<TABLE>
EX-99.2
AT&T WIRELESS GROUP
COMBINED STATEMENTS OF OPERATIONS
(Dollars in Millions)
(Unaudited)
<CAPTION>
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
REVENUE
Services revenue $2,240 $1,689 $4,232 $3,061
Equipment revenue 237 189 443 380
Total revenue 2,477 1,878 4,675 3,441
OPERATING EXPENSES
Costs of services and products 1,205 940 2,258 1,750
Selling, general and administrative 763 614 1,513 1,178
Depreciation and amortization 402 308 771 584
Total operating expenses 2,370 1,862 4,542 3,512
OPERATING INCOME (LOSS) 107 16 133 (71)
Other income 227 140 308 184
Interest expense 18 38 69 70
Income before income taxes 316 118 372 43
Provision for income taxes 116 43 146 17
Net income $ 200 $ 75 $ 226 $ 26
Dividend requirements on preferred stock
held by AT&T, net 33 13 46 27
Net income (loss) after preferred stock
dividends $ 167 $ 62 $ 180 $ (1)
<FN>
See Notes to Combined Financial Statements
</FN>
</TABLE>
<PAGE>
<TABLE>
AT&T WIRELESS GROUP
COMBINED BALANCE SHEETS
(Dollars in Millions)
<CAPTION>
June 30, December 31,
2000 1999
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 6 $ 5
Accounts receivable, less allowances of
$143 and $130 1,606 1,300
Note receivable from AT&T 3,962 -
Inventories 418 162
Deferred income taxes 144 127
Prepaid expenses and other current assets 65 34
TOTAL CURRENT ASSETS 6,201 1,628
Property, plant and equipment, net of
accumulated depreciation of $4,666 and $4,033 8,213 6,349
Licensing costs, net of accumulated amortization
of $1,614 and $1,519 9,994 8,571
Investments 4,946 4,502
Goodwill and other assets, net of accumulated
amortization of $426 and $385 3,489 2,462
TOTAL ASSETS $32,843 $23,512
LIABILITIES
Accounts payable $ 997 $ 921
Payroll and benefit-related liabilities 292 291
Debt maturing within one year 154 154
Other current liabilities 1,030 931
TOTAL CURRENT LIABILITIES 2,473 2,297
Long-term debt due to AT&T 1,800 3,400
Deferred income taxes 3,881 3,750
Other long-term liabilities 156 48
TOTAL LIABILITIES 8,310 9,495
MINORITY INTEREST 11 20
EQUITY
Preferred stock held by AT&T 3,000 1,000
Combined equity 21,496 12,971
Accumulated other comprehensive income 26 26
TOTAL EQUITY 24,522 13,997
TOTAL LIABILITIES AND EQUITY $32,843 $23,512
<FN>
See Notes to Combined Financial Statements
</FN>
</TABLE>
<PAGE>
<TABLE>
AT&T WIRELESS GROUP
COMBINED STATEMENTS OF CHANGES IN EQUITY
(Dollars in Millions)
(Unaudited)
<CAPTION>
For the Six Months
Ended June 30,
2000 1999
<S> <C> <C>
PREFERRED STOCK HELD BY AT&T
Balance at beginning of period $ 1,000 $ 1,000
Preferred stock issued to AT&T 2,000 -
Balance at end of period 3,000 1,000
COMBINED EQUITY
Balance at beginning of period 12,971 10,535
Net income (loss) after preferred stock dividends 180 (1)
Proceeds attributed from initial public offering 7,000 -
Transfers from AT&T, net 1,345 1,577
Balance at end of period 21,496 12,111
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at beginning of period 26 (3)
Net revaluation of investments (net of taxes of $12) - 21
Balance at end of period 26 18
TOTAL EQUITY $24,522 $13,129
SUMMARY OF TOTAL COMPREHENSIVE INCOME
Net income (loss) after preferred stock dividends $ 180 $ (1)
Dividend requirements on preferred stock held by AT&T, net 46 27
Net income 226 26
Net revaluation of investments (net of taxes of $12) - 21
TOTAL COMPREHENSIVE INCOME $ 226 $ 47
<FN>
See Notes to Combined Financial Statements
</FN>
</TABLE>
<PAGE>
<TABLE>
AT&T WIRELESS GROUP
COMBINED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
<CAPTION>
For the Six Months
Ended June 30,
2000 1999
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 226 $ 26
Adjustments to reconcile net income to net cash
provided by operating activities:
Gains on sale/exchange of investments (167) (99)
Depreciation and amortization 771 584
Deferred income taxes 116 13
Net equity earnings from investments (67) (71)
Minority interests in consolidated subsidiaries (8) (12)
Provision for uncollectibles 115 88
Increase in accounts receivable (328) (210)
(Increase) decrease in inventories (238) 32
Decrease in accounts payable (252) (116)
Net change in other operating assets and liabilities 55 42
NET CASH PROVIDED BY OPERATING ACTIVITIES 223 277
INVESTING ACTIVITIES
Net increase in note receivable from AT&T (3,962) -
Capital expenditures and other additions (1,879) (792)
Net acquisitions of licenses (105) (17)
Equity investment distributions and sales 245 99
Equity investment contributions and purchases (77) (134)
Net (acquisitions) dispositions of businesses
including cash acquired (2,602) 244
NET CASH USED IN INVESTING ACTIVITIES (8,380) (600)
FINANCING ACTIVITIES
Increase in short-term borrowings - 33
Increase in long-term debt due to AT&T 400 500
Proceeds attributed from initial public offering 7,000 -
Dividend requirements on preferred stock, net (46) (27)
Transfers from (to) AT&T, net 806 (85)
Other financing activities, net (2) (10)
NET CASH PROVIDED BY FINANCING ACTIVITIES 8,158 411
Net increase in cash and cash equivalents 1 88
Cash and cash equivalents at beginning of year 5 27
Cash and cash equivalents at end of period $ 6 $ 115
<FN>
See Notes to Combined Financial Statements
</FN>
</TABLE>
<PAGE>
AT&T WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in Millions)
(Unaudited)
(a) BACKGROUND AND BASIS OF PRESENTATION
Background
On April 27, 2000, AT&T completed an initial public offering of 15.6%,
or 360 million shares, of the AT&T Wireless Group tracking stock at an
initial public offering price of $29.50 per share. This stock is
designed to track the performance of AT&T's wireless services
businesses. The AT&T Wireless Group tracking stock issued in the
initial public offering reflected only a portion of the economic
interest of the AT&T Wireless Group. AT&T retained the remaining
interest in the economic performance of the AT&T Wireless Group in the
form of an inter-group interest which represented an 84.4% interest as
of the date of the initial public offering and at June 30, 2000.
Basis of Presentation
The AT&T Wireless Group is a fully integrated business unit of AT&T.
There are differences between the results reported for the AT&T
Wireless Group and the AT&T wireless segment results reported by AT&T,
for periods prior to the initial public offering. The AT&T Wireless
Group includes the results of its mobility and fixed wireless
businesses, as well as its international operations, which primarily
include the earnings or losses associated with equity interests in
international wireless communications ventures and partnerships. The
combined financial statements reflect the results of operations,
financial position, changes in equity and cash flows of the AT&T
Wireless Group as if it were a separate entity for all periods
presented. The financial information included herein may not
necessarily reflect the combined results of operations, financial
position, changes in equity and cash flows of the AT&T Wireless Group
had it been a separate, stand-alone entity during the periods
presented. Additionally, the combined results for the interim periods
presented are not necessarily indicative of results for the full year.
The combined financial statements of the AT&T Wireless Group should be
read in conjunction with AT&T's registration statement filed on Form
S-3 dated February 2, 2000, including the prospectus filed on April 27,
2000, related to the initial public offering of the AT&T Wireless Group
tracking stock. In addition, these combined financial statements should
be read in conjunction with AT&T's Form 10-K for the year ended
December 31, 1999 and AT&T's Form 10-Q for the quarters ended March 31,
2000, and June 30, 2000.
The combined financial statements of the AT&T Wireless Group conform to
generally accepted accounting principles. The combined financial
statements reflect the assets, liabilities, revenue and expenses
directly attributable to the AT&T Wireless Group, as well as
allocations deemed reasonable by management, to present the results of
operations, financial position and cash flows of the AT&T Wireless
Group on a stand-alone basis. The allocation methodologies have been
described within the notes to the combined financial statements where
appropriate.
<PAGE>
The initial public offering of the AT&T Wireless Group tracking stock
resulted in net proceeds to AT&T, after deducting underwriter's
discount and related fees and expenses, of $10.3 billion. AT&T
attributed $7.0 billion of the net proceeds to the AT&T Wireless Group
in the form of an intercompany note receivable which is included in the
accompanying combined balance sheet as of June 30, 2000, as "Note
receivable from AT&T". Changes in the note receivable reflect transfers
between the AT&T Wireless Group and AT&T subsequent to the initial
public offering, primarily to fund acquisitions and capital expansion.
Interest on the note receivable is calculated based upon the average
daily balance outstanding at a rate equal to the one month London
InterBank Offered Rate (LIBOR) minus 6 basis points, a rate designed to
be equivalent to the rate the AT&T Wireless Group would receive if it
were a stand-alone entity.
Prior to the initial public offering, the capital structure of the AT&T
Wireless Group had been assumed based upon AT&T's historical capital
ratio adjusted for certain items. This resulted in $3.4 billion in
intercompany indebtedness at December 31, 1999, paying annual interest
at 7.25%. In addition, as of December 31, 1999, the AT&T Wireless Group
had issued and outstanding, $1.0 billion of 9% cumulative preferred
stock to AT&T that, subject to the approval of the AT&T Wireless Group
capital stock committee, is redeemable at the option of AT&T. On May 1,
2000, following the initial public offering of the AT&T Wireless Group
tracking stock, $2.0 billion of the AT&T Wireless Group's outstanding
intercompany indebtedness to AT&T was recapitalized into an additional
$2.0 billion of 9% cumulative preferred stock. In conjunction with the
recapitalization, the remaining long term debt due to AT&T of $1.8
billion was recapitalized to be 10 year term debt that bears interest
at a fixed rate of 8.1% per annum. The interest rate is designed to be
substantially equivalent to the interest rate that the AT&T Wireless
Group would be able to obtain from third parties, including the public
markets, as a non-affiliate of AT&T without the benefit of any guaranty
by AT&T.
Changes in combined equity prior to the initial public offering
represented net transfers to or from AT&T, after giving effect to the
net income or loss of the AT&T Wireless Group during the period, and
were assumed to be settled in cash. AT&T's capital contributions for
purchase business combinations and initial investments in joint
ventures and partnerships which AT&T attributed to the AT&T Wireless
Group have been treated as noncash transactions prior to the initial
public offering.
(b) RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in
Financial Statements". SAB No. 101 provides guidance on revenue
recognition, including service activation fees, and certain related
costs, which requires adoption by the end of fiscal year 2000.
Management is currently assessing the impact of SAB No. 101 to the
combined results of operations and financial position of the AT&T
Wireless Group.
<PAGE>
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities". Among other
provisions, it requires that entities recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. Gains and losses resulting
from changes in the fair values of those derivatives would be accounted
for depending on the use of the derivative and whether it qualifies for
hedge accounting. The effective date of this standard was delayed via
the issuance of SFAS No. 137. The effective date for SFAS No. 133 is
now for fiscal years beginning after June 15, 2000, though earlier
adoption is encouraged and retroactive application is prohibited. For
the AT&T Wireless Group, this means that the standard must be adopted
no later than January 1, 2001. Management does not expect the adoption
of this standard will have a material impact on the AT&T Wireless
Group's results of operations, financial position or cash flows.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities" as an amendment
to SFAS No. 133. This statement provides clarification with regard to
certain implementation issues under SFAS No. 133 on specific types of
hedges. It is not expected to have a material impact on the AT&T
Wireless Group's results of operations, financial position or cash
flows.
(c) ACQUISITIONS AND DIVESTITURES
On June 19, 2000, the AT&T Wireless Group announced that it had signed
definitive agreements to acquire wireless systems in the San Francisco
Bay Area, San Diego and Houston for $3.3 billion in cash. On June 29,
2000, the AT&T Wireless Group completed the acquisition of Vodafone
Airtouch plc's 50% partnership interest in CMT Partners (Bay Area
Properties), which holds controlling interest in five Bay Area markets
including San Francisco and San Jose, for approximately $1.8 billion in
cash, thereby giving the AT&T Wireless Group a 100% ownership interest
in this partnership. The transaction was recorded under the purchase
method of accounting. The excess of aggregate purchase price over the
fair value of net tangible assets acquired, based on a preliminary
allocation, totaled $1,457, and has been assigned to licensing costs,
goodwill and other intangible assets and is being amortized over
periods of five to 40 years. We may make refinements to the allocation
of the purchase price in future periods as the related fair value
appraisals of certain assets and liabilities are finalized. Prior to
consummation of this transaction, the AT&T Wireless Group's 50%
ownership interest in CMT Partners was accounted for as an equity
investment. Accordingly, as a result of the transaction, $190 was
reclassified from investments to goodwill on the accompanying combined
balance sheet. The transactions related to the Houston and San Diego
markets have been approved by the boards of directors of AT&T and the
selling entities, however, are subject to certain federal regulatory
approvals, which the AT&T Wireless Group expects will result in
ownership adjustments in an existing Houston market. These transactions
are expected to close by the end of 2000.
On June 1, 2000, the AT&T Wireless Group completed its acquisition of
the assets of Wireless One Network, L.P., for approximately $850 in
cash, acquiring wireless systems in northwest and southwest Florida.
The transaction was recorded under the purchase method of accounting.
Accordingly, the operating results of Wireless One Network, L.P., have
been included in the accompanying combined financial statements since
the date of acquisition. The excess of aggregate purchase price over
<PAGE>
the fair value of net tangible assets acquired, based on a preliminary
allocation, totaled $780 and has been assigned to licensing costs,
goodwill and other intangible assets and is being amortized over
periods of five to 40 years. We may make refinements to the allocation
of the purchase price in future periods as the related fair value
appraisals of certain assets and liabilities are finalized.
On February 28, 2000, AT&T and Dobson Communications Corporation
(Dobson) acquired American Cellular Corporation (American Cellular),
through a joint venture, for approximately $2.4 billion. AT&T
contributed its interest in the joint venture to the AT&T Wireless
Group as of the date of the acquisition. The acquisition was funded
with non-recourse bank debt by the joint venture and cash equity
contributions of approximately $400 from each of the two partners.
Dobson is responsible for day-to-day management of the joint venture,
which is equally owned and jointly controlled by Dobson and the AT&T
Wireless Group. Accordingly, this investment is accounted for as an
equity method investment in the accompanying combined financial
statements.
On February 29, 2000, TeleCorp PCS, Inc. announced that it had signed a
definitive merger agreement with Tritel, Inc. as part of stock
transaction valued at approximately $5.3 billion. Pursuant to the terms
of the agreement, each company will merge with a separate newly formed
subsidiary of a new holding company that will be named TeleCorp PCS,
Inc. upon consummation of the transaction. The AT&T Wireless Group
currently holds equity interests in each of TeleCorp and Tritel which
are both affiliates of the AT&T Wireless Group. In connection with the
merger, the AT&T Wireless Group will contribute to TeleCorp rights to
acquire additional wireless licenses in Wisconsin and Iowa,
approximately $20 in cash and extend the term of its network membership
license agreement to the merged entity or its operating subsidiaries in
exchange for approximately $410 of common shares in the newly combined
company. This transaction will bring the AT&T Wireless Group's equity
stake in the combined TeleCorp and Tritel to approximately 23%.
Additionally, in a separate transaction, the AT&T Wireless Group agreed
to exchange certain wireless properties and rights to acquire licenses
in Wisconsin and Iowa markets, as well as a cash payment of
approximately $80. In return, the AT&T Wireless Group will receive
TeleCorp's Boston operating segment, which includes PCS licenses in
several New England markets. The boards of directors of AT&T, TeleCorp
and Tritel have approved the transactions. Both the exchange
transactions and the merger transactions are subject to regulatory
approval and are expected to close in the fourth quarter of 2000.
In June 2000, the AT&T Wireless Group sold its interest in two equity
investments for cash resulting in pretax gains of approximately $141.
(d) COMMITMENTS
In the normal course of business, the AT&T Wireless Group is subject to
proceedings, lawsuits and other claims. Such matters are subject to
many uncertainties and outcomes are not predictable with assurance.
Consequently, the AT&T Wireless Group is unable to ascertain the
ultimate aggregate amount of monetary liability or financial impact
with respect to these matters at June 30, 2000. The AT&T Wireless Group
also makes routine filings with the Federal Communications Commission
and the state regulatory authorities. These matters could affect the
operating results of any one quarter when resolved in future periods.
However, the AT&T Wireless Group believes that after final disposition
any monetary liability or financial impact beyond that provided for as
of June 30, 2000, would not be material to the combined financial
statements.
<PAGE>
In the second quarter of 1999, the AT&T Wireless Group entered into a
four-year commitment to purchase $1 billion in wireless network
equipment. As of June 30, 2000, the AT&T Wireless Group had fulfilled
its commitment.
The AT&T Wireless Group has agreements with other wireless carriers
regarding subscriber activity on other carriers' wireless systems.
These agreements establish general terms and charges for system usage,
and in some cases also establish minimum usage requirements.
The AT&T Wireless Group also has various other purchase commitments for
materials, supplies and other items incidental to the ordinary course
of business which are not significant individually, nor in the
aggregate.
(e) RELATED PARTY TRANSACTIONS
As discussed in Note (a), AT&T has provided necessary working capital
requirements to the AT&T Wireless Group through an attribution of a
portion of the initial public offering proceeds, intercompany debt and
preferred stock, as well as capital contributions prior to the initial
public offering. These amounts are reflected in the accompanying
combined balance sheets as "Note receivable from AT&T", "Long-term debt
due to AT&T" and "Preferred stock held by AT&T".
Intercompany interest income on the note receivable from AT&T for each
of the three and six month periods ended June 30, 2000, totaled $67.
The intercompany interest income was determined based upon the
methodology described in Note (a) and is included within other income
in the accompanying combined statements of operations.
Intercompany debt and interest expense was assumed based upon the
methodology discussed in Note (a). Intercompany debt was $1,800 and
$3,400 at June 30, 2000 and December 31, 1999, respectively.
Intercompany interest expense was $49 and $55 for the three month
periods ended June 30, 2000, and 1999, respectively, of which $34 and
$20, respectively, was capitalized. Intercompany interest expense was
$121 and $103 for the six month periods ended June 30, 2000 and 1999,
respectively, of which $58 and $37, respectively, was capitalized.
The 9% cumulative preferred stock was $3.0 billion as of June 30, 2000,
and $1.0 billion as of December 31, 1999. Dividend requirements were
$33 and $13 for the three month periods ended June 30, 2000 and 1999,
respectively, and $46 and $27 for the six month periods ended June 30,
2000 and 1999, respectively.
The AT&T Wireless Group purchases long distance and other
network-related services from AT&T at market-based prices. For the
three month periods ended June 30, 2000 and 1999, these amounts totaled
$64 and $38, respectively. For the six months ended June 30, 2000 and
1999, these amounts totaled $116 and $72, respectively. These amounts
are reflected within costs of services and products in the accompanying
combined statements of operations.
AT&T has allocated general corporate overhead expenses, including
finance, legal, marketing, use of the AT&T brand, planning and strategy
and human resources to the AT&T Wireless Group, as well as costs for
AT&T employees who directly support the AT&T Wireless Group, amounting
to $13 and $10 for the three month periods ended June 30, 2000 and
1999, respectively, and $26 and $20 for the six month periods ended
June 30, 2000 and 1999, respectively. These amounts are included within
selling, general and administrative expenses in the accompanying
combined statements of operations.
<PAGE>
Also included in selling, general and administrative expenses are
charges paid to AT&T related to the AT&T Wireless Group's direct sales
force who were employees of AT&T, as well as commissions and marketing
support costs reimbursed to AT&T for costs incurred to acquire
customers on our behalf. These charges amounted to $7 and $58 for the
three month periods ended June 30, 2000 and 1999, respectively, and $67
and $104 for the six month periods ended June 30, 2000 and 1999,
respectively. Effective April 1, 2000, the aforementioned sales force
became employees of the AT&T Wireless Group.
The AT&T Wireless Group purchases their administrative telephone
services from AT&T. These amounts are included within selling, general
and administrative expenses and totaled $24 and $16 for the three month
periods ended June 30, 2000 and 1999, respectively, and $48 and $31 for
the six month periods ended June 30, 2000 and 1999, respectively.
The AT&T Wireless Group sells receivables to AT&T for wireless
customers whose wireless charges are combined ("bundled") with their
long distance charges into one bill. Accounts receivable in the
accompanying combined balance sheets included $90, as of June 30, 2000,
and $83, as of December 31, 1999, associated with receivables from AT&T
for these bundled customers. Selling, general and administrative
expenses included $9 and $7 for the three month periods ended June 30,
2000 and 1999, respectively, and costs of services and products
included $9 and $11 for the three month periods ended June 30, 2000 and
1999, respectively, for the billing and collection fees charged by
AT&T. Selling, general and administrative expenses included $20 and $16
for the six month periods ended June 30, 2000 and 1999, respectively,
and costs of services and products included $19 and $16 for the six
month periods ended June 30, 2000 and 1999, respectively, for the
billing and collection fees charged by AT&T.
The AT&T Wireless Group utilizes the AT&T remittance processing
organization to process customer payments into AT&T's lockbox. The AT&T
Wireless Group paid $5 and $4, to AT&T for reimbursement of its costs
associated with these services for the three month periods ended June
30, 2000 and 1999, respectively. The AT&T Wireless Group paid $10 and
$8, to AT&T for reimbursement of its costs associated with these
services for the six month periods ended June 30, 2000 and 1999,
respectively.
(f) SUBSEQUENT EVENTS
On July 24, 2000, the AT&T Wireless Group announced it had signed a
definitive agreement with SBC Communications to acquire its
Indianapolis wireless system for approximately $530 in cash. The
transaction has been approved by the boards of directors of AT&T and
SBC Communications, however, remains subject to certain federal
regulatory approvals and is expected to close by the end of 2000.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
On April 27, 2000, AT&T completed an initial public offering of 15.6%, or 360
million shares, of the AT&T Wireless Group tracking stock at an initial public
offering price of $29.50 per share. This stock is designed to track the
performance of AT&T's wireless services businesses. The AT&T Wireless Group
tracking stock issued in the initial public offering reflected only a portion of
the economic interest of the AT&T Wireless Group. AT&T retained the remaining
interest in the economic performance of the AT&T Wireless Group in the form of
an inter-group interest which represented an 84.4% interest as of the date of
the initial public offering and at June 30, 2000. The results included herein
represent the AT&T Wireless Group in its entirety for all periods presented. For
the portion of the AT&T Wireless Group's results attributed to the public
shareholders, see AT&T's Form 10-Q. AT&T currently intends to dispose of a
portion of the remaining interest in the AT&T Wireless Group in the second half
of this year. Such disposition will include a distribution in the form of a
dividend to AT&T Common Stock Group (which represents the results of AT&T
excluding the results attributable to tracking stocks) shareowners for at least
a portion of such interest, but may also include an exchange offer, a further
sale of the AT&T Wireless Group tracking stock or a combination thereof. The
method, timing and sequence of the distribution options, which could occur in
stages, will be based on the AT&T Board of Directors' assessment of the market
conditions and other circumstances, as appropriate, with the goal of maximizing
value for all AT&T shareowners. Following the distribution we expect that the
outstanding shares of the AT&T Wireless Group tracking stock will reflect 100%
of the economic performance of the AT&T Wireless Group.
The AT&T Wireless Group is a fully integrated business unit of AT&T. The AT&T
Wireless Group includes the results of its mobility and fixed wireless
businesses, as well as its international operations, which primarily include the
earnings or losses associated with equity interests in international wireless
communications ventures and partnerships.
In June 2000, the AT&T Wireless Group closed the acquisition of the remaining
50% partnership interest they previously did not own in CMT Partners (Bay Area
Properties). The Bay Area Properties cover a population base exceeding 7 million
potential customers and, as of June 30, 2000, served nearly 1 million
subscribers. The acquisition of this entity was announced in conjunction with
the signing of agreements to purchase wireless systems in Houston and San Diego,
which are anticipated to close later this year. The three systems combined cover
a population of approximately 15 million potential customers and, as of June 30,
2000, served more than 1.3 million subscribers. Also in June, the AT&T Wireless
Group completed its acquisition of Wireless One Network, L.P. (Wireless One).
Wireless One owns and operates wireless systems in northwest and southwest
Florida covering a population base of 1.6 million potential customers and had
approximately 190,000 subscribers as of June 30, 2000. In February 2000, AT&T
and Dobson Communications Corporation, through a joint venture, acquired
American Cellular Corporation. AT&T contributed its interest in the joint
venture to the AT&T Wireless Group as of the date of the acquisition. This
acquisition increased the AT&T Wireless Group's coverage in New York State and
several midwest markets by adding approximately 450,000 subscribers.
<PAGE>
FORWARD-LOOKING STATEMENTS
Except for the historical statements and discussions contained herein,
statements herein 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, including without limitation, statements concerning future
business prospects, revenues, operating performance, working capital, liquidity,
capital needs, and general industry growth rates and the AT&T Wireless Group's
performance relative thereto. These forward-looking statements rely on a number
of assumptions concerning future events, including the AT&T Wireless Group'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 the AT&T Wireless Group's control, that could
cause actual results to differ materially from such statements. The AT&T
Wireless Group disclaims any intention or obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
COMBINED RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2000 COMPARED WITH THE THREE
AND SIX MONTH PERIODS ENDED JUNE 30, 1999
Revenue
Total revenue includes wireless voice and data services, the sale of handsets
and accessories, and revenue associated with the aviation communications and
fixed wireless operations. The AT&T Wireless Group records revenue as services
are provided or when the product is sold. Services revenue primarily includes
monthly recurring charges, airtime and toll usage charges, and roaming charges
billed to subscribers for usage outside of the AT&T Wireless Group network as
well as charges billed to other wireless providers for roaming on the AT&T
Wireless Group network.
Total revenue increased 31.9% to $2,477 million, and increased 35.9% to $4,675
million for the three and six month periods ended June 30, 2000, respectively,
compared with the respective prior year periods. The AT&T Wireless Group's
results include the revenue associated with Vanguard Cellular since its
acquisition on May 3, 1999. Total revenue increased 29.4% and 31.1% for the
three and six month periods ended June 30, 2000, respectively, compared with the
same periods for 1999, adjusted to exclude Vanguard Cellular for the period
January 2000 to April 2000, to correlate results with 1999, due to the May 1999
acquisition.
The revenue increases were primarily due to growth in our mobility business
revenue, driven by strong consolidated subscriber growth and continued rising
average monthly revenue per user (ARPU). AT&T Digital One Rate service continues
to contribute to the increase in ARPU and subscribers by acquiring and retaining
high value customers, who have a significantly higher ARPU than an average
subscriber. As of June 30, 2000, the number of subscribers using AT&T Digital
One Rate service was 2.4 million, an increase of 66.2%, compared with June 30,
1999, of which nearly 73% were new subscribers to the AT&T Wireless Group for
the six months ended June 30, 2000.
Services revenue for the three month period ended June 30, 2000, was $2,240
million, an increase of $551 million, or 32.7%, compared with the respective
period in 1999. Services revenue for the six month period ended June 30, 2000,
was $4,232 million, an increase of $1,171 million, or 38.3%, compared with the
respective period in 1999.
<PAGE>
As of June 30, 2000, the AT&T Wireless Group had 11.7 million consolidated
subscribers, an increase of 33.8%, compared with the prior year, of which 85.1%
were digital subscribers, up from 69.2% as of June 30, 1999. Included in these
figures were nearly 1 million subscribers from our acquisition of the Bay Area
Properties in June 2000 (which were previously reported as partnership
subscribers) and approximately 190,000 subscribers from our acquisition of
Wireless One in June 2000. Net consolidated wireless subscriber additions in the
second quarter totaled 532,000, a 14.2% increase over the prior year quarter.
AT&T Wireless Group's average monthly churn rate in the second quarter of 2000
was 2.7% compared with 2.3% in the second quarter of 1999. The AT&T Wireless
Group's average monthly churn in the first half of 2000 was 2.8% compared with
2.5% in the first half of 1999. Total subscribers, including partnership markets
in which the AT&T Wireless Group does not own a controlling interest, were
nearly 14 million at the end of the second quarter of 2000, a 22.3% increase
over the prior year. Ending total subscribers included approximately 450,000
subscribers associated with the AT&T Wireless Group's acquisition of American
Cellular in February 2000.
The AT&T Wireless Group's ARPU for the three months ended June 30, 2000 was
$71.5, an increase of $4.9, or 7.7%, compared with the second quarter of 1999,
and for the six months ended June 30, 2000 was $69.4, an increase of $5.7, or
8.9%, compared with the first half of 1999. These increases were primarily due
to increased minutes of use per subscriber, driven in part by the continued
success of AT&T Digital One Rate service. The AT&T Wireless Group's ARPU
remained significantly higher than the wireless industry average during the
quarter and half year ended June 30, 2000, excluding the AT&T Wireless Group.
Equipment revenue for the three month period ended June 30, 2000, was $237
million, an increase of $48 million, or 25.2%, compared with the same period in
1999. Equipment revenue for the six month period ended June 30, 2000, was $443
million, an increase of $63 million, or 16.6%, compared with the same period in
1999. These increases were primarily due to 30.8% and 29.2% increases in gross
consolidated subscriber additions in the three and six month periods ended June
30, 2000, respectively, compared with the same periods in 1999. As an integral
part of the wireless service offering, the AT&T Wireless Group supplies to its
subscribers a selection of handsets at competitive prices, which are generally
offered at or below cost.
Costs of services and products
Costs of services and products include the costs to place calls over the network
(including the costs to operate and maintain the AT&T Wireless Group's network
as well as roaming costs paid to other wireless providers), the costs of
handsets and accessories provided to the AT&T Wireless Group's customers and the
charges paid to connect calls on other networks, including those of AT&T.
Costs of services and products for the three and six month periods ended June
30, 2000, were $1,205 million and $2,258 million, respectively. This was an
increase of $265 million, or 28.3%, for the three month period ended June 30,
2000, and $508 million, or 29.0%, for the six month period ended June 30, 2000,
compared with the same periods in 1999. These increases were due primarily to
increases in the cost of handsets provided to subscribers which was attributable
to a 30.8% and 29.2% increase, respectively, in gross subscriber additions for
the three and six month periods ended June 30, 2000, compared with the same
periods in the prior year. Additionally, growth in the subscriber base and
increased minutes of usage resulted in an increase in the access and other
connection charges paid to connect calls on other networks, including AT&T, as
well as the costs to maintain the AT&T Wireless Group's network.
Roaming expenses decreased 4.4% for the quarter ended June 30, 2000, compared
with the same period for 1999, despite continued growth in off-network roaming
minutes. The decrease in roaming expenses was driven primarily by a significant
decrease in the roaming rate per minute of usage, as well as initiatives to
aggressively migrate more minutes onto the AT&T Wireless Group's network.
<PAGE>
Selling, general and administrative
Selling, general and administrative (SG&A) expenses for the three and six month
periods ended June 30, 2000, were $763 million and $1,513 million, respectively,
compared with $614 million and $1,178 million for the three and six month
periods ended June 30, 1999. These increases were primarily attributable to
higher marketing and selling costs associated with the increase in consolidated
subscriber additions in the second quarter and first half of 2000, compared with
the respective periods in 1999. Cost per gross subscriber addition (CPGA),
which includes the cost of handset subsidies recorded in costs of services and
products in the accompanying combined statement of operations, was $352 and $356
for the three and six month periods ended June 30, 2000, compared with $338 and
$345 for the three and six month periods ended June 30, 1999. In addition,
growth in the wireless customer base resulted in an increase in customer care
and information technology expenses.
Depreciation and amortization
Depreciation and amortization expenses for the three month period ended June 30,
2000, were $402 million, an increase of $94 million, or 30.5%, compared with the
second quarter of 1999. Depreciation and amortization expenses for the six month
period ended June 30, 2000, were $771 million, an increase of $187 million, or
31.9%, compared with the first half of 1999. These increases primarily resulted
from the growth in the AT&T Wireless Group's depreciable asset base resulting
from capital expenditures to increase the capacity of the network and improve
call quality as well as the acquisition of Vanguard Cellular in May 1999. Total
capital expenditures were $1,291 million and $2,123 million for the three and
six month periods ended June 30, 2000.
Other income
Other income primarily includes gains or losses on sales or exchanges of assets,
net equity earnings from investments, intercompany interest income on the note
receivable from AT&T, and minority interests in consolidated subsidiaries. Other
income for the three and six month periods ended June 30, 2000, was $227 million
and $308 million, respectively. Other income for the three and six month periods
ended June 30, 1999, was $140 million and $184 million, respectively. The
increase for the three and six month periods ended June 30, 2000, was due
primarily to higher gains on the sales of assets as well as intercompany
interest income on the note receivable from AT&T of $67 million, related to the
attribution of $7.0 billion of initial public offering proceeds to the AT&T
Wireless Group. Partially offsetting these increases, were lower equity
earnings primarily as a result of increased losses associated with affiliate
investments.
Interest expense
Interest expense consists primarily of interest on intercompany debt due to AT&T
less interest expense capitalized. Interest expense for the second quarter of
2000, was $18 million, a decrease of $20 million, or 51.6%, compared with the
second quarter of 1999. Interest expense for the first half of 2000 was $69
million, a decrease of $1 million, or 1.0%, compared with the first half of
1999. The decrease for the second quarter of 2000, compared with the second
quarter of 1999, was due to higher levels of capitalized interest as a result of
increased capital expenditures, as well as lower levels of average outstanding
debt due to AT&T. The decrease in the average outstanding debt due to AT&T was
attributable to the recapitalization of $2.0 billion of long term debt due to
AT&T into 9% cumulative preferred stock subsequent to the initial public
offering of the AT&T Wireless Group tracking stock. These decreases were
partially offset by a higher rate of interest charged on the intercompany debt
in the second quarter of 2000 versus the prior year quarter. For the six months
ended June 30, 2000, higher levels of outstanding debt, as well as a higher
interest rate, offset the increase in capitalized interest.
<PAGE>
Provision for income taxes
The provision for income taxes for the three and six month periods ended June
30, 2000, was $116 million and $146 million, respectively, compared with $43
million and $17 million for the same periods in 1999, respectively. The increase
in the provision for income taxes was due to higher income before income taxes
and a higher effective tax rate. The effective income tax rates for the three
and six month periods ended June 30, 2000 were 36.9% and 39.3%, respectively,
<PAGE>
compared with 35.5% and 35.3%, for the same periods in 1999, respectively. The
effective income tax rate for each of the 2000 periods presented was impacted by
the amortization of intangibles and unutilized equity investment losses,
partially offset by a benefit due to the disposition of an equity method
investment. The effective income tax rate for each of the 1999 periods presented
was impacted by the benefit from the change in the valuation allowance and other
estimates, offset by unutilized foreign equity losses and amortization of
intangibles.
Dividend requirements on preferred stock held by AT&T
At June 30, 2000, and December 31, 1999, the AT&T Wireless Group had outstanding
$3.0 billion and $1.0 billion, respectively, of preferred stock held by AT&T
that pays dividends at 9% per annum. Intercompany indebtedness of $2.0 billion
was recapitalized into an additional $2.0 billion of 9% cumulative preferred
stock following the initial public offering. Dividend requirements on this
preferred stock for the three and six month periods ended June 30, 2000, were
$33 million and $46 million, respectively, and for the corresponding periods in
1999 were $13 million and $27 million, respectively, net of amounts recorded in
accordance with the tax sharing agreement.
LIQUIDITY AND CAPITAL RESOURCES
The continued expansion of the AT&T Wireless Group's network, footprint and
service offerings, and the marketing and distribution of its products and
services, will continue to require substantial capital. The AT&T Wireless Group
has funded its operations by initial public offering proceeds attributed from
AT&T, intercompany borrowings from AT&T and internally generated funds, as well
as capital contributions from AT&T prior to the initial public offering. Capital
contributions from AT&T prior to the initial public offering included
acquisitions made by AT&T that have been attributed to the AT&T Wireless Group.
Noncash capital contributions from AT&T to the AT&T Wireless Group related to
acquisitions and initial investments funded by AT&T totaled $539 million and
$1,662 million for the six month periods ended June 30, 2000 and 1999,
respectively.
The initial public offering of the AT&T Wireless Group tracking stock resulted
in net proceeds to AT&T after deducting underwriter's discount and related fees
and expenses of $10.3 billion. AT&T attributed $7.0 billion of the net proceeds
to the AT&T Wireless Group in the form of an intercompany note receivable. Net
transfers to and from the AT&T Wireless Group and AT&T subsequent to the initial
public offering are reflected as changes in the intercompany note receivable.
After the attributed $7.0 billion of initial public offering proceeds are fully
utilized, AT&T intends to issue short term floating rate debt to the AT&T
Wireless Group.
On May 1, 2000, following the initial public offering, the AT&T Wireless Group
recapitalized $2.0 billion of outstanding intercompany indebtedness to AT&T into
an additional $2.0 billion of 9% cumulative preferred stock held by AT&T. In
conjunction with the recapitalization, the AT&T Wireless Group's long term debt
due to AT&T was recapitalized to be 10 year term debt that bears interest at a
fixed rate of 8.1% per annum. AT&T has provided financing at interest rates and
on terms and conditions that are consistent with those the AT&T Wireless Group
<PAGE>
would receive as a stand-alone entity. Sources for the AT&T Wireless Group's
future financing requirements may include the issuance of additional AT&T
Wireless Group tracking stock and the borrowing of funds.
Financing activities for the AT&T Wireless Group are managed by AT&T on a
centralized basis and are subject to the review of the AT&T Wireless Group
capital stock committee. Loans from AT&T to any member of the AT&T Wireless
Group will be made at interest rates and on other terms and conditions designed
to be substantially equivalent to the interest rates and other terms and
conditions that the AT&T Wireless Group would be able to obtain from third
parties, including the public markets, as a non-affiliate of AT&T without the
benefit of any guaranty by AT&T. This policy contemplates that these loans will
be made on the basis set forth above regardless of the interest rates and other
terms and conditions on which AT&T may have acquired the funds. If, however,
AT&T incurs any fees or charges in order to keep available funds for use by the
AT&T Wireless Group, those fees or charges will be allocated to the AT&T
Wireless Group.
Net cash provided by operating activities for the six months ended June 30,
2000, was $223 million, compared with $277 million for the same period in 1999.
The decrease in cash provided by operating activities was primarily due to
increases in inventories and accounts receivable, as well as a decrease in
accounts payable, partially offset by increased income excluding depreciation
and amortization, resulting from revenue growth and expense leveraging for the
first half of 2000 compared with the first half of 1999. Net cash used in
investing activities for the six months ended June 30, 2000, was $8,380 million,
compared with $600 million for the six months ended June 30, 1999. The increase
was due primarily to the issuance of a note receivable from AT&T, acquisitions
of the Bay Area Properties and Wireless One, and higher capital expenditures to
upgrade and increase network capacity in existing markets as well as to expand
the national footprint. Net cash provided by financing activities for the six
months ended June 30, 2000, was $8,158 million, compared with $411 million for
the six months June 30, 1999. The increase was primarily due to proceeds
attributed from the initial public offering of the AT&T Wireless Group tracking
stock and increased transfers from AT&T prior to the initial public offering to
fund acquisitions and higher capital expenditures.
EBITDA, excluding other income, is the primary measure used by the chief
operating decision-makers to measure our ability to generate cash flow. EBITDA,
excluding other income, defined as operating income plus depreciation and
amortization, may or may not be consistent with the calculation of EBITDA for
other public companies and should not be viewed by investors as an alternative
to generally accepted accounting principles, measures of performance or to cash
flows from operating, investing and financing activities as a measure of
liquidity.
EBITDA, excluding other income, for the three and six month periods ended June
30, 2000, was $509 million and $904 million, respectively, compared with $324
million and $513 million for the same periods in 1999. These increases were
attributable to increases in total revenue and an improving margin as SG&A
expenses declined as a percentage of revenues, primarily for our mobility
business.
For our mobility business, EBITDA, excluding other income, for the three and six
month periods ended June 30, 2000, was $550 million and $981 million,
respectively, compared with $347 million and $552 million for the same periods
in 1999.
For our fixed wireless business, EBITDA, excluding other income, for the three
and six month periods ended June 30, 2000, was a deficit of $40 million and $74
million, respectively, compared with deficits of $17 million and $32 million for
the same periods in 1999.
<PAGE>
EBITDA, excluding other income, margins were 20.5% and 19.3% for the second
quarter and first half of 2000, respectively, compared with 17.3% and 14.9% for
the second quarter and first half of, 1999, respectively. The improvement in
EBITDA, excluding other income, margins in the second quarter and first half of
2000 compared with the respective periods in 1999 was driven primarily by
revenue growth and expense leveraging, primarily off-network roaming expenses,
partially offset by increased customer acquisition and customer care costs, as
well as higher information technology costs associated with growth in the
subscriber base.
EBITDA, excluding other income, margins for our mobility business were 22.2% and
21.0% for the second quarter and first half of 2000, respectively, compared with
18.5% and 16.0% for the second quarter and first half of 1999, respectively. The
improvement in EBITDA, excluding other income, margins in the second quarter and
first half of 2000 compared with the respective periods in 1999 was driven
primarily by positive EBITDA, excluding other income, for the 1900 megahertz
markets for the three and six month periods ended June 30, 2000, compared with
losses for the respective periods in 1999, as well as increased EBITDA,
excluding other income, margins in the 850 megahertz markets.
FINANCIAL CONDITION
Total assets were $32,843 million as of June 30, 2000, an increase of $9,331
million, or 39.7%, compared with December 31, 1999. The increase was due
primarily to the $7.0 billion of initial public offering proceeds attributed to
the AT&T Wireless Group from AT&T in the form of an intercompany note
receivable, increases in goodwill, licensing costs, property, plant and
equipment, and other assets associated with the acquisitions of the Bay Area
Properties and Wireless One, and increased property, plant and equipment as a
result of significant capital spending in the first half of 2000. Additionally,
non-consolidated investments increased as a result of the investment in American
Cellular during 2000, partially offset by the acquisition of the remaining 50%
interest in CMT Partners, which is now consolidated.
Total liabilities were $8,310 million as of June 30, 2000, a decrease of $1,185
million, or 12.5%, compared with December 31, 1999. The decrease was primarily
due to the decrease in long term debt due to AT&T resulting from the
recapitalization of the AT&T Wireless Group subsequent to the initial public
offering, partially offset by increases in deferred income taxes, other
long-term liabilities, and other current liabilities. Deferred incomes taxes
increased due to the deferred tax provision recognized for the six months ended
June 30, 2000. Other long-term liabilities increased due to proceeds received in
consideration for a long-term leasing arrangement, and other current liabilities
increased due to increased business taxes and operating accruals.
Total preferred stock held by AT&T increased to $3.0 billion at June 30, 2000,
from $1.0 billion at December 31, 1999, due to the recapitalization of $2.0
billion of intercompany debt into preferred stock subsequent to the initial
public offering. Dividends payable on the preferred stock were paid at 9% per
annum.
Total equity was $24,522 million as of June 30, 2000, an increase of $10,525
million, or 75.2%, compared with December 31, 1999. The increase was primarily
due to increased combined equity associated with the attribution of initial
public offering proceeds to the AT&T Wireless Group, as well as net transfers
from AT&T prior to the initial public offering to fund capital expansion and
acquisitions, and the additional $2.0 billion of preferred stock issued to AT&T.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
<PAGE>
Statements". SAB No. 101 provides guidance on revenue recognition, including
service activation fees, and certain related costs, which requires adoption by
the end of fiscal year 2000. Management is currently assessing the impact of SAB
No. 101 to the combined results of operations and financial position of the AT&T
Wireless Group.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities". Among other provisions, it requires that
entities recognize all derivatives as either assets or liabilities in the
<PAGE>
statement of financial position and measure those instruments at fair value.
Gains and losses resulting from changes in the fair values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. The effective date of this standard was delayed
via the issuance of SFAS No. 137. The effective date for SFAS No. 133 is now for
fiscal years beginning after June 15, 2000, though earlier adoption is
encouraged and retroactive application is prohibited. For the AT&T Wireless
Group, this means that the standard must be adopted no later than January 1,
2001. Management does not expect the adoption of this standard will have a
material impact on the AT&T Wireless Group's results of operations, financial
position or cash flows.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities" as an amendment to SFAS No. 133.
This statement provides clarification with regard to certain implementation
issues under SFAS No. 133 on specific types of hedges. It is not expected to
have a material impact on the AT&T Wireless Group's results of operations,
financial position or cash flows.
SUBSEQUENT EVENTS
On July 24, 2000, the AT&T Wireless Group announced it had signed a definitive
agreement with SBC Communications to acquire its Indianapolis wireless system
for approximately $530 million in cash. The transaction has been approved by the
boards of directors of AT&T and SBC Communications, however, remains subject to
certain federal regulatory approvals and is expected to close by the end of
2000.
