadband Group.
AT&T BROADBAND GROUP OPERATIONS AND FINANCIAL RESULTS MAY BE MATERIALLY
ADVERSELY AFFECTED BY RESIDUAL LIABILITIES ASSOCIATED WITH THE RESTRUCTURING OF
THE ROAD RUNNER JOINT VENTURE AND THE RESULTING TRANSITION TO EXCITE@HOME
AT&T Broadband Group, through the MediaOne acquisition, acquired an
interest in Road Runner, a broadband cable ISP similar to Excite@Home. In
December 2000, AT&T Broadband Group and the other cable members of Road Runner
agreed to restructure this venture and distribute the assets to the cable
members. Consequently, on May 1, 2001, AT&T Broadband Group purchased the Road
Runner assets used to support the AT&T Broadband Group high-speed cable Internet
subscribers and sold its equity interest in Road Runner to subsidiaries of AOL
Time Warner Inc. However, AT&T Broadband Group and AOL Time Warner have agreed
to jointly satisfy residual liabilities associated with the restructuring of
Road Runner in proportion to their prior equity interests in Road Runner. The
extent of these residual liabilities cannot be determined at this time and
payment of AT&T Broadband Group's portion of such liabilities may have a
material adverse affect on its financial condition.
AT&T Broadband Group intends to migrate its Road Runner high-speed cable
Internet subscribers over time to the Excite@Home service. Implementation of
this transition may result in unanticipated material delays and financial
expense.
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RISK FACTORS RELATING TO AT&T CONSUMER SERVICES GROUP
AND AT&T BUSINESS SERVICES GROUP
AT&T CONSUMER SERVICES GROUP AND AT&T BUSINESS SERVICES GROUP EXPECT THERE TO BE
A CONTINUED DECLINE IN THE LONG DISTANCE INDUSTRY
Historically, prices for voice communications have fallen because of the
introduction of more efficient networks and advanced technology, product
substitution, excess capacity, deregulation and competition. AT&T Consumer
Services Group and AT&T Business Services Group expect these trends to continue
and each group may need to reduce its prices in the future to remain
competitive. In addition, AT&T Consumer Services Group and AT&T Business
Services Group do not expect that they will be able to achieve increased traffic
volumes in the near future to sustain their current revenue levels. The extent
to which each of AT&T Consumer Services Group's and AT&T Business Services
Group's business, financial condition, results of operations and cash flow could
be materially adversely affected will depend on the pace at which these
industry-wide changes continue and its ability to create new and innovative
services to differentiate its offerings, enhance customer retention and retain
or grow market share.
AT&T CONSUMER SERVICES GROUP AND AT&T BUSINESS SERVICES GROUP FACE SUBSTANTIAL
COMPETITION THAT MAY MATERIALLY ADVERSELY IMPACT BOTH MARKET SHARE AND MARGINS
Each of AT&T Consumer Services Group and AT&T Business Services Group
currently faces significant competition and we expect the level of competition
to continue to increase. Some of the potential materially adverse consequences
of this competition include the following:
- market share loss;
- the possibility that customers shift to less profitable, lower margin
services;
- the need to initiate or respond to price cuts in order to retain market
share;
- difficulties in these groups' ability to grow new businesses, introduce
new services successfully or execute on their business plan; and
- the inability to purchase fairly priced access services.
As a result of competitive factors, AT&T Consumer Services Group and AT&T
Business Services Group believe it is unlikely that they will sustain existing
price or margin levels.
AT&T CONSUMER SERVICES GROUP AND AT&T BUSINESS SERVICES GROUP FACE COMPETITION
FROM A VARIETY OF SOURCES
Competition from new entrants into long distance, including Regional Bell
Operating Companies, or RBOCs. AT&T Consumer Services Group and AT&T Business
Services Group traditionally have competed with other long distance carriers. In
recent years, AT&T Consumer Services Group and AT&T Business Services Group have
begun to compete with incumbent local exchange carriers, which historically have
dominated local telecommunications, and with other competitive local exchange
carriers for the provision of long distance services.
Some RBOC, such as Verizon Communications Inc. and SBC Communications Inc.,
already have been permitted to offer long distance services in some states
within their regions and Verizon has applications pending with the FCC for
authorization to offer long distance service in other states within their
regions. We expect that Verizon and SBC will seek to enter virtually all states
in their regions and that other RBOCs will be given permission to offer long
distance services within their regions in the next few years.
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The incumbent local exchange carriers presently have numerous advantages as
a result of their historic monopoly control over local exchanges.
Competition from Facilities-Based Companies, including RBOCs. AT&T
Consumer Services Group and AT&T Business Services Group also face the risk of
increasing competition from entities that own their own access facilities,
particularly the RBOCs, which have access facilities across vast regions of the
United States with the ability to control cost, cycle time and functionality for
most end-to-end services in their regions. These entities can preserve large
market share and high margins on access services as they enter new markets,
including long distance and end-to-end services. This places them in superior
position vis-a-vis AT&T Consumer Services Group and AT&T Business Services Group
and other competitors that must purchase such high-margin access services.
Competition from lower-cost or less leveraged providers. The cost
structure of AT&T Consumer Services Group and AT&T Business Services Group also
affects their competitiveness. Each faces the risk that it will not be able to
maintain a competitive cost structure if newer technologies favor newer
competitors that do not have legacy infrastructure, and as technology
substitution continues. The ability of each of AT&T Consumer Services Group's
and AT&T Business Services Group to make critical investments to improve cost
structure also may be impaired by its current debt obligations.
Competition as a result of technological change. AT&T Consumer Services
Group and AT&T Business Services Group also may be subject to additional
competitive pressures from the development of new technologies and the increased
availability of domestic and international transmission capacity. The
telecommunications industry is in a period of rapid technological evolution,
marked by the introduction of new product and service offerings and increasing
satellite, wireless, fiber optic and coaxial cable transmission capacity for
services similar to those provided by AT&T Consumer Services Group and AT&T
Business Services Group. We cannot predict which of many possible future product
and service offerings will be important to maintain our competitive position or
what expenditures will be required to develop and provide these products and
services.
Competition as a result of excess capacity. Each of AT&T Consumer Services
Group and AT&T Business Services faces competition as a result of excess
capacity resulting from substantial network build out by competitors who had
access to inexpensive capital.
Strength of competitors. Some of AT&T Consumer Services Group's and AT&T
Business Services Group's existing and potential competitors have financial,
personnel and other resources significantly greater than those of AT&T Consumer
Services Group and AT&T Business Services Group.
THE REGULATORY AND LEGISLATIVE ENVIRONMENT CREATES CHALLENGES FOR AT&T CONSUMER
SERVICES GROUP AND AT&T BUSINESS SERVICES GROUP
Each of AT&T Consumer Services Group and AT&T Business Services Group faces
risks relating to regulations and legislation. These risks include:
- the difficulty of effective entry into local markets due to
noncompetitive pricing and to RBOC operational issues that do not permit
rapid large-scale customer changes from RBOCs to new service providers,
- new head-on competition as RBOCs begin to enter the long distance
business, and
- the emergence of few facilities-based competitors to RBOCs and the
absence of any significant alternate source of supply for most access and
local services.
This dependency on supply materially adversely impacts each of AT&T
Business Services Group's and AT&T Consumer Services Group's cost structure and
its ability to create and market desirable and competitive end-to-end products
for customers.
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In addition, RBOCs will be entering the long distance business while they
still control substantially all the access facilities in their regions. This
will likely result in an increased level of competition for long distance or
end-to-end services as the services offered by RBOCs expand.
EACH OF AT&T CONSUMER SERVICES GROUP AND AT&T BUSINESS SERVICES GROUP HAS
SUBSTANTIAL EXISTING DEBT, WHICH COULD MATERIALLY ADVERSELY AFFECT THEIR
FINANCIAL CONDITION AND ABILITY TO OBTAIN FINANCING IN THE FUTURE AND REACT TO
CHANGES IN THEIR BUSINESSES; THESE DEBT LEVELS MAY INCREASE IN THE FUTURE
Each of AT&T Consumer Services Group and AT&T Business Services Group has a
significant amount of debt. As of March 31, 2001, AT&T Consumer Services Group's
total debt was approximately $2.9 billion, and AT&T Communications Services,
Inc.'s total debt was approximately $26.5 billion. Intense competitive
pressures, adverse regulatory developments or other factors could cause future
debt levels to increase materially. This significant amount of debt could:
- increase AT&T Consumer Services Group's and AT&T Business Services
Group's vulnerability to competitive pressures and general adverse
economic and industry conditions;
- reduce funds available for working capital, capital expenditures,
acquisitions of additional systems and other general corporate expenses
that are important in maintaining competitive flexibility;
- place AT&T Consumer Services Group and AT&T Business Services Group at a
disadvantage compared to their competitors that have proportionately less
debt; and
- make it more difficult for AT&T Consumer Services Group and AT&T Business
Services Group to satisfy these obligations.
EACH OF AT&T CONSUMER SERVICES GROUP AND AT&T BUSINESS SERVICES GROUP MAY
SUBSTANTIALLY INCREASE ITS DEBT LEVEL IN THE FUTURE, WHICH COULD SUBJECT IT TO
VARIOUS RESTRICTIONS AND HIGHER INTEREST COSTS AND DECREASE ITS CASH FLOW AND
EARNINGS
Each of AT&T Consumer Services Group and AT&T Business Services Group may
substantially increase its debt level in the future, which could subject it to
various restrictions and higher interest costs and decrease its cash flow and
earnings. It also may be difficult for AT&T Consumer Services Group and AT&T
Business Services Group to obtain all the financing they need to fund their
businesses and growth strategies on desirable terms. The amount of debt required
in the future will depend upon the performance revenue and margin of each group,
which in turn may be materially adversely affected by competitive and other
pressures. Any agreements governing indebtedness obtained by AT&T Consumer
Services Group or AT&T Business Services Group may contain financial and other
covenants that could impair AT&T Consumer Services Group's or AT&T Business
Services Group's flexibility and restrict its ability to pursue growth
opportunities.
AT&T expects to explore and evaluate the relative advantages and
disadvantages of various funding mechanisms for AT&T Communications Services,
Inc. These alternatives may include a long-term debt offering, a bank credit
line, commercial paper, and other forms of public and private debt facilities.
The decision on debt composition is dependent on, among other things, the
business and financial plans of AT&T Communications Services, Inc. and the
market conditions at the time of financing.
THE ACTUAL AMOUNT OF FUNDS NECESSARY TO IMPLEMENT EACH OF AT&T CONSUMER SERVICES
GROUP'S AND AT&T BUSINESS SERVICES GROUP'S STRATEGY AND BUSINESS PLAN MAY
MATERIALLY EXCEED CURRENT ESTIMATES, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT
ON ITS FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The actual amount of funds necessary to implement each of AT&T Consumer
Services Group's and AT&T Business Services Group's strategy and business plan
may materially exceed AT&T
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Consumer Services Group's and AT&T Business Services Group's current estimates
in the event of various factors, including:
- competitive downward pressures on revenues and margins,
- departures from AT&T Consumer Services Group's and AT&T Business Services
Group's respective current business plans,
- regulatory developments,
- unforeseen competitive developments,
- technological and other risks,
- unanticipated expenses,
- unforeseen delays and cost overruns, and
- engineering design changes.
If actual costs do materially exceed AT&T Consumer Services Group's and/or
AT&T Business Services Group's current estimates for these or other reasons,
this would have a material adverse effect on AT&T Consumer Services Group's
and/or AT&T Business Services Group's financial condition and results of
operations.
AT&T BUSINESS SERVICES GROUP'S BUILD OUT OF ITS NEXT GENERATION IP BACKBONE
NETWORK REQUIRES SUBSTANTIAL CAPITAL REQUIREMENTS AND SUBSTANTIAL CAPITAL
EXPENDITURES
AT&T Business Services Group's business plan will require substantial
capital expenditures in connection with its build out of its end-to-end IP
connectivity network, including both the next generation IP backbone as well as
dedicated IP customer connectivity and hosting facilities. AT&T Business
Services Group may not be able to obtain sufficient capital or to obtain
sufficient capital on favorable terms. This failure to obtain capital would have
a material adverse effect on AT&T Business Services Group, and result in the
delay, change or abandonment of its development or expansion plans.
AT&T CONSUMER SERVICES GROUP'S POTENTIAL GROWTH IN DSL IS SUBJECT TO
COMMERCIALLY VIABLE ACCESS TO INCUMBENT LOCAL EXCHANGE CARRIER FACILITIES, AND
REQUIRES SUBSTANTIAL CAPITAL EXPENDITURES
AT&T Consumer Services Group's business plan will require substantial
capital expenditures in connection with its expansion into providing DSL voice
and data services. The development of DSL voice and data services involves
uncertainty relating to potential technological hurdles and unforeseen costs.
AT&T Consumer Services Group historically has not had to incur these capital
expenditures, and it may not be able to obtain sufficient capital on favorable
terms or at all. This failure to obtain capital would have a material adverse
effect on AT&T Consumer Services Group, and result in the delay, change or
abandonment of its development or expansion plans.
AT&T CONSUMER SERVICES GROUP MAY BE SUBJECT TO OBLIGATIONS IN A DEFINED
GEOGRAPHIC AREA UNTIL 2006 RELATING TO WIRELINE HIGH-SPEED INTERNET ACCESS
SERVICES
As part of the March 28, 2000, term sheets among AT&T, Excite@Home, Comcast
Corporation and Cox Communications, Inc. relating to the reorganization of the
governance and distribution arrangements of Excite@Home, AT&T agreed that until
June 4, 2006, AT&T will not provide wireline (e.g., DSL or hybrid fiber/coaxial)
high-speed Internet access services to residential customers in the territories
served by the U.S. cable systems of Cox or Comcast, as the case may be. AT&T's
obligation will terminate automatically as to either Comcast or Cox, if Comcast
or Cox, as the case may be, does not continue to use Excite@Home as its provider
of platform/connectivity services used in its residential high-speed ISP
services over cable in substantially all of its U.S. cable systems. AT&T further
agreed to use all reasonable efforts to cause its subsidiaries and affiliates to
comply with the provisions, terms and obligations of that agreement that are
applicable to them. If this agreement is interpreted to apply to the activities
of AT&T Consumer Services Group, it could
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limit AT&T Consumer Services Group's ability to provide DSL and other wireline
high-speed Internet services in the geographic areas where Comcast and Cox have
cable systems and could have a material adverse effect on AT&T Consumer Services
Group's ability to expand and grow its wireline high-speed Internet business
generally or to achieve economies of scale in that business.
SUBSTANTIALLY ALL OF THE TELEPHONE CALLS MADE BY EACH OF AT&T CONSUMER SERVICES
GROUP'S AND AT&T BUSINESS SERVICES GROUP'S CUSTOMERS ARE CONNECTED USING OTHER
COMPANIES' NETWORKS, INCLUDING THOSE OF ITS COMPETITORS
AT&T Consumer Services Group principally is a long distance voice
telecommunications company. AT&T Consumer Services Group does not own or operate
any primary transmission facilities. Accordingly, it must route domestic and
international calls made by its customers over transmission facilities leased
from AT&T Business Services Group. AT&T Business Services Group provides long
distance telecommunications over its own transmission facilities. Because AT&T
Business Services Group's network does not extend to homes, both AT&T Consumer
Services Group and AT&T Business Services Group must route calls through a local
telephone company to reach AT&T Business Services Group's transmission
facilities and, ultimately, to reach their final destinations.
In the United States, the providers of local telephone service generally
are the incumbent local exchange carriers, including the RBOCs. The permitted
pricing of local transmission facilities that AT&T Consumer Services Group and
AT&T Business Services Group lease in the United States is subject to legal
uncertainties. The FCC has issued an order requiring incumbent local exchange
carriers to price those facilities that both AT&T Consumer Services Group and
AT&T Business Services Group would use to provide local exchange and exchange
access services at their total element long-run incremental cost with a major
case currently pending before the Supreme Court. Should the incumbent local
exchange carriers succeed before the Supreme Court, the result probably would be
to increase the cost of incumbent local transmission facilities obtained by AT&T
Consumer Services Group and AT&T Business Services Group. Also, AT&T Consumer
Services Group and AT&T Business Services Group expect incumbent local exchange
carriers to bring additional challenges before U.S. federal and state regulators
should incumbent local exchange carriers view the ultimate ruling unfavorably.
AT&T CONSUMER SERVICES GROUP MUST RELY ON AT&T BUSINESS SERVICES GROUP'S ABILITY
TO MAINTAIN, UPGRADE AND REDUCE COSTS ASSOCIATED WITH THE CORE NETWORK, WHICH
MAY LEAD TO ADDITIONAL COSTS
AT&T Consumer Services Group currently is dependent upon AT&T Business
Services Group for leased line capacity, data communications facilities, traffic
termination services and physical space for offices and equipment. Although AT&T
Consumer Services Group expects to enter into a services agreement with AT&T
Business Services Group for it to provide these services, if AT&T Business
Services Group becomes unwilling or unable to provide its current level of
services to AT&T Consumer Services Group during the term of the service
agreement or thereafter, AT&T Consumer Services Group may not be able to find
replacement service providers on a timely basis. If AT&T Consumer Services Group
is required to change providers, AT&T Consumer Services Group would likely
experience delays, operational difficulties and increased expenses, and its
ability to provide services to customers or expand operations may be impaired.
FAILURE TO DEVELOP FUTURE BUSINESS OPPORTUNITIES MAY HAVE A MATERIAL ADVERSE
EFFECT ON AT&T CONSUMER SERVICES GROUP'S GROWTH POTENTIAL
AT&T Consumer Services Group intends to pursue growth opportunities in
providing services over a DSL platform, which involve new services for which
there are only limited proven markets. In addition, the ability to deploy and
deliver these services relies, in many instances, on new and unproven
technology. AT&T Consumer Services Group's DSL platform may not perform as
expected
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and AT&T Consumer Services Group may not be able to successfully develop new
enabling systems to effectively and economically deliver these services. In
addition, these opportunities require substantial capital outlays to deploy on a
large scale. This capital may not be available to support these services.
Furthermore, each of these opportunities entails additional operational risks.
For example, the delivery of DSL services requires AT&T Consumer Services Group
to provide installation and maintenance services, which services AT&T Consumer
Services Group has never provided previously. This will require AT&T Consumer
Services Group to hire, employ, train and equip technicians to provide
installation and repair in each market served, or rely on subcontractors to
perform these services. AT&T Consumer Services Group may not be able to hire and
train sufficient numbers of qualified employees or subcontract these services,
or do so on economically attractive terms. These services may not be successful
when they are in place, and customers may not purchase the services offered. If
these services are not successful or costs associated with implementation and
completion of the roll-out of these services materially exceed those currently
estimated by AT&T Consumer Services Group, AT&T Consumer Services Group's
financial condition and prospects could be materially adversely affected.
AT&T BUSINESS SERVICES GROUP IS ENGAGED IN STRATEGIC DISCUSSIONS WITH BT
REGARDING POTENTIAL TRANSACTIONS WHICH MAY SUBSTANTIALLY AFFECT ITS BUSINESS AND
THE CONTEMPLATED TRANSACTIONS
AT&T Business Services Group and BT are equal owners of the Concert global
joint venture, which serves the communications needs of multinational companies
and the international calling needs of businesses around the world. AT&T and BT
are discussing ways to improve the performance of the business. These
discussions include a variety of strategic alternatives to the Concert joint
venture, including an acquisition of, or a business combination of our business
services unit, upon its planned separation from the remainder of AT&T, with,
BT's business services operations. Such a transaction could include all or a
substantial portion of BT's business services operations, including BT Ignite
and BT's interest in Concert, in exchange for some mixture of cash, equity
and/or other instruments in the combined business. These discussions may or may
not lead to any acquisition or other business combination and may or may not
lead to any change in the existing alliance arrangements. As possible
alternatives to such a transaction, we have also been considering a narrowing of
Concert's business scope, as well as its termination as a joint venture. There
can be no assurances, however, that an agreement could be reached with BT with
regard to either of such alternatives. We cannot tell you whether these
discussions will continue, whether any of these transactions, or other
transactions, will be completed, or the timing or terms of any possible
transaction.
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THE SPECIAL MEETING
GENERAL
We are mailing this proxy statement and the accompanying proxy card
beginning , 2001 to holders of AT&T common stock in connection with
the solicitation of proxies by our board of directors for use at the special
meeting. We solicit proxies to give all shareholders on the record date an
opportunity to vote on matters that will come before the special meeting. This
procedure is necessary because shareholders live in all states and abroad and
many may not be able to attend the special meeting. You can vote or let us vote
your shares of AT&T common stock only if you are present in person or
represented by proxy. A form of proxy is being provided to holders of AT&T
common stock with this proxy statement. Information with respect to the
execution and revocation of proxies is provided under "-- Proxies; Revocability
of Proxies; Cost of Solicitation."
Registered shareholders (those that hold shares directly or through AT&T
plans rather than through a bank or broker) can simplify their voting and save
AT&T expense by calling or voting via the Internet at .
Telephone and Internet voting information is provided on the proxy card. A
Control Number is designed to verify shareholders' identities and allow them to
vote their shares and confirm that their voting instructions have been properly
recorded. The Control Number is located above the shareholder's name and address
in the lower left section of the proxy card. If you hold your shares through a
bank or broker, you will receive separate instructions on the form you receive.
Although most banks and brokers now offer telephone and Internet voting,
availability and specific processes will depend on their voting arrangements.
At the special meeting, holders of AT&T common stock eligible to vote will
be asked to consider and vote upon approval and adoption of each of the charter
amendment proposals and the incentive plan proposals and the ratification and
approval of the spin-off proposal. For more information, see "The Broadband
Charter Amendment Proposal," "The Consumer Services Charter Amendment Proposal,"
"The Incentive Plan Proposals" and "The Spin-off Proposal."
DATE, TIME AND PLACE OF THE SPECIAL MEETING; RECORD DATE
The special meeting is scheduled to be held at a.m., local time, on
, , 2001, at . Our board of directors has fixed the
close of business on as the record date for determination of
holders of AT&T common stock and holders of entitled to notice of and
to vote at the special meeting. On July 10, 2001, there were outstanding
shares of AT&T common stock.
We expect that representatives from PricewaterhouseCoopers LLP, independent
accountants for AT&T, will be present at the special meeting, have the
opportunity to make a statement if they so desire and be available to respond to
appropriate questions.
VOTE; QUORUM
Approval of each of the charter amendment proposals and the spin-off
proposal requires the affirmative vote of a majority of the voting power of all
outstanding shares of AT&T common stock. Approval of each of the incentive plan
proposals and of the proposal to amend the employee stock purchase plan requires
the affirmative vote of majority of the votes cast by all outstanding shares of
AT&T common stock. Each share of AT&T common stock has one vote on each matter
properly brought before the special meeting.
The presence, either in person or by proxy, of holders of 40% of the shares
entitled to vote on the proposals to be presented to shareholders at the special
meeting is necessary to constitute a quorum at the special meeting. Shares of
AT&T common stock represented by a properly completed proxy will be treated as
present at the special meeting for purposes of determining a quorum, without
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regard to whether the proxy is marked as casting a vote or abstaining. See
"-- Proxies; Revocability of Proxies; Cost of Solicitation" for more
information.
PROXIES; REVOCABILITY OF PROXIES; COST OF SOLICITATION
If a shareholder attends the special meeting, the shareholder may vote by
ballot. However, many shareholders may be unable to attend the special meeting.
Therefore, our board of directors is soliciting proxies so that each holder of
AT&T common stock at the close of business on the record date has the
opportunity to vote on the proposals to be considered at the special meeting.
Registered shareholders can simplify their voting and save us expense by
calling 1-800- or by voting via the Internet at . We provide
telephone and Internet voting information on the proxy card. A Control Number,
located above the shareholder's name and address on the lower left of the proxy
card, is designed to verify the shareholder's identity, allow the shareholder to
vote the shareholder's shares and confirm that we have properly recorded the
shareholder's voting instructions.
If you do not choose to vote by telephone or Internet, you still may return
your proxy card, properly signed, and we will vote the shares in accordance with
your directions. You can specify your choices by marking the appropriate boxes
on your proxy card. If you sign and return your proxy card without specifying
choices, we will vote the shares as recommended by our board of directors.
Abstentions marked on your proxy card are voted neither FOR nor AGAINST, but we
count these shares in determining a quorum for each of the proposals.
Abstentions have the effect of a vote against the charter amendment proposals
and the spin-off proposal and have no effect on the incentive plan proposals. IF
YOU DO VOTE BY TELEPHONE OR VIA THE INTERNET, IT IS NOT NECESSARY TO RETURN YOUR
PROXY CARD.
If you wish to give your proxy to someone other than the Proxy Committee,
you must cross out all three names appearing on your proxy card and insert the
name of another individual or individuals (not more than three). The individual
or individuals representing you must then present your signed proxy card at the
special meeting.
The proxy card also confers discretionary authority on the individuals
appointed by our board of directors and named on the proxy card to vote the
shares represented by the proxy card on any other matter that is properly
presented for action at the special meeting. No proxies instructing that they be
voted AGAINST or ABSTAIN from voting on the charter amendment proposals, the
incentive plan proposals or the spin-off proposal will be voted in favor of any
adjournment of the special meeting to solicit additional proxies. You may revoke
your proxy at any time before it is voted at the special meeting by executing a
later-dated proxy by telephone, via the Internet or mail, by voting by ballot at
the special meeting, or by filing an instrument of revocation with the
inspectors of election in care of the Vice President -- Law and Secretary of
AT&T.
IF YOU HOLD YOUR SHARES THROUGH A BANK OR BROKER, FOLLOW THE VOTING
INSTRUCTIONS ON THE FORM YOU RECEIVE. BROKER NON-VOTES WILL BE TREATED AS SHARES
OF AT&T COMMON STOCK THAT ARE PRESENT AND ENTITLED TO VOTE AT THE SPECIAL
MEETING FOR PURPOSES OF DETERMINING WHETHER A QUORUM EXISTS AND WILL HAVE THE
SAME EFFECT AS VOTES AGAINST APPROVAL OF EACH OF THE CHARTER AMENDMENT PROPOSALS
AND THE SPIN-OFF PROPOSAL AND WILL HAVE NO EFFECT ON THE APPROVAL OF THE
INCENTIVE PLAN PROPOSALS. THE AVAILABILITY OF TELEPHONE AND INTERNET VOTING WILL
DEPEND ON THE BANK'S OR BROKER'S VOTING PROCESSES.
YOUR VOTE IS IMPORTANT. WE URGE YOU TO VOTE BY TELEPHONE, VIA THE INTERNET,
OR BY SIGNING AND RETURNING THE ACCOMPANYING PROXY CARD, WHETHER OR NOT YOU PLAN
TO ATTEND THE SPECIAL MEETING. If you do attend the special meeting, you may
vote by ballot, thereby canceling any proxy previously given.
The cost of soliciting proxies in the accompanying form will be borne by
AT&T. In addition to solicitations by mail, a number of regular employees of
AT&T and of its subsidiaries may solicit proxies in person or by telephone. AT&T
has retained to aid in the solicitation of proxies, at an estimated
cost of $ plus reimbursement of reasonable out-of-pocket expenses. In
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addition, AT&T has retained to answer telephone inquiries from
shareholders for a variable fee equal to $ per call, depending on the
type of call.
VOTING SHARES HELD IN DIVIDEND REINVESTMENT AND SAVINGS PLANS
If you are a participant in the AT&T Shareowner Dividend Reinvestment and
Stock Purchase Plan or the AT&T Employee Stock Purchase Plan, your proxy card
will represent the number of full shares in either of those accounts on the
record date as well as shares registered in your name. If you are an employee
shareholder participating in the AT&T Employee Stock Ownership Plan, the AT&T
Long Term Savings Plan for Management Employees, the AT&T Long Term Savings and
Security Plan, the AT&T Retirement Savings and Profit Sharing Plan, the AT&T of
Puerto Rico, Inc. Long Term Savings Plan for Management Employees, the AT&T of
Puerto Rico, Inc. Long Term Savings and Security Plan, the Liberty Media 401(k)
Savings Plan, the Liberty Media 401(k) Savings Plan of Puerto Rico, the Long
Term Savings Plan (for AT&T Broadband & Internet Services), or the Long Term
Savings Plan -- San Francisco (for AT&T Broadband & Internet Services), your
proxy card also will serve as a voting instruction for the trustees of these
plans for accounts registered in the same name. The trustees of these trust
plans will not vote shares for which they have not received proxy instructions,
except for shares in the employer shares fund in the AT&T Long Term Savings and
Security Plan, which shares the trustee will vote in its discretion.
SPECIAL MEETING ADMISSION
IF YOU ARE A REGISTERED SHAREHOLDER AND PLAN TO ATTEND THE SPECIAL MEETING
IN PERSON, PLEASE DETACH AND RETAIN THE ADMISSION TICKET AND MAP THAT WE HAVE
ATTACHED TO YOUR PROXY CARD. IF YOU CHOOSE TO VOTE BY MAIL AND ALSO PLAN TO
ATTEND THE SPECIAL MEETING, PLEASE BE SURE TO MARK THE "SPECIAL MEETING" BOX
WHEN YOU RETURN YOUR PROXY CARD. A BENEFICIAL OWNER THAT PLANS TO ATTEND THE
SPECIAL MEETING MAY OBTAIN AN ADMISSION TICKET IN ADVANCE BY SENDING A WRITTEN
REQUEST, WITH PROOF OF OWNERSHIP, SUCH AS A BANK OR BROKERAGE FIRM ACCOUNT
STATEMENT, TO: MANAGER -- PROXY, AT&T CORP., 295 NORTH MAPLE AVENUE, ROOM
1216L2, BASKING RIDGE, NEW JERSEY 07920. WE WILL BASE ADMITTANCE TO THE SPECIAL
MEETING UPON AVAILABILITY OF SEATING.
Subject to seating availability, we will admit shareholders that do not
present admission tickets at the special meeting upon verification of ownership
at the admissions counter.
is fully accessible to disabled persons, and sign interpretation
and wireless headsets will be available for our hearing-impaired shareholders.
CONFIDENTIAL VOTING
For many years, we have had a confidential voting policy. In 1998, we
formalized this policy by amending our by-laws so that all proxies and other
voting materials, including telephone and Internet voting, are kept confidential
and are not disclosed to AT&T or its officers and directors, subject to standard
exceptions. These documents are available for examination only by the inspectors
of election and certain personnel associated with processing proxy cards and
tabulating the vote. This new by-law provision cannot be amended, rescinded or
waived, except by a shareholder vote. One independent inspector of election, an
officer of The Corporation Trust Company, has been appointed.
RECOMMENDATION OF OUR BOARD OF DIRECTORS
Our board of directors has approved each of the charter amendment
proposals, the spin-off proposal, the incentive plan proposals and the proposal
to amend its employee stock purchase plan and recommends that shareholders vote
FOR each of these proposals.
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AT&T CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The AT&T Corp. Management's Discussion and Analysis of Financial Condition
and Results of Operations set forth below was included in AT&T's Annual Report
on Form 10-K for the year ending December 31, 2000, as amended, and Quarterly
Report on Form 10-Q for the three months ending March 31, 2001, as amended. It
provides historical information through March 31, 2001 and May 15, 2001,
respectively. The groups formed in the restructuring differ in various financial
and other respects from the segments described in this section. For financial
and other information on the groups formed by the restructuring, see the
information set forth elsewhere in this document.
OVERVIEW
AT&T Corp. (AT&T or the company) is among the world's communications
leaders, providing voice, data, video and broadband telecommunications services
to large and small businesses, consumers and government agencies. We provide
domestic and international long distance; regional, local and wireless
communications services; cable television and Internet communication services.
AT&T also provides billing, directory and calling-card services to support our
communications businesses.
MERGER WITH MEDIAONE GROUP, INC.
We completed the merger with MediaOne Group, Inc. (MediaOne) on June 15,
2000, in a cash and stock transaction valued at approximately $45 billion. We
issued approximately 603 million shares, of which 60 million were treasury
shares, and made cash payments of approximately $24 billion.
The merger was recorded under the purchase method of accounting, and
accordingly, the results of MediaOne have been included with the financial
results of AT&T, within our Broadband segment, since the date of acquisition.
Periods prior to the merger were not restated to include the results of
MediaOne.
TRACKING STOCKS
On April 27, 2000, AT&T issued a new class of stock to track the
performance of AT&T Wireless Group. AT&T sold 360 million shares of AT&T
Wireless Group tracking shares at a price of $29.50 per share. The 360 million
shares track approximately 16% of the financial performance of AT&T Wireless
Group.
In addition, in connection with the 1999 acquisition of
Tele-Communications, Inc. (TCI), renamed AT&T Broadband (Broadband), AT&T issued
a separate tracking stock to reflect the financial performance of Liberty Media
Group (LMG), TCI's former programming and technology investment businesses. The
outstanding Liberty Media Group tracking stock tracks 100% of the financial
performance of LMG.
The remaining results of operations of AT&T, including approximately 84% of
the financial performance of AT&T Wireless Group, are referred to as the AT&T
Common Stock Group and are represented by AT&T common stock.
A tracking stock is designed to provide financial returns to its holders
based on the financial performance and economic value of the assets it tracks.
Ownership of shares of AT&T common stock, AT&T Wireless Group tracking stock or
Liberty Media Class A or B tracking stock does not represent a direct legal
interest in the assets and liabilities of any of the groups, but an ownership of
AT&T in total. The specific shares represent an interest in the economic
performance of the net assets of each of the groups.
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The earnings attributable to AT&T Wireless Group represent approximately
16% of the earnings from April 27, 2000, through December 31, 2000, and are
excluded from the earnings available to AT&T Common Stock Group. Similarly, the
earnings and losses related to LMG are excluded from the earnings available to
AT&T Common Stock Group.
We do not have a controlling financial interest in LMG for financial
accounting purposes; therefore, our ownership in LMG is reflected as an
investment accounted for under the equity method in AT&T's consolidated
financial statements. The amounts attributable to LMG are reflected in the
accompanying consolidated financial statements as "Equity earnings (losses) from
Liberty Media Group" and "Investment in Liberty Media Group and related
receivables, net".
AT&T Wireless Group is an integrated business of AT&T and Liberty Media
Group is a combination of certain assets and businesses of AT&T, neither of
which is a stand-alone entity. As AT&T Wireless Group and Liberty Media Group
are tracking stocks of AT&T, separate financial statements are not required to
be filed. We have provided the financial statements as exhibits to this document
to provide additional disclosures to investors to allow them to assess the
financial performance of AT&T Wireless Group and Liberty Media Group. Since the
tracking stocks are governed by a common board of directors, the AT&T board of
directors could make operational and financial decisions or implement policies
that affect disproportionately the businesses of any group. For example, our
board of directors may decide to transfer funds or to reallocate assets,
liabilities, revenue, expenses and cash flows among groups, without the consent
of shareholders. All actions by the board of directors are subject to the board
members' fiduciary duties to all shareholders of AT&T as a group and not just to
holders of a particular class of tracking stock and to our charter, policy
statements, by-laws and intercompany agreement.
Our board of directors may change or supplement the policies set forth in
the tracking stock policy statements and our by-laws in the sole discretion of
our board of directors, subject to the provision of any inter-group agreement
but without approval of our shareholders. In addition, the fact that we have
separate classes of common stock could give rise to occasions when the interests
of the holders of AT&T common stock, AT&T Wireless Group common stock and
Liberty Media Group tracking stock diverge, conflict or appear to diverge or
conflict. Our board of directors would make any change or addition to the
policies set forth in the tracking stock policy statements or our by-laws, and
would respond to any actual or apparent divergence of interest among our groups,
in a manner consistent with its fiduciary duties to AT&T and all of our
shareholders after giving consideration to the potentially divergent interests
and all other relevant interests of the holders of the separate classes of our
shares.
YOU SHOULD CONSIDER THAT AS A RESULT OF THE FLEXIBILITY PROVIDED TO OUR
BOARD OF DIRECTORS, IT MAY BE DIFFICULT FOR INVESTORS TO ASSESS THE FUTURE
PROSPECTS OF A TRACKING STOCK GROUP BASED ON THAT GROUP'S PAST PERFORMANCE.
RESTRUCTURING OF AT&T
On October 25, 2000, we announced a restructuring plan designed to fully
separate or issue separately tracked stocks intended to reflect the financial
performance and economic value of each of the company's four major operating
units. Upon completion of the plan, AT&T Wireless, AT&T Broadband, AT&T Business
and AT&T Consumer will all be represented by asset-based or tracking stocks.
As part of the first phase of the restructuring plan, we are planning an
exchange offer that will give AT&T shareowners the opportunity to exchange any
portion of their AT&T common shares for shares of AT&T Wireless Group tracking
stock, subject to pro-ration. Following the exchange offer and subject to
specified conditions, AT&T plans to split-off AT&T Wireless Group from AT&T. We
intend, however, to retain up to $3 billion of shares of AT&T Wireless for
future sale, exchange or
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monetization within six months following the split-off. We expect AT&T Wireless
will become an independent, publicly-held company in mid-2001, upon receipt of
appropriate tax and other approvals.
In addition to the split-off of AT&T Wireless, we intend to fully separate
or issue separate tracking stocks to reflect the financial performance and
economic value of each of our other major business units. We plan to create and
issue new classes of stock to track the financial performance and economic value
of our AT&T Broadband unit and AT&T Consumer unit. We plan to sell some
percentage of shares of the AT&T Broadband unit in the fall of 2001. Within 12
months of such sale, we intend to completely separate AT&T Broadband from AT&T,
as an asset-based stock. The AT&T Consumer tracking stock is expected to be
fully distributed to AT&T shareowners in the second half of 2001.
AT&T expects that these transactions will be tax-free to U.S. shareholders.
AT&T's restructuring plan is complicated and involves a substantial number of
steps and transactions, including obtaining various conditions, such as Internal
Revenue Service (IRS) rulings. In addition, future financial conditions,
superior alternatives or other factors may arise or occur that make it
inadvisable to proceed with part or all of AT&T's restructuring plan. Any or all
of the elements of AT&T's restructuring plan may not occur as we currently
expect or in the timeframes that we currently contemplate, or at all.
Alternative forms of restructuring, including sales of interests in these
businesses, would reduce what is available for distribution to shareowners in
the restructuring.
On November 15, 2000, we announced that our board of directors voted to
split-off LMG. A new asset-based security will be issued to holders of LMG
tracking stock in exchange for their LMG tracking shares. The split-off remains
subject to receipt of a favorable tax ruling from the IRS. We expect this
split-off to be completed in mid-2001.
The discussion and analysis that follows provides information management
believes is relevant to an assessment and understanding of AT&T's consolidated
results of operations for the years ended December 31, 2000, 1999 and 1998, and
financial condition as of December 31, 2000 and 1999.
CONSOLIDATED RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 COMPARED WITH THE THREE MONTHS ENDED
MARCH 31, 2000
The comparison of first quarter 2001 results with the first quarter of 2000
was impacted by events, such as acquisitions and dispositions, that occurred
during these two years. For example, at year-end 2000, we acquired the wireless
property in Los Angeles as a result of the AB Cellular redemption of AT&T's
equity interest in AB Cellular. Prior to that date, AT&T held a 55.62% equity
interest in AB cellular with 50% voting interest and recorded the investment
under the equity method of accounting. The consolidation of the Los Angeles
property resulted in the inclusion of 100% of its results in each line item of
AT&T's Consolidated Balance Sheet on December 31, 2000 and the results were also
included in AT&T's Consolidated Income Statements starting January 2001. In
addition, in 2000, we acquired MediaOne and wireless properties in the San
Francisco Bay area, which were both included in our first quarter 2001 results,
but were not included in the first quarter 2000 results.
Year-over-year comparison was also impacted by the consolidation of At Home
Corp. (Excite@Home) beginning September 1, 2000, due to corporate-governance
changes, which gave AT&T a controlling interest. At that time and on March 31,
2001, we had an approximate 23% economic interest and 74% voting interest in
Excite@Home. The consolidation of Excite@Home resulted in the inclusion of 100%
of its results in each line item of AT&T's Consolidated Balance Sheet and
Consolidated Income Statement. The approximate 77% we do not own is reflected in
the March 31, 2001 and December 31, 2000 Consolidated Balance Sheets within
"Minority Interest" and as a component of "Minority interest income (expense)"
in the Consolidated Statement of Income for the three months ended March 31,
2001. For the three months ended March 31, 2000, our ownership interest in
Excite@Home was accounted for under the equity method of accounting, with
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earnings or losses included as a component of "Net losses from other equity
investments" in the Consolidated Statement of Income.
Effectively July 1, 2000, the Federal Communication Commission (FCC)
eliminated Primary Interexchange Carrier Charges (PICC or per-line charges) that
AT&T pays for residential and single-line businesses. The elimination of these
per-line charges resulted in lower access expense as well as lower revenue,
since AT&T has historically billed its customers for these charges.
REVENUE
FOR THE
THREE MONTHS
ENDED MARCH 31,
------------------
DOLLARS IN MILLIONS 2001 2000
------------------- ------- -------
Business services................................... $ 7,168 $ 7,252
Consumer services................................... 4,007 5,037
Wireless services................................... 3,212 2,198
Broadband........................................... 2,465 1,557
Corporate and Other................................. (89) (143)
Total revenue....................................... $16,763 $15,901
Total revenue increased 5.4%, or $0.9 billion, in the first quarter of 2001
compared with the prior year period. Approximately $1.0 billion of the increase
is due to the impact of acquisitions and the consolidation of Excite@Home
partially offset by the elimination of PICC and dispositions. Also contributing
to the revenue growth was Wireless Services, data and Internet protocol (IP)
growth within Business Services and Broadband. These increases were largely
offset by the accelerating declines in long distance voice revenue. We expect
long distance revenue to continue to be negatively impacted by ongoing
competition and product substitution.
Revenue by segment is discussed in more detail in the segment results
section.
OPERATING EXPENSES
FOR THE
THREE MONTHS
ENDED MARCH 31,
------------------
DOLLARS IN MILLIONS 2001 2000
------------------- ------ ------
Costs of services and products...................... $4,837 $3,915
Costs of services and products increased $0.9 billion, or 23.6%, in the
first quarter of 2001 compared with the first quarter of 2000. Approximately
$0.7 billion of the increase was due to acquisitions, primarily MediaOne, net of
dispositions, and the impact of consolidating Excite@Home. The higher costs
associated with new outsourcing contracts as well as our growing wireless
subscriber base increased expenses by approximately $0.2 billion. The higher
wireless expenses primarily related to higher costs of handsets sold due to an
increase in gross subscriber additions in the first quarter of 2001 compared
with the same period in the prior year.
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FOR THE
THREE MONTHS
ENDED MARCH 31,
------------------
DOLLARS IN MILLIONS 2001 2000
------------------- ------ ------
Access and other connection......................... $3,286 $3,588
Access and other connection expenses decreased 8.4%, to $3.3 billion in the
first quarter of 2001, compared with $3.6 billion in the first quarter of 2000.
Included within access and other connection expenses are costs that we pay to
connect calls on the facilities of other service providers. Mandated reductions
in per-minute access costs and decreased per-line charges effective in the
second half of 2000 resulted in lower costs of approximately $0.5 billion. These
decreases were partially offset by approximately $0.2 billion of higher costs
due to volume increases, as well as higher Universal Service Fund contributions.
Since most of these charges are passed through to the customer, the per-minute
access-rate and per-line charge reductions and the Universal Service Fund
contributions have generally resulted in a corresponding impact on revenue.
FOR THE
THREE MONTHS
ENDED MARCH 31,
----------------
DOLLARS IN MILLIONS 2001 2000
------------------- ------ ------
Selling, general and administrative................... $3,868 $3,289
Selling, general and administrative (SG&A) expenses increased $0.6 billion,
or 17.6%, in the first quarter of 2001, compared with the first quarter of 2000.
Increased marketing, advertising and customer care in support of our growing
Wireless and Broadband businesses drove approximately $0.3 billion of the
increase. In addition, $0.4 billion of the increase was due to acquisitions,
primarily MediaOne, net of dispositions, and the impact of consolidating
Excite@Home. Partially offsetting these increases was cost savings of
approximately $0.2 billion as a result of continued cost-control initiatives,
primarily from our Consumer Services Business.
FOR THE
THREE MONTHS
ENDED MARCH 31,
----------------
DOLLARS IN MILLIONS 2001 2000
------------------- ------ ------
Depreciation and other amortization................... $2,141 $1,566
Depreciation and other amortization expenses increased $0.6 billion, or
36.8%, to $2.1 billion in the first quarter of 2001 compared with the
corresponding prior-year period. Approximately half of the increase was due to a
higher asset base resulting from continued infrastructure investment, and the
remaining increase resulted from acquisitions activity, primarily MediaOne.
Capital expenditures were $3.3 billion for the first quarter of 2001 compared
with $2.8 billion for the same period in 2000. The primary focus for capital
expenditures in 2001 continues to be on the core growth areas of wireless,
broadband, data and IP, and local.
FOR THE
THREE MONTHS
ENDED MARCH 31,
----------------
DOLLARS IN MILLIONS 2001 2000
------------------- ----- -----
Amortization of goodwill, franchise costs and other
purchased intangibles................................ $846 $368
Amortization of goodwill, franchise costs and other purchased intangibles
increased $0.5 billion to $0.8 billion, or 129.6%, in the first quarter of 2001
compared with the corresponding prior year
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period. This increase was largely attributable to acquisitions, primarily
MediaOne, as well as the consolidation of Excite@Home.
FOR THE
THREE MONTHS
ENDED MARCH 31,
----------------
DOLLARS IN MILLIONS 2001 2000
------------------- ----- -----
Net restructuring and other charges.................... $808 $773
During the first quarter of 2001, AT&T recorded $808 million of net
restructuring and other charges, which had an approximate $0.21 impact on basic
and diluted earnings per share. Included in these charges was $739 million for
asset impairment charges related to Excite@Home, and $69 for restructuring and
exit costs which consisted of $59 million for cash severance costs, $6 million
related to facilities and $4 million related to termination of lease
obligations.
The asset impairment charges included $600 recorded by Excite@Home
associated with goodwill impairment of various acquisitions, primarily Excite,
and a related goodwill impairment charge of $139 recorded by AT&T associated
with its acquisition goodwill of Excite@Home. The impairment resulted from the
continued weakness of the online media market that Excite@Home operates in.
Since we consolidate, but only own approximately 23% of Excite@Home, 77% of the
charge recorded by Excite@Home was not included as a reduction to AT&T's net
income, but rather eliminated in our March 31, 2001 Consolidated Statement of
Income as "Minority interest income (expense)."
The $59 million of cash severance costs were primarily recorded as a result
of synergies created by the MediaOne merger related to approximately 2,350
employees. Approximately 10% of the individuals were management employees and
90% were non-management employees. Nearly 88% of the affected employees have
left their positions as of March 31, 2001, and the remaining employees will
leave the company by the end of 2001.
This restructuring initiative is projected to yield cash savings of
approximately $42 million in 2001 (net of severance benefit pay-outs of
approximately $59 million) and approximately $132 million per year thereafter,
as well as EBIT savings of approximately $97 million in 2001 and approximately
$101 million per year thereafter. We expect increased spending in growth
businesses will largely offset these cash and EBIT savings. The EBIT savings,
primarily attributable to reduced personnel-related expenses, will be realized
in costs of services and products and SG&A expenses.
In the second quarter of 2001, we expect to incur additional restructuring
charges resulting from MediaOne synergies and work force reductions at
Excite@Home.
During the first quarter of 2000, AT&T recorded $773 million of net
restructuring and other charges, which included $682 million for restructuring
and exit costs associated with AT&T's initiative to reduce costs by the end of
2000, and $91 million related to the government-mandated disposition of AT&T
Communications (U.K.) Ltd., which would have competed directly with Concert.
Included in restructuring and exit costs was $458 million of cash termination
benefits associated with the involuntary separation of approximately 6,200
employees. Approximately one-half of the individuals were management employees
and one-half were non-management employees. Nearly 60% of the affected employees
have left their positions as of March 31, 2001, and the remaining employees will
leave the company during 2001.
We also recorded $62 million of network lease and other contract
termination costs associated with penalties incurred as part of notifying
vendors of the termination of these contracts during the quarter.
Also included in restructuring and exit costs was $144 of benefit
curtailment costs associated with employee separations as part of these exit
plans. We also recorded an asset impairment charge
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of $18 related to the write-down of unrecoverable assets in certain businesses
in which the carrying value is no longer supported by future cash flows.
FOR THE
THREE MONTHS
ENDED MARCH 31,
----------------
DOLLARS IN MILLIONS 2001 2000
------------------- ----- -------
Operating Income........................................ $977 $2,402
Operating income decreased $1.4 billion, or 59.4%, in the first quarter of
2001 compared with the same period in 2000. The decrease was primarily due to
the impact of acquisitions and the consolidation of Excite@Home, which lowered
operating income by nearly $1.1 billion. A majority of the impact of operating
losses and the restructuring charge generated by Excite@Home was offset in
minority interest income (expense), reflecting the approximate 77% of
Excite@Home we do not own. Also contributing to the decrease in operating income
was the impact of lower revenue in Consumer Services, and higher operating
expenses for advanced Broadband services, including digital video, high-speed
data and broadband telephony, partially offset by restructuring charges, net of
asset impairment, recorded in the first quarter of 2000.
FOR THE
THREE MONTHS
ENDED MARCH 31,
---------------
DOLLARS IN MILLIONS 2001 2000
------------------- ------ -----
Other (expense) income.................................. $(781) $668
Other (expense) income for the first quarter of 2001 was an expense of $0.8
billion, compared with income of $0.7 billion in the first quarter of 2000, an
increase in expense of $1.4 billion. Effective January 1, 2001, in conjunction
with the adoption of SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," we reclassified certain investment securities, which
support debt that is indexed to those securities, from "available-for-sale" to
"trading." As a result of the reclassification, we recorded a pretax charge of
$1.0 billion in other income. Also contributing to the increase in expense were
lower net gains on sale of businesses and investments of approximately $0.4
billion.
FOR THE
THREE MONTHS
ENDED MARCH 31,
----------------
DOLLARS IN MILLIONS 2001 2000
------------------- ----- -----
Interest Expense....................................... $969 $589
Interest expense increased 64.6%, or $0.4 billion, in first quarter of 2001
compared with the same period in 2000. The increase was primarily due to the
higher average debt balance as a result of our June 2000 acquisition of
MediaOne, including outstanding debt of MediaOne and debt issued to fund the
MediaOne acquisition and debt issuance by AT&T Wireless in the quarter.
FOR THE
THREE MONTHS
ENDED MARCH 31,
----------------
DOLLARS IN MILLIONS 2001 2000
------------------- ----- -----
Provision for income taxes............................. $292 $509
The provision for income taxes was $0.3 billion in the first quarter of
2001 compared with $0.5 billion in the first quarter of 2000. The decrease in
expense was primarily due to a net loss before income taxes in the first quarter
of 2001, compared with earnings before income taxes in the first quarter of
2000. As AT&T recorded a tax provision despite having pretax losses for the
first quarter
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of 2001, the effective tax rate for the quarter was a negative 37.6%, compared
with 20.5% for the first quarter of 2000. The first quarter 2001 effective tax
rate was impacted by a charge associated with the adoption of SFAS No. 133, as
well as a non tax-deductible asset impairment charge recorded related to
Excite@Home. The first quarter of 2001 effective tax rate was also negatively
impacted by the consolidation of operational losses of Excite@Home, which is
unable to record tax benefits on its pretax losses, and higher non
tax-deductible goodwill amortization. The first quarter 2000 effective tax rate
was positively impacted by a tax-free gain resulting from an exchange of AT&T
stock for an entity owning certain cable-systems and other assets with Cox, and
the benefit of the write-off of the related deferred tax liability.
FOR THE
THREE MONTHS
ENDED MARCH 31,
----------------
DOLLARS IN MILLIONS 2001 2000
------------------- ----- -----
Minority interest income (expense)..................... $650 $(44)
Minority interest income (expense), which is recorded net of income taxes,
represents an adjustment to AT&T's income to reflect the less than 100%
ownership of consolidated subsidiaries as well as dividends on preferred stock
issued by subsidiaries of AT&T. The $0.7 billion decrease in minority interest
for the first quarter ended March 31, 2001, as compared with the corresponding
prior-year period resulted from the consolidation of Excite@Home effective
September 1, 2000. The minority interest income in 2001 primarily reflects
losses generated by Excite@Home, including an asset impairment charge that were
attributable to the approximate 77% of Excite@Home not owned by AT&T. The income
tax benefit recorded on minority interest income (expense) was $87 million and
$26 million for the first quarter of 2001 and 2000, respectively.
FOR THE
THREE MONTHS
ENDED MARCH 31,
---------------
DOLLARS IN MILLIONS 2001 2000
------------------- ------ -----
Equity (losses) earnings from Liberty Media Group....... $(697) $942
Equity losses from LMG, which are recorded net of income taxes, were $0.7
billion in the first quarter of 2001, compared with earnings of $0.9 billion for
the same period in 2000. The decline was primarily due to lower gains on
dispositions, including gains associated with the mergers of various companies
that LMG had investments in. Gains were recorded for the difference between the
carrying value of LMG's interest in the acquired company and the fair value of
securities received in the merger. In addition, the impairment charges recorded
on LMG's investments to reflect other than temporary declines in value also
contributed to the decline. These were partially offset by tax benefits recorded
in the quarter associated with the net loss before cumulative accounting change
compared with tax expense in the prior year quarter associated with net
earnings.
FOR THE
THREE MONTHS
ENDED MARCH 31,
----------------
DOLLARS IN MILLIONS 2001 2000
------------------- ----- -----
Net losses from other equity Investments............... $136 $187
Net losses from other equity investments, which were recorded net of income
taxes, were $0.1 billion in the first quarter of 2001, a 27.0% decrease compared
with the first quarter of 2000. This decrease was primarily due to the
consolidation of Excite@Home and higher earnings related to Cablevision Systems
Corp. reflecting a gain associated with the swap of cable properties, partially
offset by higher losses from its normal business operations. Partially
offsetting these decreases were
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higher equity losses from various investments including Concert, as well as
equity earnings in the first quarter of 2000 from investments sold in 2000. The
income tax benefit recorded on net losses from other equity investments were
$102 million and $115 million for the first quarter of 2001 and the first
quarter of 2000, respectively.
FOR THE
THREE MONTHS
ENDED MARCH
31,
------------
DOLLARS IN MILLIONS 2001 2000
------------------- ---- ----
Cumulative effect of accounting change.................... $904 $--
Cumulative effect of accounting change, net of applicable income taxes, was
$0.4 billion, in the first quarter of 2001 for AT&T Group. It represented fair
value adjustments of equity based derivative instruments embedded in indexed
debt instruments including those acquired in conjunction with the MediaOne
merger, as well as to our warrant portfolio due to the adoption of SFAS No. 133.
Cumulative effect of accounting change, net of applicable income taxes, was
$0.5 billion, for Liberty Media Group in the first quarter of 2001. The increase
was primarily due to separately recording the embedded call option obligations
associated with LMG's senior exchangeable debentures.
FOR THE
THREE MONTHS
ENDED MARCH 31,
----------------
DOLLARS IN MILLIONS 2001 2000
------------------- ----- -----
Dividend requirements of preferred stock................ $181 $--
Dividend requirements of preferred stock were $0.2 billion in the first
quarter of 2001. The preferred stock dividend represented interest in connection
with convertible preferred stock issued to NTT DoCoMo.
FOR THE
THREE MONTHS
ENDED MARCH 31,
----------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 2001 2000
----------------------------------------------- ------ ------
AT&T Common Stock Group:
(Losses) income....................................... $ (366) $1,741
AT&T Common Stock Group -- per basic share:
(Losses) earnings -- before cumulative effect of
accounting change................................... $(0.19) $ 0.55
Cumulative effect of accounting change................ 0.09 --
AT&T Common Stock Group (losses) earnings............. $(0.10) $ 0.55
AT&T Common Stock Group -- per diluted share:
(Losses) earnings -- before cumulative effect of
accounting change................................... $(0.19) $ 0.54
Cumulative effect of accounting change................ 0.09 --
AT&T Common Stock Group (losses) earnings............. $(0.10) $ 0.54
AT&T Wireless Group:
Losses................................................ $ 7 --
Losses per basic and diluted.......................... $ 0.02 --
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FOR THE
THREE MONTHS
ENDED MARCH 31,
----------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 2001 2000
----------------------------------------------- ------ ------
Liberty Media Group:
(Losses) earnings..................................... $ (152) $ 942
Liberty Media Group -- per basic and diluted share:
(Losses) earnings -- before cumulative effect of
accounting change................................... $(0.27) $ 0.37
Cumulative effect of accounting change................ 0.21 --
Liberty Media Group (losses) earnings................. $(0.06) $ 0.37
Losses per diluted share attributable to the AT&T Common Stock Group were
$0.10 in the first quarter of 2001 compared with EPS on a diluted basis of $0.54
in the first quarter of 2000. The decrease was primarily driven by lower
operating income, lower gains on the sales of businesses and investments, and
the net impact of the adoption of SFAS No. 133, which includes a $0.15 per share
charge relating to the revaluation of certain securities reclassified from
"available-for-sale" to "trading" recorded in other income and a net benefit of
$0.09 per share relating to the cumulative effect of adoption. Also contributing
to the decrease in earnings was increased interest expense, partially offset by
higher minority interest income.
Losses per diluted share attributable to Liberty Media Group (LMG) were
$0.06 in the first quarter of 2001, compared with earnings of $0.37 on a diluted
basis, in the first quarter of 2000. The decline was primarily due to lower
gains on dispositions, including gains associated with the mergers of various
companies that LMG had investments in. Gains were recorded for the difference
between the carrying value of LMG's interest in the acquired company and the
fair value of securities received in the merger. In addition, the impairment
charges recorded on LMG's investments to reflect other than temporary declines
in value also contributed to the decline. These were partially offset tax
benefits recorded in the quarter associated with the net loss before cumulative
accounting change compared with tax expense in the prior year quarter associated
with net earnings as well as by the cumulative effect of the accounting changes
due to the adoption of SFAS 133.
SEGMENT RESULTS
In support of the services we provide, we segment our results by the
business units that support our primary lines of business: Business Services,
Consumer Services, Wireless Services and Broadband. The balance of AT&T's
operations, excluding LMG is included in a Corporate and Other category.
Although not a segment, we also discuss the results of LMG.
The discussion of segment results includes revenue; EBIT (earnings before
interest, taxes, the cumulative effect of accounting changes and dividend
requirements on preferred stock); EBITDA [EBIT excluding depreciation and
amortization, and minority interest (expense) income other than Excite@Home's
minority (expense) interest]; total assets, and capital additions. The
discussion of EBITDA for Wireless Services and Broadband is modified to exclude
other income and net losses from equity investments. Total assets for each
segment generally include all assets, except intercompany receivables. However,
our Wireless Services segment included intercompany receivables from AT&T and
the related interest income since these assets relate to the results of the AT&T
Wireless Group tracked business. Prepaid pension assets and corporate-owned or
leased real estate are generally held at the corporate level, and therefore are
included in the Corporate and Other group. Capital additions for each segment
include capital expenditures for property, plant and equipment, acquisitions of
licenses, additions to nonconsolidated investments, increases in franchise costs
and additions to internal-use software.
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EBIT is the primary measure used by AT&T's chief operating decision makers
to measure AT&T's operating results and to measure segment profitability and
performance. AT&T calculates EBIT as earnings before interest, taxes, the
cumulative effect of accounting changes and dividend requirements on preferred
stock. In addition, management also uses EBITDA as a measure of segment
profitability and performance, and is defined as EBIT, excluding depreciation
and amortization, minority interest (expense) income other than Excite@Home's
minority (expense) interest. Interest and taxes are not factored into the
segment profitability measure used by the chief operating decision makers;
therefore, trends for these items are discussed on a consolidated basis.
Management believes EBIT is meaningful to investors because it provides analysis
of operating results using the same measures used by AT&T's chief operating
decision makers and provides a return on total capitalization measure. We
believe EBITDA is meaningful to investors as a measure of each segment's
liquidity consistent with the measure utilized by our chief operating decision
makers. In addition, we believe that both EBIT and EBITDA allow investors a
means to evaluate the financial results of each segment in relation to total
AT&T. EBIT for AT&T was $0.5 billion and $2.7 billion for the quarters ended
March 31, 2001 and 2000, respectively. EBITDA for AT&T was $3.5 billion and $4.8
billion for the three months ended March 31, 2001 and 2000, respectively. Our
calculation of EBIT and EBITDA may or may not be consistent with the calculation
of these measures by other public companies. EBIT and EBITDA should not be
viewed by investors as an alternative to generally accepted accounting
principles (GAAP) measures of income as a measure of performance or to cash
flows from operating, investing and financing activities as a measure of
liquidity. In addition, EBITDA does not take into account changes in certain
assets and liabilities as well as interest and taxes which can affect cash flow.
In connection with our corporate restructuring program set forth in late
2000, our existing segments reflect certain managerial changes enacted since the
publication of our 2000 annual results. The changes are as follows: The Business
Services segment was expanded to include the results of international operations
and ventures. In addition, certain corporate costs that were previously recorded
within the Corporate and Other Group have been allocated to the respective
segments in an effort to ultimately have the results of these businesses reflect
all direct corporate costs as well as overhead for shared services. All prior
period results have been restated to reflect these changes. Total assets for our
reportable segments generally include all asset, except intercompany
receivables. However, our Wireless Services Segment included intercompany
receivables from AT&T and the related interest income since these assets relate
to the results of the AT&T Wireless Group tracked businesses.
Reflecting the dynamics of our business, we continuously review our
management model and structure, which may result in additional adjustments to
our operating segments in the future. In addition, when we create tracking
stocks for our Consumer and Broadband units, we will begin allocating 'pure'
corporate overhead to these units. See note (b) for further detail on our
restructuring plan.
BUSINESS SERVICES
Our Business Services segment offers a variety of global communications
services, including long distance, local, and data and IP networking to small
and medium-sized businesses, large domestic and multinational businesses and
government agencies. Business Services is also a provider of voice, data and IP
transport to service resellers (wholesale services).
Business Services includes AT&T Solutions, the company's
professional-services outsourcing business, which provides seamless solutions
that maximize the competitive advantage of networking-based electronic
applications for global clients. AT&T Solutions also provides e-infrastructure
and high-availability services to enterprise clients, and manages AT&T's unified
global network. Business Services also includes the results of International
ventures and operations.
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THREE MONTHS
ENDED
MARCH 31,
----------------
DOLLARS IN MILLIONS 2001 2000
------------------- ------ ------
External revenue...................................... $6,940 $7,094
Internal revenue...................................... 228 158
Total revenue......................................... 7,168 7,252
EBIT.................................................. 1,018 1,146
EBITDA................................................ 2,036 2,152
OTHER ITEMS
Capital additions..................................... $1,287 $1,366
AT AT
MARCH 31, DECEMBER 31,
2001 2000
---------- -------------
Total assets..................................... $42,562 $42,747
REVENUE
Business Services revenue declined $0.1 billion, or 1.2%, in the first
quarter of 2001 compared with the first quarter of 2000. The decrease was
primarily due to a decline in long distance voice revenue of approximately $0.5
billion, offset by growth in data/IP of approximately $0.4 billion.
Long distance voice services revenue declined at a low-teens percentage
rate in the first quarter due to a declining average price per minute reflecting
the competitive forces within the industry that are expected to continue.
Partially offsetting this decline was a mid single-digit percentage growth rate
in minutes.
Data services, which represent the transportation of data, rather than
voice, along our network, grew at a high-teens percentage rate in the first
quarter. Growth was led by the continued strength of frame relay services; IP
services, which include IP-connectivity services and virtual private network
(VPN) services; and high-speed private-line services.
AT&T Solutions outsourcing revenue grew at a mid-teens percentage rate in
the first quarter primarily due to growth from new contract signings and add-on
business from existing clients.
Local voice services revenue grew at a low-teens percentage rate in the
first quarter. AT&T added approximately 90,000 access lines in the first quarter
bringing total access lines in service as of March 31, 2001 to almost 2.4
million, an increase of 42.5% compared to March 31, 2000. AT&T serves more than
6,000 buildings on-net representing a 3.2% increase compared to March 31, 2000.
Business Services internal revenue increased $0.1 billion, or 44.6%, in the
first quarter as a result of greater sales of business long distance services to
other AT&T units that resell such services to their external customers,
primarily Broadband, Wireless Services and Excite@Home.
EBIT/EBITDA
EBIT and EBITDA declined $0.1 billion, or 11.2% and 5.4%, respectively, in
the first quarter of 2001 compared with the same period last year. The decline
primarily reflects the impact of pricing pressure within the long distance voice
business as well as the shift from higher margin long distance services to lower
margin growth services. The decline also reflects the impact of equity losses
recorded for Concert in the first quarter of $0.1 billion, representing a
decrease of approximately $0.2 billion compared to the first quarter of 2000.
Mostly offsetting the overall decrease was lower restructuring charges of $0.4
billion in the first quarter of 2001. For the remainder of 2001, Concert is
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expected to continue to generate operating losses. Currently, Concert is
considering restructuring its business in order to return to profitability.
These actions could result in significant restructuring charges. In addition,
AT&T and BT are discussing ways to improve the performance of the Concert
business. These discussions include a variety of strategic alternatives,
including the acquisition of, or other business combination of our business
services operations with BT's business services unit. We have also considered
narrowing the scope of Concert's business, as well as its termination as a joint
venture.
OTHER ITEMS
Capital additions decreased $0.1 billion, or 5.8%, in the first quarter of
2001 compared to the first quarter of 2000.
Total assets decreased $0.2 billion, or 0.4%, at March 31, 2001 compared
with December 31, 2000.
CONSUMER SERVICES
Our Consumer Services segment provides a variety of any-distance
communications services including long distance, local toll (intrastate calls
outside the immediate local area) and Internet access to residential customers.
In addition, Consumer Services provides transaction services, such as prepaid
calling card and operator-handled calling services. Local phone service is also
provided in certain areas.
THREE MONTHS
ENDED
MARCH 31,
----------------
DOLLARS IN MILLIONS 2001 2000
------------------- ------ ------
Revenue............................................... $4,007 $5,037
EBIT.................................................. 1,318 1,658
EBITDA................................................ 1,365 1,715
OTHER ITEMS
Capital additions..................................... $ 22 $ 23
AT AT
MARCH 31, DECEMBER 31,
2001 2000
---------- -------------
Total assets..................................... $2,768 $3,150
REVENUE
Consumer Services revenue declined 20.5%, or 1.0 billion, in the first
quarter of 2001 compared with the first quarter of 2000. The decline was
primarily due to a decline in traditional voice services, such as Domestic Dial
1, reflecting the ongoing competitive nature of the consumer long distance
industry, which has resulted in pricing pressures. In addition, approximately
$0.3 billion decline was related to the elimination of per-lines charges in
2000. Also negatively impacting revenue was product substitution and market
migration away from direct-dial wireline and higher priced calling-card services
to lower-priced prepaid-card services.
The calling volume decline was in the low-teen percentage rate in the first
quarter of 2001 primarily due to both the competition in the long distance
industry and production substitution which we expect will continue to negatively
impact Consumer Services revenue.
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EBIT/EBITDA
EBIT and EBITDA for Consumer Services declined 20.5% and 20.4%,
respectively, in the first quarter of 2001 compared with the first quarter of
last year. The declines were primarily driven by impacts of lower revenue
partially offset by cost-control initiatives.
OTHER ITEMS
Capital additions was essentially flat in the first quarter of 2001
compared with the year-ago quarter.
Total assets declined $0.4 billion in the first quarter to $2.8 billion at
March 31, 2001. The decline was primarily driven by lower accounts receivables,
reflecting lower revenue.
WIRELESS SERVICES
Our Wireless Services segment offers wireless voice and data services and
products to customers in our 850 megahertz (cellular) and 1900 megahertz
(Personal Communications Services, or PCS) markets. Wireless Services also
includes certain interests in partnerships and affiliates that provide wireless
services in the United States and internationally, aviation-communications
services and fixed wireless. Fixed wireless services provide high-speed Internet
access and any-distance voice services using wireless technology to residential
and small business customers.
THREE MONTHS
ENDED
MARCH 31,
----------------
DOLLARS IN MILLIONS 2001 2000
------------------- ------ ------
Revenue............................................... $3,212 $2,198
EBIT.................................................. 118 111
EBITDA*............................................... 717 401
OTHER ITEMS
Capital additions..................................... $1,904 $1,390
AT AT
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
Total assets...................................... $46,930 $35,184
-------------------------
*EBITDA for Wireless Services excludes net pretax (losses) earnings from equity
investments and other income.
REVENUE
Wireless Services revenue grew $1.0 billion, or 46.2%, to $3.2 billion in
the first quarter of 2001 compared with the first quarter of 2000. Approximately
$0.5 billion of the growth was due to acquisitions, primarily Bay Area
Properties acquired in June 2000 and the Los Angeles market acquired in December
2000. The remaining increase was due to subscriber growth, slightly offset by a
decline in average monthly revenue per user (ARPU).
Consolidated subscribers grew 57.7% during the first quarter of 2001 to
15.7 million from 10.0 million for the first quarter of 2000. This growth
included approximately 3 million subscribers from acquisitions closed subsequent
to the first quarter of 2000. ARPU was $62.20 for the first quarter of 2001, a
7.4% decrease compared with the first quarter of 2000. AT&T Wireless Group's
average monthly churn rate in the first quarter of 2001 was 3.0% compared with
2.9% in the first quarter of
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2000. The decline in ARPU and the increase in average monthly churn are
primarily a result of competitive pricing pressures, expansion into a broader
base of consumer segments, including prepaid wireless services, and the impact
of acquisitions which closed subsequent to the first quarter of 2000.
EBIT/EBITDA
EBIT increased $7 million, or 6.5%, to $0.1 billion in the first quarter of
2001 compared with the first quarter of 2000. The increase was primarily due to
higher revenue associated with the mobility business. However, these increases
were partially offset by higher SG&A and network costs to support growth in
subscribers and the wireless network, higher depreciation and amortization
expenses associated with an increased asset base and higher net pretax losses
from equity investments.
EBITDA, which excludes net pretax (losses) earnings of equity investments
and other income, increased $0.3 billion, or 78.9%, in the first quarter of 2001
to $0.7 billion compared with the prior year quarter. The improvement was
primarily driven by revenue growth associated with the mobility business. These
improvements were partially offset by related increase in expenses associated
with subscriber growth.
OTHER ITEMS
Capital additions increased $0.5 billion in the first quarter of 2001 to
$1.9 billion compared with the first quarter of 2000. The increase was primarily
driven by capital expenditures to upgrade and increase network capacity and
improve network quality.
Total assets were $47.0 billion as of March 31, 2001, an increase of $11.7
billion, or 33.4%, compared with December 31, 2000. $6.3 billion of the increase
was due to the net proceeds from the Senior Notes offering. Also contributing to
the increase was $6.2 billion of proceeds from the NTT DoCoMo investment that
was allocated to AT&T Wireless Group from AT&T. These amounts received were
loaned back to AT&T, in the form of an intercompany receivable. These increases
were partially offset by the repayment of short-term debt due to AT&T.
BROADBAND
Our Broadband segment offers a variety of services through our cable
broadband network, including traditional analog video and advanced services such
as digital video service, high-speed data service and broadband telephony
service.
THREE MONTHS
ENDED
MARCH 31,
----------------
DOLLARS IN MILLIONS 2001 2000
------------------- ------ ------
Revenue.................................................... $2,465 $1,557
EBIT....................................................... (508) 236
EBITDA excluding other income.............................. 394 329
OTHER ITEMS
Capital additions.......................................... $ 910 $1,344
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AT AT
MARCH 31, DECEMBER 31,
2001 2000
------------ ---------------
Total assets............................... $114,191 $114,848
-------------------------
*EBITDA for Broadband excludes net losses from equity investments and other
income
Results of operations for the three months ended March 2001, include the
results of MediaOne since its acquisition on June 15, 2000, while the three
months ended March 2000, does not include any results of MediaOne.
REVENUE
Broadband revenue grew $0.9 billion, or 58.3% for the three months ended
March 31, 2001 compared with the corresponding prior year period. Approximately
$0.8 billion of the increase in revenue was due to the acquisition of MediaOne
in 2000. In addition, revenue from advanced services (digital video, high-speed
data, and broadband telephony) contributed approximately $0.1 billion to the
increase.
At March 31, 2001, Broadband serviced approximately 15.9 million basic
cable customers, passing approximately 28.1 million homes, compared with 11.1
million basic cable customers, passing approximately 19.2 million homes at March
31, 2000. At March 2001, we provided digital video service to approximately 3.1
million customers, high-speed data service to approximately 1.3 million
customers and broadband telephony service to approximately 0.7 million
customers. This compares with nearly 2.0 million digital-video customers,
approximately 0.3 million high-speed data customers, and nearly 40,000 broadband
telephony customers at March 31, 2000.
EBIT/EBITDA
EBIT for the first quarter ended March 31, 2001 was a deficit of $0.5
billion, a decline of $0.7 billion from EBIT of $0.2 billion for the comparable
prior year period. This decline was primarily due to $0.4 billion of gains on
sales of businesses and investments, recorded in the first quarter of 2000,
primarily gains on the swap of cable properties with Cox as well as the prior
year sale of our investment in Lenfest. Also contributing to the decline was the
impact of the acquisition of MediaOne, including higher amortization of goodwill
and purchased intangibles, and higher expenses associated with high-speed data
and broadband telephony services of approximately $0.5 billion. These decreases
were offset by $0.2 billion of lower pretax losses from equity investments.
EBITDA, which excludes net losses from equity investments and other income,
was $0.4 billion for the three months ended March 31, 2001 an improvement of
$0.1 billion, or 19.9% from the comparable prior year period. This improvement
was primarily due to the acquisition of MediaOne offset by increased expenses
associated with high-speed data and broadband telephony services.
OTHER ITEMS
Capital additions decreased 32.3% to $0.9 billion at March 31, 2001, as
compared with $1.3 billion at March 31, 2000. This decrease was primarily driven
by decreased contributions to various nonconsolidated investments, slightly
offset by increased property, plant and equipment.
Total assets at March 31, 2001, were $114.2 billion compared with $114.9
billion at December 31, 2000. The decrease in total assets at March 31, 2001 is
primarily due to lower mark-to-market valuations on certain investments.
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CORPORATE AND OTHER
This group reflects the results of corporate staff functions, the
elimination of transactions between segments, as well as the results of
Excite@Home.
THREE MONTHS
ENDED
MARCH 31,
----------------
DOLLARS IN MILLIONS 2001 2000
------------------- ------- -----
Revenue............................................... $ (89) $(143)
EBIT.................................................. (1,424) (453)
EBITDA................................................ (1,239) (308)
OTHER ITEMS
Capital additions..................................... $ 183 $ 30
AT AT
MARCH 31, DECEMBER 31,
2001 2000
------------ ---------------
Total assets............................... $618 $12,004
REVENUE
Revenue for corporate and other primarily includes the elimination of
intercompany revenue of negative $0.3 billion ($97 million increase from prior
year) and revenue from Excite@Home of approximately $0.1 billion which was
consolidated beginning September 1, 2000. The Corporate and other revenue
decline was primarily due to the higher intercompany elimination as a result of
higher sales from Business Services to Wireless and Broadband.
EBIT/EBITDA
EBIT and EBITDA declined $1.0 billion and $0.9 billion, respectively, to
deficits of $1.4 billion and $1.2 billion, respectively, in the first quarter of
2001 compared with the first quarter of 2000. The decline was primarily due to
the adoption of SFAS 133 in the quarter, which resulted in a charge of
approximately $1.0 billion. Also contributing to the decline was asset
impairment charges, net of minority interest, of $0.3 billion recorded by
Excite@Home and AT&T related to Excite@Home.
OTHER ITEMS
Capital additions increased approximately $0.2 billion in the first quarter
of 2001 compared with the first quarter of 2000. The increase was driven by the
capital additions of Excite@Home of $0.1 billion.
Total assets declined $11.4 billion during the first quarter of 2001 to
$0.6 billion. The decline was primarily driven by elimination of intercompany
receivables with AT&T Wireless Group of approximately $10.6 billion.
LIBERTY MEDIA GROUP RESULTS
Liberty Media Group (LMG) produces, acquires and distributes entertainment,
educational and informational programming services through all available formats
and media. LMG is also engaged in electronic retailing services, direct
marketing services, advertising sales relating to programming services,
infomercials and transaction processing. Losses from LMG were $0.2 billion for
the three months ended March 31, 2001, compared with earnings of $0.9 billion
for the three months ended March 31, 2000. The decline was primarily due to
lower gains on dispositions, including gains
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associated with the mergers of various companies that LMG had investments in.
Gains were recorded for the difference between the carrying value of LMG's
interest in the acquired company and the fair value of securities received in
the merger. In addition, the impairment charges recorded on LMG's investments to
reflect other than temporary declines in value also contributed to the decline.
These were partially offset tax benefits recorded in the quarter associated with
the net loss before cumulative accounting change compared with tax expense in
the prior year quarter associated with net earnings as well as by the cumulative
effect of the accounting changes due to the adoption of SFAS 133.
THREE YEARS ENDED DECEMBER 31, 2000
The comparison of 2000 results with 1999 was impacted by events, such as
acquisitions and dispositions that occurred during these two years. For example,
in 2000 we acquired MediaOne and wireless properties in the San Francisco Bay
area, which were both included in our 2000 results for part of the year, but
were not in 1999 results. In 1999, we acquired TCI, the IBM Global Network (now
AT&T Global Network Services, or AGNS) and Vanguard Cellular Systems, Inc.
(Vanguard). These businesses were included in 2000 results for a full year, but
only a part of 1999 (since their respective dates of acquisition). Further, we
disposed of certain international businesses during 1999 and 2000. The results
of businesses sold in 1999 were included in 1999 results for part of the year,
and were not in 2000 results. Likewise, businesses sold in 2000 were included in
1999 results for the full year and in 2000 results for part of the year.
Year-over-year comparison was also impacted by the consolidation of At Home
Corp. (Excite@Home) beginning September 1, 2000, due to corporate-governance
changes which gave AT&T a controlling interest. At that time and on December 31,
2000, we had an approximate 23% economic interest and 74% voting interest in
Excite@Home. Prior to September 1, 2000, we accounted for our ownership in
Excite@Home under the equity method of accounting, which means our investment
was included in "Other investments and related advances" in the 1999
Consolidated Balance Sheet and any earnings or losses were included as a
component of "Net losses from other equity investments" in the Consolidated
Statements of Income. The consolidation of Excite@Home resulted in the inclusion
of 100% of its results in each line item of AT&T's Consolidated Balance Sheet
and Consolidated Income Statement. The approximate 77% we do not own is shown in
the 2000 Consolidated Balance Sheet within "Minority interest" and as a
component of "Minority interest income (expense)" in the 2000 Consolidated
Statement of Income.
On January 5, 2000, we launched Concert, our global joint venture with
British Telecommunications plc (BT). AT&T contributed all of its international
gateway-to-gateway assets and the economic value of approximately 270
multinational customers specifically targeted for direct sales by Concert. As a
result, 2000 results do not include the revenue and expenses associated with
these customers and businesses, while 1999 does, and 2000 results include our
proportionate share of Concert's earnings in "Net losses from other equity
investments."
Effective July 1, 2000, the FCC eliminated Primary Interexchange Carrier
Charges (PICC or per-line charges) that AT&T pays for residential and
single-line business customers. The elimination of these per-line charges
resulted in lower access expense as well as lower revenue, since AT&T has
historically billed its customers for these charges.
The comparison of 1999 results with 1998 was also impacted by the 1999
acquisitions of TCI, AGNS and Vanguard, since 1999 results include these
businesses for part of the year, while 1998 does not include them. This
comparison is also impacted by the 1999 dispositions of international
businesses, which were included in 1999 results for part of the year, but were
in 1998 results for the full year.
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FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------- ------- -------
(DOLLARS IN MILLIONS)
Business Services................................. $28,488 $27,480 $24,285
Consumer Services................................. 18,976 21,854 22,885
Wireless Services................................. 10,448 7,627 5,406
Broadband......................................... 8,217 5,070 --
Other and Corporate............................... (148) 569 647
Total revenue..................................... $65,981 $62,600 $53,223
Total revenue increased 5.4%, or $3.4 billion, in 2000 compared with the
prior year. Approximately $2.1 billion of the increase was due to the impact of
acquisitions and the consolidation of Excite@Home, offset by the impact of
Concert, dispositions and the elimination of PICC. The remaining $1.3 billion
increase was primarily driven by a growing demand for our wireless and data and
Internet protocol (IP) products, and outsourcing services, partially offset by
continued and accelerating declines in long distance voice revenue. We expect
long distance revenue to continue to be negatively impacted by ongoing
competition and product substitution.
Total revenue in 1999 increased $9.4 billion, or 17.6%, compared with 1998.
Nearly three-quarters of the increase was due to acquisitions, net of
dispositions. The remaining increase was fueled by growth in wireless, business
data, business long distance voice and outsourcing revenue, partially offset by
the continued decline of consumer long distance voice revenue.
Revenue by segment is discussed in greater detail in the segment results
section.
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------- ------- -------
(DOLLARS IN MILLIONS)
Costs of services and products.................... $17,587 $14,594 $10,495
Costs of services and products include the costs of operating and
maintaining our networks, costs to support our outsourcing contracts, fees paid
to other wireless carriers for the use of their networks (off-network roaming),
programming and licensing costs for cable services, costs of wireless handsets
sold, the provision for uncollectible receivables and other service-related
costs.
These costs increased $3.0 billion, or 20.5%, in 2000 compared with 1999.
Nearly $2.1 billion of the increase was due to acquisitions and the impact of
consolidating Excite@Home, net of the impact of Concert and divestments of
international businesses. The higher costs associated with our growing wireless
subscriber base and wireless network as well as new outsourcing contracts
increased expenses by approximately $1.5 billion. The higher wireless expenses
primarily related to higher costs of handsets sold, due to a 53.5% increase in
gross subscriber additions in 2000 compared with 1999. Expenses also increased
due to higher video-programming costs principally due to rate increases, and
higher costs associated with new broadband services of approximately $0.3
billion. These increases were partially offset by approximately $0.9 billion of
costs savings from continued cost control initiatives and a higher pension
credit in 2000, primarily driven by a higher pension trust asset base, resulting
from increased investment returns.
Costs of services and products rose $4.1 billion, or 39.1%, in 1999
compared with 1998, primarily due to acquisitions, net of dispositions, which
accounted for approximately $3.7 billion of the increase. The higher costs
associated with our growing wireless subscriber base as well as new outsourcing
contracts increased expenses by approximately $1.5 billion. Partially offsetting
the 1999 increases were network cost-control initiatives of approximately $0.4
billion, and approximately $0.3 billion of lower expenses in Business Services
related to per-call compensation expense, provision for uncollectible
receivables and gross receipts and property taxes.
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FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------- ------- -------
(DOLLARS IN MILLIONS)
Access and other connection....................... $13,518 $14,686 $15,328
Access and other connection expenses decreased 8.0%, to $13.5 billion in
2000, compared with $14.7 billion in 1999. Included within access and other
connection expenses are costs that we pay to connect domestic calls on the
facilities of other service providers. Mandated reductions in per-minute access
costs and decreased per-line charges resulted in lower costs of approximately
$1.5 billion. Also contributing to the decrease was more efficient network
usage. These decreases were partially offset by approximately $0.7 billion of
higher costs due to volume increases, and $0.5 billion as a result of higher
Universal Service Fund contributions. Since most of these charges are passed
through to the customer, the per-minute access-rate and per-line charge
reductions and the increased Universal Service Fund contributions have generally
resulted in a corresponding impact on revenue.
Costs paid to telephone companies outside of the United States to connect
calls made to countries outside of the United States (international settlements)
are also included within access and other connection expenses. These costs
decreased approximately $0.5 billion in 2000, as result of the commencement of
operations of Concert. Concert now incurs most of our international settlements
as well as earns most of our foreign-billed revenue, previously incurred and
earned directly by AT&T. In 2000, Concert billed us a net expense composed of
international settlement (interconnection) expense and foreign-billed revenue.
The amount charged by Concert in 2000 was lower than interconnection expense
incurred in 1999, since AT&T recorded these transactions as revenue and expense,
as applicable. Partially offsetting the decline were costs incurred related to
Concert products that AT&T now sells to its customers.
Access and other connection expenses declined $0.6 billion, or 4.2%, in
1999 compared with the prior year. This decline resulted from $0.9 billion of
mandated reductions in per-minute access rates in 1999 and 1998, and $0.6
billion of lower international settlement rates resulting from our negotiations
with international carriers. Additionally, we continue to manage these costs
through more efficient network usage. These reductions were partially offset by
$0.8 billion of higher costs due to volume growth, and $0.3 billion as a result
of increased per-line charges and Universal Service Fund contributions.
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------- ------- -------
(DOLLARS IN MILLIONS)
Selling, general and administrative............... $13,303 $13,516 $12,770
Selling, general and administrative (SG&A) expenses decreased $0.2 billion,
or 1.6%, in 2000 compared with 1999. Approximately $2.0 billion of the decrease
was due to savings from continued cost-control initiatives and a higher pension
credit in 2000, primarily driven by a higher pension trust asset base, resulting
from increased investment returns. Largely offsetting this decrease was more
than $1.4 billion of higher expenses associated with our growing wireless and
broadband businesses, and nearly $0.7 billion of expenses associated with
acquisitions and the consolidation of Excite@Home, net of the impact of Concert
and dispositions.
SG&A expenses increased $0.7 billion, or 5.8%, in 1999 compared with 1998.
This increase was primarily due to acquisitions, net of dispositions, which
resulted in an increase in SG&A expenses of approximately $1.4 billion. Also
contributing to the increase was approximately $0.4 billion of higher costs to
support our growing wireless subscriber base. Partially offsetting these
increases were our continued efforts to control costs on a companywide basis,
which resulted in lower SG&A expenses of approximately $0.9 billion, including
lower spending for consumer long distance acquisition-programs.
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FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------ ------ ------
(DOLLARS IN MILLIONS)
Depreciation and other amortization.................. $7,274 $6,138 $4,378
Depreciation and other amortization expenses rose $1.1 billion, or 18.5%,
in 2000 compared with 1999 and increased $1.8 billion, or 40.2%, in 1999
compared with 1998. Approximately one-half of the increase in both years was due
to acquisitions and the consolidation of Excite@Home, net of dispositions and
the impact of Concert, as applicable. The remaining increase was primarily due
to a higher asset base resulting from continued infrastructure investment. Total
capital expenditures for 2000, 1999 and 1998 were $14.6 billion, $13.5 billion
and $8.0 billion, respectively. We continue to focus the vast majority of our
capital spending on our growth businesses of broadband, wireless, data and IP
and local.
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------ ------ ----
(DOLLARS IN MILLIONS)
Amortization of goodwill, franchise costs and other
purchased intangibles............................... $2,993 $1,301 $251
Amortization of goodwill, franchise costs and other purchased intangibles
increased $1.7 billion, or 130.1%, in 2000 compared with the prior year. This
increase was largely attributable to the consolidation of Excite@Home, as well
as acquisitions, primarily MediaOne and TCI. Franchise costs represent the value
attributable to agreements with local authorities that allow access to homes in
Broadband's service areas. Other purchased intangibles arising from business
combinations primarily included customer relationships and licenses.
Amortization of goodwill, franchise costs and other purchased intangibles
increased $1.1 billion in 1999 compared with 1998 due primarily to the
acquisition of TCI and, to a lesser extent, AGNS.
As a result of our evaluation of recent changes in our industry and the
views of regulatory authorities, AT&T expects that the amortization period for
all licensing costs, franchise costs, and goodwill associated with newly
acquired wireless, telecommunications and cable operations will not exceed 25
years.
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------ ------ ------
(DOLLARS IN MILLIONS)
Net restructuring and other charges.................. $7,029 $1,506 $2,514
During 2000, we recorded $7.0 billion of net restructuring and other
charges, which had an approximate $0.90 earnings per diluted share impact to the
AT&T Common Stock Group. The 2000 charge included $6.2 billion of asset
impairment charges related to Excite@Home, $759 million for restructuring and
exit costs associated with AT&T's initiative to reduce costs, and $91 million
related to the government-mandated disposition of AT&T Communications (U.K.)
Ltd., which would have competed directly with Concert.
The asset impairment charges related to Excite@Home resulted from the
deterioration of the market conditions and market valuations of Internet-related
companies during the fourth quarter of 2000, which caused Excite@Home to
conclude that intangible assets related to their acquisitions of
Internet-related companies may not be recoverable. Accordingly, Excite@Home
conducted a detailed assessment of the recoverability of the carrying amounts of
acquired intangible assets. This assessment resulted in a determination that
certain acquired intangible assets, including goodwill, related to these
acquisitions, including Excite, were impaired as of December 31, 2000. As a
result, Excite@Home recorded impairment charges of $4.6 billion in December
2000, representing the excess of the carrying amount of the impaired assets over
their fair value.
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The impairment was allocated to each asset group based on a comparison of
carrying values and fair values. The impairment write-down within each asset
group was allocated first to goodwill, and if goodwill was reduced to zero, to
identifiable intangible assets in proportion to carrying values.
Since we own approximately 23% of Excite@Home, 77% of the charge recorded
by Excite@Home was not included as a reduction to AT&T's net income, but rather
was eliminated in our 2000 Consolidated Statement of Income as "Minority
interest income (expense)."
Also as a result of the foregoing, AT&T recorded a goodwill and
acquisition-related impairment charge of $1.6 billion associated with the
acquisition of our investment in Excite@Home. The write-down of our investment
to fair value was determined utilizing discounted expected future cash flows.
The $759 million charge for restructuring and exit plans was primarily due
to headcount reductions, mainly in network operations and Business Services,
including the consolidation of customer-care and call centers, as well as
synergies created by the MediaOne merger.
Included in exit costs was $503 million of cash termination benefits
associated with the separation of approximately 7,300 employees as part of
voluntary and involuntary termination plans. Approximately one-half of the
separations were management employees and one-half were nonmanagement employees.
Approximately 6,700 employee separations were related to involuntary
terminations and approximately 600 to voluntary terminations.
We also recorded $62 million of network lease and other contract
termination costs associated with penalties incurred as part of notifying
vendors of the termination of these contracts during the year, and net losses of
$32 million related to the disposition of facilities primarily due to synergies
created by the MediaOne merger.
Also included in restructuring and exit costs in 2000 was $144 million of
benefit plan curtailment costs associated with employee separations as part of
these exit plans. Further, we recorded an asset impairment charge of $18 million
related to the write-down of unrecoverable assets in certain businesses where
the carrying value was no longer supported by estimated future cash flows.
The 2000 restructuring initiatives are projected to yield cash savings of
approximately $690 million per year, as well as EBIT (earnings before interest
and taxes, including pretax minority interest and net pretax losses from other
equity investments) savings of approximately $700 million per year. We expect
increased spending in growth businesses will largely offset these cash and EBIT
savings. The EBIT savings, primarily attributable to reduced personnel-related
expenses, will be realized in SG&A expenses and costs of services and products.
During 1999, we recorded $1.5 billion of net restructuring and other
charges, which had an approximate $0.37 earnings per diluted share impact to the
AT&T Common Stock Group.
A $594 million in-process research and development charge was recorded
reflecting the estimated fair value of research and development projects at TCI,
as of the date of the acquisition, which had not yet reached technological
feasibility or had no alternative future use. The projects identified related to
efforts to offer voice over IP, product-integration efforts for advanced set-top
devices, cost-savings efforts for broadband-telephony implementation, and
in-process research and development related to Excite@Home. We estimated the
fair value of in-process research and development for each project using an
income approach, which was adjusted to allocate fair value based on the
project's percentage of completion. Under this approach, the present value of
the anticipated future benefits of the projects was determined using a discount
rate of 17%. For each project, the resulting net present value was multiplied by
a percentage of completion based on effort expended to date versus projected
costs to complete.
The charge associated with voice-over-IP technology, which allows voice
telephony traffic to be digitized and transmitted in IP data packets, was $225
million as of the date of acquisition. Current voice-over-IP equipment does not
yet support many of the features required to connect customer
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premises equipment to traditional phone networks. Further technical development
is also needed to ensure voice quality that is comparable to conventional
circuit-switched telephony and to reduce the power consumption of the
IP-telephony equipment. We started testing IP-telephony equipment in the field
in late-2000 and will continue tests throughout 2001.
The charge associated with product-integration efforts for advanced set-top
devices, which will enable us to offer next-generation digital services, was
$114 million as of the acquisition date. The associated technology consists of
the development and integration work needed to provide a suite of software tools
to run on the digital set-top box hardware platform. It is anticipated that
field trials will begin in late-2001 for next-generation digital services.
The charge associated with cost-savings efforts for broadband-telephony
implementation was $101 million as of the date of acquisition. Telephony cost
reductions primarily consist of cost savings from the development of a "line of
power switch," which allows us to cost effectively provide power for customer
telephony equipment through the cable plant. This device will allow us to
provide line-powered telephony without burying the cable line to each house.
Trials related to our telephony cost reductions are complete, and implementation
has begun in certain markets.
Additionally, the in-process research and development charge related to
Excite@Home was valued at $154 million. This charge related to projects to allow
for self-provisioning of devices and the development of next-generation client
software, network and back-office infrastructure to enable a variety of network
devices beyond personal computers and improved design for the regional data
centers' infrastructure.
Although there are technological issues to overcome to successfully
complete the acquired in-process research and development, we expect successful
completion. We estimate the costs to complete the identified projects will not
have a material impact on our results of operations. If, however, we are unable
to establish technological feasibility and produce commercially viable
products/services, anticipated incremental future cash flows attributable to
expected profits from such new products/services may not be realized.
A $531 million asset impairment charge was recorded in 1999 associated with
the planned disposal of certain wireless communications equipment resulting from
a program to increase the capacity and operating efficiency of our wireless
network. As part of a multivendor program, contracts have been executed with
select vendors to replace significant portions of our wireless infrastructure
equipment in the western United States and the metropolitan New York markets.
The program is intended to provide Wireless Services with the newest technology
available and allow us to evolve to new, next-generation digital technology,
which is designed to provide high-speed data capabilities. Since the assets will
remain in service from the date of the decision to dispose of these assets to
the disposal date, the remaining net book value of the assets will be
depreciated over this period.
Also in 1999, a $145 million charge for restructuring and exit costs was
recorded as part of AT&T's initiative to reduce costs. The restructuring and
exit plans primarily focused on the maximization of synergies through headcount
reductions in Business Services and network operations, including the
consolidation of customer-care and call centers.
Included in exit costs was $142 million of cash termination benefits
associated with the separation of approximately 2,800 employees as part of
voluntary and involuntary termination plans. Approximately one-half of the
separations were management employees and one-half were nonmanagement employees.
Approximately 1,700 employee separations were related to involuntary
terminations and approximately 1,100 to voluntary terminations.
The 1999 restructuring initiatives are projected to yield cash savings of
approximately $250 million per year. This restructuring yielded EBIT savings of
approximately $200 million in 2000, and is expected to save nearly $400 million
per year thereafter. We expect increased spending in growth businesses will
largely offset these cash and EBIT savings. The EBIT savings, primarily
attributable
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to reduced personnel-related expenses, will be realized in SG&A expenses and
costs of services and products.
We also recorded net losses of $307 million related to the
government-mandated disposition of certain international businesses that would
have competed directly with Concert, and $50 million related to a contribution
agreement Broadband entered into with Phoenixstar, Inc. That agreement requires
Broadband to satisfy certain liabilities owed by Phoenixstar and its
subsidiaries. The remaining obligation under this contribution agreement and an
agreement that MediaOne had is $57 million, which was fully accrued for at
December 31, 2000. In addition, we recorded benefits of $121 million related to
the settlement of pension obligations for former employees who accepted AT&T's
1998 voluntary retirement incentive program (VRIP) offer.
During 1998, we recorded $2.5 billion of net restructuring and other
charges, which had an approximate $0.59 earnings per diluted share impact to the
AT&T Common Stock Group. The bulk of the charge was associated with our overall
cost-reduction program and the approximately 15,300 management employees who
accepted the VRIP offer. A restructuring charge of $2,724 million was composed
of $2,254 million and $169 million for pension and postretirement
special-termination benefits, respectively, $263 million of benefit plan
curtailment losses and $38 million of other administrative costs. We also
recorded charges of $125 million for related facility costs and $150 million for
executive-separation costs. These charges were partially offset by benefits of
$940 million as we settled pension benefit obligations for 13,700 of the total
VRIP employees. In addition, the VRIP charges were partially offset by the
reversal of $256 million of 1995 business restructuring reserves primarily
resulting from the overlap of VRIP on certain 1995 projects.
Also included in the 1998 net restructuring and other charges were asset
impairment charges totaling $718 million, of which $633 million was related to
our decision not to pursue Total Service Resale (TSR) as a local-service
strategy. We also recorded an $85 million asset impairment charge related to the
write-down of unrecoverable assets in certain international operations where the
carrying value was no longer supported by future cash flows. This charge was
made in connection with the review of certain operations that would have
competed directly with Concert.
Additionally, $85 million of merger-related expenses were recorded in 1998
in connection with the Teleport Communications Group Inc. (TCG) merger, which
was accounted for as a pooling of interests. Partially offsetting these charges
was a $92 million reversal of the 1995 restructuring reserve. This reversal
reflected reserves no longer deemed necessary. The reversal primarily included
separation costs attributed to projects completed at a cost lower than
originally anticipated. Consistent with the three-year plan, the 1995
restructuring initiatives were substantially completed by the end of 1998.
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------ ------- ------
(DOLLARS IN MILLIONS)
Operating income.................................... $4,277 $10,859 $7,487
Operating income decreased $6.6 billion, or 60.6%, in 2000 compared with
1999. The decrease was primarily due to higher net restructuring and other
charges of $5.5 billion. Also contributing to the decrease was the impact of the
acquisition of MediaOne and the consolidation of Excite@Home, which lowered
operating income by $1.5 billion. A majority of the impact of operating losses
and the restructuring charge generated by Excite@Home was offset in minority
interest income (expense), reflecting the approximate 77% of Excite@Home we do
not own. Partially offsetting these decreases were cost-control initiatives and
a larger pension credit associated with our mature long distance businesses and
related support groups, partially offset by lower long distance revenue.
Operating income rose $3.4 billion, or 45.0%, in 1999 compared with 1998.
The increase was driven by approximately $2.3 billion of operating income
improvements in Business Services and
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Consumer Services, reflecting operating expense efficiencies. Also contributing
to the increase was $1.0 billion of lower net restructuring and other charges.
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------ ---- ------
(DOLLARS IN MILLIONS)
Other income.......................................... $1,514 $931 $1,281
Other income increased $0.6 billion, or 62.4%, in 2000 compared with 1999.
This increase was primarily due to greater net gains on sales of businesses and
investments of approximately $1.0 billion, and higher investment-related income
of approximately $0.3 billion. The higher gains on sales were driven by
significant gains associated with the swap of cable properties with Comcast
Corporation (Comcast) and Cox Communications, Inc. (Cox), the sale of our
investment in Lenfest Communications, Inc. (Lenfest) and Celumovil, and a gain
recorded as a result of the merger of TeleCorp PCS, Inc. (TeleCorp) and Tritel,
Inc. (Tritel) and related transactions. These gains aggregated approximately
$1.0 billion and had an approximate $0.29 earnings per diluted share impact to
the AT&T Common Stock Group. In 1999, we recorded significant gains associated
with the sale of our Language Line Services business, a portion of our ownership
interest in AT&T Canada as well as our investment in Wood-TV. These gains
aggregated approximately $0.4 billion and had an approximate $0.07 earnings per
diluted share impact to the AT&T Common Stock Group. Offsetting the increases to
other income in 2000 was an approximate $0.5 billion charge reflecting the
increase in the fair value of put options held by Comcast and Cox related to
Excite@Home stock, and approximately $0.2 billion of higher investment
impairment charges.
Other income decreased $0.4 billion, or 27.3%, in 1999 compared with 1998.
The decrease was due to lower net gains on sales of businesses and investments
of approximately $0.3 billion as well as lower investment-related income of
approximately $0.2 billion. In 1999, we recorded significant gains associated
with the sale of our Language Line Services business, a portion of our ownership
interest in AT&T Canada as well as our investment in Wood-TV. These gains
aggregated approximately $0.4 billion and had an approximate $0.07 earnings per
diluted share impact to the AT&T Common Stock Group. In 1998, we recorded
significant gains associated with the sale of AT&T Solutions Customer Care, LIN
Television Corp. and SmarTone Telecommunications Holdings Limited. These gains
aggregated approximately $0.8 billion and had an approximate $0.18 earnings per
diluted share impact to the AT&T Common Stock Group.
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------ ------ ----
(DOLLARS IN MILLIONS)
Interest expense...................................... $3,183 $1,765 $427
Interest expense increased 80.3%, or $1.4 billion, in 2000 compared with
1999. The increase was primarily due to a higher average debt balance as a
result of our June 2000 acquisition of MediaOne, including outstanding debt of
MediaOne and debt issued to fund the MediaOne acquisition, and our March 1999
acquisition of TCI, partially offset by higher capitalized interest.
Interest expense increased $1.3 billion in 1999 compared with 1998, due to
a higher average debt balance associated with our acquisitions, including debt
outstanding of TCI at the date of acquisition.
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------ ------ ------
(DOLLARS IN MILLIONS)
Provision for income taxes........................... $3,342 $3,695 $3,049
The effective income tax rate is the provision for income taxes as a
percent of income from continuing operations before income taxes. The effective
income tax rate was 128.1% in 2000, 36.9% in 1999 and 36.6% in 1998. In 2000,
the effective tax rate was negatively impacted by Excite@Home, which is unable
to record tax benefits associated with its pretax losses. Therefore the $4.6
billion
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restructuring charges taken by Excite@Home in 2000 had no associated tax
benefit. The 2000 effective tax rate was positively impacted by a tax-free gain
resulting from an exchange of AT&T stock for an entity owning certain cable
systems and other assets with Cox and the benefit of the write-off of the
related deferred tax liability. The 1999 effective tax rate was negatively
impacted by a non-tax-deductible research and development charge, but positively
impacted by a change in the net operating loss utilization tax rules that
resulted in a reduction in the valuation allowance and the income tax provision.
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------ ----- ----
(DOLLARS IN MILLIONS)
Minority interest income (expense)...................... $4,120 $(115) $21
Minority interest income (expense), which is recorded net of income taxes,
represents an adjustment to AT&T's income to reflect the less than 100%
ownership of consolidated subsidiaries as well as dividends on preferred stock
issued by subsidiaries of AT&T. The $4.2 billion increase in minority interest
in 2000 resulted from the consolidation of Excite@Home effective September 1,
2000. The minority interest income in 2000 primarily reflects losses generated
by Excite@Home, including the goodwill impairment charge, that were attributable
to the approximate 77% of Excite@Home not owned by AT&T. The decrease in
minority interest in 1999 compared with 1998 was primarily due to dividends on
preferred securities issued by a subsidiary trust of AT&T in 1999.
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------ ------- ----
(DOLLARS IN MILLIONS)
Equity earnings (losses) from Liberty Media Group..... $1,488 $(2,022) --
Equity earnings from LMG, which are recorded net of income taxes, were $1.5
billion in 2000, compared with losses of $2.0 billion in 1999. The increase was
primarily due to gains on dispositions, including gains associated with the
mergers of various companies that LMG had investments in. Gains were recorded
for the difference between the carrying value of LMG's interest in the acquired
company and the fair value of securities received in the merger. In addition,
lower stock compensation expense in 2000 compared with 1999 contributed to the
increase. These were partially offset by impairment charges recorded on LMG's
investments to reflect other than temporary declines in value and higher losses
relating to LMG's equity affiliates.
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ----- ----- -----
(DOLLARS IN MILLIONS)
Net losses from other equity investments.................. $205 $765 $78
Net losses from other equity investments, which are recorded net of income
taxes, were $0.2 billion in 2000, a 73.2% improvement compared with 1999. This
improvement was primarily a result of the redemption of our investment in AB
Cellular which resulted in the distribution of wireless properties in the Los
Angeles area to AT&T, which caused AB Cellular to record a gain on the
distribution. Our pro rata share of this gain was approximately $0.4 billion. In
addition, in 2000, earnings from our investment in Cablevision Systems Corp.
(Cablevision) were approximately $0.2 billion higher than 1999 due to gains from
cable-system sales. Offsetting these increases were losses from our stake in
Time Warner Entertainment Company, L.P. (TWE) which we acquired in connection
with the MediaOne merger and greater equity losses from Excite@Home, which
aggregated approximately $0.1 billion.
Net losses from equity investments were $0.8 billion in 1999 compared with
$78 million in 1998, primarily due to losses we recorded on investments we
acquired through TCI, largely Cablevision and Excite@Home.
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FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- -------- --------- --------
(DOLLARS IN MILLIONS, EXCEPT PER
SHARE AMOUNTS)
AT&T Common Stock Group:
Income from continuing operations................. $3,105 $ 5,450 $5,235
Earnings from continuing operations per share:
Basic.......................................... 0.89 1.77 1.96
Diluted........................................ 0.88 1.74 1.94
AT&T Wireless Group:
Income............................................ $ 76 -- --
Earnings per share:
Basic and diluted.............................. 0.21 -- --
Liberty Media Group:
Income (loss)..................................... $1,488 $(2,022) --
Earnings (loss per share:
Basic and diluted.............................. 0.58 (0.80)
Earnings per diluted share (EPS) attributable to the AT&T Common Stock
Group were $0.88 in 2000 compared with $1.74 in 1999, a decrease of 49.4%. The
decrease was primarily due to higher restructuring and asset impairment charges
and the MediaOne acquisition, including the impact of shares issued, operating
losses of MediaOne and additional interest expense. Also contributing to the
decrease was the impact of Excite@Home, including the mark-to-market adjustment
related to the put options held by Comcast and Cox. These were partially offset
by lower losses from equity investments and an increase in other income,
primarily associated with higher net gains on sales of businesses and
investments, and higher investment-related income. Also impacting EPS was higher
operating income associated with our mature long distance businesses.
EPS from continuing operations attributable to the AT&T Common Stock Group
on a diluted basis declined 10.3% in 1999, to $1.74, compared with 1998. The
decline was primarily due to the impact of the TCI and AGNS acquisitions,
including the impact of shares issued and equity losses of Excite@Home and
Cablevision. Partially offsetting these declines were increased income from the
remaining operations due to revenue growth and operating expense efficiencies,
as well as lower net restructuring and other charges.
EPS for Liberty Media Group was $0.58 in 2000, compared with a loss of
$0.80 per share for 1999. The increase in EPS was primarily due to gains on
dispositions, including gains associated with the mergers of various companies
that LMG had investments in. Gains were recorded for the difference between the
carrying value of LMG's interest in the acquired company and the fair value of
securities received in the merger. In addition, lower stock compensation expense
in 2000 compared with 1999 contributed to the increase. These were partially
offset by impairment charges recorded on LMG's investments to reflect other than
temporary declines in value and higher losses relating to LMG's equity
affiliates.
DISCONTINUED OPERATIONS
Pursuant to Accounting Principles Board Opinion No. 30 "Reporting the
Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," the consolidated financial statements of AT&T reflect the
disposition of AT&T Universal Card Services (UCS), which was sold on April 2,
1998, as discontinued operations. Accordingly, the revenue, costs and expenses,
and cash flows of UCS have been excluded from the respective captions in the
1998 Consolidated Statement of
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Income and Consolidated Statement of Cash Flows, and have been reported through
the April 2, 1998 date of disposition as "Income from discontinued operations,"
net of applicable income taxes; and as "Net cash provided by discontinued
operations." The gain associated with the sale of UCS is recorded as "Gain on
sale of discontinued operations," net of applicable income taxes.
EXTRAORDINARY ITEMS
In August 1998, AT&T extinguished approximately $1.0 billion of TCG's debt.
The $217 million pretax loss on the early extinguishment of debt was recorded as
an extraordinary loss. The after-tax impact was $137 million, or $0.05 per
diluted share.
SEGMENT RESULTS
In support of the services we provided in 2000, we segment our results by
the business units that support our primary lines of business: Business
Services, Consumer Services, Wireless Services and Broadband. The balance of
AT&T's operations, excluding LMG, is included in a Corporate and Other category.
Although not a segment, we also discuss the results of LMG.
The discussion of segment results includes revenue; EBIT (earnings before
interest and taxes, including pretax minority interest and net pretax losses of
other equity investments); EBITDA (EBIT plus depreciation, amortization and
minority interest income (expense) other than Excite@Home); total assets, and
capital additions. The discussion of EBITDA for Wireless Services and Broadband
is modified to exclude other income and net losses from equity investments.
Total assets for each segment generally include all assets, except intercompany
receivables. However, our Wireless Services segment included intercompany
receivables from AT&T and the related interest income since these assets relate
to the results of the AT&T Wireless Group tracked business. Prepaid pension
assets and corporate-owned or leased real estate are generally held at the
corporate level, and therefore are included in the Corporate and Other group.
Shared network assets are allocated to the segments and reallocated each
January, based on two years of volumes. Capital additions for each segment
include capital expenditures for property, plant and equipment, acquisitions of
licenses, additions to nonconsolidated investments, increases in franchise costs
and additions to internal-use software.
EBIT is the primary measure used by AT&T's chief operating decision makers
to measure AT&T's operating results and to measure segment profitability and
performance. AT&T calculates EBIT as operating income plus net pretax losses
from equity investments, pretax minority interest income (expense) and other
income. In addition, management also uses EBITDA as a measure of segment
profitability and performance, and is defined as EBIT, excluding minority
interest income (expense) other than Excite@Home, plus depreciation and
amortization. Interest and taxes are not factored into the segment profitability
measure used by the chief operating decision makers; therefore, trends for these
items are discussed on a consolidated basis. Management believes EBIT is
meaningful to investors because it provides analysis of operating results using
the same measures used by AT&T's chief operating decision makers and provides a
return on total capitalization measure. We believe EBITDA is meaningful to
investors as a measure of each segment's liquidity consistent with the measure
utilized by our chief operating decision makers. In addition, we believe that
both EBIT and EBITDA allow investors a means to evaluate the financial results
of each segment in relation to total AT&T. EBIT for AT&T was $9.4 billion, $10.5
billion and $8.7 billion for the years ended December 31, 2000, 1999 and 1998,
respectively. EBITDA for AT&T was $19.8 billion, $18.6 billion and $13.4 billion
for the years ended December 31, 2000, 1999 and 1998, respectively. Our
calculation of EBIT and EBITDA may or may not be consistent with the calculation
of these measures by other public companies. EBIT and EBITDA should not be
viewed by investors as an alternative to generally accepted accounting
principles (GAAP) measures of income as a measure of performance or to cash
flows from operating, investing and financing activities as a measure of
liquidity. In addition, EBITDA does not take into account changes in certain
assets and liabilities as well as interest and taxes which can affect cash flow.
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Reflecting the dynamics of our business, we continually review our
management model and structure and make adjustments accordingly.
BUSINESS SERVICES
Our Business Services segment offers a variety of global communications
services, including long distance, local, and data and IP networking to small
and medium-sized businesses, large domestic and multinational businesses and
government agencies. Business Services is also a provider of voice, data and IP
transport to service resellers (wholesale services).
Business Services includes AT&T Solutions, the company's
professional-services outsourcing business, which provides seamless solutions
that maximize the competitive advantage of networking-based electronic
applications for global clients. AT&T Solutions also provides e-infrastructure
and high-availability services to enterprise clients, and manages AT&T's unified
global network.
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------- ------- -------
(DOLLARS IN MILLIONS)
External revenue.................................. $27,691 $26,749 $23,807
Internal revenue.................................. 797 731 478
Total revenue..................................... 28,488 27,480 24,285
EBIT.............................................. 6,548 6,136 4,994
EBITDA............................................ 10,260 9,488 7,548
Capital additions................................. 6,223 7,511 6,130
AT DECEMBER 31,
-------------------------------------------------- 2000 1999
------- -------
Total assets...................................... $34,804 $32,010
REVENUE
In 2000, Business Services revenue grew $1.0 billion, or 3.7%, compared
with 1999. Approximately $0.4 billion of the increase was due to the impact of
acquisitions, partially offset by the formation of Concert. Strength in data and
IP services as well as growth in our outsourcing business contributed $1.8
billion to the increase. This growth, however, was offset by an approximate $0.9
billion decline in long distance voice services as a result of continued pricing
pressures in the industry.
Revenue in 1999 grew $3.2 billion, or 13.2%. The acquisition of AGNS
contributed approximately $1.1 billion to the growth. Data, IP and outsourcing
services grew approximately $1.5 billion in 1999 compared with 1998, while long
distance voice services and local services contributed approximately $0.6
billion to the revenue increase.
Data services, which represent the transportation of data, rather than
voice, along our network, was impacted by acquisitions and the formation of
Concert. Excluding these impacts, data services grew at a high-teens percentage
rate in 2000. Growth was led by the continued strength of frame relay services;
IP services, which include IP-connectivity services and virtual private network
(VPN) services; and high-speed private-line services. Excluding the impact of
AGNS, data services grew at a high-teens percentage rate in 1999, led by
strength in frame relay and high-speed private-line services.
AT&T Solutions outsourcing revenue grew 47.9% in 2000 and 146.0% in 1999.
More than one-half of the 2000 growth and approximately 65% of the 1999 growth
was driven by our acquisition of AGNS. The remaining growth in both years was
primarily due to growth from new contract signings and add-on business from
existing clients.
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Excluding the impact of Concert, long distance voice services revenue
declined at a mid single-digit percentage rate in 2000 due to a declining
average price per minute reflecting the competitive forces within the industry
which are expected to continue. Partially offsetting this decline was a high
single-digit percentage growth rate in minutes. In 1999, long distance voice
revenue grew at a low single-digit percentage rate, as volumes grew at a
high-teens percentage rate, which was largely offset by a declining average rate
per minute.
Local voice services revenue grew nearly 20% in 2000 and more than 50% in
1999. During 2000, AT&T added more than 867,000 access lines, with the total
reaching nearly 2.3 million at the end of the year. During 1999, AT&T added more
than 719,000 access lines. Access lines enable AT&T to provide local service to
customers by allowing direct connection from customer equipment to the AT&T
network. AT&T serves more than 6,000 buildings on-network (buildings where AT&T
owns the fiber that runs into the building), representing an increase of
approximately 3.5% over 1999. At the end of 1999, AT&T served just over 5,800
buildings on-network compared with approximately 5,200 buildings at the end of
1998.
Business Services internal revenue increased $66 million, or 9.1%, in 2000
and $253 million, or 52.8%, in 1999. The increase in 2000 was the result of
greater sales of business long distance services to other AT&T units that resell
such services to their external customers, primarily Broadband and Wireless
Services. The increase in 2000 was partially offset by a decline in sales
related to international businesses divested. In 1999, the increase in internal
revenue was primarily due to greater sales of long distance services to Wireless
Services.
EBIT/EBITDA
EBIT improved $0.4 billion, or 6.7%, and EBITDA improved $0.8 billion, or
8.1%, in 2000 compared with 1999. This improvement reflects an increase in
revenue and lower costs as a result of our continued cost-control efforts,
partially offset by the formation of Concert and the acquisition of AGNS.
Additionally, the EBIT increase was partially offset by an increase in
depreciation and amortization expense in 2000 compared with 1999 primarily due
to a higher network asset base.
In 1999, EBIT improved $1.1 billion, or 22.9%, and EBITDA improved $1.9
billion, or 25.7%, compared with 1998. These increases were driven by revenue
growth combined with margin improvement resulting from ongoing cost-control
initiatives. The increase in EBIT was offset somewhat by increased depreciation
and amortization expenses resulting from increased capital expenditures aimed at
data, IP and local services.
OTHER ITEMS
Capital additions decreased $1.3 billion in 2000, and increased $1.4
billion in 1999. In 2000, the decrease was a result of lower spending for our
long distance network (including the data network). In 1999, the increase was
primarily due to additional spending for the build out of our local services
SONET transport network.
Total assets increased $2.8 billion, or 8.7%, at December 31, 2000,
compared with December 31, 1999. The increase was primarily due to net increases
in property, plant and equipment as a result of capital additions, and a higher
accounts receivable balance.
CONSUMER SERVICES
Our Consumer Services segment provides residential customers with a variety
of any-distance communications services, including long distance, local toll
(intrastate calls outside the immediate local area) and Internet access. In
addition, Consumer Services provides transaction services, such as prepaid
calling card and operator-handled calling services. Local phone service is also
provided in certain areas.
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FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------- ------- -------
(DOLLARS IN MILLIONS)
Revenue........................................... $18,976 $21,854 $22,885
EBIT.............................................. 7,090 7,909 6,570
EBITDA............................................ 7,650 8,692 7,263
Capital additions................................. 302 656 459
AT DECEMBER 31, 2000 1999
--------------- ------- -------
Total assets...................................... $ 4,801 $ 6,279
REVENUE
Consumer Services revenue declined 13.2%, or $2.9 billion, in 2000 compared
with 1999. Approximately $0.9 billion of the decline was due to the elimination
of per-line charges in 2000 and the impact of Concert. The remainder of the
decline was primarily due to a decline in traditional voice services, such as
Domestic Dial 1, reflecting the ongoing competitive nature of the consumer long
distance industry, which has resulted in pricing pressures and a loss of market
share. Also negatively impacting revenue was product substitution and market
migration away from direct-dial wireline and higher-priced calling-card services
to the rapidly growing wireless services and lower-priced prepaid-card services.
As a result, calling volumes declined at a mid single-digit percentage rate in
2000. We expect competition and product substitution to continue to negatively
impact Consumer Services revenue.
In August 1999, we introduced AT&T One Rate, which allows customers to make
long distance calls, 24 hours a day, seven days a week, for the same rate. These
One Rate offers continue to be well received in the market with more than 12
million customers enrolled since the plan's introduction. In addition, AT&T has
been successful in packaging services in the consumer market by giving customers
the option of intraLATA service with its One Rate offers. More than 60% of the
customers enrolled in One Rate have chosen AT&T as their intraLATA provider.
AT&T's any distance New York Local One Rate offer, which combines both
local and long distance service, has experienced high customer acceptance. AT&T
ended the year with nearly 760,000 customers under this plan.
In 1999, Consumer Services revenue decreased $1.0 billion, or 4.5%, on a
mid single-digit percentage decline in volumes. The 1999 decline reflects the
ongoing competitive nature of the consumer long distance industry, as well as
product substitution and market migration away from direct dial and
higher-priced calling-card services to rapidly growing wireless services and
lower-priced prepaid-card services.
EBIT/EBITDA
EBIT declined $0.8 billion, or 10.4%, and EBITDA declined $1.0 billion, or
12.0%, in 2000 compared with 1999. The declines in EBIT and EBITDA primarily
reflect the decline in the long distance business, offset somewhat by
cost-control initiatives. In addition, the declines reflect $0.2 billion of
lower gains on sales of businesses, primarily the 1999 sale of Language Line
Services, and higher restructuring charges. Reflecting our cost-control
initiatives, EBIT and EBITDA margins in 2000 improved to 37.4% and 40.3%,
respectively, compared with 36.2% and 39.8%, respectively, in 1999.
EBIT grew $1.3 billion, or 20.4%, and EBITDA grew $1.4 billion, or 19.7%,
in 1999. The EBIT margin improved to 36.2% in 1999 (excluding the gain on the
sale of Language Line Services, the 1999 EBIT margin was 35.5%) from 28.7% in
the prior year. The EBIT and EBITDA growth for
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1999 reflects ongoing cost-reduction efforts, particularly in marketing
spending, as well as lower negotiated international settlement rates.
OTHER ITEMS
Capital additions decreased $0.4 billion, or 54.0%, in 2000 as a result of
a planned reduction in spending on the voice network and reduced spending on
internal-use software as most of the functionality upgrades were completed in
1999. In 1999, capital additions increased $0.2 billion, or 42.9%, primarily due
to increased spending on internal-use software to add more functionality to our
services and in support of AT&T WorldNet Services subscriber growth.
Total assets declined $1.5 billion, or 23.5%, during 2000. The decline was
primarily due to assets transferred to Concert during 2000, as well as lower
accounts receivable, reflecting lower revenue.
WIRELESS SERVICES
Our Wireless Services segment offers wireless voice and data services and
products to customers in our 850 megahertz (cellular) and 1900 megahertz
(Personal Communications Services, or PCS) markets. Wireless Services also
includes certain interests in partnerships and affiliates that provide wireless
services in the United States and internationally, aviation-communications
services and the results of our messaging business through the October 2, 1998
date of sale. Also included are fixed wireless services providing high-speed
Internet access and any-distance voice services using wireless technology to
residential and small business customers.
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------- ------ ------
(DOLLARS IN MILLIONS)
Revenue............................................. $10,448 $7,627 $5,406
EBIT................................................ 1,131 (473) 418
EBITDA*............................................. 1,653 581 856
Capital additions................................... 5,553 2,739 2,395
AT DECEMBER 31, 2000 1999
--------------- ------- -------
Total assets........................................ $35,184 $23,312
-------------------------
*EBITDA for Wireless Services excludes net earnings (losses) from equity
investments and other income.
REVENUE
Wireless Services revenue grew $2.8 billion, or 37.0%, in 2000, and $2.2
billion, or 41.1%, in 1999. Approximately $0.6 billion of the 2000 growth was
due to acquisitions, and approximately $0.2 billion of the 1999 growth was due
to the net impact of acquisitions and dispositions. The remaining increases were
due to subscriber growth, reflecting the continued successful execution of
AT&T's wireless strategy of targeting and retaining specific customer segments,
expanding the national wireless footprint, focusing on digital service, and
offering simple rate plans. In addition, an increase in average monthly revenue
per user (ARPU) contributed to the growth.
Consolidated subscribers grew 58.5% during 2000 to approximately 15.2
million, and grew 33.4% to approximately 9.6 million in 1999. This growth
included approximately 3.0 million subscribers from acquisitions closed during
2000, and approximately 900,000 from acquisitions closed during 1999. ARPU was
$68.20 for 2000, a 3.6% increase compared with 1999. ARPU in 1999 was $65.80, a
14.2% increase from 1998. The average monthly subscriber churn rate in 2000 was
2.9% compared with 2.6% in 1999. Average monthly subscriber churn increased
during 2000 as a result of competitive pressures, as well as our efforts to
expand to a broader base of consumer segments served
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(e.g., prepaid wireless services). We expect these factors to continue, which
will result in a decline in ARPU.
EBIT/EBITDA
In 2000, EBIT improved $1.6 billion from a deficit of $0.5 billion in 1999.
Approximately one-half of the improvement was due to higher pretax earnings on
equity investments and greater gains on sales of businesses and investments.
These items included higher equity earnings due to a gain recorded relating to
the redemption of our investment in AB Cellular, as well as a gain on
transactions associated with our affiliate investments in TeleCorp and Tritel,
and a gain on the sale of Celumovil in 2000. In 1999, we recorded a gain on the
sale of WOOD-TV. Also positively impacting the EBIT growth in 2000 was a 1999
asset impairment charge of $0.5 billion and higher intercompany interest income
in 2000 resulting from the AT&T Wireless Group tracking stock offering proceeds
attributed to Wireless Services. The remaining EBIT increase was primarily due
to increased revenue, partially offset by a related increase in expenses.
In 1999, EBIT declined $0.9 billion from $0.4 billion in 1998. The EBIT
decline was primarily due to the 1999 asset impairment charge of approximately
$0.5 billion and lower gains on sales of businesses and investments of
approximately $0.5 billion.
EBITDA, which excludes net earnings (losses) from equity investments and
other income, increased $1.1 billion in 2000 to $1.7 billion. Approximately
one-half of the increase was due to the 1999 impairment charge and the remainder
was due to increased revenue, partially offset by a related increase in
expenses.
In 1999, EBITDA, which excludes net earnings (losses) from equity
investments and other income, declined $0.3 billion to $0.6 billion. The decline
was primarily due to the 1999 asset impairment charge, partially offset by an
increase in revenue net of related expenses.
OTHER ITEMS
Capital additions increased $2.8 billion in 2000, and increased $0.3
billion in 1999. Spending in both years focused on increasing the capacity and
quality of our national wireless network.
Total assets were $35.2 billion as of December 31, 2000, an increase of
$11.8 billion, or 50.3%, compared with December 31, 1999. The increase was
primarily due to increases in licensing costs, goodwill, and property, plant and
equipment associated with the acquisitions that closed in 2000. In addition,
property, plant and equipment increased as a result of significant capital
expenditures in 2000. These increases were partially offset by a decrease in
investments, as Wireless Services previously held equity interests in portions
of wireless properties in the San Francisco Bay area and Los Angeles through AB
Cellular. These markets were consolidated as of December 31, 2000.
BROADBAND
Our Broadband segment offers a variety of services through our cable
broadband network, including traditional analog video and new services such as
digital video service, high-speed data service and broadband telephony service.
FOR THE YEARS ENDED DECEMBER 31, 2000 1999
-------------------------------- --------- ---------
(DOLLARS IN MILLIONS)
Revenue............................................. $ 8,217 $ 5,070
EBIT................................................ (1,175) (1,475)
EBITDA.............................................. 1,709 802
Capital additions................................... 4,963 4,759
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AT DECEMBER 31, 2000 1999
--------------- -------- -------
Total assets....................................... $114,681 $53,819
-------------------------
*EBITDA for Broadband excludes net losses from equity investments and other
income.
Results of operations for the year ended December 31, 2000, include the
results of MediaOne since its acquisition on June 15, 2000, while the year ended
December 31, 1999, does not include any results of MediaOne. Additionally, the
results of operations for the year ended December 31, 1999, include 10 months of
TCI's results, reflecting its acquisition in March 1999, while 2000 includes a
full 12 months of TCI's results.
REVENUE
Broadband revenue grew $3.1 billion in 2000, or 62.1%, compared with 1999.
Approximately $2.8 billion of the increase in revenue was due to the acquisition
of MediaOne in 2000 and TCI in 1999. In addition, revenue from new services
(digital video, high-speed data, and broadband telephony) and a basic-cable rate
increase contributed approximately $0.4 billion to the revenue increase.
At December 31, 2000, Broadband serviced approximately 16.0 million
basic-cable customers, passing approximately 28.3 million homes, compared with
11.4 million basic-cable customers, passing approximately 19.7 million homes at
December 31, 1999. The increase reflects the acquisition of MediaOne. At
December 31, 2000, we provided digital video service to approximately 2.8
million customers, high-speed data service to approximately 1.1 million
customers, and broadband telephony service to approximately 547,000 customers.
This compares with approximately 1.8 million digital-video customers,
approximately 207,000 high-speed data customers, and nearly 8,300 broadband
telephony customers at the end of 1999.
EBIT/EBITDA
EBIT in 2000 was a deficit of $1.2 billion, an improvement of $0.3 billion,
or 20.4%. This improvement was due to approximately $0.5 billion of higher gains
on sales of businesses and investments, primarily gains on the swap of cable
properties with Cox and Comcast and the sale of our investment in Lenfest, and
$0.4 billion lower restructuring charges primarily associated with an in-process
research and development charge recorded in connection with the 1999 acquisition
of TCI. Also contributing to the improvement were lower pretax losses from
equity investments of $0.5 billion, due in part to a $0.3 billion improvement
from our investment in Cablevision due to gains from cable-system sales. These
improvements were largely offset by the impact of the acquisition of MediaOne as
well as TCI of approximately $0.5 billion and higher expenses associated with
high-speed data and broadband telephony services of approximately $0.4 billion.
EBITDA, which excludes net losses from equity investments and other income,
was $1.7 billion in 2000, an improvement of $0.9 billion compared with 1999.
This improvement was due to the impact of the MediaOne and TCI acquisitions of
$0.7 billion and lower restructuring charges of $0.4 billion. Higher expenses
associated with high-speed data and broadband telephony of approximately $0.2
billion offset these increases.
OTHER ITEMS
Capital additions increased 4.3% to approximately $5.0 billion in 2000,
from $4.8 billion in 1999. The increase was due to higher capital expenditures
of $0.8 billion primarily due to MediaOne, which was almost entirely offset by
decreased contributions to various nonconsolidated investments of $0.7 billion.
In 1999, spending was largely directed toward cable-distribution systems,
focusing on the upgrade of cable plant-assets, as well as equity infusions into
various investments.
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Total assets at December 31, 2000, were $114.7 billion compared with $53.8
billion at December 31, 1999. The increase in total assets was primarily due to
the MediaOne acquisition and an increase in property, plant and equipment as a
result of capital expenditures, net of depreciation expense. These increases
were partially offset by a decrease in the mark-to-market valuation of certain
investments.
CORPORATE AND OTHER
This group reflects the results of corporate staff functions, the
elimination of transactions between segments, as well as the results of
international operations and ventures and Excite@Home.
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------- ------- -------
(DOLLARS IN MILLIONS)
Revenue........................................... $ (148) $ 569 $ 647
EBIT.............................................. (4,167) (1,625) (3,248)
EBITDA*........................................... (3,171) (871) (2,916)
Capital additions................................. 2,150 1,494 594
AT DECEMBER 31, 2000 1999
--------------- ------- -------
Total assets...................................... $18,463 $15,535
REVENUE
Revenue for corporate and other primarily includes the elimination of
intercompany revenue of negative $0.8 billion (an increase of $0.1 billion from
1999), revenue from Excite@Home of $0.2 billion (which was consolidated
beginning on September 1, 2000), and revenue from our international operations
and ventures of $0.3 billion (a decline of $0.9 billion from 1999). The
international operations and ventures revenue decrease was largely due to the
revenue impact of businesses contributed to Concert and due to the impact of the
divestment of certain businesses.
For 1999, revenue decreased $0.1 billion, or 12.0%. The decline was driven
by an increase in the elimination of intercompany revenue and the sale of AT&T
Solutions Customer Care (ASCC) in 1998, partially offset by growth in
international operations and ventures.
EBIT/EBITDA
EBIT and EBITDA deficits in 2000 increased $2.5 billion and $2.3 billion to
$4.2 billion and $3.2 billion, respectively. The increases in the deficits were
largely related to Excite@Home. In 2000, restructuring and other charges, net of
minority interest, were $2.8 billion higher primarily due to goodwill impairment
charges recorded by Excite@Home and AT&T related to Excite@Home. Other impacts
included a charge of approximately $0.5 billion for the fair market value
increase of put options held by Comcast and Cox related to Excite@Home, and
operating losses from Excite@Home. Partially offsetting these declines were an
increase in the pension credit due to a higher pension trust asset base
resulting from increased investment returns, and lower expenses associated with
our continued efforts to reduce costs, which aggregated approximately $1.0
billion. In addition, higher net gains on sales of investments and an increase
in interest income increased EBIT and EBITDA by approximately $0.6 billion.
In 1999, EBIT and EBITDA deficits improved by $1.6 billion and $2.0 billion
to $1.6 billion and $0.9 billion, respectively. The improvements were driven by
$2.1 billion of lower net restructuring and other charges in 1999 compared with
1998, partially offset by lower gains on the sales of businesses and lower
interest income, which negatively impacted EBIT and EBITDA by $0.3 billion.
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Additionally, EBIT was impacted by dividends on trust preferred securities. In
1998, AT&T recorded a gain on the sale of ASCC.
OTHER ITEMS
Capital additions increased $0.7 billion in 2000. The increase was driven
by our investment in 2000 in Net2Phone, Inc. (Net2Phone), partially offset by
lower investments in international nonconsolidated subsidiaries. Capital
additions increased $0.9 billion in 1999 reflecting increased international
equity investments that support our global strategy.
Total assets increased $2.9 billion at December 31, 2000, primarily due to
our investments in Concert and Net2Phone.
LIBERTY MEDIA GROUP
LMG produces, acquires and distributes entertainment, educational and
informational programming services through all available formats and media. LMG
is also engaged in electronic-retailing services, direct-marketing services,
advertising sales relating to programming services, infomercials and transaction
processing. Earnings from LMG were $1.5 billion in 2000 compared with losses of
$2.0 billion from the date of acquisition through December 31, 1999. The
increase was primarily due to gains on dispositions, including gains associated
with the mergers of various companies that LMG had investments in. Gains were
recorded for the difference between the carrying value of LMG's interest in the
acquired company and the fair value of securities received in the merger. In
addition, lower stock compensation expense in 2000 compared with 1999
contributed to the increase. These were partially offset by impairment charges
recorded on LMG's investments to reflect other than temporary declines in value
and higher losses relating to LMG's equity affiliates.
LIQUIDITY
FOR THE
THREE MONTHS
ENDED MARCH 31,
------------------
DOLLARS IN MILLIONS 2001 2000
------------------- ------- -------
CASH FLOWS:
Provided by operating activities.................. $ 1,938 $ 2,528
Used in investing activities...................... (3,184) (5,001)
Provided by financing activities.................. 1,256 1,551
In the first quarter of 2001, net cash provided by operating activities
decreased $0.6 billion, compared with the prior year period. The decrease was
primarily driven by decreases in accounts payable and net income excluding the
noncash income items. These decreases were partially offset by lower
receivables.
AT&T's investing activities resulted in a net use of cash of $3.2 billion
for the first quarter of 2001, compared with use of cash of $5.0 billion for the
first quarter of 2000. During the first quarter of 2001, AT&T paid approximately
$3.9 billion for capital expenditures and received approximately $0.6 billion
primarily related to the net dispositions of businesses. During the first
quarter of 2000, AT&T spent approximately $3.2 billion on capital expenditures,
$1.1 billion primarily for investments in cable and wireless businesses and
loaned $1.0 billion to Concert.
During the first quarter of 2001, net cash provided by financing activities
was $1.3 billion, compared with $1.6 billion for the first quarter of 2000.
During the first quarter of 2001, AT&T received $9.8 billion from the issuance
of convertible preferred stock to NTT DoCoMo and $6.5 billion from the bond
offering completed by AT&T Wireless, proceeds which in part were used
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to repay short-term debt of $14.7 billion. During the first quarter of 2000,
AT&T received $3.2 billion from the issuance of short-term notes. This source of
cash was partially offset by the repayment of long-term debt of $1.0 billion and
the payment of dividends of $0.8 billion.
At March 31, 2001, we had current assets of $16.3 billion and current
liabilities of $34.4 billion. A significant portion of the current liabilities,
$17.2 billion, relates to short-term notes, the majority of which were
commercial paper or debt with an original maturity of one year or less. During
the first quarter of 2001, we continued to make progress in reducing our debt.
We have used proceeds received from the NTT DoCoMo transaction and the Wireless
bond offering to retire $14.7 billion of the short-term debt. We expect that we
will retire a portion of the remaining short-term debt with other financing
arrangements, including the monetization of publicly-held securities, sales of
certain non-strategic assets and investments, and securitization of certain
accounts receivable. During the quarter we have closed or announced the sale of
investments or assets, which will result in gross cash proceeds of approximately
$4.8 billion. Subsequent to March 31, 2001, we also entered into a program to
securitize a small percentage of our Consumer accounts receivable to receive up
to $0.5 billion, which will be used to retire a portion of the commercial paper.
At March 31, 2001, we had a current liability of $2.6 billion, reflecting
our obligation under put options held by Comcast and Cox. In January 2001,
Comcast and Cox exercised their rights under the put options and elected to
receive AT&T stock in lieu of cash. In addition, on February 28, 2001, we
exercised our registration rights in TWE and formally requested TWE to begin the
process of converting the limited partnership into a corporation with registered
equity securities. On May 14, 2001, we named Credit Suisse First Boston as our
investment banker for the registration process under the TWE partnership
agreement. We also have requested Cablevision Systems Corporation (Cablevision)
to register for sale up to 30 million Cablevision shares currently owned by
AT&T.
In connection with the planned split-off of AT&T Wireless, we announced
that we will retain up to $3 billion in shares of AT&T Wireless Services, which
we will dispose of within six months following the split-off. Another aspect of
our restructuring is the expected sale, in late-2001, of a new class of stock
which will track our Broadband business.
AT&T is in a joint venture with Alaska Native Wireless (ANW), which
participated in the Federal Communication Commission's recent auction of license
spectrum. In January 2001, the auction was completed, and ANW was the highest
bidder on approximately $2.9 billion in licenses. AT&T has committed to
contribute $2.6 billion to fund this purchase. As of March 31, 2001, AT&T
Wireless Group funded approximately $309 of the commitment and has committed to
provide the remaining approximate $2.3 billion when such licenses are granted.
Since the announced restructuring plans to create four new businesses,
AT&T's debt ratings have been under review by the applicable rating agencies. As
a result of this review, AT&T's ratings have been either downgraded and/or put
on credit watch with negative outlook. These actions will result in an increased
cost of future borrowings and will limit our access to the capital markets.
AT&T is pursing various measures to reduce its debt level. However, there
can be no assurance that we will be able to obtain financing on terms that are
acceptable to us. If these efforts cannot be completed successfully or on terms
and within the timeframe contemplated, AT&T's financial condition would be
materially adversely affected. Some of these adverse conditions include the
company's ability to pursue acquisitions or make capital expenditures to expand
its network and cable plant, or pay dividends.
On December 28, 2000, we entered into a 364-day, $25 billion
revolving-credit facility syndicated to 39 banks. This facility was reduced to
$17.5 billion primarily as a result of the NTT DoCoMo investment of $9.8
billion, the AT&T Wireless bond offering and the sale of Japan Telecom. The
364-day facility exists principally as a back-up source to our commercial paper
program. On March 31, 2001, this facility was unused and AT&T has no current
plans to borrow against this
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facility. In addition, on March 23, 2001, AT&T Wireless Services entered into
$2.5 billion in revolving credit facilities. The facilities include a 364-day
tranche and a 5-year tranche. The facilities are for general corporate purposes.
Also in connection with our restructuring plan, we have reviewed our
dividend policy as it relates to each of the new businesses. On December 20,
2000, we announced that the board of directors reduced AT&T's quarterly dividend
to $0.0375 per share, from $0.22 per share.
Our board of directors has the power to make determinations that may impact
the financial and liquidity position of each of the tracking stock groups. This
power includes the ability to set priorities for use of capital and debt
capacity, to determine cash management policies and to make decisions regarding
whether to make capital expenditures and as to the timing and amount of any
capital expenditures. All actions by the board of directors are subject to the
board members fiduciary duties to all shareholders of AT&T as a group and not
just to holders of a particular class of tracking stock and to our policy
statements, by-laws and inter-company agreements. As a result of this discretion
of our board of directors, it may be difficult for investors to assess each
group's liquidity and capital resource needs and in turn the future prospects of
each group based on past performance.
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- -------- -------- --------
(DOLLARS IN MILLIONS)
CASH FLOW OF CONTINUING OPERATIONS:
Provided by operating activities............. $ 13,307 $ 11,521 $ 10,217
(Used in) provided by investing activities... (39,934) (27,043) 3,582
Provided by (used in) financing activities... 25,729 13,386 (11,049)
In 2000, net cash provided by operating activities of continuing operations
increased $1.8 billion. The increase was primarily driven by an increase in net
income excluding the noncash impact of depreciation and amortization, net
restructuring and other charges and minority interest income (expense). In 1999,
net cash provided by operating activities of continuing operations increased
$1.3 billion, primarily due to an increase in net income, excluding the noncash
impact of depreciation and amortization, net restructuring and other charges and
the impact of earnings and losses from equity investments. This increase was
partially offset by higher receivables, due primarily to higher revenue, and an
increase in tax payments from the gain on the 1998 sale of UCS.
AT&T's investing activities resulted in a net use of cash of $39.9 billion
in 2000, compared with a net use of cash of $27.0 billion in 1999. During 2000,
AT&T used approximately $21.4 billion for acquisitions of businesses, primarily
MediaOne, and spent $15.5 billion on capital expenditures. During 1999, AT&T
spent approximately $14.3 billion on capital expenditures, approximately $6.7
billion on acquisitions of businesses, primarily AGNS, and contributed $5.5
billion of cash to LMG. During 1998, we received $10.8 billion related to the
sales of businesses, including receivables from UCS, partially offset by capital
expenditures of $7.8 billion.
During 2000, net cash provided by financing activities was $25.7 billion,
compared with $13.4 billion in 1999. In 2000, AT&T received $10.3 billion from
the AT&T Wireless Group tracking stock offering and borrowed an additional $17.0
billion of short-term debt and $2.5 billion of net long-term debt. These were
partially offset by the payment of $3.0 billion in dividends. In 1999, AT&T
received $10.2 billion from the issuance of commercial paper and short-term
debt, $5.6 billion from the net issuance of long-term debt and $4.6 billion from
the issuance of redeemable preferred securities. These sources of cash were
partially offset by the acquisition of treasury shares of $4.6 billion and the
payment of dividends of $2.7 billion. Cash used in financing activities in 1998
primarily related to repayment of long-term and short-term debt, the acquisition
of treasury shares and dividends paid on common stock.
At December 31, 2000, we had current assets of $17.1 billion and current
liabilities of $50.9 billion. A significant portion of the current liabilities,
$31.9 billion, relates to short-term notes,
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the majority of which were commercial paper or debt with an original maturity of
one year or less. We expect that we will retire a portion of the short-term debt
with other financing arrangements, including the monetization of publicly-held
securities, sales of certain non-strategic assets and investments, and
securitization of certain accounts receivable. At December 31, 2000, we had a
current liability of $2.6 billion, reflecting our obligation under put options
held by Comcast and Cox. In January 2001, Comcast and Cox exercised their rights
under the put options and elected to receive AT&T stock in lieu of cash. Since
December 31, 2000, we have announced the sale of investments or assets, which
will result in gross cash proceeds of approximately $4.6 billion. In addition,
on February 28, 2001, we exercised our registration rights in TWE and formally
requested TWE to begin the process of converting the limited partnership into a
corporation with registered equity securities. We have, however, continued our
ongoing discussions with AOL Time Warner for the sale of our stake in TWE.
In connection with the planned split-off of AT&T Wireless, we announced
that we will retain up to $3.0 billion in shares of AT&T Wireless, which we will
dispose of within six months following the split-off. Also in connection with
the split-off, on March 6, 2001, AT&T Wireless completed a $6.5 billion global
bond offering. AT&T Wireless will ultimately use the proceeds to repay $4.8
billion in notes receivable and preferred stock that AT&T Common Stock Group
holds in AT&T Wireless. In addition on March 23, 2001, AT&T Wireless entered
into $2.5 billion in revolving credit facilities. The facilities include a
364-day tranche and a 5-year tranche. The facilities are for general corporate
purposes.
Another aspect of our restructuring is the expected sale, in late-2001, of
a new class of stock which will track our Broadband business.
AT&T is in a joint venture with Alaska Native Wireless (ANW). At December
31, 2000, AT&T had committed to fund ANW up to $2.4 billion based on the outcome
of FCC license spectrum auction. In January 2001, the auction was completed and
ANW was the highest bidder on approximately $2.9 billion in licenses.
Since the announced restructuring plans to create four new businesses,
AT&T's debt ratings have been under review by the applicable rating agencies. As
a result of this review, AT&T's ratings have been downgraded and continued to be
on credit watch with negative outlook. These actions will result in an increased
cost of future borrowings and will limit our access to the capital markets.
AT&T is pursuing various measures to reduce its debt level. However, there
can be no assurance that we will be able to obtain financing on terms that are
acceptable to us. If these efforts cannot be completed successfully, or on terms
and within the timeframe contemplated, AT&T's financial condition would be
materially adversely affected. Some of these adverse conditions include the
company's ability to pursue acquisitions, make capital expenditures to expand
its network and cable plant, or pay dividends.
On December 28, 2000, we entered into a 364-day, $25 billion
revolving-credit facility syndicated to 39 banks, which was unused at December
31, 2000. As a result of certain transactions subsequent to December 31, 2000,
specifically the investment by NTT DoCoMo of $9.8 billion for a new class of
AT&T preferred stock, and the $6.5 billion AT&T Wireless bond offering, this
credit facility was reduced to $18.3 billion.
Also in connection with our restructuring, we have reviewed our dividend
policy as it relates to each of the new businesses. On December 20, 2000, we
announced that the board of directors reduced AT&T's quarterly dividend to
$0.0375 per share, from $0.22 per share.
OUR BOARD OF DIRECTORS HAS THE POWER TO MAKE DETERMINATIONS THAT MAY IMPACT
THE FINANCIAL AND LIQUIDITY POSITION OF EACH OF THE TRACKING STOCK GROUPS. THIS
POWER INCLUDES THE ABILITY TO SET PRIORITIES FOR USE OF CAPITAL AND DEBT
CAPACITY, TO DETERMINE CASH MANAGEMENT POLICIES AND TO MAKE DECISIONS REGARDING
WHETHER TO MAKE CAPITAL EXPENDITURES AND AS TO THE TIMING AND AMOUNT OF ANY
CAPITAL EXPENDITURES. ALL ACTIONS BY THE BOARD OF DIRECTORS ARE SUBJECT TO THE
BOARD MEMBERS FIDUCIARY DUTIES TO ALL SHAREHOLDERS OF AT&T AS A GROUP AND NOT
JUST TO HOLDERS OF A PARTICULAR CLASS
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OF TRACKING STOCK AND TO OUR POLICY STATEMENTS, BY-LAWS AND INTER-COMPANY
AGREEMENTS. AS A RESULT OF THIS DISCRETION OF OUR BOARD OF DIRECTORS, IT MAY BE
DIFFICULT FOR INVESTORS TO ASSESS EACH GROUP'S LIQUIDITY AND CAPITAL RESOURCE
NEEDS AND IN TURN THE FUTURE PROSPECTS OF EACH GROUP BASED ON PAST PERFORMANCE.
RISK MANAGEMENT
We are exposed to market risk from changes in interest and foreign exchange
rates, as well as changes in equity prices associated with affiliate companies.
In addition, we are exposed to market risk from fluctuations in the prices of
securities which we monetized through the issuance of debt. On a limited basis,
we use certain derivative financial instruments, including interest rate swaps,
options, forwards, equity hedges and other derivative contracts, to manage these
risks. We do not use financial instruments for trading or speculative purposes.
All financial instruments are used in accordance with board-approved policies.
We use interest rate swaps to manage the impact of interest rate changes on
earnings and cash flows and also to lower our overall borrowing costs. We
monitor our interest rate risk on the basis of changes in fair value. Assuming a
10% downward shift in interest rates at March 31, 2001, the fair value of
unhedged debt would have increased by approximately $0.6 billion. Assuming a 10%
downward shift in interest rates, the fair value of interest rate swaps and the
underlying hedged debt would have changed by $10 million and $3 million at
December 31, 2000 and 1999, respectively. In 2000, we entered into a combined
interest rate, forward contract to hedge foreign-currency-denominated debt.
Assuming a 10% downward shift in both interest rates and the foreign currency,
the fair value of the contract and the underlying hedged debt would have changed
by $88 million. In addition, certain debt is indexed to the market prices of
securities we own. Changes in the market prices of these securities result in
changes in the fair value of this debt. Assuming a 10% downward change in the
market price of these securities, the fair value of the underlying debt and
securities would have decreased by $534 million at December 31, 2000. Assuming a
10% downward shift in interest rates at December 31, 2000 and 1999, the fair
value of unhedged debt would have increased by $1.2 billion and $938 million,
respectively.
We use forward and option contracts to reduce our exposure to the risk of
adverse changes in currency exchange rates. We are subject to foreign exchange
risk for foreign-currency-denominated transactions, such as debt issued. In
addition, in 1999 we were subject to foreign exchange risk related to
reimbursements to foreign telephone companies for their portion of the revenue
billed by AT&T for calls placed in the United States to a foreign country. We
monitor our foreign exchange rate risk on the basis of changes in fair value.
Assuming a 10% appreciation in the U.S. dollar at December 31, 2000 and 1999,
the fair value of these contracts would have resulted in additional unrealized
losses of $6 million and $29 million, respectively. Because these contracts are
entered into for hedging purposes, we believe that these losses would be largely
offset by gains on the underlying firmly committed or anticipated transactions.
We use equity hedges to manage our exposure to changes in equity prices
associated with stock appreciation rights (SARs) of affiliated companies.
Assuming a 10% decrease in equity prices of affiliated companies, the fair value
of the equity hedges would have decreased by $29 million and $81 million at
December 31, 2000 and 1999, respectively. Because these contracts are entered
into for hedging purposes, we believe that the decrease in fair value would be
largely offset by gains on the underlying transaction.
In order to determine the changes in fair value of our various financial
instruments, we use certain modeling techniques, namely Black-Scholes, for our
SARs and equity collars. We apply rate sensitivity changes directly to our
interest rate swap transactions and forward rate sensitivity to our foreign
currency forward contracts.
The changes in fair value, as discussed above, assume the occurrence of
certain adverse market conditions. They do not consider the potential effect of
favorable changes in market factors and do not represent projected losses in
fair value that we expect to incur. Future impacts would be based on
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actual developments in global financial markets. We do not foresee any
significant changes in the strategies used to manage interest rate risk, foreign
currency rate risk or equity price risk in the near future.
FINANCIAL CONDITION
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
Total assets.................................... $241,141 $242,223
Total liabilities............................... 118,881 129,432
Total shareowners' equity....................... 103,963 103,198
Total assets decreased $1.0 billion, or 0.4%, to $241.1 billion at March
31, 2001 from $242.2 billion at December 31, 2000. The decrease was primarily
due to reduced goodwill, primarily driven by the Excite@Home impairment charge,
lower trade receivables and the lower market value of our short-term
investments. Partially offsetting this decrease was an increase in property,
plant and equipment resulting from capital expenditures net of depreciation.
Total liabilities decreased $10.6 billion, or 8.2%, to $118.9 billion at
March 31, 2001 from $129.4 billion at December 31, 2000. This decrease primarily
resulted from the payment of short-term debt and accounts payable with the
proceeds from the NTT DoCoMo agreement. Partially offsetting this decrease was
the issuance of $6.5 billion in long-term debt through AT&T Wireless Services.
Minority Interest decreased $0.7 billion, or 13.5%, to $4.2 billion at
March 31, 2001 from $4.9 billion at December 31, 2000. This decrease primarily
reflects the losses of Excite@Home, primarily driven by an asset impairment
charge.
Total shareowners' equity increased $0.8 billion, or 0.7%, to $104.0
billion at March 31, 2001 from $103.2 billion at December 31, 2000. This
increase primarily resulted from the issuance of stock to acquire cable-systems
from Cablevision, and an increase in additional paid-in capital related to the
NTT DoCoMo warrants, as well as issuance of stock in connection with our
employee benefit plans.
Net debt-to-annualized EBITDA was 3.19x at March 31, 2001 as compared with
3.28x at December 31, 2000, reflecting lower EBITDA partially offset by lower
debt. The debt ratio (debt divided by total debt and equity) was 39.5% at March
31, 2001 as compared with 46.2% at December 31, 2000. For purposes of this
calculation, equity includes the convertible quarterly trust preferred
securities, redeemable preferred stock of subsidiary as well as convertible
preferred stock. The decrease in debt-to-capital was driven by the repayment of
short-term debt offset somewhat by the issuance of wireless bonds.
In addition, included in debt is approximately $8.6 billion of notes, which
are exchangeable into or collateralized by securities we own. Excluding this
debt, the ratio of debt to total capital at March 31, 2001 was 35.6%.
AT DECEMBER 31, 2000 1999
--------------- --------- ---------
(DOLLARS IN MILLIONS)
Total assets...................................... $242,223 $169,406
Total liabilities................................. 129,432 83,388
Total shareowners' equity......................... 103,198 78,927
Total assets increased $72.8 billion, or 43.0%, at December 31, 2000,
primarily due to the impact of the MediaOne acquisition, which resulted in
increased goodwill, franchise costs, other investments including TWE and
Vodafone Group plc; and the addition of property, plant and equipment. Property,
plant and equipment also increased due to capital expenditures made during the
year, net of depreciation expense and equipment contributed to Concert. This
equipment contribution, as well as a
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$1.0 billion loan to Concert, and our investment in Net2Phone are reflected as
an increase to other investments. Additionally, other receivables increased due
to Concert. Wireless acquisitions, including the impact of consolidating former
equity investments, resulted in increased licensing costs.
Total liabilities at December 31, 2000, increased $46.0 billion, or 55.2%,
primarily due to the impact of the MediaOne acquisition, including debt of
MediaOne and borrowings to fund the acquisition, as well as the consolidation of
Excite@Home. In addition, total debt increased due to the monetization of our
investments in Microsoft Corporation and Comcast.
Minority interest increased $2.5 billion to $4.9 billion, primarily
reflecting the minority interest of our ownership of Excite@Home resulting from
the consolidation of Excite@Home beginning September 1, 2000, and the preferred
stock outstanding of a MediaOne subsidiary.
Total shareowners' equity was $103.2 billion at December 31, 2000, an
increase of 30.8% from December 31, 1999. This increase was primarily due to the
issuance of AT&T common stock for the MediaOne acquisition as well as the
issuance of AT&T Wireless Group tracking stock.
The ratio of total debt to total capital, excluding LMG (debt divided by
total debt and equity, excluding LMG) was 46.2% at December 31, 2000, compared
with 43.0% at December 31, 1999. The equity portion of this calculation includes
convertible trust preferred securities, as well as subsidiary redeemable
preferred stock. The increase was primarily driven by higher debt associated
with the MediaOne merger, largely offset by a higher equity base associated with
the MediaOne merger and the AT&T Wireless Group tracking stock offering. The
ratio of debt (net of cash) to EBITDA was 3.28X at December 31, 2000, compared
with 1.88X at December 31, 1999, reflecting additional debt associated with the
MediaOne merger. Included in debt was approximately $8.7 billion of notes, which
are exchangeable into or collateralized by securities we own. Excluding this
debt, the ratio of net-debt-to-EBITDA at December 31, 2000, was 2.84X.
NEW ACCOUNTING PRONOUNCEMENTS
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities -- a
Replacement of FASB Statement No. 125." This statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. Under these standards, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial assets when
control has been surrendered, and derecognizes liabilities when extinguished.
This statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. This
statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. AT&T does not
expect that the adoption of SFAS No. 140 will have a material impact on AT&T's
results of operations, financial position or cash flows.
SUBSEQUENT EVENTS
On May 7, 2001, AT&T agreed to sell our 99.75% interest in an entity owning
the Baltimore Maryland cable-system serving approximately 110,000 customers to
Comcast for approximately $0.5 billion. Pending certain closing conditions and
regulatory approvals, the transaction is expected to close in second or third
quarter of 2001.
On April 30, 2001, AT&T received 63.9 million common shares of AT&T common
held by Comcast Corporation in exchange for an entity owning cable-systems which
serves approximately 590 thousand customers in six states. The transaction
resulted in a pretax loss of $0.3 billion.
On April 27, 2001, AT&T completed the sale announced on February 27, 2001,
of our 10% stake in Japan Telecom Co. Ltd to Vodafone Group plc for $1.35
billion in cash. The proceeds from the
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transaction were split evenly between AT&T and AT&T Wireless Group. The
transaction resulted in a pretax gain of approximately $0.9 billion.
On April 26, 2001, AT&T initiated a 364-day accounts receivable
securitization program providing for up to $0.5 billion of funding. Under the
program, a small percentage of consumer accounts receivable will be sold on a
discounted, revolving basis, to a special purpose, wholly-owned subsidiary,
which assigns interests in such receivables to unrelated third-party financing
entities. The proceeds will be used for general corporate purposes, including
the repayment of commercial paper.
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REASONS FOR THE RESTRUCTURING PROPOSALS
The creation of AT&T Broadband Group tracking stock and AT&T Consumer
Services Group tracking stock and the spin-off of AT&T Communications Services,
Inc. are part of our previously announced plan to restructure AT&T. If the
proposals are approved and implemented in their entirety, shareholders of AT&T
common stock will hold securities in two entities -- historic AT&T (which will
be renamed "AT&T Broadband Corp.") and a new company, AT&T Communications
Services, Inc. (which will be spun off from historic AT&T and renamed "AT&T
Corp."). Shareholders will have two different securities in the new
company -- shares of common stock and shares of a new Consumer Services Group
tracking stock. Our board of directors recommends these actions based on its
view that AT&T's restructuring plan will promote greater market recognition of
the value of the various AT&T businesses. Our board of directors considered the
following factors among others in approving and recommending that shareholders
approve the proposals.
BACKGROUND OF THE RESTRUCTURING PLAN
By 1997, AT&T realized that competitive and regulatory forces impacting the
telecommunications business required it to undertake a fundamental shift in its
strategy. First, AT&T decided to invest in facilities-based businesses and
assets to enable it to reduce its reliance on the RBOCs for the local component
of its service and to enable AT&T to better serve its customers by providing
end-to-end communications services on its own. In addition, AT&T decided to
diversify its businesses to reduce its reliance on its long-distance voice
business and to increase the percentage of its businesses represented by growth
businesses.
To accomplish this strategy, AT&T undertook a series of major acquisitions.
In early 1998, AT&T agreed to acquire Teleport Communications Group Inc., a
provider of local telephone services to business customers. In 1998, AT&T agreed
to acquire TCI and in May 1999, AT&T agreed to acquire MediaOne. As a result of
these last two acquisitions, AT&T became the nation's largest cable company.
These three acquisitions provided AT&T with a significant facilities based
opportunity for direct access to its customers. In addition, these businesses,
together with AT&T Wireless Services, provided AT&T with a large base of growth
businesses.
AT&T had anticipated that its strong balance sheet and the cash generated
by its core long-distance voice business would be sufficient to fund its
acquisitions of, and capital expenditures required by, the cable and wireless
growth businesses. The core business was expected to be able to provide
sufficient resources until the growth businesses had time to realize the
benefits of their investment strategy.
In order to assist our wireless services business in meeting its capital
needs, AT&T sold shares of a tracking stock intended to reflect the financial
performance and economic value of a portion of our wireless services business.
However, the level of capital expenditures required by our wireless business
continued to rise as a result of factors such as the need to develop a
competitive third generation strategy and the need for investment in new
spectrum. At the same time, AT&T was facing a decline in its core voice long
distance business. These factors made it challenging to fund wireless' growth
strategy without creating a separate company for our wireless business.
AT&T began to face substantially greater than anticipated competition in
its core business. The ability of non-RBOC local telephone providers to offer
both local and long distance services, together with over-capacity in the
industry, made competition particularly severe. In addition, AT&T found that the
expected benefits of recent regulatory changes had not materialized and that
entry into local markets remained challenging.
The acquisitions of TCI and MediaOne, and the increased investments in
growth businesses, had increased AT&T's debt burden (which, as of March 31,
2001, was approximately $56.2 billion, including approximately $17.2 billion of
short-term debt). The benefits that AT&T's balance sheet
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were expected to provide to the growth businesses was reduced by the downgrade
of AT&T's debt ratings. Additionally, AT&T faced a decline in its common stock
price on a split adjusted basis from a price of $ per share on
to a recent price of $ per share on , 2001.
AT&T's board of directors determined that each of its businesses would be
better able to reach its full growth potential if AT&T restructured itself. On
October 25, 2000, AT&T announced its strategic restructuring plan. Effective
July 9, 2001, AT&T split off AT&T Wireless Services, Inc. as a separate company,
and effective August 10, 2001, AT&T split off Liberty Media Corporation as a
separate company. Although the separation of AT&T Communications Services, Inc.
from AT&T Broadband Corp. has the consequence of separating the principal assets
of TCI and MediaOne from AT&T's other businesses, AT&T's board of directors
believes that these acquisitions nonetheless accomplished AT&T's strategic goal
of creating diversification for its shareholders since AT&T shareholders will be
able to share in the growth potential of its broadband business after the
restructuring. Also, as a result of these acquisitions, if the restructuring
plan is approved and implemented, AT&T's shareholders will have on-going
investments in facilities-based communications companies.
GREATER MARKET RECOGNITION OF VALUE
AT&T believes that issuing securities intended to reflect the separate
performance of each of AT&T Broadband Group and AT&T Consumer Services Group
will result in greater market recognition and realization of the value,
individually and collectively, of AT&T and its distinct lines of business
represented by each of these groups and allow the market to evaluate each
group's results against those of its competitors.
Similarly, following the spin-off, as separate, stand-alone entities, AT&T
Broadband Corp. and AT&T Communications Services, Inc. will offer more focused
investment opportunities than those presented by a diversified AT&T. For
example, we believe that the fundamental structural decline in long distance
revenue and profit makes it harder for the market to discern the growth
potential of our broadband and data/IP services businesses. We expect that the
spin-off will promote a more efficient equity valuation for AT&T Broadband Corp.
common stock, AT&T common stock and new Consumer Services Group tracking stock.
GREATER FINANCIAL AND STRATEGIC FLEXIBILITY
AT&T believes that the creation of AT&T Broadband Group tracking stock and
AT&T Consumer Services Group tracking stock will provide AT&T (and, later, AT&T
Communications Services, Inc.) with greater financial flexibility. AT&T expects
that each tracking stock will assist it (and, later, AT&T Communications
Services, Inc.) in meeting its capital needs by creating an additional publicly
traded equity security that it can use to raise capital. In addition, the
creation of AT&T Broadband Group tracking stock and AT&T Consumer Services Group
tracking stock prior to the spin-off will allow AT&T to issue AT&T Broadband
Group tracking stock or AT&T Consumer Services Group tracking stock in potential
group-specific acquisitions and investments prior to the spin-off. This would
allow shareholders of an entity that AT&T Broadband Group or AT&T Consumer
Services Group acquires the opportunity to participate more directly in the
success of the business in which that entity engages rather than participating
in the much larger and more diversified AT&T enterprise.
In addition, the restructuring plan also is intended to permit each of AT&T
Broadband Corp. and AT&T Communications Services, Inc. to target a debt and
equity profile consistent with its own needs and comparable companies in its
industry and to prioritize its capital and invest in its own growth.
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Following the spin-off, with enhanced market recognition of the value of
each of AT&T Broadband Corp. and AT&T Communications Services, Inc., we expect
each company to be better positioned to pursue strategic acquisitions and
alliances to grow its businesses.
INCREASED SHAREHOLDER CHOICE
A corporation typically uses tracking stocks in situations where the
corporation has two or more businesses that have different investor profiles. In
this case, AT&T Broadband Group is a higher-risk, higher-growth potential
business focused on a distinct set of products and services, which contrast with
the more mature core businesses of AT&T Consumer Services Group. AT&T Consumer
Services Group consists of businesses offering a particular set of services and
targeting a particular type of customer, distinct from AT&T Business Services
Group. AT&T believes that the creation and issuance of AT&T Broadband Group
tracking stock and AT&T Consumer Services Group tracking stock will provide
investors with greater choice among the different types of investment currently
embedded in AT&T.
The creation of the tracking stocks is expected to be followed by the
spin-off, which will create two separate, distinct companies with different
investor profiles. Thus, the spin-off is intended to provide investors with an
opportunity to make an investment in different, separate entities and choose the
one(s) better suited to their investment needs without necessarily investing in
any other one.
REDUCE INDEBTEDNESS
AT&T believes that the creation and public offering of AT&T Broadband Group
tracking stock will raise funds that will allow AT&T to reduce its outstanding
indebtedness. By reducing indebtedness, AT&T intends to improve its financial
position and its credit rating.
MORE FOCUSED AND FLEXIBLE MANAGEMENT TEAMS BOTH BEFORE AND AFTER THE SPIN-OFF
Prior to the adoption of the restructuring plan, AT&T consisted of a number
of distinct businesses, including AT&T Wireless Services, AT&T Broadband
Services, AT&T Business Services and AT&T Consumer Services. The restructuring
plan would reduce the complexity inherent in managing an integrated enterprise
of this type. If the restructuring proposals are approved and implemented,
management of each separate group and company would have a greater ability to
focus on the execution of strategic objectives in its particular business and on
reacting to changes in its competitive environment. Each of our businesses would
be a smaller, but more focused and flexible, business unit, in a better position
to implement its respective business strategy and serve its customers more
effectively through quicker decision making, more efficient deployment of
resources, increased operational agility and enhanced responsiveness to
customers and markets and technological changes.
MANAGEMENT INCENTIVES
PRE-SPIN-OFF
We believe the existence of AT&T Broadband Group tracking stock and AT&T
Consumer Services Group tracking stock will permit the creation of more
effective management incentive and retention programs. In particular, we will be
able to grant stock options and other incentive awards to employees of each
group that are tied more directly to the performance of that group.
POST-SPIN-OFF
We expect the spin-off to enhance each of AT&T Broadband Corp.'s and AT&T
Communications Services, Inc.'s employees' motivation and to strengthen each
company's management's focus through incentive compensation programs tied to the
market performance of its separate common stock. The spin-off will enable each
of AT&T Broadband Corp. and AT&T Communications Services, Inc. to offer its
employees compensation more directly linked to the performance of its
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business than if both were a part of a single corporation, which we expect will
enhance each company's ability to attract and retain qualified personnel.
TAX CONSIDERATIONS
In addition, our board of directors considered that we expect that
implementation of the charter amendments and the completion of the spin-off will
not be taxable for U.S. federal income tax purposes to us, to AT&T
Communications Services, Inc. or to our shareholders.
POTENTIAL NEGATIVE CONSEQUENCES OF THE PROPOSALS
Our board of directors also considered the following potential adverse
consequences of the creation of the tracking stocks and the completion of the
spin-off, including the following:
- with regard to the tracking stocks, our board of directors considered
that:
-- there can be no assurance as to the degree to which the market price
of the tracking stocks will reflect the separate performance of the
respective groups, and
-- holders of common stock and of the tracking stocks will continue to
bear the risks associated with an investment in a single corporation
and all of AT&T's businesses, assets and liabilities;
- with regard to the spin-off, our board of directors considered that:
-- there can be no assurance as to the market for, or the trading prices
of, AT&T Broadband Corp. common stock and AT&T Communications
Services, Inc. common stock following the spin-off,
-- the lack of diversification and smaller size could affect each of AT&T
Broadband Corp.'s and AT&T Communications Services, Inc.'s ability to
achieve economies of scale, could create capital and size constraints
that did not previously exist, could create increased costs due to
decreased purchasing power and could limit each company's ability to
obtain financing, and
-- as more focused companies, the earnings of each of AT&T Broadband
Corp. and AT&T Communications Services, Inc. will be more closely tied
to its particular performance and its industry performance and as a
result their securities could be subject to greater volatility.
Our board of directors also considered the risk factors related to the
creation of AT&T Broadband Group tracking stock and AT&T Consumer Services Group
tracking stock, described under "Risk Factors Relating to the Tracking Stock
Amendments," and the spin-off described under "Risk Factors Relating to the
Spin-off of AT&T Communications Services, Inc."
Our board of directors believes, however, that, on balance, the positive
aspects of the tracking stocks and the spin-off outweigh any potentially adverse
consequences.
RECOMMENDATION OF OUR BOARD OF DIRECTORS
Our board of directors has approved each of the charter amendment
proposals, the spin-off proposal, the incentive plan proposals and the proposal
to amend the employee stock purchase plan and recommends that shareholders vote
FOR each of these proposals.
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THE BROADBAND CHARTER AMENDMENT PROPOSAL
We urge all shareholders to read the form of proposed charter amendment, a
copy of which we have attached as Appendix A to this proxy statement.
GENERAL
We are proposing the following amendment to our charter, which we refer to
as the Broadband charter amendment proposal:
Broadband Group tracking stock amendment -- an amendment to create a new
class of common stock called Broadband Group common stock, par value $1.00
per share, which we intend to reflect the financial performance and
economic value of our broadband services business. We refer to this stock
as "AT&T Broadband Group tracking stock."
Approval of the Broadband charter amendment proposal requires a majority of
the voting power of all outstanding shares of AT&T common stock to vote in its
favor. OUR BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR APPROVAL.
Any shares not voted, whether by abstention, broker non-vote or otherwise, have
the effect of a vote against the Broadband charter amendment proposal.
BROADBAND GROUP TRACKING STOCK AMENDMENT
The Broadband Group tracking stock amendment would, among other things:
- Define "AT&T Broadband Group," the financial performance and economic
value of which we intend AT&T Broadband Group tracking stock to reflect.
AT&T Broadband Group will consist of the assets and liabilities shown in
the combined balance sheets of AT&T Broadband Group and will include:
-- AT&T's cable television and cable telephone service customers;
-- AT&T's cable television and cable telephone licenses that solely
support cable telephone services;
-- AT&T's cable television and cable telephone systems and operations
that solely support cable telephone services;
-- AT&T's cable television and cable telephone support infrastructure,
including ordering, provisioning, billing and care;
-- AT&T's interest in partnerships and affiliates providing cable
television services, such as Cablevision and Time Warner
Entertainment; and
-- AT&T's interest in Excite@Home, its affiliate providing high-speed
cable Internet services.
- Establish the terms of AT&T Broadband Group tracking stock, consisting of
authorized shares and entitling the holders of AT&T
Broadband Group tracking stock to of a vote per share, voting as
one class with all other classes and series of AT&T common stock and
preferred stock of AT&T with respect to all matters to be voted upon by
AT&T shareholders, except as otherwise required by applicable state law
or by the terms of any other class or series of AT&T capital stock.
We include a more complete description of AT&T Broadband Group tracking
stock under "-- Terms of the Broadband Group Tracking Stock Amendment."
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RECOMMENDATION OF OUR BOARD OF DIRECTORS
OUR BOARD OF DIRECTORS HAS APPROVED THE BROADBAND CHARTER AMENDMENT
PROPOSAL AND RECOMMENDS THAT YOU VOTE FOR THE BROADBAND CHARTER AMENDMENT
PROPOSAL.
TERMS OF THE BROADBAND GROUP TRACKING STOCK AMENDMENT
GENERAL
If we adopt the Broadband Group tracking stock amendment, we will amend our
charter to authorize billion shares of AT&T Broadband Group
tracking stock. If we adopt the Consumer Services Group tracking stock
amendment, we will amend our charter to authorize billion shares of AT&T
Consumer Services Group tracking stock. Approval of either tracking stock
proposal will also allow our board of directors to amend our charter to
eliminate all references to AT&T Wireless Group tracking stock, Class A Liberty
Media Group common stock, Class B Liberty Media Group common stock, and AT&T
Wireless Group preferred tracking stock, following the applicable split-off, and
to redesignate such series as shares of common stock or preferred stock, as
applicable, which would be available for issuance. Currently, 16.5 billion
shares of AT&T capital stock are authorized, consisting of 100 million shares of
preferred stock and 16.4 billion shares of common stock. If both tracking stock
proposals are approved, the total number of authorized shares of AT&T common
stock will be billion, of which billion will be designated
AT&T Broadband Group tracking stock and billion will be designated
AT&T Consumer Services Group tracking stock. As of July 10, 2001, we had
outstanding shares of AT&T common stock. As of July 10, 2001,
shares of a series of preferred stock of AT&T were held by subsidiaries of AT&T.
AT&T BROADBAND GROUP
We intend AT&T Broadband Group tracking stock to reflect the financial
performance and economic value of AT&T Broadband Group. The Broadband Group
tracking stock amendment defines "AT&T Broadband Group" generally as the
interest of AT&T or any of its subsidiaries in all of the businesses, assets and
liabilities reflected in the unaudited combined financial statements of AT&T
Broadband Group, dated December 31, 2000, as included in this proxy statement,
including any successor to AT&T Broadband Group by merger, consolidation or sale
of all or substantially all of its assets. The Broadband Group tracking stock
amendment contains adjustments to the definition of "AT&T Broadband Group" to
reflect, among other things, related assets and liabilities (including
contingent liabilities), net income and net losses arising after the date of
these financial statements, contributions and allocations of assets, liabilities
and businesses between the groups and acquisitions and dispositions. AT&T
Broadband Group is not a stand-alone entity, and AT&T's board of directors will
govern AT&T Broadband Group and could make operational and financial decisions
or implement policies that disproportionately affect the business of AT&T
Broadband Group. AT&T's board of directors may transfer funds or reallocate
assets, liabilities, revenue, expenses and cash flows to or from AT&T Broadband
Group without the consent of shareholders. The Broadband Group tracking stock
amendment provides that the AT&T Broadband Group allocation fraction may be
adjusted by AT&T's board of directors as it deems appropriate to reflect
contributions or allocations from AT&T Broadband Group to AT&T's other groups,
or vise versa. All actions by AT&T's board of directors are subject to the board
members' fiduciary duties under applicable state law to all shareholders of AT&T
as a group and not just to holders of a particular class of tracking stock and
to AT&T's charter, policy statements, by-laws and inter-company agreements.
AT&T BROADBAND GROUP ALLOCATION FRACTION
Operation of the Allocation Fraction. While AT&T Broadband Group tracking
stock is intended to reflect the financial performance and economic value of
AT&T Broadband Group, the AT&T Broadband Group tracking stock issued to the
public may not represent all of the interest in
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the financial performance and economic value of AT&T Broadband Group. The
Broadband Group tracking stock amendment defines the "AT&T Broadband Group
allocation fraction" to represent the interest in the financial performance and
economic value of AT&T Broadband Group reflected by AT&T Broadband Group
tracking stock issued to the public. To the extent that AT&T Broadband Group
tracking stock issued to the public does not represent all of the interest in
the financial performance and economic value of AT&T Broadband Group, the
remaining interest in the financial performance and economic value of AT&T
Broadband Group will be allocated to AT&T. If AT&T is allocated an interest in
the financial performance and economic value of AT&T Broadband Group, AT&T will
have the right to participate in any dividend, distribution or liquidation made
to holders of AT&T Broadband Group tracking stock. This right to participate is
AT&T's retained portion of value of AT&T Broadband Group. The greater the
retained portion of value, the greater the percentage of the economic value and
financial performance of AT&T Broadband Group intended to be reflected in AT&T
common stock.
For example, if the AT&T Broadband Group allocation fraction is 0.2, this
means that shares of AT&T Broadband Group tracking stock issued to the public
are intended to represent 20% of the interest in the financial performance and
economic value of AT&T Broadband Group. In this case, the remaining 80% of the
interest in the financial performance and economic value of AT&T Broadband Group
would be kept by AT&T as its retained portion of value of AT&T Broadband Group.
In this example, to the extent that AT&T Broadband Group made a distribution to
holders of AT&T Broadband Group tracking stock, for every 20 cents distributed
to the public holders of AT&T Broadband Group tracking stock, AT&T would be
entitled to 80 cents.
If all of the interest in the financial performance and economic value of
AT&T Broadband Group is fully reflected by the AT&T Broadband Group tracking
stock held by the public, the AT&T Broadband Group allocation fraction will
equal one. None would be retained by AT&T.
Adjustments. Because the AT&T Broadband Group allocation fraction
determines the relative percentage interest in AT&T Broadband Group of public
holders of AT&T Broadband Group tracking stock, on the one hand, and AT&T, on
the other hand, the AT&T Broadband Group allocation fraction may be adjusted
from time to time as our board of directors deems appropriate for a number of
reasons, including:
- to reflect the fair market value of contributions or allocations by AT&T
of cash, property or other assets or liabilities from other AT&T groups
to AT&T Broadband Group (or vice versa);
- to reflect the fair market value of contributions or allocations by AT&T
of cash, property or other assets or liabilities of other AT&T groups to,
or for the benefit of, employees of AT&T Broadband Group in connection
with employee benefit plans or arrangements of AT&T or any of its
subsidiaries (or vice versa);
- to reflect the number of shares of AT&T capital stock contributed to, or
for the benefit of, employees of AT&T Broadband Group in connection with
benefit plans or arrangements of AT&T or any of its subsidiaries;
- to reflect repurchases by AT&T of shares of AT&T Broadband Group tracking
stock for the account of AT&T Broadband Group;
- to reflect issuances of AT&T Broadband Group tracking stock for the
account of AT&T Broadband Group;
- to reflect dividends or other distributions to holders of AT&T Broadband
Group tracking stock, to the extent no payment is made to AT&T;
- to reflect subdivisions and combinations of AT&T Broadband Group tracking
stock and stock dividends payable in shares of AT&T Broadband Group
tracking stock; and
- under other circumstances as our board of directors determines
appropriate to reflect the economic substance of any other event or
circumstance.
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In addition, in determining the percentage interest of holders of AT&T
Broadband Group tracking stock in any particular dividend or other distribution,
we will reduce the economic interest of holders of AT&T Broadband Group tracking
stock to reflect dilution arising from shares of AT&T Broadband Group tracking
stock reserved for issuance upon conversion, exercise or exchange of other
securities that are entitled to participate in this dividend or other
distribution.
The Broadband Group tracking stock amendment provides that any adjustment
of this kind must be made in a manner that our board of directors determines to
be fair and equitable to holders of AT&T common stock and AT&T Broadband Group
tracking stock. In the event that any assets or other property are acquired by
other AT&T group(s) and allocated or contributed to AT&T Broadband Group, the
consideration paid by the other AT&T group(s) to acquire these assets or other
property will be presumed to be its "fair market value" as of its acquisition.
Any adjustment to the AT&T Broadband Group allocation fraction made by our board
of directors in good faith in accordance with these principles will be at the
sole discretion of our board of directors, and this good faith determination of
our board of directors will be final and binding on all shareholders.
VOTING RIGHTS
Currently, holders of AT&T common stock have one vote per share. Holders of
AT&T Consumer Services Group tracking stock would initially have of a vote
per share. Each outstanding share of AT&T Broadband Group tracking stock
initially will have of a vote. The voting rights of AT&T Broadband
Group tracking stock will be subject to adjustments to reflect stock splits,
reverse stock splits, stock dividends or certain stock distributions with
respect to AT&T common stock, AT&T Broadband Group tracking stock or AT&T
Consumer Services Group tracking stock.
Except as otherwise required by New York law or any special voting rights
of any class or series of AT&T preferred stock or common shares, holders of
shares of AT&T common stock, AT&T Broadband Group tracking stock, each other
class of AT&T common shares, if any, that is entitled to vote, AT&T Consumer
Services Group tracking stock and holders of shares of each class or series of
AT&T preferred stock, if any, that is entitled to vote, will vote as one class
with respect to all matters to be voted on by shareholders of AT&T. No separate
class vote of AT&T Broadband Group tracking stock will be required, except as
required by the New York Business Corporation Law.
DIVIDENDS
General. Provided that AT&T has sufficient assets to pay a dividend under
applicable law, after excluding the available dividend amount relating to AT&T
Consumer Services Group, the Broadband Group tracking stock amendment provides
that dividends on AT&T Broadband Group tracking stock are limited to an
available dividend amount that is designed to be equivalent to the amount that
would legally be available for dividends on that stock if AT&T Broadband Group
were a stand-alone entity. Dividends on AT&T common stock are limited to the
amount of legally available funds for all of AT&T less the sum of the available
dividend amount for AT&T Broadband Group tracking stock, and the available
dividend amount for AT&T Consumer Services Group tracking stock.
AT&T does not expect to pay any dividends on shares of AT&T Broadband Group
tracking stock. If and when our board of directors determines to pay any
dividends on shares of AT&T Broadband Group tracking stock, the AT&T Groups
policy statement provides that this determination also will be subject to
factors similar to those that we describe above with respect to the payment of
dividends on each class of AT&T common stock.
Following the spin-off of AT&T Communications Services, Inc., AT&T
Broadband Corp. does not expect to pay dividends on shares of its common stock.
The declaration of dividends by AT&T Broadband Corp. and the amount thereof,
will, however, be in the discretion of AT&T Broadband Corp.'s board of directors
and will depend upon AT&T Broadband Corp.'s financial performance, the dividend
policies and capital structures of comparable companies, its ongoing capital
needs, results of
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operations, financial condition, cash requirements and future prospects and
other factors deemed relevant by its board of directors.
Discrimination among classes of common shares. The Broadband Group
tracking stock amendment does not provide for mandatory dividends. Our board of
directors will have the sole authority and discretion to declare and pay
dividends (or to refrain from declaring or paying dividends), in equal or
unequal amounts, on AT&T common stock, AT&T Broadband Group tracking stock, AT&T
Consumer Services Group tracking stock, any other class of AT&T common shares or
any two or more of these classes. Subject to not exceeding the applicable
available dividend amount, our board of directors has this power regardless of
the relative available dividend amounts, prior dividend amounts declared,
liquidation rights or any other factor.
SHARE DISTRIBUTIONS
Subject to the provisions of AT&T Consumer Services Group tracking stock,
AT&T may declare and pay a distribution consisting of shares of AT&T common
stock, AT&T Broadband Group tracking stock or any other securities of AT&T or
any other person to holders of AT&T common stock or AT&T Broadband Group
tracking stock only in accordance with the provisions described below. We refer
to this type of distribution as a "share distribution."
Distributions on AT&T common stock or AT&T Broadband Group tracking
stock. Subject to any limitations imposed by the terms of AT&T Consumer
Services Group tracking stock, AT&T may declare and pay a share distribution to
holders of AT&T common stock, AT&T Broadband Group tracking stock or any other
class of AT&T common shares consisting of any securities of AT&T, any subsidiary
of AT&T or any other person. However, securities attributable to a group may be
distributed to holders of another group only for consideration. In the case of
shares of AT&T Broadband Group tracking stock distributed to holders of AT&T
common stock, the consideration may consist, in whole or in part, of a decrease
in AT&T's retained portion of the value of AT&T Broadband Group.
Discrimination among classes of AT&T common shares. The Broadband Group
tracking stock amendment does not provide for mandatory share distributions.
Subject to the restrictions described above or that are in effect regarding AT&T
Consumer Services Group tracking stock, our board of directors will have the
sole authority and discretion to declare and pay share distributions (or to
refrain from declaring or paying share distributions), in equal or unequal
amounts, on AT&T common stock, AT&T Broadband Group tracking stock, AT&T
Consumer Services Group tracking stock, any other class of AT&T common shares or
any two or more of these classes. Subject to not exceeding the applicable
available dividend amounts, our board of directors has this power regardless of
the relative available dividend amounts, prior share distributions amounts
declared, liquidation rights or any other factor.
REDEMPTION
Redemption in exchange for shares of AT&T common stock after the spin off
of AT&T Communications Services, Inc. At any time, if the businesses, assets
and liabilities of AT&T Broadband Group are substantially equivalent to the
businesses, assets and liabilities of AT&T (as would be the case if the spin-off
of AT&T Communications Services, Inc. is completed as proposed), our board of
directors, in its sole discretion, may redeem all outstanding shares of AT&T
Broadband Group tracking stock for shares of AT&T common stock on a ratio
calculated in a manner intended to maintain the approximate relative
proportional interest in AT&T Broadband Group of holders of AT&T Broadband Group
tracking stock and AT&T common stock.
Specifically, each share of AT&T Broadband Group tracking stock will be
redeemed in exchange for that number of shares of AT&T common stock, calculated
to the nearest 1/10,000, equal to a fraction the numerator of which is:
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- a fraction the numerator of which is the product of (1) the number of
shares of AT&T common stock outstanding on a fully diluted basis and (2)
the AT&T Broadband Group allocation fraction and the denominator of which
is 1 minus the AT&T Broadband Group allocation fraction;
and the denominator of which is:
- the number of shares of AT&T Broadband Group tracking stock outstanding
on a fully diluted basis.
For example, suppose that prior to the spin-off of AT&T Communications
Services, Inc.:
- 800 shares of AT&T common stock are outstanding;
- the AT&T Broadband Group allocation fraction is .2; and
- 20 shares of AT&T Broadband Group tracking stock are held by the public.
In this example, following the spin-off of AT&T Communications Services,
Inc., our board of directors could redeem all 20 shares of AT&T Broadband Group
tracking stock for shares AT&T common stock. Each share of AT&T Broadband Group
tracking stock would be redeemed for:
((800 times .2)/(1 minus .2))/20 = 10 shares of AT&T common stock.
This example also illustrates how the formula is designed to maintain the
approximate relative proportional interest in AT&T Broadband Group of holders of
AT&T Broadband Group tracking stock and AT&T common stock. Following the
spin-off of AT&T Communications Services, Inc., AT&T is essentially composed
solely of AT&T Broadband Group. In the above example:
- the AT&T Broadband Group allocation fraction is .2;
- the holders of AT&T Broadband Group tracking stock own a security
intended to represent approximately 20% of AT&T Broadband Group;
- each of the 20 outstanding shares of AT&T Broadband Group tracking stock
is intended to represent 1% of AT&T Broadband Group;
- the 800 outstanding shares of AT&T common stock are intended to represent
the remaining 80% of AT&T Broadband Group; and
- each share of AT&T common stock is intended to represent 0.1% of AT&T
Broadband Group.
Consequently, in the example above, redeeming each share of AT&T Broadband
Group tracking stock for 10 shares of AT&T common stock preserves the relative
proportional interest of holders of AT&T Broadband Group tracking stock and AT&T
common stock.
All calculations of fully diluted shares of AT&T common stock or AT&T
Broadband Group tracking stock will be made on the treasury basis in accordance
with United States generally accepted accounting principles.
Other redemptions in exchange for shares of AT&T common stock after
years or if tax-related events occur. At any time following either the
occurrence of tax-related events or the anniversary of the date that AT&T
Broadband Group tracking stock is initially issued, our board of directors, in
its sole discretion, may redeem all outstanding shares of AT&T Broadband Group
tracking stock for shares of AT&T common stock. In this event, each share of
AT&T Broadband Group tracking stock will be redeemed in exchange for that number
of shares of AT&T common stock, calculated to the nearest 1/10,000, equal to
% of the ratio of the average market price per share of AT&T Broadband
Group tracking stock to the average market price per share of AT&T common stock.
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In this case, the average market price per share of AT&T common stock or
AT&T Broadband Group tracking stock, as the case may be, means the average of
the daily market value per share for such AT&T common stock or AT&T Broadband
Group tracking stock for the 40 consecutive trading days ending on the 15th
trading day prior to the date notice of the redemption is mailed to holders of
AT&T Broadband Group tracking stock.
In order to redeem AT&T Broadband Group tracking stock on the basis of a
tax-related event, AT&T must obtain the opinion of counsel that, as a result of
an amendment to or change (or prospective change) in a law or an interpretation
of the law that takes place after AT&T Broadband Group tracking stock is issued,
there is more than an insubstantial risk that:
- any issuance of AT&T Broadband Group tracking stock would be treated as a
sale or other taxable disposition by AT&T or any of its subsidiaries of
any of the assets, operations or relevant subsidiaries underlying AT&T
Broadband Group tracking stock;
- the existence of AT&T Broadband Group tracking stock would subject AT&T,
its subsidiaries or its affiliates, or any of their respective successors
to the imposition of tax or other adverse tax consequences; or
- either AT&T common stock or AT&T Broadband Group tracking stock would not
be treated solely as common stock of AT&T.
Redemption in exchange for stock of subsidiaries in connection with a spin
off of our Broadband Group. The Broadband Group tracking stock amendment also
provides that our board of directors may, at any time, redeem all outstanding
shares of AT&T Broadband Group tracking stock in exchange for a specified number
of outstanding shares of common stock of a subsidiary of AT&T that satisfies
requirements under the Code and that holds all of the assets and liabilities of
AT&T Broadband Group. We refer to a subsidiary that satisfies these requirements
as a "qualifying subsidiary." This type of redemption only may be made on a pro
rata basis, and must be tax free to the holders of AT&T Broadband Group tracking
stock, except with respect to any cash that holders receive in lieu of
fractional shares.
In this case, we would exchange each share of AT&T Broadband Group tracking
stock, on a pro rata basis, for an aggregate number of shares of common stock of
the qualifying subsidiary equal to the number of outstanding shares of common
stock of the qualifying subsidiary held by AT&T.
Redemption in exchange for shares of another tracking stock of another
company. At any time our board of directors may redeem all outstanding shares
of AT&T Broadband Group tracking stock for a new tracking stock of another
entity that owns all of the material assets and liabilities of AT&T Broadband
Group. In order to effect a redemption of this type, the new tracking stock must
have substantially the same terms as those governing AT&T Broadband Group
tracking stock as contained in AT&T's charter and by-laws, including with regard
to the definition of "AT&T Broadband Group." In the event of redemption of this
type, the voting rights of the new tracking stock will be set based on the
ratio, over a fixed measurement period, of the initial trading prices of this
new tracking stock to trading prices of the common stock of the new entity of
which the new tracking stock is a part.
Redemption in connection with significant dispositions. In the event of a
sale, transfer, assignment or other disposition by AT&T in a transaction or
series of related transactions, of all or substantially all of the properties
and assets of AT&T Broadband Group, AT&T generally is required to take one of
the following actions, which action will be selected in the sole discretion of
our board of directors:
- AT&T may redeem each outstanding share of AT&T Broadband Group tracking
stock in exchange for a number of shares of AT&T common stock (calculated
to the nearest 1/10,000) equal to % of the ratio of the average
market price per share of AT&T Broadband Group tracking stock to the
average market price per share of AT&T common
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stock. For this purpose, the "average market price per share" of AT&T common
stock or AT&T Broadband Group tracking stock, as the case may be, means the
average of the daily market value per share for AT&T common stock or AT&T
Broadband Group tracking stock, respectively, during the 10-trading-day
period beginning on the 15th trading day following completion of that
transaction.
- Subject to limitations, AT&T may declare and pay a dividend in cash
and/or in securities (other than AT&T common stock) or other property to
holders of the outstanding shares of AT&T Broadband Group tracking stock
equally on a share-for-share basis in an aggregate amount equal to the
net proceeds of the disposition allocable to AT&T Broadband Group
tracking stock.
- Subject to limitations, if the disposition involves the disposition of
all, not merely substantially all, of the properties and assets of AT&T
Broadband Group, AT&T may redeem all outstanding shares of AT&T Broadband
Group tracking stock in exchange for cash and/or securities or other
property in an aggregate amount equal to the net proceeds of the
disposition allocable to AT&T Broadband Group tracking stock.
- Subject to limitations, if the disposition involves substantially all,
but not all, of the properties and assets of AT&T Broadband Group, AT&T
may redeem a number of outstanding shares of AT&T Broadband Group
tracking stock in exchange for a redemption price equal to the net
proceeds of that disposition. The number of shares of AT&T Broadband
Group tracking stock to be redeemed would be equal to the lesser of (1) a
number determined by dividing the aggregate amount allocated to the
redemption of these shares by the average market value of one share of
AT&T Broadband Group tracking stock during the 10-trading-day period
beginning on the 15th trading day following the completion of that
disposition and (2) the total number of outstanding shares of AT&T
Broadband Group tracking stock.
- Subject to limitations, AT&T may take a combination of the actions
described in the preceding bullets whereby AT&T may redeem some shares of
AT&T Broadband Group tracking stock in exchange for shares of AT&T common
stock at the exchange rate described in the first bullet above, and use
an amount equal to a portion of the net proceeds of the disposition
allocable to AT&T Broadband Group tracking stock to either (1) declare
and pay a dividend as described in the second bullet above, or (2) redeem
part or all of the remaining shares of AT&T Broadband Group tracking
stock as described in the third or fourth bullet above.
For purposes of these provisions, "substantially all of the properties and
assets" of AT&T Broadband Group as of any date means a portion of these
properties and assets that represents at least 80% of the fair value of the
properties and assets attributed to AT&T Broadband Group as of that date.
Exceptions. The provisions described under "-- Redemption in connection
with significant dispositions" will not apply, and AT&T will not be required to
redeem any securities or make any dividend or other distribution it would
otherwise be required to make, in some circumstances, including the following:
- if, in connection with the underlying transaction, our board of directors
redeems all outstanding shares of AT&T Broadband Group tracking stock for
a new tracking stock of another entity that owns all of the material
assets and liabilities of AT&T Broadband Group pursuant to "-- Redemption
in exchange for shares of another tracking stock of another company."
- if the underlying disposition is conditioned upon the affirmative vote of
a majority of holders of AT&T Broadband Group tracking stock, voting as a
separate class;
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- if the disposition is in connection with a liquidation of AT&T;
- if the disposition is to a person or group of which AT&T is the majority
owner and AT&T Broadband Group receives in exchange primarily equity
securities of that person or group as consideration;
- in connection with a spin-off or similar distribution of AT&T's entire
interest in AT&T Broadband Group to the holders of AT&T Broadband Group
tracking stock, including a distribution that is made in connection with
a mandatory redemption as described under "-- Other redemptions in
exchange for shares of AT&T common stock after years or if tax-related
events occur" or "-- Redemption in exchange for stock of subsidiaries in
connection with a spin-off of our Broadband Group"; and
- in connection with a "related business transaction," which generally
means a disposition of all or substantially all of the assets attributed
to AT&T Broadband Group in which AT&T receives equity securities of an
entity that engages or proposes to engage primarily in one or more
businesses similar or complementary to the businesses conducted by AT&T
Broadband Group prior to that transaction.
GENERAL PROCEDURES
Conditions. With regard to any redemption at the discretion of our board
of directors, our board of directors may, in its discretion, condition the
redemption on the occurrence or failure to occur of any events set forth in the
applicable notice of redemption. Our board of directors will have the right to
waive any of these conditions in its sole discretion.
Public announcements; notices. The Broadband Group tracking stock
amendment provides that, in the case of specified dispositions or a redemption,
AT&T will publicly announce or otherwise provide specified information to
holders of AT&T Broadband Group tracking stock and, in the case of redemption of
the discretion of our board of directors, give the notice of redemption no fewer
than 15 days prior to the date of redemption.
Fractional shares. Our board of directors will not have to issue or
deliver any fractional shares to any holder of AT&T Broadband Group tracking
stock upon any redemption, dividend or other distribution under the provisions
described under "-- Redemption." Instead of issuing fractional shares, AT&T will
pay cash for the fractional share in an amount equal to the fair market value of
the fractional share, without interest.
No adjustments for dividends or other distributions. No adjustments for
dividends will be made upon the exchange of any shares of AT&T Broadband Group
tracking stock; except that, if a redemption date with respect to AT&T Broadband
Group tracking stock comes after the record date for the payment of a dividend
or other distribution to be paid on AT&T Broadband Group tracking stock but
before the payment or distribution, the registered holders of those shares of
AT&T Broadband Group tracking stock at the close of business on that record date
will be entitled to receive the dividend or other distribution on the payment
date, notwithstanding the redemption of those shares of stock or AT&T's default
in payment of the dividend or distribution.
Payment of taxes. If any person exchanging a certificate representing
shares of AT&T Broadband Group tracking stock wants us to issue a certificate in
a different name than the registered name on the old certificate, that person
must pay any transfer or other taxes required by reason of the issuance of the
certificate in another name, or establish, to the satisfaction of AT&T or its
agent, that the tax has been paid or is not applicable.
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LIQUIDATION RIGHTS
In the event of a liquidation, dissolution or winding up of AT&T, whether
voluntary or involuntary, AT&T will first pay or provide for payment of debts
and other liabilities of AT&T, including the liquidation preferences of any
class or series of AT&T preferred stock. Thereafter, holders of the shares of
AT&T common stock, AT&T Consumer Services Group tracking stock, AT&T Broadband
Group tracking stock and any other class of AT&T common shares will share in the
funds of AT&T remaining for distribution to its common shareholders in
proportion to the aggregate market capitalization of the outstanding shares of
each class of stock, as applicable, to the aggregate market capitalization of
all the classes of AT&T common shares. AT&T will calculate the market
capitalizations based on the 20-trading-day period ending on the trading day
prior to the date of the public announcement of the liquidation, dissolution or
winding up of AT&T.
None of the following, by itself, will constitute a liquidation,
dissolution or winding up of AT&T:
- the consolidation or merger of AT&T with or into any other corporation or
corporations or the sale, transfer or lease of all or substantially all
of the assets of AT&T;
- any transaction or series of related transactions that results in all of
the assets and liabilities included in AT&T Broadband Group being held by
one or more AT&T Broadband Group subsidiaries and the distribution of
AT&T Broadband Group subsidiaries, and no other material assets or
liabilities, to the holders of outstanding AT&T Broadband Group tracking
stock; or
- any transaction or series of related transactions that results in all of
the assets and liabilities included in AT&T Consumer Services Group, if
created, being held by one or more AT&T Consumer Services Group
subsidiaries and the distribution of these AT&T Consumer Services Group
subsidiaries, and no other material assets or liabilities, to the holders
of outstanding AT&T Consumer Services Group tracking stock (but this will
be subject to the provisions relating to the redemption of shares of AT&T
Consumer Services Group tracking stock described in our charter).
If the spin-off of AT&T Communications Services, Inc. occurs as
contemplated, the remaining entity, which will be renamed "AT&T Broadband
Corp.", will no longer have the assets and liabilities included in AT&T Business
Services Group and AT&T Consumer Services Group, and AT&T Consumer Services
Group tracking stock will no longer be an outstanding security of AT&T Broadband
Corp. Also, it is expected that shares of AT&T Broadband Group tracking stock
will be redeemed in exchange for shares of AT&T Broadband Corp. common stock. As
a result, AT&T Broadband Corp. will have only a single class of common stock
outstanding and the liquidation rights of holders of AT&T Broadband Corp. common
stock will depend upon the holder's percentage interest in the company and not
on any relative trading prices at the time.
DETERMINATIONS BY OUR BOARD OF DIRECTORS
Any determinations made by our board of directors under any provision
described in this section "-- Terms of the Broadband Group Tracking Stock
Amendment" will be final and binding on all shareholders of AT&T, except as may
otherwise be required by law. AT&T will prepare a statement of any determination
by our board of directors respecting the fair market value of any properties,
assets or securities, and will file the statement with our Corporate Secretary.
NO PREEMPTIVE RIGHTS
Holders of AT&T common stock, AT&T Broadband Group tracking stock, or AT&T
Consumer Services Group tracking stock do not have any preemptive rights to
subscribe for any additional shares of AT&T capital stock or other obligations
convertible into or exercisable for shares of capital stock that may hereafter
be issued by AT&T.
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THE BROADBAND PUBLIC OFFERING
THE PUBLIC OFFERING
We currently intend to issue, in an underwritten public offering, shares of
AT&T Broadband Group tracking stock representing a portion of the financial
performance and economic value of AT&T Broadband Group. We will determine the
amount to be issued based on capital requirements of AT&T and its groups, market
conditions at the time of the public offering and other factors. We currently
expect to issue shares of AT&T Broadband Group tracking stock in the public
offering reflecting no greater than 20% of the economic performance of AT&T
Broadband Group. The proceeds from the public offering may be allocated between
any of the groups or only to one group, which may or may not be the AT&T
Broadband Group.
TIMING OF THE PUBLIC OFFERING
We currently expect to complete the public offering later this year,
subject to market and other factors. However, our board of directors reserves
the right to change our current plans with respect to the public offering.
Our board of directors reserves the right to not create AT&T Broadband
Group tracking stock or to not issue AT&T Broadband Group tracking stock once it
is created. In addition, even if we complete the public offering, there is no
guarantee that the spin-off of AT&T Communications Services, Inc. will follow.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO AT&T
Subject to the discussion below in this section, neither the creation of
AT&T Broadband Group tracking stock nor the occurrence of the public offering of
AT&T Broadband Group tracking stock will be taxable to AT&T.
The conclusions in the preceding paragraph are not free from doubt. These
conclusions assume that AT&T Broadband Group tracking stock is treated as a
class of common stock of AT&T. The filing of consolidated income tax returns by
AT&T together with AT&T Broadband Group also assumes that AT&T Broadband Group
tracking stock is treated as a class of common stock of AT&T. While AT&T
believes that, under current law, AT&T Broadband Group tracking stock will be
treated as common stock of AT&T, there are no authorities directly on point nor
will AT&T receive an advance ruling from the Internal Revenue Service. There is
a risk that the Internal Revenue Service could assert that AT&T Broadband Group
tracking stock is property other than common stock of AT&T. AT&T believes it is
unlikely the Internal Revenue Service would prevail on that view, but no
assurance can be given that the views expressed in the preceding paragraph, if
contested, would be sustained by a court.
EFFECTS OF THE SPIN-OFF OF AT&T COMMUNICATIONS SERVICES, INC.
Under the terms of the proposed Broadband Group tracking stock amendment,
if the businesses, assets and liabilities of AT&T are substantially equivalent
to the business, assets and liabilities of AT&T Broadband Group, our board of
directors may redeem all outstanding shares of AT&T Broadband Group tracking
stock for shares of AT&T common stock. Following the spin-off of AT&T
Communications Services, Inc., we expect that AT&T will consist of AT&T
Broadband Group. For this reason, following the spin-off, we expect to redeem
all outstanding shares of AT&T Broadband Group tracking stock for shares of AT&T
common stock, as permitted by the terms of the proposed Broadband Group tracking
stock amendment. See "-- Terms of the Broadband Group Tracking Stock
Amendment -- Redemption."
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DESCRIPTION OF AT&T BROADBAND GROUP
The description below of AT&T Broadband Group reflects our current plans
regarding the operation of AT&T Broadband Group. These plans may change from
time to time. For financial information about AT&T Broadband Group, see
"Summary -- Consolidating Condensed Financial Information" and the combined
financial statements of AT&T Broadband Group, which are included in Appendix D
to this document.
OVERVIEW
AT&T Broadband Group is one of the nation's largest broadband
communications businesses based on customers served as of March 31, 2001,
providing cable television, high-speed cable Internet services and telephone
services over one of the most extensive broadband networks in the country. AT&T
Broadband Group's business consists primarily of the combined assets and
business of TCI, acquired by AT&T on March 9, 1999, and MediaOne, acquired by
AT&T on June 15, 2000. As of March 31, 2001, AT&T Broadband Group owned and
operated cable systems in 13 of the 20 largest Designated Marketing Areas, or
DMAs, which represented 70% of AT&T Broadband Group's total subscribers. AT&T
Broadband Group's broadband networks passed approximately 28.1 million homes and
served approximately 15.9 million customers as of March 31, 2001. AT&T Broadband
Group continues to upgrade its systems, 74% of which were upgraded to a capacity
equal to or greater than 550 MHz and 72% of which were two-way capable as of
March 31, 2001.
AT&T Broadband Group's broadband networks enable it to deliver a suite of
advanced entertainment, information and communications services, including its
digital cable, high-speed cable Internet and broadband telephone services. As of
March 31, 2001, AT&T Broadband Group provided a variety of advanced services,
including:
- digital cable, with over 3.1 million digital cable subscribers or 19.7%
of AT&T Broadband Group's basic subscribers,
- high-speed cable Internet service, with approximately 1.3 million
high-speed cable Internet service subscribers or 8.3% of marketable homes,
and
- broadband telephone service, with approximately 700,000 local telephone
subscribers or 11.0% of marketable homes.
In addition to fees from residential customers for the services AT&T
Broadband Group offers, AT&T Broadband Group also derives revenues from the sale
of advertising time on satellite-delivered networks, such as ESPN, MTV and CNN,
and on local cable channels. AT&T Broadband Group is able to provide more
targeted audiences for advertisers because it offers more channels and is able
to target advertising to particular geographic zones. In addition to the sale of
advertising time to local and regional advertisers, AT&T Broadband Group
participates in the national spot advertising marketplace through its sales
representation arrangement with and investment in National Cable Communications,
L.L.C., a partnership that represents cable systems in the sale of time to
national spot advertisers.
AT&T Broadband Group's strategy is to focus on larger markets. To that end,
it has entered into a number of sales, acquisitions and exchanges of cable
systems. As of March 31, 2001, on a pro forma basis for the completion of
previously announced transactions:
- AT&T Broadband Group had 13.5 million basic subscribers, 94% of whom were
concentrated in AT&T Broadband Group's 20 largest markets,
- 40% of AT&T Broadband Group's customers were located in its three largest
markets: Boston, San Francisco and Chicago, and
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- 11.2 million, or 83% of AT&T Broadband Group's subscribers, were in
markets where AT&T Broadband Group had more than 500,000 customers.
AT&T Broadband Group continues to upgrade its cable systems to allow it to
provide advanced services to more of its customers. AT&T Broadband Group
believes that by upgrading its cable systems, AT&T Broadband Group will be able
to provide its customers with greater programming diversity, better picture
quality, improved reliability and enhanced services. AT&T Broadband Group's
cable systems have bandwidth capacities in some areas up to 860 megahertz. At
March 31, 2001, over 74% of AT&T Broadband Group's networks had bandwidth
capacity equal to or greater than 550 MHz, the majority of AT&T Broadband
Group's networks had been upgraded to 750 MHz, and 72% of AT&T Broadband Group's
networks were two-way capable. AT&T Broadband Group also believes that
consolidation in major markets is essential in order to enable it to deploy a
bundled suite of entertainment, information and communications services on a
cost-effective basis. This combination of geographic concentration and
consolidation and system upgrades enables AT&T Broadband Group to offer a
complete bundle, under the AT&T brand, of interactive digital cable, high-speed
cable Internet and telephone services.
In addition to AT&T Broadband Group's wholly owned cable systems, AT&T
Broadband Group also owns a number of investments in companies, joint ventures
and partnerships, the most significant of which are:
- Excite@Home;
- Time Warner Entertainment, which owns and operates substantially all of
the business of Warner Bros., Inc., HBO and the cable television
businesses owned and operated by AOL Time Warner;
- Cablevision, which owns and operates cable systems that serve
approximately 3.0 million subscribers in the New York area;
- Insight Midwest, which owns and operates cable systems that serve
approximately 1.3 million subscribers in Indiana, Kentucky, Illinois and
Ohio; and
- Texas Cable Partners, which owns and operates cable systems that serve
approximately 1.1 million subscribers in Texas.
AT&T BROADBAND GROUP
AT&T Broadband Group tracking stock is intended to reflect the separate
financial performance and economic value of AT&T Broadband Group, which includes
the assets and liabilities shown in the combined balance sheets of AT&T
Broadband Group. If we acquire interests in other businesses, we intend to
attribute those assets and any related liabilities to AT&T Broadband Group or to
the other AT&T groups in accordance with the AT&T Groups policy statement. All
net income and net losses generated by the assets attributed to AT&T Broadband
Group will be attributed to AT&T Broadband Group and all net proceeds from any
disposition of these assets also will be attributed to AT&T Broadband Group.
Except as described elsewhere in this document, we attribute all of AT&T's
current Broadband business unit operations to AT&T Broadband Group, including:
- AT&T's cable television and cable telephone service customers;
- AT&T's cable television and telephone licenses that solely support cable
telephone service;
- AT&T's cable television and cable telephone systems and operations that
solely support cable telephone service;
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- AT&T's cable television and cable telephone service support
infrastructure, including ordering, provisioning, billing and care;
- AT&T's interest in partnerships and affiliates providing cable television
services, such as Cablevision and Time Warner Entertainment; and
- AT&T's interest in Excite@Home, its affiliate providing high-speed cable
Internet services.
AGREEMENTS AMONG AT&T BROADBAND GROUP AND AT&T'S OTHER GROUPS
AT&T will seek to manage AT&T Broadband Group and AT&T's other groups in a
manner designed to maximize the operations, unique assets and value of all
groups. AT&T Broadband Group will be able to:
- use the powerful AT&T brand name in accordance with a brand license
agreement,
- use AT&T's intellectual property and technology on a royalty-free basis
in accordance with an intellectual property agreement, and
- benefit from AT&T's favorable purchasing contracts with major suppliers.
The relationship among the groups will be governed by the AT&T Groups
policy statement, including the process of fair dealing described under
"Relationship among AT&T's Groups -- The AT&T Groups Policy Statement -- General
Policy." Although our board of directors has no present intention to do so, it
may modify, suspend or rescind the policies set forth in the AT&T Groups policy
statement, adopt additional policies or make exceptions to existing policies, at
any time, without the approval of our shareholders, subject to limitations we
describe under "Relationship among AT&T Groups -- The AT&T Groups Policy
Statement" and our board of directors' fiduciary duties.
INDUSTRY OVERVIEW
AT&T Broadband Group operates in the broadband communications industry,
offering video television programming services (both analog and digital),
high-speed cable Internet services and broadband telephone service, in each case
primarily to residential and small business customers. AT&T Broadband Group also
is pursuing other additional services, including video on demand and interactive
television that take advantage of the robust broadband network that AT&T
Broadband Group has assembled and constructed.
Cable television is a service that delivers multiple channels of video and
audio programming to subscribers that pay a monthly fee for the services they
receive. Cable television systems receive video, audio and data signals
transmitted by nearby television broadcast stations, terrestrial microwave relay
services and communications satellites. These signals then are amplified and
distributed by coaxial cable and optical fiber to the premises of customers that
pay a fee for the service. In many cases, cable television systems also
originate and distribute local programming. Cable television systems typically
are constructed and operated pursuant to nonexclusive franchises awarded by
local franchising authorities for specified periods of time.
Cable television systems offer varying levels of service, which may
include, among other programming, local broadcast network affiliates and
independent television stations, other news, information and entertainment
channels, such as CNN, CNBC, ESPN, and MTV, and selected premium services, such
as HBO, Showtime, The Movie Channel, Starz and Cinemax.
Cable television revenues principally are derived from monthly fees paid by
subscribers, sales of pay-per-view movies and events, sale or advertising time
on advertiser supported programming and installation charges.
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High-speed cable Internet services deliver typical ISP services, such as
e-mail, instant messaging, personal webspace management, and personalized front
pages, and content that takes advantage of the unique characteristics of
broadband distribution systems. In some cases, AT&T Broadband Group provides
unique localized content to complement the national content provided by
Excite@Home. Subscribers pay a monthly fee for the services they receive,
including unlimited access to the Internet. Other revenue streams may be derived
from sales of premium content and services, advertising spots, premium placement
of media/service providers within the service, and installation service.
Cable telephone service is a technology that allows cable operators to
offer telephone service over the same hybrid fiber/coaxial network that supplies
television service. Cable telephone service systems have three basic
components -- a headend unit, a customer premise unit and a management
interface -- though each vendor takes a slightly different approach. Cable
operators connect to the public switched telephone network through an interface
on the headend unit that conforms to one of several standards. At the customer
premise unit, voice transmission is separated from the coaxial drop and routed
to a twisted copper pair connected to the customer's existing inside telephone
wiring.
Cable telephone service continues to move forward to offer local
residential telephone service. Now, with IP networks emerging as viable
platforms for the delivery of voice traffic, cable operators hope to use their
high-speed data networks to support packet telephone services as an alternative
to deploying stand-alone telephone service equipment.
Using IP networks, cable operators attempt to create an integrated
multi-service communications platform that operates on a lower cost structure
than existing circuit-switched alternatives. Cable operators believe the
flexibility of IP networks will allow them to deliver a host of unique
value-added features, such as integrated voice mail and e-mail messaging and the
real-time provisioning of additional phone lines without rewiring a home.
STRATEGY
AT&T Broadband Group's business strategy is to utilize the technological
capabilities of its broadband networks and its regionally consolidated cable
systems to become the leading full-service provider of entertainment,
information and communications services in the markets it serves. This strategy
centers on the deployment of advanced services, including video, high-speed
cable Internet service and broadband telephone service, over AT&T Broadband
Group's broadband network infrastructure. AT&T Broadband Group believes that its
substantial investment in the technological capabilities of its broadband
networks, consolidation of operations in major markets and its service bundling
will enhance its ability to continue to offer advanced services to existing and
new customers. As a result, AT&T Broadband Group believes it will be able to
expand its customer base and reduce churn, which should result in increased
operating cash flow generated per customer.
AT&T Broadband Group's strategy consists of the following elements:
INCREASE PENETRATION OF AT&T BROADBAND GROUP'S ADVANCED SERVICES
AT&T Broadband Group offers advanced services, including interactive
digital cable, high-speed cable Internet service and all-distance telephone
services under the AT&T brand. AT&T Broadband Group believes that its ability to
provide multiple services provides it with a strong competitive advantage over
alternative video providers, such as direct broadcast satellite television
systems and incumbent telephone companies. AT&T Broadband Group's strategy is to
offer its customers a bundled suite of services, providing an increased choice
of services at a reduced overall price. AT&T Broadband Group believes that
offering a full bundle of services will result in higher customer penetrations,
higher customer satisfaction, increased use of AT&T Broadband Group's services
and greater customer retention.
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- Digital cable. AT&T Broadband Group offers digital cable service, which
includes additional channels on its existing service tiers, the creation
of new service tiers and the introduction of multiple packages of premium
services. AT&T Broadband Group's digital cable service allows it to
increase the number of pay-per-view channels it offers and to provide an
electronic program guide, on demand pay-per-view and up to 30 channels of
digital music.
- High-speed cable Internet service. AT&T Broadband Group offers Internet
services to its customers, via cable modems attached to personal
computers, at speeds that are substantially faster than the speed of a
conventional telephone modem. AT&T Broadband Group uses Excite@Home, which
AT&T Broadband Group partially owns, as its primary provider of high-speed
cable Internet service.
- Broadband telephone services. AT&T Broadband Group currently offers
broadband telephone services to customers in 16 markets using AT&T
Broadband Group's systems' direct, two-way connections to homes. AT&T
Broadband Group utilizes the capacity and reliability of its advanced
broadband networks to provide all-distance telephone services.
Beyond these existing advanced services, a variety of emerging technologies
and the rapid growth of Internet usage present substantial opportunities to
provide new or expanded products and services to broadband customers and to
expand sources of revenue. As a result, AT&T Broadband Group is in the process
of developing, testing and offering on a limited basis a variety of new or
expanded services, including video on demand, interactive television, targeted
advertising, multiple service tiers of high-speed cable Internet service, home
networking, multiple ISP offerings and a set of communications services that
work seamlessly over all television, computer and telephone platforms.
MAXIMIZE CUSTOMER SATISFACTION TO BUILD CUSTOMER LOYALTY
Customer service is a key element of AT&T Broadband Group's strategy. AT&T
Broadband Group is dedicated to quality customer service and seeks a high level
of customer satisfaction by employing customer care tailored to address local
needs, using market research and providing customers with attractively priced
offerings. AT&T Broadband Group's customer care initiatives create substantial
marketing and promotion opportunities, which AT&T Broadband Group believes will
be effective in the deployment of all of its services. AT&T Broadband Group
believes that an integrated package of services, coupled with AT&T Broadband
Group's commitment to locally focused customer service, will enhance AT&T
Broadband Group's ability to acquire and retain customers in a competitive
environment while increasing revenues per customer.
In addition, AT&T Broadband Group is dedicated to fostering strong
relations in the communities it serves. AT&T Broadband Group supports local
charities and community causes through sponsored events and promotional
campaigns, including the industry's Cable in the Classroom program. AT&T
Broadband Group believes its emphasis on customer service and strong community
involvement has led to higher customer satisfaction. To further strengthen
community relations and differentiate it from direct broadcast satellite
television systems and other multichannel video providers, AT&T Broadband Group
provides locally produced and oriented programming that offers, among other
things, community information, local government proceedings and local specialty
interest shows.
INCREASE OPERATING PERFORMANCE OF AT&T BROADBAND GROUP'S MAJOR MARKET
CLUSTERS OF CABLE SYSTEMS
AT&T Broadband Group believes that the nature of its large, consolidated
clusters of cable systems enables it to maximize revenue enhancing opportunities
and implement significant cost savings benefits. Developing large, tightly
grouped, efficient operating clusters of cable systems should enable AT&T
Broadband Group to enhance system reliability, improve engineering support and
increase customer satisfaction.
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AT&T Broadband Group believes that its major market clusters will improve
AT&T Broadband Group's ability to leverage its network capabilities, sell
advertising and enhance its ability to introduce and market new services
efficiently. In addition, AT&T Broadband Group expects that concentrating in
major markets will allow it to deploy its marketing expenditures more
efficiently and to enhance customer awareness, leading to increased use of AT&T
Broadband Group's services.
Locally and regionally focused cable television systems should enable AT&T
Broadband Group to reduce expenses through the consolidation of marketing and
support functions and to place more experienced management teams at the system
level that are better equipped to meet the new competitive and regulatory
challenges of today's broadband communications industry. AT&T Broadband Group is
currently engaged in a number of initiatives to reduce its operating costs,
including efforts to:
- increase the overall penetration of AT&T Broadband Group's cable systems;
- consolidate customer call centers, fulfillment, information technology
and support systems;
- consolidate network facilities in geographic regions;
- decrease churn of AT&T Broadband Group's existing video and advanced
services by offering new advanced services and bundling multiple services;
- reduce the cost structure of basic and advanced services; and
- reduce full time equivalent staff.
AT&T Broadband Group regularly seeks to improve the geographic
consolidation of its cable systems by selectively exchanging its cable systems
for systems of other cable operators or acquiring systems in close proximity to
AT&T Broadband Group's systems. AT&T Broadband Group has completed a significant
number of transactions in 2000, as described under "-- Acquisitions and
Divestitures," and has signed agreements in 2001 that further consolidate AT&T
Broadband Group's operations in large local and regional markets.
UPGRADE AND EXPAND AT&T BROADBAND GROUP'S BROADBAND NETWORKS
To facilitate the deployment of AT&T Broadband Group's advanced services,
AT&T Broadband Group continues to upgrade its networks to allow it to deliver
more information and entertainment services through its cable systems and to
provide for two-way communications capability, including all-distance telephone
services. AT&T Broadband Group's network upgrade includes the deployment of
fiber optic cable that creates a significant increase in network capacity,
quality and reliability, facilitating the delivery of additional higher value
added and high margin services. Currently AT&T Broadband Group's cable
television systems have bandwidth capacities in some areas of up to 860 MHz.
AT&T Broadband Group is presently upgrading its systems, 74% of which were
upgraded to a capacity equal to or greater than 550 MHz and 72% of which were
two-way capable as of March 31, 2001.
TECHNICAL OVERVIEW
AT&T Broadband Group believes that in order to achieve consistently high
levels of customer service, reduce operating costs, maintain a strong
competitive position and deploy new and advanced services, it needs to install
and maintain an advanced technical platform. The deployment of fiber optics, an
increase in the bandwidth to 550 MHz or higher, the activation of two-way
communications network and the installation of digital equipment allows AT&T
Broadband Group to deliver new and advanced services, including interactive
digital cable, high-speed cable Internet and all-distance telephone services.
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As of March 31, 2001, AT&T Broadband Group's systems were comprised of
approximately 263,000 miles of network passing approximately 28.1 million homes,
resulting in a density of approximately 106 homes per mile. As of that date,
AT&T Broadband Group's systems were made up of an aggregate of 41 headends in
its top 20 markets. As of March 31, 2001, approximately 61% of AT&T Broadband
Group's network was equal to or greater than 750 MHz, approximately 13% of its
network was greater than or equal to 550 MHz and less than 750 MHz and
approximately 26% of its network was less than 550 MHz.
AT&T Broadband Group's network design calls for a digital two-way active
network with a fiber optic trunk system carrying signals to nodes within its
customers' neighborhoods. The signals are transferred to a coaxial network at
the node for delivery to its customers. AT&T Broadband Group has designed the
fiber system to be capable of subdividing the nodes if traffic on the network
requires additional capacity.
AT&T Broadband Group believes that active use of fiber optic technology as
a supplement to coaxial cable will play a major role in expanding channel
capacity and improving the performance of its systems. Fiber optic strands are
capable of carrying hundreds of video, data and voice channels over extended
distances without the extensive signal amplification typically required for
coaxial cable. AT&T Broadband Group plans to continue to deploy fiber optic
cable to further reduce amplifier cascades while improving picture quality and
system reliability.
A direct result of this extensive use of fiber optics is an improvement in
picture quality and a reduction of outages because system failures will be both
significantly reduced and will impact far fewer customers when they do occur.
AT&T Broadband Group's design allows its systems to have the capability to run
multiple separate channel line-ups from a single headend and to insert targeted
advertisements into specific neighborhoods based on node location.
The following chart outlines the status of the capacities of AT&T Broadband
Group's networks, historically and as of March 31, 2001:
PERCENT OF NETWORK MILES
------------------------------------------- PERCENT OF
GREATER THAN OR EQUAL 750 OR NETWORK
LESS THAN TO 550 MHZ AND GREATER TWO-WAY
550 MHZ LESS THAN 750 MHZ MHZ CAPABLE
--------- --------------------- ------- ----------
As of December 31, 1999............ 49% 22% 50% 55%
As of December 31, 2000............ 24% 15% 62% 69%
As of March 31, 2001............... 26% 13% 61% 72%
SERVICES
CABLE TELEVISION SERVICES
AT&T Broadband Group offer its customers a full array of traditional cable
television services and programming offerings. AT&T Broadband Group tailors both
its basic line-up and its additional channel offerings to each regional system
in response to demographics, programming preferences, competition and local
regulation. AT&T Broadband Group offers a basic level of service which includes
from 15 to 25 channels of television programming. As of March 31, 2001,
approximately 93% of AT&T Broadband Group's customers elected to pay an
additional amount to receive additional channels under its expanded basic
service, which AT&T Broadband Group calls its Standard Cable package. Premium
channels, which AT&T Broadband Group offers individually or in packages of
several channels, are optional add-ons to its basic service.
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AT&T Broadband Group's cable television services include the following:
- Basic Service. All of AT&T Broadband Group's customers receive its basic
level of service, which generally consists of local broadcast television
and local community programming, including public, educational or
governmental programming, and may include a limited number of satellite
programs.
- Standard Cable. AT&T Broadband Group's Standard Cable package includes
basic service, plus expanded basic. This level of service includes a group
of satellite-delivered and non-broadcast channels such as ESPN, CNN,
Discovery Channel and Lifetime.
- Premium Channels. These channels provide unedited, commercial-free
movies, sports and other special event entertainment programming. AT&T
Broadband Group offers subscriptions to numerous premium channels,
including HBO, Cinemax, Starz!, Showtime and TMC, individually or in
packages.
- Pay-Per-View. These channels allow customers with addressable set top
boxes to pay to view a single showing of a recently released movie or a
one-time special sporting event or music concert on an unedited,
commercial-free basis.
Through AT&T Digital Cable, AT&T Broadband Group also offers additional
special interest networks, premium channels, pay-per-view, digital music and an
interactive on-screen guide, as described under "-- Advanced Services".
AT&T Broadband Group's basic subscribers, including its digital cable
customers, are served as follows:
DECEMBER 31,
MARCH 31, ------------------
2001 2000 1999 1998
--------- ---- ---- ----
(IN MILLIONS)
Managed through AT&T Broadband Group's operating
divisions.......................................... 15.8 15.9 11.3 11.4
Other non-managed subsidiaries of AT&T Broadband
Group.............................................. 0.1 0.1 0.1 0.5
---- ---- ---- ----
Total................................................ 15.9 16.0 11.4 11.9
==== ==== ==== ====
In addition to the above, the FCC attributes AT&T Broadband Group with the
subscribers of (1) Time Warner Entertainment and Time Warner as a consequence of
the MediaOne acquisition and (2) various other entities as a consequence of AT&T
Broadband Group's investments in those entities. The aggregate number of
attributable subscribers was approximately 18.8 million as of March 31, 2001.
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The following table sets forth selected statistical data regarding AT&T
Broadband Group's cable television operations:
MARCH 31, DECEMBER 31,
---------- ------------------------------------
2001 2000 1999 1998
---------- ---------- ---------- ----------
Homes passed by cable(1)(3)................ 28,088,000 28,303,000 19,668,000 19,889,000
Basic service subscribers(3)............... 15,873,000 16,041,000 11,408,000 11,948,000
Basic service subscribers as a percentage
of homes passed.......................... 57% 56% 57% 59%
Average monthly revenue per basic service
subscriber(2)(3)......................... $ 47.12 $ 47.63 $ 42.97 $ 32.24
-------------------------
(1)Homes passed is based on homes actually marketed and does not include
multiple dwelling units passed by the cable plant that are not connected to
it.
(2)Based on video service revenues for the last month of the period, including
installation charges and certain other nonrecurring revenues, such as
pay-per-view, advertising and home shopping revenues.
(3)Year-end statistics regarding AT&T Broadband Group's subscribers and homes
passed by cable are materially affected by AT&T Broadband Group's acquisition
and divestiture program discussed below in "-- Acquisitions and
Divestitures". Notable variations arose during 1998, when AT&T Broadband
Group contributed cable systems serving approximately 2,700,000 customers to
other persons, and during 2000, when AT&T Broadband Group acquired
approximately 5,000,000 customers from MediaOne.
ADVANCED SERVICES
As network upgrades are activated, AT&T Broadband Group offers new and
advanced services, including interactive digital cable and high-speed cable
Internet service. In addition, AT&T Broadband Group offers all-distance
telephone services in selected markets.
DIGITAL CABLE
The implementation of interactive digital technology significantly enhances
and expands the video and service offerings AT&T Broadband Group provides to its
customers to include music, parental controls and an interactive program guide.
Because of the significantly increased bandwidth of its technical platform, AT&T
Broadband Group has the capacity to design a more extensive digital product that
is rich in program offerings and interactive with its customers. In addition,
AT&T Broadband Group offers more premium and special interest networks that it
believes compare favorably with the offerings of direct broadcast satellite.
AT&T Broadband Group's interactive digital cable service also allows it to offer
TV-formatted information to its customers that has local content and is targeted
to a specific system or community. For example, through this service AT&T
Broadband Group offers local weather, sports, news and dining information. In
addition to TV-formatted information, customers can access the Internet as well
as establish multiple email accounts through their televisions.
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Below is a summary of operating statistics for digital cable services:
MARCH 31, DECEMBER 31,
--------- ---------------------
2001 2000 1999
---- --------- ---------
Digital cable customers.......................... 3,125,000 2,815,000 1,800,000
Digital penetration as a percentage of basic
service subscribers............................ 19.7% 17.5% 15.8%
AT&T digital cable offers the following features:
- A digital converter box;
- An onscreen navigational program guide from TV Guide Interactive;
- Additional special interest networks;
- Multiple channels of premium networks for customers who subscribe to
premium channels, such as HBO and Showtime on digital;
- Up to 36 channels of pay-per-view with remote control ordering; and
- Up to 30 channels of commercial free, digital audio music.
AT&T Broadband Group offers its customers four digital packages -- Bronze,
Silver, Gold, and Platinum. These packages allow viewers to select the level of
services they receive to fit their individual interests.
While channel offerings may vary somewhat from region to region, AT&T
Broadband Group's four digital packages generally include:
- Bronze -- includes AT&T Broadband Group's Standard Cable package,
multiple Encore channels, digital pay-per-view, digital music, digital
basic channels, one set-top box and remote.
- Silver -- includes AT&T Broadband Group's Standard Cable package,
multiple Encore channels, multiple Starz! channels, digital pay-per-view,
digital music, digital basic channels, one set-top box and remote,
multiple channels of one premium service and one bonus category.
- Gold -- includes AT&T Broadband Group's Standard Cable package, multiple
Encore channels, multiple Starz! channels, digital pay-per-view, digital
music, digital basic channels, two set-top boxes and remotes, multiple
channels of two premium services and two bonus categories.
- Platinum -- includes AT&T Broadband Group's Standard Cable package,
multiple Encore channels, multiple Starz! channels, digital pay-per-view,
digital music, digital basic channels, two set-top boxes and remotes,
multiple channels of all premium services and three bonus categories.
Bonus categories include movie and music channels, sports and information
channels and family and variety channels. The availability of bonus categories
is limited in some of AT&T Broadband Group's markets depending on network
bandwidth capacity.
As part of its digital cable offering, AT&T Broadband Group intends to
deploy video on demand service, which it has currently introduced into one of
its markets. Video on demand offers AT&T Broadband Group's customers the ability
to watch hit programs on demand. AT&T Broadband Group has entered into an
agreement with DIVA Systems Corporation, which allows it to offer DIVA's video
on demand services as part of a digital tier package. Through its agreement with
DIVA, AT&T Broadband Group provides a true video on demand service over the
cable television infrastructure.
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AT&T Broadband Group's customers receive movies and other entertainment
programming electronically over the network and have full VCR functionality,
including pause, play, fast forward and rewind. The movies are delivered with a
high quality digital picture and digital sound. AT&T Broadband Group's video on
demand service provides movies at prices comparable to those charged for
videotape rentals, pay-per-view and near video on demand movies, but with far
greater convenience and functionality.
AT&T Broadband Group is working with multiple vendors, including Liberate,
Microsoft and Worldgate, to introduce interactive television services. Services
AT&T Broadband Group is offering on a trial basis include managed content (news,
weather, sports and other customized local information), games, Internet access
and email services, all over the customer's television. AT&T Broadband Group is
also working with these vendors to develop future service offerings, including
enhanced interactive services and games, e-commerce, and personal video recorder
capabilities.
HIGH-SPEED CABLE INTERNET
AT&T Broadband Group offers high-speed cable Internet service for personal
computers over its networks in all of its upgraded systems. AT&T Broadband Group
has a strategic relationship with Excite@Home that allows it to offer high-speed
cable Internet service to its customers under the AT&T@Home brand.
Below is a summary of AT&T Broadband Group's high-speed cable Internet
service operating statistics:
DECEMBER 31,
MARCH 31, -----------------------
2001 2000 1999
---------- ---------- ---------
Data marketable homes passed............... 15,466,000 14,523,000 4,974,000
Customers.................................. 1,280,000 1,060,000 207,000
Penetration................................ 8.3% 7.3% 4.2%
The broad bandwidth of AT&T Broadband Group's cable networks enables data
to be transmitted substantially faster than through conventional telephone modem
technologies, and the cable connection does not interfere with normal telephone
activity or usage. For example, cable's on-line customers can download large
files from the Internet in a fraction of the time it takes when using a
conventional telephone modem. Moreover, using the Internet on a high-speed cable
network removes the long delays for web pages to appear fully on the computer
screen, allowing the experience to approximate more closely the responsiveness
of changing channels on a television set. In addition, the cable modem is always
on and does not require the customer to dial into an ISP and await
authorization. AT&T Broadband Group believes that these factors of speed and
easy accessibility will increase the use and impact of the Internet. Although
other high-speed alternatives are being developed to compete with cable, AT&T
Broadband Group believes that the cable platform currently is best able to
deliver these services and has more long-term advantages.
In addition to being an ISP, Excite@Home provides its own content to AT&T
Broadband Group for its customers. Excite@Home aggregates high quality web sites
for customers to explore and also offers various chat rooms, newsgroups, on-line
stores, gaming channels, on-demand Fox News, NBA and MTV video clips, and easy-
to-use search engines and tip wizards.
AT&T Broadband Group's AT&T@Home service offers unlimited access to the
Internet. The service includes up to seven e-mail addresses and 10 megabytes of
space with which to create a personal web site. AT&T Broadband Group recently
increased its price for the AT&T@Home service to $35.95 per month, plus $10 per
month to lease the cable modem. Alternatively, customers may purchase the cable
modem independently. AT&T Broadband Group charges customers a $99.95
installation fee for a Premium Installation and $49.95 for a Basic Installation.
In the Premium
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Installation, AT&T Broadband Group's technician installs one computer to one
data outlet, the cable modem, the Ethernet/USD device interface, and the @Home
client software. In the Basic Installation, our technician installs one cable
modem to one existing data outlet, while the customer must connect the cable
modem to his/her PC and install the @Home client software. In both the Premium
and the Basic installation, we offer an Ethernet device if one is required, at
an additional charge of $49.95. AT&T Broadband Group may, at its discretion,
discount installation to promote usage of cable modems or offer other
promotional incentives. Excite@Home also provides AT&T Broadband Group with
several additional services, such as remote access, the ability to dial-up away
from the customer's home, and the ability to share high-speed cable Internet
service on multiple computers using additional IP addresses. AT&T Broadband
Group charges its customers $4.95 per month for each additional IP address. In
addition, AT&T Broadband Group intends to offer additional premium services such
as home networking and enhanced security services.
AT&T Broadband Group has agreements with Excite@Home under which AT&T
Broadband Group is provided with broadband network services and content
aggregation necessary for the delivery of high-speed cable Internet services to
AT&T Broadband Group's subscribers. Agreements between AT&T Broadband Group and
Excite@Home extend to June 2008, with AT&T Broadband Group required to use
Excite@Home for broadband cable Internet services on an exclusive basis until
June 2002. AT&T Broadband Group cable systems acquired in the MediaOne
acquisition were covered by a similar broadband network services and content
aggregation agreement with Road Runner. Effective May 1, 2001, AT&T Broadband
Group and AOL Time Warner restructured the ownership of Road Runner, with AT&T
Broadband Group purchasing those assets used to support the AT&T Broadband Group
high-speed cable Internet subscribers and selling its equity interest in Road
Runner to subsidiaries of AOL Time Warner. As a consequence of this
restructuring, AT&T Broadband Group's affiliation agreement with Road Runner
terminated May 1, 2001. With respect to its cable systems previously affiliated
with Road Runner, AT&T Broadband Group has entered into a transitional service
agreement with an affiliate of AOL Time Warner to support AT&T Broadband Group's
pending a transition to the Excite@Home service.
BROADBAND TELEPHONE SERVICE
AT&T Broadband Group currently offers cable telephone services to customers
in 16 markets. AT&T Broadband Group utilizes the capacity and reliability of its
advanced broadband network to provide local telephone services and resell AT&T
long distance services.
Below is a summary of AT&T Broadband Group's operating statistics for
broadband telephone services:
DECEMBER 31,
MARCH 31, --------------------
2001 2000 1999
--------- --------- -------
Telephone ready homes passed................... 6,388,000 6,103,000 721,000
Customers...................................... 700,000 547,000 8,000
Penetration.................................... 11.0% 9.0% 1.1%
AT&T Broadband Group's broadband telephone service initiatives progressed
substantially in 2000. During 2000, AT&T Broadband Group commenced commercial
telephone service operations, increased the number of markets in which it offers
telephone service from ten to 16, and increased its customer base from 8,000 to
547,000. AT&T Broadband Group offers broadband telephone services in: Atlanta,
Boston, the San Francisco Bay Area, Chicago, Dallas, Denver, Hartford,
Jacksonville, Twin Cities, Pittsburgh, Richmond, Seattle, Salt Lake City, St.
Louis, Southern California and Portland, Oregon. As of March 31, 2001, AT&T
Broadband Group increased its customers to 700,000.
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AT&T Broadband Group's telephone service offerings include AT&T Digital
Phone local phone service, unlimited local calling, low in-state long distance
calling rates, by the minute and block of time calling plans, up to four lines,
custom calling feature selections, and feature packages. The features available
are Call Waiting, Caller ID, Anonymous Call Rejection, Call Forwarding, Custom
Ring, 3-Way Calling, Speed Dialing, LD Alert, Distinctive Call Ringing, and
Voice Mail, among others. AT&T Broadband Group offers a variety of options and
calling plans with various price points to meet customers' needs. These options
and calling plans range from basic one line service to multiple lines with full
feature functionality.
AT&T Broadband Group's most popular service offering provides its customers
with two lines into the home, three features on one line, unlimited local calls
and a $.07 per minute interstate calling rate. The basic monthly fee for this
service ranges from $21.95 to $33.95 depending on the market. AT&T Broadband
Group periodically offers promotions to attract new customers. AT&T Broadband
Group's current promotions include, among other items, free installation and one
month of free service. Including the effect of these promotions and discounts,
AT&T Broadband Group's average monthly revenue per customer was $44 in the first
quarter of 2001.
ADVERTISING
In addition to monthly fees from residential customers, AT&T Broadband
Group sells advertising time on satellite-delivered networks such as CNN,
Discovery, ESPN and Lifetime, and on local channels. Currently, AT&T Broadband
Group inserts advertising locally on 24 to 40 networks in each of its systems,
depending on availability and market conditions. AT&T Broadband Group is able to
provide more targeted advertising because it offers more channels and is able to
target advertising to particular geographic zones. According to published
Nielsen data, audiences are increasingly watching cable channels instead of
broadcast channels. AT&T Broadband Group believes this trend will result in an
increase in the demand for its advertising services. In addition to the sale of
advertising time to local and regional advertisers, AT&T Broadband Group
participates in the national spot advertising marketplace through its sales
representation arrangement with and investment in National Cable Communications,
LLC, a partnership that represents cable systems in the sale of time to national
spot advertisers.
ACQUISITIONS AND DIVESTITURES
AT&T Broadband Group regularly seeks to improve the geographic footprint of
its cable systems by selectively exchanging its cable systems for systems of
other cable operators or acquiring systems in close proximity to its systems. In
this regard, AT&T Broadband Group completed a significant number of transactions
in 2000 and the first half of 2001 that substantially changed the size and
profile of its cable system network, and has signed agreements that will
substantially further the strategic objective of consolidating operations in
large local and regional markets:
- In January 2000, a subsidiary of AT&T Broadband Group sold its entire 50%
interest in Lenfest Communications, Inc. to a subsidiary of Comcast. In
consideration for its 50% interest, AT&T Broadband Group received
47,289,843 shares of Comcast Special Class A common stock.
- In February 2000, AT&T Broadband Group redeemed a portion of its interest
in Bresnan Communications Group LLC for $285 million in cash. AT&T
Broadband Group then contributed its remaining interest in Bresnan to CC
VIII, LLC, in exchange for a preferred ownership interest.
- In March 2000, AT&T Broadband Group redeemed approximately 50.3 million
shares of AT&T common stock held by Cox in exchange for stock of a
subsidiary of AT&T Broadband Group owning cable television systems
serving approximately 312,000 customers, AT&T
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Broadband Group's interest of $1,088 million in certain investments, $878
million of franchise costs and $503 million of other net assets.
- In April 2000, AT&T Broadband Group contributed 103,000 subscribers into
a joint venture with Midcontinent Media, Inc. in exchange for a 50%
interest in Midcontinent Communications, a general partnership.
- In June 2000, MediaOne merged into a subsidiary of AT&T, whereby AT&T
Broadband Group acquired approximately 5 million basic cable subscribers,
0.2 million digital video subscribers, 0.3 million high-speed cable
Internet service subscribers and 0.1 million broadband telephone service
subscribers.
- Effective December 31, 2000, AT&T Broadband Group transferred systems
serving approximately 770,000 subscribers primarily located in Washington
D.C., Florida, Georgia, Michigan, New Jersey and Pennsylvania to Comcast
in exchange for systems serving approximately 700,000 subscribers
primarily located in Sacramento, California, Longmont, Colorado and
Chicago, Illinois.
- In January 2001, AT&T Broadband Group sold 98,400 subscribers to Insight
Communications Company, Inc. In a subsequent transaction, AT&T Broadband
Group contributed 247,500 additional subscribers in the Illinois markets
to Insight Midwest, L.P., a partnership owned 50% by AT&T Broadband Group
and 50% by Insight Communications, and Insight Communications also
contributed additional subscribers to the partnership. The expanded joint
venture will continue to be managed by Insight Communications.
- In January 2001, AT&T Broadband Group acquired 358,000 subscribers in the
Boston metropolitan area from Cablevision and transferred 130,000 New
York subscribers, 44 million shares of AT&T common stock valued at
approximately $871 million and approximately $204 million in cash to
Cablevision.
- Effective June 30, 2001, a subsidiary of AT&T transferred to Charter
Communications, Inc. cable systems attributed to AT&T Broadband Group
serving approximately 563,000 customers in Alabama, California, Illinois,
Missouri and Nevada. AT&T Broadband Group, through its attributed
entities, received $1,525 million in cash, $222 million in cash restricted
for future acquisitions of cable systems, and a cable system in Florida
serving 9,000 customers.
- On June 29, 2001, a subsidiary of AT&T sold to MediaCom cable systems
attributed to AT&T Broadband Group serving approximately 94,000 customers
in Missouri for approximately $309 million in cash. In addition, AT&T and
MediaCom have entered into definitive asset purchase agreements in which
certain cable systems attributed to AT&T Broadband Group serving
approximately 745,000 customers in Georgia, Iowa and Illinois will be sold
to MediaCom for approximately $1,895 million in cash, subject to
adjustments.
- On April 9, 2001, a subsidiary of AT&T and Adelphia Communications
Corporation signed a definitive agreement in which certain cable systems
attributed to AT&T Broadband Group serving approximately 128,000 customers
in central Pennsylvania and Ohio will be sold to Adelphia. AT&T Broadband
Group will receive cash of approximately $245 million and Adelphia Class A
common stock valued at approximately $73 million, subject to adjustments.
- On April 30, 2001, a subsidiary of AT&T sold to Comcast certain cable
systems attributed to AT&T Broadband Group serving approximately 590,000
subscribers in Delaware, New Mexico, Maryland, New Jersey, Pennsylvania
and Tennessee in exchange for 63.9 million shares of AT&T common stock
valued at $1,423 million.
- Effective June 30, 2001, AT&T, together with certain subsidiaries
attributed to AT&T Broadband Group transferred its 99.75% interest in an
entity owning the Baltimore, Maryland cable television system, serving
approximately 115,000 customers, to Comcast for approximately $518
million.
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Total managed basic service customers declined between 1997 and 1998 as a
result of certain contribution transactions entered into in 1998. In the most
significant of these transactions, on March 4, 1998, AT&T Broadband Group
contributed to Cablevision certain of its cable television systems serving
approximately 830,000 customers in exchange for approximately 48.9 million newly
issued Cablevision Class A common shares and the assumption of indebtedness.
In addition to the Cablevision transaction discussed in the paragraph
above, during 1998 AT&T Broadband Group also completed eight transactions
whereby AT&T Broadband Group contributed cable television systems serving in the
aggregate approximately 1,924,000 customers to eight separate joint ventures in
exchange for non-controlling ownership interests in each of the joint ventures,
and the assumption and repayment by these joint ventures of indebtedness.
SALES AND MARKETING
AT&T Broadband Group seeks to increase penetration and revenues from its
basic cable television services and its advanced services in its markets. AT&T
Broadband Group's marketing programs and campaigns offer a variety of services
creatively packaged and tailored to individual markets. AT&T Broadband Group
manages its cable systems in markets centered around its major market focus.
AT&T Broadband Group also has two regional management teams to provide
leadership and best practices across its markets. This regional approach is
intended to improve AT&T Broadband Group's ability to sell advertising and
enhance its ability to efficiently introduce and market new services. AT&T
Broadband Group routinely surveys its customers to ensure that it is meeting
their demands and effectively countering competitors' service offerings and
promotional campaigns.
AT&T Broadband Group markets its services through promotional campaigns and
local media and newspaper advertising, through telemarketing, direct mail
advertising, online selling and in person selling. In addition, AT&T Broadband
Group reserves a portion of its inventory of locally inserted cable television
advertising to market its services.
AT&T Broadband Group builds awareness of the AT&T Broadband brand through
local and national advertising campaigns and strong community relations. As a
result of its branding efforts and consistent service standards, AT&T Broadband
Group believes it has developed an improved reputation for quality and
reliability. The well-known and respected AT&T brand provides AT&T Broadband
Group a unique ability to attract new and existing customers to its suite of
services. AT&T Broadband Group also believes that its marketing strategies are
particularly effective due to its national presence and strengths in major
market consolidation and market significance, which enable it to reach a greater
number of both current and potential customers in an efficient, uniform manner.
PROGRAMMING SUPPLIERS
AT&T Broadband Group has various contracts to obtain basic and premium
programming from program suppliers whose compensation is typically based on a
fixed fee per customer or a percentage of its gross receipts for the particular
service. AT&T Broadband Group has entered into long-term agreements with several
programming suppliers, including ABC, AOL Time Warner, CBS/Viacom, Disney,
Encore, Liberty Media Corporation, NBC, News Corp. and Starz!. Generally these
agreements provide for fees based on the number of subscribers. However, certain
of these agreements provide for a flat fee or guaranteed payment obligation
regardless of subscriber levels. AT&T Broadband Group's programming contracts
are generally for a fixed period of time and are subject to negotiated renewal.
Some program suppliers provide volume discount pricing structures or offer
marketing support to AT&T Broadband Group. AT&T Broadband Group's successful
marketing of multiple premium service packages emphasizing customer value
enables it to take advantage of such cost incentives. For more information about
the risks relating to these agreements, see "-- Risk Factors Relating to AT&T
Broadband Group's Business -- Certain entities included in AT&T
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Broadband Group are subject to long-term exclusive agreements that may limit
their future operating flexibility and materially adversely affect AT&T
Broadband Group's financial results."
AT&T Broadband Group's programming costs have increased substantially in
recent years, and are expected to continue to increase due to additional
programming being provided to its customers, increased costs to produce or
purchase programming, inflationary increases and other factors affecting the
cable television industry. You should read "-- Risk Factors Relating to AT&T
Broadband Group's Business -- AT&T Broadband Group's programming costs are
increasing and it may not have the ability to pass these increases on to its
customers, which would materially adversely affect its cash flow and operating
margins."
AT&T Broadband Group believes that it will continue to have access to
programming services but at increasing cost levels. Although AT&T Broadband
Group presently is legally able to pass through increases in its programming
costs to customers, there can be no assurance that the marketplace will allow it
to do so. AT&T Broadband Group also has various retransmission consent
arrangements with commercial broadcast stations, which expire at various times
over the next ten years, with a significant portion expiring prior to December
31, 2002. None of these consent arrangements requires payment of fees for
carriage. However, AT&T Broadband Group does provide non-cash consideration,
including entering into agreements with certain networks to carry satellite-
delivered cable programming, which is associated with the network carried by
such stations.
Currently, there are over 200 cable channels carried or seeking to be
carried on AT&T Broadband Group's cable systems. AT&T Broadband Group has
continued to leverage both its systems' analog upgrades and digital cable
packages as an incentive to its suppliers to secure long term programming deals
with reasonable price structures and other creative financial arrangements to
offset license fee increases.
AGREEMENTS WITH LIBERTY MEDIA GROUP
AT&T Broadband Group is a party to various arrangements with Liberty Media.
PREFERRED VENDOR STATUS
AT&T Broadband Group has granted Liberty Media preferred vendor status with
respect to access, timing and placement of new programming services. This means
that AT&T Broadband Group must use its reasonable efforts to provide digital
basic distribution of new services created by Liberty Media and its affiliates,
on mutual "most favored nation" terms and conditions and otherwise consistent
with industry practices, subject to the programming meeting standards that are
consistent with the type, quality and character of AT&T Broadband Group's cable
services as they may evolve over time.
EXTENSION OF TERM OF AFFILIATION AGREEMENTS
AT&T Broadband Group has agreed to extend any existing affiliation
agreement of Liberty Media and its affiliates that expires on or before March 9,
2004, to a date not before March 9, 2009, if most favored nation terms are
offered and the arrangements are consistent with industry practice.
INTERACTIVE VIDEO SERVICES
AT&T Broadband Group has agreed to enter into arrangements with Liberty
Media for interactive video services under one of the following two
arrangements, which will be at the election of AT&T Broadband Group:
- Pursuant to a five-year arrangement, renewable for an additional
four-year period on then-current most favored nation terms, AT&T Broadband
Group will make available to Liberty Media capacity equal to one 6
megahertz channel (in digital form and including interactive
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enablement, first screen access and hot links to relevant web sites -- all to
the extent implemented by AT&T Broadband Group cable systems) to be used for
interactive, category-specific video channels that will provide entertainment,
information and merchandising programming. The foregoing, however, will
not compel AT&T Broadband Group to disrupt other programming or other
channel arrangements. The services are to be accessible through advanced
set-top boxes deployed by AT&T Broadband Group, except that, unless
specifically addressed in a mutually acceptable manner, AT&T Broadband
Group will have no obligation to deploy set-top boxes of a type, design or
cost materially different from that it would otherwise have deployed. The
content categories may include, among others, music, travel, health,
sports, books, personal finance, automotive, home video sales and games;
or
- AT&T Broadband Group may enter into one or more mutually agreeable
ventures with Liberty Media for interactive, category-specific video
channels that will provide entertainment, information and merchandising
programming. Each venture will be structured as a 50/50 venture for a
reasonable commercial term and provide that Liberty Media and AT&T
Broadband Group will not provide interactive services in the category(s)
of interactive video services provided through the venture for the
duration of such term other than the joint venture services in the
applicable categories. When the distribution of interactive video services
occurs through a venture arrangement, AT&T Broadband Group will share in
the revenue and expense of the provision of the interactive services pro
rata to its ownership interest in lieu of the commercial arrangements
described in the preceding paragraph. At the third anniversary of the
formulation of any such venture, AT&T Broadband Group may elect to
purchase Liberty Media's ownership interest in the venture at fair market
value. Liberty Media and AT&T Broadband Group have agreed to endeavor to
make any such transaction tax efficient to Liberty Media.
At the date of this proxy statement, AT&T Broadband Group has not entered
into any further agreements with Liberty Media regarding the distribution of
specific interactive television channels. As a result, the exact terms under
which AT&T Broadband Group will provide carriage of these channels has not been
determined, and AT&T Broadband Group has not made any elections between the
alternative carriage arrangements described above. Although AT&T Broadband Group
will continue to endeavor to negotiate agreements with Liberty Media concerning
distribution of interactive channels within the framework of the intercompany
arrangement, there can be no assurance that we will be able to conclude any such
agreement on acceptable terms.
AFFILIATION AGREEMENTS
AT&T Broadband Group is party to affiliation agreements pursuant to which
it purchases programming from Liberty Media's subsidiaries and affiliates. Some
of these agreements provide for penalties and charges in the event the
supplier's programming is not carried on AT&T Broadband Group's cable systems or
not delivered to a contractually specified number of customers. Charges to AT&T
Broadband Group for such programming are generally based upon customary rates
and often provide for payments to AT&T Broadband Group by Liberty Media's
subsidiaries and business affiliates for marketing support.
In July 1997, AT&T Broadband Group's predecessor, TCI, entered into a 25
year affiliation term sheet with Starz Encore Group (formerly Encore Media
Group) pursuant to which AT&T Broadband Group may be obligated to pay monthly
fixed amounts in exchange for unlimited access to Encore and Starz! programming.
The affiliation term sheet further provides that to the extent Starz Encore
Group's programming costs increase above certain levels, AT&T Broadband Group's
payments under the term sheet will be increased in proportion to the excess.
Starz Encore Group has requested payment from AT&T Broadband Group of amounts it
contends are AT&T Broadband Group's proportionate share of Starz Encore Group's
excess programming costs during the first quarter of 2001 (which amount,
approximately $40 million, Starz Encore Group indicated it expects
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to represent the bulk of what it considers AT&T Broadband Group's proportionate
share of excess programming costs Starz Encore considers to be payable for the
year 2001). Excess programming costs payable by AT&T Broadband Group for the
balance of 2001 and in future years are not presently estimable, and could be
significantly larger or smaller than the amount requested for the first quarter
of 2001. By letter dated May 29, 2001, AT&T Broadband Group indicated that in
its view the Starz Encore term sheet as a whole is unenforceable and reserved
its right to terminate the term sheet. AT&T Broadband Group indicated to Starz
Encore Group that it would not pay the excess programming costs requested to
date and disputed the enforceability of the excess programming costs pass
through provisions of the term sheet, among other provisions. The letter further
suggests that the parties meet to discuss a new affiliation arrangement. Starz
Encore Group has stated publicly that it views AT&T Broadband Group's position
on the term sheet to be without merit.
AT&T BROADBAND GROUP'S SYSTEMS
AT&T Broadband Group's cable systems give it a nationwide presence coupled
with a strong major market consolidation. As of March 31, 2001, approximately
83% of its customers were in markets where AT&T Broadband Group had more than
500,000 customers.
To maximize the operating and financial benefits of its major market cable
systems, AT&T Broadband Group manages and operates its systems on a regional
basis, with centralized direction and support as appropriate in areas such as
network management and systems integration. AT&T Broadband Group establishes
market regions for management purposes primarily based on geographic clusters,
but also considers other factors where appropriate. AT&T Broadband Group has
fifteen regional Senior Vice Presidents coordinating the cable systems in the
various geographic regions, with an average of fourteen years experience each in
the communications industry.
OTHER ASSETS
JOINT VENTURES
AT&T Broadband Group possesses a number of investments in companies, joint
ventures and partnerships, the most significant of which are Excite@Home, Time
Warner Entertainment, Cablevision, Insight Midwest, and Texas Cable Partners.
Excite@Home. Excite@Home is a provider of content and cable Internet
services over the cable television infrastructure and leased digital
telecommunication lines to consumers and businesses. On September 1, 2000,
Excite@Home converted approximately 50 million of the Excite@Home Series A
shares held by AT&T Broadband Group into Excite@Home Series B shares, each of
which has 10 votes. As a result, AT&T Broadband Group has approximately 23% of
the economic interest and 74% of the voting interest in Excite@Home, as compared
to the 56% voting interest AT&T Broadband Group had previously. AT&T Broadband
Group's interest reflects modifications to Excite@Home's governance structure
which were effective on September 1, 2000. Based on these governance changes,
Excite@Home's financial results, which previously were accounted for by AT&T
Broadband Group as an equity investment, are now fully consolidated and included
in AT&T Broadband Group's financial results. On January 11, 2001, Comcast and
Cox exercised their rights to sell a combined total of approximately 60.4
million shares of Excite@Home to AT&T as part of the March 2000 agreement to
reorganize Excite@Home's governance. In May 2001, AT&T completed negotiations to
restructure the transactions that resulted from Comcast and Cox exercising their
sale rights. Under these restructured transactions, Comcast and Cox retained
their respective Excite@Home shares, and AT&T issued approximately 80.3 million
shares of AT&T common stock to Comcast and 75 million shares of AT&T common
stock to Cox.
On April 17, 2001, Excite@Home issued a press release announcing that, due
to recent acceleration in the weakness of the market for online advertising and
marketing services, it expected to report significantly lower revenues, greater
operating losses and more rapid use of cash than
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previously forecasted for the balance of 2001. As a result, Excite@Home recorded
in its first quarter results an impairment charge associated with its media
business. Because AT&T owns approximately 23% of the outstanding shares of
capital stock of Excite@Home, AT&T recorded an impairment charge in its first
quarter results of $739 million, which had a net income impact, after minority
elimination, of $279 million. After giving effect to the charge, AT&T's carrying
value of Excite@Home was approximately $490 million.
In light of the weaker financial outlook, Excite@Home announced it is
taking several measures to conserve cash and raise additional funds. These
measures included adopting a revised operating plan with lower expenses and the
execution of a non-binding letter of agreement with AT&T under which AT&T may
provide Excite@Home with $75 million to $85 million in connection with the
restructuring of the backbone fiber agreement between the companies and with a
joint initiative to maintain and improve current network performance levels. In
addition, Excite@Home said it may negotiate additional debt and/or equity
financing from third parties, and continue efforts to focus its resources around
its broadband franchise through the potential sale or restructuring of its media
operations not directly supporting the broadband strategy.
On June 11, 2001, Excite@Home announced that it had completed the private
sale of $100 million of zero-percent five-year convertible secured notes. The
notes are convertible at the holders' option at any time into Excite@Home Series
A common stock at a 10% premium to the weighted average trading price of these
shares on June 8, 2001, or $4.3806 per share. The notes mature in July 2006 but
may be redeemed by the holders on each anniversary of the date of issuance of
the notes or by Excite@Home on the second, third and fourth anniversaries of the
date of issuance of the notes. Subject to certain conditions, redemption may be
made, at the option of Excite@Home, either in cash or by issuing shares of its
Series A common stock.
On June 19, 2001 Excite@Home announced that it had renegotiated its
optical-fiber backbone capacity contract with AT&T. Under terms of the
renegotiated agreement, AT&T will refund $85 million to Excite@Home for the
cancellation of the companies' original agreement and enter into a new
agreement. The companies said their new capacity agreement covers Excite@Home's
existing capacity and future upgrades, under which Excite@Home agreed to pay
$8.8 million per year to AT&T for the next 18 1/2 years. Separately, Excite@Home
agreed to pay AT&T $7 million in normal upgrade fees under the existing
contract. The new arrangement replaced in its entirety the non-binding letter of
agreement described above.
On June 27, 2001, AT&T and Excite@Home announced a joint Service Level
Agreement for cross-network performance for their high-speed, dedicated Internet
access services. This joint Service Level Agreement, which supports the
agreement between AT&T and Excite@Home announced February 14, 2001, will be
effective for all business customers who purchase the managed multi-homing
service.
Time Warner Entertainment. Time Warner Entertainment is a Delaware limited
partnership that was formed in 1992 to own and operate substantially all of the
business of Warner Bros., Inc., HBO and the cable television businesses owned
and operated by Time Warner prior to that time. AT&T Broadband Group's current
interest in Time Warner Entertainment was acquired by AT&T Broadband Group in
connection with the MediaOne acquisition. Currently, AT&T Broadband Group,
through its wholly owned subsidiaries, owns general and limited partnership
interests in 25.51% of the pro rata priority capital and residual equity capital
of Time Warner Entertainment. The remaining 74.49% limited partnership interests
in the Series A capital and residual capital of Time Warner Entertainment are
held by subsidiaries of AOL Time Warner. AT&T has an option to increase its
priority capital and residual capital interests of Time Warner Entertainment
from 25.51% to up to 31.84% in certain events. Subsidiaries of AOL Time Warner
act as the general partners of Time Warner Entertainment, and AT&T has only
certain protective governance rights pertaining to certain limited significant
matters relating to Time Warner Entertainment.
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On February 28, 2001, AT&T submitted a request to Time Warner
Entertainment, pursuant to the Time Warner Entertainment partnership agreement,
that Time Warner Entertainment reconstitute itself as a corporation and register
for sale in an initial public offering an amount of partnership interests held
by AT&T (up to the full amount held by AT&T) determined by an independent
investment banking firm so as to provide sufficient trading liquidity and
minimize the initial public offering discount, if any. Under the Time Warner
Entertainment partnership agreement, upon this request, AT&T and Time Warner are
to cause an independent investment banker to determine both the registrable
amount of partnership interests and the price at which the registrable amount
could be sold in a public offering, and upon determination of the registrable
amount and the appraised value of the registrable amount, Time Warner
Entertainment may elect not to register these interests, but instead to allow
AT&T the option to require that Time Warner Entertainment purchase the
registrable amount at the appraised value, subject to certain adjustments. If
AT&T does put the registrable amount to Time Warner Entertainment under such
circumstances, Time Warner Entertainment may call the remainder of AT&T's
interest in Time Warner Entertainment at a price described in the Time Warner
Entertainment partnership agreement. If Time Warner Entertainment elects to
register the interests, Time Warner Entertainment may have an option to purchase
these interests immediately prior to the time the public offering would
otherwise have been declared effective by the Securities and Exchange Commission
at the proposed public offering price less underwriting fees and discounts if
the proposed public offering price (as determined by the managing underwriter)
is less than 92.5% of the appraised value. If, at the conclusion of this
process, AT&T has any remaining interests in Time Warner Entertainment, AT&T
will have the right to request registration of those interests for public sale
within 60 days of July 1, 2002.
Insight Midwest. Insight Midwest is a Delaware limited partnership formed
in 1999 to own and operate certain cable systems in Indiana. AT&T Broadband
Group holds a 50% limited partnership interest and Insight Communications holds
a 50% general partnership interest in Insight Midwest. The business of the
partnership is managed by Insight Communications, as the general partner,
although certain matters also require the approval of AT&T Broadband Group.
Insight Midwest currently has approximately 1.3 million cable video subscribers.
Texas Cable Partners. Texas Cable Partners is a Delaware limited
partnership formed in December 1998 to own and operate certain cable systems in
Texas. The partnership is owned 50% by AT&T Broadband Group and 50% by the Time
Warner Entertainment-Advance /Newhouse Partnership, approximately two-thirds of
which is owned by Time Warner Entertainment. The general manager of Texas Cable
Partners is Time Warner Cable, a division of Time Warner Entertainment, although
certain governance matters require the approval of the management committee on
which the Time Warner Entertainment -- Advance /Newhouse Partnership and AT&T
Broadband Group have equal representation. Texas Cable Partners currently has
approximately 1.1 million cable video subscribers.
OTHER INVESTMENTS
AT&T Broadband Group has interests in a number of different companies,
including its ownership interest in Cablevision.
COMPETITION
Cable television competes for customers in local markets with other
providers of entertainment, news and information. The competitors in these
markets include broadcast television and radio, newspapers, magazines and other
printed material, motion picture theatres, video cassettes and other sources of
information and entertainment, including direct broadcast service, directly
competitive cable television operations and ISPs. The 1992 Cable Act and the
Telecommunications Act are designed to increase competition in the cable
television industry.
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Additionally, AT&T Broadband Group faces significant competition from both
the local telephone companies and new providers of services such as high-speed
cable Internet service and telephone services. Providers of competitive
high-speed data offerings include fixed wireless companies, direct broadcast
satellite companies and DSL resellers.
There are alternative methods of distributing the same or similar services
offered by cable television systems. Further, these technologies have been
encouraged by Congress and the FCC to offer services in direct competition with
existing cable systems.
DIRECT BROADCAST SATELLITE
Direct broadcast satellite has emerged as significant competition to cable
systems. The direct broadcast satellite industry has grown rapidly over the last
several years, far exceeding the growth rate of the cable television industry,
and now serves approximately 14 million subscribers nationwide. Direct broadcast
satellite service allows a subscriber to receive video services directly via
satellite using a relatively small dish antenna. Moreover, video compression
technology allows direct broadcast satellite providers to offer more than 200
digital channels, thereby surpassing the typical analog cable system. Direct
broadcast satellite companies historically were prohibited from retransmitting
popular local broadcast programming, but a change to the existing copyright laws
in November 1999 eliminated this legal impediment. Direct broadcast satellite
companies now need to secure retransmission consent from the popular broadcast
stations they wish to carry, and they will face mandatory carriage obligations
of less popular broadcast stations as of January 2002. In response to the
legislation, DirecTV, Inc. and EchoStar Communications Corporation already have
begun carrying the major network stations in the nation's top television
markets. Direct broadcast satellite, however, is limited in the local
programming it can provide because of the current capacity limitations of
satellite technology. It is, therefore, expected that direct broadcast satellite
companies will offer local broadcast programming only in the larger U.S. markets
for the foreseeable future. The direct broadcast satellite industry recently
initiated a judicial challenge to the statutory requirement mandating carriage
of less popular broadcast stations. This lawsuit alleges that the must-carry
requirement (similar to the requirement already applicable to cable systems, and
discussed under "-- Cable Regulation and Legislation -- Must
Carry/Retransmission Consent") is unconstitutional. Direct broadband satellite
companies also have begun offering Internet services. EchoStar began providing
high-speed Internet service in late 2000, and DirecTV, who has partnered with
AOL Time Warner, reports that it will begin providing its own version of
high-speed Internet service shortly. These developments will provide significant
new competition to AT&T Broadband Group's offering of high-speed cable Internet
service.
BROADCAST TELEVISION
Cable television has long competed with broadcast television, which
consists of television signals that the viewer is able to receive without charge
using an "off-air" antenna. The extent of this competition is dependent upon the
quality and quantity of broadcast signals available through off-air reception
compared to the services provided by the local cable system. The recent
licensing of digital spectrum by the FCC will provide incumbent television
licensees with the ability to deliver high definition television pictures and
multiple digital-quality program streams, as well as advanced digital services,
such as subscription video.
DSL
The deployment of DSL technology will allow the provision of Internet
services to subscribers at data transmission speeds greater than available over
conventional telephone lines. In addition, DSL providers also offer voice
services including via offerings that divide up a phone line into several voice
channels and an always-on data line. All significant local telephone companies
and certain other telecommunications companies are introducing DSL service. The
FCC has a policy of encouraging
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the deployment of DSL and similar technologies, both by incumbent telephone
companies and new, competing telephone companies. The FCC's regulations in this
area are subject to change. The development and deployment of DSL technology by
local telephone companies will provide substantial competition to AT&T Broadband
Group's high-speed cable Internet services and cable telephone services.
PRIVATE CABLE
AT&T Broadband Group also competes with Satellite Master Antenna
Television, or SMATV, systems, which provide multichannel program services and
high-speed Internet Services directly to hotel, motel, apartment, condominium
and similar multi-unit complexes within a cable television system's franchise
area, generally free of any regulation by state and local government authorities
and sometimes on an exclusive basis. FCC rules restrict the ability of cable
operators to maintain ownership of cable wiring inside multi-unit buildings,
thereby making it less expensive for SMATV competitors to reach those customers.
The FCC also has ruled that private cable operators can lease video distribution
capacity from local telephone companies and, thereby, distribute cable
programming services over the public rights-of-way without obtaining a
franchise. In 1999, both the Fifth and Seventh Circuit Courts of Appeal upheld
this FCC policy. This could provide a significant regulatory advantage for
private cable operators in the future.
CABLE SYSTEM OVERBUILDS
Cable operators may compete with other cable operators or new entities
seeking franchises for competing cable television systems at any time during the
terms of existing franchises. The 1992 Cable Act promotes the granting of
competitive franchises and AT&T Broadband Group systems operate under
nonexclusive franchises. Recently, there has been a significant increase in the
number of cities that have constructed their own cable television systems in a
manner similar to city-provided utility services. These systems typically
compete directly with the existing cable operator without the burdens of
franchise fees or other local regulation. Although the total number of municipal
overbuild cable systems remains relatively small, recent developments would
indicate an increasing trend in cities authorizing this direct municipal
competition with cable operators. Additionally, over the last few years there
has been significant new investment in private company overbuilders of cable
systems. If this trend continues, AT&T Broadband Group cable systems could face
an increasing number of markets in which a second cable system will be competing
directly with the AT&T Broadband Group system, providing video, audio,
interactive television, high-speed Internet and telephone services.
TELEPHONE COMPANY ENTRY
The Telecommunications Act eliminated the statutory and regulatory
restrictions that prevented local telephone companies from competing with cable
operators in the provision of video services. The Telecommunications Act allows
local telephone companies, including RBOCs, to compete with cable television
operators both inside and outside their telephone service areas. AT&T Broadband
Group expects that it could face competition from telephone companies for the
provision of video services, whether it is through wireless cable or through
upgraded telephone networks. AT&T Broadband Group assumes that all major
telephone companies already have entered or may enter the business of providing
video services. Although enthusiasm on the part of local exchange carriers
appears to be waning, AT&T Broadband Group is aware that telephone companies
have already built, or are in the process of building, competing cable system
facilities in a number of AT&T Broadband Group's franchise areas. The 1992 Cable
Act ensures that telephone company providers of video services will have access
to most of the significant cable television programming services. As AT&T
Broadband Group expands its offerings to include Internet and other
telecommunications services, it will be subject to competition from the local
telephone companies and other telecommunications providers. The
telecommunications industry is highly competitive, and includes competitors with
substantial
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financial and personnel resources, brand name recognition and long-standing
relationships with regulatory authorities.
UTILITY COMPANY ENTRY
The Telecommunications Act eliminates certain U.S. federal restrictions on
utility holding companies and thus frees all utility companies to provide cable
television services. AT&T Broadband Group expects this could result in another
source of competition in the delivery of video, telephone and high-speed
Internet services.
MMDS
Another alternative method of distribution is multichannel, multi-point
distribution systems, or MMDS, which deliver programming services over microwave
channels to customers equipped with special antennas. MMDSs are less capital
intensive, are not required to obtain local franchises or pay franchise fees,
and are subject to fewer regulatory requirements than cable television systems.
The 1992 Cable Act also ensures that MMDS operators have the opportunity to
acquire most significant cable television programming services.
LOCAL VOICE
AT&T Broadband Group's cable telephone service competes against incumbent
local exchange carriers and competitive local exchange carriers in the provision
of local voice services. Moreover, many of these companies are expanding their
offerings to include Internet service. The incumbent local exchange carriers
have very substantial capital and other resources, longstanding customer
relationships and extensive existing facilities and network rights-of-way. A few
competitive local exchange carriers also have existing local networks and
significant financial resources.
FIXED WIRELESS
Fixed wireless technologies compete with AT&T Broadband Group in the
provision of Internet and voice services. Fixed wireless providers serve the
same functions as a wireline provider, by interconnecting private networks,
bypassing a local exchange carrier or connecting to the Internet. The technology
involved in point-to-point microwave connections has advanced, allowing the use
of higher frequencies, and thus smaller antennas, resulting in lower costs and
easier-to-deploy systems for private use and encouraging the use of such
technology by carriers. Fixed wireless systems are designed to emulate cable
connections, and they use the same interfaces and protocols, such as T1, frame
relay, Ethernet and asynchronous transfer mode. Fixed wireless systems also
match the service parameters of cable systems, and consequently any application
that operates over a cable should be able to operate over a fixed wireless
system.
RESELLERS
Among AT&T Broadband Group's competitors in the areas of voice and Internet
services are resellers. Resellers typically are low-cost aggregators that serve
price-conscious market segments and value-added resellers that target customers
with special needs.
IP TELEPHONE
IP telephone providers compete directly against AT&T Broadband Group's
cable telephone service. IP telephone providers derive most of their revenues
from per-minute charges, but they also offer other services including voicemail
and IP telephone equipment. The leading IP telephone company is Net2Phone, Inc.,
which derived approximately 85% of its 2000 revenue from per-minute charges, and
approximately 34% of its 2000 revenue from international customers. Although the
offerings of IP telephone providers are limited mostly to voice services, these
companies seek to expand to other areas of the telecommunications industry, and
may succeed in doing so in the future.
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GENERAL
In addition to competition for customers, the cable television industry
competes with broadcast television, radio, print media and other sources of
information and entertainment for advertising revenue. As the cable television
industry has developed additional programming, its advertising revenue has
increased. Cable operators sell advertising spots primarily to local and
regional advertisers.
AT&T Broadband Group has no basis upon which to estimate the number of
cable television companies and other entities with which it competes or may
potentially compete. The full extent to which other media or home delivery
services will compete with cable television systems may not be known for some
time, and there can be no assurance that existing, proposed or as yet
undeveloped technologies will not become dominant in the future.
EMPLOYEES
At December 31, 2000, AT&T Broadband Group employed approximately 51,000
individuals in its operations, virtually all of whom are located in the United
States. Approximately 2,000 of these employees are represented by the
Communications Workers of America or the International Brotherhood of Electrical
Workers, both of which are affiliated with the AFL-CIO.
LEGAL PROCEEDINGS
In the normal course of business, AT&T Broadband Group is subject to
proceedings, lawsuits and other claims, including proceedings under government
laws and regulations related to environmental and other matters. Such matters
are subject to many uncertainties and outcomes are not predictable with
assurance. Consequently, AT&T Broadband Group is unable to ascertain the
ultimate aggregate amount of monetary liability or financial impact with respect
to these matters at December 31, 2000. While these matters could affect
operating results of any one quarter when resolved in future periods, it is
management's opinion that after final disposition, any monetary liability of
financial impact to AT&T Broadband Group beyond that provided for at year-end
would not be material to AT&T Broadband Group's annual consolidated financial
position or results of operations.
CABLE REGULATION AND LEGISLATION
The operation of cable television systems is extensively regulated by the
FCC, some state governments and most local governments. The Telecommunications
Act altered the regulatory structure governing the nation's telecommunications
providers. It removes barriers to competition in both the cable television
market and the local telephone market. Among other things, it reduces the scope
of cable rate regulation.
The Telecommunications Act required the FCC to implement numerous
rulemakings, some of which are still subject to court challenges. Moreover,
Congress and the FCC have frequently revisited the subject of cable television
regulation and may do so again. Future legislative and regulatory changes could
adversely affect AT&T Broadband Group's operations. This section briefly
summarizes key laws and regulations currently affecting the growth and operation
of AT&T Broadband Group's cable systems.
CABLE RATE REGULATION
The 1992 Cable Act imposed an extensive rate regulation regime on the cable
television industry, which regulation limited the ability of cable companies to
increase subscriber fees. Under that regime, all cable systems were subjected to
rate regulation, unless they faced effective competition in
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their local franchise area. U.S. federal law now defines "effective competition"
on a community-specific basis as requiring satisfaction of conditions not
typically satisfied in the current marketplace.
Although the FCC establishes all cable rate rules, local government units
(commonly referred to as local franchising authorities) are primarily
responsible for administering the regulation of the lowest level of cable -- the
basic service tier, which typically contains local broadcast stations and PEG
access channels. Before a local franchising authority begins basic service tier
rate regulation, it must certify to the FCC that it will follow applicable U.S.
federal rules, and many local franchising authorities have voluntarily declined
to exercise this authority. Local franchising authorities also have primary
responsibility for regulating cable equipment rates. Under U.S. federal law,
charges for various types of cable equipment must be unbundled from each other
and from monthly charges for programming services, and priced no higher than the
operator's actual cost, plus an 11.25% rate of return.
The FCC historically administered rate regulation of any cable programming
service tiers, which typically contain satellite-delivered programming. Under
the Telecommunications Act, however, the FCC's authority to regulate cable
programming service tier rates ended on March 31, 1999.
CABLE ENTRY INTO TELECOMMUNICATIONS
The Telecommunications Act provides that no state or local laws or
regulations may prohibit or have the effect of prohibiting any entity from
providing any interstate or intrastate telecommunications service. States are
authorized, however, to impose "competitively neutral" requirements regarding
universal service, public safety and welfare, service quality and consumer
protection. State and local governments also retain their authority to manage
the public rights-of-way. Although the Telecommunications Act clarifies that
traditional cable franchise fees may be based only on revenues related to the
provision of cable television services, it also provides that local franchising
authorities may require reasonable, competitively neutral compensation for
management of the public rights-of-way when cable operators provide
telecommunications service. The Telecommunications Act prohibits local
franchising authorities from requiring cable operators to provide
telecommunications service or facilities as a condition of a franchise grant,
renewal or transfer, except that local franchising authorities argue they can
seek "institutional networks" as part of these franchise negotiations.
In particular, cable operators that provide telecommunications services and
cannot reach agreement with local utilities over pole attachment rates in states
that do not regulate pole attachment rates will be subject to a methodology
prescribed by the FCC for determining the rates. These rates may be higher than
those paid by cable operators that do not provide telecommunications services.
The favorable pole attachment rates afforded cable operators under U.S.
federal law can be increased by utility companies owning the poles during a
five-year phase-in period beginning in 2001 if the cable operator provides
telecommunications service as well as cable service over its plant. The FCC
clarified that a cable operator's provision of cable Internet service does not
affect the favorable pole rates, but a recent decision by the Eleventh Circuit
Court of Appeals disagreed and suggested that Internet traffic is neither cable
service nor telecommunications service and might leave cable attachments that
carry Internet traffic ineligible for the U.S. federal rate structure. This
decision could lead to substantial increases in pole attachment rates, and
certain utilities have already proposed vastly higher pole attachment rates
based in part on the existing court decision. The U.S. Supreme Court is now
reviewing this decision. The Eleventh Circuit mandate has been stayed pending
Supreme Court action, and a variety of cable operators, including AT&T Broadband
Group, are challenging certain increased pole attachment rates at the FCC.
Cable entry into telecommunications will be affected by the regulatory
landscape now being fashioned by the FCC and state regulators. One critical
component of the Telecommunications Act intended to facilitate the entry of new
telecommunications providers (including cable operators) is
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the interconnection obligation imposed on all telecommunications carriers. This
requires, for example, that the incumbent local exchange carrier must allow new
competing telecommunications providers to connect to the local telephone
distribution system. A number of implementation details are subject to ongoing
regulatory and judicial review, but the basic requirement is now well
established.
CABLE SYSTEMS PROVIDING INTERNET SERVICE
Although there is at present no significant U.S. federal regulation of
cable system delivery of Internet services, and the FCC recently issued several
reports finding no immediate need to impose this regulation, this situation may
change as cable systems expand their broadband delivery of Internet services. In
particular, proposals have been advanced at the FCC and Congress that would
require cable operators to provide access to unaffiliated ISPs and on-line
service providers. The Federal Trade Commission and the FCC recently imposed
certain open access requirements on Time Warner and AOL in connection with their
merger, but those requirements are not applicable to other cable operators. Some
states and local franchising authorities are considering the imposition of
mandatory Internet access requirements as part of cable franchise renewals or
transfers. In June 2000, the Ninth Circuit Court of Appeals rejected an attempt
by the City of Portland, Oregon to impose mandatory Internet access requirements
on the local cable operator. AT&T Broadband Group has commenced a technical and
operational trial to test how multiple ISPs can offer high-speed, always-on
cable Internet service over a hybrid fiber/coaxial network.
TELEPHONE COMPANY ENTRY INTO CABLE TELEVISION
The Telecommunications Act allows telephone companies to compete directly
with cable operators by repealing the historic telephone company/cable company
cross-ownership ban and the FCC's video dial tone regulations. This will allow
local exchange carriers, including RBOCs, to compete with cable operators both
inside and outside their telephone service areas. Because of their resources,
local exchange carriers could be formidable competitors to traditional cable
operators, and certain local exchange carriers have begun offering cable
service.
Under the Telecommunications Act, a local exchange carrier or other entity
providing video programming to customers will be regulated as a traditional
cable operator (subject to local franchising authority and U.S. federal
regulatory requirements), unless it elects to provide its programming via an
open video system. It was anticipated that the primary benefit of using an open
video system regulatory model was to avoid the need to obtain a local franchise
prior to providing services. However, a January 1999 federal court of appeals
decision held that open video system providers can be required to obtain the
franchise. To be eligible for open video system status, a provider cannot occupy
more than one-third of the system's activated channels when demand for channels
exceeds supply, nor can it discriminate among programmers or establish
unreasonable rates, terms or conditions for service.
Although local exchange carriers and cable operators can now expand their
offerings across traditional service boundaries, the general prohibitions remain
on local exchange carrier buyouts (i.e., any ownership interest exceeding 10%)
of co-located cable systems, cable operator buyouts of co-located local exchange
carrier systems, and joint ventures among cable operators and local exchange
carriers in the same market. The Telecommunications Act provides a few limited
exceptions to this buyout prohibition.
ELECTRIC UTILITY ENTRY INTO TELECOMMUNICATIONS/CABLE TELEVISION
The Telecommunications Act provides that registered utility holding
companies and subsidiaries may provide telecommunications services, information
services, and other services or products subject to the jurisdiction of the FCC,
notwithstanding the Public Utilities Holding Company Act. Electric utilities
must establish separate subsidiaries, known as "exempt telecommunications
companies," and
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must apply to the FCC for operating authority. Again, because of their
resources, electric utilities could be formidable competitors to traditional
cable systems.
CABLE TELEVISION OWNERSHIP RESTRICTIONS
Pursuant to the 1992 Cable Act, the FCC adopted regulations establishing a
30% limit on the number of multichannel video subscribers (including cable and
direct broadcast satellite subscribers) nationwide that a cable operator may
reach through cable systems in which it holds an attributable interest, with an
increase to 35% if the additional cable systems are minority controlled. The FCC
stayed the effectiveness of its ownership limits pending judicial review.
The FCC directly addressed the 30% ownership rule (and the applicable
ownership attribution standards) in its June 2000 ruling on the MediaOne
acquisition. The FCC allowed the MediaOne acquisition to go forward, but
required AT&T to elect one of three divestiture options to come into compliance
with the 30% ownership cap. Specifically, AT&T was required to either (1) divest
its interest in Time Warner Entertainment, (2) terminate its involvement in Time
Warner Entertainment's video programming activities, which would require
divestiture of substantially all of AT&T's video programming interests,
including its interest in Liberty Media, or (3) divest interests in cable
systems. Compliance (or arrangements for compliance) was required by May 2001.
The FCC previously adopted regulations limiting carriage by a cable
operator of national programming services in which that operator holds an
attributable interest to 40% of the activated channels on each of the cable
operator's systems. The rules provide for the use of two additional channels or
a 45% limit, whichever is greater, provided that the additional channels carry
minority controlled programming services. The regulations also grandfather
existing carriage arrangements that exceed the channel limits, but require new
channel capacity to be devoted to unaffiliated programming services until the
system achieves compliance with the regulations. These channel occupancy limits
apply only up to 75 activated channels on the cable system, and the rules do not
apply to local or regional programming services.
In March 2001, the D.C. Circuit Court of Appeals struck down the rules
adopted by the FCC pertaining to ownership and programming carriage and remanded
the issues back to the FCC for further review. Following this decision, the FCC
suspended the compliance deadlines initially provided in its order related to
the MediaOne acquisition to afford the FCC an opportunity to determine the
relationship, if any, between the court decision and the conditions required in
the MediaOne order. The duration of such suspension and the ultimate actions of
the FCC cannot be determined at this time.
The Telecommunications Act eliminates statutory restrictions on
broadcast/cable cross-ownership (including broadcast network/cable
restrictions), but leaves in place existing FCC regulations prohibiting local
cross-ownership between television stations and cable systems. The
Telecommunications Act leaves in place existing restrictions on cable
cross-ownership with SMATV and MMDS facilities, but lifts those restrictions
where the cable operator is subject to effective competition. In January 1995,
however, the FCC adopted regulations that permit cable operators to own and
operate SMATV systems within their franchise area, provided that this operation
is consistent with local cable franchise requirements.
MUST CARRY/RETRANSMISSION CONSENT
The 1992 Cable Act contains broadcast signal carriage requirements that
allow local commercial television broadcast stations to elect once every three
years between requiring a cable system to carry the station, or must carry, or
negotiating for payments for granting permission to the cable operator to carry
the station, or retransmission consent. Less popular stations typically elect
must carry, and more popular stations typically elect retransmission consent.
Must carry requests can dilute the appeal of a cable system's programming
offerings, and retransmission consent demands may require substantial
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payments or other concessions (e.g., a requirement that the cable system also
carry the local broadcaster's affiliated cable programming service). Either
option has a potentially adverse effect on AT&T Broadband Group's business. The
burden associated with must carry obligations could dramatically increase if
television broadcast stations proceed with planned conversions to digital
transmissions and if the FCC determines that cable systems must carry
simultaneously all analog and digital signals transmitted by the television
stations during the multi-year transition in which a single broadcast license is
authorized to transmit both an analog and a digital signal. The FCC tentatively
decided against imposition of dual digital and analog must carry in a January
2001 ruling. At the same time, however, it initiated further fact gathering,
which, ultimately, could lead to a reconsideration of that tentative conclusion.
ACCESS CHANNELS
Local franchising authorities can include franchise provisions requiring
cable operators to set aside certain channels for non-commercial PEG access
programming. U.S. federal law also requires a cable system with 36 or more
channels to designate a portion of its activated channel capacity (up to 15%)
for commercial leased access by unaffiliated third parties. The FCC has adopted
rules regulating the terms, conditions and maximum rates a cable operator may
charge for use of this designated channel capacity, but use of commercial leased
access channels has been relatively limited.
"ANTI-BUY THROUGH" PROVISIONS
U.S. federal law requires each cable system to permit customers to purchase
premium services or pay-per-view video programming offered by the operator on a
per-channel or a per-program basis without the necessity of subscribing to any
tier of service (other than the basic service tier) unless the system's lack of
addressable converter boxes or other technological limitations does not permit
it to do so. The statutory exemption for cable systems that do not have the
technological capability to comply expires in October 2002, but the FCC may
extend that period if deemed necessary.
ACCESS TO PROGRAMMING
To spur the development of independent cable programmers and competition to
incumbent cable operators, the 1992 Cable Act imposed restrictions on the
dealings between cable operators and cable programmers. Of special significance
from a competitive business posture, the 1992 Cable Act precludes satellite
video programmers affiliated with cable operators from favoring cable operators
over competing multichannel video programming distributors (such as direct
broadcast satellite and MMDS distributors). This provision limits the ability of
vertically integrated satellite cable programmers to offer exclusive programming
arrangements to AT&T Broadband Group. Both Congress and the FCC have considered
proposals that would expand the program access rights of cable's competitors,
including the possibility of subjecting both terrestrially delivered video
programming and video programmers that are not affiliated with cable operators
to all program access requirements. Pursuant to the Satellite Home Viewer
Improvement Act, the FCC has adopted regulations governing retransmission
consent negotiations between broadcasters and all multichannel video programming
distributors, including cable and direct broadcast satellite.
INSIDE WIRING; SUBSCRIBER ACCESS
FCC rules require an incumbent cable operator, upon expiration of a
multiple dwelling unit service contract, to sell, abandon or remove "home run"
wiring that was installed by the cable operator in the multiple dwelling unit
building. These inside wiring rules are expected to assist building owners in
their attempts to replace existing cable operators with new programming
providers that are willing to pay the building owner a higher fee, where a
higher fee is permissible. The FCC also has proposed abrogating all exclusive
multiple-dwelling unit service agreements held by
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incumbent operators, but allowing these contracts when held by new entrants. In
another proceeding, the FCC has preempted restrictions on the deployment of
private antenna on rental property within the exclusive use of a tenant, such as
balconies and patios. This FCC ruling may limit the extent to which multiple
dwelling unit owners may enforce certain aspects of multiple dwelling unit
agreements that otherwise prohibit, for example, placement of digital broadcast
satellite receiver antennae in multiple dwelling unit areas under the exclusive
occupancy of a renter. These developments may make it more difficult for AT&T
Broadband Group to provide service in multiple dwelling unit complexes.
OTHER REGULATIONS OF THE FCC
In addition to the FCC regulations noted above, there are other regulations
of the FCC covering such areas as:
- equal employment opportunity (currently suspended as a result of a
judicial ruling);
- subscriber privacy;
- programming practices, including, among other things,
-- syndicated program exclusivity, which requires a cable system to
delete particular programming offered by a distant broadcast signal
carried on the system that duplicates the programming for which a
local broadcast station has secured exclusive distribution rights,
-- network program nonduplication,
-- local sports blackouts,
-- indecent programming,
-- lottery programming,
-- political programming,
-- sponsorship identification,
-- children's programming advertisements, and
-- closed captioning;
- registration of cable systems and facilities licensing;
- maintenance of various records and public inspection files;
- aeronautical frequency usage;
- lockbox availability;
- antenna structure notification;
- tower marking and lighting;
- consumer protection and customer service standards;
- technical standards;
- consumer electronics equipment compatibility; and
- emergency alert systems.
The FCC recently ruled that cable customers must be allowed to purchase
cable converters from third parties and established a multi-year phase-in during
which security functions, which would remain in the operator's exclusive
control, would be unbundled from basic converter functions, which
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then could be satisfied by third-party vendors. The first phase implementation
date was July 1, 2000. Compliance was technically and operationally difficult in
some locations, so AT&T Broadband Group and several other cable operators filed
a request at the FCC that the requirement be waived in those systems. The
request resulted in a temporary deferral of the compliance deadline for those
systems.
The FCC recently initiated an inquiry to determine whether the cable
industry's future provision of interactive services should be subject to
regulations ensuring equal access and competition among service vendors. The
inquiry, which grew out of the FCC's review of the AOL/Time Warner merger, is in
its earliest stages.
The FCC has the authority to enforce its regulations through the imposition
of substantial fines, the issuance of cease and desist orders and/or the
imposition of other administrative sanctions, such as the revocation of FCC
licenses needed to operate certain transmission facilities used in connection
with cable operations.
COPYRIGHT
Cable television systems are subject to U.S. federal copyright licensing
covering carriage of television and radio broadcast signals. In exchange for
filing certain reports and contributing a percentage of their revenue to a U.S.
federal copyright royalty pool (this percentage varies depending on the size of
the system and the number of distant broadcast television signals carried),
cable operators can obtain blanket permission to retransmit copyrighted material
on broadcast signals. The possible modification or elimination of this
compulsory copyright license is subject to continuing review and could adversely
affect AT&T Broadband Group's ability to obtain desired broadcast programming.
In addition, the cable industry pays music licensing fees to Broadcast Music,
Inc. and the American Society of Composers, Authors and Publishers. Copyright
clearances for nonbroadcast programming services are arranged through private
negotiations.
STATE AND LOCAL REGULATION
Cable television systems generally are operated pursuant to nonexclusive
franchises granted by a municipality or other state or local government entity.
The Telecommunications Act clarified that the need for an entity providing cable
services to obtain a local franchise depends solely on whether the entity
crosses public rights-of-way. U.S. federal law now prohibits franchise
authorities from granting exclusive franchises or from unreasonably refusing to
award additional franchises covering an existing cable system's service area.
Cable franchises generally are granted for fixed terms, and in many cases, are
terminable if the franchisee fails to comply with material provisions.
Noncompliance by the cable operator with franchise provisions also may result in
monetary penalties.
The terms and conditions of franchises vary materially from jurisdiction to
jurisdiction. Each franchise generally contains provisions governing cable
operations, service rates, franchise fees, system construction and maintenance
obligations, system channel capacity, design and technical performance, customer
service standards, and indemnification protections. A number of states subject
cable television systems to the jurisdiction of centralized state governmental
agencies. Although local franchising authorities have considerable discretion in
establishing franchise terms, there are certain U.S. federal limitations. For
example, local franchising authorities cannot insist on franchise fees exceeding
5% of the system's gross revenue, cannot dictate the particular technology used
by the system, and cannot specify video programming other than identifying broad
categories of programming.
U.S. federal law contains renewal procedures designed to protect incumbent
franchisees against arbitrary denials of renewal. Even if a franchise is
renewed, the franchise authority may seek to impose new and more onerous
requirements, such as significant upgrades in facilities and services or
increased franchise fees and funding for PEG access channels as a condition of
renewal. Similarly, if a franchise authority's consent is required for the
purchase or sale of a cable system or franchise, this
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authority may attempt to impose more burdensome or onerous franchise
requirements in connection with a request for consent. Historically, franchises
have been renewed for cable operators that have provided satisfactory services
and have complied with the terms of their franchises.
PROPOSED CHANGES IN REGULATION
The regulation of cable television systems at the U.S. federal, state and
local levels is subject to the political process and has been in constant flux
over the past decade. Material changes in the law and regulatory requirements
must be anticipated, and there can be no assurance that AT&T Broadband Group's
business will not be affected adversely by future legislation, new regulation or
deregulation.
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AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
AT&T Broadband Group is an integrated business of AT&T and not a
stand-alone entity. The combined financial statements included herein reflect
the results of the proposed AT&T Broadband Group tracking stock. Separate
financial statements are not required to be filed for tracking stocks. However,
AT&T Broadband Group has provided the financial statements as an exhibit to this
document to provide additional disclosures to investors to allow them to assess
the financial performance of AT&T Broadband Group. Since the tracking stocks are
governed by a common board of directors, AT&T's board of directors could make
operational and financial decisions or implement policies that affect
disproportionately the businesses of AT&T Broadband Group. For example, AT&T's
board of directors may decide to transfer funds or to reallocate assets,
liabilities, revenue, expenses and cash flows among groups, without the consent
of shareholders. All actions by AT&T's board of directors are subject to the
board members' fiduciary duties to all shareholders of AT&T as a group and not
just to holders of a particular class of tracking stock and to AT&T's charter,
policy statements, by-laws and inter-company agreements.
AT&T's board of directors may change or supplement the policies set forth
in the AT&T Groups policy statement and AT&T's other policy statements and
AT&T's by-laws in the sole discretion of AT&T's board of directors, subject to
the provisions of any inter-group agreement but without approval of AT&T's
shareholders. In addition, the fact that AT&T has separate classes of common
stock could give rise to occasions when the interests of the holders of AT&T
Broadband Group tracking stock and those of the holders of the other classes of
AT&T common stock conflict or appear to diverge or conflict. AT&T's board of
directors would make any change or addition to the policies set forth in the
AT&T Groups policy statement or AT&T's by-laws, and would respond to any actual
or apparent divergence of interest among the groups, in a manner consistent with
its fiduciary duties to AT&T and all of AT&T's shareholders after giving
consideration to the potentially divergent interests and all other relevant
interests of the holders of the separate classes of AT&T shares.
YOU SHOULD CONSIDER THAT AS A RESULT OF THE FLEXIBILITY PROVIDED TO AT&T'S
BOARD OF DIRECTORS, IT MAY BE DIFFICULT FOR INVESTORS TO ASSESS THE FUTURE
PROSPECTS OF AT&T BROADBAND GROUP BASED ON AT&T BROADBAND GROUP'S PAST
PERFORMANCE.
AT&T Broadband Group consists primarily of the assets and business of AT&T
Broadband, LLC (formerly TCI), acquired by AT&T on March 9, 1999 in the TCI
merger, and MediaOne, acquired by AT&T on June 15, 2000 in the MediaOne
acquisition. AT&T Broadband Group is one of the nation's largest broadband
communications providers, providing cable television, high-speed cable Internet
and telephone services. At or for the three months ended March 31, 2001, AT&T
Broadband Group's network passed approximately 28.1 million homes, and had 15.9
million basic cable subscribers. AT&T Broadband Group had approximately $2.6
billion in revenue, $1.7 billion in operating losses, approximately $1.5 billion
in net losses, and approximately ($.5) billion in EBITDA. EBITDA, excluding
asset impairment, pre-tax losses from equity investments and other income or
expense was $.4 billion for the three months ended March 31, 2001. At or for the
year ended December 31, 2000, AT&T Broadband Group's broadband network passed
approximately 28.3 million homes, and had over 16 million basic cable
subscribers. AT&T Broadband Group had approximately $8.4 billion in combined
revenue, approximately $8.6 billion in operating losses, approximately $5.4
billion in net losses, and approximately $(2.3) billion in EBITDA. EBITDA,
excluding asset impairment, pre-tax losses from equity investments and other
income or expense was $1.7 billion for
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the year ended December 31, 2000. AT&T Broadband Group provides a broad range of
traditional cable services to customers individually and in combination with
other services, including basic programming, expanded basic programming, premium
service, and pay-per-view programming. In addition, AT&T Broadband Group has
been upgrading its network to provide a variety of advanced services, including
digital video, high-speed cable Internet service, and cable telephone services.
AT&T Broadband Group's revenue is derived primarily from the provision of
analog and digital video services, high-speed cable Internet and broadband
telephone services. AT&T Broadband Group charges customers for installation of
equipment into their homes. Additionally, AT&T Broadband Group derives revenue
from the sale of advertising time via ad avails on certain cable networks. AT&T
Broadband Group sells its services on an individual basis as well as through
packages or on a bundled basis. AT&T Broadband Group expects revenue will
continue to increase in the future as a result of increases in customers for its
various services as well as rate increases. AT&T Broadband Group anticipates
that the mix of its customers will change over time as the number of customers
of advanced services increases. Accordingly, AT&T Broadband Group expects
revenue from advanced services to increase as a percentage of total revenue over
time.
Operating expenses consist of service costs and selling, general and
administrative expenses attributable to management of its 15.9 million customer
base. Service costs include fees paid to programming suppliers, expenses related
to copyright fees, wages and salaries of technical personnel, franchise fees and
plant operating costs. Programming fees have historically increased at rates in
excess of inflation due to increases in the number of programming services
offered and improvements in the quality of programming. AT&T Broadband Group
expects programming costs will continue to increase. Competitive factors may
limit AT&T Broadband Group's ability to recover increases in programming costs
through rate increases to customers. Selling, general and administrative
expenses directly attributable to our cable television systems include wages and
salaries for customer service and administrative personnel, and expenses related
to billing, marketing, advertising sales and office administration. AT&T
Broadband Group anticipates that it will reduce costs, exclusive of programming
through the consolidation of customer call centers and the reduction of its
overall cost structure.
Debt attributed to AT&T Broadband Group includes the third party
obligations of AT&T Broadband LLC (formerly TCI) and MediaOne and all
monetization debt. Additional intercompany debt has been allocated to AT&T
Broadband Group to achieve a total debt level based on several factors,
including prospective financing requirements, desired stand-alone credit
profile, working capital and capital expenditure requirements, expected sources
of future deleveraging, and comparable company profiles. Increases in historical
intercompany debt are based on historical cash flows. Such cash outflows include
capital expenditures, cash used in operations and investments in cable
companies. By the time AT&T's restructuring activities are complete, the
then-intercompany debt balance of AT&T Broadband Group will be replaced with an
equal amount of external debt in a manner to be determined. The historical
interest expense on the allocated intercompany debt was calculated based on a
rate intended to be equivalent to the rate AT&T Broadband Group would receive if
it were a stand-alone entity. Due to AT&T's deleveraging activities, the $28.8
billion of debt at March 31, 2001 is expected to be significantly lower in the
future. AT&T's expected deleveraging activities that relate to AT&T Broadband
Group include, but may not be limited to, the following: the announced sale of
non-strategic cable systems which is expected to result in net cash proceeds of
$3.1 billion; any proceeds that may result from the exercise of AT&T's
registration rights in Time Warner Entertainment; and any proceeds from the sale
of shares of Cablevision. Finally, AT&T has made no final determination as to
the allocation of proceeds from the sale of shares of AT&T Broadband Group
tracking stock.
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OPERATING RESULTS
The comparison of first quarter 2001 results with the first quarter of 2000
and the comparison of the year ended December 31, 2000 with the ten months ended
December 31, 1999 were impacted by acquisitions and dispositions that occurred
during 2000 and 2001. Effective June 15, 2000, AT&T completed the acquisition of
MediaOne. On March 15, 2000, AT&T Broadband Group received 50.3 million shares
of AT&T common stock held by Cox in exchange for an entity owning cable
television systems serving approximately 312,000 customers and certain other net
assets. In addition AT&T Broadband Group completed other dispositions and
exchanges that in the aggregate affect the comparability of financial results
between periods.
In addition to the above, the comparability of operating results between
periods has also been affected by the consolidation of Excite@Home beginning
September 1, 2000, due to AT&T Broadband Group gaining voting control. AT&T
Broadband Group, through AT&T Broadband, LLC, has an approximate 23% economic
interest and a 74% voting interest in Excite@Home. Prior to September 1, 2000,
the ownership of Excite@Home was accounted for under the equity method of
accounting, which means the investment was shown in "investments" in the
combined balance sheet, and any earnings or losses were included as a component
of "net losses from equity investments" in the combined statements of
operations. The consolidation of Excite@Home resulted in the inclusion of 100%
of its results in each line item on the combined balance sheet and statement of
operations. The approximate 77% not owned by AT&T Broadband Group, through AT&T
Broadband, LLC, is shown as a single line item on the combined balance sheet
within "minority interest" and within "minority interest income (expense)" in
the combined statement of operations.
The results of operations for AT&T Broadband Group begin on March 1, 1999,
the effective date of the TCI merger. Accordingly, the results of operations for
1999 include 10 months of operations as compared to a full 12 months of
operations in 2000 for the business of AT&T Broadband, LLC.
THREE MONTHS ENDED MARCH 31, 2001 COMPARED WITH THE THREE MONTHS ENDED
MARCH 31, 2000
Revenue
Total revenue increased $1,030 million, or 66%, for the first quarter 2001
compared to the first quarter of 2000. This increase was due to the impact of
the MediaOne acquisition of $814 million and the consolidation of Excite@Home of
$143 million. The remaining increase was primarily a result of increased revenue
from advanced services (digital video, high-speed cable Internet and cable
telephone services) of $106 million and an increase in basic cable revenue of
approximately $53 million. Basic cable revenue increased as a result of rate
increases. Such increases were offset by a decrease in revenue of $59 million
due to dispositions and exchanges.
At March 31, 2001, AT&T Broadband Group served approximately 15.9 million
basic cable customers, while passing approximately 28.1 million homes, compared
with 11.1 million basic-cable customers, while passing approximately 19.2
million homes at March 31, 2000. AT&T Broadband acquired systems passing
approximately 8.7 million homes with approximately 5.0 million basic cable
customers in the MediaOne acquisition. At March 31, 2001 AT&T Broadband Group
provided digital video service to approximately 3.1 million customers,
high-speed cable Internet service to approximately 1.3 million customers, and
cable telephone service to approximately 686,000 customers. This compares with
approximately 2.0 million digital video customers, approximately 297,000 high
speed cable Internet service customers, and nearly 40,000 cable telephone
customers at March 31, 2000. The MediaOne acquisition added 0.2 million digital
video service customers, 0.3 million high-speed cable Internet customers and 0.1
million cable telephone customers.
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Cost of Services
Cost of services increased $595 million, or 68%, for the first quarter of
2001 compared to the first quarter of 2000. This increase was primarily due to
the impact of the MediaOne acquisition of $426 million and the consolidation of
Excite@Home of $129 million. The remaining increase is primarily a result of an
increase of $66 million associated with high-speed cable Internet and cable
telephone services due to growth in the business and an increase in programming
costs of $18 million. Such increases were offset by a decrease in costs of $14
million due to dispositions and exchanges.
Selling, General and Administrative
Selling, general and administrative expenses increased $339 million, or 94%
for the first quarter of 2001 compared to the first quarter of 2000. This
increase was primarily due to the impact of the MediaOne acquisition of $183
million, an increase in expenses related to high-speed cable Internet and cable
telephone services of $49 million due to growth in the business and the
consolidation of Excite@Home of $29 million. The increase was offset by a
decrease of $14 million due to dispositions and exchanges.
Depreciation and Other Amortization
Depreciation and other amortization increased $406 million, or 166%, for
the first quarter of 2001 compared to the first quarter of 2000. The increase
was primarily due to the impact of the MediaOne acquisition of $227 million, the
consolidation of Excite@Home of $67 million and a higher asset base resulting
from continued infrastructure investment. Total capital expenditures for the
first quarters of 2001 and 2000 were $928 million and $885 million,
respectively.
Amortization of Goodwill, Franchise Costs and Other Purchased Intangibles
Amortization increased $395 million, or 167%, for the first quarter 2001
compared to the first quarter 2000. The increase was primarily due to the
MediaOne acquisition of $260 million and the consolidation of Excite@Home of
$123 million.
As a result of an evaluation of recent changes in the cable industry and
the views of regulatory authorities, AT&T Broadband Group, effective January 1,
2001, began using an amortization period for all franchise costs and goodwill
associated with newly acquired cable operations not to exceed 25 years. This
change did not have a material impact to AT&T Broadband Group's results of
operations for the three months ended March 31, 2001.
Asset Impairment, Restructuring and Other Charges
During the first quarter of 2001, AT&T Broadband Group recorded $808
million of asset impairment, restructuring and other charges. Included in these
charges were $739 million for asset impairment charges related to Excite@Home
and $69 million for restructuring and exit costs, of which $13 million related
to Excite@Home. Restructuring and exit costs consisted of $59 million for cash
severance costs, $6 million related to facilities and $4 million related to
termination of lease obligations.
The asset impairment charges included $600 million recorded by Excite@Home
associated with goodwill impairment of various acquisitions, primarily Excite,
and a related goodwill impairment charge of $139 million recorded by AT&T
Broadband Group associated with its acquisition goodwill of Excite@Home. The
impairment resulted from continued weakness of the online media market in which
Excite@Home operates. Since AT&T Broadband Group consolidates Excite@Home, but
only owns 23% of Excite@Home, 77% of the charge recorded by Excite@Home was not
included as a reduction of AT&T Broadband Group's net income (loss), but rather
eliminated in the consolidated statement of income as "minority interest income
(expense)."
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The $59 million of cash severance costs were part of an initiative to
reduce costs. The restructuring and exit plans primarily focus on the
maximization of synergies through involuntary headcount reductions of 2,350
employees, including the consolidation of customer-care and call centers and the
reduction of construction efforts on rebuilds. Approximately 10% of the
employees were management and 90% were non-management employees. Nearly 88% of
the affected employees have left their positions as of March 31, 2001, and the
remaining employees will leave the company by the end of 2001. The restructuring
initiative is projected to yield cash savings, after severance pay-outs of
approximately $59 million, of approximately $42 million in 2001 and
approximately $132 million per year thereafter, as well as operating expense
savings of approximately $97 million in 2001 and approximately $101 million per
year thereafter. We expect increased spending in growth businesses will largely
offset these cash and operating expense savings. The operating expense savings,
primarily attributable to reduced personnel-related expenses, will be realized
in cost of services and SG&A expenses.
In the second quarter of 2001, additional restructuring charges are
expected to be incurred related to continued headcount reductions and
consolidation of facilities.
During the first quarter of 2000, AT&T Broadband Group recorded a $16
million restructuring charge associated with the involuntary headcount
reductions of 36 employees of which 78% were management employees and 22% were
non-management employees. All of the affected employees had left their positions
as of March 31, 2000.
Operating Loss
Operating loss increased $1,497 million to $1,667 million for the first
quarter of 2001 compared to the first quarter of 2000. The increase was
primarily due to the consolidation of Excite@Home, which increased operating
losses by $956 million. A majority of the impact of operating losses generated
by Excite@Home was offset in minority interest income (expense), reflecting the
approximate 77% of Excite@Home AT&T Broadband Group does not own. Also
contributing to the increase were the impact of the MediaOne acquisition, an
increase in restructuring and exit costs, and higher costs for advanced
services.
Other (Expense) Income
Other (expense) income decreased from income of $484 million for the first
quarter of 2000 to expense of $953 million for the first quarter of 2001.
Effective January 1, 2001, in conjunction with the adoption of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," certain
investment securities, which support debt that is indexed to such securities,
were transferred from "available-for-sale" to "trading." As a result of the
reclassification, a noncash pretax charge of $1.0 billion was taken. This charge
represents amounts charged to combined attributed net assets in prior periods.
The first quarter of 2001 also included a $62 million charge resulting from the
increase in the fair value of the put options held by Comcast and Cox related to
Excite@Home stock, and an investment impairment charge of $62 million. Also,
contributing to the increase in expense were lower gains of approximately $331
million on the sale of businesses and investments.
Interest Expense
Interest expense increased $215 million to $479 million for the first
quarter of 2001 compared to the first quarter of 2000. The increase was a result
of an increase in debt due primarily to the MediaOne acquisition and the
monetization of investments in Microsoft and Comcast.
Benefit for Income Taxes
The benefit for income taxes for the first quarter of 2001 was $744
million, compared with a benefit of $414 million for the first quarter of 2000.
The effective income tax rate for the first quarter
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of 2001 was 24.0%, compared to (828.0%) for the first quarter of 2000. The
effective rate for 2001 was impacted by the consolidation of operational losses
of Excite@Home, which is unable to record tax benefits on its pretax losses, and
higher non tax-deductible goodwill amortization. The first quarter 2000
effective tax rate was positively impacted by a tax-free gain resulting from an
exchange of AT&T stock for an entity owning certain cable systems and other
assets with Cox, and the benefit of the write-off of the related deferred tax
liability.
Net Earnings (Losses) from Equity Investments
Net earnings (losses) from equity investments which are recorded net of
income taxes increased from a loss of $218 million for the first quarter of 2000
to income of $49 million for the first quarter of 2001. The increase was
primarily due to the consolidation of Excite@Home and higher earnings of
Cablevision Systems Corporation resulting from a gain associated with the
exchange of cable properties, partially offset by higher losses from its normal
business operations. Partially offsetting these increases were higher equity
losses from various equity investments. The income tax benefit (provision)
recorded on net earnings (losses) from equity investments was $(31) million and
$136 million for first quarter 2001 and 2000, respectively.
Minority Interest Income (Expense)
Minority interest income (expense), which is recorded net of income taxes,
represents an adjustment to AT&T Broadband Group's net income (loss) to reflect
the less than 100% ownership of entities attributed to AT&T Broadband Group as
well as dividends on preferred stock issued by subsidiaries of AT&T which have
been attributed to AT&T Broadband Group. The increase of $599 million in the
first quarter of 2001 compared to the first quarter of 2000 primarily resulted
from the consolidation of Excite@Home effective September 1, 2000. Minority
interest income (expense) in 2001 primarily reflects the losses generated by
Excite@Home, including the goodwill impairment charge, that were attributed to
the approximate 77% of Excite@Home not owned by AT&T Broadband Group, through
AT&T Broadband, LLC. The income tax benefit recorded on minority interest income
(expense) was $25 million for both the first quarter of 2001 and 2000.
Cumulative Effect of Accounting Change
Cumulative effect of accounting change, net of applicable income taxes, was
$229 million in the first quarter of 2001. The cumulative effect was
attributable to the adoption of SFAS No. 133 and represented fair value
adjustments to equity based derivative instruments embedded in indexed debt
instruments and to the warrant portfolio.
Net (Loss) Income
Net (loss) income decreased from net income of $196 million for the first
quarter of 2000 to a net loss of $1,528 million for the first quarter of 2001.
The decrease is primarily a result of increased operating losses; the adoption
of SFAS No. 133, which included a charge relating to the recognition of net
losses on the transfer of investments from available-for-sale to trading and a
benefit relating to the cumulative effect of adoption; lower gains on the sale
of businesses and investments, and an increase in interest expense. Such
decreases were offset by an increase in minority interest income and net
earnings from equity investments.
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH THE TEN MONTHS ENDED DECEMBER
31, 1999
Revenue
Total revenue increased $3,365 million, or 66%, in 2000 compared to 1999.
This increase was due to additional revenue from the MediaOne acquisition of
$1,730 million, an additional two months of revenue in 2000 of $1,035 million,
and the consolidation of Excite@Home of $248 million. The
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remaining increase was primarily a result of increased revenue from advanced
services (digital video, high-speed cable Internet and cable telephone services)
of $242 million and an increase in basic cable revenue of approximately $195
million. Basic cable revenue increased as a result of rate increases. Such
increases were offset by a decrease in revenues of $104 million due to the Cox
disposition.
At December 31, 2000, AT&T Broadband Group serviced approximately 16.0
million basic cable customers, while passing approximately 28.3 million homes,
compared with 11.4 million basic cable customers, while passing approximately
19.7 million homes at December 31, 1999. AT&T Broadband Group acquired systems
passing approximately 8.7 million homes with approximately 5.0 million basic
cable customers in the MediaOne acquisition. At December 31, 2000, AT&T
Broadband Group provided digital video service to approximately 2.8 million
customers, high-speed cable Internet service to approximately 1.1 million
customers, and cable telephone service to approximately 547,000 customers. This
compares with approximately 1.8 million digital video customers, approximately
207,000 high-speed cable Internet service customers, and nearly 8,300 cable
telephone customers at December 31, 1999. The MediaOne acquisition added 0.2
million digital video service customers, 0.3 million high-speed cable Internet
customers and 0.1 million cable telephone customers.
Cost of Services. Cost of services increased $1,914 million, or 71%, in
2000 compared with 1999. This increase was primarily due to the impact of the
MediaOne acquisition of $833 million, an additional two months of costs in 2000
of $576 million and the consolidation of Excite@Home of $195 million. The
remaining increase primarily is a result of $180 million programming costs, an
increase of $142 million associated with high-speed cable Internet and cable
telephone services and an increase in salary expense and other basic cable costs
of $138 million due to growth in business. Such increases were offset by a
decrease in costs of $48 million due to the Cox disposition.
Selling, General and Administrative. Selling, general and administrative
expenses increased $927 million, or 74%, in 2000 compared to 1999. This increase
was primarily due to the impact of the MediaOne acquisition of $458 million, an
additional two months in 2000 of $210 million, an increase in expenses related
to high-speed cable Internet and cable telephone service of $232 million and the
consolidation of Excite@Home of $56 million.
Depreciation and Other Amortization. Depreciation and other amortization
increased $869 million, or 108%, in 2000 compared to 1999. The increase was
primarily due to the impact of the MediaOne acquisition of $473 million, the
consolidation of Excite@Home of $80 million, an additional two months in 2000 of
$157 million and a higher asset base resulting from continued infrastructure
investment. Total capital expenditures for 2000 and 1999 were $4,426 million and
$3,161 million, respectively.
Amortization of Goodwill, Franchise Costs and Other Purchased
Intangibles. Amortization increased $1,508 million, or 174%, in 2000 compared
to 1999. The increase was primarily due to the MediaOne acquisition of $515
million, the consolidation of Excite@Home of $911 million, and an additional two
months in 2000 of $161 million.
Asset Impairment Restructuring and Other Charges. Asset impairment,
restructuring and other charges increased $5,626 million in 2000 to $6,270
million. For the year ended 2000, the charge included $6,179 million of asset
impairment charges related to Excite@Home and $91 million related to
restructuring and exit costs.
The charges related to Excite@Home include $4,609 million of asset
impairment charges recorded by Excite@Home associated with the impairment of
goodwill from various acquisitions and a related goodwill impairment charge of
$1,570 million recorded by AT&T Broadband Group associated with goodwill from
the acquisition of its investment in Excite@Home. The impairments resulted from
a decision by Excite@Home to exit certain businesses, as well as significant
changes to the dynamics of the online media market that Excite@Home operates in,
which necessitated a general impairment review of Excite@Home's intangible
assets. Since AT&T Broadband Group,
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through AT&T Broadband, LLC, owns approximately 23% of Excite@Home, 77% of the
charge recorded by Excite@Home was not included as a reduction of net income,
but rather was eliminated through minority interest in income (expense) in the
combined statements of operations.
The $91 million charge for restructuring and exit plans was primarily due
to headcount reductions as part of the integration of MediaOne, the
centralization of certain functions, and the consolidation of call center
facilities. This charge included $61 million of cash termination benefits
associated with the involuntary separation of 1,060 employees. Approximately 25%
of the employees were management while 75% were non-management employees.
Approximately 74% of the affected employees have left their positions as of
December 31, 2000. The $91 million charge also included a loss of $30 million
recognized on the disposition of facilities as a result of synergies created by
the MediaOne acquisition.
The 2000 restructuring initiatives are projected to yield cash savings of
approximately $80 million per year. It is expected that increased spending in
growth businesses will largely offset these cash and earnings before interest
and taxes, or EBIT, savings of approximately $50 million. The EBIT savings,
primarily attributable to reduced personnel related expenses, will be realized
in cost of services and selling, general and administrative expenses.
During 1999, AT&T Broadband Group recorded $644 million of asset
impairment, restructuring and other charges. This included an in-process
research and development charge of $594 million reflecting the estimated fair
value of research and development projects, as of the date of the TCI merger,
which had not yet reached technological feasibility or had alternative future
use. The projects identified related to efforts to offer voice-over-IP,
product-integration efforts for advanced set-top devices, cost-savings efforts
for cable telephone services implementation, and in-process research and
development related to Excite@Home. The fair value of in-process research and
development was estimated for each project using an income approach, which was
adjusted to allocate fair value based on the project's percentage of completion.
Under this approach, the present value of the anticipated future benefits of the
projects was determined using a discount rate of 17%. For each project, the
resulting net present value was multiplied by a percentage of completion based
on effort expended to date versus projected costs to complete.
The charge associated with the voice-over-IP technology, which allows voice
telephone traffic to be digitalized and transmitted in IP data packets, was $225
million as of the date of the TCI merger. Current voice-over-IP equipment does
not yet support many of the features required to connect customer premises
equipment to traditional phone networks. Further technical development is also
needed to ensure voice quality that is comparable to conventional
circuit-switched telephone services and to reduce the power consumption of the
IP telephone services equipment. Testing of IP telephone services equipment in
the field was started in late 2000 and will continue throughout 2001.
The charge associated with product integration efforts for advanced set-top
devices, which will enable us to offer next-generation digital services, was
$114 million as of the date of the TCI merger. The associated technology
consists of the development and integration work needed to provide a suite of
software tools to run on the digital set-top box hardware platform. It is
anticipated that field trials will begin in late 2001 for next generation
digital services.
The charge associated with cost-savings efforts for broadband telephone
services implementation was $101 million as of the date of the TCI merger.
Telephone services cost reductions primarily consist of cost savings from the
development of a "line of power switch," which allows cost effective power for
customer telephone equipment through the cable plant. This device will allow us
to provide line-powered telephone service without burying the cable line to each
house. Trials related to the telephone services cost reductions are complete and
implementation has begun in certain markets.
Additionally, the in-process research and development charge related to
Excite@Home was valued at $154 million. This charge related to projects to allow
for self-provisioning of devices and the development of next-generation client
software, network and back-office infrastructure to enable a
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variety of network devices beyond personal computers and improved design for the
regional data centers' infrastructure.
Although there are technological issues to overcome to complete
successfully the acquired in-process research and development, successful
completion is expected. The costs to complete the identified projects will not
have a material impact on the results of operations. If, however, management of
AT&T Broadband Group is unable to establish technological feasibility and
produce commercially viable products/services, anticipated incremental cash
flows attributed to expected profits from such new products/services may not be
realized.
Also in 1999, the asset impairment, restructuring and other charges
included a $50 million loss related to a contribution agreement TCI entered into
with Phoenixstar, Inc. This agreement requires AT&T Broadband Group to satisfy
certain liabilities owned by Phoenixstar and its subsidiaries. The remaining
obligation under this contribution agreement and an agreement that MediaOne has
is $57 million, which was fully accrued at December 31, 2000.
Operating Loss. Operating loss increased $7,479 million to $8,656 million
in 2000 compared to 1999. The increase was primarily due to the consolidation of
Excite@Home which increased operating losses by $7,173 million. The operating
loss of Excite@Home included asset impairment charges of $6,179 million. A
majority of the impact of operating losses generated by Excite@Home was offset
in minority interest income (expense), reflecting the approximate 77% of
Excite@Home AT&T Broadband Group does not own. Also contributing to the increase
was the impact of the MediaOne acquisition and higher costs of advanced
services.
Other (Expense) Income. Other (expense) income, decreased from income of
$50 million in 1999 to expense of $39 million for 2000. This decrease was
primarily a result of a $537 million charge resulting from the increase in the
fair value of the put options held by Comcast and Cox related to Excite@Home
stock and investment impairment charges of $240 million. This was offset by an
increase in gains on sales of businesses and investments of $577 million,
including the swap of cable systems with Comcast and Cox and the sale of the
investment in Lenfest, and an increase of $69 million in interest and dividend
income.
Interest Expense. Interest expense increased $618 million in 2000 to
$1,323 million compared to 1999. The increase was a result of an increase in
debt of $13.5 billion due primarily to the MediaOne acquisition, the
monetization of investments in Microsoft and Comcast, two additional months of
interest in 2000, and an increase in the interest rate charged from AT&T for
intercompany debt.
Benefit for Income Taxes. The benefit for income taxes for the year ended
December 31, 2000, was $1,183 million, compared with a benefit of $465 million
for the ten months ended December 31, 1999. The effective income tax rate for
the year ended December 31, 2000 was 11.8%, compared to 25.3% for the ten months
ended December 31, 1999. The effective rate for 2000 was impacted by the
inclusion of Excite@Home as a consolidated entity, and the Cox disposition. The
1999 effective tax rate was impacted by the non tax-deductible write-off of
in-process research and development.
Net Losses from Equity Investments. Net losses from equity investments,
which are recorded net of income taxes decreased $110 million compared to 1999.
The decrease was due in part to a $185 million improvement in Cablevision's
results, which was partially offset by additional equity losses of $64 million
from amortization of excess basis of equity investments acquired in the MediaOne
acquisition. The improvement in Cablevision's results is primarily due to gains
from cable system sales.
Minority Interest Income (Expense). Minority interest income (expense),
which is recorded net of income taxes, represents an adjustment to AT&T
Broadband Group's net loss to reflect the less than 100% ownership of entities
attributed to AT&T Broadband Group as well as dividends on preferred stock
issued by subsidiaries of AT&T which have been attributed to AT&T Broadband
Group. The increase of $4,188 million in 2000 primarily resulted from the
consolidation of
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Excite@Home effective September 1, 2000. The minority interest in 2000 primarily
reflects the losses generated by Excite@Home, including the goodwill impairment
charge, that were attributed to the approximate 77% of Excite@Home not owned by
AT&T Broadband Group through AT&T Broadband, LLC.
Net loss. Net loss increased $3,170 million to $5,370 million in 2000
compared to 1999. The increase was primarily due to increased operating losses,
the mark-to-market adjustment related to the put options held by Comcast and
Cox; increases in interest expense; and impairment of investments. Such
increases were offset by an increase in minority interest income and increased
gains on the sale of businesses and investments.
LIQUIDITY AND CAPITAL RESOURCES
AT&T Broadband Group has funded its operations through internally generated
funds, asset sales, capital contributions from AT&T and intercompany borrowings
from AT&T. Capital contributions from AT&T include acquisitions made by AT&T
that have been attributed to AT&T Broadband Group which are treated as non cash.
Currently, financing activities for AT&T Broadband Group are managed by
AT&T on a centralized basis. Sources for AT&T Broadband Group's future financing
requirements may include borrowing of funds, including additional debt from AT&T
and/or third party debt. Loans from AT&T to any entity within AT&T Broadband
Group have been made at interest rates and on other terms and conditions
intended to be substantially equivalent to the interest rates and other terms
and conditions that AT&T Broadband Group would be able to obtain from third
parties, including the public markets, as a non-affiliate of AT&T without the
benefit of any guaranty by AT&T.
AT&T performs cash management functions on behalf of AT&T Broadband Group.
Substantially all of AT&T Broadband Group's cash balances are swept to AT&T on a
daily basis, where they are managed and invested by AT&T. Transfers of cash to
and from AT&T, after giving consideration to the debt allocation methodology,
are reflected as a component of combined attributed net assets.
Net cash used in operating activities for the three months ended March 31,
2001 was $660 million compared with $22 million for the three months ended March
31, 2000. The increase in cash used in operating activities was primarily due to
a net use of cash from changes in the timing of payments for accounts payable
and other operating assets and liabilities and the launch of high-speed cable
Internet service and broadband telephone service in 2000.
Net cash used in investing activities for the three months ended March 31,
2001 was $458 million compared with $1,210 million for the three months ended
March 31, 2000. AT&T Broadband Group received $598 million from business
dispositions and exchanges, compared to the first quarter of 2000 when it spent
$89 million for net acquisitions and dispositions. In addition, the remaining
decrease in cash used in investing activities is primarily due to a reduction in
equity investment purchases and contributions from $569 million in the first
quarter of 2000 to $239 million in the first quarter of 2001.
Net cash provided by financing activities for the three months ended March
31, 2001 was $1,121 million compared with $1,232 million for the three months
ended March 31, 2000. AT&T Broadband Group continues to receive funding from
AT&T to cover capital expenditures and other investing activities and operating
activities. The slight decrease was primarily due to fewer payments on debt
obligations and less borrowings from AT&T.
Net cash provided by operating activities for the year ended December 31,
2000, was $802 million, compared with $1,380 million for the ten months ended
December 31, 1999. The decrease in cash provided by operating activities was
primarily due to the launch of high-speed cable Internet service and broadband
telephone service, and a net use of cash from changes in accounts receivable,
accounts payable and other operating assets and liabilities.
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Net cash used in investing activities for the year ended December 31, 2000
was $4,511 million compared with $2,915 million for the ten months ended
December 31, 1999. The increase was primarily due to capital expenditures for
upgrades and rebuilds of the broadband network. In 2000, AT&T Broadband Group
spent $71 million for net acquisitions and dispositions and in 1999 received
$740 million from net acquisitions and dispositions.
Net cash provided by financing activities for the year ended December 31,
2000 was $3,770 million compared with $1,535 million for the ten months ended
December 31, 1999. The increase was primarily due to additional funding needed
for increased capital expenditures.
The continued expansion and upgrade of AT&T Broadband Group's network to
provide advanced services, including digital video, high-speed cable Internet
service and cable telephone service will continue to require substantial
capital. AT&T Broadband Group anticipates that it will spend approximately $3.9
billion in 2001 to expand and upgrade its network for the provision of advanced
services. AT&T has provided and it is anticipated that AT&T will continue to
provide funding to AT&T Broadband Group for capital expenditures.
At March 31, 2001, AT&T Broadband Group had current assets of $2,824
million and current liabilities of $15,656 million. Included in this amount is a
$2,627 million liability under a put option granted to Cox and Comcast on
Excite@Home common shares. Such obligation was satisfied with shares of AT&T
common stock subsequent to March 31, 2001. A significant portion of the current
liabilities, $9,277 million, relates to short-term debt, of which $1,919 million
was monetized investments and $6,707 million was due to AT&T. The monetized
investments can be delivered in full satisfaction of the underlying debt at the
time of maturity. AT&T Broadband Group expects that it will repay a portion of
the short-term debt payable in a variety of ways. Major elements of this
deleveraging plan include net cash proceeds of approximately $3.1 billion from
announced sales of cable systems which are expected to close in 2001 and
proceeds from the sale of other investments such as Time Warner Entertainment
and Cablevision. In February 2001, AT&T exercised its registration rights in
Time Warner Entertainment and formally requested Time Warner Entertainment to
begin the process of converting the limited partnership into a corporation with
registered equity securities. Since Time Warner Entertainment and Cablevision
are attributed to AT&T Broadband Group, any proceeds from sales would also be
attributed to AT&T Broadband Group. In addition, AT&T retains the flexibility to
allocate proceeds from the AT&T Broadband Group tracking stock offering among
the AT&T groups in any manner which it deems most appropriate.
As of March 31, 2001, total debt was $28.8 billion of which $8.6 billion
was monetized by investments, where such investments can be delivered in full
satisfaction of the underlying debt at the time of maturity.
EBITDA, excluding asset impairment, pre-tax losses from equity investments
and other income or expense, is the primary measure used by the chief operating
decision-makers to measure the ability to generate cash flow. EBITDA, excluding
asset impairment, pre-tax losses from equity investments and other income or
expense, may or may not be consistent with the calculation of EBITDA for other
companies and should not be viewed as an alternative to generally accepted
accounting principles, measures of performance or to cash flow from operating,
investing and financing activities as a measure of liquidity.
EBITDA, excluding asset impairment, pre-tax losses from equity investments
and other income or expense, for the first quarter of 2001, was $356 million,
compared with $312 million for the first quarter of 2000. This improvement was
due to the impact of the MediaOne acquisition. Higher expenses in high-speed
cable Internet and cable broadband telephone services and the asset impairment
and restructuring charge offset this increase.
EBITDA, excluding asset impairment, pre-tax losses from equity investments
and other income or expense, for the year ended December 31, 2000, was $1.7
billion, compared with $1.1 billion for
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the ten months ended December 31, 1999. This improvement was due to the impact
of the MediaOne acquisition and an additional two months of operations of AT&T
Broadband, LLC in 2000. Higher expenses in high-speed cable Internet and cable
telephone services offset this increase.
AT&T Broadband Group has other commitments and contractual obligations that
will also impact its cash needs. AT&T Broadband Group's more significant
commitments and contractual obligations are as follows:
- Pursuant to an affiliation term sheet with a subsidiary of Liberty Media,
entities attributed to AT&T Broadband Group purchase programming and other
services from a subsidiary of Liberty Media, and are required to make
minimum payments for these programming and other services through 2022.
The commitment increases annually from $288 million in 2001 to $315
million in 2003, and will increase annually through 2022 with inflation.
In the event that programming costs of this Liberty Media subsidiary
increase by more than 10 percent of an amount specified in the agreement,
AT&T Broadband Group's commitment may be increased by an amount equal to
66 percent of the increase over the amount specified in the term sheet.
Other factors such as acquisitions and divestitures also affect the
commitment amounts. By letter dated May 29, 2001, AT&T Broadband Group
indicated that in its view the term sheet as a whole is unenforceable and
reserved its right to terminate the term sheet. AT&T Broadband Group
indicated that it would not pay the excess programming costs requested by
the Liberty Media Group subsidiary to date and disputed the enforceability
of the excess programming costs pass through provisions of the term sheet,
among other provisions. The letter further suggests that the parties meet
to discuss a new affiliation arrangement. The Liberty Media Group
subsidiary has stated publicly that it views AT&T Broadband Group's
position on the term sheet to be without merit.
- AT&T Broadband Group is party to an agreement under which it purchases
certain billing services from an unaffiliated third party. Unless
terminated by either party pursuant to the terms of the agreement, the
agreement expires on December 31, 2012. The agreement calls for monthly
payments. Such payments are subject to adjustments and conditions pursuant
to the terms of the underlying agreement. Amounts included in selling,
general and administrative expenses that were incurred in connection with
these arrangements were approximately $143 million for the year ended
December 31, 2000.
- AT&T Broadband Group, through MediaOne, had a 31.4% ownership interest in
Road Runner. The members of Road Runner have dissolved Road Runner during
2001 and agreed to convert the customers to the respective cable members'
systems. In order to accomplish this, AT&T Broadband Group acquired
approximately $66 million of network assets, net of related liabilities,
and will incur additional transition and dissolution costs estimated at
$75 million to $100 million.
- An entity attributed to AT&T Broadband Group has an agreement with
Motorola, Inc. to purchase a minimum of 1.25 million digital set-top
devices at an average price of $248 per unit until 2001. This commitment
has been satisfied.
In light of the weaker financial outlook, Excite@Home announced it is
taking several immediate measures to conserve cash and raise additional funds.
These measures included adopting a revised operating plan with lower expenses
and the execution of a non-binding letter of agreement with AT&T under which
AT&T may provide Excite@Home with $75 million to $85 million in connection with
the restructuring of the backbone fiber agreement between the companies and with
a joint initiative to maintain and improve current network performance levels.
In addition, Excite@Home said it may negotiate additional debt and/or equity
financing from third parties, and continue efforts to focus its resources around
its broadband franchise through the potential sale or restructuring of its media
operations not directly supporting the broadband strategy.
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On June 11, 2001, Excite@Home announced that it had completed the private
sale of $100 million of zero-percent five-year convertible secured notes. The
notes are convertible at the holders' option at any time into Excite@Home Series
A common stock at a 10% premium to the weighted average trading price of these
shares on June 8, 2001, or $4.3806 per share. The notes mature in July 2006 but
may be redeemed by the holders on each anniversary of the date of issuance of
the notes or by Excite@Home on the second, third and fourth anniversaries of the
date of issuance of the notes. Subject to certain conditions, redemption may be
made, at the option of Excite@Home, either in cash or by issuing shares of its
Series A common stock.
On June 19, 2001 Excite@Home announced that it had renegotiated its
optical-fiber backbone capacity contract with AT&T. Under terms of the
renegotiated agreement, AT&T will refund $85 million to Excite@Home for the
cancellation of the companies' original agreement and entry into a new
agreement. The companies said their new capacity agreement covers Excite@Home's
existing capacity and future upgrades, under which Excite@Home agreed to pay
$8.8 million per year to AT&T for the next 18 1/2-years. Separately, Excite@Home
agreed to pay AT&T $7 million in normal upgrade fees under the existing
contract. The new arrangement replaced in its entirety the non-binding letter of
agreement described above.
On June 27, 2001, AT&T and Excite@Home announced a joint Service Level
Agreement for cross-network performance for their high-speed, dedicated Internet
access services. This joint Service Level Agreement, which supports the
agreement between AT&T and Excite@Home announced February 14, 2001, will be
effective for all business customers who purchase the managed multi-homing
service.
AT&T'S BOARD OF DIRECTORS HAS THE POWER TO MAKE DETERMINATIONS THAT MAY
IMPACT THE FINANCIAL AND LIQUIDITY POSITION OF AT&T BROADBAND GROUP. THIS POWER
INCLUDES THE ABILITY TO SET PRIORITIES FOR USE OF CAPITAL AND DEBT CAPACITY, TO
DETERMINE CASH MANAGEMENT POLICIES AND TO MAKE DECISIONS REGARDING WHETHER TO
MAKE CAPITAL EXPENDITURES AND AS TO THE TIMING AND AMOUNT OF ANY CAPITAL
EXPENDITURES. ALL ACTIONS BY AT&T'S BOARD OF DIRECTORS ARE SUBJECT TO THE BOARD
MEMBERS' FIDUCIARY DUTIES TO ALL SHAREHOLDERS OF AT&T AS A GROUP AND NOT JUST TO
HOLDERS OF A PARTICULAR CLASS OF TRACKING STOCK AND TO AT&T'S CHARTER, POLICY
STATEMENTS, BY-LAWS AND INTER-COMPANY AGREEMENTS. AS A RESULT OF THIS DISCRETION
OF AT&T'S BOARD OF DIRECTORS, IT MAY BE DIFFICULT FOR INVESTORS TO ASSESS AT&T
BROADBAND GROUP'S LIQUIDITY AND CAPITAL RESOURCE NEEDS AND IN TURN THE FUTURE
PROSPECTS OF AT&T BROADBAND GROUP BASED ON PAST PERFORMANCE.
FINANCIAL CONDITION
Total assets were $115,985 million as of March 31, 2001, which represented
a decrease of $1,549 million compared to December 31, 2000. The decrease
primarily resulted from the disposition and exchange of cable systems during the
first quarter of 2001, the transfer of $628 million of investments to AT&T
offset by an increase in the value of investments, reduced goodwill due to the
Excite@Home impairment charge and amortization of franchise costs and goodwill.
Total liabilities were $63,611 million as of March 31, 2001, representing a
decrease of $1,475 million compared to December 31, 2000. This decrease was
primarily due to dispositions and exchanges of cable systems and the adoption of
SFAS No. 133.
Minority Interest decreased $626 million to $3,795 million at March 31,
2001. This decrease primarily reflects the losses of Excite@Home, which were
primarily driven by asset impairment charges.
Combined attributed net assets were $43,866 million as of March 31, 2001,
an increase of $549 million from December 31, 2000. The increase is due to
contributions from AT&T and an increase in accumulated other comprehensive
income due to an increase in the valuation of financial instruments and the
adoption of SFAS No. 133. This was offset by the net loss for the first quarter
of 2001.
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Total assets were $117,534 million as of December 31, 2000, which increased
$59,306 million compared to December 31, 1999. The increase was primarily due to
the impact of the MediaOne acquisition, which resulted in increased goodwill,
franchise costs, other investments including Time Warner Entertainment and
Vodafone Group plc and the impact of the consolidation of Excite@Home. In
addition, the increase resulted from capital expenditures, net of depreciation.
These increases were partially offset by a decrease in the mark to market
valuation of certain investments.
Total liabilities were $65,086 million as of December 31, 2000, which
increased $28,774 million compared to December 31, 1999 primarily due to the
impact of the MediaOne acquisition, including the debt of MediaOne and the
deferred taxes related to the franchise costs, as well as the consolidation of
Excite@Home. In addition, total debt increased due to the monetization of
investments in Microsoft and Comcast. At December 31, 2000, $8.7 billion of
total debt was monetized investments, where such investments can be delivered in
full satisfaction of the underlying debt at the time of maturity.
Minority interest increased $2,094 million to $4,421 million at December
31, 2000, primarily reflecting the minority interest in Excite@Home resulting
from the consolidation of Excite@Home beginning September 1, 2000 and the
preferred stock outstanding of a MediaOne subsidiary.
Combined attributed net assets were $43,317 million as of December 31,
2000, an increase of $28,428 million compared to December 31, 1999. The increase
was primarily due to the net transfers from AT&T for the MediaOne acquisition
and net transfers from AT&T to fund capital expenditures.
RISK MANAGEMENT
AT&T Broadband Group is exposed to market risk from changes in interest
rates, as well as changes in equity prices associated with affiliated companies.
In addition, AT&T Broadband Group is exposed to market risk from fluctuations in
the prices of securities which have been monetized through the issuance of debt.
On a limited basis, certain derivative financial instruments, including interest
rate swaps and options are used to manage these risks. Financial instruments are
not used for trading or speculative purposes. All financial instruments are used
in accordance with AT&T board-approved policies.
Interest rate swaps are used to manage the impact of interest rate changes
on earnings and cash flows and to lower overall borrowing costs. Option
contracts are used to reduce exposure to the risk of fluctuations in the prices
of securities that have been monetized. Interest rate risk is monitored on the
basis of changes in fair value. Assuming a 10% downward shift in interest rates,
the fair value of interest rate swaps and the underlying hedged debt would have
changed by $15 million and $1 million at December 31, 2000 and 1999,
respectively. In addition, certain debt is indexed to the market prices of
certain securities owned. Changes in the market price of these securities result
in changes in the fair value of this debt. Assuming a 10% downward change in the
market price of the securities, the fair value of the underlying debt and
securities would have decreased by $534 million at December 31, 2000. Assuming a
10% downward shift in interest rates at December 31, 2000 and 1999, the fair
value of unhedged debt would have increased by $563 million and $288 million,
respectively.
Equity hedges are used to manage exposure to changes in equity prices
associated with stock appreciation rights, or SARs, of affiliated companies.
Assuming a 10% decrease in equity prices of affiliated companies, the fair value
of equity hedges would have decreased by $29 million and $75 million at December
31, 2000 and 1999, respectively. Because these contracts are entered into for
hedging purposes, it's believed that the decrease in fair value would be largely
offset by gains on the underlying transaction.
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In order to determine the changes in fair value of the various financial
instruments, certain modeling techniques, namely Black-Scholes, are used for the
SARs and equity collars. Rate sensitivity changes are directly applied to
interest rate swap transactions.
The changes in fair value, as discussed above, assume the occurrence of
certain adverse market conditions. They do not consider the potential effect of
favorable changes in market factors and do not represent projected losses in
fair value expected to incur. Future impacts would be based on actual
developments in global financial markets. There are no significant foreseen
changes in the strategies used to manage interest rate risk or equity price risk
in the near future.
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities -- a
Replacement of FASB No. 125." This statement provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities. Under these standards, after a transfer of financial assets, an
entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. This statement
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. This statement is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. AT&T Broadband Group does not expect
the adoption of SFAS No. 140 will have a material impact on AT&T Broadband
Group's results of operations, financial position or cash flows.
SUBSEQUENT EVENTS
On April 9, 2001, a subsidiary of AT&T and Adelphia signed a definitive
agreement in which certain cable systems attributed to AT&T Broadband Group
serving approximately 128,000 customers in central Pennsylvania and Ohio will be
sold to Adelphia. AT&T Broadband Group will receive cash of approximately $245
million and Adelphia Class A common stock valued at approximately $73 million,
subject to adjustments. Pending certain closing conditions and regulatory
approvals, the transaction is expected to close in the third quarter of 2001.
On April 30, 2001, a subsidiary of AT&T sold to Comcast certain cable
systems attributed to AT&T Broadband Group serving approximately 590,000
customers in Delaware, New Mexico, Maryland, New Jersey, Pennsylvania and
Tennessee in exchange for 63.9 million shares of AT&T stock valued at $1,423
million.
Effective June 30, 2001, AT&T, together with certain subsidiaries
attributed to AT&T Broadband Group, transferred its 99.75% interest in an entity
owning the Baltimore, Maryland cable system serving approximately 115,000
customers to Comcast for approximately $518 million.
Effective June 30, 2001, a subsidiary of AT&T transferred to Charter cable
systems attributed to AT&T Broadband Group serving approximately 563,000
customers in Alabama, California, Illinois, Missouri and Nevada. AT&T Broadband
Group, through its attributed entities, received $1,525 million in cash, $222
million in cash restricted for future acquisitions of cable systems, and a cable
system in Florida serving 9,000 customers.
Effective June 29, 2001, a subsidiary of AT&T sold to MediaCom cable
systems attributed to AT&T Broadband Group serving approximately 94,000
customers in Missouri for approximately $309 million in cash. In addition, AT&T
and MediaCom have entered into definitive asset purchase agreements in which
certain cable systems attributed to AT&T Broadband Group serving approximately
745,000 customers in Georgia, Iowa and Illinois will be sold to MediaCom for
approximately $1,895 million in cash, subject to adjustments. Pending certain
closing conditions and regulatory approvals, the transaction is expected to
close in the third quarter of 2001.
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On June 11, 2001, Excite@Home announced that it had completed the private
sale of $100 million of zero-percent five-year convertible secured notes. The
notes are convertible at the holders' option at any time into Excite@Home Series
A common stock at a 10% premium to the weighted average trading price of these
shares on June 8, 2001, or $4.3806 per share. The notes mature in July 2006 but
may be redeemed by the holders on each anniversary of the date of issuance of
the notes or by Excite@Home on the second, third and fourth anniversaries of the
date of issuance of the notes. Subject to certain conditions, redemption may be
made, at the option of Excite@Home, either in cash or by issuing shares of its
Series A common stock.
On June 19, 2001 Excite@Home announced that it had renegotiated its
optical-fiber backbone capacity contract with AT&T. Under terms of the
renegotiated agreement, AT&T will refund $85 million to Excite@Home for the
cancellation of the companies' original agreement and entry into a new
agreement. The companies said their new capacity agreement covers Excite@Home's
existing capacity and future upgrades, under which Excite@Home agreed to pay
$8.8 million per year to AT&T for the next 18 1/2-years. Separately, Excite@Home
agreed to pay AT&T $7 million in normal upgrade fees under the existing
contract. The new arrangement replaced in its entirety the non-binding letter of
agreement described above.
On June 27, 2001, AT&T and Excite@Home announced a joint Service Level
Agreement for cross-network performance for their high-speed, dedicated Internet
access services. This joint Service Level Agreement, which supports the
agreement between AT&T and Excite@Home announced February 14, 2001, will be
effective for all business customers who purchase the managed multi-homing
service.
In January 2001, AT&T announced that Cox and Comcast exercised their rights
to sell a combined total of approximately 60.4 million shares of Excite@Home
Series A common stock to AT&T as part of the March 2000 agreement to reorganize
Excite@Home's governance. In May 2001, AT&T completed negotiations to
restructure the transactions that resulted from Comcast and Cox exercising their
sale rights. Under these restructured transactions, Comcast and Cox retained
their respective Excite@Home shares, and AT&T issued approximately 80.3 million
shares of AT&T common stock to Comcast and 75 million shares of AT&T common
stock to Cox.
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THE CONSUMER SERVICES CHARTER AMENDMENT PROPOSAL
We urge all shareholders to read the form of proposed charter amendment, a
copy of which we have attached as Appendix B to this proxy statement.
GENERAL
We are proposing the following amendment to our charter, which we refer to
as the Consumer Services charter amendment proposal:
Consumer Services Group tracking stock amendment -- an amendment to create
a new class of common stock called Consumer Services Group common stock,
par value $1.00 per share, which we intend to reflect the financial
performance and economic value of our Consumer Services business. We refer
to this stock as "AT&T Consumer Services Group tracking stock."
Approval of the Consumer Services charter amendment proposal requires a
majority of the voting power of all outstanding shares of AT&T common stock to
vote in its favor. OUR BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR
APPROVAL. Any shares not voted, whether by abstention, broker non-vote or
otherwise, have the effect of a vote against the Consumer Services charter
amendment proposal.
CONSUMER SERVICES GROUP TRACKING STOCK AMENDMENT
The Consumer Services Group tracking stock amendment would, among other
things:
- Define "AT&T Consumer Services Group," the financial performance and
economic value of which we intend AT&T Consumer Services Group tracking
stock to reflect. AT&T Consumer Services Group will consist of the assets
and liabilities shown in the combined balance sheets of AT&T Consumer
Services Group and will include:
-- all Consumer Services long distance customers;
-- all Consumer Services support infrastructure, including ordering,
provisioning, billing and care; and
-- all Consumer Services marketing operations.
- Establish the terms of AT&T Consumer Services Group tracking stock,
consisting of authorized shares and entitling the holders
of the AT&T Consumer Services Group tracking stock to
of a vote per share, voting as one class with
all other classes and series of common stock and preferred stock of AT&T
with respect to all matters to be voted upon by AT&T shareholders, except
as otherwise required by the New York Business Corporation Law or by the
terms of any other class or series of AT&T's capital stock.
We include a more complete description of AT&T Consumer Services Group
tracking stock under "--Terms of the Consumer Services Group Tracking Stock
Amendment."
RECOMMENDATION OF OUR BOARD OF DIRECTORS
OUR BOARD OF DIRECTORS HAS APPROVED THE CONSUMER SERVICES CHARTER AMENDMENT
PROPOSAL AND RECOMMENDS THAT YOU VOTE FOR THE CONSUMER SERVICES CHARTER
AMENDMENT PROPOSAL.
TERMS OF THE CONSUMER SERVICES GROUP TRACKING STOCK AMENDMENT
GENERAL
If we adopt the Consumer Services Group tracking stock amendment, we will
amend our charter to authorize billion shares of AT&T Consumer
Services Group tracking stock. For a description of the currently authorized and
outstanding shares of AT&T capital stock, see "The Broadband Charter Amendment
Proposal -- Terms of the Broadband Group Tracking Stock Amendment -- General."
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AT&T CONSUMER SERVICES GROUP
We intend AT&T Consumer Services Group tracking stock to reflect the
financial performance and economic value of AT&T Consumer Services Group. The
Consumer Services Group tracking stock amendment defines "AT&T Consumer Services
Group" generally as the interest of AT&T or any of its subsidiaries in all of
the businesses, assets and liabilities reflected in the unaudited combined
financial statements of AT&T Consumer Services Group, dated December 31, 2000,
as included in this proxy statement, including any successor to AT&T Consumer
Services Group by merger, consolidation or sale of all or substantially all of
its assets. The Consumer Services Group tracking stock amendment contains
adjustments to the definition of "AT&T Consumer Services Group" to reflect,
among other things, related assets and liabilities (including contingent
liabilities), net income and net losses arising after the date of these
financial statements, contributions and allocations of assets, liabilities and
businesses between the groups and acquisitions and dispositions.
AT&T Consumer Services Group is not a stand-alone entity, and AT&T's board
of directors will govern AT&T Consumer Services Group and could make operational
and financial decisions or implement policies that disproportionately affect the
businesses of AT&T Consumer Services Group. AT&T's board of directors may
transfer funds or reallocate assets, liabilities, revenue, expenses and cash
flows to or from AT&T Consumer Services Group without the consent of
shareholders. The Consumer Services Group tracking stock amendment provides that
the AT&T Consumer Services Group allocation fraction may be adjusted by AT&T's
board of directors as it deems appropriate to reflect contributions or
allocations from AT&T Consumer Services Group to AT&T's other groups, or vice
versa. All actions by AT&T's board of directors are subject to the board
members' fiduciary duties under New York law to all shareholders of AT&T as a
group and not just to holders of a particular class of tracking stock and to
AT&T's charter, policy statements, by-laws and inter-company agreements.
Any retained portion of the value of AT&T Consumer Services Group
represented by AT&T common stock will be included in AT&T Business Services
Group. See "-- AT&T Consumer Services Group Allocation Fraction."
AT&T CONSUMER SERVICES GROUP ALLOCATION FRACTION
Operation of the Allocation Fraction. While AT&T Consumer Services Group
tracking stock is intended to reflect the financial performance and economic
value of AT&T Consumer Services Group, the AT&T Consumer Services Group tracking
stock issued to the public may not represent all of the interest in the
financial performance and economic value of AT&T Consumer Services Group. The
Consumer Services Group tracking stock amendment defines the "AT&T Consumer
Services Group allocation fraction" to represent the interest in the financial
performance and economic value of AT&T Consumer Services Group reflected by AT&T
Consumer Services Group tracking stock distributed to the public.
To the extent that AT&T Consumer Services Group tracking stock issued to
the public does not represent all of the interest in the financial performance
and economic value of AT&T Consumer Services Group, the remaining interest in
the financial performance and economic value of AT&T Consumer Services Group
will be allocated to AT&T. If AT&T is allocated an interest in the financial
performance and economic value of AT&T Consumer Services Group, AT&T will have
the right to participate in any dividend, distribution or liquidation made to
holders of AT&T Consumer Services Group tracking stock. This right to
participate is AT&T's retained portion of value of AT&T Consumer Services Group.
If all of the interest in the financial performance and economic value of AT&T
Consumer Services Group is intended to be fully reflected by the AT&T Consumer
Services Group tracking stock held by the public, none will be allocated to AT&T
and this fraction will equal one.
Adjustments. Because the AT&T Consumer Services Group allocation fraction
determines the relative percentage interest in AT&T Consumer Services Group of
public holders of AT&T
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Consumer Services Group tracking stock, on the one hand, and AT&T, on the other
hand, the AT&T Consumer Services Group allocation fraction may be adjusted from
time to time as our board of directors deems appropriate for a number of
reasons, including:
- to reflect the fair market value of contributions or allocations by AT&T
of cash, property or other assets or liabilities from other AT&T groups
to AT&T Consumer Services Group (or vice versa);
- to reflect the fair market value of contributions or allocations by AT&T
of cash, property or other assets or liabilities of other AT&T groups to,
or for the benefit of, employees of AT&T Consumer Services Group in
connection with employee benefit plans or arrangements of AT&T or any of
its subsidiaries (or vice versa);
- to reflect the number of shares of AT&T capital stock contributed to, or
for the benefit of, employees of AT&T Consumer Services Group in
connection with benefit plans or arrangements of AT&T or any of its
subsidiaries;
- to reflect repurchases by AT&T of shares of AT&T Consumer Services Group
tracking stock for the account of AT&T Broadband Group;
- to reflect issuances of AT&T Consumer Services Group tracking stock for
the account of AT&T Consumer Services Group;
- to reflect dividends or other distributions to holders of AT&T Consumer
Services Group tracking stock, to the extent no required payment is made
to AT&T;
- to reflect subdivisions and combinations of AT&T Consumer Services Group
tracking stock and stock dividends payable in shares of AT&T Consumer
Services Group tracking stock; and
- under other circumstances as our board of directors determines
appropriate to reflect the economic substance of any other event or
circumstance.
In addition, in determining the percentage interest of holders of AT&T
Consumer Services Group tracking stock in any particular dividend or other
distribution, we will reduce the economic interest of holders of AT&T Consumer
Services Group tracking stock to reflect dilution arising from shares of AT&T
Consumer Services Group tracking stock reserved for issuance upon conversion,
exercise or exchange of other securities that are entitled to participate in
this dividend or other distribution.
The Consumer Services Group tracking stock amendment provides that any
adjustment of this kind must be made in a manner that our board of directors
determines to be fair and equitable to holders of AT&T common stock and AT&T
Consumer Services Group tracking stock. In the event that any assets or other
property are acquired by other AT&T group(s) and allocated or contributed to
AT&T Consumer Services Group, the consideration paid by the other AT&T group(s)
to acquire these assets or other property will be presumed to be its "fair
market value" as of its acquisition. Any adjustment to the AT&T Consumer
Services Group allocation fraction made by our board of directors in good faith
in accordance with these principles will be at the sole discretion of our board
of directors and this good faith determination of our board of directors will be
final and binding on all shareholders.
VOTING RIGHTS
Currently, holders of AT&T common stock have one vote per share. Holders of
AT&T Broadband Group tracking stock would initially have of a vote per
share. Each outstanding share of AT&T Consumer Services Group tracking stock
initially will have of a vote. The voting rights of AT&T Consumer
Services Group tracking stock will be subject to adjustments to reflect stock
splits, reverse stock splits, stock dividends or certain stock distributions
with respect to AT&T common stock, AT&T Consumer Services Group tracking stock
or AT&T Broadband Group tracking stock.
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Except as otherwise required by New York law or any special voting rights
of any class or series of AT&T preferred stock, AT&T Broadband Group tracking
stock or any other class of AT&T common shares, holders of shares of AT&T common
stock, AT&T Consumer Services Group tracking stock, each other class of AT&T
common shares, if any, that is entitled to vote, AT&T Broadband Group tracking
stock and holders of shares of each class or series of AT&T preferred stock, if
any, that is entitled to vote, will vote as one class with respect to all
matters to be voted on by shareholders of AT&T. No separate class vote of AT&T
Consumer Services Group tracking stock will be required, except as required by
the New York Business Corporation Law.
DIVIDENDS
General. AT&T's current quarterly dividend is $.0375 per share of AT&T
common stock. Following any issuance of AT&T Consumer Services Group tracking
stock, it is currently expected that one-third of the current dividend payable
on AT&T common stock will be allocated to AT&T common stock and that two-thirds
of the dividend will be allocated to AT&T Consumer Services Group tracking
stock. In that event, the aggregate dividend payable to holders of AT&T common
stock and holders of AT&T Consumer Services Group tracking stock would be the
same as that payable to holders of AT&T common stock before the issuance of the
AT&T Consumer Services Group tracking stock. The declaration of dividends by
AT&T and the amount thereof will, however, be in the discretion of our board of
directors and will depend upon each of our group's financial performance, the
dividend policies and capital structures of comparable companies, each group's
ongoing capital needs, and AT&T's results of operations, financial condition,
cash requirements and future prospects and other factors deemed relevant by our
board of directors. Payment of dividends also may be restricted by loan
agreements, indentures and other transactions that AT&T enters into from time to
time.
Provided that AT&T has sufficient assets to pay a dividend under applicable
law, after excluding the available dividend amount relating to AT&T Broadband
Group, the Consumer Services Group tracking stock amendment provides that
dividends on AT&T Consumer Services Group tracking stock are limited to an
available dividend amount that is designed to be equivalent to the amount that
would legally be available for dividends on that stock if AT&T Consumer Services
Group were a stand-alone entity. Dividends on AT&T common stock are limited to
the amount of legally available funds for all of AT&T less the sum of the
available dividend amount for AT&T Consumer Services Group tracking stock and
the available dividend amount for AT&T Broadband Group tracking stock.
Discrimination among classes of common shares. The Consumer Services Group
tracking stock amendment does not provide for mandatory dividends. Our board of
directors will have the sole authority and discretion to declare and pay
dividends (or to refrain from declaring or paying dividends), in equal or
unequal amounts, on AT&T common stock, AT&T Consumer Services Group tracking
stocks, AT&T Broadband Group tracking stock, any other class of AT&T common
shares or any two or more of these classes. Subject to not exceeding the
applicable available dividend amount, our board of directors has this power
regardless of the relative available dividend amounts, prior dividend amounts
declared, liquidation rights or any other factor.
SHARE DISTRIBUTIONS
Subject to the provisions of AT&T Broadband Group tracking stock, AT&T may
declare and pay a distribution consisting of shares of AT&T common stock, AT&T
Consumer Services Group tracking stock or any other securities of AT&T or any
other person to holders of AT&T common stock or AT&T Consumer Services Group
tracking stock only in accordance with the provisions described below. We refer
to this type of distribution as a "share distribution."
Distributions on AT&T common stock or AT&T Consumer Services Group tracking
stock. Subject to any limitations imposed by the terms of AT&T Broadband Group
tracking stock, AT&T may declare and pay a share distribution to holders of AT&T
common stock, AT&T Consumer Services Group tracking stock or any other class of
AT&T common shares consisting of any securities
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of AT&T, any subsidiary of AT&T, or any other person. However, securities
attributable to a group may be distributed to holders of another group only for
consideration. In the case of shares of AT&T Consumer Services Group tracking
stock distributed to holders of AT&T common stock, the consideration may
consist, in whole or in part, of a decrease in the retained portion of the
value, if any, held by AT&T in AT&T Consumer Services Group.
Discrimination among classes of AT&T common shares. The Consumer Services
Group tracking stock amendment does not provide for mandatory share
distributions. Subject to the restrictions described above or that are in effect
regarding AT&T Broadband Group tracking stock, our board of directors will have
the sole authority and discretion to declare and pay share distributions (or to
refrain from declaring or paying share distributions), in equal or unequal
amounts, on AT&T common stock, AT&T Consumer Services Group tracking stock, AT&T
Broadband Group tracking stock, any other class of AT&T common shares or any two
or more of these classes. Subject to not exceeding the applicable available
dividend amounts, our board of directors has this power regardless of the
relative available dividend amounts, prior share distributions amounts declared,
liquidation rights or any other factor.
REDEMPTION
Redemption in exchange for shares of another tracking stock of another
company. At any time our board of directors may redeem all outstanding shares
of AT&T Consumer Services Group tracking stock for a new tracking stock of
another entity that owns all of the material assets and liabilities of AT&T
Consumer Services Group. In order to effect a redemption of this type, the new
tracking stock must have substantially the same terms as those governing AT&T
Consumer Services Group tracking stock as contained in AT&T's charter and
by-laws, including with regard to the definition of "AT&T Consumer Services
Group." In the event of a redemption of this type, the voting rights of the new
tracking stock will be set based on the ratio, over a fixed measurement period,
of the initial trading prices of this new tracking stock to trading prices of
the common stock of the new entity of which the new tracking stock is a part. In
connection with the spin-off of AT&T Communications Services, Inc., we expect to
redeem all outstanding shares of AT&T Consumer Services Group tracking stock for
shares of the new Consumer Services Group tracking stock.
Redemption in exchange for shares of AT&T common stock after years or if
tax-related events occur. At any time following either the occurrence of
tax-related events or the anniversary of the date that AT&T Consumer
Services Group tracking stock initially is issued, our board of directors, in
its sole discretion, may redeem all outstanding shares of AT&T Consumer Services
Group tracking stock for shares of AT&T common stock. In this event, each share
of AT&T Consumer Services Group tracking stock will be redeemed in exchange for
that number of shares of AT&T common stock, calculated to the nearest 1/10,000,
equal to % of the ratio of the average market price per share of AT&T
Consumer Services Group tracking stock to the average market price per share of
AT&T common stock.
In this case, the average market price per share of AT&T common stock or
AT&T Consumer Services Group tracking stock, as the case may be, means the
average of the daily market value per share for such AT&T common stock or AT&T
Consumer Services Group tracking stock for the 40 consecutive trading days
ending on the 15th trading day prior to the date notice of the redemption is
mailed to holders of AT&T Consumer Services Group tracking stock.
In order to redeem AT&T Consumer Services Group tracking stock on the basis
of a tax-related event, AT&T must obtain the opinion of counsel that, as a
result of an amendment to or change (or prospective change) in a law or an
interpretation of the law that takes place after AT&T Consumer Services Group
tracking stock is issued, there is more than an insubstantial risk that:
- any issuance of AT&T Consumer Services Group tracking stock would be
treated as a sale or other taxable disposition by AT&T or any of its
subsidiaries of any of the assets, operations or relevant subsidiaries
underlying AT&T Consumer Services Group tracking stock;
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- the existence of AT&T Consumer Services Group tracking stock would
subject AT&T, its subsidiaries or its affiliates, or any of their
respective successors to the imposition of tax or other adverse tax
consequences; or
- either AT&T common stock or AT&T Consumer Services Group tracking stock
would not be treated solely as common stock of AT&T.
Redemption in exchange for stock of subsidiaries in connection with a
spin-off of our Consumer Services Group. The Consumer Services Group tracking
stock amendment also provides that AT&T may, at any time, redeem all outstanding
shares of AT&T Consumer Services Group tracking stock in exchange for a
specified number of outstanding shares of common stock of a subsidiary of AT&T
that satisfies certain requirements under the Code and that holds all of the
assets and liabilities of AT&T Consumer Services Group. We refer to a subsidiary
that satisfies these requirements as a "qualifying subsidiary." This type of
redemption only may be made on a pro rata basis, and must be tax free to the
holders of AT&T Consumer Services Group tracking stock, except with respect to
any cash that holders receive in lieu of fractional shares.
In this case, we would exchange each share of AT&T Consumer Services Group
tracking stock, on a pro rata basis, for an aggregate number of shares of common
stock of the qualifying subsidiary equal to the number of outstanding shares of
common stock of the qualifying subsidiary held by AT&T.
Redemption in connection with significant dispositions. In the event of a
sale, transfer, assignment or other disposition by AT&T in a transaction or
series of related transactions, of all or substantially all of the properties
and assets of AT&T Consumer Services Group, AT&T generally is required to take
one of the following actions, which action will be selected in the sole
discretion of our board of directors:
- AT&T may redeem each outstanding share of AT&T Consumer Services Group
tracking stock in exchange for a number of shares of AT&T common stock
(calculated to the nearest 1/10,000) equal to % of the ratio of the
average market price per share of AT&T Consumer Services Group tracking
stock to the average market price per share of AT&T common stock.
- Subject to limitations, AT&T may declare and pay a dividend in cash
and/or in securities (other than AT&T common stock) or other property to
holders of the outstanding shares of AT&T Consumer Services Group
tracking stock equally on a share-for-share basis in an aggregate amount
equal to the net proceeds of the disposition allocable to AT&T Consumer
Services Group tracking stock.
- Subject to limitations, if the disposition involves the disposition of
all, not merely substantially all, of the properties and assets of AT&T
Consumer Services Group, AT&T may redeem all outstanding shares of AT&T
Consumer Services Group tracking stock in exchange for cash and/or
securities or other property in an aggregate amount equal to the net
proceeds of the disposition allocable to AT&T Consumer Services Group
tracking stock.
- Subject to limitations, if the disposition involves substantially all,
but not all, of the properties and assets of AT&T Consumer Services
Group, AT&T may redeem a number of outstanding shares of AT&T Consumer
Services Group tracking stock in exchange for a redemption price equal to
the net proceeds of that disposition. The number of shares of AT&T
Consumer Services Group tracking stock to be redeemed would be equal to
the lesser of (1) a number determined by dividing the aggregate amount
allocated to the redemption of these shares by the average market value
of one share of AT&T Consumer Services Group tracking stock during the
10-trading-day period beginning on the 15th trading day following the
completion of that disposition and (2) the total number of outstanding
shares of AT&T Consumer Services Group tracking stock.
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- Subject to limitations, AT&T may take a combination of the actions
described in the preceding bullets whereby AT&T may redeem some shares of
AT&T Consumer Services Group tracking stock in exchange for shares of
AT&T common stock at the exchange rate described in the first bullet
above, and use an amount equal to a portion of the net proceeds of the
disposition allocable to AT&T Consumer Services Group tracking stock to
either (1) declare and pay a dividend as described in the second bullet
above, or (2) redeem part or all of the remaining shares of AT&T Consumer
Services Group tracking stock as described in the third or fourth bullet
above.
For purposes of these provisions, "substantially all of the properties and
assets" of AT&T Consumer Services Group as of any date means a portion of these
properties and assets that represents at least 80% of the fair value of the
properties and assets attributed to AT&T Consumer Services Group as of that
date.
Exceptions. The provisions described under "-- Redemption in connection
with significant dispositions" will not apply, and AT&T will not be required to
redeem any securities or make any dividend or other distribution it would
otherwise be required to make, in some circumstances, including the following:
- if, in connection with the underlying transaction, our board of directors
redeems all outstanding shares of AT&T Consumer Services Group tracking
stock for a new tracking stock of another entity that owns all of the
material assets and liabilities of AT&T Broadband Group pursuant to
"-- Redemption in exchange for shares of another tracking stock of
another company";
- if the underlying disposition is conditioned upon the affirmative vote of
a majority of holders of AT&T Consumer Services Group tracking stock,
voting as a separate class;
- if the disposition is in connection with a liquidation of AT&T;
- if the disposition is to a person or group of which AT&T is the majority
owner and AT&T Consumer Services Group receives in exchange primarily
equity securities of that person or group as consideration;
- in connection with a spin-off or similar distribution of AT&T's entire
interest in AT&T Consumer Services Group to the holders of AT&T Consumer
Services Group tracking stock, including a distribution that is made in
connection with a mandatory redemption as described under "-- Redemption
in exchange for shares of AT&T common stock after years or if
tax-related events occur" or "-- Redemption in exchange for stock of
subsidiaries in connection with a spin-off of our Consumer Services
Group"; and
- in connection with a "related business transaction," which generally
means a disposition of all or substantially all of the assets attributed
to AT&T Consumer Services Group in which AT&T receives equity securities
of an entity that engages or proposes to engage primarily in one or more
businesses similar or complementary to the businesses conducted by AT&T
Consumer Services Group prior to that transaction.
GENERAL PROCEDURES
Conditions. With regard to any redemption at the discretion of our board
of directors, our board of directors may, in its discretion, condition such
redemption on the occurrence or failure to occur of any events set forth in the
applicable notice of redemption. Our board of directors will have the right to
waive any of these conditions in its sole discretion.
Public announcements; notices. The Consumer Services Group tracking stock
amendment provides that, in the case of specified dispositions or a redemption,
AT&T will publicly announce or otherwise provide specified information to
holders of AT&T Consumer Services Group tracking stock and, in the case of
redemption at the discretion of our board of directors, give the notice of
redemption no less than 15 days prior to the date of redemption.
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Fractional shares. Our board of directors will not have to issue or
deliver any fractional shares to any holder of AT&T Consumer Services Group
tracking stock upon any redemption, dividend or other distribution under the
provisions described under "-- Redemption." Instead of issuing fractional
shares, AT&T will pay cash for the fractional share in an amount equal to the
fair market value of the fractional share, without interest.
No adjustments for dividends or other distributions. No adjustments for
dividends will be made upon the exchange of any shares of AT&T Consumer Services
Group tracking stock; except that, if a redemption date with respect to AT&T
Consumer Services Group tracking stock comes after the record date for the
payment of a dividend or other distribution to be paid on AT&T Consumer Services
Group tracking stock but before the payment or distribution, the registered
holders of those shares of AT&T Consumer Services Group tracking stock at the
close of business on that record date will be entitled to receive the dividend
or other distribution on the payment date, notwithstanding the redemption of
those shares of stock or AT&T's default in payment of the dividend or
distribution.
Payment of taxes. If any person exchanging a certificate representing
shares of AT&T Consumer Services Group tracking stock wants us to issue a
certificate in a different name than the registered name on the old certificate,
that person must pay any transfer or other taxes required by reason of the
issuance of the certificate in another name, or establish, to the satisfaction
of AT&T or its agent, that the tax has been paid or is not applicable.
LIQUIDATION RIGHTS
In the event of a liquidation, dissolution or winding up of AT&T, whether
voluntary or involuntary, AT&T will first pay or provide for payment of debts
and other liabilities of AT&T, including the liquidation preferences of any
class or series of AT&T preferred stock. Thereafter, holders of the shares of
AT&T common stock, AT&T Broadband Group tracking stock, AT&T Consumer Services
Group tracking stock and any other class of AT&T common shares will share in the
funds of AT&T remaining for distribution to its common shareholders in
proportion to the aggregate market capitalization of the outstanding shares of
each class of stock, as applicable, to the aggregate market capitalization of
all the classes of AT&T common shares. AT&T will calculate the market
capitalizations based on the 20-trading-day period ending on the trading day
prior to the date of the public announcement of the liquidation, dissolution or
winding up of AT&T.
None of the following, by itself, will constitute a liquidation,
dissolution or winding up of AT&T:
- the consolidation or merger of AT&T with or into any other corporation or
corporations or the sale, transfer or lease of all or substantially all
of the assets of AT&T;
- any transaction or series of related transactions that results in all of
the assets and liabilities included in AT&T Consumer Services Group being
held by one or more AT&T Consumer Services Group subsidiaries and the
distribution of AT&T Consumer Services Group subsidiaries, and no other
material assets or liabilities, to the holders of the outstanding AT&T
Consumer Services Group tracking stock; or
- any transaction or series of related transactions that results in all of
the assets and liabilities included in AT&T Broadband Group being held by
one or more AT&T Broadband Group subsidiaries and the distribution of
these AT&T Broadband Group subsidiaries, and no other material assets or
liabilities, to the holders of outstanding AT&T Broadband Group tracking
stock (but this will be subject to the provisions relating to the
redemption of shares of AT&T Broadband Group tracking stock described in
our charter).
DETERMINATIONS BY OUR BOARD OF DIRECTORS
Any determinations made by our board of directors under any provision
described in this section "-- Terms of the Consumer Services Group Tracking
Stock Amendment" will be final and binding on all shareholders of AT&T, except
as may otherwise be required by law. AT&T will prepare a
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statement of any determination by our board of directors respecting the fair
market value of any properties, assets or securities, and will file the
statement with our Corporate Secretary.
NO PREEMPTIVE RIGHTS
Holders of AT&T common stock, AT&T Consumer Services Group tracking stock
or AT&T Broadband Group tracking stock do not have any preemptive rights to
subscribe for any additional shares of capital stock or other obligations
convertible into or exercisable for shares of capital stock that may hereafter
be issued by AT&T.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
Subject to the discussion under this section, neither the adoption of the
Consumer Services Group tracking stock amendment nor the distribution of AT&T
Consumer Services Group tracking stock to holders of AT&T common stock will be
taxable to AT&T or holders of AT&T common stock.
Holders of AT&T common stock who receive AT&T Consumer Services tracking
stock in a pro rata distribution will allocate their tax basis in AT&T common
stock between AT&T common stock and AT&T Consumer Services Group tracking stock
in accordance with the relative fair market values of such stocks on the date on
which AT&T Consumer Services Group tracking stock is distributed. A holder's
holding period for AT&T Consumer Services Group tracking stock will include such
holder's holding period of AT&T common stock with respect to which AT&T Consumer
Services Group tracking stock is distributed.
The conclusions in the two preceding paragraphs are not free from doubt.
These conclusions assume that AT&T Consumer Services Group tracking stock is
treated as a class of common stock of AT&T. The filing of consolidated income
tax returns by AT&T together with AT&T Consumer Services Group also assumes that
AT&T Consumer Services Group tracking stock is treated as a class of common
stock of AT&T. While AT&T believes that, under current law, AT&T Consumer
Services Group tracking stock will be treated as common stock of AT&T, there are
no authorities directly on point nor will AT&T receive an advance ruling from
the Internal Revenue Service. There is a risk that the Internal Revenue Service
could assert that AT&T Consumer Services Group tracking stock is property other
than common stock of AT&T. AT&T believes it is unlikely the Internal Revenue
Service would prevail on that view, but no assurance can be given that the views
expressed in the two preceding paragraphs, if contested, would be sustained by a
court.
The foregoing discussion under this section "-- Material U.S. Federal
Income Tax Consequences" is only a general summary of the material federal
income tax consequences of the issuance and distribution of AT&T Consumer
Services Group tracking stock. It is not a complete analysis of all potential
tax effects relevant to the issuance or distribution of AT&T Consumer Services
Group tracking stock. The discussion does not address consequences that may be
relevant to a particular AT&T common stock holder subject to special treatment
under U.S. federal income tax laws (such as dealers in securities, banks,
insurance companies, tax-exempt organizations, non-U.S. persons, holders that
acquired their AT&T common stock pursuant to the exercise of options or
otherwise as compensation and holders that do not hold such shares as capital
assets, nor any consequences arising under any state, local or foreign
jurisdiction). The discussion is based on current provisions of the Code,
Treasury Regulations promulgated thereunder, judicial opinions, published
positions of the Internal Revenue Service, and all other applicable authorities,
all of which are subject to change (possibly with retroactive effect).
WE URGE YOU TO CONSULT YOUR OWN TAX ADVISOR CONCERNING THE U.S. FEDERAL,
STATE AND LOCAL, AND FOREIGN TAX CONSEQUENCES OF THE ISSUANCE AND DISTRIBUTION
OF AT&T CONSUMER SERVICES GROUP TRACKING STOCK TO YOU.
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DESCRIPTION OF AT&T CONSUMER SERVICES GROUP
The description below of AT&T Consumer Services Group reflects our current
plans regarding the operation of AT&T Consumer Services Group. These plans may
change from time to time. For financial information about AT&T Consumer Services
Group, see "Summary -- Consolidating Condensed Financial Information" and the
combined financial statements of AT&T Consumer Services Group, which are
included in Appendix D to this document.
OVERVIEW
AT&T Consumer Services Group is the leading provider of domestic and
international long distance service to residential consumers in the United
States with approximately 60 million customers. AT&T Consumer Services Group
provides interstate and intrastate long distance communications services
throughout the continental United States, and provides, or joins in providing
with other carriers, communications services to and from Alaska, Hawaii, Puerto
Rico and the Virgin Islands and international communications services to and
from virtually all nations and territories around the world.
AT&T Consumer Services Group had:
- approximately $18.9 billion, $21.8 billion and $22.8 billion in combined
revenue for the years ended December 31, 2000, 1999 and 1998,
respectively;
- approximately $6.7 billion, $7.3 billion and $6.1 billion in combined
operating income for the years ended December 31, 2000, 1999 and 1998,
respectively;
- approximately $4.1 billion, $4.6 billion and $3.8 billion in combined net
income for the years ended December 31, 2000, 1999 and 1998, respectively;
and
- approximately $7.0 billion, $7.7 billion and $6.3 billion in combined
EBITDA for the years ended December 31, 2000, 1999 and 1998, respectively.
AT&T Consumer Services Group provides a broad range of communications
services to consumers individually and in combination with other services,
including:
- inbound and outbound domestic and international long distance through the
traditional "one plus" dialing of the desired call destination;
- transaction-based long distance services, such as operator-assisted
calling services and prepaid phone cards;
- local calling through unbundled network elements platform resale and
service offers; and
- dial-up Internet service through AT&T WorldNet Service.
AT&T CONSUMER SERVICES GROUP
AT&T Consumer Services Group tracking stock is designed to reflect the
separate economic performance of AT&T Consumer Services Group, which includes
the assets and liabilities shown in the combined balance sheets of AT&T Consumer
Services Group. If we acquire interests in other businesses, we intend to
attribute those assets and any related liabilities to AT&T Consumer Services
Group or to our other groups in accordance with the AT&T Groups policy
statement. All net income and cash flows generated by the assets attributed to
AT&T Consumer Services Group will be attributed to AT&T Consumer Services Group
and all net proceeds from any disposition of these assets also will be
attributed to AT&T Consumer Services Group.
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Except as described elsewhere in this document, we attribute all of AT&T's
current Consumer Services operations to AT&T Consumer Services Group, including:
- all Consumer Services wireline long distance customers and AT&T WorldNet
Service consumer customers;
- all Consumer Services support infrastructure, including ordering,
provisioning, billing and care; and
- all Consumer Services marketing operations.
AGREEMENTS AMONG AT&T CONSUMER SERVICES GROUP AND AT&T'S OTHER GROUPS
AT&T will seek to manage AT&T Consumer Services Group and AT&T's other
groups in a manner designed to maximize the value of all groups. Following the
issuance of AT&T Consumer Services Group tracking stock, AT&T Consumer Services
Group will be able to:
- use the powerful AT&T brand name in accordance with a brand agreement,
- use AT&T's Communications Services, Inc.'s extensive network assets
including its DSL assets,
- use AT&T's intellectual property and technology in accordance with an
intellectual property agreement, and
- benefit from AT&T's favorable purchasing contracts with major suppliers.
The relationship among the groups will be governed by the AT&T Groups
policy statement, including the process of fair dealing described under
"Relationship among AT&T Groups -- The AT&T Groups Policy Statement -- General
Policy." Although our board of directors has no present intention to do so, it
may modify, suspend or rescind the policies set forth in the AT&T Groups policy
statement, adopt additional policies or make exceptions to existing polices, at
any time, without the approval of our shareholders, subject to limitations we
describe under "Relationship among AT&T Groups -- The AT&T Groups Policy
Statement" and our board of directors' fiduciary duties.
INDUSTRY OVERVIEW
The communications services industry continues to change competitively and
technologically both domestically and internationally, providing significant
opportunities and risks to the participants in these markets. In the United
States, the Telecommunications Act has had a significant impact on AT&T Consumer
Services Group's business by establishing a statutory framework for opening the
local service markets to competition and by allowing RBOCs to provide in-region
long distance services bundled with their existing local franchise. In addition,
prices for long distance minutes and other basic communications services have
declined as a result of competitive pressures, excess capacity as a result of
substantial network build-out, the introduction of more efficient networks and
advanced technologies, product substitution, and deregulation. Competition in
the provision of basic communications services to consumers is based more on
price and less on other differentiating factors that appeal to the larger
business market customers, such as the range of services offered, bundling of
products, customer service, and communications quality, reliability and
availability.
The consumer long distance market is characterized by rapid deregulation
and intense competition among long distance providers, and, more recently,
incumbent local exchange carriers. Under the Telecommunications Act, an RBOC may
offer long distance services in a state within its region if the FCC finds,
first, that the RBOC's service territory within the state has been sufficiently
opened to local competition, and second, that allowing the RBOC to provide these
services is in the public interest. To date, the FCC has granted this access to
Verizon in New York and Massachusetts and to SBC in Texas, Kansas and Oklahoma,
and Verizon has applications pending with the FCC for
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authorization to offer long distance services in other states within their
respective regions. The incumbent local exchange carriers presently have
numerous advantages as a result of their historic monopoly control over local
exchanges. Additionally, in the next few years, AT&T Consumer Services Group
expects that Verizon and SBC will seek to enter virtually all states in their
regions and that other RBOCs will be given permission to offer long distance
services within their regions. AT&T Consumer Services Group has challenged, and
will continue to challenge, any of these regulatory applications that do not
meet the criteria envisioned by the Telecommunications Act or the related rules
relating to local competition issued by the FCC. To date, these challenges have
focused on the pricing of unbundled network elements and on the adequacy of the
RBOCs' operations support systems.
Other important factors affecting the markets in which AT&T Consumer
Services Group competes include the development of new technologies and the
resulting increased availability of domestic and international transmission
capacity, and increasing competition from entities that own their own access
facilities. These developments, among others, impact the degree to which AT&T
Consumer Services Group's communications services offerings are competitive with
the services of other companies.
STRATEGY
AT&T Consumer Services Group's goal is to maintain its leadership position
in the long distance market while utilizing its current consumer marketing
service capabilities to pursue new product or service opportunities.
MAINTAIN MARKET LEADERSHIP
Focus marketing and retention efforts to maximize its share of high-value
long distance consumers. Historically, the long distance communications
industry focused on market share, and marketing efforts were targeted to reach
mass audiences in order to maintain share. AT&T Consumer Services Group focuses
its marketing and retention efforts on high-value long distance customers, with
targeted offers and solicitations. AT&T Consumer Services Group narrowed new
customer solicitations in direct mail and outbound telemarketing only to
high-value customers with aggressively priced by the minute and block of time
calling plans. Further, high-value customers in AT&T Consumer Services Group's
embedded base have the opportunity to participate in a portfolio of
loyalty-centric plans. For example, high-value customers can earn rewards, such
as frequent flier miles, free cable programming or contributions to an
educational fund. AT&T Consumer Services Group believes that these high-value
customers are more likely to use offers of the AT&T Consumer Services Group,
such as local toll, calling card, international plans, AT&T WorldNet Service
and, eventually, DSL, and are more desirable because their revenues are capable
of offsetting the cost of obtaining, provisioning and maintaining each customer.
Provisioning costs include the channel-related cost to acquire customers,
billing and customer care support. These expenses are relatively independent of
customer spending levels. Going forward, AT&T Consumer Services Group will seek
to create efficiencies and to generate new revenues through serving these
high-value customers. These efforts include cross-marketing telecommunications
and non-telecommunications services, new loyalty-based rewards, increased use of
leading-edge voice recognition technology and new billing and communication
options via the AT&T Consumer Services Group web site.
Continue to hold a significant operating margin through operating cost
reductions. AT&T Consumer Services Group has significantly reduced costs and
expenses over the past three years. These efforts were focused on access reform
and reductions in the cost associated with terminating international calls,
billing costs and headcount. As a result, AT&T Consumer Services Group has
reduced selling, general and administrative expenses by $1 billion and reduced
overall costs and expenses by $5 billion over the past three years.
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Continue to benefit from AT&T Consumer Services Group's relationship with
and use of the resources of AT&T, including the use of the AT&T brand and
network, cross-marketing opportunities and bundled offers. AT&T Consumer
Services Group believes that its relationship with AT&T provides it with
significant competitive advantages, including:
- use of the powerful AT&T brand name substantially in the same manner as
it has been used by AT&T Consumer Services Group up to now consistent
with guidelines to avoid confusion with certain competing services;
- an opportunity to use AT&T Consumer Services Group sales channels through
cross-marketing arrangements and, where appropriate, through bundled
offers, (as may be agreed by AT&T, AT&T Broadband Group, AT&T Consumer
Services Group and AT&T Wireless Group), of AT&T Consumer Services Group
with services of other AT&T groups;
- use of specified AT&T intellectual property and technology;
- use of the AT&T network on contractual terms; and
- potential benefits from certain AT&T purchasing contracts with suppliers
where permitted by existing contracts or where arrangements can be made
with these suppliers.
AT&T brand. The AT&T brand is one of the best known and respected brand
names in the United States. AT&T Consumer Services Group believes that the AT&T
brand positively impacts consumer awareness of, and confidence in, AT&T Consumer
Services Group's products and services. In addition, as competition in the
consumer services communications industry intensifies, AT&T Consumer Services
Group believes that the power of a strong national brand plays an increasingly
important role in consumers' purchasing decisions.
Marketing. AT&T Consumer Services Group believes that its relationship
with AT&T's other groups has and can continue to provide marketing benefits.
AT&T Consumer Services Group will be able, in certain circumstances, to use its
sales channels to market the services of AT&T Broadband Group or AT&T Wireless
Group in exchange for a marketing fee. In addition, AT&T Business Services
Group, AT&T Broadband Group and AT&T Consumer Services Group will have the
opportunity to cooperatively bundle offers of services designed for targeted
markets.
Technology. AT&T Consumer Services Group will continue to have the
advantage of being able to use specified AT&T proprietary intellectual property
and technology as well as specified intellectual property that AT&T has the
right to use through licensing or other arrangements.
Purchasing power. AT&T, as a large communications carrier has substantial
leverage in the industry with major equipment and other suppliers. AT&T's
ability to purchase large amounts of goods has enabled it to obtain favorable
pricing and other terms with those suppliers. Through contractual and other
arrangements, AT&T Consumer Services Group may be able to participate in certain
of AT&T's supplier contracts.
PURSUE NEW GROWTH OPPORTUNITIES
Provide communication services to customers by bundling AT&T long distance
with local resale, Internet services and DSL opportunities. AT&T Consumer
Services Group believes there may be opportunities to provide communication
services to customers by bundling AT&T long distance with local services (using
incumbent local exchange carrier network combinations), AT&T WorldNet Services
and high-speed Internet access services on a DSL platform.
AT&T Consumer Services Group currently provides local service in eight
markets via network element combinations and resale. The largest numbers of its
customers are in New York and Texas. AT&T Consumer Services Group entered both
of these markets in late 1999 providing customers with bundled local and long
distance services on a single bill.
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Integrated high-speed data and voice services. AT&T Consumer Services
Group has been laying the groundwork for moving, in selected markets, from
traditional narrowband telecommunications to broadband telecommunications. AT&T
Consumer Services Group plans to focus on creating offers consistent with the
evolution of communications services using the DSL platform currently being
integrated into the AT&T network.
DSL is provided over traditional telephone "twisted pair" copper lines
leased from local exchange carriers. Using electronics attached to a typical
telephone line both at the customer premises (through a modem) and at a point in
the AT&T network, DSL service provides customers with a continuous connection to
the Internet, featuring AT&T WorldNet Service. The typical residential offering
features connection speeds up to 12 times faster than current 56k modem
technology.
The DSL platform broadens AT&T Consumer Services Group's franchise from
long distance and local voice services, to telephone and communication, whether
voice, Internet, data, e-mail or messaging.
AT&T Consumer Services Group expects to introduce high-speed data and voice
service into the consumer marketplace in late 2001 on a trial basis and plans to
offer a choice of DSL platform services based on customer needs, including
connection speed and appropriate price levels. Provided the trial is successful,
both from technical and economic perspectives, AT&T Consumer Services Group
plans to expand its services strategically in selected markets throughout 2002
and beyond.
As part of the March 28, 2000 term sheets among AT&T, Excite@Home, Comcast
and Cox relating to the reorganization of the governance and distribution
arrangements of Excite@Home, AT&T agreed that, until June 4, 2006, AT&T will not
provide wireline (e.g., DSL or hybrid fiber/coaxial) high-speed Internet access
services to residential customers in the territories served by the U.S. cable
systems of Cox or Comcast, as the case may be. AT&T's obligation will terminate
automatically as to either Comcast or Cox, if Comcast or Cox, as the case may
be, does not continue to use Excite@Home as its provider of
platform/connectivity services used in its residential high-speed ISP services
over cable in substantially all of its U.S. cable systems. This agreement could
be terminated by either Cox or Comcast as early as June 2002. AT&T further
agreed to use all reasonable efforts to cause its subsidiaries and affiliates to
comply with the provisions, terms and obligations of that agreement that are
applicable to them. If this agreement is interpreted to apply to the activities
of AT&T Consumer Services Group, it could limit AT&T Consumer Services Group's
ability to provide some wireline high-speed Internet services in the geographic
areas where Comcast and Cox have cable systems and could have an adverse effect
on AT&T Consumer Services Group's ability to expand and grow its wireline
high-speed Internet business generally or to achieve economies of scale in that
business.
LEVERAGE AT&T WORLDNET SERVICE'S NARROWBAND OPPORTUNITIES WITH LONG
DISTANCE AND MIGRATE TO BROADBAND OPPORTUNITIES WITH DSL IN KEY MARKETS
AT&T WorldNet Service currently has narrowband subscribers that use IP
communication services within the AT&T WorldNet Service offer, such as e-mail,
calendar and alerting. AT&T Consumer Services Group plans to extend IP
communication services to its base of long distance customers via bridge offers
and bundles. AT&T Consumer Services Group's objective is to increase usage by
the long distance customer base of AT&T Consumer Services Group's IP-based
services and then migrate those customers to more advanced IP-based services,
such as Voice Mail. Once the IP-based offers are readily available, AT&T
Consumer Services Group plans to market its DSL offers to both the narrowband
customer base and the long distance customer base, including those customers who
use IP communication services.
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SERVICES AND PRODUCTS
LONG DISTANCE
AT&T Consumer Services Group provides interstate and intrastate long
distance telecommunications services throughout the continental United States
and provides, or joins in providing with other carriers, telecommunications
services to and from Alaska, Hawaii, Puerto Rico and the Virgin Islands and
international telecommunications services to and from virtually all nations and
territories around the world. Consumers can use AT&T Consumer Services' domestic
and international long distance services through traditional "one plus" dialing
of the desired call destination, through dial-up access or through use of AT&T
calling cards.
AT&T purchases transport services from Concert for the delivery and receipt
of AT&T's international service. In accordance with the terms of the operating
agreements Concert has with foreign carriers throughout the world, the cost of
transporting AT&T's traffic is sensitive to changes in international settlement
rates and international traffic routing patterns.
In the continental United States, AT&T Consumer Services Group provides
long distance telecommunications services over AT&T Business Services Group's
backbone network. International telecommunications services are provided by
submarine cable systems in which Concert holds investment positions, satellites
and facilities of other domestic and foreign carriers.
Calling Card. AT&T Consumer Services Group provides a fast, easy to use,
convenient way for placing all "away from home" calls. The AT&T calling card can
be used to place domestic and international calls in the U.S. and Canada by
accessing 1-800CALLATT, 10-10-288 or 0+ the number dialed. Features include
purchase limits, geographic restrictions, native language preference, voice
messaging and sequence dialing. Customers can place calls over the AT&T network
by using any of the following options: AT&T calling cards, local exchange
carrier cards and commercial credit cards.
TRANSACTION-BASED SERVICES
AT&T Consumer Services Group offers a variety of transaction-based services
that are designed to provide customers with an alternative to access long
distance services as well as to provide assistance in completing long distance
communications.
Operator Services. Traditional Collect, Billed to Third Number, Person to
Person and Coin Sent Paid are the family of operator-assisted calling services.
Directory Assistance. Directory Assistance is provided to customers both
domestically and internationally, with an option to complete the call for a
nominal extra charge.
AT&T Direct Services. AT&T Consumer Services Group provides customers with
the ability to reach the AT&T network from outside the U.S. By dialing the
access code associated with the country of origin, customers can receive all the
benefits of our calling card and operator-assisted calling services.
True Message. AT&T True Messages is a voice store and forward service.
Using this service, callers can record a message in their own voice and have it
delivered to a telephone number that they called or they can access AT&T True
Messages directly and send a message.
Accessible Communication Service. AT&T Consumer Services Group provides
Telecommunications Relay Service for the deaf and hearing-impaired customers to
help them communicate with anyone in the world on the phone.
1-800CALLATT (Collect). 1-800CALLATT for collect calls continues to be
AT&T Consumer Services Group's lead discounted collect calling offer in the
operator services portfolio. 1-800CALLATT is a domestic, automated, flat-rate
collect calling service. The service is targeted at
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price conscious consumers and advertised nationally through multiple media
channels. Optional collect messaging capabilities exist as well.
AT&T Prepaid Card. AT&T prepaid cards provide local, long distance and
international calls charged to an AT&T prepaid card account maintained on AT&T's
prepaid platform. The AT&T prepaid card service is available 24 hours a day, 7
days a week. The service is accessed using an 800 number printed on the card and
entering the card PIN number, also printed on the card. This PIN number is
unique to each card issued. An announcement confirms the time remaining on the
card. The user then dials the telephone number they wish to reach, and the call
is completed. The user's call will be interrupted with an announcement when the
balance is about to be depleted. This announcement will occur one minute prior
to depletion, based on the terminating location of the call. Call times are
billed in one-minute increments. Recorded prompts and announcements are
available in both English and Spanish. AT&T prepaid cards are available in both
minute- and dollar-based denominations. Minute-based denominations are based on
U.S. domestic calling rates. Currently, AT&T prepaid cards are available in over
60,000 retail locations of various types including grocery, drug, convenience,
mass merchandise, wholesale clubs, electronics/office and military/government.
10-10-345. 10-10-345 is a non-AT&T-branded dial-around service that allows
customers an alternative way to make a long distance call. The service is
targeted at price-savvy, budget-conscious dial-around and other common carriers'
users completing domestic and/or international calls from home. A customer can
use the service by dialing 10-10-345 + 1 + area code + number for domestic calls
and 10-10-345 + 011 + country code + number for international calls. When a
customer dials 10-10-345, they pay a competitive per-minute rate, 24 hours a
day, 7 days a week with a minimal surcharge per call. Charges made for calls
using 10-10-345 are billed through the local telephone company.
LOCAL AND LONG DISTANCE
In August 1999, AT&T Consumer Services Group began offering residential
customers in New York and Texas local service via unbundled network elements
platform bundled together with intraLATA and long distance services resulting in
a package of complete phone service from one company on one bill. The unbundled
network elements platform generally refers to a combination of incumbent local
exchange carrier network elements that AT&T leases in order to supply the
underlying local connectivity for AT&T's integrated local and long distance
offering. The local services are priced roughly at parity with those offered by
the incumbent RBOC and are available with AT&T Consumer Services Group's most
popular local toll and long distance rates.
AT&T Consumer Services Group provides local service to customers by using
the incumbent local exchange carrier's local phone service using combinations of
incumbent local exchange carrier unbundled network elements, as well as
incumbent local exchange carrier unbundled loops (which are, in general, the
lines from a customer's home to the switching facility -- these can be combined
with switching, transport and other network elements) to support differentiated
voice and data services. However, this fact is transparent to the customer. AT&T
Consumer Services Group handles all aspects of the phone service for the
customer, including ordering, customer service, billing and inside wiring. AT&T
Consumer Services Group also offers many of the same local calling features as
the incumbent local exchange carriers, such as Call Waiting and Caller ID.
AT&T WORLDNET SERVICE
AT&T offers dial-up Internet access to consumers through its award-winning
AT&T WorldNet Service, a leading provider of Internet access service in the
United States.
In 1999, AT&T WorldNet Service began offering members an AT&T-branded
search engine as part of the redesign of the AT&T's website, and enhanced
several other subscriber features, including increasing the disk storage space
for personal web pages to 10 megabytes for each e-mail id (six
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e-mail ids per account, 60 megabytes of disk storage) and providing a template
that helps members build personal web pages quickly and easily. AT&T WorldNet
Service also offers the AT&T Any Who Internet directory, as well as AT&T-branded
advanced communications services, such as instant messaging. The AT&T WorldNet
web site also serves as a stand-alone Internet portal and, together with the
AT&T Any Who Internet directory and the advanced communications services, are
also available to, and are used by, nonsubscribers to AT&T WorldNet Service.
In 2000, AT&T WorldNet Service began offering members Internet service that
includes a persistently present toolbar that displays advertising to subscribers
even when they are on web sites other than those operated by AT&T. This new
service was marketed directly by AT&T WorldNet Service and indirectly through
several major distribution arrangements.
J.D. Power and Associates ranked AT&T WorldNet Service #1 in "Customer
Satisfaction" among the largest national ISPs in their 2000 National ISP
Customer Satisfaction Study based on 4,173 responses. AT&T WorldNet Service
earned its top position of overall customer satisfaction based on seven factors,
including speed/availability, cost/billing/image, suitability of
services/content, customer care/technical support, e-mail services,
navigation/access to other portals and ease of use. In November, PC World gave
AT&T WorldNet Service their "Best Buy" award, noting AT&T WorldNet Service's
outstanding dial-up speed, high connection success rate and extras, such as
multiple e-mail boxes, and superior support.
AT&T WorldNet Service generates revenues principally through subscription
and usage fees, as well as from electronic commerce and advertising. AT&T
WorldNet Service offers a variety of pricing plan options, including bundled
options with AT&T long distance and AT&T wireless offers. Generally, customers
are charged a flat rate for a certain number of hours with charges for each
additional hour of usage. AT&T WorldNet Service also offers a plan without a
usage restriction.
AT&T WorldNet Service's marketing programs are designed to attract and
retain high-value customers. AT&T Consumer Services Group seeks to build brand
recognition and customer loyalty and to make it easy for consumers to try, and
stay with, AT&T WorldNet Service. In addition to direct marketing through brand
name mass advertising, direct mail and magazine insert promotions and bundling
offers, AT&T WorldNet Service maintains a large indirect channel marketing
effort. Through this indirect channel, AT&T WorldNet Service software is bundled
in new computers produced by major manufacturers and is included in millions of
software titles published by independent software vendors. AT&T WorldNet Service
also has a co-branded ISP offer that enables businesses to offer customers their
own branded, full-featured Internet access in affiliation with AT&T.
LONG DISTANCE MARKETING
AT&T Consumer Services Group develops customer awareness through its
marketing and promotion efforts. AT&T Consumer Services Group uses the AT&T
brand name and provides superior customer care. AT&T Consumer Services Group
reinforces its brand position in the market through direct mail, outbound
telemarketing, the mass media, bill inserts and network announcements in eleven
different languages.
AT&T Consumer Services Group offers customers a family of calling plans.
These calling plans are simple and are consistently offered on the web and over
the telephone. Further, these plans offer customers a broad choice of price
points to meet their needs. The newest plan, AT&T 7/7, introduced in February
2001, offers customers combined Internet access and phone service for a $7
monthly fee. The service provides customers unlimited access to the Internet and
a round-the-clock rate of 7 cents a minute for state-to-state long distance
calls from home.
AT&T Consumer Services Group also offers various reward and partnership
programs for high-value customers. For example, customers enrolled in AT&T
rewards receive redemption options every
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six months based on their long distance spending. AT&T Consumer Services Group
partnerships with companies such as Continental Airlines, Inc., Starwood Hotels
& Resorts Worldwide Inc. and Cablevision, among others, provide customers with
options ranging from airline miles to hotel nights to premium cable channel
upgrades. Through one of the most recent partnerships, announced in January 2001
with Upromise Inc., the customer can receive a contribution equal to 4% of the
cost of residential long distance calls made into an Upromise savings account to
be used for education.
AT&T Consumer Services Group provides its customers with excellent customer
care and support. J.D. Power and Associates' 2000 Customer Satisfaction Survey
ranked AT&T Consumer Services Group highest in residential long distance
satisfaction for customers with monthly charges in excess of $50, and strongest
in the areas of customer service, corporate image, communications and operators.
There are 26 service centers, handling 9 million calls per month, in eleven
different languages.
SALES
AT&T Consumer Services Group markets its products and services to a broad
spectrum of customers seeking to communicate locally or globally. AT&T Consumer
Services Group predominantly markets under the AT&T brand with the exception of
its 10-10-345 service. AT&T Consumer Services Group extensively utilizes direct
marketing channels, including the Internet, direct mail, mass media, probe and
transfer, and outbound telemarketing to communicate with its existing customer
base as well as to market to prospective customers regarding the breadth of
services available to them. AT&T Consumer Services Group's marketing efforts
focus on offering its services to its customers based on their unique needs.
These efforts involve the selling of stand-alone services, such as long
distance, local and AT&T WorldNet Service, as well as bundled service offerings
including long distance/AT&T WorldNet Service, long distance/local, and long
distance/calling card.
AT&T Consumer Services Group relies on an integrated sales and service team
to solicit and handle customer contact opportunities. The customer care centers
consist of a network of internal and external vendors. The breadth of support
provided by the centers ranges from universal sales and service (multiple
services and functions) to specialized services based on functional area (local,
long distance, etc.) or customer needs (domestic, global (including languages
other than English), regional, etc.). AT&T Consumer Services Group generally
pays its vendors based on a contracted hourly rate; however, it is aggressively
moving to a pay-for-performance scale methodology.
AT&T Consumer Services Group also has begun to implement various
initiatives aimed at improving the overall quality of its sales channels as well
as lowering its costs of adding new subscribers. Recent initiatives targeted at
reducing costs and enhancing channel efficiencies have included the expansion of
AT&T Consumer Services Group's on-line capacity and capabilities (including
billing, sales and service) and the increased use of interactive voice response
technology.
RATES AND BILLING
AT&T Consumer Services Group charges long distance customers based on
applicable tariffs filed with the FCC and individual states. Effective as of
August 1, 2001, the rates for state-to-state and international calls will be set
by contract rather than by FCC tariffs as a result of the FCC de-tariffing
order. Customers select different services and various rate plans, which
determine the price per minute that customers pay on their long distance calls.
Rates typically vary based on a variety of factors, particularly the volume of
usage and the day and time that calls are made.
AT&T Consumer Services Group long distance charges may include fees per
minute for transporting a call, per call or per minute surcharges, monthly
recurring charges, minimums and price structures that offer a fixed number of
minutes each month for a specific price. The fees per minute for transporting a
call may vary by time of day or length of call and by whether the call is
domestic or international. Within the United States, in-state rates may vary
from interstate rates. These rate
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structures apply to customer dialed calls, calling card calls, directory
assistance calls, operator-assisted calls and certain miscellaneous services.
Customers also may be assessed a percentage of revenue, or a fixed monthly fee,
to satisfy AT&T Consumer Services Group's obligations to recover U.S. federal-
and state-mandated assessments and access surcharges.
ELECTRONIC CONSUMER RELATIONSHIPS
The evolution of the Internet has created a number of new business
opportunities for AT&T Consumer Services Group. AT&T Consumer Services Group is
pursuing an e-enabling strategy designed to create a more convenient,
interactive relationship with the consumer, while streamlining its existing
processes and reducing the costs of providing services.
Through the use of digital technologies, AT&T Consumer Services Group is
attempting to build a cost-effective, loyalty-enhancing relationship with its
most profitable customers. AT&T Consumer Services Group's efforts center on
making it easier for customers to do business with AT&T, and are seeking to bond
customers to the unique level of convenience and value-added services only the
Internet can provide. Monthly, an average of two million visitors come to AT&T
Consumer Services Group's web site to learn about new offers, order services and
find information that will help them stay more connected while traveling, or to
make service inquiries. To further the relationship with specific customer
segments, AT&T Consumer Services Group provides access to information in 5
languages other than English. These transactions increase consumer satisfaction
by providing a new level of control and, in many cases, reduce time consuming
contacts with AT&T Consumer Services Group's care and sales channels.
AT&T Consumer Services Group's e-consumer strategy embodies the entire
business process from advertising and marketing through sales, ordering,
billing, fulfillment, customer service, and after-sales support. AT&T Consumer
Services Group is supplying a full range of product information, bill management
utilities and customer care capabilities designed to attract and retain its most
valuable customers. AT&T Consumer Services Group's on-line billing
infrastructure enables customers to view, sort, adjust, investigate and resolve
questions regarding their billing statements. In 2000, AT&T Consumer Services
Group increased its e-billed customer base by 66%, more than double the industry
growth rate. AT&T Consumer Services Group aims to grow on-line sign-ups of
customers.
COMPETITION
Competition in communications services is based on price and pricing plans,
types of services offered, customer service, access to customer premises and
communications quality, reliability and availability. AT&T Consumer Services
Group's principal competitors include Worldcom, Inc., Sprint Corporation and
RBOCs. AT&T also experiences significant competition in long distance from dial-
around resellers.
Incumbent local exchange carriers own the only universal telephone
connection to the home, have very substantial capital and other resources,
long-standing customer relationships and extensive existing facilities and
network rights-of-way, and are AT&T Consumer Services Group's primary
competitors in the local services market. In addition, it is anticipated that a
number of long distance telecommunication, wireless and cable service providers
and others will enter the local services market in competition with AT&T
Consumer Services Group. Some of these potential competitors have substantial
financial and other resources. AT&T Consumer Services Group also will compete in
the local services market with a number of competitive local exchange carriers,
a few of which have existing local networks and significant financial resources.
See "Risk Factors Relating to AT&T Consumer Services Group and AT&T Business
Services Group -- AT&T Consumer Services Group and AT&T Business Services Group
face substantial competition that may materially adversely impact both market
share and margins."
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AT&T Consumer Services Group currently faces significant competition and
expects that the level of competition will continue to increase. As competitive,
regulatory and technological changes occur, including those occasioned by the
Telecommunications Act described under "-- Legislative and Regulatory
Developments -- Telecommunications Act of 1996," AT&T Consumer Services Group
anticipates that new and different competitors will enter and expand their
position in the communications services markets. These will include RBOC
competitors in existing states and new states plus entrants from other segments
of the communications and information services industry or global competitors
seeking to expand their market opportunities. Many of these new competitors are
likely to enter with a strong market presence, well-recognized names and
pre-existing direct customer relationships.
The Telecommunications Act already has impacted the competitive
environment. Anticipating changes in the industry, non-RBOC local exchange
carriers, which are not required to implement the Telecommunications Act's
competitive checklist prior to offering long distance in their home markets,
have begun integrating their local service offerings with long distance
offerings in advance of AT&T Consumer Services Group's offering combined local
and long distance service in these areas, adversely affecting AT&T Consumer
Services Group's revenues and earnings in these service regions.
In addition, the Telecommunications Act permits RBOCs to provide interLATA
interexchange services after demonstrating to the FCC that providing these
services is in the public interest and satisfying the conditions for developing
local competition established by the Telecommunications Act. See "-- Legislative
and Regulatory Developments -- Telecommunications Act of 1996." RBOCs have
petitioned the FCC for permission to provide interLATA interexchange services in
one or more states within their home markets. In December 1999, Verizon became
the first RBOC to obtain approval to provide long distance in a state within its
home territory, in New York, and was granted authorization to provide long
distance service in Massachusetts in April 2001. In April 2000, SBC was granted
authorization to provide long distance service in Texas, and in January 2001,
obtained authorization to provide long distance service in Kansas and Oklahoma.
In April 2001, Verizon filed an application with the FCC for authority to
provide long distance telecommunications service in Connecticut and in June
filed an application seeking such authority in Pennsylvania. The FCC is due to
rule on those requests by July 16 and September 19, 2001, respectively.
To the extent that RBOCs obtain in-region interLATA authority before the
Telecommunications Act's checklist of conditions have been fully or
satisfactorily implemented and adequate facilities-based local exchange
competition exists, or before there is an ability to resell at fair and
competitive rates there is a substantial risk that AT&T Consumer Services Group
and other interexchange service providers will be at a disadvantage to RBOCs in
providing both local service and combined service packages. Because it is widely
anticipated that substantial numbers of long distance customers will seek to
purchase local, interexchange and other services from a single carrier as part
of a combined or full service package, any competitive disadvantage, inability
to profitably provide local service at competitive rates or delays or
limitations in providing local service or combined service packages could
materially adversely affect AT&T Consumer Services Group's future revenue and
earnings. In any event, the simultaneous entrance of numerous new competitors
for interexchange and combined service packages is likely to materially
adversely affect AT&T Consumer Services Group's future long distance revenue and
could affect materially adversely future earnings.
In addition to the matters referred to above, various other factors,
including technological hurdles, market acceptance, start-up and ongoing costs
associated with the provision of new services and local conditions and
obstacles, could materially adversely affect the timing and success of AT&T
Consumer Services Group's entrance into the local exchange services market and
AT&T Consumer Services Group's ability to offer combined service packages that
include local service.
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EMPLOYEES
At December 31, 2000, AT&T Consumer Services Group employed approximately
17,400 individuals in its operations, virtually all of whom are located in the
United States. About 79% of the domestically located employees of AT&T Consumer
Services Group are represented by unions. Of those represented by unions, about
94% are represented by the Communications Workers of America and about 5% are
represented by the International Brotherhood of Electrical Workers, or IBEW,
both of which are affiliated with the AFL-CIO. In addition, there is a very
small number of domestic employees represented by other unions. Labor agreements
with most of these unions extend through May 2002.
LEGAL PROCEEDINGS
In the normal course of business, AT&T Consumer Services Group is subject
to proceedings, lawsuits and other claims, including proceedings under
government laws and regulations related to environmental and other matters. Such
matters are subject to many uncertainties and outcomes are not predictable with
assurance. Consequently, AT&T Consumer Services Group is unable to ascertain the
ultimate aggregate amount of monetary liability or financial impact with respect
to these matters at December 31, 2000. While these matters could affect
operating results of any one quarter when resolved in future periods, it is
management's opinion that after final disposition, any monetary liability or
financial impact to AT&T Consumer Services Group beyond that provided for at
year-end would not be material to AT&T Consumer Services Group's annual
consolidated financial position or results of operations.
LEGISLATIVE AND REGULATORY DEVELOPMENTS
TELECOMMUNICATIONS ACT OF 1996
In February 1996, the Telecommunications Act became law. The
Telecommunications Act, among other things, was designed to foster local
exchange competition by establishing a regulatory framework to govern new
competitive entry in local and long distance telecommunications services. The
Telecommunications Act permits an RBOC to provide interexchange services
originating in any state in its region after it demonstrates to the FCC that
this provision is in the public interest and it satisfies the conditions for
developing local competition established by the Telecommunications Act.
In August 1996, the FCC adopted rules and regulations, including pricing
rules, to implement the local competition provisions of the Telecommunications
Act, including with respect to the terms and conditions of interconnection with
local exchange carrier networks and the standards governing the purchase of
unbundled network elements and wholesale services from local exchange carriers.
These rules and regulations rely on PUCs, to develop the specific rates and
procedures applicable to particular states within the framework prescribed by
the FCC.
On July 18, 1997, the Eighth Circuit Court of Appeals issued a decision
holding that the FCC lacks authority to establish pricing rules to implement the
sections of the local competition provisions of the Telecommunications Act
applicable to interconnection with local exchange carrier networks and the
purchase of unbundled network elements and wholesale services from local
exchange carriers. Accordingly, the Eighth Circuit Court of Appeals vacated the
rules that the FCC had adopted in August 1996, and that had been stayed by the
Court since September 1996. On October 14, 1997, the Eighth Circuit Court of
Appeals vacated an FCC rule that prohibited incumbent local exchange carriers
from separating network elements that are combined in an incumbent local
exchange carrier's network, except at the request of the competitor purchasing
the elements. This decision increased the difficulty and cost of providing
competitive local service through the use of unbundled network elements
purchased from incumbent local exchange carriers.
On January 25, 1999, the Supreme Court issued a decision reversing the
Eighth Circuit Court of Appeal's holding that the FCC lacks jurisdiction to
establish pricing rules applicable to
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interconnection and the purchase of unbundled network elements, and the Eighth
Circuit Court of Appeal's decision to vacate the FCC's rule prohibiting
incumbent local exchange carriers from separating network elements that are
combined in an incumbent local exchange carrier's network. The effect of the
Supreme Court's decision was to reinstate the FCC's rules governing pricing and
the separation of unbundled network elements. The pricing issues were then
remanded to the Eighth Circuit Court of Appeals to consider the incumbent local
exchange carriers' claims that, although the FCC has jurisdiction to adopt
pricing rules, the rules it adopted are not consistent with the applicable
provisions of the Telecommunications Act. The Supreme Court also vacated the
FCC's rule identifying and defining the unbundled network elements that
incumbent local exchange carriers are required to make available to new
entrants, and directed the FCC to reexamine this issue in light of the standards
mandated by the Telecommunications Act.
In response to the Supreme Court's decision, the FCC completed its
reexamination of, and released an order identifying and defining, the unbundled
network elements that incumbent local exchange carriers are required to make
available to new entrants. That order re-adopted the original list of elements,
with certain exceptions. An association of incumbent local exchange carriers has
appealed the FCC's order to the District of Columbia Circuit Court of Appeals,
and has asked this Court to hear the appeal on an expedited basis. A number of
parties, including AT&T and other incumbent local exchange carriers, have
petitioned the FCC to reconsider and/or clarify its order. The FCC has moved to
hold the appeal in abeyance pending its disposition of the reconsideration
petitions.
In July 2000, the Eighth Circuit Court of Appeals issued a decision
addressing the incumbent local exchange carriers' claims that the FCC's pricing
rules are not consistent with the applicable provisions of the
Telecommunications Act. It rejected the incumbent local exchange carriers'
claims that the prices for network elements must be based on their "historical
costs" rather than, as the FCC had held, their "forward-looking" costs. It also
held, however, that the FCC rule providing that forward-looking costs should be
calculated on the basis of the cost of the most efficient alternatives was
contrary to the Telecommunications Act. The Eighth Circuit Court of Appeals then
stayed this ruling to enable the parties to seek review before the Supreme
Court, so the FCC's rules remain in effect until the Supreme Court decides the
case. The Supreme Court agreed to review the Eighth Circuit Court of Appeals'
decision, and a decision by the Supreme Court is anticipated by the end of June
2002. The Supreme Court will be considering the claims of AT&T, the FCC and
others that the Eighth Circuit Court of Appeals erred by invalidating the FCC
rule, and the claim by the incumbent local exchange carriers that the Eighth
Circuit Court of Appeals erred by not requiring prices based on their historical
cost.
The Eighth Circuit Court of Appeals also invalidated the FCC's rules
setting the pricing methodology for resold local services. That aspect of its
decision was not stayed and will not be reviewed by the Supreme Court.
In view of the proceedings pending before the Supreme Court, the District
of Columbia Circuit Court of Appeals, the FCC and state PUCs, there can be no
assurance that the prices and other conditions established in each state will
provide for effective local service entry and competition or provide AT&T
Consumer Services Group with new market opportunities. The effect of the most
recent decision by the Eighth Circuit Court of Appeals is to increase the risks,
costs, difficulties, and uncertainty of entering local markets through using the
incumbent local exchange carriers' facilities and services.
In December 1999, Bell Atlantic Corporation (now Verizon) obtained approval
to offer long distance telecommunications service in the State of New York,
which was the first time an RBOC had received this approval under the
Telecommunications Act. Bell Atlantic began offering combined local and long
distance service in January 2000. In July 2000, SBC became the second RBOC to
receive this approval, this time for the State of Texas, and began providing
combined local and long
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distance service in July 2000. In January 2001, the FCC approved SBC's request
for this authority for the States of Oklahoma and Kansas, and, pursuant to the
terms of that authority, SBC is free to begin providing combined local and long
distance services in those states in March 2001. Verizon received the same
authority in April 2001 for the Commonwealth of Massachusetts. In April 2001,
Verizon filed an application with the FCC for authority to provide long distance
telecommunications service in Connecticut, and in June Verizon filed an
application seeking such authority in Pennsylvania. The FCC is due to rule on
those requests by July 16 and September 19, 2001, respectively.
REGULATION OF RATES
AT&T Consumer Services Group is subject to the jurisdiction of the FCC with
respect to interstate and international rates, lines and services, and other
matters. From July 1989 to October 1995, the FCC regulated AT&T Consumer
Services Group under a system known as "price caps" whereby AT&T Consumer
Services Group's prices, rather than its earnings, were limited. On October 12,
1995, recognizing a decade of enormous change in the long distance market and
finding that AT&T lacked market power in the interstate long distance market,
the FCC reclassified AT&T as a "non-dominant" carrier for its domestic
interstate services. As a result, AT&T Consumer Services Group became subject to
the same regulations as its long distance competitors for these services. Thus,
AT&T Consumer Services Group was no longer subject to price cap regulation for
these services, was able to file tariffs that are presumed lawful on one day's
notice, and was free of other regulations and reporting requirements that apply
only to dominant carriers.
On October 31, 1996, the FCC issued an order that would have prohibited
non-dominant carriers, including AT&T Consumer Services Group, from filing
tariffs for their domestic interstate services. Non-dominant carriers, including
AT&T Consumer Services Group, have begun implementation of mechanisms other than
tariffs to establish the terms and conditions that apply to domestic, interstate
telecommunications services, and, by August 1, 2001, will have to use these
mechanisms for virtually all domestic, interstate telecommunications services.
Further, on March 16, 2001, the FCC adopted an order applying detariffing
requirements to international services.
In May 1997, the FCC adopted orders relating to price caps, access reform
and universal service that substantially revised the level and structure of
access charges that AT&T Consumer Services Group, as a long distance carrier,
pays to incumbent local exchange carriers. Under the price cap order, local
exchange carriers were required to reduce their price cap indices by 6.5%
annually, less an adjustment for inflation, which has resulted in significant
reductions in access charges that long distance companies pay to local exchange
carriers. The access reform order permitted increased flat-rate assessments to
multiline business customers and to residential customers other than for the
primary telephone line. AT&T Consumer Services Group has agreed to pass through
to consumers any savings to AT&T Consumer Services Group as a result of these
access charge reforms. Consequently, AT&T Consumer Services Group's results
after June 1997 reflect lower revenue per minute of usage and lower access and
other interconnection costs per minute of usage.
In May 2000, the FCC adopted the CALLS order for the price cap local
exchange carriers, which made additional significant access and price cap
changes. The CALLS order reduced by $3.2 billion during 2000 the interstate
access charges that AT&T Consumer Services Group and other long distance
carriers paid to these local exchange carriers for access to their networks, and
established target access rates for the long distance carriers companies, which,
over the next two years, will result in further reductions, albeit of a much
smaller magnitude. Once the target rates are reached, the annual price
reductions required by the price cap order no longer apply. In addition, the
CALLS order removed implicit subsidies from access charges and converted them
into an explicit, portable subsidy administered as part of the universal service
program described below. Also, under the CALLS order, the caps on certain
line-based costs that do not vary with usage have been increased so that these
costs increasingly are recovered from end user customers. These restructurings
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allowed the reduction in access charges assessed on long distance carriers on a
usage basis. As part of the CALLS order, AT&T Consumer Services Group agreed to
pass through to customers access charge reductions over the five-year life of
the CALLS order and made certain other commitments regarding the rate structure
of certain residential long distance offerings.
Under the August 1999 local exchange carrier pricing flexibility order,
which was affirmed by the District of Columbia Circuit Court of Appeals in
February 2001, the FCC established certain triggers that enable the price cap
local exchange carriers to obtain pricing flexibility for their interstate
access services, including Phase II relief that permits them to remove these
services from price cap regulation. Although these triggers indicate a
competitive presence sufficient to constrain monopoly pricing by the local
exchange carriers, purportedly, they may allow for premature deregulation that
could force access rates upwards.
Finally, in the universal service order, the FCC adopted a new mechanism
for funding universal service, which includes programs that defray the costs of
telephone service in high-cost areas, for low-income consumers, and for schools,
libraries and rural health care providers. Specifically, the FCC expanded the
set of carriers that must contribute to support universal service from solely
long distance carriers to all carriers, including local exchange carriers, that
provide interstate telecommunications services. Similarly, the set of carriers
eligible for the universal service support has been expanded from only local
exchange carriers to any eligible carrier providing local service to a customer,
including AT&T Consumer Services Group as a new entrant in local markets. The
universal service order also adopted measures to provide discounts on
telecommunications services, Internet access and inside wiring for eligible
schools and libraries and on telecommunications services only for rural health
care providers.
AT&T Consumer Services Group remains subject to the statutory requirements
of Title II of the Communications Act of 1934, as amended. AT&T Consumer
Services Group must offer service under rates, terms and conditions that are
just, reasonable and not unreasonably discriminatory. It also is subject to the
FCC's complaint process, and it must give notice to the FCC and affected
customers prior to discontinuance, reduction or impairment of service.
Commitments made by AT&T Consumer Services Group to address concerns that had
been raised about declaring AT&T Consumer Services Group to be non-dominant have
been satisfied or otherwise expired.
In addition to the matters described above with respect to the
Telecommunications Act, state public service or utilities commissions or similar
authorities having regulatory power over intrastate rates, lines and services
and other matters regulate AT&T Consumer Services Group's local and intrastate
communications services. The system of regulation used in many states is
rate-of-return regulation. In recent years, many states have adopted different
systems of regulation, such as complete removal of rate-of-return regulation,
pricing flexibility rules, price caps and incentive regulation.
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AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
AT&T Consumer Services Group is an integrated business of AT&T and is not a
stand-alone entity. The combined financial statements included herein reflect
the results of the proposed AT&T Consumer Services Group tracking stock.
Separate financial statements are not required to be filed for tracking stocks.
However, AT&T Consumer Services Group has provided the financial statements as
an exhibit to this document to provide additional disclosures to investors to
allow them to assess the financial performance of AT&T Consumer Services Group.
Since the tracking stocks are governed by a common board of directors, AT&T's
board of directors could make operational and financial decisions or implement
policies that affect disproportionately the businesses of any group. For
example, AT&T's board of directors may decide to transfer funds or to reallocate
assets, liabilities, revenue, expenses and cash flows among groups, without the
consent of shareholders. All actions by the board of directors are subject to
the board members' fiduciary duties to all shareholders of AT&T as a group and
not just to holders of a particular class of tracking stock and to AT&T's
charter, policy statements, by-laws and inter-company agreements.
AT&T's board of directors may change or supplement the policies set forth
in the tracking stock policy statements and AT&T's by-laws at the sole
discretion of AT&T's board of directors, subject to the provisions of any
inter-group agreement but without approval of AT&T's shareholders. In addition,
the fact that AT&T has separate classes of common stock could give rise to
occasions when the interests of the holders of the various classes of stock
diverge, conflict or appear to diverge or conflict. AT&T's board of directors
would make any change or addition to the policies set forth in the tracking
stock policy statements or AT&T's by-laws, and would respond to any actual or
apparent divergence of interest among AT&T's groups, in a manner consistent with
its fiduciary duties to AT&T and all of AT&T's shareholders after giving
consideration to the potentially divergent interests and all other relevant
interests of the holders of the separate classes of AT&T shares.
YOU SHOULD CONSIDER THAT AS A RESULT OF THE FLEXIBILITY PROVIDED TO AT&T'S
BOARD OF DIRECTORS, IT MAY BE DIFFICULT FOR INVESTORS TO ASSESS THE FUTURE
PROSPECTS OF A TRACKING STOCK GROUP BASED ON THAT GROUP'S PAST PERFORMANCE.
AT&T Consumer Services Group is the leading provider of domestic and
international long distance service to residential consumers in the United
States with approximately 60 million customers. AT&T Consumer Services Group
provides interstate and intrastate long distance communications services
throughout the continental United States and provides, or joins in providing
with other carriers, communications services to and from Alaska, Hawaii, Puerto
Rico and the Virgin Islands and international communications services to and
from virtually all nations and territories around the world.
AT&T Consumer Services Group provides a broad range of communications
services to consumers individually and in combination with other services,
including: inbound and outbound domestic and international long distance through
the traditional "one plus" dialing of the desired call destination;
transaction-based long distance services such as calling cards and prepaid phone
cards; local and local toll calling through unbundled network elements platform
resale service offers; and dial-up Internet service and telephone over the
Internet through AT&T WorldNet Service.
On October 25, 2000, AT&T announced a restructuring plan designed to fully
separate or issue separately tracked stocks intended to reflect the financial
performance and economic value of each of AT&T's four major operating units.
Under this plan AT&T will create a new class of stock intended
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to track the financial performance and economic value of AT&T Consumer Services
Group. If the Consumer Services charter amendment proposal is approved, AT&T
expects to distribute some or all of the tracking stock to AT&T shareholders
later this year.
Debt has been allocated to AT&T Consumer Services Group based on our future
view of AT&T's debt position after taking into account the significant
deleveraging activities of AT&T. This allocation took into account the following
factors: prospective financing requirements, working capital and capital
expenditure requirements and comparable company profiles. Increases in
historical debt levels are based, in general, on historical cash flows generated
by AT&T Consumer Services Group in relation to total AT&T. Such cash outflows
include acquisitions, dividend payments and capital expenditures partially
offset by cash flow from operations. For purposes of this allocation, certain
"corporate" activities were deemed to be partially funded by this entity by
contributing proceeds to the parent for these activities. These activities
included the repurchase of common shares by AT&T and cash payments associated
with the TCI merger and the MediaOne acquisition. Since AT&T Consumer Services
Group will be a tracking stock of AT&T Communications Services, Inc. following
the spin-off, the intercompany debt allocated to them will be payable to AT&T
Communications Services, Inc. The interest expense on the allocated debt was
calculated based on a rate intended to be equivalent to the rate AT&T Consumer
Services Group would have received if it were a stand-alone entity. Due to the
expected positive operating cash flow of AT&T Consumer Services Group, the level
of debt of AT&T Consumer Services Group in the future is expected to be
significantly lower than the level at March 31, 2001.
COMBINED RESULTS OF OPERATIONS
AT&T Consumer Services Group is an integrated business of AT&T and not a
stand-alone entity. The combined financial statements included herein reflect
the results of the proposed AT&T Consumer Services Group tracking stock.
Separate financial statements are not required to be filed for tracking stocks.
However, AT&T Consumer Services Group has provided the financial statements as
an exhibit to this document to provide additional disclosures to investors to
allow them to assess the financial performance of AT&T Consumer Services Group.
Presenting separate financial statements for AT&T Consumer Services Group does
not indicate that AT&T has changed title to any assets or responsibility for any
liabilities, and does not purport to affect the rights of any of AT&T's
creditors. Holders of AT&T Consumer Services Group tracking stock do not have
claims against the assets of AT&T Consumer Services Group. Instead, AT&T
Consumer Services Group shareholders own a separate class of AT&T common stock
that is intended to reflect the financial performance and economic value of
AT&T's consumer services businesses.
The comparison of 2001 results with 2000 was impacted by events that
occurred during these two periods. For example, effective July 1, 2000, the FCC
eliminated Primary Interexchange Carrier Charges, or per-line charges, that AT&T
Consumer Services Group pays for residential and single-line businesses. The
elimination of these per-line charges resulted in lower access expense as well
as lower revenue, since AT&T Consumer Services Group has historically billed its
customers for these charges.
The comparison of 2000 results with 1999 was impacted by events that
occurred during these two years. For example, on January 5, 2000, AT&T launched
Concert, its global joint venture with BT. AT&T contributed all of its
international cross-border network facilities and the economic value of
approximately 270 AT&T Business Services Group multinational customers
specifically targeted for direct sales by Concert and substantially all
international traffic of AT&T Consumer Services Group. As a result, AT&T
Consumer Services Group's 2000 results do not include the revenue and expenses
associated with international traffic contributed to Concert.
In addition, comparison of 2000 results with 1999 was impacted by the
elimination of Primary Interexchange Carrier Charges.
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THREE MONTHS ENDED MARCH 31, 2001 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2000
Revenue
FOR THE
THREE MONTHS ENDED
MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Revenue..................................................... $4,007 $5,037
Total revenue decreased 20.5%, or $1,030 million, in the first quarter of
2001, compared with the prior year period. This decrease was primarily due to a
decline in traditional voice services such as Domestic Dial 1, reflecting the
ongoing competitive nature of the consumer long distance industry, which has
resulted in pricing pressures. In addition, approximately $253 million of the
decline was related to the elimination of per-line charges in 2000. Also
negatively impacting revenue was product substitution and market migration away
from direct-dial wireline and higher priced calling card services to lower
priced prepaid card services.
The calling volume declined at a low-teen percentage rate in the first
quarter of 2001 primarily due to both the competition in the long distance
industry and product substitution which we expect will continue to negatively
impact AT&T Consumer Services Group's revenue.
Operating Expenses
FOR THE
THREE MONTHS ENDED
MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Access and other connection................................. $1,081 $1,463
Access and other connection expenses decreased 26.1%, or $382 million, in
the first quarter of 2001, compared with the first quarter of 2000. Included
within access and other connection expenses are costs that we pay to connect
calls on the facilities of other service providers. The year-over-year decline
was primarily due to the elimination of per line charges of $191 million, access
rate reductions of $128 million and volume-related reductions of $94 million.
Partially offsetting this decline was an increase in Local Connectivity expense
of $67 million primarily due to the expansion of local service in New York and
Texas.
FOR THE
THREE MONTHS ENDED
MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Selling, general and administrative......................... $ 986 $1,169
Selling, general and administrative (SG&A) expenses decreased 15.7%, or
$183 million, in the first quarter of 2001, compared with the first quarter of
2000. The decline is primarily due to lower costs associated with billing,
customer care, marketing and advertising expenses as a result of lower volumes,
outsourcing efficiencies and cost control initiatives.
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FOR THE
THREE MONTHS ENDED
MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Costs of services and products.............................. $598 $621
Costs of services and products decreased 3.7%, or $23 million, in the first
quarter of 2001, compared with the first quarter of 2000. Approximately $39
million of the decrease was due to lower costs for utilizing AT&T's network as a
result of lower volumes. Partially offsetting this decline was an increase in
the provision for uncollectible receivables of $13 million.
FOR THE
THREE MONTHS ENDED
MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Depreciation and amortization............................... $47 $56
Depreciation and amortization expenses decreased 16.1%, or $9 million,
compared with the corresponding prior-year period. Capital expenditures for the
three months ended March 31, 2001 and 2000 were $25 million and $23 million,
respectively.
FOR THE
THREE MONTHS ENDED
MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Net restructuring and other charges......................... $-- $97
During the first quarter of 2000, AT&T Consumer Services Group recorded $97
million of net restructuring and other charges. The charge for restructuring and
other charges was primarily due to headcount reductions, including the
consolidation of customer care and call centers.
Also included in restructuring and other charges was an asset impairment
charge of $18 million related to the write-down of unrecoverable assets in
certain businesses in which the carrying value is no longer supported by
estimated future cash flows.
FOR THE
THREE MONTHS ENDED
MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Operating income............................................ $1,295 $1,631
Operating income decreased 20.6%, or $336 million, in the first quarter of
2001, compared with the same period in 2000. The decrease was primarily due to
revenue declines partially offset by reductions in operating expenses. Operating
income margin (operating income as a percent of revenue) was 32.3% in 2001 and
32.4% in 2000.
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FOR THE
THREE MONTHS ENDED
MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Interest expense............................................ $60 $9
Interest expense increased $51 million in first quarter of 2001 compared
with the same period in 2000. The increase was primarily due to an increase in
long-term debt due to AT&T.
FOR THE
THREE MONTHS ENDED
MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Provision for income taxes.................................. $475 $622
The provision for income taxes decreased 23.6%, or $147 million, in the
first quarter of 2001, compared with the first quarter of 2000. The decrease in
expense was primarily due to lower income before income taxes. The effective tax
rate for the quarter remained unchanged from the first quarter of 2000 at 38.2%.
THREE YEARS ENDED DECEMBER 31, 2000
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
(DOLLARS IN MILLIONS)
Revenue........................................... $18,894 $21,753 $22,763
In 2000, AT&T Consumer Services Group's revenue decreased $2,859 million or
13.1%, on a mid-single-digit decline in volumes. Revenue in 1999 fell $1,010
million, or 4.4%, on a mid-single-digit decline in volumes. In 2000,
approximately $884 million of this decline was due to the elimination of
per-line charges and the impact of Concert. The remaining decline in both years
reflects the ongoing competitive nature of the consumer long distance industry,
which has resulted in pricing pressures and a loss of customers, which is
expected to continue. Also negatively impacting revenue growth was product
substitution and market migration away from direct dial wireline and
higher-priced calling card services to rapidly growing wireless services and
lower-priced prepaid card services. During 2000, the New York and Texas long
distance markets were opened up to competition by the RBOCs. The continued entry
of the RBOCs into the long distance market is expected to increase competitive
pressures in 2001.
AT&T Consumer Services Group has continued to demonstrate its commitment to
providing customers with choice, simplicity and competitive rates. AT&T Consumer
Services Group's One Rate plans, which allow customers to make long distance
calls 24 hours a day, seven days a week for the same rate, have continued to be
well received. As of December 31, 2000, over 12 million customers were enrolled
in these plans, with more than 60% of those customers electing to bundle their
long distance with local toll (intraLATA) service. Over one-half of the
customers enrolled in the One Rate plans were new long distance customers.
AT&T WorldNet Service revenue increased 5.9% to $319 million in 2000, and
41.2% to $301 million in 1999. The increase in 2000 is due to stronger
subscription revenue in the first half of 2000 as well as increased advertising
revenue. Growth in 1999 was higher primarily due to increased marketing efforts
and the introduction of the premium $21.95 unlimited access price plan.
Competition within the ISP industry has recently increased. AT&T WorldNet
Service has remained
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competitive with the industry, and launched their i495 plan in July 2000, which
provides up to 150 hours of Internet service for $4.95 per month.
AT&T WorldNet Service served 1.42 million residential customers as of
December 31, 2000, a decrease of 3.8% over 1999, due to the competitive nature
of the industry. At December 31, 1999, AT&T WorldNet Service served 1.48 million
residential customers, an increase of 29.5% over 1998.
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
2000 1999 1998
------ ------ ------
(DOLLARS IN MILLIONS)
Access and other connection........................ $5,204 $6,223 $7,453
Access and other connection expenses declined $1,019 million, or 16.4%, in
2000 compared with 1999. Included within access and other connection expenses
are costs paid to connect domestic calls on the facilities of other service
providers. Approximately $932 million of this decline was driven by mandated
reductions in per-minute access rates in 2000 and decreased per-line charges.
Approximately $295 million of this decline was driven by volume declines in
2000. These decreases were partially offset by an increase in Universal Service
Fund contributions of $224 million. Since most of these charges are passed
through to the customer, the per-minute access-rate, the per-line charge
reductions and the increased Universal Service Fund contributions have generally
resulted in a corresponding impact on revenue. In addition, local connectivity
charges increased $173 million, reflecting growth in the local business.
Costs paid to telephone companies outside of the United States to connect
calls made to countries outside of the United States (international settlements)
also are included within access and other connection expenses. These costs
decreased $193 million in 2000, as a result of the commencement of operations of
Concert. Concert now incurs most of AT&T's international settlements as well as
earns most of AT&T's foreign-billed revenue, previously incurred and earned
directly by AT&T Consumer Services Group. In 2000, Concert billed AT&T Consumer
Services Group a net expense composed of international settlement
(interconnection) expense, administrative fees, and foreign-billed revenue. The
amount charged by Concert in 2000 was lower than interconnection expense
incurred in 1999, since AT&T Consumer Services Group recorded these transactions
as revenue and expense, as applicable.
Access and other connection expenses declined $1,230 million, or 16.5%, in
1999 compared with the prior year. Approximately $960 million of this decline
resulted from mandated reductions in per-minute access rates and lower
international settlement rates resulting from AT&T's negotiations with
international carriers. Approximately $236 million of this decline was driven by
volume declines in 1999. These reductions were partially offset by increased
per-line charges and Universal Service Fund contributions in the amount of $172
million.
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
(DOLLARS IN MILLIONS)
Selling, general and administrative.................. $4,128 $4,688 $5,453
Selling, general and administrative, or SG&A, expenses decreased $560
million, or 11.9%, in 2000 compared with 1999. These reductions were primarily
attributed to cost control efforts such as targeted marketing, consolidation of
functions and reduction of support and corporate staff headcounts.
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In 1999, SG&A expenses decreased $765 million, or 14.0% compared with the
prior year. This decrease was primarily due to AT&T Consumer Services Group's
focus on high-value customers, which led to lower spending on
customer-acquisition and retention programs.
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
(DOLLARS IN MILLIONS)
Costs of services and products....................... $2,557 $3,316 $3,656
Costs of services and products expenses include such costs as the transport
costs for utilizing AT&T's network, operator service costs, and the provision
for uncollectible receivables. These costs decreased $759 million, or 22.9%, in
2000 and $340 million, or 9.3%, in 1999 compared with the prior year. These
declines are largely due to volume declines and network cost-control
initiatives, and the lower provision for uncollectible receivables.
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
2000 1999 1998
----- ----- -----
(DOLLARS IN MILLIONS)
Depreciation and amortization............................ $167 $184 $116
Depreciation and amortization expenses decreased $17 million, or 9.2%, in
2000. Depreciation and amortization expenses increased $68 million, or 58.6%, in
1999 compared with 1998. Total capital expenditures for 2000, 1999 and 1998 were
$148 million, $300 million and $98 million, respectively.
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
2000 1999 1998
----- ----- -----
(DOLLARS IN MILLIONS)
Net restructuring and other charges........................ $97 $7 $(19)
During 2000, AT&T Consumer Services Group recorded $97 million of net
restructuring and other charges. The charge for restructuring and exit plans was
primarily due to headcount reductions, including the consolidation of customer
care and call centers. Included in exit costs was $79 million of cash
termination benefits associated with the involuntary separation of about 1,300
employees. Approximately 65% of the individuals were management employees and
35% were non-management employees.
AT&T Consumer Services Group also recorded an asset impairment charge of
$18 million related to the write-down of unrecoverable assets in certain
businesses where the carrying value was no longer supported by estimated future
cash flows.
During 1999, AT&T Consumer Services Group recorded $7 million of net
restructuring and other charges. This $7 million charge for restructuring and
exit costs was recorded in conjunction with AT&T's initiative to reduce costs.
The restructuring and exit plans primarily focused on the maximization of
synergies through headcount reductions, including the consolidation of
customer-care and call centers.
The exit costs represent cash termination benefits associated with the
separation of approximately 164 employees as part of voluntary termination
plans. All of the terminations were nonmanagement employees.
During 1998, AT&T Consumer Services Group recorded a $19 million benefit to
net restructuring and other charges. This benefit represents the reversal of
1995 business restructuring
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reserves primarily resulting from the overlap of AT&T's 1998 voluntary
retirement incentive program, or VRIP, on certain 1995 projects.
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
(DOLLARS IN MILLIONS)
Operating income..................................... $6,741 $7,335 $6,104
Operating income decreased 8.1% in 2000 compared with 1999. These results
primarily reflect a decline in revenues, partially offset by cost reductions,
primarily in SG&A, and costs of services and products. The decrease was also
attributed to higher net restructuring and other charges in 2000 of $90 million.
Operating income margin (operating income as a percent of revenue) was 35.7% in
2000 compared with 33.7% in 1999. Increased competition and migration of
customers to products which may have a lower margin will negatively impact
operating margins in the future.
In 1999, operating income increased 20.2% compared to the prior year. This
increase was primarily driven by reduced SG&A expenses, largely due to AT&T
Consumer Services Group's focus on high-value customers, which led to lower
spending on customer-acquisition and retention programs.
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
2000 1999 1998
----- ----- -----
(DOLLARS IN MILLIONS)
Other income, net.......................................... $81 $208 $86
Other income decreased $127 million or 61.1% in 2000 compared with 1999.
Other income increased $122 million or 141.9% in 1999 compared with the prior
year. These results are primarily due to the 1999 sale of AT&T Consumer Services
Group's Language Line Services business, which resulted in a gain of $153
million.
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
2000 1999 1998
----- ----- -----
(DOLLARS IN MILLIONS)
Interest expense........................................... $164 $41 $27
In 2000, interest expense was $164 million compared to interest expense of
$41 million in 1999. This interest expense is primarily due to an increase in
long-term debt from AT&T.
In 1999, interest expense increased $14 million versus the prior year. This
is primarily due to the increase in long-term debt in 1999.
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
(DOLLARS IN MILLIONS)
Provision for income taxes........................... $2,546 $2,869 $2,356
The effective income tax rate is the provision for income taxes as a
percent of income from continuing operations before income taxes. The effective
income tax rate for AT&T Consumer Services Group was 38.24%, 38.24%, and 38.22%,
in 2000, 1999, and 1998, respectively.
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LIQUIDITY
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
--------- ---------
(DOLLARS IN MILLIONS)
CASH FLOWS:
Provided by operating activities.......................... $ 1,483 $ 1,231
Used in investing activities.............................. (22) (23)
Used in financing activities.............................. (1,459) (1,208)
Net cash provided by operating activities increased by $252 million in 2001
as compared with the first quarter of 2000. This increase was primarily due to
changes in accounts receivable, partially offset by decreases in net income and
accounts payable.
Investing activities resulted in a net use of cash of $22 million for the
first quarter of 2001. The primary use of cash was for capital expenditures.
For the first quarter 2001, net cash used in financing activities increased
by $251 million over the same prior year period. This increase was due to a
decrease in long-term debt due to AT&T, partially offset by lower dividend
payments.
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
(DOLLARS IN MILLIONS)
CASH FLOWS:
Provided by operating activities................ $ 4,787 $ 4,350 $ 4,141
(Used in)/provided by investing activities...... (132) 1,398 (1,641)
Used in financing activities.................... (4,661) (5,742) (2,500)
In 2000, net cash provided by operating activities increased $437 million.
This increase is primarily due to changes in accounts receivable and accounts
payable. These increases in net cash were partially offset by a decrease in net
income, excluding the noncash impacts of depreciation and amortization, net
restructuring and other charges and provision for uncollectibles. The increase
in net cash provided by operating activities in 1999 compared with 1998 was
primarily due to an increase in net income.
Investing activities resulted in a net use of cash of $132 million for
2000. The primary use of cash in 2000 was for capital expenditures.
Net cash provided by investing activities in 1999 was $1,398 million,
compared with a net use of cash in 1998 of $1,641 million. In 1998, AT&T
Consumer Services Group made a short term loan to AT&T; this receivable was
collected in 1999.
In 2000, net cash used in financing activities decreased by $1,081 million.
This decrease is primarily due to an increase in long term debt due to AT&T,
partially offset by a higher transfer to AT&T and dividend payment in 2000.
In 1999, net cash used in financing activities increased $3,242 million.
This increase is primarily due to an increase in transfers to AT&T.
AT&T'S BOARD OF DIRECTORS HAS THE POWER TO MAKE DETERMINATIONS THAT MAY
IMPACT THE FINANCIAL AND LIQUIDITY POSITION OF EACH OF ITS TRACKING STOCK
GROUPS. THIS POWER INCLUDES THE ABILITY TO SET PRIORITIES FOR USE OF CAPITAL AND
DEBT CAPACITY, TO DETERMINE CASH MANAGEMENT POLICIES AND TO MAKE
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DECISIONS REGARDING WHETHER TO MAKE CAPITAL EXPENDITURES AND AS TO THE TIMING
AND AMOUNT OF ANY CAPITAL EXPENDITURES. ALL ACTIONS BY THE BOARD OF DIRECTORS
ARE SUBJECT TO THE BOARD MEMBERS FIDUCIARY DUTIES TO ALL SHAREHOLDERS OF AT&T AS
A GROUP AND NOT JUST TO HOLDERS OF A PARTICULAR CLASS OF TRACKING STOCK AND TO
AT&T'S POLICY STATEMENTS, BY-LAWS AND INTER-COMPANY AGREEMENTS. AS A RESULT OF
THIS DISCRETION OF AT&T'S BOARD OF DIRECTORS, IT MAY BE DIFFICULT FOR INVESTORS
TO ASSESS EACH GROUP'S LIQUIDITY AND CAPITAL RESOURCE NEEDS AND IN TURN THE
FUTURE PROSPECTS OF EACH GROUP BASED ON PAST PERFORMANCE.
FINANCIAL CONDITION
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
(DOLLARS IN MILLIONS)
Total assets.......................................... $3,036 $3,543
Total liabilities..................................... 5,156 6,084
Total assets decreased $507 million, or 14.3%, to $3,036 million at March
31, 2001 from $3,543 million at December 31, 2000. The decrease was primarily
due to lower trade receivables as a result of lower revenue.
Total liabilities decreased $928 million, or 15.3%, to $5,156 million at
March 31, 2001 from $6,084 million at December 31, 2000. This decrease primarily
resulted from a decrease in debt as a result of favorable net operating cash
flow and a decrease in accounts payable, partially offset by an increase in
income taxes payable to AT&T.
AT DECEMBER 31,
---------------------
2000 1999
-------- -------
(DOLLARS IN MILLIONS)
Total assets............................................... $ 3,543 $4,072
Total liabilities.......................................... 6,084 3,002
Combined attributed net (liabilities) assets............... (2,541) 1,070
Total assets decreased $529 million, or 13.0%, during 2000. The decrease in
total assets was primarily associated with a decrease in accounts receivable,
reflecting lower revenue.
Total liabilities at December 31, 2000 increased $3,082 million or 102.7%
during 2000. This increase is primarily due to an increase in long-term debt due
to AT&T.
Total combined attributed net (liabilities) assets at December 31, 2000,
decreased $3,611 million from the previous year, reflecting dividends and
transfers to AT&T of $7.7 billion, partially offset by net income of $4.1
billion.
NEW ACCOUNTING PRONOUNCEMENTS
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities -- A
Replacement of FASB No. 125." This statement provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities. Under these standards, after a transfer of financial assets, an
entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. This statement
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. This statement is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. AT&T Consumer
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Services Group does not expect that the adoption of SFAS No. 140 will have a
material impact on AT&T Consumer Services Group's results of operations,
financial position or cash flows.
SUBSEQUENT EVENTS
On May 25, 2001, AT&T Corp. completed the acquisition of substantially all
of the assets of NorthPoint Communications Group, Inc. valued at approximately
$135 million. The acquisition includes all of NorthPoint's co-locations
nationwide, certain network equipment, systems and support software and related
assets, including two leased buildings. The purchase of these NorthPoint
Communications Group, Inc.'s assets was attributed to AT&T Communications
Services, Inc.
On April 26, 2001, AT&T initiated a 364-day accounts receivable
securitization program providing for up to $500 million of funding. Under the
program, a small percentage of AT&T Consumer Services Group accounts receivable
will be sold on a discounted, revolving basis, to a special purpose,
wholly-owned subsidiary, which assigns interests in such receivables to
unrelated third-party financing entities.
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RELATIONSHIP AMONG AT&T GROUPS
We urge all shareholders to read the by-law amendment relating to the AT&T
Groups capital stock committee and the AT&T Groups policy statement, a copy of
which we have attached as Appendix C to this proxy statement.
THE AT&T GROUPS CAPITAL STOCK COMMITTEE
Upon creation and issuance of either AT&T Broadband Group tracking stock or
AT&T Consumer Services Group tracking stock, we will amend our by-laws to
establish an AT&T Groups capital stock committee of our board of directors to
oversee the interaction among the businesses of different AT&T groups. The
members of the AT&T Groups capital stock committee will be selected by our board
of directors. The by-law amendment provides that our board of directors will
delegate to the AT&T Groups capital stock committee authority to:
- interpret, make determinations under and oversee the implementation of
the policies described in the Policy Statement Regarding AT&T Groups
Tracking Stock Matters described under "-- The AT&T Groups Policy
Statement;"
- review the policies, programs and practices of AT&T relating to:
-- the business and financial relationships of AT&T's groups; and
-- any matters arising in connection with any of the foregoing, all to
the extent the AT&T Groups capital stock committee may deem
appropriate; and
- recommend changes in the policies, programs and practices that the AT&T
Groups capital stock committee may deem appropriate.
The AT&T Groups capital stock committee will have and may exercise other
powers, authority and responsibilities as our board of directors may determine
from time to time.
However, as with all of our groups, there will not be a separate board of
directors for AT&T Broadband Group or AT&T Consumer Services Group, and the AT&T
Groups capital stock committee will not function as a board of directors for
AT&T Broadband Group tracking stock or AT&T Consumer Services Group tracking
stock. Under existing law, neither our board of directors nor the AT&T Groups
capital stock committee owes a separate fiduciary duty to the holders of AT&T
Broadband Group tracking stock or AT&T Consumer Services Group tracking stock
apart from the general duty that is owed to all AT&T shareholders.
Although our board of directors has no present intention to do so, it may
modify, suspend or rescind the by-law amendment or adopt additional by-laws, at
any time, without the approval of our shareholders, subject to our board of
directors' fiduciary duties.
THE AT&T GROUPS POLICY STATEMENT
In connection with the creation and issuance of AT&T Broadband Group
tracking stock and/or AT&T Consumer Services Group tracking stock, AT&T will,
effective upon issuance of AT&T Broadband Group tracking stock and/or AT&T
Consumer Services Group tracking stock, adopt the AT&T Groups policy statement,
which AT&T intends to follow.
GENERAL POLICY
Our board of directors has determined that all material matters in which
holders of AT&T common stock, AT&T Broadband Group tracking stock and/or AT&T
Consumer Services Group tracking stock may have divergent interests generally
will be resolved in a manner that is in the best interests of AT&T and all of
its common shareholders as a whole after giving fair consideration to the
potentially divergent interests and all other relevant interests of the holders
of the separate classes of AT&T common shares. Under the AT&T Groups policy
statement, the relationships among AT&T groups and the means by which the terms
of any material transactions among them will be determined will be governed by a
process of fair dealing.
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RELATIONSHIP AMONG AT&T GROUPS
The AT&T Groups policy statement provides that AT&T will seek to manage
AT&T groups in a manner designed to maximize the operations, unique assets and
value of all of the AT&T groups, and with complementary deployment of capital
and facilities.
General. Subject to special arrangements or existing commercial
arrangements in effect at the time this policy statement is adopted, the AT&T
Groups policy statement provides that, except as otherwise provided in the AT&T
Groups policy statement, all material commercial transactions among the AT&T
groups will be on commercially reasonable terms taken as a whole, and will be
subject to the review and approval of the AT&T Groups capital stock committee.
The AT&T groups may make loans to each other on terms and conditions
substantially equivalent to the interest rates and terms and conditions that the
groups would be able to obtain from third parties without the benefit of support
or guarantee by AT&T.
For shared corporate services that arise as a result of being part of a
combined entity, including securities filing and financial reporting services,
costs relating to these services will be:
- allocated directly to the group utilizing those services, and
- if not directly allocable to a group, allocated between the groups on a
fair and reasonable basis as our board of directors determines.
For other support services, for example, billing and purchasing services,
the AT&T Groups policy statement provides that the AT&T groups will seek to
achieve enterprise efficiencies to minimize the aggregate costs incurred by the
AT&T groups on a combined basis, although each group also will be entitled to
negotiate and procure support services on its own either from the other groups
or from third parties.
In addition, the AT&T Groups policy statement provides that the groups will
work collaboratively with each other to understand and take into account one
another's expansion, acquisition, deployment, marketing and sales plans, with
the goal of minimizing overlaps and conflicts between the groups.
CORPORATE OPPORTUNITIES
The AT&T Groups policy statement provides that our board of directors will
allocate any business opportunities and operations, any acquired assets and
businesses and any assumed liabilities among the groups, in whole or in part, as
it considers to be in the best interests of AT&T and its shareholders as a whole
and as contemplated by the other provisions of the AT&T Groups policy statement.
If a business opportunity or operation, an acquired asset or business, or an
assumed liability would be suitable to be undertaken by or allocated to more
than one group, our board of directors will allocate it using its business
judgment or in accordance with procedures that our board of directors adopts
from time to time to ensure that decisions will be made in the best interests of
AT&T and its shareholders as a whole. Any allocation of this type may involve
the consideration of a number of factors that our board of directors determines
to be relevant, including, without limitation, whether the business opportunity
or operation, the acquired asset or business, or the assumed liability is
principally within the existing scope of a group's business and whether a group
is comparatively better positioned to undertake or have allocated to it the
business opportunity or operation, acquired asset or business or assumed
liability.
Except under the AT&T Groups policy statement and any other policies
adopted by our board of directors, and except as may arise under branding
agreements and arrangements no group will have any duty, responsibility or
obligation to refrain from:
- engaging in the same or similar activities or lines of business as any
member of the other groups;
- doing business with any potential or actual supplier, competitor or
customer of any member of any other group; or
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- engaging in, or refraining from, any other activities whatsoever relating
to any of the potential or actual suppliers or customers of any member of
the other groups.
In addition, except under the AT&T Groups policy statement and any other
policies adopted by our board of directors, no group will have any duty,
responsibility or obligation:
- to communicate or offer any business or other corporate opportunity to
any other person, including any business or other corporate opportunity
that may arise that more than one group may be financially able to
undertake, and that is, from its nature, in the line of more than one
group's business and is of practical advantage to more than one group;
- to provide financial support to another group, or any member of that
group, except as described under "-- Relationships with AT&T -- Financing
Arrangements;" or
- otherwise to assist any other group.
Under no circumstances will any members of any AT&T group be prevented from
entering into written agreements with another group to define or restrict any
aspect of the relationship between the groups.
DIVIDEND POLICY
The AT&T Groups policy statement provides that, subject to the limitations
on dividends set forth in our charter, including any preferential rights of any
series of AT&T preferred stock, and to the limitations of applicable law,
holders of shares of any class of AT&T common stock will be entitled to receive
dividends on that stock when, as and if our board of directors authorizes and
declares dividends on that stock. The payment of dividends on any class of AT&T
common stock will be a business decision that our board of directors makes from
time to time based on the results of operations, financial condition, cash
requirements and future prospects of AT&T and other factors that our board of
directors considers relevant. Payment of dividends on any class of AT&T common
stock also may be restricted by loan agreements, indentures and other
transactions that AT&T enters into from time to time.
AT&T does not expect to pay any dividends on shares of AT&T Broadband Group
tracking stock. If and when our board of directors determines to pay any
dividends on shares of AT&T Broadband Group tracking stock, the AT&T Groups
policy statement provides that this determination also will be subject to
factors similar to those that we describe above with respect to the payment of
dividends on each class of AT&T common stock.
Following any issuance of AT&T Consumer Services Group tracking stock, it
is currently expected that one-third of the current dividend payable on AT&T
common stock will be allocated to AT&T common stock and that two-thirds of that
dividend will be allocated to AT&T Consumer Services Group tracking stock in a
manner to be determined by our board of directors. In that event, the aggregate
dividend payable to holders of AT&T common stock and holders of AT&T Consumer
Services Group tracking stock would be the same as that payable to holders of
AT&T common stock before the issuance of the AT&T Consumer Services Group
tracking stock. The declaration of dividends by AT&T and the amount thereof
will, however, be in the discretion of our board of directors and will depend
upon each of our group's financial performance, the dividend policies and
capital structures of comparable companies and each group's ongoing capital
needs. If and when our board of directors determines to pay any dividends on
shares of AT&T Consumer Services Group tracking stock, the AT&T Groups policy
statement provides that this determination also will be subject to factors
similar to those that we describe above with respect to the payment of dividends
on each class of AT&T common stock.
AT&T GROUPS CAPITAL STOCK COMMITTEE
Our by-laws will provide for the AT&T Groups capital stock committee of our
board of directors. In making determinations in connection with the policies set
forth in the AT&T Groups policy statement, the members of our board of directors
and the AT&T Groups capital stock
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committee will act in a fiduciary capacity and in accordance with legal guidance
concerning their respective obligations under applicable law. The delegation of
responsibilities to the AT&T Groups capital stock committee will be subject to
changes our board of directors may determine.
AMENDMENT AND MODIFICATION TO THE AT&T GROUPS POLICY STATEMENT
Our board of directors may modify, suspend or rescind the policies set
forth in the AT&T Groups policy statement, including any resolution implementing
the provisions of the AT&T Groups policy statement. Our board of directors also
may adopt additional or other policies or make exceptions with respect to the
application of the policies described in the AT&T Groups policy statement in
connection with particular facts and circumstances, all as our board of
directors may determine, consistent with its fiduciary duties to AT&T and our
shareholders as a whole.
RELATIONSHIPS WITH AT&T
BRANDING
Each of AT&T Broadband Group and AT&T Consumer Services Group will obtain
the right, on a royalty-free basis, to continue to use certain of the AT&T
brands, including the AT&T globe design and the AT&T trade dress, which we
collectively refer to as the "AT&T Broadband Brands" and "AT&T Consumer Services
Brands," respectively, in accordance with a brand agreement. Under the brand
agreements, AT&T Broadband Group will be entitled to use the AT&T Broadband
Brands for the provision over a cable system of its multi-channel video services
and interactive television services, and for the provision over a cable system
to residential subscribers of local telephone services (including any distance
telephone service associated with local service) and high-speed cable Internet
services and AT&T Consumer Services Group will be entitled to use AT&T Consumer
Services Brands for the provision of stand-alone residential long distance
services, prepaid consumer calling card services, consumer calling card
services, operator-assisted international telephone services for consumer
travelers, certain DSL-based communications services, residential unbundled
network elements platform services, consumer dial-up narrow-band Internet access
services, high-speed Internet access services, and certain portals, content,
equipment and software and for bundles of the foregoing offered by AT&T Consumer
Services Group. In addition, under its brand agreement AT&T Broadband Group will
have the right to use the AT&T Broadband Brands in connection with certain
satellite transmission services, digital processing services and production
studio services, each in relation to audio/video content. The rights to be
granted to AT&T Broadband Group and AT&T Consumer Services Group under their
respective brand agreements will be for a period of five years following its
effective date. After the initial five-year period, AT&T Broadband Group and
AT&T Consumer Services Group would be entitled, if they choose, to continue to
use the AT&T Broadband Brands and AT&T Consumer Services Brands, respectively,
on these services for an additional five-year period. During this second
five-year period, AT&T Broadband Group and AT&T Consumer Services Group may
terminate their respective brand agreements by providing 12 months' prior
notice.
Under its respective brand agreement, AT&T Broadband Group's rights to use
the AT&T Broadband Brands in connection with cable-based multichannel video
services and interactive television services will be exclusive. AT&T Broadband
Group will also have certain nonexclusive rights. Under its respective brand
agreement, AT&T Consumer Services Group's rights to use the AT&T Consumer
Services Brands in connection with stand-alone residential long distance
services, prepaid consumer calling card services, consumer calling card service,
operator-assisted international telephone services for consumer travelers and
consumer dial-up narrow-band Internet access services will be exclusive. AT&T
Consumer Services Group will also have certain nonexclusive rights.
The territory of each brand agreement generally will be worldwide with
exceptions where AT&T already has granted brand license agreements or where
another AT&T unit or group has exclusive brand rights for competing services.
Subject to certain conditions set forth in its brand agreement, AT&T Consumer
Services Group also may extend certain rights to use the AT&T Consumer
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Services Brands to authorized dealers of AT&T Consumer Services Group's
services. Each brand agreement will provide that AT&T Broadband Group or AT&T
Consumer Services Group, as applicable, must comply with specified quality,
customer care, graphics and marketing standards and guidelines to avoid
confusion in connection with the use of the AT&T Broadband Brands or AT&T
Consumer Services Brands, as applicable. It also will provide that, for so long
as AT&T Broadband Group or AT&T Consumer Services Group, as applicable, uses the
AT&T Broadband Brands or AT&T Consumer Services Brands, as applicable, it shall
pay AT&T a brand maintenance fee for the administration, protection and
promotion of the AT&T Broadband Brands or AT&T Consumer Services Brands, as
applicable. AT&T may terminate each brand agreement in the event of a
significant breach (as defined in the respective brand agreements), including a
change of control of AT&T Broadband Group or AT&T Consumer Services Group, as
applicable, or a failure by AT&T Broadband Group or AT&T Consumer Services
Group, as applicable, to use the AT&T Broadband Brands or AT&T Consumer Services
Brands, as applicable, on a specified portion of its products and services.
INTELLECTUAL PROPERTY
Intellectual property will continue to be managed by the AT&T group that
has managed it historically. Each group will have the right to use the
intellectual property existing as of December 31, 2000 and managed by the other
groups, or with respect to which any group has the power to grant these rights,
in accordance with an intellectual property agreement. Rights under future
intellectual property would be governed by sponsored development agreements that
may, or may not, be entered into among the groups. Pursuant to any such
sponsored development agreement, the group contracted and paid to perform the
work would own the newly developed intellectual property and the other group
would be granted perpetual, paid-up rights necessary to use the development on a
worldwide basis.
The intellectual property agreement to be entered into by each of AT&T
Broadband Group and AT&T Consumer Services Group will specify the ownership and
license rights in specified patents, software, copyrights and trade secrets.
Each AT&T group will grant to the other groups under its specified patents, if
any, a nonexclusive, fully paid-up, worldwide, perpetual license to make, use
and sell all products and services in the conduct of its present and future
business. The groups will also grant special rights under certain of each
other's patents, if any, for defensive protection, special affiliate licensing
and supplier licensing. Each group will own all of the software, trade secrets
and copyrights that it created prior to the applicable intellectual property
agreement's effective date. Each group will further grant to the other groups a
nonexclusive, fully paid-up, worldwide, perpetual license to use the group's
software, trade secrets and copyrights that they possess as of the applicable
intellectual property agreement's effective date for use in its present and
future business. Proprietary information related to a group's customers will
receive special protection under the respective intellectual property
agreements.
COMMERCIAL TRANSACTIONS BETWEEN GROUPS
We intend that, except as otherwise provided in the AT&T Groups policy
statement, all commercial transactions among the groups will be on commercially
reasonable terms taken as a whole. We expect the groups will negotiate and
develop their arrangements over time, and that these arrangements will be
subject to the review and approval of the AT&T Groups capital stock committee.
We may reallocate assets among the groups in exchange for an increase or
decrease in the retained portion of value held by AT&T Business Services Group.
Any reallocations of assets between
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the groups that do not result in this adjustment, other than reallocations made
under a contract for the provision of goods or services between the groups, will
be accompanied by:
- the reallocation by the transferee group to the transferor group of other
assets or consideration,
- the creation of inter-group debt owed by the transferee group to the
transferor group, or
- the reduction of inter-group debt owed by the transferor group to the
transferee group,
in each case, in an amount having a fair market value, in the judgment of our
board of directors, equivalent to the fair market value of the assets
reallocated by the transferor group.
AT&T's groups will enter into various network agreements with AT&T Business
Services Group.
AT&T Business Services Group and AT&T Wireless Group will also enter into
an Agency and Referral Agreement, which will provide that AT&T Business Services
Group, for compensation, will act as an agent in selling AT&T Wireless Group
services to large and small business customers.
For example, AT&T Broadband Group will enter into four principal network
agreements with AT&T Business Services Group:
- Master Carrier Agreement. This will reflect the rates, terms and
conditions on which AT&T Business Services Group will provide voice and
data services to AT&T Broadband Group, including both wholesale services
(to be used as a component in AT&T Broadband Group's services to its
customers), and "administrative" services (e.g., internal AT&T Broadband
Group usage). Pricing is market based, with provisions defining an
ongoing process to ensure the prices remain competitive. AT&T Broadband
Group's purchase commitments vary by service and over the 5-year term of
the agreement. In the first year, AT&T Broadband Group will purchase all
its requirements from AT&T Business Services Group, subject to
pre-existing contractual commitments and the right to acquire data
services (including voice over IP) from Excite@Home. In years 2 and 3,
AT&T Broadband Group may put up to 20% of its domestic needs up for bid,
subject to AT&T Business Services Group's right to retain the business if
it provides or matches the best offer. In years 4 and 5, AT&T Broadband
Group may select the vendor of its choice for the 20%. AT&T Broadband
Group will obtain all of its international requirements from AT&T
Business Services Group to the same extent and on the same terms that
AT&T Business Services Group must obtain its requirements from Concert.
- Local Network Connectivity Services Agreement (incorporated within the
Master Carrier Agreement). This agreement will reflect the rates, terms
and conditions on which AT&T Business Services Group will provide certain
local network connectivity services to AT&T Broadband Group for use in
providing local telephone services to AT&T Broadband Group's subscribers.
The agreement consists of two parts:
-- a capital lease from AT&T Business Services Group to AT&T Broadband
Group of certain network switching and transport assets to be used
exclusively by AT&T Broadband Group for a term of up to 12 years; and
-- an operating agreement for the provision of local network
connectivity, management and operational services in support of AT&T
Broadband Group's local cable telephone services, with a minimum term
of five years.
AT&T Broadband Group will be required to purchase 100% of its requirements
for circuit-switched telephone services from AT&T Business Services Group
over the initial 5-year term of the agreement, and also will be required
to pay for a minimum of 85% of the volumes initially forecasted by AT&T
Broadband Group throughout the initial 5-year term of the agreement. The
initial prices under the agreement will be based on AT&T Business Services
Group's cost plus cost of capital, subject to provisions assuring that
AT&T Broadband Group will receive prices as favorable as those provided by
AT&T Business Services Group to similarly situated wholesale customers of
AT&T Business Services Group.
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- Fiber Facilities Agreement. In 1998, Teleport Communications Group Inc.,
or TCG, and TCI (the predecessors of AT&T Local Network Services -- part
of AT&T Business Services Group -- and AT&T Broadband Group,
respectively) entered into a facilities lease agreement whereby AT&T
Broadband Group, under certain circumstances, would construct for, and
lease to TCG, fiber facilities in the areas served by AT&T Broadband
Group's cable systems for use in providing telecommunications services.
That agreement will be modified to allow, among other things, that the
areas served by the systems formerly operated by MediaOne will be
included in the Agreement. In addition, charges for the facilities
constructed and provided to AT&T Business Services Group will be based on
AT&T Broadband Group's costs. The term of the build out period will be
unchanged from the original 1998 contract, and as before, any leases
entered into during the term will be perpetual, at the option of AT&T
Business Services Group.
- Interconnection and Intercarrier Compensation Agreement. This agreement
will specify the terms of interconnection of the parties' networks, and
compensation for:
-- the origination or termination of interexchange traffic for the other
party; and
-- the exchange of local traffic between the parties' local customers.
The term will be five years. During 2001, the existing internal
arrangements with respect to access charges for interexchange traffic will
be largely retained. Beginning in 2002, each party may charge the other
prevailing rates (based on the rates charged by incumbent local exchange
carriers). Local traffic will be exchanged at standard rates in effect
between AT&T Business Services Group and the incumbent local exchange
carriers.
There will be two network agreements between AT&T Business Services Group
and AT&T Consumer Services Group.
- Master Carrier Agreement. This agreement will specify the rates, terms
and conditions on which AT&T Business Services Group will provide voice,
data, IP dial-up access and other services to AT&T Consumer Services
Group both for internal corporate purposes and for resale to other
customers. AT&T Consumer Services Group will procure all of its covered
telecommunications needs during the 3-year term of the agreement from
AT&T Business Services Group, and pricing will be based on costs, but
will be no less favorable than provided by AT&T Business Services Group
to other customers.
- Intercarrier Compensation Agreement. This agreement will specify the
terms under which AT&T Business Services Group and AT&T Consumer Services
Group will charge each other for:
-- the origination and termination of interexchange traffic; and
-- the exchange of local traffic between each other's local customers.
In addition, there will be a number of other agreements governing the provision
of other services between AT&T Business Services Group and AT&T Consumer
Services Group.
FINANCING ARRANGEMENTS
Loans between groups will be made at interest rates and on other terms and
conditions designed to be substantially equivalent to the interest rates and
other terms and conditions that the borrowing group would be able to obtain from
third parties, including the public markets, as a non-affiliate of AT&T without
the benefit of any guaranty by AT&T or any member of any AT&T group. This policy
contemplates that these loans will be made on the basis set forth above,
regardless of the interest rates and other terms and conditions on which AT&T or
members of any AT&T group may have acquired the funds. If, however, a group
incurs any fees or charges in order to keep available funds for use by another
group, those fees or charges will be allocated to the borrowing group.
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We may borrow funds and provide the proceeds to AT&T Business Services
Group, AT&T Consumer Services Group and AT&T Broadband Group on the terms and
conditions described above and subject to market availability. We may also cause
these groups to loan funds to AT&T.
In the case of AT&T Broadband Group, the financial statements included
elsewhere in this document reflect a cost of borrowing slightly in excess of the
cost historically achieved at the consolidated AT&T level. In the case of each
of AT&T Consumer Services Group and AT&T Business Services Group, the financial
statements included elsewhere in this document make no distinction between the
inter-group rate and the cost at which consolidated AT&T was historically able
to raise funds in the external market. In both of these cases, AT&T believes
that the inter-group rate is a reasonable estimate of the rate of borrowing in
the external market. However, in the future, although AT&T Consumer Services
Group is expected to be part of the same legal entity as AT&T Business Services
Group, AT&T Consumer Services Group may be charged interest at a rate higher or
lower than that of AT&T Business Services Group. The actual rates of interest
charged or paid by any of the groups in the future is uncertain and will depend
on a variety of factors including the credit profile of the group and market
conditions. As a result, future interest rates charged or paid by any of the
groups may materially exceed those reflected in the financial statements
included elsewhere in this document.
ACCOUNTING MATTERS
Following issuance of any shares of AT&T Broadband Group tracking stock
and/or AT&T Consumer Services Group tracking stock, AT&T will prepare financial
statements in accordance with generally accepted accounting principles,
consistently applied, for AT&T Broadband Group and/or AT&T Consumer Services
Group, as applicable, as well as full consolidated financial statements of AT&T.
The financial statements and information for each of the groups principally will
reflect the financial position, results of operations and cash flows of the
businesses included in those groups, respectively. Notwithstanding any
allocation of assets or liabilities for dividend purposes or the purpose of
preparing group financial statements, holders of AT&T common stock and holders
of AT&T tracking stocks will continue to be subject to risks associated with an
investment in a single corporation and all of AT&T's businesses, assets and
liabilities.
TAX SHARING AGREEMENT
Prior to issuance of any shares of AT&T Broadband Group or AT&T Consumer
Services Group tracking stock, AT&T Consumer Services Group, AT&T Business
Services Group and AT&T Broadband Group will enter into a tax sharing agreement
that will provide for tax sharing payments between these three groups based on
the taxes or tax benefits of a hypothetical affiliated group consisting of these
three groups. Each of these three groups shall generally be responsible for the
taxes attributable to its lines of business and entities comprising its group as
of such date.
This hypothetical group will not include Liberty Media Group or AT&T
Wireless Group. A separate tax sharing agreement exists between AT&T and Liberty
Media Group under which tax sharing payments are made between AT&T and Liberty
Media Group to the extent that the taxes of the actual affiliated group of which
AT&T is the common parent are increased or decreased as a result of the
inclusion of Liberty Media Group in that affiliated group. In addition, a
separate tax sharing agreement exists between AT&T and AT&T Wireless Group that
provides for tax sharing payments between AT&T and AT&T Wireless Group based on
the taxes or tax benefits of a hypothetical affiliated group consisting of AT&T
and AT&T Wireless Group with respect to taxable periods ending after the
issuance of the shares of AT&T Wireless Group tracking stock. This hypothetical
group does not include Liberty Media Group.
Under the tax sharing agreement between AT&T Consumer Services Group, AT&T
Business Services Group and AT&T Broadband Group, the consolidated tax liability
before credits of the hypothetical group will be allocated to each group and
based on each group's contribution to consolidated taxable income of the
hypothetical group. This allocation will take into account losses,
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deductions and other tax attributes, such as capital losses or charitable
deductions, that are utilized by the hypothetical group even if these attributes
could not be utilized on a stand-alone basis. Tax sharing payments in respect of
the consolidated tax liability of the hypothetical group, after allocation of
consolidated tax credits, will be made between AT&T Consumer Services Group,
AT&T Business Services Group and AT&T Broadband Group consistent with the
allocations under the tax sharing agreement. In addition, under the tax sharing
agreement, each tracking stock group will be responsible for all tax items (and
benefits from all tax benefits) resulting from the attribution of assets or
interests to such group, or transfer to a legal entity that is a member of such
group of assets, as well as any tax items and benefits resulting from the
distribution of the stock of any company the assets of which are tracked by such
group's tracking stock. Tax items or tax benefits arising from or related to
assets or interests that are not tracked by either AT&T Broadband Group tracking
stock or AT&T Consumer Services Group tracking stock will be for the account of
AT&T Business Services Group.
The tax sharing payments under the tax sharing agreement assume that the
members of AT&T Broadband Group, AT&T Consumer Services Group, and AT&T Business
Services Group are members of the same affiliated, consolidated, combined or
unitary group for the relevant U.S. federal, state, local or foreign income tax
purposes with respect to taxable periods ending after the issuance of the shares
of AT&T Consumer Services Group tracking stock and AT&T Broadband Group tracking
stock. It is possible, however, that the Internal Revenue Service may assert
that AT&T Broadband Group tracking stock or AT&T Consumer Services Group
tracking stock is not stock of AT&T, in which case each of the groups may not be
members of the same U.S. federal income tax affiliated group filing consolidated
returns. AT&T believes that it is unlikely that the Internal Revenue Service
would prevail on that view, but no assurance can be given in that regard. Each
group will be responsible under the tax sharing agreement for any
corporate-level taxes resulting from the treatment of its tracking stock as not
stock of AT&T, and any corporate-level taxes on the actual or deemed disposition
of assets caused by the issuance of its tracking stock.
Non-income tax liabilities will generally be allocated based on line of
business as of the Issue Date. As between AT&T Consumer Services Group and AT&T
Business Services Group, if the tax liability is associated with a particular
line of business, but the portion of the tax liability associated with the line
of business is not readily determinable, then the tax liability will be shared
between the businesses based on an allocation formula.
With respect to taxes resulting from audit adjustments other than those
relating to characterization of tracking stock as not stock of AT&T or relating
to the spin-off of AT&T Communications Services, Inc., tax liabilities will
generally be allocated among the three groups based on line of business.
AT&T Broadband Group, AT&T Business Services Group and AT&T Consumer
Services Group may each carry back a loss, credit or other tax attribute from a
post-spin-off period to a pre-spin-off period to the extent permitted by
applicable law.
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THE INCENTIVE PLAN PROPOSALS
GENERAL
We currently issue stock-based awards to our employees and non-employee
directors under the AT&T 1997 Long Term Incentive Program, or 1997 incentive
plan. AT&T's shareholders approved this plan in 1997 and approved amendments to
the plan in 1999 and 2000. As of , this plan authorized a total of
approximately million shares of AT&T common stock and
million shares of AT&T Wireless Group tracking stock for stock-based awards
consisting of:
- stock options, including incentive stock options, or ISOs, under the
Code,
- SARs in tandem with stock options or free-standing,
- restricted stock,
- performance shares and performance units conditioned upon meeting
performance criteria, and
- other awards of stock or awards valued, in whole or in part, by reference
to, or otherwise based on, stock or other property of AT&T, or other
stock unit awards.
In connection with any award or any deferred award, payments also may be
made representing dividends or their equivalent.
In anticipation of the issuance of AT&T Broadband Group tracking stock and
AT&T Consumer Services Group tracking stock, our board of directors will approve
the adoption of the AT&T Broadband Group 2001 Long Term Incentive Program, or
Broadband incentive plan, and the AT&T Consumer Services Group 2001 Long Term
Incentive Program, or Consumer Services incentive plan, or together, 2001
incentive plans, subject to the approval of shareholders of AT&T. The 2001
incentive plans will be substantially similar to the 1997 incentive plan, except
that instead of providing for awards based on AT&T common stock and AT&T
Wireless Group tracking stock, the Broadband incentive plan provides for awards
based on AT&T Broadband Group tracking stock and the Consumer Services incentive
plan provides for awards based on AT&T Consumer Services Group tracking stock.
Approval of each of the 2001 incentive plans requires a majority of the
votes cast by all outstanding shares of AT&T common stock to vote in its favor.
OUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR APPROVAL OF EACH OF THE 2001
INCENTIVE PLANS. Any shares not voted, whether by abstention, broker non-vote or
otherwise, will have no affect on the approval of the incentive plan proposals.
Our board of directors will not implement the 2001 incentive plans unless
our shareholders approve the corresponding charter amendment proposal.
The 1997 incentive plan, and a number of additional compensation plans,
under which stock-based awards with respect to AT&T common stock are
outstanding, are administered by the Compensation and Employee Benefits
Committee of our board of directors, subject to delegations by the Compensation
and Employee Benefits Committee to AT&T's Chairman and Chief Executive Officer,
committees comprised of other AT&T senior officers or other compensation
committees that may be designated in the additional plans. If approved, the 2001
incentive plans are expected to be administered in the same manner.
DESCRIPTION OF 2001 INCENTIVE PLANS
ADMINISTRATION AND ELIGIBILITY
Each of the 2001 incentive plans will be administered by a committee, each
of the members of which is a "non-employee director" as defined in the
Securities Exchange Act of 1934, as amended, and an "outside director" as
defined in the Code. Under each of the 2001 incentive plans, the committee has
the authority to select employees to whom awards are granted, to determine the
types of awards and the number of shares covered, and to set the terms,
conditions, and provisions of these
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awards and to cancel or suspend awards. In each case, the committee is
authorized to interpret the incentive plan and to establish, amend, and rescind
any rules and regulations relating to the incentive plan, to determine the terms
and provisions of any agreements entered into under the incentive plan, and to
make all other determinations which may be necessary or advisable for the
administration of the plan. Prospectively, all employees and directors of AT&T
and its subsidiaries and other affiliates are eligible to be participants in the
2001 incentive plans, except employees of Liberty Media Group.
SHARES SUBJECT TO PLANS
Subject to adjustment as described below, the following shares will be
available for awards granted under the 2001 incentive plans during their terms:
- Under the Broadband incentive plan, 13.5% of the total outstanding shares
of AT&T Broadband Group tracking stock; and
- Under the Consumer Services incentive plan, 9.0% of the total number of
outstanding shares of AT&T Consumer Services Group tracking stock.
As defined in the plans, the term "outstanding" includes:
- the total issued and outstanding shares of the applicable tracking stock,
plus
- the number of shares of the applicable tracking stock represented by the
retained portion of the interest held by AT&T on the particular reference
date.
If another company is acquired by AT&T, or combines with AT&T, any shares
of AT&T Broadband Group tracking stock or AT&T Consumer Services Group tracking
stock issued or reserved for issuance as a result of the assumption or
substitution of outstanding grants of the acquired company would not be deemed
issued under the applicable plan and would not be subtracted from the shares of
AT&T Broadband Group tracking stock or AT&T Consumer Services Group tracking
stock available for grant under the applicable incentive plan. If any shares
subject to any award under either of the 2001 incentive plans are forfeited, or
such award is settled for cash, or expires, or is otherwise terminated without
issuance of shares, the shares subject to such award will again be available for
grant under that incentive plan. The number of shares available for awards under
each of the 2001 incentive plans will also increase by the number of shares AT&T
withholds or tenders in connection with the payment of the exercise price of an
option or other award under that incentive plan or the satisfaction of tax
withholding obligations. The shares of stock deliverable under the 2001
incentive plans may consist in whole or in part of authorized and unissued
shares, treasury shares, or shares purchased in the open market, or otherwise.
STOCK OPTIONS
The price per share of stock purchasable under any stock option will be
determined by a committee, but will not be less than 100% of the fair market
value of the stock on the date of the grant of such option. The term of each
option will be fixed by the committee. Options will be exercisable at such time
or times as determined by the committee, but no stock option will be exercisable
after the expiration of ten years from the date the option is granted.
STOCK APPRECIATION RIGHTS
An SAR may be granted free-standing or in tandem with new options or after
the grant of a related option that is not an ISO. Upon exercise of an SAR, the
holder of that SAR is entitled to receive the excess of the fair market value of
the shares for which the right is exercised, calculated as of the exercise date
or, if the committee shall so determine in the case of any SAR, not related to
an ISO, as of any time during a specified period before the exercise date, over
the grant price of the SAR. The grant price, which will not be less than the
fair market value of the shares on the date of grant, and other terms of the SAR
will be determined by the committee. Payment by AT&T upon exercise of an SAR
will be in cash, stock, other property or any combination, as the committee
determines. Unless otherwise determined by the committee, any related option
will no longer be
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exercisable to the extent the SAR has been exercised and the exercise of an
option will cancel the related SAR to the extent of the exercise.
RESTRICTED STOCK
Restricted stock may not be disposed of by the recipient until restrictions
established by the committee lapse. Recipients of restricted stock are not
required to provide consideration other than the rendering of services or the
payment of any minimum amount required by law. The participant will have, with
respect to restricted stock, all of the rights of a shareholder of AT&T,
including the right to vote the shares, and the right to receive any cash
dividends, unless the committee determines otherwise. Upon termination of
employment during the restriction period, all restricted stock shall be
forfeited, subject to such exceptions, if any, as are authorized by the
committee.
PERFORMANCE AWARDS
From time to time, the committee may select a period during which
performance criteria determined by the committee are measured for the purpose of
determining the extent to which a performance award has been earned. Performance
awards may be in the form of performance shares, which are units valued by
reference to shares of stock, or performance units, which are units valued by
reference to cash or property other than stock. Performance awards may be paid
in cash, stock, other property, or a combination thereof. Recipients of
performance awards are not required to provide consideration other than the
rendering of service or the payment of any minimum amount required by law.
OTHER STOCK UNIT AWARDS
The committee is authorized to grant other stock unit awards to
participants, either alone or in addition to other awards granted under the
plan. Other stock unit awards may be paid in tracking stock, cash, or any other
form of property as the committee determines.
NONASSIGNABILITY OF AWARDS
Unless the committee determines otherwise at the time of an award, no award
granted under the 2001 incentive plans may be assigned, transferred, pledged or
otherwise encumbered by a participant, other than by will, by designation of a
beneficiary after death, or by the laws of descent and distribution. Each award
will be exercisable, during the participant's lifetime, only by the participant,
or, if permissible under applicable law, by the participant's guardian or legal
representative.
DEFERRALS OF AWARDS
The committee may permit participants to defer the distribution of all or
part of the specified stock, cash or other consideration in accordance with the
terms and conditions as the committee shall establish.
ADJUSTMENTS
In the event of any change affecting the shares of tracking stock subject
to either of the 2001 incentive plans by reason of any stock dividend or split,
recapitalization, reorganization, merger, consolidation, spin-off, combination,
or exchange of shares or other corporate change, or any distributions to common
shareholders other than cash dividends, the committee will substitute or adjust
the aggregate number or class of shares that may be distributed under the
applicable incentive plan (including the substitution of similar options to
purchase shares of, or other awards denominated in shares of, another company)
and substitute or adjust the number, class, and option price or other price of
shares subject to the outstanding awards granted under the applicable incentive
plan as the committee deems to be appropriate to maintain the purpose of the
original grant.
The committee will be authorized to make adjustments in performance award
criteria or in the terms and conditions of other awards in recognition of
unusual or nonrecurring events affecting AT&T or AT&T's financial statements or
changes in applicable laws, regulations or accounting
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principles. The committee may correct any defect, supply any omission or
reconcile any inconsistency in the 2001 incentive plans or any award in the
manner and to the extent it shall deem desirable to carry the incentive plan
into effect.
AMENDMENT AND TERMINATION
Our board of directors may assume responsibilities otherwise assigned to
the committee under the 2001 incentive plans and may amend, alter, or
discontinue the 2001 incentive plans or any portion thereof at any time,
provided that no such action will impair the rights of a participant without the
participant's consent and provided that no incentive plan amendment will be made
without shareholder approval either to increase the number of shares available
under the 2001 incentive plans or if such approval is necessary to qualify for
or to comply with any tax or regulatory requirement. The committee may amend the
terms of any award granted under the 2001 incentive plans, prospectively or
retroactively, but no amendment may impair the rights of any participant without
his or her consent or amend the terms of any option to reduce the option price.
TERM
No awards will be granted under the 2001 incentive plans after
, 2011.
PLAN BENEFITS
Because the 2001 incentive plans are discretionary and based on AT&T's
financial performance, it is not possible to determine or to estimate the
benefits or amounts that will be received in the future by individual employees
or groups of employees under the 2001 incentive plans.
SECTION 162(m) OF THE INTERNAL REVENUE CODE PERFORMANCE-BASED COMPENSATION
If the committee determines at the time restricted stock, a performance
award, or other stock unit award is granted under either of the 2001 incentive
plans to a participant who is, or is likely to be, as of the end of the tax year
in which AT&T would claim a tax deduction in connection with such award, a
"covered employee" under Section 162(m) of the Code, then the committee may
provide as to such award that the lapsing of restrictions thereon and the
distribution of cash, shares, or other property pursuant thereto, as applicable,
shall be subject to the achievement of one or more objective performance goals
established by the committee, which will be based on the achievement of
specified levels of one or any combination of the following: net cash provided
by operating activities, earnings per share from continuing operations,
operating income, revenues, cash flow, return on investment, gross margin,
return on operating assets, return on equity, economic value added, stock price
appreciation, total shareholder return, or cost control of AT&T or the affiliate
or division of AT&T for or within which the participant is primarily employed.
Performance goals also may be based on achievement of specified levels of AT&T
performance, or performance of the applicable affiliate or division of AT&T,
including of AT&T Broadband Group or of AT&T Consumer Services Group, under one
or more of the measures described above relative to the performance of other
corporations.
The 2001 incentive plans provide that, subject to any adjustments described
above, no participant may be granted options and/or SARs in any
-calendar-year period with respect to more than million shares of
AT&T Broadband Group tracking stock and more than million shares of AT&T
Consumer Services Group tracking stock, respectively, and that the maximum
dollar value payable with respect to other performance units or other stock unit
awards that are valued with reference to property other than shares of AT&T
Broadband Group tracking stock or AT&T Consumer Services Group tracking stock,
respectively, and granted to any participant in any one calendar year is
.
CHANGE OF CONTROL
Each of the 2001 incentive plans will contain provisions requiring or
permitting the vesting of awards or the acceleration of options and similar
adjustments in the event of a change of control.
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TAX ASPECTS OF THE PLANS
We believe that under present law, the following are the federal tax
consequences generally arising with respect to awards granted under the 2001
incentive plans. The grant of an option or SAR will create no tax consequences
for an employee or AT&T. The employee will have no taxable income upon
exercising an ISO (except that the alternative minimum tax may apply), and AT&T
will receive no deduction when an ISO is exercised. Upon exercising an SAR or an
option other than an ISO, the employee must recognize ordinary income equal to
the difference between the exercise price and the fair market value of the stock
on the date of exercise; AT&T will be entitled to a deduction for the same
amount. The treatment to an employee of a disposition of shares acquired through
the exercise of an option depends on how long the shares have been held and if
such shares were acquired by exercising an ISO or by exercising an option other
than an ISO. Generally, there will be no tax consequence to AT&T in connection
with a disposition of shares acquired under an option, except that AT&T may be
entitled to a deduction in the case of a disposition of shares acquired under an
ISO before the applicable ISO holding periods have been satisfied.
With respect to other awards granted under the 2001 incentive plans that
are settled either in cash or in stock or other property that is either
transferable or not subject to substantial risk of forfeiture, the participant
must recognize ordinary income equal to the cash or the fair market value of
shares or other property received; AT&T will generally be entitled to a
deduction for the same amount. With respect to awards that are settled in stock
or other property that is restricted as to transferability and subject to
substantial risk of forfeiture, the participant must recognize ordinary income
equal to the fair market value of the shares or other property received at the
first time the shares or other property become transferable or not subject to
substantial risk of forfeiture, whichever occurs earlier; AT&T will generally be
entitled to a deduction for the same amount.
BOARD ADJUSTMENT TO OUTSTANDING STOCK-BASED AWARDS
On the date of the contemplated spin-off of AT&T Communications Services
Inc., existing stock-based awards outstanding under the 1997 incentive plan, the
2001 incentive plans and the additional compensation plans would be adjusted in
accordance with the provisions of the plans in a manner intended to preserve the
intrinsic value of the original awards immediately before and after the
contemplated split-off. The adjustments would be effected by means of one or
more of (1) an adjustment to the exercise price or the number of shares, or
both, of stock-based awards related to any class of security, (2) the grant of
additional or replacement awards of a different class or classes of securities,
or (3) other appropriate adjustments including cash payments.
RECOMMENDATION OF OUR BOARD OF DIRECTORS
OUR BOARD OF DIRECTORS HAS APPROVED THE INCENTIVE PLAN PROPOSALS AND
RECOMMENDS THAT YOU VOTE FOR THE INCENTIVE PLAN PROPOSALS.
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EMPLOYEE STOCK PURCHASE PLAN PROPOSAL
GENERAL
AT&T's 1996 Employee Stock Purchase Plan was initially adopted in 1996 and
authorized the issuance of 50,000,000 shares of AT&T common stock (which was
later adjusted for the Company's three-for-two stock split paid on April 15,
1999). The plan was restated effective July 1, 2001 authorizing an additional
30,000,000 shares for issuance under this plan. Our board of Directors has
approved, subject to shareholder approval, an AT&T Amended 1996 Employee Stock
Purchase Plan. If approved by shareholders this plan will provide eligible
employees with an opportunity to purchase AT&T common stock, and effective
January 1, 2002, AT&T Broadband Group common stock and AT&T Consumer Services
Group tracking stock, through payroll deductions. This plan is intended to
assist eligible employees in acquiring a stock ownership interest in AT&T
pursuant to a plan that is intended to qualify as an "employee stock purchase
plan" under Section 423 of the Code. This plan also includes a component not
intended to qualify under Section 423 of the Code, or the "Non-423 Component,"
which will permit participation by certain eligible employees based outside the
United States. A description of this plan is outlined below.
SHARES RESERVED FOR THIS PLAN
The aggregate number of shares of AT&T common stock, which may be purchased
under the plan during the period from July 1, 2001 through June 30, 2006, will
not exceed 30 million, subject to adjustment. Additionally, any shares remaining
as of June 30, 2001 of the shares previously reserved to the AT&T 1996 Employee
Stock Purchase Plan will continue to be available for issuance under this plan
through June 30, 2006. On January 1, 2001, 18,474,247 shares remained available
for issuance under the AT&T 1996 Employee Stock Purchase Plan. Of the 30 million
shares which were newly authorized effective July 1, 2001, one million are
reserved for the Non-423 Component.
The aggregate amount of shares of AT&T Broadband Group tracking stock which
may be purchased under this plan during the period of January 1, 2002 through
June 30, 2006, will not exceed $ million per year. Of the newly authorized
shares of AT&T Broadband Group tracking stock, % are reserved for the
Non-423 Component.
The aggregate amount of shares of AT&T Consumer Services Group tracking
stock which may be purchased under the plan during the period of January 1, 2002
through June 30, 2006, will not exceed $ million per year. Of the
newly authorized shares of AT&T Consumer Services Group tracking stock,
% are reserved for the Non-423 Component.
Shares issued under this plan may consist, in whole or in part, of
authorized and unissued shares, treasury shares, or shares bought on the market.
ELIGIBLE PARTICIPANTS
All employees of AT&T (and those of a subsidiary designated by AT&T) are
eligible if they meet certain conditions. To be eligible, the employee must have
completed one month of continuous employment. Part-time employees are eligible
to participate.
Approximately 160,000 employees would have been eligible to participate as
of December 31, 2000.
On the first day of each month beginning July 1, 2001, except as otherwise
determined by the committee, AT&T will grant options as permitted under this
plan. The term of each option will end on the last day of the month containing
the date on which the option was granted.
Each eligible employee on a date of exercise will be entitled to purchase
shares of common stock at a purchase price equal to 85% of the average of the
reported highest and lowest sale prices of
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shares of common stock on the NYSE on the applicable date of exercise. Dates of
exercise will take place on the last day of each month common stock is traded on
the NYSE during the applicable option period. The eligible employee will elect
the allocation of AT&T common stock, AT&T Broadband Group tracking stock and
AT&T Consumer Services Group tracking stock to be purchased.
Payment for shares of common stock purchased under this plan will be made
by authorized payroll deductions from an eligible employee's total regular
compensation payable from AT&T or a participating subsidiary of AT&T during an
option period or, when authorized by the Committee, an eligible employee may pay
an equivalent amount for such shares.
Eligible employees who elect to participate in this plan will designate a
stated whole percentage equaling at least 1%, but no more than 10% of their
eligible compensation, to be deposited into a periodic deposit account. On each
date of exercise, the entire periodic deposit account of each participant in the
plan is used to purchase whole and/or fractional shares of common stock. AT&T
will maintain a stock purchase account for each participant to reflect the
shares of common stock purchased under the plan by each participant. No
participant in this plan is permitted to purchase common stock under this plan
at a rate that exceeds $25,000 in fair market value of common stock, determined
at the time options are granted, for each calendar year. For purposes of making
this determination, all of the AT&T common stock, AT&T Broadband Group tracking
stock, and AT&T Consumer Services Group tracking stock purchased by a
participant will be aggregated.
All funds received by AT&T from the sale of common stock under this plan
may be used for any corporate purpose.
NEW PLAN BENEFITS
It is not possible to determine how many eligible employees will
participate in this plan in the future. Therefore, it is not possible to
determine with certainty the dollar value or number of shares of common stock
that will be distributed under this plan. On the average, approximately 5
million shares of AT&T common stock have been distributed annually during the
prior five-year term of this plan.
The following table sets forth certain information with respect to shares
purchased under the 1996 AT&T Employee Stock Purchase Plan during 2000 by the
only one of the five most highly compensated executive officers who participated
in this plan, all current executive officers as a group, and all employees as a
group (excluding executive officers).
NUMBER OF
SHARES
NAME AND POSITION DOLLAR VALUE(1) PURCHASED
----------------- --------------- -------------
Daniel E. Somers, President and CEO, AT&T Broadband...... $ 7,661.00 451.444
All current executive officers as a group................ $ 38,120.32 2,246.336
All employees as a group (excluding current executive
officers).............................................. $84,874,074.73 5,001,418.664
-------------------------
(1)Based upon $16.97 per share, the fair value of AT&T common stock on December
29, 2000.
TAX TREATMENT
This plan (other than the Non-423 Component) is intended to qualify as an
employee stock purchase plan within the meaning of Section 423 of the Code.
Under the Code, an employee who elects to participate in an offering under this
plan will not realize income at the time the offering commences or when the
shares purchased under this plan are transferred to him or her. If an employee
disposes of such shares after two years from the date the offering of such
shares commences and after one year from the date of the transfer of such shares
to him or her, the
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employee will be required to include in income, as compensation for the year in
which such disposition occurs, an amount equal to the lesser of (i) the excess
of the fair market value of such shares at the time of disposition over the
purchase price, or (ii) 15% of the fair market value of such shares at the time
the offering commenced. The employee's basis in the shares disposed of will be
increased by an amount equal to the amount so includable in his or her income as
compensation, and any gain or loss computed with reference to such adjusted
basis which is recognized at the time of the disposition will be a capital gain
or loss, either short-term or long-term, depending on the holding period for
such shares. In such event, AT&T (or the subsidiary by which the employee is
employed) will not be entitled to any tax deduction from income.
If any employee disposed of the shares purchased under this plan within
such two-year or one-year period, the employee will be required to include in
income, as compensation for the year in which such disposition occurs, an amount
equal to the excess of the fair market value of such shares on the date of
purchase over the purchase price. The employee's basis in such shares disposed
of will be increased by an amount equal to the amount includable in his or her
income as compensation, and any gain or loss computed with reference to such
adjusted basis which is recognized at the time of disposition will be a capital
gain or loss, either short-term or long-term, depending on the holding period
for such shares. In the event of a disposition within such two-year or one-year
period, AT&T (or the subsidiary by which the employee is employed) will be
entitled to a tax deduction from income equal to the amount the employee is
required to include in income as a result of such disposition.
An employee who is a nonresident of the United States will generally not be
subject to the U.S. federal income tax rules described above with respect to the
shares of common stock purchased under this plan.
PLAN ADMINISTRATION AND TERMINATION
The board of directors of AT&T, or its delegate, will appoint a committee,
which will be composed of one or more employees, to administer the plan on
behalf of AT&T. This committee may delegate any or all of the administrative
functions under the plan to such individuals, subcommittees, or entities, as the
committee considers appropriate. The committee may adopt rules and procedures
not inconsistent with the provisions of this plan for its administration. The
committee's interpretation and construction of this plan is final and
conclusive.
The board may at any time, or from time to time, alter or amend this plan
in any respect, except that, without approval of the shareholders of AT&T, no
amendment may increase the number of shares reserved for purchase, or reduce the
purchase price per share under this plan, other than as described above.
The board will have the right to terminate this plan or any offering at any
time for any reason. The plan may continue in effect through June 30, 2006.
RECOMMENDATION OF OUR BOARD OF DIRECTORS
ADOPTION OF THIS PROPOSAL REQUIRES AN AFFIRMATIVE VOTE OF A MAJORITY OF THE
VOTES CAST. OUR BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ADOPTION OF THE
AT&T AMENDED 1996 EMPLOYEE STOCK PURCHASE PLAN.
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THE SPIN-OFF PROPOSAL
GENERAL
As part of AT&T's restructuring plan, within about a year after we issue
AT&T Broadband Group tracking stock, we plan to spin off AT&T Communications
Services, Inc., which will consist of both AT&T Business Services Group and AT&T
Consumer Services Group. Following the spin-off, AT&T will change its name to
"AT&T Broadband Corp." and AT&T Communications Services, Inc. will change its
name to "AT&T Corp." Approval of the spin-off proposal will also constitute
approval of the proposed name changes.
We expect that the spin-off will be accomplished through the following
steps, any or all of which may be effected simultaneously:
- Transfer all of the assets and liabilities of AT&T Consumer Services
Group and AT&T Business Services Group to AT&T Communications Services,
Inc., to the extent such assets and liabilities are not already held by
AT&T Communications Services, Inc.
- Distribute on a pro rata basis to holders of AT&T common stock as a
dividend shares of AT&T Communications Services, Inc. common stock.
- Mandatorily redeem, in accordance with the terms of our charter, all
issued and outstanding shares of AT&T Consumer Services Group tracking
stock for shares of the new Consumer Services Group tracking stock of
AT&T Communications Services, Inc. The new Consumer Services Group
tracking stock will continue to be intended to reflect the financial
performance and economic value of AT&T Consumer Services Group, but will
be a class of stock of AT&T Communications Services, Inc., not of AT&T.
After the mandatory redemption is completed, holders of AT&T Consumer
Services Group tracking stock that do not hold shares of AT&T common stock no
longer will be shareholders of AT&T (which will be renamed "AT&T Broadband
Corp.") and will have no interest in that entity, but instead will be
shareholders of AT&T Communications Services, Inc. through their ownership of a
new Consumer Services Group tracking stock, which is a class of common stock of
AT&T Communications Services, Inc.
The specific terms and conditions of the spin-off of AT&T Communications
Services, Inc. are expected to be governed by the separation and distribution
agreement to be entered into among AT&T and AT&T Communications Services, Inc.
The material expected terms of the separation and distribution agreement are
summarized below.
In addition, we expect that AT&T and AT&T Communications Services, Inc.
will enter into a number of other agreements in connection with the spin-off. We
expect these agreements to include:
- brand license agreement, including brand assignment,
- network services agreements,
- employee benefits agreement,
- intellectual property agreement, including intellectual property
assignment, and
- interim and other services agreements.
The material expected terms of these agreements are described below.
However, other than possible assignments concerning AT&T's brands or other
intellectual property, we do not expect that any of these agreements will be
entered into until immediately before the spin-off, and each of AT&T and AT&T
Communications Services, Inc. reserves the right to materially change the terms
of these agreements.
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SEPARATION AND DISTRIBUTION AGREEMENT
The separation and distribution agreement will set forth the agreements
among AT&T and AT&T Communications Services, Inc. with respect to the principal
corporate transactions required to effect the spin-off, and a number of other
agreements governing the relationship between AT&T and AT&T Communications
Services, Inc. following the spin-off. We only expect to enter into the
separation and distribution agreement, and to complete the spin-off, if our
board of directors determines that it is in AT&T's best interests to do so,
considering all factors at the time, and if specified conditions are met. These
conditions include, among others, continued effectiveness of a favorable ruling
on the spin-off from the Internal Revenue Service, receipt of shareholder
approval, and any other material consents. The continued effectiveness of this
ruling in all material respects is a non-waivable condition to the spin-off. For
this purpose, this condition will continue to be satisfied even if a
supplemental ruling that does not materially alter the conclusions of our ruling
is issued.
While we currently intend to complete the spin-off, our board of directors
may decide not to proceed with the spin-off due to future market conditions,
financial performance or superior alternatives or the occurrence of other
factors that make it inadvisable to proceed with the spin-off, even if the
specified conditions are met. Additionally, other events or circumstances,
including litigation, could occur and could affect the timing or terms of the
spin-off and/or our ability or plans to complete it. As a result, the spin-off
may not occur, and, if it does occur, it may not occur on the terms or in the
manner described, or in the time frame contemplated. See "Risk Factors Relating
to AT&T's Restructuring Plan -- AT&T's restructuring plan is subject to change
and may not be completed as planned or at all."
THE SEPARATION
We will agree pursuant to the separation and distribution agreement to
transfer, or to cause our subsidiaries to transfer, to AT&T Communications
Services, Inc.:
- all assets allocated to AT&T Consumer Services Group or AT&T Business
Services Group by our charter that are not then held by AT&T
Communications Services, Inc.;
- all assets reflected in the most recent balance sheets of each of AT&T
Consumer Services Group and AT&T Business Services Group that are not
then held by AT&T Communications Services, Inc.;
- contracts to the extent relating to AT&T Consumer Services Group or the
AT&T Business Services Group as will be described in the separation and
distribution agreement; and
- any other assets of AT&T that are not part of AT&T Broadband Group.
AT&T Communications Services, Inc. also will agree to assume or fulfill:
- all liabilities allocated to AT&T Consumer Services Group or AT&T
Business Services Group by our charter to which AT&T Communications
Services, Inc. or its subsidiaries are not then subject;
- all liabilities reflected in the most recent balance sheet of each of
AT&T Consumer Services Group and AT&T Business Services Group to which
AT&T Communications Services, Inc. is not then subject;
- liabilities resulting from the spin-off as will be described in the
separation and distribution agreement; and
- all other liabilities of AT&T, including contingent liabilities, that are
not expressly allocated to AT&T Broadband Group.
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AT&T Broadband Corp. will also be assigned some contingent liabilities as
will be described in the separation and distribution agreement.
Generally, neither AT&T nor AT&T Communications Services, Inc. will make
any representation or warranty as to:
- the assets, businesses or liabilities transferred or assumed;
- any consents or approvals required in connection with that transfer or
assumption;
- the value or freedom from any lien or other security interest of any of
the assets; and
- the absence of any defenses or freedom from counterclaims relating to any
claim of any person, or as to the legal sufficiency of any assignment,
document or instrument delivered to convey title to any asset
transferred.
In addition, all assets are being transferred on an "as is, where is"
basis, and AT&T Communications Services, Inc. will agree to bear the economic
and legal risks that the conveyance is insufficient to vest good and marketable
title, free and clear of any lien or other security interest.
AT&T and AT&T Communications Services, Inc. generally also will agree to
terminate all agreements, understandings and arrangements among AT&T and AT&T
Communications Services, Inc., other than the separation and distribution
agreement and the other intercompany agreements entered into by the groups in
contemplation of the establishment of the tracking stock arrangements or
subsequent separation and other than as may be provided in the agreements.
RELEASES AND INDEMNIFICATION
The separation and distribution agreement generally will provide for a full
and complete release and discharge, as of the date of the completion of the
mandatory exchange, of all liabilities existing or arising from all acts and
events occurring or failing to occur or alleged to have occurred or to have
failed to occur and all conditions existing or alleged to have existed on or
before the date of the completion of the mandatory exchange between or among
AT&T and its affiliates, on the one hand, and AT&T Communications Services, Inc.
and its affiliates, on the other hand, including any contractual agreements or
arrangements existing or alleged to exist between or among them on or before
that date, other than the separation and distribution agreement and the other
intercompany agreements entered into by the groups in contemplation of the
establishment of the tracking stock arrangements or subsequent separation.
AT&T Communications Services, Inc. will agree to indemnify, defend and hold
harmless AT&T and its affiliates, and each of their directors, officers and
employees, from and against all liabilities relating to, arising out of or
resulting from:
- the failure of AT&T Communications Services, Inc. or its affiliates, or
any other persons, to pay, perform or otherwise promptly discharge any of
the liabilities of AT&T Communications Services, Inc.;
- any liabilities of AT&T Communications Services, Inc.; and
- any breach by AT&T Communications Services, Inc. or its affiliates of the
separation and distribution agreement or any of the other agreements
entered into in connection with the separation and distribution
agreement.
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AT&T will agree to indemnify, defend and hold harmless AT&T Communications
Services, Inc. and its affiliates, and each of their directors, officers and
employees, from and against all liabilities relating to, arising out of or
resulting from:
- the failure of AT&T or its affiliates or any other person to pay, perform
or otherwise promptly discharge any liabilities of AT&T, other than
liabilities of AT&T Communications Services, Inc.;
- any liabilities of AT&T, other than liabilities of AT&T Communications
Services, Inc.; and
- any breach by AT&T or its affiliates of the separation and distribution
agreement or any of the other agreements entered into in connection with
the separation and distribution agreement.
The separation and distribution agreement also specifies procedures for
claims for indemnification made under the provisions described above.
TERMINATION
The separation and distribution agreement will provide that it may be
terminated at any time before the completion of the distribution by AT&T in its
sole discretion. If AT&T terminates the separation and distribution agreement,
neither party will have any liability or further obligation to any other party.
AMENDMENTS AND WAIVERS
The separation and distribution agreement will provide that no provisions
of it or any related agreement will be deemed waived, amended, supplemented or
modified by any party unless the waiver, amendment, supplement or modification
is in writing and signed by the authorized representative of the party against
whom that waiver, amendment, supplement or modification is sought to be
enforced.
BRAND LICENSE AGREEMENT
AT&T and AT&T Communications Services, Inc. expect to enter into a brand
license agreement, including brand assignment, unless the assignment of AT&T's
brands is effected prior to the spin-off. At or before the spin-off, all rights,
title and interest in all of AT&T's brands (including all trademarks, service
marks, trade names, trade dress, etc.), the registrations and applications
therefor throughout the world, and the goodwill they symbolize, together with
all associated license agreements (including the brand agreements with AT&T
Broadband Group and AT&T Consumer Services Group), will be transferred to AT&T
Communications Services, Inc. or a company to be held by AT&T Communications
Services, Inc. In addition, all agreements with third parties that grant to AT&T
licenses to use any other brands will, as permitted by those agreements, be
transferred to AT&T Communications Services, Inc.
NETWORK SERVICE AGREEMENTS
AT&T and AT&T Communications Services, Inc. expect to enter into network
services agreements substantially similar to those described under "Relationship
among AT&T Groups -- Relationships with AT&T -- Commercial Transactions between
Groups."
EMPLOYEE BENEFITS AGREEMENT
AT&T and AT&T Communications Services, Inc. expect to enter into an
employee benefits agreement which will cover a wide range of compensation and
benefit issues. In general, AT&T Communications Services, Inc. will be
responsible for all obligations and liabilities relating to employees and former
employees of AT&T Communications Services, Inc. and their dependents and
beneficiaries after the spin-off date, and AT&T will be responsible for the
obligations and liabilities before the spin-off date. We refer to individuals
who were employees of AT&T or its affiliates and are transferred to AT&T
Communications Services, Inc. or its affiliates as transferred individuals.
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AT&T Communications Services, Inc.'s plans will fully recognize and fully
credit transferred individuals with their full service with AT&T or its
affiliates. Transferred individuals' account balances under AT&T defined
contribution plans will vest on the spin-off date and they will be allowed to
make a one-time election to transfer their accounts to the AT&T Communications
Services, Inc. 401(k) Plan. Each transferred individual will vest in his accrued
benefit under the AT&T pension plans on the spin-off date. Transferred
individuals will also be entitled to a distribution of their accounts under the
AT&T Employee Stock Ownership Plan.
INTELLECTUAL PROPERTY AGREEMENTS
AT&T and AT&T Communications Services, Inc. expect to enter into an
intellectual property agreement, including intellectual property assignment,
unless the assignment of AT&T's intellectual property is effected prior to the
spin-off. At or before the spin-off, all rights, title and interest in AT&T's
patents, patent applications, copyrights, trade secrets and other intellectual
property rights, together with all associated license agreements (including the
intellectual property agreements with AT&T Broadband Group and AT&T Consumer
Services Group), will be transferred to AT&T Communications Services, Inc. or a
company to be held by AT&T Communications Services, Inc. In addition, all
agreements with third parties that grant intellectual property rights to AT&T
will, as permitted by those agreements, be transferred to AT&T Communications
Services, Inc.
SERVICES AGREEMENT
AT&T and AT&T Communications Services, Inc. expect to enter into a services
agreement providing for various transitional and similar services on specified
terms.
RECOMMENDATION OF OUR BOARD OF DIRECTORS
OUR BOARD OF DIRECTORS HAS APPROVED THE SPIN-OFF PROPOSAL AND RECOMMENDS
THAT YOU VOTE FOR THE SPIN-OFF PROPOSAL.
EFFECT OF THE SPIN-OFF ON AT&T CONSUMER SERVICES GROUP AND ON AT&T CONSUMER
SERVICES GROUP TRACKING STOCK
AT&T Consumer Services Group is part of the larger AT&T Communications
Services, Inc., which also includes AT&T Business Services Group. Consequently,
if we complete the spin-off of AT&T Communications Services, Inc., all of the
assets and liabilities of AT&T Consumer Services Group will be spun off as well
and be part of the new entity. As mentioned above, we intend that, in connection
with the spin-off, all of the outstanding shares of AT&T Consumer Services
tracking stock will be redeemed for shares of the new Consumer Services Group
tracking stock of AT&T Communications Services, Inc. The new Consumer Services
Group tracking stock will generally have terms substantially similar to AT&T
Consumer Services Group tracking stock, but will be stock of AT&T Communications
Services, Inc. as opposed to AT&T, and the per share voting rights of the new
Consumer Services Group tracking stock will be based on the ratio, over a fixed
measurement period, of the initial trading prices of the new Consumer Services
Group tracking stock to the trading prices of AT&T Communications Services, Inc.
common stock. See "The Consumer Services Charter Amendment Proposal -- Terms of
the Consumer Services Group Tracking Stock Amendment -- Redemption."
EFFECT OF THE SPIN-OFF ON AT&T BROADBAND GROUP AND ON AT&T BROADBAND GROUP
TRACKING STOCK
Following the spin-off of AT&T Communications Services, Inc., we expect
that AT&T will consist only of AT&T Broadband Group. For this reason, following
the spin-off, we expect to redeem all outstanding shares of AT&T Broadband Group
tracking stock for shares of AT&T common stock as permitted by the terms of the
Broadband Group tracking stock amendment. See "The Broadband Charter Amendment
Proposal -- Terms of the Broadband Group Tracking Stock Amendment --
Redemption."
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MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
GENERAL
We summarize below the material U.S. federal income tax consequences
relating to the spin-off. The summary is based on the Code, the Treasury
regulations promulgated thereunder, judicial opinions, published positions of
the Internal Revenue Service, and all other applicable authorities, all of which
are subject to change (possibly with retroactive effect). Any such change could
alter the tax consequences to us and the holders of AT&T Consumer Services Group
tracking stock or AT&T common stock.
This summary does not discuss all tax considerations that may be relevant
to stockholders in light of their particular circumstances, nor does it address
the consequences to stockholders subject to special treatment under the U.S.
federal income tax laws (such as tax-exempt entities, non-resident alien
individuals, foreign entities, foreign trusts and estates and beneficiaries
thereof, persons who acquire our common stock pursuant to the exercise of
employee stock options or otherwise as compensation, insurance companies, and
dealers in securities.) In addition, this summary does not address the U.S.
federal income tax consequences to stockholders who do not hold their AT&T
common stock or AT&T Consumer Services Group tracking stock as a capital asset.
This summary does not address any state, local or foreign tax consequences.
WE URGE YOU TO CONSULT YOUR OWN TAX ADVISOR CONCERNING THE U.S. FEDERAL,
STATE AND LOCAL, AND FOREIGN TAX CONSEQUENCES OF THE SPIN-OFF TO YOU.
U.S. FEDERAL INCOME TAX CONSEQUENCES
It is a condition to the spin-off that AT&T has obtained a private letter
ruling from the Internal Revenue Service which confirms, among other things,
that the spin-off will qualify as tax-free to AT&T and its shareholders under
Section 355 of the Code. We received this ruling on June 27, 2001. To the extent
this summary describes the federal income tax consequences of the distribution
and the redemption, such consequences have been set forth in the Internal
Revenue Service ruling. Although the ruling relating to the qualification of the
redemption and distribution as a tax-free transaction is generally binding on
the Internal Revenue Service, the continuing validity of the ruling is subject
to factual representations and assumptions. We are not aware of any facts or
circumstances that would cause such representations and assumptions to be
untrue. The continued effectiveness of this ruling in all material respects is a
non-waivable condition of the spin-off. For this purpose, this condition will
continue to be satisfied even if a supplemental ruling that does not materially
alter the conclusions of our ruling is issued.
DISTRIBUTION
Subject to the discussion below relating to the receipt of cash instead of
fractional shares, and assuming the continued effectiveness of the private
letter ruling from the Internal Revenue Service, for U.S. federal income tax
purposes the tax consequences of the distribution of AT&T Communications
Services, Inc. common stock to holders of AT&T common stock are as follows:
- no gain or loss will be recognized by, and no amount will be included in
the income of, AT&T upon the distribution;
- no gain or loss will be recognized by, and no amount will be included in
the income of, stockholders upon their receipt of shares of AT&T
Communications Services, Inc. common stock in the distribution;
- a holder of AT&T common stock will apportion the tax basis for such
holder's AT&T common stock on which AT&T Communications Services, Inc.
common stock is distributed between AT&T common stock and AT&T
Communications Services, Inc. common stock received in the distribution
(including any fractional shares of AT&T Communications Services, Inc.
common stock deemed received) in proportion to the relative fair market
values
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of such AT&T common stock and AT&T Communications Services, Inc. common
stock on the date of the distribution; and
- the holding period of shares of AT&T Communications Services, Inc. common
stock received by a holder of AT&T common stock in the distribution will
include the period during which such holder held AT&T common stock on
which AT&T Communications Services, Inc. common stock is distributed.
REDEMPTION
Subject to the discussion below relating to the receipt of cash instead of
fractional shares, and assuming the continued effectiveness of the private
letter ruling from the Internal Revenue Service, for U.S. federal income tax
purposes the tax consequences of the redemption of AT&T Consumer Services Group
tracking stock are as follows:
- no gain or loss will be recognized by, and no amount will be included in
the income of, AT&T upon the redemption of AT&T Consumer Services Group
tracking stock for new Consumer Services Group tracking stock;
- no gain or loss will be recognized by, and no amount will be included in
the income of, stockholders upon their receipt of shares of new Consumer
Services Group tracking stock in the redemption;
- the aggregate tax basis of the shares of new Consumer Services Group
tracking stock received by stockholders in the redemption will be the
same as the aggregate tax basis of the shares of AT&T Consumer Services
Group tracking stock exchanged therefor; and
- the holding period of the shares of new Consumer Services Group tracking
stock received by stockholders in the redemption will include the holding
period of the shares of AT&T Consumer Services Group tracking stock with
respect to which the shares of new Consumer Services Group tracking stock
were received.
RECEIPT OF CASH INSTEAD OF FRACTIONAL SHARES
No fractional shares of new Consumer Services Group tracking stock or AT&T
Communications Services, Inc. common stock will be issued in the distribution or
the redemption. All fractional shares resulting from the distribution and the
redemption will be aggregated and sold by the exchange agent and the proceeds
will be distributed to the owners of such fractional shares.
A stockholder who receives cash instead of a fractional share interest in
the redemption or the distribution will generally recognize gain or loss in an
amount equal to the difference between the amount of cash received and the
portion of such stockholder's tax basis allocable to such fractional share
interest. Such gain or loss will be treated as capital gain or loss. For
taxpayers who are individuals, if their fractional share interest has a holding
period for U.S. federal income tax purposes of more than one year, any gain will
generally be subject to a stated maximum rate of 20%. In general, for purposes
of the spin-off, a person's holding period for a fractional share interest will
include the period during which such person held AT&T common stock or the period
during which such person held AT&T Consumer Services Group tracking stock, as
the case may be, with respect to which such fractional share interest was
received.
Under the Code, if you receive cash in lieu of a fractional share interest,
you may be subject, under certain circumstances, to backup withholding at a 31%
rate with respect to such cash unless you provide proof of an applicable
exemption or a correct taxpayer identification number, and otherwise comply with
applicable requirements of the backup withholding rules. The letter of
transmittal provides instructions on how to provide us with information to
prevent backup withholding with respect to cash received in the spin-off in lieu
of a fractional share interest. Any amounts withheld under the backup
withholding rules are not an additional tax and may be refunded or
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credited against your U.S. federal income tax liability, provided you furnish
the required information to the Internal Revenue Service.
Holders who have blocks of AT&T common stock or AT&T Consumer Services
Group tracking stock with different per share tax bases are urged to consult
their tax advisors regarding the possible tax basis consequences to them of the
spin-off.
Current Treasury Regulations require each holder who receives new Consumer
Services Group tracking stock or AT&T Communications Services, Inc. common stock
pursuant to the spin-off to attach to his or her federal income tax return for
the year in which the spin-off occurs, a detailed statement setting forth such
data as may be appropriate in order to show the applicability of Section 355 of
the Code to the spin-off. AT&T will provide the appropriate information to each
stockholder of record.
STOCK EXCHANGE OR QUOTATION SYSTEM LISTING
Application will be made to have both AT&T Communications Services, Inc.
common stock issued in the spin-off and the new Consumer Services Group tracking
stock approved for listing on a national securities exchange or quotation
system.
ACCOUNTING TREATMENT
Upon receipt of necessary approvals, AT&T will report AT&T Communications
Services, Inc. as Discontinued Operations, in accordance with APB Opinion No. 30
"Reporting the Results of Operations -- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" (APB 30). For accounting purposes, the split-off of
AT&T Consumer Services Group is considered a non pro rata distribution and is
expected to be recorded at fair value resulting in the recognition of a gain on
the remaining AT&T entity upon the distribution date. The spin-off of AT&T
Business Services Group will be a pro rata distribution and therefore recorded
at historical cost.
DIVIDENDS
Following the spin-off, it is expected that the aggregate dividend payable
to holders of AT&T Communications Services, Inc. common stock and holders of new
Consumer Services Group tracking stock would be the same as that payable to
holders of AT&T common stock and AT&T Consumer Services Group tracking stock
before the spin-off. The declaration of dividends by AT&T Communications
Services, Inc. and the amount thereof will, however, be in the discretion of
AT&T Communications Services, Inc.'s board of directors and will depend upon
each of its group's financial performance, the dividend policies and capital
structures of comparable companies, each group's ongoing capital needs and AT&T
Communications Services, Inc.'s results of operations, financial condition, cash
requirements and future prospects and other factors deemed relevant by its board
of directors. Following the spin-off, AT&T Broadband Corp. does not expect to
pay any dividends.
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DESCRIPTION OF AT&T COMMUNICATIONS SERVICES, INC.
The description below of AT&T Communications Services, Inc. reflects our
current plans regarding the operation of AT&T Communications Services, Inc.
These plans may change from time to time prior to the spin-off.
AT&T Communications Services, Inc. is intended to consist of AT&T Consumer
Services Group and AT&T Business Services Group. We refer you to "Description of
AT&T Consumer Services Group" for more information on AT&T Consumer Services
Group and to "-- Description of AT&T Business Services Group" for more
information on AT&T Business Services Group. For more information on various
agreements that will affect the businesses of AT&T Communications Services,
Inc., see "The Spin-off Proposal." For financial information about AT&T
Communications Services, Inc., see "Summary -- Selected Historical Financial
Data -- of AT&T Communications Services, Inc." and "AT&T Communications
Services, Inc. Management's Discussion and Analysis of Financial Condition and
Results of Operations." Please also see the combined financial statements of
AT&T Communications Services, Inc., which are included in Appendix D to this
document.
DESCRIPTION OF AT&T BUSINESS SERVICES GROUP
The description below of AT&T Business Services Group reflects our current
plans regarding the operation of AT&T Business Services Group. These plans may
change from time to time prior to or after the spin-off.
OVERVIEW
AT&T Business Services Group is one of the nation's largest business
services telecommunications providers, providing a variety of global
communications services to large domestic and multinational businesses, small
and medium-sized businesses, and government agencies. Business units within this
group provide regular and custom voice services (including local, long distance,
and international outbound, 800, 877 and 888 and 900 services), data and IP
services (including private line, frame relay, asynchronous transfer mode
services) as well as hosting, outsourcing and other consulting services. AT&T
Business Services Group operates one of the largest telecommunications networks
in the United States.
AT&T BUSINESS SERVICES GROUP
Following the issuance of AT&T Broadband Group tracking stock and AT&T
Consumer Services Group tracking stock and prior to the spin-off, AT&T common
stock will represent AT&T Business Services Group, which is expected to be
comprised of all assets and liabilities of AT&T not attributable to AT&T
Broadband Group or AT&T Consumer Services Group. The AT&T common stock will also
represent the retained portion of value in AT&T Broadband Group. The primary
operating asset of AT&T Business Services Group is the AT&T Business Services
business, and except as described elsewhere in this document, we attribute all
of AT&T's current Business Services operations to AT&T Business Services Group,
including:
- Business Services business telecommunications customers,
- the AT&T telecommunications network,
- Business Services support infrastructure, including ordering,
provisioning, billing and care,
- AT&T Labs,
- AT&T brands,
- AT&T intellectual property,
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- our $3 billion ownership interest in AT&T Wireless Services, Inc., and
- a number of joint ventures and investments, including Concert, AT&T Latin
America, AT&T Canada, Alestra and Alascom.
INDUSTRY OVERVIEW
The communications services industry continues to change, both domestically
and internationally, providing significant opportunities and risks to the
participants in these markets. Factors that have been driving this change
include:
- technological advances, such as the Internet,
- rapid development of new services and products,
- the Telecommunications Act,
- deregulation of communications services markets in selected countries
around the world, and
- entry of new competitors in existing and emerging markets.
Each of these factors is impacted by the rapid development of data
services. The development of frame relay, asynchronous transfer mode and IP
networks as modes of transmitting information electronically has dramatically
transformed the array and breadth of services offered by telecommunications
carriers.
Use of the Internet, including intranets and extranets, has grown rapidly
in recent years. This growth has been driven by a number of factors, including
the large and growing installed base of personal computers, improvements in
network architectures, increasing numbers of network-enabled applications,
emergence of compelling content and commerce-enabling technologies, and easier,
faster and cheaper Internet access. Consequently, the Internet has become an
important new global communications and commerce medium. The Internet represents
an opportunity for enterprises to interact in new and different ways with both
existing and prospective customers, employees, suppliers and partners.
Enterprises are responding to this opportunity by substantially increasing their
investment in Internet connectivity and services to enhance internal
productivity as well as market competitiveness.
The market for data communications and Internet access and related products
is characterized by rapidly changing technology, evolving industry standards,
emerging competition and frequent new product and service introductions.
Developments in technology are further increasing the capacity and lifespan of
previously deployed network infrastructure.
In the United States, the Telecommunications Act has had a significant
impact on AT&T Business Services Group's business by establishing a statutory
framework for opening the local service markets to competition and by allowing
RBOCs to provide in-region long distance services. In addition, prices for long
distance minutes and other basic communications services have declined as a
result of competitive pressures, introduction of more efficient networks and
advanced technologies, product substitution, and deregulation. Competition in
these segments is based more on price and less on other differentiating factors
that appeal to the larger business market customers, including range of services
offered, bundling of products, customer service, and communications quality,
reliability and availability.
STRATEGY
The strategy of AT&T Business Services Group is to use the advantages of
its existing customer base, network and technical personnel to continue to be
the market leader in evolving telecommunications connectivity services for
business customers. AT&T Business Services Group intends to leverage its
position as a connectivity leader to become a leader in added value managed
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telecommunications services as well as telecommunication outsourcing solutions.
The following areas are critical to this transformation.
PROVIDE SEAMLESS SERVICE TO CUSTOMERS
AT&T Business Services Group believes that a key element to its success in
the provision of the services to business customers is to provide a seamless
experience for those customers in all stages of service provision. Customers
will have one point of contact for their entire AT&T Business Services Group
relationship, from contracting to service delivery, whether located domestically
or internationally. AT&T Business Services Group believes this will
substantially enhance its customers' reliance on its services and improve
customer satisfaction, retention levels and migration to new, advanced services.
END-TO-END CONNECTIVITY
In connection with providing seamless service to customers, AT&T Business
Services Group believes it must provide its customers with end-to-end
connectivity, meaning its customers can expect AT&T Business Services Group
service at each stage of the communication, in order to ensure the high level of
service that AT&T Business Services Group customers expect. AT&T Business
Services Group plans to increase the use of its own facilities to complete
customer communications on its own network assets. The ability to offer local
connections is expected to reduce access costs and to provide AT&T Business
Services Group with the ability to offer more bundled services and improve
customer experience.
COMPATIBILITY OF MULTIPLE SERVICES OR PLATFORMS ON OUR NETWORK
To transmit information over its network, AT&T Business Services Group
utilizes circuit switched, IP and asynchronous transfer mode systems. While AT&T
will continue to have both circuit and packet switching and transmission
technologies for some time, significant future capital expenditures are not
scheduled for circuit switching. As AT&T Business Services Group continues to
enhance the capabilities of its network, its goal is to ensure that the
utilization of multiple systems or platforms over its network will have no
effect on customers using the network.
TECHNOLOGICAL LEADERSHIP
AT&T Business Services Group has one of the most advanced networks in the
world. In addition, through AT&T Labs, AT&T Business Services Group has
demonstrated its ability to develop new applications for business communications
customers.
MANAGED SERVICE OPTIONS
AT&T Business Services Group intends to decrease its reliance on
traditional voice services that are experiencing intense pricing pressures, and
primarily focus on high-growth and high-value-added data services. AT&T Business
Services Group managed services offerings, including AT&T outsourcing solutions,
lead the market in providing businesses with managed solutions to communications
needs. AT&T Business Services Group intends to expand its target market for
managed services offerings from large multinational corporations to mid-size
companies by customizing a number of its offers to satisfy certain targeted
markets. In addition, AT&T Business Services Group intends to expand its web
hosting and managed data capabilities through platform consolidations and the
introduction of a number of new services.
BUILD NEW APPLICATIONS ON VOICE/IP TRANSPORT PLATFORMS
AT&T Business Services Group intends to remain at the forefront of IP
implementation. IP is a protocol that allows for market driven development and
deployment of new services and applications. AT&T Business Services Group expect
IP services such as IP Virtual Private Networks to proliferate
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and will use its tradition of pioneering innovative Internet infrastructure
services to continuously expand its Internet value-added services.
SERVICES AND PRODUCTS
VOICE SERVICES
Long distance voice services. AT&T Business Services Group's voice
communication offerings include the traditional "one plus" dialing of domestic
and international long distance for customers that select AT&T Business Services
Group as their primary long distance carrier.
AT&T Business Services Group's data services include private line and
special access services that use high-capacity digital circuits to carry voice,
data and video (or multimedia) transmission from point-to-point in multiple
configurations. These services provide high-volume customers with a direct
connection to an AT&T Business Services Group switch instead of switched access
shared by many users. These services permit customers to create internal
computer networks, to access external computer networks and the Internet, as
well as to reduce originating access costs.
AT&T Business Services Group also offers toll-free (800, 888 or 877)
inbound service, where the receiving party pays for the call. This is used in a
wide variety of applications, many of which generate revenue for the user (such
as reservation centers or customer service centers). AT&T Business Services
Group offers a variety of features to enhance customers' toll-free service,
including call routing by origination point and time-of-day routing.
AT&T Business Services Group also offers a variety of calling cards that
allow the user to place calls from virtually anywhere in the world. Additional
features include prepaid phone cards, conference calling, international
origination, information service access (such as weather or stock quotes), Speed
Dialing and voice messaging.
Business Local Services. Local carriers provide local exchange, exchange
access, toll and resold services; sell, install and maintain customer premises
equipment; and provide operator and directory services. The market for local
exchange services consists of a number of distinct service components. These
service components are defined by specific regulatory tariff classifications
including: (1) local network services, which generally include basic dial tone
charges and private line services; (2) network access services, which consist of
access charges received by local exchange carriers from long distance carriers
for the local transport and termination portion of long distance telephone
calls; (3) long distance network services, which include the variable portion of
charges received by local exchange carriers for intraLATA long distance calls;
and (4) additional value-added services, such as Caller Identification, Call
Waiting, Call Forwarding, 3-Way Calling and Voice Mail.
AT&T Business Local's customers principally are
telecommunications-intensive businesses, health care and educational
institutions, governmental agencies, long distance carriers and resellers, ISPs,
disaster recovery service providers and wireless communications and financial
services companies. AT&T Business Local's centrally managed customer care and
support operations are designed to facilitate the installation of new services
and the processing of orders for changes and upgrades in customer services.
AT&T Business Local generally offers its services in accordance with
applicable tariffs filed with state regulatory agencies (for intrastate
services). AT&T Business Local typically offers local service as part of a
package of services, which can include any combination of other AT&T Business
Services Group offerings. Customers also choose among analog, digital voice-only
and ISDN Centrex telephone lines to their desktops. AT&T Business Services Group
owns, houses, manages and maintains the switch, while customers retain control
over network configurations, allowing customers to add, delete and move lines as
needed. For local service, customers are billed a fixed charge plus usage.
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DATA AND INTERNET SERVICES
Enhanced data services. Enhanced data services consist of data networks
utilizing packet switching and transmission technologies and application
services, such as Internet access and web site hosting and management, which
utilize the frame relay network as a mode of data transmission. Enhanced data
services enable customers economically and securely to transmit large volumes of
data typically sent in bursts from one site to another. Enhanced data services
are utilized for local area network interconnection, remote site, point of sale
and branch office communications solutions.
AT&T Business Internet Services. AT&T Business Services Group provides IP
connectivity and IP value-added services, messaging, and electronic commerce
services to businesses. AT&T offers Managed Internet Services, which gives
customers dedicated, high-speed access to the public Internet for business
applications at a variety of speeds and types of access, as well as Business
Dial Service, a dial-up version of Internet access designed to meet the needs of
small- and medium-sized businesses.
AT&T Virtual Private Network Service allows businesses to obtain remote
access to e-mail, order entry systems, employee directories, human resources and
other databases, or to create an intranet and extranets with their clients,
suppliers and business partners, and enables customers to tailor their Virtual
Private Networks to accommodate specific business applications, performance
requirements or the need to integrate with existing data networks.
AT&T Web Services consist of a family of hosting and transactional services
and platforms serving the web needs of thousands of businesses. Offers include
AT&T Small Business Hosting Services, an economical way for small businesses to
establish a presence on the world wide web. In addition, Dedicated Hosting
Offers include Business Ready Dedicated Hosting Services and AT&T Dedicated
Hosting (Business-Managed, where AT&T both provides and services the equipment
involved, and Hybrid-Managed, where AT&T may or may not provide the equipment
involved) Services. AT&T Dedicated Hosting Service provides customizable and
pre-packaged web-hosting solutions. These Hosting Offers also include a range of
business tools to assist in the ongoing maintenance of web sites and e-commerce
stores as well as other managed services such as security, storage, media and
professional services.
TRANSPORT
AT&T Business Services Group is one of the leaders in providing wholesale
networking services to other carriers, providing both network capacity and
switched services. AT&T offers a combination of high-volume transmission
capacity, conventional dedicated line services and dedicated switched services
on a regional and national basis to ISPs and facility-based and switchless
resellers.
Wholesale networking service typically is provided pursuant to long-term
service agreements for terms of one year or longer. These service agreements
generally provide for payments at fixed rates based on the capacity and length
of the circuit used. Customers typically are billed on a monthly basis and also
may incur an installation charge or certain ancillary charges for equipment.
After the expiration of a service agreement, the service agreement may be
renewed or the services may be provided on a month-to-month basis. Switched
service agreements generally are offered on a month-to-month basis and the
service is billed on a minutes-of-use basis. More recently, AT&T Business
Services Group also has sold network capacity through indefeasible rights-of-use
agreements under which capacity is furnished for contract terms as long as 25
years.
MANAGED SERVICES AND OUTSOURCING SOLUTIONS
AT&T Business Services Group provides clients with a broad array of managed
and professional services to satisfy clients' complete networking technology
needs. AT&T Business Services Group's professional services range from
consulting to outsourcing and management of highly complex global data networks.
AT&T Business Services Group designs, engineers and implements seamless
solutions for clients that are designed to maximize the competitive advantage of
networking-based electronic
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commerce applications. Working with qualified partners, AT&T Business Services
Group also provides a full range of custom, managed e-infrastructure, web
hosting and high-availability services.
AT&T Business Services Group's Global Enterprise Management System platform
offers global, end-to-end networking management capabilities that extend all the
way to the applications domain. It also enables AT&T to consult with clients in
setting quality of service expectations and developing customized service level
agreements based on performance requirements for individually managed
applications, as well as the total networking environment.
INTERNATIONAL
AT&T Business Services Group has established a number of international
alliances to increase the reach and scope of AT&T Business Services Group's
services and network over time and has made strategic investments in order to
seek to increase the range of services AT&T Business Services Group offers in
those countries. These investments have included Alestra in Mexico and Japan
Telecom in Japan. On February 26, 2001, AT&T entered into an agreement to sell
its interest in Japan Telecom to Vodafone. This sale was completed in April
2001.
On January 5, 2000, AT&T and BT created a global venture to serve the
communications needs of multinational companies and the international calling
needs of businesses around the world. The venture, called Concert and owned
equally by AT&T Business Services Group and BT, combined transborder assets and
operations of each company, including their existing international networks,
their international traffic, their transborder products for business
customers -- including an expanding set of Concert services -- and AT&T Business
Services Group's and BT's multinational accounts in selected industry sectors.
AT&T and BT are discussing ways to improve the performance of the business.
These discussions include a variety of strategic alternatives to the Concert
joint venture, including an acquisition of, or a business combination of our
business services unit, upon its planned separation from the remainder of AT&T,
with, BT's business services operations. Such a transaction could include all or
a substantial portion of BT's business services operations, including BT Ignite
and BT's interest in Concert, in exchange for some mixture of cash, equity
and/or other instruments in the combined business. These discussions may or may
not lead to any acquisition or other business combination and may or may not
lead to any change in the existing alliance arrangements. As possible
alternatives to such a transaction, we have also been considering a narrowing of
Concert's business scope, as well as its termination as a joint venture. There
can be no assurances, however, that an agreement could be reached with BT with
regard to either of such alternatives. We cannot tell you whether these
discussions will continue, whether any of these transactions, or other
transactions, will be completed, or the timing or terms of any possible
transaction.
On June 1, 1999, AT&T Canada Corp. merged with MetroNet Communications
Corp., Canada's largest competitive local exchange carrier. Under the terms of
the merger agreement, AT&T Business Services Group received 31% of the equity
interest and 23% of the voting interest in AT&T Canada, Inc., or AT&T Canada, in
exchange for AT&T Canada Corp. and ACC TelEnterprises Ltd. In addition, AT&T
Business Services Group agreed to purchase all of the remaining shares of AT&T
Canada at the greater of the then appraised fair market value or the accreted
minimum price, which initially was C$37.50 accreting after June 30, 2000 at a
rate of 16% per annum, compounded quarterly. If the acquisition is not completed
by June 30, 2003, those shares, along with AT&T Business Services Group's
shares, would be sold through an auction process and AT&T Business Services
Group will make whole the other shareholders for the amount they would have been
entitled to if AT&T Business Services Group had purchased all of the remaining
shares of AT&T Canada. The completion of the acquisition is subject to the
condition that AT&T Business Services Group is permitted to acquire the shares
under Canada's foreign ownership restrictions. AT&T Business Services Group may
acquire the shares prior to a change in the ownership restrictions by developing
a structure that addresses these ownership restrictions. On August 16, 1999,
AT&T Business Services Group completed its sale to BT of 30% of AT&T Business
Services Group's stake in AT&T Canada. In addition, BT has agreed to purchase
30% of the shares of AT&T Canada that AT&T Business
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Services Group will be acquiring from the other stockholders, subject to BT's
right to cap its purchase at $1.65 billion.
On August 28, 2000, AT&T Business Services Group established AT&T Latin
America in connection with the merger of Netstream, a competitive local exchange
carrier in Brazil, and FirstCom Corporation, a publicly traded company with
competitive telecommunications operations in Chile, Colombia and Peru. AT&T
Business Services Group owns 58% of AT&T Latin America; SL Participacoes, an
affiliate of Promon Tecnologia, which is the former owner of Netstream, owns 7%
of AT&T Latin America, and the former FirstCom shareholders own 34% of AT&T
Latin America, on a fully diluted basis. Promon Tecnologia and the former
FirstCom shareholders own AT&T Latin America Class A shares, which have one vote
per share, and AT&T Business Services Group owns AT&T Latin America Class B
shares, which have 10 votes per share.
MARKETING AND SALES
AT&T Business Services Group has a dedicated sales force through which it
markets its voice and data communication services. The sales force predominantly
is divided into geographic markets, and in each market focuses on large,
multinational corporations, small businesses, government markets, and
value-added resellers and other wholesalers. AT&T Business Services Group
employs full service support teams to provide significant customer support and
service to help increase customer satisfaction and retention. A number of AT&T
Business Services Group's larger global accounts are served directly by Concert,
with AT&T Business Services Group as an underlying supplier of specified
services to Concert.
RATES AND BILLING
AT&T Business Services Group offers its regulated services in most cases in
accordance with applicable tariffs filed with the FCC and various states. Rates
can vary due to a number of factors, including the volume and nature of service
committed to AT&T Business Services Group. AT&T Business Services Group expects
to offer its interstate services on a detariffed basis after July 2001. AT&T
Business Services Group offers voice and data services individually and in
combination with other offerings. Through combined offerings, AT&T Business
Services Group provides customers with benefits such as single billing, unified
services for multilocation companies and customized calling plans.
Domestic and international business services originating in the United
States primarily are billed in six-second increments, while other business
services are billed in partial minutes rounded to the next minute. Switched
voice services originating in international markets are billed in increments,
subject to local market conditions and interconnect agreements. Switched long
distance and local services are billed in arrears, with monthly billing
statements itemizing date, time, duration and charges. Data services generally
are billed on a fixed per line and variable trunk rate. Data service rates are
based on the speed of transmission, and, depending on the service type, may be
billed in arrears or in advance. Private line services are billed monthly in
advance, with the invoice indicating applicable rates by circuit. AT&T Business
Services Group's rates generally are designed to be competitive with those
charged by other long distance and local carriers.
OTHER ASSETS
AT&T Business Services Group has a number of interests in other entities,
including:
- $3 billion ownership interest in AT&T Wireless Services, Inc. (not
reflected in the financial statements), and
- joint ventures and investments, including Concert, AT&T Latin America,
AT&T Canada, Alestra and Alascom.
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NETWORK
AT&T Business Services Group utilizes both IP and asynchronous transfer
mode systems to transmit information over its network. Both technologies offer
significant efficiencies over circuit switched systems, which use a single,
dedicated circuit to complete each transmission. Asynchronous transfer mode
switching also is a more efficient method of switching and transmitting
commingled or multimedia information. The packet switching technology common to
both IP and asynchronous transfer mode system breaks up a transmission into
short, digitized pieces, or packets, which are encoded and transmitted with
other packets on the same circuit, and reassembled at the desired destination.
Asynchronous transfer mode differs from IP in that the data packets used in
asynchronous transfer mode (called cells) are one size (53 bytes), whereas in IP
the data packets vary in length. Also, whereas asynchronous transfer mode
establishes virtual circuits to ensure that the information sent is reassembled
at its destination in its proper sequence, IP ships each packet of information
to its destination by a different path. While AT&T Business Services Group will
continue to have both circuit and packet switching and transmission technologies
for some time, significant future capital expenditures are not scheduled for
circuit switching.
AT&T Business Services Group's U.S. network comprises 45,000 route miles of
long-haul backbone fiber-optic cable, plus another 16,000 route miles of local
metro fiber. In addition, AT&T Business Services Group is currently installing
16,500 new route miles of the latest generation fiber-optic cable, able to carry
OC-192 (10 trillion bits, or 10 gigabits per second) traffic more efficiently
than older fiber, and capable of carrying OC-768 (40 gigabits per second) when
that standard is ready for deployment. This new next generation network
presently connects 18 of the largest U.S. cities, and will be extended to
connect the top 30 U.S. cities. AT&T Business Services Group was the first in
the industry with a coast-to-coast OC-192 backbone, connecting Boston, New York,
Chicago, St. Louis, San Francisco and Los Angeles. In addition to this
state-of-the-art 10 gigabits per second backbone, AT&T Business Services Group
also has OC-48 (2.5 gigabits per second) facilities to more than 500
points-of-presence in the continental U.S., offering high-speed data
connectivity to the majority of U.S. business centers.
This network carries more than 1000 trillion bytes (terabytes) of data each
day, in addition to 300 million voice calls every business day. AT&T Business
Services Group carries more Frame Relay and asynchronous transfer mode traffic
than any other U.S. carrier; these are the packet services used by businesses
for critical data traffic. The reliability of all services is maximized by using
Synchronous Optical Network that can reroute circuits within 150 milliseconds of
a failure on the network. On the voice network, AT&T Business Services Group's
patented Real Time Network Routing automatically completes domestic voice calls
using more than 100 possible routes. AT&T Business Services Group stands behind
its reliability claims with Service Level Agreements. For example, on its IP
backbone, AT&T Business Services Group guarantee business customers no more than
60 milliseconds of latency, or delay in the transmission of a packet of
information, and 0.7% packet loss per month.
AT&T Business Services Group has been a leader in deploying Dense
Wavelength Division Multiplexing, or DWDM, technology that divides an optical
fiber into multiple channels, each carrying up to 10 gigabits per second of
information today. AT&T Business Services Group is now deploying 64- and
80-wavelength DWDM systems, and by the end of 2001 plans to deploy 160-
wavelength systems. When installed on OC-192 facilities, a 160-wavelength DWDM
system will enable 1.6 terabits (trillion bits per second) on a single fiber
strand.
In addition to its long distance network, AT&T Business Services Group also
has an extensive local network serving business customers in 71 U.S. cities.
AT&T Business Services Group has expanded its local network so that it now
includes 109 local switches and reaches more than 6,200 buildings. This network
provides voice service to business users, as well as data connections up to
OC-48 capacity. In addition, AT&T Business Services Group is deploying Internet
Data Centers across the U.S., offering web hosting services that put data closer
to users. By the end of 2001,
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AT&T Business Services Group plans to have 21 of these web hosting centers, with
two million square feet of space in the aggregate, all directly connected to
AT&T Business Services Group's high-speed IP backbone.
COMPETITION
AT&T Business Services Group faces the same competition issues applicable
generally to the communications services industry that are discussed with
respect to AT&T Consumer Services Group. See "Description of AT&T Consumer
Services Group -- Competition" and "Risk Factors Relating to AT&T Consumer
Services Group and AT&T Business Services Group -- AT&T Consumer Services Group
and AT&T Business Services Group face substantial competition that may
materially adversely impact both market share and margins."
EMPLOYEES
At December 31, 2000, AT&T Business Services Group employed approximately
66,400 individuals in its operations. Of those employees, approximately 61,900
are located domestically. About 19,400 of the domestically located employees of
AT&T Business Services Group are represented by unions. Of those so represented,
about 94% are represented by the Communications Workers of America and about 5%
are represented by the International Brotherhood of Electrical Workers, both of
which are affiliated with the AFL-CIO. In addition, there is a very small
remainder of domestic employees represented by other unions. Labor agreements
with most of these unions extend through May 2002.
LEGAL PROCEEDINGS
In the normal course of business, AT&T Business Services Group is subject
to proceedings, lawsuits and other claims, including proceedings under
government laws and regulations related to environmental and other matters. Such
matters are subject to many uncertainties and outcomes are not predictable with
assurance. Consequently, AT&T Business Services Group is unable to ascertain the
ultimate aggregate amount of monetary liability or financial impact with respect
to these matters at December 31, 2000. While these matters could affect
operating results of any one quarter when resolved in future periods, it is
management's opinion that after final disposition, any monetary liability or
financial impact to AT&T Business Services Group beyond that provided for at
year-end would not be material to AT&T Business Services Group's annual
consolidated financial position or results of operations.
For additional information on legal proceedings, please see the discussion
on legal proceedings under "Legal Proceedings" contained in our Annual Report on
Form 10-K for the year ended December 31, 2000, which is incorporated by
reference in this document. See "Other Information -- Where You Can Find More
Information."
LEGISLATIVE AND REGULATORY DEVELOPMENTS
Legislative and regulatory developments discussed with respect to AT&T
Consumer Services Group also apply to AT&T Business Services Group. See
"Description of AT&T Consumer Services Group -- Legislative and Regulatory
Developments."
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SELECTED HISTORICAL FINANCIAL DATA OF
AT&T COMMUNICATIONS SERVICES, INC.
In the table below, we provide you with selected historical combined
financial data of AT&T Communications Services, Inc.
AT&T COMMUNICATIONS SERVICES, INC.
SUMMARY OF SELECTED FINANCIAL DATA
(UNAUDITED)
(DOLLARS IN MILLIONS)
FOR THE THREE
MONTHS ENDED FOR THE YEARS ENDED
MARCH 31, DECEMBER 31,
----------------- ---------------------------
2001 2000 2000 1999 1998
------- ------- ------- ------- -------
RESULTS OF OPERATIONS
Revenue...................................... $11,127 $12,227 $47,521 $50,152 $47,890
Operating income(1).......................... 2,502 2,534 12,960 12,702 7,683
Income before extraordinary loss and
cumulative effect of accounting change..... 1,236 1,524 8,054 8,124 5,084
ASSETS AND CAPITAL
Property, plant and equipment, net........... $26,032 $26,083 $25,587 $21,780
Total assets................................. 55,591 57,013 49,893 40,136
Long-term notes payable to AT&T.............. 8,093 8,603 9,040 2,056
Total notes payable to AT&T.................. 26,454 30,749 16,205 3,139
Combined attributed net assets............... 8,339 4,415 12,560 15,112
Debt ratio(2)................................ 76.2% 87.5% 56.3% 17.2%
Gross capital expenditures................... 1,145 6,207 7,807 6,871
OTHER INFORMATION
Operating income as a percent of revenue..... 22.5% 27.3% 25.3% 16.0%
Return on average equity(3).................. 85.7% 94.9% 58.7% 41.2%
Employees.................................... 83,420 81,971 96,777 95,765
-------------------------
(1)Operating income includes $0.8 billion of net restructuring and other charges
for the three-months ended March 31, 2000. Operating income includes
$0.8 billion, $0.3 billion and $2.5 billion of net restructuring and other
charges in 2000, 1999 and 1998, respectively.
(2)Debt ratio reflects debt as a percent of total capital (debt plus equity).
The increase in 2000 compared with 1999 and 1999 compared with 1998 was due
primarily to higher debt payable to AT&T.
(3)Amount for the three months ended March 31, 2001, is based on annualized net
income.
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AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
AT&T Communications Services, Inc. is an integrated business of AT&T and
not a stand-alone entity. The combined financial statements of AT&T
Communications Services, Inc. represent the AT&T Business Services Group and
AT&T Consumer Services Group portions of AT&T, along with certain corporate
activities. AT&T Communications Services, Inc. is among the world's
communications leaders, providing voice and data services to large and small
businesses, consumers and government agencies. AT&T Communications Services,
Inc. provides domestic and international long distance and regional, local and
Internet communication services. AT&T Communications Services, Inc. also
provides billing, directory and calling-card services to support its
communications businesses.
On October 25, 2000, AT&T announced a restructuring plan designed to fully
separate or issue separately tracked stocks intended to reflect the financial
performance and economic value of each of AT&T's four major operating units.
Upon completion of the plan, AT&T Wireless Group, AT&T Broadband Group, AT&T
Business Services Group and AT&T Consumer Services Group will all be represented
by asset-based or tracking stocks.
As part of the first phase of the restructuring plan, on April 27, 2001,
AT&T began an exchange offer that will give AT&T shareholders the opportunity to
exchange any portion of their AT&T common shares for shares of AT&T Wireless
Group tracking stock, subject to proration. The exchange offer was completed on
May 25, 2001. Subject to specified conditions, AT&T plans to split-off AT&T
Wireless Group from AT&T. AT&T intends, however, to retain up to $3 billion of
shares of AT&T Wireless Services, Inc. for future sale, exchange or monetization
within six months following the split-off. Such shares will be attributed to
AT&T Communications Services, Inc. AT&T expects AT&T Wireless Services, Inc.
will become an independent, publicly-held company on July 9, 2001.
In addition to the split-off of AT&T Wireless Group, AT&T intends to fully
separate or issue separate tracking stocks intended to reflect the financial
performance and economic value of each of its other major business units. AT&T
plans to create and issue new classes of stock intended to track the financial
performance and economic value of AT&T Broadband Group and AT&T Consumer
Services Group, and expects to sell some percentage of shares of AT&T Broadband
Group tracking stock later this year, subject to market and other factors.
Within 12 months of such sale, AT&T intends to completely separate AT&T
Broadband Group from AT&T through the spin-off of AT&T Communications Services,
Inc. Some or all of the AT&T Consumer Services Group tracking stock is expected
to be distributed to AT&T shareholders later this year.
AT&T plans to effect the spin-off in two parts. First, AT&T expects to
distribute shares of AT&T Communications Services, Inc. common stock as a
dividend to holders of AT&T common stock. Second, at the same time, AT&T will
redeem all of the shares of AT&T Consumer Services Group tracking stock for a
new tracking stock issued by the newly spun-off AT&T Communications Services,
Inc.
Following the spin-off of AT&T Communications Services, Inc., the remaining
AT&T would consist of AT&T Broadband Group. After the spin-off, AT&T will change
its name to "AT&T Broadband Corp." and AT&T Communications Services, Inc. will
change its name to "AT&T Corp."
AT&T expects that these transactions will be tax-free to U.S. shareholders.
AT&T's restructuring plan is complicated and involves a substantial number of
steps and transactions,
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including obtaining various conditions, such as Internal Revenue Service
rulings. In addition, future market conditions, financial performance or
superior alternatives or other factors may arise or occur that make it
inadvisable to proceed with part or all of AT&T's restructuring plan. Any or all
of the elements of AT&T's restructuring plan may not occur as currently expected
or in the timeframes that are currently contemplated, or at all. Alternative
forms of restructuring, including sales of interests in these businesses, would
reduce what is available for distribution to shareholders in the restructuring.
Debt has been allocated to AT&T Communications Services, Inc. based on the
future view of AT&T's debt position after taking into account the significant
deleveraging activities of AT&T. This allocation took into account the following
factors: prospective financing requirements, desired stand-alone credit profile,
working capital and capital expenditure requirements and comparable company
profiles. Increases in historical debt levels were, in general, driven primarily
by historical cash flows generated by this entity in relation to total AT&T.
Such cash outflows include acquisitions, dividend payments, capital
expenditures, partially offset by cash flow from operations. For purposes of
this allocation, certain "corporate" activities were deemed to be funded by this
entity by contributing proceeds to the parent. These activities included the
repurchase of common shares by AT&T and cash payments associated with the TCI
merger and the MediaOne acquisition. Similarly, certain corporate activities
that resulted in cash flow to AT&T were deemed to be attributed to AT&T
Communications Services, Inc. These activities are reflected within net
contributions (to) from AT&T in the combined statements of cash flows. At or
before the time of the spin-off, when AT&T Communications Services, Inc. is
separated from historical AT&T, we plan to seek to transfer the previously
allocated indebtedness from AT&T to AT&T Communications Services, Inc. This may
be accomplished through a variety of measures that may result in increased costs
and additional covenants on AT&T Communications Services, Inc. The historical
interest expense on the allocated debt was calculated based on a rate intended
to be equivalent to the rate AT&T Communications Services, Inc. would have
received if it were a stand-alone entity. Due to AT&T's deleveraging activities
and expected positive cash flow from operations of AT&T Communications Services,
Inc., the $26.6 billion of debt at March 31, 2001 is expected to be
significantly lower in the future. AT&T's expected deleveraging activities that
relate to AT&T Communications Services, Inc. include: $3 billion retained
portion of AT&T Wireless Services, Inc.; and $0.7 billion of gross proceeds from
the sale of AT&T Communications Services, Inc.'s investment in Japan Telecom.
Finally, AT&T has made no final determination as to the allocation of proceeds
from the sale of shares of AT&T Broadband Group tracking stock between AT&T
Communications Services, Inc. and AT&T Broadband Group.
CONSOLIDATED RESULTS OF OPERATIONS
The comparison of 2001 results with 2000 results was impacted by the
elimination of Primary Interexchange Carrier Charges (PICC or per-line charges)
by the Federal Communications Commission (FCC) on July 1, 2000. The elimination
of these per-line charges resulted in lower access expense as well as lower
revenue, since AT&T Communications Services, Inc. has historically billed its
customers for these charges.
The comparison of 2000 results with 1999 was impacted by events, such as
acquisitions and dispositions that occurred during these two years. For example,
in 1999, AT&T acquired the IBM Global Network (now AT&T Global Network Services,
or AGNS), which was included in 2000 results for a full year, but only a part of
1999 (since the respective date of acquisition). Further, AT&T disposed of
certain international businesses during 1999 and 2000. The results of businesses
sold in 1999 were included in 1999 results for part of the year, and were not in
2000 results. Likewise, businesses sold in 2000 were included in 1999 results
for the full year and in 2000 results for part of the year.
On January 5, 2000, AT&T launched Concert, its global joint venture with
BT. AT&T Communications Services, Inc. contributed all of its international
cross-border assets and the
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economic value of approximately 270 multinational customers specifically
targeted for direct sales by Concert. As a result, 2000 results do not include
the revenue and expenses associated with these customers and businesses, while
1999 does, and 2000 results include AT&T Communications Services, Inc.'s
proportionate share of Concert's earnings in "Net earnings (losses) from equity
investments."
Effective July 1, 2000, the FCC eliminated Primary Interexchange Carrier
Charges that AT&T Communications Services, Inc. pays for residential and
single-line business customers. The elimination of these per-line charges
resulted in lower access expense as well as lower revenue, since AT&T
Communications Services, Inc. historically billed its customers for these
charges.
The comparison of 1999 results with 1998 was also impacted by the 1999
acquisition of AGNS, since 1999 results include this business for part of the
year and 1998 does not include it. This comparison is also impacted by the 1999
dispositions of international businesses, which were included in 1999 results
for part of the year, but were in 1998 results for the full year.
THREE MONTHS ENDED MARCH 31, 2001 COMPARED WITH THE THREE MONTHS ENDED MARCH
31, 2000
FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------
2001 2000
---------- ----------
{(DOLLARS IN MILLIONS)}
AT&T Business Services Group................................ $ 7,168 $ 7,252
AT&T Consumer Services Group................................ 4,007 5,037
Other and Corporate......................................... (48) (62)
------- -------
Total revenue............................................... $11,127 $12,227
======= =======
Total revenue decreased 9.0%, or $1.1 billion, in the first quarter of 2001
compared with the first quarter of 2000. Approximately $0.3 billion of the
decrease was due to the elimination of Primary Interexchange Carrier Charges.
The remaining $0.8 billion decrease was primarily driven by continued and
accelerating declines in long distance voice revenue, partially offset by a
growing demand for AT&T Communications Services, Inc.'s data and IP products,
local services and outsourcing services. AT&T Communications Services, Inc.
expects long distance voice revenue will continue to be negatively impacted by
ongoing competition and product substitution.
Revenue by segment is discussed in more detail in the segment results
section.
FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------
2001 2000
--------- ---------
{(DOLLARS IN MILLIONS)}
Access and other connection................................. $3,148 $3,505
Access and other connection expenses decreased 10.2%, to $3.1 billion in
the first quarter of 2001 compared with the first quarter of 2000. Included
within access and other connection expenses are costs that AT&T Communications
Services, Inc. pays to connect domestic calls on the facilities of other service
providers. Mandated reductions in per-minute access costs and decreased per-line
charges effective in the second half of 2000 resulted in lower costs of
approximately $0.5 billion. These decreases were partially offset by
approximately $0.2 billion of higher costs due to volume increases and higher
Universal Service Fund contributions. Since most of these charges are passed
through to the customer, the per-minute access-rate and per-line charge
reductions and the increased Universal Service Fund contributions have generally
resulted in a corresponding impact on revenue.
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FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Costs of services and products.............................. $2,259 $2,162
Costs of services and products include the costs of operating and
maintaining AT&T Communications Services, Inc.'s networks, costs to support AT&T
Communications Services, Inc.'s outsourcing contracts, the provision for
uncollectible receivables and other service-related costs.
These costs increased 4.5% in the first quarter of 2001 compared with the
first quarter of 2000. Cost of services and products increased approximately
$0.2 billion due to higher costs associated with AT&T Communications Services,
Inc.'s new outsourcing contracts as well as additional network costs to support
other growth businesses. These increases were partially offset by lower network
costs of approximately $0.1 associated with decreased volumes related to the
provision of long distance services.
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Selling, general and administrative......................... $2,089 $2,180
Selling, general and administrative, or SG&A, expenses decreased $0.1
billion, or 4.3%, in the first quarter of 2001 compared with the first quarter
of 2000. Approximately $0.2 billion of the decrease was due to savings from
continued cost-control initiatives, partially offset by $0.1 billion of higher
costs associated with increased sales support, customer care and marketing costs
for AT&T Business Services Group.
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Depreciation and amortization............................... $1,129 $1,089
Depreciation and amortization expenses increased 3.6% in the first quarter
of 2001 compared with the first quarter of 2000. The increase was primarily due
to a higher asset base resulting primarily from continued infrastructure
investment. Capital expenditures were $1.1 billion in the first quarter of 2001,
compared with $1.3 billion in the first quarter of 2000. AT&T Communications
Services, Inc. continues to focus the majority of its capital spending on its
growth businesses of data and IP and local.
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Net restructuring and other charges......................... $-- $757
During the first quarter of 2000, AT&T Communications Services, Inc.
recorded $757 million of net restructuring and other charges, which included
$666 million for restructuring and exit costs associated with cost reduction
initiatives, and $91 million related to the government-mandated disposition of
AT&T Communications (U.K.) Ltd., which would have competed directly with
Concert.
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The charge for restructuring and exit plans was primarily due to headcount
reductions, mainly in network operations and AT&T Business Services Group,
including the consolidation of customer-care and call centers.
Included in exit costs was $442 million of cash termination benefits
associated with the involuntary separation of approximately 6,200 employees.
Approximately one-half of the individuals were management employees and one-half
were non-management employees.
AT&T Communications Services, Inc. also recorded $62 million of network
lease and other contract termination costs associated with penalties incurred as
part of notifying vendors of the termination of these contracts during the
quarter.
Also included in restructuring and exit costs was $144 million of benefit
curtailment costs associated with employee separations as part of these exit
plans. Further, AT&T Communications Services, Inc. recorded an asset impairment
charge of $18 million related to the write-down of unrecoverable assets in
certain businesses where the carrying value is no longer supported by future
cash flows.
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Operating income............................................ $2,502 $2,534
Operating income decreased 1.3% in the first quarter of 2001 compared with
the first quarter of 2000. The decrease was primarily due to lower revenue,
almost entirely offset by lower net restructuring and other charges.
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Other income................................................ $176 $162
Other income was essentially flat in the first quarter of 2001 compared
with the first quarter of 2000. As a result of the adoption of Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," AT&T Communications Services, Inc. recognized $90
million of income as a result of ongoing valuation activities in the first
quarter of 2001. This was offset by investment impairment charges of $61 million
and lower net gains on sales of investments of $24 million.
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Interest expense............................................ $486 $271
Interest expense increased $215 million in the first quarter of 2001
compared with the first quarter of 2000. The increase was primarily due to a
higher average debt payable to AT&T as a result of net funding to AT&T.
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FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Provision for income taxes.................................. $866 $904
The provision for income taxes decreased $38 million to $866 million in the
first quarter of 2001 compared with $904 million in the first quarter of 2000.
The decrease was primarily due to lower income before income taxes, partially
offset by a higher effective income tax rate. The effective income tax rate is
the provision for income taxes as a percent of income before income taxes. The
effective income tax rate was 39.5% in the first quarter of 2001 compared with
37.3% in the first quarter of 2000. The effective tax rate was impacted by
higher foreign pretax losses in 2001 and tax benefits associated with asset
dispositions in the first quarter of 2000.
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Minority interest income.................................... $35 $1
Minority interest income represents an adjustment to AT&T Communications
Services, Inc. income to reflect the less than 100% ownership of consolidated
subsidiaries. The increase in minority interest in the first quarter of 2001
compared with the first quarter of 2000 was primarily due to AT&T Latin America,
which began operations in the third quarter of 2000.
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Net (losses) earnings from equity investments............... $(125) $2
Net (losses) earnings from equity investments were losses of $125 million
in the first quarter of 2001 compared with earnings of $2 million in the first
quarter of 2000. The decrease was primarily due to higher losses from Concert
and Net2Phone.
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Cumulative effect of accounting change...................... $130 $--
Cumulative effect of accounting change, net of applicable income taxes, was
$130 million in the first quarter of 2001. It represented the fair value
adjustments related to AT&T Communications Services, Inc.'s warrant portfolio
due to the adoption of SFAS No. 133.
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Net income.................................................. $1,366 $1,524
Net income decreased $0.2 billion, or 10.4%, in the first quarter of 2001
compared with the first quarter of 2000. The decrease was primarily due to lower
revenue, higher interest expense and greater
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losses on equity investments, partially offset by lower net restructuring and
other charges, and income related to the cumulative effect of adopting SFAS No.
133.
SEGMENT RESULTS
In support of the services AT&T Communications Services, Inc. provides,
AT&T Communications Services, Inc. segments its results by the business units
that support its primary lines of business: AT&T Business Services Group and
AT&T Consumer Services Group. The balance of AT&T Communications Services, Inc.
operations is included in a Corporate and Other category.
The discussion of segment results includes revenue; EBIT (earnings before
interest, taxes and the cumulative effect of accounting changes); EBITDA (EBIT
excluding depreciation and amortization and minority interest income (expense));
total assets, and capital additions. Prepaid pension assets and corporate-owned
or leased real estate are generally held at the corporate level, and therefore
are included in the Corporate and Other group. Capital additions for each
segment include capital expenditures for property, plant and equipment,
additions to nonconsolidated investments and software development.
EBIT is the primary measure used by AT&T Communication Services, Inc.'s
chief operating decision makers to measure AT&T Communications Services, Inc.'s
operating results and to measure segment profitability and performance. AT&T
Communications Services, Inc. calculates EBIT as earnings before interest, taxes
and the cumulative effect of accounting changes. In addition, management also
uses EBITDA as a measure of segment profitability and performance, and is
defined as EBIT, excluding depreciation and amortization and minority interest
income (expense). Interest and taxes are not factored into the segment
profitability measure used by the chief operating decision makers; therefore,
trends for these items are discussed on a consolidated basis. Management
believes EBIT is meaningful to investors because it provides analysis of
operating results using the same measures used by the AT&T Communications
Services, Inc.'s chief operating decision makers and provides a return on total
capitalization measure. AT&T Communications Services, Inc. believes EBITDA is
meaningful to investors as a measure of each segment's liquidity consistent with
the measure utilized by AT&T Communications Services, Inc.'s chief operating
decision makers. In addition, AT&T Communications Services, Inc. believes that
both EBIT and EBITDA allow investors a means to evaluate the financial results
of each segment in relation to total AT&T Communications Services, Inc. EBIT for
AT&T Communications Services, Inc. was $2.5 billion, for the first quarter of
2001 and $2.7 billion for the first quarter of 2000. EBITDA for AT&T
Communications Services, Inc. was $3.6 billion for the first quarter of 2001 and
$3.8 billion for the first quarter of 2000. AT&T Communications Services, Inc.'s
calculation of EBIT and EBITDA may or may not be consistent with the calculation
of these measures by other companies. EBIT and EBITDA should not be viewed by
investors as an alternative to generally accepted accounting principles measures
of income as a measure of performance or to cash flows from operating, investing
and financing activities as a measure of liquidity. In addition, EBITDA does not
take into account changes in certain assets and liabilities as well as interest
and taxes, which can affect cash flow.
AT&T BUSINESS SERVICES GROUP
AT&T Business Services Group offers a variety of global communications
services, including long distance, local, and data and IP networking to small
and medium-sized businesses, large domestic and multinational businesses and
government agencies. AT&T Business Services Group is also a provider of voice,
data and IP transport to service resellers (wholesale services).
AT&T Business Services Group includes AT&T Solutions, the company's
professional-services outsourcing business, which provides seamless solutions
that maximize the competitive advantage of networking-based electronic
applications for global clients. AT&T Solutions also provides e-infrastructure
and high-availability services to enterprise clients, and manages AT&T's unified
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global network. AT&T Business Services Group also includes the results of
international ventures and operations.
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
External Revenue............................................ $7,098 $7,176
Internal Revenue............................................ 70 76
Total Revenue............................................... $7,168 $7,252
EBIT........................................................ 1,025 1,146
EBITDA...................................................... 2,043 2,152
Capital additions........................................... $1,287 $1,366
AT MARCH 31, AT DEC. 31,
2001 2000
------------ -----------
(DOLLARS IN MILLIONS)
Total assets........................................... $42,977 $43,186
REVENUE
AT&T Business Services Group revenue declined $0.1 billion, or 1.2%, in the
first quarter of 2001 compared with the first quarter of 2000. The decrease was
primarily due to a decline in long distance voice revenue of approximately $0.5
billion, offset by growth in data/IP of approximately $0.4 billion.
Long distance voice services revenue declined at a low-teens percentage
rate in the first quarter due to a declining average price per minute reflecting
the competitive forces within the industry that are expected to continue.
Partially offsetting this decline was a mid single-digit percentage growth rate
in minutes.
Data services, which represent the transportation of data, rather than
voice, along our network, grew at a high-teens percentage rate in the first
quarter. Growth was led by the continued strength of frame relay services; IP
services, which include IP-connectivity services and virtual private network
(VPN) services; and high-speed private-line services.
AT&T Solutions outsourcing revenue grew at a mid-teens percentage rate in
the first quarter primarily due to growth from new contract signings and add-on
business from existing clients.
Local voice services revenue grew at a low-teens percentage rate in the
first quarter. AT&T Communications Services, Inc. added approximately 90,000
access lines in the first quarter bringing total access lines in service as of
March 31, 2001 to almost 2.4 million, an increase of 42.5% compared with March
31, 2000. At March 31, 2001, AT&T Communications Services, Inc. served more than
6,000 buildings on-net, representing a 3.2% increase compared with March 31,
2000.
AT&T Business Services Group internal revenue was essentially flat in the
first quarter of 2001 compared with the first quarter of 2000.
EBIT/EBITDA
EBIT and EBITDA declined $0.1 billion, or 10.6% and 5.1%, respectively, in
the first quarter of 2001 compared with the same period last year. The decline
primarily reflects the impact of pricing pressure within the long distance voice
business as well as the shift from higher margin long distance services to lower
margin growth services. The decline also reflects the impact of losses recorded
for
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Concert in the first quarter of $0.1 billion, representing a decrease of
approximately $0.2 billion compared with the first quarter of 2000. Mostly
offsetting the overall decrease was lower restructuring charges of $0.4 billion
in the first quarter of 2001.
OTHER ITEMS
Capital additions decreased $0.1 billion, or 5.8%, in the first quarter of
2001 compared with the first quarter of 2000.
Total assets decreased $0.2 billion, or 0.5%, at March 31, 2001, compared
with December 31, 2000.
AT&T CONSUMER SERVICES GROUP
AT&T Consumer Services Group provides a variety of any-distance
communications services including long distance, local toll (intrastate calls
outside the immediate local area) and Internet access to residential customers.
In addition, AT&T Consumer Services Group provides transaction services, such as
prepaid calling card and operator-handled calling services. Local phone service
is also provided in certain areas.
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
-------- --------
(DOLLARS IN MILLIONS)
Revenue..................................................... $4,007 $5,037
EBIT........................................................ 1,302 1,637
EBITDA...................................................... 1,349 1,693
Capital additions........................................... 22 23
AT MARCH 31, AT DEC. 31,
2001 2000
------------ -----------
(DOLLARS IN MILLIONS)
Total assets........................................... $3,036 $3,543
REVENUE
AT&T Consumer Services Group revenue declined 20.5%, or $1.0 billion, in
the first quarter of 2001 compared with the first quarter of 2000. The decline
was primarily due to a decline in traditional voice services, such as Domestic
Dial 1, reflecting the ongoing competitive nature of the consumer long distance
industry, which has resulted in pricing pressures. In addition, approximately
$0.3 billion of the decline was related to the elimination of per-lines charges
in 2000. Also negatively impacting revenue was product substitution and market
migration away from direct-dial wireline and higher priced calling-card services
to lower-priced prepaid-card services.
Calling volumes declined at a low-teens percentage rate in the first
quarter of 2001 primarily due to both competition in the long distance industry,
as well as production substitution, which we expect will continue to negatively
impact AT&T Consumer Services Group revenue.
EBIT/EBITDA
EBIT and EBITDA for AT&T Consumer Services Group declined 20.5% and 20.3%,
respectively, in the first quarter of 2001 compared with the first quarter of
2000. The declines were primarily driven by the impacts of lower revenue,
partially offset by cost-control initiatives.
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OTHER ITEMS
Capital additions were essentially flat in the first quarter of 2001
compared with the first quarter of 2000.
Total assets declined $0.5 billion in the first quarter to $3.0 billion at
March 31, 2001. The decline was primarily driven by lower accounts receivables,
reflecting lower revenue.
CORPORATE AND OTHER
This group reflects the results of certain corporate staff functions and
the elimination of transactions between segments.
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
------ ------
(DOLLARS IN MILLIONS)
Revenue.................................................... $(48) $(62)
EBIT....................................................... 176 (82)
EBITDA..................................................... 231 (49)
Capital additions.......................................... 88 30
AT MARCH 31, AT DEC. 31,
2001 2000
------------ -----------
Total assets........................................... $9,578 $10,284
REVENUE
Revenue for corporate and other of negative $48 million primarily includes
the elimination of intercompany revenue, which decreased $7 million in the first
quarter of 2001 compared with the first quarter of 2000.
EBIT/EBITDA
EBIT and EBITDA increased $258 million and $280 million, respectively, in
the first quarter of 2001 compared with the first quarter of 2000. The increases
were primarily due to lower net restructuring and other charges of $252 million.
OTHER ITEMS
Capital additions increased $58 million in the first quarter of 2001
compared with the first quarter of 2000. The increase was primarily driven by
increased spending on nonconsolidated investments.
Total assets decreased $0.7 billion at March 31, 2001, compared with
December 31, 2000, primarily due to higher eliminations of intercompany
receivables of approximately $0.4 billion. In addition, nonconsolidated
investments declined approximately $0.2 billion primarily due to the revaluation
of these investments, partially offset by investment acquisitions.
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THREE YEARS ENDED DECEMBER 31, 2000
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
(DOLLARS IN MILLIONS)
AT&T Business Services Group.............................. $28,900 $28,692 $25,357
AT&T Consumer Services Group.............................. 18,894 21,753 22,763
Other and Corporate....................................... (273) (293) (230)
------- ------- -------
Total revenue............................................. $47,521 $50,152 $47,890
======= ======= =======
Total revenue decreased 5.2%, or $2.6 billion, in 2000 compared with the
prior year. Approximately $1.5 billion of the decrease was due to the impact of
Concert, dispositions and the elimination of Primary Interexchange Carrier
Charges, partially offset by acquisitions. The remaining $1.1 billion decrease
was primarily driven by continued and accelerating declines in long distance
voice revenue, due primarily to ongoing competition and product substitution.
These factors have resulted in a loss of customers in recent years, which is
expected to continue. Partially offsetting the long distance voice revenue
decline was a growing demand for AT&T Communications Services, Inc.'s data and
IP products, and outsourcing services. AT&T Communications Services, Inc.
expects long distance voice revenue to continue to be negatively impacted by
ongoing competition and product substitution.
Total revenue in 1999 increased $2.3 billion, or 4.7%, compared with 1998.
Approximately $1.4 billion of the increase was due to acquisitions, net of
dispositions. The remaining increase was fueled by growth in business data,
business long distance voice and outsourcing revenue, partially offset by the
continued decline of consumer long distance voice revenue.
Revenue by segment is discussed in more detail in the segment results
section.
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
(DOLLARS IN MILLIONS)
Access and other connection............................... $13,139 $14,439 $15,116
Access and other connection expenses decreased 9.0%, to $13.1 billion in
2000, compared with $14.4 billion in 1999. Included within access and other
connection expenses are costs that AT&T Communications Services, Inc. pays to
connect domestic calls on the facilities of other service providers. Mandated
reductions in per-minute access costs and decreased per-line charges resulted in
lower costs of approximately $1.5 billion. Also contributing to the decrease was
more efficient network usage. These decreases were partially offset by
approximately $0.6 billion of higher costs due to volume increases, and $0.5
billion as a result of higher Universal Service Fund contributions. Since most
of these charges are passed through to the customer, the per-minute access-rate
and per-line charge reductions and the increased Universal Service Fund
contributions have generally resulted in a corresponding impact on revenue.
Costs paid to telephone companies outside of the United States to connect
calls made to countries outside of the United States (international settlements)
are also included within access and other connection expenses. These costs
decreased approximately $0.5 billion in 2000, as result of the commencement of
operations of Concert. Concert now incurs most of AT&T Communications Services,
Inc.'s international settlements as well as earns most of AT&T Communications
Services, Inc.'s foreign-billed revenue, previously incurred and earned directly
by AT&T Communications Services, Inc. In 2000, Concert billed us a net expense
composed of international settlement
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(interconnection) expense and foreign-billed revenue. The amount charged by
Concert in 2000 was lower than interconnection expense incurred in 1999, since
AT&T Communications Services, Inc. recorded these transactions as revenue and
expense, as applicable. Partially offsetting the decline were costs incurred
related to Concert products that the company now sells to its customers.
Access and other connection expenses declined $0.7 billion, or 4.5%, in
1999 compared with the prior year. This decline resulted from $0.9 billion of
mandated reductions in per-minute access rates in 1999 and 1998, and $0.6
billion of lower international settlement rates resulting from AT&T
Communications Services, Inc.'s negotiations with international carriers.
Additionally, AT&T Communications Services, Inc. continues to manage these costs
through more efficient network usage. These reductions were partially offset by
$0.8 billion of higher costs due to volume growth, and $0.3 billion as a result
of increased per-line charges and Universal Service Fund contributions.
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
(DOLLARS IN MILLIONS)
Costs of services and products.............................. $8,588 $8,560 $8,344
Costs of services and products include the costs of operating and
maintaining AT&T Communications Services, Inc.'s networks, costs to support AT&T
Communications Services, Inc.'s outsourcing contracts, the provision for
uncollectible receivables and other service-related costs.
These costs were essentially flat in 2000 compared with 1999. Cost of
services and products expenses increased approximately $0.6 billion due to
higher costs associated with AT&T Communications Services, Inc.'s new
outsourcing contracts as well as additional network costs to support other
growth businesses. Additionally, cost of services and products expenses
increased nearly $0.3 billion due to acquisitions, net of the impact of Concert
and divestments of international businesses. These increases were partially
offset by approximately $0.9 billion of costs savings from continued cost
control initiatives and a higher pension credit in 2000, primarily driven by a
higher pension trust asset base, resulting from increased investment returns.
Costs of services and products rose $0.2 billion, or 2.6%, in 1999 compared
with 1998, primarily due to acquisitions, net of international dispositions,
which accounted for approximately $0.9 billion of the increase. Higher costs
associated with new outsourcing contracts increased expenses by approximately
$0.2 billion. Partially offsetting the 1999 increases were lower expenses
related to per-call compensation expense, provision for uncollectible
receivables and gross receipts and property taxes aggregating approximately $0.6
billion as well as network cost-control initiatives of approximately $0.4
billion.
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------
2000 1999 1998
------ ------ -------
(DOLLARS IN MILLIONS)
Selling, general and administrative......................... $7,537 $9,601 $10,656
Selling, general and administrative, or SG&A, expenses decreased $2.1
billion, or 21.5%, in 2000 compared with 1999. Approximately $2.0 billion of the
decrease was due to savings from continued cost-control initiatives and a higher
pension credit in 2000, primarily driven by a higher pension trust asset base,
resulting from increased investment returns. Additionally, approximately $0.2
billion of the decrease was associated with the impact of Concert and
international dispositions, net of acquisitions in 2000.
SG&A expenses decreased $1.1 billion, or 9.9%, in 1999 compared with 1998.
The decrease was due primarily to AT&T Communications Services, Inc.'s continued
efforts to control costs on a companywide basis, which resulted in lower SG&A
expenses of approximately $1.0 billion, including lower spending for consumer
long distance acquisition programs. Partially offsetting these decreases
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was the impact of acquisitions, net of dispositions, which resulted in an
increase in SG&A expenses of approximately $0.1 billion.
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
(DOLLARS IN MILLIONS)
Depreciation and amortization............................... $4,538 $4,519 $3,577
Depreciation and amortization expenses were essentially flat in 2000
compared with 1999 and increased $0.9 billion, or 26.3%, in 1999 compared with
1998. The impact of Concert and international dispositions, net of acquisitions,
decreased depreciation and amortization expense $0.1 billion. The increase in
1999 compared with 1998 was due primarily to a higher asset base resulting from
continued infrastructure investment, and to a lesser extent, the impact of
acquisitions, which accounted for approximately $0.2 billion of the increase.
Total capital expenditures for 2000, 1999 and 1998 were $6.2 billion, $7.8
billion and $6.9 billion, respectively. AT&T Communications Services, Inc.
continues to focus the vast majority of its capital spending on its growth
businesses of data and IP and local.
FOR THE YEARS ENDED
DECEMBER 31,
----------------------
2000 1999 1998
---- ---- ------
(DOLLARS IN MILLIONS)
Net restructuring and other charges......................... $759 $331 $2,514
During 2000, AT&T Communications Services, Inc. recorded $759 million of
net restructuring and other charges, which included $668 million for
restructuring and exit costs associated with AT&T Communications Services,
Inc.'s initiative to reduce costs by the end of 2000, and $91 million related to
the government-mandated disposition of AT&T Communications (U.K.) Ltd., which
would have competed directly with Concert.
The charge for restructuring and exit plans was primarily due to headcount
reductions, mainly in network operations and AT&T Business Services Group,
including the consolidation of customer-care and call centers.
Included in exit costs was $442 million of cash termination benefits
associated with the separation of approximately 6,200 employees. Approximately
one-half were management and one-half were nonmanagement employees.
Approximately 5,600 employee separations were related to involuntary
terminations and approximately 600 to voluntary terminations.
AT&T Communications Services, Inc. also recorded $62 million of network
lease and other contract termination costs associated with penalties incurred as
part of notifying vendors of the termination of these contracts during the year.
Also included in restructuring and exit costs in 2000 was $144 million of
benefit curtailment costs associated with employee separations as part of these
exit plans. Further, AT&T Communications Services, Inc. recorded an asset
impairment charge of $18 million related to the write-down of unrecoverable
assets in certain business functions in which the carrying value is no longer
supported by estimated future cash flows.
The 2000 restructuring initiatives are projected to yield cash savings of
approximately $610 million per year, as well as EBIT (earnings before interest
and taxes, including pre-tax minority interest and net pre-tax losses from other
equity investments) savings of approximately $650 million per year. The EBIT
savings, primarily attributable to reduced personnel-related expenses, will be
realized in SG&A expenses and costs of services and products.
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245
During 1999, AT&T Communications Services, Inc. recorded $331 million of
net restructuring and other charges.
A $145 million charge for restructuring and exit costs was recorded in
conjunction with an initiative to reduce costs. The restructuring and exit plans
primarily focus on the maximization of synergies through headcount reductions in
AT&T Business Services Group and network operations, including the consolidation
of customer-care and call centers.
Included in exit costs was $142 million of cash termination benefits
associated with the separation of approximately 2,800 employees as part of
voluntary and involuntary termination plans. Approximately one-half of the
separations were management employees and one-half were nonmanagement employees.
Approximately 1,700 employee separations were related to involuntary termination
plans and 1,100 to voluntary terminations.
AT&T Communications Services, Inc. also recorded a net loss of $307 million
related to the government-mandated disposition of certain international
businesses that would have competed directly with Concert. In addition, AT&T
Communications Services, Inc. recorded benefits of $121 million related to the
settlement of pension obligations for former employees who accepted AT&T's 1998
VRIP offer.
During 1998, AT&T Communications Services, Inc. recorded $2,514 million of
net restructuring and other charges. The bulk of the charge was associated with
an overall cost-reduction program and the approximately 15,300 management
employees who accepted the VRIP offer. A restructuring charge of $2,724 million
was composed of $2,254 million and $169 million for pension and postretirement
special-termination benefits, respectively, $263 million of benefit curtailment
losses and $38 million of other administrative costs. AT&T Communications
Services, Inc. also recorded charges of $125 million for related facility costs
and $150 million for executive-separation costs. These charges were partially
offset by benefits of $940 million as AT&T Communications Services, Inc. settled
pension benefit obligations of 13,700 of the total VRIP employees. In addition,
the VRIP charges were partially offset by the reversal of $256 million of 1995
business restructuring reserves primarily resulting from the overlap of VRIP
with certain 1995 restructuring initiatives.
Also included in the 1998 net restructuring and other charges were asset
impairment charges totaling $718 million, of which $633 million was related to
AT&T Communications Services, Inc.'s decision not to pursue Total Service Resale
as a local service strategy. AT&T Communications Services, Inc. also recorded an
$85 million asset impairment charge related to the write-down of unrecoverable
assets in certain international operations where the carrying value was no
longer supported by estimated future cash flows. This charge was made in
connection with the review of certain operations that would have competed
directly with Concert.
Additionally, $85 million of merger related expenses were recorded in 1998
in connection with the Teleport Communications Group Inc., or TCG, merger, which
was accounted for as a pooling of interests. Partially offsetting this charge
was a $92 million reversal of the 1995 restructuring reserve. This reserve
reflected reserves no longer deemed necessary. The reversal primarily included
separation costs attributed to projects completed at a cost lower than
originally anticipated. Consistent with the three-year plan, the 1995
restructuring initiatives were substantially completed by the end of 1998.
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
2000 1999 1998
------- ------- ------
(DOLLARS IN MILLIONS)
Operating income........................................... $12,960 $12,702 $7,683
Operating income increased $0.3 billion, or 2.0%, in 2000 compared with
1999. The increase was primarily due to cost-control initiatives and a larger
pension credit associated with AT&T
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246
Communications Services, Inc.'s mature long distance businesses and related
support groups, partially offset by lower long distance revenue and higher net
restructuring and other charges. The continuation of competitive pressures and
customer migration to lower-margin products is expected to have a negative
impact on AT&T Communications Services, Inc.'s operating margins.
Operating income rose $5.0 billion, or 65.3%, in 1999 compared with 1998.
The increase was driven by operating expense efficiencies and lower net
restructuring and other charges.
FOR THE YEARS ENDED
DECEMBER 31,
----------------------
2000 1999 1998
------ ---- ----
(DOLLARS IN MILLIONS)
Other income................................................ $1,181 $775 $812
Other income increased $0.4 billion, or 52.3%, in 2000 compared with 1999.
This increase was primarily due to higher investment related income and greater
net gains on sales of businesses and investments. The higher gains on sales in
2000 were primarily driven by gains on investment sales, partially offset by the
sale of AT&T Communications Services, Inc.'s Language Line Services business and
a portion of AT&T Communications Services, Inc.'s ownership interest in AT&T
Canada in 1999.
Other income was essentially flat in 1999 compared with 1998. Lower
investment related income was partially offset by higher net gains on sales of
businesses and investments. In 1999, AT&T Communications Services, Inc. recorded
gains associated with the sale of AT&T Communications Services, Inc.'s Language
Line Services business and a portion of AT&T Communications Services, Inc.'s
ownership interest in AT&T Canada, as well as other gains on investments. In
1998, AT&T Communications Services, Inc. recorded gains associated with the sale
of Transtech, as well as other investment sales.
FOR THE YEARS ENDED
DECEMBER 31,
----------------------
2000 1999 1998
------ ---- ----
(DOLLARS IN MILLIONS)
Interest expense............................................ $1,643 $797 $292
Interest expense increased 106.1%, or $0.8 billion, in 2000 compared with
1999. The increase was primarily due to a higher average debt payable to AT&T as
a result of net funding to AT&T.
Interest expense increased $0.5 billion in 1999 compared with 1998, due to
higher average debt payable to AT&T associated with AT&T Communications
Services, Inc.'s acquisition of AGNS and net funding to AT&T.
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
(DOLLARS IN MILLIONS)
Provision for income taxes.................................. $4,493 $4,508 $3,009
The effective income tax rate is the provision for income taxes as a
percent of income from continuing operations before income taxes. The effective
income tax rate was 35.9% in 2000, 35.5% in 1999 and 36.7% in 1998. In 2000, the
effective tax rate was impacted by the tax benefits associated with certain
foreign legal entity restructurings and foreign investments. The effective tax
rate in 1999 was positively impacted by a change in the net operating loss
utilization tax rules that resulted in a reduction in the valuation allowance
and the income tax provision as well as investment dispositions, legal entity
restructurings and other tax planning strategies. The effective tax rate for
1998 was
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impacted by the pooling of the TCG's historical results, which did not include
tax benefits on preacquisition losses, and the effects of certain foreign legal
entity restructurings and investment dispositions.
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
2000 1999 1998
----- ----- -----
(DOLLARS IN MILLIONS)
Minority interest income (expense).......................... $39 $-- $(1)
Minority interest income (expense) represents an adjustment to AT&T
Communications Services, Inc. income to reflect the less than 100% ownership of
consolidated subsidiaries. The increase in minority interest in 2000 compared
with 1999 was primarily due to AT&T Latin America, which began operations in the
third quarter of 2000, of which AT&T Communications Services, Inc. owned 62.5%
at the end of 2000.
FOR THE YEARS ENDED
DECEMBER 31,
---------------------
2000 1999 1998
---- ---- -----
(DOLLARS IN MILLIONS)
Net earnings (losses) from equity investments............... $10 $(48) $(109)
Net earnings (losses) from equity investments were earnings of $10 million
in 2000, a 119.8% improvement compared with 1999. This improvement was primarily
a result of equity earnings related to Concert, whose net equity earnings were
not included in 1999, as well as additional equity earnings for Japan Telecom.
Partially offsetting the higher equity earnings were equity losses for
Net2Phone, which was acquired in the third quarter of 2000.
Net losses from equity investments were $48 million in 1999 compared with
$109 million in 1998, primarily due to losses from AT&T Unisource Communications
Services, or AUCS, which was divested in the fourth quarter of 1998, and higher
equity earnings for Alestra, partially offset by lower earnings for AT&T Canada.
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
(DOLLARS IN MILLIONS)
Income before extraordinary loss............................ $8,054 $8,124 $5,084
Income before extraordinary loss decreased $0.1 billion, or 0.9% in 2000
compared with 1999. The decrease was primarily due to higher interest expense,
partially offset by an increase in other income, primarily associated with
higher investment related income and net gains on sales of businesses and
investments. Also impacting net income from continuing operations was lower
expenses, partially offset by lower revenue associated with AT&T Communications
Services, Inc.'s mature long distance businesses.
Income before extraordinary loss increased $3.0 billion, or 59.8%, in 1999
compared with 1998. The increase was due to revenue growth and operating expense
efficiencies, as well as lower net restructuring and other charges.
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Extraordinary Items
In August 1998, AT&T Communications Services, Inc. extinguished
approximately $1.0 billion of TCG's debt. The $217 million pre-tax loss on the
early extinguishment of debt was recorded as an extraordinary loss. The
after-tax impact was $137 million.
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
(DOLLARS IN MILLIONS)
Net Income.................................................. $8,054 $8,124 $4,947
Net income decreased $0.1 billion, or 0.9%, in 2000 compared with 1999. The
decrease was primarily due to higher interest expense, partially offset by an
increase in other income, primarily associated with higher investment related
income and net gains on sales of businesses and investments. Also impacting net
income from continuing operations was lower expenses, partially offset by lower
revenue associated with AT&T Communications Services, Inc.'s mature long
distance businesses.
Net income increased $3.2 billion, or 64.2%, in 1999 compared with 1998.
The increase was due to revenue growth and operating expense efficiencies, as
well as lower net restructuring and other charges. Also impacting net income was
the $137 million extraordinary loss associated with the early extinguishment of
TCG debt.
SEGMENT RESULTS
In support of the services AT&T Communications Services, Inc. provided in
2000, AT&T Communications Services, Inc. segments its results by the business
units that support its primary lines of business: AT&T Business Services Group
and AT&T Consumer Services Group. The balance of AT&T Communications Services,
Inc. operations is included in a Corporate and Other category.
The discussion of segment results includes revenue; EBIT (earnings before
interest and taxes, including net pre-tax income (losses) of other equity
investments); EBITDA (EBIT plus depreciation, amortization and minority interest
income (expense)); total assets, and capital additions. Prepaid pension assets
and corporate-owned or leased real estate are generally held at the corporate
level, and therefore are included in the Corporate and Other group. Capital
additions for each segment include capital expenditures for property, plant and
equipment, additions to nonconsolidated investments and software development.
EBIT is the primary measure used by AT&T Communication Services, Inc.'s
chief operating decision makers to measure AT&T Communications Services, Inc.'s
operating results and to measure segment profitability and performance. AT&T
Communications Services, Inc. calculates EBIT as operating income plus net
pre-tax losses from equity investments, pre-tax minority interest income
(expense) and other income. In addition, management also uses EBITDA as a
measure of segment profitability and performance, and is defined as EBIT,
excluding minority interest income (expense), plus depreciation and
amortization. Interest and taxes are not factored into the segment profitability
measure used by the chief operating decision makers; therefore, trends for these
items are discussed on a consolidated basis. Management believes EBIT is
meaningful to investors because it provides analysis of operating results using
the same measures used by the AT&T Communications Services, Inc.'s chief
operating decision makers and provides a return on total capitalization measure.
AT&T Communications Services, Inc. believes EBITDA is meaningful to investors as
a measure of each segment's liquidity consistent with the measure utilized by
AT&T Communications Services, Inc.'s chief operating decision makers. In
addition, AT&T Communications Services, Inc. believes that both EBIT and EBITDA
allow investors a means to evaluate the financial results of each segment in
relation to total AT&T Communications Services, Inc. EBIT for AT&T
Communications Services,
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Inc. was $14.1 billion, $13.4 billion and $8.3 billion for the years ended
December 31, 2000, 1999 and 1998, respectively. EBITDA for AT&T Communications
Services, Inc. was $18.7 billion, $17.9 billion and $11.9 billion for the years
ended December 31, 2000, 1999 and 1998, respectively. AT&T Communications
Services, Inc.'s calculation of EBIT and EBITDA may or may not be consistent
with the calculation of these measures by other companies. EBIT and EBITDA
should not be viewed by investors as an alternative to generally accepted
accounting principles measures of income as a measure of performance or to cash
flows from operating, investing and financing activities as a measure of
liquidity. In addition, EBITDA does not take into account changes in certain
assets and liabilities as well as interest and taxes which can affect cash flow.
AT&T BUSINESS SERVICES GROUP
AT&T Business Services Group offers a variety of global communications
services, including long distance, local, and data and IP networking to small
and medium-sized businesses, large domestic and multinational businesses and
government agencies. AT&T Business Services Group is also a provider of voice,
data and IP transport to service resellers (wholesale services).
AT&T Business Services Group includes AT&T Solutions, the company's
professional-services outsourcing business, which provides seamless solutions
that maximize the competitive advantage of
networking-based electronic applications for global clients. AT&T Solutions also
provides e-infrastructure and high-availability services to enterprise clients,
and manages AT&T's unified global network.
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
(DOLLARS IN MILLIONS)
External Revenue.......................................... $28,578 $28,344 $25,074
Internal Revenue.......................................... 322 348 283
Total Revenue............................................. $28,900 $28,692 $25,357
EBIT...................................................... 5,991 5,248 4,031
EBITDA.................................................... 10,200 9,468 7,389
Capital additions......................................... $ 6,839 $ 9,091 $ 6,761
AT DECEMBER 31,
----------------------
2000 1999
--------- ---------
(DOLLARS IN MILLIONS)
Total assets................................................ $43,186 $38,081
REVENUE
In 2000, AT&T Business Services Group revenue grew $0.2 billion, or 0.7%,
compared with 1999. Strength in data and IP services as well as growth in AT&T
Communications Services, Inc.'s outsourcing business contributed $1.8 billion to
the increase. This growth was largely offset by an approximate $0.9 billion
decline in long distance voice services as a result of continued pricing
pressures in the industry and approximately $0.5 billion due to the net impacts
of Concert, international dispositions and acquisitions.
Revenue in 1999 grew $3.3 billion, or 13.2%. The acquisition of AGNS
contributed approximately $1.1 billion to the growth. Data, IP and outsourcing
services grew approximately $1.5 billion in 1999 compared with 1998, while long
distance voice services and local services contributed approximately $0.6
billion to the revenue increase.
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Data services, which represent the transportation of data, rather than
voice, along AT&T Communications Services, Inc.'s network, was impacted by
acquisitions and the formation of Concert. Excluding these impacts, data
services grew at a high-teens percentage rate in 2000. Growth was led by the
continued strength of frame relay services; IP services, which include
IP-connectivity services and VPN services; and high-speed private-line services.
Excluding the impact of AGNS, data services grew at a high-teens percentage rate
in 1999, led by strength in frame relay and high-speed private-line services.
AT&T Solutions outsourcing revenue grew 47.9% in 2000 and 146.0% in 1999.
More than one-half of the 2000 growth and approximately 65% of the 1999 growth
was driven by AT&T Communications Services, Inc.'s acquisition of AGNS. The
remaining growth in both years was primarily due to growth from new contract
signings and add-on business from existing clients.
Excluding the impact of Concert, long distance voice services revenue
declined at a mid single-digit percentage rate in 2000 due to a declining
average price per minute reflecting the competitive forces within the industry
which are expected to continue. Partially offsetting this decline was a high
single-digit percentage growth rate in minutes. In 1999, long distance voice
revenue grew at a low single-digit percentage rate, as volumes grew at a
high-teens percentage rate, which was largely offset by a declining average rate
per minute.
Local voice service revenue grew nearly 20% in 2000 and more than 50% in
1999. During 2000, AT&T Communications Services, Inc. added more than 867,000
access lines, with the total reaching nearly 2.3 million at the end of the year.
During 1999, AT&T added more than 719,000 access lines. Access lines enable AT&T
to provide local service to customers by allowing direct connection from
customer equipment to the AT&T Communications Services, Inc. network. AT&T
Communications Services, Inc. serves more than 6,000 buildings on-network
(buildings where AT&T Communications Services, Inc. owns the fiber that runs
into the building), representing an increase of approximately 3.5% over 1999. At
the end of 1999, AT&T Communications Services, Inc. served just over 5,800
buildings on-network compared with approximately 5,200 buildings at the end of
1998.
AT&T Business Services Group internal revenue decreased $26 million, or
7.4%, in 2000 and increased $65 million, or 23.2%, in 1999. The decrease in 2000
was the result of lower sales of Network services to AT&T WorldNet Service,
which resells such services to its customers. The increase in 1999 was due to
greater sales of Network services to AT&T WorldNet Service.
EBIT/EBITDA
EBIT improved $0.7 billion, or 14.2%, and EBITDA improved $0.7 billion, or
7.7%, in 2000 compared with 1999. This improvement reflects lower costs as a
result of AT&T Communications Services, Inc.'s continued cost-control efforts
and an increase in revenue, partially offset by the formation of Concert and the
acquisition of AGNS.
In 1999, EBIT improved $1.2 billion, or 30.2%, and EBITDA improved $2.1
billion, or 28.1%, compared with 1998. These increases were driven by revenue
growth combined with margin improvement resulting from ongoing cost-control
initiatives. The increase in EBIT was offset somewhat by increased depreciation
and amortization expenses resulting from increased capital expenditures aimed at
data, IP and local services.
OTHER ITEMS
Capital additions decreased $2.3 billion in 2000, and increased $2.3
billion in 1999. In 2000, the decrease was a result of lower spending for AT&T
Communications Services, Inc.'s long distance network (including the data
network) and lower investment in nonconsolidated international investments. In
1999, the increase was primarily due to the additional spending for AT&T
Communications Services, Inc.'s build out of the local services Synchronous
Optical Network transport network and increased nonconsolidated international
investments that support our global strategy.
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Total assets increased $5.1 billion, or 13.4%, at December 31, 2000,
compared with December 31, 1999. The increase was primarily due to net increases
in property, plant and equipment as a result of capital additions, as well as
receivables from Concert, and higher goodwill due to AT&T Latin America.
AT&T CONSUMER SERVICES GROUP
AT&T Consumer Services Group provides residential customers with a variety
of any-distance communications services, including long distance, local toll
(intrastate calls outside the immediate local area) and Internet access. In
addition, AT&T Consumer Services Group provides transaction services, such as
prepaid calling card and operator-handled calling services. Local phone service
is also provided in certain areas.
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
(DOLLARS IN MILLIONS)
Revenue................................................... $18,894 $21,753 $22,763
EBIT...................................................... 6,822 7,543 6,190
EBITDA.................................................... 6,989 7,727 6,306
Capital additions......................................... 148 299 99
AT DECEMBER 31,
----------------
2000 1999
------ ------
Total assets................................................ $3,543 $4,072
REVENUE
AT&T Consumer Services Group revenue declined 13.1%, or $2.9 billion, in
2000 compared with 1999. Approximately $0.9 billion of the decline was due to
the elimination of per-line charges in 2000 and the impact of Concert. The
remainder of the decline was primarily due to a decline in traditional voice
services, such as Domestic Dial 1, reflecting the ongoing competitive nature of
the consumer long distance industry, which has resulted in pricing pressures and
a loss of market share, which is expected to continue. Also negatively impacting
revenue was product substitution and market migration away from direct-dial
wireline and higher-priced calling-card services to the rapidly growing wireless
services and lower-priced prepaid card services. As a result, calling volumes
declined at a mid single-digit percentage rate in 2000. AT&T Communications
Services, Inc. expects competition and product substitution to continue to
negatively impact AT&T Consumer Services Group revenue.
In August 1999, AT&T Communications Services, Inc. introduced AT&T One
Rate, which allows customers to make long distance calls, 24 hours a day, seven
days a week, for the same rate. These One Rate offers continue to be well
received in the market with more than 12 million customers enrolled since the
plan's introduction. In addition, AT&T Communications Services, Inc. has been
successful in packaging services in the consumer market, by giving customers the
option of intraLATA service with its One Rate offers. More than 60% of the
customers enrolled in One Rate have chosen AT&T Consumer Services Group as their
intraLATA provider.
AT&T Consumer Services Group any distance New York Local One Rate offer,
which combines both local and long distance service, has experienced high
customer acceptance. AT&T Consumer Services Group ended the year with nearly
760,000 customers under this plan.
In 1999, AT&T Consumer Services Group revenue decreased $1.0 billion, or
4.4%, on a mid single-digit percentage decline in volumes. The 1999 decline
reflects the ongoing competitive nature
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of the consumer long distance industry, as well as product substitution and
market migration away from direct dial and higher-priced calling card services
to rapidly growing wireless services and lower-priced prepaid card services.
EBIT/EBITDA
EBIT and EBITDA declined $0.7 billion, or 9.6%, in 2000 compared with 1999.
The declines in EBIT and EBITDA primarily reflect the decline in the long
distance business, offset somewhat by cost-control initiatives. In addition, the
declines reflect $0.2 billion of lower gains on sales of businesses, primarily
the 1999 sale of Language Line Services, and higher restructuring charges.
Reflecting AT&T Communications Services, Inc.'s cost-control initiatives, EBIT
and EBITDA margins in 2000 improved to 36.1% and 37.0%, respectively, compared
with 34.7% and 35.5%, respectively, in 1999.
EBIT grew $1.4 billion, or 21.9%, and EBITDA grew $1.4 billion, or 22.5%,
in 1999. The EBIT margin improved to 34.7% in 1999 (excluding the gain on the
sale of Language Line Services, the 1999 EBIT margin was 34.0%) from 27.2% in
the prior year. The EBIT and EBITDA growth for 1999 reflects ongoing
cost-reduction efforts, particularly in marketing spending, as well as lower
negotiated settlement rates.
OTHER ITEMS
Capital additions decreased $0.2 billion, or 50.6%, in 2000 as a result of
reduced spending on software development as most of the functionality upgrades
were completed in 1999. In 1999, capital additions increased $0.2 billion, or
201.9%, primarily due to increased spending on software development to add more
functionality to AT&T Communications Services, Inc.'s services and in support of
AT&T WorldNet Service subscriber growth.
Total assets declined $0.5 billion, or 13.0%, during 2000. The decline was
primarily due to assets transferred to Concert during 2000, as well as lower
accounts receivable, reflecting lower revenue.
CORPORATE AND OTHER
This group reflects the results of certain corporate staff functions and
the elimination of transactions between segments.
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2000 1999 1998
------ ----- -------
(DOLLARS IN MILLIONS)
Revenue..................................................... $ (273) $(293) $ (230)
EBIT........................................................ 1,319 607 (1,904)
EBITDA...................................................... 1,500 723 (1,800)
Capital additions........................................... 1,596 271 310
AT DECEMBER 31,
-----------------
2000 1999
------- ------
Total assets................................................ $10,284 $7,740
REVENUE
Revenue for corporate and other of negative $0.3 billion, primarily
includes the elimination of intercompany revenue, which decreased $20 million in
2000 compared with 1999. For 1999, revenue decreased $63 million, or 27.6%. The
decline was driven primarily by the sale of AT&T Solutions Customer Care, or
ASCC, in 1998.
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EBIT/EBITDA
EBIT and EBITDA in 2000 increased $0.7 billion and $0.8 billion,
respectively, to $1.3 billion and $1.5 billion, respectively. The increases were
largely due to gains on sales of investments and investment related income and
an increase in the pension credit due to a higher pension trust asset base
resulting from increased investment returns. Partially offsetting these
increases were higher net restructuring and other charges.
In 1999, EBIT and EBITDA both improved by $2.5 billion to $0.6 billion and
$0.7 billion, respectively. The improvements were driven by $2.6 billion of
lower net restructuring and other charges in 1999 compared with 1998.
OTHER ITEMS
Capital additions increased $1.3 billion in 2000. The increase was driven
by AT&T Communications Services, Inc.'s investment in 2000 in Net2Phone. 1999
capital additions were essentially flat as compared with 1998.
Total assets increased $2.5 billion at December 31, 2000, primarily due to
AT&T Communications Services, Inc.'s investment in Net2Phone and loan to
Concert.
LIQUIDITY
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
--------- ---------
(DOLLARS IN MILLIONS)
CASH FLOWS:
Provided by operating activities.......................... $ 2,184 $ 2,579
Used in investing activities.............................. (966) (2,542)
Used in financing activities.............................. (1,321) (748)
In the first quarter of 2001, net cash provided by operating activities
decreased $0.4 billion compared with the first quarter of 2000. Higher uses of
cash in 2001 included lower accounts payable and lower net income excluding the
noncash impact of net restructuring and other charges, deferred income taxes,
earnings and losses from equity investments and the cumulative effect of an
accounting change. Partially offsetting these uses of cash was lower accounts
receivable and net changes in other operating assets and liabilities.
AT&T Communications Services, Inc. investing activities resulted in a net
use of cash of $1.0 billion in the first quarter of 2001, compared with a net
use of cash of $2.5 billion in the first quarter of 2000. The decreased use of
cash in investing activities was the result of a $1.0 billion loan to Concert in
the first quarter of 2000, and higher equity investment distribution and sales
of $0.6 billion in the first quarter of 2001.
During the first quarter of 2001, net cash used in financing activities was
$1.3 billion compared with $0.7 billion in the first quarter of 2000. This
increased use of cash in financing activities in the first quarter 2001 was the
result of decreased long-term and short-term debt due to AT&T of $4.3 billion
compared with an increase in long-term and short-term debt of $1.4 billion in
the first quarter of 2000. This was partially offset by net contributions from
AT&T of $3.1 billion in the first quarter of 2001 primarily related to the
attributed funds from the investment by NTT DoCoMo, compared with net
contributions to AT&T of $1.9 billion in the first quarter of 2000.
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FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
2000 1999 1998
------- -------- -------
(DOLLARS IN MILLIONS)
CASH FLOWS OF CONTINUING OPERATIONS:
Provided by operating activities....................... $10,454 $ 10,088 $10,090
(Used in) provided by investing activities............. (9,094) (13,454) 638
Provided by (used in) financing activities............. (2,112) 1,337 (7,907)
In 2000, net cash provided by operating activities of continuing operations
increased $0.4 billion compared with 1999. Higher sources of cash in 2000 were
primarily driven by the timing of cash payments related to other operating
assets as well as an increase in net income excluding the noncash impact of net
restructuring and other charges and the provision for uncollectibles. Partially
offsetting these sources of cash were lower accounts payables and higher
receivable due from Concert. In 1999, net cash provided by operating activities
of continuing operations was essentially flat as compared with 1998. Higher
sources of cash were due primarily to an increase in net income, excluding the
noncash impact of depreciation and amortization and net restructuring and other
charges. This increase was partially offset by the timing of cash payments
related to other operating assets, and higher receivables, due primarily to
higher revenue.
AT&T Communications Services, Inc. investing activities resulted in a net
use of cash of $9.1 billion in 2000, compared with a net use of cash of $13.5
billion in 1999. During 2000, AT&T Communications Services, Inc. spent $7.0
billion on capital expenditures and acquired Net2Phone for approximately $1.4
billion. During 1999, AT&T Communications Services, Inc. spent approximately
$8.7 billion on capital expenditures and approximately $4.9 billion on the
acquisition of AGNS. During 1998, net cash provided by investing activities was
$0.6 billion, due primarily to higher receivables from UCS and the net
dispositions of businesses, partially offset by capital expenditures of $6.8
billion.
During 2000, net cash used in financing activities was $2.1 billion,
compared with net cash provided by financing activities of $1.3 billion in 1999.
In 2000, AT&T Communications Services, Inc. contributed $13.6 billion to AT&T,
primarily to fund the MediaOne acquisition, which was partially offset by the
attributed portion of the proceeds from the AT&T Wireless Group stock offering.
AT&T Communications Services, Inc. received an additional $15.0 billion from
short-term intercompany debt. Additionally, AT&T Communications Services, Inc.
made a $3.0 billion dividend payment to AT&T. In 1999, AT&T received $7.0
billion related to an increase in long-term debt payable to AT&T and $6.1
billion from the increase of short-term debt payable to AT&T. These sources of
cash were partially offset by $9.0 billion contributed to AT&T, which includes
$4.6 billion for the acquisition of treasury shares. Additionally, AT&T
Communications Services, Inc. made a $2.7 billion dividend payment to AT&T. Cash
used in financing activities in 1998 primarily related to repayment of long-term
and short-term debt, and dividends paid to AT&T.
At March 31, 2001, AT&T Communications Services, Inc. had current assets of
$11.7 billion and current liabilities of $27.4 billion. A significant portion of
the current liabilities, $18.4 billion, relates to short-term payables to AT&T.
At December 31, 2000, AT&T Communications Services, Inc. had current assets of
$12.7 billion and current liabilities of $32.3 billion. A significant portion of
the current liabilities, $22.1 billion, relates to short-term payables to AT&T.
Financing activities of AT&T Communications Services, Inc. were managed by AT&T
on a centralized basis. The debt amount incurred by AT&T was allocated to and
reflected in the historical financial statements of AT&T Communications
Services, Inc. The historical financial statements presented reflect cash
payments to AT&T to fund "corporate" activities such as the TCI merger and the
MediaOne acquisition, and the repurchase of AT&T common stock. Similarly,
certain corporate activities that resulted in cash flow to AT&T were deemed to
be attributed to AT&T Communications Services,
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Inc. such as the sale of shares to NTT DoCoMo. These activities are reflected
within net contributions (to) from AT&T in the combined statements of cash
flows. AT&T Communications Services, Inc. expects that it will repay a portion
of the short-term debt payable to AT&T in a variety of ways. Major elements of
this deleveraging plan include operating cashflow, the attribution to AT&T
Communications Services, Inc. of AT&T's retained $3 billion of AT&T Wireless
Services, Inc. stock which will be sold or monetized and $0.7 billion of gross
proceeds from the sale of AT&T Communications Services, Inc.'s investment in
Japan Telecom. In addition, AT&T retains the flexibility to allocate proceeds
from the AT&T Broadband Group tracking stock offering among the AT&T
Communications Services, Inc. and AT&T Broadband Group businesses in any manner
which it deems most appropriate.
AT&T Communications Services, Inc.'s operations have been funded by
internally generated funds, which on occasion, have been transferred to AT&T,
and are reflected within net contributions (to) from AT&T within the combined
statements of cash flows. AT&T Communications Services, Inc.'s net contributions
from (to) AT&T were $3.1 billion and $(1.9) billion for the first quarter of
2001 and the first quarter of 2000, respectively. AT&T Communications Services,
Inc. net contributions (to) from AT&T were ($13.6) billion, ($9.0) billion and
$1.1 billion, in 2000, 1999 and 1998, respectively. Future funding of the
company's operations is expected to be generated internally from cash flow from
operations, but may include the borrowing of funds, including additional
borrowing from AT&T and/or third party debt. Short- and long-term payables to
AT&T have been made at embedded interest rates experienced on AT&T debt. At or
before the time of the spin-off, when AT&T Communications Services, Inc. is
separated from historical AT&T, we plan to seek to transfer the previously
allocated indebtedness from AT&T to AT&T Communications Services, Inc. This may
be accomplished through a variety of measures, which may result in increased
costs and additional covenants on AT&T Communications Services, Inc.
In determining the initial capital structure of AT&T Communications
Services, Inc., a number of factors were considered. These factors include
prospective financing requirements, desired stand-alone credit profile, working
capital and capital expenditure requirements, expected sources of future
deleveraging, and comparable company profiles.
Also in connection with AT&T's restructuring, AT&T has reviewed its
dividend policy as it relates to each of the new businesses. On December 20,
2000, AT&T announced that the board of directors reduced AT&T's quarterly
dividend to $0.0375 per share, from $0.22 per share.
RISK MANAGEMENT
AT&T Communications Services, Inc. is exposed to market risk from changes
in foreign exchange rates and equity prices associated with affiliate companies.
On a limited basis, AT&T Communications Services, Inc. uses certain derivative
financial instruments, including options, forwards, equity hedges and other
derivative contracts, to manage these risks. AT&T Communications Services, Inc.
does not use financial instruments for trading or speculative purposes. All
financial instruments are used in accordance with board-approved policies.
AT&T Communications Services, Inc. has outstanding debt payable to AT&T,
who maintains the exposure to third parties. Hence, all interest rate swaps to
manage the impact of interest rate changes on earnings and cash flows is
maintained by AT&T.
AT&T Communications Services, Inc. uses forward and option contracts to
reduce its exposure to the risk of adverse changes in currency exchange rates.
AT&T Communications Services, Inc. is subject to foreign exchange risk for
foreign-currency-denominated transactions. In 1999 AT&T Communications Services,
Inc. was subject to foreign exchange risk related to reimbursements to foreign
telephone companies for their portion of the revenue billed by AT&T for calls
placed in the United States to a foreign country. AT&T Communications Services,
Inc. monitors its foreign exchange rate risk on the basis of changes in fair
value. Assuming a 10% appreciation in the U.S.
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dollar at December 31, 1999, the fair value of these contracts would have
resulted in additional unrealized losses of $17 million. Because these contracts
are entered into for hedging purposes, AT&T Communications Services, Inc.
believes that these losses would be largely offset by gains on the underlying
firmly committed or anticipated transactions.
AT&T Communications Services, Inc. uses equity hedges to manage its
exposure to changes in equity prices associated with stock appreciation rights
of affiliated companies. Assuming a 10% decrease in equity prices of affiliated
companies, the fair value of the equity hedges would have decreased by $1
million and $6 million at December 31, 2000 and 1999, respectively. Because
these contracts are entered into for hedging purposes, AT&T Communications
Services, Inc. believes that the decrease in fair value would be largely offset
by gains on the underlying transaction.
In order to determine the changes in fair value of its various financial
instruments, AT&T Communications Services, Inc. uses certain modeling
techniques, namely Black-Scholes for its SARs. AT&T Communications Services,
Inc. applies rate sensitivity changes directly to its foreign currency forward
contracts.
The changes in fair value, as discussed above, assume the occurrence of
certain adverse market conditions. They do not consider the potential effect of
favorable changes in market factors and do not represent projected losses in
fair value that AT&T Communications Services, Inc. expects to incur. Future
impacts would be based on actual developments in global financial markets. AT&T
Communications Services, Inc. does not foresee any significant changes in the
strategies used to manage interest rate risk, foreign currency rate risk or
equity price risk in the near future.
FINANCIAL CONDITION
AT AT
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
(DOLLARS IN MILLIONS)
Total assets................................................ $55,591 $57,013
Total liabilities........................................... 46,866 52,178
Combined attributed net assets.............................. 8,339 4,415
Total assets decreased $1.4 billion, or 2.5%, at March 31, 2001, compared
with December 31, 2000. This decrease was primarily due to lower receivables
resulting largely from lower revenue in AT&T Consumer Services Group and lower
nonconsolidated investments due to revaluation and equity losses recorded during
the period.
Total liabilities at March 31, 2001, decreased $5.3 billion, or 10.2%,
primarily due to lower debt payable to AT&T and lower accounts payable primarily
due to timing of payments.
Total combined attributed net assets were $8.3 billion at March 31, 2001,
an increase of 88.9% from December 31, 2000. This increase was primarily due to
net contributions from AT&T of $3.1 billion as well as net income of $1.4
billion.
The ratio of total debt to total capital (debt divided by total debt and
equity) was 76.2% at March 31, 2001, compared with 87.5% at December 31, 2000.
The decrease was primarily driven by lower debt, partially offset by higher
equity. The ratio of debt (net of cash) to annualized EBITDA was 1.82X at March
31, 2001, compared with 1.63X at December 31, 2000, due to lower annualized
EBITDA, partially offset by lower debt.
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AT DECEMBER 31,
----------------------
2000 1999
--------- ---------
(DOLLARS IN MILLIONS)
Total assets................................................ $57,013 $49,893
Total liabilities........................................... 52,178 37,288
Combined attributed net assets.............................. 4,415 12,560
Total assets increased $7.1 billion, or 14.3%, at December 31, 2000. This
increase was due to higher investments reflecting equipment contributed to
Concert, a $1.0 billion loan to Concert, and AT&T Communications Services,
Inc.'s investment in Net2Phone. Additionally, other receivables increased due to
Concert, goodwill increased due primarily to AT&T Latin America and property,
plant and equipment increased due to capital additions. Partially offsetting
these increases was lower cash.
Total liabilities at December 31, 2000, increased $14.9 billion, or 39.9%,
primarily due to higher debt payable to AT&T.
Minority interest increased $0.4 billion to $420 million, primarily
reflecting the minority interest of AT&T Communications Services, Inc.'s
ownership of AT&T Latin America, which began operations in the third quarter of
2000.
Total combined attributed net assets was $4.4 billion at December 31, 2000,
a decrease of 64.9% from December 31, 1999. This decrease was primarily due to
net contributions to AT&T and dividends, partially offset by higher net income.
The ratio of total debt to total capital, (debt divided by total debt and
equity) was 87.5% at December 31, 2000, compared with 56.3% at December 31,
1999. The increase was primarily driven by higher debt, partially offset by
lower equity. The ratio of debt (net of cash) to EBITDA was 1.63X at December
31, 2000, compared with 0.84X at December 31, 1999, also reflecting higher debt.
NEW ACCOUNTING PRONOUNCEMENTS
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities -- a
Replacement of FASB No. 125." This statement provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities. Under these standards, after a transfer of financial assets, an
entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. This statement
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. This statement is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. AT&T Communications Services, Inc.
does not expect that the adoption of SFAS No. 140 will have a material impact on
its results of operations, financial position or cash flows.
SUBSEQUENT EVENTS
On June 22, 2001, AT&T initiated a 364-day accounts receivable
securitization program providing for up to $2.2 billion of funding. Under the
program, a percentage of accounts receivable related to AT&T Business Services
will be sold on a discounted, revolving basis, to a special purpose, wholly
owned subsidiary, which assigns interests in such receivables to unrelated
third-party financing entities.
On May 25, 2001, AT&T acquired substantially all of the assets of
NorthPoint Communications Group, Inc. valued at approximately $135 million. The
acquisition includes all of NorthPoint's co-
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locations nationwide, certain network equipment, systems and support software
and related assets, including two leased buildings. The purchase of these
NorthPoint Communications Group, Inc. assets was attributed to AT&T
Communications Services, Inc.
On April 27, 2001, AT&T completed the sale of its stake in Japan Telecom
Co. Ltd to Vodafone Group plc. The net pre-tax gain attributable to AT&T
Communications Services, Inc. is expected to be approximately $470 million.
On April 26, 2001, AT&T initiated a 364-day accounts receivable
securitization program providing for up to $500 million of funding. Under the
program, a small percentage of accounts receivable related to AT&T Consumer
Services Group will be sold on a discounted, revolving basis, to a special
purpose, wholly owned subsidiary, which assigns interests in such receivables to
unrelated third-party financing entities.
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DESCRIPTION OF CAPITAL STOCK OF
AT&T COMMUNICATIONS SERVICES, INC.
FOLLOWING THE SPIN-OFF
GENERAL
Immediately after the spin-off, we expect AT&T Communications Services,
Inc.'s authorized capital stock to consist of shares of preferred
stock, par value $.01, shares of common stock, par value $0.01,
of which shares will be the new Consumer Services Group tracking
stock.
AT&T COMMUNICATIONS SERVICES, INC. COMMON STOCK
The holders of AT&T Communications Services, Inc. common stock will be
entitled to one vote for each share on all matters voted on by shareholders,
including elections of directors, and, except as otherwise required by law or
provided in any resolution adopted by AT&T Communications Services, Inc.'s board
of directors with respect to any series of AT&T Communications Services, Inc.
preferred stock (a "preferred stock designation"), the holders of AT&T
Communications Services, Inc. common stock and the new Consumer Services Group
tracking stock will together possess all of the voting power of AT&T
Communications Services, Inc. AT&T Communications Services, Inc.'s charter will
not provide for cumulative voting in the election of directors. Subject to any
preferential rights of any outstanding series of AT&T Communications Services,
Inc. preferred stock created by AT&T Communications Services, Inc.'s board of
directors from time to time and to the rights of the new Consumer Services Group
tracking stock, the holders of AT&T Communications Services, Inc. common stock
will be entitled to the dividends as may be declared from time to time by AT&T
Communications Services, Inc.'s board of directors from funds legally available
for dividends, and, upon liquidation, will be entitled to receive pro rata all
assets available for distribution to the holders of AT&T Communications
Services, Inc. common stock. For a more complete discussion of AT&T
Communications Services, Inc.'s expected dividend policy, see "-- Dividend
Policy."
THE NEW CONSUMER SERVICES GROUP TRACKING STOCK
If AT&T Consumer Services Group tracking stock is created prior to the
spin-off, in connection with the spin-off, we intend to redeem all outstanding
shares of AT&T Consumer Services Group tracking stock for the new Consumer
Services Group tracking stock. The new Consumer Services Group tracking stock
will be a type of common stock of AT&T Communications Services, Inc., but will
differ from AT&T Communications Services, Inc. common stock in that it would be
intended to reflect the financial performance and economic value of AT&T
Consumer Services Group, which would be part of AT&T Communications Services,
Inc. The holders of the new Consumer Services Group tracking stock will
generally be entitled to a vote on all matters voted on by holders of AT&T
Communications Services, Inc. common stock, including elections of directors,
and, except as otherwise required by law, will vote as a single class with AT&T
Communications Services, Inc. common stock. The per share voting rights of the
new Consumer Services Group tracking stock will be based on the ratio, over a
fixed measurement period, of the initial trading prices of the new Consumer
Services Group tracking stock to the trading prices of AT&T Communications
Services, Inc. common stock. The other rights of holders of the new Consumer
Services Group tracking stock will be substantially similar to the rights of
holders of AT&T Consumer Services Group tracking stock as described under "The
Consumer Services Charter Amendment Proposal -- Terms of the Consumer Services
Group Tracking Stock Amendment."
AT&T COMMUNICATIONS SERVICES, INC. PREFERRED STOCK
AT&T Communications Services, Inc.'s charter will authorize AT&T
Communications Services, Inc.'s board of directors to establish one or more
series of preferred stock and to determine, with
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respect to any series of preferred stock, the terms and rights of the series,
including, but not limited to:
- the designation of the series;
- the number of shares of the series, which number AT&T Communications
Services, Inc.'s board of directors may later, except where otherwise
provided in the preferred stock designation, increase or decrease, but
not below the number of shares thereof then outstanding;
- whether dividends, if any, will be cumulative or noncumulative, and, in
the case of shares of any series having cumulative dividend rights, the
date or dates or method of determining the date or dates from which
dividends on the shares of the series having cumulative dividend rights
shall be cumulative;
- the rate of any dividends, or method of determining the dividends,
payable to the holders of the shares of the series, any conditions upon
which the dividends will be paid and the date or dates or the method for
determining the date or dates upon which the dividends will be payable;
- the redemption rights and price or prices, if any, for shares of the
series;
- the terms and amounts of any sinking fund provided for the purchase or
redemption of shares of the series;
- the amounts payable on and the preferences, if any, of shares of the
series in the event of any voluntary or involuntary liquidation,
dissolution or winding up of AT&T Communications Services, Inc.'s
affairs;
- whether the shares of the series will be convertible or exchangeable into
shares of any other class or series, or any other security, of AT&T
Communications Services, Inc. or any other entity, and, if so, the
specification of the other class or series or the other security, the
conversion or exchange price or prices or rate or rates, any adjustments
thereof, the date or dates as of which the shares will be convertible or
exchangeable and all other terms and conditions upon which the conversion
or exchange may be made;
- restrictions on the issuance of shares of the same series or of any other
class or series; and
- the voting rights, if any, of the holders of the shares of the series.
We believe that the ability of AT&T Communications Services, Inc.'s board
of directors to issue one or more series of preferred stock will provide AT&T
Communications Services, Inc. with flexibility in structuring possible future
financings and acquisitions, and in meeting other corporate needs that might
arise. The authorized shares of AT&T Communications Services, Inc. preferred
stock, as well as shares of AT&T Communications Services, Inc. common stock,
will be available for issuance without further action by AT&T Communications
Services, Inc. shareholders unless required by applicable law or the rules of
any stock exchange or automated quotation system on which AT&T Communications
Services, Inc. securities may be listed or traded. Listing authorities currently
require shareholder approval as a prerequisite to listing shares in several
instances, including where the present or potential issuance of shares could
result in an increase of at least 20% in the number of outstanding shares of
common stock, or in the amount of voting securities, outstanding. If the
approval of AT&T Communications Services, Inc. shareholders is not required for
the issuance of shares of AT&T Communications Services, Inc. preferred stock or
common stock, AT&T Communications Services, Inc.'s board of directors may
determine not to seek shareholder approval.
Although we believe AT&T Communications Services, Inc.'s board of directors
will have no intention of immediately doing so, it could issue a series of
preferred stock that could, depending on the terms of the series, impede the
completion of a merger, tender offer or other takeover attempt. AT&T
Communications Services, Inc.'s board of directors will make any determination
to issue the
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shares of preferred stock based on its judgment as to the best interests of AT&T
Communications Services, Inc. and its shareholders. AT&T Communications
Services, Inc.'s board of directors, in so acting, could issue preferred stock
having terms that could discourage an acquisition attempt through which an
acquiror may be able to change the composition of AT&T Communications Services,
Inc.'s board of directors, including a tender offer or other transaction that
some, or a majority, of AT&T Communications Services, Inc. shareholders might
believe to be in their best interests or in which AT&T Communications Services,
Inc. shareholders might receive a premium for their stock over the then-current
market price of AT&T Communications Services, Inc. common stock.
We expect that, as of the completion of the spin-off, shares of Series A
junior participating preferred stock, par value $.01 per share, of AT&T
Communications Services, Inc. will be reserved for issuance upon exercise of the
rights issued under AT&T Communications Services, Inc.'s rights agreement. For a
more complete discussion of AT&T Communications Services, Inc.'s rights
agreement, see "-- Rights Agreement."
DIVIDEND POLICY
Following completion of the spin-off, it is currently expected that AT&T
Communications Services, Inc. will pay a total dividend equal to the current
dividend payable on AT&T common stock, one-third of which will be allocated to
AT&T Communications Services Inc. common stock and two-thirds of which will be
allocated to the new Consumer Services Group tracking stock in a manner to be
determined by the AT&T Communications Services, Inc.'s board of directors. The
declaration of dividends by AT&T Communications Services Inc. and the amount
thereof will be in the discretion of its board of directors and will depend upon
its group's financial performance, the dividend policies and capital structures
of comparable companies and its group's ongoing capital needs, AT&T
Communications Services Inc.'s results of operations, financial condition, cash
requirements and future prospects and other factors deemed relevant by its board
of directors. Payment of dividends also may be restricted by loan agreements,
indentures and other transactions that AT&T Communications Services Inc. enters
into from time to time.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF AT&T COMMUNICATIONS SERVICES,
INC.'S CHARTER AND BY-LAWS
BOARD OF DIRECTORS
AT&T Communications Services, Inc.'s charter will provide that, except as
otherwise provided in any preferred stock designation relating to the rights of
the holders of any class or series of preferred stock to elect additional
directors under specified circumstances, the number of directors will be fixed
from time to time exclusively by a resolution adopted by a majority of the total
number of directors that AT&T Communications Services, Inc. would have if there
were no vacancies, or the whole board, but shall not be less than three. AT&T
Communications Services, Inc.'s directors, other than those who may be elected
by the holders of any class or series of AT&T Communications Services, Inc.
preferred stock having the right under a preferred stock designation to elect
additional directors under specified circumstances, will be classified into
three classes, as nearly equal in number as possible, one class originally to be
elected for a term expiring at the annual meeting of shareholders to be held in
2003, another class to be originally elected for a term expiring at the annual
meeting of shareholders to be held in 2004 and another class to be originally
elected for a term expiring at the annual meeting of shareholders to be held in
2005, with each director to hold office until his or her successor is duly
elected and qualified. Commencing with the 2003 annual meeting of shareholders,
directors elected to succeed directors whose terms then expire will be elected
for a term of office to expire at the third succeeding annual meeting of
shareholders after their election, with each director to hold office until such
director's successor is duly elected and qualified.
AT&T Communications Services, Inc.'s charter will provide that, except as
otherwise provided in any preferred stock designation relating to the rights of
the holders of any class or series of preferred
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stock to elect directors under specified circumstances, newly created
directorships resulting from any increase in the number of directors and any
vacancies on AT&T Communications Services, Inc.'s board of directors resulting
from death, resignation, disqualification, removal or other cause will be filled
by the affirmative vote of a majority of the remaining directors then in office,
even though less than a quorum of AT&T Communications Services, Inc.'s board of
directors, and not by the shareholders. Any director elected in accordance with
the preceding sentence will hold office for the remainder of the full term of
the class of directors in which the new directorship was created or the vacancy
occurred and until the director's successor shall have been duly elected and
qualified. No decrease in the number of directors constituting AT&T
Communications Services, Inc.'s board of directors will shorten the term of any
incumbent director. Subject to the rights of any class or series of preferred
stock having the right under a preferred stock designation to elect directors
under specified circumstances, any director may be removed from office only for
cause by the affirmative vote of the holders of at least a majority of the
voting power of all voting stock then outstanding, voting together as a single
class.
These provisions would preclude a third party from removing incumbent
directors and simultaneously gaining control of AT&T Communications Services,
Inc.'s board of directors by filling the vacancies created by removal with its
own nominees. Under the classified board provisions described above, it would
take at least two elections of directors for any individual or group to gain
control of AT&T Communications Services, Inc.'s board of directors. Accordingly,
these provisions could discourage a third party from initiating a proxy contest,
making a tender offer or otherwise attempting to gain control of AT&T
Communications Services, Inc.
NO SHAREHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS
We expect AT&T Communications Services, Inc.'s charter and by-laws to
provide that shareholders must effect any action required or permitted to be
taken at a duly called annual or special meeting of shareholders, and that those
actions may not be effected by any consent in writing by the shareholders.
Except as otherwise required by law or by any preferred stock designation,
special meetings of shareholders may be called only by a majority of the whole
board of directors or by AT&T Communications Services, Inc.'s Chairman. No
business other than that stated in the notice of meeting may be transacted at
any special meeting. These provisions may have the effect of delaying
consideration of a shareholder proposal until the next annual meeting unless a
special meeting of shareholders is called by AT&T Communications Services,
Inc.'s board of directors or AT&T Communications Services, Inc.'s Chairman.
ADVANCE NOTICE PROCEDURES
We expect AT&T Communications Services, Inc.'s by-laws to establish an
advance notice procedure for shareholders to make nominations of candidates for
election as directors or to bring other business before an annual meeting of
shareholders. These shareholder notice procedures will provide that only persons
who are nominated by AT&T Communications Services, Inc.'s board of directors, or
by a shareholder that was a shareholder of record at the time of giving notice
and has given timely written notice to AT&T Communications Services, Inc.'s
Secretary before the meeting at which directors are to be elected, will be
eligible for election as directors. These shareholder notice procedures also
will provide that, at an annual meeting, only the business as has been brought
before the annual meeting by AT&T Communications Services, Inc.'s board of
directors, or by a shareholder who has given timely written notice to AT&T
Communications Services, Inc.'s Secretary of the shareholder's intention to
bring the business before the annual meeting, may be conducted. Under these
shareholder notice procedures, for notice of shareholder nominations to be made
at, or for shareholders to bring other business before, an annual meeting, the
notice must be received by AT&T Communications Services, Inc.'s Secretary not
later than the close of business on the 90th calendar day nor earlier than the
close of business on the 120th calendar day before the first anniversary of the
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preceding year's annual meeting, except that, if the date of the annual meeting
is more than 30 calendar days before or more than 60 calendar days after this
anniversary date, notice by the shareholder to be timely must be so delivered
not earlier than the close of business on the 120th calendar day before the
annual meeting and not later than the close of business on the later of the 90th
calendar day before the annual meeting or the 10th calendar day following the
day on which public announcement of the annual meeting date is first made by
AT&T Communications Services, Inc.
Nevertheless, if the number of directors to be elected to AT&T
Communications Services, Inc.'s board of directors is increased and there is no
public announcement by AT&T Communications Services, Inc. naming all of the
nominees for director or specifying the size of AT&T Communications Services,
Inc.'s increased board of directors at least 100 calendar days before the first
anniversary of the preceding year's annual meeting, a shareholder's notice also
will be considered timely, but only with respect to nominees for any new
positions created by the increase, if it is delivered not later than the close
of business on the 10th calendar day following the day on which the public
announcement is first made by AT&T Communications Services, Inc. Under these
shareholder notice procedures, for notice of a shareholder nomination to be made
at a special meeting at which directors are to be elected to be timely, the
notice must be received by AT&T Communications Services, Inc. not earlier than
the close of business on the 120th calendar day before the special meeting and
not later than the close of business on the later of the 90th calendar day
before the special meeting or the 10th calendar day following the day on which
public announcement is first made of the date of the special meeting and of the
nominees proposed by AT&T Communications Services, Inc.'s board of directors to
be elected at the special meeting.
In addition, under these shareholder notice procedures, a shareholder's
notice to AT&T Communications Services, Inc. proposing to nominate a person for
election as a director or relating to the conduct of business other than the
nomination of directors will be required to contain some specified information.
If the chairman of a meeting determines that an individual was not nominated, or
other business was not brought before the meeting, in accordance with AT&T
Communications Services, Inc. shareholder notice procedure, the individual will
not be eligible for election as a director, or the business will not be
conducted at the meeting, as the case may be.
AMENDMENT
We expect that AT&T Communications Services, Inc.'s charter will provide
that the affirmative vote of the holders of at least 80% of AT&T Communications
Services, Inc. voting stock then outstanding, voting together as a single class,
is required to amend provisions of AT&T Communications Services, Inc.'s charter
relating to shareholder action; the number, election and tenure of directors;
the filling of vacancies; and the removal of directors. We expect AT&T
Communications Services, Inc.'s charter to further provide that the related
by-laws described above, including the shareholder notice procedure, may be
amended only by the affirmative vote of a majority of the whole board or by the
affirmative vote of the holders of at least 80% of the voting power of the
outstanding shares of voting stock, voting together as a single class. We expect
that the affirmative vote of holders of at least 50% of the voting power of
outstanding shares of voting stock, voting as a single class, will be required
to amend AT&T Communications Services, Inc.'s by-laws.
RIGHTS AGREEMENT
We expect that AT&T Communications Services, Inc.'s board of directors may
adopt a rights agreement on or before the completion of the spin-off. The rights
have anti-takeover effects. The rights will cause substantial dilution to a
person or group of persons that attempts to acquire AT&T Communications
Services, Inc. on terms not approved by AT&T Communications Services, Inc.'s
board of directors. The rights should not interfere with any merger or other
business combination approved by AT&T Communications Services, Inc.'s board of
directors before the time that a person
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or group has acquired beneficial ownership of a specified percentage of the
voting power or shares of all AT&T Communications Services, Inc. common stock
since the rights may be redeemed by AT&T Communications Services, Inc. at the
redemption price until that time.
DELAWARE BUSINESS COMBINATION STATUTE
Section 203 of the Delaware General Corporation Law provides that, subject
to some exceptions, an interested stockholder of a Delaware corporation shall
not engage in any business combination, including mergers or consolidations or
acquisitions of additional shares of the corporation, with the corporation for a
three-year period following the date that the stockholder becomes an interested
stockholder unless:
- before the date of the business combination, the corporation's board of
directors approved either the business combination or the transaction
that resulted in the stockholder becoming an interested stockholder;
- upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding some shares; or
- on or subsequent to that date, the business combination is approved by
the corporation's board of directors and authorized at an annual or
special meeting of stockholders by the affirmative vote of at least
66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
Except as otherwise specified in Section 203, an "interested stockholder"
is defined to include:
- any person that is the owner of 15% or more of the outstanding voting
stock of the corporation, or is an affiliate or associate of the
corporation and was the owner of 15% or more of the outstanding voting
stock of the corporation at any time within three years immediately
before the date of determination; and
- the affiliates and associates of the stockholder.
Under some circumstances, Section 203 makes it more difficult for a person
that would be an interested stockholder to effect various business combinations
with a corporation for a three-year period. AT&T Communications Services, Inc.
is not expected to elect to be exempt from the restrictions imposed under
Section 203. The provisions of Section 203 may encourage persons interested in
acquiring AT&T Communications Services, Inc. to negotiate in advance with AT&T
Communications Services, Inc.'s board of directors, since the stockholder
approval requirement would be avoided if a majority of the directors then in
office approves either the business combination or the transaction that results
in any person becoming an interested stockholder. These provisions also may have
the effect of preventing changes in AT&T Communications Services, Inc.'s
management. It is possible that these provisions could make it more difficult to
accomplish transactions that AT&T Communications Services, Inc. shareholders may
otherwise deem to be in their best interests.
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COMPARISON OF RIGHTS OF HOLDERS OF AT&T COMMON STOCK
AND AT&T COMMUNICATIONS SERVICES, INC. COMMON STOCK
FOLLOWING THE SPIN-OFF
If you retain your shares of AT&T common stock upon completion of the
spin-off, you will be a holder of AT&T Communications Services, Inc. common
stock as well as AT&T common stock. The rights of holders of AT&T common stock
are defined and governed by our charter and by-laws and the New York Business
Corporation Law. The rights of holders of AT&T Communications Services, Inc.
common stock will be defined and governed by AT&T Communications Services,
Inc.'s charter and by-laws and the Delaware General Corporation Law.
We summarize below the material differences between the rights of holders
of AT&T common stock and AT&T Communications Services, Inc. common stock. We
refer shareholders to the New York Business Corporation Law, Delaware General
Corporation Law, our charter and by-laws and AT&T Communications Services,
Inc.'s charter and by-laws for more information. For information about how to
obtain copies of documents, see "Other Information -- Where You Can Find More
Information."
CHARTER AMENDMENTS
Under the New York Business Corporation Law, proposed charter amendments
must be authorized by a corporation's board of directors and generally must be
approved by vote of a majority of all outstanding shares entitled to vote on the
amendment at a meeting of shareholders. The approval of a majority of the votes
of all outstanding shares of any class of capital stock of a corporation, voting
separately as a class, is required to approve an amendment, whether or not the
shareholders are otherwise entitled to vote on the amendment pursuant to the
corporation's charter, that:
- would decrease the par value of the shares of the class, change any
shares of the class into a different number of shares of the same class
or into the same or a different number of shares of a different class,
alter or change the designation, relative rights, preferences or
limitations of the shares of the class or provide new conversion rights
or the alteration of any existing conversion rights, so as to affect them
adversely;
- would exclude or limit the voting rights of the shares of the class,
except as such rights may be limited by voting rights given to new shares
then being authorized of any existing or new class or series of shares;
or
- would subordinate the rights of the shares of the class by authorizing
shares having preferences superior to the rights of the existing shares.
If an amendment would have any of the effects discussed in the last
sentence of the previous paragraph only on one or more series of any class so as
to affect them adversely, but would not affect the remainder of the class, then
only the shares of the series affected by the amendment would be entitled to
vote as a separate class on the amendment. The provisions in our charter
relating to the amendment of our charter are generally consistent with those
found in the New York Business Corporation Law.
Under the Delaware General Corporation Law, unless a corporation's charter
requires a greater vote, an amendment requires an affirmative vote of a majority
of the voting power of the outstanding stock entitled to vote on the amendment
and a majority of the voting power of the outstanding stock of any class
entitled to vote on the amendment separately as a class.
Except as described below, if an amendment would change the aggregate
number of authorized shares of any class of capital stock, the par value of the
shares of any class of capital stock, or alter or change the powers, preferences
or special rights of the shares of any class of capital stock so as to affect
them adversely, the Delaware General Corporation Law requires that the amendment
be approved by the holders of a majority of the outstanding shares of the
affected class, voting separately
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as a class, whether or not the class is entitled to vote on the amendment by the
corporation's charter. If an amendment would alter or change the powers,
preferences or special rights of one or more series of any class so as to affect
them adversely, but would not affect the remainder of the class, then only the
shares of the series so affected would be entitled to vote as a separate class
on the amendment. The authorized number of shares of any class of stock may be
increased or decreased (but may not be decreased below the number of outstanding
shares in the class) without a separate vote of stockholders of the class if so
provided in the corporation's original charter or in any amendment that created
the class of stock or that was adopted prior to the issuance of any shares of
the class, or in an amendment authorized by a majority vote of the holders of
shares of the class. We expect that AT&T Communications Services, Inc.'s charter
will include supermajority voting provisions with respect to some types of
amendments. For a discussion of the expected supermajority voting provisions in
AT&T Communications Services, Inc.'s charter, see "Description of the Capital
Stock of AT&T Communications Services, Inc. Following the
Spin-off -- Anti-Takeover Effects of Certain Provisions of AT&T Communications
Services, Inc.'s Charter and By-Laws -- Amendment."
BY-LAW AMENDMENTS
Under the New York Business Corporation Law, except as otherwise provided
in a corporation's charter, a corporation's by-laws may be amended, repealed or
adopted by a majority of the votes cast by the shares entitled to vote in the
election of any directors. When provided in a corporation's charter or a
corporation's by-law adopted by the shareholders, by-laws also may be amended,
repealed or adopted by the corporation's board of directors by the vote
specified, which vote may be greater than the vote otherwise prescribed by the
New York Business Corporation Law, but any by-law adopted by the corporation's
board of directors may be amended or repealed by the shareholders as provided by
the New York Business Corporation Law. Our by-laws may be amended by our
shareholders at any meeting of shareholders, or by our board of directors at any
meeting by a majority vote of our full board of directors or at two successive
meetings by a majority vote of our directors present, provided that a quorum is
present.
Under the Delaware General Corporation Law, the power to adopt, alter and
repeal a corporation's by-laws is vested in the stockholders, except to the
extent that the corporation's charter vests concurrent power in the
corporation's board of directors. AT&T Communications Services, Inc.'s charter
will vest the power to make, alter or repeal AT&T Communications Services,
Inc.'s by-laws with AT&T Communications Services, Inc.'s board of directors.
BUSINESS COMBINATIONS
Generally, under the Delaware General Corporation Law, the approval by the
affirmative vote of the holders of a majority of the outstanding stock or, if
the certificate of incorporation provides for more or less than one vote per
share, a majority of the votes of the outstanding stock, of a corporation
entitled to vote on the matter is required to complete a merger or consolidation
or sale, lease or exchange of all or substantially all the corporation's assets.
AT&T Communications Services Inc.'s charter will not contain a provision
related to voting on a merger or consolidation or sale, lease or exchange of all
or substantially all of the corporation's assets.
Under the New York Business Corporation Law, a plan of merger or
consolidation, a plan of share exchange or the sale, lease, exchange or other
disposition of all or substantially all of the assets of a corporation must be
approved:
- in the case of corporations like AT&T that were in existence on February
22, 1998 and that do not expressly provide in their certificates of
incorporation for majority approval of these transactions, by two-thirds
of the votes of all outstanding shares entitled to vote on the
transaction; and
- in the case of all other corporations, by a majority of the votes of all
outstanding shares entitled to vote on the transaction.
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AT&T obtained an amendment at its 2001 Annual Meeting to its charter to
provide for majority approval of these types of transactions.
The New York Business Corporation Law also provides that the holders of
shares of a class, or series of a class, of capital stock of a corporation will
be entitled to vote together and to vote as a separate class on any merger or
consolidation in which:
- the holder's shares will remain outstanding after the merger or
consolidation or will be converted into the right to receive shares of
stock of the surviving or consolidated corporation or another
corporation; and
- the charter of the surviving or consolidated corporation or other
corporation immediately after the merger or consolidation is effective:
(1) will contain any provision that is not contained in the charter of
the pre-merger corporation; and
(2) if the provision was contained in an amendment to the pre-merger
charter, the shareholders would be entitled to vote as a separate
class under the procedures of the New York Business Corporation Law
for class voting on charter amendments discussed under "-- Charter
Amendments."
STATE TAKEOVER LEGISLATION
DELAWARE BUSINESS COMBINATION LAW
For a description of the Delaware Business Combination Law, see
"Description of Capital Stock of AT&T Communications Services, Inc. Following
the Spin-off -- Delaware Business Combination Statute."
NEW YORK BUSINESS COMBINATION LAW
Section 912 of the New York Business Corporation Law prohibits any
"business combination" (defined to include a variety of transactions, including
mergers, sales or dispositions of assets, issuances of stock, liquidations,
reclassifications and benefits from the corporation, including loans or
guarantees) with, involving or proposed by any "interested shareholder" for a
period of five years after the date on which the interested shareholder became
an interested shareholder. "Interested shareholder" is defined generally as any
person who, directly or indirectly, beneficially owns 20% or more of the
outstanding voting stock of a New York corporation. These restrictions do not
apply, however, to any business combination with an interested shareholder if
the business combination, or the purchase of stock by the interested shareholder
that caused the shareholder to become an interested shareholder, was approved by
the board of directors of the New York corporation prior to the date on which
the interested shareholder became an interested shareholder. After the five-year
period, a business combination between a New York corporation and the interested
shareholder is prohibited unless either the "fair price" provisions set forth in
Section 912 are complied with or the business combination is approved by a
majority of the outstanding voting stock not beneficially owned by the
interested shareholder or its affiliates and associates.
A New York corporation may adopt an amendment to its by-laws, approved by
the affirmative vote of a majority of votes of the outstanding voting stock,
excluding the voting stock of interested shareholders and their affiliates and
associates, expressly electing not to be governed by Section 912. The amendment
will not, however, be effective until 18 months after the shareholder vote and
will not apply to any business combination with a shareholder who was an
interested shareholder on or prior to the effective date of the amendment.
AT&T's by-laws do not contain a provision electing not to be governed by Section
912.
APPRAISAL RIGHTS
Except as otherwise provided by the New York Business Corporation Law,
shareholders of a New York corporation whose shares are not listed on a national
securities exchange or designated as
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a national market system security on an inter-dealer quotation system by the
National Association of Securities Dealers, Inc., or NASD, have the right to
dissent and receive payment of the fair value of their shares, if the
corporation:
- amends or changes its charter in a manner that adversely affects their
shares;
- is involved in a merger or consolidation of a specified type; or
- sells, leases, exchanges or otherwise disposes of all or substantially
all of its assets or effects an exchange of its shares.
Under the Delaware General Corporation Law, except as otherwise provided by
the Delaware General Corporation Law, stockholders of a constituent corporation
in a merger or consolidation have the right to demand and receive payment of the
fair value of their stock in a merger or consolidation. However, except as
otherwise provided by the Delaware General Corporation Law, stockholders do not
have appraisal rights in a merger or consolidation if, among other things, their
shares are:
- listed on a national securities exchange or designated as a national
market system security on an inter-dealer quotation system by the NASD;
or
- held of record by more than 2,000 stockholders; and
- in each case, the consideration the stockholders receive for their shares
in a merger or consolidation consists solely of:
-- shares of stock of the corporation surviving or resulting from the
merger or consolidation,
-- shares of stock of any other corporation that at the effective date
of the merger or consolidation will be either listed on a national
securities exchange, or designated as a national market system
security on an inter-dealer quotation system by the NASD or held of
record by more than 2,000 stockholders,
-- cash in lieu of fractional shares of the corporations described in
the two immediately preceding points, or
-- any combination of shares of stock and cash in lieu of fractional
shares described in the three immediately preceding points.
PREEMPTIVE RIGHTS
Under the New York Business Corporation Law, except as otherwise provided
in the New York Business Corporation Law or in a corporation's charter, holders
of equity shares of any corporation incorporated prior to February 22, 1998,
like AT&T, are granted preemptive rights. Our charter provides that no holder of
AT&T common stock has any preemptive rights.
Under the Delaware General Corporation Law, a stockholder does not possess
preemptive rights unless preemptive rights are specifically granted in a
corporation's charter. AT&T Communications Services, Inc.'s charter does not
provide for preemptive rights to shareholders.
REDEMPTION OF CAPITAL STOCK
Under the New York Business Corporation Law, subject to several
limitations, a corporation's charter may provide for one or more classes or
series of shares to be redeemable at the option of the corporation, the holders
of the class or series, other persons or upon the happening of specified events
for cash, other property, debt or other securities of the same or another
corporation, at the time or times, price or prices, or rate or rates, and with
any adjustments, that are stated in the corporation's charter.
Under the Delaware General Corporation Law, subject to several limitations,
a corporation's capital stock may be made subject to redemption by the
corporation at its option, at the option of its stockholders or otherwise.
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DIVIDENDS
Under the New York Business Corporation Law, a corporation may declare and
pay dividends or make other distributions, except when it is insolvent or would
thereby be made insolvent, or when the declaration, payment or distribution
would be contrary to any restrictions contained in the corporation's charter.
Except as otherwise provided in the New York Business Corporation Law, dividends
may be declared and paid and other distributions may only be made out of
surplus, so that the net assets of the corporation remaining after the
declaration, payment or distribution must at least equal the amount of its
stated capital. A corporation may declare and pay dividends or make other
distributions, except when it is insolvent or would thereby be made insolvent,
or when the declaration, payment or distribution would be contrary to any
restrictions contained in the corporation's charter.
Under the Delaware General Corporation Law, a corporation's board of
directors may authorize the corporation to declare and pay dividends and other
distributions to its stockholders, subject to any restrictions contained in the
corporation's charter, either out of surplus, or, if there is no surplus, out of
net profits for the current or preceding fiscal year in which the dividend is
declared. However, a distribution out of net profits is not permitted if a
corporation's capital is less than the amount of capital represented by the
issued and outstanding stock of all classes having a preference upon the
distribution of assets, until the deficiency has been repaired.
SHAREHOLDER ACTION
The New York Business Corporation Law provides that shareholder action may
be taken without a meeting of shareholders upon the written consent of the
holders of all outstanding shares entitled to vote, and also allows, if a
corporation's charter permits, shareholder action without a meeting of
shareholders upon the written consent of holders of outstanding shares having at
least the minimum number of votes that would be necessary to authorize the
action at a meeting of shareholders at which all shares entitled to vote upon
the action were present and voted. Our charter does not contain this type of a
provision.
Under the Delaware General Corporation Law, unless otherwise provided in a
corporation's charter, any action required or permitted to be taken at a meeting
of stockholders may be taken without a meeting of stockholders, without prior
notice and without a vote, if a written consent setting forth the action taken
is signed by the holders of outstanding stock having at least the minimum number
of votes that would be necessary to authorize or take the action at a meeting of
shareholders at which all shares entitled to vote upon the action were present
and voted.
AT&T Communications Services, Inc.'s charter will provide that no action
required or permitted to be taken at a meeting of shareholders may be taken
without a meeting of shareholders, and the power of shareholders to consent in
writing without a meeting of shareholders is specifically denied.
SHAREHOLDER BUSINESS AND NOMINATIONS
Our by-laws require that, for a shareholder to properly bring business
before or nominate directors at an annual meeting of shareholders, the
shareholder generally must have delivered written notice to us containing the
information specified in our by-laws not less than 90 and no more than 120 days
prior to the first anniversary of the preceding year's annual meeting of
shareholders. This requirement is in addition to the requirements that a
shareholder must meet to have a shareholder proposal included in our proxy
statement under SEC Rule 14a-8.
AT&T Communications Services, Inc.'s by-laws will contain comparable
procedures for shareholder nominations of directors and shareholder proposals.
SPECIAL MEETINGS
The New York Business Corporation Law provides that, if, for a period of
one month after the date fixed by or under a corporation's by-laws for the
annual meeting of shareholders or, if no date has been so fixed, for a period of
13 months after the last annual meeting of shareholders, there is a
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failure to elect a sufficient number of directors to conduct the corporation's
business, the corporation's board of directors must call a special meeting of
shareholders for the election of directors. If the corporation's board of
directors does not call a special meeting of shareholders within two weeks after
the expiration of the 13-month period or if it is called but directors are not
elected for a period of two months after the expiration of the 13-month period,
holders of 10% of the votes of the shares entitled to vote in an election of
directors may, in writing, demand the call of a special meeting of shareholders
for the election of directors. The New York Business Corporation Law provides
that a corporation's board of directors or any person authorized by a
corporation's charter or by-laws may call a special meeting of shareholders.
Our by-laws provide that only our Chairman or our board of directors may
call a special meeting of shareholders.
The Delaware General Corporation Law provides that a special meeting of
stockholders may be called by the corporation's board of directors or by any
person or persons as may be authorized by a corporation's charter or by-laws.
AT&T Communications Services, Inc.'s by-laws will provide that special meetings
of shareholders may be called only by AT&T Communications Services, Inc.'s board
of directors.
CUMULATIVE VOTING
Under the New York Business Corporation Law, a corporation's charter may
provide that in all elections of directors each shareholder is entitled to
cumulative voting. AT&T's charter does not provide for cumulative voting in the
election of directors.
Under the Delaware General Corporation Law, a corporation's charter may
provide that at all elections of directors, or at elections held under specified
circumstances, each stockholder is entitled to cumulative voting. AT&T
Communications Services, Inc.'s charter will not contain a provision relating to
cumulative voting.
SIZE OF THE BOARD; STAGGERED BOARD
Subject to several limitations, the New York Business Corporation Law
permits the number of directors of a corporation to be fixed by the
corporation's by-laws, by action of the shareholders or by action of the
corporation's board of directors under the specific provision of a by-law
adopted by the shareholders. The number of directors may be increased or
decreased, subject to several limitations set forth in the New York Business
Corporation Law. At each annual meeting of shareholders, directors are to be
elected to hold office until the next annual meeting of shareholders, except as
described below for corporations with staggered boards. The New York Business
Corporation Law also permits a corporation's charter, or the specific provisions
of a by-law adopted by the shareholders, to provide that directors be divided
into either two, three or four classes. All classes must be as nearly equal in
number as possible. The term of office of one class of directors shall expire
each year, with the terms of office of no two classes expiring the same year.
Recent amendments to the New York Business Corporation Law delete the
requirement of at least three directors in any class. Our charter provides that
the number of directors shall be as provided for in our by-laws. Our by-laws
provide that the number of directors shall be not less than 10 and no more than
25, the exact number of directors to be fixed and determined by the vote of a
majority of our entire board of directors. We do not have a classified board of
directors. We expect that AT&T Communications Services, Inc. will have a
staggered board of directors, consisting of three classes of directors. For a
discussion of AT&T Communications Services, Inc.'s expected staggered board of
directors, and the anti-takeover effects that this could have, see "Description
of the Capital Stock of AT&T Communications Services, Inc. Following the
Spin-off -- Anti-Takeover Effects of Certain Provisions of AT&T Communications
Services, Inc.'s Charter and By-Laws -- Board of Directors."
The Delaware General Corporation Law permits a corporation's charter or
by-laws to contain provisions governing the number and terms of directors.
However, if the corporation's charter contains
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provisions fixing the number of directors, the number may not be changed without
amending the corporation's charter. The Delaware General Corporation Law also
permits a corporation's charter or a by-law adopted by the stockholders to
provide that directors be divided into one, two or three classes, with the term
of office of one class of directors to expire each year. The Delaware General
Corporation Law further permits a corporation's charter to confer upon holders
of any class or series of stock the right to elect one or more directors to
serve for the terms and have the voting powers contained in the corporation's
charter. The terms of office and voting powers of directors so elected may be
greater or less than those of any other director or class of directors.
REMOVAL OF DIRECTORS
The New York Business Corporation Law provides that any or all of a
corporation's directors may be removed for cause by a vote of its shareholders,
and, if the corporation's charter or the specific provisions of a by-law adopted
by its shareholders provides, a director may be removed for cause by action of
the corporation's board of directors. An action to procure a judgment removing a
director for cause may be brought by the Attorney General of the State of New
York or by the holders of 10% of the outstanding shares, whether or not entitled
to vote. If the corporation's charter or by-laws provide, any or all of the
directors may be removed without cause by vote of the corporation's
shareholders.
The removal of directors, with or without cause, is subject to the
following:
- in the case of a corporation having cumulative voting, no director may be
removed when the votes cast against the director's removal would be
sufficient to elect the director if voted cumulatively; and
- if a director is elected by the holders of shares of any class or series,
that director may be removed only by the applicable vote of the holders
of the shares of that class or series voting as a class.
Neither our charter nor our by-laws provide that our directors may be removed
without cause by our common shareholders or by our board of directors.
The Delaware General Corporation Law provides that directors may be removed
with or without cause by the holders of a majority in voting power of the shares
then entitled to vote at an election of directors, except that:
- members of a classified board of directors may be removed only for cause,
unless the corporation's charter provides otherwise; and
- in the case of a corporation having cumulative voting, if less than the
entire board of directors is to be removed, no director may be removed
without cause if the votes cast against the director's removal would be
sufficient to elect the director if then cumulatively voted at an
election of the entire board of directors or of the class of directors of
which the director is a part.
AT&T Communications Services, Inc.'s charter will provide that, subject to
the rights of any class or series of preferred stock having the right under a
preferred stock designation to elect directors under specified circumstances,
any director may be removed from office only for cause by the affirmative vote
of the holders of at least a majority of the voting power of all voting stock
then outstanding, voting together as a single class.
VACANCIES
Under the New York Business Corporation Law, newly created directorships
resulting from an increase in the number of directors and vacancies occurring on
a corporation's board of directors for any reason, except the removal of
directors without cause, may be filled by vote of the corporation's board of
directors. Unless a corporation's charter or by-laws provide otherwise, a
vacancy in a directorship elected by holders of a particular class of shares
shall be filled by the vote of the other
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directors elected by holders of the same class of shares. However, a
corporation's charter or by-laws may provide that these newly created
directorships or vacancies are to be filled by vote of the shareholders. Unless
a corporation's charter or the specific provisions of a by-law adopted by the
shareholders provide that the corporation's board of directors may fill
vacancies occurring on the corporation's board of directors by reason of the
removal of directors without cause, these vacancies may be filled only by vote
of the shareholders. A director elected to fill a vacancy, unless elected by the
shareholders, will hold office until the next meeting of shareholders at which
the election of directors is in the regular order of business and until his or
her successor has been elected and qualified. Notwithstanding the foregoing,
unless otherwise provided in a corporation's charter or by-laws, whenever the
holders of one or more classes or series of shares are entitled to elect one or
more directors by the corporation's charter, any vacancy that may be filled by
the corporation's board of directors or a majority of the directors then in
office shall be filled by a majority of the directors then in office that were
elected by such class or series. Our by-laws provide that any vacancy on our
board of directors may be filled by a majority vote of the remaining directors,
though less than a quorum.
Under the Delaware General Corporation Law, unless otherwise provided in a
corporation's charter or by-laws, vacancies on a corporation's board of
directors and newly created directorships resulting from an increase in the
authorized number of directors may be filled by a majority of the directors then
in office, although less than a quorum, or by the sole remaining director.
However, in the case of a classified board of directors, vacancies and newly
created directorships may be filled by a majority of the directors elected by
the class or by the sole remaining director so elected. Directors elected to
fill vacancies or newly created directorships on a classified board of directors
hold office until the next election of the class for which the directors have
been chosen, and until their successors have been duly elected and qualified. In
addition, if, at the time any vacancy or newly created directorship is filled,
the directors in office constitute less than a majority of the whole board of
directors (as constituted immediately prior to any increase), the Delaware Court
of Chancery may, upon application of any stockholder or stockholders holding at
least 10% of the total number of outstanding shares entitled to vote for the
directors, summarily order an election to fill any such vacancy or newly created
directorship, or replace the directors chosen by the directors then in office.
AT&T Communications Services, Inc.'s by-laws will provide that any
vacancies on AT&T Communications Services, Inc.'s board of directors, including
a vacancy created by an increase in the number of directors, may be filled for
the unexpired term by a majority vote of the remaining directors, though less
than a quorum.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Under the New York Business Corporation Law, a corporation may indemnify
its directors and officers that are made, or are threatened to be made, a party
to any action or proceeding, except for shareholder derivative suits, against
judgments, fines, amounts paid in settlement and reasonable expenses incurred as
a result of the action or proceeding if the director or officer acted in good
faith, for a purpose that he or she reasonably believed to be in the best
interests of the corporation or, in the case of service to another corporation
or enterprise, not opposed to the best interests of the corporation. In criminal
proceedings, in addition to the preceding conditions, the director or officer
must not have had reasonable cause to believe that his or her conduct was
unlawful. In the case of shareholder derivative suits, the corporation may
indemnify a director or officer if he or she acted in good faith for a purpose
that he or she reasonably believed to be in or, in the case of service to
another corporation or enterprise, not opposed to the best interests of the
corporation, except that, in either case, no indemnification may be made in
respect of:
- a threatened action, or an action that is settled or otherwise disposed
of; or
- any claim, issue or matter as to which the individual has been adjudged
to be liable to the corporation, unless and only to the extent that the
court in which the action was brought, or, if no action was brought, any
court of competent jurisdiction, determines, upon application, that,
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in view of all the circumstances of the case, the individual is fairly
and reasonably entitled to indemnity for that portion of the settlement
amount and expenses as the court deems proper.
Any individual who has been successful on the merits or otherwise in the
defense of a civil or criminal action or proceeding will be entitled to
indemnification. Except as provided in the preceding sentence, unless ordered by
a court pursuant to the New York Business Corporation Law, any indemnification
under the New York Business Corporation Law pursuant to the above paragraph may
be made only if authorized in the specific case and after a finding that the
director or officer met the applicable standard of conduct by the disinterested
directors if a quorum is available, or if the quorum so directs or is
unavailable, by a corporation's board of directors upon the written opinion of
independent legal counsel, or the shareholders.
A corporation may advance expenses incurred by a director or officer in
defending any action or proceeding prior to its final disposition upon receipt
of an undertaking by or on behalf of the officer or director to repay the
advance to the extent the advance exceeds the indemnification to which the
officer or director is entitled.
The indemnification described above under the New York Business Corporation
Law is not exclusive of other indemnification rights to which a director or
officer may be entitled, whether contained in a corporation's charter or
by-laws, or, when authorized by a corporation's charter or by-laws contained in:
- a resolution of shareholders,
- a resolution of directors, or
- an agreement providing for indemnification;
provided that indemnification may not be made to or on behalf of any director or
officer if a judgment or other final adjudication adverse to the director or
officer establishes that his or her acts were committed in bad faith or were the
result of active and deliberate dishonesty and were material to the cause of
action so adjudicated, or that he or she personally gained in fact a financial
profit or other advantage to which he or she was not legally entitled.
Our by-laws provide that we are authorized, to the fullest extent permitted
by applicable law, to provide indemnification and to advance expenses to our
directors and officers by resolution of shareholders or directors or by an
agreement providing for indemnification, in each case, for claims, actions,
suits or proceedings based on, arising from, relating to or by reason of the
fact that any director or officer serves or served in such capacity with AT&T,
or at our request, in any capacity with any other enterprise.
We have entered into indemnification agreements with some of our officers
and directors in accordance with our by-laws.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling AT&T under the
foregoing provisions, we have been informed that, in the opinion of the SEC,
this indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
The Delaware General Corporation Law generally permits a corporation to
indemnify its directors and officers against expenses, judgments, fines and
amounts paid in settlement actually and reasonably incurred in connection with a
third-party action, other than a derivative action, and against expenses
actually and reasonably incurred in the defense or settlement of a derivative
action, provided that there is a determination that the individual acted in good
faith and in a manner reasonably believed to be in or not opposed to the best
interests of the corporation. The determination must be made, in the case of an
individual who is a director or officer at the time of determination, by:
- a majority of the directors who are not parties to the action, suit or
proceeding, even though less than a quorum;
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- a committee of directors who are not parties to the action, suit or
proceeding, designated by a majority vote of these directors who are not
parties to the action, suit or proceeding, even though less than a
quorum;
- independent legal counsel, in a written opinion; or
- a majority vote of the stockholders, at a meeting of stockholders at
which a quorum is present.
Without court approval, however, an individual may not be indemnified in
any claim, issue or matter in a derivative action as to which the individual is
adjudged liable to the corporation. The Delaware General Corporation Law
requires indemnification of directors and officers for expenses relating to a
successful defense on the merits or otherwise of a derivative or third-party
action. The Delaware General Corporation Law permits a corporation to advance
expenses incurred in the defense of any proceeding to directors and officers
contingent upon an undertaking by or on behalf of the individuals to repay any
advances if it is determined ultimately that the individuals are not entitled to
be indemnified. Under the Delaware General Corporation Law, the rights to
indemnification and advancement of expenses provided in the law are
nonexclusive, in that, subject to public policy issues, indemnification and
advancement of expenses beyond that provided by statute may be provided by law,
agreement, or vote of stockholders, disinterested directors or otherwise.
AT&T Communications Services, Inc.'s charter and by-laws will provide that
its officers and directors (and the heirs, executors and administrators of these
officers and directors) will be indemnified to the fullest extent permitted by
Delaware law.
LIMITATION OF PERSONAL LIABILITY OF OFFICERS AND DIRECTORS
The New York Business Corporation Law provides that a corporation's charter
may contain a provision eliminating or limiting a director's personal liability
to the corporation or its shareholders for damages for any breach of duty in his
or her capacity as a director. However, a corporation's charter may not contain
a provision that eliminates or limits a director's liability:
- if a judgment or other final adjudication adverse to the director
establishes that the director's acts or omissions were in bad faith or
involved intentional misconduct or a knowing violation of law, that the
director personally gained, in fact, a financial profit or other
advantage to which the director was not legally entitled, or that the
director's acts violated certain provisions of the New York Business
Corporation Law; or
- for any act or omission that occurred before the provision limiting
director liability was adopted.
Our charter provides that directors will not be personally liable to AT&T
or any of our shareholders for damages for any breach of duty as a director.
However, a director's liability will not be eliminated or limited:
- if a judgment or other final adjudication adverse to him or her
establishes that his or her acts or omissions were in bad faith or
involved intentional misconduct or a knowing violation of law, that he or
she personally gained in fact a financial profit or other advantage to
which he or she was not legally entitled, or that his or her acts
violated Section 719 of the New York Business Corporation Law (which
includes declaration of dividends, purchase of capital stock,
distribution of assets to shareholders after dissolution of the
corporation and loans to directors to the extent contrary to New York
law); or
- for any act or omission that occurred before the provision limiting
director liability was adopted by our shareholders.
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The Delaware General Corporation Law provides that a corporation's charter
may include a provision limiting a director's personal liability to the
corporation or its stockholders for monetary damages for breach of his or her
fiduciary duty as a director. However, the charter may not contain a provision
that eliminates or limits a director's liability for:
- any breach of the director's duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of the law;
- violation of certain provisions of the Delaware General Corporation Law;
- any transaction from which the director derived an improper personal
benefit; or
- any act or omission that occurred before the provision limiting director
liability was adopted.
AT&T Communications Services, Inc.'s charter will provide that, subject to
the limitations in the preceding paragraph, no director will be personally
liable to AT&T Communications Services, Inc. or its shareholders for monetary
damages for breach of fiduciary duty as a director for any act or omission.
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APPRAISAL RIGHTS
Holders of AT&T common stock will be entitled to appraisal rights in
connection with the spin-off. Shareholders are urged to read the full text of
Section 623 and 910 of the New York Business Corporation Law, copies of which
are attached as Appendix E. A PERSON HAVING A BENEFICIAL INTEREST IN SHARES OF
AT&T COMMON STOCK THAT ARE HELD OF RECORD IN THE NAME OF ANOTHER PERSON, SUCH AS
A BROKER OR NOMINEE, MUST ACT PROMPTLY TO CAUSE THE RECORD HOLDER TO FOLLOW THE
STEPS SUMMARIZED BELOW PROPERLY AND IN A TIMELY MANNER TO PERFECT WHATEVER
APPRAISAL RIGHTS THE BENEFICIAL OWNER MAY HAVE.
THE FAILURE TO STRICTLY COMPLY WITH ANY OF THE PROCEDURAL REQUIREMENTS SET
FORTH UNDER SECTION 623 OR SECTION 910 OF THE NEW YORK BUSINESS CORPORATION LAW
WILL RESULT IN A TERMINATION OR WAIVER OF A SHAREHOLDER'S APPRAISAL RIGHTS.
THUS, THIS DISCUSSION AND APPENDIX E SHOULD BE REVIEWED CAREFULLY BY ANY HOLDER
OF AT&T COMMON STOCK THAT WISHES TO EXERCISE STATUTORY APPRAISAL RIGHTS OR THAT
WISHES TO PRESERVE THE RIGHT TO DO SO. WE URGE HOLDERS OF AT&T COMMON STOCK TO
CONSULT WITH THEIR ADVISORS SO AS TO ASSURE STRICT COMPLIANCE WITH THE APPRAISAL
RIGHTS PROCEDURES.
WHO MAY EXERCISE APPRAISAL RIGHTS
A record holder of shares of AT&T common stock as of the record date for
the special meeting that elects to dissent from the approval of the spin-off
according to specific procedures, which are described below, will be entitled,
under the provisions of Sections 623 and 910 of the New York Business
Corporation Law, to appraisal rights as an alternative to receiving shares of
common stock of AT&T Communications Services, Inc. in the spin-off. A dissenting
shareholder that properly exercises his appraisal rights will not receive any of
these shares in the spin-off, but instead can receive the judicially determined
"fair value" of his AT&T common stock prior to the spin-off in exchange for his
shares of AT&T common stock. If any dissenting shareholder improperly exercises,
effectively withdraws or loses the right to dissent, that shareholder's shares
of AT&T common stock will be treated as not having dissented and will be
entitled to receive shares of AT&T Communications Services, Inc. common stock as
a dividend.
PROCEDURE FOR EXERCISING APPRAISAL RIGHTS
Any holder of AT&T common stock that wishes to exercise his dissenters'
rights with respect to the spin-off must:
- file a written objection to the spin-off with AT&T either before the
special meeting or at the special meeting but before the vote on the
spin-off is taken, and
- not vote for the spin-off.
The written objection must include:
- a notice of his election to dissent,
- his name and residence address,
- the number of shares of AT&T common stock as to which he dissents, and
- a demand for payment of the fair value of his AT&T common stock if the
spin-off is consummated.
All notices of election to dissent must be addressed to AT&T Corp., 32
Avenue of the Americas, New York, New York 10013-2412, Attention: Vice
President -- Law and Secretary.
For purposes of exercising dissenters' rights, AT&T will deem the written
objection of a holder of AT&T common stock filed upon receipt at the above
address. However, any holder of AT&T
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common stock to whom AT&T did not properly give notice of the special meeting
does not need to make this objection. Voting or not voting on the spin-off will
not satisfy the requirement of filing a written objection.
Second, a dissenting shareholder must either vote against or not vote on
the spin-off. A shareholder voting to approve the spin-off will be deemed to
have waived his dissenters' rights. The return of a signed proxy without
instructions as to the spin-off will be deemed a vote in favor of the spin-off.
See "The Special Meeting -- Proxies; Revocability of Proxies; Cost of
Solicitation." However, provided that a written objection has been properly
filed, the failure to vote against the spin-off will not constitute a waiver of
appraisal rights.
To exercise his appraisal rights, a shareholder must dissent as to all the
shares of AT&T common stock held of record that he beneficially owns. Thus, if
the shares of AT&T common stock are owned of record by more than one person,
such as with joint ownership, the demand must be made by or on behalf of all
record owners. Similarly, to exercise appraisal rights on behalf of a beneficial
owner, a nominee or fiduciary must dissent as to all of the beneficial owner's
shares of AT&T common stock that the nominee or fiduciary has a right to
exercise dissent and holds of record. Consequently, a broker or an agent that is
a record holder of shares of AT&T common stock as a nominee must exercise
appraisal rights on behalf of the beneficial owners that desire to demand
appraisal with respect to all of the shares of AT&T common stock held for these
beneficial owners.
Within a month of filing a written objection, a dissenting shareholder must
submit the certificate or certificates representing his shares of AT&T common
stock to AT&T or its transfer agent, for a conspicuous notation on his shares of
his election to dissent, after which these certificates will be returned.
serves as the transfer agent for the shares of AT&T common stock,
and its address is . Upon AT&T's written notice, within 45 days
from the date of filing of the notice to dissent, any shareholder that fails to
submit his certificate for notation will lose his appraisal rights unless a
court, for good cause shown, otherwise directs.
Within 10 days after the date of the shareholders' vote approving the
spin-off, AT&T will give written notice of the shareholder approval by
registered mail to each holder of AT&T common stock that filed a timely, written
objection to the spin-off and to each holder that was not required to file a
written objection and that did not vote in favor of the spin-off.
DETERMINATION OF FAIR VALUE
Within 15 days after the spin-off (but in no case later than 90 days after
the shareholders' vote approving the spin-off), AT&T must make a written offer
by registered mail to each shareholder that filed an election to dissent to pay
for his shares of AT&T common stock at a specified price that AT&T considers to
be their fair value. This offer will be accompanied by a statement setting forth
the aggregate number of shares of AT&T common stock with respect to which
elections to dissent have been received and the aggregate number of holders of
these shares.
If the spin-off has been completed at the time AT&T's offer is made, the
offer will also be accompanied by (1) advance payment of 80% of the offer to
each dissenting holder that has submitted his certificate(s) to AT&T for
notation of his election to dissent, or (2) a statement that advance payment of
80% of the offer will be made promptly to each dissenting holder that has not
yet submitted his certificates for notation upon submission of his certificates.
If the spin-off has not been completed at the time of AT&T's offer, the above
advance payment or statement about advance payment will be sent to each properly
dissenting shareholder upon completion of the spin-off. The acceptance of the
advance payment does not constitute a waiver of the holder's dissenters' rights.
If the spin-off has not been completed within 90 days after the shareholders'
vote approving the spin-off, AT&T may condition its offer upon the completion of
the spin-off.
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If, within 30 days after AT&T makes its offer, AT&T and any dissenting
shareholder agree upon the price to be paid for his shares, upon the
shareholder's surrender of these share certificate(s), AT&T will pay for the
shares within the later of 60 days after the offer or the completion of the
spin-off. Dissenting shareholders that receive payment for their shares of AT&T
common stock will not receive any shares of AT&T Communications Services, Inc.
common stock in the spin-off.
If AT&T fails to make the above-described offer within the 15-day period,
or if AT&T makes an offer but cannot agree with the dissenting shareholder
within 30 days of the offer upon the price to be paid for the shareholder's
shares, AT&T must, within 20 days after the expiration of the 15- or 30-day
period, as the case may be, institute a special proceeding in the New York
Supreme Court, New York County, to determine the rights of dissenting
shareholders and fix the fair value of their shares of AT&T common stock. AT&T
currently intends to institute this proceeding within the 20-day period.
However, if AT&T does not do so, any dissenting shareholder may, within 30 days
after the expiration of the 20-day period, institute a proceeding for the same
purpose. If this proceeding is not instituted within the 30-day period,
dissenting shareholders that have not agreed with AT&T as to the price to be
paid for their shares will lose their dissenters' rights, unless the court, for
good cause shown, otherwise directs.
All dissenting shareholders, other than those that shall have agreed with
AT&T as to the price for their shares, will be made parties to these appraisal
proceedings. AT&T may request the court to determine whether any given
dissenting shareholder is entitled to receive payment for his shares. If AT&T
does not request this determination or if the court finds that any dissenting
shareholder is entitled to payment, the court will then determine the fair value
of the holder's shares of AT&T common stock as of the close of business on the
day prior to the date the shareholders approved the spin-off. In fixing the fair
value of the shares of AT&T common stock, the court will consider all relevant
factors, including the effects of the spin-off on AT&T and its shareholders and
customary methods of evaluating similar securities in comparable circumstances.
Within 60 days after the court's final determination, upon a shareholder's
surrender of his share certificates to AT&T, AT&T must pay to each dissenting
shareholder the amount found to be due such holders, with equitable interest, if
and as determined by the court, from the date the spin-off is completed.
As restricted by Section 623 of the New York Business Corporation Law, AT&T
cannot make payments with respect to appraisal demands or in settlement of any
of these demands, including interest, if it is, or doing so would render it,
unable to pay debts in the usual course of business.
COSTS OF APPRAISAL ACTION
The parties to an appraisal proceeding will bear their own costs and
expenses, including the fees and expenses of their counsel and any experts
employed by them. However, in some circumstances, the court, may, in its
discretion, apportion all or a portion of the expenses incurred by the
dissenting shareholders against AT&T any or all of the dissenting shareholders.
LOSS OF APPRAISAL RIGHTS
Any shareholder that has filed a notice of election to dissent will not,
after the completion of the spin-off, receive any shares of AT&T Communications
Services, Inc. common stock in the spin-off or have any of the rights of a
shareholder with respect to his shares of AT&T common stock, other than the
right to be paid the fair value of his shares of AT&T common stock under the New
York Business Corporation Law and any other dissenting rights to which he is
entitled to under the New York Business Corporation Law. Any notice of election
to dissent may be withdrawn by a dissenting shareholder at any time prior to his
written acceptance of an offer made by AT&T, as described above, but in no case
later than 60 days after the completion of the spin-off. If AT&T fails to make a
timely offer to pay the fair value of his share, the shareholder may withdraw
his dissent at any time
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within 60 days after AT&T makes an offer. A shareholder also may withdraw his
consent after the expiration of the above periods with the written consent of
AT&T. To be effective, withdrawal of a notice of election to dissent must be
accompanied by the return of any advance payment to the shareholder made by
AT&T. Any dissenting shareholder who withdraws his notice of election to dissent
or otherwise loses his dissenters' rights will, from then on, have only the
right to receive shares of AT&T Communications Services, Inc. common stock for
his shares of AT&T common stock.
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STOCK OWNERSHIP OF AT&T MANAGEMENT AND DIRECTORS
The following table sets forth information concerning the beneficial
ownership of AT&T common stock, AT&T Wireless Group tracking stock, Class A
Liberty Media Group tracking stock, and Class B Liberty Media Group tracking
stock as of January 1, 2001 for (a) each current director elected to our board
of directors in 2000 and each nominee for election as a director in 2001; (b)
each of the officers named in the Summary Compensation Table set forth under
"AT&T Executive Compensation," and not listed as a director; and (c) directors
and executive officers as a group. No director or executive officer owns any
AT&T preferred stock. Except as otherwise noted, the nominee or family members
had sole voting and investment power with respect to such securities. The number
of shares of Class A Liberty Media Group tracking stock and Class B Liberty
Media Group tracking stock reflects the two-for-one stock split paid on June 9,
2000.
PERCENT
BENEFICIALLY DEFERRAL OF
NAME TITLE OF STOCK CLASS OWNED PLANS(1) TOTAL CLASS
---- ------------------------------------------ ------------ ---------- ----------- -------
(A)
C. Michael
Armstrong(2)......... AT&T common stock 1,112,025(3) 15,729 1,127,754 *
AT&T Wireless Group tracking stock 47,687(3) 0 47,687 *
Class A Liberty Media Group tracking stock 0 0 0 *
Class B Liberty Media Group tracking stock 0 0 0 *
Kenneth T. Derr........ AT&T common stock 5,450 9,462 14,912 *
AT&T Wireless Group tracking stock 24,785(4) 0 24,785 *
Class A Liberty Media Group tracking stock 5,645 0 5,645 *
Class B Liberty Media Group tracking stock 0 0 0 *
M. Kathryn
Eickhoff(5).......... AT&T common stock 7,000 6,837 13,837 *
AT&T Wireless Group tracking stock 4,125(4) 0 4,125 *
Class A Liberty Media Group tracking stock 0 0 0 *
Class B Liberty Media Group tracking stock 0 0 0 *
Walter Y. Elisha....... AT&T common stock 16,643 34,503 51,146 *
AT&T Wireless Group tracking stock 13,125(4) 0 13,125 *
Class A Liberty Media Group tracking stock 0 0 0 *
Class B Liberty Media Group tracking stock 0 0 0 *
George M.C. Fisher..... AT&T common stock 15,000 10,885 25,885 *
AT&T Wireless Group tracking stock 13,125(4) 0 13,125 *
Class A Liberty Media Group tracking stock 0 0 0 *
Class B Liberty Media Group tracking stock 0 0 0 *
Donald V. Fites........ AT&T common stock 4,500 8,721 13,221 *
AT&T Wireless Group tracking stock 13,125(4) 0 13,125 *
Class A Liberty Media Group tracking stock 0 0 0 *
Class B Liberty Media Group tracking stock 0 0 0 *
Amos B. Hostetter,
Jr.(6)............... AT&T common stock 53,529,753(7) 3,652 53,533,405 1.42%
AT&T Wireless Group tracking stock 31,935(4) 0 31,935 *
Class A Liberty Media Group tracking stock 1,103,600 0 1,103,600 *
Class B Liberty Media Group tracking stock 0 0 0 *
Ralph S. Larsen........ AT&T common stock 4,800 15,039 19,839 *
AT&T Wireless Group tracking stock 8,125(4) 0 8,125 *
Class A Liberty Media Group tracking stock 0 0 0 *
Class B Liberty Media Group tracking stock 0 0 0 *
John C. Malone(8)...... AT&T common stock 26,377,706(9)(10) 2,505 26,380,211 *
AT&T Wireless Group tracking stock 27,910(4) 0 27,910 *
Class A Liberty Media Group tracking stock 6,837,578(9)(10) 0 6,837,578 *
Class B Liberty Media Group tracking stock 196,256,844(9)(10)(11) 0 196,256,844 95.17%
Donald F. McHenry...... AT&T common stock 4,863 10,852 15,715 *
AT&T Wireless Group tracking stock 5,125(4) 0 5,125 *
Class A Liberty Media Group tracking stock 0 0 0 *
Class B Liberty Media Group tracking stock 0 0 0 *
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PERCENT
BENEFICIALLY DEFERRAL OF
NAME TITLE OF STOCK CLASS OWNED PLANS(1) TOTAL CLASS
---- ------------------------------------------ ------------ ---------- ----------- -------
(A)
Louis A. Simpson....... AT&T common stock 144,869(12) 1,673 146,542 *
AT&T Wireless Group tracking stock 2,500(13) 0 2,500 *
Class A Liberty Media Group tracking stock 0 0 0 *
Class B Liberty Media Group tracking stock 0 0 0 *
Michael I. Sovern...... AT&T common stock 2,400 7,739 10,139 *
AT&T Wireless Group tracking stock 7,125(4) 0 7,125 *
Class A Liberty Media Group tracking stock 3,000 0 3,000 *
Class B Liberty Media Group tracking stock 0 0 0 *
Sanford I. Weill....... AT&T common stock 75,000 2,697 77,697 *
AT&T Wireless Group tracking stock 23,125(4) 0 23,125 *
Class A Liberty Media Group tracking stock 0 0 0 *
Class B Liberty Media Group tracking stock 0 0 0 *
Masaki Yoshikawa(14)... AT&T common stock 0 0 0 *
AT&T Wireless Group tracking stock 0 0 0 *
Class A Liberty Media Group tracking stock 0 0 0 *
Class B Liberty Media Group tracking stock 0 0 0 *
John D. Zeglis......... AT&T common stock 1,224,360(15) 206,307 1,430,667 *
AT&T Wireless Group tracking stock 478,850(15) 0 478,850 *
Class A Liberty Media Group tracking stock 0 0 0 *
Class B Liberty Media Group tracking stock 0 0 0 *
(b)
Daniel E. Somers....... AT&T common stock 321,206(16) 24,681 345,887 *
AT&T Wireless Group tracking stock 22,187(16) 0 22,187 *
Class A Liberty Media Group tracking stock 0 0 0 *
Class B Liberty Media Group tracking stock 0 0 0 *
Charles H. Noski....... AT&T common stock 618,940(17) 55,034 806,582 *
AT&T Wireless Group tracking stock 21,875(17) 0 21,875 *
Class A Liberty Media Group tracking stock 0 0 0 *
Class B Liberty Media Group tracking stock 0 0 0 *
Frank Ianna............ AT&T common stock 428,004(18) 9,204 437,209 *
AT&T Wireless Group tracking stock 22,218(18) 0 22,218 *
Class A Liberty Media Group tracking stock 0 0 0 *
Class B Liberty Media Group tracking stock 0 0 0 *
(c)
Directors and.......... AT&T common stock 6,086,155(19) 478,064 86,564,219 2.29%
Executive Officers AT&T Wireless Group tracking stock 858,695(19) 0 858,695 *
as a group Class A Liberty Media Group tracking stock 7,949,823 0 7,949,823 *
Class B Liberty Media Group tracking stock 196,256,844 0 196,256,844 95.17%
------------------------
* Less than one percent.
(1) Share units held in deferred compensation accounts that do not constitute
beneficially owned securities.
(2) Also beneficially owns 10,000 shares of Excite@Home Series A common stock.
At December 31, 2000, AT&T had an approximate 23% economic interest and a
74% voting interest in Excite@Home.
(3) Includes beneficial ownership of 903,210 shares of AT&T common stock and
47,687 shares of AT&T Wireless Group tracking stock, both of which may be
acquired within 60 days pursuant to stock options awarded under employee
incentive compensation plans.
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(4) Includes beneficial ownership of 3,125 shares that may be acquired within
60 days pursuant to stock options awarded under employee incentive
compensation plans.
(5) Includes 2,000 shares of AT&T common stock and 600 shares of AT&T Wireless
Group tracking stock held by a trust, as to which Ms. Eickhoff has
disclaimed beneficial ownership. Also beneficially owns 500 shares of
Excite@Home Series A common stock. At December 31, 2000, AT&T had an
approximate 23% economic interest and a 74% voting interest in Excite@Home.
(6) Also beneficially owns 4,216 shares of Excite@Home Series A common stock.
At December 31, 2000, AT&T had an approximate 23% economic interest and a
74% voting interest in Excite@Home.
(7) Includes 9,720,739 shares of AT&T common stock as to which Mr. Hostetter
has disclaimed beneficial ownership.
(8) Also beneficially owns 18,276 shares of Excite@Home Series A common stock.
At December 31, 2000, AT&T had an approximate 23% economic interest and a
74% voting interest in Excite@Home.
(9) Includes beneficial ownership of the following shares which may be acquired
within 60 days pursuant to stock options granted in tandem with SARs: (a)
325,794 shares of AT&T common stock; (b) 5,048,920 shares of Class A
Liberty Media Group tracking stock; and (c) 3,494,400 shares of Class B
Liberty Media Group tracking stock.
(10) Includes 1,004,620 shares of AT&T common stock, 50,904 shares of Class A
Liberty Media Group tracking stock, and 3,409,436 shares of Class B Liberty
Media Group tracking stock held by Dr. Malone's wife, Mrs. Leslie Malone,
as to which Dr. Malone has disclaimed beneficial ownership, and includes
721,564 shares of AT&T common stock held by the Malone Foundation.
(11) In connection with the TCI merger, TCI assigned to Liberty Media Group its
rights under a call agreement with Dr. Malone and Dr. Malone's wife and a
call agreement with the estate of Bob Magness, the Estate of Betsy Magness,
Gary Magness (individually and in certain representative capacities) and
Kim Magness (individually and in certain representative capacities). As a
result, Liberty Media Group has the right, under certain circumstances, to
acquire the Class B Liberty Media Group tracking stock owned by the Malones
and the Magness group. Further, in connection with the TCI merger, TCI
assigned to Liberty Media Group its rights under a shareholders agreement
with the Magness group and the Malones, pursuant to which, among other
things, Dr. Malone has an irrevocable proxy, under certain circumstances,
to vote the Class B Liberty Media Group tracking stock or any super voting
class of equity securities issued by Liberty Media Group held by the
Magness group. As a result of certain provisions of the shareholders
agreement referred to above, Dr. Malone's beneficial ownership of Class B
Liberty Media Group tracking stock includes 95,582,332 shares held by the
Magness group. See footnotes 6, 7, 8 and 9 under "Ownership of Voting
Securities in Excess of Five Percent by Beneficial Owners."
(12) Includes beneficial ownership of 62,631 shares that may be acquired within
60 days pursuant to an existing MediaOne stock option that was converted
into a fully vested option for AT&T common stock expiring on June 16, 2008
at an exercise price of $18.9446.
(13) Includes beneficial ownership of 2,500 shares that may be acquired within
60 days pursuant to stock options awarded under employee incentive
compensation plans.
(14) Effective March 21, 2001, Mr. Yoshikawa was elected to our board of
directors.
(15) Includes beneficial ownership of 1,216,217 shares of AT&T common stock and
468,750 shares of AT&T Wireless Group tracking stock, both of which shares
may be acquired within 60 days pursuant to stock options awarded under
employee incentive compensation plans.
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(16) Includes beneficial ownership of 319,500 shares of AT&T common stock and
21,187 shares of AT&T Wireless Group tracking stock, both of which shares
may be acquired within 60 days pursuant to stock options awarded under
employee incentive compensation plans.
(17) Includes beneficial ownership of 439,042 shares of AT&T common stock and
19,875 shares of AT&T Wireless Group tracking stock, both of which shares
may be acquired within 60 days pursuant to stock options awarded under
employee incentive compensation plans.
(18) Includes beneficial ownership of 415,796 shares of AT&T common stock and
17,218 shares of AT&T Wireless Group tracking stock, both of which shares
may be acquired within 60 days pursuant to stock options awarded under
employee incentive compensation plans.
(19) Includes beneficial ownership of 4,801,675 shares of AT&T common stock and
679,840 shares of AT&T Wireless Group tracking stock, both of which shares
may be acquired within 60 days pursuant to stock options awarded under
employee incentive compensation plans.
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OWNERSHIP OF VOTING SECURITIES IN EXCESS OF FIVE PERCENT
BY BENEFICIAL OWNERS
The following table sets forth information as to the beneficial ownership
of AT&T common stock, AT&T Wireless Group tracking stock, AT&T Wireless Group
preferred tracking stock, Class A Liberty Media Group tracking stock, and Class
B Liberty Media Group tracking stock by each person or group known by AT&T,
based on filings pursuant to Section 13(d) or (g) under the Exchange Act, to own
beneficially more than 5% of the outstanding shares of AT&T common stock, AT&T
Wireless Group tracking stock, Class A Liberty Media Group tracking stock or
Class B Liberty Media Group tracking stock as of January 1, 2001. The number of
shares of Class A Liberty Media Group tracking stock and Class B Liberty Media
Group tracking stock reflects the two-for-one stock split paid on June 9, 2000.
NAME AND ADDRESS OF NUMBER OF PERCENT OF
BENEFICIAL OWNER TITLE OF STOCK CLASS SHARES CLASS
------------------- -------------------------------------------- ----------- ----------
NTT DoCoMo, Inc(1) AT&T Preferred Stock 896,008 100%
Sanno Park Tower, AT&T Wireless Group tracking stock 448,004,162 55.32%
11-1, Nagata-cho 2-chome,
Chiyoda-ku
Tokyo 100-6150, Japan
AXA(2)(3) AT&T Wireless Group tracking stock 136,725,587 37.79%
9 Place Vendome Class A Liberty Media Group tracking stock 251,926,535 10.66%
75001 Paris, France
FMR Corp., AT&T Wireless Group tracking stock 30,912,803 8.54%
Edward C. Johnson 3d
and Abigail P. Johnson(4)
82 Devonshire Ave
Boston, MA 02109
Janus Capital Corporation and Class A Liberty Media Group tracking stock 120,095,676 5.08%
Thomas H. Bailey(5)
100 Fillmore Street
Denver, CO 80206
Gary Magness(6) AT&T common stock 56,211,956 1.49%
c/o Baker & Hostetler LLP Class A Liberty Media Group tracking stock 131,965,136 5.58%
Suite 1100 Class B Liberty Media Group tracking stock 93,954,636 45.56%
303 East 17th Avenue
Denver, CO 80203
Kim Magness(7) AT&T common stock 56,089,908 1.49%
c/o Baker & Hostetler LLP Class A Liberty Media Group tracking stock 131,581,360 5.57%
Suite 1100 Class B Liberty Media Group tracking stock 94,109,904 45.64%
303 East 17th Avenue
Denver, CO 80203
Estate of Bob Magness(8) AT&T common stock 40,866,614 1.09%
c/o Baker & Hostetler LLP Class A Liberty Media Group tracking stock 97,183,024 4.11%
Suite 1100 Class B Liberty Media Group tracking stock 70,850,112 34.36%
303 East 17th Avenue
Denver, CO 80203
Magness Securities, LLC(9) AT&T common stock 14,181,380 0.38%
c/o Baker & Hostetler LLP Class A Liberty Media Group tracking stock 31,128,720 1.32%
Suite 1100 Class B Liberty Media Group tracking stock 21,632,096 10.49%
303 East 17th Avenue
Denver, CO 80203
-------------------------
(1) According to a Schedule 13D filed on January 8, 2001 by Nippon Telegraph and
Telephone Corporation on its own behalf and on behalf of DoCoMo and DCM
Capital USA (UK) Limited, DoCoMo agreed to acquire shares of a new series of
AT&T Wireless Group preferred tracking stock from AT&T that are convertible
into shares of AT&T Wireless Group tracking stock and to acquire warrants to
acquire additional shares of AT&T Wireless Group preferred tracking stock
that are also convertible into shares of AT&T Wireless Group tracking stock.
Nippon owns approximately 67% of the outstanding shares of DoCoMo, which in
turn owns
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100% of the voting shares of DCM Capital. Upon finalization of the
agreement, on January 22, 2001, DoCoMo purchased 812,511.778 shares of AT&T
Wireless Group preferred tracking stock convertible into 406,255,889 shares
of AT&T Wireless Group tracking stock and 83,496.546 warrants convertible
into 41,748,273 additional shares of AT&T Wireless Group preferred tracking
stock. Nippon, DoCoMo and DCM Capital beneficially own and have shared
voting and dispositive power with respect to 896,008 shares of AT&T Wireless
Group preferred tracking stock, convertible into 448,004,162 shares of AT&T
Wireless Group tracking stock. The AT&T Wireless Group preferred tracking
stock and the warrants represent approximately 17.4% of the economic
interest in AT&T Wireless Group. DoCoMo and DCM Capital share the same
address. Nippon is located at 3-1 Otemachi 2-chome, Chiyoda-ku Tokyo
100-8116, Japan.
(2) According to a Schedule 13G/A jointly filed on February 12, 2001 by AXA
Assurances I.A.R.d. Mutuelle, or IARD, AXA Assurances Vie Mutuelle, or AAVM,
AXA Conseil Vie Assurance Mutuelle, or ACVAM, AXA Courtage Assurance
Mutuelle, or ACAM, AXA, or AXA, and AXA Financial, Inc., or AFI: (a) IARD,
AAVM, ACVAM, ACAM, and AXA each beneficially own 136,725,587 shares of AT&T
Wireless Group tracking stock and have sole voting power with respect to
54,896,309 shares, shared voting power with respect to 53,171,158 shares,
sole dispositive power with respect to 136,704,229 shares, and shared
dispositive power with respect to 21,358 shares, including the following AXA
entities having sole voting and dispositive power: AXA, 37,756 shares, AXA
Investment Managers -- France, 1,367,943 shares; AXA Investment
Managers -- Hong Kong, 322,615 shares; AXA Investment Managers -- Den Haag,
46,000 shares; AXA Investment Managers -- U.K., 3,637,338 shares; and AXA
Colonia Konzern AG (Germany), 60,000 shares; (b) AFI beneficially owns
131,253,935 of AT&T Wireless Group tracking stock, has sole voting power
with respect to 49,424,657 shares, shared voting power with respect to
53,571,158 shares, sole dispositive power with respect to 131,232,577
shares, and shared dispositive power with respect to 21,358 shares; and (c)
the following AFI subsidiaries beneficially own shares of AT&T Wireless
Group tracking stock: (i) Alliance Capital Management L.P. (130,308,035
shares, with sole voting power with respect to 49,417,757 shares, shared
voting power with respect to 52,632,158 shares, sole dispositive power with
respect to 130,286,677 shares, and shared dispositive power with respect to
21,358 shares), and (ii) The Equitable Life Insurance Society of the United
States (945,900 shares, with sole voting power with respect to 6,900 shares,
shared voting power with respect to 939,000 shares, and sole dispositive
power with respect to 945,900 shares. Addresses of the joint filers: IARD
and AAVM, 21, rue de Chateaudun, 75009 Paris France; ACVAM, 100-101 Terrasse
Boieldieu, 92042 Paris La Defense France; ACAM, 26, rue Louis le Grand,
75002 Paris France; and AFI, 1290 Avenue of the Americas, New York NY 10104.
(3) According to a Schedule 13G/A jointly filed on February 12, 2001 by IARD,
AAVM, ACVAM, ACAM, AXA and AFI: (a) IARD, AAVM, ACVAM, ACAM, and AXA each
beneficially own 251,926,535 shares of Class A Liberty Media Group tracking
stock and have sole voting power with respect to 101,846,151 shares, shared
voting power with respect to 100,945,408 shares, sole dispositive power with
respect to 251,658,296 shares, and shared dispositive power with respect to
268,239 shares, including the following AXA entities having sole voting and
dispositive power: AXA Investment Managers -- Hong Kong, 32,010 shares; AXA
Investment Managers -- U.K., 5,350 shares; AXA Investment Managers -- Den
Haag, 3,500 shares; and AXA Colonia Konzern AG (Germany), 2,000 shares; (b)
AFI beneficially owns 251,883,675 shares of Class A Liberty Media Group
tracking stock and has sole voting power with respect to 101,803,291 shares,
shared voting power with respect to 100,945,408 shares, sole dispositive
power with respect to 251,615,436 shares, and shared dispositive power with
respect to 268,239 shares; and (c) the following AFI subsidiaries
beneficially own shares of Class A Liberty Media Group tracking stock: (i)
Alliance Capital Management L.P. (249,800,504 shares, plus an additional
400,000 shares which may be acquired upon exercise of options, with sole
voting power with respect to 101,680,941 shares, shared voting power with
respect to 98,984,587 shares,
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sole dispositive power with respect to 249,532,265 shares, and shared
dispositive power with respect to 268,239 shares); and (ii) The Equitable
Life Insurance Society of the United States (2,083,171 shares, with sole
voting power with respect to 122,350 shares, shared voting power with
respect to 1,960,821 shares, and sole dispositive power with respect to
2,083,171 shares). Addresses of the joint filers: IARD and AAVM, 21, rue de
Chateaudun, 75009 Paris, France; ACVAM, 100-101 Terrasse Boieldieu, 92042
Paris La Defense, France; ACAM, 26, rue Louis le Grand, 75002 Paris, France;
and AFI, 1290 Avenue of the Americas, New York, NY 10104.
(4) According to a Schedule 13G jointly filed on February 13, 2001, FMR Corp.,
Edward C. Johnson 3d and Abigail P. Johnson beneficially own and have sole
dispositive power with respect to 30,912,803 shares of AT&T Wireless Group
tracking stock; FMR Corp. has sole voting power with respect to 3,210,513
shares; and Edward C. Johnson 3d has sole voting power with respect to
76,000 shares. The following FMR Corp. subsidiaries have beneficial
ownership: Fidelity Management & Research Company, 27,493,990 shares, with
Edward C. Johnson 3d having sole dispositive power over such shares; and
Fidelity Management Trust Company, 2,747,465 shares with Edward C. Johnson
3d and FMR Corp. each having sole dispositive over such shares and sole
voting power over 2,539,165 shares. Edward C. Johnson 3d owns 12.0% and
Abigail P. Johnson owns 24.5% of the outstanding stock of FMR Corp. The
Johnson family represents 49% of the voting power of FMR Corp. Fidelity
International Limited is the beneficial owner of 595,348 shares and the
Johnson family has voting power over 39.89% of the shares of Fidelity
International Limited.
(5) According to a Schedule 13G filed on February 15, 2001, Janus Capital
Corporation and Thomas H. Bailey beneficially own 120,095,676 shares of
Class A Liberty Media Group tracking stock and have sole voting and
dispositive power over all such shares. Thomas H. Bailey owns approximately
12.2% of Janus Capital, serves as President and Chairman of the Board of
Janus Capital, and may be deemed to have voting and dispositive power with
respect to shares held by the managed portfolios of Janus Capital.
(6) According to a Schedule 13D filed on April 10, 1999 but reflecting
subsequent two-for-one stock splits paid on June 11, 1999 and June 9, 2000,
Gary Magness beneficially owns (a) 56,211,956 shares of AT&T common stock
and has sole voting power with respect to 1,163,960 shares, shared voting
power with respect to 40,866,614 shares, sole dispositive power with respect
to 1,163,960 shares, and shared dispositive power with respect to 55,047,996
shares; (b) 131,965,136 shares of Class A Liberty Media Group tracking stock
with sole voting power with respect to 2,609,400 shares, shared voting power
with respect to 97,183,024 shares, sole dispositive power with respect to
2,609,400 shares, and shared dispositive power with respect to 129,355,736
shares; and (c) 93,954,636 shares of Class B Liberty Media Group tracking
stock with sole voting power with respect to 1,472,428 shares, shared voting
power with respect to 70,850,112 shares, sole dispositive power with respect
to 1,472,428 shares, and shared dispositive power with respect to 92,482,208
shares. Gary Magness is the holder of a 50% membership interest in Magness
Securities, LLC. The following shares beneficially owned by Magness
Securities are reflected in full in Gary Magness' share information:
14,181,380 shares of AT&T common stock, 31,128,720 shares of Class A Liberty
Media Group tracking stock, and 21,632,096 shares of Class B Liberty Media
Group tracking stock.
(7) According to a Schedule 13D filed on April 10, 1999 but reflecting
subsequent two-for-one stock splits paid on June 11, 1999 and June 9, 2000,
Kim Magness beneficially owns (a) 56,089,908 shares of AT&T common stock and
has sole voting power with respect to 15,223,292 shares, shared voting power
with respect to 40,866,614 shares, sole dispositive power with respect to
1,041,912 shares and shared dispositive power with respect to 55,047,996
shares; (b) 131,581,360 shares of Class A Liberty Media Group tracking stock
with sole voting power with respect to 34,398,336 shares, shared voting
power with respect to 97,183,024 shares, sole dispositive power with respect
to 2,225,624 shares and shared dispositive power with respect to 129,355,736
shares; and (c) 94,109,904 shares of Class B Liberty Media Group tracking
stock with sole voting power
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with respect to 23,259,792 shares, shared voting power with respect to
70,850,112 shares, sole dispositive power with respect to 1,627,696 shares,
and shared dispositive power with respect to 92,482,208 shares. Kim Magness
is the manager and a holder of a 50% membership interest in Magness
Securities. The following shares beneficially owned by Magness Securities
are reflected in full in Kim Magness' share information: 14,181,380 shares
of AT&T common stock, 31,128,720 shares of Class A Liberty Media Group
tracking stock, and 21,632,096 shares of Class B Liberty Media Group
tracking stock.
(8) According to a Schedule 13D filed on April 10, 1999 but reflecting
subsequent two-for-one stock splits paid on June 11, 1999 and June 9, 2000,
the Estate of Bob Magness beneficially owns (a) 40,866,614 shares of AT&T
common stock with sole voting power and sole dispositive power with respect
to all such shares; (b) 97,183,024 shares of Class A Liberty Media Group
tracking stock with sole voting power, and sole dispositive power with
respect to all such shares and (c) 70,850,112 shares of Class B Liberty
Media Group tracking stock with sole voting power and sole dispositive power
with respect to all such shares. Kim Magness and Gary Magness are the
co-personal representatives of the Estate of Bob Magness and share both
voting and dispositive power over the shares held by the Estate of Bob
Magness.
(9) According to a Schedule 13D filed on April 10, 1999 but reflecting
subsequent two-for-one stock splits paid on June 11, 1999 and June 9, 2000,
Magness Securities beneficially owns (a) 14,181,380 shares of AT&T common
stock with sole voting power and sole dispositive power with respect to all
such shares; (b) 31,128,720 shares of Class A Liberty Media Group tracking
stock with sole voting power and sole dispositive power with respect to all
such shares; and (c) 21,632,096 shares of Class B Liberty Media Group
tracking stock with sole voting power and sole dispositive power with
respect to all such shares. Kim Magness is the manager and a holder of a 50%
membership interest in Magness Securities. Gary Magness also is a holder of
a 50% membership interest in Magness Securities.
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BOARD COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
The Compensation and Employee Benefits Committee is composed of six
independent non-employee directors. The Compensation and Employee Benefits
Committee is responsible for setting and administering executive officer
salaries, the annual bonus, and long-term incentive plans that govern the
compensation paid to all senior managers of AT&T, except that our board of
directors (other than directors who are employees) is responsible for setting
and administering salaries and the annual bonus of the Chief Executive Officer
and the four other most highly compensated executive officers of AT&T, or the
Named Officers, named in the Summary Compensation Table included under "AT&T
Executive Compensation" based on recommendations of the Compensation and
Employee Benefits Committee. The Compensation and Employee Benefits Committee
held six meetings during 2000, including both regularly scheduled and special
meetings.
COMPENSATION PHILOSOPHY AND OBJECTIVES
AT&T operates in extremely competitive and rapidly changing industries.
AT&T believes that its executive compensation programs should be designed to
attract and retain executives who possess the high-quality skills and talents
necessary to advance or transform the business. AT&T's compensation philosophy
seeks to provide a strong link between an executive's total earnings opportunity
and the short-term and long-term performance of AT&T based on the achievement of
predetermined financial targets, operational goals, service quality, and
customer satisfaction relative to AT&T's competitors as well as an individual's
contributions.
COMPENSATION COMPONENTS AND PRACTICES
AT&T's executive compensation program consists of three key components: (1)
base salary; (2) short-term incentives, i.e., annual bonus; and (3) long-term
incentives, i.e., performance shares, stock options, and restricted stock/units.
The Compensation and Employee Benefits Committee relies on independent
compensation consultants, published compensation studies, and public company
proxy data to compare executive compensation to market data of similarly sized
companies in the telecommunications industry, as well as other industries in
which AT&T competes for products, services, and talent to develop a competitive
compensation program. The policies and the basis for determining executive
compensation and specifically that AT&T's Chairman and Chief Executive Officer,
Mr. Armstrong, are described below:
1. BASE SALARY
The Compensation and Employee Benefits Committee establishes the salary
ranges for each of the executive officer positions based upon the job
responsibilities and scope, level of expertise and experience required,
strategic impact of the position, overall business performance, and individual
contributions, as well as competitive compensation of similarly positioned
executives in comparable companies. Surveys conducted by external compensation
consultants provide the market data utilized by the Compensation and Employee
Benefits Committee annually as part of the determination of the executive
compensation structure. Annual salary adjustments recognize sustained individual
performance by the executive, with overall salary increase funding levels
sensitive to both market movement and AT&T performance.
The Compensation and Employee Benefits Committee presents the salary
recommendations for the Named Officers to the non-employee directors for
approval. These salary recommendations are based on the executive's contribution
to AT&T, experience, expertise and relative position against competitive market
rates. No individual performance matrices or pre-established weightings are
given to each factor.
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2. ANNUAL INCENTIVES
The annual bonus for AT&T's Chairman and for the other Named Officers is
(1) 0.4% of AT&T's net cash provided by operating activities for the annual
performance period, divided by the total number of Named Officers with respect
to such period, or (2) a lesser amount based on factors including AT&T's
performance relative to pre-set financial, employee, customer, and individual
performance targets applicable to bonuses set for other executive officers.
The annual bonus for other executive officers is based on AT&T's financial
and key non-financial results as measured against pre-set targets for revenue
growth, earnings as measured by operational net income, and other qualitative
measures in areas such as customer and employee satisfaction. Targets for these
measures were reviewed and approved by the Compensation and Employee Benefits
Committee.
3. LONG-TERM INCENTIVES
Long-term incentives, including stock options, long-term performance
incentive awards and restricted stock or restricted stock units provide a
mechanism to reward executive officers for maximizing long-term shareholder
value. Grants of stock options and performance shares are made annually under
the 1997 incentive plan. The size of these annual grants is based on competitive
market grant levels for similar positions. The size of previous grants and the
number of shares held by an executive generally are not considered in
determining annual award levels. Stock option awards and performance share
awards are based on creating incremental shareholder value or on the attainment
of cumulative, three-year financial targets. Grants of restricted stock or
restricted stock units are made on a selective basis for purposes of retention
or reward for outstanding performance. In total, these awards represent a
significant portion of the total compensation opportunity provided to executive
officers.
Stock ownership guidelines were established in 1998 for executives to more
closely align their interests with those of our shareholders. The guidelines
provide that, within a five-year time period, executives should attain an
investment interest in AT&T stock or stock units of one to five times their base
salary, depending upon the executive's position and scope of responsibilities.
Performance Shares. Performance shares, which are units equivalent in
value to shares of AT&T common stock, are awarded annually based on surveys of
competitive market grant levels for similar positions. The value of the payout
to each executive for the performance period is (1) 0.13% of AT&T's net cash
provided by operating activities for each year in the performance period,
divided by the total number of Named Officers receiving such payouts, or (2) a
lesser amount, based on factors that include targets for AT&T's earnings and
revenue established for performance shares for the three-year performance
period.
AT&T's performance share program was tied to three-year relative total
shareholder return as measured against a peer group of industry competitors.
Total shareholder return equals the sum of the appreciation in the price of AT&T
common stock plus dividends paid over the period. Because of the continuing
consolidation in the industry and among the peer group companies, and AT&T's
continuing transformation into an all-distance company, as well as the ongoing
difficulty of setting viable long-term financial targets for measurement
purposes, the Compensation and Employee Benefits Committee approved, in 2000, a
parallel set of measures to be used for all outstanding performance share cycles
(1998-2000, 1999-2001, and 2000-2002). The additional measurements for the
performance share program are tied to a combination of three-year cumulative
Earnings Per Share, or EPS, and revenue results against pre-established targets
and relative total shareholder return, as measured against the S&P 500 peer
group companies. Depending on the level of performance against the three-year
goals, performance share payouts can range between 0% and 200% of the target
award. No more than 100% of the target can be awarded and paid out based on
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achievement of AT&T's EPS and revenue measures. Award payouts in excess of 100%
but no greater than 200% of target can only be attained if AT&T's total
shareholder return ranks above the 75th percentile when measured against the
peer group. The performance shares are valued based on the market price of AT&T
common stock at the end of the performance period. In addition to the extra
measures, the Compensation and Employee Benefits Committee approved calculating
the performance shares based on the greater performance results of either set of
measures. Based on AT&T's performance for the period covering 1997-1999, payable
in 2000, no performance shares were earned by the executive officers as reported
in the Summary Compensation Table included under "AT&T Executive Compensation."
Stock Options. Stock options are granted annually to executive officers
based on surveys of competitive grant levels for similar positions. Like
performance shares, the magnitude of the stock option awards is determined
annually by the Compensation and Employee Benefits Committee. Stock options are
granted with an exercise price equal to or greater than the fair market value of
AT&T common stock on the day of grant, and become exercisable after the
expiration of a period of time, typically between one and four years, and
continue to be exercisable until ten years from the date granted. These stock
options provide incentive for the creation of shareholder value over the long
term since the full benefit of the compensation package cannot be realized
unless AT&T common stock appreciates during the term of the option.
In 2000, AT&T completed the largest initial public offering to date and
created AT&T Wireless Group tracking stock, trading under the symbol "AWE" on
the New York Stock Exchange. In order to balance executive interests
appropriately and to reward key executives for contributing to the success of
AT&T Wireless Group, stock options in AT&T Wireless Group tracking stock were
granted to the Named Officers and other key executives of AT&T.
Restricted Stock. Restricted stock and restricted stock unit awards are
granted from time to time to executive officers, primarily for purposes of
retention. Restricted stock is subject to forfeiture and may not be disposed of
by the recipient until certain restrictions established by the Compensation and
Employee Benefits Committee lapse. Recipients of restricted stock are not
required to provide consideration other than the rendering of services or the
payment of any minimum amount required by law.
COMPENSATION FOR AT&T'S CHAIRMAN AND CHIEF EXECUTIVE OFFICER
During 2000, AT&T's most highly compensated officer was C. Michael
Armstrong, Chairman and Chief Executive Officer. Mr. Armstrong's 2000
performance was reviewed by the Compensation and Employee Benefits Committee,
discussed by the non-employee directors, and reviewed with our board of
directors. The Compensation and Employee Benefits Committee's recommendations to
our board of directors concerning the annual cash component (base salary and
annual bonus) of Mr. Armstrong's compensation and our board of directors'
approval of the annual component and his long-term component (performance shares
and stock options) were based on the considerations discussed below.
BASE SALARY
Mr. Armstrong's base salary was established at the time of his hire based
on competitive market rates for a chief executive with his experience and record
of accomplishment and, prior to 2000, had not been increased since his date of
hire. As specified in Mr. Armstrong's employment agreement, the Compensation and
Employee Benefits Committee reviews Mr. Armstrong's salary annually in
comparison with the salaries of chief executive officers of other Fortune 20
companies, industry competitors, and selected other large market capitalized
companies during its annual compensation survey and review process. Effective
March 1, 2000, Mr. Armstrong's salary was increased to $1.8
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million from $1.4 million based on the recommendation to our board of directors
by the Compensation and Employee Benefits Committee. The Compensation and
Employee Benefits Committee's recommendation was driven by several important
considerations such as the overall complexity involved in transforming AT&T to
an any-distance company, unprecedented competition in the marketplace, and the
leadership provided by Mr. Armstrong since joining AT&T.
ANNUAL BONUS
After determining the maximum award payable to Mr. Armstrong based on
AT&T's net cash provided by operating activities, the Compensation and Employee
Benefits Committee exercised its discretion in determining the actual bonus
payable based on achievement of pre-set performance targets related to revenue
growth and earnings, as well as performance goals for service quality, customer
satisfaction, and operational measures. Based on AT&T's failure to achieve
certain targeted performance against financial measures described above, and the
level of achievement on certain qualitative objectives, our board of directors
authorized a total annual bonus for Mr. Armstrong of $650,000, or 25% of his
target annual bonus. In a year that included the challenge of integrating
several major strategic acquisitions, the establishment of a joint venture with
BT, and the launch of the largest initial public offering in corporate history
with the creation of AT&T Wireless Group tracking stock, Mr. Armstrong continued
to demonstrate his vision and leadership at a time of unprecedented turmoil in
the telecommunications industry. Despite disappointing financial performance in
2000, Mr. Armstrong's leadership is critical as AT&T continues to transform
itself as a communications leader.
LONG-TERM INCENTIVES
In January 2000, our board of directors granted Mr. Armstrong an option on
419,200 shares of AT&T common stock, which becomes exercisable in 2001, 2002,
2003, and 2004. In order for Mr. Armstrong to realize the value indicated in the
Option/SAR Grants in 2000 table under "AT&T Executive Compensation," the AT&T
common stock price would produce a corresponding aggregate pre-tax gain of more
than $145 billion for AT&T's shareholders when compared to the closing price on
March 1, 2001. The Compensation and Employee Benefits Committee also granted Mr.
Armstrong 59,300 performance shares for the 2000-2002 cycle.
In recognition of the incremental responsibilities associated with AT&T
Wireless Group, our board of directors granted (in April 2000) an option on
1,237,400 shares of AT&T Wireless Group tracking stock which becomes exercisable
in 2000, 2001, 2002, and 2003. These special grants represented the projected
value of target stock option awards in AT&T Wireless Group tracking stock for
2000 and the next two performance years were awarded as an additional incentive
to ensure the success of the AT&T Wireless Group initial public offering and to
obtain a more even balance between the AT&T common stock and AT&T Wireless Group
tracking stock in Mr. Armstrong's long-term incentive portfolio.
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Section 162(m) of the Code generally disallows a tax deduction to public
companies, such as AT&T, for compensation in excess of $1 million paid to a
corporation's chief executive officer and its four other most highly compensated
executive officers. Section 162(m) provides that qualifying performance-based
compensation will not be subject to the deduction limit if certain requirements
are met. Elements of compensation under the annual bonus and long-term incentive
plans qualify for exemption from the annual limit on tax deductibility under
Section 162(m) of the Code. In addition, AT&T has a salary and incentive award
deferral plan that permits compensation deferred under the plan to be exempt
from the limit on tax deductibility.
THE COMPENSATION AND EMPLOYEE
BENEFITS COMMITTEE
George M.C. Fisher, Chairman
Kenneth T. Derr
Amos B. Hostetter, Jr.
Donald F. McHenry
Louis A. Simpson
Michael I. Sovern
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AT&T EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table reflects the cash and non-cash compensation for
services in all capacities to AT&T by those persons who were, as of December 31,
2000, the Named Officers.
LONG TERM COMPENSATION(2)
AWARDS(4)
ANNUAL COMPENSATION(2) ------------------------------------ PAYOUTS
----------------------------------------- RESTRICTED ----------
OTHER ANNUAL STOCK OPTIONS/SARS (#) LTIP
NAMED OFFICERS AND COMPENSATION(3) AWARD(S)(5) --------------------- PAYOUTS(6)
PRINCIPAL POSITION(1) YEAR SALARY ($) BONUS ($) ($) ($) AT&T WIRELESS ($)
--------------------- ---- ---------- --------- ---------------- ----------- --------- --------- ----------
C. Michael Armstrong 2000 1,700,000 650,000 737,523 0 419,200 1,237,400 0
Chairman of the 1999 1,400,000 2,258,000 683,284 0 573,410 0 0
Board and CEO 1998 1,400,000 1,900,150 507,338 0 450,000 0 0
John D. Zeglis 2000 975,000 1,075,000 922,121 0 0 2,400,000 0
Chairman & CEO 1999 850,000 1,335,400 1,199,880 6,107,250(a) 667,500 0 1,306,838
AT&T Wireless 1998 700,000 950,100 563,906 0 157,500 0 605,782
Group
Daniel E. Somers 2000 800,000 100,000 240,875 474,750(b) 235,000 271,200 0
President & CEO 1999 556,250 706,900 172,800 3,897,863(a) 546,500 0 1,062,444
AT&T Broadband 1998 500,000 542,000 71,202 0 99,000 0 730,148
Charles H. Noski 2000 730,980 233,000 591,051 0 0 271,300 0
Sr. Executive Vice 1999 0 0 0 24,405,177(c) 1,403,126 0 0
President & CFO 1998 0 0 0 0 0 0 0
Frank Ianna 2000 618,750 250,000 215,475 564,425(b) 199,100 244,100 0
Executive Vice 1999 497,250 612,900 185,414 3,897,863(a) 405,000 0 402,426
President-- 1998 414,000 540,000 105,121 0 78,000 0 228,206
AT&T Network
Services
ALL OTHER
NAMED OFFICERS AND COMPENSATION(7)
PRINCIPAL POSITION(1) ($)
--------------------- ---------------
C. Michael Armstrong 171,368
Chairman of the 275,100
Board and CEO 2,490,806
John D. Zeglis 126,855
Chairman & CEO 41,224
AT&T Wireless 47,601
Group
Daniel E. Somers 82,129
President & CEO 76,847
AT&T Broadband 65,681
Charles H. Noski 6,131,593
Sr. Executive Vice 0
President & CFO 0
Frank Ianna 80,074
Executive Vice 16,077
President-- 24,788
AT&T Network
Services
-------------------------
1. Includes AT&T's Chairman and Chief Executive Officer and the four other most
highly compensated individuals who were executive officers of AT&T at the end
of 2000, as measured by salary and bonus.
2. Compensation deferred at the election of Named Officers is included in the
category (e.g., bonus, LTIP payouts) and year it would have otherwise been
reported had it not been deferred.
3. Includes (a) payments of above-market interest on deferred compensation, (b)
dividend equivalents paid with respect to long-term incentive compensation
paid during the year, and (c) tax payment reimbursements. In addition, for
Mr. Armstrong, includes in 2000, 1999, and 1998, $55,364, $54,146, and
$32,785, respectively, for personal use of corporate aircraft and in 1998,
$14,790 for personal use of an AT&T-provided leased automobile. For Mr.
Noski, includes $69,212 for personal use of corporate aircraft in 2000.
4. All share and per share amounts have been adjusted to reflect AT&T's April
15, 1999, three-for-two stock split. All stock options awarded in 2000
include both options exercisable for AT&T common stock and AT&T Wireless
Group tracking stock.
5. (a) On January 29, 1999, Messrs. Zeglis, Somers and Ianna received a special
award of restricted stock units of 102,000; 65,100; and 65,100 units,
respectively. The value of these awards, as of the original grant date, is
reflected in the table. These units vest upon the earlier of retirement or
attainment of age 65 and carry penalties for competition and other specified
adverse activities. Dividends on the units are paid in cash to Messrs.
Zeglis, Somers, and Ianna.
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(b) On January 31, 2000, Messrs. Somers and Ianna, received a special award
of restricted stock units of 9,000 and 10,700 units, respectively. The value
of these awards, as of the original grant date, is reflected in the table.
These units vest fully on January 31, 2003. Dividends on the units are paid
in cash to Messrs. Somers and Ianna.
(c) On December 10, 1999, the Compensation and Employee Benefits Committee
granted Mr. Noski an award of 310,648 restricted shares and 117,513
restricted stock units to replace grants from Hughes Electronics Corporation
which were forfeited upon his termination from Hughes. The value of these
awards, as of the closing price on the grant date, is reflected in the
table. The vesting schedule for these grants mirrors that applicable to the
original grants from Hughes. 81,766 of the restricted shares vested October
17, 2000 and 96,274 of the restricted shares vested December 10, 2000. Of
the remaining 132,608 restricted shares, 123,816 vest on October 17, 2001
and 8,792 on October 17, 2002. The restricted stock units vested 19,899
units on February 28, 2000, 10,279 units on April 7, 2000, and 13,488 units
on May 1, 2000. Of the remaining 73,847 restricted stock units, 19,899 units
vest February 26, 2001, 10,279 units vest April 7, 2001, 13,489 units vest
May 1, 2001, 19,900 units vest February 26, 2002 and 10,280 units vest April
7, 2002. Dividends on the restricted shares and dividend equivalents on the
restricted units are paid to Mr. Noski in cash.
The aggregate number (and value) of each of the Named Officers at December
31, 2000 for outstanding restricted stock and restricted stock unit awards
was: Mr. Armstrong 352,269 ($6,098,657); Mr. Zeglis 120,000 ($2,077,500);
Mr. Somers 89,100 ($1,542,544); Mr. Noski 206,455 ($3,574,252); and Mr.
Ianna 75,800 ($1,312,288).
6. Includes distributions in 1998, and 1999 to Mr. Zeglis of performance shares
or stock units as to which three-year performance periods ended December 31,
1997, and December 31, 1998, respectively. Includes distributions in 1998
and 1999 to Messrs. Somers, and Ianna, of stock units as to which three-year
performance criteria, in recognition of AT&T's restructuring and the
difficulty of setting long-term financial targets while the restructuring
was in progress, were deemed to have been met at the target level.
7. In 2000, includes (a) AT&T contributions to savings plans (Mr. Armstrong
$6,800, Mr. Zeglis $6,800, Mr. Somers $6,800, and Mr. Ianna $6,800); (b)
dollar value of the benefit of premiums paid for universal life insurance
policies (unrelated to term insurance coverage) calculated on an actuarial
basis (Mr. Armstrong $110,267, Mr. Zeglis $92,100, Mr. Somers $59,162, Mr.
Noski $5,213, and Mr. Ianna $59,425); (c) payments equal to lost AT&T
savings match caused by Internal Revenue Service limitations (Mr. Armstrong
$49,601, Mr. Zeglis $27,944, Mr. Somers $16,167, and Mr. Ianna $13,490); (d)
temporary accommodation expenses, commutation, interest and COBRA payments
to Mr. Noski of $204,996; (e) special payments to Mr. Noski of $3,921,384 to
preserve forfeitures from his prior employer; and (f) $2,000,000 signing
bonus as described under "-- Employment Contracts and Termination of
Employment Arrangements." In addition, for Mr. Armstrong, includes a
$2,293,714 AT&T-paid premium in 1998 to purchase a split-dollar survivorship
insurance policy insuring Mr. Armstrong and his spouse, as specified in his
employment agreement, which is described under "-- Employment Contracts and
Termination of Employment Arrangements." Interest was accrued on the
$2,050,000 base amount from Mr. Armstrong's hire date of October 17, 1997
through November 6, 1998, the date of the premium payment, at the interest
rate in effect for the Senior Management Incentive Award Deferral Plan in
1998.
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AGGREGATED OPTION/STOCK APPRECIATION RIGHTS
EXERCISES IN 2000 AND YEAR-END VALUES
AT&T COMMON STOCK
EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
--------------------------- ---------------------------
NUMBER OF NUMBER OF $ VALUE OF $ VALUE OF
NUMBER OF AT&T WIRELESS AT&T WIRELESS
SHARES UNEXERCISED UNEXERCISED IN-THE-MONEY IN-THE-MONEY
ACQUIRED $ VALUE OPTIONS/SARS OPTIONS/SARS OPTIONS/SARS OPTIONS/SARS
NAME(1) ON EXERCISE REALIZED AT YEAR END AT YEAR END AT YEAR END AT YEAR END
------- ----------- ---------- ------------ ------------ ------------ ------------
C. Michael Armstrong... 0 $ 0 648,410 38,150 $ 0 $0
1,769,200 1,199,250 $ 0 $0
John D. Zeglis(2)(3)... 77,124 $4,660,561 1,202,185 375,000 $338,991 $0
720,000 2,025,000 $ 0 $0
Daniel E. Somers....... 10,000 $ 338,958 207,500 16,950 $ 0 $0
852,000 254,250 $ 0 $0
Charles H. Noski....... 0 $ 0 439,042 15,900 $ 0 $0
964,084 255,400 $ 0 $0
Frank Ianna............ 0 $ 0 315,519 13,775 $ 0 $0
630,102 230,325 $ 0 $0
-------------------------
(1) Includes AT&T's Chairman and Chief Executive Officer and the four other most
highly compensated individuals who were executive officers of AT&T at the
end of 2000, as measured by salary and bonus.
(2) A portion of the outstanding AT&T stock options for Mr. Zeglis were
converted in connection with AT&T's restructuring into a combination of
adjusted AT&T options and SARs exercisable with respect to shares of Lucent
Technologies Inc. and/or NCR Corporation. This balancing of risk and
opportunity among the three companies mirrored the impact that the
restructuring had on AT&T shareholders. The conversion was awarded to Mr.
Zeglis by virtue of his membership on the Transition Steering Committee, the
charter of which was to ensure the creation of three healthy independent
companies as a result of the restructuring. Consistent with accounting
principles governing such conversion, the adjusted options and SARs retain
the same term and vesting provision as the original options.
(3) For Mr. Zeglis, includes exercises in 2000 of Lucent SARs.
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OPTION/SAR GRANTS IN 2000
INDIVIDUAL GRANTS IN AT&T COMMON STOCK
-----------------------------------------------------------------------
NUMBER OF % OF TOTAL GRANT
SECURITIES OPTIONS/SARS DATE
UNDERLYING GRANTED TO EXERCISE OR PRESENT
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION VALUE(4)
NAME(1) GRANTED(2) FISCAL YEAR ($/SH) DATE ($)
------- ------------ ------------ ----------- ---------- ----------
C. Michael Armstrong.................... 419,200 0.56% $45.4375 2/28/10 $6,413,760
John D. Zeglis.......................... 0 0 $ 0 $ 0
Daniel E. Somers(3)..................... 81,000 0.11% $50.8750 1/31/10 $1,241,730
154,000 0.21% $45.4375 2/28/10 $2,356,200
Charles H. Noski........................ 0 0 $ 0 $ 0
Frank Ianna(3).......................... 98,000 0.13% $50.8750 1/31/10 $1,502,340
101,100 0.14% $45.4575 2/28/10 $1,546,830
-------------------------
(1) Includes AT&T's Chairman and Chief Executive Officer and the four other most
highly compensated individuals who were executive officers of AT&T at the
end of 2000, as measured by salary and bonus.
(2) Options granted for AT&T common stock become exercisable to the extent of
one-fourth of the grant on the first, second, third and fourth anniversaries
of the grant date, respectively.
(3) On January 31, 2000, Messrs. Somers and Ianna were awarded a special stock
option grant, exercisable for AT&T common stock of 81,000 and 98,000 shares,
respectively. These grants vest 50% of the shares on the first and second
anniversary dates of the grant.
(4) The Black-Scholes option pricing model was chosen to estimate the Grant Date
Present Value of the options set forth in this table. AT&T's use of this
model should not be construed as an endorsement of its accuracy of valuing
options. All stock option valuation models, including the Black-Scholes
model, require a prediction about the future movement of the stock price.
The following assumptions were made for purposes of calculating the Grant
Date Present Value on the grants awarded on January 31, 2000: an option term
of 4 years, volatility of 31.00%, dividend yield at 1.70%, and interest rate
of 6.67%. The following assumptions were made for purposes of calculating
the Grant Date Present Value on the grants awarded on February 28, 2000: an
option term of 5 years, volatility of 31.00%, dividend yield at 1.70%, and
interest rate of 6.71%. The real value of the options in this table depends
upon the actual performance of AT&T common stock during the applicable
period.
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OPTION/SAR GRANTS IN 2000
INDIVIDUAL GRANTS IN AT&T WIRELESS GROUP TRACKING STOCK
------------------------------------------------------------------------
NUMBER OF % OF TOTAL GRANT
SECURITIES OPTIONS/SARS DATE
UNDERLYING GRANTED TO EXERCISE OR PRESENT
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION VALUE(4)
NAME(1) GRANTED(2) FISCAL YEAR ($/SH) DATE ($)
------- ------------ ------------ ----------- ---------- -----------
C. Michael Armstrong(3).............. 1,084,800 1.41% 29.5000 4/27/10 $15,816,384
152,600 0.20% 29.5000 4/27/10 $ 2,224,908
John D. Zeglis(3).................... 900,000 1.17% 29.5000 4/27/10 $13,122,000
1,500,000 1.95% 29.5000 4/27/10 $21,870,000
Daniel E. Somers(3).................. 203,400 0.26% 29.5000 4/27/10 $ 2,965,572
67,800 0.09% 29.5000 4/27/10 $ 988,524
Charles H. Noski(3).................. 207,700 0.27% 29.5000 4/27/10 $ 3,028,266
63,600 0.08% 29.5000 4/27/10 $ 927,288
Frank Ianna(3)....................... 189,000 0.25% 29.5000 4/27/10 $ 2,755,620
55,100 0.07% 29.5000 4/27/10 $ 803,358
-------------------------
(1) Includes AT&T's Chairman and Chief Executive Officer and the four other most
highly compensated individuals who were executive officers of AT&T at the
end of 2000, as measured by salary and bonus.
(2) Options granted for AT&T Wireless Group tracking stock become exercisable to
the extent of 25% of the grant on the six-month anniversary of the grant
date and 6.25% on each quarter thereafter.
(3) On April 27, 2000, Messrs. Armstrong, Zeglis, Somers, Noski and Ianna were
awarded a special stock option grant, exercisable for AT&T Wireless Group
tracking stock of 1,084,800; 900,000; 203,400; 207,700; and 189,000 shares
respectively. These grants vest one-third on each of the first, second and
third anniversary dates of the grant.
(4) The Black-Scholes option pricing model was chosen to estimate the Grant Date
Present Value of the options set forth in this table. AT&T's use of this
model should not be construed as an endorsement of its accuracy of valuing
options. All stock option valuation models, including the Black-Scholes
model, require a prediction about the future movement of the stock price.
The following assumptions were made for purposes of calculating the Grant
Date Present Value: an option term of 4 years, volatility of 55.00%,
dividend yield at 0%, and interest rate of 6.56%. The real value of the
options in this table depends upon the actual performance of AT&T common
stock during the applicable period.
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LONG-TERM INCENTIVE PLANS-AWARDS IN 2000
PERFORMANCE ESTIMATED FUTURE PAYOUTS UNDER
PERIOD NON-STOCK PRICE BASED PLANS
NUMBER OF UNTIL ------------------------------
PERFORMANCE MATURATION THRESHOLD TARGET MAXIMUM
NAME(1) SHARES OR PAYOUT (#) (#)(2) (#)
------- ----------- ----------- --------- ------ -------
C. Michael Armstrong.......................... 59,300 2000-2002 14,825 59,300 118,600
John D. Zeglis................................ 0
Daniel E. Somers.............................. 21,800 2000-2002 5,450 21,800 43,600
Charles H. Noski.............................. 18,900 2000-2002 4,725 18,900 37,800
Frank Ianna................................... 14,300 2000-2002 3,575 14,300 28,600
-------------------------
(1) Includes AT&T's Chairman and Chief Executive Officer and the four other most
highly compensated individuals who were executive officers of AT&T at the
end of 2000, as measured by salary and bonus.
(2) In January 2000, the Performance Share Awards listed in the table were made.
If they remain Named Officers at December 31, 2002, the payout value of
these awards to Messrs. Armstrong, Somers, Noski, and Ianna would be (i)
0.13% of AT&T's net cash provided by operating activities for each year in
the performance period, divided by the total number of Named Officers
receiving payouts for the period ending December 31, 2002, or (ii) a lesser
amount, based on factors such as targets for AT&T's earnings, return to
equity, cash flow, and total shareholder return for the period.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
AT&T entered into an employment agreement with Mr. Armstrong dated October
17, 1997. The agreement provided for an initial base salary of $1,400,000 per
year. It also provided for a guaranteed annual incentive award for the 1998
performance year of no less than 100% of his then base salary, and for 1998 and
1999 performance shares/stock units granted under the 1997 incentive plan, a
guaranteed grant value equivalent to no less than 100% of his base salary at the
time of grant. Mr. Armstrong was eligible for annual stock option awards
commencing in 1998 in accordance with the Compensation and Employee Benefits
Committee-approved compensation structure for such years.
To address certain forfeitures experienced when Mr. Armstrong left his
previous employer, AT&T paid a premium of $2,050,000 to purchase a split-dollar
survivorship insurance policy insuring Mr. Armstrong and his spouse. Such policy
will, upon the death of the last surviving insured, provide insurance proceeds
equal to the sum of the face amount of the policy and the policy's cash value.
An amount equal to the policy face amount shall be payable to Mr. Armstrong's
beneficiaries or to a trust which may be established to own Mr. Armstrong's
interest in such policy. The balance of the proceeds will be paid to AT&T, and,
from its share of the death benefit, AT&T will pay an AT&T-paid death benefit to
Mr. Armstrong's beneficiaries equal to the death benefit received by AT&T, minus
the AT&T-paid premium. The face amount of such split-dollar survivorship
insurance policy will be determined in accordance with the underwriting
requirements of the insurance company providing such coverage based on AT&T's
premium payment of $2,050,000 and additional premium payments, if any, that Mr.
Armstrong may become eligible for under any similar program adopted by AT&T for
its senior executives and in which Mr. Armstrong elects to participate.
In accordance with his employment agreement, Mr. Armstrong also was granted
AT&T restricted stock, AT&T restricted stock units, and AT&T stock options under
the 1997 incentive plan to replace similar grants forfeited from his prior
employer and to provide strong incentives to create shareholder value for AT&T
shareholders.
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Details of these grants follow:
1. Mr. Armstrong was granted 157,995 shares of AT&T restricted stock,
of which 86,288 shares vested in 1998 and 1999. The remaining 71,707 shares
vest as follows: 27,441 shares on January 1, 2000; 16,415 shares on May 1,
2000; 12,423 shares on October 17, 2000; 3,007 shares on May 1, 2001; and
12,421 shares on October 17, 2001.
2. Mr. Armstrong also was granted 336,841 AT&T restricted stock units,
which vest on October 1, 2003, assuming continued employment, with a
guarantee that, in the event the fair market value of the AT&T shares
furnished to Mr. Armstrong on October 1, 2003 is less than $10,000,000,
such shortfall will be made up in cash by AT&T. In the event of (a) a
Change in Control (as defined) on or before April 1, 2002 and a subsequent
(within 3 years) AT&T-initiated termination for other than "cause" (as
defined) or Constructive Termination Without Cause (as defined) or (b) Mr.
Armstrong's death, special vesting rules apply.
3. Mr. Armstrong was granted an option to purchase, within ten years,
1,125,000 shares of AT&T common stock, with a purchase price of $29.6876
per share. These options vest one-third each on October 17, 2000, 2001, and
2002, based on continued employment.
As part of his employment agreement, AT&T entered into a supplemental
pension arrangement with Mr. Armstrong. Pursuant to such arrangement, Mr.
Armstrong will receive an annual benefit (as defined in the employment
agreement) commencing at his retirement at or after age 65. Such benefit will
vest 20% per year on each of the first five anniversaries of his hire, and will
be payable in actuarially-reduced amounts for retirement and commencement prior
to age 65. Pension benefits payable under this arrangement will be paid out of
AT&T's operating income, and will be offset by (1) all amounts actually received
by Mr. Armstrong under any other AT&T qualified or non-qualified retirement plan
or arrangement, and (2) the greater of (a) $655,642 or (b) the actual pension
benefits to be paid to Mr. Armstrong with respect to that year by his prior
employers under their qualified and non-qualified defined benefit plans. In
addition, Mr. Armstrong will be entitled to certain other post-retirement
benefits that generally are made available from time to time to retired
executive officers and service-pension-eligible senior managers.
Mr. Armstrong's agreement provides for certain entitlements in the event of
his termination from AT&T under specified circumstances. Pursuant to his
agreement, in the event of Mr. Armstrong's death, his beneficiaries or estate
will be entitled to his base salary through the end of his month of death, his
target annual incentive award for the year of death, a lump-sum payout at target
for each open long-term incentive program performance cycle, and payment of
survivor benefits under his supplemental pension arrangement which vests 100% at
his death. All outstanding unvested stock options will vest and together with
already vested options will be exercisable for the remainder of the original
term of each grant; restrictions on the restricted stock granted as part of his
agreement will lapse; restricted stock units granted in his agreement will be
payable in accordance with the schedule established in his Restricted Stock Unit
Award Agreement (20% to 100% of units granted will be payable, depending on the
date of death) in the event of his death prior to the vesting of such restricted
stock units on October 1, 2003.
Mr. Armstrong's agreement also provides that in the event his employment is
terminated as a result of disability (as defined), he shall be entitled to
receive disability benefits in accordance with the long-term disability program
then in effect for senior managers. In addition, base salary, annual incentive,
stock options, restricted stock, and restricted stock units shall be treated in
the same manner as described above in the case of death. Treatment of long-term
incentives will be as described above in the case of death, provided, however,
payment will be in accordance with the terms of the plan instead of a lump sum.
Pension benefits under his supplemental pension arrangement will vest and will
be offset by any AT&T-provided disability benefits.
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In the event of a termination for "cause" (as defined) or in the event of a
voluntary resignation, other than a termination due to death or disability or a
Constructive Termination (as defined) without "cause" or retirement on October
31, 2003, Mr. Armstrong will forfeit all restricted stock and restricted stock
units as to which restrictions have not lapsed, long-term incentives with
respect to uncompleted performance cycles, outstanding stock options which are
not exercisable, and any pension benefit not yet vested under his supplemental
pension arrangement. He will receive base salary through his date of
termination, and vested stock options shall remain exercisable for 90 days after
termination or until the originally scheduled expiration date, if earlier.
In the event of an AT&T-initiated termination for other than "cause" or in
the event of a Constructive Termination without "cause," neither of which follow
within three years of a Change in Control (as defined), Mr. Armstrong will be
provided the following: base salary through the date of termination, a prorated
annual incentive award at target for the year of termination, a 24-month
continuation of monthly base salary, or at his option, the lump-sum present
value of such payments (using the short-term Treasury bill rate for the month of
termination); two times the target annual incentive award for the year of
termination payable over 24 months, or at his option, the lump-sum present value
of such payments (using the short-term Treasury bill rate for the month of
termination); and payout at target for each open long-term incentive program
performance cycle in accordance with the plan or in a lump sum as described
above. In addition, all outstanding unvested stock options will vest and
together with already vested options will be exercisable for the remainder of
the original term of each grant; restrictions on the restricted stock granted as
part of his agreement will lapse; and his supplemental pension benefit shall
fully vest. For a period of 24 months following his termination, or, if earlier,
until he receives equivalent coverage and benefits from another employer, Mr.
Armstrong will be entitled to continued participation in AT&T's benefit plans
and programs.
In the event of Mr. Armstrong's retirement as of October 31, 2003, he will
be entitled to payment of his supplemental pension and will be treated in
accordance with the plans, programs, and practices applicable to retired senior
managers.
Mr. Armstrong's agreement provides that in the event of a Change in
Control, all amounts and benefits to which he is entitled but are not yet vested
(except with respect to his restricted stock unit grant which is governed by the
terms of the grant agreement) shall become fully vested. In addition, in the
event of an AT&T-initiated termination or a Constructive Termination without
"cause" following a Change in Control, he shall be entitled to the benefits
described above in connection with an AT&T-initiated termination without "cause"
or a Constructive Termination without "cause" not associated with a Change in
Control, provided, however: (1) the number of months associated with salary,
annual incentive, and benefits continuation shall be 48 months, and such amounts
will be payable as a lump sum as soon as practicable after his termination; and
(2) restricted stock units granted in his agreement will be payable in
accordance with the schedule established in his Restricted Stock Unit Award
Agreement (25% to 100% of units granted will be payable, depending on the date
of termination). In the event the payments in this paragraph are determined to
constitute a payment under Section 280G(b)(2) of the Code and such payment is
subject to an excise tax under Section 4999 of the Code, AT&T will provide Mr.
Armstrong with a tax gross-up payment to negate the excise tax.
In the event of any termination described above, Mr. Armstrong or his
estate shall also be entitled to the unpaid balance of any incentive awards for
completed performance periods, any expense reimbursements due him, and other
benefits in accordance with applicable plans and programs.
AT&T entered into an employment agreement with Mr. Somers dated as of April
1997. The agreement provided for an initial base salary of $500,000. It also
provided for a guaranteed annual
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incentive award for 1997 performance of no less than 80% of his then base salary
prorated for his partial service in 1997. Mr. Somers also was provided 17,400
performance shares covering the 1997-1999 performance period and an option to
purchase, within 10 years, up to 129,000 shares of AT&T common stock with a
purchase price of $24.0417 per share. These options vest one-third each on June
1, 1998, 1999, and 2000, based on continued employment.
To address certain forfeitures experienced when Mr. Somers left his
previous employer and to incent him to join AT&T, the agreement provided for (i)
a payment of $238,000 to replace a forfeited bonus from his prior employer; (ii)
a payment of $337,000 to replace forfeited spread on stock options of his prior
employer; (iii) a signing bonus of $200,000; and (iv) two awards each consisting
of 17,400 performance shares/stock units for the 1995-1997 and 1996-1998
performance periods, respectively.
As part of his employment agreement, AT&T entered into an arrangement with
Mr. Somers that will provide him with certain benefits in the event that he
terminates his employment after ten years of employment for any reason other
than death or AT&T-initiated termination for "cause." Pursuant to such
arrangement, he will be entitled to a death benefit of two and one-half times
base salary under the AT&T's life insurance program for senior managers and for
AT&T-sponsored medical coverage.
In the event Mr. Somers is terminated by AT&T, at any time for any reason
other than "cause" or "long-term disability" (as both terms are defined in the
agreement) or in the event of self-initiated termination by Mr. Somers for "good
reason" (as defined in the agreement) following a Change in Control (as defined
in the agreement), Mr. Somers will be provided the following: immediate vesting
and continuation of all stock options granted under the agreement as if he were
eligible for AT&T post-retirement benefits, and continuation of vesting and/or
exercisability of all long-term incentive awards granted in 1998 and later years
under the terms and conditions applicable to senior managers terminating
employment with eligibility for post-retirement benefits.
In the event Mr. Somers is terminated by AT&T at any time within five years
of his date of hire for any reason other than "cause" or "long-term disability"
or in the event of self-initiated termination by Mr. Somers for "good reason"
following a Change in Control, Mr. Somers will be provided the following: a
severance benefit, payable over 12 months, equivalent to the greater of $900,000
or 100% of the sum of his annual base salary plus target annual incentive awards
in effect at termination; a prorated target annual incentive for his year of
termination and continuation of all performance shares/stock units granted under
the agreement under the terms and conditions applicable to senior managers
terminating employment with eligibility for post-retirement benefits.
AT&T entered into an employment agreement with Mr. Noski dated December 8,
1999. The agreement provided for an initial base salary of $750,000 per year. It
also provided for a guaranteed annual incentive award for the 2000 performance
year of no less than 100% of his then base salary, three separate performance
shares/stock unit awards under the 1997 incentive plan for 20,657, 20,287, and
21,330 for performance periods ending December 31, 1999, 2000, and 2001,
respectively. Mr. Noski also was provided an option to purchase, within 10
years, 86,000 shares of AT&T common stock with a purchase price of $57.3438 per
share, and was granted 18,900 performance shares/stock units covering the
2000-2002 performance period in accordance with the Compensation and Employee
Benefits Committee-approved compensation structure for 2000. The stock options
vest in three equal annual installments, beginning December 10, 2002, based on
continued employment.
To address certain forfeitures experienced when Mr. Noski left his previous
employer and to provide him with incentive to join AT&T, the agreement provided
for (i) a special lump-sum cash payment of $1,561,250 payable within 30 days
from hire, and (ii) a signing bonus of $2,000,000, 50% paid within 30 days of
hire and the remaining 50% paid after six months from his date of hire.
In accordance with his employment agreement, Mr. Noski also was granted
AT&T restricted stock, AT&T restricted stock units, and AT&T stock options under
the 1997 incentive plan to replace
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similar grants forfeited from his prior employer and to provide strong
incentives to create shareholder value for AT&T shareholders.
Details of these grants follow:
1. To offset certain vested stock option gains forfeited by Mr. Noski
when he left his previous employer, AT&T granted him 310,648 shares of AT&T
restricted stock, of which 178,040 shares vested in 2000. The remaining
132,608 shares vest as follows: 123,816 shares on October 17, 2001 and
8,792 shares on October 17, 2002.
2. Mr. Noski also was granted 117,513 AT&T restricted stock units, of
which 43,666 vested in 2000. The remaining 73,847 stock units vest as
follows: 19,899 on February 26, 2001, 10,279 on April 7, 2001, 13,489 on
May 1, 2001, 19,900 on February 26, 2002, and 10,280 on April 7, 2002,
assuming continued employment.
3. Mr. Noski was granted an option to purchase, within 10 years,
1,317,126 shares of AT&T common stock, with a purchase price of $57.3438
per share. These options vest one-third each on December 10, 2000, 2001,
and 2002, based on continued employment.
As part of his employment agreement, Mr. Noski entered into a supplemental
pension arrangement with AT&T. Pursuant to such arrangement, Mr. Noski will
receive an annual benefit (as defined in the employment agreement) commencing at
his retirement at or after age 65. Such benefit will vest at age 57 and will be
payable in actuarially-reduced amounts for retirement and commencement prior to
age 65. Pension benefits payable under this arrangement will be paid out of
AT&T's operating income, and will be offset by all amounts actually received by
Mr. Noski under any other AT&T qualified and non-qualified retirement plan or
arrangement, and the actual pension benefits to be paid to Mr. Noski with
respect to that year by his prior employer under their qualified and
non-qualified defined benefit plans. In addition, Mr. Noski will be entitled to
certain other post-retirement benefits that generally are made available from
time to time to retired executive officers and service-pension-eligible senior
managers.
Mr. Noski's agreement provides for certain entitlements in the event of his
termination from AT&T under specified circumstances. Pursuant to his agreement,
in the event of Mr. Noski's termination resulting from death or disability, Mr.
Noski, his beneficiaries, or estate will be entitled to his target annual
incentive award for the year in which his death or disability resulted in his
termination of employment (prorated for the total period of eligibility
calculated as of his date of death or disability termination), the continuation
of the vesting and distribution of actual payout for each open long-term
incentive program performance share/stock unit cycle, and payment of survivor
benefits under his supplemental pension arrangement based on the amount of the
benefits accrued, but not vested, as of the date of termination for death or
disability. All outstanding unvested stock options will continue to vest, and
together with already vested options, will be exercisable for the remainder of
the original term of each grant; all outstanding unvested restricted stock and
restricted stock units will be payable in accordance with the schedule
established in his Restricted Stock and Restricted Stock Unit Award Agreements.
In the event of a termination for "cause" (as defined) or in the event of a
voluntary resignation, other than a termination due to death or disability or a
Good Reason termination (as defined) without "cause" or retirement based on
satisfying the age and service requirements included as termination provisions
under the plan, Mr. Noski will forfeit all restricted stock and restricted stock
units as to which restrictions have not lapsed, long-term incentives with
respect to uncompleted performance cycles, outstanding stock options which are
not exercisable, and any pension benefit not yet vested under his supplemental
pension arrangement. He will receive base salary through his date of
termination, and vested stock options shall remain exercisable for 90 days after
termination or until the originally scheduled expiration date, if earlier. In
the event Mr. Noski is precluded from
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exercising vested stock options within the 90 days due to an AT&T-prohibited
trading period, an additional 30 days after the end of the prohibited period
will be provided. Mr. Noski, to the extent not eligible for retiree medical
benefits from AT&T, will be eligible for coverage under the AT&T Separation
Medical Plan offered to certain former senior managers and will be responsible
for the annual premium for this coverage.
In the event of an AT&T-initiated termination for other than "cause" or a
Good Reason termination without "cause," Mr. Noski will be provided the
following: base salary through the date of termination, a prorated annual
incentive award at target for the year of termination, a lump sum payment equal
to two times the annual base salary and target annual incentive award for the
year of termination payable. In addition, all outstanding unvested stock options
will continue to vest, and together with already vested options, will be
exercisable for the remainder of the original term of each grant; all
outstanding unvested restricted stock, restricted stock units, and performance
share units will be payable in accordance with the schedules established in his
Restricted Stock, Restricted Stock Unit, and Performance Share Unit Award
Agreements. Mr. Noski, to the extent not eligible for retiree medical benefits
from AT&T, will be eligible for coverage under the AT&T Separation Medical Plan
offered to certain former senior managers and will be responsible for the annual
premium for this coverage.
In 1997, AT&T adopted the Special Executive Severance Plan, or Severance
Plan, for members of the Operations Team as constituted at that time and certain
members of the Senior Management Team (a total of 10 executives, seven of whom
remain with AT&T). Under the Severance Plan, if covered executives (i) are
terminated by AT&T for other than "cause" (as defined in the Severance Plan) or
(ii) self-initiate termination for "good reason" (as defined in the Severance
Plan), they will be provided a severance payment equivalent to two times the sum
of base salary plus target annual incentive in effect at termination. The
severance amount payable may be deferred for up to five years with five annual
payments thereafter and will be credited with interest based on the interest
rate formula in effect for the Senior Management Incentive Award Deferral Plan
on the Severance Plan effective date. In addition, covered executives who
terminate under the terms of the Severance Plan will be entitled to certain
other post-termination benefits that are generally made available from time to
time to retired executive officers and service-pension-eligible senior managers.
PENSION PLANS
AT&T maintains the AT&T Management Pension Plan, a non-contributory pension
plan which covers all management employees, including the Named Officers. The
normal retirement age under this plan is 65; however, retirement before age 65
can be elected under certain conditions.
The AT&T Management Pension Plan was amended in 1997 to update the adjusted
career average pay formula for computing pensions. Effective August 1, 1997, the
adjusted career average pay formula was 1.6% of the average annual pay for the
three years ending December 31, 1996, times the lesser of (a) 105% of the number
of years of service prior to January 1, 1997 or (b) the number of years of
service prior to January 1, 1997 plus one. Only the basic salary was taken into
account in the formula used to compute pension amounts for the Named Officers
and other senior managers under the adjusted career average pay formula. No
service or compensation after December 31, 1996 was used in calculating an
employee's normal retirement benefit under the adjusted career average pay
formula.
Effective January 1, 1998, the AT&T Management Pension Plan was further
amended to convert the plan to a cash balance design. Under the new design, a
hypothetical cash balance account is established for each participant for
record-keeping purposes. Each year a participant's cash balance account is
credited with (a) a pay credit based on the participant's age and eligible pay
for that year, and (b) an interest credit based on the participant's account
balance as of the end of the prior year.
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Effective January 1, 1998, an eligible participant's cash balance account
received an initial credit based on a conversion benefit equal to the
participant's normal retirement benefit under the adjusted career average pay
formula described above multiplied by a conversion factor based on the
participant's age as of December 31, 1996. The initial pay credit was made as of
January 1, 1998 based on the participant's eligible pay for 1997, and the
initial interest credit was made as of January 1, 1998 based on the conversion
benefit. Only basic salary is considered eligible pay under the cash balance
design for the Named Officers and other senior managers. Interest credits are
calculated at the effective annual rate of 7% for calendar years 1997, 1998,
1999, and 2000. Under the cash balance design, a participant's benefit is
determined by projecting interest credits to his or her cash balance account to
age 65, converting the projected cash balance account to an annuity, and
reducing that annuity for early commencement. A participant's benefit under the
plan after conversion to the cash balance design will be no less than the
benefit calculated under the career average pay formula as adjusted in 1997.
Federal laws place limitations on pensions that may be paid from the
pension trust related to the AT&T Management Pension Plan. Pension amounts based
on the AT&T Management Pension Plan formula which exceed the applicable
limitations will be paid as an operating expense.
AT&T also maintains the AT&T Non-Qualified Pension Plan. Under the plan,
annual pensions for Messrs. Armstrong, Zeglis, Somers, Ianna and Noski, and
other senior managers, are computed based on actual annual bonus awards under
the AT&T Short Term Incentive Plan. Pension benefits under this plan will
commence at the same time as benefits under the AT&T Management Pension Plan.
The annual pension amounts payable under this plan are equal to no less than the
greater of the amounts computed under the Basic Formula or Alternate Formula
which were amended in 1997 and are described below.
BASIC FORMULA
For the three-year period ending December 31, 1996, 1.6% of the average of
the actual annual bonus awards times the lesser of (a) 105% of the number of
years of service prior to January 1, 1997 or (b) the number of years of service
prior to January 1, 1997 plus one.
ALTERNATE FORMULA
The excess of (a) 1.7% of the adjusted career average pay over (b) 0.8% of
the covered compensation base times the lesser of (i) 105% of the number of
years of service prior to January 1, 1997 or (ii) the number of years of service
prior to January 1, 1997 plus one, minus the benefit calculated under the AT&T
Management Pension Plan formula (without regard to limitations imposed by the
Code). For purposes of this formula, adjusted career average pay is the average
annual compensation for the three-year period ending December 31, 1996, without
regard to the limitations imposed by the Code. The covered compensation base
used in this formula is the average of the maximum wage amount on which an
employee was liable for Social Security tax for each year beginning with 1961
and ending with 1996. In 1996, the covered compensation base was $27,600.
No service or compensation after December 31, 1996 is used to calculate an
employee's normal retirement benefit under the Basic Formula or Alternate
Formula.
Effective January 1, 1998, the AT&T Non-Qualified Pension Plan was further
amended to convert the plan to a cash balance pension design. Under the new
design, a hypothetical cash balance account is established for each participant
for record-keeping purposes. Each year a participant's cash balance account is
credited with (a) an award credit based on the participant's age and short-term
award paid in that year and (b) an interest credit based on the participant's
account balance as of the end of the prior year. Effective January 1, 1998, an
eligible participant's cash balance account
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received an initial credit based on a conversion benefit equal to the
participant's normal retirement benefit under the Basic Formula described above
multiplied by a conversion factor based on the participant's age as of December
31, 1996. The initial award credit was made as of January 1, 1998 based on the
participant's short-term award paid in 1997 and the initial interest credit was
made as of January 1, 1998 based on the conversion benefit. Interest credits are
calculated at the effective annual rate of 7% for calendar years 1997, 1998,
1999, and 2000. Under the cash balance design, a participant's benefit is
determined by projecting interest credits to his or her cash balance account to
age 65, converting the projected cash balance account to an annuity, and
reducing that annuity for early commencement in the same manner as under the
AT&T Management Pension Plan.
Senior managers, including Mr. Zeglis, and certain other management
employees who are hired at age 35 or over, are covered by a supplemental AT&T
Mid-Career Pension Plan. For qualified managers retiring with at least five
years at a senior level, the plan provides additional credits at approximately
one-half the rate in the AT&T Management Pension Plan. The number of credits is
equal to the lesser of (1) actual years of net credited service at retirement,
or (2) the employee's age at the time of hire minus 30. In addition, the AT&T
Mid-Career Pension Plan was amended to provide that liability with respect to
senior managers actively employed on January 1, 1998 be transferred to the AT&T
Non-Qualified Pension Plan and converted to cash balance as described above.
Pension amounts under the AT&T Management Pension Plan formula, the AT&T
Non-Qualified Pension Plan, or the AT&T Mid-Career Pension Plan are not subject
to reductions for Social Security Benefits or other offset amounts. If Messrs.
Armstrong, Zeglis, Somers, Ianna, and Noski continue in the positions as
previously stated and retire at the normal retirement age of 65, the estimated
annual pension amount payable under the AT&T Management Pension Plan formula and
the AT&T Non-Qualified Pension Plan would be $465,000, $1,369,700, $740,900,
$1,015,400, and $1,134,600, respectively. Amounts shown are straight life
annuity amounts not reduced by a joint and survivorship provision which is
available to these officers.
In 1997, AT&T began purchasing annuity contracts to satisfy its unfunded
obligations to retired senior managers under the AT&T Non-Qualified Pension
Plan. In the event AT&T purchases an annuity contract for any of the Named
Officers, the pension payments for such officer will vary from that set forth
above. In such instance there would be a tax gross-up payment to the officer,
and annuity benefits paid by the annuity provider will be reduced to offset the
tax gross-up payment. The after-tax pension benefit will be the same as the
after-tax benefit the participant would otherwise have received under the AT&T
Non-Qualified Pension Plan. Receipt of the annuity is contingent on the signing
of a two-year non-competition agreement which, should competitive activity occur
within the two-year period, gives AT&T the right to seek injunctive relief and
to recapture any amounts already paid out under the annuity contract.
In 1997, AT&T entered into a supplemental pension arrangement with Mr.
Zeglis. Pursuant to Mr. Zeglis's arrangement, if employment is terminated for
any reason other than (i) AT&T-initiated termination for "cause" (as defined in
the arrangement) or (ii) self-initiated termination prior to age 52 for other
than "good reason" (as defined in the arrangement), he will be entitled to the
supplemental pension. Under the supplemental pension arrangement, Mr. Zeglis is
entitled to pension benefits determined under the then-existing AT&T qualified
and non-qualified pension formulas, using January 1, 1973 as a date of hire, and
subject to a minimum amount. Pension benefits payable under this arrangement
will be paid out of AT&T's operating income, and will be offset by all amounts
actually received by Mr. Zeglis under any then-existing AT&T qualified and/or
non-qualified retirement plans. In addition, Mr. Zeglis will be entitled to
certain other post-retirement benefits that generally are made available from
time to time to retired executive officers and service-pension-eligible senior
managers. Pursuant to the supplemental pension arrangement for Mr. Zeglis, if he
continues in the position previously stated and retires at the normal retirement
age of 65, the
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estimated annual supplemental pension amount, in addition to the pension payable
under the AT&T Management Pension Plan and AT&T Non-Qualified Pension Plan
described above, would be $140,900.
In 1997, AT&T also entered into a special individual non-qualified
supplemental retirement arrangement with two executive officers including Mr.
Ianna. Under this agreement, on November 1, 1997 a deferred account, or Deferred
Account, was credited with an initial balance of two times base pay. AT&T shall
credit interest to the Deferred Account as of the end of each calendar quarter
at a rate equal to one-quarter of the average 30-Year Treasury Bond Rate in
effect for the last previous quarter. Pursuant to the arrangement, if (i)
employment is terminated by AT&T for any reason other than "cause" prior to the
vesting date or (ii) employee self-initiates termination prior to the vesting
date for "good reason" (as defined in the arrangement), he will be entitled to
the Deferred Account. The vesting date for the officer named above is the sixth
anniversary of the "effective date" (as defined in the arrangement). The
Deferred Account will be maintained as a bookkeeping account on the records of
AT&T and the named officers have no present ownership right or interest in the
Deferred Account, or in any assets of AT&T with respect thereto.
As part of his employment agreement as described above, AT&T entered into a
supplemental pension arrangement with Mr. Armstrong in 1997. Pursuant to Mr.
Armstrong's arrangement, if he continues in his position as previously stated
and retires at the normal retirement age of 65, the estimated pension amount
payable under the agreement, which supplements the annual pension amount payable
under the AT&T Management Pension Plan and the AT&T Non-Qualified Pension Plan,
would be $846,600.
As part of his employment agreement as described above, AT&T entered into a
supplemental pension arrangement with Mr. Noski in 2000. Pursuant to Mr. Noski's
arrangement, if he continues in his position as previously stated and retires at
the normal retirement age of 65, the estimated pension amount payable under the
agreement, which supplements the annual pension amount payable under the AT&T
Management Pension Plan and the AT&T Non-Qualified Pension Plan, would be
$555,100.
COMPENSATION OF DIRECTORS
In 2000, directors who were not employees received an annual cash retainer
of $45,000 and AT&T common stock units with a then-current market value of
$45,000, which were deferred automatically and credited to a portion of a
deferred compensation account, pursuant to AT&T's Deferred Compensation Plan for
Non-Employee Directors. The chairpersons of the Audit Committee, Liberty Capital
Stock Committee, Compensation and Employee Benefits Committee, Finance
Committee, and Wireless Group Capital Stock Committee each received an
additional annual retainer of $7,500. The chairperson of the Governance and
Nominating Committee received an additional annual retainer of $5,000. No fees
are paid for attendance at regularly scheduled board and committee meetings.
Directors received a fee of $1,500 for each special board or committee meeting
attended. In addition, non-employee directors received a stock option grant to
purchase 10,000 shares of AT&T Wireless Group tracking stock.
Directors may elect to defer the receipt of all or part of their cash
retainer and other compensation into the AT&T common stock portion or the cash
portion of the deferred compensation account. The AT&T common stock portion (the
value of which is measured from time to time by the market value of AT&T common
stock) is credited on each dividend payment date for AT&T common stock with a
number of deferred shares of AT&T common stock equivalent in market value to the
amount of the quarterly dividend on the shares then credited in the accounts.
The cash portion of the deferred compensation account, representing amounts
deferred prior to January 1, 2001, earns interest, compounded quarterly, at an
annual rate equal to the average interest rate for ten-year
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United States Treasury Notes for the previous quarter, plus 5%. Thereafter,
amounts deferred to the cash portion of the deferred compensation account earn
interest, compounded quarterly, at an annual rate equal to the average interest
rate for ten-year United States Treasury Notes for the previous quarter, plus
2%.
Effective December 31, 1996, AT&T terminated its Pension Plan for
Non-Employee Directors. The Pension Plan now covers only those non-employee
directors who retired prior to December 31, 1996. Benefits accrued for
then-active directors were valued and converted into a deferred annuity. AT&T
also provides non-employee directors with travel accident insurance when on AT&T
business. A non-employee director may purchase life insurance sponsored by AT&T.
AT&T will share the premium expense with the director; however, all AT&T
contributions will be returned to AT&T at the earlier of (a) the director's
death or (b) the later of age 70 or 15 years from the policy's inception. This
benefit will continue after the non-employee director's retirement from the
board.
Effective December 1997, the board adopted AT&T stock ownership targets
equal to five times the total value of the annual cash retainer and annual stock
unit amounts. Directors generally have five years to attain the ownership goal.
Ten of the non-employee directors have met their targets. Directors who are
employees of AT&T receive no compensation for serving as directors, but also
have ownership targets.
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MANAGEMENT OF GROUPS AND AT&T COMMUNICATIONS SERVICES, INC.
C. Michael Armstrong is currently Chairman of the Board and Chief Executive
Officer of AT&T. David Dorman is currently President of AT&T, with
responsibilities that include the consumer, business and network services
groups, international ventures and AT&T Labs. Betsy J. Bernard is president and
chief executive officer of our Consumer Services business. Daniel E. Somers is
president and chief executive officer of our Broadband business. We have not yet
determined who will constitute the management of AT&T Corp. or AT&T Broadband
Corp. following the spin-off, but we have no current plans to change the
existing management of AT&T or our Business Services, Consumer Services or
Broadband businesses.
OTHER MATTERS TO COME BEFORE THE SPECIAL MEETING
In addition to the matters described above, there will be an address by our
Chairman and a general discussion period during which shareholders will have an
opportunity to ask questions about the business.
In the event that any matter not described in this document may properly
come before the special meeting, or any adjournment or postponement of the
special meeting, the Proxy Committee will vote the shares represented by it in
accordance with its best judgment. At the time this proxy statement went to
press, we knew of no other matters that might be presented for shareholder
action at the special meeting.
SHAREHOLDER PROPOSALS
AT&T's 2002 annual meeting of shareholders is expected to be held in May
2002. Any AT&T shareholder that intended to submit a proposal for inclusion in
the proxy materials for AT&T's 2002 annual meeting of shareholders must have
submitted that proposal to AT&T's Vice President -- Law and Secretary by
November 25, 2001. Our by-laws require shareholders that intend to nominate
individuals for election as directors or to propose business to be considered by
shareholders at an annual meeting of shareholders, other than shareholder
proposals included in the proxy statement, give written notice to AT&T's
Secretary not less than 90 days nor more than 120 days prior to the first
anniversary of the preceding year's annual meeting. Matters to be raised by a
shareholder and nominations at AT&T's 2002 annual meeting of shareholders must
be submitted on or after January 20, 2002 but no later than February 19, 2002.
The written notice should be sent to Vice President -- Law and Secretary, AT&T
Corp., 32 Avenue of the Americas, New York, New York 10013-2412, and must
include a brief description of the business, the reasons for conducting the
business, any material interest in such business by the shareholder, the name
and address of the shareholder as they appear on AT&T's books, and the class and
number of shares of AT&T beneficially owned by the shareholder.
SEC rules set forth standards as to what shareholder proposals are required
to be included in a proxy statement for an annual meeting of shareholders.
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OTHER INFORMATION
DIRECTORS' AND OFFICERS' LIABILITY POLICY
A directors' and officers' liability policy was placed, effective July 1,
1997, with Lloyds of London and other carriers. The policy insures AT&T for
certain obligations incurred in the indemnification of its directors and
officers under New York law or under contract, and insures directors and
officers when this indemnification is not provided by AT&T. The policy premium
from July 1, 2000 through July 1, 2001 is approximately $1.1 million.
INDEPENDENT ACCOUNTANTS
The AT&T consolidated financial statements as of December 31, 2000 and 1999
and for each of the three years in the period ended December 31, 2000, included
in this proxy statement, have been audited by PricewaterhouseCoopers LLP,
independent accountants, as stated in their report.
The AT&T Wireless Group combined financial statements as of December 31,
2000 and 1999 and for each of the three years in the period ended December 31,
2000, incorporated by reference, have been audited by PricewaterhouseCoopers
LLP, independent accountants, as stated in their report.
The AT&T Broadband Group combined financial statements as of December 31,
2000 and 1999 and for each of the three years in the period ended December 31,
2000, included in this proxy statement, have been audited by
PricewaterhouseCoopers LLP, independent accountants, as stated in their report
appearing herein.
The AT&T Consumer Services Group combined financial statements as of
December 31, 2000 and 1999 and for each of the three years in the period ended
December 31, 2000, included in this proxy statement, have been audited by
PricewaterhouseCoopers LLP, independent accountants, as stated in their report
appearing herein.
The AT&T Communications Services, Inc. combined financial statements as of
December 31, 2000 and 1999 and for each of the three years in the period ended
December 31, 2000, included in this proxy statement, have been audited by
PricewaterhouseCoopers LLP, independent accountants, as stated in their report
appearing herein.
Representatives of PricewaterhouseCoopers LLP expect to be present at the
special meeting and will be available to respond to appropriate questions from
shareholders in attendance. Although these representatives have stated that they
do not intend to make any statements at the special meeting, they will have the
opportunity to do so.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements with respect to:
- AT&T's restructuring plan, including the spin-off of AT&T Communications
Services, Inc.,
- financial condition,
- results of operations,
- cash flows,
- dividends,
- financing plans,
- business strategies,
- operating efficiencies or synergies,
- budgets,
- capital and other expenditures,
- network build out and upgrade,
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- competitive positions,
- availability of capital,
- growth opportunities for existing products,
- benefits from new technologies,
- availability and deployment of new technologies,
- plans and objectives of management,
- markets for stock of AT&T, AT&T Broadband Group, AT&T Consumer Services
Group and AT&T Communications Services, Inc., and
- other matters.
Statements in this proxy statement that are not historical facts are hereby
identified as "forward-looking statements" for the purpose of the safe harbor
provided by Section 21E of the Exchange Act and Section 27A of the Securities
Act. These forward-looking statements, including, without limitation, those
relating to the future business prospects, revenues, working capital, liquidity,
capital needs, network build out, interest costs and income, in each case,
relating to AT&T, AT&T Broadband Group, AT&T Consumer Services Group, AT&T
Business Services Group and AT&T Communications Services, Inc., wherever they
occur in this document, are necessarily estimates reflecting the best judgment
of senior management and involve a number of risks and uncertainties that could
cause actual results to differ materially from those suggested by the
forward-looking statements. These forward-looking statements should, therefore,
be considered in light of various important factors, including those set forth
in this document. Important factors that could cause actual results to differ
materially from estimates or projections contained in the forward-looking
statements include, without limitation:
- the risks associated with the implementation of new business strategies,
including risks relating to the operations of new systems and
technologies, substantial required expenditures and potential
unanticipated costs, uncertainties regarding the adequacy of suppliers on
whom these groups must rely to provide both network and consumer
equipment and consumer acceptance of the products and services to be
offered,
- the risks associated with the implementation of AT&T's restructuring
plan, which is complicated and which involves a substantial number of
different transactions each with separate conditions, any or all of which
may not occur as we currently intend, or which may not occur in the
timeframe we currently expect,
- the risks associated with each of AT&T's main business units operating as
an independent entity as opposed to as part of an integrated
telecommunications provider following completion of AT&T's restructuring
plan, including the inability of these groups to rely on the financial
and operational resources of the combined company and these groups having
to provide services that were previously provided by a different part of
the combined company,
- the impact of existing and new competitors in the markets in which these
groups compete, including competitors that may offer less expensive
products and services, desirable or innovative products, technological
substitutes, or have extensive resources or better financing,
- the introduction or popularity of new products and services, including
pre-paid phone products, which could increase churn,
- the impact of oversupply of capacity resulting from excessive deployment
of network capacity,
- the ongoing global and domestic trend towards consolidation in the
telecommunications industry, which trend may have the effect of making
the competitors larger and better financed and afford these competitors
with extensive resources and greater geographic reach, allowing them to
compete more effectively,
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- the effects of vigorous competition in the markets in which these groups
operate and for each group's more valuable customers, which may decrease
prices charged, increase churn and change the group's customer mix,
profitability and average revenue per user,
- the ability to enter into agreements to provide, and the cost of entering
new markets necessary to provide, nationwide services,
- the ability to establish a significant market presence in new geographic
and service markets,
- the availability and cost of capital and the consequences of increased
leverage,
- the successful execution of plans to dispose of non-strategic assets as
part of an overall corporate deleveraging plan,
- the impact of any unusual items resulting from ongoing evaluations of the
business strategies of these groups,
- the requirements imposed on these groups or latitude allowed to
competitors by the FCC or state regulatory commissions under the
Telecommunications Act or other applicable laws and regulations,
- the risks and costs associated with the need to acquire additional
spectrum for current and future services,
- the risks associated with technological requirements, technology
substitution and changes and other technological developments,
- the results of litigation filed or to be filed against these groups,
- the possibility of one or more of the markets in which these groups
compete being impacted by changes in political, economic or other
factors, such as monetary policy, legal and regulatory changes or other
external factors over which these groups have no control,
- the risks related to AT&T's investments and joint ventures, and
- those factors listed under "Risk Factors Relating to the Tracking Stock
Amendments," "Risk Factors Relating to AT&T Broadband Group," "Risk
Factors Relating to AT&T Consumer Services Group and AT&T Business
Services Group," "Risk Factors Relating to the Spin-off of AT&T
Communications Services, Inc." and "Risk Factors Relating to AT&T's
Restructuring Plan."
The words "estimate," "project," "intend," "expect," "believe," "plan" and
similar expressions are intended to identify forward-looking statements. These
forward-looking statements are found at various places throughout this document
and throughout the other documents incorporated into this document by reference,
including, but not limited to, AT&T's 2000 Annual Report on Form 10-K, including
any amendments to the annual report. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date of
this document. AT&T undertakes no obligation to publicly release any revisions
to these forward-looking statements to reflect events or circumstances after the
date of this proxy statement or to reflect the occurrence of unanticipated
events. Moreover, in the future, AT&T, through its senior management team, may
make forward-looking statements about the matters described in this document or
other matters concerning AT&T, AT&T Broadband Group, AT&T Consumer Services
Group, AT&T Business Services Group or AT&T Communications Services, Inc.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any reports, statements or other
information, we file at the SEC's public reference room at 450 Fifth Street,
N.W., Washington, D.C. 20549. Please call the SEC at
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1-800-SEC-0330 for further information on the operation of the public reference
room. Our SEC filings also are available to the public from commercial documents
retrieval services and at the Internet world wide web site maintained by the SEC
at www.sec.gov.
The SEC allows us to "incorporate by reference" information into this proxy
statement, which means that we can disclose important information to you by
referring you to another document filed separately with the SEC. The information
incorporated by reference is deemed to be part of this proxy statement, except
for any information superseded by information contained directly in this proxy
statement. This proxy statement incorporates by reference the documents set
forth below that we have previously filed with the SEC. These documents contain
important information about us and our financial condition.
AT&T SEC FILINGS (FILE NO. 1-1105) PERIOD
---------------------------------- ------
Annual Report on Form 10-K................... Year ended December 31, 2000, filed on April
2, 2001 (as amended April 17, 2001)
Quarterly Report on Form 10-Q................ Quarter ended March 31, 2001, filed on May
15, 2001 (as amended July 3, 2001)
Current Reports on Form 8-K.................. Filed on February 16, 2001, March 1, 2001,
March 28, 2001, March 29, 2001 (as amended
April 11, 2001), April 19, 2001, April 27,
2001, May 22, 2001 and June 19, 2001
We also are incorporating by reference into this proxy statement additional
documents that may be filed with the SEC from the date of this proxy statement
to the date of the special meeting. These include periodic reports, such as
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports
on Form 8-K, as well as proxy statements. If you are a shareholder, we may have
sent you some of the documents incorporated by reference, but you can obtain any
of them through us, the SEC or the SEC's Internet world wide web site as
described above. Documents incorporated by reference are available from us
without charge, excluding all exhibits unless we have specifically incorporated
by reference such exhibits in this proxy statement. Shareholders may obtain
documents incorporated by reference in this proxy statement by requesting them
in writing or by telephone to us at the following address:
AT&T Corp.
32 Avenue of the Americas
New York, New York 10013-2412
Tel: (212) 387-5400
Attn: Office of the Corporate Secretary
If you would like to request documents from us, please do so by
, 2001 to receive them before the special meeting.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROXY STATEMENT TO VOTE ON THE MATTERS BEING CONSIDERED AT THE
SPECIAL MEETING. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION
THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS PROXY STATEMENT. THIS PROXY
STATEMENT IS DATED , 2001. YOU SHOULD NOT ASSUME THAT THE
INFORMATION CONTAINED IN THIS PROXY STATEMENT IS ACCURATE AS OF ANY DATE OTHER
THAN THAT DATE, AND THE MAILING OF THIS PROXY STATEMENT TO SHAREHOLDERS SHALL
NOT CREATE ANY IMPLICATION TO THE CONTRARY.
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APPENDIX A
FORM OF
CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION
UNDER SECTION 805 OF THE NEW YORK STATE
BUSINESS CORPORATION LAW
We, the undersigned, being a Vice President and an Assistant Secretary
respectively, of AT&T Corp., do hereby certify as follows:
FIRST: The name of the corporation is AT&T Corp.
SECOND: The Certificate of Incorporation of the corporation was filed
by the Department of State on March 3, 1885.
THIRD: (a) The Certificate of Incorporation of the corporation is
hereby amended to create one new class of common stock, AT&T Broadband
Group common stock, having the number, designation, relative rights,
preferences, and limitations as set forth herein.
(b) The Certificate of Incorporation of the corporation is hereby
amended to remove references to Wireless Group tracking stock and each
class of Liberty Media Group tracking stock and to AT&T Wireless Group
preferred tracking stock.
(c) To effect the foregoing, and certain related technical changes,
Article THIRD is hereby amended as set forth in Exhibit A hereto.
FOURTH: The manner in which the foregoing amendment of said
Certificate of Incorporation of the corporation was authorized was by the
vote of the holders of a majority of all outstanding shares of the
corporation entitled to vote thereon at a meeting of shareholders,
subsequent to the unanimous vote of our board of directors.
IN WITNESS WHEREOF, we have subscribed this document on , 2001
and do hereby affirm, under the penalties of perjury, that the statements
contained herein have been examined by us and are true and correct.
By
------------------------------------------
Name: Marilyn J. Wasser
Title: Vice President -- Law and Secretary
By
------------------------------------------
Name: Robert S. Feit
Title: Assistant Secretary
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ARTICLE THIRD
CAPITAL STOCK
If the Consumer Services charter amendment proposal is adopted, PART A of
Article THIRD is hereby amended to read in its entirety as follows:
The aggregate number of shares which the corporation is authorized to issue
is ( ) shares, consisting of one hundred million (100,000,000)
preferred shares having a par value of $1.00 per share ("Preferred Stock") and
( ) common shares, of which six billion (6,000,000,000) common shares
shall be Common Stock having a par value of $1.00 per share ("Common Stock"),
( ) common shares shall be Broadband Group Common Stock having a par
value of $ per share ("Broadband Group Common Stock") and ( )
common shares shall be Consumer Services Group Common Stock having a par value
of $ per share ("Consumer Services Group Common Stock").
If the Consumer Services charter amendment proposal is not adopted, PART A
of Article THIRD is hereby amended to read in its entirety as follows:
The aggregate number of shares which the corporation is authorized to issue
is ( ) shares, consisting of one hundred million (100,000,000)
preferred shares having a par value of $1.00 per share ("Preferred Stock") and
( ) common shares, of which six billion (6,000,000,000) common shares
shall be Common Stock having a par value of $1.00 per share ("Common Stock"),
and ( ) common shares shall be Broadband Group Common Stock having a
par value of $ per share ("Broadband Group Common Stock").
Part C of Article THIRD is hereby deleted in its entirety and reserved.
Part D of Article THIRD shall remain unchanged, except that it shall be
redesignated as Part C of Article THIRD if the Consumer Services charter
amendment proposal is not adopted. Part B of Article THIRD is hereby amended to
read in its entirety as follows (with brackets removed if the Consumer Services
charter amendment proposal is adopted, and with bracketed references to the
Consumer Services charter amendment deleted and appropriate grammatical and
section reference changes made if the Consumer Services charter amendment
proposal is not adopted):
PART B -- COMMON STOCK AND BROADBAND GROUP COMMON STOCK
1. Voting Rights.
(a) Subject to paragraph 1(c) of this Part B of this Article Third, holders
of Common Stock shall be entitled to one vote for each share of such stock held
and holders of Broadband Group Common Stock shall be entitled to of a vote
per share of such stock held, on all matters presented to such shareholders.
(b) Except as may otherwise be required by the laws of the State of New
York or, with respect to additional or special voting rights (which may include,
without limitation, rights of any such holders of any such class or series to
elect one or more directors voting separately as a class) of any class or series
of Preferred Stock or any other class of common shares, except as may be
required by this Certificate of Incorporation of the corporation, as the same
may be amended from time to time (this "Certificate") (including the terms of
[the Consumer Services Group Common Stock,] any class or series of Preferred
Stock and any resolution or resolutions providing for the establishment of such
class or series pursuant to authority vested in the Board of Directors by this
Certificate and the terms of any other class of common shares), the holders of
shares of Common Stock, the holders of shares of Broadband Group Common Stock,
[the holders of shares of Consumer Services Group Common Stock,] the holders of
shares of each other class of common shares, if any, entitled to vote thereon,
and the holders of shares of each class or series of Preferred Stock, if any,
entitled to vote thereon, shall vote as one class with respect to all matters to
be voted on by shareholders of the
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corporation, and no separate vote or consent of the holders of shares of Common
Stock, the holders of shares of Broadband Group Common Stock, [the holders of
shares of Consumer Services Group Common Stock] or the holders of shares of any
such class of common shares or any such class or series of Preferred Stock shall
be required for the approval of any such matter[, except, in the case of
Consumer Services Group Common Stock, under the circumstances described in
paragraph 1(b) of Part C of this Article Third].
(c) If the corporation shall in any manner subdivide (by stock split or
otherwise) or combine (by reverse stock split or otherwise) the outstanding
shares of Common Stock, Broadband Group Common Stock [or Consumer Services Group
Common Stock], or pay a stock dividend in shares of any class to holders of that
class or shall otherwise effect a share distribution (as defined in paragraph 3
of this Part B of this Article Third) of Common Stock, Broadband Group Common
Stock [or Consumer Services Group Common Stock,] the per share voting rights of
Common Stock and Broadband Group Common Stock specified in paragraph 1(a) of
this Part B of this Article Third [and/or the per share voting rights of
Consumer Services Group Common Stock specified in paragraph 1(a) of Part C of
this Article Third] shall be appropriately adjusted so as to avoid any dilution
in the aggregate voting rights of any one class relative to the other classes.
2. Dividends.
(a) DIVIDENDS ON COMMON STOCK. Dividends on Common Stock may be declared
and paid only to the extent of (i) the assets of the corporation legally
available therefor minus (ii) [the sum of (A) the Consumer Services Group
Available Dividend Amount (as defined in paragraph 9 of Part C of this Article
Third and (B)] the Broadband Group Available Dividend Amount (such amount
available for the payment of dividends on Common Stock is referred to in this
Part B of this Article Third as the "Common Stock Available Dividend
Amount(B)").
(b) DIVIDENDS ON BROADBAND GROUP COMMON STOCK. Dividends on Broadband
Group Common Stock may be declared and paid only out of the lesser of (i) [the
excess, if any, of (A)] the assets of the corporation legally available
therefor, [over (B) the Consumer Services Group Available Dividend Amount] and
(ii) the Broadband Group Available Dividend Amount. Concurrently with the
payment of any dividend on shares of Broadband Group Common Stock, at the
election of the Board of Directors, either (x) the Common Stock Group(B) shall
receive from the Broadband Group an aggregate payment of the same kind of cash
and/or property that is the subject of such dividend, which payment shall be
equal to the excess, if any, of (i) the quotient obtained by dividing (A) the
aggregate amount of such dividend, as determined by the Board of Directors, by
(B) the Broadband Group Allocation Fraction, over (ii) the aggregate amount of
such dividend, as so determined, or (y) the Broadband Group Allocation Fraction
will be adjusted as described in paragraph 8 of this Part B of this Article
Third. The payment to be made to the Common Stock Group(B) pursuant to the
preceding sentence may, at the discretion of the Board of Directors, be
reflected by an allocation or by a direct transfer of cash or other property.
(c) DISCRIMINATION BETWEEN OR AMONG CLASSES OF COMMON SHARES. The Board of
Directors, subject to the provisions of paragraphs 2(a) and 2(b) of this Part B
of this Article Third and paragraphs 2(a) and 2(b) of Part C of this Article
Third, shall have the sole authority and discretion to declare and pay dividends
(or to refrain from declaring or paying the same) exclusively to the holders of
Common Stock, exclusively to the holders of Broadband Group Common Stock,
[exclusively to holders of Consumer Services Group Common Stock,] exclusively to
the holders of any other class of common shares or to the holders of any two or
more of such classes in equal or unequal amounts, notwithstanding the
relationship between the Common Stock Available Dividend Amount(B), the
Broadband Group Available Dividend Amount, [the Consumer Services Group
Available Dividend Amount,] the respective amounts of prior dividends declared
on, or the liquidation rights of, Common Stock, Broadband Group Common Stock[,
Consumer Services Group Common Stock] or any other factor.
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3. Share Distributions.
[Subject to the provisions of paragraph 3 of Part C of this Article Third,]
the corporation may declare and pay a distribution consisting of shares of
Common Stock, Broadband Group Common Stock or any other securities of the
corporation or any other Person (hereinafter sometimes called a "share
distribution") to holders of Common Stock or Broadband Group Common Stock only
in accordance with this paragraph 3 of this Part B of this Article Third.
(a) DISTRIBUTIONS ON COMMON STOCK OR BROADBAND GROUP COMMON STOCK. [Except
as set forth in paragraph 3 of Part C of this Article Third,] the corporation
may declare and pay a share distribution to holders of Common Stock, Broadband
Group Common Stock or any other class of common shares [(other than Consumer
Services Group Common Stock)] consisting of any securities of the corporation,
any Subsidiary of the corporation, or any other Person, including, without
limitation, a share distribution consisting of shares of any class or series of
Preferred Stock or shares of Common Stock, Broadband Group Common Stock or any
other class of common shares [(other than Consumer Services Group Common Stock)]
(or Convertible Securities convertible into or exercisable or exchangeable for
shares of any class or series of Preferred Stock or shares of Common Stock,
Broadband Group Common Stock or any other class of common shares [(other than
Consumer Services Group Common Stock]).
Concurrently with the making of any share distribution with respect to
Broadband Group Common Stock, at the election of the Board of Directors, either
(x) the Common Stock Group(B) shall receive from the Broadband Group an
aggregate payment of the same kind of property that is the subject of such
distribution, which payment shall be equal to the excess, if any, of (i) the
quotient obtained by dividing (A) the aggregate amount of such distribution, as
determined by the Board of Directors, by (B) the Broadband Group Allocation
Fraction, over (ii) the aggregate amount of such dividend, as so determined, or
(y) the Broadband Group Allocation Fraction shall be adjusted as described in
paragraph 8 of this Part B of this Article Third. Any payment to be made to the
Common Stock Group(B) pursuant to the preceding sentence may, at the discretion
of the Board of Directors, be reflected by an allocation or by a direct transfer
of cash or other property.
(b) DISCRIMINATION BETWEEN OR AMONG CLASSES OF COMMON SHARES. The Board of
Directors, subject to the foregoing provisions of this paragraph 3 of this Part
B of this Article Third [and the provisions of paragraph 3 of Part C of this
Article Third], shall have the sole authority and discretion to declare and pay
(or to refrain from declaring or paying) share distributions exclusively to
holders of Common Stock, exclusively to holders of Broadband Group Common Stock,
[exclusively to holders of Consumer Services Group Common Stock,] exclusively to
the holders of any other class of common shares or to holders of any two or more
of such classes in equal or unequal amounts, notwithstanding the relationship
between the Common Stock Available Dividend Amount(B), the Broadband Group
Available Dividend Amount, [the Consumer Services Group Available Dividend
Amount,] the respective amounts of prior share distributions declared on, or the
liquidation rights of, Common Stock, Broadband Group Common Stock [,Consumer
Services Group Common Stock] or any other factor.
4. Exchange of Broadband Group Common Stock.
(a) EXCHANGE AT OPTION OF BOARD OF DIRECTORS. (I) At any time, the Board
of Directors may redeem all outstanding shares of Broadband Group Common Stock
for a new class of common stock of another entity that owns all of the material
assets and liabilities of the Broadband Group, provided that this new class of
common stock has substantially the same terms as those governing Broadband Group
Common Stock as provided for in this Part B of this Article Third and in the
Corporation's by-laws, including with regard to the definition of "AT&T
Broadband Group," and provided, further that the per share voting rights of this
new class of common stock shall be based on the ratio of the initial trading
prices of this new class of common stock to the trading prices of the common
stock of such other entity over a fixed number of Trading Days (not to exceed
25), such number of Trading Days to be determined by the Board of Directors
prior to or at the time of such redemption.
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(II) At any time that the assets and liabilities represented by the
Broadband Group are substantially equivalent to the assets and liabilities of
the corporation as a whole, the Board of Directors, in its sole discretion, may
effect a recapitalization of the corporation by declaring that all of the
outstanding shares of Broadband Group Common Stock shall be exchanged for fully
paid and nonassessable shares of Common Stock on a ratio based on the number of
shares of Common Stock outstanding, the number of shares of Broadband Group
Common Stock outstanding and the AT&T Broadband Group allocation fraction. In
this event, each share of Broadband Group Common Stock will be redeemed in
exchange for that number of shares of AT&T Common Stock, calculated to the
nearest 1/10,000, equal to a fraction the numerator of which is:
a fraction the numerator of which is the product of the number of shares of
Common Stock outstanding on a fully diluted basis and the Broadband Group
Allocation Fraction and the denominator of which is 1 minus the Broadband Group
Allocation Fraction;
and the denominator of which is:
the number or shares of Broadband Group Common Stock outstanding on a fully
diluted basis.
All calculations of fully diluted shares of Common Stock or Broadband Group
Common Stock in the preceding sentence shall be made on the treasury basis in
accordance with United States generally accepted accounting principles.
(III) At any time following the occurrence of any of 1) a Tax Event or 2)
the anniversary of the date of initial issuance of any shares of Broadband
Group Common Stock (the "Initial Issuance Date"), the Board of Directors, in its
sole discretion, may, at any time, effect a recapitalization of the corporation
(a "Board Required Exchange") by declaring that all of the outstanding shares of
Broadband Group Common Stock shall be exchanged for fully paid and nonassessable
shares of Common Stock in accordance with the Exchange Rate. In addition, at any
time following the Initial Issuance Date, so long as all of the assets and
liabilities included in the Broadband Group are held, directly or indirectly, by
one or more Qualifying Subsidiaries of the corporation [(which shall not include
any Subsidiary that is a part of the Consumer Services Group as defined in
paragraph 9 of Part C of this Article Third)] that hold no other material assets
or liabilities (the "Broadband Group Subsidiaries"), the Board of Directors may,
subject to the availability of assets of the corporation legally available
therefor, effect a Board Required Exchange by exchanging, on a pro rata basis,
all of the outstanding shares of Broadband Group Common Stock in exchange for an
aggregate number of outstanding fully paid and nonassessable shares of common
stock of such Broadband Group Subsidiary or Subsidiaries at the applicable
Exchange Rate, provided that no such exchange may occur unless the exchange is
tax free to the holders of Broadband Group Common Stock (except with respect to
any cash received by such holders in lieu of fractional shares).
(IV) For purposes of this paragraph 4 of this Part B of this Article Third,
the term "Exchange Shares" shall mean the shares of Common Stock or shares of
the one or more Broadband Group Subsidiaries, as the case may be, into which
shares of Broadband Group Common Stock may be exchanged pursuant to paragraphs
(I), (II) or (III) above. With regard to any redemption or exchange pursuant to
paragraphs (I), (II) or (III) above, the Board of Directors may, in its sole
discretion, condition the redemption or exchange on the occurrence or failure to
occur of certain events, and the Board of Directors may, in its sole discretion,
waive any of these conditions.
(b) EXCHANGE IN CONNECTION WITH CERTAIN SIGNIFICANT TRANSACTIONS. In the
event of a Disposition other than a Broadband Group Related Business Transaction
by the corporation in a transaction or series of related transactions of all or
substantially all of the properties and assets (as defined below) of the
Broadband Group to any Person(s) or group(s) of which the corporation is not a
majority owner (whether by merger, consolidation, sale of assets or stock,
liquidation, dissolution, winding up or otherwise) (a "Significant
Transaction"), effective upon the consummation of such sale, transfer,
assignment or other disposition and automatically without any action on the part
of the
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corporation or the Board of Directors or on the part of the holders of shares of
Broadband Group Common Stock, the corporation shall be recapitalized (a
"Significant Transaction Exchange") by exchanging all outstanding shares of
Broadband Group Common Stock for, at the sole discretion of the Board of
Directors, either (i) fully paid and nonassessable shares of Common Stock at the
Exchange Rate or (ii) other consideration, as described in paragraph 4(c) of
this Part B of this Article Third. Notwithstanding the preceding sentence, the
corporation shall be under no obligation to effect a Significant Transaction
Exchange that it might otherwise be required to effect pursuant to such sentence
(and the Exchange Rate shall not apply) if (i) the underlying Significant
Transaction is conditioned upon the affirmative vote of a majority of the
holders of Broadband Group Common Stock, voting as a separate class, (ii) in
connection with a spin-off or similar distribution of the corporation's entire
interest in the Broadband Group to the holders of Broadband Group Common Stock,
including any such distribution that is made in connection with a Board Required
Exchange, (iii) in connection with the liquidation, dissolution or winding up of
the corporation, whether voluntary or involuntary, or (iv) in connection with
the underlying Significant Transaction, the Board of Directors redeems all
outstanding shares of Broadband Group Common Stock for a new class of common
stock of another entity that owns all of the material assets and liabilities of
the Broadband Group pursuant to paragraph 4(a)(I) of this Part B of this Article
Third.
(c) ALTERNATE CONSIDERATION IN CONNECTION WITH SIGNIFICANT TRANSACTION
EXCHANGE. In connection with any Significant Transaction Exchange, the
corporation may, at the sole discretion of the Board of Directors, (i) in lieu
of issuing shares of Common Stock in exchange for shares of Broadband Group
Common Stock, either (x) subject to the limitations described in paragraph 2(b)
of this Part B of this Article Third and to the other provisions described in
this paragraph 4(c) of this Part B of this Article Third, declare and pay a
dividend in cash and/or in securities or other property (determined as provided
below) to holders of the outstanding shares of Broadband Group Common Stock
equally on a share for share basis in an aggregate amount equal to the Broadband
Group Net Proceeds of such Significant Transaction; or (y) provided that there
are assets of the corporation legally available therefor and to the extent the
Broadband Group Available Dividend Amount would have been sufficient to pay a
dividend in lieu thereof as described in clause (x) of this paragraph 4(c) of
this Part B of this Article Third, then (A) if such Significant Transaction
involves the Disposition of all (not merely substantially all) of the properties
and assets of the Broadband Group, redeem all outstanding shares of Broadband
Group Common Stock in exchange for cash and/or securities or other property
(determined as provided below) in an aggregate amount equal to the Broadband
Group Net Proceeds; or (B) if such Significant Transaction involves the
Disposition of substantially all (but not all) of the properties and assets of
the Broadband Group, apply an aggregate amount of cash and/or securities or
other property (determined as provided below) equal to the Broadband Group Net
Proceeds to the redemption of outstanding shares of Broadband Group Common
Stock, the number of shares to be redeemed to equal the lesser of (1) the whole
number nearest the number determined by dividing the aggregate amount so
allocated to the redemption of Broadband Group Common Stock by the average
Market Value of one share of Broadband Group Common Stock during the 10-Trading
Day period beginning on the 15th Trading Day following the consummation of such
Disposition, and (2) the number of shares of Broadband Group Common Stock
outstanding, and (ii) in lieu of issuing solely shares of Common Stock in
exchange for shares of Broadband Group Common Stock, subject to the limitations
described in paragraph 2(b) of this Part B of this Article Third and to the
other provisions described in paragraph 4(c) of this Part B of this Article
Third, combine the issuance of shares of Common Stock in exchange for shares of
Broadband Group Common Stock with the payment of a dividend on or the redemption
of shares of Broadband Group Common Stock for cash and/or other securities or
other property as described below.
In the event that the Board of Directors elects the option described in
(ii) of the preceding paragraph, the outstanding shares of Broadband Group
Common Stock exchanged for fully paid and nonassessable shares of Common Stock
shall be exchanged at the Exchange Rate and a dividend shall be paid on all the
remaining shares of Broadband Group Common Stock equally on a share for share
basis, or some or all of the remaining outstanding shares of Broadband Group
Common Stock
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shall be exchanged for cash and/or other securities or other property, as
follows. The aggregate amount of such dividend, in the case of a dividend, or
the portion of the Broadband Group Net Proceeds to be applied to such an
exchange, in the case of an exchange, shall equal (A) an amount equal to the
total Broadband Group Net Proceeds multiplied by (B) one minus a fraction, the
numerator of which shall be the number of shares of Broadband Group Common Stock
exchanged for shares of Common Stock and the denominator of which shall be the
total number of outstanding shares of Broadband Group Common Stock. In the event
of an exchange, if the Significant Transaction involves the Disposition of all
(not merely substantially all) of the properties and assets of the Broadband
Group, then all remaining outstanding shares of Broadband Group Common Stock
will be redeemed in exchange for cash and/or securities or other property in an
aggregate amount equal to the portion of the Broadband Group Net Proceeds to be
applied to the exchange. If the Significant Transaction involves the Disposition
of substantially all (but not all) of the properties and assets of the Broadband
Group, then the portion of the Broadband Group Net Proceeds to be applied to the
exchange will be used to redeem a number of shares equal to the lesser of (1)
the whole number nearest the number determined by dividing the aggregate amount
so allocated to the redemption of Broadband Group Common Stock by the average
Market Value of one share of Broadband Group Common Stock during the 10-Trading
Day period beginning on the 15th Trading Day following consummation of the
Disposition, and (2) the number of shares of Broadband Group Common Stock
outstanding.
For purposes of this paragraph 4 of this Part B of this Article Third, in
the case of a Significant Transaction involving a Disposition of properties and
assets in a series of related transactions, such Disposition shall not be deemed
to have been consummated until the consummation of the last of such
transactions. Any exchange described in this paragraph 4 of this Part B of this
Article Third shall be effected in accordance with the applicable provisions set
forth in paragraph 5 of this Part B of this Article Third. In the event that, at
the time of any Significant Transaction, there are outstanding any Convertible
Securities convertible into or exercisable for shares of Broadband Group Common
Stock that would give the holders rights to receive any dividend or exchange
consideration related to the Significant Transaction upon exercise, conversion
or otherwise, or would adjust as a result of such dividend or exchange to give
the holder equivalent economic rights, then the shares of Broadband Group Common
Stock underlying such Convertible Securities will be taken into account for
purposes of determining the terms of any dividend payment or exchange effected
in lieu of a Significant Transaction Exchange.
(d) PAYMENT TO COMMON STOCK GROUP (B). Concurrently with the payment of
any dividend referred to in paragraph 4(c) of this Part B of this Article Third,
at the election of the Board of Directors, either (A) the Common Stock Group(B)
shall receive from the Broadband Group an aggregate payment of the same kind of
property that is the subject of such dividend, which payment shall be equal to
the excess of (i) the quotient obtained by dividing (x) the aggregate amount of
such dividend, as determined by the Board of Directors, by (y) the Broadband
Group Allocation Fraction, over (ii) the aggregate amount of such dividend, as
so determined, or (B) the Broadband Group Allocation Fraction will be adjusted
as described in paragraph 9 of this Part B of this Article Third. Any payment to
be made to the Common Stock Group(B) pursuant to the preceding sentence may, at
the discretion of the Board of Directors, be reflected by an allocation or by a
direct transfer of cash or other property.
(e) EXCHANGE RATE. For purposes of this paragraph 4 of this Part B of this
Article Third, the term "Exchange Rate" shall mean the number of Exchange Shares
for which each share of Broadband Group Common Stock shall be exchangeable
pursuant to a Board Required Exchange or a Significant Transaction Exchange,
determined as follows. If the shares of Broadband Group Common Stock are to be
exchanged for shares of Common Stock (other than pursuant to paragraph 4(a)(II)
of this Part B of this Article Third), each share of Broadband Group Common
Stock shall be exchangeable for such number of shares of Common Stock
(calculated to the nearest 1/10,000), subject to paragraph 5 below, equal to
% of the ratio of the Average Market Price Per Share of such Broadband
Group Common Stock to the Average Market Price Per Share of
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Common Stock. For purposes of computing the Exchange Rate, the "Average Market
Price Per Share" of Common Stock or Broadband Group Common Stock, as the case
may be, shall mean (i) in the case of a Board Required Exchange, the average of
the daily Market Value per share for such Common Stock or Broadband Group Common
Stock for the 40 consecutive Trading Days ending on the 15th Trading Day prior
to the date an Exchange Notice is mailed, or (ii) in the case of a Significant
Transaction Exchange, the average of the daily Market Value per share for such
Common Stock or Broadband Group Common Stock for the 10 consecutive Trading Days
beginning on the 15th Trading Day following consummation of the Significant
Transaction. If the shares of Broadband Group Common Stock are to be exchanged
for shares of one or more Broadband Group Subsidiaries, such shares of Broadband
Group Common Stock shall be exchanged, on a pro rata basis, for an aggregate
number of outstanding fully paid and nonassessable shares of common stock of
each such Broadband Group Subsidiary equal to the number of outstanding shares
of common stock of such Subsidiary held by the corporation multiplied by the
Broadband Group Allocation Fraction and, if the Board of Directors so
determines, the remaining shares of such Subsidiary shall be distributed on a
pro rata basis to the holders of shares of Common Stock (or shares of Common
Stock shall be exchanged for such remaining shares of such Subsidiary); provided
that no such distribution (or mandatory exchange) may occur unless the
distribution (or mandatory exchange) is tax free to the holders of Common Stock
(except with respect to any cash received by such holders in lieu of fractional
shares). If at the time of such an exchange for shares of one or more Broadband
Group Subsidiaries, there are outstanding any Convertible Securities convertible
into or exercisable for shares of Broadband Group Common Stock that would become
exercisable or convertible for shares of one or more Broadband Group
Subsidiaries as a result of such exchange, and the obligation to issue such
shares under such options, warrants, convertible securities or similar rights is
not assumed or otherwise provided for by one or more Broadband Group
Subsidiaries, then the shares of Broadband Group Common Stock underlying such
Convertible Securities will be taken into account for purposes of determining
the Exchange Rate for such exchange.
For purposes of this paragraph 4 of this Part B of this Article Third,
"substantially all of the properties and assets" of the Broadband Group as of
any date shall mean a portion of such properties and assets that represents at
least 80% of the Fair Value of the properties and assets attributed to the
Broadband Group as of such date.
5. Certain Procedures Relating to Exchanges.
(a) The Board of Directors may, in its sole discretion, elect to issue
fractional Exchange Shares in connection with an exchange or to make a cash
payment in lieu of fractional shares, as described below. If the Board of
Directors elects not to issue fractional Exchange Shares, then no such
fractional shares shall be issued in connection with the exchange of shares of
Broadband Group Common Stock into Exchange Shares, and, in lieu thereof, each
holder of Broadband Group Common Stock who would otherwise be entitled to a
fractional interest of an Exchange Share shall, upon surrender of such holder's
certificate or certificates representing shares of Broadband Group Common Stock,
receive a cash payment (without interest) (the "Fractional Payment") equal to
(i) in the case of an exchange for shares of Common Stock, the product resulting
from multiplying (A) the fraction of a share of Common Stock to which such
holder would otherwise have been entitled by (B) the Average Market Price Per
Share of Common Stock on the Exchange Date, or (ii) in the case of an exchange
for shares of one or more Broadband Group Subsidiaries, such value as is
determined by the Board of Directors.
(b) No adjustments in respect of dividends shall be made upon the exchange
of any shares of Broadband Group Common Stock; provided, however, that, if the
Exchange Date with respect to Broadband Group Common Stock shall be subsequent
to the record date for the payment of a dividend or other distribution thereon
or with respect thereto but prior to the payment or distribution thereof, the
registered holders of such shares at the close of business on such record date
shall be entitled to receive the dividend or other distribution payable on such
shares on the date set for
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payment of such dividend or other distribution, notwithstanding the exchange of
such shares or the corporation's default in payment of the dividend or
distribution due on such date.
(c) At such time or times as the corporation exercises its right to cause a
redemption or exchange pursuant to paragraphs 4(a)(I) or 4(a)(II) of this Part B
of this Article Third or to cause a Board Required Exchange, and at the time of
any Significant Transaction Exchange, the corporation shall give notice of such
exchange to the holders of Broadband Group Common Stock whose shares are to be
exchanged, by mailing by first-class mail a notice of such exchange (an
"Exchange Notice"), in the case of an exchange at the discretion of the Board of
Directors, not less than 15 nor more than 60 days prior to the date fixed for
such exchange (the "Exchange Date"), and, in the case of any other required
exchange, as soon as practicable before or after the Exchange Date, in either
case, to their last addresses as they appear upon the corporation's books. Each
such Exchange Notice shall specify 1) the Exchange Date, 2) the Exchange Rate
applicable to, or a description of the consideration to be received in, such
exchange, and 3) any conditions to the occurrence of such exchange as set forth
by the Board of Directors (which conditions may be waived by the Board of
Directors in its sole discretion), and shall state that issuance of certificates
representing the applicable type of Exchange Shares to be received upon exchange
of shares of Broadband Group Common Stock shall be upon surrender of
certificates representing such shares of Broadband Group Common Stock.
(d) Before any holder of shares of Broadband Group Common Stock shall be
entitled to receive certificates representing such Exchange Shares, such holder
must surrender, at such office as the corporation shall specify, certificates
for such shares of Broadband Group Common Stock duly endorsed to the corporation
or in blank or accompanied by proper instruments of transfer to the Corporation
or in blank, unless the corporation shall waive such requirement. The
corporation shall, as soon as practicable after such surrender of certificates
representing such shares of Broadband Group Common Stock, issue and deliver, at
the office of the transfer agent representing Exchange Shares, to the holder for
whose account such shares of Broadband Group Common Stock were so surrendered,
or to such holder's nominee or nominees, certificates representing the number of
Exchange Shares to which such holder shall be entitled, together with the
Fractional Payment, if any.
(e) From and after any Exchange Date, all rights of a holder of shares of
Broadband Group Common Stock shall cease except for the right, upon surrender of
the certificates representing such shares of Broadband Group Common Stock, to
receive certificates representing Exchange Shares together with a Fractional
Payment, if any, as described in paragraphs 5(a) and 5(d) of this Part B of this
Article Third and rights to dividends as described in paragraph 5(b) of this
Part B of this Article Third. No holder of a certificate that immediately prior
to the applicable Exchange Date represented shares of Broadband Group Common
Stock shall be entitled to receive any dividend or other distribution with
respect to Exchange Shares until surrender of such holder's certificate for a
certificate or certificates representing Exchange Shares. Upon surrender, the
holder shall receive the amount of any dividends or other distributions (without
interest) that were payable with respect to a record date after the Exchange
Date, but that were not paid by reason of the foregoing with respect to the
number of Exchange Shares represented by the certificate or certificates issued
upon such surrender. From and after an Exchange Date applicable to Broadband
Group Common Stock, the corporation shall, however, be entitled to treat
certificates for Broadband Group Common Stock that have not yet been surrendered
for exchange as evidencing the ownership of the number of Exchange Shares for
which the shares of Broadband Group Common Stock represented by such
certificates have been exchanged, notwithstanding the failure to surrender such
certificates.
(f) If any certificate for Exchange Shares is to be issued in a name other
than that in which the certificate representing shares of Broadband Group Common
Stock surrendered in exchange therefor is registered, it shall be a condition of
such issuance that the person requesting the issuance pays any transfer or other
taxes required by reason of the issuance of certificates for such Exchange
Shares in a name other than that of the record holder of the certificate
surrendered, or establishes, to the satisfaction of the corporation or its
agent, that such tax has been paid or is not applicable. Under no
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circumstances shall the corporation be liable to a holder of shares of Broadband
Group Common Stock for any Exchange Shares or dividends or distributions thereon
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law.
(g) At the time an Exchange Notice is delivered with respect to any shares
of Broadband Group Common Stock, or at the time of the Exchange Date, if
earlier, the corporation shall have reserved and kept available, solely for the
purpose of issuance upon exchange of the outstanding shares of Broadband Group
Common Stock, such number of Exchange Shares as shall be issuable upon the
exchange of the number of shares of Broadband Group Common Stock specified or to
be specified in the applicable Exchange Notice, provided that the corporation
shall not under any circumstances be precluded from satisfying its obligation in
respect of the exchange of the outstanding shares of Broadband Group Common
Stock by delivery of purchased Exchange Shares that are held in the treasury of
the corporation.
6. Liquidation.
In the event of a liquidation, dissolution or winding up of the
corporation, whether voluntary or involuntary, after payment or provision for
payment of the debts and other liabilities of the corporation and subject to the
prior payment in full of the preferential amounts to which any class or series
of Preferred Stock is entitled, (a) the holders of the shares of Common Stock
shall share in the aggregate in a percentage of the funds of the corporation
remaining for distribution to its common shareholders equal to 100% multiplied
by the average daily ratio (expressed as a decimal) of X/Z for the 20-Trading
Day period ending on the Trading Day prior to the date of the public
announcement of such liquidation, dissolution or winding up, (b) the holders of
the shares of Broadband Group Common Stock shall share in the aggregate in a
percentage of the funds of the corporation remaining for distribution to its
common shareholders equal to 100% multiplied by the average daily ratio
(expressed as a decimal) of B/Z for such 20-Trading Day period, [(c) as provided
in paragraph 6 of Part C of this Article Third, the holders of the shares of
Consumer Services Group Common Stock shall share in the aggregate in a
percentage of the funds of the corporation remaining for distribution to its
common shareholders equal to 100% multiplied by the average daily ratio
(expressed as a decimal) of C/Z for such 20-Trading Day period,] and (d) if
applicable, the holders of the shares of any other class of common shares of the
corporation (other than Common Stock, Broadband Group Common Stock, [or Consumer
Services Group Common Stock]), on the basis that may be set forth in this
Certificate with respect to any such shares, shall share in the aggregate in a
percentage of the funds of the corporation remaining for distribution to its
common shareholders equal to 100% multiplied by the average daily ratio
(expressed as a decimal) of V/Z for such 20-Trading Day period, where X is the
aggregate Market Capitalization of the Common Stock, B is the aggregate Market
Capitalization of the Broadband Group Common Stock, [C is the aggregate Market
Capitalization of Consumer Services Group Common Stock,] V is the aggregate
Market Capitalization, if applicable, of any other class of common shares (other
than Common Stock, Broadband Group Common Stock, [and Consumer Services Group
Common Stock]), and Z is the aggregate Market Capitalization of (i) the Common
Stock, (ii) the Broadband Group Common Stock, [(iii) the Consumer Services Group
Common Stock,] and (iv) any other class of common shares of the corporation
(other than Common Stock, Broadband Group Common Stock, [and Consumer Services
Group Common Stock]). Neither the consolidation or merger of the corporation
with or into any other corporation or corporations nor the sale, transfer or
lease of all or substantially all of the assets of the corporation shall itself
be deemed to be a liquidation, dissolution or winding up of the corporation
within the meaning of this paragraph 6 of this Part B of this Article Third.
Notwithstanding the foregoing, any transaction or series of related transactions
that results in all of the assets and liabilities included in the Broadband
Group being held by one or more Broadband Group Subsidiaries, and the
distribution of some or all of the shares of such Broadband Group Subsidiaries
(and no other material assets or liabilities) to the holders of the outstanding
Broadband Group Common Stock shall not constitute a voluntary or involuntary
liquidation, dissolution or
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winding up of the corporation for purposes of this paragraph 6 of this Part B of
this Article Third, but shall be subject to paragraph 4 of this Part B of this
Article Third. [Notwithstanding the foregoing, any transaction or series of
related transactions that results in all of the assets and liabilities included
in the Consumer Services Group being held by one or more Consumer Services Group
Subsidiaries, and the distribution of some or all of the shares of such Consumer
Services Group Subsidiaries (and no other material assets or liabilities) to the
holders of the outstanding Consumer Services Group Common Stock shall not
constitute a voluntary or involuntary liquidation, dissolution or winding up of
the corporation for purposes of this paragraph 6 of this Part B of this Article
Third, but shall be subject to paragraph 4 of Part C of this Article Third.]
7. Determinations by the Board of Directors.
Any determinations made by the Board of Directors under any provision of
this Part B of this Article Third shall be final and binding on all shareholders
of the corporation, except as may otherwise be required by law. The corporation
shall prepare a statement of any determination by the Board of Directors,
respecting the fair market value of any properties, assets or securities, and
shall file such statement with the Secretary of the corporation.
8. Adjustment of the Broadband Group Allocation Fraction.
(a) The denominator of the Broadband Group Allocation Fraction shall be
adjusted from time to time as deemed appropriate by the Board of Directors (i)
to reflect subdivisions (by stock split or otherwise) and combinations (by
reverse stock split or otherwise) of Broadband Group Common Stock and stock
dividends payable in shares of Broadband Group Common Stock, (ii) to reflect the
fair market value of contributions or allocations by the corporation of cash or
property or other assets or liabilities from the Common Stock Group(B) to the
Broadband Group (or vice versa), or of cash or property or other assets or
liabilities of the Common Stock Group(B) to, or for the benefit of, employees of
the Broadband Group in connection with employee benefit plans or arrangements of
the corporation or any of its subsidiaries (or vice versa), (iii) to reflect the
number of shares of capital stock of the corporation contributed to, or for the
benefit of, employees of the Broadband Group in connection with benefit plans or
arrangements of the corporation or any of its Subsidiaries, (iv) to reflect
repurchases by the corporation of shares of Broadband Group Common Stock for the
account of the Broadband Group, (v) to reflect issuances of Broadband Group
Common Stock for the account of the Broadband Group, (vi) to reflect dividends
or other distributions to holders of the Broadband Group Common Stock to the
extent no payment is made to the Common Stock Group(B), and (vii) under such
other circumstances as the Board of Directors determines appropriate to reflect
the economic substance of any other event or circumstance, provided that, in
each case, the adjustment shall be made in a manner that is fair and equitable
to holders of Common Stock and Broadband Group Common Stock (and intended to
reflect the relative deemed economic ownership interest, if any, of the Common
Stock Group(B) in the Broadband Group). Any adjustment made by the Board of
Directors pursuant to the preceding sentence shall, subject to the foregoing, be
at the sole discretion of the Board of Directors, and all such determinations
shall be final and binding on all shareholders of the corporation. For purposes
of this paragraph 8 of this Part B of this Article Third, the consideration paid
by the Common Stock Group(B) to acquire any assets or other property or
contributed or allocated to the Broadband Group shall be presumed to be the
"fair market value" as of its acquisition.
(b) Without duplication of any adjustment pursuant to paragraph 8(a) of
this Part B of this Article Third, in the event that the corporation shall issue
shares of Broadband Group Common Stock for the account of the Broadband Group,
then the denominator of the Broadband Group Allocation Fraction shall be
increased by the number of shares of Broadband Group Common Stock so issued.
(c) Without duplication of any adjustment pursuant to paragraph 8(a) of
this Part B of this Article Third, if, in connection with any share issuance
described in paragraph 8(b) of this Part B of
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this Article Third, or otherwise, the corporation contributes or allocates cash
or other property or assets from the Common Stock Group(B) to the Broadband
Group, the denominator of the Broadband Group Allocation Fraction shall be
increased (or further increased) by an amount obtained by dividing (i) the fair
market value of such cash, property or assets (as determined by the Board of
Directors) by (ii) the net per share offering price of the Broadband Group
Common Stock.
9. Certain Definitions.
Unless the context otherwise requires, the terms defined in this paragraph
9 of this Part B of this Article Third shall have, for all purposes of this Part
B of this Article Third, the meanings herein specified:
"Broadband Group" shall mean, as of any date that any shares of Broadband
Group Common Stock have been issued and continue to be outstanding, without
duplication, the direct or indirect interest of the corporation (either itself
or through direct or indirect subsidiaries, affiliates, joint ventures or other
investments, or any of their predecessors or successors) (a) in all of the
businesses, assets and liabilities reflected in the financial statements of the
Broadband Group dated December 31, 2000, publicly filed by the corporation,
including any successor to the Broadband Group by merger, consolidation or sale
of all or substantially all of its assets (whether or not in connection with a
Broadband Group Related Business Transaction), (b) the other assets and
liabilities (contingent or otherwise) of the corporation and its Subsidiaries
primarily related to the businesses, assets and liabilities described in clause
(a) and all net income and net losses arising in respect thereof after such
date, (c) all assets, liabilities and businesses acquired by the Broadband Group
or acquired by the corporation or any of its Subsidiaries for the account of, or
contributed, allocated or otherwise transferred to, the Broadband Group
(including the net proceeds of any new issuance for the account of the Broadband
Group of any new shares of Broadband Group Common Stock or Convertible
Securities), in each case, after the date of such financial statements and as
determined by the Board of Directors in accordance with the provisions of
paragraphs 7 and 8 of this Part D of this Article Third, and (d) the proceeds of
any Disposition of any of the foregoing; provided, however, that the Broadband
Group shall not include (a) any assets, liabilities or businesses disposed of
after the date of such financial statements or (b) any assets, liabilities or
businesses allocated to the Common Stock Group(B) or otherwise distributed or
otherwise transferred from the Broadband Group, whether to the Common Stock
Group(B), to holders of shares of Broadband Group Common Stock or otherwise, in
each case after the date of such financial statements and as determined by the
Board of Directors in accordance with the provisions of paragraphs 7 and 8 of
this Part B of this Article Third. [The Broadband Group shall not include any
business, assets or liabilities of or the Consumer Services Group.]
"Broadband Group Allocated Portion" shall mean, with respect to the
Broadband Group as a whole, or any dividend, distribution, payment,
consideration or other amount or allocation requiring apportionment between the
holders of Broadband Group Common Stock (other than the corporation and its
Subsidiaries), on the one hand, and the Common Stock Group(B), on the other
hand, the following: (a) in the case of the Broadband Group as a whole, the
proportion of such Group represented by the Broadband Group Allocation Fraction,
and (b) in the case of any other amount or allocation, the product of (i) such
amount or allocation and (ii) the Broadband Group Allocation Fraction.
"Broadband Group Allocation Fraction" shall mean, as of any date of
determination, a fraction, the numerator of which shall be the number of shares
of Broadband Group Common Stock outstanding on such date and the denominator of
which shall be a number initially determined by the Board of Directors, in its
sole discretion, prior to the Initial Issuance Date, subject to adjustment from
time to time as described in paragraph 8 of this Part B of this Article Third,
provided that such fraction shall in no event be greater than one. If the
holders of any securities of the corporation or any other Person that are
convertible into or exercisable or exchangeable for shares of Broadband Group
Common Stock are entitled to participate in any dividend or other distribution
with respect to the Broadband Group Common Stock, such shares so issuable upon
such conversion, exercise or
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exchange shall be taken into account in calculating the Broadband Group
Allocation Fraction and any amount payable to the Common Stock Group(B) in such
manner as the Board of Directors determines to be appropriate.
"Broadband Group Available Dividend Amount" shall mean, as of any date, the
Broadband Group Allocated Portion of the excess of (a) the amount by which the
total assets of the Broadband Group exceed the total liabilities of the
Broadband Group as of such date over (b) the sum of (i) the par value of all
issued shares of Broadband Group Common Stock and each class or series of
Preferred Stock attributed to the Broadband Group, (ii) the amount of the
consideration received for any shares of Preferred Stock attributed to the
Broadband Group without par value that have been issued, except such part of the
consideration therefor as may have been allocated to surplus in a manner
permitted by law, and (iii) any amount not included in subclauses (i) and (ii)
above that the corporation (by appropriate action of the Board of Directors) has
transferred to stated capital specifically in respect of Broadband Group Common
Stock, minus (c) all reductions from such sums set forth in clauses (i), (ii)
and (iii) above as have been effected in a manner permitted by law; provided,
however, that, in the event that the law governing the corporation changes from
that governing the corporation on the date the adoption of the Amendment to this
Certificate pursuant to which the Broadband Group Common Stock was authorized
(whether because of amendment of the applicable law or because of a change in
the jurisdiction of incorporation of the corporation through merger or
otherwise), the Broadband Group Available Dividend Amount shall mean the amount
of dividends, as determined by the Board of Directors, that could be paid by a
corporation (governed under such applicable law) having the assets and
liabilities of the Broadband Group, an amount of outstanding common stock (and
having an aggregate par value) equal to the amount (and aggregate par value) of
the outstanding Broadband Group Common Stock and of each class or series of
Preferred Stock attributed to the Broadband Group and having an amount of
earnings or loss or other relevant corporate attributes as reasonably determined
by the Board of Directors in light of all factors deemed relevant by the Board
of Directors.
"Broadband Group Net Proceeds" shall mean, as of any date, with respect to
any Disposition of any of the properties and assets of the Broadband Group, an
amount, if any, equal to the Broadband Group Allocated Portion of the gross
proceeds of such Disposition after any payment of, or reasonable provision for,
(a) any taxes payable by the corporation or any other member of the Common Stock
Group in respect of such Disposition or in respect of any mandatory dividend or
redemption resulting from such Disposition (or that would have been payable but
for the utilization of tax benefits attributable to the Common Stock Group(B)
[or the Consumer Services Group]), (b) any transaction costs borne by the Common
Stock Group(B) in connection with such Disposition, including, without
limitation, any legal, investment banking and accounting fees and expenses borne
by the Common Stock Group(B) in connection with such Disposition, (c) any
liabilities and other obligations (contingent or otherwise) of the Broadband
Group borne by the Common Stock Group(B) in connection with such Disposition,
including, without limitation, any indemnity or guarantee obligations incurred
by the Common Stock Group(B) in connection with the Disposition or any
liabilities assumed by the Common Stock Group(B) for future purchase price
adjustments, and (d) any preferential amounts, accumulated and unpaid dividends
and other obligations in respect of Preferred Stock attributed to the Broadband
Group. To the extent the proceeds of any Disposition include any securities or
other property other than cash, the Board of Directors shall determine the value
of such securities or property; provided that the value of any marketable
securities included in such proceeds shall be the average of the daily Market
Value of such securities for the 10 consecutive Trading Days beginning on the
15th Trading Day following consummation of the Disposition.
"Broadband Group Related Business Transaction" shall mean any Disposition
of all or substantially all the properties and assets attributed to the
Broadband Group in a transaction or series of related transactions that results
in the corporation or one or more of its Subsidiaries receiving in consideration
of such properties and assets primarily equity securities (including, without
limitation,
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capital stock, debt securities convertible into or exchangeable for equity
securities or interests in a general or limited partnership or limited liability
company, without regard to the voting power or other management or governance
rights associated therewith) of any entity that (a) acquires such properties or
assets or succeeds (by merger, formation of a joint venture or otherwise) to the
business conducted with such properties or assets or controls such acquiror or
successor, and (b) which the Board of Directors determines is primarily engaged
or proposes to engage primarily in one or more businesses similar or
complementary to the businesses conducted by the Broadband Group prior to such
Disposition.
"Common Stock Group(B)" shall mean, as of any date, the interest of the
corporation in all of the businesses in which the corporation is or has been
engaged, directly or indirectly (either itself or through direct or indirect
subsidiaries, affiliates, joint ventures or other investments or any of their
predecessors or successors), and the respective assets and liabilities of the
corporation therein, other than [(a)] the Broadband Group Allocated Portion of
the Broadband Group, [and (b) any businesses, assets or liabilities of the
Consumer Services Group].
"Convertible Securities" shall mean any securities of the corporation
[(other than Consumer Services Group Common Stock)] or any Subsidiary of the
corporation that are convertible into, exchangeable for or evidence the right to
purchase any shares of Common Stock, Broadband Group Common Stock or [Consumer
Services Group Common Stock], whether upon conversion, exercise or exchange, or
pursuant to anti-dilution provisions of such securities or otherwise.
"Disposition" shall mean the sale, transfer, assignment or other
disposition (whether by merger, consolidation, sale or contribution of assets or
stock, or otherwise) by the corporation (or its successors) or any of its
Subsidiaries or properties or assets. Disposition shall not include a merger,
consolidation, exchange of shares or other business combination transaction
involving the corporation in which the corporation (or its successors)
continues, immediately following such transaction, to hold the same, direct and
indirect, interest in the business, assets and liabilities comprising the
Broadband Group that it held immediately prior to such transaction (other than
as a result of any action by any Person included in the Broadband Group).
"Fair Value" shall mean, in the case of equity securities or debt
securities of a class that has previously been publicly traded for a period of
at least three months, the Market Value thereof (if such Market Value, as so
defined, can be determined) or, in the case of an equity security or debt
security that has not been publicly traded for at least such period, means the
fair value per share of stock or per other unit of such other security, on a
fully distributed basis, as determined by an independent investment banking firm
experienced in the valuation of securities selected in good faith by the Board
of Directors; provided, however, that, in the case of property other than
securities, the "Fair Value" thereof shall be determined in good faith by the
Board of Directors based upon such appraisals or valuation reports of such
independent experts as the Board of Directors shall in good faith determine to
be appropriate in accordance with good business practice. Any such determination
of Fair Value shall be described in a statement filed with the records of the
actions of the Board of Directors.
"Group" shall mean the Common Stock Group(B)[, the Consumer Services Group]
or the Broadband Group.
Initial Issuance Date" shall mean the date of first issuance of any shares
of Broadband Group Common Stock.
"Market Capitalization" of any class or series of capital stock of the
corporation on any Trading Day shall mean the product of (a) the Market Value of
one share of such class or series on such Trading Day and (b) the number of
shares of such class or series outstanding on such Trading Day.
"Market Value" of any class or series of capital stock of the corporation
on any day shall mean the average of the high and low reported sales prices
regular way of a share of such class or series on
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such day (if such day is a Trading Day, and, if such day is not a Trading Day,
on the Trading Day immediately preceding such day), or, in case no such reported
sale takes place on such Trading Day, the average of the reported closing bid
and asked prices regular way of a share of such class or series on such Trading
Day, in either case, on the New York Stock Exchange or, if the shares of such
class or series are not quoted on the New York Stock Exchange on such Trading
Day, on the Nasdaq National Market, or, if the shares of such class or series
are not quoted on the Nasdaq National Market on such Trading Day, the average of
the closing bid and asked prices of a share of such class or series in the
over-the-counter market on such Trading Day as furnished by any New York Stock
Exchange member firm selected from time to time by the corporation, or, if such
closing bid and asked prices are not made available by any such New York Stock
Exchange member firm on such Trading Day (including, without limitation, because
such securities are not publicly held), the market value of a share of such
class or series as determined by the Board of Directors; provided that, for
purposes of determining the ratios set forth in paragraph 6 of this Part B of
this Article Third, (a) the "Market Value" of any share of Common Stock[,
Consumer Services Group Common Stock] or of Broadband Group Common Stock on any
day prior to the "ex" date or any similar date for any dividend or distribution
paid or to be paid with respect to Common Stock[, Consumer Services Group Common
Stock] or Broadband Group Common Stock, as applicable, shall be reduced by the
fair market value of the per share amount of such dividend or distribution as
determined by the Board of Directors, and (b) the "Market Value" of any share of
Common Stock[, Consumer Services Group Common Stock] or of Broadband Group
Common Stock on any day prior to (i) the effective date of any subdivision (by
stock split or otherwise) or combination (by reverse stock split or otherwise)
of outstanding shares of Common Stock[, Consumer Services Group Common Stock] or
of Broadband Group Common Stock, as applicable, or (ii) the "ex" date or any
similar date for any dividend or distribution with respect to the Common Stock[,
Consumer Services Group Common Stock] or Broadband Group Common Stock in shares
of Common Stock[, Consumer Services Group Common Stock] or Broadband Group
Common Stock, as applicable, shall be appropriately adjusted to reflect such
subdivision, combination, dividend or distribution.
"Person" shall mean any individual, corporation, partnership, limited
liability company, joint venture, association, joint stock company, trust,
unincorporated organization, government or agency or political subdivision
thereof, or other entity, whether acting in an individual, fiduciary or other
capacity.
"Qualifying Subsidiary" of a Person shall mean a Subsidiary of such Person
in which such Person's ownership and voting interest is sufficient to satisfy
the ownership and voting requirements of the Internal Revenue Code of 1986, as
amended, and the regulations thereunder, for a distribution of such Person's
interest in such Subsidiary to the holders of Broadband Group Common Stock and,
in the event that the Broadband Group Allocation Fraction is less than one, the
holders of Common Stock (or any such securities into which the Broadband Group
Common Stock or the Common Stock may have been converted, reclassified or
changed or for which they may have been exchanged), as the case may be, to be
tax free to such holders.
"Subsidiary" shall mean, with respect to any Person, any corporation,
limited liability company or partnership 50% or more of whose outstanding voting
securities or membership or partnership interests, as the case may be, are,
directly or indirectly, owned by such Person.
"Trading Day" shall mean each weekday other than any day on which any
relevant class or series of capital stock of the corporation is not available
for trading on the New York Stock Exchange or the Nasdaq National Market or in
the over-the-counter market.
"Tax Event" shall mean receipt by the corporation of an opinion of tax
counsel of the corporation's choice, to the effect that, as a result of any
amendment to, clarification of, or change (including a prospective change) in,
the laws (or any interpretation or application of the laws) of the United States
or any political subdivision or taxing authority thereof or therein (including
enactment of any legislation and the publication of any judicial or regulatory
decision, determination or pronouncement) which amendment, clarification or
change is effective, announced, released,
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promulgated or issued on or after the date of initial issuance of the Broadband
Group Common Stock, regardless of whether such amendment, clarification or
change is issued to or in connection with a proceeding involving the
corporation, the Common Stock Group(B) or the Broadband Group and whether or not
subject to appeal, there is more than an insubstantial risk that:
(i) for tax purposes, any issuance of Broadband Group Common Stock
would be treated as a sale or other taxable disposition by the corporation
or any of its Subsidiaries of any of the assets, operations or relevant
subsidiaries to which the Broadband Group Common Stock relates,
(ii) the existence of the Broadband Group Common Stock would subject
the corporation, its Subsidiaries or affiliates, or any of their respective
successors or shareholders to the imposition of tax or to other adverse tax
consequences, or
(iii) for tax purposes, either Common Stock or Broadband Group Common
Stock is not or, at any time in the future, will not be treated solely as
common stock of the corporation.
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APPENDIX B
FORM OF
CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION
UNDER SECTION 805 OF THE NEW YORK STATE
BUSINESS CORPORATION LAW
We, the undersigned, being a Vice President and an Assistant Secretary
respectively, of AT&T Corp., do hereby certify as follows:
FIRST: The name of the corporation is AT&T Corp.
SECOND: The Certificate of Incorporation of the corporation was filed
by the Department of State on March 3, 1885.
THIRD: (a) The Certificate of Incorporation of the corporation is
hereby amended to create one new class of common stock, AT&T Consumer
Services Group common stock, having the number, designation, relative
rights, preferences, and limitations as set forth herein.
(b) The Certificate of Incorporation of the corporation is hereby
amended to remove references to Wireless Group tracking stock and each
class of Liberty Media Group tracking stock and to AT&T Wireless Group
preferred tracking stock.
(c) To effect the foregoing, and certain related technical changes,
Article THIRD is hereby amended as set forth in Exhibit A hereto.
FOURTH: The manner in which the foregoing amendment of said
Certificate of Incorporation of the corporation was authorized was by the
vote of the holders of a majority of all outstanding shares of the
corporation entitled to vote thereon at a meeting of shareholders,
subsequent to the unanimous vote of our board of directors.
IN WITNESS WHEREOF, we have subscribed this document on ,
2001 and do hereby affirm, under the penalties of perjury, that the statements
contained herein have been examined by us and are true and correct.
By
------------------------------------------
Name: Marilyn J. Wasser
Title: Vice President -- Law and
Secretary
By
------------------------------------------
Name: Robert S. Feit
Title: Assistant Secretary
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ARTICLE THIRD
CAPITAL STOCK
If the Broadband charter amendment proposal is adopted, PART A of Article
THIRD is hereby amended to read in its entirety as follows:
The aggregate number of shares which the corporation is authorized to issue
is ( ) shares, consisting of one hundred million
(100,000,000) preferred shares having a par value of $1.00 per share ("Preferred
Stock") and ( ) common shares, of which six billion
(6,000,000,000) common shares shall be Common Stock having a par value of $1.00
per share ("Common Stock"), ( ) common shares shall be
Broadband Group Common Stock having a par value of $ per share
("Broadband Group Common Stock") and ( ) common shares shall
be Consumer Services Group Common Stock having a par value of $ per share
("Consumer Services Group Common Stock").
If the Broadband charter amendment proposal is not adopted, PART A of
Article THIRD is hereby amended to read in its entirety as follows:
The aggregate number of shares which the corporation is authorized to issue
is ( ) shares, consisting of one hundred million
(100,000,000) preferred shares having a par value of $1.00 per share ("Preferred
Stock") and ( ) common shares, of which six billion
(6,000,000,000) common shares shall be Common Stock having a par value of $1.00
per share ("Common Stock") and ( ) common shares shall be
Consumer Services Group Common Stock having a par value of $ per share
("Consumer Services Group Common Stock").
If the Broadband charter amendment proposal is adopted, PART C of Article
THIRD is hereby amended to read in its entirety as set forth below, with
brackets removed from the bracketed text. If the Broadband charter amendment
proposal is not adopted, PART B of Article Third is hereby amended to read in
its entirety as set forth below, with bracketed references to the Broadband
charter amendment deleted and appropriate grammatical and section reference
changes made, and PART C of Article THIRD is hereby deleted in its entirety. In
either case, PART D of Article THIRD shall remain unchanged, except that it
shall be redesignated as PART C of Article THIRD if the Broadband charter
amendment proposal is not adopted. References to PART B/C shall be deemed to be
references to PART C if the Broadband charter amendment proposal is adopted, and
shall be deemed to be references to PART B if the Broadband charter amendment
proposal is not adopted.
PART B/C -- COMMON STOCK AND CONSUMER SERVICES GROUP COMMON STOCK
1. Voting Rights.
(a) Subject to paragraph 1(c) of this Part B/C of this Article Third,
holders of Common Stock shall be entitled to one vote for each share of such
stock held and holders of Consumer Services Group Common Stock shall be entitled
to of a vote per share of such stock held, on all matters presented to such
shareholders.
(b) Except as may otherwise be required by the laws of the State of New
York or, with respect to additional or special voting rights (which may include,
without limitation, rights of any such holders of any such class or series to
elect one or more directors voting separately as a class) of any class or series
of Preferred Stock or any other class of common shares, except as may be
required by this Certificate of Incorporation of the corporation, as the same
may be amended from time to time (this "Certificate") (including the terms of
[the Broadband Group Common Stock,] any class or series of Preferred Stock and
any resolution or resolutions providing for the establishment of such class or
series pursuant to authority vested in the Board of Directors by this
Certificate and the terms
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of any other class of common shares), the holders of shares of Common Stock, the
holders of shares of Consumer Services Group Common Stock, [the holders of
shares of Broadband Group Common Stock,] the holders of shares of each other
class of common shares, if any, entitled to vote thereon, and the holders of
shares of each class or series of Preferred Stock, if any, entitled to vote
thereon, shall vote as one class with respect to all matters to be voted on by
shareholders of the corporation, and no separate vote or consent of the holders
of shares of Common Stock, the holders of shares of Consumer Services Group
Common Stock, [the holders of shares of Broadband Group Common Stock] or the
holders of shares of any such class of common shares or any such class or series
of Preferred Stock shall be required for the approval of any such matter[,
except, in the case of Broadband Group Common Stock, under the circumstances
described in paragraph 1(b) of Part B of this Article Third.]
(c) If the corporation shall in any manner subdivide (by stock split or
otherwise) or combine (by reverse stock split or otherwise) the outstanding
shares of Common Stock, Consumer Services Group Common Stock [or Broadband Group
Common Stock], or pay a stock dividend in shares of any class to holders of that
class or shall otherwise effect a share distribution (as defined in paragraph 3
of this Part B/C of this Article Third) of Common Stock, Consumer Services Group
Common Stock, [or Broadband Group Common Stock,] the per share voting rights of
Common Stock specified in paragraph 1(a) of this Part B/C of this Article Third,
[the per share voting rights of Broadband Group Common Stock specified in
paragraph 1(a) of Part B of this Article Third] and/or the per share voting
rights of Consumer Services Group Common Stock specified in paragraph 1(a) of
this Part B/C of this Article Third shall be appropriately adjusted so as to
avoid any dilution in the aggregate voting rights of any one class relative to
the other classes.
2. Dividends.
(a) DIVIDENDS ON COMMON STOCK. Dividends on Common Stock may be declared
and paid only to the extent of (i) the assets of the corporation legally
available therefor minus (ii) [the sum of (A) the Broadband Group Available
Dividend Amount (as defined in paragraph 9 of Part D of this Article Third and
(B)] the Consumer Services Group Available Dividend Amount (such amount
available for the payment of dividends on Common Stock is referred to in this
Part B/C of this Article Third as the "Common Stock Available Dividend
Amount(C)").
(b) DIVIDENDS ON CONSUMER SERVICES GROUP COMMON STOCK. Dividends on
Consumer Services Group Common Stock may be declared and paid only out of the
lesser of (i) [the excess, if any, of (A)] the assets of the corporation legally
available therefor, [over (B) the Broadband Group Available Dividend Amount] and
(ii) the Consumer Services Group Available Dividend Amount. Concurrently with
the payment of any dividend on shares of Consumer Services Group Common Stock,
at the election of the Board of Directors, either (x) the Common Stock Group(C)
shall receive from the Consumer Services Group an aggregate payment of the same
kind of cash and/or property that is the subject of such dividend, which payment
shall be equal to the excess, if any, of (i) the quotient obtained by dividing
(A) the aggregate amount of such dividend, as determined by the Board of
Directors, by (B) the Consumer Services Group Allocation Fraction, over (ii) the
aggregate amount of such dividend, as so determined, or (y) the Consumer
Services Group Allocation Fraction will be adjusted as described in paragraph 8
of this Part B/C of this Article Third. The payment to be made to the Common
Stock Group(C) pursuant to the preceding sentence may, at the discretion of the
Board of Directors, be reflected by an allocation or by a direct transfer of
cash or other property.
(c) DISCRIMINATION BETWEEN OR AMONG CLASSES OF COMMON SHARES. The Board of
Directors, subject to the provisions of [paragraphs 2(a) and 2(b) of Part B of
this Article Third and] paragraphs 2(a) and 2(b) of this Part B/C of this
Article Third, shall have the sole authority and discretion to declare and pay
dividends (or to refrain from declaring or paying the same) exclusively to the
holders of Common Stock, exclusively to the holders of Consumer Services Group
Common Stock, [exclusively to holders of Broadband Group Common Stock,]
exclusively to the holders of any other class of common shares or to the holders
of any two or more of such classes in equal or
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unequal amounts, notwithstanding the relationship between the Common Stock
Available Dividend Amount(C), the Consumer Services Group Available Dividend
Amount [the Broadband Group Available Dividend Amount,] the respective amounts
of prior dividends declared on, or the liquidation rights of, Common Stock,
Consumer Services Group Common Stock [,Broadband Group Common Stock] or any
other factor.
3. Share Distributions.
[Subject to the provisions of paragraph 3 of Part B of this Article Third,]
the corporation may declare and pay a distribution consisting of shares of
Common Stock, Consumer Services Group Common Stock or any other securities of
the corporation or any other Person (hereinafter sometimes called a "share
distribution") to holders of Common Stock or Consumer Services Group Common
Stock only in accordance with this paragraph 3 of this Part B/C of this Article
Third.
(a) DISTRIBUTIONS ON COMMON STOCK OR CONSUMER SERVICES GROUP COMMON
STOCK. [Except as set forth in paragraph 3 of Part B of this Article Third,]
the corporation may declare and pay a share distribution to holders of Common
Stock, Consumer Services Group Common Stock or any other class of common shares
[(other than Broadband Group Common Stock)] consisting of any securities of the
corporation, any Subsidiary of the corporation, or any other Person, including,
without limitation, a share distribution consisting of shares of any class or
series of Preferred Stock or shares of Common Stock, Consumer Services Group
Common Stock or any other class of common shares [(other than Broadband Group
Common Stock)] (or Convertible Securities convertible into or exercisable or
exchangeable for shares of any class or series of Preferred Stock or shares of
Common Stock, Consumer Services Group Common Stock or any other class of common
shares [(other than Broadband Group Common Stock)].
Concurrently with the making of any share distribution with respect to
Consumer Services Group Common Stock, at the election of the Board of Directors,
either (x) the Common Stock Group(C) shall receive from the Consumer Services
Group an aggregate payment of the same kind of property that is the subject of
such distribution, which payment shall be equal to the excess, if any, of (i)
the quotient obtained by dividing (A) the aggregate amount of such distribution,
as determined by the Board of Directors, by (B) the Consumer Services Group
Allocation Fraction, over (ii) the aggregate amount of such dividend, as so
determined, or (y) the Consumer Services Group Allocation Fraction shall be
adjusted as described in paragraph 8 of this Part B/C of this Article Third. Any
payment to be made to the Common Stock Group(C) pursuant to the preceding
sentence may, at the discretion of the Board of Directors, be reflected by an
allocation or by a direct transfer of cash or other property.
(b) DISCRIMINATION BETWEEN OR AMONG CLASSES OF COMMON SHARES. The Board of
Directors, subject to the foregoing provisions of this paragraph 3 of this Part
B/C of this Article Third [and the provisions of paragraph 3 of Part B of this
Article Third], shall have the sole authority and discretion to declare and pay
(or to refrain from declaring or paying) share distributions exclusively to
holders of Common Stock, exclusively to holders of Consumer Services Group
Common Stock, [exclusively to holders of Broadband Group Common Stock,]
exclusively to the holders of any other class of common shares or to holders of
any two or more of such classes in equal or unequal amounts, notwithstanding the
relationship between the Common Stock Available Dividend Amount(C), the Consumer
Services Group Available Dividend Amount, [the Broadband Group Available
Dividend Amount,] the respective amounts of prior share distributions declared
on, or the liquidation rights of, Common Stock, Consumer Services Group Common
Stock [,Broadband Group Common Stock] or any other factor.
4. Exchange of Consumer Services Group Common Stock.
(a) EXCHANGE AT OPTION OF BOARD OF DIRECTORS. (I) At any time, the Board
of Directors may redeem all outstanding shares of Consumer Services Group Common
Stock for a new class of common stock of another entity that owns all of the
material assets and liabilities of the Consumer
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Services Group, provided that this new class of common stock has substantially
the same terms as those governing Consumer Services Group Common Stock as
provided for in this Part B/C of this Article Third and in the Corporation's
by-laws, including with regard to the definition of "Consumer Services Group",
and provided, further that the per share voting rights of this new class of
common stock shall be based on the ratio of the initial trading prices of this
new class of common stock to the trading prices of the common stock of such
other entity over a fixed number of Trading Days (not to exceed 25), such number
of Trading Days to be determined by the Board of Directors prior to or at the
time of such redemption.
(II) At any time following the occurrence of any of 1) a Tax Event or 2)
the anniversary of the date of initial issuance of any shares of
Consumer Services Group Common Stock (the "Initial Issuance Date"), the Board of
Directors, in its sole discretion, may, at any time, effect a recapitalization
of the corporation (a "Board Required Exchange") by declaring that all of the
outstanding shares of Consumer Services Group Common Stock shall be exchanged
for fully paid and nonassessable shares of Common Stock in accordance with the
Exchange Rate. In addition, at any time following the Initial Issuance Date, so
long as all of the assets and liabilities included in the Consumer Services
Group are held, directly or indirectly, by one or more Qualifying Subsidiaries
of the corporation [(which shall not include any Subsidiary that is a part of
the Broadband Group as defined in paragraph 9 of Part B of this Article Third)]
that hold no other material assets or liabilities (the "Consumer Services Group
Subsidiaries"), the Board of Directors may, subject to the availability of
assets of the corporation legally available therefor, effect a Board Required
Exchange by exchanging, on a pro rata basis, all of the outstanding shares of
Consumer Services Group Common Stock in exchange for an aggregate number of
outstanding fully paid and nonassessable shares of common stock of such Consumer
Services Group Subsidiary or Subsidiaries at the applicable Exchange Rate,
provided that no such exchange may occur unless the exchange is tax free to the
holders of Consumer Services Group Common Stock (except with respect to any cash
received by such holders in lieu of fractional shares).
(III) For purposes of this paragraph 4 of this Part B/C of this Article
Third, the term "Exchange Shares" shall mean the shares of Common Stock or
shares of the one or more Consumer Services Group Subsidiaries, as the case may
be, into which shares of Consumer Services Group Common Stock may be exchanged
pursuant to paragraphs (I) or (II) above. With regard to any redemption or
exchange pursuant to paragraphs (I) or (II) above, the Board of Directors may,
in its sole discretion, condition the redemption or exchange on the occurrence
or failure to occur of certain events, and the Board of Directors may, in its
sole discretion, waive any of these conditions.
(b) EXCHANGE IN CONNECTION WITH CERTAIN SIGNIFICANT TRANSACTIONS. In the
event of a Disposition other than a Consumer Services Group Related Business
Transaction by the corporation in a transaction or series of related
transactions of all or substantially all of the properties and assets (as
defined below) of the Consumer Services Group to any Person(s) or group(s) of
which the corporation is not a majority owner (whether by merger, consolidation,
sale of assets or stock, liquidation, dissolution, winding up or otherwise) (a
"Significant Transaction"), effective upon the consummation of such sale,
transfer, assignment or other disposition and automatically without any action
on the part of the corporation or the Board of Directors or on the part of the
holders of shares of Consumer Services Group Common Stock, the corporation shall
be recapitalized (a "Significant Transaction Exchange") by exchanging all
outstanding shares of Consumer Services Group Common Stock for, at the sole
discretion of the Board of Directors, either (i) fully paid and nonassessable
shares of Common Stock at the Exchange Rate or (ii) other consideration, as
described in paragraph 4(c) of this Part B/C of this Article Third.
Notwithstanding the preceding sentence, the corporation shall be under no
obligation to effect a Significant Transaction Exchange that it might otherwise
be required to effect pursuant to such sentence (and the Exchange Rate shall not
apply) if (i) the underlying Significant Transaction is conditioned upon the
affirmative vote of a majority of the holders of Consumer Services Group Common
Stock, voting as a separate class, (ii) in connection with a spin-off or similar
distribution of the corporation's entire interest in the Consumer
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Services Group to the holders of Consumer Services Group Common Stock, including
any such distribution that is made in connection with a Board Required Exchange,
(iii) in connection with the liquidation, dissolution or winding up of the
corporation, whether voluntary or involuntary, or (iv) in connection with the
underlying Significant Transaction, the Board of Directors redeems all
outstanding shares of Consumer Services Common Stock for a new class of common
stock of another entity that owns all of the material assets and liabilities of
the Consumer Services Group pursuant to paragraph 4(a)(I) of this Part B/C of
this Article Third.
(c) ALTERNATE CONSIDERATION IN CONNECTION WITH SIGNIFICANT TRANSACTION
EXCHANGE. In connection with any Significant Transaction Exchange, the
corporation may, at the sole discretion of the Board of Directors, (i) in lieu
of issuing shares of Common Stock in exchange for shares of Consumer Services
Group Common Stock, either (x) subject to the limitations described in paragraph
2(b) of this Part B/C of this Article Third and to the other provisions
described in this paragraph 4(c) of this Part B/C of this Article Third, declare
and pay a dividend in cash and/or in securities or other property (determined as
provided below) to holders of the outstanding shares of Consumer Services Group
Common Stock equally on a share for share basis in an aggregate amount equal to
the Consumer Services Group Net Proceeds of such Significant Transaction; or (y)
provided that there are assets of the corporation legally available therefor and
to the extent the Consumer Services Group Available Dividend Amount would have
been sufficient to pay a dividend in lieu thereof as described in clause (x) of
this paragraph 4(c) of this Part B/C of this Article Third, then (A) if such
Significant Transaction involves the Disposition of all (not merely
substantially all) of the properties and assets of the Consumer Services Group,
redeem all outstanding shares of Consumer Services Group Common Stock in
exchange for cash and/or securities or other property (determined as provided
below) in an aggregate amount equal to the Consumer Services Group Net Proceeds;
(B) if such Significant Transaction involves the Disposition of substantially
all (but not all) of the properties and assets of the Consumer Services Group,
apply an aggregate amount of cash and/or securities or other property
(determined as provided below) equal to the Consumer Services Group Net Proceeds
to the redemption of outstanding shares of Consumer Services Group Common Stock,
the number of shares to be redeemed to equal the lesser of (1) the whole number
nearest the number determined by dividing the aggregate amount so allocated to
the redemption of Consumer Services Group Common Stock by the average Market
Value of one share of Consumer Services Group Common Stock during the 10-Trading
Day period beginning on the 15th Trading Day following the consummation of such
Disposition, and (2) the number of shares of Consumer Services Group Common
Stock outstanding; and (ii) in lieu of issuing solely shares of Common Stock in
exchange for shares of Consumer Services Group Common Stock, subject to the
limitations described in paragraph 2(b) of this Part B/C of this Article Third
and to the other provisions described in paragraph 4(c) of this Part B/C of this
Article Third, combine the issuance of shares of Common Stock in exchange for
shares of Consumer Services Group Common Stock with the payment of a dividend on
or the redemption of shares of Consumer Services Group Common Stock for cash
and/or other securities or other property as described below.
In the event that the Board of Directors elects the option described in
(ii) of the preceding paragraph, the outstanding shares of Consumer Services
Group Common Stock exchanged for fully paid and nonassessable shares of Common
Stock shall be exchanged at the Exchange Rate and a dividend shall be paid on
all the remaining shares of Consumer Services Group Common Stock equally on a
share for share basis, or some or all of the remaining outstanding shares of
Consumer Services Group Common Stock shall be exchanged for cash and/or other
securities or other property, as follows. The aggregate amount of such dividend,
in the case of a dividend, or the portion of the Consumer Services Group Net
Proceeds to be applied to such an exchange, in the case of an exchange, shall
equal (A) an amount equal to the total Consumer Services Group Net Proceeds
multiplied by (B) one minus a fraction, the numerator of which shall be the
number of shares of Consumer Services Group Common Stock exchanged for shares of
Common Stock and the denominator of which shall be the total number of
outstanding shares of Consumer Services Group Common Stock. In the event of an
exchange, if the Significant Transaction involves the Disposition of all (not
merely substantially all) of the properties and assets of the Consumer Services
Group,
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then all remaining outstanding shares of Consumer Services Group Common Stock
will be redeemed in exchange for cash and/or securities or other property in an
aggregate amount equal to the portion of the Consumer Services Group Net
Proceeds to be applied to the exchange. If the Significant Transaction involves
the Disposition of substantially all (but not all) of the properties and assets
of the Consumer Services Group, then the portion of the Consumer Services Group
Net Proceeds to be applied to the exchange will be used to redeem a number of
shares equal to the lesser of (1) the whole number nearest the number determined
by dividing the aggregate amount so allocated to the redemption of Consumer
Services Group Common Stock by the average Market Value of one share of Consumer
Services Group Common Stock during the 10-Trading Day period beginning on the
15th Trading Day following consummation of the Disposition, and (2) the number
of shares of Consumer Services Group Common Stock outstanding.
For purposes of this paragraph 4 of this Part B/C of this Article Third, in
the case of a Significant Transaction involving a Disposition of properties and
assets in a series of related transactions, such Disposition shall not be deemed
to have been consummated until the consummation of the last of such
transactions. Any exchange described in this paragraph 4 of this Part B/C of
this Article Third shall be effected in accordance with the applicable
provisions set forth in paragraph 5 of this Part B/C of this Article Third. In
the event that, at the time of any Significant Transaction, there are
outstanding any Convertible Securities convertible into or exercisable for
shares of Consumer Services Group Common Stock that would give the holders
rights to receive any dividend or exchange consideration related to the
Significant Transaction upon exercise, conversion or otherwise, or would adjust
as a result of such dividend or exchange to give the holder equivalent economic
rights, then the shares of Consumer Services Group Common Stock underlying such
Convertible Securities will be taken into account for purposes of determining
the terms of any dividend payment or exchange effected in lieu of a Significant
Transaction Exchange.
(d) PAYMENT TO COMMON STOCK GROUP(C). Concurrently with the payment of any
dividend referred to in paragraph 4(c) of this Part B/C of this Article Third,
at the election of the Board of Directors, either (A) the Common Stock Group(C)
shall receive from the Consumer Services Group an aggregate payment of the same
kind of property that is the subject of such dividend, which payment shall be
equal to the excess of (i) the quotient obtained by dividing (x) the aggregate
amount of such dividend, as determined by the Board of Directors, by (y) the
Consumer Services Group Allocation Fraction, over (ii) the aggregate amount of
such dividend, as so determined, or (B) the Consumer Services Group Allocation
Fraction will be adjusted as described in paragraph 8 of this Part B/C of this
Article Third. Any payment to be made to the Common Stock Group(C) pursuant to
the preceding sentence may, at the discretion of the Board of Directors, be
reflected by an allocation or by a direct transfer of cash or other property.
(e) EXCHANGE RATE. For purposes of this paragraph 4 of this Part B/C of
this Article Third, the term "Exchange Rate" shall mean the number of Exchange
Shares for which each share of Consumer Services Group Common Stock shall be
exchangeable pursuant to a Board Required Exchange or a Significant Transaction
Exchange, determined as follows. If the shares of Consumer Services Group Common
Stock are to be exchanged for shares of Common Stock, each share of Consumer
Services Group Common Stock shall be exchangeable for such number of shares of
Common Stock (calculated to the nearest 1/10,000), subject to paragraph 5 below,
equal to % of the ratio of the Average Market Price Per Share of such
Consumer Services Group Common Stock to the Average Market Price Per Share of
Common Stock. For purposes of computing the Exchange Rate, the "Average Market
Price Per Share" of Common Stock or Consumer Services Group Common Stock, as the
case may be, shall mean (i) in the case of a Board Required Exchange, the
average of the daily Market Value per share for such Common Stock or Consumer
Services Group Common Stock for the 40 consecutive Trading Days ending on the
15th Trading Day prior to the date an Exchange Notice is mailed, or (ii) in the
case of a Significant Transaction Exchange, the average of the daily Market
Value per share for such Common Stock or Consumer Services Group Common Stock
for the 10 consecutive Trading Days beginning on the 15th Trading Day following
consummation of the Significant Transaction. If the shares of Consumer Services
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Group Common Stock are to be exchanged for shares of one or more Consumer
Services Group Subsidiaries, such shares of Consumer Services Group Common Stock
shall be exchanged, on a pro rata basis, for an aggregate number of outstanding
fully paid and nonassessable shares of common stock of each such Consumer
Services Group Subsidiary equal to the number of outstanding shares of common
stock of such Subsidiary held by the corporation multiplied by the Consumer
Services Group Allocation Fraction and, if the Board of Directors so determines,
the remaining shares of such Subsidiary shall be distributed on a pro rata basis
to the holders of shares of Common Stock (or shares of Common Stock shall be
exchanged for such remaining shares of such Subsidiary); provided that no such
distribution (or mandatory exchange) may occur unless the distribution (or
mandatory exchange) is tax free to the holders of Common Stock (except with
respect to any cash received by such holders in lieu of fractional shares). If
at the time of such an exchange for shares of one or more Consumer Services
Group Subsidiaries, there are outstanding any Convertible Securities convertible
into or exercisable for shares of Consumer Services Group Common Stock that
would become exercisable or convertible for shares of one or more Consumer
Services Group Subsidiaries as a result of such exchange, and the obligation to
issue such shares under such options, warrants, convertible securities or
similar rights is not assumed or otherwise provided for by one or more Consumer
Services Group Subsidiaries, then the shares of Consumer Services Group Common
Stock underlying such Convertible Securities will be taken into account for
purposes of determining the Exchange Rate for such exchange.
For purposes of this paragraph 4 of this Part B/C of this Article Third,
"substantially all of the properties and assets" of the Consumer Services Group
as of any date shall mean a portion of such properties and assets that
represents at least 80% of the Fair Value of the properties and assets
attributed to the Consumer Services Group as of such date.
5. Certain Procedures Relating to Exchanges.
(a) The Board of Directors may, in its sole discretion, elect to issue
fractional Exchange Shares in connection with an exchange or to make a cash
payment in lieu of fractional shares, as described below. If the Board of
Directors elects not to issue fractional Exchange Shares, then no such
fractional shares shall be issued in connection with the exchange of shares of
Consumer Services Group Common Stock into Exchange Shares, and, in lieu thereof,
each holder of Consumer Services Group Common Stock who would otherwise be
entitled to a fractional interest of an Exchange Share shall, upon surrender of
such holder's certificate or certificates representing shares of Consumer
Services Group Common Stock, receive a cash payment (without interest) (the
"Fractional Payment") equal to (i) in the case of an exchange for shares of
Common Stock, the product resulting from multiplying (A) the fraction of a share
of Common Stock to which such holder would otherwise have been entitled by (B)
the Average Market Price Per Share of Common Stock on the Exchange Date, or (ii)
in the case of an exchange for shares of one or more Consumer Services Group
Subsidiaries, such value as is determined by the Board of Directors.
(b) No adjustments in respect of dividends shall be made upon the exchange
of any shares of Consumer Services Group Common Stock; provided, however, that,
if the Exchange Date with respect to Consumer Services Group Common Stock shall
be subsequent to the record date for the payment of a dividend or other
distribution thereon or with respect thereto but prior to the payment or
distribution thereof, the registered holders of such shares at the close of
business on such record date shall be entitled to receive the dividend or other
distribution payable on such shares on the date set for payment of such dividend
or other distribution, notwithstanding the exchange of such shares or the
corporation's default in payment of the dividend or distribution due on such
date.
(c) At such time or times as the corporation exercises its right to cause a
redemption or exchange pursuant to paragraph 4(a)(I) or 4(a)(II) of this Part
B/C of this Article Third or to cause a Board Required Exchange, and at the time
of any Significant Transaction Exchange, the corporation shall give notice of
such exchange to the holders of Consumer Services Group Common Stock whose
shares are to be exchanged, by mailing by first-class mail a notice of such
exchange (an "Exchange Notice"), in the case of an exchange at the discretion of
the Board of Directors, not less
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than 15 nor more than 60 days prior to the date fixed for such exchange (the
"Exchange Date"), and, in the case of any other required exchange, as soon as
practicable before or after the Exchange Date, in either case, to their last
addresses as they appear upon the corporation's books. Each such Exchange Notice
shall specify 1) the Exchange Date, 2) the Exchange Rate applicable to, or a
description of the consideration to be received in, such exchange, and 3) any
conditions to the occurrence of such exchange as set forth by the Board of
Directors (which conditions may be waived by the Board of Directors in its sole
discretion), and shall state that issuance of certificates representing the
applicable type of Exchange Shares to be received upon exchange of shares of
Consumer Services Group Common Stock shall be upon surrender of certificates
representing such shares of Consumer Services Group Common Stock.
(d) Before any holder of shares of Consumer Services Group Common Stock
shall be entitled to receive certificates representing such Exchange Shares,
such holder must surrender, at such office as the corporation shall specify,
certificates for such shares of Consumer Services Group Common Stock duly
endorsed to the corporation or in blank or accompanied by proper instruments of
transfer to the Corporation or in blank, unless the corporation shall waive such
requirement. The corporation shall, as soon as practicable after such surrender
of certificates representing such shares of Consumer Services Group Common
Stock, issue and deliver, at the office of the transfer agent representing
Exchange Shares, to the holder for whose account such shares of Consumer
Services Group Common Stock were so surrendered, or to such holder's nominee or
nominees, certificates representing the number of Exchange Shares to which such
holder shall be entitled, together with the Fractional Payment, if any.
(e) From and after any Exchange Date, all rights of a holder of shares of
Consumer Services Group Common Stock shall cease except for the right, upon
surrender of the certificates representing such shares of Consumer Services
Group Common Stock, to receive certificates representing Exchange Shares
together with a Fractional Payment, if any, as described in paragraphs 5(a) and
5(d) of this Part B/C of this Article Third and rights to dividends as described
in paragraph 5(b) of this Part B/C of this Article Third. No holder of a
certificate that immediately prior to the applicable Exchange Date represented
shares of Consumer Services Group Common Stock shall be entitled to receive any
dividend or other distribution with respect to Exchange Shares until surrender
of such holder's certificate for a certificate or certificates representing
Exchange Shares. Upon surrender, the holder shall receive the amount of any
dividends or other distributions (without interest) that were payable with
respect to a record date after the Exchange Date, but that were not paid by
reason of the foregoing with respect to the number of Exchange Shares
represented by the certificate or certificates issued upon such surrender. From
and after an Exchange Date applicable to Consumer Services Group Common Stock,
the corporation shall, however, be entitled to treat certificates for Consumer
Services Group Common Stock that have not yet been surrendered for exchange as
evidencing the ownership of the number of Exchange Shares for which the shares
of Consumer Services Group Common Stock represented by such certificates have
been exchanged, notwithstanding the failure to surrender such certificates.
(f) If any certificate for Exchange Shares is to be issued in a name other
than that in which the certificate representing shares of Consumer Services
Group Common Stock surrendered in exchange therefor is registered, it shall be a
condition of such issuance that the person requesting the issuance pays any
transfer or other taxes required by reason of the issuance of certificates for
such Exchange Shares in a name other than that of the record holder of the
certificate surrendered, or establishes, to the satisfaction of the corporation
or its agent, that such tax has been paid or is not applicable. Under no
circumstances shall the corporation be liable to a holder of shares of Consumer
Services Group Common Stock for any Exchange Shares or dividends or
distributions thereon delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.
(g) At the time an Exchange Notice is delivered with respect to any shares
of Consumer Services Group Common Stock, or at the time of the Exchange Date, if
earlier, the corporation shall have reserved and kept available, solely for the
purpose of issuance upon exchange of the outstanding
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shares of Consumer Services Group Common Stock, such number of Exchange Shares
as shall be issuable upon the exchange of the number of shares of Consumer
Services Group Common Stock specified or to be specified in the applicable
Exchange Notice, provided that the corporation shall not under any circumstances
be precluded from satisfying its obligation in respect of the exchange of the
outstanding shares of Consumer Services Group Common Stock by delivery of
purchased Exchange Shares that are held in the treasury of the corporation.
6. Liquidation.
In the event of a liquidation, dissolution or winding up of the
corporation, whether voluntary or involuntary, after payment or provision for
payment of the debts and other liabilities of the corporation and subject to the
prior payment in full of the preferential amounts to which any class or series
of Preferred Stock is entitled, (a) Common Stock shall share in the aggregate,
on a share for share basis, in a percentage of the funds of the corporation
remaining for distribution to its common shareholders equal to 100% multiplied
by the average daily ratio (expressed as a decimal) of X/Z for the 20-Trading
Day period ending on the Trading Day prior to the date of the public
announcement of such liquidation, dissolution or winding up, (b) the holders of
the shares of Consumer Services Group Common Stock shall share in the aggregate
in a percentage of the funds of the corporation remaining for distribution to
its common shareholders equal to 100% multiplied by the average daily ratio
(expressed as a decimal) of C/Z for such 20-Trading Day period, [(c) as provided
in paragraph 6 of Part B of this Article Third, the holders of the shares of
Broadband Group Common Stock shall share in the aggregate in a percentage of the
funds of the corporation remaining for distribution to its common shareholders
equal to 100% multiplied by the average daily ratio (expressed as a decimal) of
B/Z for such 20-Trading Day period], and (d) if applicable, the holders of the
shares of any other class of common shares of the corporation (other than Common
Stock, Consumer Services Group Common Stock [or Broadband Group Common Stock],
on the basis that may be set forth in this Certificate with respect to any such
shares, shall share in the aggregate in a percentage of the funds of the
corporation remaining for distribution to its common shareholders equal to 100%
multiplied by the average daily ratio (expressed as a decimal) of V/Z for such
20-Trading Day period, where X is the aggregate Market Capitalization of the
Common Stock, C is the aggregate Market Capitalization of Consumer Services
Group Common Stock, [B is the aggregate Market Capitalization of Broadband Group
Common Stock,] V is the aggregate Market Capitalization, if applicable, of any
other class of common shares (other than Common Stock, Consumer Services Group
Common Stock, [and Broadband Group Common Stock]), and Z is the aggregate Market
Capitalization of (i) the Common Stock, (ii) the Consumer Services Group Common
Stock, [(iii) the Broadband Group Common Stock,] and (iv) any other class of
common shares of the corporation (other than Common Stock, Consumer Services
Group Common Stock, [and Broadband Group Common Stock]). Neither the
consolidation or merger of the corporation with or into any other corporation or
corporations nor the sale, transfer or lease of all or substantially all of the
assets of the corporation shall itself be deemed to be a liquidation,
dissolution or winding up of the corporation within the meaning of this
paragraph 6 of this Part B/C of this Article Third. Notwithstanding the
foregoing, any transaction or series of related transactions that results in all
of the assets and liabilities included in the Consumer Services Group being held
by one or more Consumer Services Group Subsidiaries, and the distribution of
some or all of the shares of such Consumer Services Group Subsidiaries (and no
other material assets or liabilities) to the holders of the outstanding Consumer
Services Group Common Stock shall not constitute a voluntary or involuntary
liquidation, dissolution or winding up of the corporation for purposes of this
paragraph 6 of this Part E of this Article Third, but shall be subject to
paragraph 4 of this Part B/C of this Article Third.[Notwithstanding the
foregoing, any transaction or series of related transactions that results in all
of the assets and liabilities included in the Broadband Group being held by one
or more Broadband Group Subsidiaries, and the distribution of some or all of the
shares of such Broadband Group Subsidiaries (and no other material assets or
liabilities) to the holders of the outstanding Broadband Group Common Stock
shall not constitute a voluntary or involuntary liquidation, dissolution or
winding up of the corporation for purposes of this paragraph 6 of this Part C of
this Article Third, but shall be subject to paragraph 4 of Part B of this
Article Third.]
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7. Determinations by the Board of Directors.
Any determinations made by the Board of Directors under any provision of
this Part B/C of this Article Third shall be final and binding on all
shareholders of the corporation, except as may otherwise be required by law. The
corporation shall prepare a statement of any determination by the Board of
Directors, respecting the fair market value of any properties, assets or
securities, and shall file such statement with the Secretary of the corporation.
8. Adjustment of the Consumer Services Group Allocation Fraction.
(a) The denominator of the Consumer Services Group Allocation Fraction
shall be adjusted from time to time as deemed appropriate by the Board of
Directors (i) to reflect subdivisions (by stock split or otherwise) and
combinations (by reverse stock split or otherwise) of Consumer Services Group
Common Stock and stock dividends payable in shares of Consumer Services Group
Common Stock, (ii) to reflect the fair market value of contributions or
allocations by the corporation of cash or property or other assets or
liabilities from the Common Stock Group(C) to the Consumer Services Group (or
vice versa), or of cash or property or other assets or liabilities of the Common
Stock Group(C) to, or for the benefit of, employees of the Consumer Services
Group in connection with employee benefit plans or arrangements of the
corporation or any of its subsidiaries (or vice versa), (iii) to reflect the
number of shares of capital stock of the corporation contributed to, or for the
benefit of, employees of the Consumer Services Group in connection with benefit
plans or arrangements of the corporation or any of its Subsidiaries, (iv) to
reflect repurchases by the corporation of shares of Consumer Services Group
Common Stock for the account of the Consumer Services Group, (v) to reflect
issuances of Consumer Services Group Common Stock for the account of the
Consumer Services Group, (vi) to reflect dividends or other distributions to
holders of the Consumer Services Group Common Stock to the extent no payment is
made to the Common Stock Group(C), and (vii) under such other circumstances as
the Board of Directors determines appropriate to reflect the economic substance
of any other event or circumstance, provided that, in each case, the adjustment
shall be made in a manner that is fair and equitable to holders of Common Stock
and Consumer Services Group Common Stock (and intended to reflect the relative
deemed economic ownership interest, if any, of the Common Stock Group(C) in the
Broadband Group). Any adjustment made by the Board of Directors pursuant to the
preceding sentence shall, subject to the foregoing, be at the sole discretion of
the Board of Directors, and all such determinations shall be final and binding
on all shareholders of the corporation. For purposes of this paragraph 8 of this
Part B/C of this Article Third, the consideration paid by the Common Stock
Group(C) to acquire any assets or other property or contributed or allocated to
the Consumer Services Group shall be presumed to be the "fair market value" as
of its acquisition.
(b) Without duplication of any adjustment pursuant to paragraph 8(a) of
this Part B/C of this Article Third, in the event that the corporation shall
issue shares of Consumer Services Group Common Stock for the account of the
Consumer Services Group, then the denominator of the Consumer Services Group
Allocation Fraction shall be increased by the number of shares of Consumer
Services Group Common Stock so issued.
(c) Without duplication of any adjustment pursuant to paragraph 8(a) of
this Part B/C of this Article Third, if, in connection with any share issuance
described in paragraph 8(b) of this Part B/C of this Article Third, or
otherwise, the corporation contributes or allocates cash or other property or
assets from the Common Stock Group(C) to the Consumer Services Group, the
denominator of the Consumer Services Group Allocation Fraction shall be
increased (or further increased) by an amount obtained by dividing (i) the fair
market value of such cash, property or assets (as determined by the Board of
Directors) by (ii) the net per share offering price of the Consumer Services
Group Common Stock.
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9. Certain Definitions.
Unless the context otherwise requires, the terms defined in this paragraph
9 of this Part E of this Article Third shall have, for all purposes of this Part
B/C of this Article Third, the meanings herein specified:
"Common Stock Group(C)" shall mean, as of any date, the interest of the
corporation in all of the businesses in which the corporation is or has been
engaged, directly or indirectly (either itself or through direct or indirect
subsidiaries, affiliates, joint ventures or other investments or any of their
predecessors or successors), and the respective assets and liabilities of the
corporation therein, other than (a) the Consumer Services Group Allocated
Portion of the Consumer Services Group [and (b) any businesses, assets or
liabilities of the Broadband Group].
"Consumer Services Group" shall mean, as of any date that any shares of
Consumer Services Group Common Stock have been issued and continue to be
outstanding, without duplication, the direct or indirect interest of the
corporation (either itself or through direct or indirect subsidiaries,
affiliates, joint ventures or other investments, or any of their predecessors or
successors) (a) in all of the businesses, assets and liabilities reflected in
the financial statements of the Consumer Services Group dated December 31, 2000,
publicly filed by the corporation, including any successor to the Consumer
Services Group by merger, consolidation or sale of all or substantially all of
its assets (whether or not in connection with a Consumer Services Group Related
Business Transaction), (b) the other assets and liabilities (contingent or
otherwise) of the corporation and its Subsidiaries primarily related to the
businesses, assets and liabilities described in clause (a) and all net income
and net losses arising in respect thereof after such date, (c) all assets,
liabilities and businesses acquired by the Consumer Services Group or acquired
by the corporation or any of its Subsidiaries for the account of, or
contributed, allocated or otherwise transferred to, the Consumer Services Group
(including the net proceeds of any new issuance for the account of the Consumer
Services Group of any new shares of Consumer Services Group Common Stock or
Convertible Securities), in each case, after the date of such financial
statements and as determined by the Board of Directors in accordance with the
provisions of paragraphs 7 and 8 of this Part B/C of this Article Third, and (d)
the proceeds of any Disposition of any of the foregoing; provided, however, that
the Consumer Services Group shall not include (a) any assets, liabilities or
businesses disposed of after the date of such financial statements or (b) any
assets, liabilities or businesses allocated to the Common Stock Group(C) or
otherwise distributed or otherwise transferred from the Consumer Services Group,
whether to the Common Stock Group(C), to holders of shares of Consumer Services
Group Common Stock or otherwise, in each case after the date of such financial
statements and as determined by the Board of Directors in accordance with the
provisions of paragraphs 7 and 8 of this Part B/C of this Article Third. [The
Consumer Services Group shall not include any business, assets or liabilities of
the Broadband Group.]
"Consumer Services Group Allocated Portion" shall mean, with respect to the
Consumer Services Group as a whole, or any dividend, distribution, payment,
consideration or other amount or allocation requiring apportionment between the
holders of Consumer Services Group Common Stock (other than the corporation and
its Subsidiaries), on the one hand, and the Common Stock Group(C), on the other
hand, the following: (a) in the case of the Consumer Services Group as a whole,
the proportion of such Group represented by the Consumer Services Group
Allocation Fraction, and (b) in the case of any other amount or allocation, the
product of (i) such amount or allocation and (ii) the Consumer Services Group
Allocation Fraction.
"Consumer Services Group Allocation Fraction" shall mean, as of any date of
determination, a fraction, the numerator of which shall be the number of shares
of Consumer Services Group Common Stock outstanding on such date and the
denominator of which shall be a number initially determined by the Board of
Directors, in its sole discretion, prior to the Initial Issuance Date, subject
to adjustment from time to time as described in paragraph 8 of this Part B/C of
this Article Third, provided that such fraction shall in no event be greater
than one. If the holders of any securities of the corporation or any other
Person that are convertible into or exercisable or exchangeable for shares
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of Consumer Services Group Common Stock are entitled to participate in any
dividend or other distribution with respect to the Consumer Services Group
Common Stock, such shares so issuable upon such conversion, exercise or exchange
shall be taken into account in calculating the Consumer Services Group
Allocation Fraction and any amount payable to the Common Stock Group(C) in such
manner as the Board of Directors determines to be appropriate.
"Consumer Services Group Available Dividend Amount" shall mean, as of any
date, the Consumer Services Group Allocated Portion of the excess of (a) the
amount by which the total assets of the Consumer Services Group exceed the total
liabilities of the Consumer Services Group as of such date over (b) the sum of
(i) the par value of all issued shares of Consumer Services Group Common Stock
and each class or series of Preferred Stock attributed to the Consumer Services
Group, (ii) the amount of the consideration received for any shares of Preferred
Stock attributed to the Consumer Services Group without par value that have been
issued, except such part of the consideration therefor as may have been
allocated to surplus in a manner permitted by law, and (iii) any amount not
included in subclauses (i) and (ii) above that the corporation (by appropriate
action of the Board of Directors) has transferred to stated capital specifically
in respect of Consumer Services Group Common Stock, minus (c) all reductions
from such sums set forth in clauses (i), (ii) and (iii) above as have been
effected in a manner permitted by law; provided, however, that, in the event
that the law governing the corporation changes from that governing the
corporation on the date the adoption of the Amendment to this Certificate
pursuant to which the Consumer Services Group Common Stock was authorized
(whether because of amendment of the applicable law or because of a change in
the jurisdiction of incorporation of the corporation through merger or
otherwise), the Consumer Services Group Available Dividend Amount shall mean the
amount of dividends, as determined by the Board of Directors, that could be paid
by a corporation (governed under such applicable law) having the assets and
liabilities of the Consumer Services Group, an amount of outstanding common
stock (and having an aggregate par value) equal to the amount (and aggregate par
value) of the outstanding Consumer Services Group Common Stock and of each class
or series of Preferred Stock attributed to the Consumer Services Group and
having an amount of earnings or loss or other relevant corporate attributes as
reasonably determined by the Board of Directors in light of all factors deemed
relevant by the Board of Directors.
"Consumer Services Group Net Proceeds" shall mean, as of any date, with
respect to any Disposition of any of the properties and assets of the Consumer
Services Group, an amount, if any, equal to the Consumer Services Group
Allocated Portion of the gross proceeds of such Disposition after any payment
of, or reasonable provision for, (a) any taxes payable by the corporation or any
other member of the Common Stock Group in respect of such Disposition or in
respect of any mandatory dividend or redemption resulting from such Disposition
(or that would have been payable but for the utilization of tax benefits
attributable to the Common Stock Group(C) [or the Broadband Group]), (b) any
transaction costs borne by the Common Stock Group(C) in connection with such
Disposition, including, without limitation, any legal, investment banking and
accounting fees and expenses borne by the Common Stock Group(C) in connection
with such Disposition, (c) any liabilities and other obligations (contingent or
otherwise) of the Consumer Services Group borne by the Common Stock Group(C) in
connection with such Disposition, including, without limitation, any indemnity
or guarantee obligations incurred by the Common Stock Group(C) in connection
with the Disposition or any liabilities assumed by the Common Stock Group(C) for
future purchase price adjustments, and (d) any preferential amounts, accumulated
and unpaid dividends and other obligations in respect of Preferred Stock
attributed to the Consumer Services Group. To the extent the proceeds of any
Disposition include any securities or other property other than cash, the Board
of Directors shall determine the value of such securities or property; provided
that the value of any marketable securities included in such proceeds shall be
the average of the daily Market Value of such securities for the 10 consecutive
Trading Days beginning on the 15th Trading Day following consummation of the
Disposition.
"Consumer Services Group Related Business Transaction" shall mean any
Disposition of all or substantially all the properties and assets attributed to
the Consumer Services Group in a transaction
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or series of related transactions that results in the corporation or one or more
of its Subsidiaries receiving in consideration of such properties and assets
primarily equity securities (including, without limitation, capital stock, debt
securities convertible into or exchangeable for equity securities or interests
in a general or limited partnership or limited liability company, without regard
to the voting power or other management or governance rights associated
therewith) of any entity that (a) acquires such properties or assets or succeeds
(by merger, formation of a joint venture or otherwise) to the business conducted
with such properties or assets or controls such acquiror or successor, and (b)
which the Board of Directors determines is primarily engaged or proposes to
engage primarily in one or more businesses similar or complementary to the
businesses conducted by the Consumer Services Group prior to such Disposition.
"Convertible Securities" shall mean any securities of the corporation
[(other than Broadband Group Common Stock)] or any Subsidiary of the corporation
that are convertible into, exchangeable for or evidence the right to purchase
any shares of Common Stock, Consumer Services Group Common Stock or [Broadband
Group Common Stock], whether upon conversion, exercise or exchange, or pursuant
to anti-dilution provisions of such securities or otherwise.
"Disposition" shall mean the sale, transfer, assignment or other
disposition (whether by merger, consolidation, sale or contribution of assets or
stock, or otherwise) by the corporation (or its successors) or any of its
Subsidiaries or properties or assets. Disposition shall not include a merger,
consolidation, exchange of shares or other business combination transaction
involving the corporation in which the corporation (or its successors)
continues, immediately following such transaction, to hold the same, direct and
indirect, interest in the business, assets and liabilities comprising the
Consumer Services Group that it held immediately prior to such transaction
(other than as a result of any action by any Person included in the Consumer
Services Group).
"Fair Value" shall mean, in the case of equity securities or debt
securities of a class that has previously been publicly traded for a period of
at least three months, the Market Value thereof (if such Market Value, as so
defined, can be determined) or, in the case of an equity security or debt
security that has not been publicly traded for at least such period, means the
fair value per share of stock or per other unit of such other security, on a
fully distributed basis, as determined by an independent investment banking firm
experienced in the valuation of securities selected in good faith by the Board
of Directors; provided, however, that, in the case of property other than
securities, the "Fair Value" thereof shall be determined in good faith by the
Board of Directors based upon such appraisals or valuation reports of such
independent experts as the Board of Directors shall in good faith determine to
be appropriate in accordance with good business practice. Any such determination
of Fair Value shall be described in a statement filed with the records of the
actions of the Board of Directors.
"Group" shall mean the Common Stock Group(C)[, the Broadband Group] or the
Consumer Services Group.
"Initial Issuance Date" shall mean the date of first issuance of any shares
of Consumer Services Group Common Stock.
"Market Capitalization" of any class or series of capital stock of the
corporation on any Trading Day shall mean the product of (a) the Market Value of
one share of such class or series on such Trading Day and (b) the number of
shares of such class or series outstanding on such Trading Day.
"Market Value" of any class or series of capital stock of the corporation
on any day shall mean the average of the high and low reported sales prices
regular way of a share of such class or series on such day (if such day is a
Trading Day, and, if such day is not a Trading Day, on the Trading Day
immediately preceding such day), or, in case no such reported sale takes place
on such Trading Day, the average of the reported closing bid and asked prices
regular way of a share of such class or series on such Trading Day, in either
case, on the New York Stock Exchange or, if the shares of such class or series
are not quoted on the New York Stock Exchange on such Trading Day, on the Nasdaq
B-14
343
National Market, or, if the shares of such class or series are not quoted on the
Nasdaq National Market on such Trading Day, the average of the closing bid and
asked prices of a share of such class or series in the over-the-counter market
on such Trading Day as furnished by any New York Stock Exchange member firm
selected from time to time by the corporation, or, if such closing bid and asked
prices are not made available by any such New York Stock Exchange member firm on
such Trading Day (including, without limitation, because such securities are not
publicly held), the market value of a share of such class or series as
determined by the Board of Directors; provided that, for purposes of determining
the ratios set forth in paragraph 6 of this Part B/C of this Article Third, (a)
the "Market Value" of any share of Common Stock, Consumer Services Group Common
Stock [or Broadband Group Common Stock] on any day prior to the "ex" date or any
similar date for any dividend or distribution paid or to be paid with respect to
Common Stock, Consumer Services Group Common Stock [or Broadband Group Common
Stock], as applicable, shall be reduced by the fair market value of the per
share amount of such dividend or distribution as determined by the Board of
Directors, and (b) the "Market Value" of any share of Common Stock, any share of
Consumer Services Group Common Stock [or Broadband Group Common Stock] on any
day prior to (i) the effective date of any subdivision (by stock split or
otherwise) or combination (by reverse stock split or otherwise) of outstanding
shares of Common Stock, Consumer Services Group Common Stock [or Broadband Group
Common Stock], as applicable, or (ii) the "ex" date or any similar date for any
dividend or distribution with respect to the Common Stock, Consumer Services
Group Common Stock [or Broadband Group Common Stock] in shares of Common Stock,
Consumer Services Group Common Stock [or Broadband Group Common Stock], as
applicable, shall be appropriately adjusted to reflect such subdivision,
combination, dividend or distribution.
"Person" shall mean any individual, corporation, partnership, limited
liability company, joint venture, association, joint stock company, trust,
unincorporated organization, government or agency or political subdivision
thereof, or other entity, whether acting in an individual, fiduciary or other
capacity.
"Qualifying Subsidiary" of a Person shall mean a Subsidiary of such Person
in which such Person's ownership and voting interest is sufficient to satisfy
the ownership and voting requirements of the Internal Revenue Code of 1986, as
amended, and the regulations thereunder, for a distribution of such Person's
interest in such Subsidiary to the holders of Consumer Services Group Common
Stock and, in the event that the Consumer Services Group Allocation Fraction is
less than one, the holders of Common Stock (or any such securities into which
the Consumer Services Group Common Stock or the Common Stock may have been
converted, reclassified or changed or for which they may have been exchanged),
as the case may be, to be tax free to such holders.
"Subsidiary" shall mean, with respect to any Person, any corporation,
limited liability company or partnership 50% or more of whose outstanding voting
securities or membership or partnership interests, as the case may be, are,
directly or indirectly, owned by such Person.
"Trading Day" shall mean each weekday other than any day on which any
relevant class or series of capital stock of the corporation is not available
for trading on the New York Stock Exchange or the Nasdaq National Market or in
the over-the-counter market.
"Tax Event" shall mean receipt by the corporation of an opinion of tax
counsel of the corporation's choice, to the effect that, as a result of any
amendment to, clarification of, or change (including a prospective change) in,
the laws (or any interpretation or application of the laws) of the United States
or any political subdivision or taxing authority thereof or therein (including
enactment of any legislation and the publication of any judicial or regulatory
decision, determination or pronouncement) which amendment, clarification or
change is effective, announced, released, promulgated or issued on or after the
date of initial issuance of the Consumer Services Group Common Stock, regardless
of whether such amendment, clarification or change is issued to or in connection
with a proceeding involving the corporation, the Common Stock Group(C) or the
B-15
344
Consumer Services Group and whether or not subject to appeal, there is more than
an insubstantial risk that:
(i) for tax purposes, any issuance of Consumer Services Group Common
Stock would be treated as a sale or other taxable disposition by the
corporation or any of its Subsidiaries of any of the assets, operations or
relevant subsidiaries to which the Consumer Services Group Common Stock
relates,
(ii) the existence of the Consumer Services Group Common Stock would
subject the corporation, its Subsidiaries or affiliates, or any of their
respective successors or shareholders to the imposition of tax or to other
adverse tax consequences, or
(iii) for tax purposes, either Common Stock or Consumer Services Group
Common Stock is not or, at any time in the future, will not be treated
solely as common stock of the corporation.
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APPENDIX C
FORM OF BY-LAW AMENDMENT
[NOTE: THE AT&T GROUPS CAPITAL STOCK COMMITTEE WILL REPLACE THE LAST TWO
PARAGRAPHS OF THE BY-LAW PROVISION ESTABLISHING STANDING COMMITTEES SUCH AS THE
AUDIT COMMITTEE AND THE COMPENSATION COMMITTEE. THESE PARAGRAPHS CURRENTLY
RELATE TO THE LIBERTY MEDIA GROUP CAPITAL STOCK COMMITTEE AND THE AT&T WIRELESS
GROUP CAPITAL STOCK COMMITTEE.]
AT&T Groups Capital Stock Committee. The board of directors shall form an
AT&T Groups Capital Stock Committee, the members of which shall be selected by
the board of directors of the Corporation. The board of directors of the
Corporation shall delegate to the AT&T Groups Capital Stock Committee the
authority to, and the AT&T Groups Capital Stock Committee will have the
authority to, (i) interpret, make determinations under, and oversee the
implementation of the policies set forth in the Policy Statement Regarding AT&T
Groups Tracking Stock Matters; (ii) review the policies, programs and practices
of the Corporation relating to (a) the business and financial relationships
between the Corporation or any of its units and each of AT&T Broadband Group and
AT&T Consumer Services Group, and (b) any matters arising in connection
therewith, all to the extent the AT&T Groups Capital Stock Committee may deem
appropriate; and (iii) recommend such changes in such policies, programs and
practices as the AT&T Groups Capital Stock Committee may deem appropriate. In
performing this function, the AT&T Groups Capital Stock Committee's role shall
not be to make decisions concerning matters referred to its attention, but,
rather, to oversee the process by which decisions concerning such matters are
made. The AT&T Groups Capital Stock Committee shall have and may exercise such
other powers, authority and responsibilities as may be determined from time to
time by the board of directors of the Corporation.
C-1
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AT&T CORP.
BOARD OF DIRECTORS
POLICY STATEMENT REGARDING
GROUPS TRACKING STOCK MATTERS
1. GENERAL POLICY. It is the policy of the Board of Directors (the "BOARD") of
AT&T Corp. ("AT&T") that:
(a) all material matters as to which the holders of the Common Stock
and the holders of Broadband Group Common Stock and/or Consumer Services
Group Common Stock may have potentially divergent interests shall be
resolved in a manner that the Board (or the Groups Capital Stock Committee)
determines to be in the best interests of AT&T and all of its common
shareholders as a whole, after giving fair consideration to the potentially
divergent interests and all other relevant interests of the holders of the
separate classes of common stock of AT&T; and
(b) a process of fair dealing will govern the relationship between the
Common Stock Group, the Broadband Group and the Consumer Services Group and
the means by which the terms of any material transaction between them will
be determined.
2. RELATIONSHIP BETWEEN THE GROUPS.
AT&T will seek to manage the Common Stock Group, the Broadband Group and
the Consumer Services Group in a manner designed to maximize the operations,
unique assets and value of all Groups, and with complementary deployments of
capital and facilities.
(a) General. Subject to special arrangements or existing commercial
arrangements in effect at the time this policy statement is adopted, except
as otherwise provided in this policy statement, all material commercial
transactions between the Common Stock Group, the Broadband Group and the
Consumer Services Group will be on commercially reasonable terms taken as a
whole and will be subject to the review and approval of the Groups Capital
Stock Committee.
(b) Inter-group Borrowing. The Groups may make loans to each other on
terms and conditions substantially equivalent to the interest rates and
terms and conditions that the groups would be able to obtain from third
parties without the benefit of support or guarantee by AT&T.
(c) Allocation of Corporate Overhead and Support Services. With
respect to shared corporate services that arise as a result of being part
of a combined entity (e.g., securities filing and financial reporting
services), costs relating to such services will be directly attributed to
the Group utilizing such services, and to the extent such costs are not
directly attributable, allocated between the Groups on a fair and
reasonable basis as determined by the Board. With respect to other support
services (e.g., billing and purchasing services), while the Groups will
seek to obtain for the combined Groups the lowest aggregate cost for all
such services, each Group will be entitled to procure such services from
the other Groups or from third parties.
(d) Marketing of Services. Each Group will work collaboratively with
the other Groups to understand and take into account the other's expansion,
acquisition, deployment, marketing and sales plans, with the goal of
minimizing overlaps and conflicts between the Groups.
(e) No Inter-Group Interest in Common Stock Group. The Broadband
Group and the Consumer Services Group shall not acquire an Inter-Group
Interest in the Common Stock Group.
C-2
347
3. CORPORATE OPPORTUNITIES. The Board will allocate any business opportunities
and operations, any acquired assets and businesses and any assumed liabilities
between the Groups, in whole or in part, as it considers to be in the best
interests of AT&T and its shareholders as a whole and as contemplated by the
provisions of these policies. To the extent a business opportunity or operation,
an acquired asset or business, or an assumed liability would be suitable to be
undertaken by or allocated to more than one Group, it will be allocated by the
Board in its business judgment or in accordance with procedures adopted by the
Board from time to time to ensure that decisions will be made in the best
interests of AT&T and its shareholders as a whole. Any such allocation may
involve the consideration of a number of factors that the Board determines to be
relevant, including, without limitation, whether the business opportunity or
operation, the acquired asset or business, or the assumed liability is
principally within the existing scope of a Group's business and whether a Group
is better positioned to undertake or have allocated to it such business
opportunity or operation, acquired assets or business or assumed liability.
4. DIVIDEND POLICY. Subject to the limitations set forth in the Charter,
including any preferential rights of any series of preferred stock of AT&T, and
to the limitations of applicable law, holders of shares of Common Stock,
Broadband Group Common Stock and/or Consumer Services Group Common Stock will be
entitled to receive dividends on such stock when, as and if authorized and
declared by the Board. The payment of dividends on the Common Stock will be a
business decision to be made by the Board from time to time based upon the
results of operations, financial condition, capital requirements and future
prospects of AT&T and such other factors as the Board considers relevant.
Payment of dividends on the Common Stock may be restricted by loan agreements,
indentures and other transactions entered into by AT&T from time to time.
With respect to the Broadband Group Common Stock, AT&T does not expect to
pay any dividends on shares of Broadband Group Common Stock for the foreseeable
future. If and when the Board does determine to pay any dividends on shares of
Broadband Group Common Stock, any such determination will also be subject to
factors similar to those described above with respect to the payment of
dividends on the Common Stock.
With respect to the Consumer Services Group Common Stock, it is currently
expected that one-third of the current regular dividend payable on the Common
Stock will be allocated to the Common Stock and that two-thirds of that dividend
will be allocated to the Consumer Services Group Common Stock. The declaration
of dividends by AT&T and the amount thereof will, however, be in the discretion
of the Board and will depend upon each of our groups' financial performance, the
dividend policies and capital structures of comparable companies and each
group's ongoing capital needs. If and when the Board does determine to pay any
dividends on shares of Consumer Services Group Common Stock, any such
determination will also be subject to factors similar to those described above
with respect to the payment of dividends on the Common Stock.
5. GROUPS CAPITAL STOCK COMMITTEE. AT&T's by-laws will provide for a standing
committee of the Board to be known as the Groups Capital Stock Committee. The
Groups Capital Stock Committee will have and exercise such powers, authority and
responsibilities as the Board may delegate to such Committee, which will
initially include authority to (a) interpret, make determinations under, and
oversee the implementation of these policies, other than as they relate to
dividends, with respect to which all determinations will be made solely by the
Board, (b) adopt additional general policies governing the relationship between
the Groups, and (c) engage the services of accountants, investment bankers,
appraisers, attorneys and other service providers to assist it in discharging
its duties. In making determinations in connection with these policies, the
members of the Board and the Groups Capital Stock Committee will act in a
fiduciary capacity and pursuant to legal guidance concerning their respective
obligations under applicable law. The delegation of responsibilities to the
Groups Capital Stock Committee will be subject to such changes as may be
determined by the Board.
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348
6. DEFINITIONS. Capitalized terms not defined in this policy statement shall
have the meanings set forth in the Charter. References throughout this policy
statement to "ARTICLES," set in all capital letters, are references to ARTICLES
in the Charter.
6.1 Broadband Group.
"Broadband Group" means the Broadband Group as defined in Part B of ARTICLE
THIRD of the Charter.
6.2 Broadband Group Common Stock.
"Broadband Group Common Stock" means the Broadband Group Common Stock as
defined in Part A of ARTICLE THIRD of the Charter.
6.3 Charter.
"Charter" means the Restated Certificate of Incorporation of AT&T, as
amended from time to time.
6.4 Common Stock.
"Common Stock" means the Common Stock as defined in Part A of ARTICLE THIRD
of the Charter.
6.5 Common Stock Group.
"Common Stock Group" means the Common Stock Group(B) as defined in Part B
of ARTICLE THIRD of the Charter or the Common Stock Group(C) as defined in Part
C of Article Third of the Charter, as applicable.
6.6 Consumer Services Group.
"Consumer Services Group" means the Consumer Services Group as defined in
Part C of ARTICLE THIRD of the Charter.
6.7 Consumer Services Group Common Stock.
"Consumer Services Group Common Stock" means the Consumer Services Group
Common Stock as defined in Part A of ARTICLE THIRD of the Charter.
7. AMENDMENT AND MODIFICATION OF THESE POLICIES. These policies and any
resolution implementing the provisions hereof may at any time and from time to
time be amended, modified or rescinded by the Board, and the Board may adopt
additional or other policies or make exceptions with respect to the application
of these policies in connection with particular facts and circumstances, all as
the Board may determine, consistent with its fiduciary duties to AT&T and all of
its shareholders.
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349
APPENDIX D
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
HISTORICAL FINANCIAL STATEMENTS
AT&T CORP
At or for the three months ended March 31, 2001:
Unaudited Consolidated Statements of Income............... D-3
Unaudited Consolidated Balance Sheets..................... D-4
Unaudited Consolidated Statements of Changes in
Shareowners' Equity.................................... D-5
Unaudited Consolidated Statements of Cash Flows........... D-7
Notes to Unaudited Consolidated Financial Statements...... D-8
At or for the year ended December 31, 2000:
Consolidated Statements of Income......................... D-36
Consolidated Balance Sheets............................... D-37
Consolidated Statements of Changes in Shareowners'
Equity................................................. D-38
Consolidated Statements of Cash Flows..................... D-40
Notes to Consolidated Financial Statements................ D-42
AT&T BROADBAND GROUP
At or for the three months ended March 31, 2001:
Unaudited Combined Statements of Operations............... D-112
Unaudited Combined Balance Sheets......................... D-113
Unaudited Combined Statements of Changes in Combined
Attributed Net Assets.................................. D-114
Unaudited Combined Statements of Cash Flows............... D-115
Notes to Unaudited Combined Financial Statements.......... D-116
At or for the year ended December 31, 2000:
Combined Statements of Operations......................... D-126
Combined Balance Sheets................................... D-127
Combined Statements of Changes in Combined Attributed Net
Assets................................................. D-128
Combined Statements of Cash Flows......................... D-129
Notes to Combined Financial Statements.................... D-130
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PAGE
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AT&T CONSUMER SERVICES GROUP
At or for the three months ended March 31, 2001:
Unaudited Combined Statements of Income................... D-168
Unaudited Combined Balance Sheets......................... D-169
Unaudited Combined Statements of Changes in Combined
Attributed Net Assets.................................. D-170
Unaudited Combined Statements of Cash Flows............... D-171
Notes to Unaudited Combined Financial Statements.......... D-172
At or for the year ended December 31, 2000:
Combined Statements of Income............................. D-178
Combined Balance Sheets................................... D-179
Combined Statements of Changes in Combined Attributed Net
Assets................................................. D-180
Combined Statements of Cash Flows......................... D-181
Notes to Combined Financial Statements.................... D-182
AT&T COMMUNICATIONS SERVICES, INC.
At or for the three months ended March 31, 2001:
Unaudited Combined Statements of Income................... D-195
Unaudited Combined Balance Sheets......................... D-196
Unaudited Combined Statements of Changes in Combined
Attributed Net Assets.................................. D-197
Unaudited Combined Statements of Cash Flows............... D-198
Notes to Unaudited Combined Financial Statements.......... D-199
At or for the year ended December 31, 2000:
Combined Statements of Income............................. D-208
Combined Balance Sheets................................... D-209
Combined Statements of Changes in Combined Attributed Net
Assets................................................. D-210
Combined Statements of Cash Flows......................... D-211
Notes to Combined Financial Statements.................... D-213
AT&T CONSOLIDATING CONDENSED FINANCIAL STATEMENTS........... D-242
AT&T PRO FORMA FINANCIAL STATEMENTS
Unaudited Pro Forma Condensed Combined Financial
Statements............................................. D-256
Unaudited Condensed Combined Pro Forma Balance Sheet March
31, 2001............................................... D-258
Unaudited Condensed Combined Pro Forma Statement of Income
for the Year Ended, December 31, 2000.................. D-261
Unaudited Condensed Combined Pro Forma Statement of Income
for the Year Ended, December 31, 1999.................. D-263
Unaudited Condensed Combined Pro Forma Statement of Income
for the Year Ended, December 31, 1998.................. D-265
Notes to Unaudited Pro Forma Condensed Combined Financial
Statements............................................. D-267
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351
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
2001 2000
-------- --------
Revenue..................................................... $16,763 $15,901
Operating Expenses
Costs of services and products (excluding depreciation of
$1,540 and $1,178 included below)......................... 4,837 3,915
Access and other connection................................. 3,286 3,588
Selling, general and administrative......................... 3,868 3,289
Depreciation and other amortization......................... 2,141 1,566
Amortization of goodwill, franchise costs and other
purchased intangibles..................................... 846 368
Net restructuring and other charges......................... 808 773
Total operating expenses.................................... 15,786 13,499
Operating income............................................ 977 2,402
Other (expense) income...................................... (781) 668
Interest expense............................................ 969 589
Income before income taxes, minority interest, (losses)
earnings from equity investments and cumulative effect of
accounting change......................................... (773) 2,481
Provision for income taxes.................................. 292 509
Minority interest income (expense).......................... 650 (44)
Equity (losses) earnings from Liberty Media Group........... (697) 942
Net losses from other equity investments.................... 136 187
(Losses) income before cumulative effect of accounting
change.................................................... (1,248) 2,683
Cumulative effect of accounting change -- net of income
taxes of $578............................................. 904 --
Net (losses) income......................................... (344) 2,683
Dividend requirements of preferred stock.................... 181 --
Net (losses) income available to common shareowners......... $ (525) $ 2,683
AT&T Common Stock Group -- per basic share:
(Losses) earnings -- before cumulative effect of accounting
change.................................................... $ (0.19) $ 0.55
Cumulative effect of accounting change...................... 0.09 --
AT&T Common Stock Group (losses) earnings................... $ (0.10) $ 0.55
AT&T Common Stock Group -- per diluted share:
(Losses) earnings -- before cumulative effect of accounting
change.................................................... $ (0.19) $ 0.54
Cumulative effect of accounting change...................... 0.09 --
AT&T Common Stock Group (losses) earnings................... $ (0.10) $ 0.54
Dividends declared.......................................... $0.0375 $ 0.22
AT&T Wireless Group -- per basic and diluted share:
AT&T Wireless Group losses.................................. $ 0.02 $ --
Liberty Media Group -- per basic and diluted share:
(Losses) earnings -- before cumulative effect of accounting
change.................................................... $ (0.27) $ 0.37
Cumulative effect of accounting change...................... 0.21 --
Liberty Media Group (losses) earnings....................... $ (0.06) $ 0.37
See Notes to Consolidated Financial Statements
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AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
ASSETS
Cash and cash equivalents................................... $ 136 $ 126
Receivables, less allowances of $1,373 and $1,379........... 10,633 11,144
Other receivables........................................... 1,805 1,703
Investments................................................. 1,676 2,102
Deferred income taxes....................................... 855 812
Other current assets........................................ 1,148 1,200
TOTAL CURRENT ASSETS........................................ 16,253 17,087
Property, plant and equipment, net of accumulated
depreciation of $34,239 and $32,871....................... 52,265 51,161
Franchise costs, net of accumulated amortization of $1,921
and $1,664................................................ 47,924 48,218
Licensing costs, net of accumulated amortization of $1,856
and $1,762................................................ 13,568 13,626
Goodwill, net of accumulated amortization of $1,218 and
$850...................................................... 30,525 31,478
Investment in Liberty Media Group and related receivables,
net....................................................... 34,072 34,290
Other investments and related advances...................... 34,287 34,261
Prepaid pension costs....................................... 3,092 3,003
Other assets................................................ 9,155 9,099
TOTAL ASSETS................................................ $241,141 $242,223
LIABILITIES
Accounts payable............................................ $ 4,905 $ 6,455
Payroll and benefit-related liabilities..................... 1,882 2,423
Debt maturing within one year............................... 17,225 31,947
Liability under put options................................. 2,627 2,564
Other current liabilities................................... 7,805 7,478
TOTAL CURRENT LIABILITIES................................... 34,444 50,867
Long-term debt.............................................. 39,004 33,092
Long-term benefit-related liabilities....................... 3,654 3,670
Deferred income taxes....................................... 36,665 36,713
Other long-term liabilities and deferred credits............ 5,114 5,090
TOTAL LIABILITIES........................................... 118,881 129,432
Minority Interest........................................... 4,222 4,883
Company-Obligated Convertible Quarterly Income Preferred
Securities of Subsidiary Trust Holding Solely Subordinated
Debt Securities of AT&T................................... 4,713 4,710
Convertible Preferred Stock................................. 9,362 --
SHAREOWNERS' EQUITY
Common Stock:
AT&T Common Stock, $1 par value, authorized 6,000,000,000
shares; issued and outstanding 3,809,487,226 shares (net
of 416,033,726 treasury shares) at March 31, 2001 and
3,760,151,185 shares (net of 416,887,452 treasury shares)
at December 31, 2000...................................... 3,809 3,760
AT&T Wireless Group Common Stock, $1 par value, authorized
6,000,000,000 shares; issued and outstanding 363,203,425
shares at March 31, 2001 and 361,802,200 shares at
December 31, 2000......................................... 363 362
Liberty Media Group Class A Common Stock, $1 par value,
authorized 4,000,000,000 shares; issued and outstanding
2,376,748,041 shares (net of 53,732,514 treasury shares)
at March 31, 2001 and 2,363,738,198 shares (net of
59,512,496 treasury shares) at December 31, 2000.......... 2,377 2,364
Liberty Media Group Class B Common Stock, $1 par value,
authorized 400,000,000 shares; issued and outstanding
212,045,288 shares (net of 10,607,776 treasury shares) at
March 31, 2001 and 206,221,288 shares (net of 10,607,776
treasury shares) at December 31, 2000..................... 212 206
Additional paid-in capital.................................. 92,045 90,496
Retained earnings........................................... 6,732 7,408
Accumulated other comprehensive income...................... (1,575) (1,398)
TOTAL SHAREOWNERS' EQUITY................................... 103,963 103,198
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY................... $241,141 $242,223
See Notes to Consolidated Financial Statements
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353
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
(DOLLARS IN MILLIONS)
(UNAUDITED)
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
2001 2000
-------- -------
AT&T Common Shares
Balance at beginning of year.............................. $ 3,760 $ 3,196
Shares issued (acquired), net:
Under employee plans.................................... 4 1
For acquisitions........................................ 44 --
Other................................................... 1 (50)
Balance at end of period.................................... 3,809 3,147
AT&T Wireless Group Common Stock
Balance at beginning of year.............................. 362 --
Shares issued under employee plans........................ 1 --
Balance at end of period.................................... 363 --
Liberty Media Group Class A Common Stock
Balance at beginning of year.............................. 2,364 2,314
Shares issued, net:
For acquisitions........................................ -- 49
Other................................................... 13 --
Balance at end of period.................................... 2,377 2,363
Liberty Media Group Class B Common Stock
Balance at beginning of year.............................. 206 217
Shares issued (acquired), net:
Other................................................... 6 (11)
Balance at end of period.................................... 212 206
Additional Paid-In Capital
Balance at beginning of year.............................. 90,496 59,526
Shares issued (acquired), net:
Under employee plans.................................... 107 50
For acquisitions........................................ 827 737
Other................................................... 290 (2,619)
Gain on issuance of common stock by affiliates............ 25 (95)
Beneficial conversion value of preferred stock............ 295 --
Other..................................................... 5 37
Balance at end of period.................................... 92,045 57,636
Guaranteed ESOP Obligation
Balance at beginning of year.............................. -- (17)
Amortization.............................................. -- 17
Balance at end of period.................................... -- --
Retained Earnings
Balance at beginning of year.............................. 7,408 6,712
Net (losses) income....................................... (344) 2,683
Dividends declared -- common stock........................ (143) (692)
Dividends declared -- preferred stock..................... (181) --
Treasury shares issued at less than cost.................... (8) (150)
Balance at end of period.................................... 6,732 8,553
Accumulated Comprehensive Income
Balance at beginning of year.............................. (1,398) 6,979
Other comprehensive income................................ (177) 1,821
Balance at end of year...................................... (1,575) 8,800
Total Shareowners' Equity................................... $103,963 $80,705
Summary of Total Comprehensive Income:
(Losses) income before cumulative effect of accounting
change.................................................... $ (1,248) $ 2,683
Cumulative accounting change................................ 904 --
Net (losses) income......................................... (344) 2,683
Dividend requirements of preferred stock.................... 181 --
Net (losses) income available to common shareowners......... $ (525) $ 2,683
Net foreign currency translation adjustment (net of income
taxes of $(136) and $(34))................................ (192) (58)
Net revaluation of securities:
Unrealized (losses) gain (net of income taxes of $(293)
and $260)............................................... (494) 401
Recognition of previously unrealized losses (gains) on
available-for-sale securities (net of income taxes of
$313 and $967).......................................... 509 1,478
Comprehensive Income........................................ $ (702) $ 4,504
In the first quarter of 2001, the recognition of previously unrealized
losses (gains) on available-for-sale securities included $0.7 billion ($1.2
billion pretax, recorded in other income) resulting from the reclassification of
securities from "available-for-sale" to "trading" in conjunction
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with the adoption of Statement of Financial Accounting Standard (SFAS) No. 133,
$(0.1) billion ($(0.2) billion pretax) relating to the sales of various
securities and $0.1 billion relating to LMG's adoption of SFAS No. 133 (see note
j).
In the first quarter of 2001, other comprehensive income included Liberty
Media Group's (LMG) foreign currency translation adjustments totaling $(149),
net of applicable taxes and the revaluation of LMG's available-for-sale
securities totaling $50, net of applicable taxes.
In the first quarter of 2000, other comprehensive income included LMG's
foreign currency translation adjustments totaling $(31), net of applicable
taxes, and revaluation of LMG's available-for-sale securities totaling $3,259,
net of applicable taxes, partially offset by the recognition of previously
unrecognized available for sale securities of $1,478.
AT&T accounts for treasury stock as retired stock, and as of March 31,
2001, had 416 million treasury shares of which 346 million shares were owned by
AT&T Broadband subsidiaries and 70 million shares related to the purchase of
AT&T shares previously owned by Liberty Media Group.
We have 100 million authorized shares of preferred stock at $1 par value.
In the first quarter of 2001, AT&T issued 812,511.778 share of convertible
preferred stock with a par value of $1 per share to NTT DoCoMo. These shares are
economically equivalent to 406 million shares of AT&T Wireless Group tracking
stock and are intended to reflect approximately 16% of the financial performance
and economic value of AT&T Wireless Group (See note (h)).
See Notes to Consolidated Financial Statements
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AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
2001 2000
-------- -------
OPERATING ACTIVITIES
Net (losses) income......................................... $ (344) $ 2,683
Adjustments to reconcile net (losses) income to net cash
provided by operating activities:
Cumulative effect of accounting change -- net of tax........ (904) --
Net gains on sales of businesses and investments............ (218) (594)
Net restructuring and other charges......................... 796 748
Depreciation and amortization............................... 2,987 1,934
Provision for uncollectible receivables..................... 424 284
Deferred income taxes....................................... (250) (477)
Minority interest (income) expense.......................... (665) 39
Net equity losses (earnings) from Liberty Media Group....... 697 (942)
Net losses from other equity investments.................... 238 301
Increase in receivables..................................... (24) (890)
Decrease in accounts payable................................ (1,078) (73)
Net revaluation of trading securities....................... 944 --
Net change in other operating assets and liabilities........ (820) (483)
Other adjustments, net...................................... 155 (2)
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 1,938 2,528
INVESTING ACTIVITIES
Capital expenditures and other additions.................... (3,923) (3,236)
Proceeds from sale or disposal of property, plant and
equipment................................................. 11 143
Increase in other receivables............................... (34) (980)
Net acquisitions of licenses................................ (39) (82)
Sales of marketable securities.............................. 88 --
Equity investment distributions and sales................... 742 417
Equity investment contributions and purchases............... (733) (1,059)
Net disposition (acquisitions) of businesses net of cash
disposed/acquired......................................... 613 (188)
Other investing activities, net............................. 91 (16)
NET CASH USED IN INVESTING ACTIVITIES....................... (3,184) (5,001)
FINANCING ACTIVITIES
Proceeds from long-term debt issuances...................... 6,345 739
Retirement of long-term debt................................ (130) (1,007)
Issuance of convertible preferred securities and warrants... 9,811 --
Redemption of redeemable securities......................... -- (152)
Issuance of AT&T common shares.............................. 61 --
Issuance of AT&T Wireless Group common shares............... 31 --
Net issuance (acquisition) of treasury shares............... 15 (393)
Dividends paid on common stock.............................. (141) (703)
Dividends paid on preferred securities...................... (22) (97)
(Decrease) increase in short-term borrowings, net........... (14,715) 3,179
Other financing activities, net............................. 1 (15)
NET CASH PROVIDED BY FINANCING ACTIVITIES................... 1,256 1,551
Net increase (decrease) in cash and cash equivalents........ 10 (922)
Cash and cash equivalents at beginning of year.............. 126 1,024
Cash and cash equivalents at end of period.................. $ 136 $ 102
The notes are an integral part of the consolidated financial statements.
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AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED (EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
(A) BASIS OF PRESENTATION
The consolidated financial statements have been prepared by AT&T Corp.
(AT&T) pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC) and, in the opinion of management, include all adjustments
necessary for a fair statement of the consolidated results of operations,
financial position and cash flows for each period presented. The consolidated
results for interim periods are not necessarily indicative of results for the
full year. These financial results should be read in conjunction with AT&T's
Form 10-K405/A for the year ended December 31, 2000, which includes the
financial statements of AT&T Wireless Group and Liberty Media Group, and the
financial statements of Liberty Media Group and AT&T Wireless Group for the
quarter ended March 31, 2001, included as Exhibit 99.1 and 99.2, respectively,
to this AT&T quarterly report on Form 10-Q.
We have reclassified certain prior period amounts to conform with our
current presentation. In addition, we restated prior year share and per share
amounts to reflect the June 2000 two-for-one split of Liberty Media Group common
stock.
(B) RESTRUCTURING OF AT&T
On October 25, 2000, AT&T announced a restructuring plan designed to fully
separate or issue separately tracked stocks intended to reflect the financial
performance and economic value of each of AT&T's four major operating units.
Upon completion of the plan, AT&T Wireless, AT&T Broadband, AT&T Business and
AT&T Consumer will all be represented by asset-based or tracking stocks.
As part of the first phase of the restructuring plan, on April 18, 2001,
AT&T announced details of an offer to exchange shares of AT&T common stock for
shares of AT&T Wireless Group tracking stock. On the same date, AT&T Wireless
Services, Inc., filed its initial registration statement in connection with the
planned split-off. Under the terms of the exchange offer, AT&T will issue 1.176
shares of AT&T Wireless Group tracking stock in exchange for each share of AT&T
common stock validly tendered and not withdrawn, subject to specified
conditions. Following the exchange offer and subject to receipt of specific
conditions, AT&T plans to split-off AT&T Wireless Group from AT&T. AT&T intends
to retain up to $3 billion of AT&T Wireless shares for future sale, exchange or
monetization within six months following the split-off. We expect AT&T Wireless
will become an independent, publicly-held company in mid-2001, upon receipt of
appropriate tax and other approvals.
In addition to the split-off of AT&T Wireless, we intend to fully separate
or issue separate tracking stocks to reflect the financial performance and
economic value of each of our other major business units. We plan to create and
issue new classes of stock to track the financial performance and economic value
of our AT&T Broadband unit and AT&T Consumer unit. We plan to sell some
percentage of shares of the AT&T Broadband unit in the fall of 2001. Within 12
months of such sale, we intend to completely separate AT&T Broadband from AT&T,
as an asset-based stock. The AT&T Consumer tracking stock is expected to be
fully distributed to AT&T shareowners in the second half of 2001.
AT&T expects that these transactions will be tax-free to U.S. shareholders.
AT&T's restructuring plan is complicated and involves a substantial number of
steps and transactions, including obtaining various conditions, such as Internal
Revenue Service rulings. In addition, future financial conditions, superior
alternatives or other factors may arise or occur that make it inadvisable
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AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to proceed with part or all of AT&T's restructuring plans. Any or all of the
elements of AT&T's restructuring plan may not occur as we currently expect or in
the time frames that we currently contemplate, or at all. Alternative forms of
restructuring, including sales of interests in these businesses, would reduce
what is available for distribution to shareholders in the restructuring.
On April 11, 2001, the Internal Revenue Service ruled that the proposed
split-off of Liberty Media Corporation, which will own all of the assets
reflected in the Liberty Media Group (LMG), qualifies as a tax-free transaction
for AT&T, Liberty Media and their shareowners. AT&T acquired Liberty Media
through the acquisition of Tele-Communications, Inc. (TCI). AT&T does not have a
controlling financial interest for financial accounting purposes in LMG;
therefore, our investment in LMG is accounted for under the equity method in the
accompanying consolidated financial statements. The amounts attributable to LMG
are reflected as separate line items "Equity earnings (losses) from Liberty
Media Group" and "Investment in Liberty Media Group and related receivables,
net," in the accompanying consolidated financial statements.
By mid-2001, AT&T plans to convert the LMG tracking stock into an
asset-based security and launch Liberty Media Corporation as an independent,
publicly-traded company.
(C) MERGER WITH MEDIAONE, INC (MEDIAONE)
On June 15, 2000, AT&T completed a merger with MediaOne Group, Inc.
(MediaOne) in a cash and stock transaction valued at approximately $45 billion.
For each share of MediaOne stock, MediaOne shareowners received, in the
aggregate, 0.95 of a share of AT&T common stock and $36.27 per share in cash,
consisting of $30.85 per share as stipulated in the merger agreement and $5.42
per share based on AT&T's stock price preceding the merger, which was below a
predetermined amount. AT&T issued approximately 603 million shares of common
stock in the transaction, of which approximately 60 million were treasury
shares. The AT&T shares had an aggregate market value of approximately $21
billion and cash payments totaled approximately $24 billion.
The merger was accounted for under the purchase method. Accordingly, the
results of MediaOne have been included in the accompanying consolidated
financial statements since the date of acquisition as part of our Broadband
segment.
Approximately $16 billion of the purchase price of $45 billion has been
attributed to agreements with local franchise authorities that allow access to
homes in our broadband service areas ("franchise costs") and is being amortized
on a straight-line basis over 40 years. Also included in the purchase price was
approximately $23 billion related to nonconsolidated investments, including
investments in Time Warner Entertainment Company, L.P. (TWE) and Vodafone Group
plc (Vodafone), approximately $5 billion related to property, plant and
equipment, and approximately $6 billion of other net assets. In addition,
included was approximately $14 billion in deferred income tax liabilities,
approximately $10 billion attributable to MediaOne debt, and approximately $1
billion of minority interest in Centaur Funding Corporation, a subsidiary of
MediaOne. The purchase resulted in goodwill of approximately $20 billion, which
is being amortized on a straight-line basis over 40 years.
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AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PRO FORMA RESULTS
Following is a summary of the pro forma results of AT&T as if the merger
with MediaOne had closed effective January 1, 2000:
SHARES IN MILLIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
------------------------------------ -----------
(UNAUDITED)
Revenue..................................................... $16,607
Net income.................................................. 3,505
Weighted-average AT&T common shares......................... 3,788
Weighted-average AT&T common shares and potential common
shares.................................................... 3,863
Weighted-average Liberty Media Group Shares................. 2,563
AT&T Common Stock Group (losses) earnings per common share:
Basic..................................................... $ 0.68
Diluted................................................... $ 0.67
Liberty Media Group earnings (losses) per common share:
Basic and diluted......................................... $ 0.37
Pro forma data may not be indicative of the results that would have been
obtained had these events actually occurred at the beginning of the periods
presented, nor does it intend to be a projection of future results.
(D) OTHER ACQUISITIONS, EXCHANGES AND DISPOSITIONS
COX AND COMCAST
On January 12, 2001, AT&T announced that Cox Communications, Inc. and
Comcast Corporation had exercised their rights to sell a combined total of 60.4
million shares of Excite@Home Series A common stock to AT&T as part of an
agreement announced in August 2000 to reorganize Excite@Home's governance. Cox
and Comcast elected to receive shares of AT&T common stock in exchange for their
Excite@Home shares. AT&T is currently in discussions to renegotiate the terms of
the put options which may result in a change to the number of shares of AT&T
stock that Cox and Comcast will receive, as well as the number of Excite@Home
shares, if any, AT&T receives. There can be no assurance that an agreement will
be reached with Cox and Comcast.
CABLEVISION
On January 8, 2001, AT&T and Cablevision Systems Corporation (Cablevision)
completed agreements for the transfer of cable-systems. AT&T received
cable-systems serving 358 thousand subscribers in Boston and Eastern
Massachusetts. In exchange, Cablevision received cable-systems serving
approximately 130 thousand subscribers in northern New York suburbs, and 44
million shares of AT&T common stock valued at approximately $0.9 billion, and
approximately $0.2 billion in cash. Cablevision recorded a gain as a result of
the transaction. Due to AT&T's ownership interest in Cablevision, AT&T recorded
an after-tax gain of approximately $0.1 billion as part of "Net losses from
other equity investments."
INSIGHT COMMUNICATIONS COMPANY LP
Effective January 1, 2001, AT&T sold to Insight Communications Company LP
(Insight) several Illinois cable-systems serving approximately 98 thousand
customers for $392. Insight
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AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
subsequently contributed the purchased cable-system and additional cable-systems
serving approximately 177 thousand customers to Insight Midwest L.P. in which
AT&T has a 50% interest. AT&T also contributed entities owning cable-systems
serving approximately 248 thousand customers in Illinois to Insight Midwest L.P.
The transactions resulted in pretax gains of $179, which were deferred due to a
keep well agreement with Insight Midwest, L.P.
(E) NET RESTRUCTURING AND OTHER CHARGES
During the first quarter of 2001, AT&T recorded $808 of net restructuring
and other charges, which included $739 of asset impairment charges related to
Excite@Home, and $69 for restructuring and exit costs which consisted of $59 for
cash severance costs, $6 related to facility closings and $4 related to
termination of lease obligations.
The asset impairment charges included $600 recorded by Excite@Home
associated with goodwill impairment of various acquisitions, primarily Excite,
and a related goodwill impairment charge of $139 recorded by AT&T associated
with its acquisition goodwill of Excite@Home. The impairment resulted from the
continued weakness of the online media market that Excite@Home operates in.
Since we consolidate, but only own approximately 23% of Excite@Home, 77% of the
charge recorded by Excite@Home was not included as a reduction to AT&T's net
income, but rather eliminated in our March 31, 2001 Consolidated Statement of
Income as "Minority interest income (expense)."
The $59 of cash severance costs were primarily a result of synergies
created by the MediaOne merger related to approximately 2,350 employees.
Approximately 10% of the individuals were management employees and 90% were
non-management employees. Nearly 88% of the affected employees have left their
positions as of March 31, 2001, and the remaining employees will leave the
company by the end of 2001.
In the second quarter of 2001, we expect to incur additional restructuring
charges resulting from MediaOne synergies and work force reductions at
Excite@Home.
The following table displays the activity and balances of the restructuring
reserve account from January 1, 2001, to March 31, 2001:
TYPE OF COST
EMPLOYEE FACILITY
SEPARATIONS CLOSINGS OTHER TOTAL
----------- -------- ----- -----
Balance at January 1, 2001..................... $ 259 $173 $36 $ 468
Additions...................................... 59 6 4 69
Deductions..................................... (108) (14) 0 (122)
Balance at March 31, 2001...................... $ 210 $165 $40 $ 415
Deductions reflect cash payments of $108 related to employee separations
and $14 related to facilities. The cash outlay was primarily funded through cash
from operations.
During the first quarter of 2000, AT&T recorded $773 of net restructuring
and other charges, which included $682 for restructuring and exit costs
associated with AT&T's initiative to reduce costs by the end of 2000, and $91
related to the government-mandated disposition of AT&T Communications (U.K.)
Ltd., which would have competed directly with Concert.
Included in restructuring and exit costs was $458 of cash termination
benefits associated with the involuntary separation of approximately 6,200
employees. Approximately half of the individuals were
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AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
management employees and half were non-management employees. Nearly 60% of the
affected employees have left their positions as of March 31, 2001, and the
remaining employees will leave the company during 2001.
We also recorded $62 of network lease and other contract termination costs
associated with penalties incurred as part of notifying vendors of the
termination of these contracts during the quarter.
Also included in restructuring and exit costs was $144 of benefit
curtailment costs associated with employee separations as part of these exit
plans. We also recorded an asset impairment charge of $18 related to the
write-down of unrecoverable assets in certain businesses in which the carrying
value is no longer supported by future cash flows.
(F) EARNINGS PER COMMON SHARE AND POTENTIAL COMMON SHARE
(Losses) earnings attributable to the different classes of AT&T common
stock is as follows:
AT&T COMMON AT&T LIBERTY
STOCK GROUP WIRELESS GROUP MEDIA GROUP
---------------- -------------- ------------
FOR THE THREE MONTHS ENDED MARCH 31, 2001 2000 2001 2000 2001 2000
------------------------------------ ------- ------ ----- ----- ----- ----
(Losses) income before cumulative effect
of accounting change................... $ (544) $1,741 $ (7) $ -- $(697) $942
Cumulative effect of accounting change... 359 -- -- -- 545 --
Net (losses) income...................... (185) 1,741 (7) -- (152) 942
Dividend requirements of preferred
stock.................................. 181 -- -- -- -- --
Net (losses) income available to common
shareowners............................ $ (366) $1,741 $ (7) $ -- $(152) $942
Basic (losses) earnings per share for AT&T Common Stock Group for the three
months ended March 31, 2001 and 2000, were computed by dividing AT&T Common
Stock Group (losses) income by the weighted-average number of shares outstanding
during the period of 3,805 million and 3,185 million, respectively.
Since AT&T recorded losses for the three months ended March 31, 2001,
diluted losses per share are the same as basic, as any potentially dilutive
securities would be antidilutive. Diluted earnings per share (EPS) for AT&T
Common Stock Group for the three months ended March 31, 2000, was computed by
dividing AT&T Common Stock Group income, adjusted for the conversion of
securities, by the weighted-average number of shares and dilutive potential
shares outstanding during the period, assuming conversion of the potential
shares at the beginning of the periods presented. Shares issuable upon
conversion of preferred stock of subsidiaries, convertible debt securities of a
subsidiary, stock options and other performance awards have been included in the
diluted calculation of weighted-average shares to the extent that the assumed
issuance of such shares would have been dilutive, as illustrated below.
The convertible quarterly income preferred securities were antidilutive and
were excluded from the computation of diluted EPS. Computed on a quarterly
basis, the dividends would have an after-tax impact to earnings of approximately
$40. Assuming conversion of the securities, the dividends would no longer have
to be included as a reduction to net income and the securities would convert
into approximately 67 million shares of AT&T common stock. There were seven
million potentially dilutive AT&T securities outstanding at March 31, 2001.
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AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the income and share components for diluted EPS
calculations with respect to AT&T Group is as follows:
FOR THE THREE MONTHS ENDED MARCH 31, 2000
------------------------------------ ------
AT&T Common Stock Group:
Income...................................................... $1,741
Income impact of assumed conversion of preferred stock of
subsidiary................................................ 8
Income adjusted for conversion of securities................ $1,749
Shares in millions Weighted-average common shares........... 3,185
Stock options............................................... 31
Preferred stock of subsidiary............................... 40
Weighted-average common shares and potential common
shares.................................................... 3,256
Basic losses per share for AT&T Wireless Group for the quarter ended March
31, 2001 was computed by dividing the AT&T Wireless Group losses by the
weighted-average number of shares outstanding of AT&T Wireless Group of 363
million. Since AT&T Wireless Group recorded losses for the three months ended
March 31, 2001, diluted losses per share are the same as basic, as any
potentially dilutive securities would be antidilutive. There were 311 million
potentially dilutive AT&T Wireless securities (including NTT DoCoMo convertible
preferred stock) outstanding at March 31, 2001.
Basic (losses) income per share for LMG were computed by dividing the LMG
(losses) income by the weighted-average number of shares outstanding of LMG of
2,574 million and 2,563 million, for the three months ended March 31, 2001 and
2000, respectively. Potentially dilutive securities, including fixed and
nonvested performance awards and stock options, have not been factored into the
dilutive calculations because past history has indicated that these contracts
are generally settled in cash. There were 99 million of these potentially
dilutive securities outstanding at March 31, 2000. Since LMG recorded losses for
the three months ended March 31, 2001, diluted losses per share are the same as
basic, as any potentially dilutive securities would be antidilutive. There were
101 million potentially dilutive LMG securities outstanding at March 31, 2001.
(G) LONG-TERM DEBT
On March 6, 2001, AT&T Wireless Services (AWS), a wholly-owned subsidiary
of AT&T, completed a private placement of $6.5 billion in unsecured and
unsubordinated Senior Notes. The notes pay interest semi-annually at rates
ranging from 7.35% to 8.75% per annum, with maturity dates ranging from 2006 to
2031. The notes include customary covenants and registration rights.
Also, on March 23, 2001, AWS entered into $2.5 billion in revolving credit
facilities. The facilities consist of a 364-day facility of $1.25 billion and a
five-year revolving credit facility of $1.25 billion. The facilities are subject
to a facility fee ranging from 8 to 30 basis points, payable quarterly on the
total commitment, used or unused. The facility fees are based on the respective
agreement and will fluctuate based on AT&T Wireless Group's Senior Note rating.
The facilities are also subject to a utilization fee of 12.5 basis points if
borrowings exceed certain levels as defined in the agreement. The facilities
bear interest at variable rates based upon, in various cases, LIBOR plus 32.5 to
100 basis points depending on (i) AT&T Wireless Group's Senior Notes rating, or
(ii) the greater of the prime rate or the Federal funds effective rate plus 50
basis points. The facilities are to be used for general corporate purposes and
are subject to customary covenants, representations and warranties, and events
of default. The facilities were unused at March 31, 2001.
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AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As a result of the issuance of notes by AWS, the investment by NTT DoCoMo,
and the sale of Japan Telecom, AT&T's $25 billion credit facility was reduced to
$17.5 billion.
(H) CONVERTIBLE PREFERRED STOCK
On January 22, 2001, NTT DoCoMo invested approximately $9.8 billion for
812,511.778 shares of a new class of AT&T preferred stock with a par value of $1
per share; and five-year warrants to purchase the equivalent of an additional
41.7 million shares of AT&T Wireless Group tracking stock at $35 per share. The
$9.8 billion proceeds were recorded as $9.2 billion for preferred shares, $0.3
billion for the warrants, and $0.3 billion for the beneficial conversion
feature, based on their relative fair values. The preferred shares are
economically equivalent to 406 million shares (a 16 percent interest) of AT&T
Wireless Group tracking stock. These shares will convert to AT&T Wireless common
stock at the time of split-off. Upon conversion, AT&T will reduce its portion of
the financial performance and economic value in the AT&T Wireless Group by 178
million shares, and the balance of the 406 million shares will come from the
issuance of 228 million new shares of AT&T Wireless Group tracking stock.
In the event that AT&T has not split-off AT&T Wireless by specified dates
beginning January 1, 2002, DoCoMo will have the right, at its election, to
require AT&T to repurchase the preferred shares at NTT DoCoMo's original
purchase price plus a carrying cost of approximately 7% up to date of payment.
In addition to the approximate 7% carrying cost we accrue on the DoCoMo
convertible preferred stock, there is an intrinsic value embedded in the
conversion feature of the preferred stock that is accreted over the period that
DoCoMo can put the shares back to us. This intrinsic value, referred to as the
beneficial conversion feature, represents the difference in the fair value
assigned to the preferred stock and the fair market value equivalent of the
Wireless tracking stock. The total of the carrying costs and the accretion of
the beneficial conversion feature was $0.2 billion and is treated as a preferred
stock dividend recorded as a reduction of AT&T Common Stock Group earnings. At
March 31, 2001, the preferred stock had a liquidation value of $9.4 billion.
(I) RELATED PARTY TRANSACTIONS
AT&T has various related party transactions with Concert since the
commencement of this global venture in January 2000.
Included in revenue for the first quarter of 2001 and 2000, was $0.3
billion for services provided to Concert.
Included in access and other connection expenses are charges from Concert
representing costs incurred on our behalf to connect calls made to foreign
countries (international settlements) and costs paid by AT&T to Concert for
distributing Concert products. Such charges totaled $0.5 billion and $0.6
billion, for the three months ended March 31, 2001 and March 31, 2000,
respectively.
During the first quarter of 2000, AT&T loaned $1.0 billion to Concert; that
loan is included within investments and related advances in the accompanying
Consolidated Balance Sheets. Interest income of $17 and $13, were recognized for
the quarters ended March 31, 2001 and 2000, respectively.
At March 31, 2001, AT&T had a floating rate loan from Concert due on demand
in the amount of $0.1 billion. The loan is included in "Debt maturing within one
year" in the accompanying Consolidated Balance Sheets. Interest expense was $2
for the quarter ended March 31, 2001.
D-14
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AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Included in accounts receivable and accounts payable was $0.4 billion and
$0.1 billion, and $0.5 billion and $0.5 billion, at March 31, 2001 and December
31, 2000, respectively, related to transactions with Concert. Included in other
receivables and other current liabilities was $0.9 billion and $1.1 billion, and
$1.1 billion and $1.0 billion, at March 31, 2001 and December 31, 2000,
respectively, related to transactions associated with Concert.
In addition, we had various related party transactions with LMG. Included
in costs of services and products were programming expenses related to services
from LMG. Those expenses amounted to $82 and $52 for the three months ended
March 31, 2001 and 2000, respectively.
Included in "Other current liabilities" at March 31, 2001 was $25 payable
to LMG. Included in "Investment in Liberty Media Group and related receivables,
net" was $155 receivable from LMG at December 31, 2000. These amounts primarily
related to taxes pursuant to a tax-sharing agreement between LMG and Broadband.
That agreement existed prior to the TCI merger.
(J)STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 133 "ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES"
Effective January 1, 2001, AT&T adopted Statement of Financial Accounting
Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities", and its corresponding amendments under SFAS No. 138. SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. All derivatives, whether designated in hedging relationships
or not, are required to be recorded on the balance sheet at fair value. If the
derivative is designated as a fair value hedge, the changes in the fair value of
the derivative and of the hedged item attributable to the hedged risk are
recognized in earnings. If the derivative is designated as a cash flow hedge,
the effective portions of changes in the fair value of the derivative are
recorded in other comprehensive income (OCI) and are recognized in the income
statement when the hedged item affects earnings. Changes in fair values of
derivative instruments not designated as hedging instruments and ineffective
portions of hedges, if any, are recognized in earnings in the current period.
The adoption of SFAS No. 133 on January 1, 2001, resulted in a pretax
cumulative-effect increase to income of $1.5 billion ($0.9 billion net-of-tax).
$0.6 billion ($0.4 billion net-of-tax) and $0.9 billion ($0.5 billion
net-of-tax) were attributable to AT&T Group and Liberty Media Group,
respectively.
AT&T GROUP
AT&T Group's cumulative-effect increase to net income of $0.4 billion was
attributable primarily to equity based derivative instruments embedded in
indexed debt instruments and warrants held in both public and private companies.
Included in the after tax cumulative effect benefit of $0.4 billion, was a
$0.2 billion benefit for the separation of embedded derivative instruments from
the indexed debt instruments, and $0.2 billion benefit for changes in the fair
value of warrants. Additionally within the cumulative effect of adoption, AT&T
Group recorded a gain for amounts previously recorded within accumulated OCI on
the indexed debt obligations that had been considered a hedge of Comcast,
Microsoft and Vodaphone available for sale securities. This gain has been offset
with the related loss on the securities which had previously been recorded in
accumulated OCI. These offsetting transition adjustments had no net impact on
the cumulative effect benefit.
D-15
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AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition, the adoption of SFAS No. 133 also resulted in a cumulative
pretax charge to OCI of $10 ($6 net-of-tax) on cash flow hedges. The net
derivative losses included in OCI as of January 1, 2001 will be reclassified
into earnings over the life of the instruments, of which the last expires in
February of 2005.
Upon adoption, AT&T Group, as permitted by SFAS 133, also reclassified $9.3
billion of securities from "available-for-sale" to "trading". This
reclassification resulted in a pretax charge of $1.2 billion ($0.7 billion
net-of-tax) recorded in other income. This $0.7 billion represents the net
revaluation of securities to fair market value which was accounted for in OCI
prior to the adoption of SFAS 133.
FOREIGN CURRENCY RISK
We enter into foreign currency exchange contracts, including forward and
option contracts, to manage our exposure to changes in currency exchange rates
related to foreign-currency-denominated transactions. In first quarter 2001,
this consisted primarily of Brazilian reals, Swiss francs and Canadian dollar
related to debt.
COLLARS AND EQUITY SECURITIES PRICE RISK
We enter into option agreements to hedge our exposure on debt that is
collateralized by securities we own. From time to time, AT&T Group uses options
and collars to manage the risk from changes in fair values and cash flows on
certain equity securities, primarily on those being used to collateralize
underlying debt instruments. The securities selected for hedging are determined
by market conditions, up-front costs, and other relevant factors. Once
established, the hedges are not dynamically managed or traded, and are generally
not removed until maturity of the option contracts.
INTEREST RATE SWAP AGREEMENTS
We enter into interest rate swaps to manage our exposure to changes in
interest rates and to lower our overall costs of financing. We enter into swap
agreements to manage the fixed/floating mix of our debt portfolio in order to
reduce aggregate risk to interest rate movements. Interest rate swaps also allow
us to raise funds at floating rates and effectively swap them into fixed rates
that are lower than those available to us if fixed-rate borrowings were made
directly. These agreements involve the exchange of floating-rate for fixed-rate
payments, fixed-rate for floating-rate payments or floating-rate for other
floating-rate payments without the exchange of the underlying principal amount.
OTHER DERIVATIVES
In addition, AT&T Group may hold warrants to purchase securities of other
companies. Warrants that can be net share settled are deemed derivative
financial instruments and are generally not eligible to be designated as hedging
instruments as there is no corresponding underlying exposure. This includes
warrants held in both public and private companies.
Hedge ineffectiveness, determined in accordance with SFAS 133, had no
impact on earnings for the three months ended March 31, 2001. No fair value
hedges or cash flow hedges were derecognized or discontinued for the three
months ended March 31, 2001.
For the three months ended March 31, 2001, other income included a total
pretax gain of $735, comprised of a $664 gain for changes in the value of
options for fair value hedges and $71 net gain for changes in the fair value of
warrants, swaps and foreign currency transactions. We also recorded a pretax
loss of $524 in other income for trading securities related to FAS 133
instruments.
D-16
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AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Derivative gains and losses included in OCI are reclassified into earnings
at the time the forecasted transaction is recognized. During the three months
ended March 31, 2001, no gains or losses were reclassified to income. We
reclassified $14 pretax from OCI to interest expense related to amortization of
interest for prepaid interest rate swaps.
LIBERTY MEDIA GROUP (LMG)
LMG's cumulative-effect increase to income of $0.5 billion was attributable
primarily to separately recording the embedded call option obligations
associated with LMG's senior exchangeable debentures. Also included in the
cumulative-effect was $87 previously included in OCI related primarily to
changes in the fair value of LMG's warrants and options to purchase certain
available-for-sale securities.
DERIVATIVE INSTRUMENTS
LMG uses various derivative instruments including equity collars, put
spread collars, interest rate swaps and forward foreign exchange contracts to
manage fair value risk associated with certain investments, interest rate risk
on certain indebtedness, and foreign exchange rate risk. Derivative instruments
are generally not used for speculative purposes. The derivative instruments may
involve elements of credit and market risk in excess of amounts recognized in
the financial statements. LMG monitors its positions and the credit quality of
counter-parties, consisting primarily of major financial institutions, and do
not anticipate nonperformance by any counter-party.
For derivatives designed either as fair value or cash flow hedges, changes
in the time value of the derivatives are excluded from the assessment of hedge
effectiveness and are recognized in earnings. Hedge ineffectiveness, determined
in accordance with SFAS No. 133, had no impact on LMG's earnings for the three
months ended March 31, 2001. No fair value hedges or cash flow hedges were
derecognized or discontinued during the three months ended March 31, 2001.
(K) COMMITMENTS
AT&T has entered into various purchase commitments for wireless network
equipment and handsets. The commitments totaled $2.2 billion as of March 31,
2001. These commitments expire between 2001 and 2004.
AT&T has committed to provide funding to a joint venture with other
investors, Alaska Native Wireless (ANW), which was formed in November 2000 to
participate in the Federal Communication Commission's license spectrum auction.
The auction concluded in January 2001 and ANW was the highest bidder on
approximately $2.9 billion in licenses. AT&T has committed to fund approximately
$2.6 billion to ANW to fund ANW's purchase of licenses. As of March 31, 2001,
AT&T Wireless Group funded approximately $309 of the commitment and has
committed to provide the remaining approximate $2.3 billion when such licenses
are granted.
(L) SEGMENT REPORTING
AT&T's results are segmented according to the way we manage our business:
Business Services, Consumer Services, Wireless Services and Broadband. In
connection with our corporate restructuring program set forth in late 2000, our
existing segments reflect certain managerial changes since the publication of
our 2000 annual results. The changes are as follows: The Business Services
segment was expanded to include the results of international operations and
ventures. In addition, certain corporate costs that were previously recorded
within the Corporate and Other Group have been
D-17
366
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
allocated to the respective segments in an effort to ultimately have the results
of these businesses reflect all direct corporate costs as well as overhead for
shared services. All prior period results have been restated to reflect these
changes. Total assets for our reportable segments generally include all asset,
except intercompany receivables. However, our Wireless Services Segment included
intercompany receivables from AT&T and the related interest income since these
assets relate to the results of the AT&T Wireless Group tracked businesses.
Reflecting the dynamics of our business, we continuously review our
management model and structure, which may result in additional adjustments to
our operating segments in the future. In addition, when we create tracking
stocks for our Consumer and Broadband units, we will begin allocating 'pure'
corporate overhead to these units. See note (b) for further detail on our
restructuring plan.
REVENUE
FOR THE THREE MONTHS ENDED MARCH 31, 2001 2000
------------------------------------ ------- -------
Business services external revenue..................... $ 6,940 $ 7,094
Business services internal revenue..................... 228 158
Total Business Services revenue.......................... 7,168 7,252
Consumer Services external revenue....................... 4,007 5,037
Wireless Services external revenue....................... 3,212 2,198
Broadband external revenue............................. 2,461 1,557
Broadband internal revenue............................. 4 0
Total Broadband revenue.................................. 2,465 1,557
Total reportable segments.............................. 16,852 16,044
Corporate and Other(a)................................... (89) (143)
Total revenue............................................ $16,763 $15,901
---------------
(a)Includes $143 Excite@Home revenue in first quarter 2001.
RECONCILIATION OF EARNINGS BEFORE INTEREST AND TAXES (EBIT) TO INCOME BEFORE
INCOME TAXES
FOR THE THREE MONTHS ENDED MARCH 31, 2001 2000
------------------------------------ ------- ------
Business services......................................... $ 1,018 $1,146
Consumer services......................................... 1,318 1,658
Wireless services......................................... 118 111
Broadband................................................. (508) 236
Total reportable segments............................... 1,946 3,151
Corporate and Other(a).................................... (1,424) (453)
Deduct: Pretax minority interest income (expense)......... 563 (70)
Add: Pretax losses from other equity investments.......... 237 302
Interest expense.......................................... 969 589
Total (losses) income before income taxes............... $ (773) $2,481
-------------------------
(a)Includes $(272) and $(269) related to Excite@Home in the first quarter of
2001 and 2000, respectively. The Excite@Home EBIT impact for the first
quarter 2001, includes approximately $278 of asset impairment charges.
D-18
367
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ASSETS
AT MAR. 31, AT DEC. 31,
2001 2000
----------- -----------
Business services..................................... $ 42,562 $ 42,747
Consumer services..................................... 2,768 3,150
Wireless services..................................... 46,930 35,184
Broadband............................................. 114,191 114,848
Total reportable segments........................... 206,451 195,929
Corporate and Other:
Other segments...................................... 1,161 1,174
Prepaid pension costs............................... 3,092 3,003
Deferred income taxes............................... 388 406
Other corporate assets(a)........................... (4,023) 7,421
Investment in Liberty Media Group and related
receivables, net.................................... 34,072 34,290
Total assets.......................................... $241,141 $242,223
-------------------------
(a)Includes $1,705 and $2,541 related to Excite@Home at March 31, 2001 and
December 31, 2000, respectively.
(M) GUARANTEE OF PREFERRED SECURITIES
TCI SECURITIES:
Prior to the consummation of the TCI merger, TCI issued mandatorily
redeemable preferred securities through subsidiary trusts that held subordinated
debt securities of TCI. At March 31, 2001, $1,245 of the guaranteed redeemable
preferred securities remained outstanding.
MEDIAONE SECURITIES:
Prior to the consummation of the MediaOne merger, MediaOne issued
mandatorily redeemable preferred securities through subsidiary trusts that held
subordinated debt securities of MediaOne. At March 31, 2001, $776 of the
guaranteed redeemable preferred securities remained outstanding.
AT&T provides a full and unconditional guarantee on the outstanding
securities issued by TCI Communications Financing I, II and IV and the
outstanding securities issued by MediaOne Financing I and II and MediaOne
Finance II and III. The following are the condensed consolidating financial
statements of AT&T Corp., which include the financial results of TCI and
MediaOne for each of the corresponding periods. The results of MediaOne have
been included in the financial results of AT&T since the date of acquisition on
June 15, 2000, and the results of TCI have been included since the March 9,
1999, date of acquisition.
D-19
368
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AT&T CORP.
CONSOLIDATING CONDENSED INCOME STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(DOLLARS IN MILLIONS)
GUARANTOR GUARANTOR GUARANTOR TCI TCI TCI MEDIAONE
AT&T SUBSIDIARY SUBSIDIARY FINANCING FINANCING FINANCING FINANCING
PARENT TCI MEDIAONE I II IV I
--------- ---------- ---------- --------- --------- --------- ---------
Revenue................................ $4,975 $ -- $ -- $-- $-- $-- $--
Operating Expenses
Costs of services and products......... 855
Access and other connection............ 1,682
Selling, general and administrative.... 467 (46) 4
Depreciation and other amortization.... 404 13 1
Amortization of goodwill, franchise
costs and other purchased
intangibles........................... 23 125
Net restructuring and other charges....
Total operating expenses............... 3,431 (33) 130
Operating income (losses).............. 1,544 33 (130)
Other income (expense)................. (504) 1 2 11 12 4 1
Interest expense (benefit)............. 1,319 478 88 11 12 4 1
Income (losses) before income taxes,
minority interest and earnings
(losses) from equity investments and
cumulative effect of accounting
change................................ 208 (444) (773)
Provision (benefit) for income taxes... (114) (228) (23)
Minority interest income (expenses).... (40) (1) (1)
Equity losses from Liberty Media
Group................................. (697)
Net earnings (losses) from other equity
investments........................... 1,759 (1,778) (65)
Income (losses) before cumulative
effect of accounting change........... 1,554 (2,692) (259)
Cumulative effect of accounting
change................................ 508 545
Net income (losses).................... 2,062 (2,147) (259)
Dividend requirements on preferred
stock................................. 181
Net income (losses) available to common
shareowners........................... $1,881 $(2,147) $(259) $-- $-- $-- $--
MEDIAONE MEDIAONE MEDIAONE ELIMINATION AND
FINANCING FINANCE FINANCE NON-GUARANTOR CONSOLIDATION CONSOLIDATED
II II III SUBSIDIARIES ADJUSTMENTS AT&T CORP.
--------- --------- --------- ------------- --------------- ------------
Revenue................................ $-- $-- $-- $12,386 $ (598) $16,763
Operating Expenses
Costs of services and products......... 4,523 (541) 4,837
Access and other connection............ 1,660 (56) 3,286
Selling, general and administrative.... 3,444 (1) 3,868
Depreciation and other amortization.... 1,723 2,141
Amortization of goodwill, franchise
costs and other purchased
intangibles........................... 698 846
Net restructuring and other charges.... 808 808
Total operating expenses............... 12,856 (598) 15,786
Operating income (losses).............. (470) 977
Other income (expense)................. 1 5 11 949 (1,274) (781)
Interest expense (benefit)............. 1 5 11 271 (1,232) 969
Income (losses) before income taxes,
minority interest and earnings
(losses) from equity investments and
cumulative effect of accounting
change................................ 208 (42) (773)
Provision (benefit) for income taxes... 657 292
Minority interest income (expenses).... 692 650
Equity losses from Liberty Media
Group................................. (697)
Net earnings (losses) from other equity
investments........................... (135) 83 (136)
Income (losses) before cumulative
effect of accounting change........... 108 41 (1,248)
Cumulative effect of accounting
change................................ (149) 904
Net income (losses).................... (41) 41 (344)
Dividend requirements on preferred
stock................................. 42 (42) 181
Net income (losses) available to common
shareowners........................... $-- $-- $-- $ (83) $ 83 $ (525)
D-20
369
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AT&T CORP.
CONSOLIDATING CONDENSED BALANCE SHEETS
AS OF MARCH 31, 2001
(DOLLARS IN MILLIONS)
GUARANTOR GUARANTOR GUARANTOR TCI TCI TCI MEDIAONE
AT&T SUBSIDIARY SUBSIDIARY FINANCING FINANCING FINANCING FINANCING
PARENT TCI MEDIAONE I II IV I
--------- ---------- ---------- --------- --------- --------- ---------
ASSETS
Cash and cash equivalents............... $ -- $ -- $ -- $ -- $ -- $ -- $--
Other current assets.................... 12,773 3,380 237
TOTAL CURRENT ASSETS.................... 12,773 3,380 237
Property, plant & equipment, net........ 9,066 86 22
Franchise costs, net.................... 1,610... 30
Goodwill, net........................... 158 19,774
Investment in Liberty Media Group and
related receivables, net............... 34,072
Other investments and related
advances............................... 170,979 34,265 28,457
Other assets............................ 7,123 1 527 514 204 51
TOTAL ASSETS............................ $201,709 $71,834 $48,490 $527 $514 $204 $51
LIABILITIES
Debt maturing within one year........... $ 49,335 $ 383 $ 1,892 $ -- $ -- $ -- $--
Other current liabilities............... 9,371 941 96
TOTAL CURRENT LIABILITIES............... 58,706 1,324 1,988
Long-term debt.......................... 20,811 30,292 2,355 527 514 204 30
Deferred income taxes................... 634 230
Other long-term liabilities and deferred
credits................................ 7,317 982 189
TOTAL LIABILITIES....................... 87,468 32,598 4,762 527 514 204 30
Minority interest....................... 1,461 1,149
Company-Obligated Convertible Quarterly
Income Preferred Securities of
Subsidiary Trust Holding Solely
Subordinated Debt Securities of AT&T... 4,713
Convertible preferred stock............. 9,362
SHAREOWNERS' EQUITY
AT&T Common Stock....................... 4,225
AT&T Wireless Group common stock........ 363
Liberty Media Group Class A
Common Stock........................... 2,377
Liberty Media Group Class B
Common Stock........................... 212
Other shareowners' equity............... 92,989 37,775 42,579 21
TOTAL SHAREOWNERS' EQUITY............... 100,166 37,775 42,579 21
TOTAL LIABILITIES AND SHAREOWNERS'
EQUITY................................. $201,709 $71,834 $48,490 $527 $514 $204 $51
ELIMINATION
MEDIAONE MEDIAONE MEDIAONE AND
FINANCING FINANCE FINANCE NON-GUARANTOR CONSOLIDATION CONSOLIDATED
II II III SUBSIDIARIES ADJUSTMENTS AT&T CORP.
--------- -------- -------- ------------- ------------- ------------
ASSETS
Cash and cash equivalents............... $-- $ -- $ -- $ 136 $ -- $ 136
Other current assets.................... 64,383 (64,656) 16,117
TOTAL CURRENT ASSETS.................... 64,519 (64,656) 16,253
Property, plant & equipment, net........ 43,094 (3) 52,265
Franchise costs, net.................... 46,284 47,924
Goodwill, net........................... 10,593 30,525
Investment in Liberty Media Group and
related receivables, net...............
Other investments and related
advances............................... 49,622 (249,036) 34,287
Other assets............................ 44 230 516 29,296 (12,691) 25,815
TOTAL ASSETS............................ $44 $230 $516 $243,408 $(326,386) $241,141
LIABILITIES
Debt maturing within one year........... $-- $ -- $ -- $ 7,396 $ (41,781) $ 17,225
Other current liabilities............... 15,603 (8,792) 17,219
TOTAL CURRENT LIABILITIES............... 22,999 (50,573) 34,444
Long-term debt.......................... 28 214 504 10,197 (26,672) 39,004
Deferred income taxes................... 35,801 36,665
Other long-term liabilities and deferred
credits................................ 359 (79) 8,768
TOTAL LIABILITIES....................... 28 214 504 69,356 (77,324) 118,881
Minority interest....................... 1,612 4,222
Company-Obligated Convertible Quarterly
Income Preferred Securities of
Subsidiary Trust Holding Solely
Subordinated Debt Securities of AT&T... 4,713
Convertible preferred stock............. 3,000 (3,000) 9,362
SHAREOWNERS' EQUITY
AT&T Common Stock....................... (416) 3,809
AT&T Wireless Group common stock........ 363
Liberty Media Group Class A
Common Stock........................... 2,377
Liberty Media Group Class B
Common Stock........................... 212
Other shareowners' equity............... 16 16 12 169,856 (246,062) 97,202
TOTAL SHAREOWNERS' EQUITY............... 16 16 12 169,440 (246,062) 103,963
TOTAL LIABILITIES AND SHAREOWNERS'
EQUITY................................. $44 $230 $516 $243,408 $(326,386) $241,141
D-21
370
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AT&T CORP.
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(DOLLARS IN MILLIONS)
GUARANTOR GUARANTOR GUARANTOR TCI TCI TCI MEDIAONE
AT&T SUBSIDIARY SUBSIDIARY FINANCING FINANCING FINANCING FINANCING
PARENT TCI MEDIAONE I II IV I
--------- ---------- ---------- --------- --------- --------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES............................. $ (173) $ 501 $(582) $ -- $ -- $ -- $ --
INVESTING ACTIVITIES
Capital expenditures and other
additions.............................. (254) (6) (1)
Other................................... (692) (739) 841
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES............................. (946) (745) 840
FINANCING ACTIVITIES
Proceeds from long-term debt
issuances.............................. 187
Proceeds from debt from AT&T............ 101 337
Issuance of convertible preferred
securities and warrants................ 9,811
Increase (decrease) in short-term
borrowings, net........................ (9,911) (50) (445)
Other................................... 1,118 (43)
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES............................. 1,119 244 (258)
Net (decrease) increase in cash and cash
equivalents............................
Cash and cash equivalents at beginning
of year................................
Cash and cash equivalents at end of
period................................. $ -- $ -- $ -- $ -- $ -- $ -- $ --
ELIMINATION
MEDIAONE MEDIAONE MEDIAONE AND
FINANCING FINANCE FINANCE NON-GUARANTOR CONSOLIDATION CONSOLIDATED
II II III SUBSIDIARIES ADJUSTMENTS AT&T CORP.
--------- -------- -------- ------------- ------------- ------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES............................. $ -- $ -- $ -- $ 2,192 $ -- $ 1,938
INVESTING ACTIVITIES
Capital expenditures and other
additions.............................. (3,662) (3,923)
Other................................... (3,525) 4,854 739
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES............................. (7,187) 4,854 (3,184)
FINANCING ACTIVITIES
Proceeds from long-term debt
issuances.............................. 6,158 6,345
Proceeds from debt from AT&T............ (337) (101)
Issuance of convertible preferred
securities and warrants................ 9,811
Increase (decrease) in short-term
borrowings, net........................ 540 (4,849) (14,715)
Other................................... (1,356) 96 (185)
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES............................. 5,005 (4,854) 1,256
Net (decrease) increase in cash and cash
equivalents............................ 10 10
Cash and cash equivalents at beginning
of year................................ 126 126
Cash and cash equivalents at end of
period................................. $ -- $ -- $ -- $ 136 $ -- $ 136
D-22
371
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AT&T CORP.
CONSOLIDATING CONDENSED INCOME STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(DOLLARS IN MILLIONS)
GUARANTOR GUARANTOR TCI TCI TCI ELIMINATION AND
AT&T SUBSIDIARY FINANCING FINANCING FINANCING NON-GUARANTOR CONSOLIDATION
PARENT TCI I II IV SUBSIDIARIES ADJUSTMENTS
--------- ---------- --------- --------- --------- ------------- ---------------
Revenue.......................... $5,922 $ -- $-- $-- $-- $10,431 $ (452)
Operating Expenses
Costs of services and products... 742 3,548 (375)
Access and other connection...... 1,874 1,789 (75)
Selling, general and
administrative................. 664 28 2,599 (2)
Depreciation and other
amortization................... 513 14 1,039
Amortization of goodwill,
franchise costs and other
purchased intangibles.......... 8 360
Net restructuring and other
charges........................ 663 16 94
Total operating expenses......... 4,464 58 9,429 (452)
Operating income (losses)........ 1,458 (58) 1,002
Other income (expense)........... 304 9 10 4 1,195 (854)
Interest expense (benefit)....... 956 354 9 10 4 110 (854)
Income (losses) before income
taxes, minority interest and
earnings (losses) from equity
investments.................... 806 (412) 2,087
Provision (benefit) for income
taxes.......................... 376 (66) 199
Minority interest income
(expense)...................... (40) (5) 1
Equity earnings from Liberty
Media Group.................... 942
Net earnings (losses) from other
equity investments............. 1,702 (186) (1,703)
Net income (losses).............. $2,092 $ 591 $-- $-- $-- $ 1,703 $(1,703)
CONSOLIDATED
AT&T CORP.
------------
Revenue.......................... $15,901
Operating Expenses
Costs of services and products... 3,915
Access and other connection...... 3,588
Selling, general and
administrative................. 3,289
Depreciation and other
amortization................... 1,566
Amortization of goodwill,
franchise costs and other
purchased intangibles.......... 368
Net restructuring and other
charges........................ 773
Total operating expenses......... 13,499
Operating income (losses)........ 2,402
Other income (expense)........... 668
Interest expense (benefit)....... 589
Income (losses) before income
taxes, minority interest and
earnings (losses) from equity
investments.................... 2,481
Provision (benefit) for income
taxes.......................... 509
Minority interest income
(expense)...................... (44)
Equity earnings from Liberty
Media Group.................... 942
Net earnings (losses) from other
equity investments............. (187)
Net income (losses).............. $ 2,683
D-23
372
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AT&T CORP.
CONSOLIDATING CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 2000
(DOLLARS IN MILLIONS)
GUARANTOR GUARANTOR GUARANTOR TCI TCI TCI MEDIAONE
AT&T SUBSIDIARY SUBSIDIARY FINANCING FINANCING FINANCING FINANCING
PARENT TCI MEDIAONE I II IV I
--------- ---------- ---------- --------- --------- --------- ---------
ASSETS
Cash and cash equivalents............. $ -- $ -- $ -- $ -- $ -- $ -- $--
Receivables........................... 11,424 2,577 78
Investments...........................
Deferred income taxes................. 811
Other current assets.................. 1,103 11
TOTAL CURRENT ASSETS.................. 13,338 2,588 78
Property, plant & equipment, net...... 9,064 93 22
Franchise costs, net.................. 838
Licensing costs, net.................. 30
Goodwill, net......................... 161 19,786
Investment in Liberty Media Group and
related receivables, net............. 34,290
Other investments and related
advances............................. 164,844 35,358 29,325
Other assets.......................... 5,500 528 514 204 51
TOTAL ASSETS.......................... $193,745 $72,359 $49,211 $528 $514 $204 $51
LIABILITIES
Debt maturing within one year......... $ 52,556 $ 435 $ 2,337 $ -- $ -- $ -- $--
Liability under put options...........
Other current liabilities............. 9,535 1,166 76
TOTAL CURRENT LIABILITIES............. 62,091 1,601 2,413
Long-term debt........................ 21,333 30,096 2,168 528 514 204 30
Deferred income taxes................. 569 230
Other long-term liabilities and
deferred credits..................... 7,341 939 129
TOTAL LIABILITIES..................... 91,334 32,636 4,940 528 514 204 30
Minority interest..................... 1,462 1,147
Company-Obligated Convertible
Quarterly Income Preferred Securities
of Subsidiary Trust Holding Solely
Subordinated Debt Securities of
AT&T................................. 4,710
SHAREOWNERS' EQUITY
AT&T Common Stock..................... 4,176
AT&T Wireless Group common stock...... 362
Liberty Media Group Class A Common
Stock................................ 2,364
Liberty Media Group Class B Common
Stock................................ 206
Other shareowners' equity............. 90,593 38,261 43,124 21
TOTAL SHAREOWNERS' EQUITY............. 97,701 38,261 43,124 21
TOTAL LIABILITIES AND SHAREOWNERS'
EQUITY............................... $193,745 $72,359 $49,211 $528 $514 $204 $51
MEDIAONE MEDIAONE MEDIAONE NON- ELIMINATION AND
FINANCING FINANCE FINANCE GUARANTOR CONSOLIDATION CONSOLIDATED
II II III SUBSIDIARIES ADJUSTMENTS AT&T CORP.
--------- -------- -------- ------------ --------------- ------------
ASSETS
Cash and cash equivalents............. $-- $ -- $ -- $ 126 $ -- $ 126
Receivables........................... 50,788 (52,020) 12,847
Investments........................... 2,102 2,102
Deferred income taxes................. 1 812
Other current assets.................. 90 (4) 1,200
TOTAL CURRENT ASSETS.................. 53,107 (52,024) 17,087
Property, plant & equipment, net...... 41,985 (3) 51,161
Franchise costs, net.................. 47,380 48,218
Licensing costs, net.................. 13,596 13,626
Goodwill, net......................... 11,531 31,478
Investment in Liberty Media Group and
related receivables, net............. 34,290
Other investments and related
advances............................. 23,059 (218,325) 34,261
Other assets.......................... 44 230 516 17,020 (12,505) 12,102
TOTAL ASSETS.......................... $44 $ 230 $ 516 $207,678 $(282,857) $242,223
LIABILITIES
Debt maturing within one year......... $-- $ -- $ -- $ 6,409 $ (29,790) $ 31,947
Liability under put options........... 2,564 2,564
Other current liabilities............. 13,972 (8,393) 16,356
TOTAL CURRENT LIABILITIES............. 22,945 (38,183) 50,867
Long-term debt........................ 28 214 504 3,895 (26,422) 33,092
Deferred income taxes................. 35,914 36,713
Other long-term liabilities and
deferred credits..................... 431 (80) 8,760
TOTAL LIABILITIES..................... 28 214 504 63,185 (64,685) 129,432
Minority interest..................... 2,274 4,883
Company-Obligated Convertible
Quarterly Income Preferred Securities
of Subsidiary Trust Holding Solely
Subordinated Debt Securities of
AT&T................................. 4,710
SHAREOWNERS' EQUITY
AT&T Common Stock..................... (416) 3,760
AT&T Wireless Group common stock...... 362
Liberty Media Group Class A Common
Stock................................ 2,364
Liberty Media Group Class B Common
Stock................................ 206
Other shareowners' equity............. 16 16 12 142,635 (218,172) 96,506
TOTAL SHAREOWNERS' EQUITY............. 16 16 12 142,219 (218,172) 103,198
TOTAL LIABILITIES AND SHAREOWNERS'
EQUITY............................... $44 $ 230 $ 516 $207,678 $(282,857) $242,223
D-24
373
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AT&T CORP.
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(DOLLARS IN MILLIONS)
GUARANTOR GUARANTOR TCI TCI TCI ELIMINATION AND
AT&T SUBSIDIARY FINANCING FINANCING FINANCING NON-GUARANTOR CONSOLIDATION
PARENT TCI I II IV SUBSIDIARIES ADJUSTMENTS
--------- ---------- --------- --------- --------- ------------- ---------------
NET CASH PROVIDED BY (USED
IN) OPERATING
ACTIVITIES................ $ (260) $ 381 $ 11 $ 12 $ 5 $ 2,379 $ --
INVESTING ACTIVITIES
Capital expenditures and
other additions........... (19) (3,217)
Equity investment
distributions and sales... 57 360
Equity investment
contributions and
purchases................. (16) (7,409) (1,043) 7,409
Net (acquisitions)
dispositions of businesses
net of cash
acquired/disposed......... (197) 9
Other....................... (708) (105) (4,832) 4,710
NET CASH (USED IN) PROVIDED
BY INVESTING ACTIVITIES... (883) (7,514) (8,723) 12,119
FINANCING ACTIVITIES
Proceeds from long-term debt
issuances................. 739
Proceeds from debt from
AT&T...................... 7,648 (7,648)
Retirement of long-term
debt...................... (487) (258) (262)
Dividends paid on common
stock..................... (703)
Increase (decrease) in
short-term borrowings,
net....................... 7,889 (257) 257 (4,710)
Other....................... (6,295) (11) (12) (5) 13,075 (7,409)
NET CASH PROVIDED BY (USED
IN) FINANCING
ACTIVITIES................ 1,143 7,133 (11) (12) (5) 5,422 (12,119)
Net decrease in cash and
cash equivalents.......... (922)
Cash and cash equivalents at
beginning of year......... 1,024
Cash and cash equivalents at
end of period............. $ -- $ -- $ -- $ -- $-- $ 102 $ --
CONSOLIDATED
AT&T CORP.
------------
NET CASH PROVIDED BY (USED
IN) OPERATING
ACTIVITIES................ $ 2,528
INVESTING ACTIVITIES
Capital expenditures and
other additions........... (3,236)
Equity investment
distributions and sales... 417
Equity investment
contributions and
purchases................. (1,059)
Net (acquisitions)
dispositions of businesses
net of cash
acquired/disposed......... (188)
Other....................... (935)
NET CASH (USED IN) PROVIDED
BY INVESTING ACTIVITIES... (5,001)
FINANCING ACTIVITIES
Proceeds from long-term debt
issuances................. 739
Proceeds from debt from
AT&T......................
Retirement of long-term
debt...................... (1,007)
Dividends paid on common
stock..................... (703)
Increase (decrease) in
short-term borrowings,
net....................... 3,179
Other....................... (657)
NET CASH PROVIDED BY (USED
IN) FINANCING
ACTIVITIES................ 1,551
Net decrease in cash and
cash equivalents.......... (922)
Cash and cash equivalents at
beginning of year......... 1,024
Cash and cash equivalents at
end of period............. $ 102
(N) CONSOLIDATING CONDENSED FINANCIAL INFORMATION
In conjunction with the issuance of AT&T Wireless Group and Liberty Media
Group tracking stocks, AT&T has separated, for financial reporting purposes in
all periods, the AT&T Common Stock Group, Liberty Media Group and AT&T Wireless
Group. Provided below is the consolidating financial information reflecting the
businesses of these individual groups, including the allocation of expenses
between the groups in accordance with our allocation policies, as well as other
related party transactions such as sales of services between groups and interest
income and expense on intercompany borrowings. The AT&T Common Stock Group
presented below excludes its retained portion of the value of AT&T Wireless
Group. AT&T does not have a controlling financial interest in LMG for financial
accounting purposes; therefore, our ownership in LMG is reflected as an
investment accounted for under the equity method and is reflected as such in the
consolidating financial statements.
AT&T Wireless Group purchases long distance and other network-related
services from AT&T at market-based prices and accordingly such amounts are
eliminated. Prior to the offering of AT&T
D-25
374
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Wireless Group tracking stock, the capital structure of AT&T Wireless Group had
been assumed based upon AT&T's historical capital ratio adjusted for certain
items. Intercompany interest rates are intended to be substantially equivalent
to the interest rate that AT&T Wireless Group would be able to obtain or receive
if it were a stand-alone entity. General corporate overhead related to AT&T's
corporate headquarters and common support divisions has been allocated to AT&T
Wireless Group based on the ratio of AT&T Wireless Group's external costs and
expenses to AT&T's consolidated external costs and expenses, adjusted for any
functions that AT&T Wireless Group performs on its own. The consolidated income
tax provision or benefit, related tax payments or refunds, and deferred tax
balances of AT&T have been allocated to AT&T Wireless Group based principally on
the taxable income or losses and tax credits directly attributable to AT&T
Wireless Group.
Pursuant to the Inter-Group agreement, AT&T does not allocate general
overhead expenses to Liberty Media Group (LMG) and only charges LMG for specific
services that LMG receives from AT&T pursuant to service agreements or similar
arrangements. Additionally, as LMG operates independent of AT&T, there is no
cash or debt allocated to them.
D-26
375
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AT&T
CONSOLIDATING CONDENSED INCOME STATEMENT
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(IN MILLIONS)
AT&T AT&T LIBERTY
COMMON STOCK WIRELESS MEDIA ELIMINATIONS/ CONSOLIDATED
GROUP GROUP GROUP RECLASSES(1) AT&T CORP.
------------ -------- ------- ------------- ------------
External Revenue.......................... $13,551 $3,212 $ -- $16,763
Inter-group revenue....................... 101 $(101)
Total Revenue............................. 13,652 3,212 (101) $16,763
Operating expenses:
Costs of services and products............ 3,624 1,348 (135) 4,837
Access and other connection............... 3,151 135 3,286
Selling, general and administrative....... 2,858 1,010 3,868
Depreciation and other amortization....... 1,702 576 (137) 2,141
Amortization of goodwill, franchise costs
and other purchased intangibles......... 709 137 846
Net restructuring and other charges....... 808 808
Inter-group expenses...................... (36) 137 (101)
Total operating expenses.................. 12,816 3,071 (101) 15,786
Operating income.......................... 836 141 977
Other income (expense).................... (784) 7 (4) (781)
Inter-group interest income............... 82 77 (159)
Interest expense.......................... 962 7 969
Inter-group interest expense.............. 77 40 (117)
Income (loss) before income taxes,
minority interest, earnings (losses)
from equity investments and cumulative
effect of accounting change............. (905) 178 (46) (773)
(Benefit) provision for income taxes...... 213 79 292
Minority interest income (expense)........ 646 4 650
Equity (losses) from Liberty Media
Group................................... (697) (697)
Net losses from other equity
investments............................. (37) (99) (136)
Income (losses) before cumulative effect
of accounting change.................... (509) 0 (697) (42) (1,248)
Cumulative effect of accounting change.... 359 545 904
Net (losses) income....................... (150) 0 (152) (42) (344)
Dividend requirements on preferred
stock................................... 181 42 (42) 181
Net income (losses) available to common
shareowners............................. $ (331) $ (42) $(152) $ -- $ (525)
======= ====== ===== ===== =======
-------------------------
(1)Includes the elimination of inter-group transactions, consolidating entries
as well as reclassifications and adjustments related to the AT&T Wireless
Group tracking stock financial statements.
D-27
376
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AT&T
CONSOLIDATING CONDENSED BALANCE SHEET
AT MARCH 31, 2001
(IN MILLIONS)
AT&T AT&T LIBERTY
COMMON STOCK WIRELESS MEDIA ELIMINATIONS/ CONSOLIDATED
GROUP GROUP GROUP RECLASSES(1) AT&T CORP.
------------ -------- ------- ------------- ------------
ASSETS:
Cash and cash equivalents............... $ 102 $ 34 $ $ $ 136
Other current assets.................... 13,781 2,567 (231) 16,117
Short-term note due from related
party................................. 10,588 (10,588)
TOTAL CURRENT ASSETS.................... $ 13,883 $13,189 (10,819) 16,253
Property, plant and equipment, net...... 41,540 10,725 52,265
Franchise costs, net.................... 47,924 47,924
Goodwill, net........................... 25,839 5,653 (967) 30,525
Investment in Liberty Media Group and
related receivables, net.............. 34,072 34,072
Other investments and related
advances.............................. 30,383 3,904 34,287
Other assets............................ 11,278 13,568 969 25,815
Long-term assets due from related
party................................. 4,800 (4,800)
TOTAL ASSETS............................ $175,647 $47,039 $34,072 $(15,617) $241,141
LIABILITIES:
Debt maturing within one year........... $ 17,076 $ 103 $ $ 46 $ 17,225
Short-term debt due to related party.... 10,588 (10,588)
Other current liabilities............... 14,891 2,641 (313) 17,219
TOTAL CURRENT LIABILITIES............... 42,555 2,744 (10,855) 34,444
Long-term debt.......................... 32,514 6,487 3 39,004
Long-term debt due to related party..... 1,800 (1,800)
Deferred income taxes................... 31,926 4,739 36,665
Other long-term liabilities and deferred
credits............................... 8,478 290 8,768
TOTAL LIABILITIES....................... $115,473 $16,060 $(12,652) $118,881
======== ======= ======== ========
-------------------------
(1)Includes the elimination of inter-group transactions, consolidating entries
as well as reclassifications and adjustments related to the AT&T Wireless
Group tracking stock financial statements.
D-28
377
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AT&T
CONSOLIDATING CONDENSED BALANCE SHEET
AT MARCH 31, 2001
(IN MILLIONS)
AT&T AT&T LIBERTY
COMMON STOCK WIRELESS MEDIA ELIMINATIONS/ CONSOLIDATED
GROUP GROUP GROUP RECLASSES(1) AT&T CORP.
------------ -------- ------- ------------- ------------
Minority interest....................... 4,180 42 4,222
Company-obligated convertible quarterly
income preferred securities of
subsidiary trust holding solely
subordinated debt securities of
AT&T.................................. 4,713 4,713
Convertible Preferred Stock............. 9,362 9,362
Other shareowners' equity due to related
party................................. 3,000 (3,000)
AT&T common stock....................... 3,809 3,809
AT&T Wireless Group common stock........ 363 363
Liberty Media Group Class A............. 2,377 2,377
Liberty Media Group Class B............. 212 212
Other shareowners' equity............... 41,919 27,937 34,072 (6,726) 97,202
Total shareowners' equity............... 41,919 30,937 34,072 (2,965) 103,963
Total liabilities and shareowners'
equity................................ $175,647 $47,039 $34,072 $(15,617) $241,141
======== ======= ======= ======== ========
-------------------------
(1)Includes the elimination of inter-group transactions, consolidating entries
as well as reclassifications and adjustments related to the AT&T Wireless
Group tracking stock financial statements.
D-29
378
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AT&T CORP.
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(DOLLARS IN MILLIONS)
AT&T AT&T LIBERTY
COMMON STOCK WIRELESS MEDIA ELIMINATIONS/ CONSOLIDATED
GROUP GROUP GROUP RECLASSES(1) AT&T CORP.
------------ -------- ------- ------------- ------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES................. $ 2,050 $ 655 $ $ (767) $ 1,938
INVESTING ACTIVITIES
Capital expenditures and other
additions............................ (2,516) (1,407) (3,923)
Other.................................. 1,223 (11,112) 10,628 739
NET CASH (USED IN) INVESTING
ACTIVITIES........................... (1,293) (12,519) 10,628 (3,184)
FINANCING ACTIVITIES
Proceeds from long-term debt
issuance............................. 6,345 6,345
Issuance of convertible preferred
securities and warrants.............. 3,670 6,141 9,811
Increase (decrease) in short-term
borrowings, net...................... (4,174) (638) (9,903) (14,715)
Other.................................. (215) (12) 42 (185)
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES................. (719) 11,836 (9,861) 1,256
Net (decrease) increase in cash and
cash equivalents..................... 38 (28) 10
Cash and cash equivalents at beginning
of year.............................. 64 62 126
Cash and cash equivalents at end of
period............................... $ 102 $ 34 $ $ $ 136
======= ======== ======= ======= ========
-------------------------
(1)Includes the elimination of inter-group transactions, consolidating entries
as well as reclassifications and adjustments related to the AT&T Wireless
Group tracking stock financial statements.
D-30
379
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AT&T
CONSOLIDATING CONDENSED INCOME STATEMENT
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(IN MILLIONS)
AT&T AT&T LIBERTY
COMMON STOCK WIRELESS MEDIA ELIMINATIONS/ CONSOLIDATED
GROUP GROUP GROUP RECLASSES(1) AT&T CORP.
------------ -------- ------- ------------- ------------
External Revenue.................. $13,703 $2,198 $ -- $ -- $15,901
Inter-group revenue............... 70 (70)
Total Revenue..................... 13,773 2,198 (70) 15,901
Operating expenses:
Costs of services and products.... 3,002 1,001 (88) 3,915
Access and other connection....... 3,506 82 3,588
Selling, general and
administrative.................. 2,652 637 3,289
Depreciation and other
amortization.................... 1,270 369 (73) 1,566
Amortization of goodwill,
franchise costs and other
purchased intangibles........... 301 67 368
Net restructuring and other
charges......................... 773 773
Inter-group expenses.............. (95) 165 (70)
Total operating expenses.......... 11,409 2,172 (82) 13,499
Operating income.................. 2,364 26 12 2,402
Other income (expense)............ 648 24 (4) 668
Inter-group interest income....... 85 (85)
Interest expense.................. 610 (21) 589
Inter-group interest expense...... 72 (72)
Income (loss) before income taxes,
minority interest, earnings
(losses) from equity investments
and cumulative effect of
accounting change............... 2,487 (1) (5) 2,481
(Benefit) provision for income
taxes........................... 490 (2) 21 509
Minority interest income
(expense)....................... (48) 4 (44)
Equity (losses) from Liberty Media
Group........................... 942 942
Net losses from other equity
investments..................... (224) 25 12 (187)
Income (losses) income............ 1,725 26 942 (10) 2,683
Dividend requirements on preferred
stock........................... 13 (13)
Net (losses) income available to
common shareowners.............. $ 1,725 $ 13 $942 $ 3 $ 2,683
======= ====== ==== ==== =======
-------------------------
(1)Includes the elimination of inter-group transactions, consolidating entries
as well as reclassifications and adjustments related to the AT&T Wireless
Group tracking stock financial statements.
D-31
380
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AT&T
CONSOLIDATING CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 2000
(IN MILLIONS)
AT&T AT&T LIBERTY
COMMON STOCK WIRELESS MEDIA ELIMINATIONS/ CONSOLIDATED
GROUP GROUP GROUP RECLASSES(1) AT&T CORP.
------------ -------- ------- ------------- ------------
ASSETS:
Cash and cash equivalents..................... $ 64 $ 62 $ $ $ 126
Other receivables............................. 11,053 2,010 (216) 12,847
Deferred income taxes......................... 719 93 812
Investments................................... 2,102 2,102
Other current assets.......................... 788 417 (5) 1,200
Short-term note due from related party........ 638 (638)
Total current assets.......................... 15,364 2,582 (859) 17,087
Property, plant and equipment, net............ 41,269 9,892 51,161
Franchise costs, net.......................... 48,218 48,218
Licensing costs, net.......................... 13,627 (1) 13,626
Goodwill, net................................. 26,782 5,816 (1,120) 31,478
Investment in Liberty Media Group and related
receivables, net............................ 34,290 34,290
Other investments and related advances........ 30,876 3,385 34,261
Other assets.................................. 10,984 1,118 12,102
Long-term assets due from related party....... 4,800 (4,800)
Total assets.................................. $178,293 $35,302 $34,290 $(5,662) $242,223
LIABILITIES:
Debt maturing within one year................. $ 31,838 $ 109 $ $ $ 31,947
Short-term debt due to related party.......... 638 (638)
Liability under put options................... 2,564 2,564
Other current liabilities..................... 13,709 2,907 (260) 16,356
Total current liabilities..................... 48,111 3,654 (898) 50,867
Long-term debt................................ 33,089 3 33,092
Long-term debt due to related party........... 1,800 (1,800)
Deferred income taxes......................... 32,054 4,659 36,713
Other long-term liabilities and deferred
credits..................................... 8,493 271 (4) 8,760
Total liabilities............................. 121,747 10,384 (2,699) 129,432
======== ======= ======= ========
Minority interest............................. 4,842 41 4,883
Company-obligated convertible quarterly income
preferred securities of subsidiary trust
holding solely subordinated debt securities
of AT&T..................................... 4,710 4,710
AT&T common stock............................. 3,760 3,760
AT&T Wireless Group common stock.............. 362 362
Liberty Media Group Class A Tracking stock.... 2,364 2,364
Liberty Media Group Class B tracking stock.... 206 206
Other shareowners' equity..................... 46,994 21,877 34,290 (6,655) 96,506
Other shareowners' equity due to related
party....................................... 3,000 (3,000)
Total shareowners' equity..................... 46,994 24,877 34,290 (2,963) 103,198
Total liabilities and shareowners' equity..... $178,293 $35,302 $34,290 $(5,662) $242,223
======== ======= ======= ======= ========
-------------------------
(1)Includes the elimination of inter-group transactions, consolidating entries
as well as reclassifications and adjustments related to the AT&T Wireless
Group tracking stock financial statements.
D-32
381
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AT&T CORP.
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THREE MONTHS ENDED MARCH 31, 2000
(DOLLARS IN MILLIONS)
AT&T AT&T LIBERTY
COMMON STOCK WIRELESS MEDIA ELIMINATIONS/ CONSOLIDATED
GROUP GROUP GROUP RECLASSES(1) AT&T CORP.
------------ -------- ------- ------------- ------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES.............................. $ 2,314 $ 228 $ $ (14) $ 2,528
INVESTING ACTIVITIES
Capital expenditures and other
additions............................... (2,418) (818) (3,236)
Equity investment distributions and
sales................................... 391 26 417
Equity investment contribution and
purchases............................... (985) (74) (1,059)
Net acquisitions of businesses net of cash
acquired/disposed....................... (188) (188)
Other..................................... (1,153) (82) 300 (935)
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES.............................. (4,353) (948) 300 (5,001)
FINANCING ACTIVITIES
Proceeds from long-term debt issuance..... 739 739
Retirement of long-term debt.............. (1,009) 2 (1,007)
Dividends paid on common stock............ (703) (703)
Increase (decrease) in short-term
borrowings, net......................... 3,179 3,179
Other..................................... (1,094) 725 (288) (657)
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES.............................. 1,112 725 (286) 1,551
Net (decrease) increase in cash and cash
equivalents............................. (927) 5 (922)
Cash and cash equivalents at beginning of
year.................................... 1,019 5 1,024
Cash and cash equivalents at end of
period.................................. $ 92 $ 10 $ $ $ 102
======= ===== ===== ===== =======
-------------------------
(1)Includes the elimination of inter-group transactions, consolidating entries
as well as reclassifications and adjustments related to the AT&T Wireless
Group tracking stock financial statements.
D-33
382
AT&T CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(O) NEW ACCOUNTING PRONOUNCEMENT
In September 2000, the Financial Accounting Standards Board (FASB) issued
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities -- a Replacement of FASB Statement No. 125." This
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities. Under these
standards, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. This statement provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. This statement is effective for transfers
and servicing of financial assets and extinguishment of liabilities occurring
after March 31, 2001. AT&T does not expect that the adoption of SFAS No. 140
will have a material impact on AT&T's results of operations, financial position
or cash flows.
(P) SUBSEQUENT EVENTS
On May 7, 2001, AT&T agreed to sell our 99.75% interest in an entity owning
the Baltimore Maryland cable-system serving approximately 110,000 customers to
Comcast for approximately $0.5 billion. Pending certain closing conditions and
regulatory approvals, the transaction is expected to close in second or third
quarter of 2001.
On April 30, 2001, AT&T received 63.9 million common shares of AT&T common
held by Comcast Corporation in exchange for an entity owning cable-systems which
serves approximately 590 thousand customers in six states. The transaction
resulted in a pretax loss of $0.3 billion.
On April 27, 2001, AT&T completed the sale announced on February 27, 2001,
of our 10% stake in Japan Telecom Co. Ltd to Vodafone Group plc for $1.35
billion in cash. The proceeds from the transaction were split evenly between
AT&T and AT&T Wireless Group. The transaction resulted in a pretax gain of
approximately $0.9 billion.
On April 26, 2001, AT&T initiated a 364-day accounts receivable
securitization program providing for up to $0.5 billion of funding. Under the
program, a small percentage of consumer accounts receivable will be sold on a
discounted, revolving basis, to a special purpose, wholly-owned subsidiary,
which assigns interests in such receivables to unrelated third-party financing
entities. The proceeds will be used for general corporate purposes, including
the repayment of commercial paper.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareowners of AT&T Corp.:
In our opinion, based on our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of income, changes in shareowners' equity and of cash flows present fairly, in
all material respects, the financial position of AT&T Corp. and its subsidiaries
(AT&T) at December 31, 2000 and 1999, and the results of their operations and
their cash flows for each of the three years ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of AT&T's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Liberty Media Group, an
equity method investee, which was acquired by AT&T on March 9, 1999. AT&T's
financial statements include an investment of $34,290 million and $38,460
million as of December 31, 2000 and 1999, respectively, and equity method
earnings (losses) of $1,488 million and $(2,022) million, for the years ended
December 31, 2000 and 1999, respectively. Those statements were audited by other
auditors whose report thereon has been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for Liberty
Media Group, as of and for the years ended December 31, 2000 and 1999, is based
solely on the report of the other auditors. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
March 16, 2001
D-35
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AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------
2000 1999 1998
------- ------- -------
DOLLARS IN MILLIONS
(EXCEPT PER SHARE AMOUNTS)
REVENUE..................................................... $65,981 $62,600 $53,223
Operating Expenses
Costs of services and products (excluding depreciation of
$5,457, $4,947 and $3,362 included below)................. 17,587 14,594 10,495
Access and other connection................................. 13,518 14,686 15,328
Selling, general and administrative......................... 13,303 13,516 12,770
Depreciation and other amortization......................... 7,274 6,138 4,378
Amortization of goodwill, franchise costs and other
purchased intangibles..................................... 2,993 1,301 251
Net restructuring and other charges......................... 7,029 1,506 2,514
Total operating expenses.................................... 61,704 51,741 45,736
Operating income............................................ 4,277 10,859 7,487
Other income................................................ 1,514 931 1,281
Interest expense............................................ 3,183 1,765 427
Income from continuing operations before income taxes,
minority interest and earnings (losses) from equity
investments............................................... 2,608 10,025 8,341
Provision for income taxes.................................. 3,342 3,695 3,049
Minority interest income (expense).......................... 4,120 (115) 21
Equity earnings (losses) from Liberty Media Group........... 1,488 (2,022) --
Net losses from other equity investments.................... 205 765 78
Income from continuing operations........................... 4,669 3,428 5,235
Discontinued Operations
Income from discontinued operations (net of income taxes of
$6)....................................................... -- -- 10
Gain on sale of discontinued operations (net of income taxes
of $799).................................................. -- -- 1,290
Income before extraordinary loss............................ 4,669 3,428 6,535
Extraordinary loss (net of income taxes of $80)............. -- -- 137
Net income.................................................. $ 4,669 $ 3,428 $ 6,398
------- ------- -------
AT&T Common Stock Group -- per basic share:
Income from continuing operations........................... $ 0.89 $ 1.77 $ 1.96
Income from discontinued operations......................... -- -- --
Gain on sale of discontinued operations..................... -- -- 0.48
Extraordinary loss.......................................... -- -- 0.05
AT&T Common Stock Group earnings............................ $ 0.89 $ 1.77 $ 2.39
------- ------- -------
AT&T Common Stock Group -- per diluted share:
Income from continuing operations........................... $ 0.88 $ 1.74 $ 1.94
Income from discontinued operations......................... -- -- --
Gain on sale of discontinued operations..................... -- -- 0.48
Extraordinary loss.......................................... -- -- 0.05
AT&T Common Stock Group earnings............................ $ 0.88 $ 1.74 $ 2.37
------- ------- -------
AT&T Wireless Group:
Earnings per share:
Basic and diluted......................................... $ 0.21 $ -- $ --
Liberty Media Group:
Earnings (loss) per share:
Basic and diluted......................................... $ 0.58 $ (0.80) $ --
The notes are an integral part of the consolidated financial statements.
D-36
385
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31,
----------------------
2000 1999
--------- ---------
(DOLLARS IN MILLIONS)
ASSETS
Cash and cash equivalents................................... $ 126 $ 1,024
Receivables, less allowances of $1,379 and $1,281........... 11,144 9,813
Other receivables........................................... 1,703 640
Investments................................................. 2,102 --
Deferred income taxes....................................... 812 1,287
Other current assets........................................ 1,200 1,120
TOTAL CURRENT ASSETS........................................ 17,087 13,884
Property, plant and equipment, net.......................... 51,161 39,618
Franchise costs, net of accumulated amortization of $1,664
and $697.................................................. 48,218 32,693
Licensing costs, net of accumulated amortization of $1,762
and $1,491................................................ 13,626 8,548
Goodwill, net of accumulated amortization of $850 and
$363...................................................... 31,478 7,445
Investment in Liberty Media Group and related receivables,
net....................................................... 34,290 38,460
Other investments and related advances...................... 34,261 19,366
Prepaid pension costs....................................... 3,003 2,464
Other assets................................................ 9,099 6,928
TOTAL ASSETS................................................ $242,223 $169,406
-------- --------
LIABILITIES
Accounts payable............................................ $ 6,455 $ 6,771
Payroll and benefit-related liabilities..................... 2,423 2,651
Debt maturing within one year............................... 31,947 12,633
Liability under put options................................. 2,564 --
Other current liabilities................................... 7,478 6,152
TOTAL CURRENT LIABILITIES................................... 50,867 28,207
Long-term debt.............................................. 33,092 23,217
Long-term benefit-related liabilities....................... 3,670 3,964
Deferred income taxes....................................... 36,713 24,199
Other long-term liabilities and deferred credits............ 5,090 3,801
TOTAL LIABILITIES........................................... 129,432 83,388
Minority Interest........................................... 4,883 2,391
Company-Obligated Convertible Quarterly Income Preferred
Securities of Subsidiary Trust Holding Solely Subordinated
Debt Securities of AT&T................................... 4,710 4,700
SHAREOWNERS' EQUITY
Common Stock:
AT&T Common Stock, $1 par value, authorized 6,000,000,000
shares; issued and outstanding 3,760,151,185 shares (net
of 416,887,452 treasury shares) at December 31, 2000, and
3,196,436,757 shares (net of 287,866,419 treasury shares)
at December 31, 1999...................................... 3,760 3,196
AT&T Wireless Group Common Stock, $1 par value, authorized
6,000,000,000 shares; issued and outstanding 361,802,200
shares at December 31, 2000............................... 362 --
Liberty Media Group Class A Common Stock, $1 par value,
authorized 4,000,000,000 shares; issued and outstanding
2,363,738,198 shares (net of 59,512,496 treasury shares)
at December 31, 2000, and 2,313,557,460 shares at December
31, 1999.................................................. 2,364 2,314
Liberty Media Group Class B Common Stock, $1 par value,
authorized 400,000,000 shares; issued and outstanding
206,221,288 shares (net of 10,607,776 treasury shares) at
December 31, 2000, and 216,842,228 shares at December 31,
1999...................................................... 206 217
Additional paid-in capital.................................. 90,496 59,526
Guaranteed ESOP obligation.................................. -- (17)
Retained earnings........................................... 7,408 6,712
Accumulated other comprehensive income...................... (1,398) 6,979
TOTAL SHAREOWNERS' EQUITY................................... 103,198 78,927
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY................... $242,223 $169,406
-------- --------
The notes are an integral part of the consolidated financial statements.
D-37
386
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31,
2000 1999 1998
--------- -------- --------
(DOLLARS IN MILLIONS)
AT&T Common Shares
Balance at beginning of year........................... $ 3,196 $ 2,630 $ 2,684
Shares issued (acquired), net:
Under employee plans................................ 3 -- 2
For acquisitions.................................... 607 566 (56)
Other*.............................................. (46) -- --
Balance at end of year................................... 3,760 3,196 2,630
AT&T Wireless Group Common Stock
Balance at beginning of year........................... -- -- --
Shares issued:
For stock offering.................................. 360 -- --
Under employee plans................................ 2 -- --
Balance at end of year................................... 362 -- --
Liberty Media Group Class A Common Stock
Balance at beginning of year........................... 2,314 -- --
Shares issued (acquired), net:
For acquisitions.................................... 62 2,280 --
Other............................................... (12) 34 --
Balance at end of year................................... 2,364 2,314 --
Liberty Media Group Class B Common Stock
Balance at beginning of year........................... 217 -- --
Shares issued (acquired), net:
For acquisitions.................................... (11) 220 --
Other............................................... -- (3) --
Balance at end of year................................... 206 217 --
Additional Paid-In Capital
Balance at beginning of year........................... 59,526 15,195 17,121
Shares issued (acquired), net:
Under employee plans................................ 98 431 67
For acquisitions.................................... 23,097 42,425 (2,105)
Other*.............................................. (2,767) 323 112
Proceeds in excess of par value from issuance of AT&T
Wireless common stock............................... 9,915 -- --
Common stock warrants issued........................... -- 306 --
Gain on issuance of common stock by affiliates......... 530 667 --
Other.................................................. 97 179 --
Balance at end of year................................... 90,496 59,526 15,195
D-38
387
FOR THE YEARS ENDED DECEMBER 31,
2000 1999 1998
--------- -------- --------
(DOLLARS IN MILLIONS)
Guaranteed ESOP Obligation
Balance at beginning of year........................... (17) (44) (70)
Amortization........................................... 17 27 26
Balance at end of year................................... -- (17) (44)
Retained Earnings
Balance at beginning of year........................... 6,712 7,800 3,981
Net income............................................. 4,669 3,428 6,398
Dividends declared..................................... (2,485) (2,807) (2,230)
Treasury shares issued at less than cost............... (1,488) (1,709) (370)
Other changes.......................................... -- -- 21
Balance at end of year................................... 7,408 6,712 7,800
Accumulated Comprehensive Income
Balance at beginning of year........................... 6,979 (59) (38)
Other comprehensive income............................. (8,377) 7,038 (21)
Balance at end of year................................... (1,398) 6,979 (59)
Total Shareowners' Equity................................ $103,198 $78,927 $25,522
-------- ------- -------
Summary of Total Comprehensive Income:
Net income............................................... $ 4,669 $ 3,428 $ 6,398
Other comprehensive income [net of income taxes of
$(5,348), $4,600 and $(53)]............................ (8,377) 7,038 (21)
Comprehensive Income..................................... $ (3,708) $10,466 $ 6,377
-------- ------- -------
-------------------------
* Activity in 2000 primarily represents AT&T stock received from Cox
Communications, Inc. in exchange for an entity owning cable systems and
certain other assets.
AT&T accounts for treasury stock as retired stock, and as of December 31, 2000
and 1999, had 417 million and 288 million treasury shares, respectively, of
which 346 million and 216 million shares, respectively, were owned by AT&T
Broadband subsidiaries. In addition, 70 million treasury shares related to the
purchase of AT&T shares previously owned by Liberty Media Group.
We have 100 million authorized shares of preferred stock at $1 par value. No
preferred stock was issued or outstanding.
The notes are an integral part of the consolidated financial statements.
D-39
388
AT&T CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
2000 1999 1998
-------- -------- --------
(DOLLARS IN MILLIONS)
OPERATING ACTIVITIES
Net income............................................. $ 4,669 $ 3,428 $ 6,398
Deduct: Income from discontinued operations............ -- -- 10
Gain on sale of discontinued operations....... -- -- 1,290
Add: Extraordinary loss on retirement of debt....... -- -- 137
Income from continuing operations...................... 4,669 3,428 5,235
Adjustments to reconcile net income to net cash
provided by operating activities of continuing
operations:
Net gains on sales of businesses and investments..... (1,683) (682) (959)
Net restructuring and other charges.................. 6,793 1,209 2,362
Depreciation and amortization........................ 10,267 7,439 4,629
Provision for uncollectible receivables.............. 1,393 1,416 1,389
Deferred income taxes................................ 1,054 145 (128)
Minority interest (income) expense................... (4,357) 8 (55)
Net equity (earnings) losses from Liberty Media
Group............................................. (1,488) 2,022 --
Net losses from other equity investments............. 395 1,155 68
Increase in receivables.............................. (3,350) (2,891) (1,577)
(Decrease) increase in accounts payable.............. (773) 116 (467)
Net change in other operating assets and
liabilities....................................... 4 (1,679) 5
Other adjustments, net............................... 383 (165) (285)
NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING
OPERATIONS........................................... 13,307 11,521 10,217
INVESTING ACTIVITIES
Capital expenditures and other additions............... (15,524) (14,306) (7,817)
Proceeds from sale or disposal of property, plant and
equipment............................................ 600 286 104
(Increase) decrease in other receivables............... (1,052) 17 6,403
Net acquisitions of licenses........................... (247) (6) (97)
Sales of marketable securities......................... 96 -- 2,003
Purchases of marketable securities..................... -- -- (1,696)
Equity investment distributions and sales.............. 1,352 1,875 1,516
Equity investment contributions and purchases.......... (3,412) (8,121) (1,281)
Net (acquisitions) dispositions of businesses including
cash acquired........................................ (21,410) (6,711) 4,507
Other investing activities, net........................ (337) (77) (60)
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES OF
CONTINUING OPERATIONS................................ (39,934) (27,043) 3,582
D-40
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FOR THE YEARS ENDED DECEMBER 31,
2000 1999 1998
-------- -------- --------
(DOLLARS IN MILLIONS)
FINANCING ACTIVITIES
Proceeds from long-term debt issuances................. 4,601 8,396 17
Retirement of long-term debt........................... (2,118) (2,807) (2,610)
Issuance of convertible securities..................... -- 4,638 --
Redemption of redeemable securities.................... (152) -- --
Issuance of AT&T common shares......................... 99 -- 32
Issuance of AT&T Wireless Group common shares.......... 10,314 -- --
Net acquisition of treasury shares..................... (581) (4,624) (3,321)
Dividends paid on common stock......................... (3,047) (2,712) (2,187)
Dividends on preferred securities...................... (294) (135) --
Increase (decrease) in short-term borrowings, net...... 16,973 10,238 (3,033)
Other financing activities, net........................ (66) 392 53
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES OF
CONTINUING OPERATIONS................................ 25,729 13,386 (11,049)
NET CASH PROVIDED BY DISCONTINUED OPERATIONS........... -- -- 92
Net (decrease) increase in cash and cash equivalents... (898) (2,136) 2,842
Cash and cash equivalents at beginning of year......... 1,024 3,160 318
Cash and cash equivalents at end of year............... $ 126 $ 1,024 $ 3,160
-------- -------- --------
The notes are an integral part of the consolidated financial statements.
D-41
390
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED (EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include all controlled subsidiaries.
All significant intercompany accounts and transactions have been eliminated in
consolidation. Investments in majority-owned subsidiaries where control does not
exist and investments in which we exercise significant influence but do not
control (generally a 20% to 50% ownership interest) are accounted for under the
equity method of accounting. This represents the majority of our investments.
Investments in which we have less than a 20% ownership interest and in which
there is no significant influence are accounted for under the cost method of
accounting.
FOREIGN CURRENCY TRANSLATION
For operations outside the United States that prepare financial statements
in currencies other than the U.S. dollar, we translate income statement amounts
at average exchange rates for the year, and we translate assets and liabilities
at year-end exchange rates. We present these translation adjustments as a
component of accumulated other comprehensive income within shareowners' equity.
Gains and losses from foreign currency transactions are included in results of
operations.
REVENUE RECOGNITION
We recognize long distance, local and wireless services revenue based upon
minutes of traffic processed or contracted fee schedules. Cable 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
recognized over the estimated average period that customers are expected to
remain connected to the cable distribution systems. Customer activation fees,
along with the related costs, are deferred and amortized over the customer
relationship period. The revenue and related expenses associated with the sale
of wireless handsets and accessories are recognized when the products are
delivered and accepted by customers, as this is considered to be a separate
earnings process from the sale of wireless services. We recognize other products
and services revenue when the products are delivered and accepted by customers
and when services are provided in accordance with contract terms. During 2000,
we adopted Securities and Exchange Commission (SEC) Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements". The adoption did not
have a material impact on our results of operations or financial condition.
ADVERTISING AND PROMOTIONAL COSTS
We expense costs of advertising and promotions, including cash incentives
used to acquire customers, as incurred. Advertising and promotional expenses
were $1,995, $1,804 and $1,920 in 2000, 1999 and 1998, respectively. Of these
amounts, $288, $320 and $622 were cash incentives to acquire customers in 2000,
1999 and 1998, respectively.
INVESTMENT TAX CREDITS
We amortize investment tax credits as a reduction to the provision for
income taxes over the useful lives of the assets that produced the credits.
D-42
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AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CASH EQUIVALENTS
We consider all highly liquid investments with original maturities of
generally three months or less to be cash equivalents.
PROPERTY, PLANT AND EQUIPMENT
We state property, plant and equipment at cost and determine depreciation
based upon the assets' estimated useful lives using either the group or unit
method. The useful lives of communications and network equipment range from
three to 15 years. The useful lives of other equipment ranges from three to
seven years. The useful lives of buildings and improvements range from 10 to 40
years. The group method is used for most depreciable assets, including the
majority of communications and network equipment. When we sell or retire assets
depreciated using the group method, the cost is deducted from property, plant
and equipment and charged to accumulated depreciation, without recognition of a
gain or loss. The unit method is primarily used for large computer systems and
support assets. When we sell assets that were depreciated using the unit method,
we include the related gains or losses in other income.
We use accelerated depreciation methods primarily for certain
high-technology computer-processing equipment and digital equipment used in the
telecommunications network, except for switching equipment placed in service
before 1989, where a straight-line method is used. All other plant and
equipment, including capitalized software, is depreciated on a straight-line
basis.
LICENSING COSTS
Licensing costs are costs incurred to acquire cellular and personal
communications services (PCS) licenses. Amortization begins with the
commencement of service to customers and is computed using the straight-line
method over periods of 35 or 40 years.
FRANCHISE COSTS
Franchise costs include the value attributed to agreements with local
authorities that allow access to homes in cable service areas acquired in
connection with business combinations. Such amounts are amortized on a
straight-line basis over 40 years.
GOODWILL
Goodwill is the excess of the purchase price over the fair value of net
assets acquired in business combinations accounted for under the purchase
method. We amortize goodwill on a straight-line basis over the periods
benefited, ranging from five to 40 years.
SOFTWARE CAPITALIZATION
Certain direct development costs associated with internal-use software are
capitalized, including external direct costs of material and services, and
payroll costs for employees devoting time to the software projects. These costs
are included within other assets and are amortized over a period not to exceed
five years beginning when the asset is substantially ready for use. Costs
incurred during the preliminary project stage, as well as maintenance and
training costs, are expensed as incurred. AT&T also capitalizes initial
operating-system software costs and amortizes them over the life of the
associated hardware.
D-43
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AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AT&T also capitalizes costs associated with the development of application
software incurred from the time technological feasibility is established until
the software is ready to provide service to customers. These capitalized costs
are included in property, plant and equipment and are amortized over a useful
life not to exceed five years.
VALUATION OF LONG-LIVED ASSETS
Long-lived assets, such as property, plant and equipment, licensing costs,
franchise costs, goodwill, investments and software, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. If the total of the expected future undiscounted cash
flows is less than the carrying amount of the asset, a loss is recognized for
the difference between the fair value and carrying value of the asset. In
addition, in accordance with Accounting Principles Board (APB) Opinion No. 17,
"Intangible Assets", we continue to evaluate the amortization periods to
determine whether events or circumstances warrant revised amortization periods.
DERIVATIVE FINANCIAL INSTRUMENTS
We use various financial instruments, including derivative financial
instruments, for purposes other than trading. We do not use derivative financial
instruments for speculative purposes. Derivatives, used as part of our
risk-management strategy, must be designated at inception as a hedge and
measured for effectiveness both at inception and on an ongoing basis. Gains and
losses related to qualifying hedges of foreign currency firm commitments are
deferred in current assets or liabilities and recognized as part of the
underlying transactions as they occur. All other foreign exchange contracts are
marked to market on a current basis, and the respective gains or losses are
recognized in other income. Interest rate differentials associated with interest
rate swaps used to hedge AT&T's debt obligations are recorded as an adjustment
to interest payable or receivable, with the offset to interest expense over the
life of the swaps. If we terminate an interest rate swap agreement, the gain or
loss is deferred and amortized over the remaining life of the liability. Cash
flows from financial instruments are classified in the Consolidated Statements
of Cash Flows under the same categories as the cash flows from the related
assets, liabilities or anticipated transactions.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and revenue and expenses during the period reported. Actual results
could differ from those estimates. Estimates are used when accounting for
certain items such as long-term contracts, allowance for doubtful accounts,
depreciation and amortization, employee benefit plans, taxes, restructuring
reserves and contingencies.
CONCENTRATIONS
As of December 31, 2000, we do not have any significant concentration of
business transacted with a particular customer, supplier or lender that could,
if suddenly eliminated, severely impact our operations. We also do not have a
concentration of available sources of labor, services, franchises, or licenses
or other rights that could, if suddenly eliminated, severely impact our
operations. We invest our cash with several high-quality credit institutions.
D-44
393
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ISSUANCE OF COMMON STOCK BY AFFILIATES
Changes in our proportionate share of the underlying equity of a subsidiary
or equity method investee, which result from the issuance of additional equity
securities by such entity, are recognized as increases or decreases to
additional paid-in capital in the Consolidated Statements of Shareowners'
Equity.
RECLASSIFICATIONS AND RESTATEMENTS
We reclassified certain amounts for previous years to conform to the 2000
presentation. In addition, we restated prior year share and per share amounts to
reflect the June 2000 two-for-one split of Liberty Media Group common stock.
2. RESTRUCTURING OF AT&T
On October 25, 2000, we announced a restructuring plan designed to fully
separate or issue separately tracked stocks intended to reflect the financial
performance and economic value of each of AT&T's four major operating units.
Upon completion of the plan, AT&T Wireless, AT&T Broadband, AT&T Business and
AT&T Consumer will all be represented by asset-based or tracking stocks.
As part of the first phase of the restructuring plan, we are planning an
exchange offer that will give AT&T shareowners the opportunity to exchange any
portion of their AT&T common shares for shares of AT&T Wireless Group tracking
stock, subject to pro-ration. Following the exchange offer and subject to
specified conditions, AT&T plans to split-off AT&T Wireless Group from AT&T. We
intend, however, to retain up to $3 billion of shares of AT&T Wireless for
future sale, exchange or monetization within six months following the split-off.
We expect AT&T Wireless will become an independent, publicly-held company in
mid-2001, upon receipt of appropriate tax and other approvals.
In addition to the split-off of AT&T Wireless, we intend to fully separate
or issue separate tracking stocks to reflect the financial performance and
economic value of each of our other major business units. We plan to create and
issue new classes of stock to track the financial performance and economic value
of our AT&T Broadband unit and AT&T Consumer unit. We plan to sell some
percentage of shares of the AT&T Broadband unit in the fall of 2001. Within 12
months of such sale, we intend to completely separate AT&T Broadband from AT&T,
as an asset-based stock. The AT&T Consumer tracking stock is expected to be
fully distributed to AT&T shareowners in the second half of 2001.
AT&T expects that these transactions will be tax-free to U.S. shareholders.
AT&T's restructuring plan is complicated and involves a substantial number of
steps and transactions, including obtaining various conditions, such as Internal
Revenue Service (IRS) rulings. In addition, future financial conditions,
superior alternatives or other factors may arise or occur that make it
inadvisable to proceed with part or all of AT&T's restructuring plans. Any or
all of the elements of AT&T's restructuring plan may not occur as we currently
expect or in the timeframes that we currently contemplate, or at all.
Alternative forms of restructuring, including sales of interests in these
businesses, would reduce what is available for distribution to shareowners in
the restructuring.
On November 15, 2000, AT&T announced that our board of directors voted to
split-off Liberty Media Group (LMG), which we acquired through our acquisition
of Tele-Communications, Inc. A new asset-based security will be issued to
holders of LMG tracking stock in exchange for their LMG tracking shares. The
split-off remains subject to receipt of a favorable tax ruling from the IRS. We
expect this split-off to be completed in mid-2001.
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AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. SUPPLEMENTARY FINANCIAL INFORMATION
SUPPLEMENTARY INCOME STATEMENT INFORMATION
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
2000 1999 1998
------ ---- ------
INCLUDED IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Research and development expenses........................... $ 402 $550 $ 513
OTHER INCOME
Investment-related income................................... $ 514 $222 $ 389
Net gains on sales of businesses and investments............ 1,683 682 959
Mark-to-market charge on put options........................ (537) -- --
Investment impairment charges............................... (248) (40) --
Miscellaneous, net.......................................... 102 67 (67)
Total other income.......................................... $1,514 $931 $1,281
Deducted from interest expense
Capitalized interest........................................ $ 299 $143 $ 197
------ ---- ------
SUPPLEMENTARY BALANCE SHEET INFORMATION
AT DECEMBER 31,
--------------------
2000 1999
-------- --------
PROPERTY, PLANT AND EQUIPMENT
Communications, network and other equipment................. $ 74,550 $ 60,985
Buildings and improvements.................................. 8,951 8,104
Land and improvements....................................... 531 586
Total property, plant and equipment......................... 84,032 69,675
Accumulated depreciation.................................... (32,871) (30,057)
Property, plant and equipment, net.......................... $ 51,161 $ 39,618
-------- --------
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AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTARY SHAREOWNERS' EQUITY INFORMATION
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------
2000 1999 1998
------- ------ ----
OTHER COMPREHENSIVE INCOME
Net foreign currency translation adjustment [net of income
taxes of $(181), $87 and $(3)]............................ $ (309) $ 148 $ (5)
Net revaluation of securities [net of income taxes of
$(5,166), $4,506 and $(35)]............................... (8,067) 6,878 (25)
Net minimum pension liability adjustment [net of income
taxes of $(1), $7 and $(15)].............................. (1) 12 9
Total other comprehensive income............................ $(8,377) $7,038 $(21)
------- ------ ----
In 2000, other comprehensive income included LMG's foreign currency
translation adjustments totaling $(202), net of applicable income taxes,
revaluation of LMG's available-for-sale securities totaling $(6,117), net of
applicable income taxes, and the recognition of previously unrecognized
available-for-sale securities totaling $(635), net of applicable income taxes.
In 1999, other comprehensive income included LMG's foreign currency
translation adjustments totaling $60, net of applicable income taxes, and
revaluation of LMG's available-for-sale securities totaling $6,497, net of
applicable income taxes.
SUPPLEMENTARY CASH FLOW INFORMATION
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
Interest payments, net of amounts capitalized............... $3,453 $1,425 $ 422
Income tax payments......................................... 1,976 3,906 2,881
4. MERGERS WITH MEDIAONE GROUP, INC. AND TELE-COMMUNICATIONS, INC.
MERGER WITH MEDIAONE GROUP, INC.
On June 15, 2000, AT&T completed a merger with MediaOne Group, Inc.
(MediaOne) in a cash and stock transaction valued at approximately $45 billion.
For each share of MediaOne stock, MediaOne shareowners received, in the
aggregate, 0.95 of a share of AT&T common stock and $36.27 per share in cash,
consisting of $30.85 per share as stipulated in the merger agreement and $5.42
per share based on AT&T's stock price preceding the merger, which was below a
predetermined amount. AT&T issued approximately 603 million shares of common
stock in the transaction, of which approximately 60 million were treasury
shares. The AT&T shares had an aggregate market value of approximately $21
billion and cash payments totaled approximately $24 billion.
The merger was accounted for under the purchase method. Accordingly, the
results of MediaOne have been included in the accompanying consolidated
financial statements since the date of acquisition as part of our Broadband
segment.
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AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Approximately $16 billion of the purchase price of $45 billion has been
attributed to agreements with local franchise authorities that allow access to
homes in our broadband service areas ("franchise costs") and is being amortized
on a straight-line basis over 40 years. Also included in the purchase price was
approximately $22 billion related to nonconsolidated investments, including
investments in Time Warner Entertainment Company, L.P. (TWE) and Vodafone Group
plc (Vodafone), approximately $5 billion related to property, plant and
equipment, and approximately $7 billion of other net assets. In addition,
included was approximately $14 billion in deferred income liabilities,
approximately $10 billion attributable to MediaOne debt, and approximately $1
billion of minority interest in Centaur Funding Corporation, a subsidiary of
MediaOne. The purchase resulted in preliminary goodwill of approximately $20
billion, which is being amortized on a straight-line basis over 40 years. AT&T
may make refinements to the allocation of the purchase price in future periods
as the related fair value appraisals of certain assets and liabilities are
finalized.
MERGER WITH TELE-COMMUNICATIONS, INC.
On March 9, 1999, AT&T completed a merger with Tele-Communications, Inc.
(TCI), renamed AT&T Broadband, in an all-stock transaction valued at
approximately $52 billion. Each share of TCI Group Series A common stock was
converted into 1.16355 shares of AT&T common stock, and each share of TCI Group
Series B common stock was converted into 1.27995 shares of AT&T common stock.
AT&T issued approximately 664 million shares of common stock in the transaction,
of which approximately 149 million were treasury shares. The AT&T shares had an
aggregate market value of approximately $27 billion. Certain subsidiaries of TCI
held TCI Group Series A common stock, which was converted into 216 million
shares of AT&T common stock. These subsidiaries continue to hold these shares,
which are reflected as treasury stock in the accompanying Consolidated Balance
Sheets.
In addition, TCI simultaneously combined its Liberty Media Group
programming business with its TCI Ventures Group technology investment business,
forming LMG. In connection with the closing, AT&T issued separate tracking stock
in exchange for the TCI Liberty Media Group and TCI Ventures Group tracking
shares previously outstanding. We issued 2,280 million shares of Liberty Media
Group Class A tracking stock (including 120 million shares related to the
conversion of convertible notes) and 220 million shares of Liberty Media Group
Class B tracking stock. The tracking stock is designed to reflect the separate
financial performance and economic value of LMG. These shares had an aggregate
market value of approximately $23 billion.
AT&T does not have a controlling financial interest for financial
accounting purposes in LMG. Therefore, our investment in LMG has been reflected
as an investment accounted for under the equity method in the accompanying
consolidated financial statements. The amounts attributable to LMG are reflected
as "Equity earnings (losses) from Liberty Media Group" and "Investment in
Liberty Media Group and related receivables, net" in the accompanying
consolidated financial statements. As a separate tracking stock, all of the
earnings or losses related to LMG are excluded from the earnings available to
the holders of AT&T common stock.
Each share of Liberty Media Group Class A common stock is entitled to
0.0375 of a vote, and each share of Liberty Media Group Class B common stock is
entitled to 0.375 of a vote.
The TCI merger was accounted for under the purchase method. Accordingly,
the results of TCI have been included in the financial results of AT&T since the
date of acquisition. The operating results of TCI have been included in the
accompanying consolidated financial statements at their fair value since March
1, 1999, the deemed effective date of acquisition for accounting purposes. The
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AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
impact of the results from March 1 through March 9, 1999, were deemed immaterial
to our consolidated results.
Approximately $20 billion of the purchase price of $52 billion was
attributed to franchise costs and is being amortized on a straight-line basis
over 40 years. Pursuant to Statement of Financial Accounting Standards (SFAS)
No. 109, "Accounting for Income Taxes," AT&T recorded an approximate $13 billion
deferred tax liability in connection with this franchise intangible, which is
also included in franchise costs. We do not expect that this deferred tax
liability will ever be paid. This deferred tax liability is being amortized on a
straight-line basis over 40 years and is included in the provision for income
taxes. Also included was approximately $11 billion related to nonconsolidated
investments, approximately $5 billion related to property, plant and equipment,
approximately $11 billion of TCI long-term debt and approximately $7 billion
related to other net liabilities. In addition, our investment in LMG was
recorded at approximately $34 billion, including approximately $11 billion of
goodwill that is being amortized on a straight-line basis over 20 years as a
component of "Equity earnings (losses) from Liberty Media Group."
Following is a summary of the pro forma results of AT&T as if the mergers
with MediaOne and TCI had closed effective January 1, 1999:
FOR THE YEARS ENDED DECEMBER 31, 2000 1999
-------------------------------- ------- -------
SHARES IN MILLIONS (UNAUDITED)
Revenue..................................................... $67,306 $66,236
Net income.................................................. 5,617 6,452
Weighted-average AT&T common shares......................... 3,762 3,784
Weighted-average AT&T common shares and potential common
shares.................................................... 3,821 3,906
Weighted-average AT&T Wireless Group shares................. 361 --
Weighted-average Liberty Media Group shares................. 2,572 2,519
AT&T Common Stock Group earnings per common share:
Basic..................................................... $ 1.08 $ 2.30
Diluted................................................... $ 1.07 $ 2.23
AT&T Wireless Group earnings per common share:
Basic and diluted......................................... $ 0.21 $ --
Liberty Media Group earnings (loss) per share:
Basic and diluted......................................... $ 0.58 $ (0.89)
Pro forma data may not be indicative of the results that would have been
obtained had these events actually occurred at the beginning of the periods
presented, nor does it intend to be a projection of future results.
5. OTHER MERGERS, ACQUISITIONS, STOCK OFFERING, VENTURE, DISPOSITIONS AND
DISCONTINUED OPERATIONS
AB CELLULAR
On December 29, 2000, AB Cellular completed the redemption of AT&T's equity
interest in AB Cellular. Prior to that date, AT&T held a 55.62% equity interest
in AB Cellular, which was formed in 1998 with BellSouth, with each party having
a 50% voting interest. AB Cellular owned, controlled and supervised wireless
properties in Los Angeles, Houston, and Galveston, Texas. BellSouth exercised an
option available to it, which resulted in AB Cellular redeeming AT&T's interest
in AB Cellular in exchange for 100% of the net assets of the Los Angeles
property. AB Cellular recognized a significant gain upon completion of the
transaction. Accordingly, net losses from other equity investments included $603
representing our portion of this gain, and other income
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AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
included a net pretax loss of $184 related to the difference between the
carrying value of our investment in AB Cellular and the fair market value of the
Los Angeles property. As a result of this transaction, we consolidated the Los
Angeles property. The consolidation resulted in licensing costs of $2.2 billion,
goodwill of $0.8 billion, other net assets of $0.6 billion and the removal of
our investment in AB Cellular of $3.8 billion.
TELECORP PCS, INC.
On November 13, 2000, two of AT&T's wireless affiliates, TeleCorp PCS, Inc.
(TeleCorp) and Tritel, Inc., merged as part of a stock transaction. In
connection with the merger, AT&T contributed to TeleCorp rights to acquire
wireless licenses in Wisconsin and Iowa, paid approximately $20 in cash and
extended the term of its brand license agreement through July 2005, in exchange
for approximately 9.3 million additional common shares in the newly merged
entity. In a separate transaction, AT&T exchanged certain additional wireless
licenses and rights to acquire licenses in the Wisconsin and Iowa markets, and
made a cash payment of approximately $80 for certain TeleCorp PCS licenses and
wireless systems in several New England markets. These transactions resulted in
a net pretax gain of $379. The acquisition of the wireless systems was accounted
for under the purchase method. The pro forma impact of the wireless systems on
historical AT&T results is not material.
AT HOME CORPORATION
On August 28, 2000, AT&T and At Home Corporation (Excite@Home) announced
shareholder approval of a new board of directors and governance structure for
Excite@Home and completion of the extension of distribution contracts with AT&T,
Cox Communications, Inc. (Cox) and Comcast Corporation (Comcast). AT&T was given
the right to designate six of the 11 Excite@Home board members. In addition,
Excite@Home converted approximately 50 million of AT&T's Series A shares into
Series B shares, each of which has 10 votes. As a result of these governance
changes, AT&T gained a controlling interest and began consolidating
Excite@Home's results upon the closing of the transaction on September 1, 2000.
As of December 31, 2000, AT&T had, on a fully diluted basis, approximately 23%
of the economic interest and 74% of the voting interest in Excite@Home.
In exchange for Cox and Comcast relinquishing their rights under the
shareholder agreement, AT&T granted put options to Cox and Comcast on a combined
total of 60.4 million shares of Excite@Home Series A common stock. The put
options provide Cox and Comcast with the right to convert their Excite@Home
shares into either AT&T stock or cash at their option, at any time between
January 1, 2001 and June 4, 2002, at the higher of (i) $48 per share or (ii) the
30-day average trading price at the time of exercise (beginning 15 trading days
prior to the exercise date, and ending 15 days after the exercise date). The
maximum amount that AT&T would be required to pay in cash or stock is
approximately $2.9 billion based on the $48 strike price. The obligation under
these put options was recorded at fair value, with gains or losses resulting
from changes in fair value being recorded as a component of other income. For
the year, changes in fair market value resulted in a pretax expense of $537.
Subsequent to December 31, 2000, Cox and Comcast exercised their put options,
electing to receive AT&T common shares (see Note 23).
Also, in connection with the distribution agreements which extend through
2008, AT&T obtained the right to purchase up to approximately 25 million
Excite@Home Series A shares and 25 million Series B shares. In addition, Cox and
Comcast will each receive new warrants to purchase two Series A shares for each
home its cable system passes. These warrants will vest in installments every six
months beginning in June 2001, and will be fully vested by June 2006 if Cox and
Comcast elect to continue their extended non-exclusive distribution agreements
through that period.
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AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The consolidation of Excite@Home resulted in minority interest of
approximately $2.2 billion, goodwill of approximately $2.4 billion, short-term
liabilities of approximately $2.4 billion (including an initial put option
liability), other net assets of approximately $1.2 billion and the removal of
our investment in Excite@Home of approximately $1.9 billion.
AT&T WIRELESS GROUP
On April 27, 2000, AT&T created a new class of stock and completed a public
stock offering of 360 million shares, which represented 15.6% of AT&T Wireless
Group tracking stock at a price of $29.50 per share. This stock is intended to
track the financial performance and economic value of AT&T's wireless services'
business. The net proceeds to AT&T after deducting underwriter's discount and
related fees and expenses were $10.3 billion. AT&T allocated $7.0 billion of the
net proceeds to AT&T Wireless Group, which were used for acquisitions, network
expansion, capital expenditures and for general corporate purposes. The
remaining net proceeds of $3.3 billion were utilized by AT&T for general
corporate purposes. Holders of AT&T Wireless Group tracking stock are entitled
to one-half of a vote per share. The AT&T Wireless Group tracking stock is
listed on the New York Stock Exchange under the symbol "AWE."
COX COMMUNICATIONS, INC.
On March 15, 2000, AT&T received 50.3 million shares of AT&T common stock
held by Cox in exchange for an entity owning cable television systems serving
approximately 312,000 customers and certain other net assets. Specifically, AT&T
exchanged $1.1 billion of investments and related advances, $0.9 billion of
franchise costs and $0.5 billion of other net assets for stock valued at $2.7
billion on March 15, 2000. The transaction resulted in a pretax gain of $189.
LENFEST COMMUNICATIONS, INC.
On January 18, 2000, AT&T sold its ownership in Lenfest Communications,
Inc. to a subsidiary of Comcast. In connection with the sale, we received 47.3
million shares of Comcast Class A Special common stock. The transaction resulted
in a pretax gain of $224.
CONCERT
On January 5, 2000, AT&T and British Telecommunications plc (BT) announced
financial closure of Concert, their global communications joint venture. AT&T
contributed all of its international gateway-to-gateway assets, as well as the
economic value of approximately 270 multinational customers specifically
targeted for direct sales by Concert.
ACC EUROPE
On November 5, 1999, AT&T sold ACC Corp. (ACC) in Europe, including ACC's
principal operations in the United Kingdom as well as ACC's operating companies
in France, Germany and Italy, to WORLDxCHANGE Communications. We were required
to dispose of this investment pursuant to a government mandate since it would
have competed directly with Concert. The transaction resulted in a pretax loss
of $179.
IBM GLOBAL NETWORK
On April 30, 1999, AT&T completed its acquisition of the IBM Global Network
business (renamed AT&T Global Network Services or AGNS) and its assets in the
United States. The
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AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
non-U.S. acquisitions were completed in phases throughout 1999 and during the
first quarter of 2000. Under the terms of the agreement, AT&T acquired the
global network of IBM, and the two companies entered into outsourcing agreements
with each other. The acquisition was accounted for under the purchase method.
Accordingly, the operating results of AGNS have been included in the
accompanying consolidated financial statements since the date of acquisition.
The pro forma impact of AGNS on historical AT&T results is not material.
TELEPORT COMMUNICATIONS GROUP INC.
On July 23, 1998, AT&T completed a merger with Teleport Communications
Group Inc. (TCG) pursuant to an agreement and plan of merger dated January 8,
1998. Each share of TCG common stock was exchanged for 1.4145 shares of AT&T
common stock, resulting in the issuance of 272.4 million shares in the
transaction. The merger was accounted for as a pooling of interests, and
accordingly, AT&T's results of operations, financial position and cash flows
were restated to reflect the merger. In 1998, we recognized $85 of
merger-related expenses. Premerger TCG revenue was $455, and net losses were
$118, for the six months ended June 30, 1998. Elimination entries between AT&T
and TCG were not material. On April 22, 1998, TCG purchased ACC for an aggregate
value of approximately $1,100, including approximately $700 in goodwill.
OTHER DISPOSITIONS
On March 3, 1998, AT&T sold its 45% common share interest in LIN Television
Corp., a subsidiary of LIN Broadcasting Company, for $742 to Hicks, Muse, Tate
and Furst Inc. We recognized a pretax gain of $317. Also on March 3, 1998, AT&T
sold AT&T Solutions Customer Care to MATRIXX Marketing Inc., a teleservices unit
of Cincinnati Bell, for $625. AT&T recognized a pretax gain of $350 in 1998 on
the sale.
DISCONTINUED OPERATIONS
On April 2, 1998, AT&T sold AT&T Universal Card Services Inc. (UCS) for
$3,500 to Citigroup, Inc. The after-tax gain resulting from the disposal of UCS
was $1,290, or $0.48 per diluted share. Included in the transaction was a
cobranding and joint-marketing agreement. In addition, we received $5,722 in
settlement of receivables from UCS.
The consolidated financial statements of AT&T reflect UCS as a discontinued
operation. Accordingly, the revenue, costs and expenses, and cash flows of this
business have been excluded from the respective captions in the 1998
Consolidated Statement of Income and Consolidated Statement of Cash Flows, and
have been reported through the date of disposition as "Income from discontinued
operations," net of applicable income taxes, and as "Net cash provided by
discontinued operations" for all periods presented. The gain associated with
this sale is reflected as "Gain on sale of discontinued operations," net of
applicable income taxes.
Summarized financial information for UCS was as follows:
FOR THE YEAR ENDED DECEMBER 31, 1998
------------------------------- ----
Revenue..................................................... $365
Income before income taxes.................................. 16
Net income.................................................. 10
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AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
No interest expense was allocated to UCS in 1998 due to the immateriality
of the amounts; however, UCS recorded direct interest expense of $85 in 1998,
primarily related to amounts payable to AT&T.
ACQUISITION-RELATED INTANGIBLE ASSETS
As a result of our evaluation of recent changes in our industry and the
views of regulatory authorities, AT&T expects that the amortization period for
all licensing costs, franchise costs, and goodwill associated with newly
acquired wireless, telecommunications, and cable operations will not exceed 25
years.
6. EARNINGS PER COMMON SHARE AND POTENTIAL COMMON SHARE
Income (loss) from continuing operations attributable to the different
classes of AT&T common stock is as follows:
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------ ------ ------
AT&T Common Stock Group.............................. $3,105 $5,450 $5,235
AT&T Wireless Group.................................. 76 -- --
Liberty Media Group.................................. 1,488 (2,022) --
Income from continuing operations.................... $4,669 $3,428 $5,235
Basic earnings per share (EPS) for AT&T Common Stock Group for 2000, 1999
and 1998 were computed by dividing AT&T Common Stock Group income by the
weighted-average number of shares outstanding during the year.
Diluted EPS for AT&T Common Stock Group was computed by dividing AT&T
Common Stock Group income, adjusted for the conversion of securities, by the
weighted-average number of shares and dilutive potential shares outstanding
during the year, assuming conversion of the potential shares at the beginning of
the years presented. Shares issuable upon conversion of preferred stock of
subsidiaries, convertible debt securities of subsidiary, stock options and other
performance awards have been included in the diluted calculation of
weighted-average shares to the extent that the assumed issuance of such shares
would have been dilutive, as illustrated below. The convertible quarterly income
preferred securities were antidilutive and were excluded from the computation of
diluted EPS. Computed on a yearly basis, the dividends would have an after-tax
impact to earnings of approximately $155. Assuming conversion of the securities,
the dividends would no longer be included as a reduction to net income and the
securities would convert into 67 million shares of AT&T common stock.
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AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the income and share components for basic and diluted
EPS calculations with respect to AT&T Common Stock Group continuing operations
is as follows:
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------ ------ ------
Income...................................................... $3,105 $5,450 $5,235
Income impact of assumed conversion of preferred stock of
subsidiary................................................ 32 26 --
Income adjusted for conversion of securities................ $3,137 $5,476 $5,235
Shares in millions
Weighted-average common shares.............................. 3,486 3,082 2,676
Stock options............................................... 19 35 24
Preferred stock of subsidiary............................... 40 33 --
Convertible debt securities of subsidiary................... -- 2 --
Weighted-average common shares and potential common
shares.................................................... 3,545 3,152 2,700
Basic EPS for AT&T Wireless Group for the period from April 27, 2000, the
stock offering date, through December 31, 2000, was computed by dividing AT&T
Wireless Group income by the weighted-average number of shares outstanding of
AT&T Wireless Group of 361 million. There were no potentially dilutive
securities outstanding at December 31, 2000.
Basic EPS for LMG was computed by dividing LMG income (loss) by the
weighted-average number of shares outstanding of LMG of 2,572 million in 2000
and 2,519 million from the March 9, 1999, date of issuance through December 31,
1999. Potentially dilutive securities, including fixed and nonvested performance
awards and stock options, have not been factored into the dilutive calculations
because past history has indicated that these contracts are generally settled in
cash. There were 96 million and 124 million of these potentially dilutive
securities outstanding at December 31, 2000 and 1999, respectively. The diluted
earnings per share calculation for 2000 also excludes approximately 700,000
warrants outstanding at December 31, 2000, which were antidilutive. In addition,
since LMG had a loss in 1999, the impact of any potential shares would have been
antidilutive.
7. NET RESTRUCTURING AND OTHER CHARGES
During 2000, we recorded $7,029 of net restructuring and other charges,
which included $6,179 of asset impairment charges related to Excite@Home, $759
for restructuring and exit costs associated with AT&T's initiative to reduce
costs, and $91 related to the government-mandated disposition of AT&T
Communications (U.K.) Ltd., which would have competed directly with Concert.
The charges related to Excite@Home included $4,609 of asset impairment
charges recorded by Excite@Home associated with the impairment of goodwill from
various acquisitions, including Excite, and a related goodwill impairment charge
of $1,570 recorded by AT&T associated with goodwill from the acquisition of our
investment in Excite@Home.
The impairments resulted from the deterioration of the market conditions
and market valuations of Internet-related companies during the fourth quarter of
2000, which caused Excite@Home to conclude that intangible assets related to
their acquisitions of Internet-related companies may not be recoverable. In
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of", Excite@Home conducted a
detailed assessment of the recoverability of the carrying amounts of acquired
intangible assets. This assessment resulted in a determination that certain
acquired intangible assets, including goodwill, related to these acquisitions,
including Excite, were impaired as of December 31, 2000. As a result,
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AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
we recorded impairment charges of $4,609 in December 2000, representing the
excess of the carrying amount of the impaired assets over their fair value.
The review for impairment included a review of publicly-traded Internet
companies that are comparable to the companies that Excite@Home acquired. These
companies experienced a substantial decline in stock price and market
capitalization during the fourth quarter of 2000.
Excite@Home also reviewed the business climate for Internet advertising and
web-based infrastructure companies as of December 31, 2000, and observed the
following: (1) investor and consumer enthusiasm for the Internet sector severely
deteriorated during the fourth quarter of 2000; (2) many Internet companies,
including those acquired by Excite@Home, experienced significant decelerations
in their growth both as a result of economic conditions and due to
Internet-sector specific issues such as competition and the weakening of the
Internet advertising market; and (3) funding sources for Internet-based consumer
businesses, which require considerable amounts of capital, had substantially
evaporated as of December 31, 2000. As a result, Excite@Home concluded that
fundamental, permanent and significant adverse changes had occurred during the
fourth quarter of 2000 in the business climate for companies providing Internet
advertising and other web-based services.
In addition, Excite@Home reviewed operating and cash flow projections that
existed at the time Excite@Home made the acquisitions and that were used as a
basis upon which the decisions to complete the acquisitions were made. These
operating and cash flow projections indicated that the acquired companies, over
their useful lives, would be profitable and generate positive cash flows. The
operating and cash flow projections were compared to operating results after the
date of the acquisitions through December 31, 2000, as well as to projected
operating results for 2001. These comparisons indicated that certain
acquisitions generated operating and cash flow losses through the end of 2000,
and were projected to continue generating operating and cash flow losses for the
foreseeable future.
As a result of these factors, Excite@Home determined that the intangible
assets related to the acquisitions might not be recoverable and conducted
impairment tests.
Generally, the impairment tests were performed at an asset group level
corresponding to the lowest level at which cash flows independent of other
assets could be identified. Each asset group consisted of the goodwill and
acquired identifiable intangible assets related to a specific acquisition.
Acquired intangible assets were combined for those acquisitions where separately
identifiable cash flows that are largely independent of the cash flows of other
groups of assets could not be identified.
For each of the asset groups to be tested for impairment, Excite@Home
projected undiscounted cash flows over a future projection period of five years,
based on Excite@Home's determination of the current remaining useful lives of
the asset groups, plus an undiscounted terminal period cash flow to reflect
disposition of the entities at the end of their useful lives. Undiscounted
future cash flows were estimated using projected net realizable value in a sales
transaction (undiscounted cash flows during the expected remaining holding
period until disposition were estimated as negligible). The undiscounted future
cash flows were compared to the carrying amount of each asset group and for
those asset groups where the carrying amount exceeded the undiscounted future
cash flows, Excite@Home concluded that the asset group was impaired.
Excite@Home measured the impairment loss related to impaired asset groups
based on the amount by which the carrying amount of the asset group exceeded the
fair value of the asset group. Measurement of fair value was based on an
analysis by Excite@Home utilizing the best information available in the
circumstances using reasonable and supportable assumptions and projections, and
D-55
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AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
including the discounted cash flow and market comparison valuation techniques.
The discounted cash flow analysis considered the likelihood of possible outcomes
and was based on Excite@Home's best estimate of projected future cash flows,
including terminal value cash flows expected to result from the disposition of
the asset at the end of its useful life, discounted at our weighted average cost
of capital. Weighted average cost of capital was based on historical risk
premiums required by investors for companies of Excite@Home's size, industry and
capital structure and included risk factors specific to Excite@Home. The market
comparison model represented Excite@Home's estimate of the prices that a buyer
would be willing to pay currently for similar assets, based on comparable
products and services, customer base, risks, earnings capabilities and other
factors.
Based on the foregoing, Excite@Home recorded an impairment write-down of
$4,609 in the aggregate, which was allocated to each asset group based on a
comparison of carrying values and fair values. The impairment write-down within
each asset group was allocated first to goodwill, and if goodwill was reduced to
zero, to identifiable intangible assets in proportion to carrying values.
Also as a result of the foregoing, AT&T recorded a goodwill and
acquistion-related impairment charge associated with the acquisition of our
investment in Excite@Home. The write-down of our investment to fair value was
determined utilizing discounted expected future cash flows.
Since we own approximately 23% of Excite@Home, 77% of the charge recorded
by Excite@Home was not included as a reduction to AT&T's net income, but rather
was eliminated in our 2000 Consolidated Statement of Income as "Minority
interest income (expense)."
The $759 charge for restructuring and exit plans was primarily due to
headcount reductions, mainly in network operations and Business Services,
including the consolidation of customer-care and call centers, as well as
synergies created by the MediaOne merger.
Included in exit costs was $503 of cash termination benefits associated
with the separation of approximately 7,300 employees as part of voluntary and
involuntary termination plans. Approximately one-half of the separations were
management employees and one-half were nonmanagement employees. Approximately
6,700 employee separations were related to involuntary terminations and
approximately 600 to voluntary terminations.
We also recorded $62 of network lease and other contract termination costs
associated with penalties incurred as part of notifying vendors of the
termination of these contracts during the year, and net losses of $32 related to
the disposition of facilities primarily due to synergies created by the MediaOne
merger.
D-56
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AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table displays the activity and balances of the restructuring
reserve account:
TYPE OF COST
EMPLOYEE FACILITY
SEPARATIONS CLOSINGS OTHER TOTAL
----------- ------------ ----- -----
Balance at January 1, 1998...................... $ 413 $ 434 $ 60 $ 907
Additions..................................... 150 125 -- 275
Deductions.................................... (445) (190) (30) (665)
Balance at December 31, 1998.................... 118 369 30 517
Additions..................................... 142 -- 3 145
Deductions.................................... (110) (130) (12) (252)
Balance at December 31, 1999.................... 150 239 21 410
Additions..................................... 503 32 62 597
Deductions.................................... (394) (98) (47) (539)
Balance at December 31, 2000.................... $ 259 $ 173 $ 36 $ 468
Deductions reflect cash payments of $245, $209 and $369, for 1998, 1999 and
2000, respectively. These payments included cash termination benefits of $124,
$40 and $257, respectively, which were primarily funded through cash from
operations. Deductions also reflect noncash utilization of $420, $43 and $170
for 1998, 1999 and 2000, respectively. Noncash utilization included deferred
severance payments primarily related to executives, and a reversal in 1998 of
$348 related to the 1995 restructuring plan. Nearly 75% of the employees
affected by the 1999 and 2000 restructuring charges have left their positions as
of December 31, 2000.
Also included in restructuring and exit costs in 2000 was $144 of benefit
plan curtailment costs associated with employee separations as part of these
exit plans. Further, we recorded an asset impairment charge of $18 related to
the write-down of unrecoverable assets in certain businesses where the carrying
value was no longer supported by estimated future cash flows.
During 1999, we recorded $1,506 of net restructuring and other charges.
A $594 in-process research and development charge was recorded reflecting
the estimated fair value of research and development projects at TCI, as of the
date of acquisition, which had not yet reached technological feasibility or had
no alternative future use. The projects identified related to efforts to offer
voice over Internet protocol (IP), product-integration efforts for advanced
set-top devices that would enable the offering of next-generation digital
services and cost-savings efforts for broadband-telephony implementation. In
addition, Excite@Home had research and development efforts underway, including
projects to allow for self-provisioning of devices and the development of
next-generation client software, network and back-office infrastructure to
enable a variety of network devices beyond personal computers, and improved
design for the regional data centers' infrastructure. We began testing
IP-telephony equipment in the field in late-2000, we anticipate beginning field
trials for next-generation digital services in late-2001, and have completed
trials related to our telephony cost reductions and implementation has begun in
certain markets. Although there are technological issues to overcome to
successfully complete the acquired in-process research and development, we
expect successful completion. If, however, AT&T is unable to establish
technological feasibility and produce commercially viable products/services,
anticipated incremental future cash flows attributable to expected profits from
such new products/services may not be realized.
D-57
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AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A $531 asset impairment charge was recorded in 1999 associated with the
planned disposal of certain wireless communications equipment resulting from a
program to increase the capacity and operating efficiency of our wireless
network. As part of a multivendor program, contracts have been executed with
select vendors to replace significant portions of our wireless infrastructure
equipment in the western United States and the metropolitan New York markets.
The program is intended to provide Wireless Services with the newest technology
available and allow it to evolve to new, next-generation digital technology,
which is designed to provide high-speed data capabilities.
The planned disposal of the existing wireless infrastructure equipment
required an evaluation of asset impairment in accordance with SFAS No. 121 to
write-down these assets to their fair value, which was estimated by discounting
the expected future cash flows of these assets through the date of disposal.
Since the assets will remain in service from the date of the decision to dispose
of these assets to the disposal date, the remaining net book value of the assets
will be depreciated over this period. As of December 31, 2000, approximately
$320 of the asset impairment reserve has been utilized for assets that have been
disposed of and written off. The remaining net book value of these assets was
approximately $23 at December 31, 2000, which will be depreciated over an
estimated remaining useful life of three months.
Also in 1999, a $145 charge for restructuring and exit costs was recorded
as part of AT&T's initiative to reduce costs. The restructuring and exit plans
primarily focused on the maximization of synergies through headcount reductions
in Business Services and network operations, including the consolidation of
customer-care and call centers.
Included in exit costs was $142 of cash termination benefits associated
with the separation of approximately 2,800 employees as part of voluntary and
involuntary termination plans. Approximately one-half of the separations were
management employees and one-half were nonmanagement employees. Approximately
1,700 employee separations were related to involuntary terminations and
approximately 1,100 to voluntary terminations.
We also recorded net losses of $307 related to the government-mandated
disposition of certain international businesses that would have competed
directly with Concert, and $50 related to a contribution agreement Broadband
entered into with Phoenixstar, Inc. That agreement requires Broadband to satisfy
certain liabilities owed by Phoenixstar and its subsidiaries. In addition, we
recorded benefits of $121 related to the settlement of pension obligations for
former employees who accepted AT&T's 1998 voluntary retirement incentive program
(VRIP) offer.
During 1998, we recorded $2,514 of net restructuring and other charges. The
bulk of the charge was associated with our overall cost-reduction program and
the approximately 15,300 management employees who accepted the VRIP offer. A
restructuring charge of $2,724 was composed of $2,254 and $169 for pension and
postretirement special-termination benefits, respectively, $263 of benefit plan
curtailment losses and $38 of other administrative costs. We also recorded
charges of $125 for related facility costs and $150 for executive-separation
costs. These charges were partially offset by benefits of $940 as we settled
pension benefit obligations of 13,700 of the total VRIP employees. In addition,
the VRIP charges were partially offset by the reversal of $256 of 1995 business
restructuring reserves primarily resulting from the overlap of VRIP on certain
1995 projects.
Also included in the 1998 net restructuring and other charges were asset
impairment charges totaling $718, of which $633 was related to our decision not
to pursue Total Service Resale (TSR) as a local-service strategy. We also
recorded an $85 asset impairment charge related to the write-down of
unrecoverable assets in certain international operations where the carrying
value was no longer
D-58
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AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
supported by future cash flows. This charge was made in connection with the
review of certain operations that would have competed directly with Concert.
Additionally, $85 of merger-related expenses was recorded in 1998 in
connection with the TCG merger, which was accounted for as a pooling of
interests. Partially offsetting these charges was a $92 reversal of the 1995
restructuring reserve. This reversal reflected reserves no longer deemed
necessary. The reversal primarily included separation costs attributed to
projects completed at a cost lower than originally anticipated. Consistent with
the three-year plan, the 1995 restructuring initiatives were substantially
completed by the end of 1998.
8. INVESTMENT IN LIBERTY MEDIA GROUP
As a result of our merger with TCI, we acquired Liberty Media Group, a
wholly-owned investment accounted for under the equity method (see Note 4).
Summarized results of operations for Liberty Media Group were as follows:
FOR THE YEAR FOR THE TEN MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------------
Revenue..................................................... $ 1,526 $ 729
Operating income (loss)..................................... 436 (2,214)
Net income (loss)........................................... 1,488 (2,022)
AT DECEMBER 31,
---------------------------------
2000 1999
------------ ----
Current assets.............................................. $ 2,954 $ 3,387
Noncurrent assets........................................... 51,314 55,297
Current liabilities......................................... 2,962 3,370
Noncurrent liabilities...................................... 16,668 16,853
Minority interest........................................... 348 1
During 2000 and 1999, certain investees of Liberty Media Group issued
common stock. Changes in the equity of the investees, net of the dilution of
LMG's ownership interest, resulted in an increase to AT&T's additional paid-in
capital of $355 and $109 in 2000 and 1999, respectively.
9. OTHER INVESTMENTS
We have investments in various companies and partnerships that are
accounted for under the equity method and included within "Other investments and
related advances" in the accompanying Consolidated Balance Sheets. Under the
equity method, investments are stated at initial cost, and are adjusted for
subsequent contributions and our share of earnings, losses and distributions. At
December 31, 2000 and 1999, we had equity investments (other than LMG) of
$13,624 and $18,454, respectively. The carrying value of these investments
exceeded our share of the underlying reported net assets by approximately $8,720
and $12,530, at December 31, 2000 and 1999, respectively. The goodwill is being
amortized over periods ranging from 15 to 40 years. Pretax amortization of
goodwill was $571, $495, and $52 in 2000, 1999, and 1998, respectively. The
amortization is shown net of income taxes as a component of "Net losses from
other equity investments" in the accompanying
D-59
408
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Consolidated Statements of Income. Distributions from equity investments totaled
$214, $317 and $360, for the years ended December 31, 2000, 1999 and 1998,
respectively.
Ownership of significant equity investments was as follows:
AT DECEMBER 31, 2000 1999
--------------- ----- -----
Cablevision Systems Corporation............................. 27.98%(a) 32.04%(a)
Concert..................................................... 50.00%(b) --
Time Warner Texas........................................... 50.00% 50.00%
Net2Phone, Inc. ............................................ 31.34%(c) --
Insight Midwest LP.......................................... 50.00% 50.00%
EuroTel Praha, spol. s.r.o. ................................ 24.50% --
Century-TCI California, LP.................................. 25.00% 25.00%
Rogers Wireless Communications, Inc......................... 16.65%(d) 16.65%(d)
TeleCorp PCS, Inc. ......................................... 22.99% 15.67%
Kansas City Cable Partners.................................. 50.00% 50.00%
Parnassos, LP............................................... 33.33% 33.33%
ACC Acquisitions, LLC....................................... 50.00% --
Far EasTone Telecommunications, ltd......................... 22.70% 13.87%
AB Cellular................................................. --(e) 55.62%(e)
At Home Corporation......................................... --(f) 25.00%(f)
Lenfest Communications, Inc. ............................... -- 50.00%
Bresnan Communications Group LLC............................ -- 50.00%
-------------------------
(a) At December 31, 2000 and 1999, we owned 48,942,172 shares of Cablevision
Systems Corporation Class A common stock, which had a closing market price
of $84.94 and $75.50 per share, respectively, on those dates. Cablevision
Systems Corporation (Cablevision) redeemed all of its outstanding preferred
stock and issued additional common stock, and issued shares of its common
stock for acquisitions. As a result of these transactions, AT&T's ownership
interest in Cablevision decreased from 32.04% to 27.98%. Due to the dilution
of AT&T's ownership interest in Cablevision, net of the increase in
Cablevision's equity, AT&T recorded a net decrease to additional paid-in
capital of $170 in 2000.
(b) On January 5, 2000, we formed Concert, our global-communications joint
venture with BT.
(c) At December 31, 2000, we owned 18,900,000 shares of Net2Phone, Inc. Class A
common stock, which had a closing market price of $7.38 per share on that
date.
(d) This investment is accounted for under the equity method because of our
ability to elect certain members of the board of directors of this entity,
which we believe provides us with significant influence.
(e) On December 29, 2000, AB Cellular completed the redemption of our equity
interest in AB Cellular. Voting interest in AB Cellular was 50% at December
31, 1999.
(f) On August 28, 2000, AT&T and Excite@Home announced the closing of their
extension contracts and governance reorganization. As a result of the
governance changes, AT&T gained a controlling interest and began
consolidating Excite@Home's results on September 1, 2000. As of
D-60
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AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2000, AT&T had an approximate 23% economic interest and 74%
voting interest in Excite@Home. We owned 7,924,422 and 63,720,000 shares of
Excite@Home Class A common stock at December 31, 2000 and 1999,
respectively, which had closing market prices of $5.53 and $42.88 per share,
respectively, on those dates. We also owned 86,595,578 and 30,800,000 shares
of Excite@Home Class B common stock at December 31, 2000 and 1999,
respectively, which are not publicly traded. During 2000 and 1999,
Excite@Home issued shares of its common stock for various acquisitions. As a
result of these transactions, AT&T's economic interest in Excite@Home
decreased from 25% to 23% in 2000, and from 38% to 25% in 1999,
respectively. Due to the resulting increase in Excite@Home's equity, net of
the dilution of AT&T's ownership interest in Excite@Home, AT&T recorded an
increase to additional paid-in capital of $116 and $527 in 2000 and 1999,
respectively.
Summarized unaudited combined financial information for investments
accounted for under the equity method was as follows:
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------- ------- ------
(UNAUDITED)
Revenue............................................ $32,663 $12,751 $4,488
Operating (loss) income............................ (583) (1,384) 239
(Loss) income from continuing operations before
extraordinary items and cumulative effect of a
change in accounting principle................... (1,005) (2,701) 147
Net (loss) income.................................. (1,373) (2,897) 53
AT DECEMBER 31, 2000 1999
--------------- ------- -------
(UNAUDITED)
Current assets..................................... $12,274 $ 7,616
Noncurrent assets.................................. 44,748 38,008
Current liabilities................................ 12,181 6,209
Noncurrent liabilities............................. 26,337 19,422
Redeemable preferred stock......................... 2,198 1,094
Minority interest.................................. 621 1,740
In addition, we have a 25.51% interest in TWE. This investment is
"held-for-sale" at December 31, 2000. Accordingly, we are no longer recording
equity earnings (losses) on this investment.
We also have investments accounted for under the cost method of accounting.
Under this method, investments are stated at cost, and earnings are recognized
to the extent distributions are received from the accumulated earnings of the
investee. Distributions received in excess of accumulated earnings are
recognized as a reduction of our investment balance. These investments, which
are covered under the scope of SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," are classified as "available-for-sale" and are
carried at fair value with any unrealized gain or loss, net of income taxes,
being included within other comprehensive income as a component of shareowners'
equity. Approximately $2,102 of these investments have been classified as
current assets since they are indexed to certain currently maturing debt
instruments.
D-61
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AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. DEBT OBLIGATIONS
DEBT MATURING WITHIN ONE YEAR
AT DECEMBER 31, 2000 1999
--------------- ------- -------
Commercial paper............................................ $16,234 $ 5,974
Short-term notes............................................ 11,505 5,000
Currently maturing long-term debt........................... 3,724 1,355
Other....................................................... 484 304
Total debt maturing within one year......................... $31,947 $12,633
Weighted-average interest rate of short-term debt........... 6.5% 5.3%
In February 2000, we entered into a 364-day, $10 billion syndicated credit
facility upon the expiration of existing credit facilities. On December 28,
2000, we entered into a new 364-day, $25 billion credit facility syndicated to
39 banks. As a result, the outstanding $10 billion credit facility was
terminated. The credit facility is for commercial paper back-up and was unused
at December 31, 2000. The credit facility agreement contains a financial
covenant that requires AT&T to maintain a net debt-to-EBITDA ratio (as defined
in the credit agreement) not exceeding 3.00 to 1.00 for four consecutive
quarters ending on the last day of each fiscal quarter. At December 31, 2000, we
were in compliance with this covenant.
At December 31, 1999, we had a 364-day, $7 billion revolving-credit
facility with a consortium of 42 lenders. We also had additional 364-day,
revolving-credit facilities of $3 billion. These lines were for commercial paper
back-up and were unused at December 31, 1999.
LONG-TERM OBLIGATIONS
AT DECEMBER 31, 2000 1999
--------------- ------- -------
DEBENTURES, NOTES AND TRUST PREFERRED SECURITIES(A)
Interest Rates(b) Maturities
4.00% - 6.00% 2001 - 2018....................................... $ 6,639 $ 5,251
6.25% - 6.50% 2001 - 2029....................................... 6,660 4,367
6.55% - 7.50% 2001 - 2037....................................... 7,840 3,701
7.53% - 8.50% 2001 - 2097....................................... 5,267 4,762
8.60% - 11.13% 2001 - 2045....................................... 7,320 5,389
Variable rate 2001 - 2054....................................... 2,794 867
Total debentures, notes and trust preferred securities................. 36,520 24,337
Other.................................................................. 360 362
Unamortized discount, net.............................................. (64) (127)
Total long-term obligations............................................ 36,816 24,572
Less: Currently maturing long-term debt................................ 3,724 1,355
Net long-term obligations.............................................. $33,092 $23,217
-------------------------
(a) Included in these balances was $946 and $975 representing the remaining
excess of the fair value over the recorded value of debt in connection with
the TCI and MediaOne mergers at
D-62
411
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2000 and December 31, 1999, respectively. The excess is being
amortized over the remaining lives of the underlying debt obligations.
(b) The actual interest paid on our debt obligations may have differed from the
stated amount due to our entering into interest rate swap contracts to
manage our exposure to interest rate risk and our strategy to reduce finance
costs (see Note 12).
On January 26, 1999, AT&T filed a registration statement with the SEC for
the offering and sale of up to $10 billion of notes and warrants to purchase
notes, resulting in a total available shelf registration of $13.1 billion. On
March 26, 1999, AT&T issued $8 billion in notes. We received net proceeds of
approximately $7.9 billion from the sale of the notes. The proceeds were
utilized to repay commercial paper issued in connection with the TCI merger and
toward funding the share repurchase program. On September 14, 1999, AT&T
completed a $450 bond offering in connection with the same registration
statement. The proceeds from the issuance were utilized for general corporate
purposes.
Included in long-term debt are subsidiary-obligated mandatorily redeemable
preferred securities of subsidiary trusts holding solely subordinated debt
securities, exchangeable notes and other exchangeable debt acquired in
connection with the TCI and MediaOne mergers.
SUBSIDIARY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUSTS HOLDING SOLELY SUBORDINATED DEBT SECURITIES
Certain subsidiary trusts of TCI (TCI Trusts) had preferred securities
outstanding at December 31, 2000 and 1999, as follows:
CARRYING AMOUNT
INTEREST MATURITY ----------------
RATE DATE 2000 1999
-------- -------- ------ ------
TCI Communications Financing I.................... 8.72% 2045 $ 528 $ 528
TCI Communications Financing II................... 10.00% 2045 514 521
TCI Communications Financing III.................. 9.65% 2027 357 360
TCI Communications Financing IV................... 9.72% 2036 204 217
Total............................................. $1,603 $1,626
------ ------
The TCI Trusts were created for the exclusive purpose of issuing trust
preferred securities and investing the proceeds thereof into subordinated
deferrable interest notes (subordinated debt securities) of TCI. The
subordinated debt securities have interest rates equal to the interest rate of
the corresponding trust preferred securities and have maturity dates ranging
from 30 to 49 years from the date of issuance. The preferred securities are
mandatorily redeemable upon repayment of the subordinated debt securities, and
are callable by AT&T. The Financing I and II trust preferred securities are
callable at face value beginning in January and May 2001, respectively.
Financing III trust preferred securities are callable at 104.825% of face value
beginning in March 2007. Financing IV trust preferred securities are callable at
face value beginning in March 2002. TCI effectively provides a full and
unconditional guarantee of the TCI Trusts' obligations under the trust preferred
securities. In 2000, AT&T provided a full and unconditional guarantee of the
trust preferred securities for TCI Communications Financing I, II and IV
subsidiary trusts (see Note 19).
AT&T has the right to defer interest payments up to 20 consecutive
quarters; as a consequence, dividend payments on the trust preferred securities
can be deferred by the trusts during any such interest-payment period.
D-63
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AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Certain subsidiary trusts of MediaOne (MediaOne Trusts) had preferred
securities outstanding at December 31, 2000, as follows:
INTEREST MATURITY CARRYING
RATE DATE AMOUNT
-------- -------- --------
MediaOne Financing I............................... 7.96% 2025 $ 30
MediaOne Financing II.............................. 8.25% 2036 28
MediaOne Finance II................................ 9.50% 2036 214
MediaOne Finance III............................... 9.04% 2038 504
Total.............................................. $776
----
The MediaOne Trusts exist for the purpose of issuing the trust preferred
securities and investing the proceeds thereof into subordinated deferrable
interest notes (subordinated deferrable notes) of MediaOne Group Funding, Inc.,
a wholly owned subsidiary of MediaOne. The subordinated deferrable notes have
the same interest rate and maturity date as the trust preferred securities to
which they relate. All of the subordinated deferrable notes are redeemable by
MediaOne Group Funding, Inc. or MediaOne at a redemption price of $25.00 per
security, plus accrued and unpaid interest. Upon redemption of the subordinated
deferrable notes, the trust preferred securities will be mandatorily redeemable,
at a price of $25.00 per share, plus accrued and unpaid distributions. The 7.96%
subordinated deferrable notes became redeemable after September 11, 2000. The
9.50% and 8.25% subordinated deferrable notes are redeemable after October 29,
2001. The 9.04% subordinated deferrable notes are redeemable after October 28,
2003. MediaOne has effectively provided a full and unconditional guarantee of
the MediaOne Trusts' obligations under the trust preferred securities. In 2000,
AT&T provided a full and unconditional guarantee of MediaOne's trust preferred
securities (see Note 19).
AT&T has the right to defer interest payments up to 20 consecutive
quarters; as a consequence, dividend payments on the trust preferred securities
can be deferred by the trusts during any such interest-payment period.
EXCHANGEABLE NOTES
During 2000, we issued debt (exchangeable notes) which is mandatorily
redeemable at AT&T's option into shares of Comcast and Microsoft Corporation
(Microsoft) common stock, as applicable, or its cash equivalent. During 1999 and
1998, MediaOne issued exchangeable notes which are mandatorily redeemable at
MediaOne's option into (i) Vodafone American Depository Receipts (ADRs) held by
MediaOne, (ii) the cash equivalent, or (iii) a combination of cash and Vodafone
ADRs. The maturity value of these exchangeable notes varies based upon the fair
market value of the security it is indexed to.
D-64
413
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following is a summary of the exchangeable notes outstanding at December
31, 2000, which are indexed to 25 million shares of Comcast common stock:
MATURITY DATE 2003 2004 2005
------------- ------ ------ ------
Face value........................................... $ 371 $ 314 $ 329
Interest rate........................................ 6.75% 5.50% 4.63%
Put price............................................ 41.50 41.06 39.13
Call price........................................... 49.80 49.27 46.96
Carrying value at December 31, 2000.................. $ 371 $ 314 $ 329
At maturity, the exchangeable notes will be redeemed, at AT&T's option,
with (i) a number of shares of Comcast common stock equal to the underlying
shares multiplied by the exchange ratio, or (ii) its equivalent cash value. The
exchange ratio will be calculated at maturity in the following manner:
(a) If the fair market value of a share of Comcast common stock is greater
than the call price, the exchange ratio will be 0.8333;
(b) If the fair market value of a share of Comcast common stock is less
than or equal to the put price, the exchange ratio will be 1;
(c) If the fair market value of a share of Comcast common stock is less
than or equal to the call price but greater than the put price, the
exchange ratio will be a fraction, the numerator of which is equal to
the put price, and the denominator of which is equal to the fair market
value of a share of Comcast common stock.
Following is a summary of the exchangeable notes outstanding at December
31, 2000, which are indexed to 10 million shares of Microsoft common stock:
MATURITY DATE 2003 2004 2005
------------- ------ ------- -------
Face value......................................... $ 227 $ 226 $ 226
Interest rate...................................... 6.96% 7.00% 7.04%
Put price.......................................... 67.87 67.87 67.87
Call price......................................... 97.39 111.64 128.60
Carrying value at December 31, 2000................ $ 145 $ 144 $ 144
At maturity, the exchangeable notes will be redeemed, at AT&T's option,
with (i) a number of shares of Microsoft common stock equal to the underlying
shares multiplied by the exchange ratio, or (ii) its equivalent cash value. The
exchange ratio will be calculated at maturity in the following manner:
(a) If the fair market value of a share of Microsoft common stock is
greater than the call price, the exchange ratio will be a fraction, the
numerator of which is equal to the sum of (i) the put price, plus (ii)
the excess of the fair market value of a share of Microsoft common
stock over the call price, and the denominator of which is equal to the
fair market value of a share of Microsoft common stock;
(b) If the fair market value of a share of Microsoft common stock is less
than or equal to the put price, the exchange ratio will be 1;
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AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(c) If the fair market value of a share of Microsoft common stock is less
than or equal to the call price but greater than the put price, the
exchange ratio will be a fraction, the numerator of which is equal to
the put price, and the denominator of which is equal to the fair market
value of a share of Microsoft common stock.
Following is a summary of the exchangeable notes outstanding at December
31, 2000, which are indexed to 22.3 million shares of Comcast common stock:
MATURITY DATE 2003 2004 2005
------------- ------ ------ ------
Face value........................................... $ 267 $ 267 $ 267
Interest rate........................................ 6.76% 6.80% 6.84%
Put price............................................ 35.89 35.89 35.89
Call price........................................... 50.64 58.39 67.97
Carrying value at December 31, 2000.................. $ 267 $ 267 $ 267
At maturity, the exchangeable notes will be redeemed, at AT&T's option,
with (i) a number of shares of Comcast common stock equal to the underlying
shares multiplied by the exchange ratio, or (ii) its equivalent cash value. The
exchange ratio will be calculated at maturity in the following manner:
(a) If the fair market value of a share of Comcast common stock is greater
than or equal to the call price, the exchange ratio will be a fraction,
the numerator of which is equal to the sum of (i) the put price, plus
(ii) the excess of the fair market value of a share of Comcast common
stock over the call price, and the denominator of which is equal to the
fair market value of a share of Comcast common stock;
(b) If the fair market value of a share of Comcast common stock is less
than or equal to the put price, the exchange ratio will be 1;
(c) If the fair market value of a share of Comcast common stock is less
than the call price but greater than the put price, the exchange ratio
will be a fraction, the numerator of which is equal to the put price,
and the denominator of which is equal to the fair market value of a
share of Comcast common stock.
Following is a summary of the exchangeable notes outstanding at December
31, 2000, which are indexed to Vodafone ADRs:
MATURITY DATE 2001 2002
------------- ------ ------
Face value.................................................. $1,686 $1,129
Interest rate............................................... 6.25% 7.00%
Put price................................................... 19.65 43.44
Call price.................................................. 25.10 51.26
Carrying value at December 31............................... $2,337 $1,012
The exchangeable notes that mature in 2001 are indexed to 29 million
Vodafone ADRs, and will be exchanged at maturity based upon a redemption value
of $9.00 in cash plus 2 1/2 times the fair market value of a Vodafone ADR
(maturity price), as follows:
(a) If the maturity price is greater than or equal to $9.00 plus 2 1/2
times the call price per share, each exchangeable note is equivalent to
0.8101 of the maturity price;
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AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(b) If the maturity price is less than or equal to $9.00 plus 2 1/2 times
the put price per share, each exchangeable note is equivalent to the
maturity price; or
(c) If the maturity price is less than $71.75 per share but greater than
$58.125 per share, each exchangeable note is equivalent to $58.125.
The exchangeable notes that mature in 2002 are indexed to 26 million
Vodafone ADRs, and will be exchanged at maturity as follows:
(a) If the fair market value of a Vodafone ADR is greater than or equal to
the call price, each exchangeable note is equivalent to 0.8475 of a
Vodafone ADR;
(b) If the fair market value of a Vodafone ADR is less than or equal to the
put price, each exchangeable note is equivalent to one Vodafone ADR; or
(c) If the fair market value of a Vodafone ADR is less than the call price
but greater than the put price, each exchangeable note is equivalent to
a fraction of a Vodafone ADR equal to (i) the put price divided by (ii)
the fair market value of a Vodafone ADR.
The exchangeable notes are being accounted for as indexed debt instruments
since the maturity value of the debt is dependent upon the fair market value of
the underlying Comcast, Microsoft and Vodafone securities. The exchangeable
notes contain embedded options that hedge the market risk of a decline in value
of Comcast, Microsoft and Vodafone securities. The market risk of a decline in
Comcast and Microsoft stock, and Vodafone ADRs, below the respective put prices
has been eliminated. In addition, any market gains we may earn have been limited
to the call prices, with the exception of certain debt indexed to Comcast stock
and the debt indexed to the Vodafone ADRs, which provides for our participation
in a portion of the market gains above the call price.
Since the Comcast, Microsoft, and Vodafone securities are cost method
investments being accounted for as "available-for-sale" securities under SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
changes in the maturity value of the exchangeable notes and the underlying
securities are being recorded as unrealized gains or losses, net of income
taxes, within other comprehensive income as a component of shareowners' equity.
The exchangeable notes indexed to Comcast common stock and Microsoft common
stock are secured by the Comcast and Microsoft investments AT&T owns. The
exchangeable notes indexed to Vodafone ADRs are unsecured obligations, ranking
equally in right of payment with all other unsecured and unsubordinated
obligations of AT&T.
OTHER EXCHANGEABLE DEBT
During 2000, we entered into a series of purchased and written options on
21.9 million shares of Microsoft common stock, and issued floating rate debt.
The carrying value of the debt at December 31, 2000, was $1,369, which pays
interest at the three-month London Inter-Bank Offered Rate (LIBOR) plus 0.4%.
The debt matures annually with $458 maturing in 2003 and 2004, and $453 maturing
in 2005, and is repayable at AT&T's option in either Microsoft stock or cash.
In addition, during 1999 two subsidiaries of MediaOne, MediaOne SPC IV and
MediaOne SPC VI, entered into a series of purchased and written options on
Vodafone ADRs contributed to them by MediaOne, and issued floating rate debt.
The carrying value of the debt at December 31, 2000, was $1,739, which pays
interest at the three-month LIBOR plus 0.5%. This debt matures in equal
quarterly installments beginning in 2003 and ending in 2005. The assets of
MediaOne SPC IV, which are primarily 29.1 million Vodafone ADRs, are available
only to pay the creditors of
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AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MediaOne SPC IV. Likewise, the assets of MediaOne SPC VI, which are primarily
18.0 million Vodafone ADRs, are available only to pay the creditors of MediaOne
SPC VI.
This table shows the maturities at December 31, 2000, of the $36,816 in
total long-term obligations:
2001 2002 2003 2004 2005 LATER YEARS
------ ------ ------ ------ ------ -----------
$3,724 $2,661 $3,093 $4,112 $4,182 $19,044
11. OTHER SECURITIES
PREFERRED STOCK OF SUBSIDIARIES
Prior to the TCI merger, TCI Pacific Communications Inc. (Pacific) issued
5% Class A Senior Cumulative Exchangeable preferred stock, which remains
outstanding. There were 6.3 million shares authorized and outstanding at
December 31, 2000 and 1999. Each share is exchangeable, from and after August 1,
2001, for approximately 6.3 shares of AT&T common stock, subject to certain
antidilution adjustments. Additionally, Pacific may elect to make any dividend,
redemption or liquidation payment in cash, shares of AT&T common stock or a
combination of the foregoing. The Pacific preferred stock is reflected within
"Minority Interest" in the accompanying Consolidated Balance Sheets, and
aggregated $2.1 billion at December 31, 2000 and 1999.
Prior to the TCI merger, TCI issued Class B 6% Cumulative Redeemable
Exchangeable Junior preferred stock (Class B preferred stock). There were 1.6
million shares outstanding as of December 31, 1999, net of shares held by a
subsidiary, out of an authorized 1.7 million shares. Class B preferred stock and
accumulated dividends aggregated $152 at December 31, 1999, and were reflected
within "Minority Interest" in the accompanying 1999 Consolidated Balance Sheet.
On February 22, 2000, all outstanding shares of Class B preferred stock were
redeemed at $105.88 per share.
COMPANY-OBLIGATED CONVERTIBLE QUARTERLY INCOME PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY SUBORDINATED DEBT SECURITIES OF AT&T AND RELATED
WARRANTS
On June 16, 1999, AT&T Finance Trust I (AT&T Trust), a wholly owned
subsidiary of AT&T, completed the private sale of 100 million shares of 5.0%
cumulative quarterly income preferred securities (quarterly preferred
securities) to Microsoft. Proceeds of the issuance were invested by the AT&T
Trust in junior subordinated debentures (debentures) issued by AT&T due 2029,
which represent the sole asset of the AT&T Trust.
The quarterly preferred securities pay dividends at an annual rate of 5.0%
of the liquidation preference of $50 per security, and are convertible at any
time prior to maturity into 66.667 million shares of AT&T common stock. The
quarterly preferred securities are subject to mandatory redemption upon
repayment of the debentures at maturity or their earlier redemption. The
conversion feature can be terminated, under certain conditions, after three
years.
The debentures will make a quarterly payment in arrears of 62.5 cents per
security on the last day of March, June, September and December of each year.
AT&T has the right to defer such interest payments up to 20 consecutive
quarters. As a consequence, quarterly dividend payments on the quarterly
preferred securities can be deferred by the AT&T Trust during any such interest-
payment period. If AT&T defers any interest payments, we may not, among other
things, pay any dividends on our common stock until all interest in arrears is
paid to the AT&T Trust.
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AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Dividends on the quarterly preferred securities were $250 and $135 for the
years ended December 31, 2000 and 1999, respectively, and are reported within
"Minority interest income (expense)" in the accompanying Consolidated Statements
of Income.
On June 16, 1999, AT&T also issued to Microsoft 40 million warrants, each
to purchase one share of AT&T common stock at a price of $75 per share at the
end of three years. Alternatively, the warrants are exercisable on a cashless
basis. If the warrants are not exercised on the three-year anniversary of the
closing date, the warrants expire.
A discount on the quarterly preferred securities equal to the value of the
warrants of $306 was recognized and is being amortized over the 30-year life of
the quarterly preferred securities as a component of "Minority interest income
(expense)" in the accompanying Consolidated Statements of Income.
CENTAUR FUNDING CORPORATION
Centaur Funding Corporation (Centaur), a subsidiary of MediaOne, issued
three series of preferred shares prior to AT&T's acquisition of MediaOne.
Centaur was created for the principal purpose of raising capital through the
issuance of preferred shares and investing those proceeds into notes issued by
MediaOne SPC II, a subsidiary of MediaOne. Principal and interest payments from
the notes are expected to be Centaur's primary source of funds to make dividend
and redemption payments on the preferred shares. In addition, the dividend and
certain redemption payments on the preferred shares will be determined by
reference to the dividend and redemption activity of the preferred stock of
AirTouch Communications, Inc. (ATI Shares) held by MediaOne SPC II. Payments on
the preferred shares are neither guaranteed nor secured by MediaOne or AT&T. The
assets of MediaOne SPC II, which include the ATI shares, are available only to
pay the creditors of MediaOne SPC II. These securities remained outstanding at
December 31, 2000 as follows:
DIVIDEND CARRYING
RATE MATURITY DATE AMOUNT
-------- -------------- --------
Series A....................................... Variable None $ 100
Series B....................................... 9.08% April 21, 2020 927
Series C....................................... None April 21, 2020 118
Total.......................................... $1,145
------
The Auction Market Preference Shares, Series A, have a liquidation value of
$250 thousand per share and dividends are payable quarterly when declared by
Centaur's board of directors out of funds legally available. The 9.08%
Cumulative Preference Shares, Series B, have a liquidation value of $1 thousand
per share and dividends are payable quarterly in arrears when declared by
Centaur's board of directors out of funds legally available. In addition,
dividends may be declared and paid only to the extent that dividends have been
declared and paid on the ATI shares. The preference shares, Series C, have a
liquidation value of $1 thousand per share at maturity. The value of the Series
C will be accreted to reach its liquidation value upon maturity. The Series B
shares rank equally with the Series C shares as to redemption payments and upon
liquidation, and the Series B and Series C shares rank senior to the Series A
shares as to redemption payments and upon liquidation. The preference shares
issued by Centaur are reflected within "Minority interest" in the accompanying
2000 Consolidated Balance Sheet.
Dividends on the preferred shares were $55 for the period ended December
31, 2000, and were included within "Minority interest income (expense)" in the
Consolidated Statement of Income.
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AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. FINANCIAL INSTRUMENTS
In the normal course of business, we use various financial instruments,
including derivative financial instruments, for purposes other than trading. We
do not use derivative financial instruments for speculative purposes. These
instruments include letters of credit, guarantees of debt, interest rate swap
agreements, foreign currency exchange contracts, option contracts and equity
hedges. Collateral is generally not required for these types of instruments.
By their nature, all such instruments involve risk, including the credit
risk of nonperformance by counterparties, and our maximum potential loss may
exceed the amount recognized in our balance sheet. However, at December 31, 2000
and 1999, in management's opinion, there was no significant risk of loss in the
event of nonperformance of the counterparties to these financial instruments. We
control our exposure to credit risk through credit approvals, credit limits and
monitoring procedures. We do not have any significant exposure to any individual
customer or counterparty, nor do we have any major concentration of credit risk
related to any financial instruments.
LETTERS OF CREDIT
Letters of credit are purchased guarantees that ensure our performance or
payment to third parties in accordance with specified terms and conditions.
Letters of credit do not create any additional risk to AT&T.
GUARANTEES OF DEBT
From time to time, we guarantee the debt of our subsidiaries and certain
unconsolidated joint ventures. Prior to the merger, TCI had agreed to take
certain steps to support debt compliance with respect to obligations aggregating
$1,461 and $1,720 at December 31, 2000 and 1999, respectively, of certain cable
television partnerships in which TCI has a non-controlling ownership interest.
Although there can be no assurance, management believes that it will not be
required to meet its obligations under such guarantees. Additionally, in
connection with the restructuring of AT&T in 1996, we issued guarantees for
certain debt obligations of our former subsidiaries AT&T Capital Corp. and NCR.
The amount of guaranteed debt associated with AT&T Capital Corp. and NCR was $48
and $56 at December 31, 2000 and 1999, respectively.
INTEREST RATE SWAP AGREEMENTS
We enter into interest rate swaps to manage our exposure to changes in
interest rates and to lower our overall costs of financing. We enter into swap
agreements to manage the fixed/floating mix of our debt portfolio in order to
reduce aggregate risk to interest rate movements. Interest rate swaps also allow
us to raise funds at floating rates and effectively swap them into fixed rates
that are lower than those available to us if fixed-rate borrowings were made
directly. These agreements involve the exchange of floating-rate for fixed-rate
payments, fixed-rate for floating-rate payments or floating-rate for other
floating-rate payments without the exchange of the underlying principal amount.
Fixed interest rate payments at December 31, 2000, were at rates ranging from
6.05% to 8.20%. Floating-rate payments are based on rates tied to the LIBOR. In
addition, we also have combined interest rate, foreign currency swap agreements
for foreign-currency-denominated debt, which hedge our risk to both interest
rate and currency movements.
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AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table indicates the types of swaps in use at December 31,
2000 and 1999, and their weighted-average interest rates. Average variable rates
are those in effect at the reporting date and may change significantly over the
lives of the contracts.
2000 1999
----- ------
Fixed to variable swaps -- notional amount.................. $ 750 $1,800
Average receive rate...................................... 8.16% 6.89%
Average pay rate.......................................... 8.16% 6.67%
Variable to fixed swaps -- notional amount.................. $ 218 $ 229
Average receive rate...................................... 6.81% 6.30%
Average pay rate.......................................... 7.31% 6.77%
Variable to variable swaps -- notional amount............... $ 739 $ 495
Average receive rate...................................... 1.74% 6.63%
Average pay rate.......................................... 5.42% 6.53%
The weighted-average remaining terms of the swap contracts were 11 and
seven years at December 31, 2000 and 1999, respectively.
FOREIGN EXCHANGE
We enter into foreign currency exchange contracts, including forward and
option contracts, to manage our exposure to changes in currency exchange rates
related to foreign-currency-denominated transactions. In 2000, this consisted
principally of Brazilian reais and Swiss francs related to debt. In 1999, this
consisted principally of European Union currency (Euro), British pounds sterling
and Japanese Yen contracts related to the reimbursement to foreign telephone
companies for their portion of the revenue billed by AT&T for calls placed in
the United States to a foreign country and other foreign currency payables and
receivables. In addition, we are subject to foreign exchange risk related to
other foreign-currency-denominated transactions.
COLLARS
We enter into option agreements to hedge our exposure on debt that is
indexed to securities we own. During 2000, we entered into a series of purchased
and written options related to a portion of our holdings in Microsoft stock
(Microsoft collar), which is indexed to floating rate debt. The collar has been
designated and is effective as a hedge of the market risk associated with our
investment in Microsoft stock. The Microsoft collar is carried at fair value,
with unrealized gains or losses, net of income taxes, being recorded within
other comprehensive income as a component of shareowners' equity, together with
any change in the fair value of the Microsoft stock. The carrying value of the
Microsoft collar was $419 at December 31, 2000.
At the expiration of the Microsoft collar, if the price of a Microsoft
share is equal to or less than the put price of $62.48, we would exercise the
put option and deliver all underlying shares of Microsoft common stock and
receive cash equal in value to (i) the put price, multiplied by (ii) the
underlying share amount. Alternatively, at our option, we can elect not to
deliver the underlying shares and instead settle the put option by receiving
cash equal in value to the (i) the difference between the put price minus the
fair value of one Microsoft share, multiplied by (ii) the underlying share
amount. If the price of a Microsoft share is greater then the call price, which
range from $86.26 to $118.36, then the call option would be exercised and we
would deliver all underlying shares
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AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and receive cash equal in value to (i) the call price, multiplied by (ii) the
underlying share amount. At our option, we can elect not to deliver the
underlying shares and instead settle the call option by paying cash equal in
value to the (i) the difference between the call price minus the fair value of
one Microsoft share, multiplied by (ii) the underlying share amount. Any cash
received by AT&T from the exercise or settlement of either put or call option
would be used to retire the floating rate debt. We would retain cash in excess
of the call price from a call option exercise. If the price of a Microsoft share
is between the put price and the call price, the collar will expire without
value.
Prior to our merger with MediaOne, two subsidiaries of MediaOne, MediaOne
SPC IV and MediaOne SPC VI, entered into a series of purchased and written
options (Vodafone collars) on Vodafone ADRs contributed to them by MediaOne, and
issued floating rate debt. The Vodafone collars have been designated and are
effective as a hedge of the market risk associated with our investment in
Vodafone ADRs. The Vodafone collars are carried at fair value, with unrealized
gains or losses, net of income taxes, being recorded within other comprehensive
income as a component of shareowners' equity, together with any change in the
fair value of the Vodafone ADRs. The carrying value of the Vodafone collars was
$453 at December 31, 2000.
At the expiration of the MediaOne SPC IV collar, we will receive cash if
the market value of a Vodafone ADR is less than approximately $34.00 per share,
effectively eliminating downside risk on the stock below $34.00 per share.
Conversely, if the market value of a Vodafone ADR is greater than approximately
$49.00 per share, we will be required to pay cash, which will be offset by the
corresponding increase in the value of the Vodafone ADR. This Vodafone collar
expires quarterly beginning in 2003 and ending in 2005.
At the expiration of the MediaOne SPC VI collar, we will receive cash if
the market value of a Vodafone ADR is less than approximately $40.00 per share,
effectively eliminating downside risk on the stock below $40.00 per share.
Conversely, if the market value of a Vodafone ADR is greater than approximately
$58.00 per share, we will be required to pay cash, which will be offset by the
corresponding increase in the value of the Vodafone ADR. This Vodafone collar
expires quarterly beginning in 2003 and ending in 2005.
EQUITY HEDGES
We enter into equity hedges to manage our exposure to changes in equity
prices associated with stock appreciation rights of affiliated companies.
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AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUES OF FINANCIAL INSTRUMENTS INCLUDING DERIVATIVE FINANCIAL INSTRUMENTS
The following table summarizes the notional amounts of material financial
instruments. The notional amounts represent agreed-upon amounts on which
calculations of dollars to be exchanged are based. They do not represent amounts
exchanged by the parties and, therefore, are not a measure of our exposure. Our
exposure is limited to the fair value of the contracts with a positive fair
value plus interest receivable, if any, at the reporting date.
DERIVATIVES AND OFF BALANCE SHEET INSTRUMENTS
2000 1999
--------- ---------
CONTRACT/ CONTRACT/
NOTIONAL NOTIONAL
AMOUNT AMOUNT
--------- ---------
Interest rate swap agreements.............................. $ 968 $2,524
Combined interest rate foreign currency swap agreements.... 739 --
Foreign exchange forward contracts......................... 71 1,881
Option contracts........................................... 3,108 --
Equity hedges.............................................. 392 495
Letters of credit.......................................... 852 243
Guarantees of debt......................................... 1,607 1,848
The following tables show the valuation methods, the carrying amounts and
estimated fair values of material financial instruments.
FINANCIAL INSTRUMENT VALUATION METHOD
-------------------- ------------------------------------------
Debt excluding capital leases............. Market quotes or rates available to us for
debt with similar terms and maturities
Letters of credit......................... Fees paid to obtain the obligations
Guarantees of debt........................ There are no quoted market prices for
similar agreements available
Interest rate swap agreements............. Market quotes obtained from dealers
Combined interest rate foreign currency
swap agreements......................... Market quotes obtained from dealers
Foreign exchange contracts................ Market quotes
Option contracts.......................... Black-Scholes option-pricing model
Equity hedges............................. Market quotes
Preferred securities...................... Market quotes*
-------------------------
* It is not practicable to estimate the fair market value of our quarterly
preferred securities that aggregated $4,710 and $4,700 at December 31, 2000
and 1999, respectively. There are no current market quotes available on this
private placement.
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AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2000 1999
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
Debt excluding capital leases.................. $64,542 $61,686 $35,507 $34,092
Pacific preferred stock........................ 2,121 595 2,121 1,929
2000 1999
----------------------------- -----------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------- ------------- ------------- -------------
ASSET LIAB. ASSET LIAB. ASSET LIAB. ASSET LIAB.
----- ----- ----- ----- ----- ----- ----- -----
Interest rate swap agreements........... $4 $ 5 $4 $ 5 $ 28 $27 $ 6 $29
Combined interest rate foreign currency
swap agreements....................... 1 3 1 3 -- -- -- --
Foreign exchange forward contracts...... -- 1 1 2 -- 26 1 28
Equity hedges........................... 2 100 2 100 313 2 313 --
13. PENSION, POSTRETIREMENT AND OTHER EMPLOYEE BENEFIT PLANS
We sponsor noncontributory, defined benefit pension plans covering the
majority of our employees. Pension benefits for management employees are based
principally on career-average pay. Pension benefits for occupational employees
are not directly related to pay. Pension trust contributions are made to trust
funds held for the sole benefit of plan participants. Our benefit plans for
current and certain future retirees include health-care benefits, life insurance
coverage and telephone concessions.
The following table shows the components of the net periodic benefit costs
included in our Consolidated Statements of Income:
PENSION BENEFITS POSTRETIREMENT BENEFITS
--------------------------- ------------------------
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998 2000 1999 1998
-------------------------------- ------- ------- ------- ------ ------ ------
Service cost benefits earned during the
period................................ $ 248 $ 247 $ 275 $ 35 $ 54 $ 56
Interest cost on benefit obligations.... 991 919 940 352 324 322
Amortization of unrecognized prior
service cost.......................... 174 159 135 4 13 (2)
Credit for expected return on plan
assets................................ (1,821) (1,458) (1,570) (230) (200) (173)
Amortization of transition asset........ (156) (158) (175) -- -- --
Amortization of gains................... (332) (10) -- (16) (1) --
Charges for special termination
benefits*............................. -- -- 2,254 16 5 169
Net curtailment losses (gains)*......... 121 -- 140 (14) -- 141
Net settlement losses (gains)*.......... 8 (121) (921) -- -- --
Net periodic benefit (credit) cost...... $ (767) $ (422) $ 1,078 $ 147 $ 195 $ 513
---------------
* Primarily included in "Net restructuring and other charges" in the
Consolidated Statements of Income.
On January 26, 1998, we offered a voluntary retirement incentive program
(VRIP) to employees who were eligible participants in the AT&T Management
Pension Plan. Approximately 15,300 management employees accepted the VRIP offer.
In connection with the VRIP, we recorded pretax
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AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
charges in 1998 for pension and postretirement plan special-termination benefits
of $2,254 and $169, respectively. We also recorded pension and postretirement
plan pretax charges of $120 and $143, respectively, which are included within
net curtailment losses in 1998. The special-termination benefits reflect the
value of pension benefit improvements and expanded eligibility for
postretirement benefits. The VRIP also permitted employees to choose either a
total lump-sum distribution of their pension benefits or periodic future annuity
payments.
As of December 31, 1999, all 15,300 employees had terminated employment
under the VRIP. AT&T has settled the pension obligations covering about 15,100
of these employees, the remainder of which either chose to defer commencing
their pension benefits or elected to receive an annuity distribution. Lump-sum
pension settlements totaling $5.2 billion, including a portion of the special-
pension termination benefits referred to above, resulted in settlement gains of
$121 and $940 recorded in 1999 and 1998, respectively.
The following tables provide a reconciliation of the changes in the plans'
benefit obligations and fair value of assets, and a statement of the funded
status:
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------ ------------------------
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 2000 1999
-------------------------------- ------- ------- ---------- ----------
Change in benefit obligations:
Benefit obligation, beginning of year............... $12,868 $14,443 $ 4,642 $ 5,168
Service cost........................................ 248 247 35 54
Interest cost....................................... 991 919 352 324
Plan amendments..................................... 32 558 (45) 4
Actuarial losses (gains)............................ 5 (1,683) 203 (579)
Acquisition......................................... 204 -- 38 --
Benefit payments.................................... (1,228) (1,062) (362) (334)
Special termination benefits........................ -- -- 16 5
Settlements......................................... (57) (554) -- --
Curtailment losses.................................. -- -- 7 --
Benefit obligation, end of year..................... $13,063 $12,868 $ 4,886 $ 4,642
------- ------- ------- -------
Change in fair value of plan assets:
Fair value of plan assets, beginning of year........ $21,854 $18,567 $ 2,852 $ 2,476
Actual return on plan assets........................ 995 4,855 (128) 385
Employer contributions.............................. 94 48 159 325
Acquisition......................................... 205 -- 5 --
Benefit payments.................................... (1,228) (1,062) (362) (334)
Settlements......................................... (57) (554) -- --
Fair value of plan assets, end of year.............. $21,863 $21,854 $ 2,526 $ 2,852
------- ------- ------- -------
AT DECEMBER 31,
---------------
Funded (unfounded) benefit obligation............... $ 8,800 $ 8,986 $(2,360) $(1,790)
Unrecognized net gain............................... (7,301) (8,457) (188) (800)
Unrecognized transition asset....................... (123) (279) -- --
Unrecognized prior service cost..................... 1,100 1,362 (9) 55
Net amount recorded................................. $ 2,476 $ 1,612 $(2,557) $(2,535)
------- ------- ------- -------
At December 31, 2000, our pension plan assets included $34 of AT&T common
stock, $26 of Liberty Media Group Series A common stock, and $2 of AT&T Wireless
Group common stock. At
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AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1999, our pension plan assets included $82 of AT&T common stock and
$34 of Liberty Media Group Series A common stock.
The following table provides the amounts recorded in our Consolidated
Balance Sheets:
POSTRETIREMENT
PENSION BENEFITS BENEFITS
---------------- ------------------
AT DECEMBER 31, 2000 1999 2000 1999
--------------- ------ ------ ------- -------
Prepaid pension cost............................. $3,003 $2,464 $ -- $ --
Benefit related liabilities...................... (579) (918) (2,557) (2,535)
Intangible asset................................. 30 46 -- --
Accumulated other comprehensive income........... 22 20 -- --
Net amount recorded.............................. $2,476 $1,612 $(2,557) $(2,535)
------ ------ ------- -------
Our nonqualified pension plans had an unfunded accumulated benefit
obligation of $125 and $118 at December 31, 2000 and 1999, respectively. Our
postretirement health and telephone concession benefit plans had accumulated
postretirement benefit obligations of $4,282 and $4,021 at December 31, 2000 and
1999, respectively, which were in excess of plan assets of $1,413 and $1,635 at
December 31, 2000 and 1999, respectively.
The assumptions used in the measurement of the pension and postretirement
benefit obligations are shown in the following table:
AT DECEMBER 31, 2000 1999 1998
--------------- ---- ---- ----
Weighted-average assumptions:
Discount rate............................................... 7.5% 7.75% 6.5%
Expected return on plan assets.............................. 9.5% 9.5% 9.5%
Rate of compensation increase............................... 4.5% 4.5% 4.5%
We assumed a rate of increase in the per capita cost of covered health-care
benefits (the health-care cost trend rate) of 7.6%. This rate was assumed to
gradually decline after 2000 to 4.5% by 2010 and then remain level. Assumed
health-care cost trend rates have a significant effect on the amounts reported
for the health-care plans. A one percentage point increase or decrease in the
assumed health-care cost trend rate would increase or decrease the total of the
service and interest-cost components of net periodic postretirement health-care
benefit cost by $9 and $9, respectively, and would increase or decrease the
health-care component of the accumulated postretirement benefit obligation by
$125 and $122, respectively.
We also sponsor savings plans for the majority of our employees. The plans
allow employees to contribute a portion of their pretax and/or after-tax income
in accordance with specified guidelines. We match a percentage of the employee
contributions up to certain limits. Our contributions amounted to $280 in 2000,
$234 in 1999 and $204 in 1998.
14. STOCK-BASED COMPENSATION PLANS
Under the 1997 Long-term Incentive Program (Program), which was effective
June 1, 1997, and amended on May 19, 1999 and March 14, 2000, we grant stock
options, performance shares, restricted stock and other awards on AT&T common
stock as well as stock options on AT&T Wireless Group tracking stock.
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AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under the Program, there were 150 million shares of AT&T common stock
available for grant with a maximum of 22.5 million common shares that could be
used for awards other than stock options. Beginning with January 1, 2000, the
remaining shares available for grant at December 31 of the prior year, plus
1.75% of the shares of AT&T common stock outstanding on January 1 of each year,
become available for grant. There are a maximum of 37.5 million shares that may
be used for awards other than stock options. The exercise price of any stock
option is equal to the stock price when the option is granted. Generally, the
options vest over three or four years and are exercisable up to 10 years from
the date of grant.
Under the Program, performance share units are awarded to key employees in
the form of either common stock or cash at the end of a three-year period, based
on AT&T's total shareholder return and certain financial-performance targets.
Under the 1987 Long-term Incentive Program, performance share units with the
same terms were also awarded to key employees based on AT&T's return-to-equity
performance compared with a target.
On April 27, 2000, AT&T created a new class of stock and completed an
offering of AT&T Wireless Group tracking stock. Under the Program, 5% of the
outstanding AT&T Wireless Group shares became available for grant with a maximum
of 1.25% of the outstanding shares that may be used for awards other than
options. Beginning with January 1, 2001, the remaining AT&T Wireless Group
shares available for grant at December 31 of the prior year, plus 2% of the
outstanding AT&T Wireless Group shares on January 1 of each year, become
available for grant. The exercise price of any stock option is equal to the
stock price when the option is granted. Generally, the options vest over two to
three and one-half years and are exercisable up to 10 years from the date of
grant. In 2000, there were no grants of awards other than stock options. On
April 27, 2000, substantially all employees were granted AT&T Wireless Group
tracking stock options.
Under the AT&T 1996 Employee Stock Purchase Plan (Plan), which was
effective July 1, 1996, we are authorized to sell up to 75 million shares of
AT&T common stock to our eligible employees. Under the terms of the Plan,
employees may have up to 10% of their earnings withheld to purchase AT&T's
common stock. The purchase price of the stock on the date of exercise is 85% of
the average high and low sale prices of shares on the New York Stock Exchange
for that day. Under the Plan, we sold approximately 6 million shares to
employees in 2000 and 3 million shares to employees in both 1999 and 1998.
We apply APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations in accounting for our plans. Accordingly, no
compensation expense has been recognized for our stock-based compensation plans
other than for our performance-based and restricted stock awards and stock
appreciation rights (SARs). Stock based-compensation income (expense) was $253,
$(462) and $(157) in 2000, 1999 and 1998, respectively. These amounts included
income (expense) of $269 and $(382) in 2000 and 1999, respectively, related to
grants of SARs of affiliated companies held by certain employees subsequent to
the TCI merger. We also entered into an equity hedge in 1999 to offset potential
future compensation costs associated with these SARs. (Expense) income related
to this hedge was $(297) and $247 in 2000 and 1999, respectively.
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AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the AT&T common stock option transactions is shown below:
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
2000 PRICE 1999 PRICE 1998 PRICE
------- --------- ------- --------- ------- ---------
SHARES IN THOUSANDS
Outstanding at January 1,........ 168,763 $37.42 131,904 $30.41 110,972 $24.77
Options assumed in mergers....... 29,613 $24.71 11,770 $14.79 -- --
Options granted.................. 74,570 $36.12 47,927 $57.13 46,148 $41.69
Options and SARs exercised....... (11,446) $22.07 (17,858) $22.87 (18,894) $21.95
Options canceled or forfeited.... (12,474) $45.61 (4,980) $42.44 (6,322) $31.64
At December 31:
Options outstanding.............. 249,026 $35.82 168,763 $37.42 131,904 $30.41
Options exercisable.............. 131,450 $30.44 57,894 $28.21 35,472 $23.13
Shares available for grant....... 34,204 41,347 91,838
All of the 11.8 million stock options assumed in connection with the TCI
merger were in tandem with SARs, which were canceled on April 30, 1999. During
1999, 386,000 SARs (including 137,000 for TCI) were exercised. At December 31,
2000, there were no AT&T SARs outstanding.
The following table summarizes information about the AT&T common stock
options outstanding at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------- -------------------------------
WEIGHTED- NUMBER
AVERAGE WEIGHTED- EXERCISABLE AT WEIGHTED-
RANGE OF NUMBER OUTSTANDING REMAINING AVERAGE DECEMBER 31, AVERAGE
EXERCISE PRICES AT DECEMBER 31, 2000 CONTRACTUAL LIFE EXERCISE PRICE 2000 EXERCISE PRICE
--------------- -------------------- ---------------- -------------- -------------- --------------
(IN THOUSANDS) (IN THOUSANDS)
$ 2.69 - $18.08 21,182 5.0 $11.23 20,206 $10.99
$18.15 - $24.49 16,914 6.2 $22.51 11,808 $22.57
$24.50 15,451 6.6 $24.50 15,451 $24.50
$24.55 - $26.18 8,664 6.2 $25.33 8,664 $25.33
$26.21 17,299 6.1 $26.21 17,299 $26.21
$26.33 - $31.97 20,246 6.6 $30.31 12,501 $29.98
$32.09 25,551 9.6 $32.09 141 $32.09
$32.19 - $42.04 26,908 8.5 $36.91 10,147 $39.57
$42.10 26,975 7.1 $42.10 17,531 $42.10
$42.19 - $45.44 20,017 9.1 $45.25 1,927 $44.45
$45.48 - $59.75 23,581 8.6 $51.33 9,293 $50.40
$59.88 - $62.13 26,238 8.1 $59.89 6,482 $59.89
249,026 7.5 $35.82 131,450 $30.44
------- -------
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AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the AT&T Wireless Group tracking stock option transactions is
shown below:
WEIGHTED-
AVERAGE
EXERCISE
2000 PRICE
------ ---------
SHARES IN THOUSANDS
Outstanding at January 1,................................... -- $ --
Options granted............................................. 76,983 $29.29
Options exercised........................................... -- $ --
Options canceled or forfeited............................... (3,357) $29.43
At December 31:
Options outstanding......................................... 73,626 $29.29
Options exercisable......................................... 12,391 $29.48
Shares available for grant.................................. 41,874
The following table summarizes information about the AT&T Wireless Group
tracking stock options outstanding at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------- -------------------------------
WEIGHTED- NUMBER
AVERAGE WEIGHTED- EXERCISABLE AT WEIGHTED-
RANGE OF NUMBER OUTSTANDING AT REMAINING AVERAGE DECEMBER 31, AVERAGE
EXERCISE PRICES DECEMBER 31, 2000 CONTRACTUAL LIFE EXERCISE PRICE 2000 EXERCISE PRICE
--------------- --------------------- ---------------- -------------- -------------- --------------
(IN THOUSANDS) (IN THOUSANDS)
$17.06 - $21.00 305 9.9 $17.91 -- $ --
$24.47 1,741 9.8 $24.47 -- $ --
$26.00 - $28.53 1,865 9.5 $27.62 122 $27.21
$29.50 69,715 9.3 $29.50 12,269 $29.50
73,626 9.3 $29.29 12,391 $29.48
------ ------
AT&T has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." If AT&T had elected to recognize
compensation costs based on the fair value at the date of grant for awards in
2000, 1999 and 1998, consistent with the provisions of SFAS No. 123, net income
and earnings per share amounts would have been as follows:
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------ ------ ------
AT&T Common Stock Group:
Income from continuing operations........................... $2,625 $5,193 $5,078
Income from discontinued operations......................... -- -- 7
Gain on sale of discontinued operations..................... -- -- 1,290
Extraordinary loss.......................................... -- -- 137
Income...................................................... $2,625 $5,193 $6,238
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AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------ ------ ------
Earnings per AT&T Common Stock Group common share-basic:
Continuing operations....................................... $ 0.75 $ 1.68 $ 1.90
Discontinued operations..................................... -- -- --
Gain on sale of discontinued operations..................... -- -- 0.48
Extraordinary loss.......................................... -- -- 0.05
AT&T Common Stock Group earnings............................ $ 0.75 $ 1.68 $ 2.33
Earnings per AT&T Common Stock Group common share-diluted:
Continuing operations....................................... $ 0.74 $ 1.65 $ 1.88
Discontinued operations..................................... -- -- --
Gains on sale of discontinued operations.................... -- -- 0.48
Extraordinary loss.......................................... -- -- 0.05
AT&T Common Stock Group earnings............................ $ 0.74 $ 1.65 $ 2.31
AT&T Wireless Group:
Income...................................................... $ 51 $ -- $ --
Earnings per share:
Basic and diluted........................................... $ 0.14 $ -- $ --
The pro forma effect on net income for 1998 may not be representative of
the pro forma effect on net income of future years because the SFAS No. 123
method of accounting for pro forma compensation expense has not been applied to
options granted prior to January 1, 1995.
The weighted-average fair values at date of grant for AT&T common stock
options granted during 2000, 1999 and 1998 were $12.10, $15.64 and $9.75,
respectively, and were estimated using the Black-Scholes option-pricing model.
The weighted-average risk-free interest rates applied for 2000, 1999 and 1998
were 6.29%, 5.10% and 5.33%, respectively. The following assumptions were
applied for 2000, 1999 and 1998, respectively: (i) expected dividend yields of
1.6%, 1.7% and 2.1%, (ii) expected volatility rates of 33.5%, 28.3% and 23.8%
and (iii) expected lives of 4.7 years in 2000 and 4.5 years for 1999 and 1998.
The weighted-average fair values at date of grant for AT&T Wireless Group
tracking stock options granted during 2000 was $14.20 and was estimated using
the Black-Scholes option-pricing model. The following weighted-average
assumptions were applied for 2000: (i) risk-free rate of 6.53%, (ii) expected
volatility rate of 55.0% and (iii) expected life of 3.9 years.
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AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. INCOME TAXES
The following table shows the principal reasons for the difference between
the effective income tax rate and the U.S. federal statutory income tax rate:
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------ ------ ------
U.S. federal statutory income tax rate............... 35% 35% 35%
Federal income tax at statutory rate................. $ 913 $3,509 $2,920
Amortization of investment tax credits............... (23) (10) (14)
State and local income taxes, net of federal income
tax effect......................................... 176 247 199
In-process research and development write-off........ -- 208 --
Amortization of intangibles.......................... 111 43 28
Foreign rate differential............................ 104 56 30
Taxes on repatriated and accumulated foreign income,
net of tax credits................................. (84) (45) (36)
Research and other credits........................... (40) (64) (91)
Valuation allowance.................................. -- (78) 37
Investment dispositions, acquisitions and legal
entity restructurings.............................. (477) (94) (153)
Operating losses and charges relating to
Excite@Home........................................ 2,757 -- --
Other differences, net............................... (95) (77) 129
Provision for income taxes........................... $3,342 $3,695 $3,049
Effective income tax rate............................ 128.1% 36.9% 36.6%
The U.S. and foreign components of income from continuing operations before
income taxes and the provision for income taxes are presented in this table:
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------ ------- ------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES
United States....................................... $3,014 $ 9,595 $8,047
Foreign............................................. (406) 430 294
Total............................................... $2,608 $10,025 $8,341
------ ------- ------
PROVISION FOR INCOME TAXES
CURRENT
Federal........................................... $1,878 $ 2,691 $2,784
State and local................................... 196 415 232
Foreign........................................... 89 100 41
2,163 3,206 3,057
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AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- ------ ------- ------
DEFERRED
Federal........................................... 1,136 527 (68)
State and local................................... 71 (36) 74
Foreign........................................... (5) 8 --
1,202 499 6
Deferred investment tax credits..................... (23) (10) (14)
Provision for income taxes.......................... $3,342 $ 3,695 $3,049
------ ------- ------
In addition, we also recorded current and deferred income tax expenses
(benefits) related to minority interest and net equity losses on other equity
investments in the amounts of $(154) and $(125) in 2000, $(94) and $(344) in
1999 and $143 and $(120) in 1998, respectively.
Deferred income tax liabilities are taxes we expect to pay in future
periods. Similarly, deferred income tax assets are recorded for expected
reductions in taxes payable in future periods. Deferred income taxes arise
because of differences in the book and tax bases of certain assets and
liabilities.
Deferred income tax liabilities and assets consist of the following:
AT DECEMBER 31, 2000 1999
--------------- ------- -------
LONG-TERM DEFERRED INCOME TAX LIABILITIES
Property, plant and equipment............................. $ 9,123 $ 7,678
Investments............................................... 10,716 7,304
Franchise costs........................................... 18,571 11,998
Other..................................................... 2,826 1,156
Total long-term deferred income tax liabilities........... 41,236 28,136
LONG-TERM DEFERRED INCOME TAX ASSETS
Business restructuring.................................... 127 120
Net operating loss/credit carryforwards................... 710 710
Employee pensions and other benefits, net................. 1,470 1,359
Reserves and allowances................................... 99 376
Other..................................................... 2,867 1,603
Valuation allowance....................................... (750) (231)
Total net long-term deferred income tax assets.............. 4,523 3,937
Net long-term deferred income tax liabilities............... $36,713 $24,199
------- -------
CURRENT DEFERRED INCOME TAX LIABILITIES
Investments............................................... $ 670 $ --
Other..................................................... 309 427
Total current deferred income tax liabilities............. 979 427
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AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AT DECEMBER 31, 2000 1999
--------------- ------- -------
CURRENT DEFERRED INCOME TAX ASSETS
Business restructuring.................................... 155 47
Employee pensions and other benefits...................... 436 562
Reserves and allowances................................... 639 682
Other..................................................... 600 423
Valuation allowance....................................... (39) --
Total net current deferred income tax assets................ 1,791 1,714
Net current deferred income tax assets...................... $ 812 $ 1,287
------- -------
At December 31, 2000, we had net operating loss carryforwards
(tax-effected), excluding Excite@Home, for federal and state income tax purposes
of $79 and $164, respectively, expiring through 2015. In addition, we had
federal tax credit carryforwards of $145, of which $64 have no expiration date
and $81 expire through 2005. We also had state tax credit carryforwards (tax-
effected) of $32 expiring through 2003. In connection with the TCI merger, we
acquired certain federal and state net operating loss carryforwards subject to a
valuation allowance of $59. If, in the future, the realization of these acquired
deferred tax assets becomes more likely than not, any reduction of the
associated valuation allowance will be allocated to reduce franchise costs and
other purchased intangibles.
At December 31, 2000, Excite@Home had net operating loss carryforwards (tax
effected) for federal and state income tax purposes of $290 expiring through
2020. Utilization of Excite@Home's net operating loss carryforwards may be
subject to a minor annual limitation due to the ownership change limitations
provided by the Internal Revenue Code of 1986, as amended, and similar state
provisions. The annual limitation may result in the expiration of a portion of
Excite@Home's net operating loss carryforwards before utilization. The
realization of Excite@Home's net deferred tax asset is dependent upon
Excite@Home's future earnings, if any, the timing and amount of which are
uncertain. In addition, Excite@Home is a separate taxpayer and is not a member
of the AT&T consolidated tax group. Accordingly, Excite@Home provided a
valuation allowance in an amount equal to its net deferred tax assets of $702 as
of December 31, 2000. Approximately $142 of Excite@Home's valuation allowance at
December 31, 2000, is attributable to stock option deductions, the benefit of
which will be credited to paid-in capital when realized. Approximately $269 of
Excite@Home's valuation allowance at December 31, 2000, is attributable to
deferred tax assets that, if realized, will be allocated to first reduce
goodwill, then other purchased intangibles, and then income tax expense.
On November 15, 2000, we announced our intention to split-off LMG. The
split-off of LMG remains subject to the receipt of necessary approvals,
including a favorable tax ruling from the IRS. Pursuant to the tax-sharing
agreement dated March 9, 1999 between AT&T and LMG, in the event LMG is
split-off, AT&T would be required to reimburse LMG approximately $830 for the
value of certain TCI pre-acquisition net operating loss carryforwards. Also, in
connection with a tax-sharing agreement between LMG and TCI that was executed
prior to AT&T's acquisition of TCI, LMG would be obligated to pay AT&T
approximately $138 upon its split-off from AT&T.
16. COMMITMENTS AND CONTINGENCIES
In the normal course of business we are subject to proceedings, lawsuits
and other claims, including proceedings under laws and regulations related to
environmental and other matters. Such
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AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
matters are subject to many uncertainties, and outcomes are not predictable with
assurance. Consequently, we are unable to ascertain the ultimate aggregate
amount of monetary liability or financial impact with respect to these matters
at December 31, 2000. These matters could affect the operating results of any
one quarter when resolved in future periods. However, we believe that after
final disposition, any monetary liability or financial impact to us beyond that
provided for at year-end would not be material to our annual consolidated
financial statements.
We lease land, buildings and equipment through contracts that expire in
various years through 2037. Our rental expense under operating leases was $980
in 2000, $827 in 1999 and $742 in 1998. The total of minimum rentals to be
received in the future under noncancelable operating subleases as of December
31, 2000, was $209.
The following table shows our future minimum commitments due under
noncancelable operating and capital leases at December 31, 2000:
OPERATING LEASES CAPITAL LEASES
---------------- --------------
2001.............................................. $ 830 $ 149
2002.............................................. 700 137
2003.............................................. 602 87
2004.............................................. 519 66
2005.............................................. 413 63
Later years....................................... 1,218 175
Total minimum lease payments...................... $4,282 677
------
Less: Amount representing interest................ (179)
Present value of net minimum lease payments....... $ 498
-----
AT&T has an agreement with Motorola, Inc. to purchase a minimum of 1.25
million digital set-top devices at an average price of $248 per unit in 2001.
During 2000, AT&T satisfied its obligation under a previous agreement with
Motorola, Inc. to purchase set-top devices.
AT&T has entered into various purchase commitments for wireless network
equipment and handsets. The commitments totaled $432 as of December 31, 2000,
and extend through 2004.
AT&T has committed to provide funding to a joint venture with other
investors, Alaska Native Wireless (ANW), which was formed in November 2000 to
participate in the Federal Communication Commission's recent license spectrum
auction. The auction was concluded in January 2001 and ANW was the highest
bidder on approximately $2.9 billion in licenses. AT&T has committed to fund
approximately $2.6 billion to ANW to fund ANW's purchase of licenses. At
December 31, 2000, AT&T had provided approximately $229 of funding and has
committed to provide additional funding of approximately $2.4 billion consisting
primarily of debt securities of ANW. At the fifth anniversary of the first date
on which licenses are granted to ANW, the other owners of ANW have rights to
require AT&T to purchase their equity interests. If such rights are exercised
five years after the license grant date, the purchase price would be
approximately $950 and would be payable, at our option, in either cash or
marketable securities. In the event that these rights are exercised before the
fifth anniversary, or in the event that the winning bid is rejected, or if any
licenses granted to ANW are revoked or challenged, the amount that AT&T would be
required to pay would be less than $950.
Through a joint venture (70% owned by AT&T and 30% owned by BT), AT&T and
BT have a 31% ownership of AT&T Canada Corp. as a result of the 1999 merger
between AT&T Canada Corp.
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AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and MetroNet Communications, Corp. In connection with this merger, the AT&T and
BT joint venture has the right to call, or arrange for another entity to call,
the remaining 69% of AT&T Canada for the greater of Cdn$40.56 per share, which
represented the projected value as of December 31, 2000, with an accretion of 4%
each quarter that began on June 30, 2000, or the then-appraised fair market
value. If we do not exercise our call rights by June 30, 2003, the shares would
be put up for auction, and the AT&T and BT joint venture would have to make the
shareholders whole for the difference between the proceeds received in auction
and the greater of the fair market value or the accreted value. The exact timing
of any purchase will likely be partially dependent upon the future status of
Canadian foreign-ownership regulations.
17. RELATED PARTY TRANSACTIONS
AT&T has various related party transactions with Concert as a result of the
closure of this global venture in early January 2000.
Included in revenue for the year ended December 31, 2000, is $1,080, for
services provided to Concert.
Included in access and other connection expenses for the year ended
December 31, 2000, are charges from Concert representing costs incurred on our
behalf to connect calls made to foreign countries (international settlements)
and costs paid by AT&T to Concert for distributing Concert products totaling
$2,364.
During the first quarter of 2000, AT&T contributed property, plant and
equipment of approximately $1,600 to Concert. AT&T also loaned $1,000 to
Concert; that loan is included within "Other investments and related advances"
in the accompanying 2000 Consolidated Balance Sheet. Interest income of $67 was
recognized for the year ended December 31, 2000.
At December 31, 2000, AT&T had a floating rate loan payable to Concert in
the amount of $126. The loan, which is due on demand, is included in "Debt
maturing within one year" in the accompanying Consolidated Balance Sheet.
Interest expense was $6 for the year ended December 31, 2000.
Included in accounts receivable and accounts payable at December 31, 2000,
was $462 and $518, respectively, related to transactions with Concert. Included
in other receivables and other current liabilities at December 31, 2000, was
$1,106 and $1,032, respectively, related to transactions associated with
Concert.
In addition, we had various related party transactions with LMG. Included
in costs of services and products were programming expenses related to services
from LMG. These expenses amounted to $239 for the year ended December 31, 2000
and $184 for the 10 months ended December 31, 1999, respectively.
Included in "Investment in Liberty Media Group and related receivables,
net" was $155 and $27 at December 31, 2000 and 1999, respectively, primarily
related to taxes pursuant to a tax-sharing agreement between LMG and Broadband.
That agreement existed prior to the TCI merger.
18. SEGMENT REPORTING
AT&T's results are segmented according to the way we manage our business:
Business Services, Consumer Services, Wireless Services and Broadband.
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434
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Our Business Services segment offers a variety of global communications
services, including long distance, local, and data and Internet protocol (IP)
networking, to small and medium-sized businesses, large domestic and
multinational businesses and government agencies. Business Services is also a
provider of voice, data and IP transport to service resellers (wholesale
services). Also included in the Business Services segment is AT&T Solutions, our
outsourcing and network-management business.
Our Consumer Services segment provides a variety of any-distance
communications services, including long distance, local toll (intrastate calls
outside the immediate local area) and Internet access to residential customers.
In addition, Consumer Services provides prepaid calling card and
operator-handled calling services. Local phone service is also provided in
certain areas.
Our Wireless Services segment offers wireless voice and data services and
products to customers in our 850 megahertz (cellular) and 1900 megahertz
(Personal Communications Services, or PCS) markets. Wireless Services also
includes certain interests in partnerships and affiliates that provide wireless
services in the United States and internationally, aviation-communications
services and fixed wireless services. Fixed wireless provides high-speed
Internet access and any-distance voice services using wireless technology to
residential and small business customers.
Our Broadband segment offers a variety of services through our cable
broadband network, including traditional analog video and new services such as
digital video, high-speed data and broadband telephony.
The balance of AT&T's operations (excluding LMG) is included in a
"Corporate and Other" category. This category reflects corporate staff functions
and the elimination of transactions between segments, as well as the results of
Excite@Home and international operations and ventures. LMG is not an operating
segment of AT&T because AT&T does not have a controlling financial interest in
LMG for financial accounting purposes. Therefore, we account for this investment
under the equity method. Additionally, LMG's results are not reviewed by the
chief operating decision-makers for purposes of determining resources to be
allocated.
Total assets for our reportable segments generally include all assets,
except intercompany receivables. However, our Wireless Services segment included
intercompany receivables from AT&T and the related interest income since these
assets relate to the results of the AT&T Wireless Group tracked business.
Prepaid pension assets and corporate-owned or leased real estate are generally
held at the corporate level and therefore, are included in the Corporate and
Other category. Shared network assets are allocated to the segments and
reallocated each January based on two years of volumes. Capital additions for
each segment include capital expenditures for property, plant and equipment,
acquisitions of licenses, additions to nonconsolidated investments, increases in
franchise costs and additions to internal-use software.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies (see Note 1). AT&T evaluates
performance based on several factors, of which the primary financial measure is
earnings before interest and taxes, including pretax minority interest and net
pretax losses from other equity investments (EBIT).
Generally, AT&T accounts for Business Services' and Broadband's
intersegment transactions at market prices.
D-86
435
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- -------- -------- -------
Business Services external revenue............ $ 27,691 $ 26,749 $23,807
Business Services internal revenue............ 797 731 478
Total Business Services revenue................. 28,488 27,480 24,285
Consumer Services external revenue.............. 18,976 21,854 22,885
Wireless Services external revenue.............. 10,448 7,627 5,406
Broadband external revenue.................... 8,203 5,069 --
Broadband internal revenue.................... 14 1 --
Total Broadband revenue......................... 8,217 5,070 --
Total reportable segments............. 66,129 62,031 52,576
Corporate and Other(1).......................... (148) 569 647
Total revenue................................... $ 65,981 $ 62,600 $53,223
-------- -------- -------
-------------------------
(1)Includes $248 and $10 related to Excite@Home in 2000 and 1999, respectively.
DEPRECIATION AND AMORTIZATION(1)
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- -------- -------- -------
Business Services............................... $ 3,714 $ 3,352 $ 2,554
Consumer Services............................... 561 783 693
Wireless Services............................... 1,678 1,246 1,051
Broadband....................................... 3,068 1,636 --
Total reportable segments............. 9,021 7,017 4,298
Corporate and Other(2).......................... 1,246 422 331
Total depreciation and amortization............. $ 10,267 $ 7,439 $ 4,629
-------- -------- -------
-------------------------
(1)Includes the amortization of goodwill, franchise costs and other purchased
intangibles.
(2)Includes $991 and $38 related to Excite@Home in 2000 and 1999, respectively.
EARNINGS (LOSSES) FROM OTHER EQUITY INVESTMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- -------- -------- -------
Wireless Services............................... $ 382 $ (10) $ 30
Broadband....................................... (215) (396) --
Total reportable segments............. 167 (406) 30
Corporate and Other(1).......................... (372) (359) (108)
Total net losses from other equity
investments................................... $ (205) $ (765) $ (78)
-------- -------- -------
-------------------------
(1)Includes $(619) and $(504) related to Excite@Home in 2000 and 1999,
respectively.
D-87
436
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RECONCILIATION OF EBIT TO INCOME BEFORE INCOME TAXES
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- -------- -------- -------
Business Services............................... $ 6,548 $ 6,136 $ 4,994
Consumer Services............................... 7,090 7,909 6,570
Wireless Services............................... 1,131 (473) 418
Broadband....................................... (1,175) (1,475) --
Total reportable segments............. 13,594 12,097 11,982
Corporate and Other(1).......................... (4,167) (1,625) (3,248)
Less: Pretax minority interest income
(expense)..................................... 4,031 (163) 34
Add: Pretax losses from other equity
investments................................... 395 1,155 68
Interest expense................................ (3,183) (1,765) (427)
Total income before income taxes................ $ 2,608 $ 10,025 $ 8,341
-------- -------- -------
-------------------------
(1)Includes $(3,603) and $(686) related to Excite@Home in 2000 and 1999,
respectively. The Excite@Home EBIT impact in 2000 includes $2,630 of net
restructuring and other charges.
ASSETS
AT DECEMBER 31, 2000 1999 1998
--------------- -------- -------- -------
Business Services............................... $ 34,804 $ 32,010 $22,189
Consumer Services............................... 4,801 6,279 6,185
Wireless Services............................... 35,184 23,312 19,416
Broadband....................................... 114,681 53,810 --
Total reportable segments............. 189,470 115,411 47,790
Corporate and Other assets:
Other segments................................ 6,892 3,386 3,016
Prepaid pension costs......................... 3,003 2,464 2,074
Deferred income taxes......................... 720 899 1,156
Other corporate assets(1)..................... 7,848 8,786 5,514
Investment in Liberty Media Group and related
receivables, net.............................. 34,290 38,460 --
Total assets.................................... $242,223 $169,406 $59,550
-------- -------- -------
-------------------------
(1)Includes $2,541 and $2,726 related to Excite@Home for 2000 and 1999,
respectively.
D-88
437
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EQUITY INVESTMENTS (EXCLUDING LMG)
AT DECEMBER 31, 2000 1999 1998
--------------- -------- -------- -------
Wireless Services............................... $ 3,080 $ 4,409 $ 3,766
Broadband....................................... 6,470 10,327 --
Total reportable segments............. 9,550 14,736 3,766
Corporate and Other(1).......................... 4,074 3,718 491
Total equity investments........................ $ 13,624 $ 18,454 $ 4,257
-------- -------- -------
-------------------------
(1)Includes $35 and $2,726 related to Excite@Home for 2000 and 1999,
respectively.
CAPITAL ADDITIONS
FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
-------------------------------- -------- -------- -------
Business Services............................... $ 6,223 $ 7,511 $ 6,130
Consumer Services............................... 302 656 459
Wireless Services............................... 5,553 2,739 2,395
Broadband....................................... 4,963 4,759 --
Total reportable segments............. 17,041 15,665 8,984
Corporate and Other(1).......................... 2,150 1,494 594
Total capital additions......................... $ 19,191 $ 17,159 $ 9,578
-------- -------- -------
-------------------------
(1)Includes $92 related to Excite@Home in 2000.
Geographic information is not presented due to the immateriality of revenue
attributable to international customers.
Reflecting the dynamics of our business, we continually review our
management model and structure and make adjustments accordingly.
19. GUARANTEE OF PREFERRED SECURITIES
TCI SECURITIES
Prior to the consummation of the TCI merger, TCI issued mandatorily
redeemable preferred securities through subsidiary trusts that held subordinated
debt securities of TCI. At December 31, 2000, $1,246 of the guaranteed
redeemable preferred securities remained outstanding.
MEDIAONE SECURITIES
Prior to the consummation of the MediaOne merger, MediaOne issued
mandatorily redeemable preferred securities through subsidiary trusts that held
subordinated debt securities of MediaOne. At December 31, 2000, $776 of the
guaranteed securities remained outstanding.
AT&T provides a full and unconditional guarantee on the outstanding
securities issued by TCI Communications Financing I, II and IV and the
outstanding securities issued by MediaOne Financing I and II and MediaOne
Finance II and III. Following are the condensed consolidating financial
statements of AT&T Corp., which include the financial results of TCI and
MediaOne for each of the corresponding periods. The results of MediaOne have
been included in the financial results of AT&T since the date of acquisition on
June 15, 2000, and the results of TCI have been included since the March 9,
1999, date of acquisition.
D-89
438
AT&T CORP AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 2000
GUARANTOR GUARANTOR GUARANTOR TCI TCI TCI MEDIAONE MEDIAONE
AT&T SUBSIDIARY SUBSIDIARY FINANCING FINANCING FINANCING FINANCING FINANCING
PARENT TCI MEDIAONE I II IV I II
--------- ---------- ---------- --------- --------- --------- --------- ---------
ASSETS
Cash and cash equivalents........
Receivables...................... 11,424 2,577 78
Investments......................
Deferred income taxes............ 811
Other current assets............. 1,103 11
TOTAL CURRENT ASSETS............. 13,338 2,588 78
Property, plant & equipment,
net............................ 9,064 93 22
Franchise costs, net............. 838
Licensing costs, net............. 30
Goodwill, net.................... 161 19,786
Investment in Liberty Media Group
and related receivables, net... 34,290
Other investments and related
advances....................... 164,844 35,358 29,325
Other assets..................... 5,500 528 514 204 51 44
TOTAL ASSETS..................... $193,745 $72,359 $49,211 $528 $514 $204 $51 $44
LIABILITIES
Debt maturing within one year.... $ 52,556 $ 435 $ 2,337
Liability under put options......
Other current liabilities........ 9,535 1,166 76
TOTAL CURRENT LIABILITIES........ 62,091 1,601 2,413
Long-term debt................... 21,333 30,096 2,168 528 514 204 30 28
Deferred income taxes............ 569 230
Other long-term liabilities and
deferred credits............... 7,341 939 129
TOTAL LIABILITIES................ 91,334 32,636 4,940 528 514 204 30 28
Minority interest................ 1,462 1,147
Company-Obligated Convertible
Quarterly Income Preferred
Securities of a Subsidiary
Trust Holding Solely
Subordinated Debt Securities of
AT&T........................... 4,710
SHAREOWNERS' EQUITY
AT&T Common Stock................ 4,176
AT&T Wireless Group Common
Stock.......................... 362
Liberty Media Group Class A
Common Stock................... 2,364
Liberty Media Group Class B
Common Stock................... 206
Other shareowners' equity........ 90,593 38,261 43,124 21 16
TOTAL SHAREOWNERS' EQUITY........ 97,701 38,261 43,124 21 16
TOTAL LIABILITIES AND
SHAREOWNERS' EQUITY............ $193,745 $72,359 $49,211 $528 $514 $204 $51 $44
ELIMINATION
MEDIAONE MEDIAONE NON- AND CONSOLIDATED
FINANCE FINANCE GUARANTOR CONSOLIDATION AT&T
II III SUBSIDIARIES ADJUSTMENTS CORP.
-------- -------- ------------ ------------- -------------
ASSETS
Cash and cash equivalents........ $ 126 $ 126
Receivables...................... 50,788 (52,020) 12,847
Investments...................... 2,102 2,102
Deferred income taxes............ 1 812
Other current assets............. 90 (4) 1,200
TOTAL CURRENT ASSETS............. 53,107 (52,024) 17,087
Property, plant & equipment,
net............................ 41,985 (3) 51,161
Franchise costs, net............. 47,380 48,218
Licensing costs, net............. 13,596 13,626
Goodwill, net.................... 11,531 31,478
Investment in Liberty Media Group
and related receivables, net... 34,290
Other investments and related
advances....................... 23,059 (218,325) 34,261
Other assets..................... 230 516 17,020 (12,505) 12,102
TOTAL ASSETS..................... $230 $516 $207,678 $(282,857) $242,223
LIABILITIES
Debt maturing within one year.... $ 6,409 $ (29,790) $ 31,947
Liability under put options...... 2,564 2,564
Other current liabilities........ 13,972 (8,393) 16,356
TOTAL CURRENT LIABILITIES........ 22,945 (38,183) 50,867
Long-term debt................... 214 504 3,895 (26,422) 33,092
Deferred income taxes............ 35,914 36,713
Other long-term liabilities and
deferred credits............... 431 (80) 8,760
TOTAL LIABILITIES................ 214 504 63,185 (64,685) 129,432
Minority interest................ 2,274 4,883
Company-Obligated Convertible
Quarterly Income Preferred
Securities of a Subsidiary
Trust Holding Solely
Subordinated Debt Securities of
AT&T........................... 4,710
SHAREOWNERS' EQUITY
AT&T Common Stock................ (416) 3,760
AT&T Wireless Group Common
Stock.......................... 362
Liberty Media Group Class A
Common Stock................... 2,364
Liberty Media Group Class B
Common Stock................... 206
Other shareowners' equity........ 16 12 142,635 (218,172) 96,506
TOTAL SHAREOWNERS' EQUITY........ 16 12 142,219 (218,172) 103,198
TOTAL LIABILITIES AND
SHAREOWNERS' EQUITY............ $230 $516 $207,678 $(282,857) $242,223
D-90
439
AT&T CORP AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2000
GUARANTOR GUARANTOR GUARANTOR TCI TCI TCI MEDIAONE
AT&T SUBSIDIARY SUBSIDIARY FINANCING FINANCING FINANCING FINANCING
PARENT TCI MEDIAONE I II IV I
--------- ---------- ---------- --------- --------- --------- ---------
Revenue................................ $22,234 $ 0 $ 0
Operating Expenses
Costs of services and products......... 2,961 6
Access and other connection............ 7,047
Selling, general and administrative.... 2,071 (378) 29
Depreciation and other amortization.... 1,791 45 7
Amortization of goodwill, franchise
costs and other purchased
intangibles.......................... 50 3 226
Net restructuring and other charges.... 443 60
Total operating expenses............... 14,363 (264) 262
Operating income (loss)................ 7,871 264 (262)
Other income (expense)................. 971 30 64 43 46 18 2
Interest expense (benefit)............. 4,786 1,974 194 43 46 18 1
Income (loss) before income taxes,
minority interest and earnings
(losses) from equity investments..... 4,056 (1,680) (392) 0 0 0 1
Provision (benefit) for income taxes... 1,505 (72) (46)
Minority interest income (expenses).... (161) (23)
Equity earnings from Liberty Media
Group................................ 1,488
Net earnings (losses) from other equity
investments.......................... 5,371 (2,437) (168)
Net income (loss)...................... 7,761 (2,580) (514) 0 0 0 1
Dividend requirements on preferred
stock held by AT&T, net..............
Net income (loss) after preferred stock
dividends............................ $ 7,761 $(2,580) $(514) $ 0 $ 0 $ 0 $1
ELIMINATION
MEDIAONE MEDIAONE MEDIAONE NON- AND CONSOLIDATION
FINANCING FINANCE FINANCE GUARANTOR CONSOLIDATION AT&T
II II III SUBSIDIARIES ADJUSTMENTS CORP.
--------- -------- -------- ------------ ------------- -------------
Revenue................................ $45,834 $(2,087) $65,981
Operating Expenses
Costs of services and products......... 16,359 (1,739) 17,587
Access and other connection............ 6,803 (332) 13,518
Selling, general and administrative.... 11,597 (16) 13,303
Depreciation and other amortization.... 5,431 7,274
Amortization of goodwill, franchise
costs and other purchased
intangibles.......................... 2,714 2,993
Net restructuring and other charges.... 6,526 7,029
Total operating expenses............... 49,430 (2,087) 61,704
Operating income (loss)................ (3,596) 0 4,277
Other income (expense)................. 2 11 25 4,749 (4,447) 1,514
Interest expense (benefit)............. 1 11 24 421 (4,336) 3,183
Income (loss) before income taxes,
minority interest and earnings
(losses) from equity investments..... 1 0 1 732 (111) 2,608
Provision (benefit) for income taxes... 1 1,954 3,342
Minority interest income (expenses).... 4,304 4,120
Equity earnings from Liberty Media
Group................................ 1,488
Net earnings (losses) from other equity
investments.......................... (203) (2,768) (205)
Net income (loss)...................... 1 0 0 2,879 (2,879) 4,669
Dividend requirements on preferred
stock held by AT&T, net.............. 111 (111) 0
Net income (loss) after preferred stock
dividends............................ $1 $ 0 $ 0 $ 2,768 $(2,768) $ 4,669
D-91
440
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2000
GUARANTOR GUARANTOR GUARANTOR TCI TCI TCI MEDIAONE
AT&T SUBSIDIARY SUBSIDIARY FINANCING FINANCING FINANCING FINANCING
PARENT TCI MEDIAONE I II IV I
--------- ---------- ---------- --------- --------- --------- ---------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES............... $ 3,131 $ (634) $1,792 $43 $53 $31 $2
INVESTING ACTIVITIES
Capital expenditures and other
additions.......................... (51) (10) (21)
Equity investment distributions and
sales.............................. 363
Equity investment contributions and
purchases.......................... (1,700) (6,904)
Net acquisitions of businesses
including cash acquired............ (23,943)
Other............................... (2,057) (34)
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES............... (27,388) (6,948) (21) 0 0 0 0
FINANCING ACTIVITIES
Proceeds from long-term debt
issuances.......................... 739
Proceeds from debt from AT&T........ 5,867 13,715
Retirement of long-term debt........ (498) (1,143)
Retirement of AT&T debt............. (4,990) (1,500)
Issuance of AT&T Wireless Group
common stock....................... 10,314
Dividends paid...................... (3,047)
Increase in short-term borrowings,
net................................ 12,108 (271)
Other............................... (830) (43) (53) (31) (2)
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES............... 24,653 7,582 (1,771) (43) (53) (31) (2)
Net (decrease) increase in cash and
cash equivalents................... 396 0 0 0 0 0 0
Cash and cash equivalents at
beginning of year.................. (396)
Cash and cash equivalents at end of
period............................. $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $0
ELIMINATION
MEDIAONE MEDIAONE MEDIAONE NON- AND CONSOLIDATED
FINANCING FINANCE FINANCE GUARANTOR CONSOLIDATION AT&T
II II III SUBSIDIARIES ADJUSTMENTS CORP.
--------- -------- -------- ------------ ------------- ------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES............... $2 $11 $25 $ 9,129 $ (278) $13,307
INVESTING ACTIVITIES
Capital expenditures and other
additions.......................... (14,842) (14,924)
Equity investment distributions and
sales.............................. 989 1,352
Equity investment contributions and
purchases.......................... (1,712) 6,904 (3,412)
Net acquisitions of businesses
including cash acquired............ 2,533 (21,410)
Other............................... (6,376) 6,927 (1,540)
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES............... 0 0 0 (19,408) 13,831 (39,934)
FINANCING ACTIVITIES
Proceeds from long-term debt
issuances.......................... 3,862 4,601
Proceeds from debt from AT&T........ 4,898 (24,480) 0
Retirement of long-term debt........ (477) (2,118)
Retirement of AT&T debt............. 6,490 0
Issuance of AT&T Wireless Group
common stock....................... 10,314
Dividends paid...................... (3,047)
Increase in short-term borrowings,
net................................ 977 4,159 16,973
Other............................... (2) (11) (25) (275) 278 (994)
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES............... (2) (11) (25) 8,985 (13,553) 25,729
Net (decrease) increase in cash and
cash equivalents................... 0 0 0 (1,294) 0 (898)
Cash and cash equivalents at
beginning of year.................. 1,420 1,024
Cash and cash equivalents at end of
period............................. $0 $ 0 $ 0 $ 126 $ 0 $ 126
D-92
441
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 1999
ELIMINATION
GUARANTOR GUARANTOR TCI TCI TCI NON- AND
AT&T SUBSIDIARY FINANCING FINANCING FINANCING GUARANTOR CONSOLIDATION
PARENT TCI I II IV SUBSIDIARIES ADJUSTMENTS
--------- ---------- --------- --------- --------- ------------ -------------
ASSETS
Cash and cash equivalents.......... $ 1,024
Receivables........................ 12,513 5 42,270 (44,335)
Deferred income taxes.............. 945 342
Other current assets............... 381 3 741 (5)
TOTAL CURRENT ASSETS............... 13,839 8 44,377 (44,340)
Property, plant & equipment, net... 10,974 128 28,516
Franchise costs, net............... 33 32,660
Licensing costs, net............... 38 8,510
Goodwill, net...................... 88 7,357
Investment in Liberty Media Group
and related receivables, net..... 38,460
Other investments and related
advances......................... 111,056 35,694 23,338 (150,722)
Other assets....................... 5,105 528 521 217 9,809 (6,788)
TOTAL ASSETS....................... $141,100 $74,323 $528 $521 $217 $154,567 $(201,850)
LIABILITIES
Debt maturing within one year...... $ 40,246 $ 1,136 $ 6,141 $ (34,890)
Other current liabilities.......... 6,319 1,262 16,097 (8,104)
TOTAL CURRENT LIABILITIES.......... 46,565 2,398 22,238 (42,994)
Long-term debt..................... 13,429 18,873 528 521 217 891 (11,242)
Deferred income taxes.............. 78 24,121
Other long-term liabilities &
deferred credits................. 6,600 333 935 (103)
TOTAL LIABILITIES.................. 66,672 21,604 528 521 217 48,185 (54,339)
Minority Interest.................. 5 1,462 924
Company-Obligated Convertible
Quarterly Income Preferred
Securities of a Subsidiary Trust
Holding Solely Subordinated Debt
Securities of AT&T............... 4,700
SHAREOWNERS' EQUITY
AT&T Common Stock.................. 3,483 (287)
Liberty Media Group Class A Common
Stock............................ 2,314
Liberty Media Group Class B Common
Stock............................ 217
Other Shareowners' Equity.......... 63,709 51,257 105,745 (147,511)
TOTAL SHAREOWNERS' EQUITY.......... 69,723 51,257 105,458 (147,511)
TOTAL LIABILITIES AND SHAREOWNERS'
EQUITY........................... $141,100 $74,323 $528 $521 $217 $154,567 $(201,850)
CONSOLIDATED
AT&T
CORP.
------------
ASSETS
Cash and cash equivalents.......... $ 1,024
Receivables........................ 10,453
Deferred income taxes.............. 1,287
Other current assets............... 1,120
TOTAL CURRENT ASSETS............... 13,884
Property, plant & equipment, net... 39,618
Franchise costs, net............... 32,693
Licensing costs, net............... 8,548
Goodwill, net...................... 7,445
Investment in Liberty Media Group
and related receivables, net..... 38,460
Other investments and related
advances......................... 19,366
Other assets....................... 9,392
TOTAL ASSETS....................... $169,406
LIABILITIES
Debt maturing within one year...... $ 12,633
Other current liabilities.......... 15,574
TOTAL CURRENT LIABILITIES.......... 28,207
Long-term debt..................... 23,217
Deferred income taxes.............. 24,199
Other long-term liabilities &
deferred credits................. 7,765
TOTAL LIABILITIES.................. 83,388
Minority Interest.................. 2,391
Company-Obligated Convertible
Quarterly Income Preferred
Securities of a Subsidiary Trust
Holding Solely Subordinated Debt
Securities of AT&T............... 4,700
SHAREOWNERS' EQUITY
AT&T Common Stock.................. 3,196
Liberty Media Group Class A Common
Stock............................ 2,314
Liberty Media Group Class B Common
Stock............................ 217
Other Shareowners' Equity.......... 73,200
TOTAL SHAREOWNERS' EQUITY.......... 78,927
TOTAL LIABILITIES AND SHAREOWNERS'
EQUITY........................... $169,406
D-93
442
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1999
GUARANTOR GUARANTOR TCI TCI TCI
AT&T SUBSIDIARY FINANCING FINANCING FINANCING NON-GUARANTOR
PARENT TCI I II IV SUBSIDIARIES
--------- ---------- --------- --------- --------- -------------
Revenue......................................... $24,755 $ 0 $39,506
Operating Expenses
Costs of services and products.................. 1,536 (59) 14,372
Access and other connection..................... 8,403 6,479
Selling, general and administrative............. 4,363 380 8,777
Depreciation and other amortization............. 2,056 56 4,026
Amortization of goodwill, franchise costs and
other purchased intangibles................... 34 4 1,263
Net restructuring and other charges............. 18 440 1,048
Total operating expenses........................ 16,410 821 35,965
Operating income (loss)......................... 8,345 (821) 3,541
Other income (expense).......................... 539 (33) 36 40 16 2,916
Interest expense (benefit)...................... 3,186 1,008 36 40 16 268
Income (loss) before income taxes, minority
interest and earnings (losses) from equity
investments................................... 5,698 (1,862) 0 0 0 6,189
Provision (benefit) for income taxes............ 2,118 (1,580) 3,157
Minority interest income (expense).............. (87) (14) (14)
Equity loss from Liberty Media Group............ 2,022
Net earnings (losses) from other equity
investments................................... 4,155 (1,902) (788)
Net income (loss)............................... $ 7,648 $(4,220) $ 0 $ 0 $ 0 $ 2,230
ELIMINATION
AND CONSOLIDATED
CONSOLIDATION AT&T
ADJUSTMENTS CORP.
------------- ------------
Revenue......................................... $(1,661) $62,600
Operating Expenses
Costs of services and products.................. (1,255) 14,594
Access and other connection..................... (196) 14,686
Selling, general and administrative............. (4) 13,516
Depreciation and other amortization............. 6,138
Amortization of goodwill, franchise costs and
other purchased intangibles................... 1,301
Net restructuring and other charges............. 1,506
Total operating expenses........................ (1,455) 51,741
Operating income (loss)......................... (206) 10,859
Other income (expense).......................... (2,583) 931
Interest expense (benefit)...................... (2,789) 1,765
Income (loss) before income taxes, minority
interest and earnings (losses) from equity
investments................................... 0 10,025
Provision (benefit) for income taxes............ 3,695
Minority interest income (expense).............. (115)
Equity loss from Liberty Media Group............ 2,022
Net earnings (losses) from other equity
investments................................... (2,230) (765)
Net income (loss)............................... $(2,230) $ 3,428
D-94
443
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999
ELIMINATION
GUARANTOR GUARANTOR TCI TCI TCI NON- AND
AT&T SUBSIDIARY FINANCING FINANCING FINANCING GUARANTOR CONSOLIDATION
PARENT TCI I II IV SUBSIDIARIES ADJUSTMENTS
--------- ---------- --------- --------- --------- ------------ -------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES............. $ 2,672 $(2,807) $ 44 $ 75 $24 $ 11,370 $ 143
INVESTING ACTIVITIES
Capital expenditures and other
additions........................ (1,733) (60) (12,227)
Equity investment distributions and
sales............................ 61 1,814
Equity investment contributions and
purchases........................ (5,473) (2,648)
Net acquisitions of businesses
including cash acquired.......... (6,405) (306)
Other.............................. (203) (130) (16,343) 16,610
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES............. (13,753) (190) 0 0 0 (29,710) 16,610
FINANCING ACTIVITIES
Proceeds from long-term debt
issuances........................ 8,396
Proceeds from debt from AT&T....... 6,176 5,055 (11,231)
Retirement of long-term debt....... (1,014) (1,070) (723)
Retirement of AT&T debt............ (2,109) 2,109
Issuance of AT&T convertible
securities....................... 4,694 (56)
Net acquisitions of treasury
shares........................... (4,624)
Dividends paid..................... (2,685) (27)
Increase in short-term borrowings,
net.............................. 19,154 (1,142) (7,774)
Other............................ (13,215) 0 (44) (75) (24) 13,472 143
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES............. 10,706 2,997 (44) (75) (24) 16,579 (16,753)
Net (decrease) in cash and cash
equivalents...................... (375) 0 0 0 0 (1,761) 0
Cash and cash equivalents at
beginning of year................ 375 2,785
Cash and cash equivalents at end of
period........................... $ 0 $ 0 $ 0 $ 0 $ 0 $ 1,024 $ 0
CONSOLIDATED
AT&T
CORP.
------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES............. $ 11,521
INVESTING ACTIVITIES
Capital expenditures and other
additions........................ (14,020)
Equity investment distributions and
sales............................ 1,875
Equity investment contributions and
purchases........................ (8,121)
Net acquisitions of businesses
including cash acquired.......... (6,711)
Other.............................. (66)
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES............. (27,043)
FINANCING ACTIVITIES
Proceeds from long-term debt
issuances........................ 8,396
Proceeds from debt from AT&T....... 0
Retirement of long-term debt....... (2,807)
Retirement of AT&T debt............ 0
Issuance of AT&T convertible
securities....................... 4,638
Net acquisitions of treasury
shares........................... (4,624)
Dividends paid..................... (2,712)
Increase in short-term borrowings,
net.............................. 10,238
Other............................ 257
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES............. 13,386
Net (decrease) in cash and cash
equivalents...................... (2,136)
Cash and cash equivalents at
beginning of year................ 3,160
Cash and cash equivalents at end of
period........................... $ 1,024
D-95
444
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. CONSOLIDATING CONDENSED FINANCIAL INFORMATION
In conjunction with the issuance of AT&T Wireless Group and Liberty Media
Group tracking stocks, AT&T has separated for financial reporting purposes in
all periods the AT&T Common Stock Group, Liberty Media Group and AT&T Wireless
Group. Below is the consolidating financial information reflecting the
businesses of these individual groups, including the allocation of expenses
between the groups in accordance with our allocation policies, as well as other
related party transactions such as sales of services between groups and interest
income and expense on intercompany borrowings. The AT&T Common Stock Group
presented below excludes its retained portion of the value of AT&T Wireless
Group. AT&T does not have a controlling financial interest in LMG for financial
accounting purposes; therefore, our ownership in LMG is reflected as an
investment accounted for under the equity method and is reflected as such in the
consolidating financial statements below.
AT&T Wireless Group, purchases long distance and other network-related
services from AT&T at market-based prices and accordingly such amounts are
eliminated. Prior to the offering of AT&T Wireless Group tracking stock, the
capital structure of AT&T Wireless Group had been assumed based upon AT&T's
historical capital ratio adjusted for certain items. Intercompany interest rates
are intended to be substantially equivalent to the interest rate that AT&T
Wireless Group would be able to obtain or receive if it were a stand-alone
entity. General corporate overhead related to AT&T's corporate headquarters and
common support divisions has been allocated to AT&T Wireless Group based on the
ratio of AT&T Wireless Group's external costs and expenses to AT&T's
consolidated external costs and expenses, adjusted for any functions that AT&T
Wireless Group performs on its own. The consolidated income tax provision,
related tax payments or refunds, and deferred tax balances of AT&T have been
alloated to AT&T Wireless Group based principally on the taxable income and tax
credits directly attributable to AT&T Wireless Group.
Pursuant to the Inter-Group agreement, AT&T does not allocate general
overhead expenses to Libery Media Group and only charges Liberty Media Group for
specific services that Liberty Media Group receives from AT&T pursuant to
service agreements or similar arrangements. Additionally, as Liberty Media Group
operates independent of AT&T, there is no cash or debt allocated to them.
CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2000
AT&T AT&T
COMMON STOCK WIRELESS LIBERTY MEDIA ELIMINATIONS/ CONSOLIDATED
GROUP GROUP GROUP RECLASSIFICATIONS(1) AT&T CORP.
------------ -------- ------------- -------------------- ------------
External Revenue......... $55,533 $10,448 $ $ $65,981
Inter-group revenue...... 321 (321)
Total Revenue............ 55,854 10,448 (321) $65,981
Operating Expenses
Costs of services and
products............... 13,001 4,969 (383) 17,587
Access and other
connection............. 13,140 378 13,518
D-96
445
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AT&T AT&T
COMMON STOCK WIRELESS LIBERTY MEDIA ELIMINATIONS/ CONSOLIDATED
GROUP GROUP GROUP RECLASSIFICATIONS(1) AT&T CORP.
------------ -------- ------------- -------------------- ------------
Selling, general and
administrative......... $10,001 $ 3,302 $ $ $13,303
Depreciation and other
amortization........... 5,923 1,686 (335) 7,274
Amortization of goodwill,
franchise costs and
other purchased
intangibles............ 2,665 328 2,993
Net restructuring and
other charges.......... 7,029 7,029
Inter-group expenses..... (208) 529 (321)
Total operating
expenses............... 51,551 10,486 (333) 61,704
Operating income
(loss)................. 4,303 (38) 12 4,277
Other income (expense)... 1,150 391 (27) 1,514
Inter-group interest
income................. 326 143 (469)
Interest expense......... 3,294 (111) 3,183
Inter-group interest
expense................ 143 196 (339)
Income before income
taxes, minority
interest and earnings
(losses) from equity
investments............ 2,342 411 (145) 2,608
Provision for income
taxes.................. 3,199 141 2 3,342
Minority interest
income................. 4,092 28 4,120
Equity earnings from
Liberty Media Group.... 1,488 1,488
Net earnings (losses)
from other equity
investments............ (585) 388 (8) (205)
Net income............... 2,650 658 1,488 (127) 4,669
Dividend requirements on
preferred stock held by
AT&T, net.............. 130 (130)
Net income after
preferred stock
dividends.............. $ 2,650 $ 528 $1,488 $ 3 $ 4,669
-------------------------
(1)Includes the elimination of inter-group transactions, consolidating entries
as well as reclassifications and adjustments related to AT&T Wireless Group
tracking stock.
D-97
446
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 2000
AT&T AT&T
COMMON STOCK WIRELESS LIBERTY MEDIA ELIMINATIONS/ CONSOLIDATED
GROUP GROUP GROUP RECLASSIFICATIONS(1) AT&T CORP.
------------ -------- ------------- -------------------- ------------
ASSETS
Cash and cash equivalents........................ $ 64 $ 62 $ $ $ 126
Receivables...................................... 11,053 2,010 (216) 12,847
Deferred income taxes............................ 719 93 812
Other current assets............................. 2,890 417 (5) 3,302
Short-term note due from related party........... 638 (638)
TOTAL CURRENT ASSETS............................. 15,364 2,582 (859) 17,087
Property, plant and equipment, net............... 41,269 9,892 51,161
Franchise costs, net............................. 48,218 48,218
Licensing costs, net............................. 13,627 (1) 13,626
Goodwill, net.................................... 26,782 5,816 (1,120) 31,478
Investment in Liberty Media Group and related
receivables, net............................... 34,290 34,290
Other investments and related advances........... 30,876 3,385 34,261
Other assets..................................... 10,984 1,118 12,102
Long-term assets due from related party.......... 4,800 (4,800)
TOTAL ASSETS..................................... $178,293 $35,302 $34,290 $(5,662) $242,223
LIABILITIES
Debt maturing within one year.................... $ 31,838 $ 109 $ $ $ 31,947
Short-term debt due to related party............. 638 (638)
Liability under put options...................... 2,564 2,564
Other current liabilities........................ 13,709 2,907 (260) 16,356
TOTAL CURRENT LIABILITIES........................ 48,111 3,654 (898) 50,867
Long-term debt................................... 33,089 3 33,092
Long-term debt due to related party.............. 1,800 (1,800)
Deferred income taxes............................ 32,054 4,659 36,713
Other long-term liabilities and deferred
credits........................................ 8,493 271 (4) 8,760
TOTAL LIABILITIES................................ 121,747 10,384 (2,699) 129,432
Minority Interest................................ 4,842 41 4,883
Company-Obligated Convertible Quarterly Income
Preferred Securities of a Subsidiary Trust
Holding Solely Subordinated Debt Securities of
AT&T........................................... 4,710 4,710
D-98
447
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AT&T AT&T
COMMON STOCK WIRELESS LIBERTY MEDIA ELIMINATIONS/ CONSOLIDATED
GROUP GROUP GROUP RECLASSIFICATIONS(1) AT&T CORP.
------------ -------- ------------- -------------------- ------------
SHAREOWNERS' EQUITY
AT&T Common Stock................................ 3,760 3,760
AT&T Wireless Group Common Stock................. 362 362
Liberty Media Group Class A Common Stock......... 2,364 2,364
Liberty Media Group Class B Common Stock......... 206 206
Other shareowners' equity........................ 46,994 21,877 34,290 (6,655) 96,506
Other shareowners' equity due to related party... 3,000 (3,000)
TOTAL SHAREOWNERS' EQUITY........................ 46,994 24,877 34,290 (2,963) 103,198
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY........ $178,293 $35,302 $34,290 $(5,662) $242,223
-------------------------
(1)Includes the elimination of inter-group transactions, consolidating entries
as well as reclassifications and adjustments related to AT&T Wireless Group
tracking stock.
D-99
448
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2000
AT&T AT&T
COMMON STOCK WIRELESS LIBERTY MEDIA ELIMINATIONS/ CONSOLIDATED
GROUP GROUP GROUP RECLASSIFICATIONS(1) AT&T CORP.
------------ -------- ------------- -------------------- ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES..... $11,684 $ 1,635 $ $ (12) $13,307
INVESTING ACTIVITIES
Capital expenditures and
other additions.......... (10,912) (4,012) (14,924)
Equity investment
distributions and
sales.................... 992 360 1,352
Equity investment
contributions and
purchases................ (1,767) (1,645) (3,412)
Net acquisitions of
businesses including cash
acquired................. (16,647) (4,763) (21,410)
Other...................... (2,113) (465) 1,038 (1,540)
NET CASH USED IN INVESTING
ACTIVITIES............... (30,447) (10,525) 1,038 (39,934)
FINANCING ACTIVITIES
Proceeds from long-term
debt issuance............ 4,601 4,601
Retirement of long-term
debt..................... (2,118) (2,118)
Issuance of AT&T Wireless
Group common stock....... 3,314 7,000 10,314
Dividends paid............. (3,047) (3,047)
Increase in short-term
borrowings, net.......... 17,009 638 (674) 16,973
Other...................... (1,951) 1,309 (352) (994)
NET CASH PROVIDED BY
FINANCING ACTIVITIES..... 17,808 8,947 (1,026) 25,729
Net (decrease) increase in
cash and cash
equivalents.............. (955) 57 (898)
Cash and cash equivalents
at beginning of year..... 1,019 5 1,024
Cash and cash equivalents
at end of period......... $ 64 $ 62 $ $ $ 126
---------------
(1)Includes the elimination of inter-group transactions, consolidating entries
as well as reclassifications and adjustments related to AT&T Wireless Group
tracking stock.
D-100
449
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1999
AT&T
COMMON AT&T LIBERTY
STOCK WIRELESS MEDIA ELIMINATIONS/ CONSOLIDATED AT&T
GROUP GROUP GROUP RECLASSIFICATIONS(1) CORP.
------------ -------- ------- -------------------- ------------------
Revenue...................... $54,973 $7,627 $ $ $62,600
Inter-group revenue.......... 227 (227)
Total Revenue................ 55,200 7,627 (227) 62,600
Operating Expenses
Costs of services and
products................... 11,158 3,676 (240) 14,594
Access and other
connection................. 14,439 247 14,686
Selling, general and
administrative............. 11,243 2,273 13,516
Depreciation and other
amortization............... 5,137 1,253 (252) 6,138
Amortization of goodwill,
franchise costs and other
purchased intangibles...... 1,057 244 1,301
Net restructuring and other
charges.................... 976 531 (1) 1,506
Inter-group expenses......... (333) 560 (227)
Total operating expenses..... 43,677 8,293 (229) 51,741
Operating income (loss)...... 11,523 (666) 2 10,859
Other income (expense)....... 824 122 (15) 931
Inter-group interest
income..................... 270 (270)
Interest expense............. 1,755 (78) 88 1,765
Inter-group interest
expense.................... 214 (214)
Income (loss) before income
taxes, minority interest
and earnings (losses) from
equity investments......... 10,862 (680) (157) 10,025
Provision for income taxes... 4,016 (294) (27) 3,695
Minority interest income
(expense).................. (132) 17 (115)
Equity earnings from Liberty
Media Group................ (2,022) (2,022)
Net earnings (losses) from
other equity investments... (760) (19) 14 (765)
Income (loss)................ 5,954 (405) (2,022) (99) 3,428
Dividend requirements on
preferred stock held by
AT&T, net.................. 56 (56)
Net income (loss) after
preferred stock
dividends.................. $ 5,954 $ (461) $(2,022) $ (43) $ 3,428
---------------
(1)Includes the elimination of inter-group transactions, consolidating entries
as well as reclassifications and adjustments related to AT&T Wireless Group
tracking stock.
D-101
450
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 1999
AT&T AT&T
COMMON STOCK WIRELESS LIBERTY MEDIA ELIMINATIONS/ CONSOLIDATED
GROUP GROUP GROUP RECLASSIFICATIONS(1) AT&T CORP.
------------ -------- ------------- -------------------- ------------
ASSETS
Cash and cash equivalent........ $ 1,019 $ 5 $ $ $ 1,024
Receivables..................... 9,241 1,300 (88) 10,453
Deferred income taxes........... 1,160 127 1,287
Other current assets............ 929 196 (5) 1,120
TOTAL CURRENT ASSETS............ 12,349 1,628 (93) 13,884
Property, plant and equipment,
net........................... 33,366 6,349 (97) 39,618
Franchise costs, net............ 32,693 32,693
Licensing costs, net............ 8,571 (23) 8,548
Goodwill, net................... 5,310 2,462 (327) 7,445
Investment in Liberty Media
Group and related receivables,
net........................... 38,460 38,460
Other investments and related
advances...................... 14,856 4,502 8 19,366
Other assets.................... 9,065 327 9,392
Long-term assets due from
related party................. 4,400 (4,400)
TOTAL ASSETS.................... $112,039 $23,512 $38,460 $(4,605) $169,406
LIABILITIES
Debt maturing within one year... $ 12,479 $ 154 $ $ $ 12,633
Other current liabilities....... 13,711 2,143 (280) 15,574
TOTAL CURRENT LIABILITIES....... 26,190 2,297 (280) 28,207
Long-term debt.................. 23,213 4 23,217
Long-term debt due to related
party......................... 3,400 (3,400)
Deferred income taxes........... 20,507 3,750 (58) 24,199
Other long-term liabilities and
deferred credits.............. 7,722 48 (5) 7,765
TOTAL LIABILITIES............... 77,632 9,495 (3,739) 83,388
---------------
(1)Includes the elimination of inter-group transactions, consolidating entries
as well as reclassifications and adjustments related to AT&T Wireless Group
tracking stock.
D-102
451
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AT&T AT&T
COMMON STOCK WIRELESS LIBERTY MEDIA ELIMINATIONS/ CONSOLIDATED
GROUP GROUP GROUP RECLASSIFICATIONS(1) AT&T CORP.
------------ -------- ------------- -------------------- ------------
Minority Interest............... 2,371 20 2,391
Company-Obligated Convertible
Quarterly Income Preferred
Securities of a Subsidiary
Trust Holding Solely
Subordinated Debt Securities
of AT&T....................... 4,700 4,700
SHAREOWNERS' EQUITY
AT&T Common Stock............... 3,196 3,196
AT&T Wireless Group Common
Stock.........................
Liberty Media Group Class A
Common Stock.................. 2,314 2,314
Liberty Media Group Class B
Common Stock.................. 217 217
Other shareowners' equity....... 27,336 12,997 38,460 (5,593) 73,200
Other shareowners' equity due to
related party................. 1,000 (1,000)
TOTAL SHAREOWNERS' EQUITY....... 27,336 13,997 38,460 (866) 78,927
TOTAL LIABILITIES AND
SHAREOWNERS' EQUITY........... $112,039 $23,512 $38,460 $(4,605) $169,406
---------------
(1)Includes the elimination of inter-group transactions, consolidating entries
as well as reclassifications and adjustments related to AT&T Wireless Group
tracking stock.
D-103
452
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999
AT&T AT&T LIBERTY
COMMON STOCK WIRELESS MEDIA ELIMINATIONS/ CONSOLIDATED
GROUP GROUP GROUP RECLASSIFICATIONS(1) AT&T CORP.
------------ -------- ------- -------------------- ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES.................... $10,907 $ 867 $ $(253) $11,521
INVESTING ACTIVITIES
Capital expenditures and other
additions..................... (11,795) (2,272) 47 (14,020)
Equity investment distributions
and sales..................... 1,639 236 1,875
Equity investment contributions
and purchases................. (7,837) (284) (8,121)
Net acquisitions of businesses
including cash acquired....... (6,955) 244 (6,711)
Other........................... (960) (47) 941 (66)
NET CASH USED IN INVESTING
ACTIVITIES.................... (25,908) (2,123) 988 (27,043)
FINANCING ACTIVITIES
Proceeds from long-term debt
issuance...................... 8,396 8,396
Retirement of long-term debt.... (2,807) (2,807)
Issuance of convertible
securities.................... 4,638 4,638
Net acquisition of treasury
shares........................ (4,624) (4,624)
Dividends paid.................. (2,712) (2,712)
Increase in short-term
borrowings, net............... 10,173 65 10,238
Other........................... (177) 1,169 (735) 257
NET CASH PROVIDED BY FINANCING
ACTIVITIES.................... 12,887 1,234 (735) 13,386
Net decrease in cash and cash
equivalents................... (2,114) (22) (2,136)
Cash and cash equivalents at
beginning of year............. 3,133 27 3,160
Cash and cash equivalents at end
of period..................... $ 1,019 $ 5 $ $ $ 1,024
-------------------------
(1)Includes the elimination of inter-group transactions, consolidating entries
as well as reclassifications and adjustments related to AT&T Wireless Group
tracking stock.
D-104
453
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1998
AT&T AT&T
COMMON STOCK WIRELESS ELIMINATIONS/ CONSOLIDATED
GROUP GROUP RECLASSIFICATIONS(1) AT&T CORP.
------------ -------- -------------------- ------------
Revenue................................. $47,817 $5,406 $ $53,223
Inter-group revenue..................... 73 (73)
Total Revenue........................... 47,890 5,406 (73) 53,223
Operating Expenses:
Costs of services and products.......... 8,336 2,363 (204) 10,495
Access and other connection............. 15,117 211 15,328
Selling, general and administrative..... 10,845 1,931 (6) 12,770
Depreciation and other amortization..... 3,534 1,079 (235) 4,378
Amortization of goodwill, franchise
costs and other purchased
intangibles........................... 44 207 251
Net restructuring and other charges..... 2,514 120 (120) 2,514
Inter-group expenses.................... (183) 256 (73)
Total operating expenses................ 40,207 5,749 (220) 45,736
Operating income (loss)................. 7,683 (343) 147 7,487
Other income............................ 811 650 (180) 1,281
Inter-group interest income............. 246 (246)
Interest expense........................ 515 (70) (18) 427
Inter-group interest expense............ 190 (190)
Income from continuing operations before
income taxes, minority interest and
earnings (losses) from equity
investments........................... 8,225 187 (71) 8,341
Provision for income taxes.............. 2,996 59 (6) 3,049
Minority interest income................ 21 21
Net earnings (losses) from other equity
investments........................... (108) 36 (6) (78)
Income from continuing operations....... 5,121 164 (50) 5,235
Dividend requirements on preferred stock
held by AT&T, net..................... 56 (56)
Income from continuing operations after
preferred stock dividends............. $ 5,121 $ 108 $ 6 $ 5,235
-------------------------
(1)Includes the elimination of inter-group transactions, consolidating entries
as well as reclassifications and adjustments related to AT&T Wireless Group
tracking stock.
D-105
454
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
AT&T AT&T
COMMON STOCK WIRELESS ELIMINATIONS/ CONSOLIDATED
GROUP GROUP RECLASSIFICATIONS(1) AT&T CORP.
------------ -------- -------------------- ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES......................... $ 9,928 $ 414 $(125) $ 10,217
INVESTING ACTIVITIES
Capital expenditures and other
additions.......................... (6,509) (1,219) 15 (7,713)
Decrease in other receivables........ 6,303 100 6,403
Net sales of marketable securities... 307 307
Equity investment distributions and
sales.............................. 148 1,354 14 1,516
Equity investment contributions and
purchases.......................... (1,118) (156) (7) (1,281)
Net acquisitions of businesses
including cash acquired............ 4,183 324 4,507
Other................................ (60) (65) (32) (157)
NET CASH PROVIDED BY INVESTING
ACTIVITIES......................... 3,254 238 90 3,582
FINANCING ACTIVITIES
Proceeds from long-term debt issuance
Retirement of long-term debt....... (2,610) (2,610)
Net acquisition of treasury shares... (3,321) (3,321)
Dividends paid....................... (2,187) (2,187)
Increase in short-term borrowings,
net................................ (3,076) 43 (3,033)
Other................................ 833 (674) (57) 102
NET CASH USED IN FINANCING
ACTIVITIES......................... (10,361) (631) (57) (11,049)
NET CASH PROVIDED BY DISCONTINUED
OPERATIONS......................... 92 92
Net increase in cash and cash
equivalents........................ 2,821 21 2,842
Cash and cash equivalents at
beginning of year.................. 312 6 318
Cash and cash equivalents at end of
period............................. $ 3,133 $ 27 $ $ 3,160
-------------------------
(1)Includes the elimination of inter-group transactions, consolidating entries
as well as reclassifications and adjustments related to AT&T Wireless Group
tracking stock.
D-106
455
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
21. QUARTERLY INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
2000
Revenue(1).......................................... $15,901 $16,221 $16,975 $16,884
Operating income (loss)(2).......................... 2,402 3,267 2,954 (4,346)
Net income.......................................... $ 2,683 $ 2,034 $ 3,072 $(3,120)
AT&T Common Stock Group:
Earnings (loss) per share:
Basic............................................. $ .55 $ .54 $ .35 $ (.45)
Diluted........................................... .54 .53 .35 (.45)
Dividends declared................................ $ .22 $ .22 $ .22 $ .0375
AT&T Wireless Group(3):
Earnings (loss) per share:
Basic and diluted................................. $ -- $ .06 $ (.01) $ .16
Liberty Media Group(3):
Earnings (loss) per share:
Basic and diluted(4).............................. $ .37 $ .10 $ .68 $ (.57)
Stock price(5):
AT&T common stock
High.............................................. $ 61.00 $ 58.81 $ 35.19 $ 30.00
Low............................................... 44.31 31.25 27.25 16.50
Quarter-end close................................. 56.25 31.63 29.38 17.25
AT&T Wireless Group common stock
High.............................................. -- 36.00 29.56 24.94
Low............................................... -- 23.56 20.50 16.38
Quarter-end close................................. -- 27.88 20.88 17.31
Liberty Media Group Class A common stock(4)
High.............................................. 30.72 29.94 26.56 19.25
Low............................................... 24.44 19.19 17.44 10.75
Quarter-end close................................. 29.63 24.25 18.00 13.56
Liberty Media Group Class B common stock(4)
High.............................................. 36.56 32.69 32.63 20.63
Low............................................... 27.00 22.13 18.75 12.75
Quarter-end close................................. 32.81 32.50 18.75 18.75
1999
Revenue(1).......................................... $14,117 $15,752 $16,333 $16,398
Operating income(2)................................. 2,116 2,913 3,389 2,441
Net income (loss)................................... $ 1,018 $ 1,045 $ 1,416 $ (51)
AT&T Common Stock Group:
Earnings per share:
Basic............................................. $ .39 $ .50 $ .51 $ .36
Diluted........................................... $ .38 $ .49 $ .50 $ .36
Dividends declared.................................. $ .22 $ .22 $ .22 $ .22
Liberty Media Group(3):
Loss per share:
Basic and diluted(4).............................. $ .02 $ .21 $ .09 $ .48
D-107
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AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
Stock price(5):
AT&T common stock
High.............................................. $ 64.08 $ 63.00 $ 59.00 $ 61.00
Low............................................... 50.58 50.06 41.81 41.50
Quarter-end close................................. 53.20 55.81 43.50 50.81
Liberty Media Group Class A common stock(4)
High.............................................. 14.53 18.52 19.84 28.34
Low............................................... 10.95 13.13 15.44 17.94
Quarter-end close................................. 13.15 18.38 18.66 28.41
Liberty Media Group Class B common stock(4)
High.............................................. 14.56 18.63 19.88 34.38
Low............................................... 11.13 13.69 16.00 19.31
Quarter-end close................................. 13.44 18.63 19.88 34.38
-------------------------
(1)Results have been restated to reflect certain franchise tax expenses as
revenue and expense in the amount of $21 in first quarter 1999, $61 in second
quarter 1999, $63 in third quarter 1999, $64 in fourth quarter 1999 and $65
in first quarter 2000. This restatement had no impact on operating income or
net income.
(2)Operating income (loss) included net restructuring and other charges of $773
in first quarter 2000, $24 in third quarter 2000, $6,232 in fourth quarter
2000, $731 in first quarter 1999 and $804 in fourth quarter 1999. Second
quarter 1999 included a net restructuring and other charges benefit of $29.
(3)No dividends have been declared on AT&T Wireless Group or Liberty Media Group
(LMG) common stocks.
(4)Amounts have been restated to reflect the June 2000 two-for-one split of LMG
common stock.
(5)Stock prices obtained from the New York Stock Exchange Composite Tape.
22. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." Among
other provisions, it requires that entities recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. Gains and losses resulting from changes in the fair
values of those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. The effective date for
this standard was delayed via the issuance of SFAS No. 137. The effective date
for SFAS No. 133 is now for fiscal years beginning after June 15, 2000, though
earlier adoption is encouraged and retroactive application is prohibited. For
AT&T, this means that the standard must be adopted no later than January 1,
2001.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," as an amendment to SFAS
No. 133. This statement provides clarification with regard to certain
implementation issues under SFAS No. 133 on specific types of hedges.
On January 1, 2001, AT&T adopted SFAS No. 133. We recorded a cumulative
effect of an accounting change, net of applicable income taxes, of approximately
$1,370 of income, or approximately $0.34 per diluted share, primarily
attributable to fair value adjustments of debt
D-108
457
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
instruments, including those acquired in conjunction with the MediaOne merger,
as well as to our warrant portfolio. In addition, in connection with the
adoption of SFAS No. 133, we reclassified certain investment securities, which
support debt that is indexed to those securities, from "available-for-sale" to
"trading." This reclassification resulted in the recognition of a charge of
$1,724, or approximately $0.43 per diluted share, net of applicable taxes, which
was recorded as a reduction of other income. As available-for-sale securities,
changes in fair value were previously included within other comprehensive income
as a component of shareowners' equity. In addition, LMG recorded a cumulative
effect of an accounting change, net of applicable income taxes, of approximately
$800 of income, or approximately $0.31 per share.
The impact of the adoption of SFAS No. 133, as amended by SFAS No. 138, on
AT&T's future results of operations is dependent upon the fair values of our
derivatives and related financial instruments and could result in pronounced
quarterly fluctuations in other income in future periods.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities -- a
Replacement of FASB Statement No. 125." This statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. Under these standards, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial assets when
control has been surrendered, and derecognizes liabilities when extinguished.
This statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. This
statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. AT&T does not
expect that the adoption of SFAS No. 140 will have a material impact on AT&T's
results of operations, financial position or cash flows.
23. SUBSEQUENT EVENTS
On January 12, 2001, AT&T announced that Cox and Comcast had exercised
their rights to sell a combined total of 60.4 million shares of Excite@Home
Series A common stock to AT&T as part of an agreement announced in August 2000
to reorganize Excite@Home's governance. Cox and Comcast elected to receive
shares of AT&T common stock in exchange for their Excite@Home shares. AT&T is
currently in discussions to renegotiate the terms of the put options which may
result in a change to the number of shares of AT&T stock that Cox and Comcast
will receive, as well as the number of Excite@Home Shares, if any AT&T receives.
There can be no assurance that an agreement will be reached with Cox and
Comcast.
On January 22, 2001, AT&T and NTT DoCoMo (DoCoMo) finalized an agreement
whereby DoCoMo invested approximately $9.8 billion for a new class of AT&T
preferred stock, termed DoCoMo Wireless tracking stock, that is economically
equivalent to 406 million shares of AT&T Wireless Group tracking stock and
reflects approximately 16% of the financial performance and economic value of
AT&T Wireless Group. AT&T allocated $6.2 billion of the proceeds to AT&T
Wireless Group. Each share of DoCoMo Wireless tracking stock is convertible at
any time into AT&T Wireless Group tracking stock. Upon the conversion of the
DoCoMo Wireless tracking stock, AT&T will reduce its portion of the financial
performance and economic value in AT&T Wireless Group by 178 million shares, and
the balance of the 406 million shares will come from the issuance of 228 million
new shares of AT&T Wireless Group tracking stock. Additionally, upon completion
of the planned split-off of AT&T Wireless, the DoCoMo Wireless tracking stock
and related warrants will automatically be converted into AT&T Wireless Group
tracking stock and thereafter be exchanged on the same terms as all other shares
of AT&T Wireless Group tracking stock in the split-
D-109
458
AT&T CORP. AND SUBSIDIARIES (AT&T)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
off. In the event that AT&T has not split-off AT&T Wireless by specified dates
beginning January 1, 2002, DoCoMo will have the right, at its election, to
require AT&T to repurchase from DoCoMo the preferred shares initially issued to
them at DoCoMo's original purchase price plus interest up to the date of
payment. The interest under this right will be treated as preferred stock
dividends, with charges recorded as a reduction of AT&T Common Stock Group
earnings. In addition, DoCoMo acquired five-year warrants to purchase the
equivalent of an additional 41.7 million shares of AT&T Wireless Group tracking
stock at $35 per share. As part of the agreement, DoCoMo obtained a seat on
AT&T's board of directors until AT&T Wireless Group is split-off from AT&T as a
separate public company, which is expected to occur later in 2001. At that time,
DoCoMo will retain representation on the new public AT&T Wireless board. Receipt
of the DoCoMo proceeds reduced AT&T's existing $25 billion credit facility by
$1.8 billion.
In January 2001, AT&T entered into agreements with certain network
equipment vendors, which extend through 2004, to purchase next-generation
wireless network equipment for a total of approximately $1.8 billion.
On February 27, 2001, AT&T entered into an agreement with Vodafone Group
plc to sell our 10% stake in Japan Telecom Co. Ltd for approximately $1.35
billion in cash. The transaction is expected to be completed in April 2001 and
will result in a gain.
On March 1, 2001, AT&T Wireless completed a private placement of $6.5
billion in notes. The notes pay interest at rates ranging from 7.35% to 8.75%
per annum, with maturity dates ranging from 2006 to 2031. The notes include
customary covenants and registration rights. As a result of the issuance of
these notes, AT&T's existing $25 billion credit facility was reduced by $4.8
billion.
On March 23, 2001, AT&T Wireless entered into $2.5 billion in revolving
credit facilities. The facilities consist of a 364-day facility of $1.25 billion
and a five-year revolving credit facility of $1.25 billion. The facilities may
be used for general corporate purposes and are subject to customary covenants
and events of default.
D-110
459
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
FINANCIAL STATEMENTS
AT&T Broadband Group is an integrated business of AT&T and not a
stand-alone entity. The combined financial statements included herein reflect
the results of the proposed AT&T Broadband Group tracking stock. Separate
financial statements are not required to be filed for tracking stocks. However,
the financial statements have been provided as an exhibit to this document to
provide additional disclosures to investors to allow them to assess the
financial performance of AT&T Broadband Group. Presenting separate financial
statements for AT&T Broadband Group does not indicate that AT&T has changed
title to any assets or responsibility for any liabilities, and does not purport
to affect the rights of any of AT&T's creditors. Holders of AT&T Broadband Group
tracking stock do not have claims against the assets of AT&T Broadband Group.
Instead, AT&T Broadband Group shareholders own a separate class of AT&T common
stock that is intended to reflect the financial performance and economic value
of AT&T's broadband businesses.
D-111
460
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS
ENDED
MARCH 31,
---------------------
2001 2000
--------- --------
(DOLLARS IN MILLIONS)
Revenue..................................................... $ 2,587 $1,557
Operating expenses:
Costs of services (excluding depreciation of $462 and $202
for 2001 and 2000, respectively, included below)....... 1,465 870
Selling, general and administrative....................... 698 359
Depreciation and other amortization....................... 651 245
Amortization of goodwill, franchise costs and other
purchased intangibles.................................. 632 237
Asset impairment, restructuring and other charges......... 808 16
------- ------
Total operating expenses.................................... 4,254 1,727
------- ------
Operating loss.............................................. 1,667 170
Other (expense) income.................................... (953) 484
Interest expense.......................................... 479 264
------- ------
(Loss) income before income taxes, net earnings (losses)
from equity investments, minority interest and cumulative
effect of accounting change............................... (3,099) 50
Benefit for income taxes.................................... 744 414
Net earnings (losses) from equity investments............... 49 (218)
Minority interest income (expense).......................... 549 (50)
(Losses) income before cumulative effect of accounting
change.................................................... 1,757 --
Cumulative effect of accounting change...................... 229 --
------- ------
Net (loss) income........................................... $(1,528) $ 196
======= ======
The notes are an integral part of the combined financial statements.
D-112
461
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2001 2000
----------- ------------
(UNAUDITED)
(DOLLARS IN MILLIONS)
ASSETS
Cash and cash equivalents................................... $ 64 $ 61
Trade receivables, less allowances of $79 and $74........... 608 774
Investments................................................. 1,690 2,204
Other current assets........................................ 462 467
-------- --------
Total current assets.............................. 2,824 3,506
Property, plant and equipment, net of accumulated
depreciation of $1,981 and $2,078......................... 15,508 15,187
Franchise costs, net of accumulated amortization of $1,921
and $1,664................................................ 47,924 48,218
Goodwill, net of accumulated amortization of $543 and
$240...................................................... 20,306 21,139
Investments................................................. 24,931 25,045
Other assets, net of accumulated amortization of $869 and
$578...................................................... 4,492 4,439
-------- --------
Total assets...................................... $115,985 $117,534
======== ========
LIABILITIES AND COMBINED ATTRIBUTED NET ASSETS
Accounts payable............................................ $ 858 $ 1,250
Payroll and benefit-related liabilities..................... 539 570
Debt maturing within one year............................... 2,570 3,073
Short-term debt due to AT&T................................. 6,707 5,830
Deferred income tax liability............................... 451 486
Liability under put options................................. 2,627 2,564
Other current liabilities................................... 1,904 2,177
-------- --------
Total current liabilities......................... 15,656 15,950
Long-term debt.............................................. 19,523 19,517
Deferred income taxes....................................... 27,411 28,550
Other long-term liabilities and deferred credits............ 1,021 1,069
-------- --------
Total liabilities................................. 63,611 65,086
Minority interest........................................... 3,795 4,421
Company-Obligated Convertible Quarterly Income Preferred
Securities of Subsidiary Trust Holding Solely Subordinated
Debt Securities of AT&T................................... 4,713 4,710
Combined attributed net assets.............................. 43,866 43,317
-------- --------
Total liabilities and combined attributed net
assets......................................... $115,985 $117,534
======== ========
The notes are an integral part of the combined financial statements.
D-113
462
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED STATEMENTS OF CHANGES IN COMBINED
ATTRIBUTED NET ASSETS
(UNAUDITED)
THREE MONTHS
ENDED
MARCH 31,
----------------------
2001 2000
--------- ---------
(DOLLARS IN MILLIONS)
Combined attributed net assets:
Balance at beginning of period............................ $43,317 $14,889
Net (loss) income......................................... (1,528) 196
Contributions from (transfers to) AT&T, net............... 1,531 (1,859)
Issuance of common stock by affiliates.................... 16 (174)
Net revaluation of financial instruments.................. 341 (425)
Recognition of previously unrealized losses............... 152 --
Other comprehensive income................................ 37 --
------- -------
Balance at end of period.................................. $43,866 $12,627
======= =======
Summary of total comprehensive loss:
(Losses) income before cumulative effect of accounting
change................................................. $(1,757) $ (196)
Cumulative effect of accounting change.................... 229 --
Net (loss) income......................................... $(1,528) $ 196
Net revaluation of financial instruments (net of tax
(provision) benefit of $211 and (257))................. 341 (425)
Recognition of previously unrealized losses (net of tax
benefit of $94)........................................ 152 --
Other comprehensive income (net of tax benefit of $18).... 37 --
------- -------
Total comprehensive loss.................................. $ (998) $ (229)
======= =======
The notes are an integral part of the combined financial statements.
D-114
463
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS
ENDED
MARCH 31,
-----------------
2001 2000
------- -------
(DOLLARS IN
MILLIONS)
Operating activities:
Net (loss) income......................................... $(1,528) $ 196
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Cumulative effect of accounting change................. (229) --
Gains on sales of businesses and investments........... (150) (481)
Asset impairment, restructuring and other charges, net
of cash payments...................................... 796 16
Depreciation and amortization.......................... 1,283 482
Provision for uncollectibles........................... 46 19
Net (earnings) losses from equity investments.......... (80) 354
Deferred income taxes.................................. (554) (301)
Minority interest (income) expense..................... (561) 65
Decrease in accounts receivable........................ 123 40
Decrease in accounts payable........................... (314) (97)
Net revaluation of trading securities.................. 1,035 --
Net change in other operating assets and liabilities... (640) (311)
Other adjustments, net................................. 113 (4)
------- -------
Net cash used in operating activities................ (660) (22)
------- -------
Investing activities:
Capital expended for property and equipment, net of
proceeds from disposal................................. (928) (885)
Sales of marketable securities............................ 88 --
Equity investment distributions and sales................. 85 334
Equity investment contributions and purchases............. (239) (569)
Net cash received (paid) for acquisitions and dispositions
of businesses.......................................... 598 (89)
Other investing activities, net........................... 62 (1)
------- -------
Net cash used in investing activities................ (458) (1,210)
------- -------
Financing activities:
Retirements of long-term debt............................. (112) (518)
Retirements of redeemable securities...................... -- (151)
Dividends paid on preferred securities.................... (22) (97)
Increase in short-term debt due to AT&T................... 877 1,643
Transfers from AT&T, net.................................. 378 426
Other financing activities, net........................... -- (71)
------- -------
Net cash provided by financing activities............ 1,121 1,232
------- -------
Net change in cash and cash equivalents..................... 3 --
------- -------
Cash and cash equivalents at beginning of period............ 61 --
------- -------
Cash and cash equivalents at end of period.................. $ 64 $ --
======= =======
The notes are an integral part of the combined financial statements.
D-115
464
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND UNLESS OTHERWISE NOTED)
(1) BASIS OF PRESENTATION
On October 25, 2000, AT&T announced a restructuring plan designed to fully
separate or issue separately tracked stocks intended to reflect the financial
performance and economic value of each of AT&T's four major operating units.
Upon completion of the plan, AT&T Wireless, AT&T Broadband, AT&T Business and
AT&T Consumer will all be represented by asset-based or tracking stocks.
AT&T Broadband Group is a fully integrated business of AT&T and is not a
separate legal entity. The combined financial statements of AT&T Broadband Group
consist primarily of the assets, liabilities and businesses of AT&T Broadband,
LLC (formerly Tele-Communications, Inc. ("TCI")), including At Home Corporation
("Excite@Home"), and MediaOne Group, Inc. ("MediaOne") and their respective
subsidiaries. AT&T Broadband, LLC ("ATTBLLC") and MediaOne are both separate
subsidiaries of AT&T. The accompanying combined financial statements reflect the
business of AT&T Broadband Group.
The combined financial statements of AT&T Broadband Group are prepared in
accordance with generally accepted accounting principles and in management's
opinion, include all adjustments necessary for a fair statement of consolidated
operations, financial position and statement of cash flows for the periods
presented. The combined financial statements of AT&T Broadband Group reflect the
assets, liabilities, revenue and expenses directly attributable to AT&T
Broadband Group, as well as allocations deemed reasonable by management, to
present the results of operations, financial position, and cash flows of AT&T
Broadband Group on a stand-alone basis. The allocation methodologies have been
described within the notes to the combined financial statements where
appropriate, and management considers the allocations to be reasonable. All
significant intercompany accounts and transactions within the AT&T Broadband
Group have been eliminated. The financial information included herein may not
necessarily reflect the combined results of operations, financial position,
changes in combined attributed net assets and cash flows of AT&T Broadband Group
in the future or what they would have been had AT&T Broadband Group been a
separate, stand-alone entity during the periods presented. In addition, the
combined results for interim periods presented are not necessarily indicative of
results for the full year. Earnings per share disclosure has not been presented
as AT&T Broadband Group is a business unit of AT&T and earnings per share data
is not considered meaningful. The combined financial statements of AT&T
Broadband Group should be read in conjunction with AT&T's Form 10-K/A for the
year ended December 31, 2000 and AT&T's Form 10-Q/A for the quarter ended March
31, 2001, and AT&T Broadband Group financial statements for the year ended
December 31, 2000 included elsewhere in this document.
Debt attributed to AT&T Broadband Group includes the third party
obligations of AT&T Broadband LLC, and MediaOne and all monetization debt.
Additional intercompany debt has been allocated to AT&T Broadband Group to
achieve a total debt level based on several factors including prospective
financing requirements, desired standalone credit profile, working capital and
capital expenditure requirements, expected sources of future deleveraging and
comparable company profiles. Increases in historical intercompany debt are based
on historical cash flows. Such cash outflows include capital expenditures,
operating activities and investments in cable companies. By the time AT&T's
restructuring activities are complete, the then intercompany debt balance of
AT&T Broadband Group will be replaced with an equal amount of external debt in a
manner to be determined. The historical interest expense on the allocated
intercompany debt was calculated based
D-116
465
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
on a rate intended to be equivalent to the rate AT&T Broadband Group would
receive if it were a stand-alone entity. Due to AT&T's deleveraging activities,
the $28.8 billion of debt at March 31, 2001 is expected to be significantly
lower in the future. AT&T's expected deleveraging activities that relate to AT&T
Broadband Group include, but may not be limited, to the following: the announced
sale of rural cable systems which is expected to result in net cash proceeds of
$3.1 billion; any proceeds that may result from the exercise of AT&T's
registration rights in Time Warner Entertainment ("TWE"); and any proceeds from
the sale of shares of Cablevision Systems Corp. Finally, AT&T has made no final
determination as to the allocation of proceeds from the sale of shares of AT&T
Broadband Group tracking stock, between AT&T Communications Services and AT&T
Broadband Group.
As a result of the above methodology, AT&T Broadband Group may advance
funds to AT&T. These advances are accounted for as short-term borrowings between
the entities and bear interest at a market rate that is substantially equal to
the rate at which AT&T would be able to borrow from third parties on a
short-term basis.
AT&T performs cash management functions on behalf of the AT&T Broadband
Group. Substantially all of the AT&T Broadband Group's cash balances are swept
to AT&T on a daily basis, where they are managed and invested by AT&T. Transfers
of cash to and from AT&T, after giving consideration to the debt allocation
methodology, are reflected as a component of combined attributed net assets. Net
transfers to or from AT&T are assumed to be settled in cash. AT&T's capital
contributions for purchase business combinations and initial investments in
joint ventures and partnerships which AT&T attributed to AT&T Broadband Group
have been treated as noncash transactions.
General corporate overhead related to AT&T's corporate headquarters and
common support divisions has been allocated to AT&T Broadband Group as it was
not deemed practicable to specifically identify such common costs to AT&T
Broadband Group. The allocation of corporate overhead is divided into an
allocation of shared services (e.g., payroll and finance) and other corporate
overhead. Costs of shared services are allocated to AT&T Broadband Group based
on transaction based prices. Other corporate overhead is allocated to AT&T
Broadband Group based on the ratio of AT&T Broadband Group's external costs and
expenses adjusted for any functions AT&T Broadband Group performs on its own.
The costs of these services charged to AT&T Broadband Group are not necessarily
indicative of the costs that would have been incurred if AT&T Broadband Group
had performed these functions entirely as a stand-alone entity, nor are they
indicative of costs that will be charged or incurred in the future. However,
management believes such allocations are reasonable.
Consolidated income tax provisions or benefits, related tax payments or
refunds, and deferred tax balances of AT&T have been allocated to AT&T Broadband
Group based principally on the taxable income and tax credits directly
attributable to AT&T Broadband Group, essentially a stand-alone presentation.
These allocations reflect AT&T Broadband Group's contribution to AT&T's
consolidated taxable income and the consolidated tax liability and tax credit
position. Prior to the issuance of any shares of AT&T Broadband Group's tracking
stock, AT&T and AT&T Broadband Group have entered into a tax sharing agreement
that will provide for tax sharing payments based on the tax expense or tax
benefits of a hypothetical affiliated group consisting of AT&T Broadband Group
and AT&T Communications Services, Inc. Based on this agreement, the consolidated
tax liability before credits will be allocated between the groups, based on each
group's contribution to consolidated
D-117
466
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
taxable income of the hypothetical group. Consolidated tax credits of the
hypothetical group will be allocated between groups based on each group's
contribution to each tax credit.
(2) MERGERS, ACQUISITIONS, VENTURES, DISPOSITIONS AND EXCHANGES
MERGER WITH MEDIAONE
On June 15, 2000, AT&T completed a merger with MediaOne in a cash and stock
transaction valued at approximately $45 billion (the "MediaOne Merger"). The
AT&T shares had an aggregate market value of approximately $21 billion and cash
payments totaled approximately $24 billion.
The MediaOne Merger was accounted for under the purchase method of
accounting, accordingly the results of MediaOne have been included in the
accompanying combined financial statements since the date of acquisition.
Approximately $16 billion of the purchase price of $45 billion has been
attributed to franchise costs and is being amortized on a straight-line basis
over 40 years. Also included in the $45 billion purchase price was approximately
$23 billion related to nonconsolidated investments, including investments in TWE
and Vodafone Group, plc, approximately $5 billion related to property, plant and
equipment, and approximately $6 billion of other net assets. In addition,
included was approximately $14 billion in deferred income tax liabilities,
approximately $10 billion attributable to debt and approximately $1 billion of
minority interest. AT&T did not attribute $7 billion of cash acquired in the
MediaOne merger to AT&T Broadband Group. The purchase price resulted in goodwill
of $20 billion, which is being amortized on a straight-line basis over 40 years.
PRO FORMA RESULTS
Following is a summary of the pro forma results of AT&T Broadband Group as
if the MediaOne Merger had closed effective January 1, 2000:
THREE MONTHS ENDED
MARCH 31, 2000
------------------
Revenue............................................. $2,263
Operating loss...................................... $ 392
Net income.......................................... $1,018
Pro forma data may not be indicative of the results that would have been
obtained had the events actually occurred at the beginning of the period
presented, nor does it intend to be a projection of future results.
EXCITE@HOME
On August 28, 2000, AT&T and Excite@Home announced shareholder approval of
a new board of directors and governance structure for Excite@Home. As a result
of these governance changes, AT&T gained a controlling financial interest and
AT&T Broadband Group began consolidating Excite@Home's results upon the closing
of the transaction on September 1, 2000, at which time ATTBLLC had an
approximate 24% economic interest and 74% voting interest.
In January 2001, AT&T announced that Cox Communications, Inc. ("Cox") and
Comcast Corporation ("Comcast") had exercised their rights to sell a combined
total of 60.4 million shares of Excite@Home Series A common stock to AT&T as
part of the March 2000 agreement to reorganize Excite@Home's governance. In May
2001, AT&T completed negotiations to restructure the
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AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
transactions that resulted from Comcast and Cox exercising their sale rights.
Under these restructured transactions, Comcast and Cox retained their respective
Excite@Home shares, and AT&T issued approximately 80.3 million shares of AT&T
common stock to Comcast and 75 million shares of AT&T common stock to Cox.
INSIGHT COMMUNICATIONS COMPANY LP
Effective January 1, 2001, entities attributed to AT&T Broadband Group sold
to Insight Communications Company LP ("Insight"), for $392, several Illinois
systems serving approximately 98,400 customers. Insight contributed the
customers to Insight Midwest L.P. in which AT&T Broadband Group, through its
attributed entities, has a 50% interest. The $62 gain is being deferred due to a
keep well agreement with Insight Midwest, LP. Entities attributed to AT&T
Broadband Group also contributed several Illinois systems serving approximately
247,500 customers to Insight Midwest, LP while Insight contributed systems
serving approximately 177,000 customers. The $117 gain is being deferred due to
a keepwell agreement with Insight Midwest LP.
CABLEVISION SYSTEMS CORPORATION
On January 8, 2001, a subsidiary of AT&T and Cablevision Systems
Corporation completed agreements for the transfer of cable-systems. AT&T
received cable-systems serving 358,000 customers in Boston and Eastern
Massachusetts. In exchange, Cablevision received cable-systems serving
approximately 130,000 customers in northern New York suburbs, and 44 million
shares of AT&T common stock valued at approximately $871, and approximately $204
in cash. Cablevision recorded a gain as a result of the transaction. Due to the
ownership interest in Cablevision, AT&T Broadband Group recorded its $143
portion, net of tax, of Cablevision's gain in "net earnings (losses) from equity
investments."
KEARNS-TRIBUNE, LLC
On January 2, 2001, AT&T, through ATTBLLC, completed the sale of
Kearns-Tribune, LLC to MediaNews Group for $200 million in cash. The transaction
resulted in a pretax gain of approximately $107 million.
ACQUISITION-RELATED INTANGIBLE ASSETS
As a result of an evaluation of recent changes in the cable industry and
the views of regulatory authorities, AT&T Broadband Group, effective January 1,
2001, will use an amortization period for all franchise costs and goodwill
associated with newly acquired cable operations not to exceed 25 years. This
change did not have a material impact to AT&T Broadband Group's results of
operations for the three months ended March 31, 2001.
(3) ASSET IMPAIRMENT, RESTRUCTURING AND OTHER CHARGES
During the first quarter of 2001, AT&T Broadband Group recorded $808 of
asset impairment, restructuring and other charges which included $739 of asset
impairment charges related to Excite@Home.
The charges related to Excite@Home include $600 in asset impairment charges
taken by Excite@Home associated with the goodwill impairment from various
acquisitions, primarily Excite
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AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
and a related goodwill impairment of $139 recorded by AT&T Broadband Group
associated with its acquisition goodwill of Excite@Home.
The impairments resulted from the continued weakness of the online media
market that Excite@Home operates in. Since AT&T Broadband Group, through
ATTBLLC, consolidates Excite@Home but owns approximately 23% of Excite@Home, 77%
of the charge recorded by Excite@Home is not included as a increase in AT&T
Broadband Group's net loss, but rather is eliminated in the statement of
operations as minority interest income (expense).
In the first quarter of 2001, a $69 charge for restructuring and exit costs
was recorded primarily as part of an initiative to reduce costs. The
restructuring and exit plans primarily focus on the maximization of synergies,
through head count reductions, including the consolidation of customer-care and
call centers and the reduction in construction efforts on cable plant upgrade
and rebuild activity. The charge for the first quarter of 2001 included
termination benefits of $59 associated with the involuntary separation of about
2,350 employees. Approximately 10% of the individuals were management employees
and 90% were non-management employees. Approximately 88% of the affected
employees have left their positions as of March 31, 2001 and the remaining
employees will leave the Company by the end of 2001. The $69 charge also
included a charge of $6 related to facility closings and $4 related to
termination of lease obligations.
In the second quarter of 2001, AT&T Broadband Group expects to incur
additional restructuring charges from MediaOne synergies, including customer
care and call center consolidations and workforce reductions at Excite@Home.
The following table displays the activity and balances of the restructuring
reserve account from January 1, 2001 to March 31, 2001.
JANUARY 1, MARCH 31,
2001 CASH 2001
TYPE OF COST BALANCE ADDITIONS PAYMENTS BALANCE
------------ ---------- --------- -------- ---------
Employee separations........................ $16 59 31 44
Facility closings and lease terminations.... -- 10 3 7
--- -- -- --
Total....................................... $16 69 34 51
=== == == ==
(4)STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 133 "ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES"
Effective January 1, 2001, AT&T Broadband Group adopted Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities", and its corresponding amendments under SFAS
No. 138. SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. All derivatives, whether designated in
hedging relationships or not, are required to be recorded on the balance sheet
at fair value. If the derivative is designated as a fair value hedge, the
changes in the fair value of the derivative and of the hedged item attributable
to the hedged risk are recognized in earnings. If the derivative is designated
as a cash flow hedge, the effective portions of changes in the fair value of the
derivative are recorded in other comprehensive income ("OCI") and are recognized
in the income statement when the hedged item affects earnings. Changes in fair
values of derivative instruments not designated as hedging instruments and
ineffective portions of hedges, if any, are recognized in earnings in the
current period.
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AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The adoption of SFAS No. 133 on January 1, 2001, resulted in a pretax
cumulative-effect decrease to net loss of $371 ($229 net-of-tax).
The cumulative-effect decrease to net loss of $229 was attributable
primarily to equity based derivative instruments embedded in indexed debt
instruments and warrants held in both public and private companies. The
exchangeable notes contain embedded options that hedge the market risk of a
decline in the value of Comcast, Microsoft and Vodafone securities.
Included in the after tax cumulative effect benefit of $229, was a $185
benefit for the separation of embedded derivative instruments from the indexed
debt instruments and $44 benefit for changes in the fair value of warrants.
Additionally within the cumulative effect of adoption, AT&T Broadband Group
recorded a gain for amounts previously recorded within accumulated OCI on the
indexed debt obligations that had been considered a hedge of Comcast, Microsoft
and Vodaphone available-for-sale securities. This gain has been offset with the
related loss on the securities which had previously been recorded in accumulated
OCI. These offsetting transition adjustments had no impact on the cumulative
effect benefit.
Upon adoption, AT&T Broadband Group, as permitted by SFAS 133, also
reclassified $9.3 billion of securities from "available-for-sale" to "trading".
This reclassification resulted in a pretax charge of $1,154 ($713 net-of-tax)
recorded in other (expense) income. This $713 represents the net revaluation of
securities to fair market value which was accounted for in OCI prior to the
adoption of SFAS 133.
COLLARS AND EQUITY SECURITIES PRICE RISK
Option agreements are entered into to hedge exposure on debt that is
collateralized by securities owned by AT&T Broadband Group. From time to time,
AT&T Broadband Group uses options and collars, to manage the risk from changes
in fair values and cash flows on certain equity securities, primarily on those
being used to collateralize underlying debt instruments. The securities selected
for hedging are determined by market conditions, up-front costs, and other
relevant factors. Once established, the hedges are not dynamically managed or
traded, and are generally not removed until maturity of the option agreements.
INTEREST RATE SWAP AGREEMENTS
Interest rate swaps are entered into to manage exposure to changes in
interest rates and to lower overall costs of financing. Swap agreements are
entered into to manage the fixed/floating mix of the debt portfolio in order to
reduce aggregate risk to interest rate movements. Interest rate swaps also allow
AT&T Broadband Group to raise funds at floating rates and effectively swap them
into fixed rates that are lower than those available to us if fixed-rate
borrowings were made directly. These agreements involve the exchange of
floating-rate for fixed-rate payments, fixed-rate for floating-rate payments or
floating-rate for other floating-rate payments without the exchange of the
underlying principal amount.
OTHER DERIVATIVES
In addition, AT&T Broadband Group, through AT&T Broadband, LLC and
MediaOne, may hold warrants to purchase securities of other companies. Warrants
that can be net share settled are deemed derivative financial instruments and
are generally not eligible to be designated as hedging
D-121
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AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
instruments as there is no corresponding underlying exposure. This includes
warrants held in both public and private companies.
Hedge ineffectiveness, determined in accordance with SFAS 133, had no
impact on earnings for the three months ended March 31, 2001. No fair value
hedges or cash flow hedges were derecognized or discontinued for the three
months ended March 31, 2001.
For the three months ended March 31, 2001, other (expense) income included
a total pretax gain of $645, comprised of a $663 gain for changes in the value
of options for fair value hedges and $18 net loss for changes in the fair value
of warrants and swaps. AT&T Broadband Group also recorded a pretax loss of $524
in other income (expense) for trading securities related to FAS 133 instruments.
Derivative gains and losses included in OCI are reclassified into earnings
at the time the forecasted transaction is recognized. During the three months
ended March 31, 2001, no gains or losses were reclassified to income. AT&T
Broadband Group reclassified $14 pretax from OCI to interest expense related to
amortization of interest for prepaid interest rate swaps.
(5) RELATED PARTY TRANSACTIONS
As discussed in Note 1, AT&T provides necessary working capital
requirements through intercompany debt and capital contributions to AT&T
Broadband Group. These amounts are reflected in the accompanying combined
balance sheets as short-term debt due to AT&T or a component of combined
attributed net assets. Short-term debt due to AT&T and interest was assumed
based upon the methodology outlined in Note 1. Intercompany debt was $6,707 and
$5,830 at March 31, 2001 and December 31, 2000, respectively. Intercompany
interest expense was $105 and $82 for the three months ended March 31, 2001 and
2000, respectively. An affiliation term sheet with a subsidiary of LMG requires
minimum payments for programming and other services through 2022. The commitment
increases annually from $288 in 2001 to $315 in 2003, and will increase annually
through 2022 with inflation. In the event programming costs of this LMG
subsidiary increase by more than 10 percent of an amount specified in the
agreement, AT&T Broadband Group's commitment may be increased by an amount equal
to 66 percent of the increase over the amount specified in the term sheet. Other
factors such as acquisitions and divestitures also affect the commitment
amounts. By letter dated May 29, 2001, AT&T Broadband Group indicated that in
its view the term sheet as a whole is enforceable and reserved its right to
terminate the term sheet. AT&T Broadband Group indicated that it would not pay
the excess programming costs requested by the LMG subsidiary to date and
disputed the unenforceability of the excess programming costs pass through
provisions of the term sheet, among other provisions. The letter further
suggests that the parties meet to discuss a new affiliation arrangement. The LMG
subsidiary has stated publicly that it views A&T Broadband Group's position on
the term sheet to be without merit.
Pursuant to an agreement with a subsidiary of LMG, entities attributed to
AT&T Broadband Group purchase programming and other services from such LMG
subsidiary. Amounts included in costs of services for programming purchased from
such LMG subsidiary were $82 and $52 for the three months ended March 31, 2001
and 2000, respectively.
AT&T Consumer Services Group provides AT&T Broadband Group with sales
support and customer care services at cost based prices, which approximate
market prices. For the three months ended March 31, 2001 and 2000, such amounts
totaled $47 and $13, respectively, and are included in selling, general and
administrative expenses in the accompanying combined statements of operations.
D-122
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AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In addition, AT&T Business Services Group provides AT&T Broadband Group
with wireline communication and other services. For the three months ended March
31, 2001 and 2000, charges for such services totaled $57 and $24, respectively,
and are included in costs of services in the accompanying combined statements of
operations.
Included in current liabilities at March 31, 2001 and December 31, 2000,
was $21 and $98, respectively, related to amounts due AT&T Consumer Services
Group and AT&T Business Services Group for the above described services.
AT&T allocates general corporate overhead expenses, including finance,
legal, marketing, use of the AT&T brand, planning and strategy and human
resources to AT&T Broadband Group, as well as costs for AT&T employees who
directly support the activities of the AT&T Broadband Group. Charges for such
services amounted to $40 and $42 for the three months ended March 31, 2001 and
2000, respectively. These amounts are included in selling, general and
administrative expenses in the accompanying combined statements of operations
and were determined based on methodology described in note 1.
AT&T Broadband Group transferred $628 of marketable securities and equity
investments and $284 million of related deferred tax assets to AT&T through
combined attributed net assets during the first quarter of 2001.
(6) NEW ACCOUNTING PRONOUNCEMENTS
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities - a
Replacement of FASB No. 125". This statement provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities. Under these standards, after a transfer of financial assets, an
entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. This statement
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. This statement is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. AT&T Broadband Group does not expect
that the adoption of SFAS No. 140 will have a material impact on AT&T Broadband
Group's results of operations, financial position or cash flows.
(7) SUBSEQUENT EVENTS
On April 9, 2001, a subsidiary of AT&T and Adelphia Communications
Corporation ("Adelphia") signed a definitive agreement in which certain cable
systems attributed to AT&T Broadband Group serving approximately 128,000
customers in central Pennsylvania and Ohio will be sold to Adelphia. AT&T
Broadband Group will receive cash of approximately $245 and Adelphia Class A
common stock valued at approximately $73, subject to adjustments. Pending
certain closing conditions and regulatory approvals, the transaction is expected
to close in the third quarter of 2001.
On April 30, 2001, a subsidiary of AT&T sold to Comcast certain cable
systems attributed to AT&T Broadband Group serving approximately 590,000
customers in New Mexico, Maryland, New Jersey, Pennsylvania and Tennessee in
exchange for 63.9 million shares of AT&T stock valued at $1,423.
D-123
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AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Effective June 30, 2001, AT&T, together with certain subsidiaries
attributed to AT&T Broadband Group, transferred its 99.75% interest in an entity
owning the Baltimore, Maryland cable system serving approximately 115,000
customers to Comcast for approximately $518.
Effective June 30, 2001, a subsidiary of AT&T transferred to Charter
Communications, Inc. ("Charter") cable systems attributed to AT&T Broadband
Group serving approximately 563,000 customers in Alabama, California, Illinois,
Missouri and Nevada. AT&T Broadband Group, through its attributed entities,
received $1,525 in cash, $222 in cash restricted for future acquisitions of
cable systems, and a cable system in Florida serving 9,000 customers.
On June 29, 2001, a subsidiary of AT&T sold to MediaCom Communications
Corporation ("MediaCom") cable systems attributed to AT&T Broadband Group
serving approximately 94,000 customers in Missouri for approximately $309 in
cash. In addition, AT&T and MediaCom have entered into definitive asset purchase
agreements in which certain cable systems attributed to AT&T Broadband Group
serving approximately 745,000 customers in Georgia, Iowa and Illinois will be
sold to MediaCom for approximately $1,895 in cash, subject to adjustments.
Pending certain closing conditions and regulatory approvals, the transaction is
expected to close in the third quarter of 2001.
On June 11, 2001, Excite@Home announced that it had completed the private
sale of $100 of zero-percent five-year convertible secured notes. The notes are
convertible at the holders' option at any time into Excite@Home Series A common
stock at a 10% premium to the weighted average trading price of these shares on
June 8, 2001, or $4.3806 per share. The notes mature in July 2006 but may be
redeemed by the holders on each anniversary of the date of issuance of the notes
or by Excite@Home on the second, third and fourth anniversaries of the date of
issuance of the notes. Subject to certain conditions, redemption may be made, at
the option of Excite@Home, either in cash or by issuing shares of its Series A
common stock.
On June 19, 2001 Excite@Home announced that it had renegotiated its
optical-fiber backbone capacity contract with AT&T. Under terms of the
renegotiated agreement, AT&T will refund $85 to Excite@Home for the cancellation
of the companies' original agreement and entry into a new agreement. The
companies said their new capacity agreement covers Excite@Home's existing
capacity and future upgrades, under which Excite@Home agreed to pay $8.8 per
year to AT&T for the next 18 1/2 years. Separately, Excite@Home agreed to pay
AT&T $7 in normal upgrade fees under the existing contract. The new arrangement
replaced in its entirety the non-binding letter of agreement described above.
On June 27, 2001, AT&T and Excite@Home announced a joint Service Level
Agreement for cross-network performance for their high-speed, dedicated Internet
access services. This joint Service Level Agreement, which supports the
agreement between AT&T and Excite@Home announced February 14, 2001, will be
effective for all business customers who purchase the managed multi-homing
service.
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473
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareowners of AT&T Corp.:
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations and changes in combined attributed net assets
and of cash flows present fairly, in all material respects, the financial
position of AT&T Broadband Group at December 31, 2000 and 1999, and the results
of their operations and their cash flows for the year ended December 31, 2000
and for the ten-month period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of AT&T Broadband Group's
management; our responsibility is to express our opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
AT&T Broadband Group is a fully integrated business unit of AT&T Corp.;
consequently, as indicated in Note 1, these combined financial statements have
been derived from the consolidated financial statements and accounting records
of AT&T Corp. and reflect certain assumptions and allocations. Moreover, as
indicated in Note 1, AT&T Broadband Group relies on AT&T Corp. for
administrative, management and other services. The financial position, results
of operations and cash flows of AT&T Broadband Group could differ from those
that would have resulted had AT&T Broadband Group operated autonomously or as an
entity independent of AT&T Corp. As more fully discussed in Note 1, the combined
financial statements of AT&T Broadband Group should be read in conjunction with
the audited consolidated financial statements of AT&T Corp.
PricewaterhouseCoopers LLP
New York, New York
May 9, 2001
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AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED STATEMENTS OF OPERATIONS
TEN MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
(DOLLARS IN MILLIONS)
REVENUE..................................................... $ 8,445 $ 5,080
Operating expenses:
Costs of services (excluding depreciation of $1,291 and
$663 for 2000 and 1999, respectively, included
below)................................................. 4,600 2,686
Selling, general and administrative....................... 2,180 1,253
Depreciation and other amortization....................... 1,674 805
Amortization of goodwill, franchise costs and other
purchased intangibles.................................. 2,377 869
Asset impairment, restructuring and other charges......... 6,270 644
-------- -------
Total operating expenses.................................... 17,101 6,257
-------- -------
Operating loss.............................................. 8,656 1,177
Other (expense) income.................................... (39) 50
Interest expense.......................................... 1,323 705
-------- -------
Loss before income taxes, net losses from equity investments
and minority interest..................................... 10,018 1,832
Benefit for income taxes.................................... 1,183 465
Net losses from equity investments.......................... 597 707
Minority interest income (expense).......................... 4,062 (126)
-------- -------
Net loss.................................................... $ 5,370 $ 2,200
======== =======
The notes are an integral part of the combined financial statements.
D-126
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AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED BALANCE SHEETS
DECEMBER 31,
---------------------
2000 1999
--------- --------
(DOLLARS IN MILLIONS)
ASSETS
Cash and cash equivalents................................... $ 61 $ --
Trade receivables, less allowances of $74 and $25........... 774 407
Deferred income taxes....................................... -- 261
Investments................................................. 2,204 --
Other current assets........................................ 467 432
-------- -------
Total current assets................................... 3,506 1,100
Property, plant and equipment, net.......................... 15,187 7,780
Franchise costs, net of accumulated amortization of $1,664
and $697.................................................. 48,218 32,693
Goodwill, net of accumulated amortization of $240 and $5.... 21,139 129
Investments................................................. 25,045 13,334
Other assets, net of accumulated amortization of $578 and
$150...................................................... 4,439 3,192
-------- -------
Total assets........................................... $117,534 $58,228
======== =======
LIABILITIES AND COMBINED ATTRIBUTED NET ASSETS
Accounts payable............................................ $ 1,250 $ 1,047
Payroll and benefit-related liabilities..................... 570 720
Debt maturing within one year............................... 3,073 932
Short-term debt due to AT&T................................. 5,830 4,297
Deferred income tax liability............................... 486 --
Liability under put options................................. 2,564 --
Other current liabilities................................... 2,177 1,106
-------- -------
Total current liabilities.............................. 15,950 8,102
Long-term debt.............................................. 19,517 9,671
Deferred income taxes....................................... 28,550 18,142
Other long-term liabilities and deferred credits............ 1,069 397
-------- -------
Total liabilities...................................... 65,086 36,312
Minority interest........................................... 4,421 2,327
Company-Obligated Convertible Quarterly Income Preferred
Securities of Subsidiary Trust Holding Solely Subordinated
Debt Securities of AT&T................................... 4,710 4,700
Combined attributed net assets.............................. 43,317 14,889
-------- -------
Total liabilities and combined attributed net assets........ $117,534 $58,228
======== =======
The notes are an integral part of the combined financial statements.
D-127
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AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED STATEMENTS OF CHANGES IN COMBINED
ATTRIBUTED NET ASSETS
TEN MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
(DOLLARS IN MILLIONS)
COMBINED ATTRIBUTED NET ASSETS:
Balance at beginning of period............................ $14,889 $14,377
Net loss.................................................. 5,370 2,200
Contributions from AT&T, net.............................. 35,101 2,128
Issuance of common stock by affiliates.................... (54) 515
Net revaluation of financial instruments.................. (1,256) 69
Other comprehensive income................................ 7 --
------- -------
Balance at end of period.................................. $43,317 $14,889
======= =======
SUMMARY OF TOTAL COMPREHENSIVE INCOME:
Net loss.................................................. $ 5,370 $ 2,200
Net revaluation of financial instruments (net of tax
(provision) benefit of $711 and $(36))................. (1,256) 69
Other comprehensive income................................ 7 --
------- -------
Total comprehensive loss............................... $ 6,619 $ 2,131
======= =======
The notes are an integral part of the combined financial statements.
D-128
477
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED STATEMENTS OF CASH FLOW
TEN MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
(DOLLARS IN MILLIONS)
OPERATING ACTIVITIES:
Net loss.................................................... $ 5,370 $ 2,200
Adjustments to reconcile net loss to net cash provided by
operating activities:
Gains on sales of businesses and investments.............. (616) (39)
Asset impairment, restructuring and other charges, net of
cash payments.......................................... 6,216 594
Depreciation and amortization............................. 4,051 1,674
Provision for uncollectibles.............................. 154 75
Net losses from equity investments........................ 967 1,145
Deferred income taxes..................................... (880) (422)
Impairment of investments................................. 240 --
Market adjustment for put option.......................... 537 --
Minority interest......................................... (4,039) 180
Increase in accounts receivable........................... (263) (116)
Increase (decrease) in accounts payable................... (90) 447
Net change in other operating assets and liabilities...... (298) 143
Other adjustments, net.................................... 193 (101)
------- -------
Net cash provided by operating activities.............. 802 1,380
------- -------
INVESTING ACTIVITIES:
Capital expended for property and equipment, net of
proceeds from disposal................................. (4,426) (3,161)
Sales of marketable securities............................ 96 --
Purchase of marketable securities......................... (14) --
Equity investment distributions and sales................. 578 817
Equity investment contributions and purchases............. (593) (1,308)
Net cash received (paid) for acquisitions and dispositions
of businesses.......................................... (71) 740
Other investing activities, net........................... (81) (3)
------- -------
Net cash used in investing activities.................. (4,511) (2,915)
------- -------
FINANCING ACTIVITIES:
Proceeds from long-term debt issuances.................... 3,862 --
Issuance of convertible securities........................ -- 4,638
Retirements of long-term debt............................. (1,429) (2,031)
Retirements of redeemable securities...................... (152) --
Dividends paid on preferred securities.................... (294) (135)
Increase in short-term debt due to AT&T................... 1,533 4,297
Transfers from (to) AT&T, net............................. 765 (5,234)
Other financing activities, net........................... (515) --
------- -------
Net cash provided by financing activities.............. 3,770 1,535
------- -------
Net change in cash and cash equivalents..................... 61 --
------- -------
Cash and cash equivalents at beginning of period............ -- --
------- -------
Cash and cash equivalents at end of period.................. $ 61 $ --
======= =======
The notes are an integral part of the combined financial statements.
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478
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND UNLESS OTHERWISE NOTED)
1. BASIS OF PRESENTATION
On October 25, 2000, AT&T announced a restructuring plan designed to fully
separate or issue separately tracked stocks intended to reflect the financial
performance and economic value of each of AT&T's four major operating units.
Upon completion of the plan, AT&T Wireless, AT&T Broadband, AT&T Business and
AT&T Consumer will all be represented by asset-based or tracking stocks. The
accompanying combined financial statements reflect the business of AT&T
Broadband Group.
AT&T Broadband Group is a fully integrated business unit of AT&T and is not
a separate legal entity. The AT&T Broadband Group consists primarily of the
assets, liabilities and business of AT&T Broadband, LLC (formerly
Tele-Communications, Inc. ("TCI")) and MediaOne Group, Inc. ("MediaOne"), and
includes At Home Corporation ("Excite@Home"). AT&T Broadband, LLC ("ATTBLLC")
and MediaOne are both separate subsidiaries of AT&T. The AT&T Broadband Group is
primarily engaged in the construction, acquisition, ownership and operation of
cable television systems throughout the United States. AT&T Broadband Group
offers a variety of services through its cable broadband network, including
traditional analog video and advanced services such as digital video service,
high-speed cable Internet service and broadband telephony service.
On March 9, 1999, AT&T acquired TCI in a merger (the "TCI Merger") which
was attributed to AT&T Broadband Group. The results of operations, financial
position, changes in combined attributed net assets and cash flows of the
business of AT&T Broadband, LLC which are included in AT&T Broadband Group have
been included since March 1, 1999, the deemed effective date of the TCI Merger
for accounting purposes. The impact of the results from March 1 through March 9,
1999 were deemed immaterial to the combined results. On June 15, 2000 AT&T
acquired MediaOne which was attributed to AT&T Broadband Group. The results of
operations, financial position, changes in combined attributed net assets and
cash flows of the businesses of MediaOne which are included in AT&T Broadband
Group have been included since June 15, 2000. See note 4.
The combined financial statements of AT&T Broadband Group are prepared in
accordance with generally accepted accounting principles. The combined financial
statements of AT&T Broadband Group reflect the assets, liabilities, revenue and
expenses directly attributable to AT&T Broadband Group, as well as allocations
deemed reasonable by management, to present the results of operations, financial
position, changes in combined attributed net assets, and cash flows of AT&T
Broadband Group on a stand-alone basis. The allocation methodologies have been
described within the notes to the combined financial statements where
appropriate, and management considers the allocations to be reasonable. All
significant intercompany accounts and transactions within the AT&T Broadband
Group have been eliminated. The financial information included herein may not
necessarily reflect the combined results of operations, financial position,
changes in combined attributed net assets and cash flows of AT&T Broadband Group
in the future or what they would have been had AT&T Broadband Group been a
separate, stand-alone entity during the periods presented. Earnings per share
disclosure has not been presented as AT&T Broadband Group is a business unit of
AT&T and earnings per share data is not considered meaningful. The combined
financial statements of AT&T Broadband Group should be read in conjunction with
AT&T's Form 10-K/A for the year ended December 31, 2000.
Debt attributed to AT&T Broadband Group includes the third party
obligations of AT&T Broadband LLC (formerly Tele-Communications, Inc.) and
MediaOne Group, Inc. and all
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AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
monetization debt. Additional intercompany debt has been allocated to AT&T
Broadband Group to achieve a total debt level based on several factors including
prospective financing requirements, desired standalone credit profile, working
capital and capital expenditure requirements, expected sources of future
deleveraging, and comparable company profiles. Increases in historical
intercompany debt are based on historical cash flows. Such cash outflows include
capital expenditures and investments in cable companies, offset by cash flow
from operations. By the time AT&T's restructuring activities are complete, the
then intercompany debt balance of AT&T Broadband Group will be replaced with an
equal amount of external debt in a manner to be determined. The historical
interest expense on the allocated intercompany debt was calculated based on a
rate intended to be equivalent to the rate AT&T Broadband Group would receive if
it were a stand-alone entity. Due to AT&T's deleveraging activities, the $28.4
billion of debt at December 31, 2000 is expected to be significantly lower in
the future. AT&T's expected deleveraging activities that relate to AT&T
Broadband Group include, but may not be limited, to the following: the announced
sale of rural cable systems which is expected to result in gross cash proceeds
of $3.3 billion and up to $0.5 billion of Charter Communications common stock;
any proceeds that may result from the exercise of AT&T's registration rights in
Time Warner Entertainment; and any proceeds from the sale of shares of
Cablevision Systems Corp. Finally, AT&T has made no final determination as to
the allocation of proceeds from the sale of shares of AT&T Broadband Group
tracking stock, between AT&T Communications Services and AT&T Broadband Group.
AT&T performs cash management functions on behalf of the AT&T Broadband
Group. Substantially all of the AT&T Broadband Group's cash balances are swept
to AT&T on a daily basis, where they are managed and invested by AT&T. Transfers
of cash to and from AT&T, after giving consideration to the debt allocation
methodology, are reflected as a component of combined attributed net assets. Net
transfers to or from AT&T are assumed to be settled in cash. AT&T's capital
contributions for purchase business combinations and initial investments in
joint ventures and partnerships which AT&T attributed to AT&T Broadband Group
have been treated as noncash transactions.
General corporate overhead related to AT&T's corporate headquarters and
common support divisions has been allocated to AT&T Broadband Group as it was
not deemed practicable to specifically identify such common costs to AT&T
Broadband Group. The allocation of corporate overhead is divided into an
allocation of shared services (e.g., payroll and finance) and other corporate
overhead. Costs of shared services are allocated to AT&T Broadband Group based
on transaction based prices. Other corporate overhead is allocated to AT&T
Broadband Group based on the ratio of AT&T Broadband Group's external costs and
expenses adjusted for any functions AT&T Broadband Group performs on its own.
The costs of these services charged to AT&T Broadband Group are not necessarily
indicative of the costs that would have been incurred if AT&T Broadband Group
had performed these functions entirely as a stand-alone entity, nor are they
indicative of costs that will be charged or incurred in the future. However,
management believes such allocations are reasonable.
Consolidated income tax provisions or benefits, related tax payments or
refunds, and deferred tax balances of AT&T have been allocated to AT&T Broadband
Group based principally on the taxable income and tax credits directly
attributable to AT&T Broadband Group, essentially a stand-alone presentation.
These allocations reflect AT&T Broadband Group's contribution to AT&T's
consolidated taxable income and the consolidated tax liability and tax credit
position. Prior to the issuance of any shares of AT&T Broadband Group's tracking
stock, AT&T and AT&T Broadband Group have
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AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
entered into a tax sharing agreement that will provide for tax sharing payments
based on the tax expense or tax benefits of a hypothetical affiliated group
consisting of AT&T Broadband Group and AT&T Communications Services, Inc. Based
on this agreement, the consolidated tax liability before credits will be
allocated between the groups, based on each group's contribution to consolidated
taxable income of the hypothetical group. Consolidated tax credits of the
hypothetical group will be allocated between groups based on each group's
contribution to each tax credit.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenue for customer fees, equipment rental, advertising, and pay-per-view
programming is recognized in the period the services 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
recognized over the estimated average period customers are expected to remain
connected to the cable distribution system.
During 2000, AT&T Broadband Group adopted Securities and Exchange
Commission ("SEC") Staff Accounting Bulletin No. 101 ("SAB No. 101"), "Revenue
Recognition in Financial Statements." The adoption of SAB No. 101 did not have a
material impact on combined results of operations or financial condition.
ADVERTISING AND PROMOTIONAL COSTS
Advertising and promotional costs are expensed as incurred. Advertising and
promotional expenses were $325, and $138 for the year ended December 31, 2000
and the ten months ended December 31, 1999, respectively.
INCOME TAXES
AT&T Broadband Group is not a separate taxable entity for federal and state
income tax purposes and its results of operations are included in the
consolidated federal and state income tax returns of AT&T and its affiliates.
The provision for income taxes is based on AT&T Broadband Group's contribution
to the overall income tax liability or benefit of AT&T and its affiliates.
STOCK-BASED COMPENSATION
Stock-based compensation is accounted for in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
AT&T Broadband Group follows the disclosure-only provisions of Statement of
Financial Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based
Compensation."
CASH EQUIVALENTS
All highly liquid investments with original maturities of three months or
less are considered to be cash equivalents.
INVESTMENTS
Investments in which AT&T Broadband Group exercises significant influence,
but does not control, are accounted for under the equity method of accounting.
Under the equity method, investments are stated at cost and are adjusted for
AT&T Broadband Group's subsequent
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481
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
contributions and share of earnings, losses and distributions. The excess of the
investment over the underlying book value of the investee's net assets is being
amortized over periods ranging from 25 to 40 years. Investments in which AT&T
Broadband Group has no significant influence over the investee are accounted for
under the cost method of accounting. Under the cost method, investments are
stated at cost and earnings are recognized to the extent distributions are
received from the accumulated earnings of the investee. Distributions in excess
of accumulated earnings are recognized as a reduction of the investment balance.
Marketable equity securities are classified as available-for-sale and are
carried at fair market value with unrealized gains and losses, net of tax,
included in combined attributed net assets as a component of other comprehensive
income. The fair market value of these securities is based on quoted market
prices.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Construction costs, labor
and applicable overhead related to installations and interest during
construction are capitalized.
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
equipment and buildings.
Repairs and maintenance are charged to operations, and additions and
replacements 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 charged to accumulated depreciation, and salvage, if any, is
credited thereto. Gains or losses are only recognized in connection with the
sales of properties in their entirety.
FRANCHISE COSTS
Franchise costs include the value attributed to agreements with local
authorities that allow access to homes in cable service areas acquired in
connection with a business combination. Such amounts are generally amortized on
a straight-line basis over 40 years. Costs incurred by the AT&T Broadband Group
in negotiating and renewing franchise agreements are amortized on a
straight-line basis over the life of the franchise, generally 10 to 20 years.
GOODWILL
Goodwill is the excess of the purchase price over the fair value of net
assets acquired in business combinations accounted for as purchases. Goodwill is
amortized on a straight-line basis over 7 to 40 years.
SOFTWARE CAPITALIZATION
Certain direct development costs associated with internal-use software are
capitalized, including external direct costs of material and services, and
payroll costs for employees devoting time to the software projects. Such costs
are included within other assets and are amortized over a period not to exceed
five years beginning when the asset is substantially ready for use. Costs
incurred during the preliminary project stage, as well as maintenance and
training costs, are expensed as incurred. Initial operating-system software
costs are capitalized and amortized over the life of the associated hardware.
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482
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
VALUATION OF LONG-LIVED ASSETS
Long-lived assets such as property, plant and equipment, franchise costs,
goodwill, investments and software are reviewed for impairment whenever events
or changes in circumstances indicate the carrying amount may not be recoverable.
If the total of the expected future undiscounted cash flows is less than the
carrying amount of the asset, a loss is recognized for the difference between
the fair value and carrying value of the asset. Assets to be disposed of are
carried at the lower of their financial statement carrying value or fair value
less cost to sell. In addition, in accordance with Accounting Principles Board
("APB") Opinion No. 17, "Intangible assets," the amortization periods are
evaluated to determine whether events or circumstances warrant revised
amortization periods.
DERIVATIVE FINANCIAL INSTRUMENTS
AT&T Broadband Group uses various financial instruments, including
derivative financial instruments, for purposes other than trading. Derivative
financial instruments are not used for speculative purposes. Derivatives, used
as part of the risk-management strategy, are designated at inception as a hedge
and measured for effectiveness both at inception and on an ongoing basis.
Interest rate differentials associated with interest rate swaps used to hedge
debt obligations are recorded as an adjustment to interest payable or receivable
with the offset to interest expense over the life of the swaps. If an interest
rate swap agreement is terminated, the gain or loss is deferred and amortized
over the remaining life of the liability. Purchased and written options
("Collars") are carried at fair value, with unrealized gains and losses, net of
tax, being recorded within other comprehensive income as a component of combined
attributed net assets. Cash flows from financial instruments are classified in
the combined statements of cash flows under the same categories as the cash
flows from the related assets, liabilities or anticipated transactions.
CASH FLOWS
For purposes of the combined statements of cash flows, all transactions
between AT&T Broadband Group and AT&T, except for purchase business combinations
and initial investments in joint ventures and partnerships which were funded by
AT&T and contributed by AT&T to AT&T Broadband Group, have been accounted for as
having been settled in cash at the time the transaction was recorded by AT&T
Broadband Group.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and revenue and expenses during the period reported. Actual results
could differ from those estimates. Estimates are used when accounting for
certain items such as long-term contracts, allowance for doubtful accounts,
depreciation and amortization, employee benefit plans, taxes, restructuring
reserves, impairment and contingencies.
CONCENTRATIONS
As of December 31, 2000, except for 80% of the billing services being
provided by a single vendor (see note 14), AT&T Broadband Group does not have
any significant concentration of business transacted with a particular customer,
supplier or lender that could, if suddenly eliminated, severely impact its
operations. AT&T Broadband Group does not have a concentration of available
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483
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
sources of labor, services, or other rights that could, if suddenly eliminated,
severely impact its operations.
ISSUANCE OF COMMON STOCK BY AFFILIATES
Changes in the proportionate share of the underlying equity of an
attributed entity or equity method investee, which result from the issuance of
additional equity securities by such entity, are recognized as increases or
decreases to combined attributed net assets.
RECOGNITION OF GAINS ON ASSET DISPOSITIONS
From time to time, AT&T Broadband Group contributes cable television
systems to joint ventures and partnerships in exchange for a non-controlling
interest in such entity. In connection with such contributions, AT&T Broadband
Group may guarantee the debt of the joint venture or partnership. AT&T Broadband
Group defers any gain associated with such transactions until such time as AT&T
Broadband Group has no remaining financial obligation to the joint venture or
partnership.
3. SUPPLEMENTAL FINANCIAL INFORMATION
SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION
TEN MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
OTHER INCOME (EXPENSE), NET
Gains on sales of businesses and investments.............. $ 616 $ 39
Impairment of investments................................. (240) --
Interest and dividend income.............................. 77 8
Mark to market change on put option....................... (537) --
Other..................................................... 45 3
-------- ------
Other (expense) income................................. $ (39) $ 50
======== ======
SUPPLEMENTARY BALANCE SHEET INFORMATION
DECEMBER 31,
----------------------------
2000 1999
------------ ------------
PROPERTY, PLANT AND EQUIPMENT
Land and improvements..................................... $ 135 $ 114
Distribution systems...................................... 13,133 5,577
Support equipment and buildings........................... 2,580 1,026
Construction in progress.................................. 1,417 1,696
Accumulated depreciation.................................. (2,078) (633)
-------- ------
Property, plant and equipment, net..................... $ 15,187 $7,780
======== ======
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484
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTARY CASH FLOW INFORMATION
TEN MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
Interest payments, net of amounts capitalized............... $ 1,016 $ 488
-------- ------
Income tax payments......................................... $ 62 $ 8
-------- ------
4. MERGERS, ACQUISITIONS, VENTURES, DISPOSITIONS AND EXCHANGES
MERGER WITH TELE-COMMUNICATIONS, INC.
The AT&T Broadband Group was created upon the merger of TCI with a
subsidiary of AT&T. The TCI Merger was completed on March 9, 1999, in an
all-stock transaction valued at approximately $52 billion. TCI simultaneously
combined its Liberty Media Group programming business with its TCI Ventures
Group technology investments business, forming Liberty Media Group ("LMG"). In
connection with the TCI Merger, AT&T issued a separate tracking stock in
exchange for the TCI Liberty Media Group and TCI Ventures Group tracking shares
previously outstanding. LMG is excluded from AT&T Broadband Group.
The TCI Merger was accounted for under the purchase method of accounting,
accordingly, AT&T recorded the assets and liabilities of TCI at their fair
values and TCI results have been included since March 1, 1999, the deemed
effective date of the merger. Approximately $20 billion of the purchase price of
$52 billion was attributed to franchise costs and is being amortized on a
straight-line basis over 40 years. Franchise costs represent the value
attributable to the agreements with local franchise authorities that allow
access to homes in the broadband service areas. Pursuant to SFAS No. 109,
"Accounting for Income Taxes," AT&T recorded an approximate $13 billion deferred
tax liability in connection with this franchise intangible, which is also
included in franchise costs. AT&T does not expect that this deferred tax
liability will ever be paid. This deferred tax liability is being amortized on a
straight-line basis over 40 years and is included in the provision for income
taxes. Also included in the $52 billion purchase price was approximately $11
billion related to nonconsolidated investments, approximately $5 billion related
to property, plant and equipment, approximately $11 billion of long-term debt,
and $7 billion related to other net liabilities. In addition, $34 billion was
attributed to the investment in LMG which is excluded from the AT&T Broadband
Group.
MERGER WITH MEDIAONE
On June 15, 2000, AT&T completed a merger with MediaOne in a cash and stock
transaction valued at approximately $45 billion (the "MediaOne Merger"). The
AT&T shares had an aggregate market value of approximately $21 billion and cash
payments totaled approximately $24 billion.
The MediaOne Merger was accounted for under the purchase method of
accounting; accordingly the results of MediaOne have been included in the
accompanying combined financial statements since the date of acquisition.
Approximately $16 billion of the purchase price of $45 billion has been
attributed to franchise costs and is being amortized on a straight-line basis
over 40 years. Also included in the $45 billion purchase price was approximately
$22 billion related to nonconsolidated investments, including investments in TWE
and Vodafone Group, plc, approximately $5 billion related to property, plant and
equipment, and $7 billion of other net assets. In addition, included was
approximately $14 billion in deferred income tax liabilities, approximately $10
billion attributable to
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485
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
debt and approximately $1 billion of minority interest. AT&T did not attribute
$7 billion of cash acquired in the MediaOne merger to AT&T Broadband Group. The
purchase price resulted in preliminary goodwill of $20 billion, which is being
amortized on a straight-line basis over 40 years. Refinements to the allocation
of purchase price may be made in future periods as the related fair value
appraisals of certain assets and liabilities are finalized.
PRO FORMA RESULTS
Following is a summary of the pro forma results of AT&T Broadband Group as
if the MediaOne Merger had closed effective March 1, 1999:
TEN MONTHS
YEAR ENDED ENDED
DECEMBER 31, 2000 DECEMBER 31, 1999
----------------- -----------------
(UNAUDITED)
Revenue...................................... $ 9,770 $7,326
Operating loss............................... $ 9,089 $1,832
Net income (loss)............................ $(4,422) $1,047
Pro forma data may not be indicative of the results that would have been
obtained had the events actually occurred at the beginning of the periods
presented, nor does it intend to be a projection of future results.
Excite@Home. On August 28, 2000, AT&T and Excite@Home announced
shareholder approval of a new board of directors and governance structure for
Excite@Home and completion of the extension of distribution contracts with AT&T,
Cox Communications, Inc. ("Cox") and Comcast Corporation ("Comcast"). In
connection with the above described announcement, AT&T was given the right to
designate six of the 11 Excite@Home board members. In addition, Excite@Home
converted approximately 50 million shares of Excite@Home's Series A common stock
held by AT&T into Series B shares, each of which has 10 votes. As a result of
these governance changes, AT&T gained a controlling financial interest and AT&T
Broadband Group, through ATTBLLC, began consolidating Excite@Home's results upon
the closing of the transaction on September 1, 2000, at which time ATTBLLC had
an approximate 24% economic interest and 74% voting interest. As of December 31,
2000, ATBLLC had, on a fully diluted basis, an approximate 23% economic interest
and 74% voting interest in Excite@Home. Excite@Home has been attributed to AT&T
Broadband Group.
In exchange for Cox and Comcast relinquishing their rights under the
shareholder agreement, AT&T granted put options to Cox and Comcast on a combined
total of 60.4 million shares of Excite@Home Series A common stock. The put
options provide Cox and Comcast with the right to convert their Excite@Home
shares into either AT&T stock or cash at their option, at any time between
January 1, 2001 and June 4, 2002, at the higher of (i) $48 per share or (ii) the
30 day average trading price at the time of exercise (beginning 15 trading days
prior to the exercise date and ending 15 days after the exercise date). If the
average price is above $48 per share, the number of Excite@Home shares that AT&T
would acquire would be reduced proportionately from the original 60.4 million
shares. Accordingly, the maximum amount AT&T would be required to pay in cash or
stock is approximately $2,900 based on the $48 strike price. The obligation
under these put options has been attributed to AT&T Broadband Group and is
reflected in current liabilities on the balance sheet at the fair value of the
put options. Gains or losses resulting from changes in the fair value of the put
options are recorded as a component of other income (expense). For 2000, changes
in the
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486
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
fair value of the put options resulted in a pre-tax expense of $537. Subsequent
to December 31, 2000, Cox and Comcast exercised their put options electing to
receive AT&T Common shares. See note 17.
Also, in connection with the extension of certain distribution agreements
through 2008, AT&T obtained the right to purchase up to approximately 25 million
Excite@Home Series A shares and 25 million Series B shares. In addition, Cox and
Comcast each will receive new warrants to purchase two Series A shares for each
home their respective cable systems pass. Such warrants will vest in
installments every six months beginning in June 2001, and be fully vested by
June 2006, if Cox and Comcast elect to continue their extended non-exclusive
distribution agreements through that period.
The consolidation of Excite@Home resulted in minority interest of
approximately $2,200, goodwill of approximately $2,400, short-term liabilities
of approximately $2,400 (including an initial put option liability), other net
assets of approximately $1,200 and the removal of the investment in Excite@Home
of approximately $1,900.
Cox Communications, Inc. On March 15, 2000, AT&T Broadband Group, through
ATTBLLC, received 50.3 million shares of AT&T common stock held by Cox in
exchange for an entity owning cable television systems serving approximately
312,000 customers and certain other net assets. The AT&T common stock received
in such transaction has been included in combined attributed net assets.
Specifically, AT&T Broadband Group exchanged $1,088 of investments, $878 of
franchise costs and $503 of other net assets for stock valued at $2,658 on March
15, 2000. The transaction resulted in a pre-tax gain of $189.
Lenfest Communications, Inc. On January 18, 2000, AT&T Broadband Group,
through ATTBLLC, sold its ownership interest in Lenfest Communications, Inc., to
a subsidiary of Comcast. In connection with the sale, AT&T Broadband Group
received 47.3 million shares of Comcast Class Special A common stock. The
transaction resulted in a pretax gain of $224.
ACQUISITION-RELATED INTANGIBLE ASSETS
As a result of an evaluation of recent changes in our industry and the
views of regulatory authorities, AT&T Broadband Group expects that the
amortization period for all franchise costs and goodwill associated with newly
acquired cable operations will not exceed 25 years.
5. ASSET IMPAIRMENT, RESTRUCTURING AND OTHER CHARGES
During 2000, AT&T Broadband Group recorded $6,270 of asset impairment,
restructuring and other charges which included $6,179 of asset impairment
charges related to Excite@Home.
The charges related to Excite@Home include $4,609 in asset impairment
charges taken by Excite@Home associated with the goodwill impairment from
various acquisitions and a related goodwill impairment of $1,570 recorded by
AT&T Broadband Group associated with its acquisition goodwill of Excite@Home.
The impairments resulted from the deterioration of the market conditions
and market valuations of Internet-related companies during the fourth quarter of
2000, which caused Excite@Home to conclude that intangible assets related to
their acquisitions of Internet-related companies may not be recoverable. In
accordance with SFAS 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of", Excite@Home conducted a detailed
assessment of the recoverability of the carrying amounts of acquired intangible
assets. This assessment resulted in a determination that certain acquired
intangible assets, including goodwill, related to these acquisitions
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AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
were impaired as of December 31, 2000. As a result, AT&T Broadband Group
recorded impairment charges of $4,609 in December 2000, representing the excess
of the carrying amount of the impaired assets over their fair value.
The review for impairment included a review of publicly-traded Internet
companies that are comparable to the companies that Excite@Home acquired. These
companies experienced a substantial decline in stock price and market
capitalization during the fourth quarter of 2000.
Excite@Home also reviewed the business climate for Internet advertising and
web-based infrastructure companies as of December 31, 2000, and observed the
following: (1) investor and consumer enthusiasm for the Internet sector severely
deteriorated during the fourth quarter of 2000; (2) many Internet companies,
including those acquired by Excite@Home, experienced significant decelerations
in their growth both as a result of economic conditions and due to
Internet-sector specific issues such as competition and the weakening of the
Internet advertising market; and (3) funding sources for Internet-based consumer
businesses, which require considerable amounts of capital, had substantially
evaporated as of December 31, 2000. As a result, Excite@Home concluded that
fundamental, permanent and significant adverse changes had occurred during the
fourth quarter of 2000 in the business climate for companies providing Internet
advertising and other web-based services.
In addition, Excite@Home reviewed operating and cash flow projections that
existed at the time Excite@Home made the acquisitions and that were used as a
basis upon which the decisions to complete acquisition were made. These
operating and cash flow projections indicated that the acquired companies, over
their useful lives, would be profitable and generate positive cash flows. The
operating and cash flow projections were compared to operating results after the
date of the acquisitions through December 31, 2000, as well as to projected
operating results for 2001. These comparisons indicated that certain
acquisitions generated operating and cash flow losses through the end of 2000,
and were projected to continue generating operating and cash flow losses for the
foreseeable future.
As a result of these factors, Excite@Home determined that the intangible
assets related to the acquisitions might not be recoverable and conducted
impairment tests.
Generally, the impairment tests were performed at an asset group level
corresponding to the lowest level at which cash flows independent of other
assets could be identified. Each asset group consisted of the goodwill and
acquired identifiable intangible assets related to a specific acquisition.
Acquired intangible assets were combined for those acquisitions where separately
identifiable cash flows that are largely independent of the cash flows of other
groups of assets could not be identified.
For each of the asset groups to be tested for impairment, Excite@Home
projected undiscounted cash flows over a future projection period of five years,
based on Excite@Home's determination of the current remaining useful lives of
the asset groups, plus an undiscounted terminal period cash flow to reflect
disposition of the entities at the end of their useful lives. Undiscounted
future cash flows were estimated using projected net realizable value in a sales
transaction (undiscounted cash flows during the expected remaining holding
period until disposition were estimated as negligible). The undiscounted future
cash flows were compared to the carrying amount of each asset group and for
those asset groups where the carrying amount exceeded the undiscounted future
cash flows, Excite@Home concluded that the asset group was impaired.
Excite@Home measured the impairment loss related to impaired asset groups
based on the amount by which the carrying amount of the asset group exceeded the
fair value of the asset group.
D-139
488
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Measurement of fair value was based on an analysis by Excite@Home, with
assistance from independent valuation experts, utilizing the best information
available in the circumstances using reasonable and supportable assumptions and
projections, and including the discounted cash flow and market comparison
valuation techniques. The discounted cash flow analysis considered the
likelihood of possible outcomes and was based on Excite@Home's best estimate of
projected future cash flows, including terminal value cash flows expected to
result from the disposition of the asset at the end of its useful life,
discounted at Excite@Home's weighted average cost of capital. Weighted average
cost of capital was based on historical risk premiums required by investors for
companies of Excite@Home's size, industry and capital structure and included
risk factors specific to Excite@Home. The market comparison model represented
Excite@Home's estimate of the prices that a buyer would be willing to pay
currently for similar assets, based on comparable products and services,
customer base, risks, earnings capabilities and other factors.
Based on the foregoing, Excite@Home recorded an impairment write-down of
$4,609 in aggregate, which was allocated to each asset group based on a
comparison of carrying values and fair values. The impairment write-down within
each asset group was allocated first to goodwill, and if goodwill was reduced to
zero, to identifiable intangible assets in proportion to carrying values.
Also as a result of the foregoing, AT&T Broadband Group recorded a goodwill
impairment charge associated with the acquisition of ATTBLLC's investment in
Excite@Home. The write-down of ATTBLLC's investment to fair value was similarly
based on independent appraisals, utilizing discounted expected future cash
flows.
Since AT&T Broadband Group, through ATTBLLC owns approximately 23% of
Excite@Home, 77% of the charge recorded by Excite@Home is not included as an
increase in AT&T Broadband Group's net loss, but rather is eliminated in the
statement of operations as minority interest income (expense).
In 2000, a $91 charge for restructuring and exit costs was recorded
primarily as part of the integration of MediaOne, the centralization of certain
functions, and the consolidation of call center facilities. The charge for the
year ended December 31, 2000, included termination benefits of $61 associated
with the involuntary separation of about 1,060 employees. Approximately 25% of
the individuals were management employees and 75% were non-management employees.
Approximately 74% of the affected employees have left their positions as of
December 31, 2000. The $91 charge included a loss of $30 recognized on the
disposition of facilities as a result of synergies created by the MediaOne
Merger.
The following table displays the activity and balances of the restructuring
reserve account from January 1, 2000, to December 31, 2000. There was no
activity in the restructuring reserve account from March 1, 1999 to December 31,
1999.
JANUARY 1, DECEMBER 31,
2000 2000
TYPE OF COST BALANCE ADDITIONS DEDUCTIONS BALANCE
------------ ---------- --------- ---------- ------------
Employee separations..................... $-- $61 $(45) $16
Facility closings........................ -- 30 (30) --
-- --- ---- ---
Total............................... $-- $91 $(75) $16
== === ==== ===
D-140
489
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Deductions reflect cash payments of $45 and noncash utilization of $30.
This cash outlay was funded primarily through cash from operations. Noncash
utilization included the loss on the disposition of facilities.
During 1999, AT&T Broadband Group recorded $644 of asset impairment,
restructuring and other charges. Such amount included a $594 in-process research
and development charge which reflected the estimated fair value of research and
development projects at AT&T Broadband Group, as of the date of the TCI Merger,
which had not yet reached technological feasibility or that had no alternative
future use. The projects identified related to TCI's efforts to offer voice over
Internet protocol ("IP"), product integration efforts for advanced set-top
devices that would enable AT&T Broadband Group to offer next-generation digital
services, and cost-savings efforts for cable telephony implementation. In
addition, Excite@Home had research and development efforts underway, including
projects to allow for self-provisioning of devices and the development of
next-generation client software, network and back-office infrastructure to
enable a variety of network devices, and improved design for the regional data
center's infrastructure. We began testing IP telephony equipment in the field in
the fourth quarter of 2000. We anticipate beginning field trials related to
product integration efforts for set-top devices in late 2001, and have completed
trials related to telephony reductions and implementation has begun in certain
markets. Although there are significant technological issues to overcome to
successfully complete the acquired in-process research and development, AT&T
Broadband Group expects successful completion. If, however, AT&T Broadband Group
is unable to establish technological feasibility and produce commercially viable
products/ services, the anticipated incremental future cash flows attributable
to expected profits from such new products/services may not be realizable.
The 1999 charge also included a $50 loss related to a contribution
agreement TCI entered into with Phoenixstar, Inc. that requires AT&T Broadband
Group to satisfy certain liabilities owed by Phoenixstar, Inc. and its
subsidiaries. The remaining obligation under this contribution agreement and an
agreement that MediaOne has is $57, which was fully accrued at December 31,
2000.
6. INVESTMENTS
Subsidiaries of AT&T have investments in various companies and partnerships
accounted for under the equity method which have been attributed to AT&T
Broadband Group. At December 31, 2000 and 1999, equity investments of $6,350 and
$13,059, respectively, had been attributed to AT&T Broadband Group. The carrying
value of these investments exceeded AT&T Broadband Group's share of the
underlying reported net assets by approximately $5,455 and $10,894 at December
31, 2000 and 1999, respectively. The excess cost is being amortized over periods
ranging from 25 to 40 years. Pretax amortization of the excess cost of $485 and
$476 for the year ended December 31, 2000 and for the ten months ended December
31, 1999, respectively, is reflected as a component of net losses from equity
investments, net of income tax benefit in the accompanying combined statements
of operations.
D-141
490
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Ownership of significant equity investments attributed to AT&T Broadband
Group was as follows:
AT DECEMBER 31,
------------------
2000 1999
------ ------
Cablevision Systems Corporation............................ 27.98%(a) 32.04%(a)
Time Warner Texas.......................................... 50.00% 50.00%
Insight Midwest LP......................................... 50.00% 50.00%
Century-TCI California Communications, LP.................. 25.00% 25.00%
Kansas City Cable Partners................................. 50.00% 50.00%
Parnassos Communications, LP............................... 33.33% 33.33%
US Cable of Coastal-Texas, LP.............................. 37.06% 37.06%
Mid Continent Communications............................... 50.00%(b) --
At Home Corporation........................................ -- 25.00%(c)
Lenfest Communications, Inc................................ -- 50.00%(d)
Bresnan Communications Group LLC........................... -- 50.00%(e)
-------------------------
(a) At December 31, 2000 and 1999, AT&T Broadband Group, through ATTBLLC, owned
48,942,172, shares of Cablevision Systems Corporation Class A common stock,
which had a closing market price of $84.94 and $75.50 per share,
respectively, on such dates. Cablevision System Corporation ("Cablevision")
exercised its right to redeem all of its outstanding preferred stock and
issued additional common stock. Cablevision also issued shares of its common
stock for acquisitions. As a result of these transactions, ATTBLLC's
ownership interest in Cablevision decreased from 32.04% to 27.98%. Due to
the resulting decrease in Cablevision's equity, net of the dilution of
ATTBLLC's ownership interest in Cablevision, AT&T Broadband Group recorded a
net decrease to "Combined attributed net assets" of $170 in 2000.
(b) On April 1, 2000, AT&T Broadband Group, through ATTBLLC, contributed cable
and ad sales systems to Mid Continent Communications, a newly formed
partnership, in exchange for a 50% interest in the partnership. A gain of $5
is being deferred due to a keep well agreement with the partnership.
(c) On August 28, 2000, AT&T and Excite@Home announced the closing of their
extension contracts and governance reorganization. As a result of the
governance changes, AT&T gained a controlling financial interest and AT&T
Broadband Group, through ATTBLLC, began consolidating Excite@Home's results
on September 1, 2000. As of December 31, 2000, ATTBLLC had an approximate
23% economic interest and 74% voting interest in Excite@Home. ATTBLLC owned
7,924,422 and 63,720,000 shares of Excite@Home Class A common stock at
December 31, 2000 and 1999, respectively, with closing market prices of
$5.53 and $42.88 per share, respectively. ATTBLLC also owned 86,595,578 and
30,800,000 shares of Excite@Home Class B common stock at December 31, 2000
and 1999, respectively, which are not publicly traded. During 2000 and 1999,
Excite@Home issued shares of its common stock for various acquisitions. As a
result of these transactions, ATTBLLC's economic interest in Excite@Home
decreased from 25% to 23% in 2000, and from 38% to 25% in 1999,
respectively. Due to the resulting increase in Excite@Home equity, net of
the dilution of ATTBLLC's
D-142
491
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
ownership interest in Excite@Home, AT&T Broadband Group recorded an increase to
"combined attributed net assets" of $116 and $527 in 2000 and 1999,
respectively.
(d) On January 18, 2000, AT&T Broadband Group, through ATTBLLC, sold its
interest in Lenfest Communications, Inc. to Comcast. See note 4.
(e) On February 14, 2000, AT&T Broadband Group, through ATTBLLC, sold its
interest in Bresnan Communications Group LLC to Charter Communications, Inc.
("Charter") for $285 in cash and a cost investment valued at $629 in Charter
Communications VIII, LLC. The transaction resulted in a pretax gain of $33.
Summarized unaudited combined financial information for investments
accounted for under the equity method was as follows:
FOR THE
FOR THE TEN MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
Revenue.............................................. $ 6,578 $ 6,148
Operating loss....................................... $ 1,419 $ 1,401
Net loss............................................. $ 2,447 $ 2,327
DECEMBER 31,
------------------
2000 1999
------- -------
(UNAUDITED)
Current assets.............................................. $ 1,092 $ 1,394
Noncurrent assets........................................... 17,763 20,815
Current liabilities......................................... 2,796 3,248
Noncurrent liabilities...................................... 14,910 12,441
Redeemable preferred stock.................................. 1,514 1,685
Minority interests.......................................... 586 614
At December 31, 2000, AT&T Broadband Group, through MediaOne, had a 25.51%
interest in TWE. This investment is "held-for-sale" at December 31, 2000.
Accordingly, AT&T Broadband Group is no longer recording equity earnings or
losses on this investment.
D-143
492
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Subsidiaries of AT&T also have investments accounted for under the cost
method of accounting which have been attributed to AT&T Broadband Group.
Included in current investments is approximately $2,102 of Vodafone ADRs since
they are indexed to certain maturing debt instruments. Investments at December
31, 2000 for AT&T Broadband Group are as follows:
UNREALIZED
COST GAINS ESTIMATED
BASIS (LOSSES) FAIR VALUE
------- ---------- ----------
Common stock and warrants........................ $12,986 $(3,606) $ 9,380
Preferred stock.................................. 1,467 105 1,572
Cost investments and other....................... 1,050 -- 1,050
------- ------- -------
$15,503 $(3,501) $12,002
======= ======= =======
Other investments at December 31, 1999 for AT&T Broadband Group are as
follows:
COST UNREALIZED ESTIMATED
BASIS GAINS FAIR VALUE
----- ---------- ----------
Common stock and warrants......................... $168 $103 $271
Cost investments and other........................ 4 -- 4
---- ---- ----
$172 $103 $275
==== ==== ====
During the fourth quarter of 2000, AT&T Broadband Group recognized a loss
on the marketable equity security holdings for Telewest Communications, plc, of
$111 million. Management determined the loss was not temporary due to the
downturn in market conditions and its inability to hold the investment as a
result of requirements related to the regulatory approval of the MediaOne
Merger. The fair value was based on quoted market prices.
During the fourth quarter of 2000, Excite@Home recognized a loss on
investments totaling $129 which included a $107 loss on publicly held companies
and $22 on privately held investments. The loss recognized on the publicly held
investment was a result of Excite@Home's decision that the decline in market
value of certain investments was not temporary. The loss recognized on the
privately held companies was based on Excite@Home's determination that the
carrying value of certain investments was not recoverable, based on indicators
such as limited liquidity and poor prospects for additional funding. Since AT&T
Broadband Group, through ATTBLLC owns 23% of Excite@Home, 77% of the loss
recorded by Excite@Home is not included as a reduction of AT&T Broadband Group's
net income, but rather is eliminated in the statement of operations as minority
interest income (expense).
D-144
493
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. DEBT OBLIGATIONS
LONG-TERM DEBT
Debentures, notes and trust preferred securities(a):
DECEMBER 31,
------------------------------
2000 1999
INTEREST RATES(B) MATURITIES ------------- -------------
4.00%-6.00% 2001-2018... 1,389 1
6.25%-6.50% 2001-2008... 3,210 917
6.55%-7.49% 2001-2037... 5,738 1,601
7.53%-8.50% 2001-2097... 3,370 2,363
8.60%-10.75% 2001-2045... 6,594 4,664
Variable
rate 2001-2005........ 2,019 827
------------- -------------
Total debentures, notes and trust preferred securities...... 22,320 10,373
Other....................................................... 270 230
------- -------
Total long-term debt........................................ 22,590 10,603
Less currently maturing long-term debt...................... 3,073 932
------- -------
Net long-term debt.......................................... $19,517 $ 9,671
======= =======
-------------------------
(a) Included in these balances was $946 and $975 representing the remaining
excess of the fair value over the recorded value of debt in connection with
the TCI Merger and MediaOne Merger at December 31, 2000 and 1999,
respectively. The excess is being amortized over the remaining lives of the
underlying debt obligations.
(b) The actual interest paid on debt obligations may have differed from the
stated amount due to entering into interest rate swap contracts to manage
exposure to interest rate risk and the strategy to reduce finance costs (see
Note 10).
EXCHANGEABLE NOTES
During 2000, AT&T Broadband Group, through ATTBLLC and MediaOne, issued
debt which is mandatorily redeemable at AT&T's option into shares of Comcast
common stock or its equivalent (the "Comcast Exchangeable Notes") and Microsoft
Corporation ("Microsoft") common stock or its equivalent (the "Microsoft
Exchangeable Notes").
Following is a summary of the Comcast Exchangeable Notes outstanding at
December 31, 2000 by year of maturity which are indexed to 25 million shares of
Comcast common stock:
MATURITY DATE 2003 2004 2005
------------- ------ ------ ------
Face value.............................. $ 371 $ 314 $ 329
Interest rate........................... 6.75% 5.50% 4.63%
Put price............................... $41.50 $41.06 $39.13
Call price.............................. $49.80 $49.27 $46.96
Carrying value at December 31, 2000..... $ 371 $ 314 $ 329
D-145
494
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
At maturity, the Comcast Exchangeable Notes will be redeemed, at AT&T's
option, into (i) a number of shares of Comcast common stock equal to the
underlying shares multiplied by the exchange ratio, or (ii) its equivalent cash
value. The exchange ratio will be calculated at maturity in the following
manner:
(a) If the fair market value of a share of Comcast common stock is
greater than the call price, the exchange ratio will be 0.8333;
(b) If the fair market value of a share of Comcast common stock is
less than or equal to the put price, the exchange ratio will be 1;
(c) If the fair market value of a share of Comcast common stock is
less than the call price but greater than the put price, the exchange ratio
will be a fraction the numerator of which is equal to the put price, and
the denominator of which is equal to the fair market value of one share of
Comcast common stock.
Following is a summary of the Comcast Exchangeable Notes outstanding at
December 31, 2000, which are indexed to 22.3 million shares of Comcast common
stock:
MATURITY DATE 2003 2004 2005
------------- ------ ------ ------
Face value........................................... $ 267 $ 267 $ 267
Interest rate........................................ 6.76% 6.80% 6.84%
Put price............................................ $35.89 $35.89 $35.89
Call price........................................... $50.64 $58.39 $67.97
Carrying value at December 31, 2000.................. $ 267 $ 267 $ 267
At maturity, such Comcast Exchangeable Notes will be redeemed, at AT&T's
option, with (i) a number of shares of Comcast common stock equal to the
underlying shares multiplied by the exchange ratio, or (ii) its equivalent cash
value. The exchange ratio will be calculated at maturity in the following
manner:
(a) If the fair market value of a share of Comcast common stock is
greater than or equal to the call price, the exchange ratio will be a
fraction the numerator of which is equal to the sum of (i) the put price,
plus (ii) the excess of the fair market value of one share of Comcast
common stock over the call price, and the denominator of which is equal to
the fair market value of one share of Comcast common stock;
(b) If the fair market value of a share of Comcast common stock is
less than or equal to the put price, the exchange ratio will be 1;
(c) If the fair market value of a share of Comcast common stock is
less than the call price but greater than the put price, the exchange ratio
will be a fraction of which the numerator is equal to the put price, and
the denominator of which is equal to the fair market value of one Comcast
common stock.
D-146
495
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Following is a summary of the Microsoft Exchangeable Notes outstanding at
December 31, 2000, which are indexed to 10 million shares of Microsoft common
stock:
MATURITY DATE 2003 2004 2005
------------- ------ ------- -------
Face value......................................... $ 227 $ 226 $ 226
Interest rate...................................... 6.96% 7.00% 7.04%
Put price.......................................... $67.87 $ 67.87 $ 67.87
Call price......................................... $97.39 $111.64 $128.60
Carrying value at December 31, 2000................ $ 145 $ 144 $ 144
At maturity, the Microsoft Exchangeable Notes will be redeemed, at AT&T's
option, with (i) a number of shares of Microsoft common stock equal to the
underlying shares multiplied by the exchange ratio, or (ii) its equivalent cash
value. The exchange ratio will be calculated at maturity in the following
manner:
(a) If the fair market value of a share of Microsoft common stock is
greater than the call price, the exchange ratio will be a fraction the
numerator of which is equal to the sum of (i) the put price, plus (ii) the
excess of the fair market value of one share of Microsoft common stock over
the call price, and the denominator of which is equal to the fair market
value of one share of Microsoft common stock;
(b) If the fair market value of a share of Microsoft common stock is
less than or equal to the put price, the exchange ratio will be 1;
(c) If the fair market value of a share of Microsoft common stock is
less than or equal to the call price but greater than the put price, the
exchange ratio will be a fraction of which the numerator is equal to the
put price, and the denominator of which is equal to the fair market value
of one Microsoft common stock.
During 1999 and 1998, MediaOne issued debt (the "Vodafone Exchangeable
Notes") which is mandatorily redeemable at AT&T's option into (i) Vodafone Group
plc ("Vodafone") American Depository Receipts ("ADRs") held by AT&T Broadband
Group, through MediaOne, (ii) the cash equivalent, or (iii) a combination of
cash and Vodafone ADRs. The maturity value of the Vodafone Exchangeable Notes
varies based on the fair value of a Vodafone ADR.
Following is a summary of the Vodafone Exchangeable Notes outstanding at
December 31, 2000, which are indexed to Vodafone ADRs:
MATURITY DATE 2001 2002
------------- ------ ------
Face value.................................................. $1,686 $1,129
Interest rate............................................... 6.25% 7.0%
Put price................................................... $19.65 $43.44
Call price.................................................. $25.10 $51.26
Carrying value at December 31, 2000......................... $2,337 $1,012
D-147
496
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Vodafone Exchangeable Notes that mature in 2001, which are indexed to
29 million Vodafone ADRs, will be exchanged at maturity based upon a redemption
value of $9.00 in cash plus 2 1/2 times the fair market value of a Vodafone ADR
("Maturity Price"), as follows:
(a) If the Maturity Price is greater than or equal to $9.00 plus 2 1/2
times the call price per share, each Vodafone Exchangeable Note is
equivalent to 0.8101 of the Maturity Price;
(b) If the Maturity Price is less than or equal to $9.00 plus 2 1/2
times the put price per share, each Vodafone Exchangeable Note is
equivalent to the Maturity Price; or
(c) If the Maturity Price is less than $71.75 per share but greater
than $58.125 per share, each Vodafone Exchangeable Note is equivalent to
$58.125.
The redemption formula for such Vodafone Exchangeable Notes that mature in
2002, which are indexed to 26 million shares of Vodafone ADRs, is as follows:
(a) If the fair market value of a Vodafone ADR is greater than or
equal to the call price, each Vodafone exchangeable Note is equivalent to
0.8475 of a Vodafone ADR;
(b) If the fair market value of a Vodafone ADR is less than or equal
to the put price, each Vodafone Exchangeable Note is equivalent to one
Vodafone ADR; or
(c) If the fair market value of a Vodafone ADR is less than the call
price but greater than the put price, each Vodafone Exchangeable Note is
equivalent to a fraction of a Vodafone ADR equal to (i) the put price
divided by (ii) the fair market value of one Vodafone ADR.
The exchangeable notes are being accounted for as indexed debt instruments
since the maturity value of the debt is dependent upon the fair market value of
the underlying Comcast, Microsoft and Vodafone securities. The exchangeable
notes contain an embedded option that hedges the market risk of a decline in
value of Comcast, Microsoft and Vodafone securities. The market risk of a
decline in Comcast and Microsoft stock, and Vodafone ADRs, below the respective
put prices has been eliminated. In addition, any market gains we may earn have
been limited to the call prices, with the exception of certain debt indexed to
Comcast stock and the debt indexed to the Vodafone ADRs, which provides for our
participation in a portion of the market gains above the call price.
Since the Comcast, Microsoft and Vodafone securities are cost method
investments being accounted for as "available-for-sale" securities under SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
changes in the maturity value of the exchangeable notes and the underlying
securities are being recorded as unrealized gains or losses, net of tax, within
other comprehensive income as a component of combined attributed net assets.
The exchangeable notes indexed to Comcast common stock and Microsoft common
stock are secured by the Comcast and Microsoft investments AT&T Broadband Group
owns, through ATTBLLC and MediaOne. The exchangeable notes indexed to Vodafone
are unsecured obligations, ranking equally in right of payment with all other
unsecured and unsubordinated obligations of AT&T.
OTHER EXCHANGEABLE NOTES
During 2000, AT&T Broadband Group, through MediaOne, also entered into a
series of purchased and written options with a number of financial institutions
to monetize its holdings of 21.9 million shares of Microsoft common stock and
issued floating rate debt, which is attributed to AT&T Broadband Group. The
carrying value of the debt outstanding at December 31, 2000 was $1,369,
D-148
497
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
which pays interest at the three month London Inter-Bank Offering Rate ("LIBOR")
plus 0.4%. The debt matures annually with $458 maturing in 2003 and 2004, and
$453 maturing in 2005, and is repayable at AT&T's option in either Microsoft
common stock or cash.
In addition, two subsidiaries of MediaOne, MediaOne SPC IV and MediaOne SPC
VI, entered into a series of purchased and written options on Vodafone ADRs
contributed to them by MediaOne and issued floating rate debt. The carrying
value of the debt outstanding at December 31, 2000 was $1,739, which pays
interest at a three-month LIBOR plus 0.5%. This debt has been attributed to AT&T
Broadband Group and matures in equal quarterly installments beginning in 2003
and ending in 2005. The assets of MediaOne SPC IV, which are primarily 29.1
million Vodafone ADRs, are only available to pay the creditors of MediaOne SPC
IV. Likewise, the assets of MediaOne SPC VI, which are primarily 18.0 million
Vodafone ADRs, are only available to pay the creditors of MediaOne SPC VI.
SUBSIDIARY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUSTS HOLDING SOLELY SUBORDINATED DEBT SECURITIES
Certain subsidiary trusts (the "Trusts") of AT&T Broadband Group, through
ATTBLLC and MediaOne, had preferred securities outstanding at December 31, 2000
and 1999 as follows:
CARRYING AMOUNT
INTEREST MATURITY ----------------
SUBSIDIARY TRUST RATE DATE 2000 1999
---------------- -------- -------- ------ ------
TCI Communications Financing I.................... 8.72% 2045 $ 528 $ 528
TCI Communications Financing II................... 10.00% 2045 514 521
TCI Communications Financing III.................. 9.65% 2027 357 360
TCI Communications Financing IV................... 9.72% 2036 204 217
MediaOne Financing I.............................. 7.96% 2025 30 --
MediaOne Financing II............................. 8.25% 2036 28 --
MediaOne Finance II............................... 9.50% 2036 214 --
MediaOne Finance III.............................. 9.04% 2038 504 --
------ ------
$2,379 $1,626
====== ======
The Trusts were created for the exclusive purpose of issuing the Trust
Preferred Securities and investing the proceeds thereof into Subordinated
Deferrable Interest Notes (the "Subordinated Debt Securities") of TCI and
MediaOne. The Subordinated Debt Securities have interest rates equal to the
interest rate of the corresponding Trust Preferred Securities. The TCI
Communications Financing I and II Trust Preferred Securities are callable at
face value beginning January and May 2001, respectively. The TCI Communications
Financing III Trust Preferred Securities are callable at 104.825% of face value
beginning in March 2007. TCI Communications Financing IV Trust Preferred
Securities are callable at face value beginning in March 2002. Upon redemption
of the Subordinated Debt Securities, the Trust Preferred Securities will be
mandatorily redeemable. All of the MediaOne Subordinated Debt Securities are
redeemable at a redemption price of $25.00 per security, plus accrued and unpaid
interest. Upon redemption of the MediaOne Subordinated Debt Securities, the
MediaOne Trust Preferred Securities are mandatorily redeemable at a price of
$25.00 per share, plus accrued and unpaid distributions. The 7.96% MediaOne
Subordinated Debt Securities became redeemable after September 11, 2000. The
9.50% and 8.25% MediaOne Subordinated Debt
D-149
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AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Securities are redeemable after October 29, 2001. The 9.04% MediaOne
Subordinated Debt Securities are redeemable after October 28, 2003. The Trust
Preferred Securities are recorded within long-term debt in the accompanying
combined balance sheet. AT&T Broadband, LLC effectively provides a free and
unconditional guarantee of all the TCI Trusts' obligations under the Trust
Preferred Securities. In 2000, AT&T provided a full and unconditional guarantee
on the outstanding securities issued by TCI Communications Financing I, II and
IV. MediaOne has effectively provided a full and unconditional guarantee of the
MediaOne trust obligations under the Trust Preferred Securities. In 2000, AT&T
provided a full and unconditional guarantee of the MediaOne Trust Preferred
Securities. Dividends accrued and paid on the Trust Preferred Securities
aggregated $182 and $114 for the for the year ended December 31, 2000 and the
ten months ended December 31, 1999, respectively, and are included in interest
expense in the accompanying combined financial statements. AT&T has the right to
defer interest payments up to 20 consecutive quarters; as a consequence,
dividend payments on the Trust Preferred Securities can be deferred by the
trusts during any such interest-payment period.
Annual maturities at December 31, 2000, of the $22,590 in total long-term
obligations are as follows:
2001............................ $3,073
2002............................ 1,700
2003............................ 3,071
2004............................ 1,693
2005............................ 3,144
Later years..................... 9,909
8. MINORITY INTEREST
PREFERRED STOCK OF SUBSIDIARIES
Prior to the TCI Merger, TCI Pacific Communications Inc. ("Pacific"), an
attributed entity of AT&T Broadband Group, issued 5% Class A Senior Cumulative
Exchangeable preferred stock, which remains outstanding. At December 31, 2000
and 1999, 6.3 million shares of such stock were authorized and outstanding. Each
share is exchangeable, from and after August 1, 2001, for approximately 6.3
shares of AT&T common stock, subject to certain antidilution adjustments.
Additionally, Pacific may elect to make any dividend, redemption or liquidation
payment in cash, shares of AT&T common stock or a combination of the foregoing.
The Pacific preferred stock is reflected within minority interest in the
accompanying combined balance sheets and aggregated $2.1 billion at December 31,
2000 and 1999.
Prior to the TCI Merger, TCI issued Class B 6% Cumulative Redeemable
Exchangeable Junior preferred stock (the "Class B Preferred Stock"). At December
31, 1999, 1.6 million shares of Class B Preferred Stock were outstanding, net of
shares held by a subsidiary, out of an authorized 1.7 million shares. The Class
B Preferred Stock and accumulated dividends aggregated $152 at December 31,
1999, and were reflected within minority interest in the accompanying combined
balance sheet at December 31, 1999. On February 22, 2000, all outstanding shares
of Class B Preferred Stock were redeemed at $105.88 per share.
D-150
499
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
CENTAUR FUNDING CORPORATION
Prior to the MediaOne Merger, Centaur Funding Corporation ("Centaur"), a
subsidiary of MediaOne, issued three series of preferred shares, the Auction
Market Preference Shares, Series A ("Series A Shares"), the 9.08% Cumulative
Preference Shares, Series B (the "Series B Shares"), and the Preference Shares,
Series C (the "Series C Shares"). Centaur was created for the principal purpose
of raising capital through the issuance of preferred shares and investing those
proceeds into notes issued by MediaOne SPC II, a subsidiary of MediaOne.
Principal and interest payments from the notes are expected to be Centaur's
principal source of funds to make dividend and redemption payments on the
preferred shares. In addition, the dividend and redemption payments on the
preferred shares will be determined by reference to the dividend and redemption
activity of the preferred stock of AirTouch Communications, Inc. ("ATI shares")
held by MediaOne SPC II. AirTouch Communications, Inc. is a subsidiary of
Vodafone. Payments on the preferred shares are neither guaranteed nor secured by
MediaOne or AT&T. The assets of MediaOne SPC II, which include the ATI shares,
are only available to pay creditors of MediaOne SPC II. Centaur and MediaOne SPC
II are attributed entities of AT&T Broadband Group.
At December 31, 2000, the following Centaur preferred securities, which
have been attributed to AT&T Broadband Group, were outstanding:
SHARES CARRYING
DIVIDEND RATE MATURITY DATE OUTSTANDING AMOUNT
------------- -------------- ----------- --------
Series A Shares.................. Variable None 400 $ 100
Series B Shares.................. 9.08% April 21, 2020 934,500 927
Series C Shares.................. None April 21, 2020 715,500 118
------
$1,145
======
The Series A Shares have a liquidation value of $250 thousand per share and
dividends are payable quarterly when declared by Centaur's Board of Directors
out of funds legally available. The Series B Shares have a liquidation value of
$1 thousand per share and dividends are payable quarterly in arrears when
declared by Centaur's Board of Directors out of funds legally available. In
addition, dividends may be declared and paid only to the extent dividends have
been declared and paid on the ATI shares. The Series C Shares have a liquidation
value of $1 thousand per share at maturity. The value of the Series C Shares
will be accreted to its liquidation value upon maturity. The Series B Shares
rank equally with the Series C Shares as to the redemption payments and upon
liquidation, and the Series B and Series C Shares rank senior to the Series A
Shares and the common stock shares of Centaur as to the redemption payments and
upon liquidation. The Series B Shares rank senior to the Series A Shares and the
common shares with respect to dividend payments. The preferred shares issued by
Centaur are recorded within minority interest in the accompanying combined
balance sheet at December 31, 2000.
Dividends on the preferred shares were $55 for the year ended December 31,
2000 and were included within minority interest income (expense) in the combined
statements of operations.
9. COMPANY-OBLIGATED CONVERTIBLE QUARTERLY INCOME PREFERRED SECURITIES
On June 16, 1999, AT&T Finance Trust I (the "AT&T Trust"), a wholly owned
subsidiary of AT&T completed the private sale of 100 million shares of 5.0%
cumulative quarterly income
D-151
500
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
preferred securities ("Quarterly Preferred Securities") to Microsoft. Proceeds
from the issuance were invested by the AT&T Trust in junior subordinated
debentures ("Debentures") issued by AT&T due 2029, which represent the sole
asset of the AT&T Trust. The Quarterly Preferred Securities have been attributed
to AT&T Broadband Group.
The Quarterly Preferred Securities pay dividends at an annual rate of 5.0%
of the liquidation preference of $50 per security, and are convertible at any
time prior to maturity into 66.667 million shares of AT&T common stock. The
Quarterly Preferred Securities are subject to mandatory redemption upon
repayment of the Debentures at maturity or their earlier redemption. The
conversion feature can be terminated, under certain conditions, after three
years.
The Debentures will make a quarterly payment in arrears of 62.5 cents per
security on the last day of March, June, September and December of each year.
AT&T has the right to defer such interest payments up to 20 consecutive
quarters. As a consequence, quarterly dividend payments on the Quarterly
Preferred Securities can be deferred by the AT&T Trust during any such interest-
payment period. If AT&T defers any interest payments, AT&T may not, among other
things, pay any dividends on AT&T common stock until all interest in arrears is
paid to the AT&T Trust.
Dividends on the Quarterly Preferred Securities were $250 and $135 for the
year ended December 31, 2000 and the ten months ended December 31, 1999,
respectively, and are reported within minority interest income (expense) in the
accompanying combined statements of operations.
On June 16, 1999, AT&T also issued to Microsoft 40 million warrants, each
to purchase one share of AT&T common stock at a price of $75 per share at the
end of three years. Alternatively, the warrants are exercisable on a cashless
basis. If the warrants are not exercised on the three-year anniversary of the
closing date, the warrants expire.
A discount on the Quarterly Preferred Securities equal to the value of the
warrants of $306 was recognized and is being amortized over the 30-year life of
the Quarterly Preferred Securities as a component of minority interest income
(expense) in the accompanying combined statements of operations.
10. FINANCIAL INSTRUMENTS
In the normal course of business, AT&T Broadband Group uses various
financial instruments, including derivative financial instruments, for purposes
other than trading. AT&T Broadband Group does not use derivative financial
instruments for speculative purposes. Financial instruments used by AT&T
Broadband Group include guarantees of debt, letters of credit, option contracts
and interest rate swap agreements. Option contracts are used to mitigate
exposure to the fluctuations of stock prices of securities that collateralize
certain debt instruments. Interest rate swap agreements are used to mitigate
interest rate exposures. Collateral is generally not required for these types of
instruments.
By their nature, all such instruments involve risk, including the credit
risk of nonperformance by counterparties. The maximum potential loss associated
with such risk may exceed the amount recognized in the balance sheet. However,
at December 31, 2000 and 1999, in management's opinion there was no significant
risk of loss in the event of nonperformance of the counterparties to these
financial instruments. AT&T Broadband Group controls its exposure to credit risk
through credit approvals, credit limits and monitoring procedures. AT&T
Broadband Group does not have any significant exposure to any individual
customer or counterparty, or any major concentration of credit risk related to
any financial instruments.
D-152
501
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
OPTION CONTRACTS
Prior to the MediaOne Merger two subsidiaries of MediaOne, MediaOne SPC IV
and MediaOne SPC VI, entered into a series of purchased and written options (the
"Vodafone Collars") on Vodafone ADRs contributed to them by MediaOne and issued
floating rate debt. Such subsidiaries of MediaOne have been attributed to AT&T
Broadband Group. The Vodafone Collars have been designated and are effective as
a hedge of the market risk associated with the investment in Vodafone ADRs. The
Vodafone Collars are therefore carried at fair value, with unrealized gains and
losses, net of tax, being recorded within other comprehensive income as a
component of combined attributed net assets, together with any change in the
fair value of the Vodafone ADRs. The carrying value of the Vodafone Collars at
December 31, 2000, was $453.
At the expiration of the MediaOne SPC IV collar, AT&T Broadband Group will
receive cash if the market value of a Vodafone ADR is less than approximately
$34.00 per share, which effectively eliminates the downside risk if the stock
price falls below $34.00 per share. Conversely, if the value of a Vodafone ADR
is greater than approximately $49.00 per share, AT&T Broadband Group will be
required to pay cash, which effectively offsets the corresponding increase in
the value of a Vodafone ADR. This Vodafone Collar expires quarterly beginning in
2003 and ending in 2005.
At the expiration of the MediaOne SPC VI collar, AT&T Broadband Group will
receive cash if the market value of a Vodafone ADR is less than approximately
$40.00 per share, which effectively eliminates the downside risk if the stock
price falls below $40.00 per share. Conversely, if the market value of a
Vodafone ADR is greater than approximately $58.00 per share, AT&T Broadband
Group will be required to pay cash, which effectively offsets the corresponding
increase in the value of a Vodafone ADR. This Vodafone Collar expires quarterly
beginning in 2003 and ending in 2005.
During 2000, AT&T also entered into a series of purchased and written
options related to a portion of AT&T's holdings in Microsoft stock (the
"Microsoft Collar"), which is indexed to floating rate debt. AT&T's holdings in
Microsoft stock and the Microsoft Collar have been attributed to AT&T Broadband
Group. The Microsoft Collar has been designated and is effective as a hedge of
the market risk associated with AT&T's investment in Microsoft stock. The
Microsoft Collar is carried at fair value, with unrealized gains or losses, net
of tax, being recorded within other comprehensive income as a component of
combined attributed net assets, together with any change in the fair value of
the securities. The carrying value of the Microsoft Collar was $419 at December
31, 2000.
At the expiration of the Microsoft Collar, if the price of a Microsoft
share is equal to or less than the put price of $62.48, AT&T would exercise the
put option and deliver all underlying shares of Microsoft common stock and
receive cash equal in value to (i) the put price, multiplied by (ii) the
underlying share amount. Alternatively, at AT&T's option, AT&T can elect not to
deliver the underlying shares and instead settle the put option by receiving
cash equal in value to the (i) difference between the put price minus the fair
value of one Microsoft share, multiplied by (ii) the underlying share amount. If
the price of a Microsoft share is greater than the call price, which ranges from
$86.26 to $118.36, then the call option would be exercised and AT&T would
deliver all underlying shares and receive cash equal in value to (i) the call
price, multiplied by (ii) the underlying share amount. At AT&T's option, AT&T
can elect not to deliver the underlying shares and instead settle the call
option by delivering cash equal in value to the (i) difference between the call
price minus the fair value of one Microsoft share, multiplied by (ii) the
underlying share amount. Any such amount received from the exercise or
settlement of either put or call option
D-153
502
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
will be used to retire the floating rate debt. AT&T Broadband Group would retain
cash in excess of the call price from a call option exercise. If the price of a
Microsoft share is between the put price and the call price, the collar will
expire without value.
INTEREST RATE SWAP AGREEMENTS
Interest rate swaps are entered into to manage exposure to changes in
interest rates and to lower overall costs of financing. AT&T enters into swap
agreements to manage the fixed/floating mix of the debt portfolio in order to
reduce aggregate risk to interest rate movements. Interest rate swaps also allow
funds to be raised at floating rates and effectively swap them into fixed rates
that are lower than those available if fixed-rate borrowings were made directly.
These agreements involve the exchange of fixed-rate for floating-rate payments
or floating-rate for other floating-rate payments without the exchange of the
underlying principal amount. Floating-rate payments are based on rates tied to
the LIBOR.
The following table indicates the types of swaps in use at December 31,
2000 and 1999, which have been attributed to AT&T Broadband Group, and their
weighted-average interest rates. Average variable rates are those in effect at
the reporting date and may change significantly over the lives of the contracts.
2000 1999
----- ------
Fixed to variable swaps -- notional amount.................. $ 500 $1,550
Average receive rate...................................... 9.68% 7.18%
Average pay rate.......................................... 8.92% 6.77%
Variable to variable swaps -- notional amount............... $ -- $ 495
Average receive rate...................................... -- 6.63%
Average pay rate.......................................... -- 6.53%
The weighted-average remaining terms of the swap contracts were 30 years at
December 31, 2000.
The notional amounts represent agreed-upon amounts on which calculations of
dollars to be exchanged are based. They do not represent amounts exchanged by
the parties and, therefore, are not a measure of AT&T Broadband Group's
exposure. Exposure is limited to the fair value of the contracts with a positive
fair value plus interest receivable, if any, at the reporting date.
GUARANTEES OF DEBT
From time to time, AT&T Broadband, LLC and MediaOne may guarantee the debt
of their subsidiaries and certain unconsolidated joint ventures. AT&T Broadband,
LLC has taken certain steps to support debt compliance with respect to
obligations aggregating $1,461 and $1,720 at December 31, 2000 and 1999,
respectively, of certain cable television partnerships in which AT&T Broadband,
LLC has a non-controlling ownership interest and which have been attributed to
AT&T Broadband Group. All guarantees of AT&T Broadband Group, through ATTBLLC,
totaled $1,486 and $1,760 at December 31, 2000 and 1999, respectively. Although
there can be no assurance, management believes that it will not be required to
meet its obligations under such guarantees.
D-154
503
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
LETTERS OF CREDIT
Letters of credit are purchased guarantees that ensure performance or
payment to third parties in accordance with specified terms and conditions.
Letters of credit do not create additional risk to AT&T Broadband Group.
Outstanding letters of credit at December 31, 2000 were $263.
EQUITY HEDGES
Equity hedges are used to manage exposure to changes in equity prices
associated with stock appreciation rights of affiliated companies.
FAIR VALUES OF FINANCIAL INSTRUMENTS INCLUDING DERIVATIVE FINANCIAL
INSTRUMENTS
The following tables show the valuation methods, the carrying amounts and
estimated fair values of material financial instruments.
FINANCIAL INSTRUMENT VALUATION METHOD
-------------------- ----------------
Debt excluding capital leases Market quotes or rates available for
debt with similar terms and
maturities
Guarantees of debt There are no quoted market prices for
similar agreements available
Letters of Credit Fees paid to obtain obligations
Option contracts Market quotes obtained from dealers
Interest rate swap agreements Market quotes obtained from dealers
Equity hedges Market quotes
Preferred securities Market quotes*
-------------------------
* It is not practicable to estimate the fair value of the $4,700 Quarterly
Preferred Securities that aggregated $4,710 and $4,700 at December 31, 2000
and 1999, respectively. There are no current market quotes on this private
placement.
2000 1999
------------------- ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- ------
Debt excluding capital leases................... $22,182 $20,275 $10,314 $9,676
Pacific preferred stock......................... $ 2,121 $ 595 $ 2,121 $1,929
2000 1999
------------------------------- -------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------------- -------------- -------------- --------------
ASSET LIAB. ASSET LIAB. ASSET LIAB. ASSET LIAB.
------ ----- ------ ----- ------ ----- ------ -----
Interest rate swap
agreements................... $ -- -- -- -- 22 23 2 19
Equity hedges.................. $ -- 87 -- 87 281 -- 281 --
===== ===== ===== ===== ===== ===== ===== =====
D-155
504
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
11. PENSION, POSTRETIREMENT AND OTHER EMPLOYEE BENEFIT PLANS
As a result of the MediaOne Merger, AT&T sponsors a pension plan covering
substantially all of the former MediaOne employees. Pension benefits are
principally based on pay and service. In addition, AT&T sponsors retiree benefit
plans for certain former MediaOne employees. These plans have been included in
AT&T Broadband Group.
The following table shows the components of the net periodic benefit costs
included in the combined statements of income for the year ended December 31,
2000:
PENSION POSTRETIREMENT
BENEFITS BENEFITS
-------- --------------
Service cost-benefits earned during the period........... $ 9 $ 1
Interest cost on benefit obligations..................... 8 1
Credit for expected return on plan assets................ (9) --
---- ----
Net periodic benefit cost................................ $ 8 $ 2
==== ====
The following tables provide a reconciliation of the changes in the plans'
benefit obligations and fair value of assets for the year ending December 31,
2000, and a statement of the funded status at December 31, 2000:
PENSION POSTRETIREMENT
BENEFITS BENEFITS
-------- --------------
CHANGE IN BENEFIT OBLIGATIONS:
Benefit obligation, beginning of year.................... $ -- $ --
Acquisition of MediaOne.................................. 204 38
Service cost............................................. 9 1
Interest cost............................................ 8 1
Plan amendments.......................................... (5) --
Actuarial losses (gains)................................. 17 (5)
Benefit payments......................................... (68) --
---- ----
Benefit obligations, end of year......................... $165 $ 35
==== ====
CHANGE IN FAIR VALUE OF PLAN ASSETS:
Fair value of plan assets, beginning of year............. $ -- $ --
Acquisition of MediaOne.................................. 205 5
Actual return on plan assets............................. (12) --
Employer contributions................................... 23 --
Benefit payments......................................... (68) --
---- ----
Fair value of plan assets, end of year................... $148 $ 5
==== ====
Unfunded benefit obligation.............................. $(17) $(30)
Unrecognized net loss (gain)............................. 38 (5)
Unrecognized prior service cost.......................... (5) --
---- ----
Net amount recorded...................................... $ 16 $(35)
==== ====
D-156
505
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following table provides the amounts recorded in AT&T Broadband Group's
combined balance sheet at December 31, 2000:
PENSION POSTRETIREMENT
BENEFITS BENEFITS
-------- --------------
Prepaid pension cost..................................... $ 36 $ --
Benefit related liabilities.............................. (21) (35)
Accumulated other comprehensive income................... 1 --
---- ----
Net amount recorded...................................... $ 16 $(35)
==== ====
The nonqualified pension plan had an unfunded accumulated benefit
obligation of $21 at December 31, 2000.
The weighted-average assumptions used in the measurement of the pension and
postretirement benefit obligations at December 31, 2000 are:
Discount rate............................................... 7.5%
Expected return on plan assets.............................. 9.5%
Rate of compensation increase............................... 4.0%
A rate of increase in the per capita cost of covered healthcare benefits
(the healthcare cost trend rate) of 7% was assumed. This rate was assumed to
gradually decline after 2000 to 5% by the year 2011 and then remain level.
Assumed healthcare cost trend rates have a significant effect on the amounts
reported for the healthcare plans. A one percentage point increase or decrease
in the assumed healthcare cost trend rate would increase or decrease the
healthcare component of the accumulated postretirement benefit obligation by $4
and $3, respectively. The impact on the service and interest-cost components of
net periodic postretirement healthcare benefit cost would not have been
material.
AT&T also sponsors savings plans for the majority of its employees. The
plans allow employees to contribute a portion of their pre-tax and/or after-tax
income in accordance with specified guidelines. Employee contributions are
matched up to certain limits. AT&T Broadband Group contributions amounted to $70
and $38 for the year ended December 31, 2000 and the ten months ended December
31, 1999.
12. STOCK-BASED COMPENSATION PLANS
Under AT&T's 1997 Long-term Incentive Program (the "Program"), AT&T grants
stock options, performance shares, restricted stock and other awards on AT&T
common stock. The exercise price of any stock option is equal to the stock price
when the option is granted. Generally, the options vest over three or four years
and are exercisable up to 10 years from the date of grant.
Under the Program, performance share units are awarded to key employees in
the form of either common stock or cash at the end of a three-year period, based
on AT&T's total shareholder return and/or certain financial-performance targets.
Under the AT&T 1996 Employee Stock Purchase Plan (the "Plan"), which was
effective July 1, 1996, AT&T is authorized to sell up to 75 million shares of
AT&T common stock to its eligible employees. Under the terms of the Plan,
employees may have up to 10% of their earnings withheld to purchase AT&T's
common stock. The purchase price of the stock on the date of exercise is 85% of
D-157
506
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the average high and low sale prices of shares on the New York Stock Exchange
for that day. Under the Plan, AT&T sold approximately 506 thousand and 102
thousand shares to AT&T Broadband Group employees in 2000 and 1999,
respectively.
AT&T Broadband Group applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its plans. Accordingly, no compensation expense has been
recognized for stock-based compensation plans other than for performance-based
and restricted stock awards and stock appreciation rights ("SARs"). Stock based
compensation income (expense) for AT&T Broadband Group was $268 and $(366) for
the year ended December 31, 2000 and the ten months ended December 31, 1999,
respectively. These amounts included income (expense) of $269 and $(382) for the
year ended December 31, 2000 and the ten months ended December 31, 1999,
respectively, related to grants of SARs of affiliated companies held by certain
employees subsequent to the TCI Merger. AT&T entered into an equity hedge in
1999 to offset potential future compensation costs associated with such SARs.
(Expense) income related to this hedge was $(297) and $247 for the year ended
December 31, 2000 and the ten months ended December 31, 1999, respectively.
AT&T Broadband Group has adopted the disclosure-only provisions of SFAS No.
123, "Accounting for Stock-Based Compensation." If AT&T Broadband Group had
elected to recognize compensation costs based on the fair value at the date of
grant for AT&T awards granted to AT&T Broadband Group employees in 2000 and
1999, consistent with the provisions of SFAS No. 123, AT&T Broadband Group's net
loss would have been adjusted to reflect additional compensation expense
resulting in the following pro forma amounts:
YEAR TEN MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
Net loss............................................. $(5,390) $(2,203)
AT&T granted approximately 13.4 million and 1.0 million stock options to
AT&T Broadband Group employees during 2000 and 1999, respectively. At the date
of grant, the weighted average exercise price for AT&T options granted to AT&T
Broadband Group employees during 2000 and 1999 were $34.17 and $56.56,
respectively. The weighted-average fair values at date of grant for AT&T options
granted to AT&T Broadband Group employees during 2000 and 1999 were $10.28 and
$17.45, respectively, and were estimated using the Black-Scholes option-pricing
model. The following weighted-average assumptions were applied for 2000 and
1999, respectively: (i) expected dividend yields of 1.7% and 1.7% (ii) expected
volatility rates of 33.9% and 28.6%, and (iii) risk-free interest rates of 6.24%
and 5.26% and (iv) expected lives of 3.7 years and 5.7 years.
13. INCOME TAXES
AT&T Broadband Group is not a separate taxable entity for federal and state
income tax purposes and its results of operations are included in the
consolidated federal and state income tax returns of AT&T and its affiliates, as
described in note 1.
D-158
507
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the provision (benefit) for income taxes follow:
YEAR TEN MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
FEDERAL:
Current............................................ $ (786) $(469)
Deferred........................................... (215) 64
------- -----
(1,001) (405)
STATE AND LOCAL:
Current............................................ $ (136) $ 22
Deferred........................................... (47) (82)
------- -----
(183) (60)
------- -----
FOREIGN:
Current............................................ $ 1 $ --
------- -----
1 --
------- -----
Benefit for income taxes............................. $(1,183) $(465)
------- -----
In addition, AT&T Broadband Group also recorded current and deferred income
tax benefits related to minority interest and net equity losses on other equity
investments in the amounts of $100 and $370 for the year ended December 31, 2000
and $54 and $438 for the ten months ended December 31, 1999, respectively.
The following table shows the principal reasons for the difference between
the effective income tax rate and the United States federal statutory income tax
rate:
YEAR TEN MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
U.S. federal statutory income tax rate............... 35% 35%
Federal income tax benefit at statutory rate......... $3,507 $ 642
Operating losses and charges relating to
Excite@Home........................................ (2,758) --
Investment dispositions, acquisitions and legal
entity restructuring............................... 374 --
In-process research and development write-off........ -- (208)
State and local income taxes, net of federal income
tax benefit........................................ 119 39
Amortization of intangibles.......................... (81) (12)
Other................................................ 22 4
------ ------
Benefit for income taxes............................. $1,183 $ 465
Effective income tax rate............................ 11.8% 25.3%
D-159
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AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax liabilities are taxes AT&T Broadband Group expects to
pay in future periods. Similarly, deferred income tax assets are recorded for
expected reductions in taxes payable in future periods. Deferred income taxes
arise because of differences in the book and tax basis of certain assets and
liabilities. Deferred income tax liabilities and assets consist of the
following:
DECEMBER 31,
----------------------
2000 1999
--------- ---------
(AMOUNTS IN MILLIONS)
LONG-TERM DEFERRED INCOME TAX LIABILITIES
Property, plant and equipment............................. $ 1,319 $ 896
Investments............................................... 9,148 6,161
Franchises................................................ 18,571 11,998
Other..................................................... 2,087 147
------- -------
Total long-term deferred income tax liabilities........... 31,125 19,202
LONG-TERM DEFERRED INCOME TAX ASSETS
Business restructuring.................................... 3
Net operating loss/credit carryforwards................... 509 465
Employee pensions and other benefits, net................. 520
Reserves and allowances................................... 65 10
Valuation allowances...................................... (726) (124)
Other..................................................... 2,204 709
------- -------
Total long-term deferred income tax assets................ $ 2,575 $ 1,060
------- -------
Net long-term deferred income tax liabilities............. $28,550 $18,142
------- -------
Current deferred income tax liabilities:
Investments............................................. 670 --
Other................................................... 6 12
------- -------
Total current deferred income tax liabilities............. 676 12
------- -------
CURRENT DEFERRED INCOME TAX ASSETS
Employee pensions and other benefits...................... 22 235
Reserves and allowances................................... 10 10
Valuation allowances...................................... (39) --
Other..................................................... 197 28
------- -------
Total current deferred income tax assets.................. 190 273
------- -------
Net current deferred income tax (liabilities) assets...... (486) 261
------- -------
Total deferred income tax liabilities..................... $29,036 $17,881
======= =======
The valuation allowance for deferred tax assets as of December 31, 2000 and
1999 was $765 and $124, respectively. The realization of AT&T Broadband Group's
deferred tax assets is not dependent upon the consolidated tax group of AT&T. On
a stand alone basis, AT&T Broadband Group has
D-160
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AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
sufficient reversing taxable temporary differences to warrant recognition of its
deferred tax assets without the need for any additional valuation allowance.
At December 31, 2000, AT&T Broadband Group, excluding Excite@Home, had
federal net operating loss carryforwards of $64, expiring through 2013. AT&T
Broadband Group also has federal tax credit carryforwards of $82, expiring
through 2004. In connection with the TCI Merger, certain federal and state net
operating loss carryforwards were subject to a valuation allowance of $59. If,
in the future, the realization of these acquired deferred tax assets becomes
more likely than not, any reduction of the associated valuation allowance will
be allocated to reduce franchise costs and other purchased intangibles.
At December 31, 2000, Excite@Home had net operating loss carryforwards (tax
effected) for federal and state income tax purposes of $281 expiring through
2020 and $9 expiring through 2010, respectively. Utilization of Excite@Home's
net operating loss carryforwards may be subject to a minor annual limitation due
to the ownership change limitations provided by the Internal Revenue Code of
1986, as amended, and similar state provisions. The annual limitation may result
in the expiration of a portion of Excite@Home's net operating loss and tax
credit carryforwards before utilization. The realization of Excite@Home's net
deferred tax asset is dependent upon Excite@Home's future earnings, if any, the
timing and amount of which are uncertain. In addition, Excite@Home is a separate
taxpayer and is not a member of the AT&T consolidated tax group. Accordingly,
Excite@Home provided a valuation allowance in an amount equal to its net
deferred tax assets of $702 as of December 31, 2000. Approximately $142 of
Excite@Home's valuation allowance at December 31, 2000, is attributable to stock
option deductions, the benefit of which will be credited to paid in capital when
realized. Approximately $269 of Excite@Home's valuation allowance at December
31, 2000, is attributable to deferred tax assets that if realized will be
allocated to first reduce goodwill, then other purchased intangibles, and then
income tax expense.
14. COMMITMENTS AND CONTINGENCIES
The Cable Television Consumer Protection and Competition Act of 1992 (the
"1992 Cable Act") imposed certain rate regulations on the cable television
industry. Under the 1992 Cable Act, all cable systems are subject to rate
regulation, unless they face "effective competition," as defined by the 1992
Cable Act and expanded in the Telecommunications Act of 1996 (the "1996 Act"),
in their local franchise area.
The entities attributed to the AT&T Broadband Group believe that they have
complied in all material respects with the provisions of the 1992 Cable Act and
the 1996 Act, including its rate setting provisions. If, as a result of the
review process, a system cannot substantiate its rates, it could be required to
retroactively reduce its rates to the appropriate benchmark and refund the
excess portion of rates received.
In the normal course of business AT&T Broadband Group is subject to
proceedings, lawsuits and other claims, including proceedings under laws and
regulations related to environmental and other matters. Such matters are subject
to many uncertainties, and outcomes are not predictable with assurance.
Consequently, AT&T Broadband Group is unable to ascertain the ultimate aggregate
amount of monetary liability or financial impact with respect to these matters
at December 31, 2000. These matters could affect the operating results of any
one quarter when resolved in future periods. However, management believes after
final disposition, any monetary liability or financial impact to AT&T Broadband
Group beyond that provided for at year-end would not be material to AT&T
Broadband Group's annual combined financial statements.
D-161
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AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
AT&T Broadband Group leases land, buildings and equipment through contracts
that expire in various years through 2029. Rental expense under operating leases
was $122 for the year ended December 31, 2000, and $68 for the ten months ended
December 31, 1999. The following table shows the future minimum lease payments
due under noncancelable operating and capital leases at December 31, 2000:
OPERATING CAPITAL
LEASES LEASES
--------- -------
2001........................................................ $ 133 $ 140
2002........................................................ 130 129
2003........................................................ 123 80
2004........................................................ 116 59
2005........................................................ 117 55
Later years................................................. 462 86
------ -----
Total minimum lease payments................................ $1,081 549
======
Less amount representing interest........................... (141)
-----
Present value of net minimum lease payments................. $ 408
=====
At December 31, 2000, an entity attributed to AT&T Broadband Group has an
agreement with Motorola, Inc. to purchase a minimum of 1.25 million digital
set-top devices at an average price of $248 per unit in 2001.
AT&T Broadband Group is party to an agreement under which it purchases
certain billing services from an unaffiliated third party. Unless terminated by
either party pursuant to terms of the agreement, the agreement expires on
December 31, 2012. The agreement calls for monthly payments. Such payments are
subject to adjustments and conditions pursuant to the terms of the underlying
agreements.
15. RELATED PARTY TRANSACTIONS
As discussed in Note 1, AT&T provides necessary working capital
requirements through intercompany debt and capital contributions to AT&T
Broadband Group. These amounts are reflected in the accompanying combined
balance sheets as short-term debt due to AT&T or a component of combined
attributed net assets. Short-term debt due to AT&T and interest was assumed
based upon the methodology outlined in Note 1. Intercompany debt was $5,830 and
$4,297 at December 31, 2000 and 1999, respectively. Intercompany interest
expense was $323 and $91 for the year ended December 31, 2000 and for the ten
months ended December 31, 1999, respectively.
Pursuant to an agreement with a subsidiary of LMG, entities attributed to
AT&T Broadband Group purchase programming and other services from such LMG
subsidiary. Amounts included in costs of services for programming purchased from
such LMG subsidiary were $239 and $184 for the year ended December 31, 2000 and
for the ten months ended December 31, 1999, respectively. Pursuant to such
agreement, certain entities attributed to AT&T Broadband Group are required to
make minimum payments for such programming and other services through 2022. The
commitments increase annually from $288 in 2001 to $315 in 2003, and will
thereafter increase annually through 2022 with inflation. In the event that
programming costs of such LMG subsidiary increase by more
D-162
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AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
than ten percent of an amount specified in the contract, AT&T Broadband Group's
commitment will be increased by 66 percent of the increase above the amount
specified in the contract. Other factors such as acquisitions and divestitures
also affect the commitment amounts.
AT&T Consumer Services Group provides AT&T Broadband Group with sales
support and customer care services at cost based prices. For the year ended
December 31, 2000 and the ten months ended December 31, 1999, such amounts
totaled $89 and $121, respectively, and are included in selling, general and
administrative expenses in the accompanying combined statements of operations.
In addition, AT&T Consumer Services Group and AT&T Business Services Group
provide AT&T Broadband Group with wireline communication and other services. For
the year ended December 31, 2000 and the ten months ended December 31, 1999,
charges for such services totaled $104 and $31, respectively, and are included
in costs of services in the accompanying combined statements of operations.
Included in current liabilities at December 31, 2000 and 1999, was $98 and
$213, respectively, related to amounts due AT&T Consumer Services Group and AT&T
Business Services Group for the above described services.
AT&T allocates general corporate overhead expenses, including finance,
legal, marketing, use of the AT&T brand, planning and strategy and human
resources to AT&T Broadband Group, as well as costs for AT&T employees who
directly support the activities of the AT&T Broadband Group. Charges for such
services amounted to $159 and $120 for the year ended December 31, 2000 and for
the ten months ended December 31, 1999, respectively. These amounts are included
in selling, general and administrative expenses in the accompanying combined
statements of operations and were determined based on the methodology described
in note 1.
On October 2, 2000, AT&T Broadband Group, through MediaOne, completed the
sale of several equity interests in international ventures acquired as a result
of the MediaOne Merger to the AT&T Wireless Group. Such interests were sold for
approximately $1 billion, which was based upon a third party valuation. AT&T
Broadband Group received 120,335,081 of AT&T common shares for sale of such
equity interests. The AT&T common stock received in such transaction has been
included in combined attributed net assets. In connection with such sale, $196
of related deferred tax liabilities were transferred to AT&T Wireless Group. No
gain or loss was recognized on the sale of such equity interests.
16. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." Among
other provisions, it requires entities recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. Gains and losses resulting from changes in the fair
values of those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. The effective date of
this standard was delayed via the issuance of SFAS No. 137. The effective date
for SFAS No. 133 is now for fiscal years beginning after June 15, 2000, though
earlier adoption is encouraged and retroactive application is prohibited. For
AT&T Broadband Group, this means the standard must be adopted no later than
January 1, 2001. In June 2000, the FASB issued SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities" as an amendment
to SFAS No. 133. This statement provides
D-163
512
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
clarification with regard to certain implementation issues under SFAS No. 133 on
specific types of hedges.
On January 1, 2001, AT&T Broadband Group adopted SFAS No. 133. AT&T
Broadband Group recorded a cumulative effect of an accounting change, net of
applicable taxes, of approximately $1,209 of income, primarily attributable to
fair value adjustments of debt instruments, including those acquired in
conjunction with the MediaOne Merger, as well as to the warrant portfolio. In
addition, in connection with the adoption of SFAS No. 133, AT&T Broadband Group
reclassified certain investment securities, which support debt that is indexed
to such securities, from "available-for-sale" to "trading". This
reclassification resulted in the recognition of a charge of $1,724, net of
applicable taxes, which was recorded as a reduction of other income. As
available-for-sale securities, changes in fair value were previously included
within other comprehensive income as a component of combined attributed net
assets.
The impact of the adoption of SFAS No. 133, as amended by SFAS No. 138, on
AT&T Broadband Group's future results of operations is dependent upon the fair
values of the derivatives and related financial instruments and could result in
pronounced quarterly fluctuations in other income in future periods.
In December 1999, the SEC issued SAB No. 101, "Revenue Recognition in
Financial Statements." Registrants were required to apply the accounting and
disclosures described in SAB No. 101 no later than the fourth quarter of 2000.
AT&T Broadband Group is currently in compliance with the provisions of SAB No.
101.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities - a
Replacement of FASB No. 125." This statement provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities. Under these standards, after a transfer of financial assets, an
entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. This statement
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. This statement is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. AT&T Broadband Group does not expect
that the adoption of SFAS No. 140 will have a material impact on AT&T Broadband
Group's results of operations, financial position or cash flows.
17. SUBSEQUENT EVENTS
Effective January 1, 2001, entities attributed to AT&T Broadband Group sold
to Insight Communications Company LP ("Insight"), for $392, several Illinois
systems serving approximately 98,400 customers. Insight contributed the
customers to Insight Midwest L.P. in which AT&T Broadband Group, through its
attributed entities, has a 50% interest. The $62 gain is being deferred due to a
keep well agreement with Insight Midwest, LP. Entities attributed to AT&T
Broadband Group also contributed several Illinois systems serving approximately
247,500 customers to Insight Midwest, LP while Insight contributed systems
serving approximately 177,000 customers. The $117 gain is being deferred due to
a keep well agreement with Insight Midwest LP.
On January 2, 2001, AT&T through ATTBLLC, completed the sale of
Kearns-Tribune, LLC, to MediaNews Group for $200 in cash. The transaction
resulted in a pretax gain of approximately $107.
D-164
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AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
On January 8, 2001, a subsidiary of AT&T and Cablevision Systems
Corporation completed agreements for the transfer of cable-systems. AT&T
received cable-systems serving 358,000 customers in Boston and Eastern
Massachusetts. In exchange, Cablevision received cable-systems serving
approximately 130,000 customers in northern New York suburbs, and 44 million
shares of AT&T common stock valued at approximately $871, and approximately $204
in cash. Cablevision recorded a gain as a result of the transaction. Due to the
ownership interest in Cablevision, AT&T Broadband Group recorded its portion of
the gain, of $234 in "net losses from equity investments".
On April 30, 2001, a subsidiary of AT&T received 63.9 million shares of
AT&T stock valued at $1,423 held by Comcast in exchange for an entity owning
cable systems serving approximately 590,000 customers in Delaware, New Mexico,
Maryland, New Jersey, Pennsylvania and Tennessee.
In February 2001, a subsidiary of AT&T and Charter signed a definitive
agreement involving several strategic cable system transactions. In accordance
with such agreement, Charter will receive cable systems which are attributed to
AT&T Broadband Group serving approximately 574,000 customers in Missouri,
Illinois, Alabama, Nevada and California. AT&T Broadband Group, through its
attributed entities, will receive $1,790, subject to adjustments, composed of
cable systems serving approximately 62,000 customers in Florida, up to $502 in
Charter common stock, and the balance in cash. Pending certain closing
conditions and regulatory approvals, the transactions are expected to close in
the second and third quarters of 2001.
In February 2001, a subsidiary of AT&T and MediaCom Communications
Corporation ("MediaCom") signed a definitive agreement in which certain cable
systems attributed to AT&T Broadband Group serving approximately 837,000
customers in Georgia, Iowa, Illinois and Missouri will be sold to MediaCom. AT&T
Broadband Group will receive cash of approximately $2,215, subject to
adjustments. Pending certain closing conditions and regulatory approvals, the
transaction is expected to close in the second quarter of 2001.
In April 2001, a subsidiary of AT&T and Adelphia Communications Corporation
("Adelphia") signed a definitive agreement in which certain cable systems
attributed to AT&T Broadband Group serving approximately 128,000 customers in
central Pennsylvania and Ohio will be sold to Adelphia. AT&T Broadband Group
will receive cash of approximately $318, subject to adjustments. Pending certain
closing conditions and regulatory approvals, the transaction is expected to
close in the third quarter of 2001.
In May 2001, AT&T, together with certain subsidiaries attributed to the
AT&T Broadband Group, agreed to sell the 99.75% interest they own in the entity
holding the Baltimore, Maryland cable television system, serving approximately
110,000 customers, to Comcast for approximately $516. Pending certain closing
conditions and certain regulatory conditions, this transaction is expected to
close at the end of the second quarter or beginning of the third quarter of
2001.
On January 11, 2001, Cox and Comcast exercised their rights to sell a
combined total of approximately 60 million shares of Excite@Home Series A common
stock to AT&T as part of the March 2000 agreement to reorganize Excite@Home's
governance. If this transaction were completed as originally contemplated, AT&T
Broadband Group would hold, on a fully diluted basis, approximately 38% of the
economic interest in Excite@Home and approximately 79% of the voting interest.
However, AT&T currently is in discussions to renegotiate the structure or terms
of the exercise of these sale rights, which negotiations may change the number
of shares or the percentage interests in Excite@Home that AT&T Broadband Group
will hold and may result in Comcast and/or Cox retaining all of their
Excite@Home shares.
D-165
514
AT&T BROADBAND GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In the first quarter of 2001, AT&T Broadband Group recorded a charge of $56
for restructuring and exit costs as part of an initiative to reduce costs. The
restructuring and exit plans primarily focus on the maximization of synergies
through head count reductions, including the consolidation of customer-care and
call centers and the reduction in the construction efforts on cable plant
upgrade and rebuild activity. Included in exit costs was $53 of cash termination
benefits associated with the separation of approximately 2,100 employees as part
of involuntary termination plans. Approximately 11 percent of the separations
were management employees and 89 percent were non-management employees. The
charge also included approximately $3 recognized on the disposition of
facilities as a result of the headcount reductions.
In the first quarter of 2001, AT&T signed a non-binding letter of agreement
under which AT&T may provide Excite@Home with $75 to $85 in connection with the
restructuring of the backbone fiber agreement between the companies and with a
joint initiative to maintain and improve current network performance levels. In
addition, AT&T Broadband Group recorded $752 of asset impairment and
restructuring charges related to Excite@Home. The impairment charges relate to
$600 in asset impairment charges taken by Excite@Home and a related goodwill
impairment of $139 taken by AT&T Broadband Group associated with its acquisition
goodwill of Excite@Home. The asset impairment and restructuring charge included
$13 of restructuring charges for headcount reductions and consolidation of
facilities.
D-166
515
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
FINANCIAL STATEMENTS
AT&T Consumer Services Group is an integrated business of AT&T Corp. (AT&T)
and is not a stand-alone entity. The combined financial statements included
herein reflect the results of the proposed AT&T Consumer Services Group tracking
stock. Separate financial statements are not required to be filed for tracking
stocks. However, we have provided the financial statements as an exhibit to this
document to provide additional disclosures to investors to allow them to assess
the financial performance of AT&T Consumer Services Group. Presenting separate
financial statements for AT&T Consumer Services Group does not indicate that we
have changed title to any assets or responsibility for any liabilities, and does
not purport to affect the rights of any of AT&T's creditors. Holders of AT&T
Consumer Services Group tracking stock do not have claims against the assets of
AT&T Consumer Services Group. Instead, AT&T Consumer Services Group shareholders
own a separate class of AT&T common stock that is intended to reflect the
financial performance and economic value of AT&T's consumer services'
businesses.
D-167
516
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS)
(UNAUDITED)
FOR THE THREE
MONTHS ENDED
MARCH 31,
----------------
2001 2000
------ ------
Revenue..................................................... $4,007 $5,037
Operating Expenses
Access and other connection................................. 1,081 1,463
Selling, general and administrative......................... 986 1,169
Costs of services and products (excluding depreciation of
$39 and $50 included below)............................... 598 621
Depreciation and amortization............................... 47 56
Net restructuring and other charges......................... - 97
Total operating expenses.................................... 2,712 3,406
Operating income............................................ 1,295 1,631
Other income, net........................................... 7 6
Interest expense............................................ 60 9
Income before income taxes.................................. 1,242 1,628
Provision for income taxes.................................. 475 622
Net income.................................................. $ 767 $1,006
The notes are an integral part of the combined financial statements.
D-168
517
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED BALANCE SHEETS
(DOLLARS IN MILLIONS)
MARCH 31, DECEMBER 31,
2001 2000
----------- ------------
(UNAUDITED)
ASSETS
Cash and cash equivalents................................... $ 2 $ -
Receivables, less allowances of $378 and $410............... 2,222 2,681
Deferred income taxes....................................... 296 314
Other current assets........................................ 84 68
TOTAL CURRENT ASSETS........................................ 2,604 3,063
Property, plant and equipment, net of accumulated
depreciation of $504 and $468............................. 137 170
Other assets................................................ 295 310
TOTAL ASSETS................................................ $ 3,036 $ 3,543
LIABILITIES
Accounts payable............................................ $ 920 $ 1,133
Payroll and benefit-related liabilities..................... 127 149
Debt maturing within one year............................... - 13
Income taxes payable to AT&T................................ 494 -
Other current liabilities................................... 432 475
TOTAL CURRENT LIABILITIES................................... 1,973 1,770
Long-term debt due to AT&T.................................. 2,871 4,000
Long-term liabilities and deferred credits.................. 283 285
Deferred income taxes....................................... 29 29
TOTAL LIABILITIES........................................... 5,156 6,084
COMBINED ATTRIBUTED NET LIABILITIES......................... (2,120) (2,541)
TOTAL LIABILITIES AND COMBINED ATTRIBUTED NET
LIABILITIES................................................. $ 3,036 $ 3,543
The notes are an integral part of the combined financial statements.
D-169
518
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED STATEMENTS OF CHANGES IN COMBINED
ATTRIBUTED NET ASSETS
(DOLLARS IN MILLIONS)
(UNAUDITED)
FOR THE THREE
MONTHS ENDED
MARCH 31,
-----------------
2001 2000
------- ------
Combined Attributed Net (Liabilities) Assets
Balance at beginning of year.............................. $(2,541) $1,070
Net income............................................. 767 1,006
Dividends declared to AT&T............................. (95) (461)
Contributions to AT&T, net............................. (251) (96)
Balance at end of period.................................. $(2,120) $1,519
The notes are an integral part of the combined financial statements.
D-170
519
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
FOR THE THREE
MONTHS ENDED
MARCH 31,
------------------
2001 2000
------- -------
OPERATING ACTIVITIES
Net income.................................................. $ 767 $ 1,006
Adjustments to reconcile net income to net cash provided by
operating activities:
Net restructuring and other charges....................... - 97
Depreciation and amortization............................. 47 56
Provision for uncollectible receivables................... 163 150
Decrease (increase) in receivables........................ 296 (79)
(Decrease) increase in accounts payable................... (213) 210
Net change in other operating assets and liabilities...... 423 (209)
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 1,483 1,231
INVESTING ACTIVITIES
Capital expenditures and other additions.................... (25) (23)
Other investing activities, net............................. 3 -
NET CASH USED IN INVESTING ACTIVITIES....................... (22) (23)
FINANCING ACTIVITIES
Decrease in long-term debt due to AT&T...................... (1,129) (549)
Contributions to AT&T, net.................................. (236) (190)
Dividends paid to AT&T...................................... (94) (469)
NET CASH USED IN FINANCING ACTIVITIES....................... (1,459) (1,208)
Net increase in cash and cash equivalents................... 2 -
Cash and cash equivalents at beginning of year.............. - -
Cash and cash equivalents at end of period.................. $ 2 $ -
The notes are an integral part of the combined financial statements.
D-171
520
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
(UNAUDITED)
(A) BACKGROUND AND BASIS OF PRESENTATION
On October 25, 2000 AT&T announced a restructuring plan designed to fully
separate or issue separately tracked stocks intended to reflect the financial
performance and economic value of each of AT&T's four major operating units.
Under this plan AT&T will create a new class of stock to track the financial
performance and economic value of AT&T Consumer Services Group. If the Consumer
Services charter amendment is approved, AT&T expects to distribute some or all
of the tracking stock to AT&T shareholders later this year.
AT&T Consumer Services Group will be combined with AT&T Business Services
Group to form AT&T Communications Services, Inc. AT&T Communications Services,
Inc. will be separated from AT&T as an asset based stock, however will be the
owner of the AT&T Brand. AT&T Consumer Services Group is expected to be a
tracking stock of AT&T Communications Services, Inc.
The combined financial statements have been prepared by AT&T Consumer
Services Group pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC) and, in the opinion of management, include all
adjustments necessary for a fair statement of the consolidated results of
operations, financial position and cash flows for each period presented. The
consolidated results for interim periods are not necessarily indicative of
results for the full year. These financial results should be read in conjunction
with AT&T's Form 10-K/A for the year ended December 31, 2000, AT&T's quarterly
report on Form 10-Q/A and AT&T Consumer Services Group's combined financial
statements for the year ended December 31, 2000 included elsewhere in this
document.
AT&T Consumer Services Group provides to residential customers a variety of
any-distance communications services including long distance, local toll
(intrastate calls outside the immediate local area) and Internet access. In
addition, AT&T Consumer Services Group provides calling card, operator-handled
calling services and, in certain areas, local phone services.
AT&T Consumer Services Group is an integrated business of AT&T and is not a
separate legal entity. These combined financial statements reflect the results
of operations, financial position, changes in combined attributed net assets and
cash flows of AT&T Consumer Services Group as if it were a separate entity for
all periods presented. The combined financial statements of AT&T Consumer
Services Group were prepared in accordance with GAAP. The financial information
included herein may not necessarily reflect the combined results of operations,
financial position, changes in combined attributed net assets and cash flows of
AT&T Consumer Services Group had it been a separate, stand-alone entity during
the periods presented.
The combined financial statements of AT&T Consumer Services Group reflect
the assets, liabilities, revenue and expenses directly attributable to AT&T
Consumer Services Group, as well as allocations deemed reasonable by management,
to present the results of operations, financial position and cash flows of AT&T
Consumer Services Group on a stand-alone basis. The allocation methodologies
have been described within the notes to the combined financial statements where
appropriate. All significant intercompany accounts and transactions within AT&T
Consumer Services Group have been eliminated. Earnings per share disclosure has
not been presented as AT&T Consumer Services Group is a business unit of AT&T
and earnings per share data is not considered meaningful.
D-172
521
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The combined financial statements of AT&T Consumer Services Group primarily
include the results of the following legal entities: AT&T Communications of the
Southern States Inc., AT&T Communications of the Southwest, Inc., AT&T
Communications companies in other jurisdictions and certain attributed assets of
AT&T.
Debt has been allocated to AT&T Consumer Services Group based on our future
view of AT&T's debt position after taking into account the significant
deleveraging activities of AT&T Corp. This allocation took into account the
following factors: prospective financing requirements, working capital and
capital expenditure requirements and comparable company profiles. Increases in
historical debt levels are based, in general, on historical cash flows generated
by this entity in relation to total AT&T. Such cash outflows include
acquisitions, dividend payments and capital expenditures, partially offset by
cash flow from operations. For purposes of this allocation, certain "corporate"
activities were deemed to be partially funded by this entity by contributing
proceeds to the parent for these activities. These activities included the
repurchase of common shares by AT&T and cash payments associated with the TCI
merger and the MediaOne acquisition. Since AT&T Consumer Services Group will be
a tracking stock of AT&T Communications Services, Inc., the intercompany debt
allocated to them will be payable to AT&T Communications Services, Inc. The
interest expense on the allocated debt was calculated based on a rate intended
to be equivalent to the rate AT&T Consumer Services Group would have received if
it were a stand-alone entity. Due to the expected positive operating cash flow
of AT&T Consumer Services Group, the level of debt of AT&T Consumer Services
Group in the future is expected to be significantly lower than the level at
March 31, 2001.
As a result of the above methodology, AT&T Consumer Services Group may
advance funds to AT&T. These advances are accounted for as short-term borrowings
between the entities and bear interest at a market rate that is substantially
equal to the rate at which AT&T would be able to borrow from third parties on a
short-term basis.
General corporate overhead related to AT&T's corporate headquarters and
common support divisions has been allocated to AT&T Consumer Services Group as
it was not deemed practicable to specifically identify such common costs to AT&T
Consumer Services Group. The allocation of corporate overhead is divided into an
allocation of shared services (e.g., payroll and accounts payable) and other
corporate overhead. Costs of shared services are allocated to AT&T Consumer
Services Group based on transaction based prices. Other corporate overhead is
allocated to AT&T Consumer Services Group based on the ratio of AT&T Consumer
Services Group's external costs and expenses adjusted for any functions that
AT&T Consumer Services Group performs on its own. The costs of these services
charged to AT&T Consumer Services Group are not necessarily indicative of the
costs that would have been incurred by AT&T Consumer Services Group had they
performed these functions entirely as a stand alone entity, nor are they
indicative of costs that will be charged or incurred in the future. However,
management believes that such allocations are reasonable.
AT&T performs cash management functions on behalf of AT&T Consumer Services
Group. Substantially all of AT&T Consumer Services Group's cash balances are
swept to AT&T on a daily basis, where they are managed and invested by AT&T.
Transfers of cash to and from AT&T are reflected as a component of combined
attributed net assets, after giving effect to the allocation of debt described
above.
D-173
522
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Changes in combined attributed net assets primarily represent net transfers
to or from AT&T, after giving effect to the net income or loss of AT&T Consumer
Services Group during the period, and were assumed to be settled in cash.
Consolidated income tax provision, related tax payments or refunds, and
deferred tax balances of AT&T have been allocated to AT&T Consumer Services
Group based principally on the taxable income and tax credits directly
attributable to AT&T Consumer Services Group, essentially a stand alone
presentation. These allocations reflect AT&T Consumer Services Group's
contribution to AT&T's consolidated taxable income and the consolidated tax
liability and tax credit position. AT&T and its affiliates and AT&T Consumer
Services Group have entered into a tax sharing agreement that provides for tax
sharing payments based on the taxes or tax benefits of a hypothetical affiliated
group consisting of AT&T Broadband Group, AT&T Communications Services, Inc.,
and AT&T Consumer Services Group. Based on this agreement, the consolidated tax
liability before credits is allocated between the groups, based on each group's
contribution to consolidated taxable income of the hypothetical group.
Consolidated tax credits of the hypothetical group are allocated between groups
based on each group's contribution to each tax credit.
(B) NET RESTRUCTURING AND OTHER CHARGES
The following table displays the activity and balances of the restructuring
reserve account from January 1, 2001, to March 31, 2001:
EMPLOYEE
SEPARATIONS
-----------
Balance at January 1, 2001................................. $41
Additions.................................................. -
Deductions................................................. 4
Balance at March 31, 2001.................................. $37
Deductions reflect cash payments of $4 related to employee separations. The
cash outlay was primarily funded through cash from operations.
During the first quarter of 2000, AT&T Consumer Services Group recorded $97
of net restructuring and other charges, which included $79 for restructuring and
exit costs associated with AT&T's initiative to reduce costs by the end of 2000.
Also included in restructuring and other charges was an asset impairment
charge of $18 related to the write-down of unrecoverable assets in certain
businesses in which the carrying value is no longer supported by estimated
future cash flows.
(C) RELATED PARTY TRANSACTIONS
AT&T Consumer Services Group purchases network related services from AT&T
at cost-based prices, which approximate market prices. For the three months
ended March 31, 2001 and 2000, these amounts totaled $152 and $201,
respectively, and are reflected within costs of services and products in the
combined statements of income. There are no inter-entity payables for these
services as amounts are deemed to be settled in cash.
AT&T Consumer Services Group purchases sales and sales support, customer
care, billing, and research and development services from AT&T Business Services
at cost-based prices, which
D-174
523
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
approximate market prices. For the three months ended March 31, 2001 and 2000,
these amounts totaled $118 and $120, respectively, and are reflected within
selling, general and administrative (SG&A) expenses in the combined statements
of income.
AT&T has allocated general corporate overhead expenses related to AT&T's
corporate headquarters and common support division to AT&T Consumer Services
Group. For the three months ended March 31, 2001 and 2000, these amounts totaled
$62 and $69, respectively, and are reflected within SG&A.
AT&T Consumer Services Group purchases receivables from AT&T Wireless
Services and provides customer care and billing services to AT&T Wireless
Services at cost-based prices, which approximate market prices. For the three
months ended March 31, 2001 and 2000, these customer care and billing services
totaled $19 and $22, respectively, and are reflected as a reduction of SG&A
expenses in the combined statements of income. Included within accounts payable
at March 31, 2001 was $63 and $79 at December 31, 2000.
AT&T Consumer Services Group provides AT&T Broadband Group with sales
support and customer care services at cost based prices, which approximate
market prices. For the three months ended March 31, 2001 and 2000, these amounts
totaled $47 and $13, respectively, and are reflected as a reduction of SG&A
expenses in the combined statements of income. There were no inter-entity
receivables from AT&T Broadband Group at March 31, 2001; at December 31, 2000,
amounts due were $130. AT&T Consumer Services Group provides billing and
collections services on behalf of AT&T Broadband Group. Amounts due to AT&T
Broadband Group were $1 at March 31, 2001 and $48 at December 31, 2000.
AT&T invests excess cash of AT&T Puerto Rico and AT&T Virgin Islands on
their behalf. Notes receivable related to this cash, included within accounts
receivable, were $269 at March 31, 2001 and $262 at December 31, 2000.
(D)STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 133 "ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES"
Effective January 1, 2001, AT&T Consumer Services Group adopted Statement
of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities", and its corresponding amendments under SFAS
No. 138. SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. All derivatives, whether designated in
hedging relationships or not, are required to be recorded on the balance sheet
at fair value. If the derivative is designated as a fair value hedge, the
changes in the fair value of the derivative and of the hedged item attributable
to the hedged risk are recognized in earnings. If the derivative is designated
as a cash flow hedge, the effective portions of changes in the fair value of the
derivative are recorded in other comprehensive income within combined attributed
net liabilities and are recognized in the income statement when the hedged item
affects earnings. Changes in fair values of derivative instruments not
designated as hedging instruments and ineffective portions of hedges, if any,
are recognized in earnings in the current period.
The adoption of SFAS No. 133 on January 1, 2001 did not have an impact on
AT&T Consumer Services Group's financial statements.
D-175
524
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(E) NEW ACCOUNTING PRONOUNCEMENT
In September 2000, the Financial Accounting Standards Board (FASB) issued
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities -- a Replacement of FASB Statement No. 125." This
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities. Under these
standards, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. This statement provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. This statement is effective for transfers
and servicing of financial assets and extinguishment of liabilities occurring
after March 31, 2001. AT&T Consumer Services Group does not expect that the
adoption of SFAS No. 140 will have a material impact on AT&T Consumer Services
Group's results of operations, financial position or cash flows.
(F) SUBSEQUENT EVENTS
On May 25, 2001, AT&T Corp. completed the acquisition of substantially all
of the assets of NorthPoint Communications Group, Inc. valued at approximately
$135. The acquisition includes all of NorthPoint's co-locations nationwide,
certain network equipment, systems and support software and related assets,
including two leased buildings. The purchase of these NorthPoint Communications
Group, Inc. assets was attributed to AT&T Communications Services, Inc.
On April 26, 2001, AT&T initiated a 364-day accounts receivable
securitization program providing for up to $500 million of funding. Under the
program, a small percentage of AT&T Consumer Services Group's accounts
receivable will be sold on a discounted, revolving basis, to a special purpose,
wholly-owned subsidiary, which assigns interests in such receivables to
unrelated third-party financing entities.
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525
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareowners of AT&T Corp.:
In our opinion, the accompanying combined balance sheets and the related
combined statements of income and changes in combined attributed net assets and
of cash flows present fairly, in all material respects, the financial position
of AT&T Consumer Services Group at December 31, 2000 and 1999, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of AT&T Consumer Services Group's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
AT&T Consumer Services Group is a fully integrated business unit of AT&T Corp.;
consequently, as indicated in Note 1, these combined financial statements have
been derived from the consolidated financial statements and accounting records
of AT&T Corp. and reflect certain assumptions and allocations. Moreover, as
indicated in Note 1, AT&T Consumer Services Group relies on AT&T Corp. for
administrative, management and other services. The financial position, results
of operations and cash flows of AT&T Consumer Services Group could differ from
those that would have resulted had AT&T Consumer Services Group operated
autonomously or as an entity independent of AT&T Corp. As more fully discussed
in Note 1, the combined financial statements of AT&T Consumer Services Group
should be read in conjunction with the audited consolidated financial statements
of AT&T Corp.
PricewaterhouseCoopers LLP
New York, New York
May 9, 2001
D-177
526
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED STATEMENTS OF INCOME
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
(IN MILLIONS)
Revenue................................................... $18,894 $21,753 $22,763
Operating Expenses
Access and other connection............................... 5,204 6,223 7,453
Selling, general and administrative....................... 4,128 4,688 5,453
Costs of services and products (excluding depreciation of
$137, $168 and $116 included below)..................... 2,557 3,316 3,656
Depreciation and amortization............................. 167 184 116
Net restructuring and other charges....................... 97 7 (19)
Total operating expenses.................................. 12,153 14,418 16,659
Operating income.......................................... 6,741 7,335 6,104
Other income, net......................................... 81 208 86
Interest expense.......................................... 164 41 27
Income before income taxes................................ 6,658 7,502 6,163
Provision for income taxes................................ 2,546 2,869 2,356
Net income................................................ $ 4,112 $ 4,633 $ 3,807
The notes are an integral part of the combined financial statements.
D-178
527
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED BALANCE SHEETS
AT DECEMBER 31,
----------------
2000 1999
------ ------
(IN MILLIONS)
ASSETS
Cash and cash equivalents................................... $ -- $ 6
Receivables, less allowances of $410 and $414............... 2,681 3,115
Deferred income taxes....................................... 314 372
Other current assets........................................ 68 81
Total current assets................................... 3,063 3,574
Property, plant and equipment, net of accumulated
depreciation of $468 and $485............................. 170 132
Other assets................................................ 310 366
Total assets........................................... $3,543 $4,072
LIABILITIES
Accounts payable............................................ $1,133 $ 884
Payroll and benefit-related liabilities..................... 149 246
Debt maturing within one year............................... 13 36
Other current liabilities................................... 475 600
Total current liabilities.............................. 1,770 1,766
Long-term debt due to AT&T.................................. 4,000 900
Long-term liabilities and deferred credits.................. 285 295
Deferred income taxes....................................... 29 41
Total liabilities...................................... 6,084 3,002
Combined attributed net (liabilities) assets................ (2,541) 1,070
Total liabilities and combined attributed net assets........ $3,543 $4,072
The notes are an integral part of the combined financial statements.
D-179
528
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED STATEMENTS OF CHANGES IN COMBINED
ATTRIBUTED NET ASSETS
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
(IN MILLIONS)
COMBINED ATTRIBUTED NET (LIABILITIES) ASSETS
Balance at beginning of year............................ $ 1,070 $ 3,266 $ 821
Net income........................................... 4,112 4,633 3,807
Dividends declared to AT&T........................... (1,657) (1,871) (1,487)
Contributions (to) from AT&T, net.................... (6,066) (4,958) 125
Balance at end of year.................................. $(2,541) $ 1,070 $ 3,266
The notes are an integral part of the combined financial statements.
D-180
529
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
(IN MILLIONS)
OPERATING ACTIVITIES
Net income................................................ $ 4,112 $ 4,633 $ 3,807
Adjustments to reconcile net income to net cash provided
by operating activities:
Gains on sales of businesses and investments............ (56) (162) --
Net restructuring and other charges..................... 55 6 (19)
Depreciation and amortization........................... 167 184 116
Provision for uncollectibles............................ 595 749 886
Increase in accounts receivable......................... (161) (954) (426)
Increase (decrease) in accounts payable................. 249 (55) (10)
Net change in other operating assets and liabilities.... (174) (51) (213)
Net cash provided by operating activities............ 4,787 4,350 4,141
INVESTING ACTIVITIES
Capital expenditures and other additions................ (148) (300) (98)
Loan to AT&T............................................ -- 1,580 (1,580)
Net dispositions of businesses.......................... 15 125 --
Other investing activities, net......................... 1 (7) 37
Net cash (used in) provided by investing
activities......................................... (132) 1,398 (1,641)
FINANCING ACTIVITIES
Decrease in long-term debt due to AT&T.................. -- -- (1,122)
Increase in long-term debt due to AT&T.................. 3,100 900 --
Dividends paid to AT&T.................................. (2,031) (1,808) (1,458)
Contributions (to) from AT&T, net....................... (5,707) (4,829) 80
Decrease in short-term borrowings, net.................. (23) (5) --
Net cash used in financing activities................ (4,661) (5,742) (2,500)
Net increase (decrease) in cash and cash equivalents...... (6) 6 --
Cash and cash equivalents, beginning of year.............. 6 -- --
Cash and cash equivalents, end of year.................... -- 6 --
The notes are an integral part of the combined financial statements.
D-181
530
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
1. BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
On October 25, 2000 AT&T announced a restructuring plan designed to fully
separate or issue separately tracked stocks intended to reflect the financial
performance and economic value of each of AT&T's four major operating units.
Under this plan AT&T will create a new class of stock to track the financial
performance and economic value of AT&T Consumer Services Group. If the Consumer
Services charter amendment proposal is approved, AT&T expects to distribute some
or all of the tracking stock to AT&T shareholders later this year.
AT&T Consumer Services Group will be combined with AT&T Business Services
Group to form AT&T Communications Services, Inc. AT&T Communications Services,
Inc. will be separated from AT&T as an asset based stock, however will be the
owner of the AT&T Brand. AT&T Consumer Services Group is expected to be a
tracking stock of AT&T Communications Services Inc.
BASIS OF PRESENTATION
AT&T Consumer Services Group provides to residential customers a variety of
any-distance communications services including long distance, local toll
(intrastate calls outside the immediate local area) and Internet access. In
addition, AT&T Consumer Services Group provides calling card, operator-handled
calling services, and in certain areas, local phone services.
AT&T Consumer Services Group is an integrated business of AT&T and is not a
separate legal entity. These combined financial statements reflect the results
of operations, financial position, changes in combined attributed net assets and
cash flows of AT&T Consumer Services Group as if it were a separate entity for
all periods presented. The combined financial statements of AT&T Consumer
Services Group were prepared in accordance with GAAP. The financial information
included herein may not necessarily reflect the combined results of operations,
financial position, changes in combined attributed net assets and cash flows of
AT&T Consumer Services Group had it been a separate, stand-alone entity during
the periods presented. These financial statements should be read in conjunction
with AT&T's Form 10-K/A for the year ended December 31, 2000.
The combined financial statements of AT&T Consumer Services Group reflect
the assets, liabilities, revenue and expenses directly attributable to AT&T
Consumer Services Group, as well as allocations deemed reasonable by management,
to present the results of operations, financial position and cash flows of AT&T
Consumer Services Group on a stand-alone basis. The allocation methodologies
have been described within the notes to the combined financial statements where
appropriate. All significant intercompany accounts and transactions within AT&T
Consumer Services Group have been eliminated. Earnings per share disclosure has
not been presented as AT&T Consumer Services Group is a business unit of AT&T
and earnings per share data is not considered meaningful.
The combined financial statements of AT&T Consumer Services Group primarily
include the results of the following legal entities: AT&T Communications of the
Southern States Inc., AT&T Communications of the Southwest, Inc., AT&T
Communications companies in other jurisdictions and certain attributed assets of
AT&T Corp.
Debt has been allocated to AT&T Consumer Services Group based on our future
view of AT&T's debt position after taking into account the significant
deleveraging activities of AT&T Corp.
D-182
531
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
This allocation took into account the following factors: prospective financing
requirements, working capital and capital expenditure requirements and
comparable company profiles. Increases in historical debt levels are based, in
general, on historical cash flows generated by this entity in relation to total
AT&T. Such cash outflows include acquisitions, dividend payments and capital
expenditures, partially offset by cash flow from operations. For purposes of
this allocation, certain "corporate" activities were deemed to be partially
funded by this entity by contributing proceeds to the parent for these
activities. These activities included the repurchase of common shares by AT&T
and cash payments associated with the acquisitions of TCI merger and MediaOne
acquisition. Since AT&T Consumer Services Group will be a tracking stock of AT&T
Communications Services, Inc., the intercompany debt allocated to them will be
payable to AT&T Communications Services, Inc. The interest expense on the
allocated debt was calculated based on a rate intended to be equivalent to the
rate AT&T Consumer Services Group would have received if it were a stand-alone
entity. Due to the expected positive operating cash flow of AT&T Consumer
Services Group, the level of debt of AT&T Consumer Services Group in the future
is expected to be significantly lower than the level at December 31, 2000.
As a result of the above methodology, AT&T Consumer Services Group advanced
funds to AT&T. These advances are accounted for as short-term borrowings between
the entities and bear interest at a market rate that is substantially equal to
the rate at which AT&T would be able to borrow from third parties on a
short-term basis.
General corporate overhead related to AT&T's corporate headquarters and
common support divisions has been allocated to AT&T Consumer Services Group as
it was not deemed practicable to specifically identify such common costs to AT&T
Consumer Services Group. The allocation of corporate overhead is divided into an
allocation of shared services (e.g., payroll and accounts payable) and other
corporate overhead. Costs of shared services are allocated to AT&T Consumer
Services Group based on transaction based prices. Other corporate overhead is
allocated to AT&T Consumer Services Group based on the ratio of AT&T Consumer
Services Group's external costs and expenses adjusted for any functions that
AT&T Consumer Services Group performs on its own. The costs of these services
charged to AT&T Consumer Services Group are not necessarily indicative of the
costs that would have been incurred in AT&T Consumer Services Group had they
performed these functions entirely as a stand alone entity, nor are they
indicative of costs that will be charged or incurred in the future. However,
management believes that such allocations are reasonable.
AT&T performs cash management functions on behalf of AT&T Consumer Services
Group. Substantially all of AT&T Consumer Service's Group's cash balances are
swept to AT&T on a daily basis, where they are managed and invested by AT&T.
Transfers of cash to and from AT&T are reflected as a component of combined
attributed net assets, after giving effect to the allocation of debt described
above.
Changes in combined attributed net assets primarily represented net
transfers to or from AT&T, after giving effect to the net income of AT&T
Consumer Services Group during the period, and were assumed to be settled in
cash.
Consolidated income tax provision, related tax payments or refunds, and
deferred tax balances of AT&T have been allocated to AT&T Consumer Services
Group based principally on the taxable income and tax credits directly
attributable to AT&T Consumer Services Group, essentially a stand alone
presentation. These allocations reflect AT&T Consumer Services Group's
contribution to AT&T's consolidated taxable income and the consolidated tax
liability and tax credit position. AT&T
D-183
532
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
and its affiliates and AT&T Consumer Services Group have entered into a tax
sharing agreement that provides for tax sharing payments based on the taxes or
tax benefits of a hypothetical affiliated group consisting of AT&T Broadband
Group, AT&T Communications Services, Inc., and AT&T Consumer Services Group.
Based on this agreement, the consolidated tax liability before credits is
allocated between the groups, based on each group's contribution to consolidated
taxable income of the hypothetical group. Consolidated tax credits of the
hypothetical group are allocated between groups based on each group's
contribution to each tax credit.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
AT&T Consumer Services Group recognizes long distance and local services
revenue based upon minutes of traffic processed or contracted fee schedules.
AT&T Consumer Services Group recognizes revenue as services are rendered or as
products are delivered to and are accepted by customers and when services are
provided in accordance with contract terms. Customer activation fees, along with
related costs up to but not exceeding the revenue, are deferred and amortized
over the customer relationship period. AT&T Consumer Services Group records
revenue net of an estimate for unbillable accounts. During 2000, AT&T Consumer
Services Group adopted Securities and Exchange Commission Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements." The adoption
did not have a material impact on AT&T Consumer Services Group's results of
operations or financial condition.
ADVERTISING AND PROMOTIONAL COSTS
AT&T Consumer Services Group expenses costs of advertising and promotions,
including cash incentives used to acquire customers, as incurred. Advertising
and promotional expenses were $930, $1,085 and $1,361 in 2000, 1999 and 1998,
respectively. Of these amounts, $288, $320, and $622 were cash incentives to
acquire customers in 2000, 1999 and 1998, respectively.
CASH EQUIVALENTS
AT&T Consumer Services Group considers all highly liquid investments with
original maturities of generally three months or less to be cash equivalents.
CASH FLOWS
For purposes of the combined statements of cash flows, transactions between
AT&T Consumer Services Group and AT&T, other than dividends, have been accounted
for as having been settled in cash at the time the transaction was recorded by
AT&T Consumer Services Group.
PROPERTY, PLANT AND EQUIPMENT
AT&T Consumer Services Group states property, plant and equipment at cost
and determines depreciation based upon the assets' estimated useful lives using
either the group or unit method. All of AT&T Consumer Services Group's property,
plant and equipment consists of communications and network equipment. The useful
lives of communications and network equipment range from three to 15 years. The
group method is used for the majority of the communications and network
equipment. All other property, plant and equipment, is depreciated on a
straight-line basis. When AT&T Consumer Services Group sells or retires assets
depreciated using the group method, the cost is
D-184
533
AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
deducted from property, plant and equipment and charged to accumulated
depreciation, without recognition of a gain or loss. The unit method is
primarily used for large computer systems and support assets. When AT&T Consumer
Services Group sells assets that were depreciated using the unit method, AT&T
Consumer Services Group includes the related gains or losses in other income.
GOODWILL
Goodwill is the excess of the purchase price over the fair value of net
assets acquired in business combinations accounted for as purchases. AT&T
Consumer Services Group amortizes goodwill on a straight-line basis over 10
years.
SOFTWARE CAPITALIZATION
Certain direct software development costs are capitalized, including
external direct costs of material and services, and payroll costs for employees
devoting time to the software projects. These costs are included within other
assets and are amortized over a period not to exceed five years beginning when
the asset is substantially ready for use. Costs incurred during the preliminary
project stage, as well as maintenance and training costs, are expensed as
incurred. AT&T Consumer Services Group capitalizes initial operating-system
software costs and amortizes them over the life of the associated hardware. AT&T
Consumer Services Group also capitalizes costs of purchased application
software. These capitalized costs are included in property, plant and equipment
and are amortized over a useful life not to exceed five years.
INCOME TAXES
AT&T Consumer Services Group is not a separate taxable entity for federal
and state income tax purposes and its results of operations are included in the
consolidated federal and state income tax returns of AT&T and its affiliates.
AT&T Consumer Services Group's provision or benefit for income taxes is based
upon its contribution to the overall income tax liability of AT&T and its
affiliates as described in Note 1.
VALUATION OF LONG-LIVED ASSETS
Long-lived assets such as property, plant and equipment, goodwill,
investments and software are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be recoverable. If
the total of the expected future undiscounted cash flows is less than the
carrying amount of the asset, a loss is recognized for the difference between
the fair value and carrying value of the asset. In addition, in accordance with
Accounting Principles Board (APB) Opinion No. 17, "Intangible Assets," AT&T
Consumer Services Group continues to evaluate the amortization periods to
determine whether events or circumstances warrant revised amortization periods.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and revenue and expenses during the period reported. Actual results
could differ from those estimates. Estimates are used when accounting for
certain items such as long-term contracts,
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AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
allowance for doubtful accounts, depreciation and amortization, employee benefit
plans, taxes, restructuring reserves and contingencies.
CONCENTRATIONS
As of December 31, 2000, AT&T Consumer Services Group does not have any
significant concentration of business transacted with a particular customer,
supplier or lender that could, if suddenly eliminated, severely impact AT&T
Consumer Services Group's operations. AT&T Consumer Services Group also does not
have a concentration of available sources of labor, services, or other rights
that could, if suddenly eliminated, severely impact AT&T Consumer Services
Group's operations. AT&T Consumer Services Group currently obtains a significant
portion of its transport services exclusively from AT&T Business Services Group.
If AT&T Consumer Services Group is unable to procure such transport services it
could affect its ability to meet demand for its products which would have an
adverse affect on the results.
3. SUPPLEMENTARY FINANCIAL INFORMATION
SUPPLEMENTARY INCOME STATEMENT INFORMATION
FOR THE YEARS ENDED
DECEMBER 31,
--------------------
2000 1999 1998
---- ---- ----
INCLUDED IN DEPRECIATION AND AMORTIZATION
Amortization of purchased intangibles..................... $21 $ 9 $ --
Amortization of goodwill.................................. 9 7 --
INCLUDED IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Research and development expenses......................... $59 $101 $174
OTHER INCOME, NET
Interest income........................................... 14 45 84
Gains on sales of businesses and investments.............. 56 162 --
Miscellaneous, net........................................ 11 1 2
Total other income, net................................... $81 $208 $ 86
SUPPLEMENTARY BALANCE SHEET INFORMATION
AT DECEMBER 31,
----------------
2000 1999
----- -----
OTHER ASSETS:
Software development costs, net........................... $155 $192
Goodwill, net............................................. 81 90
Other..................................................... 74 84
---- ----
$310 $366
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AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
AT DECEMBER 31,
----------------
2000 1999
----- -----
OTHER CURRENT LIABILITIES:
Marketing Incentives...................................... $255 $322
Deferred Revenue.......................................... 98 124
Other..................................................... 122 154
---- ----
$475 $600
SUPPLEMENTARY CASH FLOW INFORMATION
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
Interest payments.................................... $ 164 $ 41 $ 27
Income tax payments.................................. $2,546 $2,869 $2,356
4. ACQUISITIONS AND DISPOSITIONS
In 1999, AT&T Consumer Services Group purchased certain assets of SmarTalk
Teleservices, Inc., a leading seller of prepaid calling cards. The difference
between the purchase price and the fair value of net assets acquired has been
recorded as Goodwill in the accompanying financial statements. AT&T Consumer
Services Group amortizes this asset over 10 years, and recorded amortization
expense in the amount of $9 and $7 for the years ended December 31, 2000, and
1999, respectively.
Also in 1999, AT&T Consumer Services Group sold its Language Line Services
business for a gain of $153, which is reflected in the combined statements of
income.
5. NET RESTRUCTURING AND OTHER CHARGES
During 2000, AT&T Consumer Services Group recorded $97 of net restructuring
and other charges, which included $18 of asset impairment charges and $79 for
restructuring and exit costs.
The charge for restructuring and exit plans was primarily due to headcount
reductions, including the consolidation of customer care and call centers.
Included in exit costs was $79 of cash termination benefits associated with
the involuntary separation of about 1,300 employees. Approximately 65% of the
individuals were management employees and 35% were non-management employees.
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AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following table displays the activity of the restructuring reserve
account:
EMPLOYEE
SEPARATIONS
-----------
Balance at January 1, 1998.................................. $ 53
Deductions................................................ (48)
Balance at December 31, 1998................................ $ 5
Additions................................................. 7
Deductions................................................ (6)
Balance at December 31, 1999................................ $ 6
Additions................................................. 79
Deductions................................................ (44)
Balance at December 31, 2000................................ $ 41
Deductions reflect cash payments of $29, $6 and $44 for 1998, 1999, and
2000, respectively. These payments included cash termination benefits of $29, $0
and $42, for the years ended December 31, 1998, 1999 and 2000, respectively.
Deductions for 1998 also include noncash utilization of $19, which reflects a
reversal of excess reserves. Nearly 53% of the employees affected by the 1999
and 2000 restructuring charges have left their positions at December 31, 2000.
In 2000, AT&T Consumer Services Group also recorded an asset impairment
charge of $18 related to the write-down of unrecoverable assets in certain
businesses where the carrying value was no longer supported by estimated future
cash flows.
During 1999, AT&T Consumer Services Group recorded $7 of net restructuring
and other charges. This $7 charge for restructuring and exit costs was recorded
in conjunction with AT&T's initiative to reduce costs. The restructuring and
exit plans primarily focused on the maximization of synergies through headcount
reductions, including the consolidation of customer-care and call centers.
The exit costs represent cash termination benefits associated with the
separation of approximately 164 employees as part of voluntary termination
plans. All of the terminations were nonmanagement employees.
During 1998, AT&T Consumer Services Group recorded a $19 benefit to net
restructuring and other charges. This benefit represents the reversal of 1995
business restructuring reserves primarily resulting from the overlap of AT&T's
1998 voluntary retirement incentive program (VRIP) on certain 1995 projects.
6. RELATED PARTY TRANSACTIONS
AT&T Consumer Services Group purchases network related services from AT&T
at cost-based prices, which approximate market prices. For the years ended
December 31, 2000, 1999 and 1998, these amounts totaled $846, $1,249 and $1,402,
respectively, and are reflected within costs of services and products in the
combined statements of income. There are no inter-entity payables for these
services as amounts are deemed to be settled in cash.
AT&T Consumer Services Group purchases sales and sales support, customer
care, billing, and research and development services from AT&T Business Services
Group at cost-based prices, which approximate market prices. For the years ended
December 31, 2000, 1999, and 1998, these amounts
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AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
totaled $445, $704, and $1,014, respectively, and are reflected within selling,
general and administrative (SG&A) expenses in the combined statements of income.
AT&T has allocated general corporate overhead expenses related to AT&T's
corporate headquarters and common support division to AT&T Consumer Services
Group. For the years ended December 31, 2000, 1999, and 1998, these amounts
totaled $244, $335, and $415, respectively, and are reflected within SG&A.
AT&T Consumer Services Group purchases receivables from AT&T Wireless
Services and provides customer care and billing services to AT&T Wireless
Services at cost-based prices, which approximate market prices. For the years
ended December 31, 2000, 1999 and 1998, these customer care and billing services
totaled $88, $77 and $18, respectively, and are reflected as a reduction of SG&A
expenses in the combined statements of income. Included within accounts payable
at December 31, 2000 and 1999 was $79 and $77, respectively.
AT&T Consumer Services Group provides AT&T Broadband with sales support and
customer care services at cost-based prices, which approximate market prices.
For the years ended December 31, 2000 and 1999, these amounts totaled $89 and
$121, respectively, and are reflected as a reduction of SG&A expenses in the
combined statements of income. The inter-entity receivables from AT&T Broadband
Group were $130 and $120 at December 31, 2000 and 1999, respectively. AT&T
Consumer Services Group provides billing and collections services on behalf of
AT&T Broadband Group. Amounts due to AT&T Broadband Group were $48 at December
31, 2000.
AT&T invests excess cash of AT&T Puerto Rico and AT&T Virgin Islands on
their behalf. Notes receivable related to this cash, included within accounts
receivable, were $262 and $171 at December 31, 2000, 1999, respectively.
7. PENSION, POSTRETIREMENT AND OTHER EMPLOYEE BENEFIT PLANS
The majority of AT&T Consumer Services Group's employees participate in
AT&T's noncontributory defined benefit pension plans and postretirement benefit
plans. Pension benefits for management employees are principally based on
career-average pay. Pension benefits for occupational employees are not directly
related to pay. AT&T's benefit plans for current and certain future retirees
include health care benefits, life insurance coverage and telephone concessions.
For purposes of allocating a portion of AT&T's net pension and
postretirement periodic benefit cost to AT&T Consumer Services Group's financial
statements, certain estimates were made as of December 31, 2000, 1999 and 1998
of AT&T Consumer Services Group's share of AT&T's pension and postretirement
assets and benefit obligations related to AT&T Consumer Services Group's active
employees. Based on this methodology, AT&T Consumer Services Group's share of
AT&T's net pension and postretirement periodic benefit (credit) cost was $(14)
and $11 in 2000, $(11) and $17 in 1999 and $(4) and $10 in 1998, respectively.
AT&T Consumer Services Group's employees are also eligible to participate
in savings plans sponsored by AT&T. The plans allow employees to contribute a
portion of their pretax and/or after-tax income in accordance with specified
guidelines. AT&T matches a certain percentage of employee contributions, up to
certain limits. AT&T Consumer Services Group's expense related to the AT&T
savings plans was $21 in 2000, $26 in 1999 and $26 in 1998.
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AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCK-BASED COMPENSATION PLANS
Under AT&T's 1997 Long-term Incentive Program (Program), AT&T grants stock
options, performance shares, restricted stock and other awards on AT&T common
stock.
The exercise price of any stock option is equal to the stock price when the
option is granted. Generally, the options vest over three or four years and are
exercisable up to 10 years from the date of grant.
Under the Program, performance share units are awarded to key employees in
the form of either common stock or cash at the end of a three-year period, based
on AT&T's total shareholder return and/or certain financial-performance targets.
Under the AT&T 1996 Employee Stock Purchase Plan (Plan), which was
effective July 1, 1996, AT&T is authorized to sell up to 75 million shares of
AT&T common stock to its eligible employees. Under the terms of the Plan,
employees may have up to 10% of their earnings withheld to purchase AT&T's
common stock. The purchase price of the stock on the date of exercise is 85% of
the average high and low sale prices of shares on the New York Stock Exchange
for that day. Under the Plan, AT&T sold approximately 389 thousand, 311 thousand
and 251 thousand shares to AT&T Consumer Services Group's employees in 2000,
1999 and 1998, respectively.
AT&T and AT&T Consumer Services Group applied Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its plans. Accordingly, no compensation
expense has been recognized for its stock-based compensation plans other than
for performance-based and restricted stock awards and stock appreciation rights
(SARs). Compensation costs charged against AT&T Consumer Services Group's
results of operations were $3, $4 and $2 in 2000, 1999 and 1998, respectively.
AT&T and AT&T Consumer Services Group have adopted the disclosure-only
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." If AT&T
Consumer Services Group had elected to recognize compensation costs based on the
fair value at the date of grant for AT&T awards granted to AT&T Consumer
Services Group's employees in 2000, 1999 and 1998, consistent with the
provisions of SFAS No. 123, AT&T Consumer Services Group's net income would have
been adjusted to reflect additional compensation expense resulting in the
following pro forma amounts:
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
Net income........................................... $4,095 $4,621 $3,801
The pro forma effect on net income for 1998 may not be representative of
the pro forma effect on net income of future years because the SFAS No. 123
method of accounting for pro forma compensation expense has not been applied to
options granted prior to January 1, 1995, as all such options were fully vested
by the end of 1998.
AT&T granted approximately 5.2 million, 2.5 million and 1.7 million stock
options to AT&T Consumer Services Group employees during 2000, 1999 and 1998,
respectively. At the date of grant, the weighted average exercise price for AT&T
options granted to AT&T Consumer Services Group's employees during 2000, 1999
and 1998 were $36.06, $55.96 and $41.72, respectively. The weighted-average fair
values at date of grant for AT&T options granted to AT&T Consumer Services
Group's
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AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
employees during 2000, 1999 and 1998 were $12.41, $15.53 and $9.88,
respectively, and were estimated using the Black-Scholes option-pricing model.
The following weighted-average assumptions were applied for 2000, 1999 and 1998,
respectively: (i) expected dividend yields of 1.6%, 1.7% and 2.0% (ii) expected
volatility rates of 33.6%, 28.5% and 24.5%, and (iii) risk-free interest rates
of 6.29%, 5.15% and 5.14% and (iv) expected lives of 4.9 years, 4.6 years and
4.3 years.
9. INCOME TAXES
AT&T Consumer Services Group is not a separate legal entity for federal and
state income tax purposes and its results of operations are included in the
consolidated federal and state income tax returns of AT&T and its affiliates.
(See Note 1). AT&T Consumer Services Group's provision for income taxes has been
prepared as if the entity prepares separate tax returns for federal and state
tax purposes.
The following table shows the principal reasons for the difference between
the effective income tax rate and the U.S. federal statutory income tax rate:
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
U.S. federal statutory income tax rate............... 35.00% 35.00% 35.00%
Federal income tax at statutory rate................. $2,330 $2,626 $2,157
Foreign income taxes................................. 21 26 16
Taxes on repatriated and accumulated foreign income,
net of tax credits................................. (21) (26) (16)
State and local income taxes, net of federal income
tax effect......................................... 216 244 200
Research and other credits........................... (1) (2) (3)
Other differences, net............................... 1 1 2
Provision for income taxes........................... $2,546 $2,869 $2,356
Effective income tax rate............................ 38.2% 38.2% 38.2%
D-191
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AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The U.S. and foreign components of income from continuing operations before
income taxes and the provision for income taxes are presented in this table:
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
INCOME BEFORE INCOME TAXES
United States...................................... $6,656 $7,497 $6,171
Foreign............................................ 2 5 (8)
Total.............................................. $6,658 $7,502 $6,163
PROVISION FOR INCOME TAXES
CURRENT
Federal............................................ $2,150 $2,402 $2,028
State and local.................................... 327 366 308
Foreign............................................ 21 26 16
DEFERRED
Federal............................................ $ 42 $ 65 $ 4
State and local.................................... 6 10 --
Provision for income taxes........................... $2,546 $2,869 $2,356
Deferred income tax liabilities are taxes AT&T Consumer Services Group
expects to pay in future periods. Similarly, deferred income tax assets are
recorded for expected reductions in taxes payable in future periods. Deferred
income taxes arise because of differences in the book and tax basis of certain
assets and liabilities.
Deferred income tax liabilities and assets consist of the following:
AT DECEMBER 31,
----------------
2000 1999
---- ----
LONG-TERM DEFERRED INCOME TAX LIABILITIES
Property, plant and equipment............................. $ 18 $ 11
Intangibles............................................... 60 81
Other..................................................... 1 2
Total long-term deferred income tax liabilities........... $ 79 $ 94
LONG-TERM DEFERRED INCOME TAX ASSETS
Employee Benefits......................................... $ 41 $ 46
Reserves and allowances................................... 5 7
Other..................................................... 4 --
Total long-term deferred income tax assets................ $ 50 $ 53
Net long-term deferred income tax liabilities............... 29 41
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AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
AT DECEMBER 31,
----------------
2000 1999
---- ----
CURRENT DEFERRED INCOME TAX LIABILITIES
Total current deferred income tax liabilities............... $ 9 $ 9
CURRENT DEFERRED INCOME TAX ASSETS
Business restructuring.................................... $ 17 $ 21
Employee benefits......................................... 23 39
Reserve and allowances.................................... 255 300
Advanced Payments......................................... 27 20
Other..................................................... 1 1
Total current deferred income tax assets.................... $323 $381
Net current deferred income tax assets...................... $314 $372
10. COMMITMENTS AND CONTINGENCIES
In the normal course of business AT&T Consumer Services Group is subject to
proceedings, lawsuits and other claims, including proceedings under laws and
regulations related to environmental and other matters. Such matters are subject
to many uncertainties, and outcomes are not predictable with assurance.
Consequently, AT&T Consumer Services Group is unable to ascertain the ultimate
aggregate amount of monetary liability or financial impact with respect to these
matters at December 31, 2000. These matters could affect the operating results
of any one quarter when resolved in future periods. However, AT&T Consumer
Services Group believes that after final disposition, any monetary liability or
financial impact to us beyond that provided for at year-end would not be
material to AT&T Consumer Services Group's annual combined financial statements.
AT&T Consumer Services Group leases equipment through contracts that expire
in various years through 2004. Rental expense under operating leases was $15,
$19 and $11 for the years ended December 31 2000, 1999 and 1998, respectively.
11. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." Among
other provisions, it requires that entities recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. Gains and losses resulting from changes in the fair
value of those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. The effective date of
this standard was delayed via the issuance of SFAS No. 137. The effective date
for SFAS No. 133 is now for fiscal years beginning after June 15, 2000, though
earlier adoption is encouraged and retroactive application is prohibited. For
AT&T Consumer Services Group this means that the standard must be adopted no
later than January 1, 2001.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities" as an amendment to SFAS
No. 133. This statement provides clarification with regard to certain
implementation issues under SFAS No. 133 on specific types of hedges.
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AT&T CONSUMER SERVICES GROUP
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
On January 1, 2001, AT&T Consumer Services Group adopted SFAS No. 133. This
adoption did not have a material impact on AT&T Consumer Services Group's
combined financial statements.
The impact of the adoption of SFAS No. 133, as amended by SFAS No. 138, on
AT&T Consumer Services Group's future results of operations is dependent upon
the fair values of AT&T Consumer Services Group's derivatives and related
financial instruments and could result in pronounced quarterly fluctuations in
other income in future periods.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities -- A
Replacement of FASB No. 125." This statement provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities. Under these standards, after a transfer of financial assets, an
entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. This statement
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. This statement is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. AT&T Consumer Services Group does
not expect that the adoption of SFAS No. 140 will have a material impact on AT&T
Consumer Services Group's results of operations, financial position or cash
flows.
12. SUBSEQUENT EVENTS
On April 26, 2001, AT&T initiated a 364-day accounts receivable
securitization program providing for up to $500 of funding. Under the program, a
small percentage of accounts receivable related to AT&T Consumer Services Group
will be sold on a discounted, revolving basis, to a special purpose,
wholly-owned subsidiary, which assigns interests in such receivables to
unrelated third-party financing entities.
On March 23, 2001, AT&T Inc. signed an agreement to acquire substantially
all of the assets of NorthPoint Communications Group, Inc. valued at
approximately $135. The acquisition includes all of NorthPoint's co-locations
nationwide, certain network equipment, systems and support software and related
assets, including two leased buildings. The purchase of NorthPoint
Communications Group, Inc. is expected to be attributed to AT&T Communications
Services, Inc.
D-194
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AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
--------- ---------
(DOLLARS IN MILLIONS)
Revenue..................................................... $11,127 $12,227
Operating Expenses
Access and other connection................................. 3,148 3,505
Costs of services and products (excluding depreciation of
$725 and $749 included below)............................. 2,259 2,162
Selling, general and administrative......................... 2,089 2,180
Depreciation and amortization............................... 1,129 1,089
Net restructuring and other charges......................... - 757
Total operating expenses.................................... 8,625 9,693
Operating income............................................ 2,502 2,534
Other income................................................ 176 162
Interest expense............................................ 486 271
Income before income taxes, minority interest, (losses)
earnings from equity investments and cumulative effect of
accounting change......................................... 2,192 2,425
Provision for income taxes.................................. 866 904
Minority interest income.................................... 35 1
Net (losses) earnings from equity investments............... (125) 2
Income before cumulative effect of accounting change........ 1,236 1,524
Cumulative effect of accounting change, net of income taxes
of $80.................................................... 130 -
Net income.................................................. $ 1,366 $ 1,524
The notes are an integral part of the combined financial statements.
D-195
544
AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2001 2000
----------- ------------
(UNAUDITED)
(DOLLARS IN MILLIONS)
ASSETS
Cash and cash equivalents................................... $ 249 $ 352
Receivables, less allowances of $1,105 and $1,111........... 8,374 8,846
Other receivables........................................... 1,486 1,770
Deferred income taxes....................................... 1,135 1,206
Other current assets........................................ 467 480
Total current assets........................................ 11,711 12,654
Property, plant and equipment, net of accumulated
amortization of $27,180 and $26,051....................... 26,032 26,083
Goodwill, net of accumulated amortization of $403 and
$369...................................................... 5,534 5,643
Investments and related advances............................ 5,451 5,830
Prepaid pension costs....................................... 3,092 3,003
Long-term receivables....................................... 1,011 1,012
Other assets................................................ 2,760 2,788
Total assets................................................ $55,591 $57,013
LIABILITIES
Accounts payable............................................ $ 3,760 $ 4,998
Payroll and benefit-related liabilities..................... 1,079 1,421
Short-term notes payable to AT&T............................ 18,361 22,146
Other current liabilities................................... 4,198 3,763
Total current liabilities................................... 27,398 32,328
Long-term notes payable to AT&T............................. 8,093 8,603
Long-term benefit-related liabilities....................... 3,512 3,531
Deferred income taxes....................................... 3,712 3,575
Other long-term liabilities and deferred credits............ 4,151 4,141
Total liabilities........................................... 46,866 52,178
Minority Interest........................................... 386 420
Combined attributed net assets.............................. 8,339 4,415
Total liabilities and combined attributed net assets........ $55,591 $57,013
The notes are an integral part of the combined financial statements.
D-196
545
AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED STATEMENTS OF CHANGES IN COMBINED
ATTRIBUTED NET ASSETS
(UNAUDITED)
FOR THE THREE
MONTHS ENDED
MARCH 31,
---------------------
2001 2000
-------- ---------
(DOLLARS IN MILLIONS)
COMBINED ATTRIBUTED NET ASSETS:
Balance at beginning of year.............................. $4,415 $12,560
Net income................................................ 1,366 1,524
Dividends declared to AT&T................................ (143) (692)
Net contributions from (to) AT&T.......................... 3,123 (1,904)
Other comprehensive income................................ (422) 467
Balance at end of period.................................... $8,339 $11,955
SUMMARY OF TOTAL COMPREHENSIVE INCOME:
Income before cumulative effect of accounting change........ $1,236 $ 1,524
Cumulative accounting change................................ 130 -
Net income.................................................. $1,366 $ 1,524
Other comprehensive income
Net foreign currency translation adjustment (net of income
taxes of $(30) and $(17)).............................. (49) (27)
Net revaluation of investments (net of income taxes of
$(232) and $306)....................................... (373) 494
Total other comprehensive income............................ (422) 467
Total Comprehensive Income.................................. $ 944 $ 1,991
The notes are an integral part of the combined financial statements.
D-197
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AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
2001 2000
--------- ---------
(DOLLARS IN MILLIONS)
OPERATING ACTIVITIES
Net income.................................................. $ 1,366 $ 1,524
Adjustments to reconcile net income to net cash provided by
operating activities:
Cumulative effect of accounting change, net of income
taxes.................................................. (130) -
Net gains on sales of businesses and investments.......... (68) (92)
Net restructuring and other charges....................... - 732
Depreciation and amortization............................. 1,129 1,089
Provision for uncollectible receivables................... 231 210
Net losses (earnings) from equity investments............. 211 (3)
Minority interest income.................................. (35) -
Deferred income taxes..................................... 198 -
Decrease (increase) in accounts receivable................ 552 (844)
(Decrease) increase in accounts payable................... (1,022) 437
Net revaluation of securities............................. (90) -
Net change in other operating assets and liabilities...... (213) (439)
Other adjustments, net.................................... 55 (35)
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 2,184 2,579
INVESTING ACTIVITIES
Capital expenditures and other additions.................... (1,512) (1,624)
Proceeds from sale or disposal of property, plant and
equipment................................................. 7 143
Decrease (increase) in other receivables.................... 9 (980)
Equity investment distributions and sales................... 655 57
Equity investment contributions and purchases............... (97) (32)
Net dispositions (acquisitions) of businesses including cash
acquired.................................................. 15 (92)
Other investing activities, net............................. (43) (14)
NET CASH USED IN INVESTING ACTIVITIES....................... (966) (2,542)
FINANCING ACTIVITIES
(Decrease) increase in long-term debt to AT&T............... (510) 362
(Decrease) increase in short-term debt to AT&T.............. (3,785) 1,067
Net contributions from (to) AT&T............................ 3,115 (1,474)
Dividends paid to AT&T...................................... (141) (703)
NET CASH USED IN FINANCING ACTIVITIES....................... (1,321) (748)
Net decrease in cash and cash equivalents................... (103) (711)
Cash and cash equivalents at beginning of year.............. 352 1,104
Cash and cash equivalents at end of period.................. $ 249 $ 393
The notes are an integral part of the combined financial statements.
D-198
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AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
(UNAUDITED)
1. BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
On October 25, 2000, AT&T announced a restructuring plan designed to fully
separate or issue separately tracked stocks intended to reflect the financial
performance and economic value of each of AT&T's four major operating units.
Upon completion of the plan, AT&T Wireless, AT&T Broadband, AT&T Business and
AT&T Consumer will all be represented by asset-based or tracking stocks.
AT&T Communications Services, Inc. is a wholly-owned subsidiary of AT&T
Corp. AT&T Communications Services, Inc. will be separated from AT&T as a
stand-alone entity however, it will become the owner of the AT&T brand, which it
will license to the other companies. AT&T Communications Services, Inc. includes
the AT&T Business Services Group and AT&T Consumer Services Group portions of
AT&T, along with certain corporate activities. AT&T Business Services Group
provides long distance, local, data and Internet Protocol (IP) networking to
small and medium-sized businesses, large domestic and multinational businesses
and government agencies. AT&T Consumer Services Group provides to residential
customers a variety of any-distance communications services including long
distance, local toll (intrastate calls outside the immediate local area) and
Internet access. AT&T Consumer Services Group also provides prepaid
calling-card, operator-handled calling services and local phone service in
certain areas. AT&T Consumer Services Group will be separately represented by a
tracking stock, some or all of which is expected to be distributed to AT&T
shareholders in the second half of 2001.
BASIS OF PRESENTATION
AT&T Communications Services, Inc. is an integrated business of AT&T. The
combined financial statements reflect the results of operations, financial
position, changes in combined attributed net assets and cash flows of AT&T
Communications Services, Inc. as if it were a separate entity for all periods
presented. The financial information included herein may not necessarily reflect
the combined results of operations, financial position, changes in combined
attributed net assets and cash flows of AT&T Communications Services, Inc. had
it been a separate, stand-alone entity during the periods presented. In
addition, the combined results for interim periods presented are not necessarily
indicative of results for the full year. The combined financial statements of
AT&T Communications Services, Inc. should be read in conjunction with AT&T's
Form 10-K/A for the year ended December 31, 2000, AT&T's Form 10-Q/A for the
quarter ended March 31, 2001, and AT&T Communications Services, Inc. financial
statements for the year ended December 31, 2000, included elsewhere in this
document.
The combined financial statements of AT&T Communications Services, Inc.
were prepared in accordance with generally accepted accounting principles. The
combined financial statements of AT&T Communications Services, Inc. reflect the
assets, liabilities, revenue and expenses directly attributable to AT&T
Communications Services, Inc., as well as allocations deemed reasonable by
management, to present the results of operations, financial position and cash
flows of AT&T Communications Services, Inc. on a stand-alone basis. The
allocation methodologies have been described within the notes to the combined
financial statements where appropriate.
D-199
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AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
All significant intercompany accounts and transactions within AT&T
Communications Services, Inc. have been eliminated. Earnings per share
disclosure has not been presented as AT&T Communications Services, Inc. is a
business unit of AT&T.
The combined financial statements of AT&T Communications Services, Inc.
primarily include the legal entity results of AT&T Communications of Virginia,
Inc., AT&T Communications of the Southwest, Inc., Global Card Holdings, Inc.,
Teleport Communications Group Inc., AT&T Communications of New York, Inc., AT&T
Communications of New Jersey, Inc., AT&T Communications of Southern States,
Inc., AT&T Communications of Illinois, Inc., AT&T Communications of the Mountain
States Inc., AT&T Communications of California, Inc., AT&T Network Procurement
LP, AT&T Global Network Services Inc., AT&T Global Network Services Group LLC,
VLT Corporation, AT&T Latin America Consolidated, US Holding Co LLC and certain
attributed assets of AT&T.
Debt has been allocated to AT&T Communications Services, Inc. based on the
future view of AT&T's debt position after taking into account the significant
deleveraging activities of AT&T. This allocation took into account the following
factors: prospective financing requirements, desired stand-alone credit profile,
working capital and capital expenditure requirements and comparable company
profiles. Changes in historical debt levels were, in general, driven primarily
by historical cash flows generated by this entity in relation to total AT&T.
Such cash outflows include acquisitions, dividend payments, capital
expenditures, offset by cash flow from operations. For purposes of this
allocation, certain "corporate" activities were deemed to be funded by this
entity by contributing proceeds to the parent. These activities included the
repurchase of common shares by AT&T and cash payments associated with the TCI
merger and MediaOne acquisition. Similarly, certain corporate activities that
resulted in cash flow to AT&T were deemed to be attributed to AT&T
Communications Services, Inc., such as the sale of shares to NTT DoCoMo. These
activities are reflected within net contributions (to) from AT&T in the combined
statements of cash flows. At or before the time of the spin-off, when AT&T
Communications Services, Inc. is separated from historical AT&T, we plan to seek
to transfer the previously allocated indebtedness from AT&T to AT&T
Communications Services, Inc. This may be accomplished through a variety of
measures that may result in increased costs and additional covenants on AT&T
Communications Services, Inc. The historical interest expense on the allocated
debt was calculated based on a rate intended to be equivalent to the rate AT&T
Communications Services, Inc. would have received if it were a stand-alone
entity. Due to AT&T's continuing deleveraging activities and expected positive
cash flow from operations, the $26.6 billion of debt at March 31, 2001, is
expected to be significantly lower in the future.
AT&T's expected deleveraging activities that relate to AT&T Communications
Services, Inc. include: $3 billion retained portion of AT&T Wireless Services
for future sale, exchange or monetization and $0.7 billion of gross proceeds
from the sale of AT&T Communications Services, Inc.'s investment in Japan
Telecom. Finally, AT&T has made no final determination as to the allocation of
proceeds from the sale of shares of AT&T Broadband Group tracking stock, between
AT&T Communications Services, Inc. and AT&T Broadband Group.
Net contributions to or from AT&T are generally assumed to be settled in
cash. General corporate overhead related to AT&T's corporate headquarters and
common support divisions has been allocated to AT&T Communications Services,
Inc. as it was not deemed practicable to specifically identify such common costs
to AT&T Communications Services, Inc. These allocations were based on the ratio
of AT&T Communications Services, Inc.'s external costs and expenses to AT&T's
consolidated external costs and expenses. The costs of these services charged to
AT&T
D-200
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AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Communications Services, Inc. are not necessarily indicative of the costs that
would have been incurred if AT&T Communications Services, Inc. had performed
these functions entirely as a stand-alone entity, nor are they indicative of
costs that will be charged or incurred in the future. However, management
believes such allocations are reasonable.
The combined provision for income taxes, related tax payments or refunds,
and deferred tax balances of AT&T have been allocated to AT&T Communications
Services, Inc. based principally on the taxable income and tax credits directly
attributable to AT&T Communications Services, Inc., essentially a stand-alone
presentation. These allocations reflect AT&T Communications Services, Inc.'s
contribution to AT&T's consolidated taxable income and the consolidated tax
liability and tax credit position. AT&T and its affiliates and AT&T
Communications Services, Inc. have entered into a tax sharing agreement that
provides for tax sharing payments based on the tax expense or tax benefits of a
hypothetical affiliated group consisting of AT&T Broadband Group and AT&T
Communications Services, Inc. Based on this agreement, the consolidated tax
liability before credits is allocated between the groups, based on each group's
contribution to the consolidated taxable income of the hypothetical group.
Consolidated tax credits of the hypothetical group are allocated between groups
based on each group's contribution to each tax credit.
2. NET RESTRUCTURING AND OTHER CHARGES
During the first quarter of 2000, AT&T Communications Services, Inc.
recorded $757 of net restructuring and other charges, which included $666 for
restructuring and exit costs associated with cost reduction initiatives, and $91
related to the government-mandated disposition of AT&T Communications (U.K.)
Ltd., which would have competed directly with Concert.
The charge for restructuring and exit plans was primarily due to headcount
reductions, mainly in network operations and AT&T Business Services Group,
including the consolidation of customer-care and call centers.
Included in exit costs was $442 of cash termination benefits associated
with the involuntary separation of approximately 6,200 employees. Approximately
one-half of the separations were management employees and one-half were
non-management employees. Nearly 60% of the affected employees have left their
positions as of March 31, 2001, and the remaining employees will leave the
company during 2001.
AT&T Communications Services, Inc. also recorded $62 of network lease and
other contract termination costs associated with penalties incurred as part of
notifying vendors of the termination of these contracts during the quarter.
The following table displays the activity and balances of the restructuring
reserve account:
TYPE OF COST
-----------------------------------------
EMPLOYEE FACILITY
SEPARATIONS CLOSINGS OTHER TOTAL
----------- -------- ----- -----
Balance at January 1, 2001............................ $243 $173 $36 $452
Additions........................................... -- -- -- --
Deductions.......................................... (77) (11) -- (88)
Balance at March 31, 2001............................. $166 $162 $36 $364
Deductions reflect cash payments of $88. These payments included cash
termination benefits of $77, which were primarily funded through cash from
operations.
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AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Also included in restructuring and exit costs in 2000 was $144 of benefit
curtailment costs associated with employee separations as part of these exit
plans. Further, AT&T Communications Services, Inc. recorded an asset impairment
charge of $18 million related to the write-down of unrecoverable assets in
certain businesses where the carrying value was no longer supported by estimated
future cash flows.
3. DEBT OBLIGATIONS
As discussed in Note 1 to the combined financial statements, AT&T
Communications Services, Inc. had notes payable to AT&T in the amount of $26,454
and $30,749, at March 31, 2001 and December 31, 2000, respectively. Of these
amounts, $18,361 and $22,146, respectively, were short-term notes payable to
AT&T. Interest expense on notes payable to AT&T was $486 and $271 for the first
quarter of 2001 and 2000, respectively. Included within other current
liabilities was $73 and $194 of short-term debt, at March 31, 2001 and December
31, 2000, respectively. Included within other long-term liabilities and deferred
credits was $98 and $143 of long-term debt at March 31, 2001 and December 31,
2000, respectively. These third party obligations consist primarily of notes
payable on demand, capital leases and various medium term notes.
4. SEGMENT REPORTING
AT&T Communications Services, Inc.'s results are segmented according to the
way we manage our business: AT&T Business Services and AT&T Consumer Services
Group. The balance of AT&T Communications Services, Inc.'s operations is
included in a "Corporate and Other" category. This category reflects corporate
staff functions and the elimination of transactions between segments.
AT&T Communications Services, Inc. evaluates performance based on several
factors, of which the primary financial measure is earnings before interest and
taxes, including pretax minority interest and net pretax earnings or losses from
equity investments (EBIT). Prepaid pension assets and corporate-owned or leased
real estate are generally held at the corporate level and, therefore, are
included in the Corporate and Other category.
Generally, AT&T Communications Services, Inc.'s intersegment
telecommunications transactions are accounted for at market prices.
REVENUE
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
2001 2000
-------- --------
AT&T Business Services Group external revenue............... $ 7,098 $ 7,176
AT&T Business Services Group internal revenue............... 70 76
Total AT&T Business Services Group revenue.................. 7,168 7,252
AT&T Consumer Services Group external revenue............... 4,007 5,037
Total reportable segments................................... 11,175 12,289
Corporate and other......................................... (48) (62)
Total revenue............................................... $11,127 $12,227
D-202
551
AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
RECONCILIATION OF EARNINGS BEFORE INTEREST AND TAXES (EBIT) TO INCOME BEFORE
INCOME TAXES
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
2001 2000
-------- --------
AT&T Business Services Group................................ $1,025 $1,146
AT&T Consumer Services Group................................ 1,302 1,637
Total reportable segments' EBIT................... 2,327 2,783
Corporate and other......................................... 176 (82)
Deduct: Pretax minority interest income (expense)........... 36 2
Add: Pretax losses (earnings) from equity investments....... 211 (3)
Interest expense............................................ 486 271
Income before income taxes, minority interest, earnings
(losses) from equity investments and cumulative effect of
accounting change......................................... $2,192 $2,425
ASSETS
AT AT
MARCH 31, DECEMBER 31,
--------- ------------
2001 2000
--------- ------------
AT&T Business Services Group................................ $42,977 $43,186
AT&T Consumer Services Group................................ 3,036 3,543
Total reportable segments................................... 46,013 46,729
Corporate and Other assets
Prepaid pension costs..................................... 3,092 3,003
Deferred taxes............................................ 839 892
Other corporate assets.................................... 5,647 6,389
Total assets................................................ $55,591 $57,013
Geographic information is not presented due to the immateriality of revenue
attributable to international customers.
AT&T Communications Services, Inc. continually reviews its management model
and structure and makes adjustments accordingly, reflecting the dynamics of its
business.
5. RELATED PARTY TRANSACTIONS
TRANSACTIONS WITH CONCERT:
AT&T Communications Services, Inc. has various related party transactions
with Concert since the commencement of this global venture in early January
2000.
Included in revenue for both the first quarter of 2001 and the first
quarter of 2000, was $0.3 billion for services provided to Concert.
Included in access and other connection expenses are charges from Concert
representing costs incurred on our behalf to connect calls made to foreign
countries (international settlements) and
D-203
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AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
costs paid by AT&T to Concert for distributing Concert products. Such charges
totaled $0.5 billion and $0.6 billion, for the first quarter of 2001 and the
first quarter of 2000, respectively.
During the first quarter of 2000, AT&T Communications Services, Inc. loaned
$1.0 billion to Concert; that loan is included within "Investments and related
advances" in the accompanying Combined Balance Sheets. Interest income of $17
and $13, was recognized for the first quarter of 2001 and the first quarter of
2000, respectively.
At March 31, 2001 and December 31, 2000, AT&T Communications Services, Inc.
had a floating rate loan from Concert due on demand in the amount of $0.1
billion. The loan is included in "Other current liabilities" in the accompanying
Combined Balance Sheets. Interest expense was $2 for the first quarter of 2001.
Included in accounts receivable and accounts payable was $0.4 billion and
$0.1 billion, and $0.5 billion and $0.5 billion, at March 31, 2001 and December
31, 2000, respectively, related to transactions with Concert. Included in other
receivables and other current liabilities was $0.9 billion and $1.1 billion, and
$1.1 billion and $1.0 billion, at March 31, 2001 and December 31, 2000,
respectively, related to transactions associated with Concert.
TRANSACTIONS WITH AT&T WIRELESS GROUP:
Included in revenue for the first quarter of 2001 and the first quarter of
2000 was $100 and $70, respectively, for wireline communications and other
services provided to AT&T Wireless Group.
AT&T Communications Services, Inc. purchases receivables from AT&T Wireless
Services and provides customer care and billing services to AT&T Wireless
Services at cost-based prices, which approximate market prices. For the first
quarter of 2001 and the first quarter of 2000, these customer care and billing
services totaled $19 and $22, respectively, and are reflected as a reduction of
SG&A expenses in the combined statements of income. Included within accounts
payable at March 31, 2001 and December 31, 2000 was $63 and $79, respectively,
related to these services.
Included in current assets at December 31, 2000 were receivables of $402,
which included $394 related to the sale of our investment in Rogers Cantel in
December 2000. The note was settled in the first quarter of 2001 and interest
recorded on the note was $7 during the first quarter of 2001. Included in
current liabilities was $75 and $99 at March 31, 2001 and December 31, 2000,
respectively, related to the billing and collection functions on behalf of AT&T
Wireless Group.
TRANSACTIONS WITH AT&T BROADBAND GROUP:
Included in revenue for the first quarter of 2001 and 2000, was $58 and
$11, respectively, for wireline communications and other services provided to
AT&T Broadband Group.
AT&T Communications Services, Inc. provides AT&T Broadband Group with sales
support and customer care services at cost based prices, which approximate
market prices. For the first quarter of 2001 and the first quarter of 2000,
these amounts totaled $47 and $13, respectively, and are reflected as a
reduction of SG&A expenses in the combined statements of income. There were no
inter-entity receivables from AT&T Broadband Group at March 31, 2001; at
December 31, 2000, amounts due were $130. AT&T Communications Services, Inc.
provides billing and collections services on behalf of AT&T Broadband Group.
Amounts due to AT&T Broadband Group were $1 and $48 at March 31, 2001 and
December 31, 2000, respectively.
D-204
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AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Included in current assets at March 31, 2001 and December 31, 2000, were
receivables of $25 and $147, respectively. These receivables are primarily
related to the sales support, customer care and billing services provided.
Included in current liabilities were $2 and $49 at March 31, 2001 and December
31, 2000, primarily related to billing and collection functions on behalf of
AT&T Broadband Group.
6.STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 133 "ACCOUNT FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES"
Effective January 1, 2001, AT&T Communication Services, Inc. adopted
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities", and its corresponding amendments
under SFAS No. 138. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. All derivatives, whether designated
as hedging relationships or not, are required to be recorded on the balance
sheet at fair value. If the derivative is designated as a fair value hedge, the
changes in the fair value of the derivative and of the hedged item attributable
to the hedged risk are recognized in earnings. If the derivative is designated
as a cash flow hedge, the effective portions of changes in the fair value of the
derivative are recorded within other comprehensive income as a component of
combined attributed net assets and are recognized in the income statement when
the hedged item affects earnings. Changes in fair values of derivative
instruments not designated as hedging instruments and ineffective portions of
hedges, if any, are recognized in earnings in the current period.
The adoption of SFAS No. 133 on January 1, 2001, resulted in a pretax
cumulative-effect increase to income of $210 million ($130 million net of income
taxes), which was attributable primarily to changes in the fair value of
warrants held in both public and private companies. Warrants that can be net
share settled are deemed derivative financial instruments and are generally not
eligible to be designated as hedging instruments as there is no corresponding
underlying exposure. This includes warrants held in both public and private
companies. For the first quarter of 2001, other income included a net pretax
gain of $72 for changes in the fair value of warrants.
7. NEW ACCOUNTING PRONOUNCEMENT
In September 2000, the Financial Accounting Standards Board issued SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities -- a Replacement of FASB Statement No. 125". This
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. Under these
standards, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. This statement provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings.
This statement is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after March 31, 2001. AT&T
Communications Services Inc. does not expect that the adoption of SFAS No. 140
will have a material impact on its results of operations, financial position or
cash flows.
D-205
554
AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
8. SUBSEQUENT EVENTS
On June 22, 2001, AT&T initiated a 364-day accounts receivable
securitization program providing for up to $2.2 billion of funding. Under the
program, a percentage of accounts receivable related to AT&T Business Services
will be sold on a discounted, revolving basis, to a special purpose, wholly
owned subsidiary, which assigns interests in such receivables to unrelated
third-party financing entities.
On May 25, 2001, AT&T acquired substantially all of the assets of
NorthPoint Communications Group, Inc. valued at approximately $135. The
acquisition includes all of Northpoint's co-locations nationwide, certain
network equipment, systems and support software and related assets, including
two leased buildings. The purchase of NorthPoint Communications Group, Inc. was
attributed to AT&T Communications Services, Inc.
On April 27, 2001, AT&T completed the sale of its stake in Japan Telecom
Co. Ltd to Vodafone Group plc. The net pretax gain attributable to AT&T
Communications Services, Inc. is expected to be approximately $470.
On April 26, 2001, AT&T initiated a 364-day accounts receivable
securitization program providing for up to $500 of funding. Under the program, a
small percentage of accounts receivable related to AT&T Consumer Services Group
will be sold on a discounted, revolving basis, to a special purpose,
wholly-owned subsidiary, which assigns interests in such receivables to
unrelated third-party financing entities.
D-206
555
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareowners of AT&T Corp.:
In our opinion, the accompanying combined balance sheets and the related
combined statements of income, of changes in combined attributed net assets and
of cash flows present fairly, in all material respects, the financial position
of AT&T Communications Services, Inc. at December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America. These combined financial
statements are the responsibility of AT&T Communications Services, Inc.'s
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these combined
financial statements in accordance with auditing standards generally accepted in
the United States of America, which require 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, assessing
the accounting principles used and the significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
AT&T Communications Services, Inc. is a fully integrated business unit of AT&T
Corp.; consequently as indicated in Note 1, these combined financial statements
have been derived from the consolidated financial statements and accounting
records of AT&T Corp. and reflect certain assumptions and allocations. Moreover,
as indicated in Note 1, AT&T Communications Services, Inc. relies on AT&T Corp.
for administrative, management and other services. The financial position,
results of operations and cash flows of AT&T Communications Services, Inc. could
differ from those that would have resulted had AT&T Communications Services,
Inc. operated autonomously or as an entity independent of AT&T Corp. As more
fully discussed in Note 1, the combined financial statements of AT&T
Communications Services, Inc. should be read in conjunction with the audited
consolidated financial statements of AT&T Corp.
PricewaterhouseCoopers LLP
New York, New York
May 9, 2001
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AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED STATEMENTS OF INCOME
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
(DOLLARS IN MILLIONS)
REVENUE................................................... $47,521 $50,152 $47,890
Operating Expenses
Access and other connection............................... 13,139 14,439 15,116
Costs of services and products (excluding depreciation of
$3,119, $3,552 and $2,763 included below)............... 8,588 8,560 8,344
Selling, general and administrative....................... 7,537 9,601 10,656
Depreciation and amortization............................. 4,538 4,519 3,577
Net restructuring and other charges....................... 759 331 2,514
Total operating expenses............................. 34,561 37,450 40,207
Operating income.......................................... 12,960 12,702 7,683
Other income.............................................. 1,181 775 812
Interest expense.......................................... 1,643 797 292
Income before income taxes, minority interest and
(earnings) losses from equity investments............... 12,498 12,680 8,203
Provision for income taxes................................ 4,493 4,508 3,009
Minority interest income (expense)........................ 39 -- (1)
Net earnings (losses) from equity investments............. 10 (48) (109)
Income before extraordinary loss.......................... 8,054 8,124 5,084
Extraordinary loss (net of income taxes of $80)........... -- -- 137
Net income................................................ $ 8,054 $ 8,124 $ 4,947
The notes are an integral part of the combined financial statements.
D-208
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AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED BALANCE SHEETS
AT DECEMBER 31,
----------------------
2000 1999
--------- ---------
(DOLLARS IN MILLIONS)
ASSETS
Cash and cash equivalents................................... $ 352 $ 1,104
Receivables, less allowances of $1,111 and $1,126........... 8,846 8,492
Other receivables........................................... 1,770 442
Deferred income taxes....................................... 1,206 1,045
Other current assets........................................ 480 531
Total current assets................................... 12,654 11,614
Property, plant and equipment, net.......................... 26,083 25,587
Goodwill, net of accumulated amortization of $369 and
$189...................................................... 5,643 5,181
Investments and related advances............................ 5,830 1,517
Prepaid pension costs....................................... 3,003 2,464
Long-term receivables....................................... 1,012 1,040
Other assets................................................ 2,788 2,490
Total assets........................................... $57,013 $49,893
LIABILITIES
Accounts payable............................................ $ 4,998 $ 5,419
Payroll and benefit-related liabilities..................... 1,421 1,640
Short-term notes payable to AT&T............................ 22,146 7,165
Other current liabilities................................... 3,763 3,995
Total current liabilities.............................. 32,328 18,219
Long-term notes payable to AT&T............................. 8,603 9,040
Long-term benefit-related liabilities....................... 3,531 3,923
Deferred income taxes....................................... 3,575 2,508
Other long-term liabilities and deferred credits............ 4,141 3,598
Total liabilities...................................... 52,178 37,288
Minority Interest........................................... 420 45
Combined attributed net assets.............................. 4,415 12,560
Total liabilities and combined attributed net assets........ $57,013 $49,893
The notes are an integral part of the combined financial statements.
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AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED STATEMENTS OF CHANGES IN
COMBINED ATTRIBUTED NET ASSETS
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
2000 1999 1998
-------- ------- -------
(DOLLARS IN MILLIONS)
COMBINED ATTRIBUTED NET ASSETS:
Balance at beginning of year........................... $ 12,560 $15,112 $ 8,918
Net income............................................. 8,054 8,124 4,947
Dividends declared to AT&T............................. (2,485) (2,807) (2,229)
Net contribution (to) from AT&T........................ (13,536) (8,256) 3,461
Other comprehensive income............................. (178) 387 15
Balance at end of year................................... $ 4,415 $12,560 $15,112
SUMMARY OF TOTAL COMPREHENSIVE INCOME:
Net income............................................... $ 8,054 $ 8,124 $ 4,947
Other comprehensive income
Net foreign currency translation adjustment (net of
income taxes of $(69), $54 and $(2))................ (111) 88 (5)
Net revaluation of investments (net of income taxes of
$(40), $178 and $(14)).............................. (66) 287 11
Net minimum pension liability adjustment (net of income
taxes of $(1), $7 and $(15))........................ (1) 12 9
Total other comprehensive income......................... (178) 387 15
Total Comprehensive Income............................... $ 7,876 $ 8,511 $ 4,962
The notes are an integral part of the combined financial statements.
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AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
2000 1999 1998
-------- -------- -------
(DOLLARS IN MILLIONS)
OPERATING ACTIVITIES
Net income.............................................. $ 8,054 $ 8,124 $ 4,947
Add: Extraordinary loss on retirement of debt........... -- -- 137
Income from continuing operations....................... 8,054 8,124 5,084
Adjustments to reconcile net income to net cash provided
by operating activities:
Gains on sales of businesses and investments.......... (715) (546) (408)
Net restructuring and other charges................... 577 85 2,362
Depreciation and amortization......................... 4,538 4,519 3,577
Provision for uncollectibles.......................... 925 1,140 1,290
Net losses from equity investments.................... 50 78 177
Minority interest income.............................. (39) -- (1)
Deferred income taxes................................. 1,002 760 (105)
Increase in accounts receivable....................... (2,661) (2,523) (1,268)
Decrease in accounts payable.......................... (198) (5) (424)
Net change in other operating assets and
liabilities........................................ (388) (1,360) 183
Other adjustments, net................................ (691) (184) (377)
NET CASH PROVIDED BY OPERATING ACTIVITIES.......... 10,454 10,088 10,090
INVESTING ACTIVITIES
Capital expenditures and other additions.............. (7,040) (8,745) (6,822)
Proceeds from sale or disposal of property, plant and
equipment.......................................... 555 268 104
(Increase) decrease in other receivables.............. (981) 17 6,403
Sales of marketable securities........................ -- -- 2,003
Purchases of marketable securities.................... -- -- (1,696)
Equity investment distributions and sales............. 414 757 125
Equity investment contributions and purchases......... (1,790) (467) (102)
Net (acquisitions) dispositions of businesses
including cash acquired............................ (142) (5,270) 687
Other investing activities, net....................... (110) (14) (64)
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES..... (9,094) (13,454) 638
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AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
COMBINED STATEMENTS OF CASH FLOWS -- (CONTINUED)
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
2000 1999 1998
-------- -------- -------
(DOLLARS IN MILLIONS)
FINANCING ACTIVITIES
Retirement of long-term debt.......................... -- -- (1,046)
Increase (decrease) in long-term debt to AT&T......... (437) 6,984 (2,807)
Increase (decrease) in short-term debt to AT&T........ 14,981 6,083 (2,951)
Net contributions (to) from AT&T...................... (13,609) (9,045) 1,084
Dividends paid to AT&T................................ (3,047) (2,685) (2,187)
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES....................................... (2,112) 1,337 (7,907)
Net (decrease) increase in cash and cash equivalents.... (752) (2,029) 2,821
Cash and cash equivalents at beginning of year.......... 1,104 3,133 312
Cash and cash equivalents at end of year................ $ 352 $ 1,104 $ 3,133
The notes are an integral part of the combined financial statements.
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AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in millions unless otherwise noted)
1. BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
On October 25, 2000, AT&T announced a restructuring plan designed to fully
separate or issue separately tracked stocks intended to reflect the financial
performance and economic value of each of AT&T's four major operating units.
Upon completion of the plan, AT&T Wireless, AT&T Broadband, AT&T Business and
AT&T Consumer will all be represented by asset-based or tracking stocks.
AT&T Communications Services, Inc. is a wholly-owned subsidiary of AT&T
Corp. AT&T Communications Services, Inc. will be separated from AT&T as a
stand-alone entity however, it will become the owner of the AT&T brand, which it
will license to the other companies. AT&T Communications Services, Inc. includes
the AT&T Business Services Group and AT&T Consumer Services Group portions of
AT&T, along with certain corporate activities. AT&T Business Services Group
provides long distance, local, data and Internet Protocol (IP) networking to
small and medium-sized businesses, large domestic and multinational businesses
and government agencies. AT&T Consumer Services Group provides to residential
customers a variety of any-distance communications services including long
distance, local toll (intrastate calls outside the immediate local area) and
Internet access. AT&T Consumer Services Group also provides prepaid
calling-card, operator-handled calling services and local phone service in
certain areas. AT&T Consumer Services Group will be separately represented by a
tracking stock, some or all of which is expected to be distributed to AT&T
shareholders in the second half of 2001.
BASIS OF PRESENTATION
AT&T Communications Services, Inc. is an integrated business of AT&T. The
combined financial statements reflect the results of operations, financial
position, changes in combined attributed net assets and cash flows of AT&T
Communications Services, Inc. as if it were a separate entity for all periods
presented. The financial information included herein may not necessarily reflect
the combined results of operations, financial position, changes in combined
attributed net assets and cash flows of AT&T Communications Services, Inc. had
it been a separate, stand-alone entity during the periods presented. The
combined financial statements of AT&T Communications Services, Inc. should be
read in conjunction with AT&T's Form 10-K/A for the year ended December 31,
2000.
The combined financial statements of AT&T Communications Services, Inc.
were prepared in accordance with generally accepted accounting principles. The
combined financial statements of AT&T Communications Services, Inc. reflect the
assets, liabilities, revenue and expenses directly attributable to AT&T
Communications Services, Inc., as well as allocations deemed reasonable by
management, to present the results of operations, financial position and cash
flows of AT&T Communications Services, Inc. on a stand-alone basis. The
allocation methodologies have been described within the notes to the combined
financial statements where appropriate. All significant intercompany accounts
and transactions within the AT&T Communications Services, Inc. have been
eliminated. Earnings per share disclosure has not been presented as AT&T
Communications Services, Inc. is a business unit of AT&T.
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AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The combined financial statements of AT&T Communications Services, Inc.
primarily include the legal entity results of AT&T Communications of Virginia,
Inc., AT&T Communications of the Southwest, Inc., Global Card Holdings, Inc.,
Teleport Communications Group Inc., AT&T Communications of New York, Inc., AT&T
Communications of New Jersey, Inc., AT&T Communications of Southern States,
Inc., AT&T Communications of Illinois, Inc., AT&T Communications of the Mountain
States, Inc., AT&T Communications of California, Inc., AT&T Network Procurement
LP, AT&T Global Network Services Inc., AT&T Global Network Services Group LLC,
VLT Corporation, AT&T Latin America Consolidated, US Holding Co LLC and certain
attributed assets of AT&T.
Debt has been allocated to AT&T Communications Services, Inc. based on the
future view of AT&T's debt position after taking into account the significant
deleveraging activities of AT&T. This allocation took into account the following
factors: prospective financing requirements, desired stand-alone credit profile,
working capital and capital expenditure requirements and comparable company
profiles. Increases in historical debt levels were, in general, driven primarily
by historical cash flows generated by this entity in relation to total AT&T.
Such cash outflows include acquisitions, dividend payments, capital
expenditures, offset by cash flow from operations. For purposes of this
allocation, certain "corporate" activities were deemed to be funded by this
entity by contributing proceeds to the parent. These activities included the
repurchase of common shares by AT&T and cash payments associated with the TCI
Merger and MediaOne acquisition. Similarly, certain corporate activities that
resulted in cash flow to AT&T were deemed to be attributed to AT&T
Communications Services, Inc. These activities are reflected within net
contributions (to) from AT&T in the combined statements of cash flows. At or
before the time of the spin-off, when AT&T Communications Services, Inc. is
separated from historical AT&T, we plan to seek to transfer the previously
allocated indebtedness from AT&T to AT&T Communications Services, Inc. This may
be accomplished through a variety of measures that may result in increased costs
and additional covenants on AT&T Communications Services, Inc. The historical
interest expense on the allocated debt was calculated based on a rate intended
to be equivalent to the rate AT&T Communications Services, Inc. would have
received if it were a stand-alone entity. Due to AT&T's deleveraging activities
and expected positive cash flow from operations, the $31.1 billion of debt at
December 31, 2000 is expected to be significantly lower in the future. AT&T's
expected deleveraging activities that relate to AT&T Communications Services,
Inc. include: $3 billion retained portion of AT&T Wireless Services; $3.6
billion of the proceeds from the DoCoMo investment in AT&T preferred stock,
which will be attributed to AT&T Communications Services, Inc.; and $0.7 billion
of gross proceeds from the sale of AT&T Communications Services, Inc.'s
investment in Japan Telecom. Finally, AT&T has made no final determination as to
the allocation of proceeds from the sale of shares of AT&T Broadband Group
tracking stock, between AT&T Communications Services, Inc. and AT&T Broadband
Group.
Net contributions to or from AT&T are assumed to be settled in cash.
General corporate overhead related to AT&T's corporate headquarters and
common support divisions has been allocated to AT&T Communications Services,
Inc. as it was not deemed practicable to specifically identify such common costs
to AT&T Communications Services, Inc. These allocations were based on the ratio
of AT&T Communications Services, Inc.'s external costs and expenses to AT&T's
consolidated external costs and expenses. The costs of these services charged to
AT&T Communications Services, Inc. are not necessarily indicative of the costs
that would have been incurred if AT&T Communications Services, Inc. had
performed these functions entirely as a
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AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
stand-alone entity, nor are they indicative of costs that will be charged or
incurred in the future. However, management believes such allocations are
reasonable.
The combined provision for income taxes, related tax payments or refunds,
and deferred tax balances of AT&T have been allocated to AT&T Communications
Services, Inc. based principally on the taxable income and tax credits directly
attributable to AT&T Communications Services, Inc., essentially a stand-alone
presentation. These allocations reflect AT&T Communications Services, Inc.'s
contribution to AT&T's consolidated taxable income and the consolidated tax
liability and tax credit position. AT&T and its affiliates and AT&T
Communications Services, Inc. have entered into a tax sharing agreement that
provides for tax sharing payments based on the tax expense or tax benefits of a
hypothetical affiliated group consisting of AT&T Broadband Group and AT&T
Communications Services, Inc. Based on this agreement, the consolidated tax
liability before credits is allocated between the groups, based on each group's
contribution to the consolidated taxable income of the hypothetical group.
Consolidated tax credits of the hypothetical group are allocated between groups
based on each group's contribution to each tax credit.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
We recognize long distance and local services revenue based upon minutes of
traffic processed or contracted fee schedules. We recognize other products and
services revenue when the products are delivered and accepted by customers and
when services are provided in accordance with contract terms. Customer
activation fees, along with the related costs up to but not exceeding the
revenue, are deferred and amortized over the customer relationship period.
During 2000, we adopted Securities and Exchange Commission (SEC) Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements". The
adoption did not have a material impact on our results of operations or
financial condition.
ADVERTISING AND PROMOTIONAL COSTS
We expense costs of advertising and promotions, including cash incentives
used to acquire customers, as incurred. Advertising and promotional expenses
were $1,052, $1,280 and $1,576 in 2000, 1999 and 1998, respectively. Of these
amounts, $288, $320 and $622 were cash incentives to acquire customers in 2000,
1999 and 1998, respectively.
FOREIGN CURRENCY TRANSLATION
For operations outside the United States that prepare financial statements
in currencies other than the U.S. dollar, we translate income statement amounts
at average exchange rates for the year, and we translate assets and liabilities
at year-end exchange rates. We present these translation adjustments as a
component of accumulated other comprehensive income within combined attributed
net assets. Gains and losses from foreign currency transactions are included in
results of operations.
INCOME TAXES
AT&T Communications Services, Inc. is not a separate taxable entity for
federal and state income tax purposes and its results of operations are included
in the consolidated federal and state
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AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
income tax returns of AT&T and its affiliates. The provision for income taxes is
based on AT&T Communications Services, Inc.'s contribution to the overall income
tax liability or benefit of AT&T and its affiliates as described in Note 1.
INVESTMENT TAX CREDITS
We amortize investment tax credits as a reduction to the provision for
income taxes over the useful lives of the assets that produced the credits.
CASH EQUIVALENTS
We consider all highly liquid investments with original maturities of
generally three months or less to be cash equivalents.
PROPERTY, PLANT AND EQUIPMENT
We state property, plant and equipment at cost and determine depreciation
based upon the assets' estimated useful lives using either the group or unit
method. The useful lives of communications and network equipment range from
three to 15 years. The useful lives of other equipment ranges from three to
seven years. The useful lives of buildings and improvements range from 10 to 40
years. The group method is used for most depreciable assets, including the
majority of the communications and network equipment. When we sell or retire
assets depreciated using the group method, the cost is deducted from property,
plant and equipment and charged to accumulated depreciation, without recognition
of a gain or loss. The unit method is primarily used for large computer systems
and support assets. When we sell assets that were depreciated using the unit
method, we include the related gains or losses in other income.
We use accelerated depreciation methods primarily for certain
high-technology computer-processing equipment and digital equipment used in the
telecommunications network, except for switching equipment placed in service
before 1989, where a straight-line method is used. All other plant and
equipment, including capitalized software, is depreciated on a straight-line
basis.
GOODWILL
Goodwill is the excess of the purchase price over the fair value of net
assets acquired in business combinations accounted for under the purchase
method. We amortize goodwill on a straight-line basis over the periods
benefited, ranging from seven to 40 years.
INVESTMENTS
Investments in which we exercise significant influence but do not control
(generally a 20% to 50% ownership interest) are accounted for under the equity
method of accounting. This represents the majority of our investments.
Investments in which we have less than a 20% ownership interest and in which
there is no significant influence are accounted for under the cost method of
accounting.
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AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
SOFTWARE CAPITALIZATION
Certain direct software development costs are capitalized, including
external direct costs of material and services, and payroll costs for employees
devoting time to the software projects. These costs are included within other
assets and are amortized over a period not to exceed five years beginning when
the asset is substantially ready for use. Costs incurred during the preliminary
project stage, as well as maintenance and training costs, are expensed as
incurred. AT&T Communications Services, Inc. also capitalizes initial
operating-system software costs and amortizes them over the life of the
associated hardware.
AT&T Communications Services, Inc. also capitalizes costs associated with
the development of application software incurred from the time technological
feasibility is established until the software is ready to provide service to
customers. These capitalized costs are included in property, plant and equipment
and are amortized over a useful life not to exceed five years.
VALUATION OF LONG-LIVED ASSETS
Long-lived assets such as property, plant and equipment, goodwill,
investments and software are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be recoverable. If
the total of the expected future undiscounted cash flows is less than the
carrying amount of the asset, a loss is recognized for the difference between
the fair value and carrying value of the asset. In addition, in accordance with
Accounting Principles Board (APB) Opinion No. 17, "Intangible Assets", we
continue to evaluate the amortization periods to determine whether events or
circumstances warrant revised amortization periods.
DERIVATIVE FINANCIAL INSTRUMENTS
We use various financial instruments, including derivative financial
instruments, for purposes other than trading. We do not use derivative financial
instruments for speculative purposes. Derivatives, used as part of our
risk-management strategy, must be designated at inception as a hedge and
measured for effectiveness both at inception and on an ongoing basis. Gains and
losses related to qualifying hedges of foreign currency firm commitments are
deferred in current assets or liabilities and recognized as part of the
underlying transactions as they occur. All other foreign exchange contracts are
marked to market on a current basis and the respective gains or losses are
recognized in other income. Cash flows from financial instruments are classified
in the combined statements of cash flows under the same categories as the cash
flows from the related assets, liabilities or anticipated transactions.
CASH FLOWS
For purposes of the combined statements of cash flows, transactions between
AT&T Communications Services, Inc. and AT&T, other than dividends, have been
accounted for as having been settled in cash at the time the transaction was
recorded by AT&T Communications Services, Inc.
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AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and revenue and expenses during the period reported. Actual results
could differ from those estimates. Estimates are used when accounting for
certain items such as long-term contracts, allowance for doubtful accounts,
depreciation and amortization, employee benefit plans, taxes, restructuring
reserves and contingencies.
CONCENTRATIONS
As of December 31, 2000, we do not have any significant concentration of
business transacted with a particular customer, supplier or lender that could,
if suddenly eliminated, severely impact our operations. We also do not have a
concentration of available sources of labor, services, or other rights that
could, if suddenly eliminated, severely impact our operations.
ISSUANCE OF COMMON STOCK BY AFFILIATES
Changes in our proportionate share of the underlying equity of a subsidiary
or equity method investee, which result from the issuance of additional equity
securities by such entity, are recognized as increases or decreases to combined
attributed net assets.
3. SUPPLEMENTAL FINANCIAL INFORMATION
SUPPLEMENTARY INCOME STATEMENT INFORMATION
FOR THE YEARS ENDED
DECEMBER 31,
----------------------
2000 1999 1998
------ ---- ----
INCLUDED IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Research and development expenses......................... $ 313 $497 $513
OTHER INCOME
Investment-related income................................. $ 435 $210 $374
Gains on sales of businesses and investments.............. 715 546 408
Investment impairment charges............................. (7) (40) --
Miscellaneous, net........................................ 38 59 30
Total other income........................................ $1,181 $775 $812
DEDUCTED FROM INTEREST EXPENSE
Capitalized interest...................................... $ 143 $123 $106
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AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTARY BALANCE SHEET INFORMATION
AT DECEMBER 31,
--------------------
2000 1999
-------- --------
PROPERTY, PLANT AND EQUIPMENT
Communications, network and other equipment............... $ 43,591 $ 42,922
Buildings and improvements................................ 8,155 7,606
Land and improvements..................................... 388 464
Total property, plant and equipment....................... 52,134 50,992
Accumulated depreciation.................................. (26,051) (25,405)
Property, plant and equipment, net........................ $ 26,083 $ 25,587
SUPPLEMENTARY CASH FLOW INFORMATION
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
Interest payments, net of amounts capitalized............... $1,643 $ 797 $ 292
Income tax payments......................................... 4,493 4,508 3,009
4. MERGERS, ACQUISITIONS, VENTURES AND DISPOSITIONS
CONCERT
On January 5, 2000, AT&T and British Telecommunications plc (BT) announced
financial closure of Concert, their global communications joint venture. AT&T
Communications Services, Inc. contributed all of its international
gateway-to-gateway assets, as well as the economic value of approximately 270
multinational customers specifically targeted for direct sales by Concert.
AT&T's investment in Concert was attributed to AT&T Communications Services,
Inc.
ACC EUROPE
On November 5, 1999, AT&T sold ACC Corp. (ACC) in Europe, including ACC's
principal operations in the United Kingdom as well as ACC's operating companies
in France, Germany and Italy, to WORLDxCHANGE Communications. The results of ACC
were attributed to AT&T Communications Services, Inc. AT&T Communications
Services, Inc. were required to dispose of this investment pursuant to a
government mandate since it would have competed directly with Concert. The
transaction resulted in a pretax loss of $179.
IBM GLOBAL NETWORK
On April 30, 1999, AT&T completed its acquisition of the IBM Global Network
business (renamed AT&T Global Network Services or AGNS) and its assets in the
United States. The non-U.S. acquisitions occurred in phases throughout 1999 as
legal and regulatory requirements were met
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AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
in each of the countries in which the business operates. Under the terms of the
agreement, AT&T acquired the global network of IBM, and the two companies
entered into outsourcing agreements with each other. IBM is outsourcing a
significant portion of its global networking needs to AT&T Communications
Services, Inc., and AT&T Communications Services, Inc. is outsourcing certain
applications-processing and data-center-management operations to IBM. AT&T's
purchase of AGNS was attributed to and funded by AT&T Communications Services,
Inc. The acquisition was accounted for as a purchase. Accordingly, the operating
results of AGNS have been included in the accompanying combined financial
statements since the date of acquisition. The pro forma impact of AGNS on
historical AT&T Communications Services, Inc. results are not material.
TELEPORT COMMUNICATIONS GROUP INC.
On July 23, 1998, AT&T completed the merger with Teleport Communications
Group Inc. (TCG) pursuant to an agreement and plan of merger dated January 8,
1998. Each share of TCG common stock was exchanged for 1.4145 shares of AT&T
common stock, resulting in the issuance of 272.4 million shares in the
transaction. AT&T's merger with TCG was attributed to AT&T Communications
Services, Inc. The merger was accounted for as a pooling of interests, and
accordingly, AT&T Communications Services, Inc.'s results of operations,
financial position and cash flows reflect the results of TCG for all periods
presented. In 1998, we recognized $85 of merger-related expenses. Premerger TCG
revenue was $455, and net losses were $118, for the six months ended June 30,
1998. Elimination entries between AT&T Communications Services, Inc. and TCG
were not material.
5. NET RESTRUCTURING AND OTHER CHARGES
During 2000, AT&T Communications Services, Inc. recorded $759 of net
restructuring and other charges, which included $668 for restructuring and exit
costs associated with cost reduction initiatives, and $91 related to the
government-mandated disposition of AT&T Communications (U.K.) Ltd., which would
have competed directly with Concert.
The charge for restructuring and exit plans was primarily due to headcount
reductions, mainly in network operations and AT&T Business Services Group,
including the consolidation of customer-care and call centers.
Included in exit costs was $442 of cash termination benefits associated
with the separation of approximately 6,200 employees. Approximately one-half of
the separations were management employees and one-half were nonmanagement
employees. Approximately 5,600 employee separations were related to involuntary
terminations and approximately 600 to voluntary terminations.
AT&T Communications Services, Inc. also recorded $62 of network lease and
other contract termination costs associated with penalties incurred as part of
notifying vendors of the termination of these contracts during the year.
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AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following table displays the activity and balances of the restructuring
reserve account:
TYPE OF COST
-----------------------------------------
EMPLOYEE FACILITY
SEPARATIONS CLOSINGS OTHER TOTAL
----------- -------- ----- -----
Balance at January 1, 1998....................... $ 413 $ 434 $ 60 $ 907
Additions...................................... 150 125 -- 275
Deductions..................................... (445) (190) (30) (665)
Balance at December 31, 1998..................... $ 118 $ 369 $ 30 $ 517
Additions...................................... 142 -- 3 145
Deductions..................................... (110) (130) (12) (252)
Balance at December 31, 1999..................... $ 150 $ 239 $ 21 $ 410
Additions...................................... 442 2 62 506
Deductions..................................... (349) (68) (47) (464)
Balance at December 31, 2000..................... $ 243 $ 173 $ 36 $ 452
Deductions reflect cash payments of $245, $209 and $324 for 1998, 1999 and
2000, respectively. These payments included cash termination benefits of $186,
$118 and $272, respectively, which were primarily funded through cash from
operations. Deductions also reflect noncash utilization of $420, $43 and $140
for 1998, 1999 and 2000 respectively. Noncash utilization included deferred
severance payments primarily related to executives, and a reversal in 1998 of
$348 related to the 1995 restructuring plan. Nearly 75% of the employees
affected by the 1999 and 2000 restructuring charges have left their positions as
of December 31, 2000.
Also included in restructuring and exit costs in 2000 was $144 of benefit
curtailment costs associated with employee separations as part of these exit
plans. Further, AT&T Communications Services, Inc. recorded an asset impairment
charge of $18 million related to the write-down of unrecoverable assets in
certain businesses where the carrying value was no longer supported by estimated
future cash flows.
During 1999, we recorded $331 of net restructuring and other charges.
A $145 charge for restructuring and exit costs was recorded in conjunction
with an initiative to reduce costs. The restructuring and exit plans primarily
focused on the maximization of synergies through headcount reductions in AT&T
Business Services Group including network operations and the consolidation of
customer-care and call centers.
Included in exit costs was $142 of cash termination benefits associated
with the separation of approximately 2,800 employees as part of voluntary and
involuntary termination plans. Approximately one-half of the separations were
management employees and one-half were nonmanagement employees. Approximately
1,700 employee separations were related to involuntary terminations and
approximately 1,100 to voluntary terminations.
AT&T Communications Services, Inc. also recorded losses of $307 related to
the government-mandated disposition of certain international businesses that
would have competed directly with Concert. In addition, AT&T Communications
Services, Inc. recorded benefits of $121 related to the
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AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
settlement of pension obligations for former employees who accepted AT&T's
Voluntary Retirement Incentive Plan (VRIP) offer.
During 1998, AT&T Communications Services, Inc. recorded $2,514 of net
restructuring and other charges. The bulk of the charge was associated with an
overall cost-reduction program and the approximately 15,300 management employees
who accepted the VRIP offer. A restructuring charge of $2,724 was composed of
$2,254 and $169 for pension and postretirement special-termination benefits,
respectively, $263 of benefit plan curtailment losses and $38 of other
administrative costs. AT&T Communications Services, Inc. also recorded charges
of $125 for related facility costs and $150 for executive-separation costs.
These charges were partially offset by benefits of $940 as AT&T Communications
Services, Inc. settled pension benefit obligations of 13,700 of the total VRIP
employees. In addition, the VRIP charges were partially offset by the reversal
of $256 of 1995 business restructuring reserves primarily resulting from the
overlap of VRIP on certain 1995 restructuring initiatives.
Also included in the 1998 net restructuring and other charges were asset
impairment charges totaling $718, of which $633 was related to our decision not
to pursue Total Service Resale (TSR) as a local service strategy. AT&T
Communications Services, Inc. also recorded an $85 asset impairment charge
related to the write-down of unrecoverable assets in certain international
operations where the carrying value was no longer supported by future cash
flows. This charge was made in connection with the review of certain operations
that would have competed directly with Concert.
Additionally, $85 of merger related expenses were recorded in 1998 in
connection with the Teleport Communications Group, Inc. (TCG) merger, which was
accounted for as a pooling of interests. Partially offsetting this charge was a
$92 reversal of the 1995 restructuring reserve. This reserve reflected reserves
no longer deemed necessary. The reversal primarily included separation costs
attributed to projects completed at a cost lower than originally anticipated.
Consistent with the three-year plan, the 1995 restructuring initiatives were
substantially completed by the end of 1998.
6. DEBT OBLIGATIONS
As discussed in Note 1 to the combined financial statements, AT&T
Communications Services, Inc. had notes payable to AT&T in the amount of $30,749
and $16,205, at December 31, 2000 and 1999, respectively. Of these amounts,
$22,146 and $7,165, respectively, were short-term notes payable to AT&T.
Interest expense on notes payable to AT&T was $1,554, $714 and $210, for the
years ended December 31, 2000, 1999 and 1998, respectively. Included within
other current liabilities was $194 and $121 of short-term debt, at December 31,
2000 and 1999, respectively. Included within other long-term liabilities and
deferred credits was $143 and $106 of long-term debt at December 31, 2000 and
1999, respectively. These third party obligations consist primarily of notes
payable on demand, capital leases and various medium term notes with interest
rates ranging from 5.38%-13.44% and various maturities through 2020.
7. FINANCIAL INSTRUMENTS
In the normal course of business, we use various financial instruments,
including derivative financial instruments, for purposes other than trading. We
do not use derivative financial instruments for speculative purposes. These
instruments include letters of credit, guarantees of debt, foreign
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AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
currency exchange contracts and equity hedges. Collateral is generally not
required for these types of instruments.
By their nature, all such instruments involve risk, including the credit
risk of nonperformance by counterparties, and our maximum potential loss may
exceed the amount recognized in our balance sheet. However, at December 31, 2000
and 1999, in management's opinion, there was no significant risk of loss in the
event of nonperformance of the counterparties to these financial instruments. We
control our exposure to credit risk through credit approvals, credit limits and
monitoring procedures. We do not have any significant exposure to any individual
customer or counterparty, nor do we have any major concentration of credit risk
related to any financial instruments.
LETTERS OF CREDIT
Letters of credit are purchased guarantees that ensure our performance or
payment to third parties in accordance with specified terms and conditions and
do not create any additional risk to AT&T Communications Services, Inc. These
letters of credit were attributed to AT&T Communications Services, Inc.
GUARANTEES OF DEBT
From time to time, the debt of AT&T subsidiaries and certain joint ventures
is guaranteed. In connection with the restructuring of AT&T in 1996, AT&T issued
guarantees for certain debt obligations of AT&T's former subsidiaries AT&T
Capital Corp. and NCR Corp. These guarantees were attributed to AT&T
Communications Services, Inc. The amount of guaranteed debt associated with AT&T
Capital Corp. and NCR Corp., was $48 and $56 at December 31, 2000 and 1999,
respectively.
FOREIGN EXCHANGE
AT&T enters into foreign currency exchange contracts, including forward and
option contracts, to manage our exposure to changes in currency exchange rates
related to foreign-currency-denominated transactions. Certain contracts were
attributed to AT&T Communications Services, Inc. in 1999. In 1999, this
consisted principally of European Union currency (Euro) and British pounds
sterling contracts related to the reimbursement to foreign telephone companies
for their portion of the revenue billed by AT&T Communications Services, Inc.
for calls placed in the United States to a foreign country and other foreign
currency payables and receivables. In addition, we are subject to foreign
exchange risk related to other foreign-currency-denominated transactions.
EQUITY HEDGES
AT&T enters into equity hedges to manage our exposure to changes in equity
prices associated with stock appreciation rights of affiliated companies.
Certain equity hedges were attributed to AT&T Communications Services, Inc.
FAIR VALUES OF FINANCIAL INSTRUMENTS INCLUDING DERIVATIVE FINANCIAL
INSTRUMENTS
The following table summarizes the notional amounts of material financial
instruments. The notional amounts represent agreed-upon amounts on which
calculations of dollars to be exchanged are
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AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
based. They do not represent amounts exchanged by the parties and, therefore,
are not a measure of our exposure. AT&T Communications Services, Inc.'s exposure
is limited to the fair value of the contracts with a positive fair value plus
interest receivable, if any, at the reporting date.
DERIVATIVES AND OFF BALANCE SHEET INSTRUMENTS
2000 1999
CONTRACT/ CONTRACT/
NOTIONAL NOTIONAL
AMOUNT AMOUNT
--------- ---------
Foreign exchange forward contracts.......................... -- 167
Equity hedges............................................... 21 31
Letters of credit........................................... 187 190
Guarantees of debt.......................................... 71 87
The following information indicates the valuation methods, the carrying
amounts and estimated fair values of material financial instruments.
FINANCIAL INSTRUMENT VALUATION METHOD
-------------------- ----------------
Debt excluding capital leases It is not practicable to obtain the fair value due to
the intercompany nature of the debt
Letters of credit Fees paid to obtain the obligations
Guarantees of debt There are no quoted market prices for similar agreements
available
Foreign exchange contracts Market quotes
Equity hedges Market quotes
In 2000, the asset and liability fair values for the equity hedges
approximated their carrying amount of $2 and $11, respectively. In 1999, the
asset fair value for the equity hedges approximated their carrying amount of
$32. The asset and liability fair values and carrying amounts for foreign
exchange forward contracts was not significant in all periods presented.
8. PENSION, POSTRETIREMENT AND OTHER EMPLOYEE BENEFIT PLANS
AT&T sponsors noncontributory defined benefit pension plans covering the
majority of our employees. Pension benefits for management employees are
principally based on career-average pay. Pension benefits for occupational
employees are not directly related to pay. Pension trust contributions are made
to trust funds held for the sole benefit of plan participants. AT&T's benefit
plans for current and certain future retirees include health-care benefits, life
insurance coverage and telephone concessions. The assets and liabilities under
these plans have been attributed to AT&T Communications Services, Inc.
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AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following table shows the components of the net periodic benefit costs
included in the Combined Statements of Income:
PENSION BENEFITS POSTRETIREMENT BENEFITS
--------------------------- ------------------------
FOR THE YEARS ENDED FOR THE YEARS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------- ------------------------
2000 1999 1998 2000 1999 1998
------- ------- ------- ------ ------ ------
Service cost benefits earned during the
period................................. $ 239 $ 247 $ 275 $ 34 $ 54 $ 56
Interest cost on benefit obligations..... 983 919 940 351 324 322
Amortization of unrecognized prior
service cost........................... 174 159 135 4 13 (2)
Credit for expected return on plan
assets................................. (1,812) (1,458) (1,570) (230) (200) (173)
Amortization of transition asset......... (156) (158) (175) -- -- --
Amortization of gains.................... (332) (10) -- (16) (1) --
Charges for special termination
Benefits*.............................. -- -- 2,254 16 5 169
Net curtailment (gains) losses........... 121 -- 140 (14) -- 141
Net settlement (gains) losses*........... 8 (121) (921) -- -- --
Net periodic benefit cost (credit)....... $ (775) $ (422) $ 1,078 $ 145 $ 195 $ 513
---------------
* Primarily included in "Net restructuring and other charges" in the Combined
Statements of Income.
On January 26, 1998, AT&T offered a VRIP to employees who were eligible
participants in the AT&T Management Pension Plan. Approximately 15,300
management employees accepted the VRIP offer. In connection with the VRIP, AT&T
Communications Services, Inc. recorded pretax charges in 1998 for pension and
postretirement plan special-termination benefits of $2,254 and $169,
respectively. We also recorded pension and postretirement plan pretax charges of
$120 and $143, respectively, which are included within net curtailment (gains)
losses in 1998. The special-termination benefits reflect the value of pension
benefit improvements and expanded eligibility for postretirement benefits. The
VRIP also permitted employees to choose either a total lump-sum distribution of
their pension benefits or periodic future annuity payments.
As of December 31, 1999, all 15,300 employees had terminated employment
under the VRIP. AT&T Communications Services, Inc. has settled the pension
obligations covering about 15,100 of these employees, the remainder of which
either chose to defer commencing their pension benefits or elected to receive an
annuity distribution. Lump-sum pension settlements totaling $5.2 billion,
including a portion of the special-pension termination benefits referred to
above, resulted in settlement gains of $121 and $940 recorded in 1999 and 1998,
respectively.
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AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables provide a reconciliation of the changes in the plans'
benefit obligations and fair value of assets for the years ended December 31,
2000 and 1999, and a statement of the funded status at December 31, 2000 and
1999, respectively:
POSTRETIREMENT
PENSION BENEFITS BENEFITS
----------------- -----------------
2000 1999 2000 1999
------- ------- ------- -------
CHANGE IN BENEFIT OBLIGATIONS:
Benefit obligation, beginning of year........ $12,868 $14,443 $ 4,642 $ 5,168
Service cost................................. 239 247 34 54
Interest cost................................ 983 919 351 324
Plan amendments.............................. 37 558 (45) 4
Actuarial (gains) losses..................... (12) (1,683) 208 (579)
Benefit payments............................. (1,160) (1,062) (362) (334)
Special termination benefits................. -- -- 16 5
Settlements.................................. (57) (554) -- --
Curtailment losses........................... -- -- 7 --
Benefit obligation, end of year.............. $12,898 $12,868 $ 4,851 $ 4,642
CHANGE IN FAIR VALUE OF PLAN ASSETS:
Fair value of plan assets, beginning of
year....................................... $21,854 $18,567 $ 2,852 $ 2,476
Actual return on plan assets................. 1,007 4,855 (128) 385
Employer contributions....................... 71 48 159 325
Benefit payments............................. (1,160) (1,062) (362) (334)
Settlements.................................. (57) (554) -- --
Fair value of plan assets, end of year....... $21,715 $21,854 $ 2,521 $ 2,852
AT DECEMBER 31,
Funded (unfunded) benefit obligation......... $ 8,817 $ 8,986 $(2,330) $(1,790)
Unrecognized net gain........................ (7,339) (8,457) (183) (800)
Unrecognized transition asset................ (123) (279) -- --
Unrecognized prior service cost.............. 1,105 1,362 (9) 55
Net amount recorded.......................... $ 2,460 $ 1,612 $(2,522) $(2,535)
At December 31, 2000, the pension plan assets included $34 of AT&T common
stock, $26 of Liberty Media Group Series A common stock, and $2 of AT&T Wireless
Group common stock. At December 31, 1999, the pension plan assets included $82
of AT&T common stock and $34 of Liberty Media Group Series A common stock.
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AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following table provides the amounts recorded in the Combined Balance
Sheets:
POSTRETIREMENT
PENSION BENEFITS BENEFITS
----------------- -----------------
AT DECEMBER 31, AT DECEMBER 31,
----------------- -----------------
2000 1999 2000 1999
------- ------- ------- -------
Prepaid pension cost........................... $3,003 $2,464 $ -- $ --
Benefit related liabilities.................... (594) (918) (2,522) (2,535)
Intangible asset............................... 30 46 -- --
Accumulated other comprehensive income......... 21 20 -- --
Net amount recorded............................ $2,460 $1,612 $(2,522) $(2,535)
Our nonqualified pension plan had an unfunded accumulated benefit
obligation of $104 and $118 at December 31, 2000 and 1999, respectively. Our
postretirement health and telephone concession benefit plans had accumulated
postretirement benefit obligations of $4,247 and $4,021 at December 31, 2000 and
1999, respectively, which were in excess of plan assets of $1,408 and $1,635 at
December 31, 2000 and 1999, respectively.
The assumptions used in the measurement of the pension and postretirement
benefit obligations are shown in the following table:
AT DECEMBER 31,
--------------------
2000 1999 1998
---- ---- ----
WEIGHTED-AVERAGE ASSUMPTIONS:
Discount rate...................................... 7.5% 7.75% 6.5%
Expected return on plan assets..................... 9.5% 9.5% 9.5%
Rate of compensation increase...................... 4.5% 4.5% 4.5%
We assumed a rate of increase in the per capita cost of covered health-care
benefits (the health-care cost trend rate) of 7.6%. This rate was assumed to
gradually decline after 2000 to 4.5% by the year 2010 and then remain level.
Assumed health-care cost trend rates have a significant effect on the amounts
reported for the health-care plans. A one percentage point increase or decrease
in the assumed health-care cost trend rate would increase or decrease the total
of the service and interest-cost components of net periodic postretirement
health-care benefit cost by $9 and $9, respectively, and would increase or
decrease the health-care component of the accumulated postretirement benefit
obligation by $121 and $119, respectively.
We also sponsor savings plans for the majority of our employees. The plans
allow employees to contribute a portion of their pretax and/or after-tax income
in accordance with specified guidelines. We match a percentage of the employee
contributions up to certain limits. Our contributions amounted to $150 in 2000,
$159 in 1999 and $173 in 1998.
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AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
9. STOCK-BASED COMPENSATION PLANS
Under the AT&T 1997 Long-term Incentive Program (Program), which was
effective June 1, 1997, and amended on May 19, 1999 and on March 14, 2000, AT&T
grants stock options, performance shares, restricted stock and other awards on
AT&T common stock.
Under the Program, there were 150 million shares of AT&T common stock
available for grant with a maximum of 22.5 million common shares that could be
used for awards other than stock options. Beginning with January 1, 2000, the
remaining shares available for grant at December 31 of the prior year, plus
1.75% of the shares of AT&T common stock outstanding on January 1 of each year,
become available for grant. There is a maximum of 37.5 million shares that may
be used for awards other than stock options. The exercise price of any stock
option is equal to the stock price when the option is granted. Generally, the
options vest over three or four years and are exercisable up to 10 years from
the date of grant.
Under the Program, performance share units are awarded to key employees in
the form of either common stock or cash at the end of a three-year period, based
on AT&T's total shareholder return and certain financial-performance targets.
Under the 1987 Long-term Incentive Program, performance share units with the
same terms were also awarded to key employees based on AT&T's return-to-equity
performance compared with a target.
Under the AT&T 1996 Employee Stock Purchase Plan (Plan), which was
effective July 1, 1996, AT&T is authorized to sell up to 75 million shares of
AT&T common stock to its eligible employees. Under the terms of the Plan,
employees may have up to 10% of their earnings withheld to purchase AT&T's
common stock. The purchase price of the stock on the date of exercise is 85% of
the average high and low sale prices of shares on the New York Stock Exchange
for that day. Under the Plan, AT&T sold approximately 4 million, 2 million and 3
million shares to AT&T Communications Services, Inc. employees in 2000, 1999 and
1998, respectively.
AT&T applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its plans.
Accordingly, no compensation expense has been recognized for its stock-based
compensation plans other than for performance-based and restricted stock awards
and stock appreciation rights (SARs). Compensation costs charged against AT&T
Communications Services, Inc.'s income were $15, $96 and $157 in 2000, 1999 and
1998, respectively.
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AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the AT&T common stock option transactions for AT&T
Communications Services, Inc.'s employees is shown below:
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
2000 PRICE 1999 PRICE 1998 PRICE
------- --------- ------- --------- ------- ---------
(SHARES IN THOUSANDS)
Outstanding at January 1......... 127,591 $38.07 107,228 $29.90 87,997 $24.41
Options granted.................. 60,078 $36.34 37,443 $56.59 35,645 $41.64
Options and SARs exercised....... (6,645) $25.05 (12,499) $23.15 (12,692) $20.97
Options canceled or forfeited.... (8,975) $46.93 (4,581) $42.44 (3,722) $30.34
AT DECEMBER 31:
Options outstanding.............. 172,049 $37.52 127,591 $38.07 107,228 $29.90
Options exercisable.............. 79,131 $32.55 35,487 $29.82 26,615 $22.36
Shares available for grant....... 34,204 41,347 91,838
The following table summarizes information about AT&T common stock options
outstanding that are held by AT&T Communications Services, Inc.'s employees, at
December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- --------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF AT DEC. 31, CONTRACTUAL EXERCISE AT DEC. 31, EXERCISE
EXERCISE PRICES 2000 LIFE PRICE 2000 PRICE
--------------- -------------- ----------- --------- -------------- ---------
(IN THOUSANDS) (IN THOUSANDS)
$ 4.88 - $18.08 4,428 3.1 $16.55 3,484 $16.63
$18.15 - $24.49 12,409 6.3 $22.90 7,429 $23.26
$24.50 14,225 6.6 $24.50 14,225 $24.50
$24.55 - $26.18 3,320 3.5 $24.87 3,332 $24.87
$26.21 13,931 6.1 $26.21 13,930 $26.21
$26.33 - $31.97 15,749 6.7 $30.38 9,101 $29.96
$32.09 25,478 9.6 $32.09 141 $32.09
$32.19 - $42.04 7,644 7.5 $38.72 3,603 $38.18
$42.10 20,364 7.1 $42.10 13,278 $42.10
$42.19 - $45.44 19,127 9.1 $45.26 1,520 $44.35
$45.48 - $59.75 17,179 8.6 $52.18 4,699 $52.02
$59.88 - $62.13 18,195 8.1 $59.88 4,389 $59.88
172,049 7.6 $37.52 79,131 $32.55
D-229
578
AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
AT&T and AT&T Communications Services, Inc. have adopted the
disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." If AT&T Communications Services, Inc. had elected to recognize
compensation costs based on the fair value at the date of grant for awards
granted to AT&T Communications Services, Inc. employees in 2000, 1999 and 1998,
consistent with the provisions of SFAS No. 123, AT&T Communications Services,
Inc.'s net income would have been as follows:
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
Net income................................... $7,800 $7,927 $4,826
The pro forma effect on net income for 1998 may not be representative of
the pro forma effect on net income of future years because the SFAS No. 123
method of accounting for pro forma compensation expense has not been applied to
options granted prior to January 1, 1995.
The weighted-average fair values at date of grant for AT&T common stock
options granted to AT&T Communications Services, Inc.'s employees during 2000,
1999 and 1998 were $12.46, $15.65 and $9.74, respectively, and were estimated
using the Black-Scholes option-pricing model. The weighted-average risk-free
interest rates applied for 2000, 1999 and 1998 were 6.29%, 5.19% and 5.35%,
respectively. The following assumptions were applied for 2000, 1999 and 1998,
respectively: (i) expected dividend yields of 1.6%, 1.7%, and 2.1%, (ii)
expected volatility rates of 33.5%, 28.6% and 23.8% and (iii) expected lives of
4.9 years, 4.4 years, and 4.5 years.
10. INCOME TAXES
AT&T Communications Services, Inc. is not a separate taxable entity for
federal and state income tax purposes and its results of operations are included
in the consolidated federal and state income tax returns of AT&T and its
affiliates, as described in Note 1 to the combined financial statements. AT&T
Communications Services, Inc. provision for income taxes has been prepared as if
the entity prepared separate tax returns for federal and state income tax
purposes.
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AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following table shows the principal reasons for the difference between
the effective income tax rate and the U.S. federal statutory income tax rate:
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
U.S. federal statutory income tax rate............... 35% 35% 35%
Federal income tax at statutory rate................. $4,374 $4,438 $2,871
Amortization of investment tax credits............... (23) (10) (13)
State and local income taxes, net of federal income
tax effect......................................... 295 320 192
Foreign rate differential............................ 101 56 30
Amortization of intangibles.......................... 10 14 17
Taxes on repatriated and accumulated foreign income,
net of tax credits................................. (81) (45) (36)
Research and other credits........................... (37) (61) (83)
Valuation allowance.................................. -- (76) 38
Investment dispositions, acquisitions and legal
entity restructurings.............................. (73) (94) (153)
Other differences, net............................... (73) (34) 146
Provision for income taxes........................... $4,493 $4,508 $3,009
Effective income tax rate............................ 35.9% 35.5% 36.7%
D-231
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AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The U.S. and foreign components of income from before income taxes and the
provision for income taxes are presented in this table:
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
2000 1999 1998
------- ------- ------
INCOME BEFORE INCOME TAXES
United States.................................... $12,852 $12,348 $8,005
Foreign.......................................... (354) 332 198
Total............................................ $12,498 $12,680 $8,203
PROVISION FOR INCOME TAXES
CURRENT
Federal.......................................... $ 3,134 $ 3,389 $2,730
State and local.................................. 421 398 224
Foreign.......................................... 87 100 41
------- ------- ------
$ 3,642 $ 3,887 $2,995
DEFERRED
Federal.......................................... $ 845 $ 529 $ (45)
State and local.................................. 33 94 72
Foreign.......................................... (4) 8 --
------- ------- ------
$ 874 $ 631 $ 27
Deferred investment tax credits.................... (23) (10) (13)
Provision for income taxes......................... $ 4,493 $ 4,508 $3,009
In addition, we also recorded current and deferred income tax expenses
(benefits) related to minority interest and net equity (earnings) losses on
equity investments in the amounts of $(206) and $147 in 2000, $(170) and $139 in
1999, and $51 and $(119) in 1998, respectively.
Deferred income tax liabilities are taxes we expect to pay in future
periods. Similarly, deferred income tax assets are recorded for expected
reductions in taxes payable in future periods. Deferred income taxes arise
because of differences in the book and tax bases of certain assets and
liabilities.
D-232
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AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax liabilities and assets consist of the following:
AT DECEMBER 31,
----------------
2000 1999
------ ------
LONG-TERM DEFERRED INCOME TAX LIABILITIES
Property, plant and equipment............................. $4,105 $3,551
Investments............................................... 447 331
Other..................................................... 992 912
Total long-term deferred income tax liabilities............. $5,544 $4,794
LONG-TERM DEFERRED INCOME TAX ASSETS
Business restructuring.................................... $ 124 $ 120
Net operating loss/credit carryforwards................... 92 179
Employee pensions and other benefits, net................. 951 1,266
Reserves and allowances................................... 34 135
Other..................................................... 785 686
Valuation allowance....................................... (17) (100)
Total net long-term deferred income tax assets.............. $1,969 $2,286
Net long-term deferred income tax liabilities............... $3,575 $2,508
CURRENT DEFERRED INCOME TAX LIABILITIES
Total current deferred income tax liabilities............... $ 332 $ 413
CURRENT DEFERRED INCOME TAX ASSETS
Business restructuring.................................... $ 155 $ 47
Employee pensions and other benefits...................... 355 468
Reserves and allowances................................... 611 564
Other..................................................... 417 379
Total current deferred income tax assets.................... $1,538 $1,458
Net current deferred income tax assets...................... $1,206 $1,045
At December 31, 2000, we had net operating loss carryforwards
(tax-effected) for federal and state income tax purposes of $4 and $56,
respectively, expiring through 2015. We had state tax credit carryforwards
(tax-effected) of $32 expiring through 2015.
11. COMMITMENTS AND CONTINGENCIES
In the normal course of business we are subject to proceedings, lawsuits
and other claims, including proceedings under laws and regulations related to
environmental and other matters. Such matters are subject to many uncertainties,
and outcomes are not predictable with assurance. Consequently, we are unable to
ascertain the ultimate aggregate amount of monetary liability or financial
impact with respect to these matters at December 31, 2000. These matters could
affect the
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AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
operating results of any one quarter when resolved in future periods. However,
we believe that after final disposition, any monetary liability or financial
impact to us beyond that provided for at year-end would not be material to AT&T
Communications Services, Inc.'s annual combined financial statements.
AT&T leases land, buildings and equipment through contracts, which have
been attributed to AT&T Communications Services, Inc., that expire in various
years through 2019. Rental expense under operating leases was $587 in 2000, $554
in 1999 and $561 in 1998. The total of minimum rentals to be received in the
future under noncancelable operating subleases as of December 31, 2000, was
$209. The following table shows our future minimum commitments due under
noncancelable operating leases at December 31, 2000:
2001........................................................ $ 369
2002........................................................ 279
2003........................................................ 236
2004........................................................ 203
2005........................................................ 163
Later years................................................. 542
Total minimum lease payments................................ $1,792
Through a joint venture (70% owned by AT&T and 30% owned by BT), AT&T and
BT have a 31% ownership of AT&T Canada Corp. as a result of the 1999 merger
between AT&T Canada Corp. and MetroNet Communications, Corp. In connection with
this merger, the AT&T and BT joint venture has the right to call, or arrange for
another entity to call, the remaining 69% of AT&T Canada for the greater of
Cdn$40.56 per share which represented the projected value as of December 31,
2000, with an accretion of 4% each quarter beginning June 30, 2000, or the then-
appraised fair market value. If AT&T does not exercise its call rights by June
30, 2003, the shares would be put up for auction, and the AT&T and BT joint
venture would have to make the shareholders whole for the difference between the
proceeds received in auction and the greater of the fair market value or the
accreted value. The exact timing of any purchase will likely be partially
dependent upon the future status of Canadian foreign-ownership regulations.
AT&T's ownership interest in AT&T Canada has been attributed to AT&T
Communications Services, Inc.
12. SEGMENT REPORTING
AT&T Communications Services, Inc.'s results are segmented according to the
way we manage our business: AT&T Business Services and AT&T Consumer Services
Group.
AT&T Business Services Group offers a variety of global communications
services including long distance, local, and data and Internet protocol (IP)
networking to small and medium-sized businesses, large domestic and
multinational businesses and government agencies. Business Services is also a
provider of voice, data and IP transport to service resellers (wholesale
services). Also included in AT&T Business Services Group is AT&T Solutions, our
outsourcing and network-management business.
AT&T Consumer Services Group segment provides a variety of any-distance
communications services including long distance, local toll (intrastate calls
outside the immediate local area) and
D-234
583
AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Internet access to residential customers. In addition, AT&T Consumer Services
Group provides prepaid calling-card and operator-handled calling services. Local
phone service is also provided in certain areas.
The balance of AT&T Communications Services, Inc.'s operations is included
in a "Corporate and Other" category. This category reflects corporate staff
functions and the elimination of transactions between segments.
Prepaid pension assets and corporate-owned or leased real estate are
generally held at the corporate level and, therefore, are included in the
Corporate and Other category. Capital additions for each segment include capital
expenditures for property, plant and equipment, additions to investments and
software development.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies (see Note 2). AT&T Communications
Services, Inc. evaluates performance based on several factors, of which the
primary financial measure is earnings before interest and taxes, including
pretax minority interest and net pretax losses from equity investments (EBIT).
Generally, AT&T Communications Services, Inc.'s intersegment
telecommunications transactions are accounted for at market prices.
REVENUE
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
AT&T Business Services Group external revenue............. $28,578 $28,344 $25,074
AT&T Business Services Group internal revenue............. 322 348 283
Total AT&T Business Services Group revenue................ 28,900 28,692 25,357
AT&T Consumer Services Group external revenue............. 18,894 21,753 22,763
Total reportable segments............................ 47,794 50,445 48,120
Corporate and other....................................... (273) (293) (230)
Total revenue............................................. $47,521 $50,152 $47,890
D-235
584
AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DEPRECIATION AND AMORTIZATION
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
AT&T Business Services Group................................ $4,220 $4,219 $3,357
AT&T Consumer Services Group................................ 167 184 116
Total reportable segments.............................. 4,387 4,403 3,473
Corporate and other......................................... 151 116 104
Total depreciation and amortization......................... $4,538 4,519 3,577
RECONCILIATION OF EARNINGS BEFORE INTEREST AND TAXES (EBIT) TO INCOME BEFORE
INCOME TAXES
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
AT&T Business Services Group.............................. $ 5,991 $ 5,248 $ 4,031
AT&T Consumer Services Group.............................. 6,822 7,543 6,190
Total reportable segments' EBIT...................... 12,813 12,791 10,221
Corporate and other....................................... 1,319 607 (1,904)
Deduct: Pretax minority interest income (expense)......... 41 (1) (1)
Add: Pretax losses from other equity investments.......... 50 78 177
Interest expense.......................................... 1,643 797 292
Income before income taxes, minority interest, and
(earnings) losses from equity investments............... 12,498 12,680 8,203
ASSETS
AT DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
AT&T Business Services Group.............................. $43,186 $38,081 $27,553
AT&T Consumer Services Group.............................. 3,543 4,072 5,314
Total reportable segments............................... 46,729 42,153 32,867
Corporate and Other assets
Prepaid pension costs................................... 3,003 2,464 2,074
Deferred taxes.......................................... 892 673 815
Other corporate assets.................................. 6,389 4,603 4,380
Total assets.............................................. 57,013 49,893 40,136
D-236
585
AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
EQUITY INVESTMENTS
AT DECEMBER 31,
----------------------
2000 1999 1998
------ ---- ----
AT&T Business Services Group................................ $2,355 $582 $ 51
Total reportable segments................................... 2,355 582 51
Corporate and other......................................... 1,631 286 276
Total equity investments.................................... $3,986 $868 $327
CAPITAL ADDITIONS
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
AT&T Business Services Group................................ $6,839 $9,091 $6,761
AT&T Consumer Services Group................................ 148 299 99
Total reportable segments.............................. 6,987 9,390 6,860
Corporate and other......................................... 1,596 271 310
Total capital additions..................................... $8,583 $9,661 $7,170
Geographic information is not presented due to the immateriality of revenue
attributable to international customers.
AT&T Communications Services, Inc. continually reviews its management model
and structure and makes adjustments accordingly, reflecting the dynamics of its
business.
13. RELATED PARTY TRANSACTIONS
TRANSACTIONS WITH CONCERT:
AT&T Communications Services, Inc. has various related party transactions
with Concert as a result of the closure of this global venture in early January
2000.
Included in revenue for the year ended December 31, 2000, is $1,080 for
services provided to Concert.
Included in access and other connection expenses for the year ended
December 31, 2000, are charges from Concert representing costs incurred on our
behalf to connect calls made to foreign countries (international settlements)
and costs paid by AT&T Communications Services, Inc. to Concert for distributing
Concert products totaling $2,364.
During the first quarter of 2000, AT&T Communications Services, Inc.,
contributed property, plant and equipment of approximately $1,600 to Concert.
AT&T Communications Services, Inc. also loaned $1,000 to Concert; that loan is
included within "Investments and related advances" in the accompanying 2000
Combined Balance Sheet. Interest income of $67 was recognized for the year ended
December 31, 2000.
D-237
586
AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 2000, AT&T Communications Services, Inc. had a floating
rate loan payable to Concert in the amount of $126. The loan, which is due on
demand, is included in "Other current liabilities" in the accompanying 2000
Combined Balance Sheet. Interest expense was $6 for the year ended December 31,
2000.
Included in accounts receivable and accounts payable at December 31, 2000,
was $462 and $518, respectively, related to transactions with Concert. Included
in other receivables and other current liabilities at December 31, 2000, was
$1,106 and $1,032, respectively, related to transactions associated with
Concert.
TRANSACTIONS WITH AT&T WIRELESS GROUP:
Included in revenue for the years ended December 31, 2000, 1999 and 1998,
was $317, $227 and $73, respectively, for wireline communications and other
services provided to AT&T Wireless Group.
AT&T Communication Services, Inc. purchases receivables from AT&T Wireless
Services and provides customer care and billing services at cost-based prices,
which approximates market prices. For the years ended December 31, 2000 and
1999, these customer care and billing services totaled $88, $77 and $18,
respectively, and are reflected as a reduction of "Selling, general and
administrative" expenses in the combined statements of income.
Included in current assets at December 31, 2000 and 1999, were receivables
of $402 and $5, respectively. The receivable at December 31, 2000 included $394
related to the sale of our investment in Rogers Cantel in December 2000. No
interest was recorded for the year ended December 31, 2000 and the note was
settled in the first quarter of 2001. Included in current liabilities are $99
and $91 at December 31, 2000 and 1999, respectively, related to the billing and
collection functions on behalf of AT&T Wireless Group.
TRANSACTIONS WITH AT&T BROADBAND GROUP:
Included in revenue for the years ended December 31, 2000 and 1999, was
$104 and $31, respectively, for wireline communication and other services
provided to AT&T Broadband Group.
AT&T Communication Services, Inc. provides AT&T Broadband Group with sales
support, customer care, and certain billing and collection services at
cost-based prices, which approximates market prices. For the years ended
December 31, 2000 and 1999, these amounts totaled $89 and $121, respectively,
and are reflected as a reduction of "selling, general and administrative"
expenses in the combined statements of income.
Included in current assets at December 31, 2000 and 1999, were receivables
of $147 and $225, respectively. These receivables are primarily related to the
sales support, customer care and billing services provided, except for $63 at
December 31, 1999 which related to assets transferred to AT&T Broadband Group.
Included in current liabilities were $49 and $12 at December 31, 2000 and 1999,
respectively, primarily related to billing and collection functions on behalf of
AT&T Broadband Group.
D-238
587
AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
14. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." Among
other provisions, it requires that entities recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. Gains and losses resulting from changes in the fair
values of those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. The effective date for
this standard was delayed via the issuance of SFAS No. 137. The effective date
for SFAS No. 133 is now for fiscal years beginning after June 15, 2000, though
earlier adoption is encouraged and retroactive application is prohibited. For
AT&T Communications Services, Inc., this means that the standard must be adopted
no later than January 1, 2001.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," as an amendment to SFAS
No. 133. This statement provides clarification with regard to certain
implementation issues under SFAS No. 133 on specific types of hedges.
On January 1, 2001, AT&T Communications Services, Inc. adopted SFAS No.
133. AT&T Communication Services, Inc. recorded a cumulative effect of an
accounting change, net of applicable taxes, of approximately $130 million of
income, primarily attributable to our warrant portfolio. The impact of the
adoption of SFAS No. 133, as amended by SFAS No. 138, on AT&T Communications
Services, Inc.'s future results of operations is dependent upon the fair values
of our derivatives and related financial instruments and could result in
pronounced quarterly fluctuations in other income in future periods.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities -- a
Replacement of FASB Statement No. 125". This statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. Under these standards, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial assets when
control has been surrendered, and derecognizes liabilities when extinguished.
This statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. This
statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. AT&T
Communications Services Inc. does not expect that the adoption of SFAS No. 140
will have a material impact on our results of operations, financial position or
cash flows.
15. SUBSEQUENT EVENTS
On April 27, 2001, AT&T completed the sale of its stake in Japan Telecom
Co. Ltd to Vodafone Group plc. The net pre-tax gain attributable to AT&T
Communications Services, Inc. is expected to be approximately $470.
On April 26, 2001, AT&T initiated a 364-day accounts receivable
securitization program providing for up to $500 of funding. Under the program, a
small percentage of accounts receivable related to AT&T Consumer Services Group
will be sold on a discounted, revolving basis, to a special purpose,
wholly-owned subsidiary, which assigns interests in such receivables to
unrelated third-party financing entities.
D-239
588
AT&T COMMUNICATIONS SERVICES, INC.
(AN INTEGRATED BUSINESS OF AT&T)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
On March 23, 2001, AT&T signed an agreement to acquire substantially all of
the assets of NorthPoint Communications Group, Inc. valued at approximately
$135. The acquisition includes all of Northpoint's co-locations nationwide,
certain network equipment, systems and support software and related assets,
including two leased buildings. The purchase of these NorthPoint Communications
Group, Inc. assets is expected to be attributed to AT&T Communications Services,
Inc.
D-240
589
REPORT OF INDEPENDENT ACCOUNTANTS
ON ACCOMPANYING CONSOLIDATING INFORMATION
To the Board of Directors and
Shareowners of AT&T Corp.
The report on our audit of the consolidated financial statements, in which
we indicated the extent of our reliance on the report of other auditors, of AT&T
Corp. and its subsidiaries at December 31, 2000 and 1999 and for each of the
three years in the period ended December 31, 2000, appears on page D-36 of this
document. That audit was conducted for the purpose of forming an opinion on the
consolidated financial statements taken as a whole. The consolidating
information that appears on page D-242, and pages D-248 through D-255 is
presented for purposes of additional analysis of the consolidated financial
statements rather than to present the financial position, results of operations
and cash flows of the individual companies. Accordingly, we do not express an
opinion on the financial position, results of operations and cash flows of the
individual companies. However, the consolidating information has been subjected
to the auditing procedures applied in the audit of the consolidated financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the consolidated financial statements taken as a whole.
PricewaterhouseCoopers LLP
New York, New York
March 16, 2001, except for the
allocation of costs and expenses between
the groups and other related party
transactions, which is as of May 9, 2001
D-241
590
AT&T
CONSOLIDATING CONDENSED FINANCIAL INFORMATION
In conjunction with the issuance of AT&T Wireless Group and Liberty Media
Group tracking stocks, and the proposed issuance of AT&T Broadband and AT&T
Consumer Services Group tracking stocks, AT&T has separated for financial
reporting purposes in all periods the AT&T Common Stock Group, Liberty Media
Group, AT&T Consumer Services Group, AT&T Broadband Group and AT&T Wireless
Group. Below is the consolidating financial information reflecting the
businesses of these individual groups, including the allocation of expenses
between the groups in accordance with our allocation policies, as well as other
related party transactions such as sales of services between groups and interest
income and expense on intercompany borrowings. The AT&T Common Stock Group
presented below excludes its retained portion of the value of any of the
tracking stocks. AT&T does not have a controlling financial interest in Liberty
Media Group for financial accounting purposes; therefore, our ownership in
Liberty Media Group is reflected as an investment accounted for under the equity
method and is reflected as such in the consolidating financial statements below.
AT&T Wireless Group, AT&T Consumer Services Group and AT&T Broadband Group
purchase long distance and other network-related services from AT&T at
market-based prices and such amounts are eliminated in consolidation. Prior to
the offering of AT&T Wireless Group tracking stock, the capital structure of
AT&T Wireless Group had been assumed based upon AT&T's historical capital ratio
adjusted for certain items. Intercompany interest rates are intended to be
substantially equivalent to the interest rate that AT&T Wireless Group would be
able to obtain or receive if it were a stand-alone entity. Debt has been
allocated to AT&T Consumer Services Group and AT&T Broadband Group, based on the
future view of AT&T's debt position after taking into account the significant
deleveraging activities of AT&T. This allocation took into account the following
factors: prospective financing requirements, desired stand-alone credit profile,
working capital and capital expenditure requirements and comparable company
profiles. At or before the time of the spin-off, when AT&T Communications
Services, Inc. is separated from historical AT&T, we plan to seek to transfer
the indebtedness allocated to AT&T Business Services Group and AT&T Consumer
Services Group from historical AT&T to AT&T Communications Services, Inc. We may
seek to accomplish this through a variety of measures that may result in
increased costs and additional covenants on AT&T Communications Services, Inc.
The historical interest expense on the allocated debt was calculated based on a
rate intended to be equivalent to the rate AT&T Consumer Services Group and AT&T
Broadband Group would have received if each was a stand-alone entity. General
corporate overhead related to AT&T's corporate headquarters and common support
divisions has been allocated to the groups based on the ratio of each group's
external costs and expenses to AT&T's consolidated external costs and expenses,
adjusted for any functions that any group performs on its own. The consolidated
income tax provision, related tax payments or refunds, and deferred tax balances
of AT&T have been allocated to the groups based principally on the taxable
income and tax credits directly attributable to each group.
Pursuant to the Inter-Group agreement, AT&T does not allocate general
overhead expenses to Liberty Media Group and only charges Liberty Media Group
for specific services that Liberty Media Group receives from AT&T pursuant to
service agreements or similar arrangements. Additionally, as Liberty Media Group
operates independent of AT&T, there is no cash or debt allocated to them.
D-242
591
AT&T
CONSOLIDATING CONDENSED INCOME STATEMENT
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(UNAUDITED)
(DOLLARS IN MILLIONS)
AT&T AT&T
COMMON AT&T CONSUMER AT&T LIBERTY
STOCK WIRELESS SERVICES BROADBAND MEDIA ELIMINATIONS/ CONSOLIDATED
GROUP GROUP GROUP GROUP GROUP RECLASSIFICATIONS(1) AT&T CORP.
------- -------- -------- --------- ------- -------------------- ------------
External revenue...................... $6,957 $3,212 $4,007 $ 2,587 $ -- $ -- $16,763
Inter-group revenue................... 224 (224)
Total revenue......................... 7,181 3,212 4,007 2,587 (224) 16,763
Operating Expenses
Costs of services and products........ 1,770 1,348 446 1,408 (135) 4,837
Access and other connection........... 2,070 1,081 135 3,286
Selling, general and administrative... 1,374 1,010 873 611 3,868
Depreciation and other amortization... 1,012 576 47 651 (145) 2,141
Amortization of goodwill, franchise
costs and other purchased
intangibles......................... 69 632 145 846
Net restructuring and other charges... 808 808
Inter-group expenses.................. (322) 137 265 144 (224)
Total operating expenses.............. 5,973 3,071 2,712 4,254 (224) 15,786
Operating income (loss)............... 1,208 141 1,295 (1,667) 977
Other income (expense)................ 162 7 7 (953) (4) (781)
Inter-group interest income........... 247 77 (324)
Interest expense...................... 588 7 374 969
Inter-group interest expense.......... 77 40 60 105 (282)
Income before income taxes, minority
interest and earnings (losses) from
equity investments.................. 952 178 1,242 (3,099) (46) (773)
Provision (benefit) for income
taxes............................... 482 79 475 (744) 292
Minority interest income.............. 97 549 4 650
Equity losses from Liberty Media
Group............................... (697) (697)
Net earnings (losses) from other
equity investments.................. (86) (99) 49 (136)
Income (loss) before cumulative effect
of accounting change................ 481 767 (1,757) (697) (42) (1,248)
Cumulative effect of accounting
change -- net of tax................ 130 229 545 904
Net income (loss)..................... 611 767 (1,528) (152) (42) (344)
Dividend requirements on preferred
stock held by AT&T, net............. 181 42 (42) 181
Net income (loss) after preferred
stock dividends..................... $ 430 $ (42) $ 767 $(1,528) $(152) $ -- $ (525)
------------------------
(1)Includes the elimination of inter-group transactions, consolidating entries,
as well as reclassifications and adjustments
D-243
592
AT&T
CONSOLIDATING CONDENSED INCOME STATEMENT
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
(DOLLARS IN MILLIONS)
AT&T AT&T
COMMON AT&T CONSUMER AT&T LIBERTY
STOCK WIRELESS SERVICES BROADBAND MEDIA ELIMINATIONS/ CONSOLIDATED
GROUP GROUP GROUP GROUP GROUP RECLASSIFICATIONS(1) AT&T CORP.
------- -------- -------- --------- ------- -------------------- ------------
External revenue...................... $7,109 $2,198 $5,037 $1,557 $ -- $ -- $15,901
Inter-group revenue................... 151 (151)
Total revenue......................... 7,260 2,198 5,037 1,557 (151) 15,901
Operating Expenses
Costs of services and products........ 1,736 1,001 420 846 (88) 3,915
Access and other connection........... 2,043 1,463 82 3,588
Selling, general and administrative... 1,333 637 1,015 304 3,289
Depreciation and other amortization... 975 369 56 245 (79) 1,566
Amortization of goodwill, franchise
costs and other purchased
intangibles......................... 58 237 73 368
Net restructuring and other charges... 660 97 16 773
Inter-group expenses.................. (448) 165 355 79 (151)
Total operating expenses.............. 6,357 2,172 3,406 1,727 (163) 13,499
Operating income (loss)............... 903 26 1,631 (170) 12 2,402
Other income (expense)................ 158 24 6 484 (4) 668
Inter-group interest income........... 176 (176)
Interest expense...................... 428 (21) 182 589
Inter-group interest expense.......... 72 9 82 (163)
Income before income taxes, minority
interest and earnings (losses) from
equity investments.................. 809 (1) 1,628 50 (5) 2,481
Provision for income taxes............ 282 (2) 622 (414) 21 509
Minority interest income (expense).... 2 (50) 4 (44)
Equity earnings from Liberty Media
Group............................... 942 942
Net earnings (losses) from other
equity investments.................. (6) 25 (218) 12 (187)
Net income............................ 523 26 1,006 196 942 (10) 2,683
Dividend requirements on preferred
stock held by AT&T, net............. 13 (13)
Net income after preferred stock
dividends........................... $ 523 $ 13 $1,006 $ 196 $942 $ 3 $ 2,683
-------------------------
(1)Includes the elimination of inter-group transactions, consolidating entries,
as well as reclassifications and adjustments
D-244
593
AT&T
CONSOLIDATING CONDENSED BALANCE SHEET
AT MARCH 31, 2001
(DOLLARS IN MILLIONS)
(UNAUDITED)
AT&T AT&T
COMMON AT&T CONSUMER AT&T LIBERTY
STOCK WIRELESS SERVICES BROADBAND MEDIA ELIMINATIONS/ CONSOLIDATED
GROUP GROUP GROUP GROUP GROUP RECLASSIFICATIONS(1) AT&T CORP.
-------- -------- -------- --------- ------- -------------------- ------------
ASSETS
Cash and cash equivalents............ $ 36 $ 34 $ 2 $ 64 $ -- $ -- $ 136
Other current assets................. 8,640 2,567 2,602 2,760 (452) 16,117
Short-term notes payable due from
related party...................... 6,707 10,588 (17,295)
Total current assets............... 15,383 13,189 2,604 2,824 (17,747) 16,253
Property, plant & equipment, net..... 25,895 10,725 137 15,508 52,265
Franchise costs, net................. 47,924 47,924
Licensing costs, net................. 13,568 13,568
Goodwill, net........................ 5,533 5,653 20,306 (967) 30,525
Investment in Liberty Media Group and
related receivables, net........... 34,072 34,072
Other investments and related
advances........................... 5,452 3,904 24,931 34,287
Other assets......................... 6,959 295 4,492 501 12,247
Long-term assets due from related
party.............................. 7,671 (7,671)
Total Assets....................... $ 66,893 $47,039 $ 3,036 $115,985 $34,072 $(25,884) $241,141
LIABILITIES
Debt maturing within one year........ $ 14,552 $ 103 $ -- $ 2,570 $ -- $ -- $ 17,225
Short-term debt due to related
party.............................. 10,588 6,707 (17,295)
Other current liabilities............ 7,149 2,641 1,973 6,379 (923) 17,219
Total current liabilities.......... 32,289 2,744 1,973 15,656 (18,218) 34,444
Long-term debt....................... 12,991 6,487 19,523 3 39,004
Long-term debt due to related
party.............................. 1,800 2,871 (4,671)
Deferred income taxes................ 4,486 4,739 29 27,411 36,665
Other long-term liabilities and
deferred credits................... 7,255 290 283 1,021 (81) 8,768
Total Liabilities.................. $ 57,021 $16,060 $ 5,156 $ 63,611 $ -- $(22,967) $118,881
Minority interest.................... 385 42 3,795 4,222
Company-obligated convertible
quarterly income...................
preferred securities of a
subsidiary trust holding.........
solely subordinated debt securities
of AT&T.......................... 4,713 4,713
Convertible preferred equity......... 9,362 9,362
SHAREOWNERS' EQUITY
AT&T Common Stock.................... 3,809 3,809
AT&T Wireless Group Common Stock..... 363 363
Liberty Media Group Class A Common
Stock.............................. 2,377 2,377
Liberty Media Group Class B Common
Stock.............................. 212 212
Other shareowners' equity............ 125 27,937 (2,120) 43,866 34,072 (6,678) 97,202
Other shareowners' equity due to
related party...................... 3,000 (3,000)
Total shareowners' equity.......... 125 30,937 (2,120) 43,866 34,072 (2,917) 103,963
Total Liabilities and Shareowners'
Equity........................... $ 66,893 $47,039 $ 3,036 $115,985 $34,072 $(25,884) $241,141
---------------
(1)Includes the elimination of inter-group transactions, consolidating entries,
as well as reclassifications and adjustments.
D-245
594
AT&T
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(UNAUDITED)
(DOLLARS IN MILLIONS)
AT&T AT&T
COMMON AT&T CONSUMER AT&T LIBERTY
STOCK WIRELESS SERVICES BROADBAND MEDIA ELIMINATIONS/ CONSOLIDATED
GROUP GROUP GROUP GROUP GROUP RECLASSIFICATIONS(1) AT&T CORP.
------- -------- -------- --------- ------- -------------------- ------------
Net cash provided by (used in)
operating activities........... $ 1,421 $ 655 $ 1,483 $ (660) $-- $ (961) $ 1,938
INVESTING ACTIVITIES
Capital expenditures and other
additions...................... (1,552) (1,407) (25) (928) (3,912)
Decrease (increase) in other
receivables.................... 261 (10,588) 10,293 (34)
Other............................ 536 (524) 3 470 277 762
Net cash used in investing
activities..................... (755) (12,519) (22) (458) 10,570 (3,184)
FINANCING ACTIVITIES
Proceeds from long-term debt
issuances...................... 6,345 6,345
Issuance of convertible preferred
securities and warrants........ 3,670 6,141 9,811
(Decrease) increase in short-term
borrowings, net................ (4,174) (638) 877 (10,780) (14,715)
Other............................ (129) (12) (1,459) 244 1,171 (185)
Net cash (used in) provided by
financing activities........... (633) 11,836 (1,459) 1,121 (9,609) 1,256
Net increase (decrease) in cash
and cash equivalents........... 33 (28) 2 3 10
Cash and cash equivalents at
beginning of year.............. 3 62 61 126
Cash and cash equivalents at end
of period...................... $ 36 $ 34 $ 2 $ 64 $-- $ -- $ 136
---------------
(1)Includes the elimination of inter-group transactions, consolidating entries,
as well as reclassifications and adjustments.
D-246
595
AT&T
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
(DOLLARS IN MILLIONS)
AT&T AT&T
COMMON AT&T CONSUMER AT&T LIBERTY
STOCK WIRELESS SERVICES BROADBAND MEDIA ELIMINATIONS/ CONSOLIDATED
GROUP GROUP GROUP GROUP GROUP RECLASSIFICATIONS(1) AT&T CORP.
------- -------- ---------- --------- ------- -------------------- ------------
Net cash provided by (used in)
operating activities.............. $ 1,105 $ 228 $ 1,231 $ (22) $-- $ (14) $ 2,528
INVESTING ACTIVITIES
Capital expenditures and other
additions......................... (1,367) (818) (23) (885) (3,093)
Increase in other receivables....... (2,374) 1,394 (980)
Equity investment distributions and
sales............................. 57 26 334 417
Equity investment contributions and
purchases......................... (416) (74) (569) (1,059)
Net acquisitions of businesses
including cash acquired........... (99) (89) (188)
Other............................... (15) (82) (1) (98)
Net cash used in investing
activities........................ (4,214) (948) (23) (1,210) 1,394 (5,001)
FINANCING ACTIVITIES
Proceeds from long-term debt
issuances......................... 739 739
Retirement of long-term debt........ (491) (518) 2 (1,007)
Dividends paid on common stock...... (234) (469) (703)
Increase (decrease) in short-term
borrowings, net................... 3,179 1,643 (1,643) 3,179
Other............................... (1,011) 725 (739) 107 261 (657)
Net cash provided by (used in)
financing activities.............. 2,182 725 (1,208) 1,232 (1,380) 1,551
Net (decrease) increase in cash and
cash equivalents.................. (927) 5 (922)
Cash and cash equivalents at
beginning of year................. 1,019 5 1,024
Cash and cash equivalents at end of
period............................ $ 92 $ 10 $ -- $ -- $-- $ -- $ 102
-------------------------
(1)Includes the elimination of inter-group transactions, consolidating entries,
as well as reclassifications and adjustments.
D-247
596
AT&T
CONSOLIDATING CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2000
(DOLLARS IN MILLIONS)
AT&T AT&T
COMMON AT&T CONSUMER AT&T LIBERTY
STOCK WIRELESS SERVICES BROADBAND MEDIA ELIMINATIONS/ CONSOLIDATED
GROUP GROUP GROUP GROUP GROUP RECLASSIFICATIONS(1) AT&T CORP.
-------- -------- -------- --------- -------- -------------------- ------------
External revenue.................... $28,194 $10,448 $18,894 $ 8,445 $ -- $ -- $ 65,981
Inter-group revenue................. 723 (723)
Total revenue....................... 28,917 10,448 18,894 8,445 (723) 65,981
Operating Expenses
Costs of services and products...... 6,690 4,969 1,711 4,600 (383) 17,587
Access and other connection......... 7,936 5,204 378 13,518
Selling, general and
administrative.................... 4,322 3,302 3,636 2,043 13,303
Depreciation and other
amortization...................... 4,082 1,686 167 1,674 (335) 7,274
Amortization of goodwill, franchise
costs and other purchased
intangibles....................... 288 2,377 328 2,993
Net restructuring and other
charges........................... 662 97 6,270 7,029
Inter-group expenses................ (1,281) 529 1,338 137 (723)
Total operating expenses............ 22,699 10,486 12,153 17,101 (735) 61,704
Operating income (loss)............. 6,218 (38) 6,741 (8,656) 12 4,277
Other income (expense).............. 1,108 391 81 (39) (27) 1,514
Inter-group interest income......... 813 143 (956)
Interest expense.................... 2,294 (111) 1,000 3,183
Inter-group interest expense........ 143 196 164 323 (826)
Income before income taxes, minority
interest and earnings (losses)
from equity investments........... 5,702 411 6,658 (10,018) (145) 2,608
Provision for income taxes.......... 1,836 141 2,546 (1,183) 2 3,342
Minority interest income
(expense)......................... 30 4,062 28 4,120
Equity earnings from Liberty Media
Group............................. 1,488 1,488
Net earnings (losses) from other
equity investments................ 12 388 (597) (8) (205)
Net income.......................... 3,908 658 4,112 (5,370) 1,488 (127) 4,669
Dividend requirements on preferred
stock held by AT&T, net........... 130 (130)
Net income after preferred stock
dividends......................... $ 3,908 $ 528 $ 4,112 $(5,370) $ 1,488 $ 3 $ 4,669
-------------------------
(1) Includes the elimination of inter-group transactions, consolidating entries,
as well as reclassifications and adjustments.
D-248
597
AT&T
CONSOLIDATING CONDENSED BALANCE SHEET
AT DECEMBER 31, 2000
(DOLLARS IN MILLIONS)
AT&T AT&T
COMMON AT&T CONSUMER AT&T LIBERTY
STOCK WIRELESS SERVICES BROADBAND MEDIA ELIMINATIONS/ CONSOLIDATED
GROUP GROUP GROUP GROUP GROUP RECLASSIFICATIONS(1) AT&T CORP.
-------- -------- -------- --------- -------- -------------------- ------------
ASSETS
Cash and cash equivalents........... $ 3 $ 62 $ -- $ 61 $ -- $ -- $ 126
Receivables......................... 7,991 2,010 2,681 774 (609) 12,847
Deferred income taxes............... 405 93 314 812
Other current assets................ 325 417 68 2,671 (179) 3,302
Short-term notes payable due from
related party..................... 6,468 (6,468)
Total current assets.............. 15,192 2,582 3,063 3,506 (7,256) 17,087
Property, plant & equipment, net.... 25,912 9,892 170 15,187 51,161
Franchise costs, net................ 48,218 48,218
Licensing costs, net................ 13,627 (1) 13,626
Goodwill, net....................... 5,562 5,816 81 21,139 (1,120) 31,478
Investment in Liberty Media Group
and related receivables, net...... 34,290 34,290
Other investments & related
advances.......................... 5,827 3,385 4 25,045 34,261
Other assets........................ 6,416 225 4,439 1,022 12,102
Long-term assets due from related
party............................. 8,800 (8,800)
Total Assets...................... $67,709 $35,302 $ 3,543 $117,534 $ 34,290 $(16,155) $242,223
LIABILITIES
Debt maturing within one year....... $28,752 $ 109 $ 13 $ 3,073 $ -- $ $ 31,947
Short-term debt due to related
party............................. 638 5,830 (6,468)
Liability under put options......... 2,564 2,564
Other current liabilities........... 8,041 2,907 1,757 4,483 (832) 16,356
Total current liabilities......... 36,793 3,654 1,770 15,950 (7,300) 50,867
Long-term debt...................... 13,572 19,517 3 33,092
Long-term debt due to related
party............................. 1,800 4,000 (5,800)
Deferred income taxes............... 3,475 4,659 29 28,550 36,713
Other long-term liabilities &
deferred credits.................. 7,230 271 285 1,069 (95) 8,760
Total Liabilities................. $61,070 $10,384 $ 6,084 $ 65,086 $ -- $(13,192) $129,432
Minority interest 421 41 4,421 4,883
Company-obligated convertible
quarterly income preferred
securities of a subsidiary trust
holding solely subordinated debt
securities of AT&T................ 4,710 4,710
SHAREOWNERS' EQUITY
AT&T Common Stock................... 3,760 3,760
AT&T Wireless Group Common Stock.... 362 362
Liberty Media Group Class A Common
Stock............................. 2,364 2,364
Liberty Media Group Class B Common
Stock............................. 206 206
Other shareowners' equity........... 6,218 21,877 (2,541) 43,317 34,290 (6,655) 96,506
Other shareowners' equity due to
related party..................... 3,000 (3,000)
Total shareowners' equity......... 6,218 24,877 (2,541) 43,317 34,290 (2,963) 103,198
Total Liabilities and Shareowners'
Equity.......................... $67,709 $35,302 $ 3,543 $117,534 $ 34,290 $(16,155) $242,223
-------------------------
(1) Includes the elimination of inter-group transactions, consolidating
entries, as well as reclassifications and adjustments.
D-249
598
AT&T
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2000
(DOLLARS IN MILLIONS)
AT&T AT&T
COMMON AT&T CONSUMER AT&T LIBERTY
STOCK WIRELESS SERVICES BROADBAND MEDIA ELIMINATIONS/ CONSOLIDATED
GROUP GROUP GROUP GROUP GROUP RECLASSIFICATIONS(1) AT&T CORP.
------- -------- -------- --------- ------- -------------------- ------------
Net cash provided by operating
activities.......................... $6,352 $ 1,830 $4,787 $ 802 $-- $ (464) $13,307
INVESTING ACTIVITIES
Capital expenditures and other
additions........................... (6,338) (4,012) (148) (4,426) (14,924)
Increase in other receivables......... (6,300) 5,248 (1,052)
Equity investment distributions and
sales............................... 414 360 578 1,352
Equity investment contributions and
purchases........................... (1,160) (1,645) (607) (3,412)
Net acquisitions of businesses
including cash acquired............. (16,591) (4,763) 15 (71) (21,410)
Other................................. (39) (465) 1 15 (488)
Net cash used in investing
activities.......................... (30,014) (10,525) (132) (4,511) 5,248 (39,934)
FINANCING ACTIVITIES
Proceeds from long-term debt
issuances........................... 739 3,862 4,601
Retirement of long-term debt.......... (689) (1,429) (2,118)
Issuance of AT&T Wireless Group common
shares.............................. 3,314 7,000 10,314
Dividends paid........................ (1,016) (2,031) (3,047)
Increase (decrease) in short-term
borrowings, net..................... 16,973 638 (23) 1,533 (2,148) 16,973
Other................................. 3,331 1,114 (2,607) (196) (2,636) (994)
Net cash provided by (used in)
financing activities................ 22,652 8,752 (4,661) 3,770 (4,784) 25,729
Net (decrease) increase in cash and
cash equivalents.................... (1,010) 57 (6) 61 (898)
Cash and cash equivalents at beginning
of year............................. 1,013 5 6 1,024
Cash and cash equivalents at end of
year................................ $ 3 $ 62 $ -- $ 61 $-- $ -- $ 126
-------------------------
(1) Includes the elimination of inter-group transactions, consolidating entries,
as well as reclassifications and adjustments.
D-250
599
AT&T
CONSOLIDATING CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1999
(DOLLARS IN MILLIONS)
AT&T AT&T
COMMON AT&T CONSUMER AT&T LIBERTY
STOCK WIRELESS SERVICES BROADBAND MEDIA ELIMINATIONS/ CONSOLIDATED
GROUP GROUP GROUP GROUP GROUP RECLASSIFICATIONS(1) AT&T CORP.
------- -------- -------- --------- ------- -------------------- ------------
External revenue...................... $ 28,140 $7,627 $21,753 $ 5,080 $ -- $ -- $62,600
Inter-group revenue................... 586 (586)
Total revenue......................... 28,726 7,627 21,753 5,080 (586) 62,600
Operating Expenses
Costs of services and products........ 6,405 3,676 2,067 2,686 (240) 14,594
Access and other connection........... 8,216 6,223 247 14,686
Selling, general and administrative... 6,266 2,273 3,872 1,106 (1) 13,516
Depreciation and other amortization... 4,164 1,253 168 805 (252) 6,138
Amortization of goodwill, franchise
costs and other purchased
intangibles......................... 172 16 869 244 1,301
Net restructuring and other charges... 324 531 7 644 1,506
Inter-group expenses.................. (2,186) 560 2,065 147 (586)
Total operating expenses.............. 23,361 8,293 14,418 6,257 (588) 51,741
Operating income (loss)............... 5,365 (666) 7,335 (1,177) 2 10,859
Other income (expense)................ 600 122 174 50 (15) 931
Inter-group interest income........... 399 34 (433)
Interest expense...................... 1,138 (78) 3 614 88 1,765
Inter-group interest expense.......... 34 214 38 91 (377)
Income before income taxes, minority
interest and earnings (losses) from
equity investments.................. 5,192 (680) 7,502 (1,832) (157) 10,025
Provision for income taxes............ 1,612 (294) 2,869 (465) (27) 3,695
Minority interest income (expense).... (6) (126) 17 (115)
Equity losses from Liberty Media
Group............................... (2,022) (2,022)
Net earnings (losses) from other
equity investments.................. (53) (19) (707) 14 (765)
Net income............................ 3,521 (405) 4,633 (2,200) (2,022) (99) 3,428
Dividend requirement on preferred
stock held by AT&T, net............. 56 (56)
Net income after preferred stock
dividends........................... $3,521 $ (461) $ 4,633 $(2,200) $(2,022) $ (43) $ 3,428
-------------------------
(1) Includes the elimination of inter-group transactions, consolidating entries,
as well as reclassifications and adjustments.
D-251
600
AT&T
CONSOLIDATING CONDENSED BALANCE SHEET
AT DECEMBER 31, 1999
(DOLLARS IN MILLIONS)
AT&T AT&T
COMMON AT&T CONSUMER AT&T LIBERTY
STOCK WIRELESS SERVICES BROADBAND MEDIA ELIMINATIONS/ CONSOLIDATED
GROUP GROUP GROUP GROUP GROUP RECLASSIFICATIONS(1) AT&T CORP.
-------- -------- -------- --------- ------- -------------------- ------------
ASSETS
Cash and cash equivalents............ $ 1,013 $ 5 $ 6 $ -- $ -- $ -- $ 1,024
Receivables.......................... 6,022 1,300 3,115 407 (391) 10,453
Deferred income taxes................ 527 127 372 261 1,287
Other current assets................. 527 196 81 432 (116) 1,120
Short-term notes payable due from
related party...................... 4,297 (4,297)
Total current assets......... 12,386 1,628 3,574 1,100 (4,804) 13,884
Property, plant & equipment, net..... 25,454 6,349 132 7,780 (97) 39,618
Franchise costs, net................. 32,693 32,693
Licensing costs, net................. 8,571 (23) 8,548
Goodwill, net........................ 5,092 2,462 89 129 (327) 7,445
Investment in Liberty Media Group and
related receivables, net........... 38,460 38,460
Other investments & related
advances........................... 1,522 4,502 13,334 8 19,366
Other assets......................... 5,674 277 3,192 249 9,392
Long-term assets due from related
party.............................. 5,300 (5,300)
Total Assets................. $55,428 $23,512 $4,072 $58,228 $38,460 $(10,294) $169,406
LIABILITIES
Debt maturing within one year........ $11,511 $ 154 $ 36 $ 932 $ -- $ $ 12,633
Short-term debt due to related
party.............................. 4,297 (4,297)
Other current liabilities............ 9,600 2,143 1,730 2,873 (772) 15,574
Total current liabilities.... 21,111 2,297 1,766 8,102 (5,069) 28,207
Long-term debt....................... 13,542 9,671 4 23,217
Long-term debt due to related
party.............................. 3,400 900 (4,300)
Deferred income taxes................ 2,324 3,750 41 18,142 (58) 24,199
Other long-term liabilities &
deferred credits................... 7,030 48 295 397 (5) 7,765
Total Liabilities............ $44,007 $ 9,495 $3,002 $36,312 $ -- $ (9,428) $ 83,388
Minority Interest.................... 44 20 2,327 2,391
Company-obligated convertible
quarterly income preferred
securities of a subsidiary trust
holding solely subordinated debt
securities of AT&T................. 4,700 4,700
SHAREOWNERS' EQUITY
AT&T common stock.................... 3,196 3,196
Liberty Media Group Class A Common
Stock.............................. 2,314 2,314
Liberty Media Group Class B Common
Stock.............................. 217 217
Other shareowners' equity............ 11,377 12,997 1,070 14,889 38,460 (5,593) 73,200
Other shareowners' equity due to
related party...................... 1,000 -- -- (1,000)
Total shareowners' equity.... 11,377 13,997 1,070 14,889 38,460 (866) 78,927
Total Liabilities and
Shareowners' Equity........ $55,428 $23,512 $4,072 $58,228 $38,460 $(10,294) $169,406
-------------------------
(1) Includes the elimination of inter-group transactions, consolidating entries,
as well as reclassifications and adjustments.
D-252
601
AT&T
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999
(DOLLARS IN MILLIONS)
AT&T AT&T
COMMON AT&T CONSUMER AT&T LIBERTY
STOCK WIRELESS SERVICES BROADBAND MEDIA ELIMINATIONS/ CONSOLIDATED
GROUP GROUP GROUP GROUP GROUP RECLASSIFICATIONS(1) AT&T CORP.
-------- -------- -------- --------- ------- -------------------- ------------
Net cash provided by (used in)
operating activities............... $ 5,227 $ 867 $ 4,350 $ 1,380 $-- $ (303) $ 11,521
INVESTING ACTIVITIES
Capital expenditures and other
additions.......................... (8,334) (2,272) (300) (3,161) 47 (14,020)
(Increase) decrease in other
receivables........................ (6,243) 1,580 4,680 17
Equity investment distributions and
sales.............................. 822 236 817 1,875
Equity investment contributions and
purchases.......................... (6,529) (284) (1,308) (8,121)
Net acquisitions of businesses
including cash acquired............ (7,820) 244 125 740 (6,711)
Other................................ (67) (47) (7) (3) 41 (83)
Net cash (used in) provided by
investing activities............... (28,171) (2,123) 1,398 (2,915) 4,768 (27,043)
FINANCING ACTIVITIES
Proceeds from long-term debt
issuances.......................... 8,396 8,396
Retirement of long-term debt......... (776) (2,031) (2,807)
Issuance of convertible securities... 4,638 4,638
Net acquisition of treasury shares... (4,624) (4,624)
Dividends paid....................... (904) (1,808) (2,712)
Increase (decrease) in short-term
borrowings, net.................... 8,768 65 (5) 4,297 (2,887) 10,238
Other................................ 9,964 1,169 (3,929) (5,369) (1,578) 257
Net cash provided by (used in)
financing activities............... 20,824 1,234 (5,742) 1,535 (4,465) 13,386
Net (decrease) increase in cash and
cash equivalents................... (2,120) (22) 6 (2,136)
Cash and cash equivalents at
beginning of year.................. 3,133 27 3,160
Cash and cash equivalents at end of
year............................... $ 1,013 $ 5 $ 6 $ -- $-- $ -- $ 1,024
-------------------------
(1) Includes the elimination of inter-group transactions, consolidating entries,
as well as reclassifications and adjustments.
D-253
602
AT&T
CONSOLIDATING CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN MILLIONS)
AT&T AT&T
COMMON AT&T CONSUMER
STOCK WIRELESS SERVICES ELIMINATIONS/ CONSOLIDATED
GROUP GROUP GROUP RECLASSIFICATIONS(1) AT&T CORP.
------- -------- -------- -------------------- ------------
External revenue............................................ $25,054 $5,406 $22,763 $ -- $53,223
Inter-group revenue......................................... 353 (353)
Total revenue............................................... 25,407 5,406 22,763 (353) 53,223
Operating Expenses..........................................
Costs of services and products.............................. 6,082 2,363 2,254 (204) 10,495
Access and other connection................................. 7,664 7,453 211 15,328
Selling, general and administrative......................... 6,802 1,931 4,043 (6) 12,770
Depreciation and other amortization......................... 3,418 1,079 116 (235) 4,378
Amortization of goodwill, franchise costs and other
purchased intangibles..................................... 44 207 251
Net restructuring and other charges......................... 2,533 120 (19) (120) 2,514
Inter-group expenses........................................ (2,715) 256 2,812 (353)
Total operating expenses.................................... 23,828 5,749 16,659 (500) 45,736
Operating income (loss)..................................... 1,579 (343) 6,104 147 7,487
Other income (expense)...................................... 792 650 19 (180) 1,281
Inter-group interest income................................. 270 67 (337)
Interest expense............................................ 512 (70) 3 (18) 427
Inter-group interest expense................................ 67 190 24 (281)
Income from continuing operations before income taxes,
minority interest and earnings (losses) from equity
investments............................................... 2,062 187 6,163 (71) 8,341
Provision for income taxes.................................. 640 59 2,356 (6) 3,049
Minority interest income.................................... 21 21
Net earnings (losses) from other equity investments......... (108) 36 (6) (78)
Income from continuing operations........................... 1,314 164 3,807 (50) 5,235
Dividend requirements on preferred stock held by AT&T,
net....................................................... 56 (56)
Net income after preferred stock dividends.................. $1,314 $ 108 $ 3,807 $ 6 $ 5,235
-------------------------
(1) Includes the elimination of inter-group transactions, consolidating entries,
as well as reclassifications and adjustments.
D-254
603
AT&T
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN MILLIONS)
AT&T AT&T
COMMON AT&T CONSUMER
STOCK WIRELESS SERVICES ELIMINATIONS/ CONSOLIDATED
GROUP GROUP GROUP RECLASSIFICATIONS(1) AT&T CORP.
------- -------- -------- -------------------- ------------
Net cash provided by operating activities of continuing
operations................................................ $5,787 $ 414 $ 4,141 $ (125) $ 10,217
INVESTING ACTIVITIES
Capital expenditures and other additions.................... (6,411) (1,219) (98) 15 (7,713)
(Increase) decrease in other receivables.................... 7,423 (1,580) 560 6,403
Net sales of marketable securities.......................... 307 307
Equity investment distributions and sales................... 148 1,354 14 1,516
Equity investment contributions and purchases............... (1,118) (156) (7) (1,281)
Net acquisitions of businesses, including cash acquired..... 4,183 324 4,507
Other....................................................... (97) (65) 37 (32) (157)
Net cash provided by (used in) investing activities of
continuing operations..................................... 4,435 238 (1,641) 550 3,582
FINANCING ACTIVITIES
Retirement of long-term debt................................ (2,608) (1,122) 1,120 (2,610)
Net acquisition of treasury shares.......................... (3,321) (3,321)
Dividends paid.............................................. (729) (1,458) (2,187)
(Decrease) increase in short-term borrowings, net........... (1,496) 43 (1,580) (3,033)
Other....................................................... 753 (674) 80 (57) 102
Net cash used in financing activities of continuing
operations................................................ (7,401) (631) (2,500) (517) (11,049)
Net cash provided by discontinued operations................ 92 92
Net increase in cash and cash equivalents................... 2,821 21 2,842
Cash and cash equivalents at beginning of year.............. 312 6 318
Cash and cash equivalents at end of year.................... $3,133 $ 27 $ -- $ -- $ 3,160
-------------------------
(1) Includes the elimination of inter-group transactions, consolidating entries,
as well as reclassifications and adjustments.
D-255
604
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The unaudited pro forma condensed combined financial statements set forth
below for AT&T give effect to
- The AT&T Wireless Group Exchange Offer
- the AT&T Wireless Group distribution (collectively, the AT&T wireless
events)
- the Liberty Media Group distribution
- the AT&T Communications Services distribution ("AT&T Business Services
and AT&T Consumer Services")
(collectively, the AT&T restructuring events), as if such events had been
completed on January 1, 1998 for income statement purposes, and at March 31,
2001 for balance sheet purposes, subject to the assumptions and adjustments in
the accompanying notes to the pro forma financial statements. The unaudited pro
forma condensed combined financial statements set forth below for AT&T also give
effect to the TCI and MediaOne mergers as if they had been completed on January
1, 1998 for income statement purposes. Based on the receipt of a favorable IRS
Ruling on May 30, 2001, AT&T will report AT&T Wireless Group as Discontinued
Operations, in accordance with APB Opinion No. 30 "Reporting the Results of
Operations -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions"
(APB30). Additionally, upon receipt of necessary approvals, AT&T will also
report AT&T Communications Services as Discontinued Operations. For accounting
purposes, the spin-off/split-off (the "distribution") of the AT&T Wireless
Group, the split-off of AT&T Consumer Services and the spin off of AT&T
Communications Services are considered non pro-rata distributions and are
expected to be recorded at fair value resulting in the recognition of gains on
the remaining AT&T entity upon the distribution date. The split-off of Liberty
Media Group will be a pro-rata distribution and is therefore recorded at
historical cost. The continuing operations of AT&T after the necessary approvals
are received for the distribution of AT&T Wireless Group, and AT&T
Communications Services will consist solely of the AT&T Broadband Group. See the
Notes to the Unaudited Pro Forma Condensed Combined Financial Statements for
additional disclosure of potential material nonrecurring charges and credits
directly attributable to the events as noted above which are not reflected in
the pro forma financial statements.
The pro forma adjustments included herein are based on available
information and certain assumptions that management believes are reasonable and
are described in the accompanying notes to the pro forma financial statements.
The unaudited pro forma condensed combined financial statements do not
necessarily represent what AT&T's financial position or results of operations
would have been had the TCI or MediaOne mergers, the AT&T wireless events or the
distributions of Liberty Media Group and AT&T Communications Services occurred
on such dates or to project AT&T's financial position or results of operations
at or for any future date or period. In the opinion of management, all
adjustments necessary to present fairly the unaudited pro forma financial
information have been made. The unaudited pro forma condensed combined financial
statements should be read in conjunction with the historical financial
statements of AT&T, AT&T Wireless Group, Liberty Media Group and AT&T
Communications Services, incorporated by reference or included herein.
After obtaining shareholder and other approvals, AT&T intends to dividend
AT&T Consumer Services Group tracking stock to current AT&T shareholders
representing 100% of the financial performance and economic value of AT&T
Consumer Services Group. Due to the fact that this separate class of stock is
being created in contemplation of the subsequent distribution, the split-off of
AT&T Consumer Services Group tracking stock will be recorded at fair value
resulting in the recognition of a nonrecurring gain on the remaining AT&T
entity. The fair value of AT&T Consumer Services Group is estimated to be
between $2 billion and $5 billion. This fair value estimate as
D-256
605
compared to the historical book value of AT&T Consumer Services Group of
approximately ($.9) billion yields a gain on distribution of between $2.9
billion and $5.9 billion. The estimate of fair value is not intended to
represent management's approximation of the market value of the AT&T Consumer
Services Group tracking stock. Such value will be determined by, among other
things, the results of operations and financial condition of AT&T Consumer
Services Group and market conditions at the time that AT&T Consumer Services
Group tracking stock is issued. AT&T Consumer Services Group tracking stock is
expected to be split-off in conjunction with the spin-off of AT&T Communications
Services. Shareowners of the AT&T Broadband Group tracking stock will not
receive shares of AT&T Communications Services upon spin-off. As a result, the
distribution of AT&T Communications Services is a non pro-rata distribution and
will therefore be accounted for at fair value resulting in the recognition of a
nonrecurring gain on the remaining AT&T entity. The fair value of AT&T
Communications Services is estimated to be between $32 billion and $45 billion.
This fair value estimate as compared to the historical book value of AT&T
Communications Services of approximately $8.7 billion yields a gain on
distribution of between $23 billion and $36 billion. The estimate of fair value
is not intended to represent management's approximation of the market value of
the AT&T Communications Services. Such value will be determined by, among other
things, the results of operations and financial condition of AT&T Communications
Services and market conditions at the time that AT&T Communications Services is
distributed. The noncash gains on the distribution of AT&T Consumer Services
Group tracking stock and the spin-off of AT&T Communications Services, Inc. will
be recorded within discontinued operations. After the distribution, AT&T
Consumer Services Group is expected to remain a tracking stock of AT&T
Communications Services.
AT&T closed its merger with MediaOne on June 15, 2000. Therefore, MediaOne
is reflected in the December 31, 2000 balance sheet. The merger was accounted
for using the purchase method of accounting. Accordingly, AT&T has established a
new basis for MediaOne Group's assets and liabilities using their preliminarily
assigned fair values based on the allocation of the purchase price including the
costs of the merger.
AT&T closed its merger with TCI on March 9, 1999. Therefore, TCI is
reflected in the December 31, 2000 balance sheet. The merger was accounted for
using the purchase method of accounting. Accordingly, AT&T has established a new
basis for TCI's assets and liabilities using their assigned fair values based
onto allocation of the purchase price including the costs of the merger. In
connection with the merger, AT&T issued a separate tracking stock to reflect the
economic performance of Liberty Media Group, TCI's former programming and
technology investment businesses.
On April 27, 2000, AT&T completed the sale of a tracking stock (AT&T
Wireless Group tracking stock) intended to reflect 15.6% of the financial
performance and economic value of AT&T Wireless Group. The results of AT&T
Wireless Group are included in their entirety in the consolidated results of
AT&T. The earnings available to Common Shareholders are (reduced) increased by
the 15.6% of (income) loss from the AT&T Wireless Group beginning on April 27,
2000, the date of formation of the AT&T Wireless Group Tracking Stock.
Upon the split-off, AT&T Wireless Services will assume a portion of AT&T's
outstanding employee stock options. In connection with this assumption, AT&T
will, effective immediately prior to the split-off, reduce the AT&T Common Stock
Group's retained portion of the value of the AT&T Wireless Group by the
equivalent of 12,577,650 shares of AT&T Wireless Group tracking stock. This will
have the effect of reducing the total number of shares of AT&T Wireless Services
common stock distributed to holders of AT&T common stock in the split-off.
D-257
606
AT&T
UNAUDITED CONDENSED COMBINED PRO FORMA BALANCE SHEET
MARCH 31, 2001
(IN MILLIONS)
AWE PRO FORMA
EXCHANGE AT&T
HISTORICAL PRO FORMA AWE OTHER EXCLUDING
AT&T(1) ADJUSTMENTS(5) DISTRIBUTION(8) ADJUSTMENTS(10) AWE
---------- -------------- --------------- --------------- ---------
ASSETS
Cash and cash equivalents........................... 136 -- (34) -- 102
5,742(9)
(5,742)(9)
Receivables -- net.................................. 12,438 -- (12,399) 10,710 10,749
Deferred income taxes............................... 855 -- (170) -- 685
Other current assets................................ 2,824 -- (477) -- 2,347
Property, plant and equipment -- net................ 52,265 -- (10,725) -- 41,540
Franchise costs -- net.............................. 47,924 -- -- -- 47,924
Licensing cost -- net............................... 13,568 -- (13,568) -- --
Goodwill -- net..................................... 30,525 -- (4,686) -- 25,839
Investment in Liberty Media Group and related
receivables, net.................................. 34,072 -- -- -- 34,072
Other investments and related advances.............. 34,287 -- (902) 3,000 33,385
(3,000)(9)
Prepaid pension costs............................... 3,092 -- -- -- 3,092
Other assets........................................ 9,155 -- (966) 1,798 8,187
(1,800)(9)
(9,460)
9,460(7)
------- ------ ------- ------- -------
TOTAL ASSETS........................................ 241,141 -- (48,727) 15,508 207,922
======= ====== ======= ======= =======
LIABILITIES
Accounts payable.................................... 4,905 -- (800) 83 4,188
Payroll and benefit-related liabilities............. 1,882 -- (263) -- 1,619
Debt maturing within one year....................... 17,225 -- (103) 10,542 22,864
(10,542)(9)
5,742(9)
Other current liabilities........................... 10,432 -- (1,468) 83 9,047
Long-term debt...................................... 39,004 -- (8,290) 1,800 32,514
Long-term benefit-related liabilities............... 3,654 -- -- -- 3,654
Deferred income taxes............................... 36,665 -- (4,739) -- 31,926
Other long-term liabilities and deferred credits.... 5,114 -- (288) -- 4,521
(305)
------- ------ ------- ------- -------
TOTAL LIABILITIES................................... 118,881 -- (21,056) 12,508 110,333
Minority interest................................... 4,222 -- (42) -- 4,180
Company-obligated convertible quarterly income
preferred securities of subsidiary trust holding
solely subordinated debt securities of AT&T....... 4,713 -- -- -- 4,713
Convertible preferred stock......................... 9,362 -- (9,362) -- --
SHAREOWNERS' EQUITY
Common Stock:
AT&T common stock, $1 par value, authorized
6,000,000,000 shares; issued and outstanding
3,809,487,226 shares.............................. 3,809 (372) -- -- 3,437
AT&T Wireless Group Preferred Stock................. -- -- (3,000) 3,000 --
AT&T Wireless Group Common Stock, $1 par value,
authorized 6,000,000,000 shares; issued and
outstanding 363,203,425........................... 363 438 406 -- --
(1,207)
Liberty Media Group Class A Common Stock, $1 par
value, authorized 4,000,000,000 shares; issued and
outstanding 2,376,748,041 shares.................. 2,377 -- -- -- 2,377
Liberty Media Group Class B Common Stock, $1 par
value, authorized 400,000,000 shares; issued and
outstanding 212,045,288 shares.................... 212 -- -- -- 212
Total additional paid-in capital.................... 92,045 (7,467) 9,190 -- 83,426
7,481 (17,823)
Retained earnings................................... 6,732 (80) 9,460(7) -- --
(15,878)
(234)
Accumulated other comprehensive income.............. (1,575) -- 819 -- (756)
------- ------ ------- ------- -------
TOTAL SHAREOWNERS' EQUITY........................... 103,963 -- (18,267) 3,000 88,696
TOTAL LIABILITIES & EQUITY.......................... 241,141 -- (48,727) 15,508 207,922
======= ====== ======= ======= =======
See Notes To Unaudited AT&T Condensed Combined Pro-Forma Financial Statements
D-258
607
AT&T
UNAUDITED CONDENSED COMBINED PRO FORMA BALANCE SHEET -- (CONTINUED)
MARCH 31, 2001
(IN MILLIONS)
PRO FORMA
AT&T LIBERTY COMMUNICATIONS
EXCLUDING MEDIA SERVICES OTHER PRO FORMA
AWE DISTRIBUTION(11) DISTRIBUTION(13) ADJUSTMENTS AT&T
--------- ---------------- ---------------- ----------- ---------
ASSETS
Cash and cash equivalents............................ 102 (827)(12) (249) 974(16) --
Receivables -- net................................... 10,749 -- (9,860) 18,361(14) 19,276
26(15)
Deferred income taxes................................ 685 -- (1,135) 450(15) --
Other current assets................................. 2,347 -- (467) -- 1,880
Property, plant and equipment -- net................. 41,540 -- (26,032) -- 15,508
Franchise costs -- net............................... 47,924 -- -- -- 47,924
Licensing cost -- net................................ -- -- -- -- --
Goodwill -- net...................................... 25,839 -- (5,534) -- 20,305
Investment in Liberty Media Group and related
receivables, net................................... 34,072 (34,072) -- -- --
Other investments and related advances............... 33,385 -- (5,451) -- 27,934
Prepaid pension costs................................ 3,092 -- (3,092) --
Other assets......................................... 8,187 -- (3,771) 8,093(14) 12,588
79(15)
------- ------- ------- ------ -------
TOTAL ASSETS......................................... 207,922 (34,899) (55,591) 27,983 145,415
======= ======= ======= ====== =======
LIABILITIES
Accounts payable..................................... 4,188 -- (3,760) 220(15) 1,622
974(16)
Payroll and benefit-related liabilities.............. 1,619 -- (1,079) -- 540
Debt maturing within one year........................ 22,864 -- (18,434) 18,361(14) 22,791
Other current liabilities............................ 9,047 (24) (4,125) 415(15) 5,313
Long-term debt....................................... 32,514 -- (8,191) 8,093(14) 32,416
Long-term benefit-related liabilities................ 3,654 -- (3,512) -- 142
Deferred income taxes................................ 31,926 -- (3,712) -- 28,214
Other long-term liabilities and deferred credits..... 4,521 -- (4,053) 79(15) 547
------- ------- ------- ------ -------
TOTAL LIABILITIES.................................... 110,333 (24) (46,866) 28,142 91,585
Minority interest.................................... 4,180 -- (386) -- 3,794
Company-obligated convertible quarterly income
preferred securities of subsidiary trust holding
solely subordinated debt securities of AT&T........ 4,713 -- -- -- 4,713
Convertible preferred stock.......................... -- -- -- -- --
SHAREOWNERS' EQUITY
Common Stock:
AT&T common stock, $1 par value, authorized
6,000,000,000 shares; issued and outstanding
3,809,487,226 shares............................... 3,437 -- -- -- 3,437
AT&T Wireless Group Preferred Stock.................. -- -- -- --
AT&T Wireless Group Common Stock, $1 par value,
authorized 6,000,000,000 shares; issued and
outstanding 363,203,425............................ -- -- -- -- --
-- --
Liberty Media Group Class A Common Stock, $1 par
value, authorized 4,000,000,000 shares; issued and
outstanding 2,376,748,041 shares................... 2,377 (2,377) -- -- --
Liberty Media Group Class B Common Stock, $1 par
value, authorized 400,000,000 shares; issued and
outstanding 212,045,288 shares..................... 212 (212) -- -- --
Total additional paid-in capital..................... 83,426 (32,865) (8,608) (159)(15) 41,794
Retained earnings.................................... -- -- -- -- --
Accumulated other comprehensive income............... (756) 579 269 -- 92
------- ------- ------- ------ -------
TOTAL SHAREOWNERS' EQUITY............................ 88,696 (34,875) (8,339) (159) 45,323
TOTAL LIABILITIES & EQUITY........................... 207,922 (34,899) (55,591) 27,983 145,415
======= ======= ======= ====== =======
See Notes To Unaudited AT&T Condensed Combined Pro-Forma Financial Statements
D-259
608
AT&T
UNAUDITED CONDENSED COMBINED PRO FORMA STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED, MARCH 31, 2001
(IN MILLIONS)
AWE EXCHANGE PRO FORMA
HISTORICAL PRO FORMA AWE OTHER AT&T EXCLUDING
AT&T(1) ADJUSTMENTS DISTRIBUTION(8) ADJUSTMENTS(10) AWE
---------- ------------ --------------- --------------- --------------
Revenue............................ 16,763 -- (3,212) 101 13,652
OPERATING EXPENSES
Costs of services and products..... 4,837 -- (1,276) 101 3,662
Access and other connection........ 3,286 -- (135) -- 3,151
Selling, general and
administrative.................... 3,868 -- (1,085) -- 2,783
Depreciation and amortization...... 2,987 -- (575) -- 2,412
Net restructuring and other
charges........................... 808 -- -- -- 808
------- ----- ------- ---- -------
Total operating expenses........... 15,786 -- (3,071) 101 12,816
Operating income (loss)............ 977 -- (141) -- 836
Other income (expense)............. (781) -- (80) 158 (703)
Interest expense................... 969 -- (47) 116 1,095
57(9)
Income from continuing operations
before income taxes and earnings
(losses) from equity
investments....................... (773) -- (174) (15) (962)
Provision (benefit) for income
taxes............................. 292 -- (79) (22)(9) 191
Minority interest income
(expense)......................... 650 -- (4) -- 646
Equity earnings (losses) from
Liberty Media Group............... (697) -- -- -- (697)
Net earnings/(losses) from other
equity investments................ (136) -- 99 -- (37)
Income (loss) from continuing
operations........................ (1,248) -- -- 7 (1,241)
Dividend Requirements on Preferred
Stock............................. 181 -- (42) 42 181
------- ----- ------- ---- -------
Net income (loss) attributable to
common shareowners................ (1,429) -- 42 (35) (1,422)
======= ===== ======= ==== =======
AT&T COMMON STOCK GROUP:
Net income......................... $ (739) $ (8)(5) $ (725)
Weighted average shares outstanding
(basic & diluted)................. 3,805 (372)(5) 3,433
Basic EPS.......................... (0.19) (0.21)
AT&T WIRELESS GROUP:
Income............................. $ 7 $ 8(5)
Basic and diluted EPS.............. $ 0.02 $0.02(5)
LIBERTY MEDIA GROUP:
Basic and diluted EPS.............. $ (0.27) $ (0.27)
COMMUNICATIONS PRO
LIBERTY MEDIA SERVICES OTHER FORMA
DISTRIBUTION(11) DISTRIBUTION(13) ADJUSTMENTS AT&T
---------------- ---------------- ----------- ---------
Revenue............................ -- (11,127) 62(15) 2,587
OPERATING EXPENSES
Costs of services and products..... -- (2,259) 64(15) 1,467
Access and other connection........ -- (3,148) (3)(15) --
Selling, general and
administrative.................... -- (2,089) 1(15) 695
Depreciation and amortization...... -- (1,129) -- 1,283
Net restructuring and other
charges........................... -- -- -- 808
--- ------- --- -------
Total operating expenses........... -- (8,625) 62 4,253
Operating income (loss)............ -- (2,502) -- (1,666)
Other income (expense)............. -- (176) 486(14) (393)
Interest expense................... -- (486) 486(14) 1,095
Income from continuing operations
before income taxes and earnings
(losses) from equity
investments....................... -- (2,192) -- (3,154)
Provision (benefit) for income
taxes............................. -- (866) -- (675)
Minority interest income
(expense)......................... -- (35) -- 611
Equity earnings (losses) from
Liberty Media Group............... 697 -- -- --
Net earnings/(losses) from other
equity investments................ -- 125 -- 88
Income (loss) from continuing
operations........................ 697 (1,236) -- (1,780)
Dividend Requirements on Preferred
Stock............................. -- -- -- 181
--- ------- --- -------
Net income (loss) attributable to
common shareowners................ 697 (1,236) -- (1,961)
=== ======= === =======
AT&T COMMON STOCK GROUP:
Net income......................... $(1,961)
Weighted average shares outstanding
(basic & diluted)................. 3,433
Basic EPS.......................... (0.57)
AT&T WIRELESS GROUP:
Income.............................
Basic and diluted EPS..............
LIBERTY MEDIA GROUP:
Basic and diluted EPS..............
See Notes To Unaudited AT&T Condensed Combined Pro Forma Financial Statements
D-260
609
AT&T
UNAUDITED CONDENSED COMBINED PRO FORMA STATEMENT OF INCOME
FOR THE YEAR ENDED, DECEMBER 31, 2000
(IN MILLIONS)
PRO FORMA DOCOMO &
MEDIAONE AT&T AWE EXCHANGE
HISTORICAL HISTORICAL PROFORMA WITH PRO FORMA AWE
AT&T(1) MEDIAONE(1) ADJUSTMENTS(4) MEDIAONE ADJUSTMENTS DISTRIBUTION(8)
---------- ----------- -------------- --------- ------------ ---------------
Revenue............................ 65,981 1,325 -- 67,306 -- (10,447)
OPERATING EXPENSES
Costs of services and products..... 17,587 554 -- 18,141 -- (4,827)
Access and other connection........ 13,518 -- -- 13,518 -- (378)
Selling, general and
administrative.................... 13,303 342 -- 13,645 -- (3,590)
Depreciation and amortization...... 10,267 706 156 11,129 -- (1,678)
Net restructuring and other
charges........................... 7,029 -- -- 7,029 -- --
------- ----- ---- ------- ----- -------
Total operating expenses........... 61,704 1,602 156 63,462 -- (10,473)
Operating income (loss)............ 4,277 (277) (156) 3,844 -- 26
Other income (expense)............. 1,514 3,341 243 5,098 -- (507)
Interest expense................... 3,183 312 712 4,207 (144)(6) 12
Income from continuing operations
before income taxes and earnings
(losses) from equity
investments....................... 2,608 2,752 (625) 4,735 144 (493)
Provision (benefit) for income
taxes............................. 3,342 1,189 (196) 4,335 55(6) (172)
Minority interest income
(expense)......................... 4,120 -- (48) 4,072 -- (17)
Equity earnings (losses) from
Liberty Media Group............... 1,488 -- -- 1,488 -- --
Net earnings/(losses) from other
equity investments................ (205) -- (138) (343) -- (383)
Income (loss) from continuing
operations........................ 4,669 1,563 (615) 5,617 89 (721)
Dividend Requirements on Preferred
Stock............................. -- -- -- -- -- (111)
------- ----- ---- ------- ----- -------
Net income (loss) attributable to
common shareowners................ 4,669 1,563 (615) 5,617 89 (610)
======= ===== ==== ======= ===== =======
AT&T COMMON STOCK GROUP:
Net income......................... $ 3,105 $ 4,053 $ 89(6)
Weighted average shares outstanding
(basic)........................... 3,486 3,762 (372)(5)
Basic EPS.......................... 0.89 1.08
Net income......................... 3,137 4,085 89(6)
Weighted average shares outstanding
(diluted)......................... 3,545 3,821 (372)(5)
Diluted EPS........................ 0.88 1.07
AT&T WIRELESS GROUP:
Income............................. $ 76 $ 76 $ 92(5)
Basic and diluted EPS.............. $ 0.21 $ 0.21 $0.21(5)
LIBERTY MEDIA GROUP:
Basic and diluted EPS.............. $ 0.58 $ 0.58
PRO FORMA
OTHER AT&T EXCLUDING
ADJUSTMENTS(10) AWE
--------------- --------------
Revenue............................ 321 57,180
OPERATING EXPENSES
Costs of services and products..... 321 13,635
Access and other connection........ -- 13,140
Selling, general and
administrative.................... -- 10,055
Depreciation and amortization...... -- 9,451
Net restructuring and other
charges........................... -- 7,029
---- -------
Total operating expenses........... 321 53,310
Operating income (loss)............ -- 3,870
Other income (expense)............. 353 4,944
Interest expense................... 242 4,544
227(9)
Income from continuing operations
before income taxes and earnings
(losses) from equity
investments....................... (116) 4,270
Provision (benefit) for income
taxes............................. (87)(9) 4,131
Minority interest income
(expense)......................... -- 4,055
Equity earnings (losses) from
Liberty Media Group............... -- 1,488
Net earnings/(losses) from other
equity investments................ -- (726)
Income (loss) from continuing
operations........................ (29) 4,956
Dividend Requirements on Preferred
Stock............................. 111 --
---- -------
Net income (loss) attributable to
common shareowners................ (140) 4,956
==== =======
AT&T COMMON STOCK GROUP:
Net income......................... $ 3,468
Weighted average shares outstanding
(basic)........................... 3,390
Basic EPS.......................... 1.02
Net income......................... 3,500
Weighted average shares outstanding
(diluted)......................... 3,449
Diluted EPS........................ 1.01
AT&T WIRELESS GROUP:
Income.............................
Basic and diluted EPS..............
LIBERTY MEDIA GROUP:
Basic and diluted EPS.............. $ 0.58
See Notes To Unaudited AT&T Condensed Combined Pro Forma Financial Statements
D-261
610
AT&T
UNAUDITED CONDENSED COMBINED PRO FORMA STATEMENT OF INCOME -- (CONTINUED)
FOR THE YEAR ENDED, DECEMBER 31, 2000
(IN MILLIONS)
PRO FORMA COMMUNICATIONS
AT&T EXCLUDING LIBERTY MEDIA SERVICES OTHER PRO FORMA
AWE DISTRIBUTION(11) DISTRIBUTION(13) ADJUSTMENTS AT&T
-------------- ---------------- ---------------- ----------- ---------
Revenue...................................... 57,180 -- (47,521) 112(15) 9,771
OPERATING EXPENSES
Costs of services and products............... 13,635 -- (8,588) 107(15) 5,154
Access and other connection.................. 13,140 -- (13,139) (1)(15) --
Selling, general and administrative.......... 10,055 -- (7,537) 6(15) 2,524
Depreciation and amortization................ 9,451 -- (4,538) -- 4,913
Net restructuring and other charges.......... 7,029 -- (759) -- 6,270
------- ------ ------- ----- -------
Total operating expenses..................... 53,310 -- (34,561) 112 18,861
Operating income (loss)...................... 3,870 -- (12,960) -- (9,090)
Other income (expense)....................... 4,944 -- (1,181) 1,643(14) 5,406
Interest expense............................. 4,544 -- (1,643) 1,643(14) 4,544
Income from continuing operations before
income taxes and earnings (losses) from
equity investments......................... 4,270 -- (12,498) -- (8,228)
Provision (benefit) for income taxes......... 4,131 -- (4,493) -- (362)
Minority interest income (expense)........... 4,055 -- (39) -- 4,016
Equity earnings (losses) from Liberty Media
Group...................................... 1,488 (1,488) -- -- --
Net earnings/(losses) from other equity
investments................................ (726) -- (10) -- (736)
Income (loss) from continuing operations..... 4,956 (1,488) (8,054) -- (4,586)
Dividend Requirements on Preferred Stock..... -- -- -- -- --
------- ------ ------- ----- -------
Net income (loss) attributable to common
shareowners................................ 4,956 (1,488) (8,054) -- (4,586)
======= ====== ======= ===== =======
AT&T COMMON STOCK GROUP:
Net income................................... $ 3,468 $(4,586)
Weighted average shares outstanding
(basic).................................... 3,390 3,390
Basic EPS.................................... 1.02 (1.35)
Net income................................... 3,500
Weighted average shares outstanding
(diluted).................................. 3,449
Diluted EPS.................................. 1.01
AT&T WIRELESS GROUP:
Income.......................................
Basic and diluted EPS........................
LIBERTY MEDIA GROUP:
Basic and diluted EPS........................ $ 0.58
See Notes To Unaudited AT&T Condensed Combined Pro Forma Financial Statements
D-262
611
AT&T
UNAUDITED CONDENSED COMBINED PRO FORMA STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN MILLIONS)
PRO FORMA
LIBERTY
VENTURES OTHER TCI PRO FORMA
HISTORICAL HISTORICAL GROUP PRO FORMA AT&T
AT&T(1) TCI(1) ADJUSTMENTS(2) ADJUSTMENTS(3) WITH TCI
---------- ---------- -------------- -------------- ---------
Revenue........................................... 62,600 1,145 (204) -- 63,541
OPERATING EXPENSES
Costs of services and products.................... 14,594 543 (79) -- 15,058
Access and other connection....................... 14,686 -- -- -- 14,686
Selling, general and administrative............... 13,516 677 (260) -- 13,933
Depreciation and amortization..................... 7,439 277 (22) 120 7,814
Net restructuring and other charges............... 1,506 -- -- -- 1,506
------- ----- ---- ---- -------
Total operating expenses.......................... 51,741 1,497 (361) 120 52,997
Operating income (loss)........................... 10,859 (352) 157 (120) 10,544
Other income (expense)............................ 931 356 (321) 142 1,108
Interest expense.................................. 1,765 161 (25) 82 1,983
Income from continuing operations before income
taxes and earnings (losses) from equity
investments...................................... 10,025 (157) (139) (60) 9,669
Provision (benefit) for income taxes.............. 3,695 119 (207) (49) 3,558
Minority interest income (expense)................ (115) -- -- (26) (141)
Equity earnings (losses) from Liberty Media
Group............................................ (2,022) -- (68) (156) (2,246)
Net earnings/(losses) from other equity
investments...................................... (765) -- -- (99) (864)
Income (loss) from continuing operations.......... 3,428 (276) -- (292) 2,860
Dividend Requirements on preferred stocks......... -- (4) -- -- (4)
------- ----- ---- ---- -------
Net income (loss) attributable to common
shareowners...................................... 3,428 (280) -- (292) 2,856
======= ===== ==== ==== =======
AT&T COMMON STOCK GROUP:
Net income........................................ $ 5,450 $ 5,102
Weighted average shares outstanding (basic)....... 3,082 3,181
Basic EPS......................................... 1.77 1.60
Net income........................................ 5,476 5,128
Weighted average shares outstanding (diluted)..... 3,152 3,299
Diluted EPS....................................... 1.74 1.55
LIBERTY MEDIA GROUP:
Basic and diluted EPS............................. $ (0.80) $ (0.89)
MEDIAONE PRO FORMA DOCOMO &
HISTORICAL GROUP AT&T W/ TCI AWE EXCHANGE
MEDIAONE PRO FORMA AND MEDIA PRO FORMA AWE
GROUP(1) ADJUSTMENTS(4) ONE GROUP ADJUSTMENTS DISTRIBUTION(8)
---------- -------------- ----------- ------------ ---------------
Revenue........................................... 2,695 -- 66,236 -- (7,627)
OPERATING EXPENSES
Costs of services and products.................... 1,069 -- 16,127 -- (3,606)
Access and other connection....................... -- -- 14,686 -- (247)
Selling, general and administrative............... 749 -- 14,682 -- (2,663)
Depreciation and amortization..................... 1,248 414 9,476 -- (1,245)
Net restructuring and other charges............... -- -- 1,506 -- (530)
----- ----- ------- ----- ------
Total operating expenses.......................... 3,066 414 56,477 -- (8,291)
Operating income (loss)........................... (371) (414) 9,759 -- 664
Other income (expense)............................ 7,551 1,918 10,577 -- (106)
Interest expense.................................. 449 1,554 3,986 (144)(6) (10)
Income from continuing operations before income
taxes and earnings (losses) from equity
investments...................................... 6,731 (50) 16,350 144 568
Provision (benefit) for income taxes.............. 3,217 (538) 6,237 55(6) 250
Minority interest income (expense)................ -- (217) (358) -- (11)
Equity earnings (losses) from Liberty Media
Group............................................ -- -- (2,246) -- --
Net earnings/(losses) from other equity
investments...................................... -- (158) (1,022) -- 10
Income (loss) from continuing operations.......... 3,514 113 6,487 89 317
Dividend Requirements on preferred stocks......... (77) 46 (35) -- --
----- ----- ------- ----- ------
Net income (loss) attributable to common
shareowners...................................... 3,437 159 6,452 89 317
===== ===== ======= ===== ======
AT&T COMMON STOCK GROUP:
Net income........................................ $ 8,698 $ 89(6)
Weighted average shares outstanding (basic)....... 3,784 (372)(5)
Basic EPS......................................... 2.30
Net income........................................ 8,724 $ 89(6)
Weighted average shares outstanding (diluted)..... 3,906 (372)(5)
Diluted EPS....................................... 2.23
LIBERTY MEDIA GROUP:
Basic and diluted EPS............................. $ (0.89)
PRO FORMA
AT&T
OTHER EXCLUDING
ADJUSTMENTS(10) AWE
--------------- ---------
Revenue........................................... 227 58,836
OPERATING EXPENSES
Costs of services and products.................... 227 12,748
Access and other connection....................... -- 14,439
Selling, general and administrative............... -- 12,019
Depreciation and amortization..................... -- 8,231
Net restructuring and other charges............... -- 976
---- ------
Total operating expenses.......................... 227 48,413
Operating income (loss)........................... -- 10,423
Other income (expense)............................ -- 10,471
Interest expense.................................. 227(9) 4,059
Income from continuing operations before income
taxes and earnings (losses) from equity
investments...................................... (227) 16,835
Provision (benefit) for income taxes.............. (87)(9) 6,455
Minority interest income (expense)................ -- (369)
Equity earnings (losses) from Liberty Media
Group............................................ -- (2,246)
Net earnings/(losses) from other equity
investments...................................... -- (1,012)
Income (loss) from continuing operations.......... (140) 6,753
Dividend Requirements on preferred stocks......... -- (35)
---- ------
Net income (loss) attributable to common
shareowners...................................... (140) 6,718
==== ======
AT&T COMMON STOCK GROUP:
Net income........................................ $8,964
Weighted average shares outstanding (basic)....... 3,412
Basic EPS......................................... 2.63
Net income........................................ 8,990
Weighted average shares outstanding (diluted)..... 3,534
Diluted EPS....................................... 2.54
LIBERTY MEDIA GROUP:
Basic and diluted EPS............................. $(0.89)
See Notes To Unaudited AT&T Condensed Combined Pro Forma Financial Statements
D-263
612
AT&T
UNAUDITED CONDENSED COMBINED PRO FORMA STATEMENT OF INCOME -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN MILLIONS)
PRO FORMA
AT&T LIBERTY COMMUNICATIONS
EXCLUDING MEDIA SERVICES OTHER PRO FORMA
AWE DISTRIBUTION(11) DISTRIBUTION(13) ADJUSTMENTS AT&T
--------- ---------------- ---------------- ----------- ---------
Revenue........................................... 58,836 -- (50,152) 31(15) 8,715
OPERATING EXPENSES
Costs of services and products.................... 12,748 -- (8,560) 31(15) 4,219
Access and other connection....................... 14,439 -- (14,439) -- --
Selling, general and administrative............... 12,019 -- (9,601) -- 2,418
Depreciation and amortization..................... 8,231 -- (4,519) -- 3,712
Net restructuring and other charges............... 976 -- (331) -- 645
------- ----- -------- --- ------
Total operating expenses.......................... 48,413 -- (37,450) 31 10,994
Operating income (loss)........................... 10,423 -- (12,702) -- (2,279)
Other income (expense)............................ 10,471 -- (775) 797(14) 10,493
Interest expense.................................. 4,059 -- (797) 797(14) 4,059
Income from continuing operations before income
taxes and earnings (losses) from equity
investments..................................... 16,835 -- (12,680) -- 4,155
Provision (benefit) for income taxes.............. 6,455 -- (4,508) -- 1,947
Minority interest income (expense)................ (369) -- -- -- (369)
Equity earnings (losses) from Liberty Media
Group........................................... (2,246) 2,246 -- -- --
Net earnings/(losses) from other equity
investments..................................... (1,012) -- 48 -- (964)
Income (loss) from continuing operations.......... 6,753 2,246 (8,124) -- 875
Dividend Requirements on preferred stocks......... (35) -- -- -- (35)
------- ----- -------- --- ------
Net income (loss) attributable to common
shareowners..................................... 6,718 2,246 (8,124) -- 840
======= ===== ======== === ======
AT&T COMMON STOCK GROUP:
Net income........................................ $ 8,964 $ 840
Weighted average shares outstanding (basic)....... 3,412 3,412
Basic EPS......................................... 2.63 0.25
Net income........................................ 8,990 866
Weighted average shares outstanding (diluted)..... 3,534 3,534
Diluted EPS....................................... 2.54 0.25
LIBERTY MEDIA GROUP:
Basic and diluted EPS............................. $ (0.89)
See Notes To Unaudited AT&T Condensed Combined Pro Forma Financial Statements
D-264
613
AT&T
UNAUDITED CONDENSED COMBINED PRO FORMA STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN MILLIONS)
LIBERTY
VENTURES OTHER TCI PRO FORMA HISTORICAL
HISTORICAL HISTORICAL GROUP PRO FORMA AT&T MEDIAONE
AT&T(1) TCI(1) ADJUSTMENTS(2) ADJUSTMENTS(3) WITH TCI GROUP(1)
---------- ---------- -------------- -------------- --------- ----------
Revenue..................................... $53,223 $7,351 $(1,148) $ -- $59,426 $2,882
OPERATING EXPENSES
Costs of services and products.............. 10,495 3,087 (495) -- 13,087 1,013
Access and other connection................. 15,328 -- -- -- 15,328 --
Selling, general and administrative......... 12,770 2,583 (943) -- 14,410 926
Depreciation and amortization............... 4,629 1,735 (135) 719 6,948 1,182
Net restructuring and other charges......... 2,514 5 (5) -- 2,514 --
------- ------ ------- ------- ------- ------
Total operating expenses.................... 45,736 7,410 (1,578) 719 52,287 3,121
Operating income (loss)..................... 7,487 (59) 430 (719) 7,139 (239)
Other income (expense)...................... 1,281 4,658 (1,631) (1,343) 2,965 3,368
Interest expense............................ 427 1,061 (103) 489 1,874 491
Income from continuing operations before
income taxes and earnings (losses) from
equity investments......................... 8,341 3,538 (1,098) (2,551) 8,230 2,638
Provision (benefit) for income taxes........ 3,049 1,595 (472) (1,087) 3,085 1,208
Minority interest income (expense).......... 21 -- -- (88) (67) --
Equity earnings (losses) from Liberty Media
Group...................................... -- -- 626 (928) (302) --
Net earnings/(losses) from other equity
investments................................ (78) -- -- (859) (937) --
Income (loss) from continuing operations.... 5,235 1,943 -- (3,339) 3,839 1,430
Dividend Requirements on preferred stocks... -- (24) -- 14 (10) (108)
------- ------ ------- ------- ------- ------
Net income (loss) attributable to common
shareowners................................ $ 5,235 $1,919 $ -- $(3,325) $ 3,829 $1,322
======= ====== ======= ======= ======= ======
AT&T COMMON STOCK GROUP:
Net income.................................. $ 5,235 $ 4,131
Weighted average shares outstanding
(basic).................................... 2,676 3,146
Basic EPS................................... 1.96 1.31
Net income.................................. 5,235 4,131
Weighted average shares outstanding
(diluted).................................. 2,700 3,251
Diluted EPS................................. 1.94 1.27
LIBERTY MEDIA GROUP:
Basic and diluted EPS....................... $ (0.13)
MEDIAONE PRO FORMA DOCOMO &
GROUP AT&T W/ TCI AWE EXCHANGE
PRO FORMA AND MEDIA PRO FORMA AWE OTHER
ADJUSTMENTS(4) ONE GROUP ADJUSTMENTS DISTRIBUTION(8) ADJUSTMENTS(10)
-------------- ----------- ------------ --------------- ---------------
Revenue..................................... $ -- $62,308 $ -- $(5,406) $ 73
OPERATING EXPENSES
Costs of services and products.............. -- 14,100 -- (2,217) --
Access and other connection................. -- 15,328 -- (211) 66
Selling, general and administrative......... -- 15,336 -- (2,123) 7
Depreciation and amortization............... 414 8,544 -- (1,050) --
Net restructuring and other charges......... -- 2,514 -- -- --
------- ------- ----- ------- -----
Total operating expenses.................... 414 55,822 -- (5,601) 73
Operating income (loss)..................... (414) 6,486 -- 195 --
Other income (expense)...................... 436 6,769 -- (470) --
Interest expense............................ 1,554 3,919 (144)(6) 86 227(9)
Income from continuing operations before
income taxes and earnings (losses) from
equity investments......................... (1,532) 9,336 144 (361) (227)
Provision (benefit) for income taxes........ (487) 3,806 55(6) (125) (87)(9)
Minority interest income (expense).......... (74) (141) -- (21) --
Equity earnings (losses) from Liberty Media
Group...................................... -- (302) -- -- --
Net earnings/(losses) from other equity
investments................................ (268) (1,205) -- (30) --
Income (loss) from continuing operations.... (1,387) 3,882 89 (287) (140)
Dividend Requirements on preferred stocks... 46 (72) -- -- --
------- ------- ----- ------- -----
Net income (loss) attributable to common
shareowners................................ $(1,341) $ 3,810 $ 89 $ (287) $(140)
======= ======= ===== ======= =====
AT&T COMMON STOCK GROUP:
Net income.................................. $ 4,112 $ 89(6)
Weighted average shares outstanding
(basic).................................... 3,760 (372)(5)
Basic EPS................................... 1.09
Net income.................................. 4,112 $ 89(6)
Weighted average shares outstanding
(diluted).................................. 3,874 (372)(5)
Diluted EPS................................. 1.06
LIBERTY MEDIA GROUP:
Basic and diluted EPS....................... $ (0.13)
PRO FORMA
AT&T
EXCLUDING
AWE
---------
Revenue..................................... $56,975
OPERATING EXPENSES
Costs of services and products.............. 11,883
Access and other connection................. 15,183
Selling, general and administrative......... 13,220
Depreciation and amortization............... 7,494
Net restructuring and other charges......... 2,514
-------
Total operating expenses.................... 50,294
Operating income (loss)..................... 6,681
Other income (expense)...................... 6,299
Interest expense............................ 4,088
Income from continuing operations before
income taxes and earnings (losses) from
equity investments......................... 8,892
Provision (benefit) for income taxes........ 3,649
Minority interest income (expense).......... (162)
Equity earnings (losses) from Liberty Media
Group...................................... (302)
Net earnings/(losses) from other equity
investments................................ (1,235)
Income (loss) from continuing operations.... 3,544
Dividend Requirements on preferred stocks... (72)
-------
Net income (loss) attributable to common
shareowners................................ $ 3,472
=======
AT&T COMMON STOCK GROUP:
Net income.................................. $ 3,774
Weighted average shares outstanding
(basic).................................... 3,388
Basic EPS................................... 1.11
Net income.................................. 3,774
Weighted average shares outstanding
(diluted).................................. 3,502
Diluted EPS................................. 1.08
LIBERTY MEDIA GROUP:
Basic and diluted EPS....................... $ (0.13)
See Notes To Unaudited AT&T Condensed Combined Pro Forma Financial Statements
D-265
614
AT&T
UNAUDITED CONDENSED COMBINED PRO FORMA STATEMENT OF INCOME -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN MILLIONS)
PRO FORMA
AT&T LIBERTY COMMUNICATIONS
EXCLUDING MEDIA SERVICES OTHER PRO FORMA
AWE DISTRIBUTION(11) DISTRIBUTION(13) ADJUSTMENTS(14) AT&T
--------- ---------------- ---------------- --------------- ---------
Revenue....................................... $56,975 $ -- $(47,890) -- $ 9,085
OPERATING EXPENSES
Costs of services and products................ 11,883 -- (8,344) -- 3,539
Access and other connection................... 15,183 -- (15,116) -- 67
Selling, general and administrative........... 13,220 -- (10,656) -- 2,564
Depreciation and amortization................. 7,494 -- (3,577) -- 3,917
Net restructuring and other charges........... 2,514 -- (2,514) -- --
------- ---- -------- --- -------
Total operating expenses...................... 50,294 -- (40,207) -- 10,087
Operating income (loss)....................... 6,681 -- (7,683) -- (1,002)
Other income (expense)........................ 6,299 -- (812) 292 5,779
Interest expense.............................. 4,088 -- (292) 292 4,088
Income from continuing operations before
income taxes and earnings (losses) from
equity investments.......................... 8,892 -- (8,203) -- 689
Provision (benefit) for income taxes.......... 3,649 -- (3,009) -- 640
Minority interest income (expense)............ (162) -- 1 -- (161)
Equity earnings (losses) from Liberty Media
Group....................................... (302) 302 -- -- --
Net earnings/(losses) from other equity
investments................................. (1,235) -- 109 -- (1,126)
Income (loss) from continuing operations...... 3,544 302 (5,084) -- (1,238)
Dividend Requirements on preferred stocks..... (72) -- -- -- (72)
------- ---- -------- --- -------
Net income (loss) attributable to common
shareowners................................. $ 3,472 $302 $ (5,084) -- $(1,310)
======= ==== ======== === =======
AT&T COMMON STOCK GROUP:
Net income.................................... $ 3,774 $(1,310)
Weighted average shares outstanding (basic)... 3,388 3,388
Basic EPS..................................... 1.11 (0.39)
Net income.................................... 3,774
Weighted average shares outstanding
(diluted)................................... 3,502
Diluted EPS................................... 1.08
LIBERTY MEDIA GROUP:
Basic and diluted EPS......................... $ (0.13)
See Notes To Unaudited AT&T Condensed Combined Pro Forma Financial Statements
D-266
615
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
1. These columns reflect the historical results of operations and financial
position of the respective companies.
2. This column reflects the deconsolidation of the historical results of
operations for the interests represented by the shares of Liberty Media
Group tracking stock for the period January 1, 1998 through February 28,
1999. AT&T accounts for the Liberty Media Group under the equity method
because it does not possess a "controlling financial interest" for financial
accounting purposes in the Liberty Media Group.
3. This column reflects the TCI merger purchase accounting adjustments. These
adjustments include the amortization of the excess of the purchase price
over the net assets acquired and incremental interest expense on additional
borrowings for the period January 1, 1998 through February 28, 1999.
4. This column reflects the MediaOne merger purchase accounting adjustments.
These adjustments include the amortization of the excess of the purchase
price over the net assets acquired, incremental interest expense on
additional borrowings for the period January 1, 1998 through June 15, 2000
and the elimination of a non-recurring charge related to the termination of
MediaOne's merger with Comcast Corp. included in 1999.
5. These entries give effect to the approximate $7.9 billion exchange of 438
million shares of AT&T Wireless Group tracking stock for 372 million shares
of AT&T common stock recorded during the second quarter of 2001 pursuant to
the AT&T Wireless Group Exchange Offer of April 17, 2001. A premium of
approximately $80 million was recorded based on the closing trading prices
for shares of AT&T common stock and AT&T Wireless Group tracking stock on
May 25, 2001, the expiration date of the exchange offer. The exchange offer,
as calculated, reflects a reduction of approximately 18.9 percent of the
AT&T Common Stock Group's portion of the value of AT&T Wireless Group. Due
to the fact that the premium is a one-time event associated with the
exchange, its effects have not been included as a pro forma adjustment to
the income statement. The impact to diluted earnings per share attributable
to the AT&T Common Stock Group for the year ended December 31, 2000 related
to the premium is a reduction of approximately $0.02 per share, or $1.05 per
diluted share and for the three month period ended March 31, 2001 a
reduction of approximately $0.07 per share or $(0.53) per share. As a result
of the exchange offer, the earnings per share calculation of the AT&T Common
Stock Group reflects a decrease in the number of outstanding shares of AT&T
common stock in all periods, and a decrease in net income attributable to
the AT&T Common Stock Group as a result of the decrease in the portion of
the value of the AT&T Wireless Group retained by the AT&T Common Stock Group
for the period subsequent to April 27, 2000, the date of the IPO of AT&T
Wireless Group tracking stock. The effect of the exchange offer on the
balance sheet includes: 1) a decrease in the par and additional
paid-in-capital of AT&T common stock and 2) an increase in the par and
additional paid-in-capital of AT&T Wireless Group tracking stock and 3) a
decrease in retained earnings as a result of the exchange offer premium.
Since the number of shares of AT&T Wireless Group tracking stock and the net
income attributable to the AT&T Wireless Group increased proportionally,
there is no change to the calculated earnings per share for the AT&T
Wireless Group.
6. This entry reflects the impact to interest and tax expense associated with
the pay down in short-term debt from the use of $3.6 billion of proceeds
attributable to the DoCoMo investment included in Historical AT&T results.
The pay down in short-term debt would result in a reduction in interest
expense, of $144 million ($89 million, net of taxes) for the years ended
December 31, 2000, 1999 and 1998. The pro forma impact for the three months
ended
D-267
616
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
March 31, 2001 is not material and therefore has not been presented as a pro
forma adjustment. The reduction in interest expense was calculated using an
interest rate of 3.95%, which reflects the current 90-day commercial paper
rate.
7. This entry reflects the fair value adjustment for accounting purposes that
result in a gain which will be recorded upon the distribution of the AT&T
Wireless Group. This distribution is non pro-rata due to the alteration of
shareowner interests in the AT&T Wireless Group as a result of the exchange
offer. For this reason, the distribution will be accounted for at fair value
and will result in a nonrecurring gain upon distribution equal to the excess
of the fair value of the securities issued over AT&T's carrying value of the
net assets of the AT&T Wireless Group adjusted for the AT&T Wireless Group
shares retained by AT&T at the time of the distribution. The actual gain
will be determined upon distribution. Due to the fact that the gain is a
one-time event, its effects have not been included as a pro forma adjustment
to the income statement; however, it has been included as a pro forma
adjustment to retained earnings on the pro forma balance sheet. The
estimated gain is calculated as follows (numbers in millions):
Fair value of AT&T Wireless Group Tracking Stock (assumed to
represent approximately 2,129 million shares of AT&T
Wireless Group Tracking Stock at $16.20 per share as of
June 22, 2001)............................................ $34,457
Fair value of approximately 228 million new primary shares
of AT&T Wireless Group Tracking Stock issued to DoCoMo
upon conversion of the preferred stock at $16.20 per share
as of June 22, 2001....................................... $ 3,721
Fair value of AT&T Wireless Group to be distributed......... $38,178
Carrying Value of net assets of AT&T Wireless Group to be
distributed............................................... $28,718
Gain on distribution........................................ $ 9,460
8. The adjustments presented deduct the historical results of operations and
the historical financial position of the AT&T Wireless Group to reflect the
distribution of the AT&T Wireless Group from AT&T. The distribution is a
fair value transaction and as such the fair value of the net assets has been
recorded as a reduction to retained earnings for the dividend of AT&T's
retained portion of the value of AT&T Wireless Group and par and additional
paid-in-capital for the distribution to the AT&T Wireless Group tracking
stock Shareholders.
D-268
617
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The reduction to retained earnings and the reduction to additional paid in
capital is calculated as follows: (Amounts in millions)
AT&T Wireless Group Tracking Stock shares................... 2,129
Issuance of new primary shares of AT&T Wireless Group
tracking stock to DoCoMo wireless tracking preferred stock
(beyond AT&T's retained portion).......................... 228
------
Total pro forma AT&T Wireless Group Tracking Stock shares
outstanding after conversion of the DoCoMo wireless
tracking stock and distribution of AT&T's retained
portion................................................... 2,357
AT&T Wireless Group Tracking Stock shares outstanding as of
June 22, 2001 which reflect 15.6% of AT&T's retained
portion of the AT&T Wireless Group prior to
distribution.............................................. 363
Pro forma AT&T Wireless Group Tracking Stock issued for the
exchange offer............................................ 438
AT&T Wireless Group Tracking Stock shares issued to DoCoMo
upon conversion of DoCoMo wireless tracking stock
(including 228 million new primary issued and 178 million
shares issued out of AT&T's retained portion)............. 406
------
Total pro forma AT&T Wireless Group Tracking Stock shares
outstanding after conversion of preferred stock held by
DoCoMo, and exchange, prior to distribution of AT&T's
retained portion.......................................... 1,207
Split-Off % of AT&T Wireless Group Tracking Stock shares
(1,207/2,357)............................................. 51.2%
Spin-Off % of AT&T Wireless Group (1 - 51.2%)............... 48.8%
Fair value of AT&T Wireless Group associated with the
split-off (38,178 x 51.2%)................................ 19,550
AT&T Wireless preferred stock............................... (3,000)
AT&T Wireless Group tracking stock par...................... (1,207)
DoCoMo warrants............................................. (305)
Other....................................................... 36
------
Reduction to Additional Paid in Capital..................... 15,074
Fair value of AT&T Wireless Group associated with the
spin-off (38,178 x 48.8%) (Reduction to Retained
Earnings)................................................. 18,627
On a pro forma financial statement basis there are insufficient retained
earnings to absorb the spin-off-related charge without creating a retained
deficit. Accordingly, $2,749 billion of the spin-off charge has been
reclassed as a charge against additional paid-in capital. The result will be
a total reduction in retained earnings associated with the spin-off of
$15,878 and a total reduction in additional paid-in capital of $17,823.
In addition to the historical adjustments, other adjustments relating to the
DoCoMo transaction have been presented. These adjustments reflect that the
preferred stock associated with the transaction is converted to 406 million
shares of AT&T Wireless Group tracking stock, the accelerated write-off of
the beneficial conversion feature and the warrants associated with the
transaction are converted to warrants in AT&T Wireless Services.
On February 15, 2001, AT&T announced that they would retain approximately $3
billion in value of AT&T Wireless Services shares subject to an IRS Ruling
of the distribution. Based on
D-269
618
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the AT&T Wireless Group tracking stock price as of the record date of June
22, 2001, AT&T will retain 185,308,303 shares. The retained shares will be
accounted for as a cost method investment under SFAS 115, and therefore any
differences between historical cost and fair value on a periodic basis will
be recorded, net of applicable taxes, as a component of Other Comprehensive
Income.
9. These adjustments reflect the incremental borrowing by AT&T in connection
with the repayment of the net $5.7 billion intercompany loan to AT&T
Wireless Group. The repayment of intercompany indebtedness is contained in
the preliminary Separation and Distribution Agreement between AT&T and AT&T
Wireless Group. The increase in short-term debt would result in an increase
in interest expense of $227 million ($140 million net of taxes) for the
years ended December 31, 2000, 1999 and 1998 and $57 million ($35 million
net of taxes) for the three month period ended March 31, 2001. The increase
in interest expense was calculated using an interest rate of 3.95%, which
reflects the current 90-day commercial paper rate.
10. Reflects certain Inter-Group transactions appropriately reflected in the
separate financial statements of AT&T after excluding the AT&T Wireless
Group on a pro forma basis that were eliminated in the AT&T consolidated
financial statements and were therefore not reflected in AT&T's historical
results and financial position.
11. The adjustments presented deduct the historical results of operations and
the historical financial position of the Liberty Media Group to reflect the
split-off of the Liberty Media Group from AT&T. The split-off is a pro-rata
distribution and as such the historical value of the net assets has been
recorded as an elimination of the AT&T Liberty Media Group equity.
12. This entry reflects the settlement of AT&T's net payable of $827 million to
Liberty Media Group primarily for the value of certain TCI pre-acquisition
net operating loss carryforwards, pursuant to the tax sharing agreements
dated March 9, 1999.
13. The adjustments presented deduct the historical results of operations and
the historical financial position of AT&T Communications Services. Due to
the fact that the fair values of AT&T Business Services and AT&T Consumer
Services have not been included in the unaudited pro forma condensed
combined financial statements, the historical value of the net assets has
been recorded as a reduction to additional paid in capital.
14. This adjustment reflects all AT&T Corporate debt as outstanding on the pro
forma financial statements since such amounts are not legally assignable at
this time. Since certain amounts have been attributed to AT&T Communications
Services, Inc., a receivable for such amounts, as well as adjustments for
the related interest expense and interest income, have been reflected
herein.
15. Reflects certain Inter-Group transactions appropriately reflected in the
separate financial statements of AT&T after excluding AT&T Communications
Services, Inc. on a pro forma basis that were eliminated in the AT&T
consolidated financial statements and were therefore not reflected in AT&T's
historical results and financial position.
16. This entry reclasses the pro forma cash overdraft to accounts payable.
D-270
619
APPENDIX E
THE FOLLOWING IS THE TEXT OF SECTION 623 OF THE NEW YORK BUSINESS CORPORATION
LAW.
SEC.623. Procedure to enforce shareholder's right to receive payment for shares
(a) A shareholder intending to enforce his right under a section of this
chapter to receive payment for his shares if the proposed corporate action
referred to therein is taken shall file with the corporation, before the meeting
of shareholders at which the action is submitted to a vote, or at such meeting
but before the vote, written objection to the action. The objection shall
include a notice of his election to dissent, his name and residence address, the
number and classes of shares as to which he dissents and a demand for payment of
the fair value of his shares if the action is taken. Such objection is not
required from any shareholder to whom the corporation did not give notice of
such meeting in accordance with this chapter or where the proposed action is
authorized by written consent of shareholders without a meeting.
(b) Within ten days after the shareholders' authorization date, which term
as used in this section means the date on which the shareholders' vote
authorizing such action was taken, or the date on which such consent without a
meeting was obtained from the requisite shareholders, the corporation shall give
written notice of such authorization or consent by registered mail to each
shareholder who filed written objection or from whom written objection was not
required, excepting any shareholder who voted for or consented in writing to the
proposed action and who thereby is deemed to have elected not to enforce his
right to receive payment for his shares.
(c) Within twenty days after the giving of notice to him, any shareholder
from whom written objection was not required and who elects to dissent shall
file with the corporation a written notice of such election, stating his name
and residence address, the number and classes of shares as to which he dissents
and a demand for payment of the fair value of his shares. Any shareholder who
elects to dissent from a merger under section 905 (Merger of subsidiary
corporation) or paragraph (c) of section 907 (Merger or consolidation of
domestic and foreign corporations) or from a share exchange under paragraph (g)
of section 913 (Share exchanges) shall file a written notice of such election to
dissent within twenty days after the giving to him of a copy of the plan of
merger or exchange or an outline of the material features thereof under section
905 or 913.
(d) A shareholder may not dissent as to less than all of the shares, as to
which he has a right to dissent, held by him of record, that he owns
beneficially. A nominee or fiduciary may not dissent on behalf of any beneficial
owner as to less than all of the shares of such owner, as to which such nominee
or fiduciary has a right to dissent, held of record by such nominee or
fiduciary.
(e) Upon consummation of the corporate action, the shareholder shall cease
to have any of the rights of a shareholder except the right to be paid the fair
value of his shares and any other rights under this section. A notice of
election may be withdrawn by the shareholder at any time prior to his acceptance
in writing of an offer made by the corporation, as provided in paragraph (g),
but in no case later than sixty days from the date of consummation of the
corporate action except that if the corporation fails to make a timely offer, as
provided in paragraph (g), the time for withdrawing a notice of election shall
be extended until sixty days from the date an offer is made. Upon expiration of
such time, withdrawal of a notice of election shall require the written consent
of the corporation. In order to be effective, withdrawal of a notice of election
must be accompanied by the return to the corporation of any advance payment made
to the shareholder as provided in paragraph (g). If a notice of election is
withdrawn, or the corporate action is rescinded, or a court shall determine that
the shareholder is not entitled to receive payment for his shares, or the
shareholder shall otherwise lose his dissenters' rights, he shall not have the
right to receive payment for his shares and he shall be reinstated to all his
rights as a shareholder as of the consummation of the corporate action,
including any intervening preemptive rights and the right to payment of any
intervening dividend or other distribution or, if any such rights have expired
or any such dividend or distribution other than in
E-1
620
cash has been completed, in lieu thereof, at the election of the corporation,
the fair value thereof in cash as determined by the board as of the time of such
expiration or completion, but without prejudice otherwise to any corporate
proceedings that may have been taken in the interim.
(f) At the time of filing the notice of election to dissent or within one
month thereafter the shareholder of shares represented by certificates shall
submit the certificates representing his shares to the corporation, or to its
transfer agent, which shall forthwith note conspicuously thereon that a notice
of election has been filed and shall return the certificates to the shareholder
or other person who submitted them on his behalf. Any shareholder of shares
represented by certificates who fails to submit his certificates for such
notation as herein specified shall, at the option of the corporation exercised
by written notice to him within forty-five days from the date of filing of such
notice of election to dissent, lose his dissenter's rights unless a court, for
good cause shown, shall otherwise direct. Upon transfer of a certificate bearing
such notation, each new certificate issued therefor shall bear a similar
notation together with the name of the original dissenting holder of the shares
and a transferee shall acquire no rights in the corporation except those which
the original dissenting shareholder had at the time of transfer.
(g) Within fifteen days after the expiration of the period within which
shareholders may file their notices of election to dissent, or within fifteen
days after the proposed corporate action is consummated, whichever is later (but
in no case later than ninety days from the shareholders' authorization date),
the corporation or, in the case of a merger or consolidation, the surviving or
new corporation, shall make a written offer by registered mail to each
shareholder who has filed such notice of election to pay for his shares at a
specified price which the corporation considers to be their fair value. Such
offer shall be accompanied by a statement setting forth the aggregate number of
shares with respect to which notices of election to dissent have been received
and the aggregate number of holders of such shares. If the corporate action has
been consummated, such offer shall also be accompanied by (1) advance payment to
each such shareholder who has submitted the certificates representing his shares
to the corporation, as provided in paragraph (f), of an amount equal to eighty
percent of the amount of such offer, or (2) as to each shareholder who has not
yet submitted his certificates a statement that advance payment to him of an
amount equal to eighty percent of the amount of such offer will be made by the
corporation promptly upon submission of his certificates. If the corporate
action has not been consummated at the time of the making of the offer, such
advance payment or statement as to advance payment shall be sent to each
shareholder entitled thereto forthwith upon consummation of the corporate
action. Every advance payment or statement as to advance payment shall include
advice to the shareholder to the effect that acceptance of such payment does not
constitute a waiver of any dissenters' rights. If the corporate action has not
been consummated upon the expiration of the ninety day period after the
shareholders' authorization date, the offer may be conditioned upon the
consummation of such action. Such offer shall be made at the same price per
share to all dissenting shareholders of the same class, or if divided into
series, of the same series and shall be accompanied by a balance sheet of the
corporation whose shares the dissenting shareholder holds as of the latest
available date, which shall not be earlier than twelve months before the making
of such offer, and a profit and loss statement or statements for not less than a
twelve month period ended on the date of such balance sheet or, if the
corporation was not in existence throughout such twelve month period, for the
portion thereof during which it was in existence. Notwithstanding the foregoing,
the corporation shall not be required to furnish a balance sheet or profit and
loss statement or statements to any shareholder to whom such balance sheet or
profit and loss statement or statements were previously furnished, nor if in
connection with obtaining the shareholders' authorization for or consent to the
proposed corporate action the shareholders were furnished with a proxy or
information statement, which included financial statements, pursuant to
Regulation 14A or Regulation 14C of the United States Securities and Exchange
Commission. If within thirty days after the making of such offer, the
corporation making the offer and any shareholder agree upon the price to be paid
for his shares, payment therefor shall be made within sixty days after the
making of such offer or the consummation of the proposed corporate action,
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whichever is later, upon the surrender of the certificates [fig 1] for any such
shares represented by certificates.
(h) The following procedure shall apply if the corporation fails to make
such offer within such period of fifteen days, or if it makes the offer and any
dissenting shareholder or shareholders fail to agree with it within the period
of thirty days thereafter upon the price to be paid for their shares:
(1) The corporation shall, within twenty days after the expiration of
whichever is applicable of the two periods last mentioned, institute a special
proceeding in the supreme court in the judicial district in which the office of
the corporation is located to determine the rights of dissenting shareholders
and to fix the fair value of their shares. If, in the case of merger or
consolidation, the surviving or new corporation is a foreign corporation without
an office in this state, such proceeding shall be brought in the county where
the office of the domestic corporation, whose shares are to be valued, was
located.
(2) If the corporation fails to institute such proceeding within such
period of twenty days, any dissenting shareholder may institute such proceeding
for the same purpose not later than thirty days after the expiration of such
twenty day period. If such proceeding is not instituted within such thirty day
period, all dissenter's rights shall be lost unless the supreme court, for good
cause shown, shall otherwise direct.
(3) All dissenting shareholders, excepting those who, as provided in
paragraph (g), have agreed with the corporation upon the price to be paid for
their shares, shall be made parties to such proceeding, which shall have the
effect of an action quasi in rem against their shares. The corporation shall
serve a copy of the petition in such proceeding upon each dissenting shareholder
who is a resident of this state in the manner provided by law for the service of
a summons, and upon each nonresident dissenting shareholder either by registered
mail and publication, or in such other manner as is permitted by law. The
jurisdiction of the court shall be plenary and exclusive.
(4) The court shall determine whether each dissenting shareholder, as to
whom the corporation requests the court to make such determination, is entitled
to receive payment for his shares. If the corporation does not request any such
determination or if the court finds that any dissenting shareholder is so
entitled, it shall proceed to fix the value of the shares, which, for the
purposes of this section, shall be the fair value as of the close of business on
the day prior to the shareholders' authorization date. In fixing the fair value
of the shares, the court shall consider the nature of the transaction giving
rise to the shareholder's right to receive payment for shares and its effects on
the corporation and its shareholders, the concepts and methods then customary in
the relevant securities and financial markets for determining fair value of
shares of a corporation engaging in a similar transaction under comparable
circumstances and all other relevant factors. The court shall determine the fair
value of the shares without a jury and without referral to an appraiser or
referee. Upon application by the corporation or by any shareholder who is a
party to the proceeding, the court may, in its discretion, permit pretrial
disclosure, including, but not limited to, disclosure of any expert's reports
relating to the fair value of the shares whether or not intended for use at the
trial in the proceeding and notwithstanding subdivision (d) of section 3101 of
the civil practice law and rules.
(5) The final order in the proceeding shall be entered against the
corporation in favor of each dissenting shareholder who is a party to the
proceeding and is entitled thereto for the value of his shares so determined.
(6) The final order shall include an allowance for interest at such rate as
the court finds to be equitable, from the date the corporate action was
consummated to the date of payment. In determining the rate of interest, the
court shall consider all relevant factors, including the rate of interest which
the corporation would have had to pay to borrow money during the pendency of the
proceeding. If the court finds that the refusal of any shareholder to accept the
corporate offer of payment for his shares was arbitrary, vexatious or otherwise
not in good faith, no interest shall be allowed to him.
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(7) Each party to such proceeding shall bear its own costs and expenses,
including the fees and expenses of its counsel and of any experts employed by
it. Notwithstanding the foregoing, the court may, in its discretion, apportion
and assess all or any part of the costs, expenses and fees incurred by the
corporation against any or all of the dissenting shareholders who are parties to
the proceeding, including any who have withdrawn their notices of election as
provided in paragraph (e), if the court finds that their refusal to accept the
corporate offer was arbitrary, vexatious or otherwise not in good faith. The
court may, in its discretion, apportion and assess all or any part of the costs,
expenses and fees incurred by any or all of the dissenting shareholders who are
parties to the proceeding against the corporation if the court finds any of the
following: (A) that the fair value of the shares as determined materially
exceeds the amount which the corporation offered to pay; (B) that no offer or
required advance payment was made by the corporation; (C) that the corporation
failed to institute the special proceeding within the period specified therefor;
or (D) that the action of the corporation in complying with its obligations as
provided in this section was arbitrary, vexatious or otherwise not in good
faith. In making any determination as provided in clause (A), the court may
consider the dollar amount or the percentage, or both, by which the fair value
of the shares as determined exceeds the corporate offer.
(8) Within sixty days after final determination of the proceeding, the
corporation shall pay to each dissenting shareholder the amount found to be due
him, upon surrender of the certificates [fig 1] for any such shares represented
by certificates.
(i) Shares acquired by the corporation upon the payment of the agreed value
therefor or of the amount due under the final order, as provided in this
section, shall become treasury shares or be cancelled as provided in section 515
(Reacquired shares), except that, in the case of a merger or consolidation, they
may be held and disposed of as the plan of merger or consolidation may otherwise
provide.
(j) No payment shall be made to a dissenting shareholder under this section
at a time when the corporation is insolvent or when such payment would make it
insolvent. In such event, the dissenting shareholder shall, at his option:
(1) Withdraw his notice of election, which shall in such event be deemed
withdrawn with the written consent of the corporation; or
(2) Retain his status as a claimant against the corporation and, if it is
liquidated, be subordinated to the rights of creditors of the corporation, but
have rights superior to the non-dissenting shareholders, and if it is not
liquidated, retain his right to be paid for his shares, which right the
corporation shall be obliged to satisfy when the restrictions of this paragraph
do not apply.
(3) The dissenting shareholder shall exercise such option under
subparagraph (1) or (2) by written notice filed with the corporation within
thirty days after the corporation has given him written notice that payment for
his shares cannot be made because of the restrictions of this paragraph. If the
dissenting shareholder fails to exercise such option as provided, the
corporation shall exercise the option by written notice given to him within
twenty days after the expiration of such period of thirty days.
(k) The enforcement by a shareholder of his right to receive payment for
his shares in the manner provided herein shall exclude the enforcement by such
shareholder of any other right to which he might otherwise be entitled by virtue
of share ownership, except as provided in paragraph (e), and except that this
section shall not exclude the right of such shareholder to bring or maintain an
appropriate action to obtain relief on the ground that such corporate action
will be or is unlawful or fraudulent as to him.
(l) Except as otherwise expressly provided in this section, any notice to
be given by a corporation to a shareholder under this section shall be given in
the manner provided in section 605 (Notice of meetings of shareholders).
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(m) This section shall not apply to foreign corporations except as provided
in subparagraph (e)(2) of section 907 (Merger or consolidation of domestic and
foreign corporations).
THE FOLLOWING IS THE TEXT OF SECTION 910 OF THE NEW YORK BUSINESS CORPORATION
LAW.
SEC. 910. Right of shareholder to receive payment for shares upon merger or
consolidation, or sale, lease, exchange or other disposition of assets, or share
exchange
(a) A shareholder of a domestic corporation shall, subject to and by
complying with section 623 (Procedure to enforce shareholder's right to receive
payment for shares), have the right to receive payment of the fair value of his
shares and the other rights and benefits provided by such section, in the
following cases:
(1) Any shareholder entitled to vote who does not assent to the taking of
an action specified in [fig 1] clauses (A), (B) and (C).
(A) Any plan of merger or consolidation to which the corporation is a
party; except that the right to receive payment of the fair value of his shares
shall not be available:
(i) To a shareholder of the parent corporation in a merger authorized by
section 905 (Merger of parent and subsidiary corporations), or paragraph(c) of
section 907 (Merger or consolidation of domestic and foreign corporations); [fig
1] or
(ii) To a shareholder of the surviving corporation in a merger authorized
by this article, other than a merger specified in subclause (i), unless such
merger effects one or more of the changes specified in subparagraph (b)(6) of
section 806 (Provisions as to certain proceedings) in the rights of the shares
held by such shareholder [fig 1]; or
(iii) Notwithstanding subclause (ii) of this clause, to [fig 1] a
shareholder for the shares of any class or series of stock, which shares or
depository receipts in respect thereof, at the record date fixed to determine
the shareholders entitled to receive notice of the meeting of shareholders to
vote upon the plan of merger or consolidation, were listed on a national
securities exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc.
(B) Any sale, lease, exchange or other disposition of all or substantially
all of the assets of a corporation which requires shareholder approval under
section 909 (Sale, lease, exchange or other disposition of assets) other than a
transaction wholly for cash where the shareholders' approval thereof is
conditioned upon the dissolution of the corporation and the distribution of
substantially all of its net assets to the shareholders in accordance with their
respective interests within one year after the date of such transaction.
(C) Any share exchange authorized by section 913 in which the corporation
is participating as a subject corporation; except that the right to receive
payment of the fair value of his shares shall not be available to a shareholder
whose shares have not been acquired in the exchange or to a shareholder for the
shares of any class or series of stock, which shares or depository receipt in
respect thereof, at the record date fixed to determine the shareholders entitled
to receive notice of the meeting of shareholders to vote upon the plan of
exchange, were listed on a national securities exchange or designated as a
national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc.
(2) Any shareholder of the subsidiary corporation in a merger authorized by
section 905 or paragraph (c) of section 907, or in a share exchange authorized
by paragraph (g) of section 913, who files with the corporation a written notice
of election to dissent as provided in paragraph (c) of section 623.
(3) (Added, L 1997) Any shareholder, not entitled to vote with respect to a
plan of merger or consolidation to which the corporation is a party, whose
shares will be cancelled or exchanged in the merger or consolidation for cash or
other consideration other than shares of the surviving or consolidated
corporation or another corporation.
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