FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Transition Period From _________ to _________
Commission File Number 1-1105
AT&T CORP.
A NEW YORK I.R.S. EMPLOYER
CORPORATION NO. 13-4924710
32 Avenue of the Americas, New York, New York 10013-2412
Telephone Number 212-387-5400
Securities registered pursuant to Section 12(b) of the Act: See attached
SCHEDULE A.
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes....x.... No........
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not con-tained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
At February 28, 2001, the aggregate market value of voting common stock held by
non-affiliates was approximately $129.7 billion. At February 28, 2001,
3,807,460,036 shares of AT&T common stock, 362,750,025 shares of AT&T Wireless
Group tracking stock, 2,363,738,198 shares of Class A Liberty Media Group
tracking stock and 206,221,288 shares of Class B Liberty Media Group tracking
stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the registrant's definitive proxy statement dated March 29, 2001
issued in connection with the annual meeting of shareholders (Part III)
SCHEDULE A
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common Shares # New York, Boston, Chicago,
(Par Value $1 Per Share) #### Philadelphia and Pacific
# Stock Exchanges
AT&T Wireless Group Tracking Stock #
(common, Par Value $1 Per Share) #
#
Class A Liberty Media Group Tracking #### New York Stock Exchange
Shares (common, Par Value $1 Per Share) #
#
Class B Liberty Media Group Tracking #
Shares (common, Par Value $1 Per Share) #
Thirty-Five Year 5-1/8% Debentures, due #
April 1, 2001 #
#
Ten Year 7-1/8% Notes, due January 15, 2002 #
#
Three Year 61/2% Notes due September 15, 2002 #
#
Five Year 5 5/8% Notes due March 15, 2004 #
#
Ten Year 6-3/4% Notes, due April 1, 2004 #
#
Ten Year 7% Notes, due May 15, 2005 #
#
Twelve Year 7-1/2% Notes, due June 1, 2006 ###### New York Stock Exchange
#
Twelve Year 7-3/4% Notes, due March 1, 2007 #
#
Ten Year 6% Notes due March 15, 2009 #
#
Thirty Year 8-1/8% Debentures, due #
January 15, 2022 #
#
Thirty Year 8.35% Debentures, due #
January 15, 2025 #
#
Thirty-Two Year 8-1/8% Debentures, due #
July 15, 2024 #
#
Thirty Year 61/2% Notes due March 15, 2029 #
#
Forty Year 8-5/8% Debentures, due #
December 1, 2031 #
PART I
ITEM 1. BUSINESS.
GENERAL
AT&T Corp. was incorporated in 1885 under the laws of the State of New
York and has its principal executive offices at 32 Avenue of the Americas, New
York, New York 10013-2412 (telephone number 212-387-5400).
AT&T is among the world's communications leaders, providing voice, data
and video communications services to large and small businesses, consumers and
government entities. AT&T and its subsidiaries furnish domestic and
international long distance, regional, local and wireless communications
services, cable (broadband) television and Internet communications services.
AT&T also provides billing, directory, and calling card services to support its
communications business.
AT&T's primary lines of business are business services; consumer
services; broadband services; and wireless services. In addition, AT&T's other
lines of business include network management and professional services through
AT&T Solutions and international operations and ventures.
Internet users can access information about AT&T and its services at
www.att.com. Our web site is not a part of this Form 10-K.
AT&T has four classes or series of common stock outstanding. Throughout
this document:
o AT&T Wireless Group refers to the business, assets and
liabilities whose financial performance and economic value we
intend to reflect in the AT&T Wireless Group Tracking Stock;
o Liberty Media Group refers to the business, assets and
liabilities whose financial performance and economic value we
intend to reflect in the Liberty Media Group tracking stock;
o AT&T, the Company or the AT&T Common Stock Group refers to the
business, assets and liabilities whose financial performance and
economic value is not reflected in either of the two tracking
stocks and that we intend to reflect in the Common Stock; and
o AT&T Corp. refers to the combined legal entity.
RESTRUCTURING
On October 25, 2000, AT&T Corp. announced its intention to split-off
the AT&T Wireless Group from AT&T. In addition, AT&T announced its intention to
fully separate, or issue separate tracking stocks intended to reflect the
financial performance and economic value of, each of AT&T's other major units:
AT&T Broadband, AT&T Business Services and AT&T Consumer Services. AT&T Corp.
also announced its plan to distribute all the common stock it holds in Liberty
Media Corporation in exchange for all the outstanding shares of Liberty Media
Group tracking stock.
AT&T Corp. expects the separations of AT&T Wireless Group and Liberty
Media Corporation to occur around the middle of 2001. Later in the year, AT&T
Corp. plans to create and issue new tracking stocks intended to reflect the
financial performance and economic value of the AT&T Broadband unit and the AT&T
Consumer Services unit. Within about a year after the issuance of these new
tracking stocks, AT&T Broadband is expected to be fully separated from the rest
of AT&T. Upon that separation, the AT&T Business Services unit and the
separately tracked AT&T Consumer Services unit would constitute one publicly
traded company, and AT&T Broadband would constitute a separate publicly traded
company. The various elements of the plan are not conditioned on the successful
completion of all elements of the plan. Many of these steps, however, are
subject to conditions, including IRS rulings, shareholder approvals and other
uncertainties. If we fail to satisfy any conditions, or if other unforeseen
events intervene, some or all of our currently planned steps could occur on a
different timetable or on different terms than we currently contemplate, or
might not occur at all.
AT&T Wireless Group is a part of AT&T Corp. However, in connection with
AT&T Corp.'s restructuring plan, subject to specified conditions, AT&T Corp.
intends to split-off AT&T Wireless Group from AT&T Corp. These conditions
include the receipt of a favorable ruling on the split-off from the IRS and
satisfaction of conditions contained in AT&T's new $25 billion credit agreement,
including the repayment of AT&T Wireless Group's intercompany obligations to
AT&T.
AT&T Corp. expects that this split-off would be accomplished through
the following steps, any or all of which may be effected simultaneously:
o Transfer all of the assets and liabilities of AT&T Wireless
Group to AT&T Wireless Services, Inc.
o Mandatorily exchange, in accordance with the terms of AT&T's
charter, all issued and outstanding shares of AT&T Wireless
Group tracking stock for shares of AT&T Wireless Services
common stock.
o Mandatorily convert DoCoMo's interest in AT&T Corp.,
including its warrants, into shares of AT&T Wireless
Services common stock, or in the case of the warrants, into
warrants to purchase AT&T Wireless Services common stock.
o Distribute on a pro rata basis to holders of AT&T common
stock all shares of AT&T Wireless Services held by AT&T
other than any of these shares retained by AT&T or shares
subject to certain adjustment arrangements.
After the mandatory exchange is completed, holders of AT&T Wireless
Group tracking stock who do not hold shares of AT&T common stock will no longer
be shareholders of AT&T. In the mandatory exchange, those holders of AT&T
Wireless Group tracking stock will receive shares of common stock of AT&T
Wireless Services.
AT&T has announced its intention to retain up to $3 billion of the
shares of AT&T Wireless Services, Inc. for its own account for sale, exchange or
monetization within six months of the split-off, subject to receipt of a
satisfactory IRS ruling. AT&T Corp. does not plan to seek any vote of holders of
AT&T common stock or AT&T Wireless Group tracking stock for the split-off of
AT&T Wireless Services from AT&T Corp.
DEVELOPMENT OF BUSINESS DURING PAST FIVE YEARS
Separation
In 1996 AT&T separated its business into three publicly held
stand-alone companies: the current AT&T, focused on communications and
information services; Lucent Technologies Inc. (Lucent), focused on
communications systems and technology; and NCR Corporation (NCR), focused on
transaction-intensive computing. AT&T distributed to its shareowners all of the
shares AT&T owned of Lucent on September 30, 1996 and all of the shares of NCR
on December 31, 1996.
Asset Sales
Following the separation, AT&T focused on its core businesses and
disposed of assets and businesses that were not strategic. In October 1996, AT&T
completed the sale of its majority interest in AT&T Capital Corporation (leasing
services business). In 1997, AT&T completed the sales of AT&T Skynet (satellite
services), AT&T Tridom (satellite data and video communications services), and
its submarine systems business, as well as its investment in DirectTV
(direct-broadcast television service and DSS equipment business). In addition,
in 1998 AT&T sold AT&T Universal Card Services, Inc. (credit card services
business), American Transtech Inc. (customer care services), its investment in
LIN Television Corporation (commercial television broadcasting), and its
investment in SmarTone Telecommunications Holdings Limited (a wireless joint
venture in Hong Kong). In 1999, AT&T sold its interest in Wood-TV (commercial
television broadcasting), AT&T Language Line Services (over the phone
interpretation business) and ACC Corp.'s operations in Europe
(telecommunications services).
TCG Acquisition
During 1998, AT&T engaged in a series of transactions to further
transform the Company from one dominated by a single product, domestic long
distance telecommunications, to a fully integrated, any distance, broadband
communications service provider. In July 1998, AT&T completed the merger with
Teleport Communications Group (TCG) pursuant to which each share of TCG was
exchanged for AT&T Common Stock in an all-stock transaction. TCG was the largest
competitive local exchange carrier (CLEC) in the United States, offering
comprehensive telecommunications services in major metropolitan markets
throughout the United States.
TCI Acquisition
On March 9, 1999, AT&T completed the acquisition of
Tele-Communications, Inc. (TCI) in a merger. In the merger, AT&T acquired all
the business and assets of the TCI Group (now referred to as AT&T Broadband),
which consisted primarily of TCI's domestic cable and telecommunications
operations, as well as TCI's interest in At Home Corporation (Excite@Home) in
exchange for approximately 664 million shares of Common Stock. AT&T Common Stock
continues to represent an interest in the business and assets of the historical
AT&T together with those assets acquired in the merger.
In addition, at the time of the merger TCI combined Liberty Media
Group, its programming arm, and TCI Ventures Group, its technology investments
unit, to form the new Liberty Media Group. The shareowners of the new Liberty
Media Group were issued separate tracking stock rather than traditional Common
Stock by AT&T Corp. in exchange for the shares held in Liberty Media Group and
TCI Ventures Group. Under the tracking stock arrangement, the Liberty Media
Group's earnings and losses are excluded from earnings available to the holders
of Common Stock and the Liberty Media Group's businesses and assets are managed
by a separate operating Board of Directors. As a result, although the Liberty
Media Group is wholly owned by AT&T Corp., it is accounted for as an investment
under the equity method of accounting in the consolidated financial statements
of AT&T Corp. since AT&T does not have a "controlling financial interest" in the
Liberty Media Group.
IBM Global Network Acquisition
On April 30, 1999, AT&T completed the first phase of its acquisition of
the IBM Global Network business (renamed AT&T Global Network Services or AGNS)
by obtaining the IBM Global Network assets in the United States. The non-U.S.
assets were acquired in phases throughout 1999 and during the first quarter
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. At
the time of acquisition, AGNS served the networking needs of several hundred
large global companies, tens of thousands of mid-sized businesses and more than
one million individual Internet users in 59 countries.
Vanguard Acquisition
On May 3, 1999, AT&T acquired Vanguard Cellular Systems, Inc.
(Vanguard), an independent operator of wireless telephone systems in the United
States with over 700,000 subscribers and which operates in markets with a
population of approximately 6.9 million. Vanguard served 26 markets in the
Eastern United States. Consummation of the acquisition resulted in the issuance
of approximately 12.6 million shares of AT&T common stock and the payment of
approximately $485 million in cash.
Comcast Corporation Exchange
On May 4, 1999, AT&T and Comcast announced an agreement to exchange
various cable systems, designed to improve each company's geographic coverage by
better clustering its systems. On January 2, 2001 AT&T and Comcast completed the
transfer of cable systems serving a total of nearly 1.5 million customers. With
the completion of this transaction, Comcast assumed the ownership of AT&T
Broadband systems serving about 773,000 customers in the areas of Avalon, N.J.;
Detroit, Mich.; Naples and Fort Myers, Fla.; Pottsville, Penn.; Royal Oak, Mich;
and Washington, D.C. AT&T Broadband assumed ownership of select Comcast cable
systems serving approximately 700,000 customers in the areas of Atlanta, Ga.;
Broward County, Fla.; Chicago, Ill.; Longmont, Colo.; Sacramento, Calif.; and
Westmoreland, Penn.
Cox Communications, Inc. Exchange
On July 6, 1999, AT&T and Cox Communications, Inc. (Cox) signed an
agreement whereby AT&T would redeem approximately 50.3 million shares of AT&T
common stock held by Cox in exchange for cable television systems serving
approximately 312,000 customers, our interest in certain investments and
approximately $750 million in other consideration, including cash. The
transaction is valued at approximately $2.7 billion. The transaction closed in
March 2000.
Concert
On January 5, 2000 AT&T and British Telecommunications plc (BT)
announced the financial closure of a global venture to serve the communications
needs of multinational companies and the international calling needs of
businesses around the world. The venture, named Concert, is owned equally by
AT&T and BT and 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 and BT's multinational accounts in selected
industry sectors.
MediaOne Group, Inc. Acquisition
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.
At the time of the acquisition, MediaOne was one of the largest broadband
communications companies in the United States. For each share of MediaOne stock,
MediaOne shareholders 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, 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.
Wireless Acquistions
On June 19, 2000, the AT&T Wireless Group announced that it had signed
definitive agreements to acquire wireless systems in the San Francisco Bay Area,
San Diego and Houston for $3.3 billion in cash. On September 29, 2000, the AT&T
Wireless Group completed the acquisition of the wireless system in San Diego,
for approximately $500 million in cash. On June 29, 2000, the AT&T Wireless
Group completed the acquisition of Vodafone Airtouch plc's 50% partnership
interest in CMT Partners (the Bay Area Properties), which holds a controlling
interest in five Bay Area markets including San Francisco and San Jose, for
approximately $1.8 billion in cash, thereby giving the AT&T Wireless Group a
100% ownership interest in this partnership. On December 29, 2000, the AT&T
Wireless Group completed the acquisition of the Houston wireless system for
approximately $984 million in cash.
At Home Corporation
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 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. In January 2001, Cox
and Comcast exercised their put options in exchange for AT&T common stock. 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.
Also, in connection with the 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 will each
receive new warrants to purchase two Series A shares for each home its system
passes. These warrants will vest in installments every six months beginning in
June 2001, and be fully vested in June 2006, if Cox and Comcast elect to
continue their extended distribution agreements through that period.
AB Cellular
On December 29, 2000, AT&T Wireless completed the disposition of its
equity interest in AB Cellular to BellSouth. Prior to this 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. BellSouth
exercised an option available to them, 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.
BUSINESS SERVICES
Business Services provides 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 Internet
Protocol Services (including private line, frame relay, asynchronous transfer
mode services) as well as hosting, outsourcing and other consulting services.
Business Services has a dedicated sales force through which it
markets its voice and data communication services. Sales forces predominantly
are divided into geographic markets, and in each market focus on large,
multinational corporations, small businesses, government markets, and
value-added resellers and other wholesalers. Business Services employs full
service support teams to provide significant customer support and service to
ensure customer satisfaction and retention. A small number of its larger
accounts are served directly by Concert, with Business Services as an underlying
supplier to Concert.
Business Services offers its regulated services in most cases
in accordance with applicable tariffs filed with the Federal Communications
Commission (FCC) and various states. Rates can vary by a number of factors,
including the volume and nature of service committed to AT&T. AT&T expects to
offer its interstate services on a detariffed basis later this year. AT&T
Business Services offers voice and data services individually and in combination
with other offerings. Through combined offerings, AT&T provides customers with
benefits such as single billing, unified services for multilocation companies
and customized calling plans.
Voice Services
Long distance voice services. Business Services' voice communication
offerings include the traditional "one plus" dialing of domestic and
international long distance for customers that select AT&T as their primary long
distance carrier.
Business Services 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 offers a variety of
features to enhance customers' toll free service, including call routing by
origination point and time of day routing.
Business Services also offers a variety of calling cards which allow
the user to place calls from virtually anywhere in the world. Additional
features include prepaid calling 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: (i) local network services, which generally include
basic dial tone charges and private line services; (ii) network access services,
which consist of access charges received by local exchange carriers (LECs) from
long distance carriers for the local transport and termination portion of long
distance telephone calls; (iii) long distance network services, which include
the variable portion of charges received by local exchange carriers for
intra-LATA long distance calls; and (iv) additional value added services such as
caller identification, call waiting, call forwarding, three way calling and
voice mail.
AT&T Business Local's customers are principally
telecommunications-intensive businesses, healthcare, and educational
institutions, governmental agencies, long distance carriers and resellers,
Internet service providers, 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.
With a direct sales force in each of its markets, AT&T Business
Local initially targets the large telecommunications-intensive businesses
concentrated in the major metropolitan markets served by its networks. AT&T
Business Local also serves small- and medium-sized business customers.
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 offerings.
Customers also choose among analog, digital voice-only and ISDN Centrex
telephone lines to their desktops. AT&T 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.
Data and Internet Services
Business Services' 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 switch instead of switched access shared by many users.
These services permit customers to create internal computer networks, access
external computer networks and the Internet, as well as reduce originating
access costs.
Enhanced Data Communications. Enhanced data services consist of
interexchange 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. Enhanced data
services enable customers to economically and securely transmit large volumes of
data typically sent in bursts from one site to another. Enhanced data services
are utilized for local area network (LAN) interconnection, remote site, point of
sale and branch office communications solutions.
AT&T utilizes both IP and ATM systems. Both technologies offer
significant efficiencies over circuit switched systems which use a single,
dedicated circuit to complete each transmission. ATM switching is also a more
efficient method of switching and transmitting comingled or multimedia
information. The packet switching technology breaks up a transmission into short
pieces, or packets, which are encoded and transmitted with other packets on the
same circuit, and reassembled at the desired destination. ATM differs from IP in
that the data packets used in ATM (called cells) are one size (53 bytes) whereas
in IP the data packets vary in length. Also, whereas ATM 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 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 Internet Services. AT&T WorldNet Business
Services 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 (VPN) 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 VPNs to accommodate specific business applications, performance
requirements or the need to integrate with existing data networks.
AT&T Web Services are a family of hosting and transaction
services and platforms serving the web needs of thousands of businesses. Offers
include AT&T Shared Hosting Services, an economical way for businesses to
establish a presence on the World Wide Web, and AT&T Enhanced Web Development
Package for businesses that want to create web sites that require higher
performance and can support greater user demand. AT&T Dedicated Hosting Service
provides customizable and pre-packaged Web hosting solutions. AT&T SecureBuy
Service provides the backoffice infrastructure required to electronically
process credit card transactions online, high-speed links into two of the
leading credit card processing services, and management reports that measure a
site's success.
Other IP services AT&T offers let Web site visitors click on a
"call me now" icon if they wish to speak to a customer service agent; connect
enterprise networks that use host or LAN-based and browser-based e-mail systems
to AT&T's value-added messaging services such as e-mail and fax; and enhanced
fax services.
Transport
Business Services 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
to Internet service providers (ISPs) and Tier 1 and Tier 2 carriers on a
national or regional basis, as well as switchless resale services to Tier 3
carriers.
Wholesale networking service is typically provided pursuant to
long-term service agreements for terms of one year or longer. These agreements
generally provide for payments at fixed rates based on the capacity and length
of the circuit used. Customers are typically billed on a monthly basis and also
may incur an installation charge or certain ancillary charges for equipment.
After contract expiration, the contracts may be renewed or the services may be
provided on a month-to-month basis. Switched services agreements are generally
offered on a month-to-month basis and the service is billed on a minutes-of-use
basis. More recently, AT&T has also sold network capacity through indefeasible
rights of use agreements under which capacity is furnished for contract terms as
long as 25 years.
CONSUMER SERVICES
Long Distance Voice
AT&T is the leading provider of domestic and international long
distance service to residential consumers in the United States. AT&T provides
regular and custom long distance communications services which it offers
individually and in combination with other services.
AT&T 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 domestic and international long
distance services by the traditional "one plus" dialing of the desired call
destination, by dial-up access or through the 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 provides long distance
telecommunications services over AT&T's backbone network. International
telecommunications services are provided by submarine cable systems in which
AT&T holds investment positions, satellites and facilities of other domestic and
foreign carriers.
AT&T markets its consumer long distance services in a variety of ways,
including by means of television advertising, direct mail solicitations and
telephonic solicitations, as well as through brand awareness.
AT&T charges customers based on applicable tariffs filed with the FCC
and individual states. Customers select different services and from various rate
plans which determine the price per minute that they 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.
Consumer Local Services
Local carriers provide local exchange, calling features (such as call
waiting and three-way calling), voice mail, exchange access, toll, and other
services, including operator and directory assistance and emergency services
(911/E-911). Increasingly, local carriers are adding high speed data services to
their offerings, using digital subscriber loop ("DSL") technology. By attaching
extra electronics to both ends of a copper loop, local carriers can transform
the loop into a broadband gateway capable of supporting upstream and downstream
data feeds at high rates of speed.
By the end of 2000, AT&T offered local service to residential customers
using non facilities-based connectivity (resold/combined incumbent LEC (ILECs)
networks and services) in 8 states, and offered facilities-based cable telephony
services in 16 states. AT&T currently is testing DSL-based offerings to add to
its package of services. Notwithstanding its substantial efforts, AT&T continues
to experience significant difficulty entering local markets. AT&T's ability to
purchase combined network elements from the ILECs, one of the primary methods
AT&T intends to use to provide local service to residential customers, continued
to be severely hampered by, among other factors, ILEC-sponsored regulatory and
judicial actions, and lack of operating interfaces necessary to process network
element orders with ILECs. Despite strong customer demand for competitive choice
in local markets outside of AT&T's cable footprint, AT&T has suspended sales of
resold local service, and continues to provide network element non
facilities-based local service only in New York and Texas. AT&T will continue
its regulatory efforts to improve operating margins in the states where it
offers non-facilities-based local services, and will seek to open other states
to competitive opportunities (both for voice and data services) by improving the
rates, rules and operating interfaces that govern carrier relationships.
AT&T also has pursued local entry by transforming the cable
footprint of one-way cable plant into a two-way, broadband network capable of
meeting the full spectrum of residential customer communications needs,
including a richly featured all distance (i.e., local, long distance,
international) voice telephony offering. AT&T uses existing circuit switched
technology to provide telephony service offers over the cable plant in 18
markets spanning 16 states. AT&T expects to begin to transition to an integrated
Internet protocol (IP) packet data architecture by the end of 2003 that affords
cost and feature benefits over the older circuit-switched technology.
In addition, AT&T, through AT&T Consumer Services as well as
its other business units, may pursue other economically feasible transport
options, including:
o Expanding AT&T's ability to offer the full range of consumer
services beyond our existing cable footprint through a
variety of partnership and investment initiatives;
o Continued investment in alternative narrowband, wideband and
broadband access technologies, including the fixed wireless
technology that AT&T is currently testing in select markets,
and the construction of dedicated, high-capacity access
facilities to serve the broadband communication needs of
residential customers living in multiple dwelling units
(MDUs); and
o Using combinations of ILEC unbundled network elements, as
well as ILEC unbundled loops (which can be combined with
switching, transport and other network elements) to support
differentiated voice and data services.
AT&T uses the AT&T Broadband sales force actively to solicit
cable customers as local service customers. AT&T intends to offer cable and
local telephony as a services package to those customers who find this
appealing. AT&T will market local service in other areas as it rolls out its
local telephony capabilities.
AT&T currently offers its local subscribers a suite of offers
including "blocks of time" for toll and long distance calls at a flat price, or
per minute charges using one of AT&T's competitive service offerings.
AT&T WorldNet(R) Consumer Services
AT&T offers dial-up Internet access to consumers through its
award-winning AT&T WorldNet Services, a leading provider of Internet access
service in the United States. At December 31, 2000, AT&T WorldNet Service had
approximately 1.423 million customers.
In 1999, AT&T WorldNet Service began offering members an AT&T
branded search engine as part of a redesign of the Company's web site, 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
e-mail ids per account, 60 megabytes of disk storage) and providing a template
that helps members build personal web pages quickly and easily.
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 were 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 Internet Service Providers in their 2000
National Internet Service Provider Customer Satisfaction StudySM based on 4,173
responses. AT&T 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's outstanding dial-up
speed, high connection success rate, extras like multiple e-mail boxes, and
superior support.
AT&T WorldNet Services generates revenues principally through
subscription and usage fees, as well as from electronic commerce and advertising
revenues. 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. In addition, WorldNet offers a plan
without a usage restriction.
AT&T WorldNet Service's marketing programs are designed to attract and
retain profitable customers. AT&T 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 on millions of software titles
published by independent software vendors. AT&T WorldNet Service also has a
co-branded ISP offer enabling businesses to offer customers their own branded,
full-featured Internet access in affiliation with AT&T.
BROADBAND SERVICES
AT&T Broadband offers a variety of services through its cable broadband
network, including traditional analog video and new services such as digital
cable, AT&T@Home and RoadRunner (which AT&T has agreed to divest, as described
below), which offers high-speed cable Internet service. Also included in AT&T
Broadband are the operations associated with developing and refining the
infrastructure that support broadband telephony.
Cable television systems receive video, audio and data signals
transmitted by nearby television and radio broadcast stations, terrestrial
microwave relay services and communications satellites. Such signals are then
amplified and distributed by coaxial cable and optical fiber to the premises of
customers who pay a fee for the service. In many cases, cable television systems
also originate and distribute local programming.
At December 31, 2000 over 75% of AT&T Broadband's cable television
systems had bandwidth capacities of at least 550 megahertz, with the majority of
the network upgraded to 750 megahertz. The Company's cable television systems
generally carry up to 80 analog channels. Compressed digital video technology
converts on average twelve analog signals (now used to transmit video and voice)
into a digital format and compresses such signals (which is accomplished
primarily by eliminating the redundancies in television imagery) into the space
normally occupied by one analog signal. The digitally compressed signal is
uplinked to a satellite, which retransmits the signal to a customer's satellite
dish or to a cable system's headend to be distributed, via optical fiber and
coaxial cable, to the customer's home. At the home, a set-top video terminal
converts the digital signal into analog channels that can be viewed on a normal
television set.
Domestic Basic-TV cable customers served by AT&T Broadband are
summarized as follows (amounts in millions):
Basic-TV customers at December 31,
----------------------------------------------
2000 1999 1998 1997 1996
---- -------- -------- -------- ------
Managed through AT&T Broadband's operating
divisions 16.0 11.4 11.4 14.2 13.4
Other non-managed subsidiaries of AT&T Broadband
7.6 0.1 0.5 0.2 0.5
----- ------- ------- ------- -------
23.6 11.5 11.9 14.4 13.9
==== ======= ======= ======= =======
In addition to the above, the FCC has taken the position that AT&T
Broadband is attributed with the subscribers of (i) Time Warner Entertainment
and Time Warner, Inc. as a consequence of the acquisition of MediaOne, Inc. and
(ii) various other entities as a consequence of AT&T's investments in those
entities. As of December 31, 2000 the aggregate attributable subscribers is
11.22 million.
AT&T Broadband had approximately 2.9 million digital video customers
and 1.1 million high speed cable Internet customers through Excite@Home and Road
Runner as of December 31, 2000.
AT&T Broadband completed a significant number of transactions in 2000
which substantially changed the size and profile of its cable system network.
On January 18, 2000, a subsidiary of AT&T Broadband sold its entire 50
percent interest in Lenfest Communications, Inc. to a subsidiary of Comcast. In
consideration for its 50 percent interest, AT&T Broadband received 47,289,843
shares of Comcast Special Class A common stock, which had a value of $2.51
billion at the time of the transaction.
On February 14, 2000, AT&T Broadband redeemed a portion of its interest
in Bresnan for $285 million in cash. AT&T Broadband then contributed its
remaining interest in Bresnan to CC VIII, LLC, in exchange for a preferred
ownership interest.
On March 15, 2000, AT&T Broadband redeemed approximately 50.3 million
shares of Common Stock held by Cox in exchange for stock of a subsidiary of AT&T
Broadband owning cable television systems serving over 300,000 customers, AT&T
Broadband's interest in certain investments, and $750 million in other assets,
including cash. This transaction was valued at approximately $2.7 billion.
On April 7, 2000, AT&T Broadband contributed 103,000 subscribers into a
joint venture with Midcontinent Communications, Inc. in exchange for a 50
percent interest in Midcontinent Communications, a general partnership.
On June 15, 2000, MediaOne Group, Inc. merged into a direct subsidiary
of AT&T Broadband. With the addition of MediaOne's five million cable
subscribers, AT&T Broadband became the country's largest cable television
operator.
Effective December 31, 2000, AT&T Broadband transferred systems serving
approximately 733,000 subscribers and located primarily in Michigan and Naples,
Florida, to Comcast in exchange for systems serving approximately 700,000
subscribers and located primarily in Florida and Chicago, Illinois.
On January 5, 2001, AT&T Broadband sold 99,000 subscribers to Insight
Communications, Inc. (Insight Communications). In a subsequent transaction, AT&T
Broadband contributed 250,000 additional subscribers in the Illinois markets to
Insight Midwest, L.P., and Insight Communications also contributed additional
subscribers. Insight Midwest, L.P. remained a partnership owned 50 percent by
AT&T Broadband and 50 percent by Insight Communications. The expanded joint
venture will continue to be managed by Insight Communications.
Also on January 5, 2001, AT&T and Cablevision announced the completion
of two separate agreements for the transfer of cable systems. In the
transactions, AT&T received cable systems serving 358,000 subscribers in Boston
and Eastern Massachusetts. In return, Cablevision acquired systems serving
approximately 130,000 subscribers in the northern New York suburbs, and
approximately $870 million in stock, or 44 million shares of AT&T common stock,
and approximately $300 million in cash.
On February 27, 2001, AT&T Broadband announced that AT&T Broadband had
entered into definitive asset purchase agreements with Mediacom Communications
Corporation (Mediacom) pursuant to which AT&T Broadband will sell to Mediacom
cable television systems serving about 840,000 basic subscribers in Georgia,
Illinois, Iowa and Missouri, for $2.215 billion in cash.
On February 28, 2001, AT&T Broadband announced that AT&T Broadband and
Charter Communications, Inc. (Charter) had signed definitive agreements pursuant
to which (i) Charter will receive cable systems from AT&T serving approximately
574,000 customers in the St. Louis area; areas of Auburn, Birmingham, Montgomery
and Selma, Alabama; and the Reno area of Nevada and California; and (ii) AT&T
Broadband will receive $1.79 billion consisting of Charter cable systems valued
at $249 million serving 62,000 customers in Miami Beach and Sebastian, Florida;
up to $500 million in Charter common stock; and the balance in cash.
The decline in total basic service customers between 1997 and 1998 is
attributable to certain contribution transactions entered into in 1998. In the
most significant of these transactions, on March 4, 1998, AT&T Broadband
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 (the Cablevision Transaction) and the
assumption of indebtedness.
In addition to the Cablevision Transaction, during 1998 AT&T Broadband
also completed eight transactions whereby AT&T Broadband contributed cable
television systems serving in the aggregate approximately 1,924,000 customers to
eight separate joint ventures (collectively, the 1998 Joint Ventures) in
exchange for non-controlling ownership interests in each of the 1998 Joint
Ventures, and the assumption and repayment by the 1998 Joint Ventures of
indebtedness.
AT&T Broadband operates cable television systems throughout the United
States.
Service Charges
AT&T Broadband offers a limited "basic service" (primarily comprised of
local broadcast signals and public, educational and governmental (PEG) access
channels) and a "standard package" (primarily comprised of basic service and
specialized programming services, in such areas as health, family entertainment,
religion, news, weather, public affairs, education, shopping, sports and music).
The monthly fee for basic service generally ranges from $7.50 to $12.00, and the
monthly service fee for the standard package generally ranges from $22.50 to
$36.00. Many of the systems acquired in the MediaOne acquisition also offered a
third tier of service which generally ranged from $2.00 to $6.00. AT&T Broadband
offers "premium services" (referred to in the cable television industry as
"Pay-TV" and "pay-per-view") to its customers. Such services consist principally
of feature films, as well as live and taped sports events, concerts and other
programming. AT&T Broadband also offers Pay-TV services for a monthly fee.
Charges are usually discounted when multiple Pay-TV services are ordered.
Customers may also elect to subscribe to digital video services comprised of up
to 80 additional video channels and between 10 and 30 additional audio channels
featuring additional specialized programming and premium services at an average
incremental monthly charge of $10.00.
As further enhancements to their cable services, for a monthly charge
customers may generally rent converters or converters with remote control
devices, as well as purchase a channel guide. Also a nonrecurring installation
charge is usually charged.
Monthly fees for basic services, standard package services and Pay-TV
services to commercial customers vary widely depending on the nature and type of
service. Except under the terms of certain contracts to provide service to
commercial accounts, customers are free to discontinue service at any time
without penalty.
AT&T Broadband also offers AT&T@Home and Road Runner high speed cable
Internet services in some markets. Monthly charges for AT&T@Home and Road Runner
range from $29.95 to $49.95, which includes, under certain offerings, the charge
for rental of cable modem equipment.
The Cable Television Consumer Protection and Competition Act of 1992
(the 1992 Cable Act) and the Telecommunications Act of 1996 (the
Telecommunications Act, together with the 1992 Cable Act, the Cable Acts),
established rules under which AT&T Broadband's basic service rates and equipment
and installation charges are regulated if the appropriate franchise authority is
certified.
Local Franchises
Cable television systems generally are constructed and operated under
the authority of nonexclusive permits or "franchises" granted by local and/or
state governmental authorities. Federal law, including the Cable Communications
Policy Act of 1984 (the 1984 Cable Act) and the 1992 Cable Act, limits the power
of the franchising authorities to impose certain conditions upon cable
television operators as a condition of the granting or renewal of a franchise.
Franchises contain varying provisions relating to construction and
operation of cable television systems, such as time limitations on commencement
and/or completion of construction; quality of service, including (in certain
circumstances) requirements as to the number of channels and broad categories of
programming offered to customers; rate regulation; provision of service to
certain institutions; provision of channels for public access; and maintenance
of insurance and/or indemnity bonds. AT&T Broadband's franchises also typically
provide for periodic payments of fees, not to exceed 5% of revenue, to the
governmental authority granting the franchise. Additionally, many franchises
require payments to the franchising authority for the funding of public,
educational and governmental access channels. Franchises usually require the
consent of the franchising authority prior to a transfer of the franchise or a
transfer or change in ownership or operating control of the franchisee.
Subject to applicable law, a franchise may be terminated prior to its
expiration date if the cable television operator fails to comply with the
material terms and conditions thereof. Under the 1984 Cable Act, if a franchise
is lawfully terminated, and if the franchising authority acquires ownership of
the cable television system or effects a transfer of ownership to a third party,
such acquisition or transfer must be at an equitable price or, in the case of a
franchise existing on the effective date of the 1984 Cable Act, at a price
determined in accordance with the terms of the franchise, if any.
In connection with a renewal of a franchise, the franchising authority
may require the cable operator to comply with different and more stringent
conditions than those originally imposed, subject to the provisions of the 1984
Cable Act and other applicable federal, state and local law. The 1984 Cable Act,
as supplemented by the renewal provisions of the 1992 Cable Act, establishes an
orderly process for franchise renewal which protects cable operators against
unfair denials of renewals when the operator's past performance and proposal for
future performance meet the standards established by the 1984 Cable Act. AT&T
Broadband believes that its cable television systems generally have been
operated in a manner which satisfies such standards and allows for the renewal
of such franchises; however, there can be no assurance that the franchises for
such systems will be successfully renewed as they expire.
Most of AT&T Broadband's present franchises had initial terms of
approximately 10 to 15 years. The duration of AT&T Broadband's outstanding
franchises presently varies from a period of months to an indefinite period of
time. More than fifteen hundred of AT&T Broadband's franchises expire within the
next three years. This represents more than 35% percent of the franchises held
by AT&T Broadband and involves over four million basic customers.
Cable Telephony
AT&T Broadband's telephony market initiatives progressed substantially
in 2000. As of December 31, 2000, AT&T Broadband had approximately 547,000
telephony customers in 17 markets. The markets in which Broadband telephony
service is available are: Atlanta, Boston, the California Bay Area, Chicago,
Dallas, Denver, Detroit, Florida, Pittsburgh, Richmond, Seattle, Salt Lake City,
St. Louis, Southern California and Portland, Oregon. AT&T Broadband's Telephony
offerings include AT&T Digital Phone local phone service, unlimited local
calling, low in-state long distance calling rates, By the Minute (BTM) and Block
of Time (BOT) calling plans, up to 4 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 offers a variety of options and calling plans with various price
points to meet our customer's needs. They range from basic one line service to
multiple lines with full feature functionality.
Joint Ventures
AT&T Broadband possesses a number of investments in publicly held
companies, joint ventures or partnerships, the three most significant of which
are At Home Corporation, Time Warner Entertainment Company, L.P., and Road
Runner LLC.
At Home Corporation. At Home Corporation 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 into Series B shares, each of which has ten votes.
As a result, AT&T Broadband has, on a fully diluted basis, approximately 23
percent of the economic interest and 74 percent of the voting interest in
Excite@Home. AT&T's interest reflects modifications to Excite@Home's governance
structure which were effective on September 1, 2000. Based upon these governance
changes, Excite@Home's financial results, which previously were accounted for by
AT&T as a nonoperational equity investment are now fully consolidated and
included in AT&T's financial results. On January 12, 2001, Comcast and Cox
exercised their right to sell a total of approximately 60 million shares of
Excite@Home to AT&T as part of the agreement to reorganize Excite@Home
governance.
Time Warner Entertainment Company, L.P. ("TWE"). TWE is a Delaware
limited partnership that was formed in 1992 to own and operate substantially all
of the business of Warner Bros., Home Box Office and the cable television
businesses owned and operated by Time Warner prior to such time. AT&T's current
interest in TWE was initially acquired by U S WEST, Inc. in 1993, and was
acquired by AT&T in connection with its 2000 acquisition of MediaOne Group, Inc.
Currently, AT&T, through its wholly owned subsidiaries, owns general and limited
partnership interests in 25.51% of the pro rata priority capital ("Series A
Capital") and residual equity capital ("Residual Capital") of TWE. The remaining
74.49% limited partnership interests in the Series A Capital and Residual
Capital of TWE are held by subsidiaries of AOL Time Warner Inc. AT&T has an
option to increase its Series A Capital and Residual Capital interests from
25.51% to up to 31.84% in certain events. Subsidiaries of AOL Time Warner Inc.
act as the general partners of TWE, and AT&T has only certain protective
governance rights pertaining to certain limited significant matters relating to
TWE.
On February 28, 2001, AT&T submitted a request to TWE, pursuant to the
TWE partnership agreement, that TWE 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 (the
"Registrable Amount"). Under the TWE partnership agreement, upon such request,
AT&T and Time Warner Inc. are to cause an independent investment banker to
determine both the Registrable Amount and the price at which the Registrable
Amount could be sold in a public offering (the "Appraised Value"). Upon
determination of the Registrable Amount and the Appraised Value, TWE may elect
not to register such interests but instead to allow AT&T the option to require
that TWE purchase the Registrable Amount at the Appraised Value, subject to
certain adjustments. If AT&T does put the Registrable Amount to TWE under such
circumstances, TWE may call the remainder of AT&T's interest in TWE at a price
described in the TWE partnership agreement. If TWE elects to register the
interests, TWE may have an option to purchase such interests immediately prior
to the time such 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
TWE, AT&T will have the right to request registration of such interests for
public sale within 60 days of July 1, 2002.
Road Runner LLC. Road Runner LLC is a limited liability company formed
in 1998 by affiliates of MediaOne Group, Time Warner, Advance/Newhouse,
Microsoft and Compaq, for purposes of developing and distributing internet
services over the cable television infrastructure. AT&T acquired a 25.1%
interest in Road Runner as part of its 2000 acquisition of MediaOne Group, Inc.
As a condition to its approval of AT&T's acquisition of MediaOne, the Department
of Justice required that AT&T agree to divest its ownership its interest in Road
Runner within certain specified time frames specified. AT&T, Time Warner and
Advance Newhouse approved a resolution of the Members' Committee of Road Runner
effective December 29, 2000, declaring the dissolution of Road Runner. As a
result of such resolution, Road Runner commenced the winding up of its business
in accordance with its organizational documents, which winding up is expected to
be completed approximately March 31, 2001. AT&T has a 31.4% residual interest in
all Road Runner assets and liabilities following the winding up. AT&T has
entered into a Transitional Affiliation Agreement with an affiliate of AOL Time
Warner effective December 15, 2000, under which AT&T will receive transition
support services sufficient to provide uninterrupted internet service to AT&T's
existing Road Runner subscribers.
WIRELESS SERVICES
The AT&T Wireless Group Tracking Stock
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. 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."
AT&T Wireless Group tracking stock is designed to reflect the separate
economic performance of the AT&T Wireless Group. Except as described below, we
attribute all of AT&T's current wireless operations to the AT&T Wireless Group,
including:
o all mobile and fixed wireless licenses,
o all wireless networks, operations, cell sites, retail operations,
wireless customer care facilities and customer location assets, and
o interests in partnerships and affiliates providing wireless mobile
communications in the United States and internationally.
The AT&T Common Stock Group retains:
o existing and future wireless activities that stem from
country-specific joint venture relationships that are predominantly
non-wireless, and
o incidental wireless capabilities or links in any backbone or other
communications network that is predominantly non-wireless.
We currently intend, until and through the date of the proposed
split-off, to include all future wireless activities in the AT&T Wireless Group.
Our board of directors may, however, in its discretion, but subject to the AT&T
Wireless Group policy statement, direct new businesses and assets to the AT&T
Wireless Group or the AT&T Common Stock Group or dispose of or transfer
businesses or assets of either group.
Please see Exhibit (99)a to this Form 10-K for supplemental information
concerning the AT&T Wireless Group.
Business of the AT&T Wireless Group
AT&T Wireless Group is one of the largest wireless service providers in
the United States. AT&T Wireless Group seeks to provide high quality, innovative
wireless services and to expand its customer base and revenue stream by
attracting subscribers who are heavy users of communication services. As of, or
for the year ended, December 31, 2000, AT&T Wireless Group had:
o 15.2 million consolidated subscribers,
o $10.4 billion of combined revenues, and
o $1.6 billion of combined operational EBITDA.
AT&T Wireless Group operates one of the largest U.S. digital wireless
networks. As of December 31, 2000, AT&T Wireless Group and its affiliates and
partners held 850 megahertz and 1900 megahertz licenses to provide wireless
services covering 98% of the U.S. population. As of December 31, 2000,
approximately 77% of the U.S. population was covered by at least 30 megahertz of
wireless spectrum owned by AT&T Wireless Group, its affiliates or its partners.
At the end of 2000, AT&T Wireless Group's networks and those of its affiliates
and partners operated in markets including over 76% of the U.S. population and
in 49 of the 50 largest U.S. metropolitan areas. AT&T Wireless group supplements
its operations with roaming agreements that allow its subscribers to use other
providers' wireless services in regions where it does not have operations. With
these roaming agreements, AT&T Wireless Group is able to offer customers
wireless services covering over 95% of the U.S. population. AT&T Wireless Group
plans to continue to increase its coverage and the quality of its services by
expanding its footprint and the capacity of its network through new network
construction, acquisitions, and partnerships with other wireless providers.
Services and products
AT&T Wireless Group offers a variety of services for both voice and
data communications. Service can include wireless voice transmission as well as
custom calling services for digital services, such as extended battery life,
message waiting indicator, text messaging and caller ID. AT&T Wireless Group
also offers a variety of other enhanced features, including enhanced directory
assistance, which enables callers to be connected to the party whose number was
sought without hanging up and redialing.
As a packet-switched data network, AT&T Wireless Group's current data
network takes advantage of the fact that with many data applications, data is
sent in bursts with intermittent quiet periods, which allows many users to share
the network channel. As a result, relative to data services carried over
circuit-switched analog or digital wireless networks, AT&T Wireless Group's
packet-switched data service is a significantly more cost-effective means of
sending data for the majority of applications because it allows a channel to be
shared by many users. For example, for many applications, AT&T Wireless Group's
packet-switched data network allows it to offer its customers unlimited usage,
most often for a flat monthly fee. This makes the data service on this network
service attractive for a variety of new applications.
AT&T Wireless Group has created applications and offers using the
cellular digital packet data network for businesses, public agencies and
consumers. To date, corporations and public agencies have been significant users
of AT&T Wireless Group's packet data service. These customers typically use this
service to carry industry-specific applications. Examples of such applications
include public safety applications, dispatch applications, wireless credit card
validation and automated vehicle location services. New devices are driving the
development of broader applications targeted to consumers. Users may access
these applications with hand held devices, like the Palm Vx, as well as phones
and laptop computers.
For hand held devices, AT&T Wireless Group now has access to new
CDPD-standard modems that work with the Palm Vx device. Users can access
Internet-based information from devices equipped with these modems. A leading
example of this is the OmniSky service available for the Palm Vx. With a Palm Vx
equipped with a modem that connects to AT&T Wireless Group's current packet data
network, an OmniSky subscriber can access email as well as several hundred
content providers that have created information specifically for hand held
devices.
AT&T Wireless Group offers a variety of products as complements to its
wireless service, including handsets and accessories, such as chargers,
headsets, belt clips, faceplates and batteries. As part of its basic service
offering, AT&T Wireless Group provides easy-to-use, interactive menu-driven
handsets that can be activated over the air. These handsets primarily feature
word prompts and menus rather than numeric codes to operate handset functions.
Some handsets allow mobile access to the Internet. In addition, AT&T Wireless
Group offers tri-mode handsets, which are handsets compatible with analog and
digital networks, the latter with 850 and 1900 megahertz frequencies and service
modes. Tri-mode handsets permit customers to roam across a variety of wireless
networks and incorporate AT&T Wireless Group's proprietary intelligent roaming
data base system, which is designed to provide service in more areas at
favorable roaming rates. AT&T Wireless Group offers its customers use of Nokia,
Ericsson, Mitsubishi and Motorola handsets.
AT&T Wireless Group markets its wireless services in its managed
markets under the AT&T brand name. It markets wireless services to business and
residential customers through a direct sales force of 2,100, through sales
points of presence in approximately 520 AT&T Wireless Group company-owned stores
located in 37 states, and kiosks and other customer points of presence,
including the Internet and inbound call centers, and through local and national
non-affiliated retailers throughout the United States. AT&T's sales force may
sell wireless services to business and residential customers as part of bundled
offerings with services of AT&T when agreed upon by the companies. AT&T Wireless
Group also relies upon dealers to market its services in some locations.
AT&T Wireless Group charges may include fees for service activation,
monthly access, per-minute airtime and customer-calling features, which may
include a fixed number of minutes or packets of data per month at a set price
and generally offers a variety of pricing options, most of which combine a fixed
monthly access fee for a fixed number of minutes or packets of data and
additional charges for usage in excess of those allotted. Customers may also
incur long distance and roaming fees. AT&T Wireless Group manages its exposure
to bad debt by reviewing prospective customers for creditworthiness and by
deactivating accounts which reach a specific date past due.
In calendar year 2000, AT&T Wireless Group adjusted its credit policies to be
more competitive, thereby increasing the number of customers with lower credit
ratings. AT&T Wireless Group expects that this may result in an increase in the
number of deactivations and, consequently, churn.
Fixed Wireless
Fixed wireless service provides customers with high speed packet data
channel which can be used by up to five data devices simultaneously (for
example, five personal computers simultaneously accessing the Internet) at
download speeds of up to one megabit per second. In addition, fixed wireless can
provide up to four lines of wireline quality voice telephony, including custom
calling features (e.g., call waiting, caller ID, three-way calling) available
today over wireline networks. As of December 31, 2000, AT&T Wireless Group was
serving fixed wireless customers in Anchorage, Alaska, Dallas/Ft. Worth and
Houston, Texas, and San Diego, California.
Other assets
The AT&T Wireless Group also possesses certain other assets not
described above. The most significant of these assets include a number of equity
interests in domestic and international wireless operations and an air-to-ground
wireless operation.
Domestically, the AT&T Wireless Group has joint ventures with or
interests in a number of wireless operators, including American Cellular
Corporation, Cincinnati Bell Wireless, LLC, Telecorp PCS and Triton PCS.
Internationally, the AT&T Wireless Group owns one half of the 33.3% equity stake
in Rogers Cantel it holds jointly with British Telecommunications. The AT&T
Wireless Group is the operating partner in wireless ventures in Colombia, India
and Taiwan. In 2000, the AT&T Wireless Group was also allocated one half the
interest that AT&T possesses in Japan Telecom, which it agreed to sell in
February 2001.
The Aviation Communications Division (ACD) of the AT&T Wireless Group
provides air-to-ground communications services. A minority ownership interest in
ACD is held by Rogers Cantel. ACD owns and operates a network of ground-based
and airborne telecommunications equipment and related assets that deliver
digital telephone service to commercial and private aircraft in North America.
Wireless network
The AT&T Wireless Group's ownership position in U.S. markets was
obtained through FCC auctions and the FCC lottery and settlement process as well
as through acquisitions of, and purchases and exchanges of, operating systems
and licenses from or with other wireless service licensees.
AT&T Wireless Group has made certain commitments to provide funding for
successful bids of Alaska Native Wireless, L.L.C. for the C and F Block
reauction (FCC Auction 35) which ended January 26, 2001. At the conclusion of
the auction, Alaska Native Wireless was the high bidder on approximately $2.9
billion in licenses. One auction participant challenged the qualifications of
Alaska Native Wireless to acquire "closed" licenses, which constituted most of
the licenses for which Alaska Native Wireless was the successful bidder. In
addition, the trustee in NextWave Telecom, Inc.'s Chapter 11 bankruptcy
proceeding, and the unsecured creditors of NextWave, are challenging the right
of the FCC to re-auction the 1900 megahertz licenses that NextWave acquired in
prior FCC auctions but which were later reclaimed by the FCC. Either of these
proceedings could result in a delay in the grant of licenses to successful
bidders or revocation of any licenses, including those won or acquired by Alaska
Native Wireless. AT&T Wireless Group has committed to provide funding of $2.6
billion in exchange for a combination of a non-controlling equity interest and
debt securities of Alaska Native Wireless to fund its purchase of these
licenses. AT&T Wireless Group's own spectrum, together with the spectrum of its
affiliates and the spectrum on which Alaska Native Wireless was the high bidder
in the recently completed FCC spectrum auction, would be sufficient to serve
over 85 of the top 100 markets with AT&T Wireless Group's selected third
generation technology, UMTS. Although Alaska Native Wireless is obligated to use
technology that is compatible and interoperable with AT&T Wireless Group's
digital mobile wireless network, no commitments have been made by Alaska Native
Wireless to AT&T Wireless Group concerning the deployment of the licenses for
which it was high bidder, and not all affiliates may be obligated to implement
AT&T Wireless Group's third generation technology strategy. Under certain
conditions, and in addition to other means by which they may transfer their
interests, the other owners of Alaska Native Wireless have the right to require
us to purchase their equity interests. If this right were exercised five years
after license grant, the price could be as much as approximately $950 million
and would be payable, at our option, in cash or marketable securities. The
amount would be less if the right were exercised earlier. Formal grant to Alaska
Native Wireless of the licenses successfully bid upon in the auction has not yet
occurred and is subject to administrative procedures.
Mobile voice network
Coverage. As of December 31, 2000, the AT&T Wireless Group's built
network, including partnership and affiliate markets, covered 98% of the U.S.
population, including operations in 49 of the 50 largest U.S. metropolitan
areas. The AT&T Wireless operates using both 850 megahertz and 1900 megahertz
licenses. Where agreements are in place, the AT&T Wireless Group is able to
offer service to customers of other wireless providers when they travel through
its service area, and AT&T Wireless Group subscribers can roam through other
wireless providers' service areas.
Analog and digital technologies. The AT&T Wireless Group offers both
analog and digital service in its 850 megahertz markets and digital service in
its 1900 megahertz markets. The AT&T Wireless Group believes that digital
technology offers many advantages over analog technology, including
substantially increased network capacity, greater call privacy, enhanced
services and features, lower operating costs, reduced susceptibility to fraud
and the opportunity to provide improved data transmissions. Moving customers to
digital service has been a key component of the AT&T Wireless Group's overall
wireless strategy. Digital service enables the AT&T Wireless Group to provide
added benefits and services to its customers, including extended battery life,
caller ID, text messaging and voicemail with message waiting indicator.
TDMA network. The AT&T Wireless Group has chosen time division multiple
access (TDMA) technology for its second generation voice digital network,
although it does operate a small a number of markets using code division
multiple access (CDMA) that were operating that technology when AT&T Wireless
Group acquired them. TDMA permits the use of advanced tri-mode handsets that
allow for roaming across analog and digital systems and across 850 megahertz and
1900 megahertz spectrums. TDMA digital technology allows for enhanced services
and features, such as short alphanumeric message service, extended battery life,
added call security and improved voice quality. TDMA's hierarchical cell
structure enables the AT&T Wireless Group to enhance network coverage with lower
incremental investment through the deployment of micro and pico, as opposed to
macro, cell sites. This enables the AT&T Wireless Group to offer customized
billing options and to track billing information per individual cell site, which
is practical for advanced wireless applications such as fixed wireless and
wireless office applications. TDMA served an estimated 35 million subscribers
worldwide and 18 million subscribers in North America as of December 31, 1999,
according to the Universal Wireless Communications Consortium, an association of
TDMA service providers and manufacturers. TDMA equipment is available from
leading telecommunication vendors such as Lucent, Ericsson and Nortel Networks
Corporation. A number of other wireless service providers have chosen code
division mobile access (CDMA) or global system for mobile communications (GSM)
as their current digital wireless technology. AT&T Wireless Group intends to
deploy an overlay of GSM technology to its TDMA network as part of its third
generation development strategy, which will use a different technology (see
below).
CDPD network. The AT&T Wireless Group's CDPD network currently covers
104 million POPs, which represents over 60% of its built network, and its CDPD
customers can roam on the CDPD networks of other wireless providers, which,
together, cover an additional 74 million POPs. CDPD is an industry standard
using Internet Protocol, which allows most applications written for the Internet
as well as many corporate applications to run efficiently over the network
without modification. Using CDPD, data files and transactions are divided into
small packets and sent on a dedicated wireless channel. In many data
applications, data is sent in bursts with intermittent quiet periods. Packet
transmission technologies take advantage of this fact and allow user data to be
efficiently carried on the same network channel. As a result, relative to data
services carried over circuit-switched analog or digital wireless networks, the
AT&T Wireless Group's packet-switched CDPD service is a significantly more
cost-effective means of sending data for the majority of applications because it
allows many users to share the same channel.
Third generation development strategy. Third generation technologies
will allow carriers to provide high-speed wireless packet data services and
ultimately voice services using Internet Protocol. AT&T Wireless Group believes
that a sound third generation strategy should allow the wireless provider to
achieve a pervasive footprint quickly and cost effectively. In addition, AT&T
Wireless Group believes third generation networks that achieve global economies
of scale and allow for global roaming will have a significant advantage. AT&T
Wireless Group had originally chosen TDMA-EDGE as its next generation wireless
architecture.
However, in November 2000, AT&T Wireless Group announced that it has
selected for its eventual third generation services the technological standard
that is the same global standard that has been selected by service providers
throughout Europe, in Japan and in other parts of the world. This standard,
known as UMTS (for universal mobile telecommunications system), has generally
been accepted as the successor technology to the second generation digital
technology known as GSM. UMTS is also known as W-CDMA, or wideband code division
multiple access. Despite the similarity of the acronyms, CDMA 2000 and W-CDMA
are not compatible. To accelerate the availability of enhanced data services
offerings, AT&T Wireless Group recently announced plans to deploy a GSM platform
for interim improvements in wireless data capabilities on the evolutionary path
to third generation services, as well as associated voice services. This
platform will be deployed as an overlay on AT&T Wireless Group's second
generation voice network. GSM platform deployment is planned to begin in the
second half of 2001. AT&T Wireless Group plans to make interim enhanced data
services using GPRS technology deployed on the GSM network starting in 2001.
Third generation EDGE technology service is expected to be available in 2002.
AT&T Wireless Group currently plans to deploy third generation UMTS technology
beginning in 2003, depending on the availability of network equipment and
customer devices. By making services on GPRS technology available in 2001, AT&T
Wireless Group expects to be able to make enhanced data services available to
customers earlier than its originally planned deployment of TDMA-EDGE in 2002.
Like AT&T Wireless Group's current packet data network, the technology
standards AT&T Wireless Group has selected for its enhanced and third generation
data services strategy are also Internet Protocol based. AT&T Wireless Group
expects that all the applications developed and deployed today will migrate to
GPRS-based and eventually to EDGE-based services as customers upgrade their
equipment to the new technologies to be deployed. However, when deployed using
GPRS and EDGE technologies, these applications are expected to operate at higher
speeds than current systems where deployed. This plan is expected to enable AT&T
Wireless Group to provide customers with earlier availability of a wide range of
data service offerings on a broad array of devices (phones, personal data
assistants, or PDA's, laptops, etc.). AT&T Wireless Group plans to sell handsets
combining its current TDMA transmission technology and the GSM technology
platform it plans to deploy with enhanced and third generation GPRS and EDGE
technologies, which would provide customers the benefit of access to AT&T
Wireless Group's current voice network as well as the new enhanced and
high-speed data services when available. Industry specifications for the
combined technology handsets were jointly developed by the Universal Wireless
Communications Consortium and the North American GSM Alliance. AT&T Wireless
Group is in discussions with manufacturers to develop such devices. In November
2000, AT&T announced nonbinding letters of intent with Ericsson, Lucent
Technologies, Nokia and Nortel Networks for third generation network equipment
and, in the case of Nokia and Ericsson, for future generation wireless customer
terminals. AT&T Wireless Group began negotiating definitive agreements with
these and other vendors during the fourth quarter of 2000 and has executed
several of these agreements.
DOCOMO STRATEGIC INVESTMENT
On January 22, 2001 NTT DoCoMo, Inc., a leading Japanese wireless
communications company, invested approximately $9.8 billion for shares of a new
class of AT&T preferred stock that are convertible into 406,255,889 shares of
AT&T Wireless Group tracking stock that are intended to reflect approximately
16% of the financial performance and economic value of AT&T Wireless Group. As
part of this investment, DoCoMo also received five-year warrants to purchase the
equivalent of an additional 41,748,273 shares of AT&T Wireless Group tracking
stock at $35 per share, and DoCoMo and AT&T Wireless Services formed a strategic
alliance to develop the next generation of mobile multimedia services on a
global-standard, high-speed wireless network. Of the 406,255,889 AT&T Wireless
Group tracking stock share equivalents issued to DoCoMo, 228,128,307 shares
represented new share equivalents at $27.00 each, and the remaining 178,127,582
share equivalents represented a reduction of AT&T Common Stock Group's retained
portion of the value of AT&T Wireless Group at $20.50 each. Accordingly, AT&T
Common Stock Group retained $3,651,615,431 of the proceeds of the DoCoMo
investment and allocated $6,159,464,289 to AT&T Wireless Group.
The following is a summary of the material provisions of the agreements
among DoCoMo, AT&T and AT&T Wireless Services, and the terms of the DoCoMo
Wireless Tracking Stock. This summary is qualified in its entirety by reference
to the full text of these documents, which have been filed as exhibits to AT&T's
Form 8-K dated December 22, 2000.
New Class of AT&T Wireless Group Tracking Stock
DoCoMo purchased 812,511.778 shares of a new class of AT&T preferred
stock, par value $1.00, that we call "DoCoMo wireless tracking stock." Each
share of DoCoMo wireless tracking stock is convertible at any time into 500
shares of AT&T Wireless Group tracking stock and has the same voting and
dividend rights as 500 shares of AT&T Wireless Group tracking stock. The DoCoMo
wireless tracking stock also has some additional rights not available to holders
of AT&T Wireless Group tracking stock. The following is a description of some of
the rights and features of the DoCoMo wireless tracking stock.
o Conversion. DoCoMo can convert all, and not less than all, of its
shares of DoCoMo wireless tracking stock into AT&T Wireless Group
tracking stock at a ratio of 500 shares of AT&T Wireless Group
tracking stock for each share of DoCoMo wireless tracking stock,
subject to anti-dilution protection. If the split-off occurs, then,
immediately before the completion of the split-off, each share of
DoCoMo wireless tracking stock automatically will be converted into
500 shares of AT&T Wireless Group tracking stock, subject to
anti-dilution protection, and thereafter be exchanged on the same
terms as all other shares of AT&T Wireless Group tracking stock in the
split-off.
o Liquidation Preference. The DoCoMo wireless tracking stock carries an
aggregate liquidation preference of $3.65 billion in the event of an
involuntary liquidation or dissolution of AT&T, and holders of DoCoMo
wireless tracking stock are entitled to participate in this preference
in proportion to the number of shares they hold. The holders of shares
of DoCoMo wireless tracking stock also will be entitled to
participate, on an as-converted basis, in any additional liquidation
payments made to holders of AT&T Wireless Group tracking stock, less
any amounts received out of the $3.65 billion liquidation preference.
The DoCoMo wireless tracking stock has no preference in the event of a
voluntary liquidation or dissolution of AT&T, but automatically would
convert into shares of AT&T Wireless Group tracking stock and
participate in any liquidation payments made to holders of AT&T
Wireless Group tracking stock.
o Dividends. Holders of DoCoMo wireless tracking stock are entitled to
participate, on an as-converted basis, in any dividends or
distributions paid to holders of AT&T Wireless Group tracking stock.
o Voting Rights. Holders of DoCoMo wireless tracking stock are entitled
to vote together with holders of AT&T common shares and not as a
separate class. Each share of DoCoMo wireless tracking stock is
entitled to the number of votes that could be cast by the shares of
AT&T Wireless Group tracking stock into which the DoCoMo wireless
tracking stock is convertible. Initially, each share of DoCoMo
wireless tracking stock will be entitled to 250 votes.
o Redemption at the Option of AT&T. There are two instances in which
AT&T may redeem all, and not less than all, of the shares of DoCoMo
wireless tracking stock and warrants owned by DoCoMo at DoCoMo's
original purchase price plus a predetermined rate. First, if the
proposed split-off does not occur before April 26, 2002 and thereafter
AT&T redeems all AT&T Wireless Group tracking stock, AT&T may
concurrently redeem the DoCoMo wireless tracking stock. In this case,
if AT&T announces a sale of all or substantially all the assets of
AT&T Wireless Group within a year of redemption and then completes the
sale, DoCoMo will be entitled to receive a payment equal to the excess
of the value from that sale that would have been attributable to the
DoCoMo wireless tracking stock over the redemption price. Second, if
specified adverse tax events occur before the split-off and,
thereafter, all AT&T Wireless Group tracking stock is redeemed, AT&T
may concurrently redeem the DoCoMo wireless tracking stock on the same
terms as described above. In either case, if AT&T splits-off all or
substantially all of the assets of AT&T Wireless Group within a year
of redeeming the DoCoMo wireless tracking stock, DoCoMo will be
entitled to reinvest in the spun off entity at the redemption price
and otherwise on terms comparable to those set forth in the agreement.
o Transfer. Shares of DoCoMo wireless tracking stock are not
transferable other than by conversion into AT&T Wireless Group
tracking stock or redemption by AT&T.
Warrants
DoCoMo has acquired 83,496.546 warrants, each of which initially
represents the right to purchase one share of DoCoMo wireless tracking stock at
an exercise price of $17,500 per share, or $35 per AT&T Wireless Group tracking
stock share equivalent, subject to customary anti-dilution adjustments. These
warrants may be exercised in any amount and at any time until the fifth
anniversary of the issuance of the warrants. Upon transfer by DoCoMo to a third
party, or if DoCoMo converts its DoCoMo wireless tracking stock into AT&T
Wireless Group tracking stock, each of the warrants will be exercisable for 500
shares of AT&T Wireless Group tracking stock at an exercise price of $35 per
share, and will no longer be exercisable for DoCoMo wireless tracking stock.
After the split-off, each warrant will be exercisable for 500 shares of the AT&T
Wireless Services common stock at an exercise price of $35 per share, subject to
adjustments to reflect the exchange ratio and customary anti-dilution
adjustments. The warrants are subject to the transfer restrictions described
below. The shares of DoCoMo wireless tracking stock issuable upon exercise of
the warrants, and any shares of AT&T Wireless Group tracking stock into which
they are convertible, will represent new share equivalents.
DoCoMo Investment Rights and Obligations
In addition to the rights inherent in the shares of DoCoMo wireless
tracking stock, under the agreements, DoCoMo has additional rights and
obligations with respect to its investment in AT&T Wireless Group that will
continue even if DoCoMo converts its shares of DoCoMo wireless tracking stock
into AT&T Wireless Group tracking stock or if the split-off is completed.
o Transfer Restrictions. Without the consent of AT&T before the
split-off, or AT&T Wireless Services after the split-off, for 18
months following the investment, DoCoMo may not transfer any warrants
or any shares of AT&T Wireless Group tracking stock or AT&T Wireless
Services common stock that it receives on conversion of DoCoMo
wireless tracking stock, except if specified events occur. Those
events are:
- a sale of all or substantially all of AT&T Wireless Group's
assets or business through merger or other business combination
unless AT&T Wireless Group shareholders continue to own
two-thirds of the successor corporation;
- the acquisition or acquisitions of business or assets, other than
radio spectrum rights, by AT&T Wireless Group totaling more than
$25 billion; or
- a tender offer or exchange offer approved by AT&T's board of
directors or AT&T Wireless Services board of directors, as
applicable.
In addition, subject to a limited exception, without AT&T's or AT&T
Wireless Group's consent, as the case may be, DoCoMo may not transfer any AT&T
Wireless Group securities to any person if after the transfer the recipient's
interest in AT&T Wireless would exceed 6%, or in the case of recipients,
principally financial institutions, who are eligible to report their interest on
Schedule 13G under the Securities Exchange Act, 10%.
None of DoCoMo's special rights are transferable by DoCoMo along with
the shares, except that DoCoMo may transfer its demand registration rights
described below to any transferee of more than $1 billion of AT&T Wireless Group
securities, and DoCoMo may transfer one demand registration right to a
transferee of the warrants. Any transfer of registration rights will be subject
to overall limitations on the registration rights and will not increase AT&T's
or AT&T Wireless Group's aggregate registration obligations.
o Repurchase Obligations.
- Failure to complete split-off within specified time frame.
If the split-off is not completed by January 1, 2002, or
March 15, 2002 if the reason it was not completed by January
1, 2002 was that the requisite IRS ruling had not been
received and AT&T reasonably believes that it is possible to
obtain such a ruling by, or effect the split-off without a
ruling by, March 15, 2002 and is continuing to seek such a
ruling or to effect the split-off without a ruling, then
DoCoMo may require AT&T to repurchase DoCoMo wireless
tracking stock, or AT&T Wireless Group tracking stock, and
warrants, that DoCoMo still holds at that time. DoCoMo must
exercise this right within 30 days of the January 1 or March
15, 2002 trigger date, whichever is applicable. The
repurchase price will be DoCoMo's original purchase price
plus a predetermined rate. This repurchase obligation will
be allocated between AT&T and AT&T Wireless Group in
proportion to the allocation of the proceeds received from
the investment. Consequently, AT&T Wireless Group will be
obligated to fund $6.2 billion of the repurchase price, plus
interest. In lieu of receiving this repurchase price from
AT&T, DoCoMo will have the right to cause AT&T to register
for public sale all of the shares of AT&T Wireless Group
tracking stock (including shares that DoCoMo would hold if
it exercised its warrants and converted its shares of DoCoMo
wireless tracking stock), and thereafter DoCoMo will be able
to sell those shares and retain the proceeds from that sale
or sales.
- Failure to meet technology benchmarks within specified time
frame. In some circumstances, if by June 30, 2004 (1) AT&T
Wireless Group fails to launch service based on a wireless
communications technology known as universal mobile
telecommunications systems, or wideband code division
multiple access, in at least 13 of the top 50 U.S. markets
or (2) abandons wideband code division multiple access as
its primary technology for third generation services, DoCoMo
may require AT&T before the split-off, or AT&T Wireless
Services after the split-off, to repurchase the warrants and
DoCoMo wireless tracking stock, or AT&T Wireless Group
tracking stock, and the warrants that DoCoMo still holds (or
the AT&T Wireless Services common stock and related warrants
if post split-off). The repurchase price will be DoCoMo's
original purchase price plus interest of a predetermined
rate. Before the split-off, the repurchase obligation will
be allocated between AT&T and AT&T Wireless Group in
proportion to the allocation of the proceeds received from
the investment, which was approximately $3.6 billion for
AT&T and $6.2 billion for AT&T Wireless Group. After the
split-off, if DoCoMo requires repayment because of AT&T
Wireless Group's failure to commence service using an agreed
technology as described above, AT&T Wireless Services will
be obligated to fund the entire amount of the repurchase
obligation, which is $9.8 billion, plus interest, with AT&T
being secondarily liable for up to $3.6 billion, plus
interest, if AT&T Wireless Services is unable to satisfy the
entire obligation. In lieu of paying all or a portion of the
repurchase price, AT&T or AT&T Wireless Services, as the
case may be, will have the right to cause DoCoMo to sell any
portion of its shares in a registered sale, and to pay
DoCoMo the difference between the repurchase price and the
proceeds from the registered sales.
o Standstill. Until the fifth anniversary of the closing of
the investment, DoCoMo, its controlled subsidiaries, when
acting on behalf of DoCoMo, its officers, directors or
agents, or any subsidiary to which DoCoMo has disclosed
confidential information regarding its investment may not
take a number of actions, including the following, without
AT&T's consent before the split-off or AT&T Wireless
Services' consent after the split-off:
- acquire or agree to acquire any voting securities of
AT&T or AT&T Wireless Services, except in connection
with DoCoMo's exercise of its preemptive rights,
conversion rights or warrants;
- solicit proxies with respect to AT&T's or AT&T Wireless
Services' voting securities or become a participant in
any election contest relating to the election of the
directors of AT&T or AT&T Wireless Services;
- call or seek to call a meeting of the AT&T or AT&T
Wireless Services shareholders or initiate a
shareholder proposal;
- contest the validity of the standstill in a manner that
would lead to public disclosure;
- form or participate in a group that would be required
to file a Schedule 13D with the SEC as a "person"
within the meaning of the Section 13(d)(3) of the
Securities Exchange Act; or
- act in concert with any person for the purpose of
electing a transaction that would result in a change of
control of AT&T or AT&T Wireless Services.
After the fifth year anniversary of the investor agreement, DoCoMo will
continue to be subject to the standstill for so long as DoCoMo has the right to
nominate at least one director. However, DoCoMo will be released from the
standstill 91 days after the resignations of all of its representatives on
AT&T's and AT&T Wireless Services' board of directors, as the case may be, all
of DoCoMo's nominated AT&T Wireless Services committee members and all of
DoCoMo's nominated management. After these resignations, AT&T Wireless may take
steps to terminate or sequester all of the other DoCoMo nominated employees.
If NTT, which owns approximately two-thirds of DoCoMo, or any of NTT's
subsidiaries other than DoCoMo takes any action contrary to the standstill
restrictions and the action leads to any vote of shareholders of AT&T before the
split-off or AT&T Wireless Services after the split-off, then DoCoMo either must
vote its shares as the board of directors of AT&T or AT&T Wireless Services
directs, or must vote its shares in proportion to the votes cast by the
shareholders that are not affiliated with either DoCoMo or NTT. In addition, if
NTT or any of its subsidiaries commences a tender offer for AT&T or AT&T
Wireless Services securities, DoCoMo cannot tender or transfer any of its
securities into that offer until all of the conditions to that offer have been
satisfied.
The standstill provisions described above will terminate in the
following circumstances:
- a third party unaffiliated with AT&T Wireless commences a tender or
exchange offer of 15% of AT&T Wireless Services' outstanding voting
securities and AT&T Wireless Services does not publicly recommend that
its shareholders reject to the offer;
- AT&T Wireless Services enters into a definitive agreement to merge
into or sell all or substantially all of its assets to a third party
unless AT&T Wireless Services shareholders retain at least 50% of the
economic and voting power of the surviving corporation; or
- AT&T Wireless Services enters into a definitive agreement that would
result in any one person or groups of persons acquiring more than 35%
of the voting power of AT&T Wireless Services, unless, among other
things, this person or group agrees to a standstill.
The standstill provisions terminate with respect to AT&T two years
after the split-off (or, if sooner, upon any of the foregoing three events as
applied to AT&T).
o Registration Rights. Subject to certain exceptions and conditions,
DoCoMo is entitled to require AT&T before the split-off, and AT&T
Wireless Services after the split-off, to register shares of AT&T
Wireless Group tracking stock or AT&T Wireless Services common stock
on up to six occasions, with each demand involving not less than $500
million worth of shares. DoCoMo cannot exercise more than one demand
right in any seven and a half month period. DoCoMo also is entitled to
require AT&T or AT&T Wireless Services, as the case may be, to
register securities for resale in an unlimited number of incidental
registrations, commonly known as piggy-back registrations. DoCoMo will
cease to be entitled to these registration rights if it owns less than
$1 billion of AT&T or AT&T Wireless Services securities, as the case
may be, and securities reflecting less than 2% of the financial
performance and economic value of AT&T Wireless Services.
o Board Representation. Until the split-off, DoCoMo is entitled to
nominate one representative to the AT&T board of directors, and that
representative also will be a member of the AT&T Wireless Group
capital stock committee. After the split-off, DoCoMo will be entitled
to nominate a number of representatives on the AT&T Wireless Services
board of directors proportional to its economic interest acquired as a
result of this investment. The DoCoMo nominees for these board seats
must be senior officers of DoCoMo that are reasonably acceptable to
AT&T or AT&T Wireless Services, as the case may be. DoCoMo will lose
these board representation rights if its economic interest in AT&T
Wireless Services falls below 10% for 60 consecutive days. However, as
long as it retains 62.5% of the shares of its original investment or
shares of AT&T Wireless Group tracking stock into which such shares
are convertible, DoCoMo will lose its board representation rights only
if its economic interest in AT&T Wireless Services falls below 8% for
60 consecutive days.
o Management Rights. Before the split-off, DoCoMo is entitled to appoint
one of its senior executives that is reasonably acceptable to AT&T
Wireless Group to AT&T Wireless Group's senior leadership team. In
addition, subject to AT&T Wireless Group's reasonable approval, DoCoMo
can appoint between two and five of its employees as employees of AT&T
Wireless Group, including the Manager-Finance and Director of
Technology. DoCoMo will lose these rights under the same circumstances
as it would lose board representation rights.
o Right to Approve Specified Actions. Before the split-off, AT&T may not
take any of the following actions without DoCoMo's prior approval:
- sell all or substantially all of AT&T Wireless Group's assets;
- sell all or substantially all of AT&T Wireless Group's business
through merger or other business combination, unless AT&T
Wireless Group shareholders retain two-thirds of the successor
corporation;
- acquire business or assets for AT&T Wireless Group, other than
radio spectrum rights, in excess of $17 billion;
- subject to some exceptions, issue any further economic interests
or rights to AT&T Wireless over 15% of AT&T Wireless Group's
market capitalization as of the date of the letter agreement;
- subject to some exceptions, pay cash dividends to or repurchase
AT&T Wireless Group tracking stock;
- amend AT&T's charter or by-laws so that the rights of the holders
of DoCoMo wireless tracking stock would be adversely affected; or
- change the split-off related agreements so that AT&T Wireless
Services would be materially adversely affected or enter into
new, material contracts among affiliated parties that do not have
arm's-length terms.
After the split-off, AT&T Wireless Services may not take any of the
following actions without DoCoMo's prior approval:
- change the scope of its business such that AT&T Wireless Group's
businesses (including those in its business plan) cease to
constitute the primary businesses of AT&T Wireless Services; or
- enter into a strategic alliance with another wireless operator so
that the wireless operator would own more than 15% but less than
50% of the economic interest in AT&T Wireless Services.
DoCoMo will lose these approval rights under the same circumstances as
it would lose board representation rights.
o Preemptive Rights. DoCoMo has limited preemptive rights that
entitle it to maintain its ownership interest by purchasing
shares in some new equity issuances by AT&T or AT&T Wireless
Services. In the event of a new equity issuance of the type
covered by the preemptive right, then:
- if DoCoMo holds 12% or more of the economic interest of AT&T
Wireless Services at the time of the new issuance, DoCoMo
may purchase a number of additional shares that would bring
DoCoMo's economic interest back up to 16%; and
- if DoCoMo holds less than 12% of the economic interest of
AT&T Wireless Services at the time of the new issuance,
DoCoMo may purchase a number of additional shares that would
maintain DoCoMo's economic interest at the level it was at
just before the new issuance.
In most cases, the purchase price for these additional shares will be
the issuance price. DoCoMo will lose these preemptive rights under the same
circumstances as it would lose board representation rights.
Strategic Alliance
In connection with DoCoMo's investment, AT&T Wireless Services and
DoCoMo formed a strategic alliance to develop the next generation of mobile
multimedia services on a global-standard, high-speed wireless network. AT&T
Wireless Services will create a new, wholly owned subsidiary to develop and
encourage the development of multimedia content, applications and services able
to be offered over AT&T Wireless Services' current network, as well as on new,
high-speed wireless networks built to global standards for third generation
services. AT&T Wireless Services will contribute, among other things, its rights
to content and applications used in its PocketNet services to the new multimedia
subsidiary. Both AT&T Wireless Services and DoCoMo plan to provide technical
resources and support staffing. In addition, AT&T Wireless Services will be able
to license from DoCoMo, without additional payment, certain rights to DoCoMo's
"i-mode" service, which provides access to the Internet from wireless
telephones, and related technology.
The strategic alliance is expected to enable each of AT&T Wireless
Services and DoCoMo to offer market-appropriate wireless services to customers
throughout the United States and Japan, respectively. In addition, each has
agreed, subject to technical and commercial feasibility, to recognize the other
as its primary and preferred roaming partner in the other party's home
territory.
AT&T and AT&T Wireless Services on the one hand, and DoCoMo on the
other hand, have agreed to certain non-competition commitments that restrict
each other's ability to provide mobile wireless services in Japan and the United
States, respectively. They have also agreed to limit the extent to which AT&T or
AT&T Wireless Services on the one hand, and DoCoMo on the other hand, will be
able to participate in certain mobile multimedia activities and investments in
each other's home territory. Any such restrictions on AT&T would terminate upon
the earlier of a split-off of AT&T Wireless Services or exercise by DoCoMo of
any put, liquidation or registration right as a result of the non-occurrence of
such a split-off. AT&T Wireless Services and DoCoMo will generally be bound by
the non-competition commitments until DoCoMo loses its board representation and
management rights, either due to any of the events described under "DoCoMo
Investment Rights and Obligations - Board Representation" and "DoCoMo Investment
Rights and Obligations -Management Rights", or due to voluntary relinquishment
of such rights by DoCoMo.
OTHER BUSINESSES
AT&T Solutions
AT&T Solutions, established as a unit in 1995, provides clients with a
broad array of professional services to satisfy clients' complete networking
technology needs. AT&T Solutions' professional services range from consulting to
outsourcing and management of highly complex global data networks. The company
designs, engineers and implements seamless solutions for clients that are
designed to maximize the competitive advantage of networking-based electronic
commerce applications. Working with best-in-breed partners, AT&T Solutions also
provides a full range of custom, managed e-infrastructure, web hosting and
high-availability services.
AT&T Solutions' Global Enterprise Management System (GEMS) 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 has established a number of international alliances to increase
the reach and scope of AT&T's services and network over time and has invested in
certain countries in order to increase the range of services AT&T offers in
those countries, such as Alestra in Mexico and AT&T Canada Corp. in Canada. In
addition, AT&T has an interest in Japan Telecom in Japan that, on February, 26,
2001, AT&T agreed to sell to the Vodafone Group plc.
On January 6, 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 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 and BT's multinational accounts in
selected industry sectors.
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 received 31 percent of the equity
interest and 23 percent of the voting interest in the combined entity in
exchange for AT&T Canada Corp. and ACC TelEnterprises Ltd. In addition, AT&T
agreed to purchase all of the remaining shares at the greater of the then
appraised fair market value or the accreted minimum price, which initially is
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's shares, would be sold through an auction process and AT&T will
make whole the other shareholders for the amount they would have been entitled
to if AT&T had purchased the shares. The completion of the acquisition is
subject to the condition that AT&T is permitted to acquire the shares under
Canada's foreign ownership restrictions. AT&T may acquire the shares prior to a
change in the ownership restrictions by developing a structure that addresses
such ownership restrictions. On August 16, 1999, AT&T completed its sale to BT
of 30% of AT&T's stake in AT&T Canada. In addition, BT has agreed to purchase
30% of the shares AT&T 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 established AT&T Latin America, in connection
with the merger of Netstream, a competitive local exchange company in Brazil,
and FirstCom, a publicly traded company with competitive telecommunications
operations in Chile, Colombia and Peru. AT&T owns 58 percent of AT&T Latin
America; SL Participacoes, an affiliate of Promon Tecnologia, which is the
former owner of Netstream, owns 7 percent of AT&T Latin America, and the former
FirstCom shareholders own 34 percent of AT&T Latin America, on a fully diluted
basis. Promon Tecnologia and the former FirstCom shareholders own Class A
shares, and have one vote per share; AT&T owns Class B shares, and have ten
votes per share.
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 will permit the Regional Bell Operating Companies (RBOCs)
to provide interexchange services originating in any state in its region after
demonstrating to the FCC that such provision is in the public interest and
satisfying the conditions for developing local competition established by the
Telecommunications Act.
In August 1996, the FCC adopted rules and regulations, including
pricing rules (the "Pricing Rules") to implement the local competition
provisions of the Telecommunications Act, including with respect to the terms
and conditions of interconnection with LEC networks and the standards governing
the purchase of unbundled network elements and wholesale services from LECs.
These implementing rules rely on state public utilities commissions (PUCs) to
develop the specific rates and procedures applicable to particular states within
the framework prescribed by the FCC.
On July 18, 1997, the United States Court of Appeals for the Eighth
Circuit 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 LEC networks and
the purchase of unbundled network elements and wholesale services from LECs.
Accordingly, the Court vacated the rules that the FCC had adopted in August
1996, and which had been stayed by the Court since September 1996. On October
14, 1997, the Eigth Circuit Court of Appeals vacated an FCC Rule that had
prohibited incumbent LECs from separating network elements that are combined in
the LEC's network, except at the request of the competitor purchasing the
elements. This decision increased the difficulty and costs of providing
competitive local service through the use of unbundled network elements
purchased from the incumbent LECs.
On January 25, 1999, the Unites States 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 interconnection and the
purchase of unbundled network elements, and the Court of Appeal's decision to
vacate the FCC's rule prohibiting incumbent LECs from separating network
elements that are combined in the LEC'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 LECs' claims
that although the FCC has jurisdiction to adopt pricing rules, the rules it
adopted are not consistent with the applicable provisions of the Act. The
Supreme Court also vacated the FCC's rule identifying and defining the unbundled
network elements that incumbent LECs are required to make available to new
entrants, and directed the FCC to reexamine this issue in light of the standards
mandated by the Act.
In response to the Supreme Court's decision, the FCC completed its
re-examination of and released an order identifying and defining the unbundled
network elements that incumbent LECs are required to make available to new
entrants. That order re-adopted the original list of elements, with certain
exceptions. An association of incumbent LECs has appealed the FCC's order to the
United States Court of Appeals for the District of Columbia Circuit, and asked
the Court to hear the appeal on an expedited basis. A number of parties,
including AT&T and other incumbent LECs, 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 issued a decision addressing the
incumbent LECs' claims that the FCC's pricing rules are not consistent with the
applicable provisions of the Act. It rejected the incumbent LECs' 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
Act. The Eighth Circuit 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 has agreed to review the
Eighth Circuit's decision, and a decision by the Supreme Court is anticipated by
the end of June 2002. The Supreme Court will be considering both the claim of
AT&T, the FCC, and others that the Eighth Circuit erred by invalidating the FCC
rule, and the claim by the incumbent LECs that the Eighth Circuit erred by not
requiring prices based on their historical cost.
The Eighth Circuit 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 DC
Circuit, 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 with new market opportunities. The effect
of the most recent decision by the Eighth Circuit is to increase the risks,
costs, difficulties, and uncertainty of entering local markets through using the
incumbent LECs' facilities and services. Notwithstanding its substantial
efforts, AT&T continues to experience significant difficulty entering local
markets. AT&T's ability to purchase combined network elements from the ILECs,
one of the primary methods AT&T intends to use to provide local service to
residential customers, continued to be severely hampered by, among other
factors, ILEC-sponsored regulatory and judicial actions, and lack of operating
interfaces necessary to process network element orders with ILECs. Despite
strong customer demand for competitive choice in local markets outside of AT&T's
cable footprint, AT&T has suspended sales of resold local service, and continues
to provide network element non facilities-based local service only in New York
and Texas. AT&T will continue its regulatory efforts to improve operating
margins in the states where it offers non-facilities-based local services, and
will seek to open other states to competitive opportunities (both for voice and
data services) by improving the rates, rules and operating interfaces that
govern carrier relationships.
In December 1999, Bell Atlantic (now Verizon) obtained approval to
offer long distance telecommunications service in New York state, 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 Communications, Inc. became the second RBOC to receive
such approval, this time for the state of Texas, and began providing combined
local and long distance service in July 2000. In January 2001, the FCC approved
SBC Communications' request for such authority for the states of Oklahoma and
Kansas, and pursuant to the terms of that authority SBC will be free to begin
providing combined local and long distance services in those states in March
2001. In January 2001, Verizon filed an application with the FCC for such
authority for the state of Massachusetts. This is Verizon's second filing for
the state of Massachusetts, and the FCC is required to issue a decision on the
application in April 2001.
Regulation of Rates
AT&T 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 under a system known as "price
caps" whereby AT&T'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 became subject to the same regulations as
its long distance competitors for such services. Thus, AT&T 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.
In addition, on October 31, 1996, the FCC issued an order that
would have prohibited non-dominant carriers, including AT&T, from filing tariffs
for their domestic interstate services. Non-dominant carriers, including AT&T,
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 such mechanisms for virtually
all domestic, interstate telecommunications services. In March 2001, the FCC
adopted an order applying detariffing requirements to international services.
Furthermore, in May 1997, the FCC adopted three orders
relating to Price Caps, Access Reform, and Universal Service that substantially
revised the level and structure of access charges that AT&T as a long distance
carrier pays to incumbent LECs. Under the Price Cap Order, LECs were required to
reduce their price cap indices by 6.5 percent annually, less an adjustment for
inflation, which has resulted in significant reductions in access charges that
long distance companies pay to LECs. 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 has agreed to pass
through to consumers any savings to AT&T as a result of these access charge
reforms. Consequently, AT&T'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
LECs 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 and other long distance carriers pay to these LECs for access to their
networks, and established target access rates for these 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 CALLS, the caps on certain line-based costs that do
not vary with usage have been increased so that these costs are increasingly
recovered from end user customers. These restructurings allowed the reduction in
access charges assessed on long distance carriers on a usage basis. As part of
the CALLS Order, AT&T agreed to flowthrough to customers access charge
reductions over the five-year life of the CALLS plan and made certain other
commitments regarding the rate structure of certain residential long distance
offerings.
Under the August 1999 LEC Pricing Flexibility Order, which was
affirmed by the D.C. Circuit in February 2001, the FCC established certain
triggers that enable the price cap LECs to obtain pricing flexibility for their
interstates access services, including Phase II relief that permits them to
remove these services from price cap regulation. Although these triggers
supposedly indicate a competitive presence sufficient to constrain monopoly
pricing by the LECs, in fact, they may allow for premature deregulation which
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 only long distance carriers to all carriers, including LECs, that provide
interstate telecommunications services. Similarly, the set of carriers eligible
for the universal service support has been expanded from only LECs to any
eligible carrier providing local service to a customer, including AT&T as a new
entrant in local markets. The Universal Service Order also adopted measures to
provide discounts on telecommunications services, Internet access and inside
wire to for eligible schools and libraries and on telecommunications services
only for rural health care providers.
AT&T remains subject to the statutory requirements of Title II of the
Communications Act. AT&T must offer service under rates, terms and conditions
that are just, reasonable and not unreasonably discriminatory; it 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 to address concerns that had been raised about
declaring AT&T 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 commissions or similar authorities
having regulatory power over intrastate rates, lines and services and other
matters regulate AT&T'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.
Wireless Regulatory Environment
The FCC regulates the licensing, construction, operation, acquisition,
sale and resale of wireless systems in the United States pursuant to the
Communications Act of 1934 and the associated rules, regulations and policies
promulgated by the FCC. FCC terminology distinguishes between "cellular"
licenses, which utilize a frequency of 850 megahertz, and ""PCS" licenses, which
utilize a frequency of 1900 megahertz. The different types of licenses and their
associated systems may have differing technical characteristics.
Licensing of wireless services systems
AT&T Wireless Group owns protected geographic service area licenses
granted by the FCC to provide cellular service and PCS. It also owns licenses
granted by the FCC to provide point-to-multi-point communications services in
various bands, including significant licenses in the 37 to 39 gigahertz bands.
A cellular system operates on one of two 25 megahertz frequency blocks
that the FCC allocates for cellular radio service. Cellular systems generally
are used for two-way mobile voice applications, although they may be used for
data applications and fixed wireless services as well. Cellular license areas
are issued for either metropolitan service areas or rural service areas.
Initially, one of the two cellular licenses available in each metropolitan
service area or rural service area was awarded to a local exchange telephone
company by the FCC, while the other license was awarded either through
competitive processes or lotteries. Licenses were issued beginning in 1983, and
over the years numerous license transfers and corporate reorganizations have
obscured the original pattern of distributing one set of licenses to local
telephone company affiliates and the other to companies that do not have local
exchange service in the license area.
A PCS system operates on one of six frequency blocks allocated for
personal communications services. PCS systems generally are used for two-way
voice applications although they may carry two-way data communications as well.
For the purpose of awarding PCS licenses, the FCC has segmented the United
States into 51 large regions called major trading areas, which are comprised of
493 smaller regions called basic trading areas. The FCC awarded two PCS licenses
for each major trading area and four licenses for each basic trading area. The
two major trading area licenses authorize the use of 30 megahertz of spectrum.
One of the basic trading area licenses is for 30 megahertz of spectrum, and the
other three are for 10 megahertz each. The FCC permits licensees to split their
licenses and assign a portion, on either a geographic or frequency basis or
both, to a third party.
The FCC awarded initial PCS licenses by auction. Auctions began with
the 30 megahertz major trading area licenses and concluded in 1998 with the last
of the basic trading area licenses. However, in March 1998, the FCC adopted an
order that allowed financially troubled entities that won PCS 30 megahertz
C-Block licenses at auction to obtain financial relief from their payment
obligations and to return some or all of their C-Block licenses to the FCC for
reauctioning. The FCC completed the reauction of the returned licenses in April
1999. In addition, certain of the C-block licenses are currently in bankruptcy
proceedings. The FCC cancelled some of these licenses, and completed the
reauction of the licenses in January 2001. The FCC's cancellation of the
licenses has been challenged by one of the bankrupt licensees, and there is no
guarantee that the reauction or the award of any licenses pursuant to the
reauction will not be affected by this challenge.
Under the FCC's current spectrum aggregation rules, no entity may hold
attributable interests, generally 20% or more of the equity of, or an officer or
director position with, the licensee, in licenses for more than 45 megahertz of
PCS, cellular and certain specialized mobile radio services where there is
significant overlap in any geographic area. Significant overlap will occur when
at least 10% of the population of the PCS licensed service area is within the
cellular and/or specialized mobile radio service area(s). The FCC recently
increased this limit to 55 megahertz for rural areas. These spectrum aggregation
rules are subject to a pending FCC proceeding that could revise or eliminate
them.
All wireless licenses have a 10-year term, at the end of which term
they must be renewed. The FCC will award a renewal expectancy to a wireless
licensee that has provided substantial service during its past license term, and
has substantially complied with applicable FCC rules and policies and the
Communications Act. Licenses may be revoked for cause and license renewal
applications denied if the FCC determines that a renewal would not serve the
public interest. FCC rules provide that competing renewal applications for
licenses will be considered in comparative hearings, and establish the
qualifications for competing applications and the standards to be applied in
hearings.
All wireless licenses must satisfy specified coverage requirements.
Cellular licenses were required, during the five years following the grant of
the initial license, to construct their systems to provide service (at a
specified signal strength) to the territory encompassed by their service area.
Failure to provide such coverage resulted in reduction of the relevant license
area by the FCC. All A, B and C block PCS licensees must construct facilities
that offer coverage to one-third of the population of the service area within
five years of the initial license grants and to two-thirds of the population
within ten years. All D, E and F block PCS licensees must construct facilities
that offer coverage to one-fourth of the population of the licensed area or
"make a showing of substantial service in their license area" within five years
of the original license grants. Other point-to-multi-point licenses require a
showing of substantial service at renewal. Licensees that fail to meet the
coverage requirements may be subject to forfeiture of the license.
In an effort to balance the competing interests of existing microwave
users in the PCS bands and newly authorized PCS licensees, the FCC has adopted a
transition plan to relocate such microwave operators to other spectrum blocks
and a cost sharing plan so that if the relocation of an incumbent benefits more
than one PCS licensee, those licensees will share the cost of the relocation.
The transition period contemplates negotiations between microwave licensees and
PCS licensees to accomplish the transition and to govern the terms and
conditions of the transition of microwave licensees from the PCS spectrum.
Generally, there is a "voluntary" negotiation period during which incumbent
microwave licensees can, but do not have to negotiate with PCS licensees. This
is followed by a "mandatory" negotiation period during which incumbent microwave
licensees must negotiate in good faith with PCS licensees.
Wireless systems are subject to certain FAA regulations governing the
location, lighting and construction of transmitter towers and antennas and are
subject to regulation under federal environmental laws and the FCC's
environmental regulations. State or local zoning and land use regulations also
apply to tower siting and construction activities. We expect to use common
carrier point-to-point microwave facilities to connect certain wireless cell
sites, and to link them to the main switching office. The FCC licenses these
facilities separately and they are subject to regulation as to technical
parameters and service.
The Communications Act preempts state and local regulation of the entry
of, or the rates charged by, any provider of private mobile radio service or of
commercial mobile radio service, which includes PCS and cellular service. The
FCC does not regulate commercial mobile radio service or private mobile radio
service rates. However, commercial mobile radio service providers are common
carriers and are required under the Communications Act to offer their services
to the public without unreasonable discrimination. The FCC's rules currently
require providers to permit others to resell their services for a profit;
however, these rules will expire in 2002.
Transfers and assignments of spectrum licenses
Except for transfers of control or assignments that are considered pro
forma, the Communications Act and FCC rules require the FCC's prior approval for
the assignment of a license or transfer of control of a licensee for a PCS or
cellular system and other types of wireless licenses. In addition, the FCC has
established transfer disclosure requirements that require licensees who assign
or transfer control of a PCS license within the first three years of their
license terms to file associated sale contracts, option agreements, management
agreements or other documents disclosing the total consideration that the
licensee would receive in return for the transfer or assignment of its license.
Non-controlling interests in an entity that holds an FCC license generally may
be bought or sold without FCC approval subject to the FCC's spectrum aggregation
limits. However, notification and expiration or earlier termination of the
applicable waiting period under Section 7A of the Clayton Act by either the
Federal Trade Commission or the Department of Justice may be required if we sell
or acquire interests over a certain size. Approval by state or local regulatory
authorities having competent jurisdiction may also be required in some
circumstances.
Foreign ownership
Under existing law, no more than 20% of an FCC licensee's capital stock
may be owned, directly or indirectly, or voted by non-U.S. citizens or their
representatives, by a foreign government or its representatives or by a foreign
corporation. If an FCC licensee is controlled by another entity, as is the case
with our ownership structure, up to 25% of that entity's capital stock may be
owned or voted by non-U.S. citizens or their representatives, by a foreign
government or its representatives or by a foreign corporation. Foreign ownership
above the 25% level may be allowed should the FCC and such higher levels not
inconsistent with the public interest. The FCC has ruled that higher levels of
foreign ownership, even up to 100%, are presumptively consistent with the public
interest with respect to investors from certain nations. If our foreign
ownership were to exceed the permitted level, the FCC could revoke our FCC
licenses, although we could seek a declaratory ruling from the FCC allowing the
foreign ownership or take other actions to reduce our foreign ownership
percentage in order to avoid the loss of our licenses. We have no knowledge of
any present foreign ownership in violation of these restrictions.
Recent regulatory developments
The FCC has announced rules for making emergency 911 services available
by cellular, PCS and other commercial mobile radio service providers, including
enhanced 911 services that provide the caller's telephone number, location and
other useful information. Commercial mobile radio service providers are required
to take actions enabling them to relay a caller's automatic number
identification and location (initially the location of the cell site first
transmitting the call, and ultimately by an approximation of the caller's actual
location) if requested to do so by a public safety dispatch agency. Providers
may use either network or handset-based technologies to provide the
approximation of the caller's actual location. There is no requirement that
dispatch agencies reimburse provider for their costs of deploying such
technologies. 911 service must be made available to users with speech or hearing
disabilities, but this requirement does not apply to providers of digital
wireless services until 2002. Finally, wireless handsets capable of receiving
analog signals must be able to complete 911 calls using the strongest analog
signal available to the caller, even if the caller does not subscribe to the
carrier providing the strongest signal. State actions incompatible with the FCC
rules are subject to preemption by the FCC.
On August 8, 1996, the FCC released its order implementing the
interconnection provisions of the Telecommunications Act. Although many of the
provisions of this order were struck down by the U.S. Court of Appeals for the
Eighth Circuit, on January 25, 1999, the U.S. Supreme Court reversed the Eighth
Circuit and upheld the FCC in all respects material to our operations. On June
10, 1999, the Eighth Circuit issued an order requesting briefs on certain issues
it did not address in its earlier order, including the pricing regime for
interconnection. While appeals have been pending, the rationale of the FCC's
order has been adopted by many states' public utility commissions, with the
result that the charges that cellular and PCS operators pay to interconnect
their traffic to the public switched telephone network have declined
significantly from pre-1996 levels. In July 2000, the Eighth Circuit rejected
certain aspects of the FCC's pricing methodology, but stayed its order pending
appeal by affected parties to the U.S. Supreme Court. The U.S. Supreme Court has
agreed to review this case.
In its implementation of the Telecommunications Act, the FCC
established federal universal service requirements that affect commercial mobile
radio service operators. Under the FCC's rules, commercial mobile radio service
providers are potentially eligible to receive universal service subsidies for
the first time; however, they are also required to contribute to the federal
universal service fund and can be required to contribute to state universal
funds. Many states are moving forward to develop state universal service fund
programs. A number of these state funds require contributions, varying greatly
from state to state, from commercial mobile radio service providers. The FCC's
universal service order was modified on appeal in the U.S. Court of Appeals for
the Fifth Circuit. The court's ruling has had the effect of reducing commercial
mobile radio service provider support payments required for the federal
universal service programs. The U.S. Supreme Court has agreed to address the
constitutionality of the FCC's universal service order, in particular as it
affects the amount of funds to which telephone companies are entitled to help
defray the costs of providing basic telephone service. The Court's determination
may also affect the FCC's interconnection pricing methodology.
On August 1, 1996, the FCC released a report and order expanding the
flexibility of cellular, PCS and other commercial mobile radio service providers
to provide fixed as well as mobile services. These fixed services include, but
need not be limited to, wireless local loop services, for example, to apartment
and office buildings, and wireless backup services to private branch exchange or
switchboards and local area networks, to be used in the event of interruptions
due to weather or other emergencies. If the fixed services are provided as an
ancillary service to a carrier's mobility services, the FCC has decided that
such fixed services should be regulated as commercial mobile radio services. The
FCC declined to render a prospective ruling on how fixed services provided on a
co-primary basis with mobility services should be regulated or if they should be
subjected to universal service obligations. Rather, it has announced its
intention to decide such matters on a case-by-case basis depending on the
characteristics of a provider's fixed service offering. The FCC has been
presented with one such case, but has not yet ruled on it. It is unclear what
effect, if any, such a ruling would have on the business of AT&T Wireless Group.
The FCC has adopted rules on telephone number portability that will
enable customers to migrate their landline and cellular telephone numbers to
cellular or PCS providers and from a cellular or PCS provider to another service
provider. On February 8, 1999, the FCC extended the deadline for compliance with
this requirement to November 24, 2002, subject to any later determination that
number portability is necessary to conserve telephone numbers. The FCC has also
adopted rules requiring cellular and PCS providers to provide certain functions
to facilitate electronic surveillance by law enforcement officials by June 30,
2000. Carriers must be able to provide additional surveillance capabilities by
September 30, 2001. AT&T Wireless Group has sought permission for a flexible
deployment schedule from the FCC. The FCC has not ruled on the request and there
can be no assurance that the FCC will grant the request. In addition, in August
2000, the U.S. Court of Appeals for the District of Columbia Circuit invalidated
some of these rules and remanded them to the FCC for further consideration.
Various other petitions are pending before the FCC seeking suspension or further
extensions of the deadlines applicable to providing surveillance capabilities.
It is not known how the FCC will revise its rules or whether it will extend
either or both of the compliance deadlines or what the scope of penalties for
failing to comply may be.
In 1997, the FCC determined that the rate integration requirement of
the Communications Act applies to the interstate, interexchange services of
commercial mobile radio service providers. Rate integration requires a carrier
to provide service between the continental U.S. and offshore U.S. states and
territories under the same rate structure applicable to service between two
points in the continental U.S. The FCC delayed implementation of the rate
integration requirements with respect to wide area rate plans we offer pending
further reconsideration of its rules. The FCC also delayed the requirement to
integrate commercial mobile radio service long distance rates among commercial
mobile radio service affiliates. On December 31, 1998, the FCC reaffirmed, on
reconsideration, that its interexchange rate integration rules apply to
interexchange commercial mobile radio service services. The FCC announced it
would initiate a further proceeding to determine how integration requirements
apply to typical commercial mobile radio service offerings, including one-rate
plans. In July 2000, the U.S. Court of Appeals for the District of Columbia
Circuit reversed the FCC's holding that the Communications Act unambiguously
extends rate integration to providers of commercial mobile services. The court
remanded the matter to the FCC for further consideration. Pending conclusion of
this further proceeding, the rate integration requirement does not apply to
commercial mobile services. To the extent that AT&T Wireless Group is required
to offer services subject to the FCC's rate integration requirements, its
pricing flexibility will be reduced. We cannot assure you that the FCC will
decline to impose rate integration requirements on AT&T Wireless Group or
decline to require it to integrate its commercial mobile radio service long
distance rates across its commercial mobile radio service affiliates.
In 1998, the FCC adopted new rules limiting the use of customer
proprietary network information by telecommunications carriers in marketing a
broad range of telecommunications and other services to their customers and the
customers of affiliated companies. The rules were struck down by the U.S. Court
of Appeals for the Tenth Circuit in 1999, and their effectiveness has been
stayed pending the court's review of a petition to the FCC for reconsideration.
Even if the rules are reinstated, AT&T Wireless Group does not anticipate that
they will result in a significant adverse impact on its financial position,
results of operation or liquidity.
State commissions have become increasingly aggressive in their efforts
to conserve numbering resources. Examples of state conservation methods include:
number pooling, number rationing and code sharing. A number of states have
petitioned the FCC for authority to adopt "technology specific" overlays that
would require wireless providers to obtain telephone numbers out of a separate
area code and may require wireless providers to change their customers'
telephone numbers. These efforts may impact wireless service providers by
imposing additional costs or limiting access to numbering resources.
The FCC has adopted detailed billing rules for landline
telecommunications service providers and applied a number of these rules to
commercial mobile radio services providers. The FCC is considering whether
carriers that decide to pass through their mandatory universal service
contributions to their customers should be required to provide a full
explanation of the program, and whether to ensure that the carriers that pass
through their contribution do not recover amounts greater than their mandatory
contributions from their customers. Adoption of some of the FCC's proposals
could increase the complexity of our billing processes and restrict our ability
to bill customers for services in the most commercially advantageous way.
The FCC has adopted an order that determines the obligations of
telecommunications carriers to make their services accessible to individuals
with disabilities. The order requires telecommunications services providers to
offer equipment and services that are accessible to and useable by persons with
disabilities. While the rules exempt telecommunications carriers from meeting
general disability access requirements if such results are not readily
achievable, it is not clear how liberally the FCC will construe this exemption.
Accordingly, the rules could require us to make material changes to our network,
product line, or services at our expense.
In June 1999, the FCC initiated an administrative rulemaking proceeding
to help facilitate the offering of calling party pays as an optional wireless
service. Under the calling party pays service, the party placing the call to a
wireless customer pays the wireless airtime charges. Most wireless customers in
the United States now pay both to place calls and to receive them. Adoption of a
calling party pays system on a widespread basis could make commercial mobile
radio service providers more competitive with traditional landline
telecommunications providers for the provision of regular telephone service.
The FCC has adopted rules specifying standards and the methods to be
used in evaluating radiofrequency emissions from radio equipment, including
network equipment and handsets used in connection with commercial mobile radio
service. These rules were upheld on appeal by the U.S. Court of Appeals for the
Second Circuit. The U.S. Supreme Court declined to review the Second Circuit's
ruling. AT&T Wireless Group's network facilities and the handsets it sells to
customers comply with these standards.
Media reports have suggested that some radio frequency emissions from
wireless handsets may be linked to health concerns, including the incidence of
cancer. Although some studies have suggested that radio frequency emissions may
cause certain biological effects, all of the expert reviews conducted to date
have concluded that the evidence does not support a finding of adverse health
effects but that further research is appropriate. Earlier this year, CTIA
entered into a Cooperative Research and Development Agreement to sponsor such
research.
Studies have shown that some hand-held digital telephones may interfere
with some medical devices, including hearing aids and pacemakers. The FDA has
recently issued guidelines for the use of wireless phones by pacemaker wearers.
Additional studies are underway to evaluate and improve the compatibility of
hearing aids and digital wireless phones.
State and local regulation
State and local governments are preempted from regulating either market
entry by, or the rates of, wireless operators. However, state governments can
regulate other terms and conditions of wireless service and several states have
imposed, or have proposed legislation that will impose, various consumer
protection regulations on the wireless industry. As noted above, States also may
impose their own universal service support regimes on wireless and other
telecommunications carriers, similar to the requirements that have been
established by the FCC and have been delegated certain authority by the FCC in
the area of number allocation and administration. At the local level, wireless
facilities typically are subject to zoning and land use regulation. However,
under the federal Telecommunications Act, neither local nor state governments
may categorically prohibit the construction of wireless facilities in any
community or unreasonably discriminate against a carrier. Numerous State and
local jurisdictions have considered imposing conditions on a driver's use of
wireless technology while operating a motor vehicle, and a few have actually
done so.
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's operations. This section briefly summarizes
key laws and regulations currently affecting the growth and operation of AT&T
Broadband's cable systems.
Cable Rate Regulation
The 1992 Cable Act imposed an extensive rate regulation regime on the
cable television industry, which limited the ability of cable companies to
increase subscriber fees. Under that regime, all cable systems were subjected to
rate regulation, unless they face "effective competition" in their local
franchise area. 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 or "LFAs") are
primarily responsible for administering the regulation of the lowest level of
cable - the basic service tier ("BST"), which typically contains local broadcast
stations and PEG access channels. Before an LFA begins BST rate regulation, it
must certify to the FCC that it will follow applicable federal rules, and many
LFAs have voluntarily declined to exercise this authority. LFAs also have
primary responsibility for regulating cable equipment rates. Under 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 ("CPST"), which typically contain satellite-delivered
programming. Under the Telecommunications Act, however, the FCC's authority to
regulate CPST rates sunset 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 LFAs may require
reasonable, competitively neutral compensation for management of the public
rights-of-way when cable operators provide telecommunications service." The
Telecommunications Act prohibits LFAs from requiring cable operators to provide
telecommunications service or facilities as a condition of a franchise grant,
renewal or transfer, except that LFAs argue they can seek "institutional
networks" as part of such franchise negotiations. The favorable pole attachment
rates afforded cable operators under 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
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 United
States 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, 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 the interconnection
obligation imposed on all telecommunications carriers. This requires, for
example, that the incumbent local telephone company 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 federal regulation of cable
system delivery of Internet services, and the Federal Communications Commission
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 Federal Communications Commission and Congress that would require cable
operators to provide access to unaffiliated Internet service providers and
online 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 has commenced a
technical and operational trial to test how multiple Internet service providers
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 LECs, including the RBOCs, to compete with cable operators both inside and
outside their telephone service areas. Because of their resources, LECs could be
formidable competitors to traditional cable operators, and certain LECs have
begun offering cable service.
Under the Telecommunications Act, a LEC or other entity providing video
programming to customers will be regulated as a traditional cable operator
(subject to local franchising and federal regulatory requirements), unless it
elects to provide its programming via an "open video system" ("OVS"). It was
anticipated that the primary benefit of using an OVS 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 OVS providers can be
required to obtain such a franchise. To be eligible for OVS status, the 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 LECs and cable operators can now expand their offerings across
traditional service boundaries, the general prohibitions remain on LEC buyouts
(i.e., any ownership interest exceeding10 percent) of co-located cable systems,
cable operator buyouts of co-located LEC systems, and joint ventures among cable
operators and LECs 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 FCCs
notwithstanding the public Utilities Holding Company Act. Electric utilities
must establish separate subsidiaries, known as "exempt telecommunications
companies" and 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 DBS 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 Federal Communications Commission directly addressed the 30%
ownership rule (and the applicable ownership attribution standards) in its June
2000 ruling on AT&T's merger with MediaOne. The FCC allowed the merger to go
forward, but required AT&T to elect one of three divestiture options to come
into compliance with the 30% ownership cap. Compliance (or arrangements for
compliance) is required by May, 2001.
The FCC previously adopted regulations limiting carriage by the 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 which 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 to75 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. The impact of this decision,
including its impact on the MediaOne Order, is not yet known.
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 which permit cable operators to own and
operate SMATV systems within their franchise area, provided that such 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 ("must carry") or
negotiating for payments for granting permission to the cable operator to carry
the station ("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 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'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
LFAs can include franchise provisions requiring cable operators to set
aside certain channels for non-commercial public, educational and governmental
("PEG") access programming. 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
Federal law requires each cable system to permit customers to purchase
premium 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 DBS and MMDS distributors). This provision limits the
ability of vertically integrated satellite cable programmers to offer exclusive
programming arrangements to AT&T Broadband. 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 who 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 DBS.
Inside Wiring; Subscriber Access
Federal Communications Commission 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
a 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 who are willing to pay the building owner a
higher fee, where such a fee is permissible. The Federal Communications
Commission has also proposed abrogating all exclusive multiple dwelling unit
service agreements held by incumbent operators, but allowing such contracts when
held by new entrants. In another proceeding, the Federal Communications
Commission 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 Federal Communications Commission ruling may limit the extent to
which multiple dwelling unit owners may enforce certain aspects of multiple
dwelling unit agreements which 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 to provide service in multiple dwelling unit
complexes.
Other Regulations of the Federal Communications
Commission
In addition to the Federal Communications Commission regulations noted
above, there are other regulations of the Federal Communications Commission
covering such areas as:
o equal employment opportunity (currently suspended as a result of a
judicial ruling),
o subscriber privacy,
o programming practices, including, among other things:
(1) syndicated program exclusivity, which requires a cable system to
delete particular programming offered by a distant broadcast
signal carried on the system which duplicates the programming for
which a local broadcast station has secured exclusive
distribution rights, (2) network program nonduplication, (3)
local sports blackouts, (4) indecent programming, (5) lottery
programming, (6) political programming, (7) sponsorship
identification, (8) children's programming advertisements, and
(9) closed captioning,
o registration of cable systems and facilities licensing,
o maintenance of various records and public inspection files,
o aeronautical frequency usage,
o lockbox availability,
o antenna structure notification,
o tower marking and lighting,
o consumer protection and customer service standards,
o technical standards,
o consumer electronics equipment compatibility, and
o emergency alert systems.
The Federal Communications Commission 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 could then 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 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 Commission's review of the AOL-Time Warner
merger, is in its earliest stages.
The Federal Communications Commission 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 Federal Communications Commission licenses needed to
operate certain transmission facilities used in connection with cable
operations.
Copyright
Cable television systems are subject to 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
federal copyright royalty pool (such 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'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. 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.
Non-compliance by the cable operator with franchise provisions may also 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 LFAs have considerable
discretion in establishing franchise terms, there are certain federal
limitations. For example, LFAs 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.
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 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, such 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 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's business
will not be affected adversely by future legislation, new regulation or
deregulation.
COMPETITION
Competition in long distance and local telecommunications services is
based on price and pricing plans, the types of services offered, customer
service, access to customer premises, and communications quality, reliability
and availability, as well as, for business customers, the ability to provide
high quality data communication services and technical support. AT&T's principal
competitors include MCIWorldcom, Inc., Sprint Corporation, the RBOCs and GTE
Corporation. AT&T also experiences significant competition in long distance from
a number of newer entrants, such as Qwest, and a large number of smaller
entities, including dial around resellers. In addition, long distance
telecommunications providers have been facing competition from non-traditional
sources, including as a result of technological substitutions, such as Internet
telephony, e-mail, and wireless services.
The ILECs have very substantial capital and other resources,
long standing customer relationships and extensive existing facilities and
network rights-of-way and are AT&T's primary competitors in the local services
market. Additionally, a number of long distance telecommunication, wireless,
cable and other service providers have entered the local services market in
competition with AT&T. Some of these actual and potential competitors have
substantial financial and other resources. AT&T also competes in the local
services market with a number of CLECs, a few of which have existing local
networks and significant financial resources.
Competition for subscribers among wireless service providers is based
principally upon the services and features offered, call quality, customer
service, system coverage and price. AT&T Wireless Group's ability to compete
successfully will depend, in part, on its ability to anticipate and respond to
various competitive factors affecting the industry, including new services that
may be introduced, changes in consumer preferences, demographic trends, economic
conditions and pricing strategies. Increased competitive pressures, the
introduction or popularity of new products and services, including prepaid phone
products, as well as a general softening of the economy, could adversely affect
our results, increase our churn and decrease our average revenue per user. AT&T
Wireless Group's primary national competitors are Cingular, Verizon Wireless,
Nextel Communications, Inc., VoiceStream Communications and Sprint PCS.
In addition, the wireless communications industry has been experiencing
significant consolidation and the AT&T Wireless Group expects that this
consolidation will continue. The previously announced, or recently completed,
mergers or joint ventures of Bell Atlantic/GTE/Vodafone AirTouch (now called
Verizon), SBC/Bell South/Ameritech (now called Cingular) have created large,
well-capitalized competitors with substantial financial, technical, marketing
and other resources to respond to AT&T Wireless Group's offerings. In addition,
in July 2000, VoiceStream Communications and Deutsche Telekom announced a
proposed transaction. These mergers or ventures have caused AT&T Wireless
Group's ranking to decline to third in U.S. revenue and U.S. subscriber share.
In terms of U.S. population covered by licenses, or POPs, AT&T Wireless Group,
including partnerships and affiliates, ranks third. As a result, these
competitors may be able to offer nationwide services and plans more quickly and
more economically than the AT&T Wireless Group and to obtain roaming rates that
are more favorable than those obtained by AT&T Wireless Group, and may be better
able to respond to offers of AT&T Wireless Group.
AT&T Wireless Group's cellular operations have always experienced
direct competition from the second cellular licensee in each market. Beginning
in 1997, AT&T Wireless Group began experiencing competition from as many as six
license holders in certain markets. Competition from new providers in AT&T
Wireless Group's markets will continue to increase as the networks of license
holders are built out over the next several years. In addition, the FCC is
likely to offer additional spectrum for wireless mobile licenses in the future
using existing or new technologies.
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 directly competitive cable television
operations and internet service providers. The Cable Acts are designed to
increase competition in the cable television industry. There are alternative
methods of distributing the same or similar video programming offered by cable
television systems. These include direct broadcast satellite, known as DBS,
(allowing the subscriber to receive video services directly via satellite using
a relatively small dish), telephone networks (whether it is through wireless
cable, or through upgraded telephone networks), utility company networks, MMDS
(which deliver programming services over microwave channels received by
customers with special antennas), competitive, non-exclusive franchises, city
provided cable services, SMATV systems (which provide multichannel program
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 governmental authorities). In addition to
competition for customers, the cable television industry competes with broadcast
television, radio, the print media and other sources of information and
entertainment for advertising revenue. Additionally, as AT&T Broadband begins to
offer new services such as high speed Internet access and telephone services,
there will be significant competition from both the local telephone companies
and new providers of such services.
DBS has emerged as significant competition to cable systems. The DBS
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 DBS 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. DBS 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. DBS,
however, is limited in the local programming it can provide because of the
current capacity limitations of satellite technology. It is, therefore, expected
that DBS companies will offer local broadcast programming only in the larger
U.S. markets for the foreseeable future. The DBS 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 one already applicable to cable systems) is unconstitutional.
EchoStar began providing high-speed Internet access in late 2000, and DirecTV,
who has partnered with AOL, reports that it will begin providing its own version
of high-speed Internet access shortly. These developments will provide
significant new competition to AT&T Broadband's offering of high speed Internet
access.
AT&T 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, AT&T anticipates that new and different competitors will
enter and expand their positions in the communications services markets. These
may include entrants from other segments of the communications and information
services industry or global competitors seeking to expand their market
opportunities. Many such new competitors are likely to enter with a strong
market presence, well recognized names and pre-existing direct customer
relationships. The Telecommunications Act has already had a significant impact
on the competitive environment. Anticipating changes in the industry, non-RBOC
LECs, which are not required to implement the Telecommunications Act's
competitive checklist prior to offering long distance in their home markets,
have integrated their local service offerings with long distance offerings in
advance of AT&T offering combined local and long distance service in these
areas, and continue to adversely affect AT&T'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 such
provision is in the public interest, and that it has satisfied the conditions
for developing local competition established by the Telecommunications Act. The
RBOCs have petitioned the FCC for permission to provide interLATA interexchange
services in one or more states within their home market; to date the FCC has
granted four of these petitions. 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. The FCC authorized SBC Communications, Inc.'s Texas
application in April 2000. More recently, in February 2001, the FCC approved SBC
applications in Kansas and Oklahoma.
To the extent that the 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, there is a substantial risk that AT&T and other
interexchange service providers would be at a disadvantage to the 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
adversely affect AT&T's future revenue and earnings. In any event, the
simultaneous entrance of numerous new competitors for interexchange and combined
service packages is likely to adversely affect AT&T's future long distance
revenue and could adversely affect future earnings. In addition, the
substitution of data and Internet services for voice services is likely to
depress earnings because of the smaller margin these services contain.
Furthermore, in February 1997, a General Agreement on Trade in Services
(GATS) was reached under the World Trade Organization. The GATS, which became
effective January 1, 1998, is designed to open each country's domestic
telecommunications markets to foreign competitors. The GATS, and future trade
agreements, may accelerate the entrance into the U.S. market of foreign
telecommunications providers, certain of whom are likely to possess dominant
home market positions in which there is not effective competition. The GATS may
also permit AT&T's entrance into other markets as only a small number of
countries refused to eliminate their foreign ownership restrictions.
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 adversely affect the timing and success of AT&T's entrance into
the local exchange services market and AT&T's ability to offer combined service
packages that include local service.
EMPLOYEES
At December 31, 2000 AT&T employed approximately 166,000 persons in its
operations, approximately 97% of whom are located domestically. About 22% of the
domestically located employees of AT&T are represented by unions. Of those so
represented, about 94% are represented by the Communications Workers of America
(CWA), which is affiliated with the AFL-CIO; about 5% by the International
Brotherhood of Electrical Workers (IBEW), which is also 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.
Of AT&T's employees, approximately 29,000 persons were employed by the
AT&T Wireless Group in its operations, virtually all of whom are located in the
United States.
SEGMENT, OPERATING REVENUE AND RESEARCH AND DEVELOPMENT
EXPENSE INFORMATION
For information about the Company's research and development expense,
see Note 3 to the Consolidated Financial Statements included in Item 8 to this
Annual Report. For information about the consolidated operating revenues
contributed by the Company's major classes of products and services, see the
revenue tables and descriptions following the caption "Segment Results" in the
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in Item 7.
LIBERTY MEDIA GROUP
The economic performance of the Liberty Media Group are reflected in
the Liberty Media Group tracking stock. A description of the Liberty Media Group
is included as Exhibit (99)b to this Form 10-K.
SPECIAL CONSIDERATIONS
Investors should carefully consider the following factors regarding
their investment in AT&T Corp. securities, including AT&T Common Stock and AT&T
Wireless Group Tracking Stock.
SPECIAL CONSIDERATIONS RELATING TO THE FACT THAT AT&T WIRELESS GROUP TRACKING
STOCK IS A TRACKING STOCK
The market price of AT&T Common Stock, AT&T Wireless Group tracking stock and
Liberty Media Group tracking stock may not reflect the financial performance and
economic value of each groups as we intend and may not effectively track the
separate performance of each group
The market price of AT&T Common Stock, AT&T Wireless Group tracking
stock and Liberty Media Tracking Stock may not in fact reflect the financial
performance and economic value of each group as we intend. Holders of AT&T
Common Stock, AT&T Wireless Group tracking stock and Liberty Media Group
tracking stock will continue to be common shareholders of AT&T Corp. and, as
such, will be subject to all risks associated with an investment in AT&T Corp.
and all of its businesses, assets and liabilities. The performance of AT&T Corp.
as a whole may affect the market price of each stock or the market price could
more independently reflect the performance of the business of each group.
Investors may discount the value of each stock because each group is part of a
common enterprise with the rest of the operations of AT&T Corp. rather than a
stand-alone entity.
Holders of AT&T common stock, AT&T Wireless Group tracking stock and Liberty
Media Group tracking stock are shareholders of one company and, therefore,
financial impacts on one group could affect the other groups
Holders of AT&T common stock, AT&T Wireless Group tracking stock and
Liberty Media Group tracking stock are all common shareholders of AT&T Corp.,
and are subject to risks associated with an investment in a single company and
all of AT&T Corp.'s businesses, assets and liabilities. Financial effects
arising from one group that affect AT&T Corp.'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 Corp. 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
Corp. and its subsidiaries. This, in turn, could increase the borrowing costs of
the other groups and AT&T Corp. 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 Corp. legally available for payment of future
dividends on each of AT&T common stock, AT&T Wireless Group tracking stock and
Liberty Media Group tracking stock. For these reasons, you should read AT&T's
consolidated financial information together with the financial information of
AT&T Wireless Group and Liberty Media Group.
The complex nature of the terms of AT&T Wireless Group tracking stock and
Liberty Media Group tracking stock, or confusion in the marketplace about what a
tracking stock is, could adversely affect the market prices of AT&T Wireless
Group tracking stock or Liberty Media Group tracking stock
Tracking stocks, like AT&T Wireless Group tracking stock and Liberty
Media Group tracking stock, are more complex than traditional common stock and
are not directly comparable to common stock of companies that have been spun off
by their parent companies. The complex nature of the terms of the tracking
stock, and the potential difficulties investors may have in understanding these
terms, may adversely affect the market price of such tracking stock. Examples of
these terms include:
o discretion of AT&T's board of directors to make determinations
affecting AT&T Wireless Group tracking stock,
o redemption and conversion rights in the event AT&T disposes of
substantially all the assets attributed to AT&T Wireless Group,
o ability of AT&T to convert shares of AT&T Wireless Group tracking
stock into shares of AT&T common stock, or
o voting rights of AT&T Wireless Group tracking stock, Liberty Media
Group tracking stock and AT&T common stock.
Confusion in the marketplace about what a tracking stock is and what it is
intended to represent could also adversely affect the market price of AT&T
Wireless Group tracking stock and Liberty Media Group tracking stock.
Holders of AT&T Wireless Group tracking stock will have limited separate
shareholder rights, and will have no additional rights specific to AT&T Wireless
Group, including direct voting rights
Holders of AT&T Wireless Group tracking stock do not have any direct
voting rights in AT&T Wireless Group, except to the extent required under AT&T's
charter or by New York law. Separate meetings for holders of AT&T Wireless Group
tracking stock are not held. 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 is in a position to control the outcome of
the vote on that matter.
Currently:
o each share of AT&T common stock has one vote,
o each share of Class B Liberty Media Group tracking stock has 0.375 of
a vote,
o each share of Class A Liberty Media Group tracking stock has 0.0375 of
a vote and
o each share of AT&T Wireless Group tracking stock has 0.5 of a vote.
The voting power of each class is subject to adjustment for stock
splits, stock dividends and combinations, including any distribution of AT&T
Wireless Group tracking stock to holders of AT&T common stock.
There is no board of directors or committee that owes any separate fiduciary
duties to holders of tracking stock, apart from those owed to AT&T shareholders
generally
AT&T does not have a separate board of directors to represent solely
the interests of the holders of AT&T Wireless Group tracking stock or Liberty
Media Group tracking stock. Each of AT&T Corp.'s board of directors, the AT&T
Wireless Group capital stock committee and the Liberty Media Group capital stock
committee owes fiduciary duties to AT&T Corp. and its shareholders as a whole.
Consequently, there is no separate board of directors or committee that owes any
separate duties to the holders of tracking stock.
Until the split-off, AT&T Wireless Group will be controlled by AT&T
Subject to fiduciary duties, our policy statements and inter-company
agreements, our board of directors could make operational and financial
decisions or implement policies that affect disproportionately the businesses of
a group. These decisions could include:
o allocation of financing opportunities in the public markets,
o allocation of business opportunities, resources and personnel, and
o transfers of services, including sales agency, resale and other
arrangements, 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.
In addition, AT&T Wireless Group is, and may continue to be, subject to
AT&T Corp.'s existing agreements or arrangements with third parties and consent
decrees, as well as new agreements or decrees. These agreements or arrangements
or decrees currently may benefit AT&T Wireless Group, as in the case of
purchasing arrangements, or may have the effect of limiting or impairing its
business opportunities. For example, AT&T and British Telecommunications plc
have entered into a joint venture agreement for the provision of global
communications services. As part of that joint venture agreement, among other
things, AT&T has agreed to various restrictions on its businesses and
activities, including non-competition provisions and exclusive purchasing
requirements, all of which apply to AT&T Wireless Group.
Holders of tracking stock may have potentially diverging interests from holders
of other classes of AT&T Corp. 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
Wireless Group tracking stock and/or Liberty Media Group tracking stock diverge,
conflict or appear to diverge or conflict. Examples include determinations by
AT&T Corp.'s board of directors to:
o set priorities for use of capital and debt capacity,
o pay or omit the payment of dividends on AT&T common stock, AT&T
Wireless Group tracking stock or Liberty Media Group tracking stock,
except where such dividends are required,
o redeem shares of AT&T Wireless Group tracking stock for shares of AT&T
common stock or stock of qualifying subsidiaries of AT&T Corp.,
o approve dispositions of assets attributed to any group,
o allocate the proceeds of issuances of AT&T Wireless Group tracking
stock either to AT&T Common Stock Group with a corresponding reduction
in the AT&T Common Stock Group's retained portion, if any, or to the
equity of AT&T Wireless Group,
o formulate public policy positions for AT&T,
o establish material commercial relationships between groups, and
o make operational and financial decisions with respect to one group
that could be considered to be detrimental to another group.
In addition, decisions regarding distribution and other commercial
arrangements between the groups may affect costs, service alternatives and
marketing approaches for each group. When making decisions with regard to
matters that create potential diverging interests, our board of directors will
act in accordance with:
o the terms of AT&T Corp.'s charter, the AT&T Wireless Group policy
statement, the Liberty Media Group policy statement and the
inter-group agreement between AT&T and Liberty Media Group, which
governs the relationship between AT&T Common Stock Group and Liberty
Media Group, to the extent applicable, and
o its fiduciary duties, which require our board of directors to consider
the impact of these decisions on all shareholders of AT&T Corp.
Our board of directors also could, from time to time, refer to the Liberty
Media Group capital stock committee and the AT&T Wireless Group capital stock
committee matters involving any conflict, and have those committees report to
our board of directors on those matters or decide those matters to the extent
permitted by AT&T's by-laws and applicable law.
AT&T's board of directors may redeem tracking stock in exchange for stock of
another subsidiary
AT&T Corp.'s charter provides that AT&T Corp. may, at any time, redeem
all outstanding shares of AT&T Wireless Group tracking stock or Liberty Media
Group tracking stock in exchange for a specified number of outstanding shares of
common stock of a subsidiary of AT&T Corp. that satisfies certain requirements
under the Internal Revenue Code and that holds, directly or indirectly, all of
the assets and liabilities of such group. This type of redemption may only be
made on a pro rata basis, and must be tax free to the holders of tracking stock,
except with respect to any cash that holders receive in lieu of fractional
shares.
If we complete the proposed split-off of AT&T Wireless Group and
Liberty Media Group in the manner we contemplate, our Board of Directors will
use this redemption right to exchange all shares of AT&T Wireless Group tracking
stock for shares of AT&T Wireless Services and all shares of Liberty Media Group
tracking stock for shares of Liberty Media Corporation. In this case,
shareholders of AT&T Wireless Group tracking stock and Liberty Media Group
tracking stock would no longer be shareholders of AT&T but would be shareholders
of a AT&T Wireless Services or Liberty Media Corporation, respectively.
A decision by AT&T Corp.'s board of directors to dispose of assets attributed
to AT&T Wireless Group could have an adverse impact on the trading price of AT&T
Wireless Group tracking stock
Assuming AT&T Wireless Group's assets represent less than substantially
all of the properties and assets of AT&T Corp. 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 properties and assets
of AT&T Wireless Group because the New York Business Corporation Law, or NYBCL,
requires shareholder approval only for a sale or other disposition of all or
substantially all of the properties and assets of all of AT&T Corp.
However, in the event of a disposition of all or substantially all of
the properties and assets attributed to AT&T Wireless Group, generally defined
as 80% or more of the fair value of that group, AT&T will be required under its
charter to:
o convert each outstanding share of AT&T Wireless Group tracking stock
into shares of AT&T common stock at a 10% premium, or
o 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 AT&T Wireless Group tracking stock, either by
special dividend or by redemption of all or part of the outstanding
shares of AT&T Wireless Group tracking stock, or
o take a combination of the actions described in the preceding bullet
points whereby AT&T Corp. would convert some shares of AT&T Wireless
Group tracking stock into AT&T common stock at a 10% premium and pay a
dividend on the remaining shares of AT&T Wireless Group tracking stock
or redeem all or part of the remaining shares of AT&T Wireless Group
tracking stock for cash and/or property equal to the fair value of a
portion of the net proceeds of the disposition allocable to AT&T
Wireless Group tracking stock.
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
Wireless Group tracking stock. In addition, under New York law, our board of
directors could decline to dispose of AT&T Wireless Group assets even if a
majority of the holders of AT&T Wireless Group tracking stock request such a
disposition.
AT&T Corp. may take positions on public policy or regulatory matters that
benefit one group more than another
Because of the nature of the businesses of AT&T Common Stock Group, and
AT&T Wireless Group, the groups may have diverging interests as to the position
AT&T Corp. should take with respect to various regulatory issues. For example,
FCC regulations that may advance the interests of one group may not advance the
interests of the other groups. Under the AT&T Wireless Group policy statement,
we will resolve material matters involving potentially divergent interests in a
manner that our board of directors, or the AT&T Wireless Group capital stock
committee, determines to be in the best interests of AT&T Corp. 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, our board of directors could take
positions on any given issue that may benefit one group more than another.
The fiduciary duties of our 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
shareholders regardless of class or series, and does not have separate or
additional duties to either group of shareholders. 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 Wireless Group tracking stock or Liberty
Media 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 the tracking stock or our board's
policies may be costly and time consuming to AT&T, AT&T Wireless Group and
Liberty Media Group.
Our board of directors has the ability to control inter-group transactions
between AT&T Common Stock Group and AT&T Wireless Group
Our board of directors may decide to transfer funds or other assets
between groups. Transfers of assets from AT&T Common Stock Group to AT&T
Wireless Group that our board of directors designates as an equity contribution
by AT&T Common Stock Group to AT&T Wireless Group will result in an increase in
AT&T Common Stock Group's retained portion of the value of AT&T Wireless Group.
Under the AT&T Wireless Group policy statement, AT&T Common Stock Group
may make loans to AT&T Wireless Group at interest rates and on terms and
conditions substantially equivalent to the interest rates and terms and
conditions that AT&T Wireless 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 AT&T Common Stock Group. The AT&T Wireless
Group policy statement contemplates that these terms will apply regardless of
the interest rates and terms and conditions on which AT&T or members of AT&T
Common Stock Group may have acquired the subject funds. We anticipate that
interest rates payable by AT&T Wireless Group initially will be higher than
those payable by AT&T or the AT&T Common Stock Group.
Any increase in AT&T Common Stock Group's retained portion of AT&T
Wireless Group resulting from an equity contribution, or any decrease in that
retained portion resulting from a transfer of funds from AT&T Wireless Group to
AT&T Common Stock Group, would be determined by reference to the then-current
market value of AT&T Wireless Group tracking stock. Such an increase or
decrease, however, could occur at a time when those shares are considered under-
or over-valued and such a decrease could occur at a time when those shares are
considered under- or over-valued.
Our board of directors may change the AT&T Wireless Group Policy Statement or
our By-Laws without shareholder approval
The AT&T Wireless Group policy statement governs the relationship
between AT&T Common Stock Group and AT&T Wireless Group and AT&T Corp.'s by-laws
create a capital stock committee that oversees the interaction between the two
groups. Our board of directors may modify, suspend or rescind the policies set
forth in the policy statement 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 may also
adopt additional policies, depending upon the circumstances. AT&T Corp.'s
by-laws may similarly be modified, suspended or rescinded. Our board of
directors would make any determination to modify, suspend or rescind these
policies or our by-laws, or to make exceptions to them or adopt additional
policies or by-laws, including any decision that would have disparate impacts
upon holders of AT&T common stock and AT&T Wireless Group tracking stock, in a
manner consistent with its fiduciary duties to AT&T Corp. 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, including the holders of AT&T common stock, AT&T
Wireless Group tracking stock and Liberty Media Group tracking stock.
It will be difficult for a third party to acquire AT&T Wireless Group without
AT&T Corp.'s consent
If AT&T Wireless Group were an independent entity, any person
interested in acquiring it 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 AT&T Wireless Group tracking stock is a class of our
common shares that is intended to reflect the financial performance and economic
value of AT&T Wireless Group, a person interested in acquiring only AT&T
Wireless 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 Corp. 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 AT&T Wireless
Group.
Future sales of AT&T Wireless Group tracking stock and AT&T common stock could
adversely affect their respective market prices and the ability to raise capital
in the future
Sales of substantial amounts of AT&T Wireless Group tracking stock,
including any sale by AT&T of AT&T Wireless Services shares it retains in the
split-off, and AT&T common stock in the public market could hurt the market
price of AT&T Wireless Group tracking stock. This also could hurt AT&T's ability
to raise capital in the future. The shares of AT&T Wireless Group tracking stock
that we sold to the public in April 2000 and the shares AT&T Wireless Group
tracking stock to be issued in the exchange offer AT&T expects to conduct in the
second quarter 2001 are or will be freely tradable without restriction under the
Securities Act of 1933 by persons other than "affiliates" of AT&T, as defined
under the Securities Act. Any sales of substantial amounts of AT&T Wireless
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
market price of AT&T Wireless Group tracking stock.
The approval of the shareholders of AT&T and AT&T Wireless Group will
not be solicited for the issuance of authorized but unissued shares of AT&T
Wireless Group tracking stock unless this approval is deemed advisable by our
board of directors or is required by applicable law, regulation or stock
exchange listing requirements. The issuance of those shares could dilute the
value of shares of AT&T Wireless Group tracking stock.
We do not expect to pay dividends on AT&T Wireless Group tracking stock or AT&T
Wireless Services common stock
Determinations as to the future dividends on AT&T Wireless Group
tracking stock primarily will be based upon the financial condition, results of
operations and business requirements of AT&T Wireless Group and AT&T Corp. as a
whole. We currently do not expect to pay any dividends on AT&T Wireless Group
tracking stock for the foreseeable future, nor do we expect AT&T Wireless
Services to pay any dividends on AT&T Wireless Services common stock for the
foreseeable future following the split-off.
Changes in the tax law or in the interpretation of current tax law may result in
redemption of AT&T Wireless Group tracking stock or may prevent us from issuing
further shares
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 Wireless Group tracking stock, it is possible that we would cease issuing
additional shares of AT&T Wireless Group tracking stock. This could affect the
value of AT&T Wireless Group tracking stock then outstanding.
Furthermore, we are entitled to convert AT&T Wireless Group tracking
stock into AT&T common stock at a premium of 10% if, based upon the opinion of
tax counsel, adverse U.S. federal income tax law developments related to AT&T
Wireless Group tracking stock occur.
In some instances, we may optionally redeem AT&T Wireless 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 May 2, 2002, redeem all
outstanding shares of AT&T Wireless Group tracking stock for shares of AT&T
common stock at a 10% premium. We could decide to redeem shares of AT&T Wireless
Group tracking stock at a time when either or both of AT&T common stock and AT&T
Wireless Group tracking stock may be considered to be overvalued or undervalued.
In addition, a redemption at any premium would preclude holders of AT&T Wireless
Group tracking stock from retaining their investment in a security intended to
reflect separately the economic performance of AT&T Wireless Group. It would
also give holders of shares of converted AT&T Wireless Group 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 AT&T Wireless Group.
If we liquidate AT&T, amounts distributed to holders of each class of common
stock may not bear any relationship to 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.
SPECIAL CONSIDERATIONS RELATING TO THE BUSINESS OF AT&T WIRELESS GROUP
AT&T Wireless 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 Wireless 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 may also be difficult for AT&T
Wireless Group to obtain all the financing it needs to fund its business and
growth strategy on desirable terms. AT&T Wireless Group currently anticipates
requiring substantial additional financing for the foreseeable future to fund
capital expenditures, license purchases and costs and expenses in connection
with funding its operations, domestic and international investments and its
growth strategy and in order to repay indebtedness and preferred equity owed to
or held by AT&T and affiliated entities at the time of the split-off. As of
December 31, 2000, the aggregate amount of this intercompany debt and preferred
equity was approximately $5.4 billion.
AT&T's relationship with DoCoMo contains features that could adversely affect
the financial condition of AT&T Wireless Group or the way in which it conducts
its business
The terms of the DoCoMo investment enable DoCoMo to terminate its
investment and require repayment of its $9.8 billion investment, plus interest,
if AT&T Corp. does not complete the split-off of AT&T Wireless Services within a
specified time frame or if by June 30, 2004 AT&T Wireless Group either fails to
commence service using an agreed technology in at least 13 of the top 50
domestic markets or abandons wideband code division multiple access, also known
as Universal Mobile Telecommunications System, as its primary technology for
third generation services. If AT&T must repay DoCoMo's investment before the
split-off, AT&T Wireless Group will fund approximately $6.2 billion, plus
interest. After the split-off, if DoCoMo requires repayment, AT&T Wireless
Services will fund the entire repurchase obligation. If DoCoMo requires
repayment of its investment, it may also terminate the technology rights
provided to AT&T Wireless Group in connection with its investment.
Before the split-off, AT&T will need to obtain DoCoMo's consent in
order to undertake a number of business actions relating to AT&T Wireless Group.
After the split-off, AT&T Wireless Services will need to obtain DoCoMo's consent
in order to make any fundamental change in the nature of its business or to
allow another wireless operator to acquire more than 15% but less than 50% of
AT&T Wireless Services' equity. These limitations could prevent AT&T Wireless
Group or AT&T Wireless Services from taking advantage of some business
opportunities or relationships that it might otherwise pursue.
AT&T Wireless Group has substantial capital requirements that it may not be able
to fund
AT&T Wireless Group's strategy and business plan will continue to
require substantial capital, which AT&T Wireless 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 Wireless Group, and result in the delay,
change or abandonment of AT&T Wireless Group's development or expansion plans
and the failure to meet regulatory build-out requirements.
AT&T Wireless Group currently estimates that its capital expenditures
for the build out of its networks, including expenditures related to its fixed
wireless operations during 2001, will total approximately $5.5 billion, as
compared to $4.1 billion in 2000. AT&T Wireless Group expects these 2001 capital
expenditure amounts to include approximately $5 billion of mobility expenditures
and approximately $450 million for fixed wireless. AT&T Wireless Group also
expects to incur substantial capital expenditures in future years. The actual
amount of the funds required to finance this network build out and other capital
expenditures may vary materially from management's estimate. AT&T Wireless Group
has entered into various contractual commitments associated with the development
of its third generation strategy totaling approximately $2.1 billion as of the
dates the agreements were executed. These include purchase commitments for
network equipment. Additionally, AT&T Wireless Group anticipates that it will
enter into material purchase commitments in the future.
AT&T Wireless Group also may require substantial additional capital
for, among other uses, acquisitions of providers of wireless services, spectrum
license or system acquisitions, system development and network capacity
expansion. AT&T Wireless Group has also entered into agreements for investments
and ventures which have required or will require substantial capital, including
agreements to invest $2.6 billion in exchange for a combination of a
non-controlling equity interest in and debt securities issued by Alaska Native
Wireless, which was the successful bidder for licenses costing approximately
$2.9 billion in the recently concluded 1900 megahertz auction. These agreements
also may contain provisions potentially requiring substantial additional capital
in future circumstances, such as allowing the other investors to require AT&T
Wireless Group to purchase assets or investments.
The actual amount of funds necessary to implement AT&T Wireless Group's business
plan may materially exceed current estimates, which could have a material
adverse effect on AT&T Wireless Group's financial condition and results of
operations
The actual amount of funds necessary to implement AT&T Wireless Group's
business plan may materially exceed AT&T Wireless current estimates in the event
of various factors including:
o departures from AT&T Wireless Group's current business plan,
o unforeseen delays,
o cost overruns,
o unanticipated expenses,
o regulatory developments,
o engineering design changes, and
o technological and other risks.
If actual costs do materially exceed AT&T Wireless Group's current estimates for
these or other reasons, this could have a material adverse effect on AT&T
Wireless Group's financial condition and results of operations.
AT&T Wireless Group's significant network build out
requirements may not be completed as planned
AT&T Wireless Group needs to complete significant remaining build-out
activities, including completion of regulatorily required build-out activities
in some of its existing wireless markets. Failure or delay to complete the build
out of the network and launch operations, or increased costs of this build out
and launch of operations, could have a material adverse effect on the operations
and financial condition of AT&T Wireless Group.
As AT&T Wireless Group continues to build out its network, it must,
among other things, continue to:
o lease, acquire or otherwise obtain rights to a large number of cell
and switch sites,
o obtain zoning variances or other local governmental or third-party
approvals or permits for network construction,
o complete the radio frequency design, including cell site design,
frequency planning and network optimization, for each of its markets,
o complete the fixed network implementation, which includes designing
and installing network switching systems, radio systems,
interconnecting facilities and systems, and operating support systems,
and
o expand and maintain customer care, network management, billing and
other financial and management systems.
In addition, over the next several years, AT&T Wireless Group will be
implementing upgrades to its network to access the next generation of digital
technology. These events may not occur in the time frame AT&T Wireless Group
assumes or that the FCC requires, or at the cost AT&T Wireless Group assumes, or
at all. Additionally, problems in vendor equipment availability, technical
resources or system performance could delay the launch of new or expanded
operations in new or existing markets or result in increased costs in all
markets. AT&T Wireless Group intends to rely on the services of various
companies that are experienced in design and build out of wireless networks in
order to accomplish its build out schedule. However, AT&T Wireless Group may not
be able to obtain satisfactory contractors on economically attractive terms or
ensure that the contractors obtained will perform as expected.
AT&T Wireless Group's business and operations would be adversely affected if it
fails to acquire adequate radio spectrum in FCC auctions or through other
transactions
AT&T Wireless Group's domestic business depends on the ability to use
portions of the radio spectrum licensed by the FCC. AT&T Wireless Group could
fail to obtain sufficient spectrum capacity in new and existing markets, whether
through FCC auctions or other transactions, in order to meet the expanded
demands for existing services, as well as to enable development of third
generation services. This type of a failure would have a material adverse impact
on the quality of AT&T Wireless Group's services and its ability to roll out
such future services in certain markets. AT&T Wireless Group intends to continue
to acquire more spectrum through a combination of alternatives, including
participation in spectrum auctions, purchase of spectrum licenses from companies
that own them or purchase of these companies outright.
As required by law, the FCC periodically conducts auctions for licenses
to use certain parts of the radio spectrum. The decision to conduct auctions,
and the determination of what spectrum frequencies will be made available for
auction, are provided for by laws administered by the FCC. The FCC may not
allocate spectrum sufficient to meet the demands of all those wishing to obtain
licenses. Even if the FCC conducts further auctions in the future, AT&T Wireless
Group may not be successful in those future auctions in obtaining the spectrum
that it believes is necessary to implement its business and technology
strategies.
AT&T Wireless Group may also seek to acquire radio spectrum through
purchases and swaps with other spectrum licensees or otherwise, including by
purchases of other licensees outright. However, AT&T Wireless Group may not be
able to acquire sufficient spectrum through these types of transactions, and it
may not be able to complete any of these transactions on favorable terms.
AT&T Wireless Group's business and operations could be hurt if it is unable to
establish new affiliates to expand its digital network or if its existing or any
new affiliates do not or cannot develop their systems in a manner consistent
with AT&T Wireless Group's
In order to accelerate the build-out of widescale coverage of the
United States by a digital mobile wireless network operating on the technical
standards AT&T Wireless Group has adopted, AT&T Wireless Group has entered into
affiliation agreements with other entities that provide wireless service or hold
spectrum licenses. Through contractual arrangements between AT&T Wireless Group
and these affiliates, AT&T Wireless Group's customers are able to obtain service
in the affiliates' territories, and the affiliates' customers are able to obtain
service in AT&T Wireless Group's territory. In all markets where these
affiliates operate, AT&T Wireless Group is at risk because it does not control
the affiliates. As a result, these affiliates are not obligated to implement
AT&T Wireless Group's third generation strategy. AT&T Wireless Group's ability
to provide service on a nationwide level and to implement its third generation
strategy would be adversely affected if these affiliates decide not to
participate in the further development of AT&T Wireless Group's digital network.
AT&T Wireless Group may establish additional affiliate relationships to
accelerate build-out of its digital mobile network. If AT&T Wireless Group is
unable to establish such affiliate relationships, or if any such affiliates are
unable or do not develop their systems in a manner consistent with AT&T Wireless
Group's network, AT&T Wireless Group's ability to service its customers and
expand the geographic coverage of its digital network could be adversely
affected.
If the FCC denies Alaska Native Wireless' application to acquire licenses for
which it was the successful bidder in the recent spectrum auction or, in the
future, revokes licenses awarded to Alaska Native Wireless, AT&T Wireless
Group's ability to implement its third generation strategy could be adversely
affected or AT&T Wireless Group could become obligated to repurchase other
investors interests in Alaska Native Wireless
AT&T Wireless Group has agreed to invest $2.6 billion in exchange for a
combination of a non-controlling equity interest in and debt securities issued
by Alaska Native Wireless, which was the successful bidder for licenses costing
approximately $2.9 billion in the recently concluded 1900 megahertz auction. One
auction participant has challenged the qualifications of Alaska Native Wireless
to acquire "closed" licenses, which constituted most of the licenses for which
Alaska Native Wireless was the successful bidder. If the FCC determines that
Alaska Native Wireless was not qualified, the FCC could refuse to grant Alaska
Native Wireless the closed licenses. If this occurs, it could have a significant
adverse impact on AT&T Wireless Group's ability to provide or enhance services
in key new and existing markets.
The Trustee in NextWave Telecom, Inc.'s Chapter 11 bankruptcy
proceeding, and the unsecured creditors of NextWave, have commenced litigation
relating to the 1900 megahertz auction that could result in a delay in the grant
of licenses to successful bidders or revocation of any licenses, including those
won or acquired by Alaska Native Wireless and cause Alaska Native Wireless to
postpone the development and use of any licenses awarded to it. If this occurs,
it could have a significant adverse impact on AT&T Wireless Group's plans to
provide or enhance services in key new and existing markets.
In specified circumstances, if a winning bid of Alaska Native Wireless
in the recently concluded 1900 megahertz spectrum auction is rejected or if any
license granted to it is revoked, AT&T Wireless Group would become obligated to
compensate other investors for making capital available to the venture. In
specified circumstances, if the grant of those licenses is challenged, AT&T
Wireless Group may be obligated to purchase the interests of other investors.
If AT&T Wireless Group is unable to reach agreement with Alaska Native Wireless
regarding the development and use of licenses for which it was the successful
bidder in the recent spectrum auction, AT&T Wireless Group s ability to
implement its third generation strategy may be adversely affected
AT&T Wireless Group has not reached any agreements with Alaska Native
Wireless as to whether it will participate in AT&T Wireless Group's digital
mobile wireless network. Alaska Native Wireless is not obligated to use or
develop any spectrum it acquires in a manner which will further, or be
consistent with, AT&T Wireless Group's strategic objectives, although Alaska
Native Wireless is obligated to use technology that is compatible and
interoperable with AT&T Wireless Group's digital mobile wireless network. If
Alaska Native Wireless does not enter into agreements with AT&T Wireless Group
regarding the use and development of this spectrum similar to those AT&T
Wireless Group has entered into with its affiliates for its existing network, it
could have a material adverse impact on the timing and cost of implementing AT&T
Wireless Group's third generation strategy.
Potential acquisitions may require AT&T Wireless 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 Wireless Group's strategy is to expand its network,
which AT&T Wireless Group may do through the acquisition of licenses, systems
and wireless providers. These acquisitions may cause AT&T Wireless Group to
incur substantial additional indebtedness to finance the acquisitions or to
assume indebtedness of the entities that are acquired. In addition, AT&T
Wireless Group may encounter difficulties in integrating those acquired
operations into its own operations, including as a result of different
technologies, 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 an adverse effect on
AT&T Wireless Group's growth potential
AT&T Wireless Group intends to pursue a number of new growth
opportunities, which 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 Wireless Group's existing
technology may not perform as expected and that AT&T Wireless 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 spectrum availability to deploy on a large scale. This
capital or spectrum may not be available to support these services.
Furthermore, each of these opportunities entails additional specific
risks. For example, the delivery of fixed wireless services requires AT&T
Wireless Group to provide installation and maintenance services, which the AT&T
Wireless Group has never provided previously. This will require AT&T Wireless
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 Wireless 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. The success of wireless data services, on the
other hand, is substantially dependent on the ability of others to develop
applications for wireless devices and to develop and manufacture devices that
support wireless applications. These applications or devices may not be
developed or developed in sufficient quantities to support the deployment of
wireless data services.
These services may not be widely introduced and fully implemented at
all or in a timely fashion. 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
Wireless Group, AT&T Wireless Group's financial condition and prospects could be
materially adversely affected.
AT&T Wireless Group faces substantial competition
There is substantial competition in the wireless telecommunications
industry. AT&T Wireless Group expects competition to intensify as a result of
the entrance of new competitors and the development of new technologies,
products and services. Other two-way wireless providers, including other
cellular and personal communications services, operators and resellers, serve
each of the markets in which AT&T Wireless Group competes.
A majority of markets will have five or more commercial mobile radio
service providers, and all of the top 50 metropolitan markets have at least
four, and in some cases as many as seven or more, facilities-based wireless
service providers offering wireless services on cellular, personal
communications services or specialized mobile radio frequency. Competition also
may increase to the extent that smaller, stand-alone wireless providers transfer
licenses to larger, better capitalized and more experienced wireless providers.
Market prices for wireless services may decline in the future
AT&T Wireless Group anticipates that market prices for two-way wireless
services generally will decline in the future due to increased competition. We
expect significant competition among wireless providers, including from new
entrants, to continue to drive service and equipment prices lower. AT&T Wireless
Group also expects that there will be increases in advertising and promotional
spending, along with increased demands on access to distribution channels.
All of this may lead to greater choices for customers, possible
consumer confusion, and increasing movement of customers between competitors,
which we refer to as "churn." AT&T Wireless Group may also adopt customer
policies or programs to be more competitive, which may also affect churn. AT&T
Wireless Group's ability to compete successfully also will depend on marketing,
and on its ability to anticipate and respond to various competitive factors
affecting the industry, including new services, changes in consumer preferences,
demographic trends, economic conditions and discount pricing strategies by
competitors.
Consolidation in the wireless communications industry may adversely affect AT&T
Wireless Group
The wireless communications industry has been experiencing significant
consolidation and AT&T Wireless Group expects that this consolidation will
continue. The previously announced mergers or joint ventures of Bell Atlantic
Corporation/GTE Corporation/Vodafone AirTouch, now called Verizon,
SBC/BellSouth, now called Cingular, have created large, well-capitalized
competitors with substantial financial, technical, marketing and other resources
to respond to AT&T Wireless Group's offerings. In addition, in July 2000,
VoiceStream Communications and Deutsche Telekom publicly announced a planned
merger.
These mergers or ventures have caused AT&T Wireless Group's ranking to
decline to third in U.S. revenue and U.S. subscriber share. In terms of U.S.
population covered by licenses, AT&T Wireless Group, including partnerships and
affiliates, ranks third. As a result, these competitors may be able to offer
nationwide services and plans more quickly and more economically than AT&T
Wireless Group, to obtain roaming rates that are more favorable than those
obtained by AT&T Wireless Group, and may be better able to respond to offers of
AT&T Wireless Group.
Significant changes in the wireless industry could materially adversely affect
AT&T Wireless Group
The wireless communications industry is experiencing significant
technological change. This change includes the increasing pace of digital
upgrades in existing analog wireless systems, evolving industry standards,
ongoing improvements in the capacity and quality of digital technology, shorter
development cycles for new products, and enhancements and changes in end-user
needs and preferences and increased importance of data and broadband
capabilities.
The pace and extent of customer demand may not continue to increase,
and airtime and monthly recurring charges may continue to decline. As a result,
the future prospects of the industry and AT&T Wireless Group and the success of
its competitive services remain uncertain. Also, alternative technologies may
develop for the provision of services to customers that may provide wireless
communications service or alternative service superior to that available from
AT&T Wireless Group. Technological developments may therefore materially
adversely affect AT&T Wireless Group.
Termination or impairment of AT&T Wireless Group's relationship with a small
number of key suppliers could adversely affect AT&T Wireless Group's revenues
and results of operations
AT&T Wireless Group has developed relationships with a small number of
key vendors, including Nokia Mobile Phones, Inc., Telefonaktiebolaget LM
Ericsson, Mitsubishi Corporation and Motorola, Inc. for its supply of wireless
handsets, Lucent Technologies, Inc., Nortel Networks, Inc., Ericsson and Nokia
Networks, Inc. for its supply of telecommunications infrastructure equipment and
Convergys Information Management Group for its billing services. AT&T Wireless
Group does not have operational or financial control over its key suppliers, and
has limited influence with respect to the manner in which these key suppliers
conduct their businesses. If these key suppliers were unable to honor their
obligations to AT&T Wireless Group, it could disrupt the business of AT&T
Wireless Group and adversely impact its revenues and results of operations.
AT&T Wireless Group's technology may not be competitive with other technologies
or be compatible with next generation technology
There are three existing digital transmission technologies, none of
which is compatible with the others. AT&T Wireless Group selected time division
multiple access technology for its second generation network because it believes
that this technology offers several advantages over other second generation
technologies. However, a number of other wireless service providers chose code
division multiple access or global system for mobile communications as their
digital wireless technology. For its path to the next generation technology,
AT&T Wireless Group has chosen a global system for mobile communications
platform to make available enhanced data services using general packet radio
service technology, and third generation capabilities using enhanced data rates
for global evolution and ultimately universal mobile telecommunications systems
technologies.
These technologies may not provide the advantages AT&T Wireless Group
expects. Other wireless providers have chosen a competing wideband technology as
their third generation technology. If the universal mobile telecommunications
systems does not gain widespread acceptance, it would materially adversely
affect the business, financial condition and prospects of AT&T Wireless Group.
As AT&T Wireless Group implements its plans for deployment of
technology for third generation capabilities, it will continue to incur
substantial costs associated with maintaining its time division multiple access
networks. Also, these networks are not compatible, and customers with phones
that operate on one network will not initially be able to use those phones on
the other network. There are risks inherent in the development of new third
generation equipment and AT&T Wireless Group may face unforeseen costs, delays
or problems that may have a material adverse affect.
AT&T Wireless Group relies on favorable roaming arrangements, which it may be
unable to continue to obtain
AT&T Wireless Group may not continue to be able to obtain or maintain
roaming agreements with other providers on terms that are acceptable to it. AT&T
Wireless Group's customers automatically can access another provider's analog
cellular or digital system only if the other provider allows AT&T Wireless
Group's customers to roam on its network. AT&T Wireless Group relies on
agreements to provide roaming capability to its customers in many areas of the
United States that AT&T Wireless Group's network does not serve. Some
competitors, because of their call volumes or their affiliations with, or
ownership of, wireless providers, however, may be able to obtain roaming rates
that are lower than those rates obtained by AT&T Wireless Group.
In addition, the quality of service that a wireless provider delivers
during a roaming call may be inferior to the quality of service AT&T Wireless
Group or an affiliated company provides, the price of a roaming call may not be
competitive with prices of other wireless providers for such call, and AT&T
Wireless Group's customer may not be able to use any of the advanced features,
such as voicemail notification, that the customer enjoys when making calls
within AT&T Wireless Group's network. Finally, AT&T Wireless Group may not be
able to obtain favorable roaming agreements for its third generation products
and services that it intends to offer using the technologies it plans to deploy
for interim enhanced data and third generation services.
AT&T Wireless Group's business is seasonal and it depends on fourth quarter
results, which may not continue to be strong
The wireless industry, including AT&T Wireless Group, has experienced a
trend of generating a significantly higher number of customer additions and
handset sales in the fourth quarter of each year as compared to the other three
fiscal quarters. A number of factors contribute to this trend, including the
increasing use of retail distribution, which is dependent upon the year-end
holiday shopping season, the timing of new product and service announcements and
introductions, competitive pricing pressures, and aggressive marketing and
promotions.
Strong fourth quarter results for customer additions and handset sales
may not continue for the wireless industry or for AT&T Wireless Group. In the
future, the number of customer additions and handset sales for AT&T Wireless
Group in the fourth quarter could decline for a variety of reasons, including
AT&T Wireless Group's inability to match or beat pricing plans offered by
competitors, failure to adequately promote AT&T Wireless Group's products,
services and pricing plans, or failure to have an adequate supply or selection
of handsets. If in any year fourth quarter results fail to significantly improve
upon customer additions and handset sales from the year's previous quarters,
this could adversely impact AT&T Wireless Group's results for the following
year.
Media reports have suggested radio frequency emissions may be linked to various
health concerns and interfere with various medical devices and AT&T Wireless
Group may be subject to potential litigation relating to these health concerns
Media and other reports have linked radio frequency emissions from
wireless handsets to various health concerns, including cancer, and to
interference with various electronic medical devices, including hearing aids and
pacemakers. These concerns over radio frequency emissions may discourage the use
of wireless handsets or expose AT&T Wireless Group to potential litigation,
which could have a material adverse effect on AT&T Wireless Group's results of
operations. Additionally, research and studies are ongoing, and may demonstrate
a link between radio frequency emissions and health concerns.
The operations of AT&T Wireless Group are subject to government regulation,
which regulation could have adverse effects on its business
The licensing, construction, operation, sale, resale and
interconnection arrangements of wireless communications systems are regulated to
varying degrees by the FCC, and, depending on the jurisdiction, state and local
regulatory agencies. These regulations may include, among other things, required
service features and capabilities, such as number portability or emergency 911
service. In addition, the FCC, together with the U.S. Federal Aviation
Administration regulates tower marking and lighting. Any of these agencies
having jurisdiction over AT&T Wireless Group's business could adopt regulations
or take other actions that could adversely affect the business of AT&T Wireless
Group.
FCC licenses to provide wireless services or personal communications
services are subject to renewal and revocation. There may be competition for
AT&T Wireless Group's licenses upon their expiration and we cannot assure you
that the FCC will renew them. FCC rules require all wireless and personal
communications services licensees to meet specified build-out requirements. AT&T
Wireless Group may not be able to meet these requirements in each market.
Failure to comply with these requirements in a given license area could result
in revocation or forfeiture of AT&T Wireless Group's license for that license
area or the imposition of fines on AT&T Wireless Group by the FCC.
State and local legislation restricting or prohibiting wireless phone use while
driving could cause subscriber usage to decline
Some state and local legislative bodies have proposed legislation
restricting or prohibiting the use of wireless phones while driving motor
vehicles. Similar laws have been enacted in other countries, and, to date, a
small number of communities in the United States have passed restrictive local
ordinances. If laws are passed prohibiting or restricting the use of wireless
phones while driving, it could have the effect of reducing subscriber usage,
which could cause a material adverse effect on AT&T Wireless Group's results of
operations.
AT&T Wireless Group may be subject to potential litigation relating to the use
of wireless phones while driving
Some studies have indicated that some aspects of using wireless phones
while driving may impair drivers' attention in certain circumstances, making
accidents more likely. These concerns could lead to potential litigation
relating to accidents, deaths or serious bodily injuries, which also could have
material adverse effects on AT&T Wireless Group's results of operations.
SPECIAL CONSIDERATIONS RELATING TO AT&T'S BUSINESS
AT&T's business units face intense competitive pressures
Communications Services
o AT&T currently faces significant competition in each of its consumer
and business communications services business units and expects that
the level of competition in each of these businesses will continue to
increase. In each of these units, AT&T faces competition from numerous
other national and regional domestic and international companies, some
of which have advantages over AT&T.
Competitive conditions impose a variety of significant challenges
including pressures that could require future price cuts and affect the
desirability of products and services. These conditions create a risk of market
share loss and the risk that customers shift to less profitable, lower margin
services. Competitive pressures also create challenges for AT&T's ability to
grow new businesses or introduce new services successfully and execute on its
business plan, including, most significantly, the ability to purchase fairly
priced access services. Each of these business units faces the risk of potential
price cuts by its competitors that could materially adversely affect both market
share and margins. We believe that it is unlikely that we will sustain existing
price or margin levels.
These business units also face the risk of increasing competition from
entities that own their own access facilities, including entities that 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 a superior position vis-a-vis AT&T and
other competitors which must purchase such high margin access services.
Additionally, each of these business units may initiate price cuts in order to
seek to retain market share or to seek to slow decline of market share.
The cost structure of AT&T's business units also affects its
competitiveness. Each of these business units faces the risk that it will not be
able to maintain a competitive cost structure if newer technologies favor newer
competitors who do not have legacy infrastructure and as technology substitution
continues. Each of these units' ability to make critical investments to improve
cost structure may also be impaired by AT&T's current significant debt
obligations.
Broadband Services
AT&T also faces competitive risks in its Broadband Services business.
These risks include the growth of satellite services, regional bell operating
companies services and/or companies providing digital subscriber lines which
compete directly for customers in most markets. They also include the emergence
of new combinations, such as AOL Time Warner, which seek both to commoditize
cable access and provide their own differentiated product, and escalating costs
for programming and other areas which may materially adversely affect margins.
In addition, AT&T's Broadband Services business faces risks relating to the
acceptance and costs of potential new services.
The regulatory and legislative environment creates challenges for AT&T's
business units
Communications Services
Each of AT&T's consumer and business communications services business
units faces the risk of the impact of the implementation of current regulations
and legislation, unfavorable changes in regulation or the introduction of new
onerous regulation. These risks include the impact of the following:
o current law has been implemented in a manner which has not allowed
effective entry into local markets due to non-competitive pricing of
access and local service and regional bell operating company systems
that do not permit rapid large-scale customer changes from the
regional bell operating companies to new service providers, and
o AT&T faces new head-on competition as regional bell operating
companies begin to enter the long distance business.
At present, AT&T does not believe that many market entry rules have
been applied or enforced to allow the economic viability of the various local
market access alternatives or effective large scale management of customers.
Further, few facilities-based competitors to the regional bell operating
companies have emerged and there is no significant alternate source of supply
for most access and local services. One consequence of this is that AT&T remains
ultimately dependent on the regional bell operating companies for supply as
regional bell operating companies still represent substantially all of the
access and still control, cost cycle times, and functionality.
This dependency on supply adversely impacts both AT&T's cost structure
and its ability to create and market desirable and competitive end-to-end
products for customers. Absent more effective application of rules and
regulations, the regional bell operating companies will be well-positioned to
deter new entrants to local service.
In addition, regional bell operating companies 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
regional bell operating companies expand.
Broadband Services
In the case of broadband services, the possibility of forced open
access for cable plant resulting in the commodization of high-speed data on
cable could materially adversely affect AT&T's business. Also, further cable
regulation regarding pricing, ownership limitations and other matters could
impede growth or raise costs.
New Legislation and regulation may increase competition
In addition, there is the possibility that either new regulations or
new legislation will further erode the rules that apply to many of our largest
competitor and suppliers, including the regional bell operating companies. These
changes could give these companies more streamlined regulations that apply to
their access services. These changes could also exclude services, so-called
"advanced" or data services, from the market-opening rules of the applicable
legislation. The consequences of these changes could be to accelerate head-on
competition against AT&T from the regional bell operating companies in both the
communications services and broadband units.
AT&T may be adversely affected by its increased overall debt levels
AT&T currently is pursuing various measures to seek to reduce its debt
level. However, if these efforts cannot be completed successfully or at levels,
on the terms and within the time frame contemplated, or if AT&T's liquidity
needs increase as a result of further revenue or margin deterioration, AT&T's
financial condition would be materially adversely affected. AT&T would be
materially adversely affected by a weakening of the overall market for corporate
credit or ratings downgrades. AT&T's current debt level itself may materially
adversely affect the company and each of its business units by impairing its
financial flexibility, its ability to pursue acquisitions or make capital
expenditures and by otherwise impacting investment decisions that could
materially impair each unit's growth and ability to compete.
AT&T 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 will 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 December 31, 2000, AT&T had total indebtedness of approximately $65
billion, with the short term portion of that at $31.9 billion. AT&T's ability to
meet these obligations depend upon its credit ratings, market conditions and
business results. AT&T continues to investigate and negotiate other financing
alternatives including the monetization of publicly held securities, sales of
certain non-strategic assets and investments, and securitization of certain
accounts receivable, as well as a $6.5 billion debt offering by AT&T Wireless
Services in the first quarter 2001. AT&T has increased its $10 billion line of
credit to $25 billion, which was subsequently reduced to $18.4 billion following
the DoCoMo investment and the AT&T Wireless Services debt offering. In addition,
AT&T plans to retire a portion of the short-term debt with all or a part of the
funds from a planned 2001 offering of a security intended to reflect the
financial performance and economic value of AT&T's Broadband unit, although that
offering may not occur as expected.
AT&T may be 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 by Standard & Poor's Rating Services to A andA1; by Moody's
Investors Service, Inc. to A2 andP1; and by Fitch, Inc. to A-and F1. Both AT&T's
short-term and long-term ratings remain under review for further downgrade at
Standard & Poor's and Moody's Investors Service.
Late last year, AT&T initiated a debt reduction plan, against which it
has continued to make progress. However, at the same time, AT&T has seen
deterioration in the results of its core communication services businesses. It
is unclear as to how the rating agencies will balance these developments in
their ratings assessment, but there is a material risk that AT&T could be
further downgraded. We expect to review with the rating agencies in the near
future the financial results and long-term financial projections of the AT&T
businesses to be separated. A ratings action could occur in advance of the
meetings, during the meeting period, or following the meetings.
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 the $25 billion bank credit facility put in place on December
28, 2000 to serve as a commercial paper back-up source of liquidity. The $25
billion bank credit facility was reduced to $18.3 billion during March 2001 as
we made progress in our deleveraging efforts. The cost of any short-term
borrowing under the bank facility would likely be higher than the cost of
commercial paper borrowings for AT&T today, and could be even higher depending
upon market conditions. In addition, the access to this bank facility extends
only until December 28, 2001 and could be reduced to as low as $10 billion if we
continue to make progress in our deleveraging efforts. To the extent that the
combined outstanding short-term borrowings under the bank credit facility and
AT&T's commercial paper program were to exceed the market capacity for such
borrowings at the expiration of the bank credit facility, 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 facility, which is
intended to serve as a back-up source of liquidity only. Such impacts could
cause further deterioration in our cost and access to capital.
Furthermore, according to the terms of the bank credit facility, AT&T's
ability to split off AT&T Wireless Group is contingent upon AT&T's senior debt
rating, as determined by Standard and Poor's and Moody's Investors Service, not
falling below BBB+ and Baa1, respectively. Failure to split off AT&T Wireless
Group by early 2002 would permit NTT DoCoMo to elect to require AT&T to
repurchase its interest in AT&T for an aggregate purchase price of $9.8 billion
plus a predetermined rate of interest, which could further limit the
availability and increase the cost of financing.
AT&T may not be able to attract and retain management
AT&T's business units face other risks, including risks related to the
difficulties in attracting, retaining and motivating key employees, particularly
in the consumer and business communications services units. There is also a risk
that it will be more difficult to attract, retain and motivate key employees as
growth declines and opportunities and compensation become limited and after the
restructuring is completed as desired hires may be less interested in working
for smaller companies.
AT&T may be unable to engage in potentially desirable strategic transactions
AT&T from time to time explores strategic alternatives with respect to
some of its assets and businesses and may engage in discussions or negotiations
with third parties regarding these possible transactions.
For example, AT&T owns an approximately 25.5% interest in Time Warner
Entertainment, L.P., which AT&T has previously announced it intends to divest.
This interest is not part of or allocated to the AT&T Wireless Group. On
February 28, 2001, AT&T exercised registration rights it has under the Time
Warner Entertainment partnership agreement, to have Time Warner Entertainment
reconstitute itself as a corporation and then to register up to AT&T's full
interest for sale in an initial public offering. Under the Time Warner
Entertainment partnership agreement, Time Warner Entertainment may determine not
to effect a public offering but instead to allow AT&T certain put rights to have
Time Warner Entertainment buy back the shares that would have been sold in such
an offering at an appraised price. AT&T is simultaneously pursuing discussions
with AOL Time Warner concerning alternative potential arrangements for the
redemption of AT&T's partnership interest in Time Warner Entertainment as well
as certain commercial arrangements with AOL Time Warner.
We cannot predict whether these discussions will continue, whether any
of these transactions will be completed or the timing or terms of any of these
transactions.
SPECIAL CONSIDERATIONS RELATING TO AT&T CORP.'S RESTRUCTURING PLAN
AT&T Corp.'s restructuring plan requires fundamental changes to our businesses
that may be hard to implement
If we complete our restructuring plan, each of our four businesses will
need to make changes in its operations that will require substantial effort and
involve substantial risks and costs. 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 our restructuring plan might be less
than the value of AT&T common stock without that plan
If we complete our restructuring plan as we currently contemplate,
holders of AT&T common stock who do not dispose of their shares of AT&T common
stock eventually will receive securities issued by or intended to reflect the
financial performance and economic value of four businesses: AT&T Business
Services, AT&T Consumer Services, AT&T Broadband and AT&T Wireless Services. The
aggregate value of these shares 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.
If 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 or AT&T Wireless Group tracking
stock.
If we do not complete AT&T's restructuring plan as we plan, there may be adverse
consequences to AT&T and AT&T Wireless Group
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,
including 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. 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 business 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 may 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 units in overlapping markets,
including the consumer markets where cable telephone, fixed wireless, and
digital subscriber line solutions may all be available at the same time,
although generally not all under the AT&T brand, 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.
SPECIAL CONSIDERATIONS RELATING TO THE AT&T WIRELESS GROUP SPLIT-OFF
We may not complete the AT&T Wireless Group split-off as we plan
We intend to separate AT&T Wireless Group from AT&T in the middle of
2001, but the split-off is subject to a number of conditions. We must obtain a
favorable IRS ruling, which we may not receive. In addition, AT&T's new $25
billion credit facility includes as conditions to the split-off that it maintain
a public debt rating for its long-term senior debt of at least BBB+ by Standard
& Poor's Rating Services and Baa1 by Moody's Investors Services, Inc. and that
AT&T Wireless Group repay intercompany obligations to AT&T, including debt and
preferred equity which totaled $5.4 billion at December 31, 2000. In order to
facilitate the receipt of the IRS ruling, we have undertaken a reorganization of
our business structure which requires receipt of various local franchise
regulatory approvals. While we currently intend to complete the split-off, we
may not be able to satisfy these conditions to the split-off. Even if we do
satisfy these conditions, other events or circumstances, including litigation,
could occur that could affect the timing or terms of the split-off or our
ability or plans to complete the split-off. For example, several large
shareholders of AT&T associated with unions that represent AT&T employees have
publicly announced their opposition to AT&T's restructuring plan. As a result of
these factors, the split-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. In this event, there may be adverse consequences, such as the
obligation to repurchase DoCoMo's investment in AT&T, or limits on AT&T Wireless
Group's capital funding, as described below.
AT&T's intention to retain $3 billion of shares of AT&T Wireless Services for
sale, exchange or monetization after the split-off could adversely affect the
market value of AT&T Wireless Group tracking stock
AT&T currently intends to retain $3 billion of shares of AT&T Wireless
Services for its own account for sale, exchange or monetization within six
months of the split-off, subject to a satisfactory IRS ruling. If AT&T does so,
the sale of these shares could adversely affect the market price of AT&T
Wireless Services common stock. In addition, AT&T's retention of these shares
would reduce the number of shares of AT&T Wireless Services that we would
distribute to holders of AT&T common stock in the split-off.
If we do not complete the split-off by early 2002 or if AT&T Wireless Group does
not meet specified technology benchmarks, AT&T or AT&T Wireless Services may
have to repurchase DoCoMo's $9.8 billion investment
In connection with DoCoMo's investment in AT&T, AT&T has agreed, if
DoCoMo so elects, to repurchase DoCoMo's interest in AT&T for an aggregate
purchase price of $9.8 billion plus a predetermined interest rate if AT&T does
not complete the split-off of AT&T Wireless Group by January 1, 2002, or March
15, 2002 if AT&T is trying to obtain an IRS ruling, or if by June 30, 2004 AT&T
Wireless Group either fails to commence service using an agreed technology in at
least 13 of the top 50 domestic markets or abandons wideband code division
multiple access as its primary technology for third generation services. Before
the split-off, AT&T Wireless Group would be required to fund its proportionate
share, consisting of $6.2 billion plus interest. After the split-off, AT&T
Wireless Services would be required to fund the entire repurchase obligation,
with AT&T being secondarily liable for $3.6 billion plus interest if AT&T
Wireless Services is unable to satisfy the entire obligation.
If we do not complete the split-off, AT&T Wireless Group may not be able to meet
its substantial capital needs that are key to its business strategy
AT&T's desire to reduce debt levels and maintain its overall credit
rating limits the ability of each of AT&T's business units, including AT&T
Wireless Group, to incur substantial indebtedness. As a result, if the split-off
does not occur in the time frame contemplated, and AT&T does not otherwise
succeed in deleveraging by disposition of assets and other debt restructuring,
AT&T Wireless Group may face significant capital constraints. These constraints
would make it difficult for AT&T Wireless Group to continue to pursue its growth
strategy in a capital intensive and highly competitive industry, including by
making it necessary to scale back plans for third generation services and
international investments. These constraints may have a material adverse effect
on AT&T Wireless Group's business.
If we complete the split-off, AT&T Wireless Services will need to obtain
financing on a stand-alone basis
Historically, all financing for AT&T Wireless Group 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 Wireless Group. If we complete the split-off, AT&T Wireless
Services will have to raise financing on a stand-alone basis without reference
to AT&T's overall balance sheet. Following the split-off, AT&T Wireless Services
may not be able to secure adequate debt or equity financing on desirable terms.
If concerns generally affecting the wireless industry arise, AT&T Wireless
Services will lose the benefit of AT&T's current diverse business profile to
support its debt. The cost to AT&T Wireless Services of stand-alone financing
may be materially higher than the cost of financing that AT&T Wireless Group
incurred as part of AT&T.
The credit ratings of AT&T Wireless Services are currently and may
continue to be different than the historical ratings of AT&T. After the
split-off, AT&T Wireless Services' credit ratings may be different from what
they are now. 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 Wireless Services.
AT&T Wireless Services may not be able to raise the capital it requires on
desirable terms.
If we complete the split-off, AT&T Wireless Services may be unable to make the
changes necessary to operate as an independent entity and may incur greater
costs
AT&T Wireless Group historically has been part of an integrated
telecommunications provider since its acquisition by AT&T in 1994. If we
complete the split-off, the separation of AT&T Wireless Services from the other
telecommunications businesses of AT&T may adversely affect AT&T Wireless
Services.
In particular, following the split-off, AT&T will have no obligation to
provide financial, operational or organizational assistance to AT&T Wireless
Services other than limited services. AT&T Wireless Services may not be able to
implement successfully the changes necessary to operate independently. AT&T
Wireless Services may also incur additional costs relating to operating
independently that would cause its cash flow and results of operations to
decline materially. In addition, although AT&T Wireless Services may be able to
participate in some of AT&T's supplier arrangements where those arrangements
permit this or the vendors agree to this, its supplier arrangements may not be
as favorable as has historically been the case.
Agreements to be entered into in connection with the split-off provide
that the business of AT&T Wireless Group will be conducted differently and that
its relationship with AT&T 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 or AT&T Wireless Services.
The historical financial information of AT&T Wireless 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 Wireless Group would have been had it been an
independent entity during the periods presented. This is because the combined
financial statements reflect allocations for services provided to AT&T Wireless
Group by AT&T, which allocations may not reflect the costs AT&T Wireless Group
will incur for similar or incremental services as an independent entity.
This historical financial information also is not reliable as an
indicator of future results.
If we complete the split-off, AT&T Wireless Services' financing needs will
increase as a result of intercompany repayment obligations
Before the split-off, AT&T Wireless Services will repay all
intercompany indebtedness owed to AT&T and will redeem all of the AT&T Wireless
Group preferred equity held by AT&T. As of December 31, 2000, these amounts were
approximately $2.4 billion and $3.0 billion, respectively, or an aggregate of
approximately $5.4 billion.
If we complete the split-off, AT&T Wireless Services will generally be
responsible for tax liability if the split-off is taxable
Under the separation and distribution agreement to be entered into
between AT&T and AT&T Wireless Services, subject to limited exceptions, AT&T
Wireless Services will be responsible for any tax liability and any related
liability that results from the split-off failing to qualify as a tax-free
transaction, subject to limited exceptions. If the split-off failed to qualify
as a tax-free transaction, this liability would have a material adverse effect
on AT&T Wireless Group.
AT&T Wireless Group may no longer receive tax sharing payments from AT&T when it
ceases to be a member of the AT&T consolidated tax return group, and AT&T
Wireless Group may incur other tax liabilities as a result of the split-off and
pre-split-off transactions
As a result of the split-off, AT&T Wireless Services will cease to be a
member of the consolidated federal income tax return group of which AT&T is the
common parent. Consequently, taxable income and losses, and other tax attributes
of AT&T Wireless Group in post split-off taxable periods could generally no
longer offset taxable income or losses and other tax attributes of the AT&T
consolidated tax return group. For two taxable years after the split-off, under
federal income tax rules, AT&T Wireless Group would generally be able to carry
back any such tax losses, subject to limitations, against taxable income, if
any, of members of AT&T Wireless Group for pre split-off periods. Under the tax
sharing agreement between AT&T and AT&T Wireless Group, however, AT&T Wireless
Group generally may only carry back net operating losses (and not other tax
attributes) from post split-off taxable periods to pre split-off taxable
periods, and only if those losses are significant and with the consent of AT&T,
which consent AT&T has agreed not to withhold unreasonably. To the extent AT&T
Wireless Group has tax losses in post split-off taxable periods, it would
generally no longer receive current tax sharing payments with respect to those
losses. Instead, except where those losses can be carried back, it would benefit
from those losses only if and when AT&T Wireless Group generated sufficient
taxable income in future years to utilize those tax losses on a stand-alone
basis.
In addition, there may be tax costs associated with the split-off that
result from AT&T Wireless Services ceasing to be a member of the AT&T
consolidated tax return group, as well as from pre-split-off transactions. If
incurred, these costs could be material to AT&T Wireless Services' results.
If we complete the split-off, various factors may interfere with AT&T Wireless
Services' ability to engage in desirable strategic transactions and equity
issuances
AT&T Wireless Services may not be able to engage in some strategic
transactions after the split-off. The Internal Revenue Code restricts the
ability of a company which has undergone a tax-free split-off from certain
issuances of shares generally within a two-year period after the split-off. In
addition, the separation and distribution agreement prohibits AT&T Wireless
Services for a period of 30 months following the split-off, from entering into
certain transactions that could render the split-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 Wireless
Services. Provisions of AT&T Wireless Services charter and bylaws, its rights
plan, applicable law, and the DoCoMo agreements may also have the effect of
discouraging, delaying or preventing change of control transactions that its
shareholders find desirable.
If we complete the split-off, AT&T Wireless Services may lose rights under
agreements with AT&T if a change of control occurs
We expect that some of the agreements that AT&T and AT&T Wireless
Services expect to enter into in connection with the split-off, including the
brand license 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 the other party that triggered these rights. 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
Wireless Services or AT&T.
The market price and trading volume of AT&T Wireless Services common stock maybe
volatile and may face negative pressure
Before the split-off, there will be no trading market for the shares of
AT&T Wireless Services common stock that holders of AT&T common stock and AT&T
Wireless Group tracking stock will receive in the split-off. Investors' interest
may not lead to a liquid trading market and the market price of AT&T Wireless
Services common stock may be volatile. Also, after the split-off, the percentage
of AT&T Wireless Services represented by publicly held shares will increase
materially.
AT&T has announced its intention to retain $3 billion of shares of AT&T
Wireless Services for its own account for sale, exchange or monetization within
six months of the split-off, subject to receipt of a satisfactory IRS ruling.
These factors may result in short- or long-term negative pressure on
the trading price of shares of AT&T Wireless Services common stock. The market
price of AT&T Wireless Services common stock could fluctuate significantly for
many reasons, including in response to the special considerations listed in this
document or for specific reasons unrelated to the performance of AT&T Wireless
Services. Investors may consider AT&T Wireless Services common stock as a
technology stock. Technology stocks have recently experienced extreme price and
volume fluctuations. Therefore, the market price and trading volume of AT&T
Wireless Services common stock also may be extremely volatile.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This Form 10-K contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 with respect to:
- AT&T's restructuring plan, including the split-off of AT&T Wireless
Group,
- 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,
- 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 Corp., AT&T Common Stock Group and AT&T
Wireless Group, and
- other matters.
Statements in this Form 10-K that are not historical facts are hereby
identified as "forward looking statements" for the purpose of the safe harbor
provided by Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Any Form 10-K, Annual Report to Shareholders,
Form 10-Q or Form 8-K of AT&T may include forward looking statements. In
addition, other written or oral statements which constitute forward looking
statements have been made and may in the future be made by or on behalf of AT&T,
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 Corp., AT&T Common Stock Group
and AT&T Wireless Group. These forward looking statements are necessarily
estimates reflecting the best judgment of senior management that rely on a
number of assumptions concerning future events, many of which are outside of
AT&T's control, 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 Form 10-K.
Important factors that could cause actual results to differ materially from
estimates or projections contained in the forward-looking statements include,
without limitation:
o the risks associated with the implementation of a third-generation
network and business strategy for AT&T Wireless Group, including risks
relating to the operations of new systems and technologies,
substantial required expenditures and potential unanticipated costs,
the need to enter into roaming agreements with third parties,
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,
o the potential impact of DoCoMo's investment in AT&T Corp., including
provisions of the agreements that restrict AT&T Wireless Group's
future operations, and provisions that may require the repurchase of
DoCoMo's investment if AT&T Corp. or AT&T Wireless Group fail to meet
specified conditions,
o the risks associated with the implementation of AT&T Corp.'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,
o the risks associated with each of AT&T Corp.'s main business units,
including AT&T Wireless Group, operating as an independent entity as
opposed to as part of an integrated telecommunications provider
following completion of AT&T Corp.'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,
o 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;
o the introduction or popularity of new products and services, including
pre-paid phone products in the case of wireless services, which could
increase churn,
o the impact of oversupply of capacity resulting from excessive
deployment of network capacity,
o 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,
o 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,
o the ability to enter into agreements to provide, and the cost of
entering new markets necessary to provide, nationwide services,
o the ability to establish a significant market presence in new
geographic and service markets,
o the availability and cost of capital and the consequences of increased
leverage,
o successful execution of plans to dispose of non-strategic assets as
part of an overall corporate deleveraging plan,
o the impact of any unusual items resulting from ongoing evaluations of
the business strategies of these groups,
o the requirements imposed on these groups or latitude allowed to
competitors by the FCC or state regulatory commissions under the
Telecommunications Act of 1996 or other applicable laws and
regulations,
o the risks and costs associated with the need to acquire additional
spectrum for current and future services,
o the risks associated with technological requirements, technology
substitution and changes and other technological developments,
o the results of litigation filed or to be filed against these groups,
o 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,
o the risks related to AT&T's investments in Liberty Media Group and
joint ventures, and
o those factors listed under "Special Considerations."
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 herein by reference.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. Moreover, in the future,
AT&T Corp., through its senior management team, may make forward-looking
statements about the matters described in this document or other matters
concerning AT&T Corp., AT&T Wireless Group or AT&T Common Stock Group. AT&T
Corp. undertakes no obligation to publicly release any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
ITEM 2. PROPERTIES.
The properties of AT&T Corp. consist primarily of plant and equipment
used to provide long distance and wireless telecommunications services and cable
television services and administrative office buildings. AT&T's owns and leases
properties to support its offices, facilities and equipment.
Telecommunications plant and equipment consists of: central office
equipment, including switching and transmission equipment; connecting lines
(cables, wires, poles, conduits, etc.); wireless cell sites, antennas and
wireless switching facilities; land and buildings; and miscellaneous properties
(work equipment, furniture, plant under construction, etc.). The majority of the
connecting lines are on or under public roads, highways and streets and
international and territorial waters. The remainder are on or under private
property. Physical cable television properties, which are located throughout the
United States, consist of system components, motor vehicles, miscellaneous
hardware, spare parts and other components. AT&T also operates a number of sales
offices, customer care centers, and other facilities, such as research and
development laboratories.
AT&T continues to manage the deployment and utilization of its assets
in order to meet its global growth objectives while at the same time ensuring
that these assets are generating value for the shareholder. AT&T will continue
to manage its asset base consistent with globalization initiatives, marketplace
forces, productivity growth and technology change.
ITEM 3. LEGAL PROCEEDINGS.
In the normal course of business, AT&T Corp. 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 Corp. 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 Corp. beyond
that provided for at year-end would not be material to AT&T Corp.'s annual
consolidated financial position or results of operations.
The Company has been named as a defendant in several purported
securities class action lawsuits filed in the United States District Courts for
the District of New Jersey and for the Southern District of New York purportedly
filed on behalf of persons who purchased securities of the Company for various
periods from October 25, 1999 through May 1, 2000. These lawsuits assert claims
under Section 11 of the Securities Act of 1933, as amended, and Section 10(b)
and 20(a) of the Securities Exchange Act of 1934, as amended, and allege, among
other things, that during the period referenced above, the Company made
materially false and misleading statements and omitted to state material facts
concerning its future business prospects. The complaints seek unspecified
damages. The Company believes that the lawsuits are without merit and intends to
defend them vigorously.
Several lawsuits have been filed asserting claims that AT&T Wireless
Group collected charges for local government taxes from customers that were not
properly subject to those charges. AT&T Wireless Group has entered into a
settlement of one of these cases, although the settlement has been challenged on
appeal. AT&T Wireless Group has asserted in those cases that any recovery should
come from the municipalities to which the taxes were paid.
Several class action lawsuits have been filed in which claims have been
asserted that AT&T Wireless Group did not have suffcient network capacity to
support the influx of new subscribers who signed up for AT&T Digital One Rate
service beginning in May 1998 and therefore has failed to provide service of a
quality allegedly promised to subscribers. The plaintiffs in these cases have
not asserted specific claims for damages, with the exception of one case filed
in Texas in which the named plaintiffs have asserted claims for compensatory and
punitive damages totaling $100 million.
Several other class action or representative lawsuits have been filed
against AT&T Wireless Group that allege, depending on the case, breach of
contract, misrepresentation or unfair practice claims relating to AT&T Wireless
Group's billing practices (including rounding up of partial minutes of use to
full minute increments and billing send to end), coverage, dropped calls, price
fixing and/or mistaken bills. Although the plaintiffs in these cases have not
specified alleged damages, the damages in two of the cases are alleged to exceed
$100 million. One of these two cases was dismissed and the dismissal was
affirmed in part on appeal. Settlement negotiations are ongoing in both cases.
AT&T Wireless Group is involved in litigation in which the Cellular One
Group claims that use of the name ""AT&T Digital One Rate" infringes a
trademarked name, ""DIGITALONE" for which the Cellular One Group has obtained
trademark registration. The Cellular One Group has not specified amounts of
claimed damages.
AT&T Wireless Group is involved in a patent infringement action against
GTE in the U.S. District Court in Seattle, Washington. GTE claims that the Nokia
phones manufactured for AT&T Wireless Group infringe a GTE patent for
over-the-air activation and over-the-air programming. AT&T Wireless Group is
seeking a declaratory judgment that its use of over-the-air activation does not
infringe GTE's patent. GTE has not specified amounts of claimed damages.
Stockholders of a former competitor of AT&T Wireless Group
air-to-ground business are plaintiffs in a lawsuit filed in 1993, alleging that
AT&T Wireless Group breached a confidentiality agreement, used trade secrets to
unfairly compete, and tortiously interfered with the business and potential
business of the competitor. Plaintiffs sought damages in an unspecified amount
in excess of $3.5 billion. AT&T Wireless Group obtained partial summary judgment
and then prevailed on the remainder of the claims at a trial on the validity of
a release of plaintiffs' claims. Final judgment was entered against plaintiffs
on their claims, and plaintiffs appealed. On appeal, the Appellate Court of
Illinois, Second District, reversed and remanded the case for trial indicating
that certain issues decided by the judge needed to be resolved by a jury.
AT&T Wireless Group is vigorously defending each of the claims
described above. AT&T Wireless Group cannot predict the final outcome of these
disputes.
AT&T is also a named party in a number of environmental actions, none
of which is material to the consolidated financial statements or business of the
Company. In addition, pursuant to the Separation and Distribution Agreement by
and among AT&T, Lucent, and NCR, dated as of February 1, 1996, and amended and
restated as of March 29, 1996, Lucent has assumed liability, subject to the
liability sharing provisions of that agreement, for a number of actions in which
AT&T remains a named party. AT&T is working to be released as a party to these
actions, although there can be no assurance that it will be successful in this
regard.
There are four environmental proceedings which are required to be
reported pursuant to Instruction 5.C. of Item 103 of Regulation S-K; for the
first three below, Lucent has assumed liability, as described above. First, on
July 31, 1991, the United States Environmental Protection Agency Region III
issued a complaint pursuant to Section 3008a of the Resource Conservation and
Recovery Act alleging violations of various waste management regulations at the
Company's Richmond Works, Richmond, Virginia. The complaint seeks a total of
$4.2 million in penalties. Second, on July 31, 1991, the United States
Environmental Protection Agency filed a civil complaint in the U.S. District
Court for the Southern District of Illinois against the Company and nine other
parties seeking enforcement of its Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") Section 106 cleanup order, issued in
November 1990 for the NL Granite City Superfund site, Granite, Illinois, past
costs, civil penalties of $25,000 per day and treble damages related to certain
United States' costs. Third, during 1994, AT&T Nassau Metals Corporation
("Nassau"), a wholly owned subsidiary of AT&T, and the New York State Department
of Environmental Conservation ("NYSDEC") were engaged in negotiations over a
study and cleanup of the Nassau plant located on Richmond Valley Road in Staten
Island, New York. During these negotiations, in June 1994, NYSDEC presented
Nassau with a draft consent order that included not only provisions relating to
site investigation and remediation but also a provision for payment of a $3.5
million penalty for alleged violations of hazardous waste management
regulations. No formal proceeding has been commenced by NYSDEC. Last, the U.S.
Department of Justice is using a grand jury sitting in the District Court of the
Virgin Islands to investigate the purported 1996 release of non-toxic bentonite
drilling mud within the coastal region of St. Croix. Requests for documents or
testimony or both have been directed to numerous entities including AT&T,
affiliated companies, contractors involved in the work, and individual
employees. The prosecutor contemplates seeking criminal penalties or other
sanctions from any party that evidence suggests either knowingly discharged
pollutants in violation of permits or knowingly made false statements in
violation of federal law.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
No matter was submitted to a vote of security holders in the fourth
quarter of the fiscal year covered by this report.
Executive Officers of the Registrant
(as of March 17, 2001)
Became AT&T
Name Age Executive Officer On
---- --- --------------------
C. Michael Armstrong*. . 62 Chairman of the Board and Chief Executive Officer . . . . 10-97
Harold W. Burlingame . . 60 Executive Vice President, AT&T Wireless Group. . . . . . . 9-86
James Cicconi . . . . . 48 Executive Vice President-Law & Government Affairs and
General Counsel . . . . . . . . . . . . . . . . . . . . 12-98
David W. Dorman . . . . 46 President . . . . . . . . . . . . . . . . . . . . . . . . 12-00
Mirian Graddick-Weir . . 46 Executive Vice President, Human Resources . . . . . . . . 3-99
Mohan Gyani . . . . . . 49 Executive Vice President and President & CEO, AT&T
Wireless Services . . . . . . . . . . . . . . . . . . . 1-00
Frank Ianna . . . . . . 51 Executive Vice President and President, AT&T Network
Services . . . . . . . . . . . . . . . . . . . . . . . . 3-97
Michael G. Keith . . . . 52 Executive Vice President and President and CEO,
AT&T Wireless Services . . . . . . . . . . . . . . . . . 12-98
Richard J. Martin . . . 54 Executive Vice President, Public Relations and
Employee Communication . . . . . . . . . . . . . . . . . 11-97
John C. Malone** . . . . 60 Chairman of the Board, Liberty Media Corporation . . . . . 3-99
David C. Nagel . . . . . 56 President, AT&T Labs & Chief Technology Officer. . . . . . 3-97
Charles H. Noski . . . . 48 Senior Executive Vice President and Chief Financial
Officer . . . . . . . . . . . . . . . . . . . . . . . . 12-99
John C. Petrillo . . . . 51 Executive Vice President, Corporate Strategy and
Business Development . . . . . . . . . . . . . . . . . . 1-96
Daniel E. Somers . . . . 53 President and CEO, AT&T Broadband . . . . . . . . . . . . 5-97
John D. Zeglis** . . . . 53 Chairman and Chief Executive Officer, AT&T Wireless Group. 9-86
-----------
*Chairman of the Board of Directors and Chairman of the Executive and Proxy
Committees.
**Member of the Board of Directors.
All of the above executive officers have held high level managerial
positions with AT&T or its affiliates for more than the past five years, except
Messrs. Armstrong, Cicconi, Dorman, Gyani, Malone, Nagel, Noski and Somers.
Prior to joining AT&T in October 1997, Mr. Armstrong was Chairman and Chief
Executive Officer of Hughes Electronics from 1993. Prior to joining AT&T in
September 1998 as Senior Vice President-Law and Government Affairs, Mr. Cicconi
was a partner at the law firm of Akin, Gump, Strauss, Houer and Feld, L.L.P.
from 1991. Prior to joining AT&T in December 2000, Mr. Dorman was Chief
Executive Officer of Concert, a global venture created by AT&T and BT, from 1999
and from 1998 to 1999 Mr. Dorman was Chairman, President and CEO of PointCast,
an Internet-based news and information service company and from 1996 to 1998 he
was Executive Vice President of SBC Communications and from 1994 to 1996 he was
Chief Executive Officer of Pacific Bell. Prior to joining AT&T in January 2000,
Mr. Gyani was Executive Vice President and Chief Financial Officer of Airtouch
Communications from 1995 to 1999, and following the merger of Vodafone and
Airtouch, was head of strategy and corporate development at Vodafone Airtouch
plc. Prior to joining AT&T, Dr. Malone was President, Chairman and Chief
Executive Officer of TCI from 1994. In addition, Dr. Malone served as director
of TCI Pacific Communications, Inc. since 1996. Prior to joining AT&T in April
1996, Mr. Nagel was with Apple Computer, serving as Senior Vice President from
1995 and General Manager from 1988 through 1995. Prior to joining AT&T in
December 1999, Mr. Noski was with Hughes Electronics serving as President and
Chief Operating Officer and Director from 1997 and Vice Chairman and Chief
Financial Officer from 1996 to 1997 and Sr. Vice President and Chief Financial
Officer from 1992 to 1996. Prior to joining AT&T in May 1997, Mr. Somers was
Chairman and Chief Executive Officer for Bell Cablemedia, plc, of London from
1995.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED
STOCKHOLDER MATTERS.
AT&T (ticker symbol "T") is listed on the New York Stock Exchange, as
well as the Boston, Chicago, Cincinnati, Pacific and Philadelphia exchanges in
the United States, and on stock exchanges in Brussels, London, Paris and Geneva.
As of December 31, 2000, AT&T had approximately 3.8 billion shares outstanding,
held by more than 4.8 million shareowners. AT&T Wireless Group common stock
(ticker symbol "AWE"), a tracking stock of AT&T, is listed on the New York Stock
Exchange. As of December 31, 2000, there were approximately 361.8 million
registered shareowners of AT&T Wireless Group. Liberty Media Group Class A and
Class B common stock (ticker symbols "LMG.A" and "LMG.B"), tracking stocks of
AT&T, are listed on the New York Stock Exchange. As of December 31, 2000,
Liberty Media Class A had approximately 2.4 billion shares outstanding, held by
6,842 shareowners; Liberty Media Class B had approximately 206.2 million shares
outstanding, held by 375 shareowners.
For additional information about the market for the Company's common
equity, see Note 21 to the Consolidated Financial Statements included in Item 8
to this Annual Report.
ITEM 6. SELECTED FINANCIAL DATA.
AT&T Corp. and Subsidiaries
SEVEN-YEAR SUMMARY OF SELECTED FINANCIAL DATA (UNAUDITED)
Dollars in millions (except per share amounts)
2000(1) 1999(2) 1998 1997 1996 1995 1994
----- ----- ---- ---- ---- ---- ----
RESULTS OF OPERATIONS AND EARNINGS
PER SHARE
Revenue............................ $65,981 $62,600 $53,223 $51,577 $50,688 $48,449 $46,063
Operating income................... 4,277 10,859 7,487 6,836 8,709 5,169 7,393
Income from continuing operations.. 4,669 3,428 5,235 4,249 5,458 2,981 4,230
AT&T Common Stock Group:
Income from continuing operations 3,105 5,450 5,235 4,249 5,458 2,981 4,230
Earnings per basic share........ 0.89 1.77 1.96 1.59 2.07 1.15 1.65
Earnings per diluted share...... 0.88 1.74 1.94 1.59 2.07 1.14 1.64
Dividends declared per share.... 0.6975 0.88 0.88 0.88 0.88 0.88 0.88
AT&T Wireless Group(3):
Income.......................... 76 -- -- -- -- -- --
Earnings per basic and diluted
share........................ 0.21 -- -- -- -- -- --
Liberty Media Group(3),(4):
Income (loss)................... 1,488 (2,022) -- -- -- -- --
Earnings (loss) per basic and
diluted share................ 0.58 (0.80) -- -- -- -- --
ASSETS AND CAPITAL
Property, plant and equipment, net. $51,161 $39,618 $26,903 $24,203 $20,803 $16,453 $14,721
Total assets-continuing operations. 242,223 169,406 59,550 59,994 55,838 54,365 47,926
Total assets....................... 242,223 169,406 59,550 61,095 57,348 62,864 57,817
Long-term debt..................... 33,092 23,217 5,556 7,857 8,878 8,913 9,138
Total debt......................... 65,039 35,850 6,727 11,942 11,351 21,081 18,720
Mandatorily redeemable preferred
securities...................... 2,380 1,626 -- -- -- -- --
Shareowners' equity................ 103,198 78,927 25,522 23,678 21,092 17,400 18,100
Debt ratio(5)...................... 46.2% 43.0% 20.9% 33.5% 35.0% 54.8% 50.8%
Gross capital expenditures......... 14,566 13,511 7,981 7,714 7,084 4,659 3,504
OTHER INFORMATION
Operating income as a percent of
revenue......................... 6.5% 17.3% 14.1% 13.3% 17.2% 10.7% 16.1%
Income from continuing operations
attributable to AT&T Common Stock
Group as a percent of revenue... 4.8% 8.7% 9.8% 8.2% 10.8% 6.2% 9.2%
Return on average common equity(6). 6.2% 15.2% 25.3% 19.7% 27.1% 0.4% 29.5%
Employees-continuing operations(6). 165,600 147,800 107,800 130,800 128,700 126,100 116,400
Data at year-end:
AT&T stock price per share...... 17.25 50.81 50.50 40.87 27.54 29.60 22.97
AT&T Wireless Group stock price
per share.................... 17.31 -- -- -- -- -- --
Liberty Media Group A stock price
per share(4)................. 13.56 28.41 -- -- -- -- --
Liberty Media Group B stock price
per share(4)................. 18.75 34.38 -- -- -- -- --
----------
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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
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.
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".
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 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.
FORWARD-LOOKING STATEMENTS
This document may contain forward-looking statements with respect to
AT&T's restructuring plan, 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, 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, and other
matters.
These forward-looking statements, including, without limitation, those
relating to the future business prospects, revenue, working capital, liquidity,
capital needs, network build out, interest costs and income, 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 that could cause actual results to differ materially from estimates or
projections contained in the forward-looking statements including, without
limitation:
o the risks associated with the implementation of AT&T's
restructuring plan, which is complicated and 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,
o the risks associated with each of AT&T's main business units,
operating as independent entities 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,
o 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.
o the impact of oversupply of capacity resulting from excessive
deployment of network capacity,
o the ongoing global and domestic trend towards consolidation in
the telecommunications industry, which trend may have the
effect of making the competitors of these entities larger and
better financed and afford these competitors with extensive
resources and greater geographic reach, allowing them to
compete more effectively,
o the effects of vigorous competition in the markets in which
the company operates, which may decrease prices charged,
increase churn and change customer mix, profitability and
average revenue per user,
o the ability to enter into agreements to provide, and the cost
of entering new markets necessary to provide, nationwide
services,
o the ability to establish a significant market presence in new
geographic and service markets,
o the availability and cost of capital and the consequences of
increased leverage,
o the successful execution of plans to dispose of non-strategic
assets as part of an overall corporate deleveraging plan,
o the potential impact of NTT DoCoMo's investment in AT&T,
including provisions of the agreements that restrict AT&T
Wireless Group's future operations, and provisions that may
require AT&T to repurchase DoCoMo's interest in AT&T if AT&T
or AT&T Wireless Group fail to meet specified conditions,
o the impact of any unusual items resulting from ongoing
evaluations of the business strategies of the company,
o the requirements imposed on the company or latitude allowed to
competitors by the Federal Communications Commission (FCC) or
state regulatory commissions under the Telecommunications Act
of 1996 or other applicable laws and regulations,
o the risks and costs associated with the need to acquire
additional wireless spectrum for current and future services,
o the risks associated with technological requirements,
technology substitution and changes and other technological
developments,
o the results of litigation filed or to be filed against the
company,
o the possibility of one or more of the markets in which the
company competes 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, and
o the risks related to AT&T's investments in LMG and joint
ventures.
The words "estimate," "project," "intend," "expect," "believe," "plan"
and similar expressions are intended to identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this document. Moreover, in the
future, AT&T, through its senior management, may make forward-looking statements
about the matters described in this document or other matters concerning AT&T.
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
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.
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.
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.
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.
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.
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 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 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 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 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.
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 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.
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.
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.
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 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 (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
At December 31, 2000 1999
---- ----
Total assets..................................................................... $114,681 $53,810
* 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.
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. 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 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, 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.
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, 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 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
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 $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 June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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
$1.4 billion of income, or approximately $0.34 per diluted share, primarily
attributable to fair value adjustments of debt 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 $2.8 billion ($1.7
billion after income taxes), or approximately $0.43 per diluted share, 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
$0.8 billion 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.
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 assurances 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-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 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.
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.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF MANAGEMENT
Management is responsible for the preparation, integrity and
objectivity of the consolidated financial statements and all other financial
information included in this report. Management is also responsible for
maintaining a system of internal controls as a fundamental requirement for the
operational and financial integrity of results. The financial statements, which
reflect the consolidated accounts of AT&T Corp. and subsidiaries (AT&T) and
other financial information shown, were prepared in conformity with generally
accepted accounting principles. Estimates included in the financial statements
were based on judgments of qualified personnel. To maintain its system of
internal controls, management carefully selects key personnel and establishes
the organizational structure to provide an appropriate division of
responsibility. We believe it is essential to conduct business affairs in
accordance with the highest ethical standards as set forth in the AT&T Code of
Conduct. These guidelines and other informational programs are designed and used
to ensure that policies, standards and managerial authorities are understood
throughout the organization. Our internal auditors monitor compliance with the
system of internal controls by means of an annual plan of internal audits. On an
ongoing basis, the system of internal controls is reviewed, evaluated and
revised as necessary in light of the results of constant management oversight,
internal and independent audits, changes in AT&T's business and other
conditions. Management believes that the system of internal controls, taken as a
whole, provides reasonable assurance that (1) financial records are adequate and
can be relied upon to permit the preparation of financial statements in
conformity with generally accepted accounting principles, and (2) access to
assets occurs only in accordance with management's authorizations.
The Audit Committee of the Board of Directors, which is composed of
directors who are not employees, meets periodically with management, the
internal auditors and the independent accountants to review the manner in which
these groups of individuals are performing their responsibilities and to carry
out the Audit Committee's oversight role with respect to auditing, internal
controls and financial reporting matters. Periodically, both the internal
auditors and the independent accountants meet privately with the Audit Committee
and have access to its individual members at any time.
The consolidated financial statements in this annual report have been
audited by PricewaterhouseCoopers LLP, Independent Accountants. Their audits
were conducted in accordance with generally accepted auditing standards and
include an assessment of the internal control structure and selective tests of
transactions. Their report follows.
C. Michael Armstrong Charles H. Noski
Chairman of the Board, Senior Executive Vice President,
Chief Executive Officer Chief Financial Officer
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
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.
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.
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
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.
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
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.
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.
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.
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.
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.
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
-------- --------
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.
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 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 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.
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 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:
1998
----
For the Year Ended December 31,
Revenue.......................................................... $365
Income before income taxes....................................... 16
Net income....................................................... 10
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.
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.
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, 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
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.
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.
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 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 Ended For the Ten Months Ended
December 31, 2000 December 31, 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 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
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.............................................. 7,316 6,457
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.
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 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:
Interest Maturity Carrying Amount
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.
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.
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 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;
(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, 2000.................................................. $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 21/2 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 21/2 times the call price per share, each 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
21/2 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 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.
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 Rate Maturity Date Carrying 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.
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.
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 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.
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.
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 Amount Fair Value Carrying 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 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 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:
Pension Benefits Postretirement 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.
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.
A summary of the AT&T common stock option transactions is shown below:
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares in thousands 2000 Price 1999 Price 1998 Price
---- ----- ---- ----- ---- -----
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
------------------- -------------------
Number
Weighted- Exercisable
Average Weighted- at Weighted-
Number Outstanding Remaining Average December 31, Average
Range of 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
-------------------- -----------
A summary of the AT&T Wireless Group tracking stock option transactions
is shown below:
Weighted-
Average
Exercise
Shares in thousands 2000 Price
---- ---------
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
------------------- -------------------
Number
Weighted- Exercisable
Average Weighted- at Weighted-
Number Outstanding at Remaining Average December 31, Average
Range of 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
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.
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
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
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 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. 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.
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.
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........................................................................... (148) 569 647
Total revenue................................................................................. $65,981 $62,600 $53,223
------- ------- -------
DEPRECIATION AND AMORTIZATION*
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........................................................................... 1,246 422 331
Total depreciation and amortization........................................................... $10,267 $7,439 $4,629
------- ------ ------
* Includes the amortization of goodwill, franchise costs and other purchased
intangibles.
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........................................................................... (372) (359) (108)
Total net losses from other equity investments................................................ $(205) $(765) $(78)
------ ------ -----
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........................................................................ (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
------ ------- ------
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.................................................................. 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
-------- -------- -------
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........................................................................ 4,074 3,718 491
Total equity investments................................................................... $13,624 $18,454 $4,257
------- ------- ------
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....................................................................... 2,150 1,494 594
Total capital additions................................................................... $19,191 $17,159 $9,578
------- ------- ------
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.
CONSOLIDATING CONDENSED BALANCE SHEET
As of December 31, 2000
Guarantor Guarantor Guarantor TCI TCI TCI Media- Media- Media- Media- Non- Elimination Consol-
AT&T Subsidiary Subsidiary Finan- Finan- Finan- One One One Fin One Guaran- and idated
Parent TCI MediaOne cing cing cing Finan Finan ance Finance tor Consolidation AT&T
I II IV cing I cing II II III Subsidiaries Adjustments Corp.
------- --- -------- ---- ---- --- ----- ------ ---- --- --------- --------- ------
ASSETS
Cash and cash $126 $126
equivalents.........
Receivables........... 11,424 2,577 78 50,788 (52,020) 12,847
Investments........... 2,102 2,102
Deferred income taxes. 811 1 812
Other current assets.. 1,103 11 90 (4) 1,200
TOTAL CURRENT ASSETS.. 13,338 2,588 78 53,107 (52,024) 17,087
Property, plant & 9,064 93 22 41,985 (3) 51,161
equipment, net......
Franchise costs, net.. 838 47,380 48,218
Licensing costs, net.. 30 13,596 13,626
Goodwill, net......... 161 19,786 11,531 31,478
Investment in Liberty
Media Group and 34,290 34,290
related
receivables, net....
Other investments and 164,844 35,358 29,325 23,059 (218,325) 34,261
related advances....
Other assets.......... 5,500 528 514 204 51 44 230 516 17,020 (12,505) 12,102
TOTAL ASSETS.......... $193,745 $72,359 $49,211 $528 $514 $204 $51 $44 $230 $516 $207,678 $(282,857) $242,223
LIABILITIES
Debt maturing within $52,556 $435 $2,337 $6,409 $(29,790) $31,947
one year............
Liability under put 2,564 2,564
options.............
Other current 9,535 1,166 76 13,972 (8,393) 16,356
liabilities.........
TOTAL CURRENT 62,091 1,601 2,413 22,945 (38,183) 50,867
LIABILITIES.........
Long-term debt........ 21,333 30,096 2,168 528 514 204 30 28 214 504 3,895 (26,422) 33,092
Deferred income taxes. 569 230 35,914 36,713
Other long-term
liabilities and 7,341 939 129 431 (80) 8,760
deferred credits....
TOTAL LIABILITIES..... 91,334 32,636 4,940 528 514 204 30 28 214 504 63,185 (64,685) 129,432
Minority interest..... 1,462 1,147 2,274 4,883
Company-Obligated
Convertible
Quarterly Income
Preferred 4,710 4,710
Securities of a
Subsidiary Trust
Holding Solely
Subordinated Debt
Securities of AT&T..
SHAREOWNERS' EQUITY
AT&T Common Stock..... 4,176 (416) 3,760
AT&T Wireless Group 362 362
common stock........
Liberty Media Group 2,364 2,364
Class A Common Stock
Liberty Media Group 206 206
Class B Common Stock
Other shareowners' 90,593 38,261 43,124 21 16 16 12 142,635 (218,172) 96,506
equity..............
TOTAL SHAREOWNERS' 97,701 38,261 43,124 21 16 16 12 142,219 (218,172) 103,198
EQUITY..............
TOTAL LIABILITIES AND
SHAREOWNERS' EQUITY. $193,745 $72,359 $49,211 $528 $514 $204 $51 $44 $230 $516 $207,678 $(282,857) $242,223
CONSOLIDATING CONDENSED INCOME STATEMENT
For the year ended December 31, 2000
Guarantor Guarantor Guarantor TCI TCI TCI Media- Media- Media- Media- Non- Elimination Consol-
AT&T Subsidiary Subsidiary Finan- Finan- Finan- One One One Fin One Guaran- and idated
Parent TCI MediaOne cing cing cing Finan Finan ance Finance tor Consolidation AT&T
I II IV cing I cing II II III Subsidiaries Adjustments Corp.
------- --- -------- ---- ---- --- ----- ------ ---- --- --------- --------- -------
Revenue......................... $22,234 $0 $0 $45,834 $(2,087) $65,981
Operating Expenses
Costs of services and products.. 2,961 6 16,359 (1,739) 17,587
Access and other connection..... 7,047 6,803 (332) 13,518
Selling, general and 2,071 (378) 29 11,597 (16) 13,303
administrative................
Depreciation and other 1,791 45 7 5,431 7,274
amortization..................
Amortization of goodwill,
franchise costs and other 50 3 226 2,714 2,993
purchased intangibles.........
Net restructuring and other 443 60 6,526 7,029
charges.......................
Total operating expenses........ 14,363 (264) 262 49,430 (2,087) 61,704
Operating income (loss)......... 7,871 264 (262) (3,596) 0 4,277
Other income (expense).......... 971 30 64 43 46 18 2 2 11 25 4,749 (4,447) 1,514
Interest expense (benefit)...... 4,786 1,974 194 43 46 18 1 1 11 24 421 (4,336) 3,183
Income (loss) before income
taxes, minority interest and
earnings (losses) from equity 4,056 (1,680) (392) 0 0 0 1 1 0 1 732 (111) 2,608
investments...................
Provision (benefit) for income 1,505 (72) (46) 1 1,954 3,342
taxes.........................
Minority interest income (161) (23) 4,304 4,120
(expenses)....................
Equity earnings from Liberty 1,488 1,488
Media Group...................
Net earnings (losses) from
other equity investments...... 5,371 (2,437) (168) (203) (2,768) (205)
Net income (loss)............... 7,761 (2,580) (514) 0 0 0 1 1 0 0 2,879 (2,879) 4,669
Dividend requirements on
preferred stock held by AT&T, 111 (111) 0
net...........................
Net income (loss) after
preferred stock dividends..... $7,761 $(2,580)$(514) $0 $0 $0 $1 $1 $0 $0 $2,768 $(2,768) $4,669
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
For the year ended December 31, 2000
Guarantor Guarantor Guarantor TCI TCI TCI Media- Media- Media- Media- Non- Elimination Consol-
AT&T Subsidiary Subsidiary Finan- Finan- Finan- One One One Fin One Guaran- and idated
Parent TCI MediaOne cing cing cing Finan Finan ance Finance tor Consolidation AT&T
I II IV cing I cing II II III Subsidiaries Adjustments Corp.
------- --- -------- ---- ---- --- ----- ------ ---- --- --------- --------- -------
NET CASH PROVIDED BY (USED
IN) OPERATING ACTIVITIES... $3,131 $(634) $1,792 $43 $53 $31 $2 $2 $11 $25 $9,129 $(278) $13,307
INVESTING ACTIVITIES
Capital expenditures and (51) (10) (21) (14,842) (14,924)
other additions............
Equity investment 363 989 1,352
distributions and sales....
Equity investment
contributions and purchases (1,700) (6,904) (1,712) 6,904 (3,412)
Net acquisitions of
businesses including cash (23,943) 2,533 (21,410)
acquired...................
Other........................ (2,057) (34) (6,376) 6,927 (1,540)
NET CASH (USED IN) PROVIDED
BY INVESTING ACTIVITIES.... (27,388)(6,948) (21) 0 0 0 0 0 0 0 (19,408) 13,831 (39,934)
FINANCING ACTIVITIES
Proceeds from long-term debt 739 3,862 4,601
issuances..................
Proceeds from debt from AT&T. 5,867 13,715 4,898 (24,480) 0
Retirement of long-term debt. (498) (1,143) (477) (2,118)
Retirement of AT&T debt...... (4,990) (1,500) 6,490 0
Issuance of AT&T Wireless
Group common stock......... 10,314 10,314
Dividends paid............... (3,047) (3,047)
Increase in short-term 12,108 (271) 977 4,159 16,973
borrowings, net............
Other........................ (830) (43) (53) (31) (2) (2) (11) (25) (275) 278 (994)
NET CASH PROVIDED BY (USED
IN) FINANCING ACTIVITIES... 24,653 7,582 (1,771) (43) (53) (31) (2) (2) (11) (25) 8,985 (13,553) 25,729
Net (decrease) increase in
cash and cash equivalents.. 396 0 0 0 0 0 0 0 0 0 (1,294) 0 (898)
Cash and cash equivalents at
beginning of year.......... (396) 1,420 1,024
Cash and cash equivalents at
end of period.............. $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $126 $0 $126
CONSOLIDATING CONDENSED BALANCE SHEET
As of December 31, 1999
Guarantor Guarantor TCI TCI TCI Non- Elimination
AT&T Subsidiary Finan- Finan-cinFinancing Guarantor and
Parent TCI cing I II IV Subsidiarie Consolidation Consolidated
Adjustments AT&T Corp.
----- --- ------ -- -- ----------- ---------- ----------
ASSETS
Cash and cash equivalents......... $1,024 $1,024
Receivables....................... 12,513 5 42,270 (44,335) 10,453
Deferred income taxes............. 945 342 1,287
Other current assets.............. 381 3 741 (5) 1,120
TOTAL CURRENT ASSETS.............. 13,839 8 44,377 (44,340) 13,884
Property, plant & equipment, net.. 10,974 128 28,516 39,618
Franchise costs, net.............. 33 32,660 32,693
Licensing costs, net.............. 38 8,510 8,548
Goodwill, net..................... 88 7,357 7,445
Investment in Liberty Media Group
and related receivables, net.... 38,460 38,460
Other investments and related 111,056 35,694 23,338 (150,722) 19,366
advances........................
Other assets...................... 5,105 528 521 217 9,809 (6,788) 9,392
TOTAL ASSETS...................... $141,100 $74,323 $528 $521 $217 $154,567 $(201,850) $169,406
LIABILITIES
Debt maturing within one year..... $40,246 $1,136 $6,141 $(34,890) $12,633
Other current liabilities......... 6,319 1,262 16,097 (8,104) 15,574
TOTAL CURRENT LIABILITIES......... 46,565 2,398 22,238 (42,994) 28,207
Long-term debt.................... 13,429 18,873 528 521 217 891 (11,242) 23,217
Deferred income taxes............. 78 24,121 24,199
Other long-term liabilities & 6,600 333 935 (103) 7,765
deferred credits................
TOTAL LIABILITIES................. 66,672 21,604 528 521 217 48,185 (54,339) 83,388
Minority Interest................. 5 1,462 924 2,391
Company-Obligated Convertible
Quarterly Income Preferred
Securities of a Subsidiary Trust
Holding Solely Subordinated Debt 4,700 4,700
Securities of AT&T..............
SHAREOWNERS' EQUITY
AT&T Common Stock................. 3,483 (287) 3,196
Liberty Media Group Class A Common 2,314 2,314
Stock...........................
Liberty Media Group Class B Common 217 217
Stock...........................
Other Shareowners' Equity......... 63,709 51,257 105,745 (147,511) 73,200
TOTAL SHAREOWNERS' EQUITY......... 69,723 51,257 105,458 (147,511) 78,927
TOTAL LIABILITIES AND SHAREOWNERS'
EQUITY.......................... $141,100 $74,323 $528 $521 $217 $154,567 $(201,850) $169,406
CONSOLIDATING CONDENSED INCOME STATEMENT
For the year ended December 31, 1999
Guarantor Guarantor TCI TCI TCI Non- Elimination
AT&T Subsidiary Finan- Finan-cinFinancing Guarantor and
Parent TCI cing I II IV Subsidiarie Consolidation Consolidated
Adjustments AT&T Corp.
----- --- ------ -- -- ----------- ---------- -------
Revenue........................... $24,755 $0 $39,506 $(1,661) $62,600
Operating Expenses
Costs of services and products.... 1,536 (59) 14,372 (1,255) 14,594
Access and other connection....... 8,403 6,479 (196) 14,686
Selling, general and administrative 4,363 380 8,777 (4) 13,516
Depreciation and other amortization 2,056 56 4,026 6,138
Amortization of goodwill, franchise
costs and other purchased 34 4 1,263 1,301
intangibles.....................
Net restructuring and other charges 18 440 1,048 1,506
Total operating expenses.......... 16,410 821 35,965 (1,455) 51,741
Operating income (loss)........... 8,345 (821) 3,541 (206) 10,859
Other income (expense)............ 539 (33) 36 40 16 2,916 (2,583) 931
Interest expense (benefit)........ 3,186 1,008 36 40 16 268 (2,789) 1,765
Income (loss) before income taxes,
minority interest and earnings
(losses) from equity investments 5,698 (1,862) 0 0 0 6,189 0 10,025
Provision (benefit) for income taxes 2,118 (1,580) 3,157 3,695
Minority interest income (expense) (87) (14) (14) (115)
Equity loss from Liberty Media Group 2,022 2,022
Net earnings (losses) from other
equity investments.............. 4,155 (1,902) (788) (2,230) (765)
Net income (loss)................. $7,648 $(4,220) $0 $0 $0 $2,230 $(2,230) $3,428
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
For the year ended December 31, 1999
Guarantor Guarantor TCI TCI TCI Non- Elimination
AT&T Subsidiary Finan- Finan-cinFinancing Guarantor and
Parent TCI cing I II IV Subsidiarie Consolidation Consolidated
Adjustments AT&T Corp.
----- --- ------ -- -- ----------- ---------- -------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES............ $2,672 $(2,807) $44 $75 $24 $11,370 $143 $11,521
INVESTING ACTIVITIES
Capital expenditures and other (1,733) (60) (12,227) (14,020)
additions.......................
Equity investment distributions and 61 1,814 1,875
sales...........................
Equity investment contributions and (5,473) (2,648) (8,121)
purchases.......................
Net acquisitions of businesses
including cash acquired......... (6,405) (306) (6,711)
Other............................. (203) (130) (16,343) 16,610 (66)
NET CASH (USED IN) PROVIDED BY
IVESTING ACTIVITIES............. (13,753) (190) 0 0 0 (29,710) 16,610 (27,043)
FINANCING ACTIVITIES
Proceeds from long-term debt 8,396 8,396
issuances.......................
Proceeds from debt from AT&T...... 6,176 5,055 (11,231) 0
Retirement of long-term debt...... (1,014) (1,070) (723) (2,807)
Retirement of AT&T debt........... (2,109) 2,109 0
Issuance of AT&T convertible 4,694 (56) 4,638
securities
Net acquisitions of treasury shares (4,624) (4,624)
Dividends paid.................... (2,685) (27) (2,712)
Increase in short-term borrowings, 19,154 (1,142) (7,774) 10,238
net.............................
Other............................. (13,215) 0 (44) (75) (24) 13,472 143 257
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES............ 10,706 2,997 (44) (75) (24) 16,579 (16,753) 13,386
Net (decrease) in cash and cash (375) 0 0 0 0 (1,761) 0 (2,136)
equivalents.....................
Cash and cash equivalents at 375 2,785 3,160
beginning of year...............
Cash and cash equivalents at end of $0 $0 $0 $0 $0 $1,024 $0 $1,024
period..........................
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/
Group Group Group Reclassifications(1) Consolidated 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
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.
Consolidating Condensed Balance Sheet
As of December 31, 2000
AT&T AT&T
Common Stock Wireless Liberty Media Eliminations/
Group Group Group Reclassifications(1) Consolidated 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
-----------
(1) Includes the elimination of inter-group transactions, consolidating
entries as well as reclassifications and adjustments related to AT&T
Wireless Group tracking stock.
Consolidating Condensed Balance Sheet
As of December 31, 2000
AT&T AT&T
Common Stock Wireless Liberty Media Eliminations/
Group Group Group Reclassifications(1) Consolidated AT&T Corp.
----- ----- ----- -------------------- -----------------------
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
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.
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.
Consolidating Condensed Income Statement
For the year ended December 31, 1999
AT&T AT&T
Common Stock Wireless Liberty Media Eliminations/
Group Group Group Reclassifications(1) Consolidated AT&T 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.
Consolidating Condensed Balance Sheet
As of December 31, 1999
AT&T AT&T
Common Stock Wireless Liberty Media Eliminations/
Group Group Group Reclassifications(1) Consolidated 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.
Consolidating Condensed Balance Sheet
As of December 31, 1999
AT&T AT&T
Common Stock Wireless Liberty Media Eliminations/
Group Group Group Reclassifications(1) Consolidated 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.
Consolidating Condensed Statement of Cash Flows
For the year ended December 31, 1999
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 $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
-----------
Includes the elimination of inter-group transactions, consolidating
entries as well as reclassifications and adjustments related to AT&T
Wireless Group tracking stock.
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.
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.
21. QUARTERLY INFORMATION (UNAUDITED)
First Second Third Fourth
2000
Revenue1......................................................................... $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 Group3:
Earnings (loss) per share:
Basic and diluted............................................................. $-- $.06 $(.01) $.16
Liberty Media Group3:
Earnings (loss) per share:
Basic and diluted4............................................................ $.37 $.10 $.68 $(.57)
Stock price5:
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 stock4
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 stock4
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
Revenue1......................................................................... $14,117 $15,752 $16,333 $16,398
Operating income2................................................................ 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 Group3:
Loss per share:
Basic and diluted4............................................................ $.02 $.21 $.09 $.48
Stock price5:
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 stock4
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 stock4
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 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-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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no changes in independent accountants and no
disagreements with independent accountants on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure during the last two years.
PART III
ITEMS 10. THROUGH 13.
Information regarding executive officers required by Item 401 of
Regulation S-K is furnished in a separate disclosure in Part I of this report
because the Company did not furnish such information in its definitive proxy
statement prepared in accordance with Schedule 14A.
The other information required by Items 10 through 13 is included in
the Company's definitive proxy statement dated March 29, 2001: the last two
paragraphs on page 4, the first two paragraphs on page 5, the last paragraph on
page 5 through the first two paragraphs on page 14, and the second paragraph on
page 28 through page 50. Such information is incorporated herein by reference,
pursuant to General Instruction G(3).
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K.
(a) Documents filed as a part of the report:
(1) The following consolidated financial statements are included in Part
II, Item 8:
Pages
------
Report of Management .................................... 113
Report of Independent Accountants ....................... 114
Statements:
Consolidated Statements of Income ....................... 115
Consolidated Balance Sheets ............................. 116
Consolidated Statements of Changes in Shareowners'
Equity ................................................ 118
Consolidated Statements of Cash Flows ................... 120
Notes to Consolidated Financial Statements .............. 121
(2) Financial Statement Schedule:
Report of Independent Accountants ....................... 197
Schedule:
II -- Valuation and Qualifying Accounts ................. 198
All other schedules are omitted because they are not applicable, not
required or the required information is included in the
consolidated financial statements or notes thereto.
Separate financial statements of Liberty Media Group, which is a
"significant subsidiary" pursuant to the provisions of Regulation S-X,
Article 3-9, are included as Exhibit (99)b.
(3) Exhibits:
Exhibits identified in parentheses below, on file with the Securities
and Exchange Commission ("SEC"), are incorporated herein by reference
as exhibits hereto.
Exhibit Number:
(3)a Restated Certificate of Incorporation of the registrant filed
January 10, 1989, Certificate of Correction of the registrant
filed June 8, 1989, Certificate of Change of the registrant
filed March 18, 1992, Certificate of Amendment of the
registrant filed June 1, 1992, Certificate of Amendment of the
registrant filed April 20, 1994, Certificate of Amendment of
the registrant filed June 8, 1998, Certificate of Amendment of
the registrant filed March 9, 1999, Certificate of Amendment
of the registrant filed April 12, 2000 and Certificate of
Amendment of the registrant filed June 2, 2000.
(3)b By-Laws of the registrant, as amended January 25, 2001.
(4) No instrument which defines the rights of holders of long term
debt, of the registrant and all of its consolidated
subsidiaries, is filed herewith pursuant to Regulation S-K,
Item 601(b)(4)(iii)(A). Pursuant to this regulation, the
registrant hereby agrees to furnish a copy of any such
instrument to the SEC upon request.
(10)(i)1 Form of Separation and Distribution Agreement by and among
AT&T Corp., Lucent Technologies Inc. and NCR Corporation,
dated as of February 1, 1996 and amended and restated as of
March 29, 1996 (Exhibit (10)(i)1 to Form 10-K for 1996, File
No. 1-1105).
(10)(i)2 Form of Distribution Agreement, dated as of November 20, 1996,
by and between AT&T Corp. and NCR Corporation (Exhibit
(10)(i)2 to Form 10-K for 1996, File No. 1-1105).
(10)(i)3 Tax Sharing Agreement by and among AT&T Corp., Lucent
Technologies Inc. and NCR Corporation, dated as of February 1,
1996 and amended and restated as of March 29, 1996 (Exhibit
(10)(i)3 to Form 10-K for 1996, File No. 1-1105).
(10)(i)4 Employee Benefits Agreement by and between AT&T Corp. and
Lucent Technologies Inc., dated as of February 1, 1996 and
amended and restated as of March 29, 1996 (Exhibit (10)(i)4 to
Form 10-K for 1996, File No. 1-1105).
(10)(i)5 Form of Employee Benefits Agreement, dated as of November 20,
1996, between AT&T Corp. and NCR Corporation (Exhibit (10)(i)5
to Form 10-K for 1996, File No. 1-1105).
(10)(i)6 Securities Purchase Agreement by and among AT&T Corp., AT&T
Wireless Services, Inc. and NTT DoCoMo, Inc., dated December
20, 2000 (Exhibit 10.1 to Form 8-K filed December 22, 2000,
File No. 1-1105).
(10)(i)7 Investor Agreement by and among AT&T Corp., AT&T Wireless
Services, Inc. and NTT DoCoMo, Inc., dated December 20, 2000
(Exhibit 10.2 to Form 8-K filed December 22, 2000, File No.
1-1105).
(10)(i)8 Warrant Agreement by and among AT&T Wireless Services, Inc.,
NTT DoCoMo, Inc. and AT&T Corp., dated December 20, 2000
(Exhibit 10.3 to Form 8-K filed December 22, 2000, File No.
1-1105).
(10)(i)9 364-Day Competitive Advance and Revolving Credit Facility
Agreement, dated as of December 28, 2000, among AT&T Corp.,
the Lenders party thereto, THE CHASE MANHATTAN BANK, CREDIT
SUISSE FIRST BOSTON and GOLDMAN SACHS CREDIT PARTNERS L.P., as
Administrative Agents, and THE CHASE MANHATTAN BANK, as Paying
Agent (Exhibit 10 to Form 8-K filed February 16, 2001, File
No. 1-1105).
(10)(ii)(B)1 General Purchase Agreement between AT&T Corp. and Lucent
Technologies Inc., dated February 1, 1996 and amended and
restated as of March 29, 1996 (Exhibit (10)(ii)(B)1 to Form
10-K for 1996, File No. 1-1105).
(10)(ii)(B)2 Form of Volume Purchase Agreement, dated as of November 20,
1996, by and between AT&T Corp. and NCR Corporation (Exhibit
(10)(ii)(B)2 to Form 10-K for 1996, File No. 1-1105).
(10)(iii)(A)1 AT&T Short Term Incentive Plan as amended March, 1994 (Exhibit
(10)(iii)(A)1 to Form 10-K for 1994, File No. 1-1105).
(10)(iii)(A)2 AT&T 1987 Long Term Incentive Program as amended December 17,
1997 (Exhibit 10)(iii)(A)2 to Form 10-K for 1997, File No.
1-1105).
(10)(iii)(A)3 AT&T Senior Management Individual Life Insurance Program as
amended March 3, 1998 (Exhibit (10)(iii)(A)3 to Form 10-K for
1997, File No. 1-1105).
(10)(iii)(A)4 AT&T Senior Management Long Term Disability and Survivor
Protection Plan, as amended and restated effective January 1,
1995 (Exhibit (10)(iii)(A)4 to Form 10-K for 1996, File No.
1-1105).
.
(10)(iii)(A)5 AT&T Senior Management Financial Counseling Program dated
December 29, 1994 (Exhibit (10)(iii)(A)5 to Form 10-K for
1994, File No. 1-1105).
(10)(iii)(A)6 AT&T Deferred Compensation Plan for Non-Employee Directors, as
amended December 15, 1993 (Exhibit (10) (iii)(A)6 to Form 10-K
for 1993, File No. 1-1105).
(10)(iii)(A)7 The AT&T Directors Individual Life Insurance Program as
amended March 2, 1998 (Exhibit (10)(iii)(A)1 to Form 10-K for
1997, File No. 1-1105).
(10)(iii)(A)8 AT&T Plan for Non-Employee Directors' Travel Accident
Insurance (Exhibit (10)(iii)(A)8 to Form 10-K for 1990, File
No. 1-1105).
(10)(iii)(A)9 AT&T Excess Benefit and Compensation Plan, as amended and
restated effective October 1, 1996 (Exhibit (10)(iii)(A)9 to
Form 10-K for 1996, File No. 1-1105).
(10)(iii)(A)10 AT&T Non-Qualified Pension Plan, as amended and restated
January 1, 1995 (Exhibit (10)(iii)(A)10 to Form 10-K for 1996,
File No. 1-1105).
(10)(iii)(A)11 AT&T Senior Management Incentive Award Deferral Plan, as
amended January 21, 1998 (Exhibit (10)(iii)(A)11 to Form 10-K
for 1998, File No. 1-1105).
(10)(iii)(A)12 AT&T Mid-Career Hire Program revised effective January 1, 1988
(Exhibit (10)(iii)(A)4 to Form SE, dated March 25, 1988, File
No. 1-1105) including AT&T Mid-Career Pension Plan, as amended
and restated July 1, 1999 (Exhibit (10)(iii)(A)12 to Form 10-K
for 1999, File No. 1-1105).
(10)(iii)(A)13 AT&T 1997 Long Term Incentive Program as amended through March
14, 2000 (Exhibit (10)(iii)(A)13 to Form 10-K for 1999, File
No. 1-1105).
(10)(iii)(A)14 Form of Indemnification Contract for Officers and Directors
(Exhibit (10)(iii)(A)6 to Form SE, dated March 25, 1987, File
No. 1-1105).
(10)(iii)(A)15 Pension Plan for AT&T Non-Employee Directors revised February
20, 1989 (Exhibit 10)(iii)(A)15 to Form 10-K for 1993, File
No. 1-1105).
(10)(iii)(A)16 AT&T Corp. Senior Management Universal Life Insurance Program
effective October 1, 1999.
(10)(iii)(A)17 Form of AT&T Benefits Protection Trust Agreement as amended
and restated as of November 1993, including the first
amendment thereto dated December 23, 1997 (Exhibit
(10)(iii)(A)17 to Form 10-K for 1999, File No. 1-1105).
(10)(iii)(A)18 AT&T Senior Officer Severance Plan effective October 9, 1997,
as amended October 30, 1997 (Exhibit (10)(iii)(A)18 to Form
10-K for 1997, File No. 1-1105).
(10)(iii)(A)19 Form of Pension Agreement between AT&T Corp. and Frank Ianna
dated October 30, 1997 (Exhibit (10)(iii)(A)19 to Form 10-K
for 1997, File No. 1-1105).
(10)(iii)(A)20 Form of Pension Agreement between AT&T Corp. and John C.
Petrillo dated October 30, 1997 (Exhibit (10)(iii)(A)21 to
Form 10-K for 1997, File No. 1-1105).
(10)(iii)(A)21 Form of Pension Agreement between AT&T Corp. and John Zeglis
dated May 7, 1997 (Exhibit (10)(iii)(A)22 to Form 10-K for
1997, File No. 1-1105).
(10)(iii)(A)22 Form of Employment Agreement between AT&T Corp. and C. Michael
Armstrong dated October 17, 1997 (Exhibit (10)(iii)(A)23 to
Form 10-K for 1997, File No. 1-1105).
(10)(iii)(A)23 Form of Employment Agreement between AT&T Corp. and Daniel E.
Somers dated April, 1997 (Exhibit (10)(iii)(A)23 to Form 10-K
for 1998, File No. 1-1105).
(10)(iii)(A)24 Liberty Media 401(K) Savings Plan (Incorporation herein by
reference to Exhibit 99.1 to Post-Effective Amendment No. 2 on
Form S-8 to the Registration Statement on Form S-4 of AT&T
Corp. (Commission File No. 333-70279) filed March 10, 1999).
(10)(iii)(A)25 AT&T Corp. Directors' Universal Life Insurance Program
effective June 1, 2000.
(10)(iii)(A)26 AT&T Corp. Senior Management Universal Life Insurance Program
for Former Executives effective October 1, 1999.
(10)(iii)(A)27 Form of Employment Agreement between AT&T Corp. and Charles H.
Noski dated December 8, 1999.
(10)(iii)(A)28 Form of Special Deferral Agreement between AT&T Corp. and
Charles H. Noski dated January 26, 2001.
(10)(iii)(A)29 Form of Special Deferral Agreement between AT&T Corp. and
Frank Ianna dated January 16, 2001.
(10)(iii)(A)30 Form of Loan Agreement between AT&T Corp. and David Dorman
dated December 21, 2000.
(10)(iii)(A)31 Form of Loan Agreement between AT&T Corp. and David Dorman
dated December 21, 2000.
(10)(iii)(A)32 AT&T Corp. board resolutions adopting change in control
provision to various plans effective October 23, 2000.
(12) Computation of Ratio of Earnings to Fixed Charges.
(21) List of subsidiaries of AT&T.
(23)a Consent of PricewaterhouseCoopers, LLP
(23)b Consent of KPMG, LLP
(24) Powers of Attorney executed by officers and directors who
signed this report.
(99)a Supplemental Information regarding AT&T Wireless Group.
(99)b Supplemental Information regarding Liberty Media Group.
AT&T will furnish, without charge, to a shareholder upon request a copy
of the annual report to shareholders and the proxy statement, portions of which
are incorporated herein by reference thereto. AT&T will furnish any other
exhibit at cost.
(b) Reports on Form 8-K:
During the fourth quarter 2000, Form 8-K dated October 23, 2000 was
filed pursuant to Item 5 (Other Events) and Item 7 (Financial Statements and
Exhibits), Form 8-K dated November 15, 2000 was filed pursuant to Item 5 (Other
Events) and Item 7 (Financial Statements and Exhibits), Form 8-K dated December
1, 2000 was filed pursuant to Item 5 (Other Events) and Item 7 (Financial
Statements and Exhibits), Form 8-K dated December 18, 2000 was filed pursuant to
Item 5 (Other Events), Form 8-K dated December 20, 2000 was filed pursuant to
Item 5 (Other Events) and Item 7 (Financial Statements and Exhibits) and Form
8-K dated December 22, 2000 was filed pursuant to Item 5 (Other Events) and Item
7 (Financial Statements and Exhibits).
REPORT OF INDEPENDENT ACCOUNTANTS ON CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareowners of AT&T Corp.:
Our audits of the consolidated financial statements referred to in our report
dated March 16, 2001 appearing in the 2000 Annual Report to Shareholders of AT&T
Corp. (which report and consolidated financial statements appear in this Annual
Report on Form 10-K) also included an audit of the consolidated financial
statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion,
this consolidated financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
PricewaterhouseCoopers LLP
New York, New York
March 16, 2001
Schedule II--Sheet 1
AT&T CORP.
AND ITS CONSOLIDATED SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(Millions of Dollars)
------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
------------------------------------------------------------------------------
Balance at Charged to Balance
Beginning Costs and at End
Description of Period Expenses Deductions(a) of Period
------------------------------------------------------------------------------
Year 2000
Allowances for doubtful
accounts (b) $1,334 $1,393 $1,292 $1,435
Deferred tax asset valuation
allowance (c) $ 231 $ 826 $ 268 $ 789
Year 1999
Allowances for doubtful
accounts (b) $1,106 $1,416 $1,188 $1,334
Deferred tax asset valuation
allowance (c) $ 278 $ 124 $ 171 $ 231
Year 1998
Allowances for doubtful
accounts (b) $1,037 $1,389 $1,320 $1,106
Deferred tax asset valuation
allowance (c) $ 361 $ 23 $ 106 $ 278
------------
(a) Amounts written off as uncollectible, net of recoveries.
(b) Includes allowances for doubtful accounts on long-term receivables of
$56, $53 and $46 at December 31, 2000, 1999 and 1998, respectively
(included in other assets in the Consolidated Balance Sheets).
(c) End of period balances at December 31, 2000 and 1998, include $39 and
$18, respectively, which represent the current portion of the deferred
tax valuation allowance. There was no current portion at December 31,
1999. The increase in the deferred tax asset valuation allowance in 2000
was primarily due to the consolidation of At Home Corporation and the
merger with MediaOne Group, Inc. The increase in 1999 was primarily due
to the merger with Tele-Communications, Inc. These increases are shown
within the charged to costs and expenses column.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AT&T Corp.
/s/ M. J. Wasser
-------------------------------
By: M. J. Wasser
Vice President - Law and Secretary
March 29, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Principal Executive Officers: #
#
C. Michael Armstrong Chairman of the Board and #
Chief Executive Officer #
#
John Zeglis Director and Chief Executive #
Officer, AT&T Wireless Group #
#
Principal Financial Officer: #
#
Charles H. Noski Senior Executive Vice President#
and Chief Financial Officer #
#
Principal Accounting Officer: #
#
Nicholas S. Cyprus Vice President and Controller ## By M. J. Wasser
# (attorney-in-fact)*
Directors: #
# March 29, 2001
Kenneth T. Derr #
M. Kathryn Eickhoff #
Walter Y. Elisha #
George M. C. Fisher #
Donald V. Fites #
Amos B. Hostetter, Jr. #
Ralph S. Larsen #
John C. Malone #
Donald F. McHenry #
Louis A. Simpson #
Michael I. Sovern #
Sanford I. Weill #
Masaki Yoshikawa #