UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
..X.. QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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 - Area Code 212-387-5400
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 ...
At April 30, 1999, the following shares of stock were outstanding:
AT&T common stock - 3,182,097,067 shares Liberty Media Class A tracking
stock - 577,496,407 shares Liberty Media Class B tracking stock -
55,072,748 shares
<PAGE>
AT&T Form 10-Q - Part I
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
For the Three
Months Ended
March 31,
1999 1998
Revenues........................................ $14,096 $12,831
Operating Expenses
Access and other interconnection................ 3,732 3,936
Network and other communications services....... 2,872 2,546
Depreciation and amortization................... 1,461 1,067
Selling, general and administrative............. 3,157 3,277
Restructuring and other charges................. 731 601
Total operating expenses........................ 11,953 11,427
Operating income................................ 2,143 1,404
Equity losses from Liberty Media Group.......... 58 -
Other income - net.............................. 149 706
Interest expense................................ 190 80
Income from continuing operations
before income taxes............................ 2,044 2,030
Provision for income taxes...................... 1,026 745
Income from continuing operations............... 1,018 1,285
Income from discontinued operations
(net of taxes of $6)........................... - 10
Net income...................................... $ 1,018 $ 1,295
Per AT&T common share - basic:
Income from continuing operations.............. $ 0.39 $ 0.48
Income from discontinued operations............ - -
Total income................................... $ 0.39 $ 0.48
Per AT&T common share - diluted:
Income from continuing operations.............. $ 0.38 $ 0.48
Income from discontinued operations............ - -
Total income................................... $ 0.38 $ 0.48
Dividends declared per AT&T common share........ $ 0.22 $ 0.22
Liberty Media Group loss per share:
Basic.......................................... $ 0.10 $ -
Diluted........................................ $ 0.10 $ -
See Notes to Consolidated Financial Statements
<PAGE>
AT&T Form 10-Q - Part I
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions Except Share Amounts)
(Unaudited)
March 31, December 31,
1999 1998
ASSETS
Cash and cash equivalents ........................... $ 1,463 $ 3,160
Receivables, less allowances of $1,143 and $1,060.... 9,383 9,055
Deferred income taxes................................ 1,690 1,310
Other current assets................................. 709 593
TOTAL CURRENT ASSETS................................. 13,245 14,118
Property, plant and equipment, net of accumulated
depreciation of $26,524 and $25,374 ............... 33,015 26,903
Licensing costs, net of accumulated amortization
of $1,321 and $1,266............................... 7,800 7,948
Goodwill, net of accumulated amortization of
$257 and $226...................................... 26,147 2,205
Investment in Liberty Media Group and related
receivables........................................ 34,532 -
Other investments.................................... 13,186 4,434
Prepaid pension costs................................ 2,168 2,074
Other assets......................................... 5,542 1,868
TOTAL ASSETS......................................... $135,635 $59,550
(CONT'D)
<PAGE>
AT&T Form 10-Q - Part I
CONSOLIDATED BALANCE SHEETS (CONT'D)
(Dollars in Millions Except Share Amounts)
(Unaudited)
March 31, December 31,
1999 1998
LIABILITIES
Accounts payable..................................... $ 5,510 $ 6,226
Payroll and benefit-related liabilities.............. 1,766 1,986
Debt maturing within one year........................ 4,899 1,171
Dividends payable.................................... 701 581
Other current liabilities............................ 6,567 5,478
TOTAL CURRENT LIABILITIES............................ 19,443 15,442
Long-term debt....................................... 22,488 5,556
Long-term benefit-related liabilities................ 4,386 4,255
Deferred income taxes................................ 10,576 5,453
Other long-term liabilities and deferred credits..... 3,821 3,213
TOTAL LIABILITIES ................................... 60,714 33,919
Minority Interest in Equity of Consolidated
Subsidiaries....................................... 2,899 109
Subsidiary-Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trusts Holding Solely
Subordinated Debt Securities of AT&T's Wholly-Owned
Subsidiary, TCI.................................... 1,660 -
SHAREOWNERS' EQUITY Common Stock:
AT&T Common Stock, $1 par value, authorized
6,000,000,000 shares; issued and outstanding
3,181,305,697 shares (net of 289,250,583 treasury
shares) at March 31, 1999 and 2,630,391,784 shares
(net of 80,222,341 treasury shares) at
December, 31, 1998................................. 3,181 2,630
Liberty Media Group Class A Tracking Stock, $1 par
value, authorized 2,500,000,000 shares; issued
and outstanding 571,156,470 shares at
March 31, 1999..................................... 571 -
Liberty Media Group Class B Tracking Stock, $1 par
value, authorized 2,500,000,000 shares; issued
and outstanding 55,072,748 shares at
March 31, 1999..................................... 55 -
Additional Paid-in Capital:
AT&T Common Stock.................................. 26,036 15,195
Liberty Media Group Stock.......................... 32,937 -
Guaranteed ESOP obligation........................... (31) (44)
Retained Earnings (Accumulated Deficit):
AT&T Common Stock.................................. 6,817 7,800
Liberty Media Group Stock.......................... (58) -
Accumulated other comprehensive income............... 854 (59)
TOTAL SHAREOWNERS' EQUITY............................ 70,362 25,522
TOTAL LIABILITIES & SHAREOWNERS' EQUITY.............. $135,635 $59,550
See Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
AT&T Form 10-Q - Part I
Consolidated Statements of Shareowners' Equity (Dollars in Millions)
For the three months ended March 31, 1999 (Unaudited)
<CAPTION>
Accumulated Total Other
Additional Guaranteed Compre- Share- Compre-
Paid-in ESOP Retained hensive owners hensive
Common Shares Capital Obligation Earnings Income Equity Income
AT&T Liberty Liberty AT&T Liberty AT&T Liberty
Common Media Group Media Group Common Media Group Common Media Group
Stock Class A Class B Stock Stock Stock Stock
Tracking Tracking
Stock Stock
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
Jan. 1, 1999 $2,630 - - 15,195 - (44) 7,800 - (59) $25,522
Shares issued
(acquired),net:
For employee plans (2) (103) (105)
For acquisitions* 553 570 55 10,880 32,890 44,948
Other 1 47 48
Amortization 13 13
Net income 1,076 (58) 1,018 $1,018
Dividends
declared (699) (699)
Treasury shares
issued at less
than cost (1,360) (1,360)
Other 64 64
Other
comprehensive
income (net of
taxes of $595)** 913 913 913
Balance at March
31, 1999 $3,181 571 55 26,036 32,937 (31) 6,817 (58) 854 $70,362 $1,931
<FN>
* AT&T accounts for treasury stock as retired stock, and at March 31, 1999,
had 289 million treasury shares of which 216 million shares were owned by
TCI subsidiaries and 70 million shares related to the purchase of AT&T
shares previously held by Liberty Media Group. ** Includes $906 (net of
taxes of $591) of other comprehensive income for Liberty Media Group.
See Notes to Consolidated Financial Statements
</FN>
</TABLE>
<PAGE>
<TABLE>
AT&T Form 10-Q - Part I
Consolidated Statements of Shareowners' Equity (Dollars in Millions)
For the three months ended March 31, 1998 (Unaudited)
<CAPTION>
AT&T Additional Guaranteed Accumulated Total Other
Common Paid-in ESOP Retained Comprehensive Shareowners' Comprehensive
Stock Capital Obligation Earnings Income Equity Income
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
Jan. 1, 1998 $2,684 17,121 (70) 3,981 (38) $23,678
Shares issued
(acquired),net:
For employee plans (1) (31) (32)
Amortization 12 12
Net income 1,295 1,295 $1,295
Dividends
declared (536) (536)
Treasury shares
issued at less
than cost (215) (215)
Other changes 59 2 61
Other
comprehensive
income (net of
taxes of $23) 30 30 30
Balance at March
31, 1998 $2,683 17,149 (58) 4,527 (8) $24,293 $1,325
<FN>
See Notes to Consolidated Financial Statements
</FN>
</TABLE>
<PAGE>
AT&T Form 10-Q - Part I
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
For the Three
Months Ended
March 31,
1999 1998
Operating Activities
Net income .................................. $ 1,018 $ 1,295
Deduct: Income from discontinued
operations ........................ - 10
Income from continuing operations ........... 1,018 1,285
Adjustments to reconcile net income to
net cash provided by operating
activities of continuing operations:
Restructuring and other charges........... 731 601
Gains on sales............................ (153) (667)
Depreciation and amortization............. 1,461 1,067
Provision for uncollectibles.............. 386 362
Increase in accounts receivable........... (622) (392)
(Decrease) increase in accounts payable... (742) 49
Net decrease in other operating assets
and liabilities......................... (1,460) (90)
Other adjustments for noncash
items - net............................. 127 (251)
Net cash provided by operating
activities of continuing operations........ 746 1,964
Investing Activities
Capital expenditures....................... (1,913) (1,702)
Proceeds from sale or disposal of
property, plant and equipment............ 16 23
Decrease in other receivables.............. 4 661
Net dispositions (acquisitions) of
licenses................................. 9 (26)
Sales of marketable securities............. - 451
Purchases of marketable securities......... - (389)
Equity investment distributions and sales.. 69 799
Equity investment contributions and
purchases................................ (5,821) (32)
Dispositions of businesses and
cash acquired in acquisitions............ 797 642
Other investing activities - net........... (52) (27)
Net cash (used in) provided by investing
activities of continuing operations........ (6,891) 400
(CONT'D)
<PAGE>
AT&T Form 10-Q - Part I
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D)
(Dollars in Millions)
(Unaudited)
For the Three
Months Ended
March 31,
1999 1998
Financing Activities
Proceeds from long-term debt issuance..... 7,948 -
Retirements of long-term debt............. (493) (40)
Issuance of common shares................. - 2
Acquisition of treasury shares............ (4,344) (262)
Dividends paid............................ (615) (536)
Increase (decrease) in short-term
borrowings - net........................ 1,834 (1,628)
Other financing activities - net.......... 118 18
Net cash provided by (used in) financing
activities of continuing operations....... 4,448 (2,446)
Net cash provided by discontinued
operations................................ - 92
Net (decrease) increase in cash and
cash equivalents.......................... (1,697) 10
Cash and cash equivalents
at beginning of year...................... 3,160 318
Cash and cash equivalents
at end of period.......................... $ 1,463 $ 328
See Notes to Consolidated Financial Statements
<PAGE>
AT&T Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
(a) BASIS OF PRESENTATION
The consolidated financial statements have been prepared by AT&T
Corp. (AT&T) pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC) and, in the opinion of
management, include all adjustments necessary for a fair statement
of the consolidated results of operations, financial position and
cash flows for each period presented. The consolidated results for
interim periods are not necessarily indicative of results for the
full year. These financial results should be read in conjunction
with AT&T's Form 10-K/A for the year ended December 31, 1998,
Tele-Communications, Inc.'s (TCI) Form 10-K for the year ended
December 31, 1998, TCI's Form 10-Q for the quarter ended March 31,
1999, the financial statements of Liberty Media Group for the year
ended December 31, 1998 included in AT&T's Form 8-K filed on March
22, 1999, and the financial statements of Liberty Media Group for
the period ended March 31, 1999, included as Exhibit 99 to this
AT&T quarterly report on Form 10-Q.
On March 17, 1999, our Board of Directors declared a three for two
split of AT&T common stock, paid on April 15, 1999, to shareowners
of record on March 31, 1999. All references to number of shares
(except shares authorized or where otherwise indicated) and per
share information in the consolidated financial statements have
been adjusted to reflect the stock split on a retroactive basis.
We have reclassified certain prior period amounts to conform to
our current presentation.
(b) MERGER WITH TCI
On March 9, 1999, the previously announced merger with TCI closed
and each share of TCI Group Series A common stock was converted
into 0.7757 of a share of AT&T common stock (on a pre-split basis)
and each share of TCI Group Series B stock was converted into
0.8533 of a share of AT&T common stock (on a pre-split basis).
AT&T issued approximately 443 million shares (664 million shares
on a post-split basis) for these TCI shares, of which 344 million
shares (515 million shares on a post-split basis) were newly
issued shares and 99 million shares (149 million shares on a
post-split basis) were treasury shares including shares
repurchased in February and March 1999. The total shares had an
aggregate market value of approximately $26.8 billion. Certain
subsidiaries of TCI held TCI Group Series A stock which was
converted into 144 million shares (216 million shares on a
post-split basis) of AT&T common stock. These subsidiaries
continue to hold these shares, which are reflected as treasury
stock in the accompanying consolidated balance sheet.
<PAGE>
AT&T Form 10-Q - Part I
In addition, TCI simultaneously combined its Liberty Media Group
programming business, and TCI Ventures Group, its technology
investments business, forming Liberty Media Group. In connection
with the closing, AT&T issued a separate tracking stock in
exchange for the TCI Liberty Media Group and TCI Ventures Group
tracking shares previously outstanding. A total of 540 million
shares of Class A Liberty Media Group tracking stock were issued
by AT&T and 55 million shares of Class B Liberty Media Group
tracking stock were issued by AT&T. AT&T also issued 30 million
Class A Liberty Media Group tracking shares in connection with the
conversion of certain convertible notes. The aggregate market
value of shares issued in conjunction with the merger was $23.4
billion. The tracking stock is designed to reflect the separate
economic performance of Liberty Media Group. AT&T does not have a
controlling financial interest in Liberty Media Group, therefore
it has been reflected as an equity method investment in the
accompanying consolidated financial statements. The results
attributable to Liberty Media Group are reflected as a separate
line item "Equity losses from Liberty Media Group" and "Investment
in Liberty Media Group" in the accompanying consolidated financial
statements. As a separate tracking stock, all of the earnings or
losses related to Liberty Media Group are excluded from the
earnings available to the holders of AT&T common stock. TCI's
cable and certain other operations, including its ownership
interest in At Home Corp. (@Home), became AT&T broadband and
Internet services, and were combined with the existing AT&T
operations to form the AT&T common stock group (AT&T Group).
In general, the holders of shares of Liberty Media Group Class A
tracking stock and the holders of shares of Liberty Media Group
Class B tracking stock will vote together as a single class with
the holders of shares of AT&T common stock on all matters
presented to such stockholders, with the holders being entitled to
one-tenth of a vote for each share of Liberty Media Group Class A
tracking stock held, one vote per share of Liberty Media Group
Class B tracking stock held and one vote per share of AT&T common
stock held.
The merger with TCI was recorded as a purchase. Accordingly the
operating results of TCI have been included in the accompanying
consolidated financial statements since March 1, 1999, the deemed
effective date of acquisition for accounting purposes. The impact
of results from March 1, 1999, through March 9, 1999, are deemed
immaterial to our consolidated results. The excess of the
aggregate purchase price of $52.155 billion over the fair value of
net assets acquired, based on a preliminary allocation, was
approximately $24 billion, of which $3 billion was allocated to
@Home and is being amortized on a straight-line basis over seven
years. The remaining $21 billion is being amortized on a
straight-line basis over 40 years. In addition, approximately $11
billion of goodwill related to Liberty Media Group was recorded as
part of our investment and is being amortized on a straight-line
<PAGE>
AT&T Form 10-Q - Part I
basis over 20 years as a component of equity earnings (losses)
from Liberty Media Group. A final allocation of the purchase price
will be made upon receipt of final third party appraisals. We do
not believe the final purchase price will differ materially from
what has been reflected herein. In addition, in conjunction with
the acquisition we acquired nonconsolidated investments in cable
affiliates of $8.4 billion.
Following is a summary of the noncash impact of the TCI merger:
Dollars in Billions
Fair value of net assets acquired $ 28
Excess purchase price over fair value of
net assets acquired 24
Other* (2)
Issuance of common shares:
AT&T common stock (27)
Liberty Media Group tracking stock (23)
*Other includes assumption of convertible notes and preferred
stock, as well as estimated merger costs.
At March 31, 1999, there was $54 of restricted cash comprised
primarily of proceeds received in connection with certain asset
dispositions of TCI, which are designated to be reinvested in
certain identified assets for tax purposes.
Included in the March 31, 1999, cash and cash equivalent balance
is $401 related to @Home. This balance is to be applied towards
the liquidity requirements of @Home, accordingly, it is not
anticipated that any portion of the @Home balance will be
distributed or otherwise made available to AT&T.
<PAGE>
AT&T Form 10-Q - Part I
Following is a summary of the pro forma results of AT&T as if the
merger with TCI had closed effective January 1, 1998:
For the Three Months Ended March 31, 1999 March 31, 1998
Revenues $15,026 $14,440
Income from continuing operations 446 1,223
Income from continuing operations,
available to AT&T Group shareowners 716 1,271
Income from continuing operations,
available to Liberty Media Group
shareowners (270) (48)
Net income 446 1,233
Income available to AT&T Group
shareowners 716 1,281
Income available to Liberty Media
Group shareowners (270) (48)
Weighted-average AT&T common shares
(millions) 3,147 3,126
Weighted-average AT&T common shares and
potential common shares (millions) 3,253 3,234
Weighted-average Liberty Media Group
shares (millions) 595 595
Basic earnings per AT&T common share:
Income from continuing operations $ 0.23 $ 0.41
Total income $ 0.23 $ 0.41
Diluted earnings per AT&T common share:
Income from continuing operations $ 0.22 $ 0.39
Total income $ 0.22 $ 0.40
Basic earnings per Liberty Media Group
share $ (0.45) $ (0.08)
Diluted earnings per Liberty Media Group
share $ (0.45) $ (0.08)
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.
<PAGE>
AT&T Form 10-Q - Part I
(c) OTHER MERGERS, ACQUISITIONS, VENTURES AND DISPOSITIONS
On March 4, 1999, AT&T Canada announced a definitive merger
agreement with MetroNet Communications Corp. (MetroNet), Canada's
largest facilities-based competitive local exchange carrier
(CLEC). The merged entity will possess a national network to
provide Canadian business customers local and long distance voice,
data, Internet and electronic commerce services as well as
wireless services through Cantel AT&T. The terms of the agreement
outline a multi-stage transaction, which will result in MetroNet
shareholders indirectly owning 69% of the merged company and AT&T
indirectly owning 31%. AT&T will contribute its 33% voting
interest in AT&T Canada Corp. (formerly AT&T Canada Long Distance
Services), the remaining 67% of AT&T Canada Corp. currently held
in trust and its 100% interest in ACC TelEnterprises Ltd. MetroNet
will contribute all of its assets and operations. In addition,
AT&T has agreed to purchase, or arrange for another entity to
purchase, all of the shares currently held by MetroNet
shareholders for the greater of at least C$75 per share or the
then appraised fair market value. The exact timing will likely be
partially dependent upon the future status of Canadian federal
foreign ownership regulations. Consideration for the MetroNet
shares will be paid in the form of cash, AT&T shares, or a
combination thereof. The merger is subject to certain conditions,
including the receipt of regulatory approval.
The previously announced global venture between AT&T and British
Telecommunications plc (BT) has received approval from the
European Commission. The global venture will combine the
transborder assets and operations of each company. The venture
will be equally owned by both companies when it begins operations.
The receipt of certain additional regulatory approvals is required
and the venture is expected to be completed by mid-1999.
On March 31, 1999, AT&T completed the acquisition of certain
assets of SmarTalk Tele-Services, Inc., a leading seller of
prepaid calling cards, for $145.
On March 31, 1999, AT&T completed the sale of its Language Line
Services over-the-phone interpretation business, which resulted in
a pretax gain of $153.
In the first quarter of 1999, @Home entered into a merger
agreement with Excite, Inc. (Excite), a global Internet media
company that offers consumers and advertisers comprehensive
Internet navigation services with extensive personalization
capabilities. Under the terms of the merger agreement, @Home will
issue approximately 55 million shares of its common stock for all
of the outstanding common stock of Excite based on an exchange
ratio of 1.041902 shares of @Home's common stock for each share of
Excite's common stock. As a result of the proposed merger, AT&T's
economic interest in @Home would decrease from 38.8% to 26.5%.
<PAGE>
AT&T Form 10-Q - Part I
(d) DEBT OFFERING
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 as follows:
$2 billion 5.625% Notes due 2004
$3 billion 6.000% Notes due 2009
$3 billion 6.500% Notes due 2029
Interest is payable semiannually in arrears on September 15 and
March 15, beginning September 15, 1999.
AT&T 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 our acquisition of TCI and towards
funding the share repurchase program.
(e) RESTRUCTURING AND OTHER CHARGES
Restructuring and other charges for the quarter were $731 pretax,
including an in-process research and development charge of $594
related to the TCI acquisition. The charge reflects the estimated
value, as of the acquisition date, of research and development
projects at TCI which have not yet reached technological
feasibility and which have no alternative future use. The projects
identified relate to TCI's efforts to offer voice over Internet
protocol, cost savings efforts for cable telephony implementation
and product integration efforts for advanced set-top devices that
will enable TCI to offer next-generation digital services. In
addition, @Home has 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. Although there are significant
technological issues to overcome in order to successfully complete
the acquired in-process research and development, AT&T expects
successful completion. If, however, AT&T is unable to establish
technological feasibility and produce a commercially viable
product/service, then anticipated incremental future cash flows
attributable to expected profits from such new product/service may
not be realized.
Additionally, AT&T recorded a charge of $196 primarily related to
the settlement associated with the exit of a joint venture that
will compete directly with the global venture that AT&T is forming
with BT. These charges were partially offset by gains of $59
related to the settlement of pension obligations for former
employees who accepted AT&T's voluntary retirement incentive
program offer.
<PAGE>
AT&T Form 10-Q - Part I
In the first quarter of 1998, AT&T recorded a $601 charge related
to AT&T's decision not to pursue Total Service Resale (TSR) as a
local service strategy. The Regional Bell Operating Companies have
made it extremely difficult to enter the local market under a TSR
strategy. After spending billions of dollars in an attempt to
enter this market, it became clear that the TSR solution was not
economically viable. The pretax charge includes a $543 write-down
of software, $42 primarily related to equipment associated with
the software platform and $16 for certain contractual obligations
and termination penalties under several contracts that were
canceled during the first quarter as a result of this decision.
AT&T received no operational benefit from these contracts once
this decision was made.
(f) EARNINGS PER COMMON SHARE AND POTENTIAL COMMON SHARE
Basic earnings per share (EPS) for AT&T Group for the three months
ended March 31, 1999 and 1998, was computed by dividing income
attributable to AT&T Group common shareowners by the
weighted-average number of common shares outstanding of AT&T Group
during the period.
Diluted EPS for AT&T Group for the three months ended March 31,
1999 and 1998, was computed by dividing the income attributable to
AT&T Group common shareowners by the weighted-average number of
common shares and dilutive potential common shares outstanding of
AT&T Group during the period, assuming conversion of the potential
common shares at the beginning of the periods 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 debt securities were all converted as of March 31,
1999.
<PAGE>
AT&T Form 10-Q - Part I
A reconciliation of basic EPS to diluted EPS with respect to AT&T
Group is as follows:
Three Months Ended
March 31,
1999 1998
Income from continuing operations attributable
to AT&T Group $1,076 $1,285
Income attributable to Liberty Media Group (58) -
Income from continuing operations $1,018 $1,285
Income attributable to AT&T Group $1,076 $1,295
Income attributable to Liberty Media Group (58) -
Net Income $1,018 $1,295
AT&T Group weighted-average common
shares (millions) 2,751 2,683
Stock options 41 26
Preferred stock of subsidiary 10 -
Convertible debt securities of subsidiary 7 -
AT&T Group weighted-average common shares and
potential common shares (millions) 2,809 2,709
Basic EPS for Liberty Media Group for the month ended March 31,
1999, was computed by dividing the income attributable to Liberty
Media Group shareowners by the weighted-average number of shares
outstanding of Liberty Media Group of 597 million for the period.
Since Liberty Media Group had a loss for the month, the impact of
any potential shares would have been antidilutive, and therefore
are not factored into the diluted calculation. There were 90
million potentially dilutive securities outstanding at March 31,
1999.
(g) SUBSIDIARY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES
OF SUBSIDIARY TRUSTS HOLDING SOLELY SUBORDINATED DEBT SECURITIES
OF AT&T'S WHOLLY-OWNEDSUBSIDIARY, TCI
Certain subsidiary trusts of TCI (the "Trusts") had preferred
securities outstanding at March 31, 1999, as follows:
Interest Maturity Face
Subsidiary Trust Rate Date Amount
TCI Communications Financing I 8.72% 2045 $ 500
TCI Communications Financing II 10.00% 2045 500
TCI Communications Financing III 9.65% 2027 300
TCI Communications Financing IV 9.72% 2036 200
Purchase accounting fair market
value adjustment* 160
Total $1,660
* In connection with the acquisition of TCI, approximately $160
was allocated to the Trust Preferred Securities representing the
excess of the fair market value over the recorded value at the
date of acquisition. The excess is being amortized over the
remaining life of the Trust Preferred Securities, 28 to 46 years.
<PAGE>
AT&T Form 10-Q - Part I
The Trusts exist for the exclusive purpose of issuing the Trust
Preferred Securities and investing the proceeds thereof into
Subordinated Deferrable Interest Notes (the "Subordinated Debt
Securities") of TCI. 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 Subordinated Debt
Securities are unsecured obligations of TCI and are subordinate
and junior in right of payment to certain other indebtedness of
TCI. Upon redemption of the Subordinated Debt Securities, the
Trust Preferred Securities will be mandatorily redeemable. TCI
effectively provides a full and unconditional guarantee of the
Trusts' obligations under the Trust Preferred Securities.
The Trust Preferred Securities are presented together in a
separate line item in the accompanying consolidated balance sheets
captioned "Subsidiary-Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trusts Holding Solely Subordinated Debt
Securities of AT&T's Wholly-Owned Subsidiary, TCI". Dividends
accrued on the Trust Preferred Securities aggregated $12 for the
period from completion of the merger with TCI through March 31,
1999, and are recorded as a reduction of other income in the
accompanying consolidated statements of income.
(h) PREFERRED STOCK
TCI issued preferred stock which remains outstanding subsequent to
the TCI merger. There are 1.552 million shares of Class B
Preferred Stock of TCI outstanding as of March 31, 1999, net of
shares held by a subsidiary, out of an authorized 1.675 million
shares.
Dividends accrue cumulatively (but without compounding) at an
annual rate of 6% of the stated liquidation value of $100 per
share, whether or not such dividends are declared or funds are
legally available for payment of dividends. Accrued dividends are
payable annually on March 1 of each year in cash or AT&T stock, or
any combination of the foregoing at the sole discretion of the
AT&T Board of Directors. Accrued dividends not paid on any
dividend payment date will accumulate. Dividends accrued on shares
of Class B Preferred Stock aggregated $776 thousand from the date
of the merger through March 31, 1999.
The amount of Class B Preferred Stock and accumulated dividends
thereon are reflected within "Minority Interest in Equity of
Consolidated Subsidiaries" in the accompanying consolidated
balance sheet and aggregated $154 at March 31, 1999.
<PAGE>
AT&T Form 10-Q - Part I
TCI Pacific Communications Inc. (Pacific) issued preferred stock
which remains outstanding after the TCI merger. There are 6.258
million shares of Pacific authorized and outstanding at March 31,
1999. Each share of the Pacific 5% Class A Senior Cumulative
Exchangeable Preferred Stock is exchangeable, from and after
August 1, 2001, for approximately 6.3375 shares of AT&T Common
Stock, subject to certain anti-dilution adjustments. Additionally,
Pacific may elect to make any dividend, redemption or liquidation
payment in cash, shares of AT&T Common Stock or by a combination
of the foregoing. The amount of Pacific Preferred Stock and
accumulated dividends thereon are reflected within "Minority
Interest in Equity of Consolidated Subsidiaries" in the
accompanying consolidated balance sheet and aggregated $2 billion
at March 31, 1999. Dividends accrued on shares of the Pacific
stock aggregated $3 from the date of the merger through March 31,
1999.
(i) 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 and foreign currency exchange contracts. Interest rate
swap agreements and foreign currency exchange contracts are used
to mitigate interest rate and foreign currency exposures.
Collateral is generally not required for these types of
instruments.
Interest Rate Swap Agreements:
As a result of the TCI merger, AT&T added interest rate swaps to
its portfolio that TCI had entered into prior to the consummation
of the merger. The following table indicates the types of swaps in
use by TCI at March 31, 1999, and their weighted-average interest
rates.
Variable to fixed rate swaps-notional amount $1,950
Average receive rate 7.04%
Average pay rate 5.71%
Variable to variable rate swaps-notional amount $ 495
Average receive rate 5.42%
Average pay rate 5.30%
<PAGE>
AT&T Form 10-Q - Part I
The weighted-average remaining terms of these swap contracts were
7.2 years at March 31, 1999.
Debt and Off Balance Sheet Instruments:
Pursuant to the TCI merger, AT&T is exposed to off balance sheet
risks which TCI had entered into prior to the consummation of the
merger. TCI has agreed to take certain steps to support debt
compliance with respect to obligations aggregating $1,690 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.
At March 31, 1999, the fair value of TCI's debt approximated its
carrying amount since the debt was written up $955 to fair market
value pursuant to the merger.
A consortium of lenders provides revolving-credit facilities of
$7.0 billion to AT&T. These credit facilities are intended for
general corporate purposes and were unused at March 31, 1999. AT&T
terminated a $2.0 billion 364-day back up facility following its
debt offering. In May 1999, AT&T entered into additional revolving
credit facilities of $3.0 billion which are currently unused.
(j) SEGMENT REPORTING
AT&T's results are segmented according to the way we manage our
business: business services, consumer services, wireless services
and broadband & Internet services. Our existing segments reflect
certain managerial changes since the publication of our 1998
annual results. The business services segment was expanded to
include the results of Teleport Communications Group Inc. (TCG)
and the business portion of AT&T WorldNet Service; the consumer
services segment was expanded to include the residential portion
of AT&T WorldNet Service. All prior results have been restated to
reflect these changes. In addition, as a result of our merger with
TCI, we established a new segment called broadband & Internet
services. Broadband & Internet services include services provided
through the broadband cable network including traditional analog
cable service, as well as new services, such as Digital Cable,
AT&T@Home - the high-speed cable Internet service, and eventually
broadband telephony.
Reflecting the dynamics of our business, we continuously review
our management model and structure, which may result in additional
adjustments to our operating segments in the future.
<PAGE>
AT&T Form 10-Q - Part I
REVENUES
For the Quarter Ended March 31, 1999 1998
Business services external revenues $ 5,927 $5,558
Business services internal revenues 287 221
Total business services revenues 6,214 5,779
Consumer services external revenues 5,486 5,680
Wireless services external revenues 1,562 1,164
Broadband & Internet services external
revenues 483 -
Total reportable segments 13,745 12,623
Other and corporate revenues (a) 351 208
Total revenues $14,096 $12,831
(a) Included in other and corporate revenues are revenues from
AT&T Solutions, international operations and ventures, other
smaller units and the elimination of internal revenues.
RECONCILIATION OF EBIT TO INCOME BEFORE INCOME TAXES
For the Quarter Ended March 31, 1999 1998
Business services $ 1,567 $ 1,124
Consumer services 1,887 1,322
Wireless services (49) (2)
Broadband & Internet services (646) -
Total reportable segments' EBIT 2,759 2,444
Other and corporate EBIT (467) (334)
Liberty Media Group equity losses 58 -
Interest expense 190 80
Total income before income taxes $ 2,044 $ 2,030
ASSETS
At Mar. 31, At Dec. 31,
1999 1998
Business services $ 21,267 $21,415
Consumer services 6,658 6,335
Wireless services 19,219 19,341
Broadband & Internet services 42,748 -
Total reportable segments 89,892 47,091
All other segments 4,417 4,165
Corporate assets:
Investment in Liberty Media
Group 34,532 -
Prepaid pension costs 2,168 2,074
Deferred taxes 1,257 1,156
Other corporate assets 3,369 5,064
Total assets $135,635 $59,550
<PAGE>
AT&T Form 10-Q - Part I
(k) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following summary of significant accounting policies
supplements our annual disclosure to reflect certain policies
related to the acquired TCI cable operations.
REVENUE RECOGNITION
Cable installation revenues are 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 system.
FRANCHISE COSTS
Franchise costs include the difference between the cost of
acquiring cable television systems and amounts allocated to their
tangible assets. These amounts are reflected within other assets
in the accompanying consolidated balance sheets. Such amounts are
generally amortized on a straight-line basis over 40 years. Costs
incurred in negotiating and renewing existing franchise agreements
are amortized on a straight-line basis over the remaining life of
the franchise, generally 10 to 20 years.
PROPERTY, PLANT AND EQUIPMENT
Cable distribution systems are amortized on a straight-line basis
using estimated useful lives of 3 to 15 years. Support equipment
and buildings are amortized on a straight-line basis using
estimated useful lives of 3 to 40 years.
(l) SUBSEQUENT EVENTS
On May 6, 1999, AT&T and Microsoft Corp. (Microsoft) announced a
series of agreements in which the companies will work together to
accelerate the deployment of next-generation broadband and
Internet services to millions of American homes. Under the
agreements, Microsoft will purchase $5 billion of AT&T securities,
AT&T will increase its use of Microsoft's TV software platform in
advanced set-top devices, and both companies will work together to
showcase new digital cable services in two U.S. cities. AT&T
currently has a commitment to use the Windows CE-based system in 5
million set-top devices. Under a non-exclusive agreement, AT&T
will expand its Windows CE-based license to cover an additional
2.5 million to 5 million set-top devices. AT&T will also license
Microsoft client/server software that supports a range of digital
services. Microsoft will pay $5 billion for newly issued AT&T
convertible trust preferred securities and warrants. The preferred
securities, which will have a face value of $5 billion and be
priced at $50 per security, will make a quarterly payment of 62.5
cents per security. The preferred securities, which will be
convertible into 66.7 million shares of AT&T common stock at a
price of $75 per share, will have a maturity of 30 years, and the
conversion feature can be terminated, under certain conditions,
after three years. The warrants will be exercisable in three years
to purchase 40 million AT&T common shares at a price of $75 per
share. AT&T will use the proceeds to fund working capital and
capital expenditures. In addition, as part of these agreements,
Microsoft will purchase the MediaOne Group Inc.'s (MediaOne) 29.9%
interest in Telewest Communications plc through a tax-free
exchange of Microsoft shares, subject to certain approvals.
<PAGE>
AT&T Form 10-Q - Part I
On May 4, 1999, AT&T and Comcast Corporation (Comcast) announced
that they had reached an agreement to exchange various cable
systems, which are designed to improve each company's geographic
coverage by better clustering its systems. The agreement will
result in a net addition to Comcast of approximately 750,000
subscribers. Because Comcast will receive more subscribers than it
is contributing in the exchange, it will pay AT&T consideration
having a value of approximately four thousand five hundred dollars
per added subscriber for a total value of $3.0 billion to $3.5
billion. In addition, Comcast will receive an option from AT&T to
purchase, over the next three years, additional cable systems with
a total of approximately 1.25 million subscribers. The price for
these additional systems is expected to be consideration having a
value of approximately $5.7 billion subject to certain conditions.
Comcast has also agreed to offer AT&T-branded telephony in all of
its markets, subject to certain conditions. The foregoing
agreements are subject to completion of the proposed AT&T/MediaOne
merger announced on April 22, 1999, and other regulatory and legal
approvals.
On May 4, 1999, AT&T and Lenfest Communications, Inc. (Lenfest)
announced that they have signed an agreement for AT&T to acquire
the remaining 50% interest in Lenfest not already owned by AT&T.
Lenfest has approximately 1.5 million customers in the greater
Philadelphia area. AT&T has agreed to a stock purchase of the
remaining ownership interest, and expects to issue approximately
43 million shares of AT&T common stock to Lenfest once the
transaction receives the necessary legal and regulatory approvals.
On May 3, 1999, AT&T closed the previously announced merger with
Vanguard Cellular Systems, Inc. (Vanguard). Under the agreement,
each Vanguard shareholder was entitled to elect to receive either
cash or AT&T stock in exchange for their Vanguard shares subject
to the limitation that the overall consideration would consist of
50% AT&T stock and 50% cash. Because stock elections were made for
a greater number of Vanguard shares, holders of Vanguard shares
that elected cash (or did not elect) received $23 per share in
cash for each Vanguard share; and, holders of Vanguard shares that
elected stock received approximately 0.3134 shares of AT&T stock
and approximately $10.95 per share in cash. Consummation of the
merger resulted in the issuance of approximately 12.6 million AT&T
shares and payment of $485 in cash. In addition, Vanguard had
approximately $550 in debt, which has subsequently been repaid by
AT&T.
On April 30, 1999, AT&T completed the U.S. phase of the previously
announced acquisition of IBM's Global Network business. Under the
terms of the agreement, AT&T acquired the global network of IBM,
and the two companies entered into outsourcing agreements with
each other. IBM will outsource a significant portion of its global
networking needs to AT&T. AT&T will outsource certain
applications-processing and data-center-management operations to
<PAGE>
AT&T Form 10-Q - Part I
IBM. Customer contracts, assets and about 3,000 employees based in
the U.S. have now been transferred to AT&T. IBM has assumed
management of AT&T's data processing centers, which operate
corporate information systems. The transfer of approximately 2,000
AT&T employees to IBM is expected to be completed in June 1999.
The acquisition of IBM Global Network assets and the transfer of
employees outside the U.S. will be completed in phases throughout
the year as legal and regulatory requirements are met. Approval
was received from the European Union in April 1999.
On April 25, 1999, AT&T and BT announced they have entered into a
definitive agreement to acquire a 30% stake in Japan Telecom, one
of Japan's largest telecommunications companies, for $1.83
billion. Under the agreement, AT&T and BT will each subscribe for
15% of the equity interest in Japan Telecom and will jointly
manage the investment. The global venture will use Japan Telecom's
extensive network infrastructure to enhance its coverage and
provide end-to-end services to customers. The agreement is
expected to close in autumn of 1999.
On April 22, 1999, AT&T announced that it had submitted an offer
to purchase MediaOne for $87.375 per share in a combination of
stock and cash worth approximately $58 billion. In addition,
approximately $4.5 billion in MediaOne debt and preferred equity
(to be converted in AT&T preferred equity) will be outstanding.
AT&T indicated it will pay $30.85 per share in cash plus .95
shares of AT&T stock for every MediaOne share, and plans to issue
approximately 626 million shares in the transaction. In addition,
the cash portion of the AT&T offer will be increased to offset up
to a 10% decline from AT&T's closing stock price of $57 per share
on April 21, 1999. This will maintain a value of $85 per share for
every MediaOne share if AT&T's stock trades between $57 per share
and $51.30 per share. On April 27, 1999, AT&T announced that it
had received commitments for a $30 billion credit facility which
would become effective at the consummation of the merger. On May
6, 1999, AT&T and MediaOne announced that the merger had been
approved by the Board of Directors of MediaOne and a definitive
merger agreement had been reached. Accordingly, in conjunction
with MediaOne's previous merger agreement with Comcast, Comcast
received a $1.5 billion break-up fee. MediaOne received the funds
to pay the break-up fee in the form of a note payable to AT&T.
<PAGE>
AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
On March 9, 1999, the previously announced merger with TCI closed and each share
of TCI Group Series A common stock was converted into 0.7757 of a share of AT&T
common stock (on a pre-split basis) and each share of TCI Group Series B stock
was converted into 0.8533 of a share of AT&T common stock (on a pre-split
basis). AT&T issued approximately 443 million shares (664 million shares on a
post-split basis) for these TCI shares, of which 344 million shares (515 million
shares on a post-split basis) were newly issued shares and 99 million shares
(149 million shares on a post-split basis) were treasury shares including shares
repurchased in February and March 1999. The total shares had an aggregate market
value of approximately $26.8 billion. Certain subsidiaries of TCI held TCI Group
Series A stock which was converted into 144 million shares (216 million shares
on a post-split basis) of AT&T common stock. These subsidiaries continue to hold
these shares, which are reflected as treasury stock in the accompanying
consolidated balance sheet.
In addition, TCI simultaneously combined its Liberty Media Group programming
business, and TCI Ventures Group, its technology investments business, forming
Liberty Media Group. 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. A total of 540 million shares of
Class A Liberty Media Group tracking stock were issued by AT&T and 55 million
shares of Class B Liberty Media Group tracking stock were issued by AT&T. AT&T
also issued 30 million Class A Liberty Media Group tracking shares in connection
with the conversion of certain convertible notes. The aggregate market value of
shares issued in conjunction with the merger was $23.4 billion. The tracking
stock is designed to reflect the separate economic performance of Liberty Media
Group. AT&T does not have a controlling financial interest in Liberty Media
Group, therefore it has been reflected as an equity method investment in the
accompanying consolidated financial statements. The results attributable to
Liberty Media Group are reflected as a separate line item "Equity losses from
Liberty Media Group" and "Investment in Liberty Media Group" in the accompanying
consolidated financial statements. As a separate tracking stock, all of the
earnings or losses related to Liberty Media Group are excluded from the earnings
available to the holders of AT&T common stock.
The merger with TCI was recorded as a purchase, accordingly the operating
results of TCI have been included in the accompanying consolidated financial
statements since the date of acquisition. For accounting purposes the deemed
effective date of the acquisition is March 1, 1999, since the impact of results
from March 1, 1999, through March 9, 1999, is deemed immaterial to our
consolidated results. TCI's cable and certain other operations, including its
ownership interest in At Home Corp.(@Home), but excluding Liberty Media Group,
became AT&T broadband & Internet services, and were combined with the existing
operations of AT&T to form the AT&T Common Stock Group (AT&T Group).
We segment our results by the way we manage our business. The following
businesses comprise AT&T Group: business services, consumer services, broadband
& Internet services and wireless services. A fifth category, other and
corporate, includes the results of AT&T Solutions, international operations and
ventures, other corporate operations, overhead and eliminations. Results are
discussed for these five categories as well as for combined AT&T Group. The
discussion for the other and corporate category is further broken out to include
information for AT&T Solutions and international operations and ventures.
<PAGE>
AT&T Form 10-Q - Part I
Operating results are discussed separately for AT&T Group and Liberty Media
Group. All lines of the accompanying consolidated statements of income except
for "Equity losses from Liberty Media Group", "Income from continuing
operations" and "Net income" reflect the results of AT&T Group only. All lines
of the accompanying consolidated balance sheet, except for the "Investment in
Liberty Media Group" and the components of shareowners' equity labeled as
relating to Liberty Media Group are attributable to AT&T Group only. The
liquidity, financial condition, risk management and year 2000 discussion pertain
to consolidated AT&T.
CONSOLIDATED RESULTS OF OPERATIONS
For the Three Months Ended March 31, 1999 1998
Dollars in Millions (except per share amounts)
Income from continuing operations attributable
to common shareowners:
AT&T Group............................... $1,076 $1,285
Liberty Media Group...................... (58) -
Income attributable to common shareowners:
AT&T Group................................ $1,076 $1,295
Liberty Media Group....................... (58) -
Per AT&T common share - basic:
Income from continuing operations......... $ 0.39 $ 0.48
Income from discontinued operations....... - -
Total income.............................. $ 0.39 $ 0.48
Per AT&T common share - diluted:
Income from continuing operations......... $ 0.38 $ 0.48
Income from discontinued operations....... - -
Total income.............................. $ 0.38 $ 0.48
Liberty Media Group loss per share:
Basic..................................... $ 0.10 $ -
Diluted................................... $ 0.10 $ -
Earnings per share attributable to AT&T common shareowners were $0.38 on a
diluted basis for the first quarter of 1999, down 20.8% from the first quarter
of 1998. AT&T Group's operational earnings excluding the impact of the TCI
merger were $0.67 on a diluted basis, up 45.7% from the first quarter of 1998.
Operational earnings also exclude restructuring and other charges in 1999 and
1998 as well as the gain on the sale of the AT&T Language Line Services business
in 1999 and gains on the sales of AT&T Solutions Customer Care (ASCC) and LIN
Television Corp. (LIN-TV) in 1998. The increase in operational earnings was
primarily due to higher revenues coupled with an improved cost structure, which
positively impacted margins. In addition, we look at our operational earnings
including TCI, but excluding the earnings impact of @Home and Cablevision
Systems Corp (Cablevision) since these companies are independent and publicly
traded. Operational earnings including the results of TCI since the date of
acquisition but excluding @Home and Cablevision were $0.61 per diluted share for
the quarter ended March 31, 1999. Liberty Media Group's loss per share was $0.10
on a diluted basis from the date of the acquisition through March 31, 1999. The
results of AT&T Group and Liberty Media Group are discussed in further detail
below.
<PAGE>
AT&T Form 10-Q - Part I
FORWARD-LOOKING STATEMENTS
Except for the historical statements and discussions contained herein,
statements contained in this Report on Form 10-Q constitute "forward-looking
statements" within the meaning of 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 Shareowners, Form 10-Q or Form 8-K of AT&T may include forward-looking
statements, including statements concerning future operating performance, year
2000 compliance, AT&T's share of new and existing markets, AT&T's short- and
long-term revenue and earnings growth rates, general industry growth rates and
AT&T's performance relative thereto. These forward-looking statements rely on a
number of assumptions concerning future events, including the adoption and
implementation of balanced and effective rules and regulations by the Federal
Communications Commission (FCC) and the state public regulatory agencies, and
AT&T's ability to achieve a significant market penetration in new markets. These
forward-looking statements are subject to a number of uncertainties and other
factors, many of which are outside AT&T's control, that could cause actual
results to differ materially from such statements.
For a more complete discussion of the factors that could cause actual results to
differ materially from such forward-looking statements, see the discussion
thereof contained under the heading "Forward-Looking Statements" in AT&T's Form
10-K for the year ended December 31, 1998. Readers should also consider the
factors discussed under the headings "Results of Operations" and "Financial
Condition" included in this Form 10-Q. AT&T disclaims any intention or
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
AT&T GROUP RESULTS OF OPERATIONS
REVENUES
For the Three Months
Ended March 31, Change
1999 1998 $ %
Dollars in Millions
Business services.......................... $ 6,214 $ 5,779 $ 435 7.5%
Consumer services.......................... 5,486 5,680 (194) (3.4)%
Wireless services.......................... 1,562 1,164 398 34.2%
Broadband & Internet services.............. 483 - 483 NMF
Other and corporate........................ 351 208 143 69.1%
Total revenues............................. $14,096 $12,831 $1,265 9.9%
Total revenues on a reported basis increased $1,265 million, or 9.9%, to $14,096
million compared with the first quarter of 1998. Excluding TCI, revenues
increased $782 million, or 6.1%, compared with the first quarter of 1998. Growth
was led by business services, primarily data and local voice services, wireless
services, AT&T Solutions' network outsourcing services, and international
operations and ventures, partially offset by lower consumer services revenues.
Revenues, on a pro forma basis which include the results of TCI for a full
quarter in 1999 and 1998 and adjusted to exclude the impact of all announced
cable partnerships, increased 6.2% for the first quarter of 1999 compared with
the first quarter of 1998.
<PAGE>
AT&T Form 10-Q - Part I
OPERATING EXPENSES
Change
For the Three Months Ended March 31, 1999 1998 $ %
Dollars in Millions
Access and other interconnection........... $3,732 $3,936 $(204) (5.2%)
Access and other interconnection expenses decreased $204 million, or 5.2%, to
$3,732 million in the first quarter of 1999 compared with the first quarter of
1998. The decline primarily relates to FCC-mandated reductions in per-minute
access charges, as well as lower negotiated international settlement rates,
partially offset by business volume increases. TCI does not have access or
interconnection expenses, therefore the results are the same excluding TCI.
Change
For the Three Months Ended March 31, 1999 1998 $ %
Dollars in Millions
Network and other communication services... $2,872 $2,546 $326 12.8%
Network and other communication services expenses increased $326 million, or
12.8%, to $2,872 million in the first quarter of 1999 compared with the same
period last year. Excluding TCI, network and other communication services
expenses increased 3.6% year-over-year, driven primarily by higher off-network
roaming charges and higher costs of wireless handsets sold, both attributable to
the success of AT&T Digital One Rate service. The increase was also partly
attributable to growth in AT&T Solutions. These increases were partially offset
by lower per-call compensation expense resulting from FCC-mandated rate
reductions in the first quarter of 1999.
Change
For the Three Months Ended March 31, 1999 1998 $ %
Dollars in Millions
Depreciation and amortization expenses..... $1,461 $1,067 $394 37.0%
Depreciation and amortization expenses increased $394 million, or 37.0%, in the
first quarter of 1999 compared with the first quarter of 1998. Excluding TCI,
depreciation and amortization expenses increased $227 million, or 21.3%,
year-over-year. The increase was primarily due to growth in AT&T Group's
depreciable asset base resulting from the continued investment in our network
assets throughout 1998. In the first quarter of 1999 capital expenditures were
$1.3 billion, which focused on cable operations, business local, data and
wireless services.
Change
For the Three Months Ended March 31, 1999 1998 $ %
Dollars in Millions
Selling, general and administrative expenses $3,157 $3,277 $(120) (3.7%)
Selling, general and administrative (SG&A) expenses were down $120 million, or
3.7%, to $3,157 million in the first quarter of 1999 compared with the
comparable prior year period. Excluding TCI, SG&A expenses declined $167
million, or 5.1%, versus the year-ago quarter. The decrease is primarily due to
savings from headcount reductions and other cost control initiatives. These
decreases were partially offset by increases in marketing and sales and customer
<PAGE>
AT&T Form 10-Q - Part I
care expenses associated with growth in wireless subscribers. Including TCI,
SG&A expenses as a percent of revenues were 22.4% compared with 25.5% in the
first quarter of 1998. SG&A expenses excluding wireless services and the
consumer local business as a percentage of revenues were 20.4%.
Change
For the Three Months Ended March 31, 1999 1998 $ %
Dollars in Millions
Restructuring and other charges............ $731 $601 $130 21.7%
Restructuring and other charges for the quarter were $731 million pretax, or a
reduction of approximately $0.24 per diluted share, including an in-process
research and development charge of $594 million related to the TCI acquisition.
The charge reflects the estimated value, as of the acquisition date, of research
and development projects at TCI which have not yet reached technological
feasibility and which have no alternative future use. The projects identified
relate to TCI's efforts to offer voice over Internet protocol, cost savings
efforts for cable telephony implementation and product integration efforts for
advanced set-top devices that will enable TCI to offer next-generation digital
services. In addition, @Home has 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. Although there are
significant technological issues to overcome in order to successfully complete
the acquired in-process research and development, AT&T expects successful
completion. If, however, AT&T is unable to establish technological feasibility
and produce a commercially viable product/service, then anticipated incremental
future cash flows attributable to expected profits from such new product/service
may not be realized.
Additionally, AT&T recorded a charge of $196 million primarily related to the
settlement associated with the exit of a joint venture that will compete
directly with the global venture that AT&T is forming with British
Telecommunications plc (BT). These charges were partially offset by gains of $59
million related to the settlement of pension obligations for former employees
who accepted AT&T's voluntary retirement incentive program offer.
In the first quarter of 1998 AT&T Group recorded a $601 million charge, or a
reduction of approximately $0.14 per diluted share, related to our decision not
to pursue Total Service Resale (TSR) as a local service strategy. The Regional
Bell Operating Companies have made it extremely difficult to enter the local
market under a TSR strategy. After spending several billions of dollars in an
attempt to enter this market, it became clear that the TSR solution was not
economically viable. The pretax charge includes a $543 million write-down of
software, $42 million primarily related to equipment associated with the
software platform and $16 million for certain contractual obligations and
termination penalties under several vendor contracts that were canceled during
the first quarter as a result of this decision. AT&T received no operational
benefit from these contracts once this decision was made.
Change
For the Three Months Ended March 31, 1999 1998 $ %
Dollars in Millions
Other income - net......................... $149 $706 $(557) (78.9%)
<PAGE>
AT&T Form 10-Q - Part I
Other income-net was $149 million in the first quarter of 1999, a decrease of
78.9% from the year-ago quarter. This decrease was due to greater gains on sales
of businesses in the first quarter of 1998 compared with the first quarter of
1999. In the first quarter of 1999, other income net-included a $153 million
pretax gain on the sale of the Language Line Services business, or approximately
$0.03 per diluted share. In the first quarter of 1998, other income-net included
pretax gains from the sales of ASCC of $350 million and LIN-TV of $317 million,
representing approximately $0.16 per diluted share.
Change
For the Three Months Ended March 31, 1999 1998 $ %
Dollars in Millions
Interest expense........................... $190 $80 $110 138.8%
Interest expense was $190 million for the first quarter of 1999. The increase
was primarily due to interest expense on the debt incurred in conjunction with
the acquisition of TCI. Excluding the impacts of TCI, interest expense was $94
million, up from $80 million in the first quarter of 1998. The $14 million
increase was due primarily to the reclassification of interest expense from
discontinued operations to continuing operations related to the debt not retired
upon the sale of Universal Card Services (UCS). This increase was partially
offset by lower average debt outstanding and lower average interest rates.
Change
For the Three Months Ended March 31, 1999 1998 $ %
Dollars in Millions
Provision for income taxes................. $1,026 $745 $281 37.6%
The provision for income taxes increased $281 million, or 37.6%, to $1,026
million compared with the first quarter of 1998. The effective income tax rate
for the quarter was 50.2%, up from 36.7% in the first quarter of 1998. In the
first quarter of 1999 AT&T Group recorded a non-tax deductible in-process
research and development charge, and accordingly, no tax benefit was recorded.
Excluding this charge as well as the equity losses from Liberty Media Group from
income before taxes, the effective income tax rate for the first quarter was
38.1%.
Change
For the Three Months Ended March 31, 1999 1998 $ %
Dollars in Millions
Income available to AT&T shareowners....... $1,076 $1,295 $(219) (16.9%)
Income available to AT&T shareowners decreased $219 million, or 16.9%, in the
first quarter of 1999 compared with the first quarter of 1998. The decrease was
due primarily due to lower gains on sales of businesses and higher restructuring
and other charges, partially offset by increased income from operations
resulting from higher revenues and an improved cost structure.
<PAGE>
AT&T Form 10-Q - Part I
AT&T GROUP SEGMENT RESULTS
Business Services
The business services segment results reflect sales of long distance and local
voice and data services to business customers, including domestic and
international, inbound and outbound, intra-LATA toll, calling card and
operator-handled services and other network enabled services. In addition, this
segment provides Internet protocol (IP) for business customers such as Web site
hosting, AT&T WorldNet business Internet access and electronic commerce
services.
Consumer Services
The consumer services segment includes the results of providing
telecommunications services to residential customers including domestic and
international long distance services, intra-LATA toll services, calling-card and
operator-handled calling services, and prepaid calling cards. In addition, this
segment includes AT&T WorldNet residential Internet access service as well as
noncable local services provided to residential customers.
Wireless Services
The results of this segment are comprised primarily of sales of wireless
services and products to customers in AT&T Group's 850 MHz (cellular) and 1900
MHz (PCS) markets. Also included are aviation communications services and the
costs associated with the development of fixed wireless technology. The results
of AT&T's former messaging business are included in 1998 results through October
2, when the unit was sold.
Broadband & Internet Services
This segment reflects operations associated with providing services through the
broadband cable network acquired as a result of AT&T's merger with TCI. This
includes the results associated with traditional analog cable service, as well
as new services, such as Digital Cable, AT&T@Home - the high-speed cable
Internet service, and eventually broadband telephony. AT&T@Home, along with
several other large cable operators, has a contract with @Home, the operator of
an Internet "backbone", over which we can provide high-speed cable Internet
service.
Other and Corporate
This group includes the results of AT&T Solutions, international operations and
ventures, other corporate operations, overhead and eliminations.
The above segments reflect certain changes since the publication of our annual
results due to changes in the way we manage our business. The business services
segment was expanded to include the results of Teleport Communications Group
Inc. (TCG) and the business portion of AT&T WorldNet Service; the consumer
services segment was expanded to include the residential portion of AT&T
WorldNet Service. All prior results have been restated to reflect these changes.
<PAGE>
AT&T Form 10-Q - Part I
The discussion of segment results for AT&T Group generally includes revenues;
earnings before interest and taxes, including other income (EBIT); earnings
before interest, taxes, depreciation and amortization, including other income
(EBITDA); capital additions and total assets. The discussion of EBITDA for AT&T
Group's wireless services and broadband & Internet services segments is modified
to exclude other income.
AT&T calculates EBIT as operating income plus other income and is a measure used
by our chief operating decision-makers to measure AT&T's consolidated operating
results and to measure segment profitability. Interest and taxes are generally
not allocated to our segments because debt is managed and serviced and taxes are
managed and calculated on a centralized basis. Trends in interest and taxes are
discussed separately on a consolidated basis. Management believes EBIT is a
meaningful measure to disclose to investors because it provides investors with
an analysis of operating results using the same measures used by the chief
operating decision-makers of AT&T, provides a return on total capitalization
measure, and allows investors a means to evaluate the financial results of each
segment in relation to consolidated AT&T. Our calculation of EBIT may or may not
be consistent with the calculation of EBIT by other public companies, and EBIT
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.
EBITDA is also used by management as a measure of segment performance and is
defined as EBIT plus depreciation and amortization. We believe it is meaningful
to investors as a measure of each segment's liquidity and allows investors to
evaluate a segment's liquidity using the same measure that is used by the chief
operating decision-makers of AT&T. Consolidated EBITDA is also provided for
comparison purposes. Our calculation of EBITDA may or may not be consistent with
the calculation of EBITDA by other public companies and should not be viewed by
investors as an alternative to 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 effect changes
in certain assets and liabilities which can affect cash flow.
Total assets for each segment include all assets, except interentity
receivables. Deferred taxes, prepaid pension assets, and corporate-owned or
leased real estate are generally held at the corporate level and therefore are
included in the other and corporate group. Shared network assets are allocated
to the segments and reallocated each January, based on the prior two years'
volumes of minutes used.
Capital additions for each segment include additions to property, plant and
equipment and other long-lived assets including licenses, investments, franchise
costs and capitalized software.
<PAGE>
AT&T Form 10-Q - Part I
BUSINESS SERVICES
Three months
ended
March 31, Change
Dollars in Millions 1999 1998 $ %
External revenues................... $ 5,927 $ 5,558 $ 369 6.6%
Internal revenues................... 287 221 66 30.1%
Total revenues...................... 6,214 5,779 435 7.5%
EBIT................................ 1,567 1,124 443 39.4%
EBITDA.............................. 2,256 1,651 605 36.6%
OTHER ITEMS
Capital additions................... $ 892 $ 960 $ (68) (7.0)%
At March 31, At Dec. 31, Change
1999 1998 $ %
Total assets........................ $21,267 $21,415 $(148) (0.7)%
REVENUES
Business services revenues increased $435 million, or 7.5%, in the first quarter
of 1999 compared with the first quarter of 1998 driven by continued strength in
data and local voice services as well as improved long distance voice volumes,
which grew at a mid-teens rate. AT&T local voice revenues formerly associated
with TCG'S operations are now reported as part of the business services segment.
Including local service, calling volumes increased in excess of 25%.
Data services revenues grew in the high teens for the quarter led by continued
strong growth in frame relay and high speed private line services. Also
contributing to growth in data services were IP and ATM services as well as
increased customer demand for high-bandwith (OC-X capability) and the increased
distribution of AT&T Concert global data services.
Long distance voice revenues grew at a low-single-digit rate for the quarter,
accelerating from the fourth quarter rate due to higher growth in calling
volumes. Volume growth continues to be partially offset by a declining average
price per minute driven by competitive forces as well as changes in product mix.
Higher-priced calling card and operator services, for example, are becoming a
smaller percentage of overall business volumes as those services are
increasingly migrating to wireless services.
Local voice service revenues grew over 90% for the quarter, as AT&T continued
the aggressive deployment of facilities-based assets serving business customers.
AT&T's integrated business local operations, including AT&T Digital Link, added
87,052 access lines in the first quarter, bringing total access lines in service
to 762,881 as of March 31, 1999. Currently, AT&T serves 22,680 buildings, up
from 15,189 in the prior year, with approximately 25% of the buildings on net in
83 metropolitan statistical areas (MSAs).
<PAGE>
AT&T Form 10-Q - Part I
EBIT/EBITDA
EBIT and EBITDA for business services increased to $1,567 million, or 39.4%, and
$2,256 million, or 36.6%, respectively, in the first quarter of 1999 compared
with the year-ago quarter. The improvements were driven by the growth in
revenues as well as continued improvement in the cost structure of the business,
in part due to headcount reductions. In addition, EBIT was impacted by higher
depreciation and amortization expense due primarily to 1998 capital
expenditures.
OTHER ITEMS
Capital additions were $892 million in the first quarter of 1999 compared with
$960 million in the first quarter of 1998. Capital spending in both periods was
focused on local and data services.
Total assets were relatively flat at March 31, 1999, compared with December 31,
1998.
CONSUMER SERVICES
Three months
ended
March 31, Change
Dollars in Millions 1999 1998 $ %
Revenues............................. $5,486 $5,680 $(194) (3.4)%
EBIT................................. 1,887 1,322 565 42.7%
EBITDA............................... 2,095 1,495 600 40.1%
OTHER ITEMS
Capital additions.................... $ 97 $ 98 $ (1) (1.0)%
At March 31, At Dec. 31, Change
1999 1998 $ %
Total assets......................... $6,658 $6,335 $323 5.1%
REVENUES
Consumer services revenues decreased 3.4% compared with the first quarter of
1998. Excluding AT&T WorldNet Services, revenues were down 3.8% while long
distance calling volumes declined at a low-single-digit rate. These results
reflect the competitive nature of the consumer long distance industry, and the
continued impact of AT&T's strategy to migrate higher-usage customers to
optional calling plans in order to improve customer retention and reduce
marketing costs. In conjunction with the above strategy, AT&T is seizing
opportunities to grow revenues profitably and gain share in key market segments.
In the first quarter of 1999, AT&T launched its Personal Network service, which
provides customers a bundled bill with a single rate per minute for domestic
long distance, wireless, calling-card, personal 800 and certain international
calling. AT&T has also accelerated its efforts in transactional calling services
such as prepaid cards, dial-around (10-10-345) and automated collect calling
(1-800-CALL-ATT). On March 31, 1999, AT&T completed the acquisition of certain
assets of SmarTalk TeleServices, Inc. (SmarTalk), a leading seller of prepaid
calling cards, giving the company distribution agreements with the U.S. Postal
<PAGE>
AT&T Form 10-Q - Part I
Service and several key retailers. Also on March 31, 1999, as a part of the
continuing focus on the core business, we completed the sale of our Language
Line Services business resulting in a pretax gain of $153 million.
EBIT/EBITDA
EBIT and EBITDA for consumer services increased 42.7% and 40.1%, respectively,
in the first quarter of 1999 compared with the first quarter of last year. EBIT
and EBITDA for consumer services excluding the gain on the sale of Language Line
Services increased 31.1% and 29.9%, respectively over the year-ago quarter
driven primarily by lower negotiated international settlement rates, reduced
headcount, and improvement in the efficiency of its marketing efforts. The
implementation of programs such as bimonthly or quarterly billing, as well as
online billing of AT&T's One Rate Online plan, have also improved consumer
services' profitability. In an effort to reduce losses due to low-usage
customers, in mid-1998 AT&T instituted a $3 monthly minimum charge for all new
basic schedule customers. In April 1999, the company announced plans to extend
the minimum charge to all existing basic rate customers effective in July 1999.
Consumer WorldNet Services revenues increased 40.8% over the year-ago quarter to
$65 million. AT&T WorldNet Services now serves approximately 1.4 million
residential subscribers, an increase of 39.4% from a year ago with over 250
thousand net new subscribers joining during the first quarter. Growth in AT&T
WorldNet Services continues to be driven by growth in the overall Internet
service provider (ISP) industry and from accelerated customer acquisition
efforts.
OTHER ITEMS
Capital additions for consumer services were essentially flat in the first
quarter of 1999 compared with the comparable prior year quarter.
Total assets increased $323 million, or 5.1%, to $6,658 million at March 31,
1999, from December 31, 1998. The increase was due primarily to an increase in
property, plant and equipment, assets acquired in connection with the purchase
of SmarTalk and increased capitalized software costs.
WIRELESS SERVICES
Three months
ended
March 31, Change
Dollars in Millions 1999 1998 $ %
Revenues............................ $ 1,562 $ 1,164 $ 398 34.2%
EBIT................................ (49) (2) (47) NMF
EBITDA, excluding other income...... 186 194 (8) (4.0)%
OTHER ITEMS
Capital additions................... $ 172 $ 168 $ 4 2.3%
At March 31, At Dec. 31, Change
1999 1998 $ %
Total assets........................ $19,219 $19,341 $(122) (0.6)%
<PAGE>
AT&T Form 10-Q - Part I
REVENUES
Wireless services revenues increased $398 million, or 34.2%, in the first
quarter of 1999 compared with the first quarter of 1998. Adjusted for the sale
of our messaging business in October 1998, revenues grew 40.0% compared with the
year-ago quarter. The growth was driven by the continued successful execution of
AT&T's wireless strategy of targeting and retaining high-value subscribers,
expanding the national wireless footprint, focusing on digital service, and
offering simple rate plans. AT&T's Digital One Rate service offer, which
leverages all of the elements of this strategy, continues to generate
significant growth and build on the momentum of 1998. During the first quarter,
the number of AT&T Digital One Rate service subscribers grew to over 1 million.
Over 80% of the net new customers who chose this product in the first quarter of
1999 were new AT&T Wireless customers.
AT&T continues to experience strong growth in wireless subscribers and net
subscriber additions. Consolidated net additions increased 94.5% versus the
year-ago period to over 378 thousand, bringing consolidated subscribers to a
total of approximately 7.6 million at March 31, 1999, up 23.0% from a year ago.
Total subscribers, including partnership markets in which AT&T does not own a
controlling interest, topped 10 million in the first quarter. In November 1998
AT&T began managing day-to-day operations of the unconsolidated Los Angeles
market; in March 1999 this market took on the AT&T brand name enabling the
introduction of AT&T Digital One Rate service to Los Angeles.
AT&T's focus on high-value subscribers has helped generate rising usage by
customers and increased quarterly average revenue per user (ARPU) compared to
prior year. ARPU across all of AT&T's wireless markets was $60.6 in the first
quarter, an increase of 15.0% from the year-ago quarter.
We continue to migrate customers rapidly to digital service, generating more
efficient use of the network while also reducing customer churn. As of the end
of the first quarter, 67.3% of AT&T's 7.6 million consolidated subscribers were
on digital service, up from 60.5% at the end of 1998 and 35.1% a year ago.
EBIT/EBITDA EXCLUDING OTHER INCOME
EBIT was a deficit of $49 million in the first quarter of 1999 compared with a
deficit of $2 million in the first quarter of 1998. EBITDA excluding other
income was $186 million in the first quarter of 1999, a decline of 4.0% from the
year-ago quarter. These declines were driven by an expanding customer base
resulting in increased costs from higher off-network roaming expenses, and
increased customer acquisition and digital migration costs, partially offset by
higher revenues.
AT&T is in the process of expanding its wireless footprint by building out new
markets including Columbus, Ohio; Omaha; San Diego; and certain Connecticut
cities. Subsequent to March 31, 1999, AT&T completed its acquisitions of
Vanguard Cellular and Bakersfield Cellular. In addition, AT&T has announced
plans to acquire Honolulu Cellular . These efforts will decrease future
off-network roaming expenses. In areas not addressed by footprint expansion,
AT&T is continuing efforts to reduce off-network roaming rates through the
renegotiation of intercarrier roaming agreements.
<PAGE>
AT&T Form 10-Q - Part I
OTHER ITEMS
Capital additions were relatively flat in the first quarter of 1999 compared
with the same period last year.
Total assets were essentially flat at March 31, 1999 compared with December 31,
1998.
BROADBAND & INTERNET SERVICES
One month
ended
March 31,
Dollars in Millions 1999
Revenues............................ $ 483
EBIT................................ (646)
EBITDA, excluding other income...... (392)
OTHER ITEMS
Capital additions................... $ 310
At March 31,
1999
Total assets........................ $42,748
REVENUES
Total revenues for the broadband and Internet services segment included in
AT&T's consolidated results were $483 million representing revenues earned from
the acquisition of TCI, which closed in early March.
Broadband & Internet services ended first quarter 1999 with 11.427 million basic
cable customers. Total Digital Cable customers were approximately 1.225 million.
The high-speed cable Internet service, AT&T@Home, had approximately 52,000
customers at the end of the first quarter.
In 1997 and early 1998, TCI announced a number of cable partnerships aimed at
improving its overall geographic clustering. When complete, these partnerships
will result in the deconsolidation of approximately 3.9 million customers and
the exchange of an additional two million customers. The majority of the
announced cable partnerships have closed, resulting in the deconsolidation of
approximately 3.3 million customers. Three partnerships are pending to which the
company expects to contribute approximately 600,000 customers.
EBIT/EBITDA EXCLUDING OTHER INCOME
EBIT was a deficit of $646 million. EBITDA excluding other income was a deficit
of $392 million. These deficits were primarily the result of a charge for
in-process research and development which reflects the estimated value, as of
the acquisition date, of research and development projects at TCI which have not
yet reached technological feasibility and which have no alternative future use.
The projects identified relate to TCI's development work for voice and Internet
protocol telephony as well as a number of projects at @Home.
OTHER ITEMS
Total assets were $42,748 million at March 31, 1999.
Capital additions were $310 million, comprised primarily of spending on cable
distribution systems.
<PAGE>
AT&T Form 10-Q - Part I
OTHER AND CORPORATE
Three months
ended
March 31, Change
Dollars in Millions 1999 1998 $ %
Revenues............................ $ 351 $ 208 $ 143 69.1%
EBIT................................ (467) (334) (133) (39.8)%
EBITDA.............................. (342) (205) (137) (65.6)%
OTHER ITEMS
Capital additions................... $ 364 $ 90 $ 274 299.3%
At March 31, At Dec. 31, Change
1999 1998 $ %
Total assets........................ $11,332 $12,459 $(1,127) (9.0)%
REVENUES
Revenues for the first quarter 1999 increased $143 million, or 69.1%, to $351
million from the same quarter a year ago. Revenue growth was primarily driven by
AT&T Solutions as a result of major contracts signed after the first quarter of
1998 and international operations and ventures due to the acquisition of ACC
Corp. in April 1998.
Revenue growth was partially offset by the sale of ASCC in March 1998.
The elimination of revenues and profit generated by the sale of services between
business segments is primarily a result of the sale of business long distance
services to other AT&T units. Revenues eliminated in the quarter were $296
million, an increase of 6.1% from the first quarter of 1998.
EBIT/EBITDA
EBIT and EBITDA deficits for the first quarter of 1999 increased $133 million
and $137 million, to deficits of $467 million and $342 million, respectively,
over the comparable prior year quarter. Excluding the international charge and
pension settlement gain in the first quarter of 1999, and the local asset
write-off and gains from the sales of ASCC and LIN-TV in the first quarter of
1998, EBIT and EBITDA deficits improved $70 million and $66 million,
respectively, in the first quarter of 1999 compared with the same period last
year due primarily to lower corporate expenses driven by cost cutting
initiatives.
OTHER ITEMS
Capital additions increased $274 million, or 299.3%, in the first quarter of
1999 compared with the first quarter of 1998 driven by an increase in
investments in non-consolidated subsidiaries at international operations and
ventures.
Total assets at March 31, 1999, were $11,332 million compared with $12,459
million at December 31, 1998, which represents a 9.0% decrease. The decrease was
primarily driven by a lower cash balance.
AT&T SOLUTIONS
AT&T Solutions is our outsourcing, network-management and professional-services
business. The results of AT&T Solutions are included in the other and corporate
group.
<PAGE>
AT&T Form 10-Q - Part I
Three months
ended
March 31, Change
Dollars in Millions 1999 1998 $ %
Revenues............................ $343 $ 226 $117 51.3%
EBIT................................ 11 (9) 20 215.5%
EBITDA.............................. 84 58 26 46.8%
OTHER ITEMS
Capital additions................... $ 11 $ 23 $(12) (54.1)%
At March 31, At Dec. 31, Change
1999 1998 $ %
Total assets........................ $989 $1,023 $(34) (3.4)%
REVENUES
AT&T Solutions grew revenues 51.3% in the first quarter of 1999 to $343 million.
With more than 800 clients, including IBM, CitiGroup, McGraw-Hill, Bank One,
United HealthCare, Textron, J.P. Morgan, Merrill Lynch, and MasterCard
International, the unit currently has the potential for more than $9.8 billion
in revenues over the life of signed contracts.
In the first quarter of 1999, AT&T Solutions announced the signing of a $60
million per year, 10-year contract with McDermott International to design,
implement and manage McDermott's global information technology capabilities.
This agreement is a significant expansion of an existing, wide area networking
relationship that dates from 1995. The new agreement now includes the full
breadth of McDermott's IT infrastructure to nearly 60 global locations including
business applications, desktops, servers, local and wide area networks (LAN/WAN)
and end-to-end networking management. Also during the first quarter, AT&T
Solutions added American Express Financial Advisors and New York Life as major
clients.
EBIT/EBITDA
EBIT and EBITDA improved $20 million and $26 million, respectively, in the first
quarter of 1999 compared with the same period in 1998. The improvement was
primarily due to revenue growth in AT&T Solutions' commercial (non-internal)
operations partially offset by higher expenses driven by the higher revenues.
AT&T Solutions manages AT&T's internal network infrastructure--an operation that
generated approximately $1.7 billion in internal billings in 1998. Total
internal billings in the first quarter were $429 million which were recorded as
a reduction to AT&T Solutions' expenses (cost recovery).
OTHER ITEMS
Capital additions for the first quarter of 1999 were $11 million, a decrease of
54.1% over the comparable 1998 period. The decrease was primarily due to higher
capital spending on the AT&T infrastructure in the first quarter of 1998.
Total assets decreased $34 million, or 3.4%, from December 31, 1998, due
primarily to depreciation of property, plant and equipment during the period,
partially offset by an increase in accounts receivable.
<PAGE>
AT&T Form 10-Q - Part I
INTERNATIONAL OPERATIONS AND VENTURES
International operations and ventures include consolidated foreign operations
such as AT&T Communications Services UK (Comms UK) and ACC, our transit and
reorigination businesses and international online services. The equity earnings
or losses of AT&T's nonconsolidated international joint ventures and alliances,
such as Alestra in Mexico and AT&T Canada Long Distance Services are also
included. This area does not include bilateral international long distance
traffic which is reflected in business services and consumer services, as
appropriate. The results of international operations and ventures are included
in the other and corporate group.
Three months
ended
March 31, Change
Dollars in Millions 1999 1998 $ %
Revenues............................ $ 292 $ 179 $113 63.8%
EBIT................................ (249) (63) (186) (295.4)%
EBITDA.............................. (230) (46) (184) (407.3)%
OTHER ITEMS
Capital additions................... $ 315 $ 31 $284 959.0%
At March 31, At Dec. 31, Change
1999 1998 $ %
Total assets........................ $2,207 $1,915 $292 15.3%
REVENUES
Revenues grew 63.8% in the first quarter of 1999 driven by the impact of ACC
which was purchased in April 1998, growth in Comms UK, and increased
reorigination traffic.
EBIT/EBITDA
EBIT and EBITDA declined in the year-over-year quarter by $186 million and $184
million, respectively, due primarily to a first quarter 1999 charge related to
the exit of a joint venture associated with our upcoming formation of a global
joint venture with BT. Excluding the charge, EBIT and EBITDA improved in the
year-over-year quarter by $10 million and $12 million, respectively, due
primarily to revenue increases and cost reduction activities as well as reduced
equity losses.
OTHER ITEMS
Capital additions increased $284 million for the quarter ended March 31, 1999,
compared with the same period last year. The increase was primarily due to
increased investments in nonconsolidated subsidiaries.
Total assets were $2,207 million at March 31, 1999, compared with $1,915 million
at December 31, 1998. The increase was due primarily to goodwill associated with
an additional investment in AT&T Canada Long Distances Services in the first
quarter of 1999.
<PAGE>
AT&T Form 10-Q - Part I
LIBERTY MEDIA GROUP RESULTS
Liberty Media Group produces, acquires and distributes entertainment,
educational and informational programming services through all available formats
and media. Liberty Media Group is also engaged in electronic retailing services,
direct marketing services, advertising sales relating to programming services,
infomercials and transaction processing. Although Liberty Media Group is a
wholly owned subsidiary of AT&T, it is accounted for as an equity investment in
the accompanying consolidated financial statements since AT&T does not have a
controlling financial interest in Liberty Media Group. Equity losses from
Liberty Media Group were $58 million for the period from the date of acquisition
through March 31, 1999.
LIQUIDITY
Three months
ended
March 31,
Dollars in Millions 1999 1998
CASH FLOW OF CONTINUING OPERATIONS:
Provided by operating activities............ $ 746 $1,964
(Used in) provided by investing activities.. (6,891) 400
Provided by (used in) financing activities.. 4,448 (2,446)
EBITDA* ...................................... $3,793 $3,192
* Earnings before interest, taxes, depreciation and amortization
(EBITDA) for the first three months of 1999 includes a $153 million
pretax gain on the sale of the Language Line Services business and
restructuring and other charges of $731 million. EBITDA for the first
three months of 1998 includes pretax gains from the sales of ASCC of
$350 million and LIN-TV of $317 million and a $601 million asset
impairment charge. EBITDA excludes the results of Liberty Media Group.
The net cash provided by the operating activities of continuing operations was
$746 million in the first quarter 1999 compared with $1,964 million in the first
quarter 1998. The decrease of $1,218 million was driven primarily by an increase
in cash tax payments in the first quarter 1999 as well as greater access
payments (due to timing differences), partially offset by greater operational
earnings excluding depreciation and amortization expense in the first quarter
1999 compared with the first quarter 1998.
AT&T's investing activities resulted in a net use of cash in the first quarter
1999 of $6,891 million compared with a net source of cash of $400 million in the
first quarter 1998. In the first quarter 1999 AT&T transferred $5.5 billion of
cash to Liberty Media Group and used $1.9 billion for capital expenditures. In
the first quarter 1998 proceeds from the sales of nonstrategic assets were
partially offset by capital spending of $1.7 billion.
In the first quarter 1999 the net cash provided by financing activities of
AT&T's continuing operations was $4.4 billion compared with cash used in
financing activities of $2.4 billion in the first quarter 1998. During 1999 AT&T
received $7.9 billion of cash from a March 1999 bond issuance and $3.3 billion
from the issuance of commercial paper. From this, $3.9 billion was used to fund
the share repurchase program and $2.0 billion was used to retire commercial
paper and other short-term debt. In the first quarter 1998 cash used in
financing activities was largely attributable to the paydown of commercial
paper.
<PAGE>
AT&T Form 10-Q - Part I
On April 15, 1999, AT&T executed a three-for-two common stock split. AT&T
shareowners of record received one additional share for every two shares they
owned at the close of business on March 31, 1999. On a post-split basis, AT&T
had approximately 3.181 billion AT&T common shares outstanding at March 31,
1999.
EBITDA is a measure of our ability to generate cash flow and should be
considered in addition to, but not as a substitute for, other measures of
financial performance reported in accordance with generally accepted accounting
principles. EBITDA increased $601 million, or 18.8%, for the first three months
of 1999 compared to the same period in 1998. Excluding TCI, the restructuring
and other charges, asset impairment and gains on sales of businesses in 1999 and
1998, EBITDA increased 35.1% to $4,223 million in the first quarter 1999 from
$3,126 million in the first quarter of 1998. The increase was primarily due to
increased revenues attributable to growth in business data services and wireless
services, and lower expenses primarily attributable to our cost reduction
efforts. These were partially offset by higher network costs associated with our
growing wireless subscriber base.
EURO CONVERSION
On January 1, 1999, certain members of the European Union established fixed
conversion rates between their existing currencies and the European Union's
currency (Euro). The transition period is anticipated to extend between January
1, 1999, and July 1, 2002. We have assessed the impact of the conversion on
information-technology systems, currency exchange rate risk, derivatives and
other financial instruments, continuity of material contracts as well as income
tax and accounting issues. We do not expect the conversion during the transition
period to have a material effect on our consolidated financial statements.
FINANCIAL CONDITION
Total assets increased $76,085 million, or 127.8%, to $135,635 million at March
31, 1999, compared with December 31, 1998. The increase in total assets was due
primarily to the TCI acquisition which resulted in an investment in Liberty
Media Group of $34.5 billion, preliminary goodwill of $24.0 billion, an increase
in investments of $8.4 billion including TCI's investments in Cablevision
Systems Corp. and Lenfest Communications, Inc., and the addition of $6.3 billion
to property, plant and equipment.
Total liabilities increased $26,795 million, or 79.0%, to $60,714 million at
March 31, 1999, compared with December 31, 1998. The increase was due primarily
to the addition of TCI debt, an $8.0 billion bond offering, the issuance of
commercial paper, as well as the addition of TCI deferred income taxes.
Total shareowners' equity increased $44,840 million, or 175.7%, to $70,362
million at March 31, 1999, compared with December 31, 1998. The increase was due
primarily to the issuance of shares related to the TCI acquisition, partially
offset by the share repurchase program.
AT&T Group's ratio of total debt to total capital at March 31, 1999, was 44.7%
compared with 20.9% at December 31, 1998, and includes the subsidiary-obligated
manditorily redeemable preferred securities of subsidiary trusts holding solely
subordinated debt securities of AT&T's wholly-owned subsidiary, TCI. The
increase was primarily driven by an increase in debt associated with the TCI
merger and an $8 billion bond issuance in March 1999, partially offset by a
higher equity base.
<PAGE>
AT&T Form 10-Q - Part I
RISK MANAGEMENT
We are exposed to market risk from changes in interest and foreign exchange
rates. On a limited basis we use certain derivative financial instruments,
including interest rate swaps, options, forwards 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.
Assuming a 10% downward shift in interest rates at March 31, 1999, the potential
loss for changes in fair value of unhedged debt would have been $1.2 billion.
AT&T has revolving credit facilities of $7 billion at March 31, 1999. The credit
facilities are intended for general corporate purposes, which include support
for AT&T's commercial paper, and were unused at March 31, 1999. AT&T terminated
its $2 billion 364-day back-up facility pursuant to AT&T's issuance of debt
under its debt offering. In May 1999, AT&T entered into additional revolving
credit facilities of $3.0 billion which are currently unused.
On April 22, 1999, AT&T announced that it had submitted an offer to purchase the
MediaOne Group for a combination of stock and cash worth approximately $58
billion. AT&T has received commitments for a $30 billion credit facility which
would become effective at the consummation of the merger.
In June 1998, the Financial Accounting Standards Board 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. This standard is
effective for fiscal years beginning after June 15, 1999, 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, 2000.
Management does not expect the adoption of this standard to have a material
impact on AT&T's results of operations, financial position or cash flows.
YEAR 2000
AT&T is preparing its systems and applications for the year 2000 (Y2K). The
issue our Y2K program addresses is the use of a two-digit year field instead of
a four-digit year field in computer systems. If computer systems cannot
distinguish between the year 1900 and the year 2000, system failures or other
computer errors could result. The potential for failures and errors spans all
aspects of our business, including computer systems, voice and data networks,
and building infrastructures. We are also faced with addressing our
interdependencies with our suppliers, connecting carriers and major customers,
all of whom face the same issue.
AT&T's company-wide Y2K program is focused on four interrelated categories which
are critical to maintaining uninterrupted service to our customers:
AT&T-developed applications and their external interfaces, AT&T networks,
information-technology (IT) platforms that support the applications, and non-IT
infrastructure.
<PAGE>
AT&T Form 10-Q - Part I
AT&T's progress in our Y2K program is measured by certain key milestones or
phases common to each category of systems. These milestones are: assessment,
repair/remediation, testing and certification. The end-state of the process is a
declaration of Y2K compliance, which means that neither performance nor
functionality is affected by dates prior to, during and after the year 2000.
AT&T monitors and tracks the progress of our Y2K program through a series of
scorecards that capture the activities related to the Y2K process phases.
All systems encompassed in our Y2K program have various projected dates for Y2K
certification, which are outlined in further detail below by major category. As
a result of our acquisition of TCI in early March 1999, we are in the process of
integrating TCI's Y2K program into ours. The status of TCI's Y2K program is
discussed separately from the existing AT&T program. All targets cited herein
also exclude information regarding pending acquisitions, whose programs are
still being evaluated and planned for integration into the overall AT&T Y2K
program.
Program Status
AT&T has approximately 3,000 internally developed software applications that (1)
directly support AT&T's voice and data telecommunications services (including
wired and wireless); (2) are critical to the provisioning, administration,
maintenance and customer service/support related to our telecommunications
services; and (3) support our sales and marketing organizations, other AT&T
services and internal administrative functions. These applications represent 380
million lines of code. As of March 31, 1999, AT&T has completed 100% of the
assessment, approximately 99% of the repair, and about 96% of the application
testing. All phases leading to 100% Y2K-compliance are targeted to be completed
in the second quarter of 1999.
With respect to external (third-party) interface assessment, formal letters were
sent to about 2,000 domestic telecommunications companies and international
telecommunications authorities to request information on their Y2K plans and
targets for compliance. We have identified about 1,000 different types of
third-party interfaces and about 10,000 total instances of those types. As of
March 31, 1999, AT&T has assessed approximately 95% of third-party interface
types, and approximately 94% are Y2K compliant. We expect to be 100% complete
with Y2K certification of external interfaces in the second quarter of 1999.
The AT&T network is critical to providing top-quality, reliable service to AT&T
customers. At March 31, 1999, the assessment, repair and certification phases of
the operation-support systems (OS) were 100% complete. Approximately 92% of
these systems are now fully deployed, with 100% deployment targeted by the
second quarter of 1999. In addition to the AT&T-developed applications
supporting the network, AT&T has inventoried more than 800 externally purchased
network elements (NE) including switches, routers, network-control points and
signal-transfer points. Additional Y2K testing is conducted to independently
verify supplier claims of compliance. All of the NEs are now certified. After
OS/NE certification is complete, AT&T performs integration testing to verify Y2K
certification of NEs in conjunction with the associated OS applications. Such
integration testing is 100% completed as of March 31, 1999, with 91% of the NEs
fully deployed. 100% deployment is targeted by the second quarter of 1999.
<PAGE>
AT&T Form 10-Q - Part I
The IT infrastructure category addresses not only the computing platforms that
are critical to the AT&T-developed applications, but also the common modules,
communications protocols, the internal AT&T wide-area and local-area networks,
desktop hardware/software and the internal voice network. A large part of this
effort has been focused on the inventory and assessment of the products and
components. As of March 31, 1999, AT&T was approximately 74% compliant in
computing platforms, about 69% compliant in desktops, approximately 92%
compliant in voice systems and adjuncts, and about 94% compliant in data
networks. AT&T anticipates completion of IT infrastructure certification by the
second quarter of 1999.
The non-IT infrastructure focuses on the energy- and environment-management
systems that are critical to various computer systems, as well as safety,
security and operations. This aspect of the Y2K program encompasses more than
8,000 sites, as well as about 6,500 wireless cell sites. As of March 31, 1999,
approximately 98% of all sites completed inventory and about 71% are assessed
and compliant (or not impacted). AT&T has targeted 100% site compliance by the
second quarter of 1999.
Similar to AT&T's Y2K program, the TCI program has a four-phased approach to
determining the readiness of systems for Y2K, namely; assessment, remediation,
testing and implementation. We anticipate substantial completion of all phases
of TCI's program by the third quarter of 1999. TCI has received information that
most critical systems, services or products supplied to TCI are either Y2K ready
or are expected to be Y2K ready by mid-1999, and is also in the process of
independently verifying such claims.
Costs
We have expended approximately $500 million since inception in 1997 on all
phases of the Y2K project. This figure includes approximately $51 million of
costs incurred during the first quarter of 1999, of which approximately $6
million represented capital spending for upgrading and replacing non-compliant
computer systems and network components. More than half of these costs represent
internal IT resources that have been redeployed from other projects and are
expected to return to these projects upon completion of the Y2K project. We
anticipate remaining Y2K costs for 1999, inclusive of approximately $103 million
projected expenditures associated with completing the TCI program, will be
approximately $250 million. This projection includes approximately $63 million
of capitalized costs.
Risk Assessment
We have assessed our business exposure that would result from a failure of our
Y2K program, as well as those of our suppliers, connecting carriers and major
customers. Such failures would result in business consequences that could
include failure to be able to serve customers, loss of network functionality,
inability to render accurate bills, lost revenues, harm to the AT&T brand, legal
and regulatory exposure, and failure of management controls. Although we believe
that internal Y2K compliance will be achieved no later than December 31, 1999,
there can be no assurance that the Y2K problem will not have a material adverse
effect on our business, financial condition or results of operations.
<PAGE>
AT&T Form 10-Q - Part I
Contingency Plans
AT&T is in the process of establishing Y2K contingency plans to further mitigate
Y2K risks. Specific examples of AT&T's contingency plan initiatives include the
following:
Plans are under way to position AT&T personnel on site at critical locations to
monitor operations and manage increases in work and call volumes.
Agreements are being negotiated with contractors and vendors to ensure the
availability of on-site technical support. This coverage includes, but is not
limited to, network centers and sites, customer-care centers and data centers.
We are planning to proactively stage power, fuel, water, heating,
air-conditioning and ventilation sources to support critical business operations
and personnel requirements.
Alternate procedures and processes are being developed to support critical
customer functions, including alternative procedures for rapid repair, recovery
and restoration of critical technology components by business resumption teams.
Procedures to perform database backups, hardcopy printouts, data retention and
recovery are being established for business critical data.
OTHER MATTERS
On March 4, 1999, AT&T Canada announced a definitive merger agreement with
MetroNet Communications Corp. (MetroNet), Canada's largest facilities-based
competitive local exchange carrier (CLEC). The merged entity will possess a
national network to provide Canadian business customers local and long distance
voice, data, Internet and electronic commerce services as well as wireless
services through Cantel AT&T. The terms of the agreement outline a multi-stage
transaction, which will result in MetroNet shareholders indirectly owning 69% of
the merged company and AT&T indirectly owning 31%. AT&T will contribute its 33%
voting interest in AT&T Canada Corp. (formerly AT&T Canada Long Distance
Services), the remaining 67% of AT&T Canada Corp. currently held in trust and
its 100% interest in ACC TelEnterprises Ltd. MetroNet will contribute all of its
assets and operations. In addition, AT&T has agreed to purchase, or arrange for
another entity to purchase, all of the shares currently held by MetroNet
shareholders for the greater of at least C$75 per share or the then appraised
fair market value. The exact timing will likely be partially dependent upon the
future status of Canadian federal foreign ownership regulations. Consideration
for the MetroNet shares will be paid in the form of cash, AT&T shares, or a
combination thereof. The merger is subject to certain conditions, including the
receipt of regulatory approval.
The previously announced global venture between AT&T and BT has received
approval from the European Commission. The global venture will combine the
transborder assets and operations of each company. The venture will be equally
owned by both companies when it begins operations. The receipt of certain
additional regulatory approvals is required and the venture is expected to be
completed by mid-1999.
On March 31, 1999, AT&T completed the acquisition of certain assets of SmarTalk,
a leading seller of prepaid calling cards, for $145 million.
<PAGE>
AT&T Form 10-Q - Part I
On March 31, 1999, AT&T completed the sale of its Language Line Services
over-the-phone interpretation business, which resulted in a pretax gain of $153
million.
In the first quarter of 1999, @Home entered into a merger agreement with Excite,
Inc. (Excite), a global Internet media company that offers consumers and
advertisers comprehensive Internet navigation services with extensive
personalization capabilities. Under the terms of the merger agreement, @Home
will issue approximately 55 million shares of its common stock for all of the
outstanding common stock of Excite based on an exchange ratio of 1.041902 shares
of @Home's common stock for each share of Excite's common stock. As a result of
the proposed merger, AT&T's economic interest in @Home would decrease from 38.8%
to 26.5%.
SUBSEQUENT EVENTS
On May 6, 1999, AT&T and Microsoft Corp. (Microsoft) announced a series of
agreements in which the companies will work together to accelerate the
deployment of next-generation broadband and Interenet services to millions of
American homes. Under the agreements, Microsoft will purchase $5 billion of AT&T
securities, AT&T will increase its use of Microsoft's TV software platform in
advanced set-top devices, and both companies will work together to showcase new
digital cable services in two U.S. cities. AT&T currently has a commitment to
use the Windows CE-based system in 5 million set-top devices. Under a
non-exclusive agreement, AT&T will expand its Windows CE-based license to cover
an additional 2.5 million to 5 million set-top devices. AT&T will also license
Microsoft client/server software that supports a range of digital services.
Microsoft will pay $5 billion for newly issued AT&T convertible trust preferred
securities and warrants. The preferred securities, which will have a face value
of $5 billion and be priced at $50 per security, will make a quarterly payment
of 62.5 cents per security. The preferred securities, which will be convertible
into 66.7 million shares of AT&T common stock at a price of $75 per share, will
have a maturity of 30 years, and the conversion feature can be terminated, under
certain conditions, after three years. The warrants will be exercisable in three
years to purchase 40 million AT&T common shares at a price of $75 per share.
AT&T will use the proceeds to fund working capital and capital expenditures. In
addition, as part of these agreements, Microsoft will purchase the MediaOne
Group Inc.'s (MediaOne) 29.9% interest in Telewest Communications plc through a
tax-free exchange of Microsoft shares, subject to certain approvals.
On May 4, 1999, AT&T and Comcast Corporation (Comcast) announced that they had
reached an agreement to exchange various cable systems, which are designed to
improve each company's geographic coverage by better clustering its systems. The
agreement will result in a net addition to Comcast of approximately 750,000
subscribers. Because Comcast will receive more subscribers than it is
contributing to the exchange, it will pay AT&T consideration having a value of
approximately $4,500 per added subscriber for a total value of $3.0 billion to
$3.5 billion. In addition, Comcast will receive an option from AT&T to purchase,
over the next three years, additional cable systems with a total of
approximately 1.25 million subscribers. The price for these additional systems
is expected to be consideration having a value of approximately $5.7 billion
subject to certain conditions. Comcast has also agreed to offer AT&T-branded
telephony in all of its markets, subject to certain conditions. The foregoing
agreements are subject to completion of the proposed AT&T/MediaOne merger
announced on April 22, 1999, and other regulatory and legal approvals.
<PAGE>
AT&T Form 10-Q - Part I
On May 4, 1999, AT&T and Lenfest Communications, Inc. (Lenfest) announced that
they have signed an agreement for AT&T to acquire the remaining 50% interest in
Lenfest not already owned by AT&T. Lenfest has approximately 1.5 million
customers in the greater Philadelphia area. AT&T has agreed to a stock purchase
of the remaining ownership interest, and expects to issue approximately 43
million shares of AT&T common stock to Lenfest once the transaction receives the
necessary legal and regulatory approvals.
On May 3, 1999, AT&T closed the previously announced merger with Vanguard
Cellular Systems, Inc. (Vanguard). Under the agreement, each Vanguard
shareholder was entitled to elect to receive either cash or AT&T stock in
exchange for their Vanguard shares subject to the limitation that the overall
consideration would consist of 50% AT&T stock and 50% cash. Because stock
elections were made for a greater number of Vanguard shares, holders of Vanguard
shares that elected cash (or did not elect) received $23 per share in cash for
each Vanguard share; and, holders of Vanguard shares that elected stock received
approximately 0.3134 shares of AT&T stock and approximately $10.95 per share in
cash. Consummation of the merger resulted in the issuance of approximately 12.6
million AT&T shares and payment of $485 million in cash. In addition, Vanguard
had approximately $550 million in debt, which has subsequently been repaid by
AT&T.
On April 30, 1999, AT&T completed the U.S. phase of the previously announced
acquisition of IBM's Global Network business. Under the terms of the agreement,
AT&T acquired the global network of IBM, and the two companies entered into
outsourcing agreements with each other. IBM will outsource a significant portion
of its global networking needs to AT&T. AT&T will outsource certain
applications-processing and data-center-management operations to IBM. Customer
contracts, assets and about 3,000 employees based in the U.S. have now been
transferred to AT&T. IBM has assumed management of AT&T's data processing
centers, which operate corporate information systems. The transfer of
approximately 2,000 AT&T employees to IBM is expected to be completed in June
1999. The acquisition of IBM Global Network assets and the transfer of employees
outside the U.S. will be completed in phases throughout the year as legal and
regulatory requirements are met. Approval was received from the European Union
in April 1999.
On April 25, 1999, AT&T and BT announced they have entered into a definitive
agreement to acquire a 30% stake in Japan Telecom, one of Japan's largest
telecommunications companies, for $1.83 billion. Under the agreement, AT&T and
BT will each subscribe for 15% of the equity interest in Japan Telecom and will
jointly manage the investment. The global venture will use Japan Telecom's
extensive network infrastructure to enhance its coverage and provide end-to-end
services to customers. The agreement is expected to close in autumn of 1999.
On April 22, 1999, AT&T announced that it had submitted an offer to purchase
MediaOne for $87.375 per share in a combination of stock and cash worth
approximately $58 billion. In addition, approximately $4.5 billion in MediaOne
debt and preferred equity (to be converted into AT&T preferred equity) will be
outstanding. AT&T indicated it will pay $30.85 per share in cash plus .95 shares
of AT&T stock for every MediaOne share, and plans to issue approximately 626
million shares in the transaction. In addition, the cash portion of the AT&T
<PAGE>
AT&T Form 10-Q - Part I
offer will be increased to offset up to a 10% decline from AT&T's closing stock
price of $57 per share on April 21, 1999. This will maintain a value of $85 per
share for every MediaOne share if AT&T's stock trades between $57 per share and
$51.30 per share. On April 27, 1999, AT&T announced that it had received
commitments for a $30 billion credit facility which would become effective at
the consummation of the merger. On May 6, 1999, AT&T and MediaOne announced that
the merger had been approved by the Board of Directors of MediaOne and a
definitive merger agreement had been reached. Accordingly, in conjunction with
MediOne's previous merger agreement with Comcast, Comcast received a $1.5
billion break-up fee. MediaOne received the funds to pay the break-up fee in the
form of a note payable to AT&T.
<PAGE>
AT&T Form 10-Q - Part II
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
A special meeting of the shareholders of the registrant was held on February 17,
1999.
(c) Holders of common shares voted at this meeting on the following director's
proposals, which were set forth in the registrant's proxy statement/prospectus
dated January 8, 1998.
(i) To approve a charter amendment and the issuance of shares in connection with
the merger of a subsidiary of AT&T Corp. with Tele-Communications, Inc.*
% of Shares Voted % of Shares Outstanding
For: 1,273,002,363 shares 98.81 72.59
Against: 8,983,412 shares 0.70 0.51
Abstain: 6,315,975 shares 0.49 0.36
(ii) In the event that any other matter may properly come before the meeting, or
any adjournment thereof, the Proxy Committee is authorized, at their discretion,
to vote the matter.**
% of Shares Voted % of Shares Outstanding
For: 891,707,698 shares 69.21 50.85
Against: 258,065,046 shares 20.03 14.71
Abstain: 138,529,006 shares 10.76 7.90
* Approval of this proposal required a majority of the outstanding common
shares.** Approval of this proposal required a majority of the common shares
voted.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit Number
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
99 Liberty Media Group financial results for the period
ended March 31, 1999
(b) Reports on Form 8-K
Form 8-K dated January 8, 1999 was filed pursuant to Item 5
(Other Events) and Item 7 (Financial Statements and Exhibits).
Form 8-K/A dated January 8, 1999 was filed pursuant to Item 5
and Item 7. Form 8-K dated January 25, 1999 was filed pursuant
to Item 5 and Item 7. Form 8-K dated March 9, 1999 was filed
pursuant to Item 5 and Item 7. Form 8-K dated March 9, 1999
was filed pursuant to Item 5. Form 8-K dated March 19, 1999
was filed pursuant to Item 2 (Acquisitions or Dispositions of
Assets) and Item 5 and Item 7.
<PAGE>
AT&T Form 10-Q
SIGNATURES
Pursuant to the requirements 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/ N. S. Cyprus
------------------------------
By: N. S. Cyprus
Vice President and Controller
(Principal Accounting Officer)
Date: May 14, 1999
<PAGE>
AT&T Form 10-Q
Exhibit Index
Exhibit
Number
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
99 Liberty Media Group Financial Results for the
Period Ended March 31, 1999
Form 10-Q
For the Three
Months Ended
March 31, 1999
AT&T Corp.
Computation of Ratio of Earnings to Fixed Charges
(Dollars in Millions)
(Unaudited)
Income from Continuing Operations
Before Income Taxes ................................. $2,044
Less Interest Capitalized during
the Period........................................... 25
Add Equity Investment Losses, net of distributions
of Less than 50% Owned Affiliates.................... 70
Add Fixed Charges...................................... 289
Total Earnings from Continuing
Operations Before Income Taxes
and Fixed Charges.................................... $2,378
Fixed Charges
Total Interest Expense Including Capitalized Interest.. $ 215
Interest Portion of Rental Expense..................... 57
Preferred Stock Dividend Requirement................... 17
Total Fixed Charges.................................. $ 289
Ratio of Earnings to Fixed Charges..................... 8.2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited consolidated balance sheet of AT&T Corp. at March 31, 1999 and the
unaudited consolidated statement of income for the three-month period ended
March 31, 1999 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,463
<SECURITIES> 0
<RECEIVABLES> 10,526
<ALLOWANCES> 1,143
<INVENTORY> 0
<CURRENT-ASSETS> 13,245
<PP&E> 59,539
<DEPRECIATION> 26,524
<TOTAL-ASSETS> 135,635
<CURRENT-LIABILITIES> 19,443
<BONDS> 22,488
1,660
0
<COMMON> 3,807
<OTHER-SE> 66,555
<TOTAL-LIABILITY-AND-EQUITY> 135,635
<SALES> 0
<TOTAL-REVENUES> 14,096
<CGS> 0
<TOTAL-COSTS> 11,953
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 386
<INTEREST-EXPENSE> 190
<INCOME-PRETAX> 2,044
<INCOME-TAX> 1,026
<INCOME-CONTINUING> 1,018
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,018
<EPS-PRIMARY> 0.39
<EPS-DILUTED> 0.38
</TABLE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in notes 1 and 2)
Combined Balance Sheets
(unaudited)
New Liberty Old Liberty
(note 1)
March 31, December 31,
1999 1998
----------- ------------
Assets amounts in millions
Current assets:
Cash and cash equivalents $ 1,973 407
Marketable securities 3,217 124
Trade and other receivables, net 135 185
Prepaid expenses and committed program
rights 287 263
----------- ------------
Total current assets 5,612 979
----------- -------------
Investments in affiliates, accounted for
under the equity method, and related
receivables (note 5) 17,093 3,079
Investment in Time Warner, Inc.
("Time Warner") (note 6) 8,072 7,083
Investment in AT&T Corp. ("AT&T") -- 3,556
Investment in Sprint Corporation ("Sprint")
(notes 2 and 5) 4,663 2,446
Other investments and related receivables
(note 7) 1,844 1,298
Property and equipment, at cost 127 935
Less accumulated depreciation 2 350
----------- ------------
125 585
----------- ------------
Intangible assets 10,325 1,139
Less accumulated amortization 43 164
----------- ------------
10,282 975
----------- ------------
Other assets, at cost, net of accumulated
amortization 940 347
----------- ------------
Total assets $ 48,631 20,348
=========== ============
(continued)
<PAGE>
Combined Balance Sheets, continued
(unaudited)
New Liberty Old Liberty
(note 1)
March 31, December 31,
1999 1998
----------- ------------
Liabilities and Combined Equity amounts in millions
Current liabilities:
Accounts payable and accrued liabilities $ 141 416
Program rights payable 178 156
Current portion of debt 652 578
----------- ------------
Total current liabilities 971 1,150
----------- ------------
Debt (note 9) 1,843 2,318
Deferred income taxes (note 10) 10,525 4,458
Other liabilities 712 549
----------- ------------
Total liabilities 14,051 8,475
----------- ------------
Minority interests in equity of attributed
subsidiaries 39 545
Obligation to redeem common stock (note 11) 9 17
Combined equity (note 11):
Combined equity 33,505 6,896
Accumulated other comprehensive earnings,
net of taxes 906 3,718
----------- ------------
34,411 10,614
Due to related parties 121 697
----------- ------------
Total combined equity 34,532 11,311
----------- ------------
Commitments and contingencies (note 12)
Total liabilities and combined
equity $ 48,631 20,348
=========== ============
See accompanying notes to combined financial statements.
<PAGE>
Combined Statements of Operations and Comprehensive Earnings
(unaudited)
<TABLE>
<CAPTION>
New Liberty Old Liberty
(note 1) (note 1)
One month Two months Three months
ended ended ended
March 31, 1999 February 28, 1999 March 31, 1998
-------------- ----------------- --------------
amounts in millions
<S> <C> <C> <C>
Revenue $ 71 282 351
Operating costs and expenses:
Operating, selling, general and
administrative 56 227 302
Stock compensation (note 11) (41) 183 158
Depreciation and amortization 53 47 54
----- ----- -----
68 457 514
----- ----- -----
Operating income (loss) 3 (175) (163)
Other income (expense):
Interest expense (note 11) (13) (28) (18)
Dividend and interest income 24 12 17
Share of losses of affiliates, net (note 5) (80) (66) (257)
Minority interests in losses of attributed
subsidiaries -- 4 13
Gain on dispositions, net -- 14 552
Gains on issuance of equity by subsidiaries
(note 8) -- 389 38
Other, net -- -- 2
----- ----- -----
(69) 325 347
----- ----- -----
Earnings (loss) before income taxes (66) 150 184
Income tax benefit (expense) 8 (209) (76)
----- ----- -----
Net earnings (loss) $ (58) (59) 108
===== ===== =====
Other comprehensive earnings, net of taxes:
Foreign currency translation adjustments 12 (15) 1
Unrealized holding gains arising during the
period, net of reclassification adjustments 894 971 348
----- ----- -----
Other comprehensive earnings 906 956 349
----- ----- -----
Comprehensive earnings $ 848 897 457
===== ===== =====
<FN>
See accompanying notes to combined financial statements.
</FN>
</TABLE>
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in notes 1 and 2)
Combined Statement of Equity
Three months ended March 31, 1999
(unaudited)
<TABLE>
<CAPTION>
Accumulated
other Due to
comprehensive (from) Total
Combined earnings, related combined
equity net of taxes parties equity
------ ------------ ------- ------
amounts in millions
<S> <C> <C> <C> <C>
Balance at January 1, 1999 6,896 3,718 697 11,311
Net loss (59) -- -- (59)
Foreign currency translation adjustments -- (15) -- (15)
Unrealized gains on available-for-sale
securities -- 971 -- 971
Reversal of reclassification of redemption
amount of common stock subject to put
obligation 8 -- -- 8
Transfer of net liabilities to related party,
net of taxes 99 -- -- 99
Excess paid on settlement of preferred stock
conversion (18) -- -- (18)
Other transfers to related parties, net -- -- (24) (24)
------- ------- ------- -------
Balance at February 28, 1999 $ 6,926 4,674 673 12,273
======= ======= ======= =======
Balance at March 1, 1999 33,515 -- 213 33,728
Net loss (58) -- -- (58)
Foreign currency translation adjustments -- 12 -- 12
Unrealized gains on available-for-sale
securities -- 894 -- 894
AT&T Liberty Media Group Tracking Stock
issued for conversion of debentures 48 -- -- 48
Other transfers to related parties, net -- -- (92) (92)
------- ------- ------- -------
Balance at March 31, 1999 $33,505 906 121 34,532
======= ======= ======= =======
<FN>
See accompanying notes to combined financial statements.
</FN>
</TABLE>
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in notes 1 and 2)
Combined Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
New Liberty Old Liberty
(note 1) (note 1)
One month Two months Three months
ended ended ended
March 31, 1999 February 28, 1999 March 31, 1998
-------------- ----------------- --------------
amounts in millions
(see note 4)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (58) (59) 108
Adjustments to reconcile net earnings
(loss) to net cash used by operating
activities:
Depreciation and amortization 53 47 54
Stock compensation (41) 183 158
Payments of stock compensation (1) (126) (44)
Share of losses of affiliates, net 80 66 257
Deferred income tax expense 3 205 15
Intergroup tax allocation (12) -- 57
Minority interests in losses of
attributed subsidiaries -- (4) (13)
Gain on issuance of equity by
subsidiaries -- (389) (38)
Gain on disposition of assets, net -- (14) (552)
Other noncash charges -- 9 1
Changes in current assets and
liabilities, net of the effect of
acquisitions and dispositions:
Change in receivables 2 (19) (3)
Change in prepaid expenses and
committed program rights (5) (10) (23)
Change in payables and accruals (32) 4 20
------- ------- -------
Net cash used by operating
activities (11) (107) (3)
------- ------- -------
Cash flows from investing activities:
Cash paid for acquisitions -- -- (10)
Capital expended for property and equipment (4) (21) (36)
Cash balances of deconsolidated subsidiaries -- (53) --
Investments in and loans to affiliates and
others (88) (45) (113)
Purchases of marketable securities (3,217) (132) (84)
Sales and maturities of marketable
securities -- 34 79
Cash proceeds from dispositions 3 43 291
Other, net 4 (9) 21
------- ------- -------
Net cash provided (used)
by investing activities (3,302) (183) 148
------- ------- -------
</TABLE>
(continued)
<PAGE>
Combined Statements of Cash Flows, continued
(unaudited)
<TABLE>
<CAPTION>
New Liberty Old Liberty
(note 1) (note 1)
One month Two months Three months
ended ended ended
March 31, 1999 February 28, 1999 March 31, 1998
-------------- ----------------- --------------
amounts in millions
(see note 4)
<S> <C> <C> <C>
Cash flows from financing activities:
Borrowings of debt 495 156 510
Repayments of debt (448) (148) (257)
Payments for call agreements -- -- (140)
Cash transfers from related parties (80) 132 (226)
Repurchase of subsidiary preferred stock -- (45) --
Other, net -- (1) (9)
------- ------- -------
Net cash provided
(used) by financing
activities (33) 94 (122)
------- ------- -------
Net increase (decrease)
in cash and cash
equivalents (3,346) (196) 23
Cash and cash equivalents
at beginning of period 5,319 407 224
------- ------- -------
Cash and cash equivalents
at end of period $ 1,973 211 247
======= ======= =======
<FN>
See accompanying notes to combined financial statements.
</FN>
</TABLE>
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in notes 1 and 2)
Notes to Combined Financial Statements
March 31, 1999
(unaudited)
(1) Basis of Presentation
The accompanying combined financial statements include the accounts of
the subsidiaries and assets of Tele-Communications, Inc. ("TCI") that
are attributed to Liberty Media Group, as defined below. On March 9,
1999, AT&T acquired TCI in a merger transaction (the "AT&T Merger").
See note 2. The AT&T Merger has been accounted for using the purchase
method. For financial reporting purposes the AT&T Merger and related
restructuring transactions described in note 2 are deemed to have
occurred on March 1, 1999. Accordingly, for periods prior to March 1,
1999 the assets and liabilities attributed to Liberty Media Group and
the related combined financial statements are sometimes referred to
herein as "Old Liberty", and for periods subsequent to February 28,
1999 the assets and liabilities attributed to Liberty Media Group and
the related combined financial statements are sometimes referred to
herein as "New Liberty". The "Company" and "Liberty Media Group" refer
to both New Liberty and Old Liberty.
The following table represents the summary balance sheet of Old Liberty
at February 28, 1999 prior to the restructuring transactions and the
consummation of the AT&T Merger and the opening summary balance sheet
of New Liberty subsequent to the restructuring transactions and the
consummation of the AT&T Merger. Certain pre-merger transactions
occurring between March 1, 1999 and March 9, 1999 that affected Old
Liberty's equity and stock compensation have been reflected in the
two-month period ended February 28, 1999.
Old Liberty New Liberty
(amounts in millions)
Assets
Cash and cash equivalents $ 211 5,319
Other current assets 648 423
Investments in affiliates 3,971 17,073
Investment in Time Warner 7,361 7,832
Investment in Sprint 3,381 3,681
Investment in AT&T 3,856 --
Other investments 1,257 1,586
Property and equipment, net 532 125
Intangibles and other assets 817 11,273
-------- --------
$ 22,034 47,312
======== ========
(continued)
<PAGE>
Liabilities and Equity
Current liabilities $ 1,317 1,012
Debt 2,319 1,845
Deferred income taxes 5,369 9,931
Other liabilities 297 748
-------- --------
Total liabilities 9,302 13,536
-------- --------
Minority interests in equity
of attributed subsidiaries 450 39
Obligation to redeem common
stock 9 9
Equity 12,273 33,728
-------- --------
$ 22,034 47,312
======== ========
The following table reflects the recapitalization resulting from the AT&T Merger
(amounts in millions):
Total combined equity of Old Liberty $ 12,273
Net contribution resulting from the restructuring
transactions 2,334
Purchase accounting adjustments 19,121
---------------
Initial total combined equity of New Liberty
subsequent to the AT&T Merger $ 33,728
===============
At March 31, 1999, Liberty Media Group consisted principally of the following:
(i) AT&T's assets and businesses which provide programming services including
production, acquisition and distribution through all available formats and media
of branded entertainment, educational and informational programming and
software, including multimedia products, (ii) AT&T's assets and businesses
engaged in electronic retailing, direct marketing, advertising sales relating to
programming services, infomercials and transaction processing, (iii) certain of
AT&T's assets and businesses engaged in international cable, telephony and
programming businesses and (iv) AT&T's holdings in a new class of tracking stock
of Sprint (the "Sprint PCS Group Stock"). All significant intercompany accounts
and transactions have been eliminated. The combined financial statements of
Liberty Media Group are presented for purposes of additional analysis of the
consolidated financial statements of AT&T and should be read in conjunction with
such consolidated financial statements.
The accompanying interim combined financial statements are unaudited but, in the
opinion of management, reflect all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the results for such periods. The
results of operations for any interim period are not necessarily indicative of
results for the full year. These combined financial statements should be read in
conjunction with the combined financial statements and notes thereto contained
in AT&T's Current Report on Form 8-K filed on March 22, 1999.
(continued)
<PAGE>
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 at the date of the
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Certain prior period amounts have been reclassified for comparability with the
1999 presentation.
(2) Merger with AT&T
As a result of the AT&T Merger, holders of shares of TCI's then
outstanding Liberty Media Group Tracking Stock and TCI Ventures Group
Tracking Stock were issued separate shares of new targeted stock of
AT&T. Each share of TCI's then outstanding Liberty Media Group Series A
Tracking Stock was converted into one share of a newly created class of
AT&T common stock, the AT&T Liberty Media Group Class A Tracking Stock,
each share of TCI's then outstanding Liberty Media Group Series B
Tracking Stock was converted into one share of a newly created class of
AT&T common stock, the AT&T Liberty Media Group Class B Tracking Stock,
each share of TCI's then outstanding TCI Ventures Group Series A
Tracking Stock was converted into 0.52 of a share of AT&T Liberty Media
Group Class A Tracking Stock and each share of TCI's then outstanding
TCI Ventures Group Series B Tracking Stock was converted into 0.52 of a
share of AT&T Liberty Media Group Class B Tracking Stock.
Effective with the AT&T Merger, each share of TCI's Convertible
Preferred Stock Series C-Liberty Media Group was converted into 56.25
shares of AT&T Liberty Media Group Class A Tracking Stock and each
share of TCI's Redeemable Convertible Liberty Media Group Preferred
Stock, Series H was converted into 0.590625 of a share of AT&T Liberty
Media Group Class A Tracking Stock. In general, the holders of shares
of AT&T Liberty Media Group Class A Tracking Stock and the holders of
shares of AT&T Liberty Media Group Class B Tracking Stock will vote
together as a single class with the holders of shares of AT&T Common
Stock on all matters presented to such stockholders, with the holders
being entitled to one-tenth (1/10th) of a vote for each share of AT&T
Liberty Media Group Class A Tracking Stock held, 1 vote per share of
AT&T Liberty Media Group Class B Tracking Stock held and 1 vote per
share of AT&T Common Stock held.
The shares of AT&T Liberty Media Group Tracking Stock issued in the
AT&T Merger are intended to reflect the separate performance of the
businesses and assets attributed to Liberty Media Group. Immediately
prior to the AT&T Merger, certain assets previously attributed to Old
Liberty (including, among others, the shares of AT&T Common Stock
received in the merger of AT&T and Teleport Communications Group, Inc.,
Old Liberty's interests in At Home Corporation ("@Home"), the National
Digital Television Center, Inc. ("NDTC") and Western
Tele-Communications, Inc.) were attributed to "TCI Group" (a group of
TCI's assets, which, prior to the AT&T Merger, was comprised primarily
of TCI's domestic cable and communications business) in exchange for
approximately $5.5 billion in cash (the "Asset Transfers"). Also, upon
(continued)
<PAGE>
consummation of the AT&T Merger, through a new tax sharing agreement
between the Company and AT&T, the Company is entitled to the benefit of
approximately $2 billion in net operating loss carryforwards available
to the entities included in TCI's consolidated income tax return as of
the date of the AT&T Merger. Such net operating loss carryforwards are
subject to adjustment by the Internal Revenue Service ("IRS") and are
subject to limitations on usage which may affect the ultimate amount
utilized. Additionally, certain warrants to purchase shares of General
Instruments Corporation ("GI Warrants") previously attributed to TCI
Group were attributed to the Company in exchange for approximately $176
million in cash. Certain agreements entered into at the time of the
AT&T Merger provide, among other things, for preferred vendor status to
the Company for digital basic distribution on AT&T's systems of new
programming services created by the Company and for a renewal of
existing affiliation agreements. Pursuant to amended corporate
governance documents for the entities included in Liberty Media Group
and certain agreements among AT&T and TCI, the business of Liberty
Media Group will continue to be managed by certain persons who were
members of TCI's management prior to the AT&T Merger.
Pursuant to a proposed final judgment (the "Final Judgment") agreed to
by TCI, AT&T and the United States Department of Justice (the "DOJ") on
December 31, 1998, Liberty Media Group transferred all of its
beneficially owned securities (the "Sprint Securities") of Sprint to a
trustee (the "Trustee") prior to the AT&T Merger. The Final Judgment,
if entered by the United States District Court for the District of
Columbia, would require the Trustee, on or before May 23, 2002, to
dispose of a portion of the Sprint Securities sufficient to cause
Liberty Media Group to beneficially own no more than 10% of the
outstanding Series 1 PCS Stock of Sprint on a fully diluted basis on
such date. On or before May 23, 2004, the Trustee must divest the
remainder of the Sprint Securities beneficially owned by Liberty Media
Group.
The Final Judgment would provide that the Trustee vote the Sprint
Securities beneficially owned by Liberty Media Group in the same
proportion as other holders of Sprint's PCS Stock so long as such
securities are held by the trust. The Final Judgment would also
prohibit the acquisition by Liberty Media Group of additional Sprint
Securities, with certain exceptions, without the prior written consent
of the DOJ.
(3) Loss Per Common Share
Basic earnings or loss per share ("EPS") is measured as the income or
loss attributable to common stockholders divided by the weighted
average outstanding common shares for the period. Diluted EPS is
similar to basic EPS but presents the dilutive effect on a per share
basis of potential common shares as if they had been converted at the
beginning of the periods presented. Potential common shares that have
an anti-dilutive effect are excluded from diluted EPS.
(continued)
<PAGE>
The basic and diluted loss attributable to Liberty Media Group common
stockholders per common share for the one month ended March 31, 1999
was computed by dividing the net loss attributable to Liberty Media
Group common stockholders by the weighted average number of common
shares outstanding of AT&T Liberty Media Group Tracking Stock during
the period. Potential common shares were not included in the
computation of weighted average shares outstanding because their
inclusion would be anti-dilutive.
At March 31, 1999, there were 90 million potential common shares
consisting of fixed and nonvested performance awards, stock options and
convertible securities that could potentially dilute future EPS
calculations in periods of net earnings. No material changes in the
weighted average outstanding shares or potential common shares occurred
after March 31, 1999.
One month ended
March 31, 1999
amounts in millions,
except per share amounts
Basic and diluted EPS:
Loss attributable to common
stockholders $ 58
==============
Weighted average common shares 597
Basic and diluted loss per share
attributable to common stockholders $ 0.10
==============
(4) Supplemental Disclosures to Combined Statements of Cash Flows
Cash paid for interest was $16 million for the one month period ended
March 31, 1999, $32 million for the two month period ended February 28,
1999 and $21 million for the three months ended March 31, 1998. Cash
paid for income taxes for the one month period ended March 31, 1999,
the two month period ended February 28, 1999 and the three months ended
March 31, 1998 was not material.
New Liberty Old Liberty
One month Two months Three months
ended ended ended
March 31, February 28, March 31,
1999 1999 1998
amounts in millions
Cash paid for acquisitions:
Fair value of assets acquired $ -- -- 15
Net liabilities assumed -- -- (2)
Gain in connection with the
issuance of shares by
attributed subsidiary -- -- (3)
-------- -------- --------
Cash paid for acquisitions $ -- -- 10
======== ======== ========
(continued)
<PAGE>
Liberty ceased to include TV Guide, Inc. ("TV Guide") in its combined
financial results and began to account for TV Guide using the equity
method of accounting, effective March 1, 1999 (see note 8). The effects
of changing the method of accounting for Liberty's ownership interests
in TV Guide as of March 31, 1999 from the consolidation method to the
equity method are summarized below (amounts in millions):
Assets (other than cash and cash equivalents)
reclassified to investments in affiliates $ (572)
Liabilities reclassified to investments in
affiliates 190
Minority interests in equity of subsidiaries
reclassified to investments in affiliates 63
Gain on issuance of equity by subsidiary 372
Decrease in cash and cash equivalents $ 53
===========
The following table reflects the change in cash and cash equivalents
resulting from the AT&T Merger and related restructuring transactions
(amounts in millions):
Cash and cash equivalents prior to the AT&T Merger $ 211
Cash received in the Asset Transfers, net of
cash balances transferred 5,284
Cash paid to TCI Group for GI Warrants (176)
Cash and cash equivalents subsequent to the AT&T Merger $ 5,319
===========
(5) Investments in Affiliates
Liberty Media Group has various investments accounted for under the
equity method. The following table includes Liberty Media Group's
carrying amount of the more significant investments at March 31, 1999
and December 31, 1998:
New Liberty Old Liberty
March 31, December 31,
1999 1998
amounts in millions
USA Networks, Inc. ("USAI") and related
investments 2,602 1,042
Telewest Communications plc ("Telewest") 2,048 515
Discovery Communications, Inc. ("Discovery") 3,684 49
Fox/Liberty Networks LLC ("Fox Sports") 1,430 (1)
TV Guide 1,776 --
QVC, Inc. ("QVC") 2,521 197
Flextech plc ("Flextech") 759 320
Other foreign investments (other than
Telewest and Flextech) 1,498 346
Other 775 611
------ ------
17,093 3,079
====== ======
(continued)
<PAGE>
The following table reflects Liberty Media Group's share of earnings
(losses) of affiliates:
New Liberty Old Liberty
One month Two months Three months
ended ended ended
March 31, February 28, March 31,
1999 1999 1998
amounts in millions
USAI and related
investments $ 3 10 9
Telewest (25) (38) (30)
Discovery (16) (8) (9)
Fox Sports (9) (1) (36)
TV Guide (4) -- --
QVC (1) 13 11
Flextech (5) (5) (6)
Other foreign
investments (15) (22) (24)
PCS Ventures -- -- (155)
Other (8) (15) (17)
------------ ------------ ------------
$ (80) (66) (257)
============ ============ ============
Summarized unaudited combined financial information for affiliates is
as follows:
New Liberty Old Liberty
One month Two months Three months
ended ended ended
March 31, February 28, March 31,
1999 1999 1998
amounts in millions
Combined Operations
Revenue $ 993 2,341 2,243
Operating expenses (849) (1,894) (2,213)
Depreciation and
amortization (124) (353) (384)
------------ ------------ ------------
Operating income (loss) 20 94 (354)
Interest expense (37) (281) (281)
Other, net (89) (127) (71)
------------ ------------ ------------
Net loss $ (106) (314) (706)
============ ============ ============
(continued)
<PAGE>
USAI owns and operates businesses in network and television production,
television broadcasting, electronic retailing, ticketing operations,
and internet services. At March 31, 1999, Liberty Media Group directly
and indirectly held 29.6 million shares of USAI's common stock. Liberty
Media Group also held shares directly in certain subsidiaries of USAI
which are exchangeable into 39.5 million shares of USAI common stock.
Liberty Media Group's direct ownership of USAI is currently restricted
by FCC regulations. The exchange of these shares can be accomplished
only if there is a change to existing regulations or if Liberty Media
Group obtains permission from the FCC. If the exchange of Liberty Media
Group's shares of such subsidiary stock, as well as certain securities
owned by Universal Studios, Inc. and certain of its affiliates, into
USAI common stock were completed at March 31, 1999, Liberty Media Group
would own 69.1 million shares or approximately 21% (on a fully-diluted
basis) of USAI common stock. USAI's common stock had a closing market
price of $35-13/16 per share on March 31, 1999. Liberty Media Group
accounts for its investments in USAI and related subsidiaries on a
combined basis under the equity method.
In February 1998, USAI paid cash and issued shares and one of it
subsidiaries issued shares in connection with the acquisition of
certain assets from Universal Studios, Inc. (the "Universal
Transaction"). Liberty Media Group recorded an increase to its
investment in USAI of $54 million and an increase to combined equity of
$33 million (after deducting a deferred income taxes of $21 million) as
a result of this share issuance. No gain was recognized in the combined
statement of operations and comprehensive earnings for the Universal
Transaction due primarily to Liberty Media Group's intention at such
time to purchase additional equity interests in USAI. In connection
with the Universal Transaction, Liberty Media Group was granted an
antidilutive right with respect to any future issuance of USAI common
stock, subject to certain limitations, that enables it to maintain its
percentage ownership interests in USAI.
Telewest currently operates and constructs cable television and
telephone systems in the UK. At March 31, 1999 Liberty Media Group
indirectly owned 463 million of the issued and outstanding Telewest
ordinary shares. The reported closing price on the London Stock
Exchange of Telewest ordinary shares was (pound)2.69 ($4.34) per share
at March 31, 1999.
Liberty Media Group and The News Corporation Limited ("News Corp.")
each hold 50% of Fox Sports which operates national and regional sports
networks. Prior to the first quarter of 1998, Liberty Media Group had
no obligation, nor intention, to fund Fox Sports. During 1998, Liberty
Media Group made the determination to provide funding to Fox Sports
based on specific transactions consummated by Fox Sports. Consequently,
Liberty Media Group's share of losses of Fox Sports for the three
months ended March 31, 1998 includes previously unrecognized losses of
Fox Sports of approximately $36 million. Losses for Fox Sports were not
recognized in prior periods due to the fact that Liberty Media Group's
investment in Fox Sports was less than zero.
The class A common stock of TV Guide is publicly traded. At March 31,
1999, Liberty Media Group held 29 million shares of TV Guide Class A
(continued)
<PAGE>
common stock and 37 million shares of TV Guide Class B common stock.
The TV Guide Class B common stock is convertible, one-for-one, into TV
Guide Class A common stock. The closing price for TV Guide Class A
common stock was $36-7/8 per share on March 31, 1999.
Flextech develops and sells a variety of television programming in the
UK. At March 31, 1999, Liberty Media Group indirectly owned 58 million
Flextech ordinary shares. The reported closing price on the London
Stock Exchange of the Flextech ordinary shares was (pound)7.91 ($12.75)
per share at March 31, 1999.
The PCS Ventures included Sprint Spectrum Holding Company, L. P. and
MinorCo, L.P. (collectively, "Sprint PCS") and PhillieCo Partnership I,
L.P. ("PhillieCo"). The partners of each of the Sprint PCS partnerships
were subsidiaries of Sprint, Comcast Corporation ("Comcast"), Cox
Communications, Inc. ("Cox") and Liberty Media Group. The partners of
PhillieCo were subsidiaries of Sprint, Cox and Liberty Media Group.
Liberty Media Group had a 30% partnership interest in each of the
Sprint PCS partnerships and a 35% partnership interest in PhillieCo.
On November 23, 1998, Liberty Media Group, Comcast, and Cox exchanged
their respective interests in Sprint PCS and PhillieCo (the "PCS
Exchange") for shares of Sprint PCS Group Stock which tracks the
performance of Sprint's newly created PCS Group (consisting initially
of the PCS Ventures and certain PCS licenses which were separately
owned by Sprint). The Sprint PCS Group Stock collectively represents an
approximate 17% voting interest in Sprint. As a result of the PCS
Exchange, Liberty Media Group holds the Sprint Securities which
consists of shares of Sprint PCS Group Stock, as well as certain
additional securities of Sprint exercisable for or convertible into
such securities, representing approximately 24% of the equity value of
Sprint attributable to its PCS Group and less than 1% of the voting
interest in Sprint. Through November 23, 1998, Liberty Media Group
accounted for its interest in the PCS Ventures using the equity method
of accounting, however, as a result of the PCS Exchange and Liberty
Media Group's less than 1% voting interest in Sprint, Liberty Media
Group no longer exercises significant influence with respect to its
investment in the PCS Ventures. Accordingly, Liberty Media Group
accounts for its investment in the Sprint PCS Group Stock as an
available-for-sale security.
The $14 billion aggregate excess of Liberty Media Group's aggregate
carrying amount in its affiliates over Liberty Media Group's
proportionate share of its affiliates' net assets is being amortized
over an estimated useful life of 20 years.
Certain of Liberty Media Group's affiliates are general partnerships
and as such, are liable as a matter of partnership law for all debts
(other than non-recourse debts) of that partnership in the event
liabilities of that partnership were to exceed its assets.
(continued)
<PAGE>
(6) Investment in Time Warner
Liberty Media Group holds shares of a series of Time Warner's series
common stock with limited voting rights (the "TW Exchange Stock") that
are convertible into an aggregate of 114 million shares of Time Warner
common stock.
As security for borrowings under one of its credit facilities, Liberty
Media Group has pledged a portion of its TW Exchange Stock. At March
31, 1999 such pledged portion had an aggregate fair value of
approximately $3.1 billion.
On June 24, 1997 Liberty Media Group granted Time Warner an option,
expiring October 10, 2002, to acquire the business of Southern
Satellite Systems, Inc. ("Southern") and certain of its subsidiaries
(together with Southern, the "Southern Business") through a purchase of
assets (the "Southern Option"). Liberty Media Group received shares of
TW Exchange Stock which are convertible into 6.4 million shares of Time
Warner common stock valued at $306 million in consideration for the
grant. In September 1997, Time Warner exercised the Southern Option.
Pursuant to the Southern Option, Time Warner acquired the Southern
Business, effective January 1, 1998, for $213 million in cash. Liberty
Media Group recognized a $515 million pre-tax gain in connection with
such transactions in the first quarter of 1998.
(7) Other Investments
On July 17, 1998, Liberty Media Group acquired 21.4 million shares of
restricted stock of General Instruments Corporation ("GI") in exchange
for (i) certain of the assets of NDTC's set-top authorization business,
(ii) the license of certain related software to GI, (iii) a $50 million
promissory note from Liberty Media Group to GI and (iv) a nine year
revenue guarantee from NDTC in favor of GI. In connection therewith,
NDTC also entered into a service agreement pursuant to which it will
provide certain postcontract services to GI's set-top authorization
business. The 21.4 million shares of GI common stock are, in addition
to other transfer restrictions, restricted as to their sale by Liberty
Media Group for a three year period, and represent approximately 12% of
the outstanding common stock of GI at March 31, 1999. Liberty Media
Group recorded its investment in such shares at fair value which
included a discount attributable to the above-described liquidity
restriction. Liberty Media Group carries its investment in such shares
at the lower of cost or net realizable value.
Management of Liberty Media Group estimates that the market value,
calculated utilizing a variety of approaches including multiple of cash
flow, per subscriber value, a value of comparable public or private
businesses or publicly quoted market prices, of all of Liberty Media
Group's other investments aggregated $2,228 million and $1,743 million
at March 31, 1999 and December 31, 1998, respectively. No independent
external appraisals were conducted for those assets.
(continued)
<PAGE>
(8) Acquisitions and Dispositions
Effective February 1, 1998, Turner-Vision, Inc. ("Turner Vision")
contributed the assets, obligations and operations of its retail C-band
satellite business to Superstar/Netlink Group LLC ("SNG") in exchange
for an approximate 20% interest in SNG. As a result of such
transaction, Liberty Media Group's direct and indirect ownership
interest in SNG, decreased to approximately 80%. In connection with the
increase in SNG's equity, net of the dilution of Liberty Media Group's
ownership interest in SNG, that resulted from such transaction, Liberty
Media Group recognized a gain of $38 million (before deducting deferred
income tax expense of $15 million). Turner Vision's contribution to SNG
was accounted for as a purchase and the $61 million excess of the
purchase price over the fair value of the net assets acquired was
recorded as excess cost and is being amortized over five years.
On January 12, 1998, Liberty Media Group acquired from a minority
shareholder of TV Guide (formerly known as United Video Satellite
Group, Inc. ("UVSG")) 24.8 million shares of UVSG Class A common stock
in exchange for 12.7 million shares of TCI Ventures Group Series A
Stock and 7.3 million shares of Liberty Media Group Series A Tracking
Stock. The aggregate value assigned to such shares issued was based
upon the market value of such shares at the time the transaction was
announced. As a result of such transaction Liberty Media Group
increased its ownership in the equity of UVSG to approximately 73% and
the voting power increased to 93%. In connection with the issuance of
common stock in such transaction, Liberty Media Group recorded a $346
million increase to combined equity.
On March 1, 1999, UVSG and News Corp. completed a transaction whereby
UVSG acquired News Corp.'s TV Guide properties creating a broader
platform for offering television guide services to consumers and
advertisers and UVSG was renamed TV Guide. A unit of News Corp.
received $800 million in cash and 60 million shares of UVSG's stock,
including 22.5 million shares of its Class A common stock and 37.5
million shares of its Class B common stock. In addition, News Corp.
purchased approximately 6.5 million additional shares of UVSG Class A
common stock for $129 million in order to equalize its ownership with
that of Liberty Media Group. As a result of these transactions, and
another transaction completed on the same date, News Corp., Liberty
Media Group and TV Guide's public stockholders own on an economic basis
approximately 44%, 44% and 12%, respectively, of TV Guide. Following
such transactions, News Corp. and Liberty Media Group each have
approximately 49% of the voting power of TV Guide's outstanding stock.
In connection with the increase in TV Guide's equity, net of the
dilution of Liberty Media Group's ownership interest in TV Guide,
Liberty Media Group recognized a gain of $372 million (before deducting
deferred income tax expense of $147 million). Upon consummation,
Liberty Media Group began accounting for its interest in TV Guide under
the equity method of accounting.
(continued)
<PAGE>
(9) Debt
Debt is summarized as follows:
New Liberty Old Liberty
March 31, December 31,
1999 1998
amounts in millions
Bank credit facilities $ 2,094 2,029
Convertible Subordinated Debentures -- 229
4-1/2% Convertible Subordinated
Debentures 306 345
Other 95 293
--------- ---------
$ 2,495 2,896
========= =========
At March 31, 1999, Liberty Media Group had approximately $531 million
in unused lines of credit under its bank credit facilities.
The bank credit facilities of Liberty Media Group generally contain
restrictive covenants which require, among other things, the
maintenance of certain financial ratios, and include limitations on
indebtedness, liens and encumbrances, acquisitions, dispositions,
guarantees and dividends. Additionally, Liberty Media Group pays fees
ranging from .15% to .375% per annum on the average unborrowed portions
of the total amounts available for borrowings under its bank credit
facilities.
As collateral for borrowings under one of Liberty Media Group's credit
facilities, the banks lend against certain assets designated by Liberty
Media Group (the "Designated Assets"). The carrying amount of the
Designated Assets as of March 31, 1999 was $6.6 billion. Recourse to
the banks for payment of Liberty Media Group's obligations under this
facility is limited solely to the Designated Assets. Also, as security
for borrowings under one of its credit facilities, Liberty Media Group
has pledged a portion of its TW Exchange Stock. See note 6.
Certain of Liberty Media Group's bank credit facilities have credit
agreements which provide for a three month interest reserve to be held
by an administrative agent. Such interest reserves amounted to $17
million as of March 31, 1999 and December 31, 1998 and are included in
other assets in the accompanying combined balance sheets.
Liberty Media Group believes that the carrying value of Liberty Media
Group's debt approximated its fair value at March 31, 1999.
(10) Income Taxes
Subsequent to the AT&T Merger, Liberty Media Group is included in the
consolidated federal income tax return of AT&T and party to a tax
sharing agreement with AT&T (the "AT&T Tax Sharing Agreement"). The
income tax provision for Liberty Media Group is calculated on a
separate return basis for those items in the consolidated tax return of
AT&T which are attributable to Liberty Media Group.
(continued)
<PAGE>
Under the AT&T Tax Sharing Agreement, Liberty Media Group will receive
a cash reimbursement from AT&T in periods when it generates taxable
losses and such taxable losses are utilized by AT&T to reduce the
consolidated income tax liability. This utilization of taxable losses
will be accounted for by Liberty Media Group as a current federal
intercompany income tax benefit. To the extent such losses are not
utilized by AT&T, such amounts will be available to reduce taxable
income generated by Liberty Media Group in future periods, similar to a
net operating loss carryforward and will be accounted for as a deferred
income tax benefit.
In periods when Liberty Media Group generates taxable income, AT&T has
agreed to satisfy such tax liability on Liberty Media Group's behalf.
The reduction of such computed tax liabilities will be accounted for by
Liberty Media Group as a credit to combined equity. The total amount of
future tax liabilities of Liberty Media Group which AT&T will satisfy
under the AT&T Tax Sharing Agreement is approximately $512 million,
which represents the tax effect of the net operating loss carryforward
reflected in TCI's final income tax return, subject to IRS adjustments.
To the extent AT&T utilizes existing net operating losses of entities
attributed to Liberty Media Group, such amounts will be accounted for
by Liberty Media Group as a reduction of combined equity.
Liberty Media Group will generally make cash payments to AT&T related
to states where it generates taxable income and receive cash payments
from AT&T in states where it generates taxable losses.
Liberty Media Group's obligation under the 1995 TCI Tax Sharing
Agreement of approximately $139 million (subject to adjustment), which
is included in "due to related parties," shall be paid at the time, if
ever, that Liberty Media Group deconsolidates from the AT&T income tax
return. The receivable under the 1997 TCI Tax Sharing Agreement of
approximately $220 million was forgiven in the AT&T Tax Sharing
Agreement and recorded as an adjustment to combined equity by Liberty
Media Group in connection with the AT&T Merger.
(11) Combined Equity
Stock Repurchase and Issuances
In conjunction with a stock repurchase program or similar transaction,
the Company may elect to sell put options on its own common stock.
Proceeds from any sales of puts with respect to the Company's tracking
stocks have been reflected as an increase to combined equity, and an
amount equal to the maximum redemption amount under unexpired put
options with respect to the Company's tracking stock is reflected as an
"obligation to redeem common stock" in the accompanying combined
balance sheets.
On March 10, 1999, Liberty Media Group announced that it would redeem
on April 8, 1999 all of its outstanding 4-1/2% convertible subordinated
debentures due February 15, 2005. (See note 9). The debentures are
convertible into shares of AT&T Liberty Media Group Class A Tracking
Stock at a conversion price of $47.07, or 21.24 shares per $1,000
principal amount. As of March 31, 1999 certain holders of the
debentures had exercised their rights to convert their debentures and
1,001,806 shares of AT&T Liberty Media Group Tracking Stock were issued
to such holders and Liberty Media Group's outstanding debentures were
reduced by $49 million.
(continued)
<PAGE>
During the three months ended March 31, 1998, pursuant to a stock
repurchase program, Liberty Media Group repurchased 155,450 shares of
TCI Ventures Group Stock at an aggregate cost of $2.4 million.
Stock Options and Stock Appreciation Rights
Liberty Media Group records stock compensation expense relating to
restricted stock awards, options and/or stock appreciation rights on
certain TCI common stock (collectively, "Awards") granted by TCI, prior
to the AT&T Merger, to certain TCI employees and/or directors who are
involved with Liberty Media Group. Estimated compensation relating to
stock appreciation rights ("SARs") has been recorded through March 31,
1999, and is subject to future adjustment based upon vesting and market
value, and ultimately, on the final determination of market value when
such rights are exercised. As allowed by Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation
("Statement 123"), Liberty Media Group continues to account for stock
based compensation pursuant to Accounting Principles Board Opinion No.
25, which Liberty Media Group estimates that compensation expense would
not be materially different under Statement 123. The payable arising
from the compensation related to the Awards was included in the amounts
due to related parties in Old Liberty and is included in other
liabilities in New Liberty in the accompanying combined balance sheets.
Transactions with TCI and Other Related Parties
Certain TCI corporate general and administrative costs are charged to
Liberty Media Group. Included in operating expenses in the accompanying
combined statements of operations and comprehensive earnings, during
the one month period ended March 31, 1999, the two month period ended
February 28, 1999 and the three months ended March 31, 1998, Liberty
Media Group was allocated less than $1 million, $2 million and $3
million, respectively, in corporate general and administrative costs by
TCI.
Certain subsidiaries attributed to Liberty Media Group produce and/or
distribute sports and other programming and other services to cable
distribution operators (including TCI) and others. Charges to TCI are
based upon customary rates charged to others. Amounts included in
revenue for services provided to TCI were $18 million, $43 million and
$65 million for the one month period ending March 31, 1999, the two
month period ending February 28, 1999 and the three months ended March
31, 1998, respectively.
Entities included in Liberty Media Group lease satellite transponder
facilities from NDTC. In connection with the AT&T Merger, NDTC is no
longer included in the combined financial results of Liberty Media
Group. Charges by NDTC for such arrangements and other related
operating expenses for the one month ended March 31, 1999 aggregated $2
million and is included in operating expenses in the accompanying
combined statements of operations and comprehensive earnings.
During 1999 and 1998, entities attributed to Liberty Media Group made
marketing support payments to entities attributed to TCI. Charges by
TCI for such arrangement was less than $1 million for each of the one
month period ended March 31, 1999, the two month period ended February
28, 1999 and the three months ended March 31, 1998.
(continued)
<PAGE>
A subsidiary of Liberty Media Group issued preferred stock in
connection with a previous acquisition which is convertible at the
option of the holders into 1,084,056 of TCI Group Series A Common Stock
beginning in April 1999 or sooner in the event of a change in control
of TCI. In July 1998, Liberty Media Group entered into an equity swap
transaction with a commercial bank, which provided Liberty Media Group
with the right but not the obligation to acquire 1,084,056 shares of
TCI Group Series A Stock for approximately $45 million on or before
April 19, 1999. In the event Liberty Media Group did not exercise its
right to acquire such shares, any difference between the counterparty's
cost and the market value of the shares on the settlement date would be
settled in cash or shares of TCI Ventures Group Series A Stock at
Liberty Media Group's option. Liberty Media Group exercised its right
under this equity swap transaction and used the TCI Group Series A
Stock to satisfy the exchange requirements of the aforementioned
preferred stock during the two months ended February 28, 1999. In
connection with such transaction, Liberty Media Group recorded an $18
million decrease to combined equity for the difference between the
exercise price of the right and the carrying amount of the preferred
stock.
Prior to the AT&T Merger, a limited liability company owned by Dr. John
C. Malone (Liberty Media Group's Chairman) acquired, from certain
subsidiaries of Liberty Media Group, for $17 million, working cattle
ranches located in Wyoming. No gain or loss was recognized on such
acquisition. The purchase price was paid by such limited liability
company in the form of a 12-month note in the amount of $17 million
having an interest rate of 7%. Such note is payable at any time without
penalty and is personally guaranteed by Dr. Malone.
Due to Related Parties
The components of "Due to related parties" are as follows:
New Liberty Old Liberty
March 31, December 31,
1999 1998
amounts in millions
Note payable to TCI, including
accrued interest $ 83 141
Intercompany account 38 556
----------- -----------
$ 121 697
=========== ===========
The amount outstanding at March 31, 1999 under note payable to TCI
bears interest at 6.5% per annum and was repaid during the second
quarter of 1999.
The non-interest bearing intercompany account includes certain income
tax and stock compensation allocations (in Old Liberty) that are to be
settled at some future date. All other amounts included in the
intercompany account are to be settled within thirty days following
notification.
(continued)
<PAGE>
(12) Commitments and Contingencies
Encore Media Group is obligated to pay fees for the rights to exhibit
certain films that are released by various producers through 2017 (the
"Film Licensing Obligations"). Based on customer levels at March 31,
1999, these agreements require minimum payments aggregating
approximately $779 million. The aggregate amount of the Film Licensing
Obligations under these license agreements is not currently estimable
because such amount is dependent upon the number of qualifying films
released theatrically by certain motion picture studios as well as the
domestic theatrical exhibition receipts upon the release of such
qualifying films. Nevertheless, required aggregate payments under the
Film Licensing Obligations could prove to be significant.
Flextech has undertaken to finance the working capital requirements of
a joint venture, (the "Principal Joint Venture") formed with BBC
Worldwide and is obligated to provide the Principal Joint Venture with
a primary credit facility of (pound)88 million ($142 million) and
subject to certain restrictions, a standby credit facility of (pound)30
million ($48 million). As of March 31, 1999, the Principal Joint
Venture had borrowed (pound)28 million ($45 million) under the primary
credit facility. If Flextech defaults in its funding obligation to the
Principal Joint Venture and fails to cure within 42 days after receipt
of notice from BBC Worldwide, BBC Worldwide is entitled, within the
following 90 days, to require that Tele-Communications International,
Inc. assume all of Flextech's funding obligations to the Principal
Joint Venture.
Liberty Media Group has guaranteed various loans, notes payable,
letters of credit and other obligations (the "Guaranteed Obligations")
of certain affiliates. At March 31, 1999, the Guaranteed Obligations
aggregated approximately $376 million. Currently, Liberty Media Group
is not certain of the likelihood of being required to perform under
such guarantees.
Liberty Media Group leases business offices, has entered into pole
rental and transponder lease agreements and uses certain equipment
under lease arrangements.
On September 21, 1998, Hurricane Georges struck Puerto Rico and caused
considerable property damage to the area in general, including the
Liberty Media Group's Puerto Rico subsidiary's cable television
systems. The Puerto Rico Subsidiary's cable television systems
represent $8 million of Liberty Media Group's revenue for the three
months ended March 31, 1999.
As of March 31, 1999, approximately 87% of the Puerto Rico Subsidiary's
pre-hurricane basic customers were receiving cable television services.
Although there can be no assurance, the Puerto Rico Subsidiary
estimates that it will regain 100% of its pre-hurricane customer base
by June 30, 1999. The loss of revenue from September 21, 1998 through
March 31, 1999 has been estimated at $10 million. In addition, the
estimated loss of revenue for the second quarter of 1999 is
approximately $1 million. The Puerto Rico Subsidiary's business
interruption insurance covered the first $3 million in lost revenue.
(continued)
<PAGE>
The Puerto Rico Subsidiary has also claimed coverage for business
interruption under a secondary insurance carrier. Such policy, which
covers the Puerto Rico Subsidiary's parent company's subsidiaries,
carries a deductible of $2.5 million. This insurance claim is subject
to approval by such insurance carrier and accordingly, no assurance can
be given that amounts claimed will be paid in their entirety. However,
in the event such claims are collected the overall impact in lost
revenues for the Puerto Rico Subsidiary as a result of Hurricane
Georges will not exceed $2.5 million.
Liberty Media Group has contingent liabilities related to legal
proceedings and other matters arising in the ordinary course of
business. Although it is reasonably possible Liberty Media Group may
incur losses upon conclusion of such matters, an estimate of any loss
or range of loss cannot be made. In the opinion of management, it is
expected that amounts, if any, which may be required to satisfy such
contingencies will not be material in relation to the accompanying
combined financial statements.
During the three months ended March 31, 1999, Liberty Media Group, in
conjunction with AT&T, continued its enterprise-wide, comprehensive
efforts to assess and remediate its computer systems and related
software and equipment to ensure such systems, software and equipment
recognize, process and store information in the year 2000 and
thereafter. AT&T's year 2000 remediation efforts include an assessment
of Liberty Media Group's most critical systems, equipment, and
facilities. AT&T also continued its efforts to verify the year 2000
readiness of Liberty Media Group's significant suppliers and vendors
and continued to communicate with significant business partners and
affiliates to assess such partners and affiliates' year 2000 status.
Failure to achieve year 2000 compliance by Liberty Media Group, its
significant business partners and affiliates with which it has a
relationship could negatively affect Liberty Media Group's ability to
conduct business for an extended period. There can be no assurance that
all of Liberty Media Group's computer systems and related software will
be fully year 2000 compliant; in addition, other companies on which
Liberty Media Group's computer systems and related software and
operations rely may or may not be fully compliant on a timely basis,
and any such failure could have a material adverse effect on Liberty
Media Group's financial position, results of operation or liquidity.
