<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
AT&T CORP.
- --------------------------------------------------------------------------------
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(4) Date Filed:
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<PAGE> 2
PRELIMINARY COPY
[AT&T LOGO]
, 2000
Dear AT&T Shareholder:
As part of our strategic plans to facilitate growth of our wireless
businesses and augment shareholder value in AT&T, our board of directors
requests your approval to create a tracking stock that is intended to reflect
the economic performance of our wireless services businesses.
We expect to issue shares of the tracking stock, which we refer to as AT&T
Wireless Group tracking stock, through an initial public offering representing a
portion of the economic performance of the AT&T Wireless Group. Following the
offering, we expect to distribute shares of AT&T Wireless Group tracking stock
representing the remaining economic performance of the AT&T Wireless Group to
holders of AT&T common stock. The exact method and timing of the issuance of
this tracking stock will depend on market conditions and any other factors that
help us determine which method is in the best interests of AT&T shareholders. We
expect that shares of AT&T Wireless Group tracking stock will be listed on
under the symbol " ."
Before we can proceed with the creation and issuance of AT&T Wireless Group
tracking stock, the holders of a majority of the combined voting power of
outstanding shares of AT&T common stock and Liberty Media Group tracking stock
must vote in favor of the amendments to our charter to create AT&T Wireless
Group tracking stock. We have called a special meeting of shareholders
specifically for this purpose. We describe the terms of AT&T Wireless Group
tracking stock in detail in the attached proxy statement.
FOR A DISCUSSION OF THE MATERIAL RISKS INVOLVED IN CONNECTION WITH THE
TRACKING STOCK PROPOSAL, SEE "RISK FACTORS -- THE TRACKING STOCK AMENDMENT"
BEGINNING ON PAGE 13 OF THE ACCOMPANYING PROXY STATEMENT.
If you plan to join us at the special meeting of shareholders, you will
need to bring the admission ticket, which is attached to the proxy card (a card
enabling a representative to vote your shares). For your convenience, a map of
the area and directions to the special meeting are printed on the back of the
proxy card. Whether you own a few or many shares of stock and whether or not you
plan to attend the special meeting, it is important that your shares be voted on
matters that come before the special meeting. Registered and many broker-managed
shareholders also can vote their shares via the Internet or by using a toll-free
telephone number. We provide instructions for using these convenient services on
the proxy card. Of course, you may still vote your shares by marking your votes
on the proxy card, signing and dating it, and mailing it in the envelope
provided. If you sign and return your proxy card without specifying your
choices, we will vote your shares in accordance with the directors'
recommendations.
I look forward to seeing you at the special meeting.
Sincerely,
C. MICHAEL ARMSTRONG
Chairman of the Board and
Chief Executive Officer
<PAGE> 3
PRELIMINARY COPY
AT&T CORP.
32 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10013-2412
-------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON , , 2000
-------------------------
A special meeting of the shareholders of AT&T Corp. will be held at
a.m., local time, on , 2000, at , , , , for the
following purposes:
- to approve and adopt an amendment to our charter to authorize the
creation of AT&T Wireless Group tracking stock and to amend other
provisions of our charter, as described in the attached proxy statement,
- to approve an amendment to our 1997 Long Term Incentive Program to enable
us to grant incentive awards based on shares of AT&T Wireless Group
tracking stock to officers and employees of the AT&T Common Stock Group
and the AT&T Wireless Group and to permit our non-employee directors to
participate under the plan, and
- to act upon such other matters as may properly come before the special
meeting or any adjournment or postponement.
We describe these items of business more fully in the attached proxy
statement.
Only holders of record of AT&T common stock and Liberty Media Group
tracking stock at the close of business on , 2000 will be entitled to
notice of, and will be entitled to vote at, the special meeting or any
adjournment or postponement.
BY ORDER OF THE BOARD OF DIRECTORS
MARILYN J. WASSER
Vice President -- Law and Secretary
New York
, 2000
TO ENSURE THAT YOUR SHARES ARE REPRESENTED AT THE SPECIAL MEETING, WE URGE
YOU TO VOTE BY TELEPHONE, VIA THE INTERNET, OR TO COMPLETE, DATE AND SIGN THE
ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE POSTAGE-PAID ENVELOPE PROVIDED,
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON. YOU CAN
WITHDRAW YOUR PROXY, OR CHANGE YOUR VOTE, AT ANY TIME BEFORE IT IS VOTED BY
EXECUTING A LATER-DATED PROXY, BY VOTING BY BALLOT AT THE SPECIAL MEETING, BY
TELEPHONE OR VIA THE INTERNET, OR BY FILING AN INSTRUMENT OF REVOCATION WITH THE
INSPECTORS OF ELECTION IN CARE OF THE VICE PRESIDENT -- LAW AND SECRETARY AT THE
ABOVE ADDRESS.
<PAGE> 4
PRELIMINARY COPY
QUESTIONS AND ANSWERS ABOUT THE TRACKING STOCK AMENDMENT
At the special meeting, one of the matters we will ask you to consider and
vote upon is the approval of an amendment to our charter to create AT&T Wireless
Group tracking stock. Here are some questions and answers relating to the
proposed tracking stock amendment.
Q: PLEASE BRIEFLY DESCRIBE THE PROPOSED TRACKING STOCK AMENDMENT.
A: The proposed tracking stock amendment provides for the creation of a new
class of AT&T common stock, which we call "AT&T Wireless Group tracking
stock." This tracking stock is designed to reflect the economic performance
of our wireless services businesses. We provide a detailed description of the
AT&T Wireless Group starting on page 44.
Q: WHAT IS A TRACKING STOCK AND HOW DOES IT WORK?
A: A tracking stock is a separate class or series of a company's common stock
that is designed to reflect the economic performance of a group of assets or
a specific business unit, division, subsidiary or equity investment of the
company. Holders of our tracking stock are shareholders of AT&T and not of
the underlying business or subsidiary. The terms of our tracking stock tie
the economic value of the tracking stock to the performance of the tracked
business rather than to the performance of AT&T as a whole.
AT&T Wireless Group tracking stock will be a separate class of AT&T common
stock, intended to reflect the economic performance of the AT&T Wireless
Group. Holders of AT&T Wireless Group tracking stock will be shareholders of
AT&T and will not be shareholders of the AT&T Wireless Group. AT&T expects to
list AT&T Wireless Group tracking stock on under the symbol
" ."
Q: WHAT WILL HAPPEN TO MY SHARES OF AT&T COMMON STOCK?
A: Following the initial public offering of AT&T Wireless Group tracking stock,
your shares of AT&T common stock will reflect the interest in all of the
assets and businesses of AT&T other than the Liberty Media Group and the
interest in the AT&T Wireless Group represented by the shares of AT&T
Wireless Group tracking stock sold in the offering. Following the
distribution of AT&T Wireless Group tracking stock to holders of AT&T common
stock, your shares of AT&T common stock will reflect all of the assets and
businesses of AT&T other than the Liberty Media Group and the AT&T Wireless
Group. We refer to the assets and businesses reflected by the AT&T common
stock as the "AT&T Common Stock Group."
Q: WHY ARE WE PROPOSING TO CREATE AT&T WIRELESS GROUP TRACKING STOCK?
A: We believe that the creation of this tracking stock will assist the AT&T
Wireless Group in meeting its capital needs by creating an additional
publicly traded equity security that it can use to raise capital and can
issue for acquisitions and investments. We further believe that it will
increase market awareness of the performance and value of AT&T's wireless
businesses by creating a direct investment vehicle. We expect this will
provide greater market recognition and realization of the value, individually
and collectively, of AT&T and its distinct lines of business represented by
each of the AT&T Wireless Group and the AT&T Common Stock Group. We describe
these and other reasons for creating AT&T Wireless Group tracking stock
starting on page 32.
<PAGE> 5
Q: WILL THE TRACKING STOCK AMENDMENT RESULT IN A SPIN-OFF OF A COMPANY?
A: No. The tracking stock amendment will not result in a distribution or
spin-off of any assets or liabilities of AT&T or its subsidiaries. Holders of
AT&T common stock, AT&T Wireless Group tracking stock and Liberty Media Group
tracking stock will continue to be common shareholders of AT&T and, as such,
will be subject to risks associated with an investment in AT&T and all of our
businesses, assets and liabilities.
Q: WHY ARE YOU ISSUING A TRACKING STOCK INSTEAD OF SPINNING OFF THE AT&T
WIRELESS GROUP?
A: The tracking stock amendment would separate the economic performance of the
AT&T Common Stock Group and the AT&T Wireless Group into two classes of
shareholders while continuing to provide both groups with advantages of doing
business under common ownership. Each group would continue to benefit from
synergies with the other group, including strategic, financial and
operational synergies, that would not necessarily be available if the AT&T
Common Stock Group and the AT&T Wireless Group were not under common
ownership. Issuing a tracking stock will allow both groups to continue to
benefit from common branding, cross marketing and bundling of services
between groups, and synergies relating to, among other things, technology
sharing, networking arrangements, purchase arrangements, taxes, interest
expense and overhead costs.
Q: HOW DOES AT&T WIRELESS GROUP TRACKING STOCK RELATE TO LIBERTY MEDIA GROUP
TRACKING STOCK?
A: As part of our merger with Tele-Communications, Inc. (TCI), which we
completed in 1999, AT&T issued another tracking stock called "Liberty Media
Group tracking stock." Liberty Media Group tracking stock is designed to
reflect the economic performance of the Liberty Media Group. After we create
AT&T Wireless Group tracking stock, both Liberty Media Group tracking stock
and AT&T Wireless Group tracking stock will be classes of common stock of
AT&T. AT&T Wireless Group tracking stock, however, is designed to reflect a
completely different set of assets and businesses from the assets and
businesses tracked by Liberty Media Group tracking stock. As a result, there
should not be any overlap between the two tracking stocks. The distribution
of AT&T Wireless Group tracking stock will be made only on AT&T common stock,
not Liberty Media Group tracking stock.
Q: HOW WILL THE TRACKING STOCK AMENDMENT AFFECT FUTURE FINANCIAL STATEMENT
PRESENTATION OF AT&T?
A: We include in this proxy statement full historical financial statements of
the AT&T Wireless Group, as well as pro forma financial information for the
AT&T Wireless Group and the AT&T Common Stock Group. In addition, we
incorporate by reference the full consolidated financial statements of and
pro forma financial information for AT&T. Following issuance of AT&T Wireless
Group tracking stock, we will present separate financial statements for the
AT&T Wireless Group and limited pro forma financial information relating to
the AT&T Common Stock Group in addition to AT&T's consolidated financial
statements. Presentation of the separate group financial statements of the
AT&T Wireless Group and the pro forma financial information of the AT&T
Common Stock Group will provide current and potential investors in each group
with financial information regarding the underlying businesses of the AT&T
Wireless Group and the AT&T Common Stock Group. AT&T, however, will retain
all beneficial ownership and control of both groups' assets and operations.
Q: WHAT DO I NEED TO DO NOW?
A: To vote, just mail your signed proxy card in the enclosed return envelope as
soon as possible so that your shares may be repre-
ii
<PAGE> 6
sented at the special meeting. You may also vote by telephone or via the
Internet, as we describe in this proxy statement. The special meeting will
take place on , 2000. Our directors unanimously recommend that
you vote in favor of the proposal to amend our charter to create AT&T
Wireless Group tracking stock and the other actions we describe in this proxy
statement.
Q: CAN I CHANGE MY VOTE?
A: Yes. Just deliver a later-dated, signed proxy card to our Corporate Secretary
before the special meeting or attend the special meeting in person and vote.
You may also change your vote prior to the special meeting by telephone, via
the Internet or by filing an instrument of revocation with the inspectors of
election in care of the Vice President -- Law and Secretary of AT&T.
Q: WHOM CAN I CALL WITH QUESTIONS?
A: If you have any questions about the tracking stock amendment, please call us
at (800) . Information regarding AT&T is also available on the AT&T
Investor Relations Home Page on the Internet at www.att.com/ir.
If you would like copies of any of the documents we refer to or that we
incorporate by reference in this proxy statement, you should call us at (800)
.
iii
<PAGE> 7
The following diagrams illustrate in general terms how our capital
structure would change as a result of the tracking stock amendment, but they are
not comprehensive. While the diagrams reflect the economic substance of the
changes, they do not precisely reflect the legal and corporate structure of AT&T
before or after the transactions. For a more complete description of the
tracking stock amendment, see "The Charter Amendment Proposal -- Tracking Stock
Amendment" starting on page 31.
CURRENT AT&T STRUCTURE
[CHART]
IMPACT ON AT&T COMMON STOCK GROUP OF INITIAL
PUBLIC OFFERING OF AT&T WIRELESS GROUP
[CHART]
iv
<PAGE> 8
IMPACT ON AT&T COMMON STOCK GROUP OF INITIAL
PUBLIC OFFERING AND DISTRIBUTION OF AT&T
WIRELESS GROUP TRACKING STOCK
[CHART]
AT&T STRUCTURE FOLLOWING INITIAL PUBLIC OFFERING AND
DISTRIBUTION OF AT&T WIRELESS GROUP TRACKING STOCK
[CHART]
v
<PAGE> 9
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY............................. 1
General............................. 1
The AT&T Wireless Group........... 1
The AT&T Common Stock Group....... 2
The Special Meeting............... 3
The Tracking Stock Amendment...... 4
The Incentive Plan Proposal....... 6
Recommendation of the AT&T Board
of Directors................... 6
SELECTED HISTORICAL FINANCIAL
DATA.............................. 7
AT&T Corp......................... 7
AT&T Wireless Group............... 9
SELECTED PRO FORMA FINANCIAL DATA... 11
AT&T Wireless Group............... 11
AT&T Common Stock Group........... 12
RISK FACTORS -- THE TRACKING STOCK
AMENDMENT......................... 13
Holders of AT&T common stock, AT&T
Wireless Group tracking stock
and Liberty Media Group
tracking stock are shareholders
of one company and, therefore,
financial impacts on one group
could affect the other
groups......................... 13
We give no assurance that the
combined market prices of AT&T
common stock and AT&T Wireless
Group tracking stock will equal
or exceed the market price of
AT&T common stock before the
initial public offering, and no
market currently exists for
AT&T Wireless Group tracking
stock.......................... 13
Holders of our tracking stock will
have limited separate
shareholder rights and will
have no additional rights with
respect to their group,
including direct voting
rights......................... 14
Holders of our tracking stock may
have potentially diverging
interests...................... 14
The fiduciary duties of our board
of directors to more than one
class of common stock are not
clear under New York law....... 19
Our board of directors will have
the ability to control
inter-group transactions
between the AT&T Common Stock
Group and the AT&T Wireless
Group.......................... 19
Our board of directors may change
the AT&T Wireless Group policy
statement or by-law amendment
without shareholder approval... 20
It will be difficult for a third
party to acquire the AT&T
Wireless Group without AT&T's
consent........................ 20
In the future, AT&T may cause a
mandatory exchange of AT&T
Wireless Group tracking
stock.......................... 20
Future sales of AT&T Wireless
Group tracking stock and AT&T
common stock could adversely
affect their respective market
prices and our ability to raise
capital in the future.......... 21
We cannot assure you that we will
complete any or all of the
transactions................... 21
RISK FACTORS -- THE AT&T WIRELESS
GROUP............................. 22
The AT&T Wireless Group has
significant network build out
that needs to be completed..... 22
The AT&T Wireless Group has
substantial capital
requirements and needs for
substantial capital
expenditures................... 22
Potential acquisitions may require
the AT&T Wireless Group to
incur substantial additional
debt and integrate new
technologies, operations and
services, which may be costly
and time consuming............. 23
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vi
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<TABLE>
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Failure to develop future business opportunities
may have an adverse effect on the AT&T Wireless
Group's growth potential........................ 23
The AT&T Wireless Group faces substantial
competition................................ 24
The AT&T Wireless Group expects to experience
significant change in the wireless
industry................................... 24
Termination or impairment of our relationship
with a small number of key suppliers could
adversely affect the AT&T Wireless Group's
revenues and results of operations......... 25
There is no guarantee that our technology will
be competitive with other technologies or
compatible with the next generation
technology................................. 25
The AT&T Wireless Group relies on favorable
roaming arrangements, which it may be
unable to continue to obtain............... 25
The AT&T Wireless Group depends on fourth
quarter results............................ 26
Media reports have suggested radio frequency
emissions may be linked to various health
concerns and interfere with various medical
devices.................................... 26
The operations of the AT&T Wireless Group are
subject to various government
regulations................................ 26
State and local legislative bodies are
considering or have enacted legislation to
restrict or prohibit wireless phone use
while driving.............................. 27
THE SPECIAL MEETING............................. 28
General....................................... 28
Date, Time and Place of the Special Meeting;
Record Date................................ 28
Vote Required; Quorum......................... 28
Proxies; Revocability of Proxies; Cost of
Solicitation............................... 29
Voting Shares Held in Dividend Reinvestment
and Savings Plans.......................... 30
Special Meeting Admission..................... 30
Confidentiality of Proxies and Ballots........ 30
Recommendation of our Board of Directors...... 30
THE CHARTER AMENDMENT PROPOSAL.................. 31
General....................................... 31
Tracking Stock Amendment...................... 31
Other Charter Amendments...................... 32
Recommendation of our Board of Directors...... 32
Reasons for the Tracking Stock Amendment...... 32
Terms of the Tracking Stock Amendment......... 35
The Initial Public Offering and the
Distribution............................... 42
Material Federal Income Tax Consequences...... 42
DESCRIPTION OF THE AT&T WIRELESS GROUP.......... 44
Overview...................................... 44
The AT&T Wireless Group....................... 45
Arrangements between the AT&T Common Stock
Group and the AT&T Wireless Group.......... 45
Industry Overview............................. 46
Strategy...................................... 49
Business of the AT&T Wireless Group........... 55
Competition................................... 65
Management of the AT&T Wireless Group......... 66
Patents and Trademarks........................ 66
Employees..................................... 66
Properties.................................... 66
Regulatory Environment........................ 67
Legal Proceedings............................. 72
SELECTED HISTORICAL FINANCIAL DATA OF THE
AT&T WIRELESS GROUP........................... 74
</TABLE>
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<CAPTION>
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AT&T WIRELESS GROUP MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS.......................... 76
Overview.......................... 76
Operating Results................. 78
Liquidity and Capital Resources... 86
Financial Condition............... 89
Recent Accounting Pronouncement... 90
Year 2000......................... 90
Subsequent Events................. 93
Forward-Looking Statements........ 94
RELATIONSHIP BETWEEN THE AT&T COMMON
STOCK GROUP AND THE AT&T WIRELESS
GROUP............................. 95
AT&T Wireless Group Capital Stock
Committee...................... 95
AT&T Wireless Group Policy
Statement...................... 95
Relationship with AT&T............ 99
THE INCENTIVE PLAN PROPOSAL......... 104
General........................... 104
Summary of Amendments to the
Plan........................... 104
Incentive Compensation Policies... 105
Term.............................. 106
Plan Benefits..................... 106
Administration and Eligibility.... 106
Shares Subject to Plan............ 106
Stock Options..................... 107
Stock Appreciation Rights......... 107
Restricted Stock.................. 107
Performance Awards................ 107
Other Stock Unit Awards........... 108
Nonassignability of Awards........ 108
Deferrals of Awards............... 108
Adjustments....................... 108
Board Adjustment to Outstanding
Stock-Based Awards............. 108
Amendment and Termination......... 109
Internal Revenue Code Section
162(m) Performance-Based
Compensation................... 109
Change of Control................. 110
Tax Aspects of the Plan........... 110
Recommendation of our Board of
Directors...................... 111
STOCK OWNERSHIP OF MANAGEMENT AND
DIRECTORS......................... 112
BOARD COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION......... 112
EXECUTIVE COMPENSATION.............. 113
Summary Compensation.............. 113
Option Grants..................... 114
Employment Contracts and
Termination of Employment
Arrangements................... 116
Pension Plans..................... 120
OTHER MATTERS TO COME BEFORE THE
SPECIAL MEETING................... 123
SHAREHOLDER PROPOSALS............... 124
OTHER INFORMATION................... 124
Directors' and Officers' Liability
Policy......................... 124
Experts........................... 124
Special Note Regarding Forward-
looking Statements............. 125
Where You Can Find More
Information.................... 126
APPENDICES
Appendix A: Form of Charter
Amendment...................... A-1
Appendix B: Form of By-Law
Amendment and AT&T Board of
Directors Policy Statement
Regarding Wireless Group
Tracking Stock Matters......... B-1
Appendix C: Index to Financial
Statements..................... C-1
</TABLE>
viii
<PAGE> 12
SUMMARY
This summary highlights selected information from this document and may not
contain all of the information that is important to you. To better understand
the proposals upon which you are being asked to vote, you should read this
entire document carefully, as well as those additional documents to which we
refer you. See "Other Information -- Where You Can Find More Information" on
page 126.
GENERAL
We are asking you to vote upon and approve a charter amendment proposal.
This proposal would, among other things, permit us to create a new class of
common stock of AT&T intended to reflect the economic performance of all of our
wireless services businesses. We are also asking you to vote upon and approve an
amendment to our 1997 Long Term Incentive Program to permit us to issue options
and other equity awards to employees based on AT&T Wireless Group tracking
stock.
THE AT&T WIRELESS GROUP
The AT&T Wireless Group is one of the largest wireless service providers in
the United States based on approximately $5.5 billion in revenues for the nine
months ended September 30, 1999. Including its partnership markets, the AT&T
Wireless Group had approximately 12 million total subscribers as of September
30, 1999. Additionally, subscribers within the AT&T Wireless Group's affiliates
totaled approximately 0.3 million as of September 30, 1999. The AT&T Wireless
Group focuses on revenue growth through the retention and expansion of its
subscriber base. The group seeks to do this by providing new and innovative
services that distinguish it from its competitors. Examples include simplified
pricing plans, such as AT&T Digital One Rate service, and bundled offerings of
communications products and services that target specific customer groups.
The AT&T Wireless Group markets its products and services primarily under
the AT&T name. We believe that AT&T's widely recognized brand significantly
contributes to consumer awareness of, and confidence in, the AT&T Wireless
Group's products and services. The AT&T Wireless Group also believes that its
relationship with AT&T will provide it with other competitive advantages. For
example, the AT&T Wireless Group and the AT&T Common Stock Group plan to offer
their products and services together in bundled offerings, which may combine
wireless services with long distance and local communications services,
broadband services and Internet services. In addition, each group will be able
to take advantage of the other group's marketing and sales efforts and network
capabilities.
The AT&T Wireless Group operates one of the largest U.S. digital wireless
networks. The AT&T Wireless Group, including its partnership and affiliate
markets, currently holds 850 and 1900 megahertz licenses to provide wireless
services covering 94% of the U.S. population. As of September 30, 1999, the AT&T
Wireless Group's built network, including partnership and affiliate markets,
covered 64% of the U.S. population. This includes operations in 42 of the 50
largest U.S. metropolitan areas. The AT&T Wireless Group supplements its own
operations with roaming agreements that allow its subscribers to use other
providers' wireless services in regions where the AT&T Wireless Group does not
have operations. Through these roaming agreements, the AT&T Wireless Group is
able to offer its customers wireless services covering over 95% of the U.S.
population. The AT&T Wireless Group plans to continue to increase its coverage
and the quality of its services by expanding the footprint and capacity of its
network at an increased pace and by acquiring or partnering with other wireless
providers.
1
<PAGE> 13
The AT&T Wireless Group provides its wireless voice and data services using
digital time division multiple access (TDMA), analog and cellular digital packet
data (CDPD) technologies. The AT&T Wireless Group has focused on building out
its digital network, including upgrading its analog systems to digital in its
850 megahertz markets, and on migrating its customers from analog to digital
service. The AT&T Wireless Group has upgraded 98% of its 850 megahertz markets
to digital based and all of its 1900 megahertz markets are digital based.
Currently, over 73% of the AT&T Wireless Group's consolidated subscribers use
digital services, accounting for over 85% of its traffic. The AT&T Wireless
Group believes that these percentages are substantially greater than the
industry average, excluding the AT&T Wireless Group. It further believes that
this high percentage of digital use improves the efficiency of its network and
allows it to offer higher quality services.
The AT&T Wireless Group has targeted two growth areas for near term
expansion: wireless data and fixed wireless. The AT&T Wireless Group is an
industry leader in wireless data services, possessing a CDPD network covering
markets with a total population of 89 million. The AT&T Wireless Group expects
new applications for corporate and consumer use to further drive wireless data
growth. These data applications may include access to email, Internet content,
e-commerce, shopping services and services that are enhanced by information
about the user's location. In addition, the AT&T Wireless Group has begun to
deploy a fixed wireless technology. Fixed wireless is capable of providing up to
four voice lines to residences and small business locations and a high-speed
packet data channel, which can be used to access the Internet.
The AT&T Wireless Group tracking stock is designed to reflect the separate
economic performance of the AT&T Wireless Group. Except as described below, we
will attribute all of AT&T's current wireless operations to the AT&T Wireless
Group, including:
- all mobile and fixed wireless licenses,
- all wireless networks, operations, cell sites, retail operations,
wireless customer care facilities and customer location assets, and
- interests in partnerships and affiliates providing wireless mobile
communications in the United States and internationally.
The AT&T Common Stock Group will retain:
- existing and future wireless activities that stem from country-specific
joint venture relationships that are predominantly non-wireless, and
- incidental wireless capabilities or links in any backbone or other
communications network that is predominantly non-wireless.
We currently intend to include all future wireless activities in the AT&T
Wireless Group. Our board of directors may, however, in its discretion, but
subject to the AT&T Wireless Group policy statement, direct new businesses and
assets to the AT&T Wireless Group or the AT&T Common Stock Group or dispose of
or transfer businesses or assets of either group.
The principal executive offices of the AT&T Wireless Group are located at
7277 164th Avenue NE, Building 1, Redmond, Washington 98052. The telephone
number is (425) 580-6000.
THE AT&T COMMON STOCK GROUP
The principal activities of the AT&T Common Stock Group initially will
include all of AT&T's domestic long distance, international long distance,
regional and local telecommunications services and broadband and Internet
communications services. The AT&T Common Stock Group also will include all of
AT&T's billing, directory and calling card services to support these
communications services.
2
<PAGE> 14
The primary lines of business that will comprise the AT&T Common Stock
Group are business services, including AT&T Solutions, consumer services,
broadband and Internet services and our international operations and ventures
(other than international wireless interests included in the AT&T Wireless
Group).
The principal executive offices of AT&T are located at 32 Avenue of the
Americas, New York, New York 10013-2412. The telephone number is (212) 387-5400.
THE SPECIAL MEETING
General; Time and Place of
Special Meeting............... We are furnishing this proxy statement to you
in connection with the solicitation of proxies
by our board of directors for use at a special
meeting of shareholders of AT&T to be held on
, , 2000 at a.m., local time,
at , , and at any and all
adjournments or postponements of the special
meeting.
Record Date................... Our board of directors has fixed the close of
business on , 2000 as the record date
for determining shareholders entitled to notice
of and to vote at the special meeting or any
adjournments or postponements.
Mailing Date.................. We are first mailing this proxy statement and
form of proxy on or about , 2000 to
shareholders of record at the close of business
on the record date.
Vote Required................. The affirmative vote of a majority of the
combined voting power of all outstanding shares
of AT&T common stock and Liberty Media Group
tracking stock, voting together as a single
class, is necessary to approve the charter
amendment proposal, which includes the tracking
stock amendment. The affirmative vote of a
majority of the votes cast by all outstanding
shares of AT&T common stock and Liberty Media
Group tracking stock, voting together as a
single class, is necessary to approve the
incentive plan proposal. Shares of AT&T common
stock entitle the holder to one vote per share,
shares of Class B Liberty Media Group tracking
stock entitle the holder to 0.75 of a vote per
share and shares of Class A Liberty Media Group
tracking stock entitle the holder to 0.075 of a
vote per share. As of December 31, 1999, the
directors and executive officers of AT&T
beneficially owned less than 3.0% of the total
voting power of the outstanding AT&T common
shares.
Dissenters' Rights............ Under the New York Business Corporation Law,
holders of AT&T common shares will not have
dissenters' rights with regard to the charter
amendment proposal or the incentive plan
proposal.
3
<PAGE> 15
THE TRACKING STOCK AMENDMENT
The Charter Amendment......... Approval of the charter amendment will permit
our board of directors to amend our charter to
define the AT&T Wireless Group, redefine the
AT&T Common Stock Group and create a new class
of common stock of AT&T intended to reflect
separately the economic performance of the AT&T
Wireless Group. The charter amendment would
also update our charter's description of AT&T's
corporate purposes.
The Initial Public Offering... If you approve the charter amendment, we
currently intend to issue in an underwritten
initial public offering shares of AT&T Wireless
Group tracking stock representing a portion of
the economic performance of the AT&T Wireless
Group. We will determine the amount to be
issued based on capital requirements of the
AT&T Wireless Group and the AT&T Common Stock
Group, market conditions at the time of the
initial public offering and other factors.
The Distribution.............. We currently intend to follow the initial
public offering with a distribution to holders
of AT&T common stock of shares of AT&T Wireless
Group tracking stock. These shares would
represent the economic performance of the AT&T
Wireless Group not represented by the shares of
tracking stock issued in the initial public
offering. Following the distribution, we expect
that the outstanding shares of AT&T Wireless
Group tracking stock will reflect 100% of the
economic performance of the AT&T Wireless
Group.
Timing of the Initial Public
Offering and the
Distribution................ We currently expect to complete the initial
public offering shortly following shareholder
approval of the charter amendment. We currently
expect to complete the distribution at some
time after the initial public offering and
after we complete our pending merger with
MediaOne Group, Inc.
Our board of directors reserves the right not
to create AT&T Wireless Group tracking stock or
not to issue the tracking stock once it is
created. In addition, even if we complete the
initial public offering, there is no guarantee
that the distribution will follow.
Inter-Group Interest.......... AT&T will have 100% legal ownership of the AT&T
Wireless Group following the creation of the
tracking stock. Following the initial public
offering and before the distribution, AT&T
Wireless Group tracking stock issued in the
initial public offering will represent a
portion of the common equity of AT&T intended
to track the economic performance of the AT&T
Wireless Group. The remaining interest of AT&T
intended to track the economic performance of
the AT&T Wireless Group will be reflected in
the financial statements of the AT&T Common
Stock Group as an "inter-group interest" in the
AT&T Wireless Group until the distribution. An
inter-group interest is similar to the AT&T
Common Stock Group
4
<PAGE> 16
holding AT&T Wireless Group tracking stock,
except that no voting or other shareholder
rights are associated with an inter-group
interest. We expect to eliminate all of the
AT&T Common Stock Group's inter-group interest
by means of the distribution, although AT&T
will continue to have 100% legal ownership of
the AT&T Wireless Group after the distribution.
The AT&T Wireless Group policy statement
provides that the AT&T Wireless Group will not
have or be able to have an inter-group interest
in the AT&T Common Stock Group.
Reasons for the Tracking Stock
Amendment................... We expect the tracking stock amendment to:
- assist the AT&T Wireless Group in
meeting its capital needs by creating an
additional publicly traded equity
security that it can use to raise
capital and can issue for acquisitions
and investments,
- maintain the benefits of doing business
under common ownership,
- increase market awareness of the
performance and value of our wireless
businesses by creating a direct
investment vehicle. We expect this will
provide greater market recognition and
realization of the value, individually
and collectively, of AT&T and its
distinct lines of business represented
by each of the AT&T Wireless Group and
the AT&T Common Stock Group, and
- permit the creation of more effective
management incentive and retention
programs, with the ability to direct
business-specific options and securities
to employees of each group.
For additional reasons for the tracking stock
amendment, see "The Charter Amendment
Proposal -- Reasons for the Tracking Stock
Amendment."
AT&T Wireless Group Policy
Statement................... The AT&T Wireless Group policy statement
generally provides that we will resolve all
material matters as to which the holders of
AT&T common stock and AT&T Wireless Group
tracking stock may have potentially divergent
interests in a manner that our board of
directors, or the AT&T Wireless Group capital
stock committee, determines to be in the best
interests of AT&T and all of its common
shareholders. The policy provides that this
determination would give fair consideration to
the potentially divergent interests and all
other relevant interests of the holders of the
separate classes of AT&T's common shares. The
policy statement also includes provisions that:
- set general guidelines for the
coordination of market activities to
achieve consistency in overlapping
markets, and
5
<PAGE> 17
- set general parameters of commercial
transactions between the two groups,
including requiring each group to
procure services offered by the other
group from that group.
Subject to some exceptions, our board of
directors may modify, suspend or rescind the
policies set forth in the policy statement,
adopt additional policies or make exceptions to
existing policies, at any time, without the
approval of our shareholders, although our
board has no present intention to do so. See
"Relationship between the AT&T Common Stock
Group and the AT&T Wireless Group -- AT&T
Wireless Group Policy Statement" for a detailed
description of the policy statement.
Risk Factors.................. When evaluating the tracking stock amendment,
you should be aware of the risk factors we
describe under "Risk Factors -- The Tracking
Stock Amendment" starting on page 13 and "Risk
Factors -- The AT&T Wireless Group" starting on
page 22.
Federal Income Tax
Considerations................ We expect the charter amendment creating AT&T
Wireless Group tracking stock and the pro rata
distribution of AT&T Wireless Group tracking
stock to holders of AT&T common stock to be tax
free to AT&T and to the holders of AT&T common
stock. See "The Charter Amendment Proposal --
Material Federal Income Tax Consequences" for
more information and explanation.
Listing....................... AT&T expects that shares of AT&T Wireless Group
tracking stock will be listed on under
the symbol " ."
THE INCENTIVE PLAN PROPOSAL
General....................... We are also asking you to vote upon a related
proposal to adopt an amendment to our 1997 Long
Term Incentive Program. The amendment would:
- enable us to grant incentive awards
based on shares of AT&T Wireless Group
tracking stock to officers and employees
of the AT&T Common Stock Group and the
AT&T Wireless Group, and
- permit our non-employee directors to
participate under the plan.
RECOMMENDATION OF THE AT&T BOARD OF DIRECTORS
Our board of directors has approved the charter amendment proposal and the
incentive plan proposal, and recommends that you vote FOR each of them.
6
<PAGE> 18
SELECTED HISTORICAL FINANCIAL DATA
AT&T CORP.
In the table below, we provide you with selected historical consolidated
financial data of AT&T. We prepared this information using our consolidated
financial statements at and for each of the fiscal years in the five-year period
ended December 31, 1998 and at and for the nine-month periods ended September
30, 1999 and 1998. We derived the consolidated income statement data below for
each of the three years ended December 31, 1998, and the consolidated balance
sheet data at December 31, 1998 and 1997, from consolidated financial statements
audited by PricewaterhouseCoopers LLP, independent accountants. We derived the
remaining data from unaudited consolidated financial statements. This
information is only a summary and you should read it together with the financial
information we incorporate by reference in this proxy statement. For copies of
the financial information we incorporate by reference, see "Other
Information -- Where You Can Find More Information" on page 126.
Income from continuing operations for the nine months ended September 30,
1999 includes $0.8 billion of net nonoperational charges, primarily including an
in-process research and development charge associated with our merger with TCI,
equity losses associated with investments in At Home Corporation and Cablevision
Systems Corporation, and gains on the sale of businesses. Income from continuing
operations for the nine months ended September 30, 1998 and for the year ended
December 31, 1998 includes net nonoperational charges of $1.3 billion and $1.1
billion, respectively, including restructuring and other charges as well as
benefits from gains on the sales of businesses. Income from continuing
operations for 1995 includes $2.0 billion of restructuring and other charges.
The number of shares of AT&T common stock outstanding and per share data have
been adjusted to reflect our three-for-two stock split paid on April 15, 1999.
The number of shares of Liberty Media Group tracking stock outstanding and per
share data reflect a two-for-one stock split paid on June 11, 1999.
7
<PAGE> 19
SELECTED HISTORICAL FINANCIAL INFORMATION
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
AT OR FOR
THE NINE
MONTHS ENDED
SEPTEMBER 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------ -----------------------------------------------
1999(1) 1998 1998 1997 1996 1995 1994
-------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues................................. $ 46,057 $39,695 $53,223 $51,577 $50,688 $48,449 $46,063
Operating income......................... 8,418 4,301 7,487 6,836 8,709 5,169 7,393
Income from continuing operations........ 3,479 3,247 5,235 4,249 5,458 2,981 4,230
Income from continuing
operations -- available to AT&T common
shareowners............................ 4,297 3,247 5,235 4,249 5,458 2,981 4,230
Weighted average AT&T common shares and
potential common shares................ 3,140 2,715 2,700 2,683 2,651 2,612 2,571
Per AT&T common share -- basic:
Income from continuing operations(2)... $ 1.41 $ 1.21 $ 1.96 $ 1.59 $ 2.07 $ 1.15 $ 1.65
Per AT&T common share -- diluted:
Income from continuing operations(3)... 1.39 1.20 1.94 1.59 2.07 1.14 1.64
Cash dividends declared per AT&T common
share.................................. .66 .66 .88 .88 .88 .88 .88
Loss from continuing operations available
to Liberty Media Group shareowners..... 818
Weighted average Liberty Media Group
shares................................. 1,257
Per Liberty Media Group share -- basic... .65
Per Liberty Media Group
share -- diluted....................... .65
Cash dividends declared per Liberty Media
Group share............................ --
BALANCE SHEET DATA:
Total assets............................. $161,806 $58,318 $59,550 $61,095 $57,348 $62,864 $57,817
Long-term debt........................... 22,073 6,079 5,556 7,857 8,878 8,913 9,138
Shareowners' equity...................... 74,763 24,164 25,522 23,678 21,092 17,400 18,100
</TABLE>
- -------------------------
(1) On March 9, 1999, the TCI merger closed. The TCI merger was recorded as a
purchase. In conjunction with the TCI merger, AT&T issued Liberty Media
Group tracking stock to reflect the separate economic performance of the
Liberty Media Group. AT&T does not have a "controlling financial interest"
for financial accounting purposes in the Liberty Media Group, therefore we
account for the Liberty Media Group as an equity investment. Because the
Liberty Media Group is reflected by a separate tracking stock, the earnings
available to the holders of AT&T common stock exclude all of the earnings or
losses related to the Liberty Media Group. Certain 1999 amounts for AT&T
have been reclassified to conform with the current presentation.
(2) Basic earnings per share from continuing operations of AT&T common stock
prior to the three-for-two stock split for the five years ended December 31,
1998 through December 31, 1994 were $2.93, $2.39, $3.10, $1.72 and $2.48,
respectively.
(3) Diluted earnings per share from continuing operations of AT&T common stock
prior to the three-for-two stock split for the five years ended December 31,
1998 through December 31, 1994 were $2.91, $2.38, $3.09, $1.71 and $2.47,
respectively.
8
<PAGE> 20
AT&T WIRELESS GROUP
In the table below, we provide you with selected historical combined
financial data of the AT&T Wireless Group. We prepared this information using
our combined financial statements at and for each of the fiscal years in the
three-year period ended December 31, 1998 and at and for the nine-month periods
ended September 30, 1999 and 1998. We derived the combined income statement data
below for each of the three years ended December 31, 1998, and the combined
balance sheet data at December 31, 1998 and 1997, from combined financial
statements audited by PricewaterhouseCoopers LLP, independent accountants. We
derived the remaining data from unaudited combined financial statements for the
periods presented.
The table below also provides you with unaudited selected pro forma
condensed combined financial information for the AT&T Wireless Group as if the
acquisition of Vanguard Cellular Systems, Inc. was completed on January 1, 1998
for purposes of the 1998 information provided and on January 1, 1999 for
purposes of the 1999 information provided. You should not rely on the unaudited
selected pro forma financial information as an indication of the results of
operations that would have been achieved had the merger taken place earlier.
This information is only a summary and you should read it together with the
financial information we include under Appendix C to this proxy statement or
incorporate by reference in this proxy statement. For copies of the financial
information we incorporate by reference, see "Other Information -- Where You Can
Find More Information" on page 126.
SELECTED HISTORICAL FINANCIAL INFORMATION
(UNAUDITED)
(IN MILLIONS, EXCEPT FOR OTHER OPERATING DATA)
<TABLE>
<CAPTION>
AT OR FOR AT OR FOR
THE NINE THE NINE
MONTHS MONTHS AT OR FOR THE
ENDED ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, SEPTEMBER 30, ---------------------------
1999 1998 1998 1997 1996
------------- ------------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Services revenues............................... $ 4,928 $3,472 $ 4,779 $ 4,249 $ 3,887
Equipment revenues.............................. 562 425 627 419 359
-------- ------ ------- ------- -------
Total revenues.................................... 5,490 3,897 5,406 4,668 4,246
Operating Expenses:
Network and other costs of services............. 2,743 1,662 2,428 1,770 1,629
Depreciation and amortization................... 917 802 1,079 826 660
Selling, general and administrative............. 1,833 1,550 2,122 1,982 1,723
Asset impairment and restructuring charges...... -- 60 120 160 --
-------- ------ ------- ------- -------
Total operating expenses.......................... 5,493 4,074 5,749 4,738 4,012
Operating (loss) income........................... (3) (177) (343) (70) 234
Other income, net................................. 180 705 764 288 346
Interest expense.................................. 102 85 120 -- --
-------- ------ ------- ------- -------
Income before income taxes........................ 75 443 301 218 580
Provision for income taxes........................ 31 197 137 93 263
-------- ------ ------- ------- -------
Net income........................................ 44 246 164 125 317
Dividend requirements on preferred stock held by
AT&T, net....................................... 41 41 56 56 56
-------- ------ ------- ------- -------
Net income attributable to AT&T's residual
interest........................................ $ 3 $ 205 $ 108 $ 69 $ 261
</TABLE>
9
<PAGE> 21
<TABLE>
<CAPTION>
AT OR FOR AT OR FOR
THE NINE THE NINE
MONTHS MONTHS AT OR FOR THE
ENDED ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, SEPTEMBER 30, ---------------------------
1999 1998 1998 1997 1996
------------- ------------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
OTHER:
EBITDA(1)......................................... $ 914 $ 625 $ 736 $ 756 $ 894
EBITDA (excluding asset impairment and
restructuring charges).......................... 914 685 856 916 894
Equity earnings................................... 69 128 114 222 205
OTHER OPERATING DATA:
(in thousands)
Consolidated subscribers.......................... 9,129 6,791 7,174 5,964 5,032
Consolidated digital subscribers.................. 6,718 3,588 4,358 1,746 909
Total subscribers................................. 11,883 9,132 9,666 8,133 6,966
Total digital subscribers(2)...................... 8,359 4,199 5,168 n/a n/a
Covered population(3)............................. 120,994
Licensed population(3)............................ 178,698
850 markets..................................... 75,312
1900 markets.................................... 103,386
CASH FLOW DATA:
Net cash provided by (used in) operating
activities...................................... $ 527 $ (96) $ 414 $ 1,338 $ 1,183
Capital expenditures.............................. (1,376) (439) (1,219) (1,931) (1,832)
Net acquisitions of licenses...................... (32) (24) (65) (443) (327)
Net dispositions of businesses.................... 244 -- 324 -- 156
Equity investments contributions and purchases.... (172) (20) (156) (84) (32)
BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 16 $ 27 $ 6
Working capital................................... (284) (388) (506)
Property, plant and equipment, net................ 6,143 5,182 5,073
Licensing costs, net.............................. 8,366 7,928 8,403
Investments....................................... 4,477 3,795 3,233
Goodwill, net and other assets.................... 2,364 1,317 1,355
Total assets...................................... 22,856 19,460 19,040
Total debt(4)..................................... 3,341 2,589 2,447
Preferred stock held by AT&T...................... 1,000 1,000 1,000
Total shareowner's equity......................... 13,818 11,532 11,187
AT&T WIRELESS GROUP PRO FORMA FOR VANGUARD ACQUISITION:
Revenues.......................................... $ 5,647 $4,251 $ 5,868 $ 5,084
Net income........................................ 14 383 254 112
Capital expenditures.............................. 1,409 638 1,223 1,787
</TABLE>
- ------------------------
(1) EBITDA is defined as earnings before interest, taxes, excluding other
income, net, plus depreciation and amortization.
(2) Digital subscriber data not available for partnership or affiliate markets.
(3) Covered and licensed population represents AT&T Wireless Group's
consolidated operations and does not include partnership or affiliate
markets.
(4) Includes $4 million of long-term debt that is included in other long-term
liabilities at September 30, 1999.
10
<PAGE> 22
SELECTED PRO FORMA FINANCIAL DATA
AT&T WIRELESS GROUP
In the table below, we provide you with unaudited selected pro forma
condensed combined financial information of the AT&T Wireless Group assuming the
AT&T Wireless Group was a separate group as of January 1, 1998 for income
statement purposes, and as of September 30, 1999 for balance sheet purposes. The
unaudited pro forma information gives effect to the conversion of $2.0 billion
of intercompany debt into $2.0 billion of preferred stock at the time of the
initial public offering.
This information is only a summary and you should read it together with the
financial information we incorporate by reference in this proxy statement. For
copies of the information we incorporate by reference, see "Other
Information -- Where You Can Find More Information" on page 126. You should not
rely on the unaudited selected pro forma financial information as an indication
of the results of operations or financial position that would have been achieved
had the conversion taken place earlier.
We have included detailed unaudited pro forma financial statements starting
on page C-34 of this proxy statement.
AT&T WIRELESS GROUP
SELECTED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
AT OR FOR THE FOR THE
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1999 1998
----------------- ------------
<S> <C> <C>
INCOME STATEMENT DATA:
Revenues.................................................... $ 5,490 $5,406
Operating (loss)............................................ (3) (343)
Net income.................................................. 86 222
BALANCE SHEET DATA:
Total assets................................................ $22,856
Long-term debt due to AT&T.................................. 1,200
Total shareowner's equity................................... 15,818
</TABLE>
11
<PAGE> 23
AT&T COMMON STOCK GROUP
In the table below, we provide you with unaudited selected pro forma
condensed financial information of the AT&T Common Stock Group assuming the AT&T
Wireless Group was a separate group as of January 1, 1998 for income statement
purposes, and as of September 30, 1999 for balance sheet purposes. The unaudited
pro forma information gives effect to the MediaOne and TCI mergers as if they
had been completed on January 1, 1998 for income statement purposes and, as if
the MediaOne merger had been completed on September 30, 1999 for balance sheet
purposes. The unaudited pro forma information excludes the results of Liberty
Media Group.
This information is only a summary and you should read it together with the
financial information we incorporate by reference in this proxy statement. For
copies of the information we incorporate by reference, see "Other
Information -- Where You Can Find More Information" on page 126. You should not
rely on the unaudited selected pro forma financial information as an indication
of the results of operations or financial position that would have been achieved
had the mergers taken place earlier or of the results of operations or financial
position of AT&T Common Stock Group after the completion of the MediaOne merger.
Income from continuing operations attributable to holders of AT&T common
stock excludes the dividend requirements on TCI preferred stock.
We have included detailed unaudited pro forma financial statements starting
on page C-39 of this proxy statement.
AT&T COMMON STOCK GROUP
SELECTED PRO FORMA CONDENSED FINANCIAL INFORMATION
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
AT OR FOR THE FOR THE
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1999 1998
----------------- ------------
<S> <C> <C>
INCOME STATEMENT DATA:
Revenues.................................................... $ 43,709 $56,975
Operating income............................................ 7,392 6,541
Income from continuing operations -- attributable to AT&T
common shareowners........................................ 4,408 4,050
Weighted average AT&T common shares diluted................. 3,911 3,874
Per AT&T common share -- basic.............................. 1.16 1.08
Per AT&T common share -- diluted............................ 1.14 1.05
Declared per AT&T common share.............................. .66 .88
BALANCE SHEET DATA:
Total assets................................................ $197,587
Long-term debt.............................................. 29,518
Total shareowners' equity................................... 62,529
</TABLE>
12
<PAGE> 24
RISK FACTORS -- THE TRACKING STOCK AMENDMENT
You should consider the following factors, in addition to the other
information contained elsewhere in this proxy statement, in connection with the
tracking stock amendment.
HOLDERS OF AT&T COMMON STOCK, AT&T WIRELESS GROUP TRACKING STOCK AND LIBERTY
MEDIA GROUP TRACKING STOCK ARE SHAREHOLDERS OF ONE COMPANY AND, THEREFORE,
FINANCIAL IMPACTS ON ONE GROUP COULD AFFECT THE OTHER GROUPS
For the purposes of preparing the respective financial statements of the
AT&T Common Stock Group, the AT&T Wireless Group and the Liberty Media Group, we
will attribute assets, liabilities and shareholders' equity to these groups.
However, the change in the capital structure of AT&T that would result from the
tracking stock amendment will not affect the legal title to those assets or the
legal responsibility for those liabilities of AT&T or any of its subsidiaries.
Holders of AT&T common stock, AT&T Wireless Group tracking stock and
Liberty Media Group tracking stock will all be common shareholders of AT&T, and
will be subject to risks associated with an investment in a single company and
all of AT&T's businesses, assets and liabilities. Financial effects arising from
one group that affect AT&T's consolidated results of operations or financial
condition could, if significant, affect the combined results of operations or
financial position of the other groups or the market price of the class of
common shares relating to the other groups. In addition, if AT&T or any of its
subsidiaries were to incur significant indebtedness on behalf of a group,
including indebtedness incurred or assumed in connection with an acquisition or
investment, it could affect the credit rating of AT&T and its subsidiaries.
This, in turn, could increase the borrowing costs of the other groups and AT&T
as a whole. Net losses of any group and dividends or distributions on shares of
any class of common or preferred stock will reduce the funds of AT&T legally
available for payment of future dividends on each of the AT&T common stock, AT&T
Wireless Group tracking stock and Liberty Media Group tracking stock. For these
reasons, you should read AT&T's consolidated financial information together with
the financial information of the AT&T Common Stock Group, the AT&T Wireless
Group and the Liberty Media Group.
WE GIVE NO ASSURANCE THAT THE COMBINED MARKET PRICES OF AT&T COMMON STOCK AND
AT&T WIRELESS GROUP TRACKING STOCK WILL EQUAL OR EXCEED THE MARKET PRICE OF AT&T
COMMON STOCK BEFORE THE INITIAL PUBLIC OFFERING, AND NO MARKET CURRENTLY EXISTS
FOR AT&T WIRELESS GROUP TRACKING STOCK
There can be no assurance that investors will assign values to AT&T common
stock and AT&T Wireless Group tracking stock based on the reported financial
results and prospects of their respective groups, or the dividend policies
established by our board of directors with respect to that class of our common
shares.
Because there has been no prior market for AT&T Wireless Group tracking
stock, there can be no assurance as to its market price following the issuance
of AT&T Wireless Group tracking stock. Even if an active trading market does
develop in these shares, there can be no assurance that it will be maintained.
In addition, AT&T cannot predict the market impact of some of the terms of AT&T
Wireless Group tracking stock, such as:
- redemption and conversion rights in the event AT&T disposes of
substantially all the assets attributed to the AT&T Wireless Group,
- the ability of AT&T to convert shares of AT&T Wireless Group tracking
stock into shares of AT&T common stock,
- the voting rights of AT&T Wireless Group tracking stock and AT&T common
stock, or
- the discretion of our board of directors to make determinations affecting
the tracking stock.
13
<PAGE> 25
There can be no assurance that the market value of AT&T common stock
following the proposed initial public offering but before any distribution of
AT&T Wireless Group tracking stock, or the combined market values of AT&T common
stock and AT&T Wireless Group tracking stock after the distribution, will equal
or exceed the market value of AT&T common stock held prior to the initial public
offering or the distribution, as applicable. In addition, during the period
following the initial public offering and before the distribution, the market
value of AT&T Wireless Group tracking stock could be adversely affected by the
anticipated distribution. This in turn may adversely impact the market value of
AT&T Wireless Group tracking stock or AT&T common stock. Until an orderly market
develops for AT&T Wireless Group tracking stock, trading prices of AT&T common
stock and AT&T Wireless Group tracking stock may fluctuate significantly. In
addition, investors may discount the value of AT&T common stock and AT&T
Wireless Group tracking stock because they are part of a common enterprise
rather than stand-alone entities.
HOLDERS OF OUR TRACKING STOCK WILL HAVE LIMITED SEPARATE SHAREHOLDER RIGHTS AND
WILL HAVE NO ADDITIONAL RIGHTS WITH RESPECT TO THEIR GROUP, INCLUDING DIRECT
VOTING RIGHTS
Under the tracking stock amendment, holders of AT&T common stock, AT&T
Wireless Group tracking stock and Liberty Media Group tracking stock will have
only the rights specified in our charter. These rights do not include direct
voting rights in their corresponding group, and include the right to vote on
matters as a separate class only to the extent required by our charter or New
York law. Separate meetings for holders of AT&T Wireless Group tracking stock
will not be held.
When a vote is taken on any matter as to which all of our common shares are
voting together as one class, any class or series of our common shares that is
entitled to more than the number of votes required to approve the matter being
voted upon will be in a position to control the outcome of the vote on that
matter. Currently, each share of AT&T common stock has one vote, each share of
Class B Liberty Media Group tracking stock has 0.75 of a vote and each share of
Class A Liberty Media Group tracking stock has 0.075 of a vote. This voting
power is subject to adjustment for stock splits, stock dividends and
combinations, including any distribution of AT&T Wireless Group tracking stock
to holders of AT&T common stock.
HOLDERS OF OUR TRACKING STOCK MAY HAVE POTENTIALLY DIVERGING INTERESTS
GENERAL
The existence of separate classes of our common stock could give rise to
occasions when the interests of the holders of AT&T common stock, AT&T Wireless
Group tracking stock and/or Liberty Media Group tracking stock diverge, conflict
or appear to diverge or conflict. Examples include determinations by our board
of directors to:
- pay or omit the payment of dividends on AT&T common stock, AT&T Wireless
Group tracking stock or Liberty Media Group tracking stock, except where
such dividends are required,
- redeem shares of AT&T Wireless Group tracking stock for shares of AT&T
common stock or stock of qualifying subsidiaries of AT&T,
- approve dispositions of assets attributed to any group,
- if and to the extent there is an inter-group interest, allocate the
proceeds of issuances of AT&T Wireless Group tracking stock either to the
AT&T Common Stock Group with a corresponding reduction in the inter-group
interest or to the equity of the AT&T Wireless Group,
- formulate public policy positions for AT&T,
- establish material commercial relationships between groups, and
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- make operational and financial decisions with respect to one group that
could be considered to be detrimental to another group.
In addition, decisions regarding distribution and other commercial
arrangements between the groups may affect costs, service alternatives and
marketing approaches for each group. When making decisions with regard to
matters that create potential diverging interests, our board will act in
accordance with:
- the terms of our charter, the AT&T Wireless Group policy statement
described under "Relationship between the AT&T Common Stock Group and the
AT&T Wireless Group," the Liberty Media Group policy statement and the
inter-group agreement between AT&T and Liberty Media Group, which governs
the relationship between the AT&T Common Stock Group and the Liberty
Media Group, to the extent applicable, and
- its fiduciary duties, which require our board of directors to consider
the impact of these decisions on all shareholders of AT&T.
Our board of directors also could, from time to time, refer to the Liberty Media
Group capital stock committee and the AT&T Wireless Group capital stock
committee matters involving any conflict, and have those committees report to
our board of directors on those matters or decide those matters to the extent
permitted by our by-laws and applicable law.
NO ASSURANCE OF PAYMENT OF DIVIDENDS
Our board of directors currently pays a cash dividend on AT&T common stock
equal to $0.22 per share per quarter. Determinations as to the future dividends
on AT&T common stock, AT&T Wireless Group tracking stock and Liberty Media Group
tracking stock primarily will be based upon the financial condition, results of
operations and business requirements of the relevant group and AT&T as a whole.
We currently do not expect to pay any dividends on AT&T Wireless Group tracking
stock for the foreseeable future.
Dividends on AT&T Wireless Group tracking stock, if any, will be payable
out of the lesser of:
- all funds of AT&T legally available for the payment of dividends less
Liberty Media Group's "available dividend amount," and
- the AT&T Wireless Group's "available dividend amount," which is intended
to be the amount that would legally be available for the payment of
dividends if the AT&T Wireless Group were a separate corporate entity.
Dividends on Liberty Media Group tracking stock, if any, are payable out of
the lesser of:
- all funds of AT&T legally available for the payment of dividends, and
- the Liberty Media Group's "available dividend amount," which is intended
to be the amount that would legally be available for the payment of
dividends if the Liberty Media Group were a separate corporate entity.
Dividends on AT&T common stock, if any, are payable only to the extent of all
funds of AT&T legally available for the payment of dividends minus the sum of:
- the AT&T Wireless Group's available dividend amount, and
- the Liberty Media Group's available dividend amount.
In connection with the TCI merger, our board of directors adopted a
dividend policy statement with regard to Liberty Media Group tracking stock that
generally provides that dividends and distributions received by a member of the
AT&T Common Stock Group from a member of the Liberty Media Group will be
distributed to holders of Liberty Media Group tracking stock, subject to the
limitations described in our charter. Subject to those limitations, our board of
directors reserves
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the right to declare and pay dividends on AT&T common stock, AT&T Wireless Group
tracking stock and Liberty Media Group tracking stock in any amount, in equal or
unequal amounts, and could, in its sole discretion, declare and pay dividends,
or refrain from declaring and paying dividends, exclusively on AT&T common
stock, exclusively on AT&T Wireless Group tracking stock or exclusively on
Liberty Media Group tracking stock, or on all or any combination of the above.
This is regardless of the relative amounts available for the payments of
dividends for each group, the amount of prior dividends declared on each class
of common stock, the respective voting or liquidation rights of each class, or
any other factor. See "The Charter Amendment Proposal -- Terms of the Tracking
Stock Amendment -- Dividends" for detailed information on the dividends we are
permitted to pay with respect to AT&T Wireless Group tracking stock.
CHANGES IN THE TAX LAW OR IN THE INTERPRETATION OF CURRENT TAX LAW MAY
RESULT IN REDEMPTION OF AT&T WIRELESS GROUP TRACKING STOCK OR CESSATION OF
THE ISSUANCE OF FURTHER SHARES
A proposal last year by the Clinton Administration would impose a
corporate-level tax on the issuance of stock similar to AT&T Wireless Group
tracking stock. As proposed, this provision would be effective on the date of
its enactment by the U.S. Congress. If this or a similar proposal is enacted,
AT&T could be subject to tax on an issuance of AT&T Wireless Group tracking
stock after the date of enactment. Legislation proposed in the U.S. House of
Representatives and the U.S. Senate does not contain any such proposal. We
cannot predict, however, whether the Clinton Administration's proposal will be
enacted by the U.S. Congress and, if enacted, whether it will be in the form
proposed.
If there are adverse tax consequences to the issuance of AT&T Wireless
Group tracking stock, it is possible that we would cease issuing additional
shares of AT&T Wireless Group tracking stock. This could affect the value of
AT&T Wireless Group tracking stock then outstanding.
Furthermore, we are entitled to convert AT&T Wireless Group tracking stock
into AT&T common stock at a premium of 10% if, based upon the opinion of tax
counsel, there are adverse U.S. federal income tax law developments related to
AT&T Wireless Group tracking stock that occur after the issuance of AT&T
Wireless Group tracking stock. The proposal of the Clinton Administration would
be such an adverse development if it were enacted in its proposed form. If we
did convert AT&T Wireless Group tracking stock into AT&T common stock, the
interests of holders of AT&T common stock would be diluted as a result of the
redemption premium paid for AT&T Wireless Group tracking stock.
OPTIONAL REDEMPTION OF AT&T WIRELESS GROUP TRACKING STOCK, INCLUDING AS A
RESULT OF AN ADVERSE TAX LAW CHANGE
Our board of directors may, at any time after either the occurrence of
tax-related events or the second anniversary of the date we initially issue
shares of AT&T Wireless Group tracking stock, redeem all outstanding shares of
AT&T Wireless Group tracking stock for shares of AT&T common stock at a rate per
share of AT&T Wireless Group tracking stock equal to 110% of the ratio of the
average market price per share of AT&T Wireless Group tracking stock to the
average market price per share of AT&T common stock computed for the 40
consecutive trading days ending on the 15th trading day prior to the date that
the notice of redemption is sent to holders of AT&T Wireless Group tracking
stock. A decision to redeem the tracking shares could be made at a time when
either or both of the AT&T common stock and the AT&T Wireless Group tracking
stock may be considered to be overvalued or undervalued. In addition, a
redemption at any premium would dilute the interests of the holders of the AT&T
common stock in AT&T, and would preclude holders of both AT&T common stock and
AT&T Wireless Group tracking stock from retaining their investment
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in a security intended to reflect separately the economic performance of the
relevant group. It would also give holders of shares of converted AT&T Wireless
Group tracking stock an amount of consideration that may differ from the amount
of consideration a third-party buyer pays or would pay for all or substantially
all of the assets of the AT&T Wireless Group. For further details, see "The
Charter Amendment Proposal -- Tracking Stock Amendment."
DISPOSITIONS OF GROUP ASSETS
Assuming the assets attributed to any group represent less than
substantially all of the properties and assets of AT&T as a whole, our board of
directors could, in its sole discretion and without shareholder approval,
approve sales and other dispositions of any amount of the properties and assets
attributed to a group because the New York Business Corporation Law requires
shareholder approval only for a sale or other disposition of all or
substantially all of the properties and assets of the entire company.
The charter amendment generally provides that, in the event of a
disposition of all or substantially all of the properties and assets attributed
to the AT&T Wireless Group, generally defined as 80% or more of the fair value
of that group, AT&T will be required to:
- convert each outstanding share of AT&T Wireless Group tracking stock into
a number of shares of AT&T common stock equal to 110% of the ratio of the
average market price per share of AT&T Wireless Group tracking stock to
the average market price per share of AT&T common stock,
- distribute cash and/or securities (other than AT&T common stock) or other
property equal to the fair value of the net proceeds from that
disposition allocable to AT&T Wireless Group tracking stock, either by
special dividend or by redemption of all or part of the outstanding
shares of AT&T Wireless Group tracking stock, or
- take a combination of the actions described in the preceding bullets
whereby AT&T would convert some shares of AT&T Wireless Group tracking
stock into AT&T common stock at a 10% premium and pay a dividend on the
remaining shares of AT&T Wireless Group tracking stock or redeem all or
part of the remaining shares of AT&T Wireless Group tracking stock for
cash and/or property equal to the fair value of a portion of the net
proceeds of the disposition allocable to AT&T Wireless Group tracking
stock.
For this purpose, the "average market price per share" of AT&T common stock or
AT&T Wireless Group tracking stock, as the case may be, means the average of the
daily market value per share for such AT&T common stock or AT&T Wireless Group
tracking stock during the 10-trading day period beginning on the 15th trading
day following completion of that transaction.
The charter amendment does not require our board of directors to select the
option that would result in the distribution with the highest value to the
holders of AT&T Wireless Group tracking stock or with the smallest effect on the
AT&T common stock. See "-- The fiduciary duties of our board of directors to
more than one class of common stock are not clear under New York law" for a
discussion of our board's fiduciary duties to the holders of the different
classes of our common shares.
In addition, under New York law, our board of directors could decline to
dispose of assets of a group despite the request of a majority of the holders of
the tracking stock designed to track the assets and businesses of that group.
PUBLIC POLICY DETERMINATIONS
Because of the nature of the businesses of the AT&T Common Stock Group, the
AT&T Wireless Group and the Liberty Media Group, the groups may have diverging
interests as to the
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position AT&T should take with respect to various regulatory issues. For
example, Federal Communications Commission (FCC) regulations that may advance
the interests of one group may not advance the interests of the other groups.
Under the AT&T Wireless Group policy statement, we will resolve material matters
involving potentially divergent interests in a manner that our board of
directors, or the AT&T Wireless Group capital stock committee, determines to be
in the best interests of AT&T and all of our common shareholders after giving
fair consideration to the potentially divergent interests and all other relevant
interests of the holders of the separate classes of our common shares.
Nevertheless, our board of directors could take positions on any given issue
that may benefit one group more than another.
OPERATIONAL AND FINANCIAL DECISIONS
Our board of directors could, in its sole discretion, from time to time,
but subject to:
- its fiduciary duties,
- the AT&T Wireless Group policy statement,
- the Liberty Media Group policy statement, and
- the terms of the inter-group agreement between AT&T and Liberty Media
Group,
make operational and financial decisions or implement policies that affect
disproportionately the businesses of a group. These decisions could include:
- transfers of services, including sales agency, resale and other
arrangements, funds or assets between groups and other inter-group
transactions,
- allocation of financing opportunities in the public markets, and
- allocation of business opportunities, resources and personnel
that, in each case, may be suitable for one or more groups. Any such decision
may benefit one group more than the other groups. For example, the decision to
obtain funds for one group may adversely affect the ability of the other groups
to obtain funds sufficient to implement their respective growth strategies or
may increase the cost of those funds.
In addition, the AT&T Wireless Group is subject to AT&T's existing
agreements or arrangements with third parties. These agreements or arrangements
currently may benefit the AT&T Wireless Group, as in the case of purchasing
arrangements, or may have the effect of limiting or impairing its business
opportunities. For example, AT&T and British Telecommunications plc have entered
into a joint venture agreement for the provision of global communications
services. As part of that agreement, among other things, AT&T has agreed to
various restrictions on its businesses and activities, including non-competition
provisions and exclusive purchasing requirements, all of which will apply to the
AT&T Wireless Group.
Any decisions by our board of directors to renew, extend, modify or
terminate its current agreements or arrangements, or enter into similar
agreements or arrangements in the future, may benefit one group more than the
other group or limit or impair the ability of either group to pursue business
opportunities. Furthermore, overlap between the businesses of the two groups may
increase as a result of regulatory changes, technological advancements or other
factors that will make those operational and financial decisions more difficult.
All of these decisions will be made by our board of directors in its good
faith business judgment and in accordance with procedures and policies adopted
by our board of directors from time to time, including the AT&T Wireless Group
policy statement described under "Relationship between the AT&T Common Stock
Group and the AT&T Wireless Group -- AT&T Wireless Group Policy Statement."
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THE FIDUCIARY DUTIES OF OUR BOARD OF DIRECTORS TO MORE THAN ONE CLASS OF COMMON
STOCK ARE NOT CLEAR UNDER NEW YORK LAW
Although we are not aware of any legal precedent under New York law
involving the fiduciary duties of directors of corporations having two or more
classes of common stock, or separate classes or series of capital stock,
principles of Delaware law established in cases involving differing treatment of
two classes of capital stock or two groups of holders of the same class of
capital stock provide that a board of directors owes an equal duty to all
stockholders regardless of class or series, and does not have separate or
additional duties to either group of stockholders. Under these principles of
Delaware law and the related principle known as the "business judgment rule,"
absent abuse of discretion, a good faith business decision made by a
disinterested and adequately informed board of directors, or a committee of the
board of directors, with respect to any matter having disparate impacts upon
holders of AT&T common stock, AT&T Wireless Group tracking stock or Liberty
Media Group tracking stock would be a defense to any challenge to such
determination made by or on behalf of the holders of any class of our common
shares. Nevertheless, a New York court hearing a case involving such a challenge
may decide to apply principles of New York law different from the principles of
Delaware law discussed above, or may develop new principles of law, in order to
decide such a case.
OUR BOARD OF DIRECTORS WILL HAVE THE ABILITY TO CONTROL INTER-GROUP TRANSACTIONS
BETWEEN THE AT&T COMMON STOCK GROUP AND THE AT&T WIRELESS GROUP
Our board of directors may decide to transfer funds between groups, which
may result in either a corresponding change in the size of the AT&T Common Stock
Group's inter-group interest in the AT&T Wireless Group, the issuance of an
additional preferred security in the AT&T Wireless Group or a loan, or repayment
of a loan, from one group to the other group, subject to the terms of the AT&T
Wireless Group policy statement. Transfers of assets from the AT&T Common Stock
Group to the AT&T Wireless Group that our board of directors designates as an
equity contribution by the AT&T Common Stock Group to the AT&T Wireless Group
will result in an increase in the inter-group interest of the AT&T Common Stock
Group in the AT&T Wireless Group.
Under the AT&T Wireless Group policy statement, the AT&T Common Stock Group
may make loans to the AT&T Wireless Group at interest rates and on terms and
conditions substantially equivalent to the interest rates and 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 or any member of the AT&T Common Stock Group.
The AT&T Wireless Group policy statement contemplates that these terms will
apply regardless of the interest rates and terms and conditions on which AT&T or
members of the AT&T Common Stock Group may have acquired the subject funds. We
anticipate that interest rates payable by the AT&T Wireless Group initially will
be higher than those payable by AT&T or the AT&T Common Stock Group.
Any increase in the inter-group interest resulting from an equity
contribution by the AT&T Common Stock Group to the AT&T Wireless Group, or any
decrease in the inter-group interest resulting from a transfer of funds from the
AT&T Wireless Group to the AT&T Common Stock Group, would be determined by
reference to the then-current market value of AT&T Wireless Group tracking
stock. Such an increase, however, could occur at a time when such shares are
considered under- or over-valued and such a decrease could occur at a time when
such shares are considered under- or over-valued. Under the AT&T Wireless Group
policy statement, there will be no inter-group interest of the AT&T Wireless
Group in the AT&T Common Stock Group. Transfers from the AT&T Wireless Group to
the AT&T Common Stock Group will require other types of consideration when there
is no inter-group interest to offset.
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OUR BOARD OF DIRECTORS MAY CHANGE THE AT&T WIRELESS GROUP POLICY STATEMENT OR
BY-LAW AMENDMENT WITHOUT SHAREHOLDER APPROVAL
In connection with the issuance of AT&T Wireless Group tracking stock, our
board of directors intends to adopt the AT&T Wireless Group policy statement
that we describe in this proxy statement to govern the relationship between the
AT&T Common Stock Group and the AT&T Wireless Group and to amend our by-laws to
create a capital stock committee that will oversee the interaction between the
two groups. Our board of directors may modify, suspend or rescind the policies
set forth in the policy statement or make additions or exceptions to them, in
the sole discretion of our board of directors, without approval of our
shareholders, although there is no present intention to do so. Our board of
directors may also adopt additional policies, depending upon the circumstances.
The by-law amendment may similarly be modified, suspended or rescinded. Our
board would make any determination to modify, suspend or rescind these policies
or by-law amendment, or to make exceptions to them or adopt additional policies
or by-laws, including any decision that would have disparate impacts upon
holders of AT&T common stock and AT&T Wireless Group tracking stock, in a manner
consistent with its fiduciary duties to AT&T and all of our common shareholders
after giving fair consideration to the potentially divergent interests and all
other relevant interests of the holders of the separate classes of our common
shares, including the holders of AT&T common stock, AT&T Wireless Group tracking
stock and Liberty Media Group tracking stock. See "-- The fiduciary duties of
our board of directors to more than one class of common stock are not clear
under New York law" for more information regarding our board of directors'
fiduciary duties to our shareholders and "Relationship between the AT&T Common
Stock Group and the AT&T Wireless Group" for a description of the AT&T Wireless
Group policy statement and by-law amendment.
IT WILL BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE THE AT&T WIRELESS GROUP
WITHOUT AT&T'S CONSENT
If the AT&T Wireless Group were a stand-alone entity, any person interested
in acquiring it without negotiation with our management could seek control of
the outstanding stock of that entity by means of a tender offer or proxy
contest. Although the tracking stock amendment will create a new class of our
common shares that is intended to reflect the separate economic performance of
the AT&T Wireless Group, a person interested in acquiring only that group
without negotiation with our management still would be required to seek control
of the voting power represented by all of the outstanding capital stock of AT&T
entitled to vote on that acquisition, including the classes of common shares
related to the other groups. As a result, this may discourage potential
interested bidders from seeking to acquire the AT&T Wireless Group. See
"-- Holders of our tracking stock will have limited separate shareholder rights
and will have no additional rights with respect to their group, including direct
voting rights" for more information on the rights of holders of tracking stocks.
IN THE FUTURE, AT&T MAY CAUSE A MANDATORY EXCHANGE OF AT&T WIRELESS GROUP
TRACKING STOCK
Under the tracking stock amendment, AT&T may effect a recapitalization of
AT&T by declaring that all outstanding shares of AT&T Wireless Group tracking
stock will be exchanged for shares of one or more qualifying subsidiaries of
AT&T provided that specified criteria are satisfied. Such an exchange would
result in the qualifying subsidiary becoming independent of AT&T and the holders
of AT&T Wireless Group tracking stock owning shares directly in that subsidiary.
If AT&T chooses to exchange shares of AT&T Wireless Group tracking stock, the
market value of the common stock received in that exchange could be less than
the market value of AT&T Wireless Group tracking stock exchanged.
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FUTURE SALES OF AT&T WIRELESS GROUP TRACKING STOCK AND AT&T COMMON STOCK COULD
ADVERSELY AFFECT THEIR RESPECTIVE MARKET PRICES AND OUR ABILITY TO RAISE CAPITAL
IN THE FUTURE
Sales of substantial amounts of AT&T Wireless Group tracking stock and AT&T
common stock in the public market after we complete the transactions
contemplated by the tracking stock amendment could hurt the market price of AT&T
Wireless Group tracking stock and AT&T common stock. This could also hurt AT&T's
ability to raise capital in the future. The shares that we sell to the public in
the initial public offering and distribute to holders of AT&T common stock will
be freely tradable without restriction under the Securities Act of 1933 by
persons other than "affiliates" of AT&T, as defined under the Securities Act.
Any sales of substantial amounts of AT&T Wireless Group tracking stock or AT&T
common stock in the public market, or the perception that such sales might
occur, whether as a result of the initial public offering, distribution or
otherwise, could materially adversely affect the market price of the AT&T
Wireless Group tracking stock or AT&T common stock.
WE CANNOT ASSURE YOU THAT WE WILL COMPLETE ANY OR ALL OF THE TRANSACTIONS
This proxy statement describes our current plan for the tracking stock
amendment and issuance of AT&T Wireless Group tracking stock. These
transactions, including the initial public offering and the distribution, are
subject to various conditions and uncertainties. Further, our board of directors
reserves the right to not amend our charter to create AT&T Wireless Group
tracking stock, even if shareholders approve the charter amendment. There can be
no assurance that we will complete all or any of the transactions we describe,
or that we will complete them on the terms or in the time frame we describe in
this proxy statement.
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RISK FACTORS -- THE AT&T WIRELESS GROUP
THE AT&T WIRELESS GROUP HAS SIGNIFICANT NETWORK BUILD OUT THAT NEEDS TO BE
COMPLETED
The AT&T Wireless Group needs to complete significant remaining build out
activities, including completion of build out activities in some of its existing
wireless markets. As the AT&T Wireless Group continues to build out its network,
it must continue to:
- lease, acquire or otherwise obtain rights to a large number of cell and
switch sites,
- obtain zoning variances or other local governmental or third-party
approvals or permits for network construction,
- complete the radio frequency design, including cell site design,
frequency planning and network optimization, for each of its remaining
markets,
- complete the fixed network implementation, which includes designing and
installing network switching systems, radio systems, interconnecting
facilities and systems, and operating support systems, and
- expand and maintain customer care, network management, billing and other
financial and management systems.
In addition, in the next several years, the AT&T Wireless Group will start
to implement upgrades to its network to access the next generation of digital
technology.
There can be no assurance that these events will occur in the time frame we
assume or that the FCC requires, or at the cost we assume, or at all.
Additionally, problems in vendor equipment availability, technical resources or
system performance could delay the launch of operations in new markets or result
in increased costs in all markets. Failure or delay to complete the build out of
the network and launch operations, or increased costs of such build out and
launch of operations, could have a material adverse effect on the operations and
financial condition of the AT&T Wireless Group. The AT&T Wireless Group intends
to rely on the services of various companies who are experienced in design and
build out of wireless networks in order to accomplish its build out schedule.
There can be no assurance, however, that the AT&T Wireless Group will be able to
obtain satisfactory contractors on economically attractive terms or that the
contractors obtained will perform as expected.
THE AT&T WIRELESS GROUP HAS SUBSTANTIAL CAPITAL REQUIREMENTS AND NEEDS FOR
SUBSTANTIAL CAPITAL EXPENDITURES
The operation and expansion of the AT&T Wireless Group's network and the
marketing and distribution of its related products and services will continue to
require substantial capital. We currently estimate that the AT&T Wireless
Group's capital expenditures for build out of its networks, including
expenditures related to its fixed wireless operations, during 2000 will total
$4.1 billion. The actual amount of the funds required to finance the AT&T
Wireless Group's network build out may vary materially from this estimate. The
AT&T Wireless Group could also require additional funds in the event of
significant departures from its current business plan, unforeseen delays, cost
overruns, unanticipated expenses, regulatory changes, engineering design
changes, and technological and other risks.
The AT&T Wireless Group also may require substantial additional capital
for, among other uses, acquisitions of providers of wireless services, spectrum
license or system acquisitions, system development and network capacity
expansion. Technological developments or issues also may require
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additional capital expenditures. As a result, the AT&T Wireless Group may incur
significant indebtedness. In addition, we may not be able to arrange additional
financing to fund the AT&T Wireless Group's capital requirements on terms
acceptable to us or the AT&T Wireless Group. Failure to obtain any such
financing could result in the delay or abandonment of the AT&T Wireless Group's
development or expansion plans or the failure to meet regulatory build out
requirements. For more information relating to the AT&T Wireless Group's access
to capital, see "AT&T Wireless Group Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
POTENTIAL ACQUISITIONS MAY REQUIRE THE AT&T WIRELESS GROUP TO INCUR SUBSTANTIAL
ADDITIONAL DEBT AND INTEGRATE NEW TECHNOLOGIES, OPERATIONS AND SERVICES, WHICH
MAY BE COSTLY AND TIME CONSUMING
An element of the AT&T Wireless Group's strategy is to expand its network,
which the AT&T Wireless Group may do through the acquisition of licenses,
systems and wireless providers. These acquisitions may cause the AT&T Wireless
Group to incur substantial additional indebtedness to finance the acquisitions
or to assume indebtedness of the entities that are acquired. In addition, the
AT&T Wireless Group may encounter difficulties in integrating those acquired
operations into its own operations, including as a result of different
technologies, services or service offerings. These actions could prove costly or
time consuming or divert management's attention from other business matters.
FAILURE TO DEVELOP FUTURE BUSINESS OPPORTUNITIES MAY HAVE AN ADVERSE EFFECT ON
THE AT&T WIRELESS GROUP'S GROWTH POTENTIAL
The AT&T Wireless Group intends to pursue a number of new growth
opportunities, including wireless data and fixed wireless services. These
opportunities involve new services for which there are no proven markets. In
addition, the ability to deploy and deliver these services relies, in many
instances, on new and unproven technology. There can be no assurance that the
AT&T Wireless Group's existing technology will perform as expected or that the
AT&T Wireless Group will be able to successfully develop new technology to
effectively and economically deliver these services. In addition, these
opportunities require substantial capital outlays and spectrum availability to
deploy on a large scale. There can be no assurance that such capital or spectrum
will be available to support these services. Furthermore, each of these
opportunities entails additional specific risks. For example, the delivery of
fixed wireless services requires the AT&T Wireless Group to provide installation
and maintenance services, which the group has never provided previously. This
will require the group to hire, employ, train and equip technicians to provide
installation and repair in each market served or rely on subcontractors to
perform these services. There can be no assurance that the AT&T Wireless Group
will be able to hire and train sufficient numbers of qualified employees or
subcontract these services or do so on economically attractive terms. The
success of wireless data services, on the other hand, is substantially dependent
on the ability of others to develop applications for wireless devices and to
develop and manufacture devices that support wireless applications. There can be
no assurance that these applications or devices will be developed or developed
in sufficient quantities to support the deployment of wireless data services.
The AT&T Wireless Group cannot guarantee when or that these services will
be widely introduced and fully implemented, that they will be successful when
they are in place or that customers will purchase the services offered. If these
services are not successful or costs associated with implementation and
completion of the roll out of these services materially exceed those currently
estimated by the AT&T Wireless Group, the AT&T Wireless Group's financial
condition and prospects could be materially adversely affected.
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THE AT&T WIRELESS GROUP FACES SUBSTANTIAL COMPETITION
There is substantial competition in the wireless telecommunications
industry. The AT&T Wireless Group expects competition to intensify as a result
of the entrance of new competitors and the development of new technologies,
products and services. Other two-way wireless providers, including other
cellular and personal communications services (PCS) operators and resellers,
serve each of the markets in which the AT&T Wireless Group competes. A majority
of markets will have five or more commercial mobile radio service providers, and
all of the top 50 metropolitan markets have at least one other cellular
competitor in addition to one or two PCS competitors. Competition also may
increase to the extent that smaller, stand-alone wireless providers transfer
licenses to larger, better capitalized and more experienced wireless providers.
The AT&T Wireless Group anticipates that market prices for two-way wireless
services generally will decline in the future due to increased competition. We
expect significant competition among wireless providers, including from new
entrants, to continue to drive service and equipment prices lower. The AT&T
Wireless Group also expects that there will be increases in advertising and
promotional spending, along with increased demands on access to distribution
channels. All of this may lead to greater choices for customers, possible
consumer confusion and increasing movement of customers between competitors
(referred to as churn). The AT&T Wireless Group's ability to compete
successfully also will depend on marketing and on its ability to anticipate and
respond to various competitive factors affecting the industry, including new
services, changes in consumer preferences, demographic trends, economic
conditions and discount pricing strategies by competitors.
The wireless communications industry has been experiencing significant
consolidation and the AT&T Wireless Group expects that this consolidation will
continue. The previously announced mergers or joint ventures of Bell Atlantic
Mobile Systems Inc./GTE Corporation/Vodafone Group Public Limited
Company/AirTouch Communications, Inc., MCI WorldCom, Inc./Sprint Corporation and
SBC Communications Inc./Ameritech Corporation will create large,
well-capitalized competitors with substantial financial, technical, marketing
and other resources to respond to the AT&T Wireless Group's offerings. In
addition, assuming these mergers or ventures were completed today, the AT&T
Wireless Group estimates that its ranking would decline to second in U.S.
revenue, third in U.S. subscriber share and fourth in U.S. population covered by
licenses, or POPs. As a result, these competitors may be able to offer
nationwide services and plans more quickly and more economically than the AT&T
Wireless Group and to obtain roaming rates that are more favorable than those
obtained by the AT&T Wireless Group, and may be better able to respond to offers
of the AT&T Wireless Group.
THE AT&T WIRELESS GROUP EXPECTS TO EXPERIENCE SIGNIFICANT CHANGE IN THE WIRELESS
INDUSTRY
The wireless communications industry is experiencing significant
technological change. This includes the increasing pace of digital upgrades in
existing analog wireless systems, evolving industry standards, ongoing
improvements in the capacity and quality of digital technology, shorter
development cycles for new products, and enhancements and changes in end-user
needs and preferences. There is also uncertainty as to the pace and extent that
customer demand will continue to increase, as well as the extent to which
airtime and monthly recurring charges may continue to decline. As a result, the
future prospects of the industry and the AT&T Wireless Group and the success of
its competitive services remain uncertain. Also, alternative technologies may
develop for the provision of services to customers that may provide wireless
communications service or alternative service superior to that available from
the AT&T Wireless Group. Thus, the AT&T Wireless Group cannot give assurance
that technological developments will not materially adversely affect it.
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TERMINATION OR IMPAIRMENT OF OUR RELATIONSHIP WITH A SMALL NUMBER OF KEY
SUPPLIERS COULD ADVERSELY AFFECT THE AT&T WIRELESS GROUP'S REVENUES AND RESULTS
OF OPERATIONS
The AT&T Wireless Group has developed relationships with a small number of
key vendors, including Nokia Corporation, Telefonaktiebolaget LM Ericsson,
Mitsubishi Corporation and Motorola, Inc. for its supply of wireless handsets,
Lucent Technologies, Inc., Nortel Inversora S.A. and Ericsson for its supply of
telecommunications equipment and Convergys Corporation for its billing services.
The AT&T Wireless Group does not have operational or financial control over its
key suppliers, and has limited influence with respect to the manner in which
they conduct their businesses. If these key suppliers were unable to honor their
obligations to the AT&T Wireless Group, it could disrupt the business of the
AT&T Wireless Group and hurt its revenues and results of operations.
THERE IS NO GUARANTEE THAT OUR TECHNOLOGY WILL BE COMPETITIVE WITH OTHER
TECHNOLOGIES OR COMPATIBLE WITH THE NEXT GENERATION TECHNOLOGY
There are three existing digital technologies, none of which are compatible
with the others. The AT&T Wireless Group has selected TDMA technology for its
network because it believes that this technology offers several advantages over
the other technologies. However, a number of other wireless service providers
have chosen code division multiple access (CDMA) or global system for mobile
communications (GSM) as their digital wireless technology. There is no guarantee
that TDMA will provide the advantages the AT&T Wireless Group expects. In
addition, we cannot guarantee that the next generation technology will be
compatible with TDMA. The AT&T Wireless Group has chosen Enhanced Data Rates
from GSM Evolution, or EDGE, also known as GSM++, as its next or third
generation wireless technology. EDGE represents a merger of TDMA and GSM.
However, other wireless providers may choose a third generation wireless
technology that combines CDMA and GSM. If the next generation technology that
gains widespread acceptance is not compatible with TDMA, it would materially
adversely affect the business, financial condition and prospects of the AT&T
Wireless Group.
THE AT&T WIRELESS GROUP RELIES ON FAVORABLE ROAMING ARRANGEMENTS, WHICH IT MAY
BE UNABLE TO CONTINUE TO OBTAIN
The AT&T Wireless Group's customers automatically can access another
provider's analog cellular or digital system or PCS system only if the other
provider allows the AT&T Wireless Group's customers to roam on its network. The
AT&T Wireless Group relies on agreements to provide roaming capability to its
customers in many areas of the United States that the AT&T Wireless Group's
network does not serve. Some competitors, because of their call volumes or their
affiliations with, or ownership of, wireless providers, however, may be able to
obtain roaming rates that are lower than those rates obtained by the AT&T
Wireless Group.
There can be no assurance that the AT&T Wireless Group will continue to be
able to obtain or maintain roaming agreements with other providers on terms that
are acceptable to it. In addition, the quality of service that a wireless
provider delivers during a roaming call may be inferior to the quality of
service the AT&T Wireless Group or an affiliated company provides, the price of
a roaming call may not be competitive with prices of other wireless providers
for such call, and the AT&T Wireless Group's customer may not be able to use any
of the advanced features, e.g., voicemail notification, that the customer enjoys
when making calls within the AT&T Wireless Group's network.
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THE AT&T WIRELESS GROUP DEPENDS ON FOURTH QUARTER RESULTS
The wireless industry, including the AT&T Wireless Group, has experienced a
trend of generating a significantly higher number of customer additions and
handset sales in the fourth quarter of each year as compared to the other three
fiscal quarters. A number of factors contribute to this trend, including the
increasing use of retail distribution, which is dependent upon the year-end
holiday shopping season, the timing of new product and service announcements and
introductions, competitive pricing pressures and aggressive marketing and
promotions. There can be no assurance that strong fourth quarter results for
customer additions and handset sales will continue for the wireless industry or
the AT&T Wireless Group. In the future, the number of customer additions and
handset sales for the AT&T Wireless Group in the fourth quarter could decline
for a variety of reasons, including the AT&T Wireless Group's inability to match
or beat pricing plans offered by competitors, the failure to adequately promote
the AT&T Wireless Group's products, services and pricing plans, or the failure
to have an adequate supply or selection of handsets. If in any year fourth
quarter results fail to significantly improve upon customer additions and
handset sales from the year's previous quarters, this could hurt the AT&T
Wireless Group's results for the following year.
MEDIA REPORTS HAVE SUGGESTED RADIO FREQUENCY EMISSIONS MAY BE LINKED TO VARIOUS
HEALTH CONCERNS AND INTERFERE WITH VARIOUS MEDICAL DEVICES
Media and other reports have linked radio frequency emissions from wireless
handsets to various health concerns, including cancer, and to interference with
various electronic medical devices, including hearing aids and pacemakers.
Although management does not know of any definitive studies showing that radio
frequency emissions raise health concerns, concerns over radio frequency
emissions may discourage the use of wireless handsets or expose the AT&T
Wireless Group to potential litigation, which could have a material adverse
effect on the AT&T Wireless Group's results of operations. Additionally,
research and studies are ongoing, and there can be no assurance that further
research and studies will not demonstrate a link between radio frequency
emissions and health concerns.
THE OPERATIONS OF THE AT&T WIRELESS GROUP ARE SUBJECT TO VARIOUS GOVERNMENT
REGULATIONS
The licensing, construction, operation, sale, resale and interconnection
arrangements of wireless communications systems are regulated to varying degrees
by the FCC, and, depending on the jurisdiction, state and local regulatory
agencies. In addition, the FCC, together with the Federal Aviation
Administration (FAA) regulates tower marking and lighting. Any of these agencies
having jurisdiction over the AT&T Wireless Group's business could adopt
regulations or take other actions that could adversely affect the business of
the AT&T Wireless Group.
FCC licenses to provide wireless services or PCS are subject to renewal and
revocation. There may be competition for the AT&T Wireless Group's licenses upon
their expiration and there can be no assurance that the FCC will renew them. FCC
rules require all wireless and PCS licensees to meet specified build out
requirements. There can be no assurance that the AT&T Wireless Group will be
able to meet these requirements in each market. Failure to comply with these
requirements in a given license area could result in revocation or forfeiture of
the AT&T Wireless Group's license for that license area or the imposition of
fines on the AT&T Wireless Group by the FCC. See "Description of the AT&T
Wireless Group -- Regulatory Environment" for a more detailed description of the
regulatory environment affecting the AT&T Wireless Group.
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STATE AND LOCAL LEGISLATIVE BODIES ARE CONSIDERING OR HAVE ENACTED LEGISLATION
TO RESTRICT OR PROHIBIT WIRELESS PHONE USE WHILE DRIVING
Legislation has been proposed in some state and local legislative bodies to
restrict or prohibit the use of wireless phones while driving motor vehicles.
Such laws have been enacted in other countries, and, to date, a small number of
communities in the United States have passed restrictive local ordinances. In
addition, some studies have indicated that some aspects of using wireless phones
while driving may impair drivers' attention in certain circumstances, making
accidents more likely. If laws are passed prohibiting or restricting the use of
wireless phones while driving, it could have the effect of reducing subscriber
usage, which could cause a material adverse effect on the AT&T Wireless Group's
results of operations. Additionally, concerns over the use of wireless phones
while driving could lead to potential litigation relating to accidents, deaths
or serious bodily injuries, which also could have material adverse effects on
the AT&T Wireless Group's results of operations.
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THE SPECIAL MEETING
GENERAL
We are mailing this proxy statement and the accompanying proxy card
beginning , 2000 to holders of AT&T common stock and holders of
Liberty Media Group tracking stock in connection with the solicitation of
proxies by our board of directors for use at the special meeting. We solicit
proxies to give all shareholders on the record date an opportunity to vote on
matters that will come before the special meeting. This procedure is necessary
because shareholders live in all states and abroad and many may not be able to
attend the special meeting. You can vote or let us vote your shares of AT&T
common stock or Liberty Media Group tracking stock only if you are present in
person or represented by proxy. A form of proxy is being provided to holders of
AT&T common stock and holders of Liberty Media Group tracking stock with this
proxy statement. Information with respect to the execution and revocation of
proxies is provided under "-- Proxies; Revocability of Proxies; Cost of
Solicitation."
At the special meeting, holders of AT&T common stock and holders of Liberty
Media Group tracking stock eligible to vote will be asked to consider and vote
upon the approval and adoption of the charter amendment proposal and the
incentive plan proposal. For more information, see "The Charter Amendment
Proposal" and "The Incentive Plan Proposal."
DATE, TIME AND PLACE OF THE SPECIAL MEETING; RECORD DATE
The special meeting is scheduled to be held at . Our board of
directors has fixed the close of business on , 2000 as the record
date for determination of holders of AT&T common stock and holders of Liberty
Media Group tracking stock entitled to notice of and to vote at the special
meeting. On , 2000, there were outstanding shares of AT&T
common stock, shares of Class A Liberty Media Group tracking stock and
shares of Class B Liberty Media Group tracking stock.
We expect that representatives from PricewaterhouseCoopers LLP, independent
accountants for AT&T, will be present at the special meeting, have the
opportunity to make a statement if they so desire and be available to respond to
appropriate questions.
VOTE REQUIRED; QUORUM
Approval of the charter amendment proposal requires a majority of the
combined voting power of all outstanding shares of AT&T common stock and Liberty
Media Group tracking stock to vote in its favor. Approval of the incentive plan
proposal requires a majority of the votes cast by all outstanding shares of AT&T
common stock and Liberty Media Group tracking stock to vote in its favor. Each
share of AT&T common stock has one vote on each matter properly brought before
the special meeting. Each share of Class B Liberty Media Group tracking stock
has 0.75 of a vote and each share of Class A Liberty Media Group tracking stock
has 0.075 of a vote on each of these matters.
The presence, either in person or by proxy, of holders of 40% of the shares
entitled to vote on the proposals to be presented to shareholders at the special
meeting is necessary to constitute a quorum at the special meeting. Shares of
AT&T common stock and Liberty Media Group tracking stock represented by a
properly completed proxy will be treated as present at the special meeting for
purposes of determining a quorum, without regard to whether the proxy is marked
as casting a vote or abstaining. See "-- Proxies; Revocability of Proxies; Cost
of Solicitation" for more information.
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PROXIES; REVOCABILITY OF PROXIES; COST OF SOLICITATION
If a shareholder attends the special meeting, he or she may vote by ballot.
However, many shareholders may be unable to attend the special meeting.
Therefore, our board of directors is soliciting proxies so that each holder of
AT&T common stock and each holder of Liberty Media Group tracking stock at the
close of business on the record date has the opportunity to vote on the
proposals to be considered at the special meeting.
Registered shareholders can simplify their voting and save us expense by
calling 1-800-273-1174 or by voting via the Internet at www.att.proxyvoting.com.
We provide telephone and Internet voting information on the proxy card. A
Control Number, located above the shareholder's name and address on the lower
left of the proxy card, is designed to verify the shareholder's identity, allow
the shareholder to vote such shareholder's shares and confirm that we have
properly recorded such shareholder's voting instructions.
If you do not choose to vote by telephone or Internet, you may still return
your proxy card, properly signed, and we will vote the shares in accordance with
your directions. You can specify your choices by marking the appropriate boxes
on your proxy card. If you sign and return your proxy card without specifying
choices, we will vote the shares as recommended by our board of directors.
Abstentions marked on your proxy card are voted neither FOR nor AGAINST, but we
count these shares in determining a quorum for each of the proposals.
Abstentions have the effect of a vote against the charter amendment proposal and
have no effect on the incentive plan proposal. IF YOU DO VOTE BY TELEPHONE OR
INTERNET, IT IS NOT NECESSARY TO RETURN YOUR PROXY CARD.
If you wish to give your proxy to someone other than the Proxy Committee,
you must cross out all three names appearing on your proxy card and insert the
name of another person or persons (not more than three). The person or persons
representing you must then present your signed proxy card at the special
meeting.
The proxy card also confers discretionary authority on the individuals
appointed by our board of directors and named on the proxy card to vote the
shares represented by the proxy card on any other matter that is properly
presented for action at the special meeting. No proxies instructing that they be
voted AGAINST or ABSTAIN from voting on the charter amendment proposal or the
incentive plan proposal will be voted in favor of any adjournment of the special
meeting to solicit additional proxies. You may revoke your proxy at any time
before it is voted at the special meeting by executing a later-dated proxy by
telephone, Internet or mail, by voting by ballot at the special meeting, or by
filing an instrument of revocation with the inspectors of election in care of
the Vice President -- Law and Secretary of AT&T.
IF YOU HOLD YOUR SHARES THROUGH A BANK OR BROKER, FOLLOW THE VOTING
INSTRUCTIONS ON THE FORM YOU RECEIVE. BROKER NON-VOTES WILL BE TREATED AS SHARES
OF AT&T COMMON STOCK THAT ARE PRESENT AND ENTITLED TO VOTE AT THE SPECIAL
MEETING FOR PURPOSES OF DETERMINING WHETHER A QUORUM EXISTS AND WILL HAVE THE
SAME EFFECT AS VOTES AGAINST APPROVAL OF THE CHARTER AMENDMENT PROPOSAL AND WILL
HAVE NO EFFECT ON THE APPROVAL OF THE INCENTIVE PLAN PROPOSAL. THE AVAILABILITY
OF TELEPHONE AND INTERNET VOTING WILL DEPEND ON THE BANK'S OR BROKER'S VOTING
PROCESSES.
YOUR VOTE IS IMPORTANT. WE URGE YOU TO VOTE BY TELEPHONE, INTERNET, OR BY
SIGNING AND RETURNING THE ACCOMPANYING PROXY CARD WHETHER OR NOT YOU PLAN TO
ATTEND THE SPECIAL MEETING. If you do attend the special meeting, you may vote
by ballot, thereby canceling any proxy previously given.
The cost of soliciting proxies in the accompanying form will be borne by
AT&T. In addition to solicitations by mail, a number of regular employees of
AT&T and of its subsidiaries may solicit
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proxies in person or by telephone. AT&T also has retained Morrow & Co. to aid in
the solicitation of proxies, at an estimated cost of $75,000 plus reimbursement
of reasonable out-of-pocket expenses.
VOTING SHARES HELD IN DIVIDEND REINVESTMENT AND SAVINGS PLANS
If you are a participant in the AT&T Shareowner Dividend Reinvestment and
Stock Purchase Plan or the AT&T Employee Stock Purchase Plan, your proxy card
will represent the number of full shares in either of those accounts on the
record date as well as shares registered in your name. If you are an employee
shareholder participating in the AT&T Employee Stock Ownership Plan, the AT&T
Long Term Savings Plan for Management Employees, the AT&T Long Term Savings and
Security Plan, the AT&T Retirement Savings and Profit Sharing Plan, the AT&T of
Puerto Rico, Inc. Long Term Savings Plan for Management Employees or the AT&T of
Puerto Rico, Inc. Long Term Savings and Security Plan, your proxy card also will
serve as a voting instruction for the trustees of those plans for accounts
registered in the same name. The trustees of these trust plans will not vote
shares for which they have not received proxy instructions, except for shares in
the employer shares fund in the AT&T Long Term Savings and Security Plan, which
the trustee will vote in its discretion.
SPECIAL MEETING ADMISSION
IF YOU ARE A REGISTERED SHAREHOLDER AND PLAN TO ATTEND THE SPECIAL MEETING
IN PERSON, PLEASE DETACH AND RETAIN THE ADMISSION TICKET AND MAP THAT WE HAVE
ATTACHED TO YOUR PROXY CARD. IF YOU CHOOSE TO VOTE BY MAIL AND ALSO PLAN TO
ATTEND THE SPECIAL MEETING, PLEASE BE SURE TO MARK THE "SPECIAL MEETING" BOX
WHEN YOU RETURN YOUR PROXY CARD. A BENEFICIAL OWNER WHO PLANS TO ATTEND THE
SPECIAL MEETING MAY OBTAIN AN ADMISSION TICKET IN ADVANCE BY SENDING A WRITTEN
REQUEST, WITH PROOF OF OWNERSHIP, SUCH AS A BANK OR BROKERAGE FIRM ACCOUNT
STATEMENT, TO: MANAGER -- PROXY, AT&T CORP., 295 NORTH MAPLE AVENUE, ROOM
1216L2, BASKING RIDGE, NEW JERSEY 07920. WE WILL BASE ADMITTANCE TO THE SPECIAL
MEETING UPON AVAILABILITY OF SEATING.
Subject to seating availability, we will admit shareholders who do not
present admission tickets at the special meeting upon verification of ownership
at the admissions counter.
is fully accessible to disabled persons, and sign interpretation and
wireless headsets will be available for our hearing-impaired shareholders.
CONFIDENTIALITY OF PROXIES AND BALLOTS
As a matter of policy, we keep private all proxies, ballots and voting
tabulations that identify individual shareholders. These documents are available
for examination only by the inspectors of election and individuals associated
with processing proxy cards and tabulating the vote. We do not disclose the vote
of any shareholder, except as may be necessary to meet legal requirements.
RECOMMENDATION OF OUR BOARD OF DIRECTORS
Our board of directors has approved the charter amendment proposal and the
incentive plan proposal and recommends that the shareholders vote FOR the
charter amendment proposal and the incentive plan proposal.
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THE CHARTER AMENDMENT PROPOSAL
The description of the material terms of the charter amendment proposal set
forth below is not complete. We qualify this description by reference to the
form of proposed charter amendment, which we have attached as Appendix A to this
proxy statement. We urge all shareholders to read it in its entirety.
GENERAL
We are proposing the following amendments to our charter, which we refer to
as the charter amendment proposal:
- Tracking Stock Amendment -- an amendment to create a new class of common
stock called Wireless Group common stock, par value $1.00 per share,
which we intend to reflect the economic performance of our domestic and
international mobile and fixed wireless services businesses. We refer to
this stock as "AT&T Wireless Group tracking stock."
- Other Charter Amendments -- other amendments to our charter as described
below.
Approval of the charter amendment proposal requires a majority of the
combined voting power of all outstanding shares of AT&T common stock and Liberty
Media Group tracking stock to vote in its favor. OUR DIRECTORS RECOMMEND THAT
SHAREHOLDERS VOTE FOR APPROVAL. Any shares not voted, whether by abstention,
broker non-vote or otherwise, have the effect of a vote against the charter
amendment proposal.
TRACKING STOCK AMENDMENT
The tracking stock amendment would, among other things:
- Define the "AT&T Wireless Group," the economic performance of which we
intend the AT&T Wireless Group tracking stock to reflect. The AT&T
Wireless Group will consist of substantially all of AT&T's domestic and
international mobile and fixed wireless services businesses.
- Redefine the "AT&T Common Stock Group." Following the creation of the
AT&T Wireless Group, the AT&T Common Stock Group will consist of all of
the remaining operations of AT&T (other than Liberty Media Group),
including all of AT&T's domestic long distance, international long
distance, regional and local telecommunications services and broadband
and Internet communications services. The AT&T Common Stock Group will
also include all of AT&T's billing, directory and calling card services
to support these communications services. Following the initial public
offering, but prior to the distribution to holders of AT&T common stock
of shares of AT&T Wireless Group tracking stock representing the interest
in the remaining economic performance of the AT&T Wireless Group, the
AT&T Common Stock Group also will include its inter-group interest in the
AT&T Wireless Group.
- Establish the terms of the AT&T Wireless Group tracking stock, consisting
of six billion authorized shares and entitling the holders of the
tracking stock to voting rights to be specified in the charter amendment.
We include a more complete description of AT&T Wireless Group tracking
stock under "-- Terms of the Tracking Stock Amendment."
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OTHER CHARTER AMENDMENTS
In addition to creating AT&T Wireless Group tracking stock, the charter
amendment proposal would amend our charter to delete the preamble to the
charter, and to replace the existing Article Second with the following:
SECOND: The purposes for which the corporation is formed are to
engage in any lawful act or activity for which corporations may be
organized under the Business Corporation Law of the State of New York,
provided that the corporation is not formed to engage in any act or
activity which requires the consent or approval of any New York state
official, department, board, agency or other body, without such consent or
approval first being obtained.
The preamble to our existing charter, which the charter amendment would
delete, currently recites the original formation of AT&T as an association under
the 1848 New York legislation providing for the creation of telegraph companies.
Article Second of our existing charter, which the amendment would replace as
described above, recites the various telegraph routes that were contemplated at
the time of the original formation of AT&T. These other amendments are designed
to modernize our charter and to provide us with the maximum flexibility
available to New York business corporations. We believe that these other
amendments are typical in the charters of most modern publicly held companies.
These other amendments will not alter the manner in which we currently do
business.
RECOMMENDATION OF OUR BOARD OF DIRECTORS
OUR BOARD OF DIRECTORS HAS APPROVED THE CHARTER AMENDMENT PROPOSAL AND
RECOMMENDS THAT YOU VOTE FOR THE CHARTER AMENDMENT PROPOSAL.
REASONS FOR THE TRACKING STOCK AMENDMENT
Our board of directors recommended the tracking stock amendment following
its review of various alternatives to provide a mechanism to increase market
awareness of the performance and value of our wireless businesses. Our board of
directors considered the following factors in approving, and recommending that
shareholders approve, the tracking stock amendment.
PROVIDE GREATER FINANCIAL FLEXIBILITY
AT&T believes that the creation of AT&T Wireless Group tracking stock will
provide AT&T with greater financial flexibility. AT&T expects that AT&T Wireless
Group tracking stock will assist the AT&T Wireless Group in meeting its capital
needs by creating an additional publicly traded equity security that it can use
to raise capital for the group. AT&T also believes that it could issue AT&T
Wireless Group tracking stock in potential acquisitions and investments. This
would allow shareholders of an entity that the AT&T Wireless Group acquires the
opportunity to participate more directly in the success of the business in which
that entity engages rather than participating in the much larger and more
diversified AT&T enterprise. In addition, because we do not expect to pay
dividends on the AT&T Wireless Group tracking stock for the foreseeable future,
any issuance of AT&T Wireless Group tracking stock, in connection with an
acquisition or otherwise, would not reduce cash flow that would otherwise be
available for capital investments.
ADVANTAGES OF DOING BUSINESS UNDER COMMON OWNERSHIP
The tracking stock amendment should allow us to achieve separate
recognition of wireless business values while continuing to benefit from
advantages of doing business under common
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ownership. Each group would be in a position to continue to benefit from
synergies with the other, including strategic, financial and operational
benefits that would not necessarily be available if the AT&T Common Stock Group
and the AT&T Wireless Group were not under common ownership. In addition, we
expect to continue to benefit from common branding, cross marketing and bundling
of services between groups, and synergies relating to, among other things,
technology sharing, networking arrangements, taxes, interest expense and
overhead costs.
GREATER MARKET RECOGNITION
AT&T believes that separating the performance of the AT&T Wireless Group
from the AT&T Common Stock Group will result in greater market recognition and
realization of the value, individually and collectively, of AT&T and its
distinct lines of business represented by each of the AT&T Wireless Group and
the AT&T Common Stock Group.
PROVIDE GREATER STRATEGIC FLEXIBILITY
In addition, our board of directors considered AT&T's strategic flexibility
after implementation of the tracking stock amendment, including the ability to
engage in mergers, acquisitions, divestitures, spin-offs, split-offs and
recombinations, and to unwind the tracking stock structure after a period of
time under the terms of our charter.
INCREASED SHAREHOLDER CHOICE
A corporation typically uses tracking stocks in situations where the
corporation has two or more businesses that have distinctly different investor
profiles -- such as mature businesses generating yield and income, like the core
businesses of the AT&T Common Stock Group, and higher-growth potential,
higher-risk businesses, like the businesses of the AT&T Wireless Group. AT&T
believes that the creation and issuance of AT&T Wireless Group tracking stock
will provide investors in the future with an opportunity to make an investment
choice better suited to their needs between the different types of investment in
AT&T.
ADVANTAGES OF TAX CONSOLIDATION
Operating the two groups under a single consolidated structure also will
allow us to retain the advantages of tax consolidation. We describe the tax
sharing agreement to be entered into between the AT&T Common Stock Group and the
AT&T Wireless Group under "Relationship between the AT&T Common Stock Group and
the AT&T Wireless Group -- Relationship with AT&T -- Tax sharing agreement."
MANAGEMENT INCENTIVES
We believe the existence of AT&T Wireless Group tracking stock will permit
the creation of more effective management incentive and retention programs. In
particular, we will be able to grant stock options and other incentive awards to
employees of each group that are tied more directly to the performance of that
group.
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OTHER CONSIDERATIONS
In addition, our board of directors considered other factors relating to
the tracking stock amendment, including:
- that we expect that implementation of the tracking stock amendment will
not be taxable for U.S. federal income tax purposes to us or to our
shareholders, and
- several other large, well-known companies, e.g., U S WEST Inc. and
Sprint, have created equity securities that are intended to reflect
separately the performance of specific businesses. Our board of directors
considered the performance of these securities and the performance of
other equity securities comparable to AT&T Wireless Group tracking stock.
Our board of directors also considered the following potential adverse
consequences of the tracking stock amendment:
- there can be no assurance as to:
- the degree to which the market price of AT&T common stock and AT&T
Wireless Group tracking stock will reflect the separate performance of
the AT&T Common Stock Group and the AT&T Wireless Group, respectively,
- the impact of the tracking stock amendment on the market price of AT&T
common stock, or
- whether the issuance of the AT&T Wireless Group tracking stock will
increase the aggregate market capitalization of AT&T.
- the tracking stock amendment presents additional corporate governance
issues, such as our board of directors' fiduciary obligation to holders
of different classes of capital stock representing different lines of
businesses. In particular, in the future, interests of the two groups
could diverge, or appear to diverge, and complex issues could arise in
resolving such conflicts that effectively require our board of directors
to benefit one group more than the other group.
- in general, the tracking stock will make the capital structure of AT&T
more complex and could cause confusion among some investors analyzing
AT&T's capital structure.
- the existence of tracking stock, as opposed to a stand-alone entity, may
limit potential unsolicited acquisitions since a person interested in
acquiring only one group without negotiation with our management would
still be required to seek control of the voting power represented by all
of the outstanding capital stock of AT&T entitled to vote on that
acquisition, including the classes of common shares related to the other
groups.
- holders of AT&T common stock, AT&T Wireless Group tracking stock and
Liberty Media Group tracking stock will continue to bear the risks
associated with an investment in a single corporation and all of AT&T's
businesses, assets and liabilities.
- the use of a tracking stock in connection with a future acquisition by
AT&T could have various adverse effects, such as the possible inability
or increased difficulty of receiving a ruling from the Internal Revenue
Service for an acquisition designed to be tax free.
- the fact that the Clinton Administration's Fiscal Year 2000 Budget
Proposal, released in February 1999, included a provision that would, if
enacted in its proposed form, require recognition of gain by the issuer
upon its issuance of tracking stock and would authorize the
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Secretary of the Treasury to treat tracking stock as nonstock or stock of
another entity. If this provision were enacted following creation of the
AT&T Wireless Group tracking stock, AT&T might decide to unwind the
tracking stock.
Our board of directors believes, however, that, on balance, the positive
aspects of the tracking stock amendment outweighs any potentially adverse
consequences, and recommends that our shareholders approve the tracking stock
amendment.
TERMS OF THE TRACKING STOCK AMENDMENT
GENERAL
If we adopt the tracking stock amendment, we will amend our charter to
authorize six billion common shares of AT&T Wireless Group tracking stock.
Currently, 8.85 billion shares of capital stock are authorized, consisting of
100 million shares of preferred stock, par value $1.00 per share, and 8.75
billion shares of common stock, of which 6 billion are shares of AT&T common
stock, 2.5 billion are shares of Class A Liberty Media Group common stock, par
value $1.00 per share, and 250 million are shares of Class B Liberty Media Group
common stock, par value $1.00 per share. We refer to the Class A Liberty Media
Group common stock and the Class B Liberty Media Group common stock together as
Liberty Media Group tracking stock. As of , 2000, we had
outstanding shares of AT&T common stock, shares of Class A
Liberty Media Group tracking stock, shares of Class B Liberty Media
Group tracking stock and no shares of AT&T preferred stock.
EFFECT UPON LIBERTY MEDIA GROUP TRACKING STOCK
The charter amendment proposal would not affect the substantive provisions
relating to Liberty Media Group tracking stock.
AT&T WIRELESS GROUP
We designed AT&T Wireless Group tracking stock to track the economic
performance of the AT&T Wireless Group. The tracking stock amendment defines the
"AT&T Wireless Group" generally as the interest of AT&T or any of its
subsidiaries in all of the businesses, assets and liabilities reflected in the
unaudited combined financial statements of the AT&T Wireless Group, dated
September 30, 1999, as included in this proxy statement, including any successor
to the AT&T Wireless Group by merger, consolidation or sale of all or
substantially all of its assets. The tracking stock amendment contains
adjustments to the definition of the AT&T Wireless Group to reflect, among other
things, related assets and liabilities (including contingent liabilities), net
income and net losses arising after the date of such financial statements,
contributions and allocations of assets, liabilities and businesses between the
groups and acquisitions and dispositions.
The tracking stock amendment defines the "AT&T Common Stock Group"
generally as the interest of AT&T or any of its affiliates in all of the
businesses in which AT&T or any of its affiliates (or any of their predecessors
or successors) is or has been engaged, directly or indirectly, and the
respective assets and liabilities of AT&T or any of its affiliates, other than:
- the economic performance in the AT&T Wireless Group represented by the
outstanding shares of AT&T Wireless Group tracking stock, and
- any businesses, assets or liabilities of the Liberty Media Group.
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We created the Liberty Media Group at the time of the TCI merger and
defined it to consist primarily of TCI's programming assets and businesses,
TCI's principal international assets and businesses, and substantially all of
TCI's non-cable and non-programming assets and businesses other than its
interest in At Home Corporation.
AT&T WIRELESS GROUP ALLOCATION FRACTION
The tracking stock amendment defines the "AT&T Wireless Allocation
Fraction" to represent the interest in the economic performance of the AT&T
Wireless Group reflected by the AT&T Wireless Group tracking stock issued to the
public. At any time that all of the interest in the economic performance of the
AT&T Wireless Group is not reflected by the outstanding AT&T Wireless Group
tracking stock, this fraction will be used, in effect, to allocate to the AT&T
Common Stock Group the right to participate in any dividend, distribution or
liquidation payment made to holders of AT&T Wireless Group tracking stock. This
right to participate will reflect the inter-group interest of the AT&T Common
Stock Group in the AT&T Wireless Group, which will be equal to one minus this
fraction. At any time that all of the interest in the economic performance of
the AT&T Wireless Group is fully reflected by the outstanding AT&T Wireless
Group tracking stock, this fraction will equal one and, accordingly, the
inter-group interest will equal zero.
Subject to the criteria we describe below, this fraction is subject to
adjustment from time to time as our board of directors deems appropriate:
- to reflect subdivisions (by stock split or otherwise) and combinations
(by reverse stock split or otherwise) of AT&T Wireless Group tracking
stock and stock dividends payable in shares of AT&T Wireless Group
tracking stock,
- to reflect the fair market value of contributions or allocations by AT&T
of cash, property or other assets or liabilities from the AT&T Common
Stock Group to the AT&T Wireless Group (or vice versa), or of cash or
property or other assets or liabilities of the AT&T Common Stock Group
to, or for the benefit of, employees of the AT&T Wireless Group in
connection with employee benefit plans or arrangements of AT&T or any of
its subsidiaries (or vice versa),
- to reflect the number of shares of capital stock of AT&T contributed to,
or for the benefit of, employees of the AT&T Wireless Group in connection
with benefit plans or arrangements of AT&T or any of its subsidiaries,
- to reflect repurchases by AT&T of shares of AT&T Wireless Group tracking
stock for the account of the AT&T Wireless Group,
- to reflect issuances of AT&T Wireless Group tracking stock for the
account of the AT&T Wireless Group,
- to reflect dividends or other distributions to holders of AT&T Wireless
Group tracking stock, to the extent no payment is made to the AT&T Common
Stock Group, and
- under such other circumstances as our board of directors determines
appropriate to reflect the economic substance of any other event or
circumstance.
In addition, in determining the percentage interest of holders of AT&T
Wireless Group tracking stock in any particular dividend or other distribution,
we will reduce the economic interest of holders of AT&T Wireless Group tracking
stock to reflect dilution arising from shares of AT&T Wireless Group tracking
stock reserved for issuance upon conversion, exercise or exchange of other
securities that are entitled to participate in such dividend or other
distribution.
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The tracking stock amendment provides that any such adjustment must be made
in a manner that our board of directors determines to be fair and equitable to
holders of AT&T common stock and AT&T Wireless Group tracking stock. In the
event that any assets or other property are acquired by the AT&T Common Stock
Group and allocated or contributed to the AT&T Wireless Group, the consideration
paid by the AT&T Common Stock Group to acquire such assets or other property
will be presumed to be its "fair market value" as of its acquisition. Any
adjustment to the AT&T Wireless Group Allocation Fraction made by our board of
directors in accordance with these principles will be at the sole discretion of
our board of directors and will be final and binding on all shareholders.
VOTING RIGHTS
Currently, holders of AT&T common stock have one vote per share, holders of
Class B Liberty Media Group tracking stock have 0.75 of a vote per share and
holders of Class A Liberty Media Group tracking stock have 0.075 of a vote per
share. This voting power is subject to adjustment for stock splits, stock
dividends and combinations, including any distribution of AT&T Wireless Group
tracking stock to holders of AT&T common stock. On all matters as to which both
the holders of AT&T common stock and AT&T Wireless Group tracking stock would
vote together as a single class:
- each outstanding share of AT&T common stock will have one vote, and
- each outstanding share of AT&T Wireless Group tracking stock will have
the voting rights to be specified in the charter amendment.
If a class of AT&T common shares is entitled to vote as a separate class with
respect to a matter, each share of that class will have one vote with respect to
that matter.
Except as otherwise required by New York law or any special voting rights
of any class or series of AT&T preferred stock, Liberty Media Group tracking
stock or any other class of AT&T common shares, holders of shares of AT&T common
stock, AT&T Wireless Group tracking stock, each other class of AT&T common
shares, if any, that is entitled to vote, Class A Liberty Media Group tracking
stock and Class B Liberty Media Group tracking stock, and holders of shares of
each class or series of AT&T preferred stock, if any, that is entitled to vote,
will vote as one class with respect to all matters to be voted on by
shareholders of AT&T. No separate class vote of AT&T Wireless Group tracking
stock will be required, except as required by the New York Business Corporation
Law.
DIVIDENDS
General. Provided that AT&T has sufficient assets to pay a dividend under
applicable law after excluding the available dividend amount relating to the
Liberty Media Group, the tracking stock amendment provides that dividends on
AT&T Wireless Group tracking stock are limited to an available dividend amount
that is designed to be equivalent to the amount that would legally be available
for dividends on that stock if the AT&T Wireless Group were a stand-alone
corporation. Dividends on AT&T common stock are limited to the amount of legally
available funds for all of AT&T less the sum of the available dividend amount
for AT&T Wireless Group tracking stock and the available dividend amount for
Liberty Media Group tracking stock.
Discrimination among classes of common shares. The tracking stock
amendment does not provide for mandatory dividends. Provided that there are
sufficient assets to pay a dividend on a class of stock as described under
"-- General," our board of directors will have the sole authority and discretion
to declare and pay dividends (or to refrain from declaring or paying dividends),
in equal or
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unequal amounts, on AT&T common stock, AT&T Wireless Group tracking stock,
Liberty Media Group tracking stock, any other class of AT&T common shares or any
two or more of such classes. Subject to not exceeding the applicable available
dividend amount, our board of directors has this power regardless of the
relative available dividend amounts, prior dividend amounts declared,
liquidation rights or any other factor. Our board of directors has adopted a
policy with respect to Liberty Media Group tracking stock that it will
distribute to the holders of Liberty Media Group tracking stock, subject to
legal restrictions, any dividends and distributions it receives from any entity
included in the Liberty Media Group.
SHARE DISTRIBUTIONS
Subject to the provisions of Liberty Media Group tracking stock, AT&T may
declare and pay a distribution consisting of shares of AT&T common stock, AT&T
Wireless Group tracking stock or any other securities of AT&T or any other
person to holders of AT&T common stock or AT&T Wireless Group tracking stock
only in accordance with the provisions described below. We refer to this type of
distribution as a "share distribution."
Distributions on AT&T common stock or AT&T Wireless Group tracking
stock. Subject to any limitations imposed by the terms of Liberty Media Group
tracking stock, AT&T may declare and pay a share distribution to holders of AT&T
common stock, AT&T Wireless Group tracking stock or any other class of AT&T
common shares consisting of any securities of AT&T, any subsidiary of AT&T, or
any other person. However, securities attributable to a group may be distributed
to holders of another group only for consideration. In the case of shares of
AT&T Wireless Group tracking stock distributed to holders of AT&T common stock,
such consideration may consist, in whole or in part, of a decrease in the
inter-group interest, if any, held by the AT&T Common Stock Group in the AT&T
Wireless Group.
Discrimination among classes of AT&T common shares. The tracking stock
amendment does not provide for mandatory share distributions. Subject to the
restrictions described above or that are in effect regarding Liberty Media Group
tracking stock, our board of directors will have the sole authority and
discretion to declare and pay share distributions (or to refrain from declaring
or paying share distributions), in equal or unequal amounts, on AT&T common
stock, AT&T Wireless Group tracking stock, Liberty Media Group tracking stock,
any other class of AT&T common shares or any two or more of such classes.
Subject to not exceeding the applicable available dividend amounts, our board of
directors has this power regardless of the relative available dividend amounts,
prior share distributions amounts declared, liquidation rights or any other
factor.
REDEMPTION
Redemption in exchange for shares of AT&T common stock at option of our
board of directors. At any time following either the occurrence of tax-related
events or the second anniversary of the date that AT&T Wireless Group tracking
stock is initially issued, our board of directors, in its sole discretion, may
redeem all outstanding shares of AT&T Wireless Group tracking stock for shares
of AT&T common stock. In such event, each share of AT&T Wireless Group tracking
stock will be redeemed in exchange for that number of shares of AT&T common
stock, calculated to the nearest 1/10,000, equal to 110% of the ratio of the
average market price per share of AT&T Wireless Group tracking stock to the
average market price per share of AT&T common stock.
In this case, the average market price per share of AT&T common stock or
AT&T Wireless Group tracking stock, as the case may be, means the average of the
daily market value per share for such AT&T common stock or AT&T Wireless Group
tracking stock for the 40 consecutive trading
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days ending on the 15th trading day prior to the date notice of the redemption
is mailed to holders of AT&T Wireless Group tracking stock.
In order to redeem AT&T Wireless Group tracking stock on the basis of a tax
event, AT&T must obtain the opinion of counsel that, as a result of an amendment
to or change (or prospective change) in a law or an interpretation of the law
that takes place after the AT&T Wireless Group tracking stock is issued, there
is more than an insubstantial risk that:
- any issuance of AT&T Wireless Group tracking stock would be treated as a
sale or other taxable disposition by AT&T or any of its subsidiaries of
any of the assets, operations or relevant subsidiaries underlying AT&T
Wireless Group tracking stock,
- the existence of AT&T Wireless Group tracking stock would subject AT&T,
its subsidiaries or its affiliates, or any of their respective successors
to the imposition of tax or other adverse tax consequences, or
- either AT&T common stock or AT&T Wireless Group tracking stock would not
be treated solely as common stock of AT&T.
Redemption in exchange for stock of qualifying subsidiaries at option of
our board of directors. The tracking stock amendment also provides that AT&T
may, at any time, redeem all outstanding shares of AT&T Wireless Group tracking
stock in exchange for a specified number of outstanding shares of common stock
of a subsidiary of AT&T that satisfies certain requirements under the Internal
Revenue Code and that holds all of the assets and liabilities of the AT&T
Wireless Group. We refer to a subsidiary that satisfies these requirements as a
"qualifying subsidiary." This type of redemption may only be made on a pro rata
basis, and must be tax free to the holders of AT&T Wireless Group tracking
stock, except with respect to any cash that holders receive in lieu of
fractional shares.
In this case, we would exchange each share of AT&T Wireless Group tracking
stock, on a pro rata basis, for an aggregate number of shares of common stock of
the qualifying subsidiary equal to the number of outstanding shares of common
stock of the qualifying subsidiary held by AT&T.
Redemption in connection with certain significant transactions. In the
event of a sale, transfer, assignment or other disposition by AT&T in a
transaction or series of related transactions, of all or substantially all of
the properties and assets of the AT&T Wireless Group, AT&T is generally required
to take one of the following actions, which will be selected in the sole
discretion of our board of directors:
- AT&T may redeem each outstanding share of AT&T Wireless Group tracking
stock in exchange for a number of shares of AT&T common stock (calculated
to the nearest 1/10,000) equal to 110% of the ratio of the average market
price per share of AT&T Wireless Group tracking stock to the average
market price per share of AT&T common stock. For this purpose, the
"average market price per share" of AT&T common stock or AT&T Wireless
Group tracking stock, as the case may be, means the average of the daily
market value per share for such AT&T common stock or AT&T Wireless Group
tracking stock during the 10-trading day period beginning on the 15th
trading day following completion of that transaction.
- Subject to limitations, AT&T may declare and pay a dividend in cash
and/or in securities (other than AT&T common stock) or other property to
holders of the outstanding shares of AT&T Wireless Group tracking stock
equally on a share-for-share basis in an aggregate amount equal to the
net proceeds of the disposition allocable to AT&T Wireless Group tracking
stock.
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- Subject to limitations, if the disposition involves the disposition of
all, not merely substantially all, of the properties and assets of the
AT&T Wireless Group, AT&T may redeem all outstanding shares of AT&T
Wireless Group tracking stock in exchange for cash and/or securities or
other property in an aggregate amount equal to the net proceeds of such
disposition allocable to the AT&T Wireless Group tracking stock.
- Subject to limitations, if the disposition involves substantially all,
but not all, of the properties and assets of the AT&T Wireless Group,
AT&T may redeem a number of outstanding shares of AT&T Wireless Group
tracking stock in exchange for a redemption price equal to the net
proceeds of that disposition. The number of shares of AT&T Wireless Group
tracking stock to be redeemed would be equal to the lesser of (1) a
number determined by dividing the aggregate amount allocated to the
redemption of these shares by the average market value of one share of
AT&T Wireless Group tracking stock during the 10-trading day period
beginning on the 15th trading day following the completion of that
disposition and (2) the total number of outstanding shares of AT&T
Wireless Group tracking stock.
- Subject to limitations, AT&T may take a combination of the actions
described in the preceding bullets whereby AT&T may redeem some shares of
AT&T Wireless Group tracking stock in exchange for shares of AT&T common
stock at the exchange rate described in the first bullet above, and use
an amount equal to a portion of the net proceeds of the disposition
allocable to AT&T Wireless Group tracking stock to either (1) declare and
pay a dividend as described in the second bullet above, or (2) redeem
part or all of the remaining shares of AT&T Wireless Group tracking stock
as described in the third or fourth bullet above.
For purposes of these provisions, "substantially all of the properties and
assets" of the AT&T Wireless Group as of any date means a portion of such
properties and assets that represents at least 80% of the fair value of the
properties and assets attributed to the AT&T Wireless Group as of such date.
Certain exceptions. The provisions described under "-- Redemption in
connection with certain significant transactions" will not apply, and AT&T will
not be required to redeem any securities or make any dividend or other
distribution it would otherwise be required to make, in some circumstances,
including the following:
- if the underlying disposition is conditioned upon the affirmative vote of
a majority of holders of AT&T Wireless Group tracking stock, voting as a
separate class,
- if the disposition is in connection with a liquidation of AT&T,
- if the disposition is to a person or group of which AT&T is the majority
owner and the AT&T Wireless Group receives in exchange primarily equity
securities of that person or group as consideration,
- in connection with a spin-off or similar disposition of AT&T's entire
interest in the AT&T Wireless Group to the holders of AT&T Wireless Group
tracking stock, including a disposition that is made in connection with a
mandatory redemption as described under "-- Redemption in exchange for
shares of AT&T common stock at option of our board of directors" or
"-- Redemption in exchange for stock of qualifying subsidiaries at option
of our board of directors," and
- in connection with a "related business transaction," which generally
means a disposition of all or substantially all of the assets attributed
to the AT&T Wireless Group in which AT&T receives equity securities of an
entity that engages or proposes to engage primarily in one or more
businesses similar or complementary to the businesses conducted by the
AT&T Wireless Group prior to such transaction.
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GENERAL PROCEDURES
Public announcements; notices. The tracking stock amendment provides that,
in the case of specified dispositions or a redemption, AT&T will publicly
announce or otherwise provide specified information to holders of AT&T Wireless
Group tracking stock.
Fractional shares. Our board of directors will not have to issue or
deliver any fractional shares to any holder of AT&T Wireless Group tracking
stock upon any redemption, dividend or other distribution under the provisions
described under "-- Redemption." Instead of issuing fractional shares, AT&T will
pay cash for the fractional share in an amount equal to the fair market value of
the fractional share, without interest.
No adjustments for dividends or other distributions. No adjustments for
dividends will be made upon the exchange of any shares of AT&T Wireless Group
tracking stock; except that, if a redemption date with respect to AT&T Wireless
Group tracking stock comes after the record date for the payment of a dividend
or other distribution to be paid on that stock but before the payment or
distribution, the registered holders of those shares at the close of business on
such record date will be entitled to receive the dividend or other distribution
on the payment date, notwithstanding the redemption of those shares or AT&T's
default in payment of the dividend or distribution.
Payment of taxes. If any person exchanging a certificate representing
shares of AT&T Wireless Group tracking stock wants us to issue a certificate in
a different name than the registered name on the old certificate, that person
must pay any transfer or other taxes required by reason of the issuance of the
certificate in another name or establish, to the satisfaction of AT&T or its
agent, that the tax has been paid or is not applicable.
LIQUIDATION RIGHTS
In the event of a liquidation, dissolution or winding up of AT&T, whether
voluntary or involuntary, AT&T will first pay or provide for payment of debts
and other liabilities of AT&T, including the liquidation preferences of any
class or series of AT&T preferred stock. Thereafter, holders of the shares of
AT&T common stock, Liberty Media Group tracking stock, AT&T Wireless Group
tracking stock and any other class of AT&T common shares will share in the funds
of AT&T remaining for distribution to its common shareholders in proportion to
the aggregate market capitalization of the outstanding shares of each class of
stock, as applicable, to the aggregate market capitalization of all the classes
of AT&T common shares. AT&T will calculate the market capitalizations based on
the 20-trading day period ending on the trading day prior to the date of the
public announcement of the liquidation, dissolution or winding up of AT&T.
None of the following, by itself, will constitute a liquidation,
dissolution or winding up of AT&T:
- the consolidation or merger of AT&T with or into any other corporation or
corporations or the sale, transfer or lease of all or substantially all
of the assets of AT&T,
- any transaction or series of related transactions that results in all of
the assets and liabilities included in the AT&T Wireless Group being held
by one or more AT&T Wireless Group subsidiaries and the distribution of
such AT&T Wireless Group subsidiaries, and no other material assets or
liabilities, to the holders of the outstanding AT&T Wireless Group
tracking stock, and
- any transaction or series of related transactions that results in all of
the assets and liabilities included in the Liberty Media Group being held
by one or more Liberty Media Group subsidiaries and the distribution of
such Liberty Media Group subsidiaries, and no other material assets or
liabilities, to the holders of the outstanding Liberty Media Group
tracking
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stock (but this will be subject to the provisions relating to the
redemption of shares of Liberty Media Group tracking stock described in
our charter).
DETERMINATIONS BY OUR BOARD OF DIRECTORS
Any determinations made by our board of directors under any provision
described in this section "-- Terms of the Tracking Stock Amendment" will be
final and binding on all shareholders of AT&T, except as may otherwise be
required by law. AT&T will prepare a statement of any determination by our board
of directors respecting the fair market value of any properties, assets or
securities, and will file the statement with our Corporate Secretary.
NO PREEMPTIVE RIGHTS
Holders of AT&T common stock, AT&T Wireless Group tracking stock or Liberty
Media Group tracking stock do not have any preemptive rights to subscribe for
any additional shares of capital stock or other obligations convertible into or
exercisable for shares of capital stock that may hereafter be issued by AT&T.
THE INITIAL PUBLIC OFFERING AND THE DISTRIBUTION
THE INITIAL PUBLIC OFFERING
We currently intend to issue in an underwritten initial public offering
shares of AT&T Wireless Group tracking stock representing a portion of the
economic performance of the AT&T Wireless Group. We will determine the amount to
be issued based on capital requirements of the AT&T Wireless Group and the AT&T
Common Stock Group, market conditions at the time of the initial public offering
and other factors. MediaOne, which has the right to consent to amendments to our
charter under the terms of our merger agreement, has consented to the charter
amendment proposal provided that we issue shares of AT&T Wireless Group tracking
stock in the initial public offering reflecting no greater than 20% of the
economic performance of the AT&T Wireless Group. The proceeds of the initial
public offering may be allocated between the two groups or only to one group.
THE DISTRIBUTION
We currently intend to follow the initial public offering with a
distribution to holders of AT&T common stock of shares of AT&T Wireless Group
tracking stock. These shares would represent the economic performance of the
AT&T Wireless Group not represented by the shares of tracking stock issued in
the initial public offering. Following the distribution, we expect that the
outstanding shares of AT&T Wireless Group tracking stock will reflect 100% of
the economic performance of the AT&T Wireless Group.
TIMING OF THE INITIAL PUBLIC OFFERING AND THE DISTRIBUTION
We currently expect to complete the initial public offering shortly
following shareholder approval of the charter amendment proposal. We currently
expect to complete the distribution at some time after the initial public
offering and after we complete our pending merger with MediaOne.
Our board of directors reserves the right not to create AT&T Wireless Group
tracking stock or not to issue the tracking stock once it is created. In
addition, even if we complete the initial public offering, there is no guarantee
that the distribution will follow.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
Subject to the discussion below in this section, neither the adoption of
the charter amendment proposal, the occurrence of the initial public offering of
AT&T Wireless Group tracking stock nor the
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pro rata distribution of AT&T Wireless Group tracking stock to holders of AT&T
common stock will be taxable to AT&T, holders of AT&T common stock, holders of
Liberty Media Group tracking stock or holders of AT&T Wireless Group tracking
stock.
Holders of AT&T common stock who receive AT&T Wireless tracking stock in
such a distribution will allocate their basis in AT&T common stock between AT&T
common stock and AT&T Wireless Group tracking stock in accordance with the
relative fair market values of such stocks on the date on which AT&T Wireless
Group tracking stock is distributed. Such a holder's holding period for AT&T
Wireless Group tracking stock will include the holder's holding period for the
holder's AT&T common stock.
The conclusions in the two preceding paragraphs are not free from doubt.
These conclusions assume that AT&T Wireless Group tracking stock is treated as a
class of common stock of AT&T. The filing of consolidated income tax returns by
the AT&T Common Stock Group together with the AT&T Wireless Group also assumes
that AT&T Wireless Group tracking stock is treated as a class of common stock of
AT&T. While AT&T believes that, under current law, AT&T Wireless Group tracking
stock will be treated as common stock of AT&T, there are no authorities directly
on point nor will AT&T receive an advance ruling from the Internal Revenue
Service. There is a risk that the Internal Revenue Service could assert that
AT&T Wireless Group tracking stock is property other than common stock of AT&T.
AT&T believes it is unlikely the Internal Revenue Service would prevail on that
view, but no assurance can be given that the views expressed in the two
preceding paragraphs, if contested, would be sustained by a court.
The foregoing discussion under this section "Material Federal Income Tax
Consequences" is only a summary of the material federal income tax consequences
of the issuance and distribution of AT&T Wireless Group tracking stock. It is
not a complete analysis of all potential tax effects relevant to the issuance or
distribution of AT&T Wireless Group tracking stock. The discussion does not
address consequences that may be relevant to a particular AT&T common stock,
Liberty Media Group tracking stock or AT&T Wireless Group tracking stock holder
subject to special treatment under U.S. federal income tax laws, such as dealers
in securities, banks, insurance companies, tax-exempt organizations, non-U.S.
persons, holders that acquired their AT&T common stock, Liberty Media Group
tracking stock or AT&T Wireless Group tracking stock upon the exercise of
options or otherwise as compensation and holders that do not hold such shares as
capital assets, nor any consequences arising under any state, local or foreign
jurisdiction. The discussion is based on the Internal Revenue Code, Treasury
Regulations thereunder and administrative rulings and court decisions as of the
date of this proxy statement. All of the foregoing is subject to change and any
such change could affect the continuing validity of this discussion. WE URGE YOU
TO CONSULT YOUR OWN TAX ADVISOR CONCERNING THE U.S. FEDERAL, STATE AND LOCAL AND
FOREIGN TAX CONSEQUENCES OF THE ISSUANCE AND DISTRIBUTION OF AT&T WIRELESS GROUP
TRACKING STOCK TO YOU.
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DESCRIPTION OF THE AT&T WIRELESS GROUP
The description below of the AT&T Wireless Group reflects our current plans
regarding the operation of the AT&T Wireless Group. These plans may change from
time to time.
OVERVIEW
The AT&T Wireless Group is one of the largest wireless service providers in
the United States, based on approximately $5.5 billion in revenues for the nine
months ended September 30, 1999. Including its partnership markets, the AT&T
Wireless Group had approximately 12 million total subscribers as of September
30, 1999. Additionally, subscribers within the AT&T Wireless Group's affiliates
totaled approximately 0.3 million as of September 30, 1999. The AT&T Wireless
Group focuses on revenue growth through the retention and expansion of its
subscriber base. The group seeks to do this by providing new and innovative
services that distinguish it from its competitors. Examples include simplified
pricing plans, such as AT&T Digital One Rate service, and bundled offerings of
communications products and services that target specific customer groups.
The AT&T Wireless Group markets its products and services primarily under
the AT&T name. We believe that AT&T's widely recognized brand significantly
contributes to consumer awareness of, and confidence in, the AT&T Wireless
Group's products and services. The AT&T Wireless Group also believes that its
relationship with AT&T will provide it with other competitive advantages. For
example, the AT&T Wireless Group and the AT&T Common Stock Group plan to offer
their products and services together in bundled offerings, which may combine
wireless services with long distance and local communications services,
broadband services and Internet services. In addition, each group will be able
to take advantage of the other group's marketing and sales efforts and network
capabilities.
The AT&T Wireless Group operates one of the largest U.S. digital wireless
networks. The AT&T Wireless Group, including its partnership and affiliate
markets, currently holds 850 and 1900 megahertz licenses to provide wireless
services covering 94% of the U.S. population. As of September 30, 1999, the AT&T
Wireless Group's built network, including partnership and affiliate markets,
covered 64% of the U.S. population. This includes operations in 42 of the 50
largest U.S. metropolitan areas. The AT&T Wireless Group supplements its own
operations with roaming agreements that allow its subscribers to use other
providers' wireless services in regions where the AT&T Wireless Group does not
have operations. Through these roaming agreements, the AT&T Wireless Group is
able to offer its customers wireless services covering over 95% of the U.S.
population. The AT&T Wireless Group plans to continue to increase its coverage
and the quality of its services by expanding the footprint and capacity of its
network at an increased pace and by acquiring or partnering with other wireless
providers.
The AT&T Wireless Group provides its wireless voice and data services using
digital TDMA, analog and CDPD technologies. The AT&T Wireless Group has focused
on building out its digital network, including upgrading its analog systems to
digital in its 850 megahertz markets, and on migrating its customers from analog
to digital service. The AT&T Wireless Group has upgraded 98% of its 850
megahertz markets to digital based and all of its 1900 megahertz markets are
digital based. Currently, over 73% of the AT&T Wireless Group's consolidated
subscribers use digital services, accounting for over 85% of its traffic. The
AT&T Wireless Group believes that these percentages are substantially greater
than the industry average, excluding the AT&T Wireless Group. It further
believes that this high percentage of digital use improves the efficiency of its
network and allows it to offer higher quality services.
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THE AT&T WIRELESS GROUP
The proposed AT&T Wireless Group tracking stock is designed to reflect the
separate economic performance of the AT&T Wireless Group. Except as described
below, we will attribute all of AT&T's current wireless operations to the AT&T
Wireless Group, including:
- all mobile and fixed wireless licenses,
- all wireless networks, operations, cell sites, retail operations,
wireless customer care facilities and customer location assets, and
- interests in partnerships and affiliates providing wireless mobile
communications in the United States and internationally.
The AT&T Common Stock Group will retain:
- existing and future wireless activities that stem from country-specific
joint venture relationships that are predominantly non-wireless, and
- incidental wireless capabilities or links in any backbone or other
communications network that is predominantly non-wireless.
We currently intend to include all future wireless activities in the AT&T
Wireless Group. Our board of directors may, however, in its discretion, but
subject to the AT&T Wireless Group policy statement, direct new businesses and
assets to the AT&T Wireless Group or the AT&T Common Stock Group or dispose of
or transfer businesses or assets of either group.
The AT&T Common Stock Group will be able to offer wireless services under
sales agency or other arrangements with the AT&T Wireless Group. These
transactions are described in more detail below and will be implemented under
the AT&T Wireless Group policy statement.
ARRANGEMENTS BETWEEN THE AT&T COMMON STOCK GROUP AND THE AT&T WIRELESS GROUP
AT&T will seek to manage the AT&T Common Stock Group and the AT&T Wireless
Group in a manner designed to maximize the operations, unique assets and value
of both groups. Following the creation and issuance of AT&T Wireless Group
tracking stock, the AT&T Wireless Group will be able to:
- use the powerful AT&T brand name on the same basis as any other AT&T
business,
- leverage AT&T's sales force through cross marketing arrangements and
through bundled offers of wireless with long distance and local
telephony, broadband and Internet services,
- use AT&T's intellectual property and technology, and
- benefit from AT&T's favorable purchasing contracts with major network and
equipment suppliers.
In addition, we currently intend to borrow funds and provide the AT&T
Wireless Group with the proceeds at interest rates that are comparable to the
rates the AT&T Wireless Group would have received in the open market as a
non-affiliate of AT&T and without the benefit of any guaranty by AT&T or any
member of the AT&T Common Stock Group.
The relationship between the two groups will be governed by the AT&T
Wireless Group policy statement, including the process of fair dealing described
under "Relationship between the AT&T Common Stock Group and the AT&T Wireless
Group -- AT&T Wireless Group Policy Statement --
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<PAGE> 57
General policy." Although our board of directors has no present intention to do
so, it may modify, suspend or rescind the policies set forth in the AT&T
Wireless Group policy statement, adopt additional policies or make exceptions to
existing policies, at any time, without the approval of our shareholders,
subject to limitations we describe under "Relationship between the AT&T Common
Stock Group and the AT&T Wireless Group -- AT&T Wireless Group Policy Statement"
and our board of directors' fiduciary duties.
INDUSTRY OVERVIEW
GENERAL
Wireless communications systems use a variety of radio frequencies to
transmit voice and data. Broadly defined, the wireless communications industry
includes one-way radio applications, such as paging or beeper services, and
two-way radio applications, such as cellular telephone, enhanced specialized
mobile radio services, PCS and fixed wireless services. The FCC licenses the
radio frequency used to provide each of these applications.
Since its introduction in 1983, wireless service has grown dramatically. As
illustrated by the following chart, domestic cellular, enhanced specialized
mobile radio and PCS providers experienced compound rates of growth of 25% and
33% in revenues and subscribers, respectively, over the five-year period from
1993 to 1998.
WIRELESS INDUSTRY STATISTICS*
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997 1998
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Total service revenues (in billions)...... $10.9 $14.2 $19.1 $23.6 $27.5 $ 33.1
Ending subscribers (in millions).......... 16.0 24.1 33.8 44.0 55.3 69.2
Subscriber growth......................... 45.1% 50.8% 40.0% 30.4% 25.6% 25.1%
Average monthly service revenue per
subscriber, including roaming revenue... $67.13 $59.08 $54.91 $50.61 $46.11 $ 44.35
Average monthly service revenue per
subscriber, excluding roaming revenue... $58.74 $51.48 $47.59 $44.66 $41.12 $ 39.66
Ending penetration........................ 6.2% 9.4% 13.0% 16.3% 20.2% 25.1%
</TABLE>
- -------------------------
* Source: Cellular Telecommunications Industry Association and Paul Kagan
Associates.
RECENT INDUSTRY TRENDS
The dramatic growth in the wireless communications industry has been shaped
by a number of industry trends that are likely to continue in the near future.
Expanding penetration fuels network optimization. The U.S. wireless
industry has experienced an increase in absolute subscriber additions and
wireless penetration levels. For example, the number of ending subscribers
increased by 5.0 million in 1993 and by 10.5 million in 1998 at the same time as
penetration grew from 6.2% to 25.3%, respectively. Increased penetration allows
wireless providers to distribute the fixed costs of a wireless network over
greater numbers of users, thereby optimizing network usage. The experience of
wireless providers in other developed nations has shown that the market for
wireless services has an inflection point with regard to subscriber penetration
whereby the number of subscribers and penetration accelerates as wireless
service usage becomes more ubiquitous.
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<PAGE> 58
In addition, those same international wireless providers have experienced EBITDA
growth at a greater rate than subscriber growth as network usage increases. The
AT&T Wireless Group believes that the U.S. wireless industry is approaching a
similar inflection point in subscriber penetration and is likely to develop
along the same path as international wireless industries have developed.
Single rate pricing simplifies customer choice and drives
consolidation. The AT&T Wireless Group has led the industry in simplifying
customer choice through pricing plans. In May 1998, the AT&T Wireless Group
revolutionized the industry by offering AT&T Digital One Rate service, which,
for the first time, charged a single rate with no roaming or long distance fees
for a specified number of minutes for calls within the United States. Because
roaming costs to the wireless provider can exceed the amount charged to the
subscriber under these single rate plans, wireless providers have been
attempting to establish national coverage through acquisitions, driving
consolidation.
Declining costs of service results in mass market availability. As the
cost of wireless service has declined, it has become, in an extremely short
period of time, a mass market product rather than a luxury good. The AT&T
Wireless Group expects that the increase in the number of competitors in each
wireless market will lead to further price declines, which should make wireless
service available to an even greater number of potential users. Experience
indicates that this widespread usage will in turn cause even more people to use
wireless services. The AT&T Wireless Group believes that these developments are
likely to drive continued and accelerated growth in the wireless communications
industry.
Digital service increases utility and functionality of wireless
services. Digital service, as opposed to analog service, permits wireless
providers to offer a variety of enhanced services to users. Technological
advancements, from longer battery life to improved voice quality, have begun to
make wireless service increasingly comparable to landline communications.
Additionally, customers have begun to expect custom calling features that are
similar to those available on a landline network. Wireless providers will need
to continue to invest in network upgrades to offer advanced services in order to
attract and retain subscribers.
Wireless data applications will drive expanded wireless usage. Existing
and new wireless data technologies, coupled with the widespread use of the
Internet, have caused wireless providers to target wireless data services. These
services predominantly have been used to date to carry corporate data
applications. The AT&T Wireless Group has been a leader in this emerging market
with its CDPD network. CDPD coverage is available in over 60% of the AT&T
Wireless Group's built network, which the AT&T Wireless Group believes provides
a critical advantage in the cost-effective provision of wireless data services.
The introduction of new applications for corporate and eventually for
consumer users, such as access to email, news, sports, weather summaries, travel
services, financial information and services and comparison shopping
applications, will drive the growth for wireless data network services. To this
end, enabling technologies, such as Wireless Access Protocol, provide an
environment that encourages developers to create innovative data services for
wireless networks. In addition, applications, such as email, instant messages,
banking, wireless portals and web services, are being developed and marketed.
The AT&T Wireless Group believes that the development and deployment of third
generation wireless networks will drive further growth in wireless data services
and applications due to increased capacity, speed and lower costs.
BACKGROUND
The AT&T Wireless Group has licenses to use three portions of the radio
spectrum that the FCC has made available for the transmission of voice and data
signals: 850 megahertz,
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1900 megahertz and 38 gigahertz. In addition, AT&T has entered into agreements
to acquire additional portions of the radio spectrum in the 2.3 gigahertz range.
The AT&T Wireless Group provides its mobile voice services using both 850
megahertz cellular and 1900 megahertz PCS licenses. The AT&T Wireless Group does
not manage its business for these spectrums separately. Rather, the AT&T
Wireless Group manages its business to provide virtually seamless network
coverage irrespective of the spectrum. From a marketing and operational
perspective, the AT&T Wireless Group defines and manages its markets
geographically, usually around an urban area or other geographic region. These
geographic markets may use either 850 megahertz or 1900 megahertz spectrum or
both. Geographic markets that use predominantly 850 megahertz spectrum have been
in operation longer and therefore are more mature than those markets that
exclusively use 1900 megahertz spectrum.
The 850 megahertz wireless markets originally used analog-based systems,
although digital technology has been introduced in most markets. As of September
30, 1999, the AT&T Wireless Group had upgraded 98% of its 850 megahertz markets
to digital-based systems. The 1900 megahertz markets all are digital-based.
Analog systems currently have several limitations, including lack of
privacy and limited capacity. However, analog handsets are compatible with all
analog systems in all markets within the United States.
Digital systems, whether in the 850 megahertz or 1900 megahertz spectrum,
convert voice or data signals into a stream of digits that is compressed before
transmission, enabling a single radio channel to carry multiple simultaneous
signal transmissions. The AT&T Wireless Group believes that digital technology
offers many advantages over analog technology, including substantially increased
network capacity, greater call privacy, enhanced services and features, lower
operating costs, reduced susceptibility to fraud and opportunity to provide
improved data transmissions.
Digital systems operate under one of three principal signal transmission
technologies, or standards, none of which is compatible with the others:
- TDMA or time division multiple access,
- CDMA or code division multiple access, or
- GSM or global system for mobile communications.
The AT&T Wireless Group has selected TDMA as its digital wireless standard.
The AT&T Wireless Group offers its subscribers tri-mode handsets that permit the
user to access both its analog and digital TDMA systems, whether operating in
850 or 1900 megahertz spectrum.
The AT&T Wireless Group also has licenses to provide communications
services utilizing 38 gigahertz digital spectrum in 156 geographic areas
covering a total population of approximately 175 million and including more than
80 of the largest 100 metropolitan markets. These licenses were acquired through
AT&T's acquisition of Teleport Communications Group Inc.
The AT&T Wireless Group has also entered into agreements to acquire
licenses for radio spectrum in the 2.3 gigahertz range. The AT&T Wireless Group
expects to use this spectrum for its fixed wireless operations.
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<PAGE> 60
STRATEGY
The AT&T Wireless Group's goal is to be the premier provider of
high-quality wireless communication services, whether mobile or fixed, voice or
data, to businesses or consumers, in the United States or internationally. The
AT&T Wireless Group believes that the following are key elements to enable it to
meet its goal:
- continue the aggressive build out and expansion of its TDMA network to
provide coverage throughout the nation, improved quality and consistent
features regardless of location, while simultaneously reducing roaming
expenses,
- continue to lower its operating cost structure by expanding its TDMA
network and developing new channels of distribution,
- target distinct consumer and business customer segments with wireless
offers that match their needs for voice and data services in order to
increase its subscriber base and revenues,
- leverage the benefits of the AT&T Wireless Group's relationship with and
use of the resources of AT&T, including the use of the AT&T brand and
AT&T's distribution channels, cross marketing opportunities and bundled
offers with AT&T's traditional products, and
- take advantage of wireless spectrum and capabilities with new growth
initiatives, including wireless data and fixed wireless opportunities.
CONTINUE THE AGGRESSIVE BUILD OUT AND EXPANSION OF ITS TDMA NETWORK
The AT&T Wireless Group believes it is competitively critical to expand its
digital TDMA footprint, as well as to increase capacity in existing markets, in
order to provide national coverage, improve quality and offer consistent
features regardless of location, while simultaneously reducing roaming expenses.
As a result, the AT&T Wireless Group has taken a number of steps to increase its
network coverage, including the purchase of 1900 megahertz PCS licenses, the
acceleration of digital build outs in 850 megahertz and 1900 megahertz markets,
and the acquisition of or partnering with other wireless providers. The AT&T
Wireless Group currently has licenses covering 94% of the U.S. population. In
addition, in many of its markets, the AT&T Wireless Group possesses licenses for
both 850 megahertz and 1900 megahertz spectrum. In each market in which the AT&T
Wireless Group is not currently operating, the AT&T Wireless Group evaluates the
benefits and costs of building out its license versus acquiring or partnering
with other experienced wireless providers before it decides on the appropriate
method of expanding into that market. The timing of these decisions depends upon
a variety of factors, including the size of the prospective market, the location
of the market relative to other AT&T markets, the economics of existing roaming
agreements and anticipated industry developments.
Digital build out. The AT&T Wireless Group has aggressively pursued the
build out of its TDMA network. In the years ended December 31, 1996, 1997 and
1998, capital expenditures for build out of owned and operated 1900 megahertz
licenses totaled $632 million, $812 million and $384 million, respectively. In
addition, during those periods, capital expenditures to increase capacity and
upgrade to digital in 850 megahertz markets totaled $1,070 million, $701 million
and $645 million, respectively. The AT&T Wireless Group expects that 1999
capital expenditures will total $2.3 billion. As of September 30, 1999, the AT&T
Wireless Group had upgraded 98% of its 850 megahertz markets to digital systems.
As of September 30, 1999, TDMA systems covering 48% of the AT&T Wireless Group's
151 million 1900 megahertz licensed POPs were in service in those markets.
Acquisitions. The AT&T Wireless Group also will expand its TDMA network
through acquisitions when it is economic to do so. For example, on May 3, 1999,
the AT&T Wireless Group acquired Vanguard Cellular Systems, Inc., an independent
operator of wireless telephone systems in
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<PAGE> 61
the United States with approximately 6.9 million POPs and over 700,000
subscribers as of September 1999. Vanguard served 26 markets in the Eastern
United States, including the Mid-Atlantic and Ohio Valley Super Systems and the
Florida, Carolinas and New England metro-clusters. The AT&T Wireless Group also
recently completed its acquisition of Honolulu Cellular Telephone Company, a
provider of cellular services covering Oahu, Hawaii with approximately 900,000
POPs and over 125,000 subscribers as of the date of its acquisition in August
1999.
Establish partnerships. The AT&T Wireless Group also will continue to
establish local market partnerships with other wireless operators in order to
accelerate the build out of its TDMA systems. In addition to existing
partnership arrangements for its 850 megahertz markets, the AT&T Wireless Group
has entered into a number of joint ventures and affiliations to expand its 1900
megahertz digital coverage. Key partnerships and affiliates include the
following:
<TABLE>
<CAPTION>
850 OR 1900
MEGAHERTZ POPS OWNERSHIP
ENTITY PARTNER MARKETS COVERED* MARKET (IN MILLIONS)* PERCENTAGE*
- --------------------- --------------------- ------------------------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C>
AB Cellular BellSouth Corporation Los Angeles, California; 850 19.6 55.6%
Houston and Galveston,
Texas
American Cellular Dobson Communications Rural service areas in 850 4.9 50.0%
Corporation** Corporation Minnesota, New York,
Wisconsin, Kentucky,
Ohio, Michigan,
Pennsylvania, Tennessee
and West Virginia;
metropolitan service
areas of Duluth,
Minnesota; Orange County
and Poughkeepsie, New
York; Eau Claire and
Wausau, Wisconsin; and
Alton, Illinois
Cincinnati Bell Cincinnati Bell Cincinnati and Dayton, 1900 3.1 19.9%
Wireless, LLC Wireless, LLC Ohio
CMT Partners Vodafone/Airtouch Northern California, 850 8.9 50.0%
including the Bay area;
Kansas City, Missouri;
and Dallas, Texas
Telecorp PCS, Inc. Telecorp PCS, Inc. Markets in Puerto Rico 1900 16.5 17.6%
and the U.S. Virgin
Islands, Louisiana,
Arkansas, Tennessee,
Massachusetts, New
Hampshire, Missouri and
Kentucky, including San
Juan, New Orleans, Baton
Rouge, Memphis, Little
Rock, Manchester,
Concord, Nashua,
Worcester, Cape Cod and
Martha's Vineyard
</TABLE>
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<PAGE> 62
<TABLE>
<CAPTION>
850 OR 1900
MEGAHERTZ POPS OWNERSHIP
ENTITY PARTNER MARKETS COVERED* MARKET (IN MILLIONS)* PERCENTAGE*
- --------------------- --------------------- ------------------------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Tritel, Inc. Tritel, Inc. Markets in Mississippi, 1900 14.0 21.4%
Kentucky, Tennessee,
Alabama and Georgia,
including Jackson,
Vicksburg, Nashville,
Knoxville, Clarksville,
Chattanooga, Dalton,
Huntsville, Mobile,
Montgomery, Birmingham,
Louisville and Lexington
Triton PCS, Inc. Triton PCS, Inc. Markets in North 1900 13.0 19.9%
Carolina, South Carolina,
Georgia, Virginia,
Tennessee and Kentucky,
including Fayetteville,
Hickory, Wilmington,
Myrtle Beach, Charleston,
Columbia, Hilton Head,
Florence, Augusta,
Savannah, Athens,
Norfolk, Richmond and
Roanoke
</TABLE>
- ------------------------
* As of September 30, 1999.
** Under contract to be formed in 2000.
CONTINUE TO LOWER ITS OPERATING COST STRUCTURE BY EXPANDING ITS TDMA
NETWORK AND DEVELOPING NEW CHANNELS OF DISTRIBUTION
The AT&T Wireless Group believes that its success also will depend in large
part on its ability to continue to lower its operating cost structure in order
to have the flexibility to offer various pricing plans and to be cost
competitive. The AT&T Wireless Group already has taken a number of steps to
lower its operating costs associated with providing network service, and is
taking a number of initiatives to lower its marketing and sales costs.
Lower network costs. As described above, the AT&T Wireless Group is
aggressively expanding its footprint across the United States. The AT&T Wireless
Group pays other wireless providers negotiated roaming rates when AT&T Wireless
Group customers make or receive wireless calls when located in other approved
wireless providers' coverage areas. Because roaming costs to the wireless
provider can be significant or exceed the amount charged to the subscriber, it
is extremely advantageous to be able to provide services on the AT&T Wireless
Group's network.
In the interim, the AT&T Wireless Group has been able to reduce roaming
charges significantly. The AT&T Wireless Group has been able to negotiate
favorable roaming rates with most wireless providers across the United States
based upon volume and growth. In addition, the AT&T Wireless Group's proprietary
Intelligent Roaming Data Base (IRDB) automatically ensures that wireless
subscribers have access to preferred service providers whenever they travel
outside their wireless home-coverage area. IRDB maintains a list of wireless
carriers and their frequency bands, ranked by priority. This is designed to
provide service in more areas and provides the AT&T Wireless Group with more
favorable roaming rates. The updated IRDB is downloaded over the air into each
digital multi-network phone monthly. During the IRDB process, the wireless phone
scans all bands to
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determine which service providers are available. The phone registers, or "locks
on," immediately if it finds sufficiently strong AT&T Wireless Group service,
the top priority. If the AT&T Wireless Group does not offer service in the area,
the IRDB instructs the phone to search for an affiliate or a partner service
provider. When an affiliate or a partner is not available, the phone scans for a
"favored" service provider, one that is preferred over a carrier not categorized
in the IRDB.
Lower marketing and sales expense. The AT&T Wireless Group has begun a
number of initiatives designed to lower its customer acquisition cost, as well
as its customer care expenses. For example, the AT&T Wireless Group has been
actively seeking lower cost distribution channels for its products and services.
The AT&T Wireless Group is increasing the number of its company-owned stores,
which are one of the lowest cost channels for distributing and signing up
customers. As of December 31, 1999, there were approximately 390 company-owned
stores throughout the United States. In addition, in June 1999, the AT&T
Wireless Group began using the Internet as a vehicle for customer acquisition,
as well as for customer care. In addition to allowing customers to sign up for
wireless services over the Internet, resulting in a lower cost to add a new
subscriber to the AT&T Wireless Group than other channels, subscribers can
access their account and obtain answers to routine inquiries that would
otherwise require a customer care representative. Since its introduction, the
number of visits to the AT&T Wireless Group's Internet site for wireless service
activation or care has grown to approximately 1.4 million per month as of
October 31, 1999.
TARGET DISTINCT CONSUMER AND BUSINESS CUSTOMER SEGMENTS WITH WIRELESS OFFERS
THAT MATCH THEIR NEEDS FOR VOICE AND DATA SERVICES IN ORDER TO INCREASE ITS
CUSTOMER BASE AND ITS REVENUES
The AT&T Wireless Group believes that one key to success in the wireless
industry is the ability to target customer segments and provide offers that
match the needs of those segments. Certain segments respond to pricing plans
tailored to their usage patterns while other segments are more attuned to
customized service features. The AT&T Wireless Group has been a leader in
differentiating its services through its use of targeted offerings and its
introduction of new features and services.
AT&T Digital One Rate service. In May 1998, the AT&T Wireless Group
introduced its AT&T Digital One Rate service, which targets high value customers
(i.e., customers that spend over $60 per month on wireless services) who travel
frequently and make frequent long distance calls. The introduction of AT&T
Digital One Rate service redefined the industry by charging a single rate with
no roaming or long distance fees for a specified number of minutes for calls
within the United States. Since the inception of AT&T Digital One Rate service
in May 1998, and through September 30, 1999, more than 1.6 million customers
have subscribed to the service. The AT&T Wireless Group believes that there are
other opportunities to segment the market with simplified pricing plans. For
example, the AT&T Wireless Group recently introduced service plans that target
customers who make frequent long distance calls but travel infrequently.
AT&T group plans. AT&T has developed offers for groups that are in
frequent contact with a predetermined number of other wireless subscribers. For
consumers, the AT&T Wireless Group developed the AT&T Family Plan, which allows
a family to establish an account with up to five family members within the same
calling area. Each family member has his or her own wireless number that allows
for unlimited calls between wireless numbers on the account, and to and from the
family's home number within the defined family calling area. All charges then
are provided on a single bill. For businesses, the AT&T Wireless Group offers
Group Calling, the wireless industry's first business offer with unlimited
calling among a wireless group of five to 50 subscribers and to as many as five
landline numbers within a designated group calling area. Group Calling is
designed for
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local, mobile businesses, such as sales and service, delivery and distribution,
dispatch and contractors, that operate within a specific geographic area.
Wireless Office Service. Wireless Office Service integrates wireless
phones into a company's office, campus or plant telephone network. Calls to and
from the wireless phone can be routed through a company's network as if the
calls were being made from or received on a desk phone. Users can receive calls
dialed to their desk phone on their wireless phone when the user is within the
expanded AT&T Wireless Group's network. Wireless Office Service provides one
number call delivery, four-digit dialing, enhanced radio frequency coverage and
low flat-rate billing for airtime usage within a customer's office, campus or
plant.
National digital prepaid wireless. AT&T national digital prepaid wireless
service is a pay-in-advance wireless product that provides wireless
communications to customers with no contract, no credit check, no deposit and no
bill. AT&T prepaid wireless service is designed to meet the needs of customers
that want to manage their expenses, prefer to pay in cash, lack credit or have
difficulty obtaining credit.
Enhanced features. The AT&T Wireless Group has been an industry leader in
the migration of subscribers from analog to digital service. At the present
time, over 85% of AT&T Wireless Group's traffic is digital, which the AT&T
Wireless Group believes is substantially greater than the industry average,
excluding the AT&T Wireless Group. The ability to migrate customers to digital
service has permitted the AT&T Wireless Group to further differentiate its
wireless offerings though enhanced features. The AT&T Wireless Group offers
custom calling services, such as voice mail, call forwarding, call waiting,
three-way calling, no-answer and busy transfer. It also offers a variety of
other enhanced features, including display messaging, which allows a cellular
phone to receive and store short alphanumeric messages and pages and to provide
subscribers with notification of voice mail messages, extended battery life and
enhanced directory assistance, which enables callers to be connected to the
party whose number is sought without hanging up and redialing.
LEVERAGE THE BENEFITS OF THE AT&T WIRELESS GROUP'S RELATIONSHIP WITH AND
USE OF THE RESOURCES OF AT&T
The AT&T Wireless Group believes that its relationship with AT&T provides
it with significant competitive advantages, including:
- use of the powerful AT&T brand name on the same basis as any other AT&T
business,
- an ability to leverage AT&T's sales force through cross marketing
arrangements and through bundled offers of wireless with long distance
and local telephony, broadband and Internet services,
- use of AT&T's intellectual property and technology,
- benefits from AT&T's favorable purchasing contracts with major network
and equipment suppliers, and
- an enhanced ability to access capital.
AT&T brand. The AT&T brand is one of the best known and respected brand
names in the United States. The AT&T Wireless Group believes that the AT&T brand
positively impacts consumer awareness of, and confidence in, the AT&T Wireless
Group's products and services. In addition, as competition in the wireless
communications industry intensifies, management believes that the power of a
strong national brand plays an increasingly important role in consumers'
purchasing decisions.
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<PAGE> 65
Marketing. The AT&T Wireless Group expects that its relationship with the
AT&T Common Stock Group will provide substantial marketing advantages. Through
its relationship with AT&T, the AT&T Wireless Group will have access to AT&T's
approximately 77 million business and consumer customers. The AT&T Wireless
Group will be able to enter into cross marketing relationships with the AT&T
sales force whereby AT&T's customers can be solicited for wireless services. In
addition, both the AT&T Common Stock Group and the AT&T Wireless Group will have
the opportunity to offer attractive and unique bundled offers of wireless with
long distance, local telephony, broadband and Internet services designed for
targeted markets.
Technology. The AT&T Wireless Group will have the advantage of being able
to use not only its intellectual property and technology, but also AT&T's
proprietary intellectual property and technology as well as all intellectual
property that AT&T has the right to use through licensing or other arrangements.
In addition, the AT&T Wireless Group will be able to engage AT&T Labs to pursue
future wireless technologies and will have access to future technological
innovations from AT&T. The ability to coordinate with the AT&T Common Stock
Group on new technological developments will allow the AT&T Wireless Group to
ensure that new features, such as a common mailbox or email applications,
offered by either group are compatible over both networks. This may permit the
AT&T Wireless Group to introduce new features more quickly and more cost
efficiently than its competitors.
Purchasing power. AT&T is one of the largest communications carriers in
the world, and, as such, has substantial leverage in the industry with major
equipment suppliers. AT&T's ability to purchase large amounts of goods has
enabled it to obtain favorable pricing and other terms with those suppliers. As
an AT&T entity, the AT&T Wireless Group will be able to continue to rely on
AT&T's purchasing power in making its own purchasing arrangements.
Enhanced ability to access capital. The AT&T Wireless Group's access to
capital will benefit from its relationship with AT&T. AT&T's presence in the
capital markets will improve the market's awareness of the AT&T Wireless Group.
We currently intend to borrow funds and provide the AT&T Wireless Group with the
proceeds at interest rates that are comparable to the rates the AT&T Wireless
Group would have received in the open market as a non-affiliate of AT&T and
without the benefit of any guaranty by AT&T or any member of the AT&T Common
Stock Group.
TAKE ADVANTAGE OF WIRELESS SPECTRUM AND CAPABILITIES WITH NEW GROWTH
INITIATIVES, INCLUDING WIRELESS DATA AND FIXED WIRELESS OPPORTUNITIES
The AT&T Wireless Group has been an industry leader in developing new
growth initiatives that take advantage of its existing wireless spectrum and
capabilities. Working with AT&T Labs and outside vendors, the AT&T Wireless
Group has targeted two growth areas for near-term expansion: wireless data and
fixed wireless.
Wireless Data
The AT&T Wireless Group has been an industry leader in wireless data
services since it introduced the first CDPD network in March 1995. The AT&T
Wireless Group's CDPD network currently covers 89 million POPs. The AT&T
Wireless Group's CDPD customers can also roam on the CDPD networks of other
wireless providers. CDPD is an industry standard using Internet Protocol, which
allows most applications written for the Internet as well as many corporate
applications to run efficiently over the network without modification. Relative
to data services carried over circuit-switched analog or digital wireless
networks, the AT&T Wireless Group's packet-switched CDPD service is a
significantly more cost effective means of sending data for the majority of
applications because it allows a channel to be shared by many users.
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To date, applications using the CDPD network have been predominately
targeted to corporations and public agencies. While the AT&T Wireless Group
expends considerable effort to sign up corporate customers to carry its
applications, these customers exhibit lower churn and often provide relatively
high revenue per subscriber. Examples of these applications include those for
public safety, dispatch, wireless credit card validation and automated vehicle
location.
New devices are now driving the development of applications targeted more
broadly to consumers. These include applications involving hand held devices,
like the Palm V and WindowsCE units, as well as those involving phones and
laptop computers. The AT&T Wireless Group expects these applications to include
email and two-way messaging services, e-commerce and shopping services and
services that are enhanced by information about the user's location. In
addition, applications that allow users to access their personal information,
including contact lists and calendars, are being made available. By providing or
facilitating these applications, the AT&T Wireless Group believes it can
generate new revenue streams and develop personalized relationships with its
customers.
Fixed Wireless
The AT&T Wireless Group believes there is a significant business
opportunity to utilize wireless technology to provide competitive substitutes
for today's wireline-based telecommunications services. As a consequence, the
AT&T Wireless Group has over the past few years developed and tested a fixed
wireless technology capable of providing a complete telecommunications system
for residential and small business customers. While several equipment
manufacturers and wireless providers have recently begun to develop fixed
wireless systems, management believes that it enjoys a time-to-market advantage
in that its fixed wireless technology currently is serving customers in the
Dallas, Texas market and is expected to be deployed more broadly in the year
2000.
Developed jointly by the AT&T Wireless Group and AT&T Labs, fixed wireless
technology is capable of providing up to four lines of voice telephony to
residences and small business locations, along with custom calling features
(e.g., call waiting, caller ID, three-way calling) available today over wireline
networks. In addition, the fixed wireless system provides a high-speed packet
data channel, which can be used to access the Internet. The packet data channel
currently operates at download speeds of up to 512 kilobits per second and is
expected to be capable of speeds up to one megabit per second by mid 2000.
The AT&T Wireless Group can use a portion of the spectrum available under
its 1900 megahertz licenses to deploy its fixed wireless services. The AT&T
Wireless Group will focus its deployment of fixed wireless in markets not
covered by AT&T's or its affiliates' broadband properties.
In addition to currently serving more than 200 customers in the Dallas,
Texas market, the AT&T Wireless Group will make fixed wireless service available
in the Ft. Worth, Texas market in the first quarter of 2000. The AT&T Wireless
Group expects to target at least two additional markets for deployment in the
third quarter of 2000 and, depending upon market acceptance, may spend as much
as $350 million of capital in 2000 ramping the service toward full scale
deployment for 2001.
BUSINESS OF THE AT&T WIRELESS GROUP
The AT&T Wireless Group offers wireless mobile and fixed voice and data
communications service to consumers and businesses in the United States,
provides air-to-ground wireless services and has interests in wireless providers
in the United States and internationally. The AT&T Wireless Group's wireless
voice services are capable of operating in virtually all of the United States
over its own network or its partners' networks or through roaming agreements.
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SERVICES AND PRODUCTS
Basic Services
The AT&T Wireless Group offers a variety of services for both voice and
data communications. Service can include wireless voice transmission as well as
custom calling services for digital services, such as voice mail, call
forwarding, call waiting, caller ID, three-way calling, no-answer and busy
transfer. The AT&T Wireless Group also offers a variety of other enhanced
features, including display messaging, which allows a cellular phone to receive
and store short alphanumeric messages and pages and provide notification of
voice mail messages, even if the handset is in use or switched off, and enhanced
directory assistance, which enables callers to be connected to the party whose
number was sought without hanging up and redialing.
Specialized Wireless Offers and Services
The AT&T Wireless Group has developed a number of specialized wireless
offers and services to target distinct customer segments:
- AT&T Digital One Rate
- AT&T group plans
- Wireless Office Service
- National Digital Prepaid Wireless
- AT&T CellCard(R)
The AT&T CellCard(R) program allows AT&T Wireless customers to make and
receive wireless calls for a basic rate plus long distance charges in over 100
countries throughout Europe, Australia, Asia and the Middle East, all while
using their existing wireless phone number. AT&T CellCard(R) enables customers
to enjoy the convenience and productivity of wireless service at rates less than
those charged by many international hotels. A customer using a wireless phone
with AT&T CellCard(R) and a laptop computer with a European GSM modem card is
able to send and receive email and faxes, check a calendar, browse the Internet
and carry out other online transactions. For simplicity, international and
domestic wireless charges are both included on the customer's regular monthly
AT&T wireless bill. We describe each of the other specialized wireless offers
and services under "-- Strategy."
Data Services
CDPD network service. As a packet-switched network, the AT&T Wireless
Group's CDPD network takes advantage of the fact that with many data
applications, data is sent in bursts with intermittent quiet periods, which
allows many users to share the network channel. As a result, relative to data
services carried over circuit-switched analog or digital networks, the AT&T
Wireless Group's CDPD service is a significantly more cost-effective means of
sending data for the majority of applications. For example, for many
applications, the AT&T Wireless Group's packet-switched CDPD network allows it
to offer its customers unlimited, always-on usage, most often for a flat monthly
fee. This makes its CDPD network service attractive for a variety of new
applications.
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To date, corporations and public agencies have been the biggest users of
the AT&T Wireless Group's CDPD service, which they typically use to carry
industry-specific applications. Examples of such applications include:
- Public Safety Applications -- Across the country many states and
municipalities have committed to CDPD as the primary means of data
communication to public safety vehicles. These vehicles, equipped with
wireless-based laptops, have real time access to bulletins, crime
databases, department of motor vehicles databases, as well as the ability
to file reports online. The result is significant improvement in both
productivity and safety.
- Dispatch Applications -- Courier companies, delivery companies, and
companies with large field installation and repair groups are using this
technology to support their employees. Workers can be dispatched with
detailed work orders, can access customer databases from the field and
can close out work orders online. This has enabled many smaller companies
to substantially improve both their service and their efficiency.
- Wireless Credit Card Validation -- New terminal equipment, accessing the
AT&T Wireless Group's CDPD service, allows merchants to verify
credit/debit cards quickly and easily. With CDPD, the validation
terminals can remain online wirelessly, substantially reducing the time
required to process a validation and eliminating the need for a separate
phone line for the verification terminal. Not only does this save money
for existing merchants, it opens up a variety of new applications in
remote service industries, such as fast food and delivery, where speed,
lower costs and mobility are all advantages.
- Automated Vehicle Location -- A variety of new applications have opened
up around a small device that contains a CDPD modem and a global
positioning system, or GPS, device. With these devices in vehicles, users
can track their fleets on the Internet, allowing rapid, cost-effective
access to the information required to improve routing and dispatch as
well as to increase safety and efficiency.
New devices are driving the development of broader applications targeted to
consumers. Users may access these applications with hand held devices, like the
Palm V and WindowsCE, as well as phones and laptop computers.
Applications on hand held devices. For hand held devices, the AT&T
Wireless Group now has access to new CDPD modems that work with both Palm (Palm
III and Palm V) and WindowsCE devices. Users can access Internet-based
information from devices equipped with these modems. A leading example of this
is the OmniSky service available for the Palm V. With a Palm V equipped with a
modem that connects to the AT&T Wireless Group's CDPD network, an OmniSky
subscriber can access email, over 100 information services (including directory
services, financial services, news/sports/weather services, etc.) and the
Internet. This application is available for one flat rate monthly fee.
Applications on phones. The AT&T Wireless Group has been instrumental in
the formation of a worldwide standard called the Wireless Application Protocol.
This standard allows a micro "browser" in a mobile phone to link into a gateway
service in the AT&T Wireless Group's network in such a way that web developers
can easily develop new services available to mobile phone users.
The AT&T Wireless Group has announced the availability of two new phones
that combine its tri-mode voice capability with a CDPD modem and a micro browser
in a single package. These phones will be available in the first part of 2000
and are expected to help increase demand for wireless data applications. The
AT&T Wireless Group first developed its own wireless data applications for
phones two years ago with the introduction of AT&T PocketNet service. The AT&T
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Wireless Group expects that the introduction of these new phones will accelerate
the adoption of AT&T PocketNet service as well as drive the introduction of new
applications. The AT&T PocketNet service is expected to be available both for
corporate and consumer users.
AT&T PocketNet service for businesses. In the first quarter of 2000, the
AT&T Wireless Group will introduce AT&T PocketNet service for businesses. This
service will allow corporations to build applications that provide access to
corporate intranet information to employees who are out of their offices. Two
key applications are already available. The first is Mobile Services for Domino,
which is available from International Business Machines Corporation/Lotus
Development Corporation. This application provides for real time access to Lotus
Notes email, calendar and contacts from AT&T Wireless Group phones via AT&T
PocketNet service. The second provides similar capabilities using Microsoft
Exchange email and Outlook calendar/contacts information. The AT&T Wireless
Group is offering this service in cooperation with Wireless Knowledge LLC and
Microsoft Corporation. These applications open up the ability for Lotus Notes
and Microsoft Exchange users to have rapid and easy control of their email and
other corporate information when away from their offices. All of these are
expected to be available at flat monthly rates, and can be bundled with AT&T
Digital One Rate service and all of the AT&T Wireless Group's other wireless
voice rate plans.
AT&T PocketNet service for the consumer. In the first half of 2000, the
AT&T Wireless Group expects to introduce a version of AT&T PocketNet service for
the consumer. As with AT&T PocketNet service for businesses, all of these
services are expected to be provided at flat monthly rates for unlimited usage.
The AT&T Wireless Group expects a wide variety of consumer-oriented services
will become available and intends to work with owners of branded content and web
portal services to provide customized access to a variety of content on the web.
This content would include news, sports, financial information, directories,
directions, travel reservations and status information, weather and concierge
services. The AT&T Wireless Group has already announced relationships with
Infospace.com, Inc. and At Home Corporation that will facilitate the development
of these services. In addition, applications that allow consumer users to access
their personal information, including contact lists and calendars, are expected
to be made available.
In the future, the AT&T Wireless Group expects a number of additional
applications will be developed, including e-commerce and shopping services and
services that are enhanced by information about the user's location. By
providing or facilitating such applications, the AT&T Wireless Group believes it
can generate new revenue streams, as well as develop personalized relationships
with its customers.
Products
The AT&T Wireless Group offers a variety of products as complements to its
wireless service, including handsets and accessories, such as chargers,
headsets, belt clips, faceplates and batteries.
As part of its basic service offering, the AT&T Wireless Group provides
easy-to-use, interactive menu-driven handsets that can be activated over the
air. These handsets primarily feature word prompts and menus rather than numeric
codes to operate handset functions. Some handsets allow mobile access to the
Internet. In addition, the AT&T Wireless Group offers tri-mode handsets, which
are handsets compatible with PCS, digital cellular and analog cellular
frequencies and service modes. Tri-mode handsets permit customers to roam across
a variety of wireless networks and incorporates AT&T's IRDB system. The AT&T
Wireless Group offers its customers use of Nokia, Ericsson, Mitsubishi and
Motorola handsets.
Tri-mode handsets offer significantly extended battery life over earlier
technologies, providing up to 14 days of stand-by battery life. Handsets
operating on a digital system are capable of sleep-mode
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while turned on but not in use, thus improving efficiency for incoming calls, as
users will be able to leave these phones on for significantly longer periods
than they can with wireless phones using an earlier technology. The use of
tri-mode handsets further extends battery life by using a digital system for
roaming when in areas covered by digital systems.
MARKETING
The AT&T Wireless Group develops customer awareness through its marketing
and promotion efforts and has been a leader in differentiating its products
through its use of targeted pricing plans and the introduction of new products
and services. The AT&T Wireless Group also uses the AT&T brand name, provides
superior customer care and is able to bundle its service with the communications
services offered by the AT&T Common Stock Group.
Target customer base. The AT&T Wireless Group targets groups of customers
who share common characteristics or have common needs. Common characteristics
may be usage (frequent travelers), social group (families), age (youth market)
or any other distinctive measure. The AT&T Wireless Group then attempts to
create a compelling offer that meets the particular needs of that targeted group
and that AT&T can provide at a competitive advantage.
The AT&T brand name. The AT&T Wireless Group prominently features the AT&T
brand name and logo on its products and services. The AT&T Wireless Group
benefits from AT&T's national advertising to build its brand awareness. The AT&T
Wireless Group believes that the use of the AT&T brand name, one of the most
well known in the United States, will continue to be a distinct marketing
advantage.
Customer care and support. The AT&T Wireless Group places a high priority
on providing its customers with the best customer care and support. J.D. Power
and Associates' 1999 U.S. Wireless Customer Satisfaction Survey rated AT&T
Wireless Group No. 1 in customer satisfaction in nine out of 13 markets studied.
The AT&T Wireless Group employs approximately 7,000 customer care
representatives located in 12 call centers and contracts for outsourced customer
care service with 1,500 additional representatives in six locations. In
addition, subscribers can access their account and obtain answers to routine
inquiries through its Internet site, www.ecare.attws.com. Customers can reach
the AT&T Wireless Group's customer care representatives or access its Internet
site on a 24 hour/seven day a week basis for answers regarding their service,
activation, changing service plans and other service options. Customer care
representatives are accessible from any point within the network on an AT&T
Wireless Group handset at no charge or through any other telephone by calling a
toll-free number. In addition, large enterprise customers may utilize a
customized extranet for ease of customer service.
Cross marketing and bundling of services with the AT&T Common Stock
Group. The AT&T Wireless Group plans to cross market with the AT&T Common Stock
Group's divisions and capitalize on the size and breadth of the AT&T Common
Stock Group's customer base in long distance and broadband service. The AT&T
Wireless Group also has the opportunity to take advantage of an array of
communications services offered by the AT&T Common Stock Group by bundling its
wireless service with other AT&T Common Stock Group products, such as long
distance. AT&T Wireless Group also will receive additional benefits from its
relationship with the AT&T Common Stock Group, including lower costs of adding
new subscribers through the AT&T Common Stock Group sales channels. In addition,
both groups are likely to benefit from the expected decrease in movement by
customers from AT&T service to a competitor's service as customers buy bundled
products.
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SALES AND DISTRIBUTION
The AT&T Wireless Group markets its wireless services in its managed
markets under the AT&T brand name. It markets wireless services to business and
residential customers through a direct sales force of 2,100, through sales
points of presence in approximately 390 AT&T company-owned stores located in 36
states, and kiosks and other customer points of presence, including the Internet
and inbound call centers, and through local and national non-affiliated
retailers throughout the United States. The AT&T Common Stock Group sales force
also sells wireless services to business and residential customers as part of
combined offerings with services of the AT&T Common Stock Group. The AT&T
Wireless Group and the AT&T Common Stock Group marketing organizations will
collaborate to bundle products of each into offers unique to AT&T's customers.
The AT&T Wireless Group also relies upon dealers to market its services in
some locations. Dealers are independent contractors that solicit customers for
AT&T Wireless service, and, typically, include specialized wireless stores,
specialized electronics stores and department stores. The AT&T Wireless Group
generally pays its dealers a commission for each customer that uses its service
for a specified period, and may make residual or account management payments to
the dealer based on the customer's ongoing service charges.
The AT&T Wireless Group has begun a number of initiatives designed to lower
its costs of adding subscribers as well as its customer care expenses. For
example, in June 1999 the AT&T Wireless Group began using the Internet as a
vehicle for signing customers onto its service as well as for customer care.
RATES AND BILLING
The AT&T Wireless Group charges may include fees for service activation,
monthly access, per-minute airtime and customer-calling features, which may
include a fixed number of minutes or packets of data per month at a set price
and generally offers a variety of pricing options, most of which combine a fixed
monthly access fee for a fixed number of minutes or packets of data and
additional charges for usage in excess of those allotted. Customers may also
incur long distance and roaming fees.
OTHER ASSETS
The AT&T Wireless Group also possesses certain other assets not described
above. The most significant of these assets include a number of equity interests
in international wireless operations and an air-to-ground wireless operation.
International
The AT&T Wireless Group's most significant international interest is the
33.3% equity stake in Rogers Cantel it holds jointly with British
Telecommunications. The AT&T Wireless Group and British Telecommunications
acquired this interest in August 1999 for an aggregate of approximately Cdn$1.4
billion (US$934 million) in cash. This ownership position is held through a
subsidiary entity that is 50% owned by AT&T and 50% owned by British
Telecommunications. AT&T and British Telecommunications share four of the 16
Rogers Cantel board seats and have been granted other governance rights
customary in a transaction of this nature.
The AT&T Wireless Group's long standing relationship with Rogers Cantel
allows two of North America's largest TDMA providers to offer virtually seamless
cross-border capabilities. Wireless
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customers throughout Canada can enjoy wireless services under the Cantel AT&T
name. This arrangement adds 30 million POPs to the AT&T Wireless Group's North
American coverage.
The AT&T Wireless Group is the operating partner in wireless ventures in
Colombia, India and Taiwan. The following table provides information regarding
these ventures:
<TABLE>
<CAPTION>
COVERED
POPS OWNERSHIP
COUNTRY ENTITY DESCRIPTION (IN MILLIONS)* PERCENTAGE
- -------- ------------------------- -------------------------------------------- -------------- ----------
<S> <C> <C> <C> <C>
Colombia Celumovil TDMA network................................ 21.0 14%
India Birla Communications Ltd. GSM networks in Goa, Gujarat and 49%
Maharashtra, India.......................... 58.0
Taiwan Far EasTone Nationwide GSM 900 and 1800 networks........ 20.1
Communications Ltd. 14%
</TABLE>
- -------------------------
* As of September 30, 1999.
In addition, subject to existing agreements or commitments, to the extent
that AT&T acquires any international wireless investments in connection with its
merger with MediaOne, AT&T intends to allocate those investments to the AT&T
Wireless Group in exchange for fair and reasonable consideration.
Air-to-ground
The Aviation Communications Division (ACD) of the AT&T Wireless Group
provides air-to-ground communications services. A minority ownership interest in
ACD is held by Rogers Cantel.
ACD owns and operates a network of ground-based and airborne
telecommunications equipment and related assets that deliver digital telephone
service to commercial and private aircraft in North America. In the United
States and Canada, ACD currently contracts with Alaska Airlines, American
Airlines, Canadian Airlines, Delta Air Lines, Midwest Express, Northwest
Airlines, and Southwest Airlines. As of August 31, 1999, ACD's North American
installed customer base represented 1,481 commercial aircraft. Outside the
United States, ACD is one of the leading airborne telecommunication equipment
and product support suppliers to airlines and other service providers. In Europe
and Asia, ACD's current installed customer base represents 338 commercial
aircraft. Through its general aviation segment, ACD provides digital telephone
service to operators of private aircraft. ACD currently has its system installed
on 373 general aviation aircraft.
ACD's North American Terrestrial System network of 151 ground stations in
the United States, Canada and Mexico provides coverage on all major routes flown
by U.S. and Canadian commercial airlines customers equipped with ACD telephony
equipment. ACD's primary role in its European airline relationships has been to
install, integrate and support in-cabin telephone equipment on the customer
aircraft.
The AT&T Wireless Group and Rogers Cantel currently are exploring strategic
options with respect to ACD. This exploration may lead to a sale of ACD in the
near future.
WIRELESS NETWORK
The AT&T Wireless Group's ownership position in U.S. markets was obtained
through FCC auctions and the FCC lottery and settlement process as well as
through acquisitions of, and purchases and exchanges of, licenses with other
cellular providers.
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Mobile voice network
Coverage. As of September 30, 1999, the AT&T Wireless Group's built
network, including partnerships and affiliates, covered 64% of the U.S.
population, including operations in 42 of the 50 largest U.S. metropolitan
areas. The AT&T Wireless Group provides virtually seamless services over its
wireless network, which operates using both 850 megahertz and 1900 megahertz
licenses. Where agreements are in place, the AT&T Wireless Group is able to
offer service to customers of other wireless providers when they travel through
its service area, and AT&T Wireless Group subscribers can roam through other
wireless providers' service areas.
Analog and digital technologies. The AT&T Wireless Group offers both
analog and digital service in its 850 megahertz markets and digital service in
its 1900 megahertz markets. The AT&T Wireless Group believes that digital
technology offers many advantages over analog technology, including
substantially increased capacity, greater call privacy, enhanced services, lower
operating costs, reduced susceptibility to fraud and the opportunity to provide
improved data transmissions. Moving customers to digital service has been a key
component of the AT&T Wireless Group's overall wireless strategy. Digital
service enables the AT&T Wireless Group to provide added benefits and services
to its customers, including extended battery life, caller ID, text messaging and
voice mail with message waiting indicator.
The AT&T Wireless Group has pursued a strategy to convert its analog
networks and subscriber base to digital. The primary goals of this program are
capacity expansion, cost reduction, and product improvement. At the present
time, over 73% of the AT&T Wireless Group's subscribers use digital service,
accounting for over 85% of its traffic.
As the AT&T Wireless Group grows its customer base and revenues, it will
need to increase its capacity in order to support higher network traffic.
Digital voice paths require less radio frequency spectrum capacity than do
analog voice paths. Further capacity improvements are possible using other
digital techniques and the AT&T Wireless Group believes that it is currently
yielding from its TDMA systems as much as four times the capacity of an analog
system using equivalent spectrum. Further capacity improvements are possible
using other digital techniques that would yield as much as or more than six
times analog capacity. The AT&T Wireless Group and its suppliers currently are
developing and intend to deploy such additional capacity-enhancing technology
within its existing spectrum.
The spectrum efficiency of digital will allow the AT&T Wireless Group to
launch entirely new networks within its existing spectrum. The AT&T Wireless
Group intends to launch a nationwide GPRS/EDGE wireless Internet Protocol
network largely using its existing spectrum resources. The AT&T Wireless Group
believes that its competitors that have not converted to digital will not have
the same flexibility in deploying high-speed data services.
The AT&T Wireless Group believes that its continued success depends on
having a competitive cost structure. In addition to enhancing capacity, digital
technology allows the AT&T Wireless Group to produce network minutes with less
capital and operating expense than analog technology. Not only is the cost of
digital network equipment lower per voice path than analog network equipment,
but also fixed costs, such as towers, shelters and other common equipment, are
reduced by spreading them over a larger number of minutes. Digital has also
allowed the AT&T Wireless Group to improve its roaming costs substantially using
over-the-air programming, which enables phones to select the most cost-effective
roaming partners. The AT&T Wireless Group believes that its aggressive
implementation of digital technology gives it a cost advantage over its
competitors that are more dependent on analog.
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Moving customers to digital service is a key component of the AT&T Wireless
Group's overall wireless strategy. Digital technology provides a host of feature
improvements to the AT&T Wireless Group's customers. To date, the AT&T Wireless
Group has delivered on its digital networks such customer features as better
handset battery life, caller ID, message waiting indicator, short message
service, and Wireless Office Service.
TDMA network. The AT&T Wireless Group has chosen TDMA technology for its
digital network. TDMA permits the use of advanced tri-mode handsets that allow
for roaming across analog and digital systems and across 850 megahertz and 1900
megahertz spectrums. TDMA digital technology allows for enhanced services and
features, such as short-messaging, extended battery life, added call security
and improved voice quality. TDMA's hierarchical cell structure enables the AT&T
Wireless Group to enhance network coverage with lower incremental investment
through the deployment of micro and pico, as opposed to macro, cell sites. This
enables the AT&T Wireless Group to offer customized billing options and to track
billing information per individual cell site, which is practical for advanced
wireless applications such as fixed wireless and wireless office applications.
TDMA served an estimated 35 million subscribers worldwide and 18 million
subscribers in North America as of December 31, 1999, according to the Universal
Wireless Communications Consortium, an association of TDMA service providers and
manufacturers. TDMA equipment is available from leading telecommunication
vendors such as Lucent, Ericsson and Nortel Networks Corporation. A number of
other wireless service providers have chosen CDMA or GSM as their digital
wireless technology.
CDPD network
The AT&T Wireless Group's CDPD network currently covers 89 million POPs,
which represents over 60% of its built network, and its CDPD customers can roam
on the CDPD networks of other wireless providers, which, together, cover an
additional 72 million POPs. CDPD is an industry standard using Internet
Protocol, which allows most applications written for the Internet as well as
many corporate applications to run efficiently over the network without
modification. Using CDPD, data files and transactions are divided into small
packets and sent on a dedicated wireless channel. In many applications, data is
sent in bursts, with long quiet periods. Packet transmission technologies take
advantage of this fact and allow user data to be efficiently carried on the same
network channel. As a result, relative to data services carried over
circuit-switched analog or digital wireless networks, the AT&T Wireless Group's
packet-switched CDPD service is a significantly more cost-effective means of
sending data for the majority of applications because it allows many users to
share the same channel.
Third generation development strategy
Third generation technologies will allow high-speed wireless packet data
services and ultimately voice services using Internet Protocol. In order to be
successful, any third generation strategy must allow the wireless provider to
achieve a pervasive footprint quickly and cost effectively. In addition, third
generation networks that achieve global economies of scale and allow for global
roaming will have a significant advantage. The AT&T Wireless Group has chosen
EDGE, also known as GSM++, as its third generation wireless architecture which
it believes accomplishes all of these goals. EDGE development is already
underway and the AT&T Wireless Group expects to be able to offer initial
services sometime in 2002, with substantial deployment continuing into 2003.
EDGE represents a convergence of the AT&T Wireless Group's existing TDMA
technology with GSM technology. AT&T has signed partnership memoranda of
understanding with Telecom Italia Mobile SpA, British Telecom, NTT Mobile
Communications Network, Inc. and Rogers Cantel
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Mobile Communications Inc. to work together on third generation standards
convergence. The AT&T Wireless Group expects that this convergence of GSM and
TDMA will yield global economies of scale in developing network equipment and
handsets, as well as seamless global roaming capabilities. EDGE can be deployed
in existing spectrum and coexist with the AT&T Wireless Group's current TDMA
voice services.
Like CDPD, EDGE is also Internet Protocol based. As a result, the AT&T
Wireless Group expects that its near term strategy of using its CDPD network to
drive innovative solutions will provide seamless migration for its data
customers. The AT&T Wireless Group expects that all the applications developed
and deployed today will migrate to EDGE network services without modification.
With EDGE, these applications are expected to operate at higher speeds and in
more places. In addition, all of the backbone network in place for CDPD today
will be reused in the future EDGE network, furthering the economic advantages of
this approach.
FIXED WIRELESS
The AT&T Wireless Group's fixed wireless technology is designed to provide
competitive substitutes for today's wireline-based communications services.
Fixed wireless technology is capable of providing up to four lines of
"wireline quality" voice telephony to residences and small business locations,
along with all of the custom calling features (e.g., call waiting, caller ID,
three-way calling) available today over wireline networks. In addition, the
fixed wireless system provides a high-speed packet data channel, which can be
used to access the Internet. The packet data channel currently operates at
download speeds of up to 512 kilobits per second and is expected to be capable
of speeds up to one megabit per second by mid-2000.
Both the voice and data channels are delivered over the existing telephone
wiring within the residence or small business premises, thus allowing customers
to utilize their existing telephone instruments. In addition, no separate modem
is required in order to connect a customer's personal computer to the data
channel. All voice and data transmissions are encrypted for customer privacy and
fraud protection.
Once connected to the existing telephone wiring within the premises, the
fixed wireless equipment creates a local area network (LAN). The LAN can
simultaneously support up to five data devices (e.g., PCs, printers, digital
cameras) within the premises. One such device is an innovative new product
called the Enhanced Personal Base Station (EPBS). Developed by the AT&T Wireless
Group, this product integrates mobile and fixed communication capabilities for a
customer. When a customer's AT&T mobile phone is in range of the EPBS, the phone
will automatically "register" on the EPBS. Once registered, calls to the mobile
phone number are directed through the home's or business' fixed wireless
connection to the network and the mobile phone operates in a similar manner to a
cordless telephone, allowing a customer to make and receive calls without
incurring mobile airtime charges. In addition, calls to a customer's mobile
number can be answered on any of the wired telephones connected to the
customer's fixed wireless system. A customer will be able to register up to 10
AT&T mobile phones on a single EPBS through a personal web page accessible on
the Internet. The AT&T Wireless Group will begin market tests of the EPBS in the
first half of 2000.
The data service has been designed to create an open environment in which
customers may select and easily change their third party Internet service
provider (ISP) or online service provider (OSP). Customers maintain a separate
billing relationship with their chosen ISP or OSP and may at any time register
online with a new or additional ISP or OSP through the fixed wireless
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data service. The AT&T Wireless Group currently is in discussions with a number
of national and regional companies to include them as participating ISPs or OSPs
on its fixed wireless service.
In order to install fixed wireless service in a customer's premises, the
AT&T Wireless Group must mount a flat panel antenna on the outside of a
customer's premises and certain electronic equipment, including a backup battery
supply, inside the premises. Once installed, the antenna on the customer's
premises communicates with a neighborhood antenna and base station that, in the
majority of cases, shares its physical location with an antenna and base station
site used to serve the AT&T Wireless Group's mobile wireless service. Thus, in
many cases the mobile and fixed wireless networks will share a common
infrastructure for towers, base station sites and backhaul transmission to a
digital switching center.
The AT&T Wireless Group estimates the total capital cost to serve a
subscriber on the fixed wireless service currently is approximately $750 and
expects this cost to fall to about $500 within the next three to five years.
These estimates include the installed cost of all premises equipment as well as
the installed cost of any additional cell sites, antennas, base station
equipment, backhaul and switching equipment necessary to add the fixed wireless
capability to the AT&T Wireless Group's mobile wireless infrastructure.
Approximately 70% of the capital cost quoted above is associated with the
equipment installed on the customer's premises and as such, is variable in
nature. Given this cost profile and the set of voice and data capabilities
provided by the fixed wireless system, management believes that it can create
highly competitive market offers for the basic voice and growing broadband data
needs of residential and small business customers in any market in which it
chooses to deploy its fixed wireless solution.
COMPETITION
Competition for subscribers among wireless service providers is based
principally upon the services and features offered, call quality, customer
service, system coverage and price. The AT&T Wireless Group's ability to compete
successfully will depend, in part, on its ability to anticipate and respond to
various competitive factors affecting the industry, including new services that
may be introduced, changes in consumer preferences, demographic trends, economic
conditions and pricing strategies. The AT&T Wireless Group's primary competitors
are Vodafone/AirTouch, BellSouth, Bell Atlantic, GTE, Nextel Communications,
Inc., SBC, VoiceStream Communications and Sprint.
In addition, the wireless communications industry has been experiencing
significant consolidation and the AT&T Wireless Group expects that this
consolidation will continue. The previously announced mergers or joint ventures
of Bell Atlantic/GTE/Vodafone/AirTouch, MCI WorldCom/ Sprint and SBC/Ameritech
will create large, well-capitalized competitors with substantial financial,
technical, marketing and other resources to respond to the AT&T Wireless Group's
offerings. Assuming these mergers or ventures were completed today, the AT&T
Wireless Group estimates that its ranking would decline to second in U.S.
revenue, third in U.S. subscriber share and fourth in terms of U.S. population
covered by licenses, or POPs. As a result, these competitors may be able to
offer nationwide services and plans more quickly and more economically than the
AT&T Wireless Group and to obtain roaming rates that are more favorable than
those obtained by the AT&T Wireless Group, and may be better able to respond to
offers of the AT&T Wireless Group.
The AT&T Wireless Group's cellular operations have always experienced
direct competition from the second cellular licensee in each market. Beginning
in 1997, the AT&T Wireless Group began experiencing competition from as many as
six license holders in certain markets. Competition from new providers in the
AT&T Wireless Group's markets will continue to increase as the networks of
license holders are built out over the next several years. In addition, the FCC
is likely to offer additional spectrum for wireless mobile licenses in the
future using existing or new technologies.
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MANAGEMENT OF THE AT&T WIRELESS GROUP
Management of the AT&T Wireless Group will consist of the following: John
D. Zeglis, 52, currently President of AT&T, will be Chairman and Chief Executive
Officer of the AT&T Wireless Group and will remain on our board of directors.
Daniel R. Hesse, 46, will remain President and Chief Executive Officer of AT&T
Wireless Services, the mobility unit, and will become Executive Vice President
of the AT&T Wireless Group. Michael G. Keith, 51, currently President of AT&T
Business Services, will join the AT&T Wireless Group as Executive Vice President
responsible for developing and launching the AT&T Wireless Group's fixed
wireless business.
PATENTS AND TRADEMARKS
AT&T and its subsidiaries own numerous patents in the United States and
foreign countries. The foreign patents are counterparts of our U.S. patents.
Many of these patents are licensed to others and AT&T and its subsidiaries are
licensed to use certain patents licensed from others. Each of the AT&T Common
Stock Group and the AT&T Wireless Group will continue to manage these patents in
the manner they have done historically. Each of the AT&T Wireless Group's wholly
owned or majority owned and controlled businesses, partnerships, ventures and
enterprises will be permitted to use the other group's patents and patent
applications in the same manner they have done historically. We expect there
will be no royalty or licensing fees related to these arrangements. The AT&T
Wireless Group does not consider any individual patents to be material to its
business operation.
AT&T has numerous trademarks registered throughout the world. We consider
many of our trademarks to be valuable assets, particularly the AT&T brand name
and globe logo. The AT&T Wireless Group will have access to these trademarks,
including the AT&T brand name and globe logo, in the United States and other
countries under the same terms as for our patents described above. In total,
these patents, patent applications, trademarks and licenses, and, in particular,
the AT&T brand name, are material to the AT&T Wireless Group's business.
EMPLOYEES
At September 30, 1999, the AT&T Wireless Group employed approximately
18,000 individuals in its operations, including its fixed wireless operations,
virtually all of whom are located in the United States. Approximately 100 of
those employees are represented by a union.
PROPERTIES
The AT&T Wireless Group owns, or controls through long-term leases or
licenses, properties consisting of plant and equipment used to provide wireless
communications services. In addition, it owns, or controls through leases,
properties used as administrative office buildings and/or retail sales
locations, customer care centers, and other facilities, such as research and
development facilities. These properties include land, interior and rooftop
office space, and space on existing structures of various types used to support
equipment used to provide wireless communications services. Most of the leased
properties are owned by private entities and the balance is owned by municipal
entities.
Plant and equipment used to provide wireless communications services
consist of:
- switching, transmission and receiving equipment,
- connecting lines (cables, wires, poles and other support structures,
conduits, etc.),
- land and buildings,
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- easements, and
- other miscellaneous properties (work equipment, furniture and plants
under construction).
The majority of the lines connecting the AT&T Wireless Group services to other
telecommunications services and power sources are on or under public roads,
highways and streets. The remainder are on or under private property.
REGULATORY ENVIRONMENT
The FCC regulates the licensing, construction, operation, acquisition, sale
and resale of wireless systems in the United States pursuant to the
Communications Act of 1934 and the associated rules, regulations and policies
promulgated by the FCC.
LICENSING OF WIRELESS SERVICES SYSTEMS
The AT&T Wireless Group owns protected geographic service area licenses
granted by the FCC to provide cellular service and PCS. It also owns licenses
granted by the FCC to provide point-to-multi-point communications services in
various bands, including significant licenses in the 37 to 39 gigahertz bands.
A cellular system operates on one of two 25 megahertz frequency blocks that
the FCC allocates for cellular radio service. Cellular systems generally are
used for two-way mobile voice applications, although they may be used for data
applications and fixed wireless services as well. Cellular license areas are
issued for either metropolitan service areas or rural service areas. Initially,
one of the two cellular licenses available in each metropolitan service area or
rural service area was awarded to a local exchange telephone company by the FCC,
while the other license was awarded either through competitive processes or
lotteries. Licenses were issued beginning in 1983 and over the years, numerous
license transfers and corporate reorganizations have obscured the original
pattern of distributing one set of licenses to local telephone company
affiliates and the other to companies that do not have local exchange service in
the license area.
A PCS system operates on one of six frequency blocks allocated for personal
communications services. PCS systems generally are used for two-way voice
applications although they may carry two-way data communications as well.
Narrowband PCS systems, in contrast, are for non-voice applications such as
paging and data service and are separately licensed. For the purpose of awarding
PCS licenses, the FCC has segmented the United States into 51 large regions
called major trading areas, which are comprised of 493 smaller regions called
basic trading areas. The FCC awarded two PCS licenses for each major trading
area and four licenses for each basic trading area. Thus, generally, six
licensees are authorized to compete in each area. The two major trading area
licenses authorize the use of 30 megahertz of spectrum. One of the basic trading
area licenses is for 30 megahertz of spectrum, and the other three are for 10
megahertz each. The FCC permits licensees to split their licenses and assign a
portion, on either a geographic or frequency basis or both, to a third party.
The FCC awarded initial PCS licenses by auction. Auctions began with the 30
megahertz major trading area licenses and concluded in 1998 with the last of the
basic trading area licenses. However, in March 1998, the FCC adopted an order
that allows troubled entities that won PCS 30 megahertz C-Block licenses at
auction to obtain financial relief from their payment obligations and to return
some or all of their C-Block licenses to the FCC for reauctioning. The FCC
completed the reauction of the returned licenses in April 1999. In addition,
certain of the C-block licenses are currently in bankruptcy proceedings, and
these licenses may be returned to the FCC for reauction.
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Under the FCC's current rules specifying spectrum aggregation limits
affecting wireless licensees, no entity may hold attributable interests,
generally 20% or more of the equity of, or an officer or director position with,
the licensee, in licenses for more than 45 megahertz of PCS, cellular and
certain specialized mobile radio services where there is significant overlap in
any geographic area. Significant overlap will occur when at least 10% of the
population of the PCS licensed service area is within the cellular and/or
specialized mobile radio service area(s). The FCC recently increased this limit
to 55 megahertz in situations in which a 25 megahertz cellular rural service
area is attributed to a 30 megahertz PCS license. These spectrum aggregation
rules are subject to a pending FCC proceeding that could revise or eliminate
them.
All wireless licenses have a 10-year term, at the end of which term they
must be renewed. The FCC will award a renewal expectancy to a wireless licensee
that has provided substantial service during its past license term, and has
substantially complied with applicable FCC rules and policies and the
Communications Act. Licenses may be revoked for cause and license renewal
applications denied if the FCC determines that a renewal would not serve the
public interest. FCC rules provide that competing renewal applications for
licenses will be considered in comparative hearings, and establish the
qualifications for competing applications and the standards to be applied in
hearings.
All wireless licenses must satisfy specified coverage requirements.
Cellular licenses were required, during the five years following the grant of
the license, to construct their systems to provide service (at a specified
signal strength) to the territory encompassed by their service area. Failure to
provide such coverage resulted in reduction of the relevant license area by the
FCC. All A and B block PCS licensees must construct facilities that offer
coverage to one-third of the population of the service area within five years of
the original license grants and to two-thirds of the population within ten
years. All D and E block PCS licensees must construct facilities that offer
coverage to one-fourth of the population of the licensed area or "make a showing
of substantial service in their license area" within five years of the original
license grants. Licensees that fail to meet the coverage requirements may be
subject to forfeiture of the license.
For a period of up to five years after the grant of a PCS license, subject
to extension, a licensee will be required to share spectrum with existing
licensees that operate certain fixed microwave systems within its license area
under circumstances where interconnection is not available through the local
exchange carrier or the competitive local exchange carrier. In an effort to
balance the competing interests of existing microwave users and newly authorized
PCS licensees, the FCC has adopted a transition plan to relocate such microwave
operators to other spectrum blocks and a cost sharing plan so that if the
relocation of an incumbent benefits more than one PCS licensee, those licensees
will share the cost of the relocation. Initially, this transition plan allowed
most microwave users to operate in the PCS spectrum for a voluntary two-year
negotiation period and an additional mandatory one-year negotiation period. For
public safety entities that dedicate a majority of their system communications
to police, fire or emergency medical services operations, the voluntary
negotiation period is three years, with an additional mandatory two-year
negotiation period. In 1998, the FCC shortened the voluntary negotiation period
by one year, without lengthening the mandatory negotiation period, for
non-public safety PCS licensees in the C, D, E and F Blocks. Parties unable to
reach agreement within these time periods may refer the matter to the FCC for
resolution, but the incumbent microwave user is permitted to continue its
operations until final FCC resolution of the matter. The transition and cost
sharing plans expire on April 4, 2005, at which time remaining microwave
incumbents in the PCS spectrum will be responsible for the costs of relocating
to alternate spectrum locations.
Wireless systems are subject to certain FAA regulations governing the
location, lighting and construction of transmitter towers and antennas and are
subject to regulation under federal environmental laws and the FCC's
environmental regulations. State or local zoning and land use
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regulations also apply to tower siting and construction activities. We expect to
use common carrier point-to-point microwave facilities to connect certain
wireless cell sites, and to link them to the main switching office. The FCC
licenses these facilities separately and they are subject to regulation as to
technical parameters and service.
The Communications Act preempts state and local regulation of the entry of,
or the rates charged by, any provider of private mobile radio service or of
commercial mobile radio service, which includes PCS and cellular service. The
FCC does not regulate commercial mobile radio service or private mobile radio
service rates. However, commercial mobile radio service providers are common
carriers and are required under the Communications Act to offer their services
to the public without unreasonable discrimination. The FCC's rules currently
require providers to permit others to resell their services for a profit;
however, these rules will expire in 2002.
TRANSFERS AND ASSIGNMENTS OF CELLULAR AND PCS LICENSES
The Communications Act and FCC rules require the FCC's prior approval of
the assignment or transfer of control of a license for a PCS or cellular system.
In addition, the FCC has established transfer disclosure requirements that
require licensees who assign or transfer control of a PCS license within the
first three years of their license terms to file associated sale contracts,
option agreements, management agreements or other documents disclosing the total
consideration that the licensee would receive in return for the transfer or
assignment of its license. Non-controlling interests in an entity that holds an
FCC license generally maybe bought or sold without FCC approval subject to the
FCC's spectrum aggregation limits. However, notification and expiration or
earlier termination of the applicable waiting period under Section 7A of the
Clayton Act by either the Federal Trade Commission or the Department of Justice
may be required, as well as approval by state or local regulatory authorities
having competent jurisdiction, if we sell or acquire PCS or cellular interests
over a certain size.
FOREIGN OWNERSHIP
Under existing law, no more than 20% of an FCC licensee's capital stock may
be owned, directly or indirectly, or voted by non-U.S. citizens or their
representatives, by a foreign government or its representatives or by a foreign
corporation. If an FCC licensee is controlled by another entity, as is the case
with our ownership structure, up to 25% of that entity's capital stock may be
owned or voted by non-U.S. citizens or their representatives, by a foreign
government or its representatives or by a foreign corporation. Foreign ownership
above the 25% level may be allowed should the FCC find such higher levels not
inconsistent with the public interest. The FCC has ruled that higher levels of
foreign ownership, even up to 100%, are presumptively consistent with the public
interest with respect to investors from certain nations. If our foreign
ownership were to exceed the permitted level, the FCC could revoke our FCC
licenses, although we could seek a declaratory ruling from the FCC allowing the
foreign ownership or take other actions to reduce our foreign ownership
percentage in order to avoid the loss of our licenses. We have no knowledge of
any present foreign ownership in violation of these restrictions.
RECENT REGULATORY DEVELOPMENTS
The FCC has announced rules for making emergency 911 services available by
cellular, PCS and other commercial mobile radio service providers, including
enhanced 911 services that provide the caller's telephone number, location and
other useful information. The original timetable required commercial mobile
radio services providers to be able to process and transmit 911 calls without
call validation, including those from callers with speech or hearing
disabilities, by late 1997. Additionally,
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commercial mobile radio service providers are required to take actions enabling
them to relay a caller's automatic number identification and cell site if
requested to do so by a public safety dispatch agency that agreed to reimburse
the provider for the additional expenses incurred to provide those services. In
October 1999, the FCC revised its rules to eliminate any requirement that such
agencies reimburse wireless providers. In a companion order issued earlier in
the fall of 1999, the FCC also modified rules requiring commercial mobile radio
service providers to provide information on the location of a 911 call. The
modified rules allow providers to use either network or handset-based
technologies to provide such information. However, providers are not permitted
to recover their costs of deploying such technologies from dispatch agencies.
The FCC has granted waivers of the requirement to provide 911 service to
users with speech or hearing disabilities to various providers, and we have
obtained a waiver. On June 9, 1999, the FCC also adopted rules designed to
ensure that analog cellular calls to 911 are completed. These rules, which do
not apply to digital cellular service or to PCS, give each cellular provider a
choice of three ways to meet this requirement. State actions incompatible with
the FCC rules are subject to preemption.
On August 8, 1996, the FCC released its order implementing the
interconnection provisions of the Telecommunications Act. Although many of the
provisions of this order were struck down by the U.S. Court of Appeals for the
Eighth Circuit, on January 25, 1999, the U.S. Supreme Court reversed the Eighth
Circuit and upheld the FCC in all respects material to our operations. On June
10, 1999, the Eighth Circuit issued an order requesting briefs on certain issues
it did not address in its earlier order, including the pricing regime for
interconnection. While appeals have been pending, the rationale of the FCC's
order has been adopted by many states' public utility commissions, with the
result that the charges that cellular and PCS operators pay to interconnect
their traffic to the public switched telephone network have declined
significantly from pre-1996 levels.
In its implementation of the Telecommunications Act, the FCC established
federal universal service requirements that affect commercial mobile radio
service operators. Under the FCC's rules, commercial mobile radio service
providers are potentially eligible to receive universal service subsidies for
the first time; however, they are also required to contribute to the federal
universal service fund and can be required to contribute to state universal
funds. Many states also are moving forward to develop state universal service
fund programs. A number of these state funds require contributions, varying
greatly from state to state, from commercial mobile radio service providers. The
FCC's universal service order was modified on appeal in the U.S. Court of
Appeals for the Fifth Circuit. The court's ruling has had the effect of reducing
commercial mobile radio service provider support payments required for the
federal universal service programs.
On August 1, 1996, the FCC released a report and order expanding the
flexibility of cellular, PCS and other commercial mobile radio service providers
to provide fixed as well as mobile services. These fixed services include, but
need not be limited to, wireless local loop services, for example, to apartment
and office buildings, and wireless backup services to private branch exchange or
switchboards and local area networks, to be used in the event of interruptions
due to weather or other emergencies. The FCC has not yet decided whether fixed
services provided on a co-primary basis to mobility services should be subjected
to universal service obligations, or how such fixed services should be
regulated, but it has proposed a presumption that they be regulated as
commercial mobile radio service services. If the fixed services are provided as
an ancillary service to a carrier's mobility services, the FCC has decided that
such fixed services should be regulated as commercial mobile radio services.
The FCC has adopted rules on telephone number portability that will enable
customers to migrate their landline and cellular telephone numbers to cellular
or PCS providers and from a cellular
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or PCS provider to another service provider. On February 8, 1999, the FCC
extended the deadline for compliance with this requirement to November 24, 2002,
subject to any later determination that number portability is necessary to
conserve telephone numbers. The FCC has also adopted rules requiring cellular
and PCS providers to provide functions to facilitate electronic surveillance by
law enforcement officials by June 30, 2000, and has proposed to adopt certain
additional obligations furthering provision of these functions. Representatives
of the cellular and PCS industry are challenging the surveillance rules.
Additionally, it is not clear that commercial mobile radio service providers
will be able to comply with the rules' compatibility requirements by the current
deadline of June 30, 2000; nor is it clear whether the FCC will grant waivers to
extend the deadline or what the scope of penalties for failing to comply may be.
The FCC has determined that the interstate, interexchange offerings,
commonly referred to as long distance, of commercial mobile radio service
providers are subject to the interstate, interexchange rate averaging and
integration provisions of the Communications Act. Rate averaging requires us to
average our interstate long distance commercial mobile radio service rates
between high cost and urban areas. The FCC has delayed implementation of the
rate integration requirements with respect to wide area rate plans we offer
pending further reconsideration of its rules. The FCC also delayed the
requirement to integrate commercial mobile radio service long distance rates
among commercial mobile radio service affiliates. On December 31, 1998, the FCC
reaffirmed, on reconsideration, that its interexchange rate integration rules
apply to interexchange commercial mobile radio service services. The FCC
announced it would initiate a further proceeding to determine how integration
requirements apply to typical commercial mobile radio service offerings,
including one-rate plans. Until this further proceeding is concluded, the FCC
will enforce long distance rate integration on our services only where we
separately state a long distance toll charge and bill to our customers. To the
extent that the AT&T Wireless Group offers services subject to the FCC's rate
integration and averaging requirements, these requirements generally reduce its
pricing flexibility. We cannot assure you that the FCC will decline to impose
rate integration or averaging requirements on the AT&T Wireless Group or decline
to require it to integrate its commercial mobile radio service long distance
rates across its commercial mobile radio service affiliates.
The FCC recently adopted new rules limiting the use of customer proprietary
network information by telecommunications carriers in marketing a broad range of
telecommunications and other services to their customers and the customers of
affiliated companies. The rules were struck down by the federal circuit court in
1999, and their effectiveness has been stayed pending the court's review of a
petition to the FCC for reconsideration. Even if the rules are reinstated, the
AT&T Wireless Group does not anticipate that they will result in a significant
adverse impact on its financial position, results of operation or liquidity.
In addition, state commissions have become increasingly aggressive in their
efforts to conserve numbering resources. These efforts may impact wireless
service providers disproportionately by imposing additional costs or limiting
access to numbering resources. Examples of state conservation methods include:
number pooling, number rationing and code sharing. A number of states have
petitioned the FCC for authority to adopt "technology specific" overlays that
would require wireless providers to obtain telephone numbers out of a separate
area code and may require wireless providers to change their customers'
telephone numbers. The FCC approval and the states' subsequent implementation of
such "technology specific overlays" could increase wireless providers' cost of
doing business and impact their ability to market services. On June 2, 1999, the
FCC released a notice of proposed rulemaking soliciting comments on a variety of
administrative and technical measures that would promote more efficient
allocation and use of numbering resources. Adoption of some of the proposed
methods could have a disproportionate impact on commercial mobile radio services
providers.
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The FCC is also considering adopting rules to govern customer billing by
commercial mobile radio services providers and applied a number of these rules
to commercial mobile radio service providers. The FCC adopted detailed billing
rules for landline telecommunications service providers and is considering
whether to extend the remaining rules to commercial mobile radio services
providers. The FCC may require that more billing detail be provided to
consumers, which could add to the expense of the billing process as systems are
modified to conform to any new requirements. The FCC also is considering whether
carriers that decide to pass through their mandatory universal service
contributions to their customers should be required to provide a full
explanation of the program, and whether to ensure that the carriers that pass
through their contribution do not recover amounts greater than their mandatory
contributions from their customers. Adoption of some of the FCC's proposals
could increase the complexity of our billing processes and restrict our ability
to bill customers for services in the most commercially advantageous way.
The FCC has adopted an order that determines the obligations of
telecommunications carriers to make their services accessible to individuals
with disabilities. The order requires telecommunications services providers to
offer equipment and services that are accessible to and useable by persons with
disabilities. While the rules exempt telecommunications carriers from meeting
general disability access requirements if such results are not readily
achievable, it is not clear how liberally the FCC will construe this exemption.
Accordingly, the rules require us to make material changes to our network,
product line, or services at our expense.
In June 1999, the FCC initiated an administrative rulemaking proceeding to
help facilitate the offering of calling party pays as an optional wireless
service. Under the calling party pays service, the party placing the call to a
wireless customer pays the wireless airtime charges. Most wireless customers in
the United States now pay both to place calls and to receive them. Adoption of a
calling party pays system on a widespread basis could make commercial mobile
radio service providers more competitive with traditional landline
telecommunications providers for the provision of regular telephone service.
STATE REGULATION AND LOCAL APPROVALS
State and local governments are preempted from regulating either market
entry by, or the rates of, wireless operators. However, state governments can
regulate other terms and conditions of wireless service and several states have
imposed (or have proposed legislation that will impose) various consumer
protection regulations on the wireless industry. States also may impose their
own universal service support regimes on wireless and other telecommunications
carriers, similar to the requirements that have been established by the FCC. At
the local level, wireless facilities typically are subject to zoning and land
use regulation. State and local jurisdictions may also impose some conditions on
a driver's use of wireless technology while operating a motor vehicle. However,
under the federal Telecommunications Act, neither local nor state governments
may categorically prohibit the construction of wireless facilities in any
community.
LEGAL PROCEEDINGS
On July 8, 1997, MCI and Ronald A. Katz Technology Licensing, L.P. filed
suit in the U.S. District Court in Philadelphia, Pennsylvania against AT&T,
claiming, among other things, that services provided by the AT&T Wireless Group
infringe on patents held by or licensed to the plaintiffs. MCI and Katz
currently claim that the AT&T Wireless Group infringed on patents relating to
customer service, wireless fraud protection and prepaid wireless service
technology applications. The plaintiffs have not specified requested damages.
A number of lawsuits exist that request class certification for claims that
the AT&T Wireless Group collected charges for local government taxes from
customers that were not properly subject to
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those charges. The AT&T Wireless Group expects to assert claims for indemnity
against several local government entities in connection with these claims.
Several lawsuits exist that request class certification for claims that the
AT&T Wireless Group did not have sufficient network capacity to support the
influx of new subscribers who signed up for AT&T Digital One Rate service
beginning in May 1998 and therefore has failed to provide service of a quality
allegedly promised to subscribers. The plaintiffs in these cases have not
asserted specific claims for damages, with the exception of one case filed in
Texas in which the named plaintiffs have asserted claims for compensatory and
punitive damages totaling $100 million.
A number of other lawsuits exist that are brought on behalf of consumers or
request class certification for contract, misrepresentation or unfair practice
claims and, depending on the case, relating to AT&T Wireless Group's billing
practices (including rounding up of partial minutes of use to full minute
increments and billing send to end) coverage, dropped calls, price fixing or
mistaken bills. Although the plaintiffs in these cases have not specified
alleged damages, the damages in two of the cases are alleged to exceed $100
million. One of these two cases has been dismissed and is on appeal and the
other currently is in settlement negotiations.
The AT&T Wireless Group is involved in litigation in which the Cellular One
Group claims that use of the name "AT&T Digital One Rate" infringes on a
trademarked name, "Digital One" allegedly used by the Cellular One Group. The
Cellular One Group has not specified amounts of claimed damages.
On July 9, 1999, GTE filed suit in the U.S. District Court in Richmond,
Virginia against Nokia, claiming that the Nokia phones manufactured for the AT&T
Wireless Group infringe a GTE patent for over-the-air activation. On October 29,
1999, the AT&T Wireless Group filed a declaratory judgment action in the U.S.
District Court in Seattle, Washington, seeking a ruling that the AT&T Wireless
Group's use of over-the-air activation and the functionality built into Nokia's
phones do not infringe the GTE patent. On December 23, 1999, the U.S. District
Court in Virginia granted the AT&T Wireless Group's request to transfer GTE's
Virginia action to Seattle. GTE has not specified amounts of claimed damages.
The AT&T Wireless Group is seeking a ruling that its use of over-the-air
activation does not infringe GTE's patent.
The AT&T Wireless Group is vigorously defending each of these claims. The
AT&T Wireless Group cannot predict the final outcome of these disputes, but does
not believe that it will suffer any material liability from them.
The AT&T Wireless Group also is a defendant in other legal actions
involving claims incidental to the normal conduct of the running of its
business. The AT&T Wireless Group believes that the amounts that may be paid in
these actions will not be material to its financial position, or its results of
operations or cash flow.
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SELECTED HISTORICAL FINANCIAL DATA OF THE AT&T WIRELESS GROUP
In the table below, we provide you with selected historical combined
financial data of the AT&T Wireless Group. We prepared this information using
our combined financial statements at and for each of the fiscal years in the
three-year period ended December 31, 1998 and at and for the nine-month periods
ended September 30, 1999 and 1998. We derived the combined income statement data
below for each of the three years ended December 31, 1998, and the combined
balance sheet data at December 31, 1998 and 1997, from combined financial
statements audited by PricewaterhouseCoopers LLP, independent accountants. We
derived the remaining data from unaudited combined financial statements for the
periods presented.
The table below also provides you with unaudited selected pro forma
condensed combined financial information for the AT&T Wireless Group as if the
acquisition of Vanguard Cellular Systems, Inc. was completed on January 1, 1998
for purposes of the 1998 information presented and on January 1, 1999 for
purposes of the 1999 information provided. You should not rely on the unaudited
selected pro forma financial information as an indication of the results of
operations that would have been achieved had the merger taken place earlier.
This information is only a summary and you should read it together with the
financial information we include under Appendix C to this proxy statement or
incorporate by reference in this proxy statement. For copies of the financial
information we incorporate by reference, see "Other Information -- Where You Can
Find More Information."
SELECTED HISTORICAL FINANCIAL INFORMATION
(UNAUDITED)
(IN MILLIONS, EXCEPT FOR OTHER OPERATING DATA)
<TABLE>
<CAPTION>
AT OR FOR AT OR FOR
THE NINE THE NINE
MONTHS MONTHS AT OR FOR THE
ENDED ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, SEPTEMBER 30, ---------------------------
1999 1998 1998 1997 1996
------------- ------------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Services revenues............................... $ 4,928 $3,472 $ 4,779 $ 4,249 $ 3,887
Equipment revenues.............................. 562 425 627 419 359
-------- ------ ------- ------- -------
Total revenues.................................... 5,490 3,897 5,406 4,668 4,246
Operating Expenses:
Network and other costs of services............. 2,743 1,662 2,428 1,770 1,629
Depreciation and amortization................... 917 802 1,079 826 660
Selling, general and administrative............. 1,833 1,550 2,122 1,982 1,723
Asset impairment and restructuring charges...... -- 60 120 160 --
-------- ------ ------- ------- -------
Total operating expenses.......................... 5,493 4,074 5,749 4,738 4,012
Operating (loss) income........................... (3) (177) (343) (70) 234
Other income, net................................. 180 705 764 288 346
Interest expense.................................. 102 85 120 -- --
-------- ------ ------- ------- -------
Income before income taxes........................ 75 443 301 218 580
Provision for income taxes........................ 31 197 137 93 263
-------- ------ ------- ------- -------
Net income........................................ 44 246 164 125 317
Dividend requirements on preferred stock held by
AT&T, net....................................... 41 41 56 56 56
-------- ------ ------- ------- -------
Net income attributable to AT&T's residual
interest........................................ $ 3 $ 205 $ 108 $ 69 $ 261
</TABLE>
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<TABLE>
<CAPTION>
AT OR FOR AT OR FOR
THE NINE THE NINE
MONTHS MONTHS AT OR FOR THE
ENDED ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, SEPTEMBER 30, ---------------------------
1999 1998 1998 1997 1996
------------- ------------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
OTHER:
EBITDA(1)......................................... $ 914 $ 625 $ 736 $ 756 $ 894
EBITDA (excluding asset impairment and
restructuring charges).......................... 914 685 856 916 894
Equity earnings................................... 69 128 114 222 205
OTHER OPERATING DATA:
(in thousands)
Consolidated subscribers.......................... 9,129 6,791 7,174 5,964 5,032
Consolidated digital subscribers.................. 6,718 3,588 4,358 1,746 909
Total subscribers................................. 11,883 9,132 9,666 8,133 6,966
Total digital subscribers(2)...................... 8,359 4,199 5,168 n/a n/a
Covered population(3)............................. 120,994
Licensed population(3)............................ 178,698
850 markets..................................... 75,312
1900 markets.................................... 103,386
CASH FLOW DATA:
Net cash provided by (used in) operating
activities...................................... $ 527 $ (96) $ 414 $ 1,338 $ 1,183
Capital expenditures.............................. (1,376) (439) (1,219) (1,931) (1,832)
Net acquisitions of licenses...................... (32) (24) (65) (443) (327)
Net acquisitions (dispositions) of businesses..... 244 -- 324 -- 156
Equity investments contributions and purchases.... (172) (20) (156) (84) (32)
BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 16 $ 27 $ 6
Working capital................................... (284) (388) (506)
Property, plant and equipment, net................ 6,143 5,182 5,073
Licensing costs, net.............................. 8,366 7,928 8,403
Investments....................................... 4,477 3,795 3,233
Goodwill, net and other assets.................... 2,364 1,317 1,355
Total assets...................................... 22,856 19,460 19,040
Total debt(4)..................................... 3,341 2,589 2,447
Preferred stock held by AT&T...................... 1,000 1,000 1,000
Total shareowner's equity......................... 13,818 11,532 11,187
AT&T WIRELESS GROUP PRO FORMA FOR VANGUARD ACQUISITION:
Revenues.......................................... $ 5,647 $4,251 $ 5,868 $ 5,084
Net income........................................ 14 383 254 112
Capital expenditures.............................. 1,409 638 1,223 1,787
</TABLE>
- ------------------------
(1) EBITDA is defined as earnings before interest, taxes, excluding other
income, net, plus depreciation and amortization.
(2) Digital subscriber data not available for partnership or affiliate markets.
(3) AT&T Wireless Group's consolidated operations and does not include
partnership or affiliate markets.
(4) Includes $4 million of long-term debt that is included in other long-term
liabilities at September 30, 1999.
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AT&T WIRELESS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The AT&T Wireless Group is one of the largest wireless service providers in
the United States, based on approximately $5.5 billion in revenues for the nine
months ended September 30, 1999. Including its partnership markets, the AT&T
Wireless Group had approximately 12 million total subscribers as of September
30, 1999. Additionally, subscribers within the AT&T Wireless Group's affiliates
totaled approximately 0.3 million as of September 30, 1999. The AT&T Wireless
Group focuses on revenue growth through the retention and expansion of its
subscriber base. The group seeks to do this by providing new and innovative
services that distinguish it from its competitors. Examples include simplified
pricing plans, such as AT&T Digital One Rate service, and bundled offerings of
communications products and services that target specific customer groups.
The AT&T Wireless Group markets its products and services primarily under
the AT&T name. We believe that AT&T's widely recognized brand significantly
contributes to consumer awareness of, and confidence in, the AT&T Wireless
Group's products and services. The AT&T Wireless Group also believes that its
relationship with AT&T will provide it with other competitive advantages. For
example, the AT&T Wireless Group and the AT&T Common Stock Group plan to offer
their products and services together in bundled offerings, which may combine
wireless services with long distance and local communications services,
broadband services and Internet services. In addition, each group will be able
to take advantage of the other group's marketing and sales efforts and network
capabilities.
The AT&T Wireless Group operates one of the largest U.S. digital wireless
networks. The AT&T Wireless Group, including its partnership and affiliate
markets, currently holds 850 and 1900 megahertz licenses to provide wireless
services covering 94% of the U.S. population. As of September 30, 1999, the AT&T
Wireless Group's built network, including partnership and affiliate markets,
covered 64% of the U.S. population. This includes operations in 42 of the 50
largest U.S. metropolitan areas. The AT&T Wireless Group supplements its own
operations with roaming agreements that allow its subscribers to use other
providers' wireless services in regions where the AT&T Wireless Group does not
have operations. Through these roaming agreements, the AT&T Wireless Group is
able to offer its customers wireless services covering over 95% of the U.S.
population. The AT&T Wireless Group plans to continue to increase its coverage
and the quality of its services by expanding the footprint and capacity of its
network at an increased pace and by acquiring or partnering with other wireless
providers.
The AT&T Wireless Group provides its wireless voice and data services using
digital TDMA, analog and CDPD technologies. The AT&T Wireless Group has focused
on building out its digital network, including upgrading its analog systems to
digital in its 850 megahertz markets, and on migrating its customers from analog
to digital service. The AT&T Wireless Group has upgraded 98% of its 850
megahertz markets to digital based and all of its 1900 megahertz markets are
digital based. Currently, over 73% of the AT&T Wireless Group's consolidated
subscribers use digital services, accounting for over 85% of its traffic. The
AT&T Wireless Group believes that these percentages are substantially greater
than the industry average, excluding the AT&T Wireless Group. It further
believes that this high percentage of digital use improves the efficiency of its
network and allows it to offer higher quality services.
The digitalization of the network and subscriber base has had a significant
impact on the AT&T Wireless Group's financial results over the past several
years. Digital service has helped increase
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growth in subscribers, especially from AT&T Digital One Rate service subscriber
additions. The usage patterns of AT&T Digital One Rate service and other digital
customers, coupled with the increase in enhanced service features, have
contributed to an increase in average revenues per user (ARPU). Digital
customers also have demonstrated reduced churn. While enhanced network
efficiency resulting from digitalization contributes to reducing costs,
upgrading the network to digital has caused an increase in capital expenditures
and network costs over the past several years. In addition, the increase in the
number of digital subscribers has resulted in additional customer migration
costs, including handset subsidies, and AT&T Digital One Rate service and other
similar expanded area plans have resulted in increased roaming expenses.
The AT&T Wireless Group provides its mobile voice services using both 850
megahertz cellular and 1900 megahertz PCS licenses. The AT&T Wireless Group does
not manage its business for these spectrums separately. Rather, the AT&T
Wireless Group manages its business to provide virtually seamless network
coverage irrespective of the spectrum. From a marketing and operational
perspective, the AT&T Wireless Group defines and manages its markets
geographically, usually around an urban area or other geographic region. These
geographic markets may use either 850 megahertz or 1900 megahertz spectrum or
both. Geographic markets that use predominantly 850 megahertz spectrum have been
in operation longer and therefore are more mature than those markets that
exclusively use 1900 megahertz spectrum. As a result, the financial results of
these two types of markets currently differ significantly.
Since the AT&T Wireless Group does not manage the business along spectrum
divisions, it does not provide separate 850 megahertz and 1900 megahertz
financial statements in the normal course of operations. As supplemental
information, however, we have set out in the table below information on 850
megahertz markets and 1900 megahertz markets to demonstrate the estimated
financial performance of these different types of markets. The supplemental
financial information contains a number of allocations and attributions between
the markets based on management's judgment. There can be no assurance that the
financial results provided below would have been obtained were these markets
actually managed separately. In addition, mixed markets possessing both 850
megahertz and 1900 megahertz systems in operation are categorized as 850
megahertz markets. In the discussion and analysis below, we draw assumed
distinctions as to the results of the 850 megahertz and 1900 megahertz markets
where it may help to better evaluate performance of these markets and the
business as a whole. When the 1900 megahertz markets mature to the point that
the distinction between these markets and the more mature 850 megahertz markets
are no longer meaningful, we will discontinue this supplemental reporting.
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The AT&T Wireless Group's results below do not include aviation
communications, earnings (losses) associated with equity interests in wireless
communications ventures and partnerships both in the United States and
internationally, or costs associated with the development of fixed wireless
technology.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1999
------------------------
850 1900
MEGAHERTZ MEGAHERTZ
--------- ---------
(AMOUNTS IN MILLIONS,
EXCEPT WHERE NOTED)
<S> <C> <C>
Revenues
Services...................................... $4,077 $ 781
Equipment..................................... 448 104
------ ------
Total Revenues.................................. 4,525 885
EBITDA.......................................... 1,074 (121)
Capital Expenditures............................ 803 523
Subscribers..................................... 7.9 1.2
ARPU (in dollars)............................... $ 61.8 $ 93.8
Licensed POPs................................... 75.3 103.4
</TABLE>
The AT&T Wireless Group seeks to establish local market partnerships with
other wireless providers in order to accelerate the build out of its TDMA
systems. In addition to partnership arrangements for its 850 megahertz markets,
the AT&T Wireless Group has entered into a number of joint ventures and
affiliations to expand its 1900 megahertz digital coverage. We list the key
partnerships and affiliates under "Description of the AT&T Wireless
Group -- Strategy -- Continue the aggressive build out and expansion of its
digital TDMA network."
The AT&T Wireless Group's proportionate share of EBITDA for these key
partnerships and affiliates was $354 million for the year ended December 31,
1998 and $322 million for the nine months ended September 30, 1999.
The AT&T Wireless Group's proportionate share of debt for these key
partnerships and affiliates was $145 million at December 31, 1998 and $372
million at September 30, 1999.
In August 1999, the AT&T Wireless Group completed its acquisition of
Honolulu Cellular, adding approximately 125,000 subscribers and providing the
AT&T Wireless Group's mainland customers with wireless services in Oahu, Hawaii.
In May 1999, the AT&T Wireless Group completed its acquisition of Vanguard,
adding approximately 700,000 subscribers and increasing the AT&T Wireless
Group's coverage in suburban and rural markets in the Ohio Valley and
Northeastern United States. In April 1999, the AT&T Wireless Group completed its
acquisition of Bakersfield Cellular, adding approximately 45,000 subscribers.
OPERATING RESULTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1998
Revenues. Total revenues include wireless voice and data services, the
sale of handsets and accessories, messaging and aviation communications. The
AT&T Wireless Group records revenues as services are provided. These services
revenues include monthly recurring charges, airtime and toll usage charges, and
roaming charges billed to subscribers for usage outside of the AT&T network as
well as charges billed to other wireless providers for roaming on the AT&T
network.
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Total revenues for the three and nine months ended September 30, 1999 were
$2,049 million and $5,490 million, respectively. This was an increase of $628
million, or 44.2%, for the three months ended September 30, 1999, and an
increase of $1,593 million, or 40.9%, for the nine months ended September 30,
1999, compared with the same periods in 1998. The AT&T Wireless Group's 1999
results include Vanguard since its acquisition on May 3, 1999, and 1998 results
include its messaging business until its sale on October 2, 1998. Adjusted to
exclude both Vanguard and its messaging business, revenues for the three and
nine months ended September 30, 1999 were $1,925 million and $5,285 million,
respectively, representing growth of 40.9% and 41.1%, respectively, compared
with the same periods in 1998. These revenue increases were driven primarily by
consolidated subscriber growth and rising ARPU.
Total revenues for the three and nine months ended September 30, 1999
within the AT&T Wireless Group's 850 megahertz markets were $1,673 million and
$4,525 million, respectively. This was an increase of $452 million, or 37.0%,
for the three months ended September 30, 1999, and an increase of $1,073
million, or 31.1%, for the nine months ended September 30, 1999, compared with
the same periods in 1998. Total revenues for the three and nine months ended
September 30, 1999 within the AT&T Wireless Group's 1900 megahertz markets were
$359 million and $885 million, respectively. This was an increase of $242
million, or 206.8%, for the three months ended September 30, 1999, and an
increase of $681 million, or 333.8%, for the nine months ended September 30,
1999, compared with the same periods in 1998.
These revenue increases in both the 850 megahertz and 1900 megahertz
markets were driven primarily by consolidated subscriber growth and rising ARPU.
As of September 30, 1999, ending subscribers within the 850 megahertz markets
increased by 25.0% compared with 1998, while ending subscribers within 1900
megahertz markets increased by 166.6% compared with 1998. AT&T Digital One Rate
service significantly contributed 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 September 30, 1999, the number of
subscribers using AT&T Digital One Rate service was 1.6 million, an increase of
1.1 million, or 219.9%, compared with September 30, 1998, of which 82.0% were
new subscribers to the AT&T Wireless Group.
Services revenues for the three and nine months ended September 30, 1999
were $1,867 million and $4,928 million, respectively. This was an increase of
$602 million, or 47.6%, for the three months ended September 30, 1999, and an
increase of $1,456 million, or 41.9%, for the nine months ended September 30,
1999, compared with the same periods in 1998. These increases were driven
primarily by consolidated subscriber growth and rising ARPU.
Services revenues for the three and nine months ended September 30, 1999
for the 850 megahertz markets were $1,525 million and $4,077 million,
respectively. This was an increase of $424 million, or 38.5%, for the three
months ended September 30, 1999, and an increase of $970 million, or 31.2%, for
the nine months ended September 30, 1999, compared with the same periods in
1998. Services revenues for the three and nine months ended September 30, 1999
for the 1900 megahertz markets were $326 million and $781 million, respectively.
This was an increase of $240 million, or 279.1%, for the three months ended
September 30, 1999, and an increase of $642 million, or 461.9%, for the nine
months ended September 30, 1999, compared with the same periods in 1998.
As of September 30, 1999, the AT&T Wireless Group had 9.1 million
consolidated subscribers, an increase of 34.4% compared with the prior year, of
which 73.6% were digital subscribers, up from 52.8% as of September 30, 1998.
Included in these figures were approximately 700,000 subscribers from our
acquisition of Vanguard in May 1999 and approximately 125,000 subscribers from
our acquisition of Honolulu Cellular in August 1999. Segmented by market, as of
September 30, 1999, 7.9 million of the consolidated subscribers were within the
850 megahertz markets, of which 69.6% were digital subscribers, and 1.2 million
of the consolidated subscribers were within the 1900
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megahertz markets. As of September 30, 1999, penetration in the 850 megahertz
markets was 10.5% compared with 9.4% as of September 30, 1998. As of September
30, 1999, penetration in the 1900 megahertz markets was 1.7% compared with 0.6%
in 1998. Including the AT&T Wireless Group's partnership markets, approximately
8.4 million of the approximately 12 million total subscribers were digital
subscribers as of September 30, 1999.
The AT&T Wireless Group's ARPU in the 850 megahertz markets for the nine
months ended September 30, 1999 was $61.8, an increase of $5.6, or 10.0%,
compared with the same period in 1998. The AT&T Wireless Group's ARPU in the
1900 megahertz markets for the nine months ended September 30, 1999 was $93.8,
an increase of $27.2, or 40.8%, compared with the same period in 1998. These
increases were primarily due to increased minutes of use per subscriber, driven
in part by the success of AT&T Digital One Rate service. The AT&T Wireless
Group's ARPU remained significantly higher than the wireless industry average
during 1999, excluding the AT&T Wireless Group.
Equipment revenues for the three and nine months ended September 30, 1999
were $182 million and $562 million, respectively. This was an increase of $26
million, or 16.7%, for the three months ended September 30, 1999, and an
increase of $137 million, or 32.2%, for the nine months ended September 30,
1999, compared with the same periods in 1998. These increases were primarily due
to the increase in gross consolidated subscriber additions of 28.1%. As an
integral part of the wireless service offering, the AT&T Wireless Group supplies
to its new subscribers a selection of handsets at competitive prices, which are
generally offered at or below cost.
Equipment revenues for the three and nine months ended September 30, 1999
within the 850 megahertz markets were $148 million and $448 million,
respectively. This was an increase of $28 million, or 23.3%, for the three
months ended September 30, 1999, and an increase of $103 million, or 29.9%, for
the nine months ended September 30, 1999 compared with the same periods in 1998.
Equipment revenues for the three and nine months ended September 30, 1999 within
the 1900 megahertz markets were $33 million and $104 million, respectively. This
was an increase of $2 million, or 6.5%, for the three months ended September 30,
1999 and an increase of $39 million, or 60.0%, for the nine months ended
September 30, 1999, compared with the same periods in 1998. These increases were
due primarily to increased migration of customers from analog to digital
service, and increased gross subscribers as a result of the success of AT&T
Digital One Rate service.
Network and other costs of services. Network and other costs of services
expenses include the costs to place calls over the network (including the costs
to operate and maintain our 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 the AT&T Common Stock Group.
Network and other costs of services expenses for the three and nine months
ended September 30, 1999 were $993 million and $2,743 million, respectively.
This was an increase of $352 million, or 54.9%, for the three months ended
September 30, 1999, and an increase of $1,081 million, or 65.0%, for the nine
months ended September 30, 1999, compared with the same periods in 1998. The
increases were due primarily to roaming expenses associated with the success of
AT&T Digital One Rate service as off-network roaming minutes of use increased by
242.6% for the nine months ended September 30, 1999, compared with the same
period in 1998, coupled with the costs of handsets provided to subscribers.
Roaming expenses continued to negatively impact results for the three and
nine months ended September 30, 1999; but to a lesser extent compared to earlier
quarters, as the AT&T Wireless Group introduced initiatives to aggressively
migrate more minutes onto the AT&T Wireless Group network as well as reduce
roaming rates. The AT&T Wireless Group continues to seek to decrease roaming
through capital spending for network expansion, acquisitions and affiliate
launches. Roaming
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rates also have declined significantly as a result of renegotiated roaming
agreements and the deployment of IRDB technology, which assists in identifying
favorable roaming partners in areas not included in the AT&T Wireless Group's
network. All of these efforts have resulted in a reduction of approximately 10%
in the average roaming rate per minute paid to other carriers for the nine
months ended September 30, 1999, compared with the same period in 1998. Compared
to the third quarter of 1998, the average roaming rate per minute improved by
approximately 20%.
Depreciation and amortization. Depreciation and amortization expenses for
the three and nine months ended September 30, 1999 were $333 million and $917
million, respectively. This was an increase of $53 million, or 18.9%, for the
three months ended September 30, 1999, and an increase of $115 million, or
14.3%, for the nine months ended September 30, 1999, compared with the same
periods in 1998. These increases primarily resulted from a larger asset base and
additional amortization of goodwill and other purchased intangibles associated
with the acquisition of Vanguard.
Selling, general and administrative. Selling, general and administrative
(SG&A) expenses for the three and nine months ended September 30, 1999 were $655
million and $1,833 million, respectively. This was an increase of $119 million,
or 22.2%, for the three months ended September 30, 1999, and an increase of $283
million, or 18.3%, for nine months ended September 30, 1999, compared with the
same periods in 1998. These increases were due to the greater marketing and
selling costs and customer care associated with the higher growth of subscriber
additions.
For the three months ended September 30, 1999, SG&A expenses as a percent
of total revenue were 32.0%, a 5.7 point improvement compared with the same
period in the prior year. For the nine months ended September 30, 1999, SG&A
expenses as a percent of total revenue were 33.4%, a 6.4 point improvement
compared with the same period in the prior year. These reductions are due to
expense leveraging primarily within general and administrative expenses.
Asset impairment and restructuring charges. There were no asset impairment
and restructuring charges for the three months ended September 30, 1998 or for
the three and nine months ended September 30, 1999. Asset impairment and
restructuring charges for the nine months ended September 30, 1998 were $60
million, which represented the costs associated with the write-down of the
remaining assets associated with the AT&T Wireless Group's investment in its
two-way messaging business.
Other (expense) income, net. Other (expense) income, net includes gains or
losses on sales or exchanges of assets, net equity earnings of investments,
minority interests in earnings or losses of subsidiaries, and other
miscellaneous items. Other (expense) income, net for the three and nine months
ended September 30, 1999 was $(4) million and $180 million, respectively. Other
(expense) income, net for the three and nine months ended September 30, 1998 was
$56 million and $705 million, respectively. The decrease for the three months
ended September 30, 1999 compared to the same period in 1998 was primarily due
to a decrease in net equity earnings. The decrease for the nine months ended
September 30, 1999 compared to the same period in 1998 was due to the pretax
gains on sales in 1998 of LIN Television Corporation of $342 million, SmarTone
Telecommunications Holdings Limited of $128 million and PriceCellular of $67
million.
Interest expense. Interest expense consists primarily of interest on
intercompany debt due to the AT&T Common Stock Group. Interest was charged at
7.75% per annum for the three and nine months ended September 30, 1998 and 7.25%
per annum for the three and nine months ended September 30, 1999. Interest
expense for the three and nine months ended September 30, 1999 was $32 million
and $102 million, respectively. The decrease of $2 million, or 5.9%, for the
three months ended September 30, 1999 compared with the same period of 1998 was
the result of a lower interest rate in 1999, which was partially offset by a
lower level of interest capitalized in 1999 since assets were placed into
service as network build out was completed in certain markets. The increase of
$17 million, or 20.0%, for the nine months ended September 30, 1999, compared
with the same period in
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1998 was the result of a lower level of interest capitalized in 1999 since
assets were placed into service as network build out was completed in certain
markets, partially offset by the impact of the lower rate charged by AT&T in
1999.
Provision (benefit) for income taxes. The provision for income taxes for
the three and nine months ended September 30, 1999 was $14 million and $31
million, respectively, compared with a tax benefit of $6 million and a tax
provision of $197 million for the three and nine months ended September 30,
1998, respectively. The effective tax rate for the nine months ended September
30, 1999 and 1998, was 41.3% and 44.5%, respectively. These decreases were due
primarily to the change in the valuation allowance and other estimates between
periods.
Dividend requirements on preferred stock. The AT&T Wireless Group has $1.0
billion of preferred stock held by AT&T that pays dividends at 9% per annum.
Dividend requirements on this preferred stock for the three and nine months
ended September 30, 1999 and 1998 were $14 million and $41 million,
respectively, net of amounts recorded in accordance with the tax sharing
agreement described in Note 1 to the historical combined financial statements.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
Revenues. Total revenues for the year ended December 31, 1998 were $5,406
million, an increase of $738 million, or 15.8%, compared with 1997. Adjusting
for the October 2, 1998 sale of the messaging business, total revenues for the
year ended December 31, 1998 increased 17.2% compared with 1997. Total revenues
for the year ended December 31, 1998 within the 850 megahertz markets were
$4,747 million, an increase of $373 million, or 8.5%, compared with 1997. The
rate of growth slowed in the 850 megahertz markets due to increased competition
from new PCS competitors. This was somewhat offset by the success of the AT&T
Digital One Rate service launched in May 1998. Total revenues for the year ended
December 31, 1998 within the 1900 megahertz markets were $384 million, an
increase of $367 million compared with 1997. The year-over-year growth in 1900
megahertz market revenues was primarily due to revenues generated from the 1900
megahertz markets launched by the AT&T Wireless Group during 1997, many in the
latter part of that year.
Services revenues for the year ended December 31, 1998 were $4,779 million,
an increase of $530 million, or 12.5%, compared with 1997. The increase in
services revenues was driven primarily by an increase in consolidated
subscribers of 20.3%, due in large part to the success of AT&T Digital One Rate
service and the full-year impact in 1998 of the nine 1900 megahertz markets that
were launched in 1997. This was partially offset by a decline in ARPU. AT&T
Digital One Rate service, was first introduced in May 1998. In 1998, 856,000
customers signed on to AT&T Digital One Rate service, 74% of which were new
customers to the AT&T Wireless Group. Services revenues from the 850 megahertz
markets were $4,240 million in 1998, an increase of $246 million, or 6.2%,
compared with 1997. Services revenues from the 1900 megahertz markets were $284
million in 1998 compared with $5 million in 1997.
As of December 31, 1998, the AT&T Wireless Group had 7.2 million
consolidated subscribers, of which 60.7% were digital subscribers, an increase
of 29.3% compared with 1997. Including AT&T Wireless Group's partnership
markets, 5.2 million of the total 9.7 million subscribers were digital
subscribers as of December 31, 1998. Segmented by market, 6.6 million of the
consolidated subscribers were within the 850 megahertz markets, of which 57.0%
were digital subscribers, and 0.6 million of the consolidated subscribers were
within the 1900 megahertz markets as of December 31, 1998. As of December 31,
1998, penetration was 9.7% and 0.9% in the 850 megahertz and 1900 megahertz
markets, respectively. This compares with a penetration of 8.9% in the 850
megahertz markets as of December 31, 1997. Penetration statistics for the 1900
megahertz markets as of December 31, 1997 are not meaningful due to the launch
of these markets in the later half of that year.
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The AT&T Wireless Group's ARPU in the 850 megahertz markets for the year
ended December 31, 1998 was $56.7, a decrease of $3.0, or 5.0%, compared with
1997. In the fourth quarter of 1998, however, ARPU increased 1.6% over the prior
year's quarter compared with quarter-over-quarter declines of 10.8%, 7.4% and
3.7% in the first, second, and third quarters of 1998, respectively. AT&T
Digital One Rate service was responsible primarily for the increase in ARPU in
the fourth quarter, and the slowdown in the ARPU decline in the second and third
quarters of 1998. ARPU in the 1900 megahertz markets was $75.0 in 1998. During
1998, AT&T Wireless Group's ARPU remained significantly higher than the wireless
industry average.
Equipment revenues for the year ended December 31, 1998 were $627 million,
an increase of $208 million, or 49.6%, compared with 1997. This increase was due
primarily to increased gross consolidated subscriber additions substantially
attributable to the success of AT&T Digital One Rate service, as well as
increased migration of subscribers from analog to digital service. Equipment
revenues within the 850 megahertz markets were $507 million in 1998, an increase
of $127 million, or 33.4%, compared with 1997. Equipment revenues within the
1900 megahertz markets were $100 million in 1998 compared with $12 million in
1997.
Network and other costs of services. Network and other costs of services
expenses for the year ended December 31, 1998 were $2,428 million, an increase
of $658 million, or 37.2%, compared with 1997. This increase was due primarily
to higher roaming costs paid to other wireless providers reflecting increased
calling volumes due in part to the introduction of AT&T Digital One Rate
service, and the costs associated with increased handset sales.
The AT&T Wireless Group has taken a number of steps to control increases in
roaming expenses, including expansion of its network coverage, acceleration of
digital buildouts and acquisitions of and partnering with other wireless
providers. In addition, the AT&T Wireless Group has been aggressively
negotiating lower roaming rates with other wireless providers and maximizing
roaming activity with its partners. The AT&T Wireless Group expects that
technological developments, including handsets that can more easily be
programmed with preferred roaming providers and tri-mode handsets that will
allow roaming between its networks, will help to manage its roaming costs.
Depreciation and amortization. Depreciation and amortization expenses for
the year ended December 31, 1998 were $1,079 million, an increase of $253
million, or 30.6%, compared with 1997. This increase reflects a full year of
depreciation expense on assets related to the launch of the new 1900 megahertz
markets during the latter half of 1997.
During 1998, the AT&T Wireless Group completed a review of the estimated
service lives of some of its wireless communications equipment. As a result,
effective January 1, 1998, the estimated service lives of this equipment were
changed from 12 years to varying periods primarily ranging from seven to 10
years, with certain assets being changed to 15 years, depending on the nature of
the equipment. These changes resulted in an annual increase in depreciation
expense of $42 million in 1998.
Selling, general and administrative. SG&A expenses for the year ended
December 31, 1998 were $2,122 million, an increase of $140 million, or 7.1%,
compared with 1997. This increase resulted primarily from increased advertising
and other marketing costs to aggressively launch and support the new 1900
megahertz market launches. SG&A remained essentially flat in the 850 megahertz
markets despite increases in revenues and subscribers, reflecting a decrease in
selling and marketing costs associated with customer acquisitions in these
markets and a reduction in headcount in other general and administrative
functions. SG&A associated with the 1900 megahertz markets increased $141
million, or 82.0%, compared with 1997, driven by subscriber growth within those
markets.
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For the year ended December 31, 1998, SG&A expenses as a percent of total
revenue were 39.3%, a 3.2 point reduction compared with 1997, due to expense
leveraging, primarily within general and administrative expenses.
Asset impairment and restructuring charges. Asset impairment and
restructuring charges for the year ended December 31, 1998, were $120 million, a
decrease of $40 million, or 25.0%, compared with 1997. During 1998, the AT&T
Wireless Group recorded a pretax asset impairment charge of $120 million, which
represented the write-down of unrecoverable assets associated with nonstrategic
businesses. During 1997, the AT&T Wireless Group recorded a pretax charge of
$160 million related to the decision to no longer pursue a two-way messaging
business. This charge included costs associated with the write-down of
unrecoverable assets, as well as costs related to contractual obligations and
termination penalties.
Other (expense) income, net. Other (expense) income, net includes gains or
losses on sales or exchanges of assets, net equity earnings of investments,
minority interests in earnings or losses of subsidiaries, and other
miscellaneous items. Other (expense) income, net for the year ended December 31,
1998 was $764 million, an increase of $476 million, or 165.3%, compared with
1997. The increase primarily was due to 1998 pretax gains on the sales of LIN-TV
of $342 million, SmarTone of $128 million and PriceCellular of $67 million.
These gains were slightly offset by a decline in net equity earnings resulting
primarily from international investments compared with 1997.
Interest expense. Interest expense consists primarily of interest on the
intercompany debt due to the AT&T Common Stock Group. Interest was charged at
7.75% per annum. Interest expense for the year ended December 31, 1998 was $120
million, compared with no interest expense in 1997. In 1997, all of the interest
expense was capitalized as the AT&T Wireless Group continued to build out its
network. In 1998, its build out was complete in certain markets and therefore,
it was no longer appropriate to capitalize interest associated with certain of
these assets.
Provision for income taxes. The provision for income taxes for the year
ended December 31, 1998 was $137 million, an increase of $44 million, or 47.3%,
compared with 1997 due to higher levels of pretax income in 1998. The effective
tax rate was 45.5% and 42.7% for the years ended December 31, 1998 and 1997,
respectively. The increase in the effective tax rate was driven primarily by
increased unutilized foreign equity losses in 1998 compared with 1997.
Dividend requirements on preferred stock. The AT&T Wireless Group has $1.0
billion of preferred stock held by the AT&T Common Stock Group that pays
dividends at 9% per annum. Dividend requirements on this preferred stock for the
year ended December 31, 1998 and 1997 were $56 million in each year, net of
amounts recorded in accordance with the methodology of the tax sharing agreement
described in Note 1 to the historical combined financial statements.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
Revenues. Total revenues for the year ended December 31, 1997 were $4,668
million, an increase of $422 million, or 9.9%, compared with 1996. In December
1996, the AT&T Wireless Group sold wireless properties in Arkansas. Adjusted for
the impact of this disposal, the 1997 growth rate would have been 12.5%. Total
revenues for the year ended December 31, 1997 from 850 megahertz markets were
$4,374 million, an increase of $426 million, or 10.8%, compared with 1996. The
rate of growth in the 850 megahertz markets was impacted as new PCS competitors
entered a number of the 850 markets. Total revenues for the year ended December
31, 1997 within the 1900 megahertz markets were $17 million in 1997, as a result
of the market launches late in that year.
Services revenues for the year ended December 31, 1997 were $4,249 million,
an increase of $362 million, or 9.3%, compared with 1996. The increase in
services revenues primarily was driven by consolidated subscriber growth of
18.5% (as adjusted for the sale of the Arkansas properties).
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Partially offsetting this increase was a decrease in ARPU. Service revenues for
the 850 megahertz markets were $3,994 million in 1997, an increase of $379
million, or 10.5%, compared with 1996.
As of December 31, 1997, the AT&T Wireless Group had 6.0 million
consolidated subscribers, an increase of 0.9 million, or 18.5%, compared with
December 31, 1996, of which 29.3% were digital subscribers, an increase of
18.1%. These consolidated subscribers were almost exclusively within the 850
megahertz markets, with 1900 megahertz market subscribers totaling less than 0.1
million as of December 31, 1997. As of December 31, 1997, penetration in the 850
megahertz markets was 8.9%, compared with 7.6% as of December 31, 1996.
Including partnership markets, the AT&T Wireless Group had 8.1 million total
subscribers as of December 31, 1997, an increase of 1.2 million, or 16.8%,
compared with the number of total subscribers as of December 31, 1996.
The AT&T Wireless Group's ARPU in the 850 megahertz markets for the year
ended December 31, 1997 was $59.7, a decrease of $6.9, or 10.4%, compared with
1996. Although declines in ARPU were experienced throughout the wireless
industry primarily as a result of lower prices from increased competition from
new market entrants, the AT&T Wireless Group's ARPU remained significantly above
the industry average.
Equipment revenues for the year ended December 31, 1997 were $419 million,
an increase of $60 million, or 16.7%, compared with 1996. This increase
primarily reflected the growth in gross consolidated subscriber additions of
9.3%, and the commencement of large scale migration of customers from analog to
digital service. Equipment revenues also increased as a result of increased
sales of higher-priced handsets compared with 1996. Equipment revenues within
the 850 megahertz markets totaled $380 million in 1997, an increase of $47
million, or 14.1%, compared with 1996. Equipment revenues within the 1900
megahertz markets were only $12 million in 1997.
Network and other costs of services. Network and other costs of services
expenses for the year ended December 31, 1997 were $1,770 million, an increase
of $141 million, or 8.7%, compared with 1996. The increase was due primarily to
increased costs of handsets and accessories from the increase in gross
subscriber additions and customer migrations from analog to digital service. In
addition, expenses to operate and maintain our network increased as a result of
higher calling volumes. These increases were partially offset by a reduction in
roaming fraud costs from approximately $55 million in 1996 to $10 million in
1997, as improved fraud management controls were implemented during 1997.
Depreciation and amortization. Depreciation and amortization expenses for
the year ended December 31, 1997 were $826 million, an increase of $166 million,
or 25.2%, compared with 1996. This increase reflects a partial year of
depreciation on assets placed in service associated with the launch of new 1900
megahertz markets during the latter half of 1997.
Selling, general and administrative. SG&A expenses for the year ended
December 31, 1997 were $1,982 million, an increase of $259 million, or 15.0%,
compared with 1996. Nearly half of the increase in 1997 was due to spending to
acquire new subscribers, including additional marketing expenses related to the
launching of the 1900 megahertz markets. The remaining increase was attributable
to costs incurred to maintain computer systems and to support a large and
growing subscriber base.
For the year ended December 31, 1997, SG&A expenses as a percent of total
revenue were 42.5%, a 2.0 point increase compared with 1996. The increase was
associated primarily with sales and marketing costs related to the 1900
megahertz markets.
Asset impairment and restructuring charges. Asset impairment and
restructuring charges for the year ended December 31, 1997 were $160 million,
related to the decision to discontinue pursuing a two-way messaging business.
This charge included costs associated with the write-down of
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unrecoverable assets, as well as costs related to contractual obligations and
termination penalties. There were no asset impairment or restructuring charges
in 1996.
Other (expense) income, net. Other (expense) income, net includes gains or
losses on sales or exchanges of assets, net equity earnings of investments,
minority interests in earnings or losses of subsidiaries and other miscellaneous
items. Other (expense) income, net for the year ended December 31, 1997 was $288
million, a decrease of $58 million, or 16.8%, compared with 1996. The decrease
was due primarily to the 1996 pretax gains from the sale and exchange of certain
cellular properties with SBC of $131 million, as well as a pretax gain of $28
million from the sale of our equity investment in Movitel. This was partially
offset by a 1997 pretax gain of $45 million on the sale of a portion of our
investment in SmarTone, a $25 million pretax distribution from a nonconsolidated
investment, and higher net equity earnings from investments.
Interest Expense. Interest expense consists primarily of interest on
intercompany debt due to AT&T Common Stock Group. Interest was charged at 7.75%
per annum. In 1997 and 1996, the AT&T Wireless Group capitalized all interest
expense due to continuing significant build out particularly in 1900 megahertz
markets.
Provision for income taxes. The provision for income taxes for the year
ended December 31, 1997 was $93 million, a decrease of $170 million, or 64.6%,
compared with 1996 due to higher amounts of pre tax income in 1996. The
effective tax rate was 42.7% and 45.3% for the years ended December 31, 1997 and
1996, respectively. The decrease in the effective tax rate was due primarily to
the impact of the change in valuation allowance and other estimates in 1997 as
compared with 1996 offset by the impact of unutilized foreign losses.
Dividend requirements on preferred stock. The AT&T Wireless Group has $1.0
billion of preferred stock held by the AT&T Common Stock Group that pays
dividends at 9% per year. Dividend requirements on this preferred stock for the
year ended December 31, 1997 and 1996 were $56 million in each year, net of
amounts recorded in accordance with the methodology of the tax sharing agreement
described in Note 1 to the historical combined financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The continued expansion of the AT&T Wireless Group's network 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
internally generated funds, intercompany borrowings from the AT&T Common Stock
Group and capital contributions from the AT&T Common Stock Group. Capital
contributions from the AT&T Common Stock Group include acquisitions made by the
AT&T Common Stock Group that have been attributed to the AT&T Wireless Group.
The AT&T Common Stock Group has provided financing at interest rates and on
terms and conditions that are consistent with those the AT&T Wireless Group
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.
Net cash provided by operating activities for the nine months ended
September 30, 1999 was $527 million compared with a $96 million use of cash in
the same period of 1998. The difference was due to increased EBITDA excluding
asset impairment and restructuring charges, lower payments of accounts payable
and decreases in compensation and other operating accruals. Net cash used in
investing activities for the nine months ended September 30, 1999 was $1,158
million compared with $667 million of net cash provided by investing activities
for the same period in 1998. The difference was due primarily to lower cash
proceeds from the sales of equity investments and higher capital expenditures to
upgrade and increase capacity in existing markets as well as to expand the
national footprint. Net cash provided by financing activities for the nine
months ended September 30, 1999 was $620 million compared with $533 million of
cash used for the same period in 1998. The
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difference was due primarily to increased debt financing from AT&T to fund the
higher capital expenditures and decreased transfers to AT&T as compared to 1998
because of lower equity investment distributions and sales in 1999.
Net cash provided by operating activities for the year ended December 31,
1998 was $414 million, a decrease of $924 million compared with $1,338 million
of cash provided by operating activities in 1997 primarily due to increased
EBITDA excluding asset impairment and restructuring charges, increased accounts
receivable largely driven by higher revenues, as well as a net increase in other
operating assets and liabilities. Net cash provided by investing activities for
the year ended December 31, 1998 was $238 million, compared with a $2,164
million use of cash in 1997 for investing activities primarily due to higher
sales of equity investments and consolidated business and lower capital
expenditures in 1998. The net use of cash in 1997 was due primarily to spending
associated with the new 1900 megahertz market launches. Net cash used in
financing activities for the year ended December 31, 1998 was $631 million
compared with net cash provided by financing activities of $742 million in 1997
primarily due to higher transfers to AT&T resulting from the additional sales of
equity investments and consolidated businesses in 1998 as stated above. The net
cash provided by financing activities in 1997 was due primarily to transfers
from AT&T in order to fund the investing activities for that year.
Net cash provided by operating activities for the year ended December 31,
1997 was $1,338 million, an increase of $155 million compared with 1996 due
primarily to a lower increase in accounts receivable and an increase in accounts
payable. Net cash used in investing activities for the year ended December 31,
1997 was $2,164 million, an increase of $305 million from the $1,859 million of
cash used in 1996 due to cash generated from dispositions of business in 1996
coupled with increased acquisitions of licenses in 1997, and higher capital
expenditures in 1997 associated with the build out of the new 1900 megahertz
markets. These were partially offset by higher proceeds from the sales of and
distributions from equity investments in 1997 as compared with 1996. Net cash
provided by financing activities for the year ended December 31, 1997 was $742
million, an increase of $32 million compared with $710 million of cash provided
in 1996 due primarily to cash received from minority partners in 1996 to help
fund the build out for markets that were launched in 1997.
EBITDA is a measure used by the chief operating decision-makers to measure
our ability to generate cash flow. EBITDA 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 margins (defined as EBITDA as a
percentage of total revenues) as calculated by the AT&T Wireless Group may not
be comparable to similar measures reported by other wireless providers. The AT&T
Wireless Group records within services revenue roaming activity which is billed
to subscribers for usage outside of the AT&T network. Concurrently, the AT&T
Wireless Group records roaming charges paid to other providers as network and
other cost of service.
In each of the periods presented, EBITDA and EBITDA margins were favorably
impacted by revenue growth. In particular AT&T Digital One Rate Service
favorably impacted 1998 and 1999. EBITDA and EBITDA margins were also favorably
impacted in the 1999 periods as fixed and variable operating expenses were
covered over a growing subscriber base, particularly for the 1900 megahertz
markets. The build out and launch of services in new 1900 megahertz markets,
sales and marketing costs (including handset subsidies) of acquiring new
customers, aggressive migration of customers to digital service, the higher
roaming expenses associated with the increasing number of AT&T Digital One Rate
and other expanded area plan subscribers, along with subsequent operational
growth, all negatively impacted EBITDA and EBITDA margins during these periods.
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EBITDA for the three and nine months ended September 30, 1999 was $401
million and $914 million, respectively. This was an increase of $157 million, or
64.3%, for the three months ended September 30, 1999 and an increase of $289
million, or 46.2%, for the nine months ended September 30, 1999 compared with
the same periods in 1998. Excluding a pretax asset impairment and restructuring
charge of $60 million in 1998, the increase was $229 million for the nine months
ended September 30, 1999. The EBITDA growth rate during the three month period
increased compared with the year-to-year EBITDA growth rate recorded during the
nine months ended September 30, 1999.
Within the 850 megahertz markets, EBITDA for the three and nine months
ended September 30, 1999 was $422 million and $1,074 million, respectively. This
was an increase of $86 million, or 25.5%, for the three months ended September
30, 1999 and an increase of $66 million, or 6.5%, for the nine months ended
September 30, 1999.
Within the 1900 megahertz markets, EBITDA for the three and nine months
ended September 30, 1999 was $(6) million and $(121) million, respectively. This
was an improvement of $83 million, for the three months ended September 30, 1999
and an improvement of $188 million compared with the same periods in 1998.
Excluding the aforementioned pretax asset impairment and restructuring
charge of $60 million in 1998, EBITDA margins were 16.6% for the nine months
ended September 30, 1999, compared with 17.6% for the same periods in 1998.
EBITDA margins within the 850 megahertz markets were 23.7% for the nine months
ended September 30, 1999, compared with 29.2% for the nine months ended
September 30, 1998. EBITDA margins within the 1900 megahertz markets were
(13.7%) for the nine months ended September 30, 1999, compared to (151.5%) for
the nine months ended September 30, 1998.
EBITDA for the year ended December 31, 1998 was $856 million compared with
$916 million in 1997, excluding the pretax asset impairment and restructuring
charges of $120 million in 1998 and $160 million in 1997.
EBITDA for the year ended December 31, 1998 within the 850 megahertz
markets was $1,261 million, an increase of $82 million, or 7.0%, compared with
1997. Within the 1900 megahertz markets, EBITDA was ($373) million in 1998
compared with ($212) million in 1997.
EBITDA for the year ended December 31, 1997 was $916 million compared with
$894 million in 1996, excluding the pretax asset impairment and restructuring
charge of $160 million in 1997.
EBITDA for the year ended December 31, 1997 within the 850 megahertz
markets was $1,179 million, an increase of $186 million, or 18.7%, compared with
1996. Within the 1900 megahertz markets, EBITDA was ($212) million in 1997
compared with ($63) million in 1996.
Excluding the pretax asset impairment and restructuring charge of $120
million in 1998 and $160 million in 1997, EBITDA margins were 15.8% in 1998
compared with 19.6% in 1997 and 21.1% in 1996. EBITDA margins within the 850
megahertz markets were 26.6% in 1998, compared with 27.0% in 1997 and 25.2% in
1996.
Capital expenditures for the nine months ended September 30, 1999 were
$1,393 million. This represented an increase of $826 million, or 145.7%,
compared with the same period in 1998. Capital expenditures within the 850
megahertz markets, including spending associated with administrative functions,
totaled $803 million during the nine months ended September 30, 1999, an
increase of 164.1%. Network capital expenditures within the 1900 megahertz
markets totaled $523 million during the nine months ended September 30, 1999, an
increase of 181.2%, compared with the same period in 1998.
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Capital expenditures for the year ended December 31, 1998 were $1,136
million, a decrease of $514 million, or 31.2%, compared with 1997. Capital
expenditures were $645 million in the 850 megahertz markets, including spending
associated with administrative functions, a decrease of $57 million, or 8.1%,
compared with 1997. This decrease resulted from significant spending in 1997
associated with the 1900 megahertz market launches. Network capital expenditures
were $384 million in the 1900 megahertz markets during 1998, a reduction of $428
million, or 52.7%, compared with 1997.
Capital expenditures for the year ended December 31, 1997 were $1,650
million, a decrease of $356 million, or 17.7%, compared with 1996. Decreased
capital expenditures in the 850 megahertz markets were partially offset by
spending for the build out of the 1900 megahertz markets. Capital spending for
the 850 megahertz markets, including spending associated with administrative
functions, declined from $1,071 million in 1996 to $701 million in 1997, a
reduction of 34.5%. Conversely, 1900 megahertz market network spending increased
from $632 million in 1996 to $812 million in 1997, an increase of 28.5%.
Financing activities for the AT&T Wireless Group will be managed by AT&T on
a centralized basis and subject to the review of the AT&T Wireless Group capital
stock committee. Loans from AT&T or any member of the AT&T Common Stock Group 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 or any member
of the AT&T Common Stock Group. This policy contemplates that these loans will
be made on the basis set forth above regardless of the interest rates and other
terms and conditions on which AT&T or members of the AT&T Common Stock Group 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. In addition, any
difference between AT&T's borrowing rates and the rates charged to the AT&T
Wireless Group, which we expect will be higher, will be reflected in the
financial statements of the AT&T Common Stock Group.
In determining the initial capitalization of the AT&T Wireless Group, a
number of factors were considered. These factors included the prospective
financing requirements, the desired stand-alone credit rating, working capital
and capital expenditure requirements, and the initial ratio of total debt and
preferred stock to EBITDA as compared to other companies in its industry.
FINANCIAL CONDITION
Total assets were $22,856 million as of September 30, 1999, an increase of
$3,396 million, or 17.5%, compared with December 31, 1998, due primarily to
increases in goodwill, licensing costs and property, plant and equipment
associated with our acquisitions of Vanguard, Honolulu Cellular and Bakersfield
Cellular. In addition, higher nonconsolidated investments primarily as a result
of our investment in Rogers Cantel and increased accounts receivable associated
with higher revenues also contributed to the increase in total assets.
Total liabilities were $8,961 million as of September 30, 1999, an increase
of $1,138 million, or 14.5%, compared with December 31, 1998, primarily debt due
to the AT&T Common Stock Group, increases in operating accruals and higher
deferred income taxes.
Total preferred stock held by AT&T was $1.0 billion at both September 30,
1999, and December 31, 1998. Dividends payable on the preferred stock was paid
at 9% per annum.
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Total shareowner's equity was $13,818 million as of September 30, 1999, an
increase of $2,286 million, or 19.8%, compared with December 31, 1998, due
primarily to increased transfers from the AT&T Common Stock Group.
Total assets were $19,460 million as of December 31, 1998, an increase of
$420 million, or 2.2%, compared with December 31, 1997, due primarily to
increased investments in nonconsolidated investments and increased accounts
receivable due to growth in revenues. These increases were partially offset by
declines in licensing costs due to the contribution of certain licenses as part
of the investments in nonconsolidated subsidiaries, the disposition of certain
licenses and the amortization for the period.
Total liabilities were $7,823 million as of December 31, 1998, an increase
of $135 million, or 1.8%, compared with December 31, 1997, primarily as a result
of an increase in accounts payable.
Total shareowner's equity was $11,532 million as of December 31, 1998, an
increase of $345 million, or 3.1%, compared with December 31, 1997, due
primarily to transfers from AT&T that represents the net balance of intercompany
transactions between the AT&T Wireless Group and AT&T in 1997.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board 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.
YEAR 2000
The AT&T Wireless Group prepared its systems and applications for the year
2000 (Y2K) through its involvement and participation in AT&T's company-wide Y2K
program. The issue the Y2K program addressed was 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. AT&T and the AT&T Wireless Group
also are faced with addressing interdependencies with our suppliers, connecting
carriers and major customers, all of whom face the same issue. January 1, 2000
passed without the occurrence of any significant Y2K problems being reported.
AT&T's Y2K program was focused on four interrelated categories that 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.
Progress in the 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.
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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.
As of September 30, 1999, AT&T's network services and AT&T-developed
applications and their external interfaces are Y2K compliant. This means they
have been assessed for the Y2K impacts, repaired if necessary, tested and fully
deployed. As of September 30, 1999, within the IT-infrastructure category, some
non-critical desktops remained to be certified and a small number of sites
remained to be certified in the non-IT infrastructure category. The
certification of these remaining desktops and sites was completed in November
1999.
PROGRAM STATUS
AT&T now has over 3,500 applications that
- directly support AT&T's voice and data telecommunications network
(including wired and wireless),
- are critical to the provisioning, administration, maintenance and
customer service/support related to AT&T's telecommunications services,
and
- support AT&T's sales and marketing organizations, other AT&T services and
internal administrative functions.
These applications represent over 385 million lines of code. As of
September 30, 1999, these applications were 100% compliant.
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 over 1,000 different types of
third-party interfaces and about 10,000 total instances of those types. As of
September 30, 1999, AT&T was 100% complete with Y2K certification of external
interfaces.
AT&T's networks (wired and wireless) are critical to providing top-quality,
reliable service to AT&T customers. As of September 30, 1999, the assessment,
repair and certification phases of the operation-support systems (OS) were 100%
complete and these systems are now fully deployed. In addition to the
AT&T-developed applications supporting the network, AT&T has inventoried about
2,000 unique types (manufactured/model combinations) of 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, and all of the NEs are fully deployed.
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. As of
September 30, 1999, AT&T was 100% compliant in computing platforms, about 95%
compliant in desktops, 100% compliant in voice systems and adjuncts, and 100%
compliant in data networks. AT&T completed the validation process in November
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
18,000 sites, including thousands of repeater huts, radio towers and wireless
cell sites. As of September 30, 1999, 100% of all sites completed inventory and
assessment and about 97% are compliant (or not impacted). The small number of
remaining sites that still remained to be certified as compliant were completed
in November 1999.
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In addition, as of September 30, 1999, AT&T has virtually completed network
interoperability tests with a variety of domestic and international testing
partners, with the remaining two tests completed in November 1999. These tests
are designed to exercise the network across a range of our vendors, and across a
range of AT&T voice, private line, and data services. We have also completed
testing with key customer and industry segments, including the financial
community, insurance, power utilities, federal government and others. All test
results to date have been positive.
COSTS
AT&T has expended approximately $675 million since inception in 1997 on all
phases of the Y2K project, of which approximately $61 million represented the
AT&T Wireless Group's portion of those costs. This figure includes about $76
million of costs for all of AT&T incurred during the third quarter of 1999, of
which about $5 million pertain to the AT&T Wireless Group. Of the total AT&T
third-quarter costs, approximately $11 million represented capital spending for
upgrading and replacing non-compliant computer systems and network components.
Less than half of the total AT&T 1999 costs incurred to date represent IT
resources that have been redeployed from other projects and are expected to
return to those projects upon completion of the Y2K project. AT&T anticipates
remaining Y2K costs for 1999, inclusive of approximately $3 million projected
expenditures for the AT&T Wireless Group, will be approximately $64 million.
This projection includes approximately $21 million of capitalized costs for all
of AT&T, of which less than $1 million pertain to the AT&T Wireless Group. The
remaining projected expenditures primarily will consist of continued independent
verification and validation, contingency planning testing, assurance of "clean
management" disciplines, completion of document retention requirements, and
continued communications expansion and enhancement.
RISK ASSESSMENT
AT&T has assessed its business exposure that would result from a failure of
the 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 AT&T and
the AT&T Wireless Group 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.
CONTINGENCY PLANS
AT&T's contingency planning program focused on 38 critical business
processes and many more that are designated as "important" or "support." The
plans addressed all facets of business continuity, including key suppliers,
systems/applications, IT infrastructure and work centers. Specific examples of
AT&T's contingency plan initiatives include the following:
- Plans are under way to engineer additional network capacity and 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.
- AT&T is planning to proactively stage power, fuel, water, heating, air
conditioning and ventilation sources to support critical business
operations and personnel requirements.
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- 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.
RISK MANAGEMENT
In addition to the contingency planning program, AT&T has implemented an
Independent Verification and Validation program for applications to validate the
quality of application remediation testing, as well as the continuing compliance
of systems put back into production. AT&T also continues to conduct independent
audits across critical areas of the Y2K program.
AT&T continues to monitor the progress of over 50 countries who represent a
significant revenue source. Based on assessments aggregated by the Network
Reliability and Interoperability Council, the outlook for Y2K readiness for
these countries and their carriers continues to improve. Network
interoperability testing results also support this view.
To maintain a state of readiness and further protect against potential
Y2K-related service disruption, AT&T has instituted a special "quiet period"
from December 1, 1999 through January 15, 2000. During this period, no new
software or hardware will be introduced into the network or support systems.
Provisioning and scheduled maintenance also will be limited.
SUBSEQUENT EVENTS
On October 6, 1999, AT&T and Dobson announced the signing of a definitive
agreement to acquire American Cellular through a newly created joint venture for
$2.32 billion. This joint venture interest will be included in the AT&T Wireless
Group. Dobson will be responsible for day-to-day management of the joint
venture, which will be equally owned and jointly controlled by Dobson and the
AT&T Wireless Group. The acquisition will be funded with non-recourse bank debt
by the joint venture and cash equity contributions of up to approximately $370
million from each of the two partners. The boards of AT&T, Dobson and American
Cellular have approved the transaction. The acquisition, which is expected to
close in the first quarter of 2000, is subject to federal regulatory approval
and certain other conditions.
On October 1, 1999, CMT Partners distributed certain assets including its
ownership interest in Kansas City, Missouri and Dallas, Texas to its partners.
Through this distribution, the AT&T Wireless Group received ownership of the
Dallas, Texas market and Vodafone Airtouch obtained ownership of the Kansas
City, Missouri market. The AT&T Wireless Group is now the sole owner of the
market in Dallas, Texas. The AT&T Wireless Group continues to hold a 50% equity
and voting interest in the remaining assets of CMT Partners.
The AT&T Wireless Group also acquired other cellular markets in California,
Idaho and Louisiana. These acquisitions were accounted for under the purchase
method. The pro forma operating results of these acquisitions are not material
to the overall operating results of the AT&T Wireless Group.
Subsequent to September 1999, the AT&T Wireless Group purchased minority
interests in several of their markets that they did not wholly own. These
purchases totaled $61 million.
The AT&T Wireless Group has a signed agreement to sell one of its equity
investments for an expected gain of approximately $40 million. This transaction
is expected to close in the first quarter of 2000.
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Asset impairment charges of $531 million were recorded primarily resulting
from the planned disposal of wireless network equipment in conjunction with a
program to increase the capacity and operating efficiency of the wireless
network. As part of this multi-vendor wireless program recently announced by the
AT&T Wireless Group contracts are being executed with certain vendors to replace
significant portions of the wireless infrastructure equipment in the Western
United States and New York markets. The program will provide the AT&T Wireless
Group with the newest technology available and allow it to seamlessly evolve to
new third generation digital technology, which will provide high-speed data and
global roaming capabilities. We anticipate the migration to be significantly
completed by the end of 2000.
The planned disposals of the existing assets and imminent move to the next
generation technology are events that require an evaluation of asset impairment
in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of." As a result, a non-cash
charge of $531 million ($328 million after tax) will be taken in the fourth
quarter of 1999 to write these assets down to their estimated fair market value.
Since there is no readily available fair market value, discounted net cash flows
were used to determine fair market value. As the assets will remain in service
for some time prior to actual disposition, the AT&T Wireless Group will
accelerate the recognition of depreciation expense on these assets over their
shortened remaining service life.
FORWARD-LOOKING STATEMENTS
Except for the historical statements and discussions we include in this
proxy statement, statements in this proxy statement constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act, including statements concerning future operating
performance, Y2K compliance, the AT&T Wireless Group's share of new and existing
markets, the AT&T Wireless Group's short- and long-term revenue and earnings
growth rates, 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 adoption and
implementation of balanced and effective rules and regulations by the FCC and
the state public regulatory agencies, and 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 control of the AT&T Wireless Group, 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.
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RELATIONSHIP BETWEEN THE AT&T COMMON STOCK GROUP
AND THE AT&T WIRELESS GROUP
The description of the AT&T Wireless Group capital stock committee and the
AT&T Wireless Group policy statement below is not complete and is qualified in
its entirety by reference to the by-law amendment and the AT&T Wireless Group
policy statement, copies of which we include as Appendix B to this proxy
statement and incorporate by reference. All shareholders are urged to read them
in their entirety.
AT&T WIRELESS GROUP CAPITAL STOCK COMMITTEE
Upon creation and issuance of AT&T Wireless Group tracking stock, we will
amend our by-laws to establish the AT&T Wireless Group capital stock committee
of our board of directors to oversee the interaction between the businesses of
the AT&T Common Stock Group and the AT&T Wireless Group. The members of the AT&T
Wireless Group capital stock committee will be selected by our board of
directors. The by-law amendment provides that our board of directors will
delegate to the AT&T Wireless Group capital stock committee authority to:
- interpret, make determinations under and oversee the implementation of
the policies described in the Policy Statement Regarding AT&T Wireless
Group Tracking Stock Matters described under "-- AT&T Wireless Group
Policy Statement,"
- review the policies, programs and practices of AT&T relating to:
-- the business and financial relationships between AT&T or any of its
units, other than the Liberty Media Group, with the AT&T Wireless
Group,
-- dividends in respect of, disclosures to shareholders and the public
concerning, and transactions by AT&T or any of its subsidiaries,
other than subsidiaries included in the Liberty Media Group, in
shares of AT&T Wireless Group tracking stock, and
-- any matters arising in connection with any of the foregoing, all to
the extent the AT&T Wireless Group capital stock committee may deem
appropriate, and
- recommend changes in the policies, programs and practices that the AT&T
Wireless Group capital stock committee may deem appropriate.
The AT&T Wireless Group capital stock committee will have and may exercise
such other powers, authority and responsibilities as our board of directors may
determine from time to time. Although our board of directors has no present
intention to do so, it may modify, suspend or rescind the by-law amendment or
adopt additional by-laws, at any time, without the approval of our shareholders,
subject to our board of directors' fiduciary duties.
AT&T WIRELESS GROUP POLICY STATEMENT
In connection with the creation and issuance of AT&T Wireless Group
tracking stock, AT&T will, effective upon issuance of AT&T Wireless Group
tracking stock, adopt the AT&T Wireless Group policy statement, which AT&T
intends to follow.
GENERAL POLICY
Our board of directors has determined that all material matters in which
holders of AT&T common stock and AT&T Wireless Group tracking stock may have
divergent interests will be
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generally resolved in a manner that is in the best interests of AT&T and all of
its common shareholders after giving fair consideration to the potentially
divergent interests and all other relevant interests of the holders of the
separate classes of AT&T common shares. Under the AT&T Wireless Group policy
statement, the relationship between the AT&T Common Stock Group and the AT&T
Wireless Group and the means by which the terms of any material transaction
between them will be determined will be governed by a process of fair dealing.
RELATIONSHIP BETWEEN THE AT&T COMMON STOCK GROUP AND THE AT&T WIRELESS
GROUP
The AT&T Wireless Group policy statement provides that AT&T will seek to
manage the AT&T Common Stock Group and the AT&T Wireless Group in a manner
designed to maximize the operations, unique assets and value of both groups, and
with complementary deployment of capital and facilities. AT&T expects that the
operating relationship between the two groups will include the coordination and
use of bundled offers, network services, marketing, sales, branding, and other
intellectual property and technology. In addition, there will be various
financial arrangements between the two groups, including with respect to debt,
other financings and taxes.
General. The AT&T Wireless Group policy statement provides that, except as
otherwise provided in the policy statement, all material commercial transactions
between the AT&T Common Stock Group and the AT&T Wireless Group will be on
commercially reasonable terms taken as a whole and will be subject to the review
and approval of the AT&T Wireless Group capital stock committee.
Allocation of corporate overhead and support services. Each group will
have access to the support services of the other group, including customer care
and billing platforms.
For shared corporate services that arise as a result of being part of a
combined entity, including securities filing and financial reporting services,
costs relating to these services will be:
- allocated directly to the group utilizing those services, and
- if not directly allocable to a group, allocated between the groups on a
fair and reasonable basis as our board of directors determines.
For other support services, for example, billing and purchasing services,
the AT&T Wireless Group policy statement provides that the groups will seek to
achieve enterprise efficiencies to minimize the aggregate costs incurred by the
two groups combined, although each group also will be entitled to negotiate and
procure support services on their own either from the other group or from third
parties.
Sourcing and provision of other services. Each group will use exclusively
the services that the other group offers for use in their respective packaged,
bundled, combined or integrated offerings. This would, for example, require the
AT&T Wireless Group to procure long distance services for its wireless service
bundles exclusively from the AT&T Common Stock Group and require the AT&T Common
Stock Group to procure wireless services for its bundled offerings exclusively
from the AT&T Wireless Group. The policy statement further provides that each
group will provide these services to the other group at the best price offered
by that group to third parties in similar situations when taking into account
all relevant factors, including the availability of wholesale pricing, volume,
peak/off-peak usage and length of commitment.
Marketing of services. The policy statement provides that, as a general
matter, each group will design, develop, deploy, produce, market, sell and
service their own service offerings and choose their own sales channels. In
addition, each group will be able to negotiate for the use of the sales channels
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of the other group to offer their services. With respect to fixed wireless
services, however, it is currently intended that the AT&T Wireless Group will
not develop, deploy, produce, market or sell:
- fixed wireless voice and data services to residences located in the AT&T
Common Stock Group's currently owned and operated broadband service areas
or after acquired owned and operated broadband service areas in which
fixed wireless has not begun deployment at the time of acquisition,
- fixed wireless voice and data services to businesses that are otherwise
connected by AT&T fiber or broadband, and
- fixed wireless voice services to residences located in broadband service
areas served by a cable operator in which the AT&T Common Stock Group
currently has or has contracted for a substantial equity interest if such
operator offers AT&T branded residential telephony services within a
commercially reasonable time, unless prior thereto the AT&T Wireless
Group has received the approval of our board of directors. Such approval
will be based on the value and likelihood, considering all terms and
conditions, of any actual or prospective AT&T branded telephony offers by
such cable operator.
Furthermore, the AT&T Wireless Group is subject to all existing agreements
and arrangements (including reasonable amendments thereto) entered into by AT&T
with third parties.
With respect to residences located in the same marketing areas as AT&T's
broadband service areas, the AT&T Wireless Group will, to the extent practical,
conform its voice and data offers to those of the AT&T Common Stock Group and
the AT&T Common Stock Group will have the non-exclusive right to market the AT&T
Wireless Group's fixed wireless services for which it will receive a sales
agency fee. Marketing areas may include those markets in which AT&T has
significant cable licenses and in which geographic proximity, marketing overlap
or other factors support coordinated marketing and sales activities, including
development of specific consumer and business service offers. In addition, the
policy statement provides that the groups will work collaboratively with each
other to understand and take into account the other's expansion, acquisition,
deployment, marketing and sales plans, with the goal of minimizing overlaps and
conflicts between the groups.
It is expected that when the combined services of the two groups are
bundled or offered together and the total cost to consumers of each of those
services are separately identified on a billing statement, each of the AT&T
Common Stock Group and the AT&T Wireless Group will control the pricing of its
respective services and receive the associated revenues. The group which sells
the service to the public will receive an appropriate fee from the other group
for selling the service.
In a bundled product offering where the services of the two groups are
integrated and the total cost to consumers of each of those services are not
separately identified on a billing statement, the groups are expected to work
collaboratively to determine the nature of their arrangements and are also
permitted to source the services of the other group as described above;
provided, however, that neither group may offer a bundle of services comprised
primarily of the services of the other group without that other group's
agreement.
Inter-Group Interest. The AT&T Wireless Group policy statement provides
that the AT&T Wireless Group will not acquire an inter-group interest in the
AT&T Common Stock Group.
CORPORATE OPPORTUNITIES
The AT&T Wireless Group policy statement provides that our board of
directors will allocate any business opportunities and operations, any acquired
assets and businesses and any assumed
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liabilities between the two groups, in whole or in part, as it considers to be
in the best interests of AT&T and its shareholders as a whole and as
contemplated by the other provisions of the policy statement. If a business
opportunity or operation, an acquired asset or business, or an assumed liability
would be suitable to be undertaken by or allocated to either group, our board of
directors will allocate it using its business judgment or in accordance with
procedures that our board of directors adopts from time to time to ensure that
decisions will be made in the best interests of AT&T and its shareholders as a
whole. Any allocation of this type may involve the consideration of a number of
factors that our board of directors determines to be relevant, including,
without limitation, whether the business opportunity or operation, the acquired
asset or business, or the assumed liability is principally within the existing
scope of a group's business and whether a group is better positioned to
undertake or have allocated to it such business opportunity or operation,
acquired asset or business or assumed liability. Our board of directors
currently intends, however, subject to and without limiting these provisions,
and subject to pre-existing agreements relating to international markets, to
allocate future mobile and fixed wireless opportunities to the AT&T Wireless
Group.
Except under the policy statement and any other policies adopted by our
board of directors, which policies will be designed to minimize conflicts
between the groups, harmonize capital spending and promote the use by each group
of services of the other group, neither the AT&T Wireless Group nor the AT&T
Common Stock Group will have any duty, responsibility or obligation to refrain
from:
- engaging in the same or similar activities or lines of business as any
member of the other group,
- doing business with any potential or actual supplier, competitor or
customer of any member of any other group, or
- engaging in, or refraining from, any other activities whatsoever relating
to any of the potential or actual suppliers or customers of any member of
the other group.
In addition, except under the policy statement and any other policies adopted by
our board of directors, neither the AT&T Wireless Group nor the AT&T Common
Stock Group will have any duty, responsibility or obligation:
- to communicate or offer any business or other corporate opportunity to
any other person, including any business or other corporate opportunity
that may arise that more than one group may be financially able to
undertake, and that are, from their nature, in the line of more than one
group's business and are of practical advantage to more than one group,
- to provide financial support to another group, or any member of that
group, except as described under "Relationship with AT&T -- Financing
arrangements," or
- otherwise to assist any other group.
Under no circumstances will any members of the AT&T Wireless Group or the
AT&T Common Stock Group be prevented from entering into written agreements with
another group to define or restrict any aspect of the relationship between the
groups.
DIVIDEND POLICY
The policy statement provides that, subject to the limitations on dividends
set forth in our charter, including any preferential rights of any series of
preferred stock of AT&T, and to the limitations of applicable law, holders of
shares of AT&T common stock or AT&T Wireless Group tracking stock will be
entitled to receive dividends on that stock when, as and if our board of
directors authorizes and declares dividends on that stock. The payment of
dividends on AT&T
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common stock will be a business decision that our board of directors makes from
time to time based upon the results of operations, financial condition and
capital requirements of AT&T and other factors that our board of directors
considers relevant. Payment of dividends on AT&T common stock also may be
restricted by loan agreements, indentures and other transactions that AT&T
enters into from time to time.
With respect to AT&T Wireless Group tracking stock, because the AT&T
Wireless Group is expected to require significant capital commitments to finance
its operations and fund its future growth, the AT&T Wireless Group policy
statement provides that AT&T does not expect to pay any dividends on shares of
AT&T Wireless Group tracking stock for the foreseeable future. If and when our
board of directors determines to pay any dividends on shares of AT&T Wireless
Group tracking stock, the policy statement provides that this determination will
also be subject to factors similar to those that we describe above with respect
to the payment of dividends on AT&T common stock.
FINANCIAL REPORTING
The AT&T Wireless Group policy statement provides that AT&T will prepare
and include in its filings with the SEC financial statements of AT&T and the
AT&T Wireless Group for so long as AT&T Wireless Group tracking stock is
outstanding.
AT&T WIRELESS GROUP CAPITAL STOCK COMMITTEE
Our by-laws will provide for the AT&T Wireless Group capital stock
committee of our board of directors that we describe above under "Relationship
between the AT&T Common Stock Group and the AT&T Wireless Group -- AT&T Wireless
Group Capital Stock Committee."
In making determinations in connection with the policies set forth in the
AT&T Wireless Group policy statement, the members of our board of directors and
the AT&T Wireless Group capital stock committee will act in a fiduciary capacity
and in accordance with legal guidance concerning their respective obligations
under applicable law. The delegation of responsibilities to the AT&T Wireless
Group capital stock committee will be subject to changes our board of directors
may determine.
AMENDMENT AND MODIFICATION TO THE AT&T WIRELESS GROUP POLICY STATEMENT
Our board of directors may modify, suspend or rescind the policies set
forth in the AT&T Wireless policy statement, including any resolution
implementing the provisions of the policy statement. Our board may also adopt
additional or other policies or make exceptions with respect to the application
of the policies described in the AT&T Wireless Group policy statement in
connection with particular facts and circumstances, all as our board may
determine, consistent with its fiduciary duties to AT&T and all of our
shareholders.
RELATIONSHIP WITH AT&T
BRANDING AND INTELLECTUAL PROPERTY
The AT&T Wireless Group will be permitted, on the same discretionary basis
as other businesses that AT&T wholly owns, or substantially owns in excess of a
majority of the economic interest in, to operate under the AT&T service mark for
appropriate business activities in its capacity as a division or subsidiary of
AT&T. Intellectual property will continue to be managed by the group that has
managed it historically. The AT&T Common Stock Group and the AT&T Wireless Group
will, on the same basis they have enjoyed historically, have the right to use
intellectual property managed by the other group, or with respect to which
either has the power to grant such rights, for
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appropriate business activities. The groups will also collaborate to achieve
enterprise objectives and agree before either group disposes of or licenses any
intellectual property used by both groups. We expect that there will be no
royalty or licensing fees related to the use of branding or intellectual
property. AT&T's divisions' or subsidiaries' use of the brand is limited in
certain respects, including requiring compliance with AT&T's corporate brand
strategy, policies, graphics standards, advertising policies, quality control
and restrictions on certain activities relating to the brand, including a
prohibition on licensing and sublicensing without corporate approval.
COMMERCIAL TRANSACTIONS BETWEEN GROUPS
We intend that all commercial transactions between the AT&T Common Stock
Group and the AT&T Wireless Group will be on commercially reasonable terms taken
as whole. We expect the groups will negotiate and develop their arrangements
over time and that these arrangements will be subject to the review and approval
of the AT&T Wireless Group capital stock committee.
We may reallocate assets between the AT&T Common Stock Group and the AT&T
Wireless Group in exchange for an increase or decrease in the retained
inter-group interest held by the AT&T Common Stock Group in the AT&T Wireless
Group. Any reallocations of assets between the groups that do not result in such
an adjustment, other than reallocations made under a contract for the provision
of goods or services between the groups, will be accompanied by:
- the reallocation by the transferee group to the transferor group of other
assets or consideration,
- the creation of inter-group debt owed by the transferee group to the
transferor group, or
- the reduction of inter-group debt owed by the transferor group to the
transferee group,
in each case, in an amount having a fair market value, in the judgment of our
board of directors, equivalent to the fair market value of the assets
reallocated by the transferor group.
FINANCING ARRANGEMENTS
Loans from AT&T or any member of the AT&T Common Stock Group 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 or any member of the AT&T Common
Stock Group. This policy contemplates that these loans will be made on the basis
set forth above regardless of the interest rates and other terms and conditions
on which AT&T or members of the AT&T Common Stock Group 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.
We currently intend to borrow funds and provide the proceeds to the AT&T
Wireless Group on the terms and conditions described above and subject to market
availability. In addition, a corporate entity within the AT&T Wireless Group has
issued to AT&T $1.0 billion of 9% cumulative preferred stock that, subject to
the approval of the AT&T Wireless Group capital stock committee, is redeemable
at the option of AT&T. This preferred stock is held by AT&T on behalf of the
AT&T Common Stock Group. The AT&T Common Stock Group also has $3.0 billion of
AT&T Wireless Group indebtedness, of which $2.0 billion is convertible into an
additional $2.0 billion of such preferred stock. We expect this conversion to
occur simultaneously with the initial public offering.
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ACCOUNTING MATTERS
Following issuance of any shares of AT&T Wireless Group tracking stock,
AT&T will prepare financial statements in accordance with generally accepted
accounting principles, consistently applied, for the AT&T Wireless Group, and
pro forma financial information for the AT&T Common Stock Group, as well as full
consolidated financial statements of AT&T. The financial statements and
information for each of the groups principally will reflect the financial
position, results of operations and cash flows of the businesses included in
those groups. Notwithstanding any allocation of assets or liabilities for
dividend purposes or the purpose of preparing group financial statements,
holders of AT&T common stock and holders of AT&T Wireless Group tracking stock
will continue to be subject to risks associated with an investment in a single
corporation and all of AT&T's businesses, assets and liabilities.
TAX SHARING AGREEMENT
Prior to issuance of any shares of AT&T Wireless Group tracking stock, the
AT&T Common Stock Group and the AT&T Wireless Group will enter into a tax
sharing agreement that will provide for tax sharing payments between the AT&T
Common Stock Group and the AT&T Wireless Group based on the taxes or tax
benefits of a hypothetical affiliated group consisting of the AT&T Common Stock
Group and the AT&T Wireless Group. This hypothetical group will not include the
Liberty Media Group. A separate tax sharing agreement exists between the AT&T
Common Stock Group and the Liberty Media Group under which tax sharing payments
are made between AT&T and the Liberty Media Group to the extent that the taxes
of the actual affiliated group of which AT&T is the common parent are increased
or decreased as a result of the inclusion of the Liberty Media Group in that
affiliated group.
Under the tax sharing agreement between the AT&T Common Stock Group and the
AT&T Wireless Group, the consolidated tax liability before credits of the
hypothetical group consisting of the AT&T Common Stock Group and the AT&T
Wireless Group will be allocated between the AT&T Common Stock Group and the
AT&T Wireless Group based on each group's contribution to consolidated taxable
income of the hypothetical group. Such allocation will take into account losses,
deductions and other tax attributes, such as capital losses or charitable
deductions, that are utilized by the hypothetical group even if these attributes
could not be utilized on a stand-alone basis. For purposes of the tax sharing
agreement, the $1.0 billion of 9% cumulative preferred stock issued by a
corporate entity within the AT&T Wireless Group to AT&T, the $3.0 billion of
AT&T Wireless Group indebtedness held by the AT&T Common Stock Group and any
preferred stock resulting from a conversion of any portion of such indebtedness
will be treated as intercompany debt instruments, each with an issue price equal
to its face amount, for federal, state and local income tax purposes.
Accordingly, tax sharing payments will be calculated by treating coupon payments
on the preferred stock and debt as interest expense to the AT&T Wireless Group
and interest income to the AT&T Common Stock Group.
Tax sharing payments in respect of consolidated tax liability of the
hypothetical group before credits will be made as follows. With respect to each
taxable period ending after the date that AT&T Wireless Group tracking stock
initially is issued, if the hypothetical group has consolidated federal taxable
income, or consolidated, combined or unitary taxable income for state, local or
foreign tax purposes, for the taxable period, then
- if the AT&T Wireless Group has allocated taxable income for the taxable
period, the AT&T Wireless Group will pay the AT&T Common Stock Group the
tax on the AT&T Wireless Group's allocated taxable income for the taxable
period, and
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- if the AT&T Wireless Group has allocated taxable loss for the taxable
period, the AT&T Common Stock Group will pay the AT&T Wireless Group the
amount by which the hypothetical group's taxes would be reduced for the
taxable period by reason of the AT&T Wireless Group's allocated taxable
loss.
With respect to each taxable period ending after the date that AT&T Wireless
Group tracking stock initially is issued, if the hypothetical group has a
consolidated net operating loss for federal income tax purposes, or
consolidated, combined or unitary net operating loss for state, local or foreign
tax purposes, for the taxable period, then
- if the AT&T Common Stock Group and the AT&T Wireless Group each have
allocated taxable losses, the refund or other tax benefit arising from
the consolidated net operating loss, and any payment from the Liberty
Media Group in respect of the taxable income of the Liberty Media Group
for such period, will be shared between the AT&T Common Stock Group and
the AT&T Wireless Group in proportion to their respective allocated
losses for the taxable period,
- if the AT&T Wireless Group has an allocated taxable loss and the AT&T
Common Stock Group has allocated taxable income, then the AT&T Common
Stock Group will pay the AT&T Wireless Group the amount by which the
hypothetical group's taxes for the taxable period would be reduced by
reason of the AT&T Wireless Group's allocated taxable loss and the refund
or other tax benefit arising from the consolidated net operating loss,
and any payment from the Liberty Media Group in respect of the taxable
income of the Liberty Media Group for such period, will be allocated to
the AT&T Wireless Group, and
- if the AT&T Wireless Group has allocated taxable income and the AT&T
Common Stock Group has an allocated taxable loss, then the AT&T Wireless
Group will pay the AT&T Common Stock Group the amount by which the
hypothetical group's taxes for the taxable period would be reduced by
reason of the AT&T Common Stock Group's allocated taxable loss and the
AT&T Common Stock Group will retain the refund or other tax benefit
arising from the consolidated net operating loss, and any payment from
the Liberty Media Group in respect of the taxable income of the Liberty
Media Group for such period.
Consolidated tax credits of the hypothetical group will be allocated
between the AT&T Common Stock Group and the AT&T Wireless Group based on each
group's contribution to each tax credit. Such allocation will take into account
credits that are utilized by the hypothetical group even if such credits could
not be utilized on a stand-alone basis. Appropriate tax sharing payments in
respect of such credits will be made between the groups consistent with such
allocation.
The tax sharing payments described above assume that the members of the
AT&T Common Stock Group and the AT&T Wireless Group are members of the same
affiliated, consolidated, combined or unitary group for the relevant federal,
state, local or foreign income tax purposes. It is possible, however, that the
Internal Revenue Service may assert that AT&T Wireless Group tracking stock is
not stock of AT&T, in which case the members of the AT&T Common Stock Group and
the AT&T Wireless Group may not be members of the same federal income tax
affiliated group filing consolidated returns. AT&T believes that it is unlikely
that the IRS would prevail on that view, but, as discussed under "The Charter
Amendment Proposal -- Material Federal Income Tax Consequences," no assurance
can be given in that regard.
With respect to taxable periods ending on or prior to the date on which
AT&T Wireless Group tracking stock is initially issued, the AT&T Wireless Group
will generally be responsible for the taxes attributable to the businesses and
entities comprising the AT&T Wireless Group. The responsibility of the AT&T
Wireless Group to pay for consolidated income taxes attributable to it, and the
AT&T
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Common Stock Group's responsibility to pay the AT&T Wireless Group for tax
benefits attributable to the AT&T Wireless Group, will generally be considered
to have been settled for taxable periods ending on or prior to the date on which
AT&T Wireless Group tracking stock is initially issued, except that:
- the AT&T Wireless Group will be required to pay the AT&T Common Stock
Group (or the AT&T Common Stock Group will be required to pay the AT&T
Wireless Group) with respect to the taxable period ending on December 31,
1999 in the event that the taxable income or loss used to calculate the
consolidated income tax asset or liability accruals for taxes currently
payable set forth on the financial statements of the AT&T Wireless Group
differs from the AT&T Wireless Group taxable income or loss reflected in
the 1999 income tax return of the consolidated group, and
- consolidated income taxes resulting from audit adjustments or other tax
contests will be payable based on each group's contribution to
consolidated taxable income. Accordingly, the AT&T Wireless Group will be
required to pay the AT&T Common Stock Group in the event that a loss or
deduction attributable to the AT&T Wireless Group for such a period is
disallowed.
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THE INCENTIVE PLAN PROPOSAL
GENERAL
We currently issue stock-based awards to our employees under the AT&T 1997
Long Term Incentive Program. AT&T's shareholders approved this plan in 1997 and
approved amendments to it in 1999. This plan currently authorizes a total of
million shares of AT&T common stock for stock-based awards
consisting of:
- stock options, including incentive stock options (ISOs) under the
Internal Revenue Code,
- stock appreciation rights (SARs), in tandem with stock options or
free-standing,
- restricted stock,
- performance shares and performance units conditioned upon meeting
performance criteria, and
- other awards of stock or awards valued in whole or in part by reference
to, or otherwise based on, stock or other property of AT&T (other stock
unit awards).
In connection with any award or any deferred award, payments may also be
made representing dividends or their equivalent.
In anticipation of the issuance of AT&T Wireless Group tracking stock, our
board of directors has approved additional amendments to the plan and is asking
our shareholders to approve these additional amendments, which we refer to as
the incentive plan proposal.
Approval of the incentive plan proposal requires a majority of the votes
cast by all outstanding shares of AT&T common stock and Liberty Media Group
tracking stock to vote in its favor. OUR BOARD OF DIRECTORS RECOMMENDS THAT YOU
VOTE FOR APPROVAL. Any shares not voted, whether by abstention, broker non-vote
or otherwise, will have no affect on the approval of the incentive plan
proposal.
Our board of directors will not implement the incentive plan proposal
unless our shareholders approve the charter amendment proposal.
SUMMARY OF AMENDMENTS TO THE PLAN
If approved by our shareholders, the new amendments to the plan would:
- in addition to the number of shares of AT&T common stock authorized for
stock-based awards under the plan, authorize million
shares of AT&T Wireless Group tracking stock for stock-based awards under
the plan, a maximum of million of which could be used for
other stock-based awards, and a maximum of million of
which could be used for restricted stock with a restriction period of
three years or less,
- amend the provisions of the plan, which currently provide that no
participant may be granted options and/or SARs with respect to more than
three million shares of AT&T common stock during any calendar year
period, to provide that no participant may be granted more than three
million shares of AT&T common stock and five million shares of AT&T
Wireless Group tracking stock during any calendar year period,
- subject to adjustments permitted by the plan, beginning in 2001, annually
increase the number of shares of AT&T Wireless Group tracking stock
available for stock-based awards by 3.0% of
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the total shares of AT&T Wireless Group tracking stock outstanding on the
first calendar day of each year during the remaining term of the plan,
which ends on May 31, 2004,
- amend the provisions of the plan to permit stock-based awards for
non-employee directors of AT&T, and
- amend the definitions of Shares in the plan to provide for definitions of
shares of AT&T common stock and shares of AT&T Wireless Group tracking
stock.
INCENTIVE COMPENSATION POLICIES
The plan, and a number of additional compensation plans, under which
stock-based awards with respect to AT&T common stock are outstanding, are
administered by the Compensation and Employee Benefits Committee of our board of
directors (the Committee), subject to delegations by the Committee to AT&T's
Chairman and Chief Executive Officer, committees comprised of other AT&T senior
officers or other compensation committees that may be designated in the
additional plans.
The Committee has adopted the following general policies with respect to
the award of stock-based compensation under the plan assuming the approval by
our shareholders of the new amendments:
- stock-based awards with respect to AT&T Wireless Group tracking stock
under the plan shall consist of supplementary grants and new grants of
both stock options and other stock-based awards to AT&T employees who may
be assigned either to the AT&T Common Stock Group or the AT&T Wireless
Group on the basis described below,
- with respect to non-employee members of our board of directors, a blend
of stock-based awards, including stock options, of both AT&T Wireless
Group tracking stock and AT&T common stock will be included within the
compensation structure of these directors,
- with respect to AT&T senior executives principally assigned to the AT&T
Wireless Group, a preponderance of their future stock-based awards under
the plan shall consist of AT&T Wireless Group tracking stock stock-based
awards, and with respect to AT&T senior executives principally assigned
to the AT&T Common Stock Group, a preponderance of their future
stock-based awards shall consist of AT&T common stock,
- on the date of the contemplated distribution of shares of AT&T Wireless
Group tracking stock to holders of AT&T common stock, under the
adjustment terms as described below, we will issue stock-based awards
based on AT&T Wireless Group tracking stock to holders of stock-based
awards based on AT&T common stock, and
- on the date of the contemplated initial public offering of AT&T Wireless
Group tracking stock, we currently intend to grant stock-based awards
consisting of AT&T Wireless Group tracking stock to AT&T senior
executives, non-employee directors and selected eligible employees.
We have not yet determined the amount, size or vesting schedule of these grants.
However, we expect that these stock-based awards will be granted at an exercise
price equal to the initial public offering price of AT&T Wireless Group tracking
stock.
The following description of the plan assumes the adoption of the incentive
plan proposal.
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TERM
No award will be granted under the plan after May 31, 2004.
PLAN BENEFITS
Because the plan is discretionary and based on AT&T financial performance,
it is not possible to determine or to estimate the benefits or amounts that will
be received in the future by individual employees or groups of employees under
the plan.
ADMINISTRATION AND ELIGIBILITY
The plan shall be administered by the Committee, each of the members of
which is a "non-Employee Director" as defined in the Securities Exchange Act of
1934, and an "outside director" as defined in the Internal Revenue Code. The
Committee has the authority to select employees to whom awards are granted, to
determine the types of awards and the number of shares covered, and to set the
terms, conditions, and provisions of these awards and to cancel or suspend
awards. The Committee is authorized to interpret the plan and to establish,
amend, and rescind any rules and regulations relating to the plan, to determine
the terms and provisions of any agreements entered into under the plan, and to
make all other determinations which may be necessary or advisable for the
administration of the plan. Prospectively, all employees of AT&T and its
subsidiaries and other affiliates are eligible to be participants except
employees of Liberty Media Group.
SHARES SUBJECT TO PLAN
Subject to adjustment as described below, the following shares will be
available for awards granted under the plan during the term of the plan:
- 150 million shares of AT&T common stock plus one and three-fourths
percent (1.75%) of the number of shares outstanding on the first day of
each calendar year commencing with January 1, 2000, and
- shares of AT&T Wireless Group tracking stock,
in each case, less the number of shares subject to existing grants. As of
, 2000, there were available for grant shares of
AT&T common stock.
All shares available in any year that are not awarded under the plan will
be available for awards in subsequent years. No more than 37.5 million shares of
AT&T common stock or million shares of AT&T Wireless Group tracking stock
may be used for awards other than options and/or SARs.
If another company is acquired by AT&T, or combines with AT&T, any shares
of AT&T common stock or AT&T Wireless Group tracking stock issued or reserved
for issuance as a result of the assumption or substitution of outstanding grants
of the acquired company would not be deemed issued under the plan and would not
be subtracted from the shares of AT&T common stock or AT&T Wireless Group
tracking stock available for grant under the plan. If any shares subject to any
award under the plan or under the prior plans are forfeited, or such award is
settled for cash, or expires, or is otherwise terminated without issuance of
shares, the shares subject to such award will again be available for grant under
the plan. The number of shares available for awards under the plan will also
increase by the number of shares AT&T withholds or tenders in connection with
the payment of the exercise price of an option or other award under the plan or
the satisfaction of tax withholding obligations. The shares of stock deliverable
under the plan may consist in whole or in
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part of authorized and unissued shares, treasury shares, or shares purchased in
the open market, or otherwise.
STOCK OPTIONS
The price per share of stock purchasable under any stock option will be
determined by the Committee, but will not be less than 100% of the fair market
value of the stock on the date of the grant of such option. The term of each
option will be fixed by the Committee. Options will be exercisable at such time
or times as determined by the Committee, but no stock option will be exercisable
after the expiration of ten years from the date the option is granted.
STOCK APPRECIATION RIGHTS
An SAR may be granted free-standing or in tandem with new options or after
the grant of a related option that is not an ISO. Upon exercise of an SAR, the
holder thereof is entitled to receive the excess of the fair market value of the
shares for which the right is exercised (calculated as of the exercise date or,
if the Committee shall so determine in the case of any SAR, not related to an
ISO, as of any time during a specified period before the exercise date) over the
grant price of the SAR. The grant price (which will not be less than the fair
market value of the shares on the date of grant) and other terms of the SAR
shall be determined by the Committee. Payment by AT&T upon exercise of an SAR
will be in cash, stock, other property or any combination, as the Committee
determines. Unless otherwise determined by the Committee, any related option
will no longer be exercisable to the extent the SAR has been exercised and the
exercise of an option will cancel the related SAR to the extent of the exercise.
RESTRICTED STOCK
Restricted stock may not be disposed of by the recipient until certain
restrictions established by the Committee lapse. Recipients of restricted stock
are not required to provide consideration other than the rendering of services
or the payment of any minimum amount required by law. The participant will have,
with respect to restricted stock, all of the rights of a shareholder of AT&T,
including the right to vote the shares, and the right to receive any cash
dividends, unless the Committee determines otherwise. Upon termination of
employment during the restriction period, all restricted stock shall be
forfeited, subject to such exceptions, if any, as are authorized by the
Committee.
A minimum three year restriction period applies to restricted stock awards
under the plan that are not subject to performance conditions restricting
transfer, except that a restriction period of less than three years may apply to
such awards with respect to up to 12 million shares of AT&T common stock and
with respect to million shares of AT&T Wireless Group tracking stock.
PERFORMANCE AWARDS
From time to time, the Committee will select a period during which
performance criteria determined by the Committee are measured for the purpose of
determining the extent to which a performance award has been earned. Performance
awards may be in the form of performance shares, which are units valued by
reference to shares of stock, or performance units, which are units valued by
reference to cash or property other than stock. Performance awards may be paid
in cash, stock, other property, or a combination thereof. Recipients of
performance awards are not required to provide consideration other than the
rendering of service or the payment of any minimum amount required by law.
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OTHER STOCK UNIT AWARDS
The Committee is authorized to grant other stock unit awards to
participants, either alone or in addition to other awards granted under the
plan. Other stock unit awards may be paid in AT&T common stock, AT&T Wireless
Group tracking stock, cash, or any other form of property as the Committee
determines.
The Committee determines the employees to whom other stock unit awards are
to be made, the times at which these awards are to be made, the number of shares
to be granted under these awards, and all other conditions of these awards. For
these awards or shares subject to these awards, the transferability of which is
conditional only on the passage of time, such restriction period is a minimum of
three years.
NONASSIGNABILITY OF AWARDS
Unless the Committee determines otherwise at the time of an award, no award
granted under the plan may be assigned, transferred, pledged, or otherwise
encumbered by a participant, otherwise than by will, by designation of a
beneficiary after death, or by the laws of descent and distribution. Each award
will be exercisable, during the participant's lifetime, only by the participant,
or, if permissible under applicable law, by the participant's guardian or legal
representative.
DEFERRALS OF AWARDS
The Committee may permit participants to defer the distribution of all or
part of the specified stock, cash, or other consideration in accordance with
such terms and conditions as the Committee shall establish.
ADJUSTMENTS
In the event of any change affecting the shares of common stock by reason
of any stock dividend or split, recapitalization, reorganization, merger,
consolidation, spin-off, combination, or exchange of shares or other corporate
change, or any distributions to common shareholders other than cash dividends,
the Committee will substitute or adjust the aggregate number or class of shares
which may be distributed under the plan (including the substitution of similar
options to purchase the shares of, or other awards denominated in the shares of,
another company) and substitute or adjust the number, class, and option price or
other price of shares subject to the outstanding awards granted under the plan
as it deems to be appropriate to maintain the purpose of the original grant.
The Committee will be authorized to make adjustments in performance award
criteria or in the terms and conditions of other awards in recognition of
unusual or non-recurring events affecting AT&T or its financial statements or
changes in applicable laws, regulations, or accounting principles. The Committee
may correct any defect, supply any omission, or reconcile any inconsistency in
the plan or any award in the manner and to the extent it shall deem desirable to
carry it into effect.
BOARD ADJUSTMENT TO OUTSTANDING STOCK-BASED AWARDS
On the date of the contemplated distribution of shares of AT&T Wireless
Group tracking stock to holders of AT&T common stock, we currently intend to
issue stock-based awards based on AT&T Wireless Group tracking stock to holders
of stock-based awards based on AT&T common stock.
Under its authority to adjust the terms of outstanding stock-based awards,
the Committee has adopted a resolution that provides that on the date of the
distribution of AT&T Wireless Group
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tracking stock to holders of AT&T common stock the terms of outstanding stock
options will be adjusted to reflect the distribution. Each stock option issued
to purchase shares of AT&T common stock will be converted into an option to
purchase the same number of shares of AT&T common stock and an option to
purchase shares of AT&T Wireless Group tracking stock.
The strike price or exercise price of the options relating to AT&T common
stock and AT&T Wireless Group tracking stock will be restated at prices intended
to preserve the intrinsic value of the original award and based on the fair
market value of each share of AT&T common stock and AT&T Wireless Group tracking
stock. All other terms of each option will be the same as the original terms of
each related option.
AMENDMENT AND TERMINATION
Our board of directors may assume responsibilities otherwise assigned to
the Committee and may amend, alter, or discontinue the plan or any portion
thereof at any time, provided that no such action will impair the rights of a
participant without the participant's consent and provided that no amendment
will be made without shareholder approval either to increase the number of
shares available under the plan or if such approval is necessary to qualify for
or to comply with any tax or regulatory requirement. The Committee may amend the
terms of any award granted under the plan, prospectively or retroactively, but
no amendment may impair the rights of any participant without his or her consent
or amend the terms of any option to reduce the option price. Neither may the
Committee, without the approval of shareholders, cancel any outstanding option
and replace it with a new option with a lower option price, where the economic
effect would be the same as reducing the option price of the cancelled option.
INTERNAL REVENUE CODE SECTION 162(m) PERFORMANCE-BASED COMPENSATION
If the Committee determines at the time restricted stock, a performance
award, or other stock unit award is granted to a participant who is then a
senior manager or an E-band employee that such participant is, or is likely to
be, as of the end of the tax year in which AT&T would claim a tax deduction in
connection with such award, a "covered employee" under Internal Revenue Code
Section 162(m), then the Committee may provide as to such award that the lapsing
of restrictions thereon and the distribution of cash, shares, or other property
pursuant thereto, as applicable, shall be subject to the achievement of one or
more objective performance goals established by the Committee, which will be
based on the achievement of specified levels of one or any combination of the
following: net cash provided by operating activities, earnings per share from
continuing operations, operating income, revenues, gross margin, return on
operating assets, return on equity, economic value added, stock price
appreciation, total shareholder return, or cost control, of AT&T or the
affiliate or division of AT&T for or within which the participant is primarily
employed. Such performance goals also may be based upon the achievement of
specified levels of AT&T performance (or performance of the applicable affiliate
or division of AT&T, including of the AT&T Common Stock Group or the AT&T
Wireless Group) under one or more of the measures described above relative to
the performance of other corporations. These performance goals will be set by
the Committee within the time period prescribed by, and will otherwise comply
with the requirements of, Section 162(m) of the Internal Revenue Code, or
successor provision.
The plan provides that, subject to any adjustments described above, no
participant may be granted options and/or SARs in any three calendar year period
with respect to more than three million shares of AT&T common stock or more than
million shares of AT&T Wireless Group tracking stock and that the
maximum dollar value payable with respect to other performance units or other
stock unit awards that are valued with reference to property other than shares
of AT&T
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common stock or AT&T Wireless Group tracking stock and granted to any
participant in any one calendar year is $10,000,000.
CHANGE OF CONTROL
To maintain all of the participants' rights in the event of a "change of
control" of AT&T, unless the Committee determines otherwise at the time of grant
with respect to a particular award:
- any options and SARs outstanding as of the date such change of control is
determined to have occurred, and which are not then exercisable and
vested, will become fully exercisable and vested to the full extent of
the original grant,
- the restrictions and deferral limitations applicable to any restricted
stock will lapse, and such restricted stock will become free of all
restrictions and limitations and become fully vested and transferable to
the full extent of the original grant,
- all performance awards will be considered to be earned and payable in
full, and any deferral or other restriction will lapse and such
performance awards will be immediately settled or distributed, and
- the restrictions and deferral limitations and other conditions applicable
to any other stock awards or any other awards shall lapse, and such other
stock unit awards or such other awards will become free of all
restrictions, limitations, or conditions and become fully vested and
transferable to the full extent of the original grant.
Change of control of AT&T shall mean the happening of any of the following
events:
- an acquisition by any individual, entity, or group (within the meaning of
Section 13(d)(3) or 14(d)(2) of the Exchange Act) of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of
20% or more of either (1) the then outstanding shares of AT&T common
stock or (2) the combined voting power of the then outstanding voting
securities of AT&T entitled to vote generally in the election of
directors; excluding, however, certain acquisitions by or from AT&T or by
AT&T employee benefit plans or certain shareholder approved merger or
sale transactions involving AT&T,
- a change in the composition of our board of directors such that the
individuals who, as of the effective date of the plan, constitute our
board or directors, cease for any reason to constitute at least a
majority of our board of directors, unless such change is approved by
certain members of the current board,
- with certain exceptions, the approval by the shareholders of AT&T of a
merger, reorganization or consolidation, or sale or other disposition of
all or substantially all of the assets of AT&T or, if consummation of
such corporate transaction is subject, at the time of such approval by
shareholders, to the consent of any government or governmental agency,
the obtaining of such consent, or
- the approval by the shareholders of AT&T of a complete liquidation or
dissolution of AT&T.
TAX ASPECTS OF THE PLAN
AT&T believes that under present law, the following are the federal tax
consequences generally arising with respect to awards granted under the plan.
The grant of an option or SAR will create no tax consequences for an employee or
AT&T. The employee will have no taxable income upon exercising an ISO (except
that the alternative minimum tax may apply), and AT&T will receive no deduction
when an ISO is exercised. Upon exercising an SAR or an option other than an ISO,
the employee must recognize ordinary income equal to the difference between the
exercise price and the fair market value of the stock on the date of exercise;
AT&T will be entitled to a deduction for the same amount. The treatment to an
employee of a disposition of shares acquired through the exercise
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of an option depends on how long the shares have been held and if such shares
were acquired by exercising an ISO or by exercising an option other than an ISO.
Generally, there will be no tax consequence to AT&T in connection with a
disposition of shares acquired under an option except that AT&T may be entitled
to a deduction in the case of a disposition of shares acquired under an ISO
before the applicable ISO holding periods have been satisfied.
With respect to other awards granted under the plan that are settled either
in cash or in stock or other property that is either transferable or not subject
to substantial risk of forfeiture, the participant must recognize ordinary
income equal to the cash or the fair market value of shares or other property
received; AT&T will be entitled to a deduction for the same amount. With respect
to awards that are settled in stock or other property that is restricted as to
transferability and subject to substantial risk of forfeiture, the participant
must recognize ordinary income equal to the fair market value of the shares or
other property received at the first time the shares or other property become
transferable or not subject to substantial risk of forfeiture, whichever occurs
earlier; AT&T will be entitled to a deduction for the same amount.
RECOMMENDATION OF OUR BOARD OF DIRECTORS
OUR BOARD OF DIRECTORS HAS APPROVED THE INCENTIVE PLAN PROPOSAL AND
RECOMMENDS THAT YOU VOTE FOR THE INCENTIVE PLAN PROPOSAL.
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STOCK OWNERSHIP OF MANAGEMENT AND DIRECTORS
The following table sets forth information concerning the beneficial
ownership of AT&T common stock as of January 1, 2000 for (a) each current
director elected to our board of directors in 1999; (b) each of the officers
named in the Summary Compensation Table not listed as a director; and (c)
directors and executive officers as a group. Except as otherwise noted, the
nominee or family members had sole voting and investment power with respect to
such securities.
<TABLE>
<CAPTION>
NUMBER OF SHARES
-------------------------------------
BENEFICIALLY DEFERRAL
NAME OWNED PLANS TOTAL
- ---- ------------ -------- ---------
(a)
<S> <C> <C> <C>
C. Michael Armstrong.......................................
Kenneth T. Derr............................................
M. Kathryn Eickoff.........................................
Walter Y. Elisha...........................................
George M.C. Fisher.........................................
Donald V. Fites............................................
Amos B. Hostetter..........................................
Ralph S. Larsen............................................
John C. Malone.............................................
Donald F. McHenry..........................................
Michael I. Sovern..........................................
Sanford I. Weill...........................................
Thomas H. Wyman............................................
John D. Zeglis.............................................
</TABLE>
<TABLE>
<CAPTION>
(b)
<S> <C> <C> <C>
Daniel E. Somers.......................................
Frank Ianna............................................
(c)
Directors and Executive Officers as a Group............
</TABLE>
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Committee is composed of five independent non-employee directors. The
Committee is responsible for setting and administering executive officer
salaries and the annual bonus and long term incentive plans that govern the
compensation paid to all senior managers of AT&T, except that our board of
directors (other than directors who are employees) is responsible for setting
and administering salaries and the annual bonus of the chief executive officer
and the four other most highly compensated executive officers of AT&T listed in
the Summary Compensation Table (the Named Officers) based upon recommendations
of the Committee.
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EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table reflects the cash and non-cash compensation for
services in all capacities to AT&T by those persons who were, as of December 31,
1999, the chief executive officer and the four other most highly compensated
executive officers of AT&T (the Named Officers).
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION(2)
--------------------------------------------------------
AWARDS(4)
ANNUAL COMPENSATION(2) ------------------------- PAYOUTS
--------------------------------------- RESTRICTED NUMBER ----------------------------
OTHER ANNUAL STOCK OF LTIP ALL OTHER
NAMED OFFICERS AND COMPENSATION(3) AWARD(S)(5) OPTIONS/ PAYOUTS(6) COMPENSATION(7)
PRINCIPAL POSITION(1) YEAR SALARY ($) BONUS ($) ($) ($) SARS ($) ($)
- --------------------- ---- ---------- --------- --------------- ----------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
C. Michael Armstrong 1999
Chairman of the Board 1998 1,400,000 1,900,150 507,338 0 450,000 0 2,490,806
and CEO 1997 291,667 0 0 14,927,568(a) 1,125,000 0 8,539
John D. Zeglis 1999
Chairman & CEO 1998 700,000 950,100 563,906 0 157,500 605,782 47,601
AT&T Wireless Group 1997 659,000 950,000 468,852 0 204,000 320,409 41,260
Daniel E. Somers 1999
President & CEO 1998 500,000 542,900 71,202 0 99,000 730,148 65,681
AT&T Broadband & 1997 270,833 350,000 0 452,813(b) 204,000 0 73,241
Internet Services
Frank Ianna 1999
Executive Vice 1998 414,000 540,000 105,121 0 78,000 228,206 24,788
President-- 1997 411,667 472,200 70,155 0 117,000 121,657 847,736
AT&T Network Services
</TABLE>
- -------------------------
1. Includes Chairman of the Board and Chief Executive Officer and the four other
most highly compensated individuals who were executive officers of AT&T at
the end of 1999, as measured by salary and bonus.
2. Compensation deferred at the election of Named Officers is included in the
category (e.g., bonus, long-term incentive plan payouts) and year it would
have otherwise been reported had it not been deferred.
3. Includes (a) payments of above-market interest on deferred compensation, (b)
dividend equivalents paid with respect to long-term incentive compensation
paid during the year, and (c) tax payment reimbursements. In addition, for
Mr. Armstrong, includes $ for personal use of corporate aircraft in
1999.
4. All awards outstanding at the time of the payment of the three-for-two stock
split on April 15, 1999 were adjusted to reflect the impact of the stock
split by increasing the shares associated with each award by a ratio of 1.5%
and decreasing the associated grant price by the same ratio.
5. (a) On October 17, 1997, the Committee granted Mr. Armstrong an award of
157,995 restricted shares and 336,841 restricted stock units to replace
grants from Hughes Electronics Corporation which were forfeited upon his
termination from Hughes. The value of these awards as of the original grant
date, is reflected in the table. The vesting schedule for these grants
mirrors that applicable to the original grants from Hughes. 16,418 of the
restricted shares vested May 1, 1998; 12,423 vested October 17, 1998; 28,608
vested January 1, 1999; 16,416 vested May 1, 1999; 12,423 vested October 17,
1999. Of the remaining 43,856 shares,
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<PAGE> 125
27,441 vest January 1, 2000, and 16,415 vest May 1, 2000. The remaining
restricted shares and all the restricted stock units vest October 17, 2000 or
later. Dividends on the restricted shares and dividend equivalents on the
restricted units are paid to Mr. Armstrong in cash.
(b) On October 15, 1997, an award of 15,000 restricted stock units was granted
to Mr. Somers. The value at the date of grant of these restricted stock units
is reflected in the table. The grant vests on October 15, 2001 assuming
continued employment and carries stringent penalties for competition and other
specified adverse activities. Dividends on the units are paid in cash to Mr.
Somers.
The aggregate number (and value) of each of the Named Officers at December 31,
1999 for outstanding restricted stock and restricted stock unit awards was:
6. Includes distributions in 1997 and 1998 to Mr. Zeglis of performance shares
as to which three-year performance periods ended December 31, 1996 and
December 31, 1997, respectively. Includes distributions in 1997 to Mr. Ianna;
and in 1998 to Messrs. Somers and Ianna of stock units as to which three-year
performance criteria, in recognition of AT&T's restructuring and the
difficulty of setting long-term financial targets while the restructuring was
in progress, was deemed to have been met at the target level.
7. For Mr. Armstrong, includes $2,293,714 AT&T-paid premium in 1998 to purchase
a split-dollar survivorship insurance policy insuring Mr. Armstrong and his
spouse, as specified in his employment agreement described under
"-- Employment Contracts and Termination of Employment
Arrangements -- Arrangements with C. Michael Armstrong." Interest was accrued
on the $2,050,000 base amount from Mr. Armstrong's hire date of October 17,
1997 through November 6, 1998, the date of the premium payment, at the
interest rate in effect for the Senior Management Incentive Award Deferral
Plan in 1998.
In 1997, for Mr. Ianna, includes deposit into an individual non-qualified
supplemental retirement deferral account in the amount of $828,000.
OPTION GRANTS
The following table summarizes the net value realized on the exercise of
options in 1999, and the value of the outstanding options at December 31, 1999,
for the Named Officers.
AGGREGATED OPTION/SAR EXERCISES IN 1999 AND YEAR-END VALUES(1)
<TABLE>
<CAPTION>
NUMBER OF $ VALUE OF
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
AT YEAR AT YEAR
END(2)(3) END(2)(3)
NUMBER OF ------------- -------------
SHARES ACQUIRED $ VALUE EXERCISABLE/ EXERCISABLE/
NAME (1) ON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
- -------- --------------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
C. Michael Armstrong......................................
John D. Zeglis(4).........................................
Daniel E. Somers..........................................
Frank Ianna...............................................
................................................
</TABLE>
- -------------------------
1. Includes Chairman of the Board and Chief Executive Officer and the four other
most highly compensated individuals who were executive officers of AT&T at
the end of 1999, as measured by salary and bonus.
2. All awards outstanding at the time of the three-for-two stock split, paid on
April 15, 1999, were adjusted to reflect the impact of the stock split by
increasing the shares associated with each award by a ratio of 1.5% and
decreasing the associated grant price by the same ratio.
3. A portion of the outstanding stock options for Mr. Zeglis was converted in
connection with AT&T's restructuring into a combination of adjusted AT&T
options and SARs exercisable with respect to Lucent and/or NCR shares. This
balancing of risk
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<PAGE> 126
and opportunity among the three companies mirrored the impact that the
restructuring had on AT&T's shareholders. The conversion was awarded to Mr.
Zeglis by virtue of his membership on the transition steering committee, the
charter of which was to ensure the creation of three healthy independent
companies as a result of the restructuring. Consistent with accounting
principles governing such conversion, the adjusted options and SARs retain
the same term and vesting provision as the original options.
4. For Mr. Zeglis, includes adjusted AT&T options and Lucent and NCR SARs.
The following table summarizes awards granted during 1999 under AT&T's
long-term incentive plans to the Named Officers.
LONG-TERM INCENTIVE PLANS-AWARDS IN 1999
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS UNDER
PERFORMANCE NON-STOCK PRICE-BASED PLAN
NUMBER OF PERIOD -------------------------------
PERFORMANCE UNTIL MATURATION THRESHOLD TARGET MAXIMUM
NAME(1) SHARES(2) OR PAYOUT (#) (#) (#)
- ------- ----------- ---------------- ---------- ------- --------
<S> <C> <C> <C> <C> <C>
C. Michael Armstrong........................................
John D. Zeglis..............................................
Daniel E. Somers............................................
Frank Ianna.................................................
.............................................
</TABLE>
- -------------------------
1. Includes Chairman of the Board and Chief Executive Officer and the four other
most highly compensated individuals who were executive officers of AT&T at
the end of 1999, as measured by salary and bonus.
2. All awards outstanding at the time of the three-for-two stock split, paid on
April 15, 1999 were adjusted to reflect the impact of the stock split by
increasing the shares associated with each award by a ratio of 1.5% and
decreasing the associated grant price by the same ratio.
OPTION/SAR GRANTS IN 1999
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------------
NUMBER OF % OF TOTAL GRANT
SECURITIES OPTIONS/SARS DATE
UNDERLYING GRANTED TO EXERCISE OR PRESENT
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION VALUE(4)
NAME (1) GRANTED(2)(3) FISCAL YEAR ($/SH) DATE ($)
- -------- ------------- ------------ ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
C. Michael Armstrong....................................
John D. Zeglis..........................................
Daniel E. Somers........................................
Frank Ianna.............................................
.........................................
</TABLE>
- -------------------------
1. Includes Chairman of the Board and Chief Executive Officer and the four other
most highly compensated individuals who were executive officers of AT&T at
the end of 1999, as measured by salary and bonus.
2. All awards outstanding at the time of the three-for-two stock split, paid on
April 15, 1999 were adjusted to reflect the impact of the stock split by
increasing the shares associated with each award by a ratio of 1.5% and
decreasing the associated grant price by the same ratio.
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<PAGE> 127
3. Options become exercisable to the extent of one-third of the grant on the
third, fourth and fifth anniversaries of the grant date, respectively.
4. The Black-Scholes option pricing model was chosen to estimate the Grant Date
Present Value of the options set forth in this table. AT&T's use of this
model should not be construed as an endorsement of its accuracy of valuing
options. All stock option valuation models, including the Black-Scholes
model, require a prediction about the future movement of the stock price. The
following assumptions were made for purposes of calculating the Grant Date
Present Value: an option term of years, volatility of %, dividend
yield at %, and interest rate of %. The real value of the
options in this table depends upon the actual performance of AT&T's stock
during the applicable period.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
ARRANGEMENTS WITH C. MICHAEL ARMSTRONG
AT&T entered into an employment agreement with Mr. Armstrong dated October
17, 1997. The agreement provided for an initial base salary of $1,400,000 per
year. It also provided for a guaranteed annual incentive award for the 1998
performance year of no less than 100% of his then base salary, and, for 1998 and
1999 performance shares/stock units granted under the 1997 Long Term Incentive
Program, a guaranteed grant value equivalent to no less than 100% of his base
salary at the time of grant. Mr. Armstrong was eligible for annual stock option
awards commencing in 1998 in accordance with the Committee-approved compensation
structure for such years.
To address certain forfeitures that Mr. Armstrong experienced when he left
his previous employer, AT&T paid a premium of $2,050,000 to purchase a
split-dollar survivorship insurance policy insuring Mr. Armstrong and his
spouse. This policy will, upon the death of the last surviving insured, provide
insurance proceeds equal to the sum of the face amount of the policy and the
policy's cash value. An amount equal to the policy face amount shall be payable
to Mr. Armstrong's beneficiaries or to a trust which may be established to own
Mr. Armstrong's interest in this policy. The balance of the proceeds will be
paid to AT&T, and, from its share of the death benefit, AT&T will pay an
AT&T-paid death benefit to Mr. Armstrong's beneficiaries equal to the death
benefit received by AT&T minus the AT&T-paid premium. The face amount of this
split-dollar survivorship insurance policy will be determined in accordance with
the underwriting requirements of the insurance company providing this coverage
based on AT&T's premium payment of $2,050,000 and additional premium payments,
if any, that Mr. Armstrong may become eligible for under any similar program
adopted by AT&T for its senior executives and in which Mr. Armstrong elects to
participate.
In accordance with his employment agreement, AT&T also granted Mr.
Armstrong AT&T restricted stock, AT&T restricted stock units and AT&T stock
options under the 1997 Long Term Incentive Program to replace similar grants
from his prior employer that were forfeited and to provide strong incentives to
create shareholder value for AT&T shareholders.
Details of these grants follow:
- Mr. Armstrong was granted 157,995 shares of AT&T restricted stock, of
which 86,288 shares vested in 1998 and 1999. The remaining 71,707 shares
vest as follows: 27,441 shares on May 1, 2000; 12,423 shares on October
17, 2000; 3,007 shares on May 1, 2001; and 12,421 shares on October 17,
2001.
- Mr. Armstrong was also granted 336,841 AT&T restricted stock units, which
vest on October 1, 2003, assuming continued employment, with a guarantee
that, in the event the fair market value of the AT&T shares furnished to
Mr. Armstrong on October 1, 2003 is less than $10 million, that shortfall
will be made up in cash by AT&T. In the event of (a) a Change in Control
on or before April 1, 2002 and, within three years after a Change in
Control, an AT&T-initiated termination for other than "cause" (as defined
in his employment agreement)
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<PAGE> 128
or "constructive termination without cause" (as defined in his employment
agreement) or (b) Mr. Armstrong's death, special vesting rules apply.
- Mr. Armstrong was granted an option to purchase, within 10 years,
1,125,000 shares of AT&T common stock, at a purchase price of $29.6876.
This option will vest as to one-third of the shares on October 17, 2000,
one-third on October 17, 2001 and one-third on October 17, 2002, based on
his continued employment.
"Change in Control" of AT&T means the occurrence of any of the following
events:
- an acquisition by any individual, entity, or group, within the meaning of
Section 13(d)(3) or 14(d)(2) of the Exchange Act, of beneficial
ownership, within the meaning of Rule 13d-3 promulgated under the
Securities and Exchange Act of 1934, of 20% or more of either (a) the
then outstanding shares of common stock of AT&T or (b) the combined
voting power of the then outstanding voting securities of AT&T entitled
to vote generally in the election of directors; excluding, however,
certain acquisitions by or from AT&T or by AT&T employee benefit plans or
certain shareholder-approved merger or sale transactions involving AT&T,
- a change in the composition of our board of directors such that the
individuals who, as of the effective date of the 1997 Long Term Incentive
Program, constitute our board of directors, cease for any reason to
constitute at least a majority of the board of directors, unless the
change is approved by certain members of the current board of directors,
- with certain exceptions, the approval by our shareholders of a merger,
reorganization or consolidation, or sale or other disposition of all or
substantially all of the assets of AT&T or, if completion of that
corporate transaction is subject, at the time of such approval by our
shareholders, to the consent of any government or governmental agency,
the obtaining of such consent, or
- the approval by our shareholders of a complete liquidation or dissolution
of AT&T.
As part of his employment agreement, AT&T entered into a supplemental
pension arrangement with Mr. Armstrong. Under this arrangement, Mr. Armstrong
will receive an annual benefit commencing at his retirement at or after age 65.
This benefit will vest 20% per year on each of the first five anniversaries of
his hire, and will be payable in actuarially-reduced amounts for retirement and
commencement prior to age 65. Pension benefits payable under this arrangement
will be paid out of AT&T's operating income, and will be offset by:
- all amounts actually received by Mr. Armstrong under any other AT&T
qualified or non-qualified retirement plan or arrangement, and
- the greater of (a) $655,642 or (b) the actual pension benefits to be paid
to Mr. Armstrong with respect to that year by his prior employers under
their qualified and non-qualified defined benefit plans.
In addition, Mr. Armstrong will be entitled to other post-retirement benefits
that are generally made available from time to time to retired executive
officers and service-pension-eligible senior managers.
Mr. Armstrong's agreement provides for a number of entitlements in the
event of his termination from AT&T under specified circumstances. Under this
agreement, in the event of Mr. Armstrong's death, his beneficiaries or estate
will be entitled to:
- his base salary through the end of his month of death,
- his target annual incentive award for the year of death,
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<PAGE> 129
- a lump sum payout at target for each open long-term incentive program
performance cycle,
- payment of survivor benefits under his supplemental pension arrangement,
which vests 100% at his death,
- the vesting of all outstanding unvested stock options, which stock
options together with already vested options, will be exercisable for the
remainder of the original term of each grant,
- the lifting of restrictions on the restricted stock granted as part of
his agreement, and
- the payout of restricted stock units granted in his agreement in
accordance with the schedule established in his Restricted Stock Unit
Award Agreement (20% to 100% of units granted will be payable, depending
on the date of death) in the event of his death occurs prior to vesting.
Mr. Armstrong's agreement also provides that in the event his employment is
terminated as a result of disability, he will be entitled to receive disability
benefits in accordance with the long-term disability program then in effect for
senior managers. In addition, base salary, annual incentive, stock options,
restricted stock, and restricted stock units shall be treated in the same manner
as described above in the case of death. Treatment of long-term incentives will
be as described above in the case of death, provided, however, that payment will
be in accordance with the terms of the plan instead of a lump sum. Pension
benefits under his supplemental pension arrangement will vest and will be offset
by any AT&T-provided disability benefits.
In the event of a termination for "cause," or in the event of a voluntary
resignation, other than a termination due to death or disability or a
Constructive Termination without "cause" or retirement on October 31, 2003, Mr.
Armstrong will forfeit all:
- restricted stock and restricted stock units as to which restrictions have
not lapsed,
- long-term incentives with respect to uncompleted performance cycles,
- outstanding stock options which are not exercisable, and
- any pension benefit not yet vested under his Supplemental Pension
Arrangement.
He will receive base salary through his date of termination, and vested stock
options shall remain exercisable for 90 days after termination or until the
originally scheduled expiration date, if earlier.
In the event of an AT&T-initiated termination for other than cause or in
the event of a Constructive Termination without cause, neither of which follow
within three years of a Change in Control, Mr. Armstrong will be provided the
following:
- base salary through the date of termination,
- a prorated annual incentive award at target for the year of termination,
- a 24-month continuation of monthly base salary, or at his option, the
lump-sum present value of such payments (using the short-term Treasury
bill rate for the month of termination),
- two times the target annual incentive award for the year of termination
payable over 24 months, or at his option, the lump-sum present value of
such payments (using the short-term Treasury bill rate for the month of
termination), and
- payout at target for each open long-term incentive program performance
cycle in accordance with the plan or in a lump sum as described above.
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<PAGE> 130
In addition, all outstanding unvested stock options will vest and together with
already vested options will be exercisable for the remainder of the original
term of each grant; restrictions on the restricted stock granted as part of his
agreement will lapse; and his supplemental pension benefit shall fully vest. For
a period of 24 months following his termination, or, if earlier, until he
receives equivalent coverage and benefits from another employer, Mr. Armstrong
will be entitled to continued participation in AT&T's benefit plans and
programs.
In the event of Mr. Armstrong's retirement as of October 31, 2003, he will
be entitled to payment of his supplemental pension and will be treated in
accordance with the plans, programs, and practices applicable to retired senior
managers.
Mr. Armstrong's agreement provides that in the event of a Change in
Control, all amounts and benefits to which he is entitled but are not yet vested
(except with respect to his restricted stock unit grant which is governed by the
terms of the grant agreement) shall become fully vested. In addition, in the
event of an AT&T-initiated termination or a Constructive Termination without
cause following a Change in Control, he shall be entitled to the benefits
described above in connection with an AT&T-initiated termination without cause
or a Constructive Termination without cause not associated with a Change in
Control provided, however: (1) the number of months associated with salary,
annual incentive, and benefits continuation shall be 48 months, and such amounts
will be payable as a lump sum as soon as practicable after his termination and
(2) restricted stock units granted in his agreement will be payable in
accordance with the schedule established in his Restricted Stock Unit Award
Agreement (25% to 100% of units granted will be payable, depending on date of
termination). In the event the payments in this paragraph are determined to
constitute a payment under Section 280G(b)(2) of the Internal Revenue Code and
such payment is subject to an excise tax under Section 4999 of the Internal
Revenue Code, AT&T will provide Mr. Armstrong with a tax gross-up payment to
negate the excise tax.
In the event of any termination described above, Mr. Armstrong or his
estate shall also be entitled to the unpaid balance of any incentive awards for
completed performance periods, any expense reimbursements due him, and other
benefits in accordance with applicable plans and programs.
ARRANGEMENTS WITH DANIEL E. SOMERS
AT&T entered into an employment agreement with Mr. Somers dated as of April
1997. The agreement provided for an initial base salary of $500,000. It also
provides for a guaranteed annual incentive award for 1997 performance of no less
than 80% of his then base salary prorated for his partial service in 1997. Mr.
Somers was also provided 17,400 performance shares covering the 1997 to 1999
performance period and an option to purchase, within ten years, up to 129,000
shares of AT&T common stock with a purchase price of $24.0417. These options
vest one-third each on June 1, 1998, 1999 and 2000, based on his continued
employment.
To address certain forfeitures experienced when Mr. Somers left his
previous employer and to incent him to join AT&T, the agreement provided for (1)
a payment of $238,000 to replace a forfeited bonus from his prior employer; (2)
a payment of $337,000 to replaced forfeited spread on stock options of his prior
employer; (3) a signing bonus of $200,000; and (4) two awards each consisting of
11,600 performance shares/stock units for the 1995-1997 and 1996-1998
performance periods, respectively.
As part of his employment agreement, AT&T entered into an arrangement with
Mr. Somers which will provide him with certain benefits in the event that he
terminates his employment after ten years of employment for any reason other
than death or AT&T initiated termination for "cause."
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<PAGE> 131
Pursuant to such arrangement, he will be entitled to a death benefit of two and
one-half times base salary under AT&T's life insurance program for Senior
Managers and for AT&T sponsored medical coverage.
In the event Mr. Somers is terminated by AT&T, at any time for any reason
other than "cause" or "long-term disability" (as both terms are defined in his
employment agreement) or in the event of self-initiated termination by Mr.
Somers for "good reason" (as defined in his employment agreement) following a
Change in Control, Mr. Somers will be provided the following: immediate vesting
and continuation of all stock options granted under the agreement as if he were
eligible for AT&T post-retirement benefits, and continuation of vesting and/or
exercisability of all long-term incentive awards granted in 1998 and later years
under the terms and conditions applicable to Senior Managers terminating
employment with eligibility for post-retirement benefits.
In the event Mr. Somers is terminated by AT&T at any time within five years
of his date of hire for any reason other than "cause" or "long-term disability"
or in the event of self-initiated termination by Mr. Somers for "good reason"
following a Change in Control, Mr. Somers will be provided the following: a
severance benefit, payable over twelve months, equivalent to the greater of
$900,000 or 100% of the sum of his annual base salary plus target annual
incentive awards in effect at termination; a prorated target annual incentive
for his year of termination and continuation of all performance shares/stock
units granted under the agreement under the terms and conditions applicable to
senior managers terminating employment with eligibility for post-retirement
benefits.
In 1997, AT&T adopted the Special Executive Severance Plan for members of
the operations team as constituted at that time and certain members of the
senior management team (a total of ten executives, 7 of whom remain with AT&T).
Under the severance plan if covered executives:
- are terminated by AT&T for other than "cause" (as defined in the
severance plan) or
- self-initiate termination for "good reason" (as defined in the severance
plan),
they will be provided a severance payment equivalent to two times the sum of
base salary plus target annual incentive in effect at termination. The severance
amount payable may be deferred for up to 5 years with 5 annual payments
thereafter and will be credited with interest based on the interest rate formula
in effect for the Senior Management Incentive Award Deferral Plan on the
severance plan effective date. In addition, covered executives who terminate
under the terms of the severance plan will be entitled to certain other
post-termination benefits that are generally made available from time to time to
retired executive officers and service-pension-eligible senior managers.
PENSION PLANS
AT&T MANAGEMENT PENSION PLAN
AT&T maintains the AT&T Management Pension Plan, a non-contributory pension
plan which covers all management employees, including the Named Officers. The
normal retirement age under this plan is 65. Retirement before age 65 can be
elected under certain conditions.
This plan was amended in 1997 to update the adjusted career average pay
formula for computing pensions. Effective August 1, 1997, the adjusted career
average pay formula was 1.6% of the average annual pay for the three years
ending December 31, 1996, times the lesser of:
- 105% of the number of years of service prior to January 1, 1997 or
- the number of years of service prior to January 1, 1997 plus one.
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Only the basic salary was taken into account in the formula used to compute
pension amounts for the Named Officers and other senior managers under the
adjusted career average pay formula. No service or compensation after December
31, 1996 was used in calculating an employee's normal retirement benefit under
the adjusted career average pay formula.
Effective January 1, 1998, the plan was further amended to convert it to a
cash balance design. Under the new design, a hypothetical cash balance account
is established for each participant for record-keeping purposes. Each year a
participant's cash balance account is credited with:
- a pay credit based on the participant's age and eligible pay for that
year, and
- an interest credit based on the participant's account balance as of the
end of the prior year.
Effective January 1, 1998, an eligible participant's cash balance account
received an initial credit based on a conversion benefit equal to the
participant's normal retirement benefit under the adjusted career average pay
formula described above multiplied by a conversion factor based on the
participant's age as of December 31, 1996. The initial pay credit was made as of
January 1, 1998 based on the participant's eligible pay for 1997, and the
initial interest credit was made as of January 1, 1998 based on the conversion
benefit. Only basic salary is considered eligible pay under the cash balance
design for the Named Officers and other senior managers. Interest credits are
calculated at the effective annual rate of 7% for calendar years 1997, 1998, and
1999. For subsequent calendar years, interest credits are based on the effective
annual rate of 4%. Under the cash balance design, a participant's benefit is
determined by projecting interest credits to his or her cash balance account to
age 65, converting the projected cash balance account to an annuity, and
reducing that annuity for early commencement. A participant's benefit under the
plan after conversion to the cash balance design will be no less than the
benefit calculated under the career average pay formula as adjusted in 1997.
Federal laws place limitations on pensions that may be paid from the
pension trust related to this plan. Pension amounts based on this plan formula
which exceed the applicable limitations will be paid as an operating expense.
AT&T NON-QUALIFIED PENSION PLAN
We also maintain the AT&T Non-Qualified Pension Plan. Under this plan,
annual pensions for the Named Officers and other senior managers are computed
based on actual annual bonus awards under our Short Term Incentive Plan. Pension
benefits under this plan will commence at the same time as benefits under the
AT&T Management Pension Plan. The annual pension amounts payable under this plan
are equal to no less than the greater of the amounts computed under the basic
formula or alternate formula which were amended in 1997 and are described below.
Basic Formula. For the three-year period ending December 31, 1996, 1.6% of
the average of the actual annual bonus awards times the lesser of:
- 105% of the number of years of service prior to January 1, 1997 or
- the number of years of service prior to January 1, 1997 plus one.
Alternate Formula. The excess of:
- 1.7% of the adjusted career average pay over
- 0.8% of the covered compensation base times the lesser of
-- 105% of the number of years of service prior to January 1, 1997 or
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-- the number of years of service prior to January 1, 1997 plus one,
minus the benefit calculated under the AT&T Management Pension Plan
formula (without regard to limitations imposed by the Internal
Revenue Code).
For purposes of this formula, adjusted career average pay is the average annual
compensation for the three-year period ending December 31, 1996, without regard
to the limitations imposed by the Internal Revenue Code. The covered
compensation base used in this formula is the average of the maximum wage amount
on which an employee was liable for Social Security Tax for each year beginning
with 1961 and ending with 1996. In 1996, the covered compensation base was
$27,600.
No service or compensation after December 31, 1996 is used to calculate an
employee's normal retirement benefit under the basic formula or alternate
formula.
Effective January 1, 1998, this plan was further amended to convert the
plan to a cash balance pension design. Under the new design, a hypothetical cash
balance account is established for each participant for record-keeping purposes.
Each year a participant's cash balance account is credited with:
- an award credit based on the participant's age and short-term award paid
in that year and
- an interest credit based on the participant's account balance as of the
end of the prior year.
Effective January 1, 1998, an eligible participant's cash balance account
received an initial credit based on a conversion benefit equal to the
participant's normal retirement benefit under the basic formula described above
multiplied by a conversion factor based on the participant's age as of December
31, 1996. The initial award credit was made as of January 1, 1998 based on the
participant's short-term award paid in 1997 and the initial interest credit was
made as of January 1, 1998 based on the conversion benefit. Interest credits are
calculated at the effective annual rate of 7% for calendar years 1997, 1998, and
1999. For subsequent calendar years, interest credits are based on the effective
annual rate of 4%. Under the cash balance design, a participant's benefit is
determined by projecting interest credits to his or her cash balance account to
age 65, converting the projected cash balance account to an annuity, and
reducing that annuity for early commencement in the same manner as under the
AT&T Management Pension Plan.
AT&T MID-CAREER PENSION PLAN
Senior managers, including Mr. Zeglis, and several other management
employees who were hired at age 35 or over, are covered by a supplemental AT&T
Mid-Career Pension Plan. For qualified managers retiring with at least five
years at a senior level, the plan provides additional credits at approximately
one-half the rate in the AT&T Management Pension Plan. The number of credits is
equal to the lesser of:
- actual years of net credited service at retirement, or
- the employee's age at the time of hire minus 30.
In addition, this plan was amended to provide that liability for senior managers
actively employed on January 1, 1998 be transferred to the AT&T Non-Qualified
Pension Plan and converted to a cash balance as we describe above.
Pension amounts under the AT&T Management Pension Plan formula, the AT&T
Non-Qualified Pension Plan, or the AT&T Mid-Career Pension Plan are not subject
to reductions for Social Security Benefits or other offset amounts. If Messrs.
Armstrong, Zeglis and Somers continue in the positions as previously stated and
retire at the normal retirement age of 65, the estimated
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annual pension amount payable under the AT&T Management Pension Plan formula and
the AT&T Non-Qualified Pension Plan would be $460,200, $1,420,100 and $796,600,
respectively. Amounts shown are straight life annuity amounts not reduced by a
joint and survivorship provision which is available to these officers.
In 1997, we began purchasing annuity contracts to satisfy our unfunded
obligations to retired senior managers under the AT&T Non-Qualified Pension
Plan. In the event we purchase an annuity contract for any of the Named
Officers, the pension payments for that officer will vary from that set forth
above. In that case, there would be a tax gross-up payment to the officer, and
annuity benefits paid by the annuity provider will be reduced to offset the tax
gross-up payment. The after-tax pension benefit will be the same as the
after-tax benefit the participant would otherwise have received under the AT&T
Non-Qualified Pension Plan. Receipt of the annuity is contingent on the signing
of a two-year non-competition agreement which, should competitive activity occur
within the two-year period, give us the right to seek injunctive relief and to
recapture any amounts already paid out under the annuity contract.
As part of his employment agreement as described above, we entered into a
supplemental pension arrangement with Mr. Armstrong in 1997. Under this
arrangement, if he continues in his position as previously stated and retires at
the normal retirement age of 65, the estimated pension amount payable under the
agreement, which supplements the annual pension amount payable under the AT&T
Management Pension Plan and the AT&T Non-Qualified Pension Plan, would be
$867,400.
In 1997, AT&T entered into a supplemental pension arrangement with Mr.
Zeglis. Pursuant to Mr. Zeglis's arrangement, if employment is terminated for
any reason other than
- AT&T initiated termination for "cause" (as defined in the arrangement) or
- self-initiated termination prior to age 52 for other than "good reason"
(as defined in the arrangement),
he will be entitled to the supplemental pension. Under the supplemental pension
arrangement, Mr. Zeglis is entitled to pension benefits determined under the
then-existing Company qualified and non-qualified pension formulas, using
January 1, 1973 as a date of hire, and subject to a minimum amount. Pension
benefits payable under this arrangement will be paid out of the company's
operating income, and will be offset by all amounts actually received by Mr.
Zeglis under any then-existing AT&T qualified and/or non-qualified retirement
plans. In addition, Mr. Zeglis will be entitled to certain other post-retirement
benefits that are generally made available from time to time to retired
executive officers and service-pension-eligible senior managers. Pursuant to the
supplemental pension arrangement for Mr. Zeglis, if he continues in the position
previously stated and retires at the normal retirement age of 65, the estimated
annual supplemental pension amount, in addition to the pension payable under the
AT&T Management Pension Plan and AT&T Non-Qualified Pension Plan described
above, would be $140,000.
OTHER MATTERS TO COME BEFORE THE SPECIAL MEETING
In addition to the matters described above, there will be an address by the
Chairman of the Board and a general discussion period during which shareholders
will have an opportunity to ask questions about the business.
In the event that any matter not described herein may properly come before
the special meeting, or any adjournment or postponement of the special meeting,
the Proxy Committee will vote the
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shares represented by it in accordance with its best judgment. At the time this
proxy statement went to press, we knew of no other matters that might be
presented for shareholder action at the special meeting.
SHAREHOLDER PROPOSALS
AT&T's 2000 Annual Meeting of Shareholders is expected to be held in May
2000. Any AT&T shareholder who intended to submit a proposal for inclusion in
the proxy materials for AT&T's 2000 Annual Meeting of Shareholders must have
submitted such proposal to the Vice President-Law and Secretary of AT&T by
November 25, 1999. Our by-laws required shareholders who intend to propose
business to be considered by shareholders at an annual meeting, other than
shareholder proposals included in the proxy statement, to give written notice to
the Secretary of AT&T not less than 90 days nor more than 120 days prior to the
first anniversary of the preceding year's annual meeting. Matters to be raised
by a shareholder at AT&T's 2000 Annual Meeting of Shareholders must be submitted
on or after January 20, 2000 but no later than February 19, 2000. The written
notice should be sent to Vice President -- Law and Secretary, AT&T Corp., 32
Avenue of the Americas, New York, New York 10013-2412 and must include a brief
description of the business, the reasons for conducting such business, any
material interest in such business by the shareholder, the name and address of
the shareholder as they appear on AT&T's books and the class and number of
shares of AT&T beneficially owned by the shareholder.
SEC rules set forth standards as to what shareholder proposals are required
to be included in a proxy statement for an annual meeting.
OTHER INFORMATION
DIRECTORS' AND OFFICERS' LIABILITY POLICY
A directors' and officers' liability policy was placed, effective July 1,
1997, with Lloyds of London and other carriers. The policy insures AT&T for
certain obligations incurred in the indemnification of its directors and
officers under New York law or under contract, and insures directors and
officers when such indemnification is not provided by AT&T. The policy premium
from July 1, 1999 through July 1, 2000 is approximately $770,000.
EXPERTS
The consolidated financial statements of AT&T Corp. incorporated in this
proxy statement by reference to the Annual Report on Form 10-K/A, filed on July
12, 1999, for the year ended December 31, 1998, have been so incorporated in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
The combined financial statements of the AT&T Wireless Group as of December
31, 1998 and 1997 and for each of the three years in the period ended December
31, 1998 included in this proxy statement, have been so included in reliance on
the report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This proxy statement contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 with respect to:
- the financial condition,
- results of operations,
- cash flows,
- dividends,
- financing plans,
- business strategies,
- operating efficiencies or synergies,
- budgets,
- capital and other expenditures,
- competitive positions,
- growth opportunities for existing products, benefits from new technology,
- plans and objectives of management,
- markets for stock of AT&T, the AT&T Common Stock Group and the AT&T
Wireless Group, and
- other matters.
Statements in this proxy statement that are not historical facts are hereby
identified as "forward-looking statements" for the purpose of the safe harbor
provided by Section 21E of the Securities Exchange Act of 1934 and Section 27A
of the Securities Act of 1933. These forward-looking statements, including,
without limitation, those relating to the future business prospects, revenues,
working capital, liquidity, capital needs, network build out, interest costs and
income, in each case, relating to AT&T, the AT&T Common Stock Group and the AT&T
Wireless Group, wherever they occur in this proxy statement, are necessarily
estimates reflecting the best judgment of senior management and involve a number
of risks and uncertainties that could cause actual results to differ materially
from those suggested by the forward-looking statements. These forward-looking
statements should, therefore, be considered in light of various important
factors, including those set forth in this proxy statement. Important factors
that could cause actual results to differ materially from estimates or
projections contained in the forward-looking statements include, without
limitation:
- the effects of vigorous competition in the markets in which these
entities operate,
- the ability to enter into agreements to, and the cost of, entering new
markets necessary to provide nationwide services,
- the ability of AT&T to establish a significant market presence in new
geographic and service markets,
- the risks related to AT&T's investments in the Liberty Media Group and
joint ventures,
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- the impact of any unusual items resulting from ongoing evaluations of the
business strategies of these entities or groups,
- requirements imposed on these entities or groups or latitude allowed to
their competitors by the FCC or state regulatory commissions under the
Telecommunications Act or other applicable laws and regulations,
- unexpected results of litigation filed against these entities,
- the possibility of one or more of the markets in which these entities
compete being impacted by changes in political, economic or other
factors, such as monetary policy, legal and regulatory changes or other
external factors over which these entities or groups have no control, and
- those factors listed under "Risk Factors -- The Tracking Stock Amendment"
and "Risk Factors -- The AT&T Wireless Group."
The words "estimate," "project," "intend," "expect," "believe" and similar
expressions are intended to identify forward-looking statements. These
forward-looking statements are found at various places throughout this proxy
statement and throughout the other documents incorporated herein by reference,
including, but not limited to, AT&T's 1998 Annual Report on Form 10-K, including
any amendments to the annual report. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date of
this proxy statement. AT&T undertakes no obligation to publicly release any
revisions to these forward-looking statements to reflect events or circumstances
after the date of this proxy statement or to reflect the occurrence of
unanticipated events. Moreover, in the future, AT&T, through its senior
management, may make forward-looking statements about the matters described in
this proxy statement or other matters concerning AT&T, the AT&T Wireless Group
or the AT&T Common Stock Group.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy
any reports, statements or other information, we file at the Securities and
Exchange Commission's public reference rooms in Washington, D.C., New York, New
York and Chicago, Illinois. Please call the Securities and Exchange Commission
at 1-800-SEC-0330 for further information on the public reference rooms. Our
Securities and Exchange Commission filings are also available to the public from
commercial documents retrieval services and at the Internet world wide web site
maintained by the Securities and Exchange Commission at www.sec.gov.
The Securities and Exchange Commission allows us to "incorporate by
reference" information into this proxy statement, which means that we can
disclose important information to you by referring you to another document filed
separately with the Securities and Exchange Commission. The information
incorporated by reference is deemed to be part of this proxy statement except
for any information superseded by information contained directly in this proxy
statement. This proxy statement incorporates by reference the documents set
forth below that we have previously filed with the Securities and Exchange
Commission. These documents contain important information about us and our
financial condition.
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<TABLE>
<CAPTION>
AT&T SEC FILINGS (FILE NO. 1-1105) PERIOD
- ---------------------------------- ------
<S> <C>
Annual Report on Form 10-K/A Year ended December 31, 1998 (as amended on March 23,
1999 and July 12, 1999)
Quarterly Reports on Form 10-Q Quarters ended March 31, 1999, June 30, 1999 and
September 30, 1999
Current Reports on Form 8-K Filed on January 8, 1999 (as an amendment to a report
dated October 16, 1998), January 8, 1999, January 27,
1999, March 9, 1999, March 10, 1999, March 22, 1999, May
3, 1999, May 7, 1999, September 2, 1999, October 29,
1999, November 22, 1999, December 6, 1999 and January 6,
2000
</TABLE>
We are also incorporating by reference into this proxy statement additional
documents that may be filed with the Securities and Exchange Commission from the
date of this proxy statement to the date of the special meeting. These include
periodic reports, such as Annual Reports on Form 10-K, Quarterly Reports on Form
10-Q and Current Reports on Form 8-K, as well as proxy statements. If you are a
shareholder, we may have sent you some of the documents incorporated by
reference, but you can obtain any of them through us, the Securities and
Exchange Commission or the Securities and Exchange Commission's Internet world
wide web site as described above. Documents incorporated by reference are
available from us without charge, excluding all exhibits unless we have
specifically incorporated by reference such exhibits in this proxy statement.
Shareholders may obtain documents incorporated by reference in this proxy
statement by requesting them in writing or by telephone to us at the following
address:
AT&T Corp.
32 Avenue of the Americas
New York, New York 10013-2412
Tel: (212) 387-5400
Attn: Office of the Corporate Secretary
If you would like to request documents from us, please do so by
, 2000 to receive them before the special meeting.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROXY STATEMENT TO VOTE ON THE MATTERS BEING CONSIDERED AT THE
SPECIAL MEETING. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION
THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS PROXY STATEMENT. THIS PROXY
STATEMENT IS DATED , 2000. YOU SHOULD NOT ASSUME THAT THE
INFORMATION CONTAINED IN THIS PROXY STATEMENT IS ACCURATE AS OF ANY DATE OTHER
THAN THAT DATE, AND THE MAILING OF THIS PROXY STATEMENT TO SHAREHOLDERS SHALL
NOT CREATE ANY IMPLICATION TO THE CONTRARY.
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APPENDIX A
FORM OF
CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION
UNDER SECTION 805 OF THE NEW YORK STATE BUSINESS CORPORATION LAW
We, the undersigned, being a Vice President and an Assistant Secretary
respectively, of AT&T Corp., do hereby certify as follows:
FIRST: The name of the corporation is AT&T Corp.
SECOND: The Certificate of Incorporation of the corporation was filed
by the Department of State on March 3, 1885.
THIRD: (a) The Certificate of Incorporation of the corporation is
hereby amended to create one new class of common stock, AT&T Wireless Group
common stock, having the number, designation, relative rights, preferences,
and limitations as set forth herein.
(b) To effect the foregoing, Article THIRD is hereby amended as set
forth in Exhibit A hereto.
FOURTH: (a) The Certificate of Incorporation of the corporation is
hereby amended to modify the purposes for which the corporation is formed.
(b) To effect the foregoing, Article SECOND is hereby amended to read
in its entirety as set forth below:
SECOND: The purposes for which the corporation is formed are to
engage in any lawful act or activity for which corporations may be
organized under the Business Corporation Law of the State of New
York, provided that the corporation is not formed to engage in any
act or activity which requires the consent or approval of any New
York state official, department, board, agency or other body, without
such consent or approval first being obtained.
FIFTH: The manner in which the foregoing amendment of said Certificate
of Incorporation of the corporation was authorized was by the vote of the
holders of a majority of all outstanding shares of the corporation entitled
to vote thereon at a meeting of shareholders, subsequent to the unanimous
vote of our board of directors.
IN WITNESS WHEREOF, we have subscribed this document on ,
2000 and do hereby affirm, under the penalties of perjury, that the statements
contained herein have been examined by us and are true and correct.
By
------------------------------------------
Name:
Title: Vice President
By
------------------------------------------
Name:
Title: Vice President
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Exhibit A
ARTICLE THIRD
CAPITAL STOCK
PART A OF ARTICLE THIRD IS HEREBY AMENDED TO READ IN ITS ENTIRETY AS FOLLOWS:
PART A -- AUTHORIZED SHARES
The aggregate number of shares which the corporation is authorized to issue
is fourteen billion eight hundred fifty million (14,850,000,000) shares,
consisting of one hundred million (100,000,000) preferred shares having a par
value of $1.00 per share ("Preferred Stock") and fourteen billion seven hundred
fifty million (14,750,000,000) common shares, of which six billion
(6,000,000,000) common shares shall be Common Stock having a par value of $1.00
per share ("Common Stock"), two billion five hundred million (2,500,000,000)
common shares shall be Class A Liberty Media Group Common Stock having a par
value of $1.00 per share ("Class A Liberty Media Group Common Stock"), two
hundred fifty million (250,000,000) common shares shall be Class B Liberty Media
Group Common Stock having a par value of $1.00 per share ("Class B Liberty Media
Group Common Stock") and six billion (6,000,000,000) common shares shall be
Wireless Group Common Stock having a par value of $1.00 per share ("Wireless
Group Common Stock"). The Class A Liberty Media Group Common Stock and the Class
B Liberty Media Group Common Stock are collectively referred to herein as the
"Liberty Media Group Common Stock".
The authorized shares of Class B Liberty Media Group Common Stock will only
be issued (i) pursuant to the Agreement and Plan of Restructuring and Merger,
dated June 23, 1998 (the "Merger Agreement"), among Tele-Communications, Inc.,
Italy Merger Corp. and the corporation, (ii) upon conversion, exercise or
exchange of Pre-Merger Convertible Securities (as defined in paragraph 9 of Part
B of this Article Third), (iii) in a subdivision (by stock split or otherwise)
of outstanding shares of Class B Liberty Media Group Common Stock, or (iv) as a
stock dividend or share distribution (as defined in paragraph 4 of Part B of
this Article Third).
Part B of Article THIRD shall remain unchanged. Part C of Article THIRD is
hereby redesignated as Part D of Article THIRD and shall otherwise remain
unchanged, and a new Part C shall be added to Article THIRD, so that Part C of
Article THIRD shall read in its entirety as follows:
PART C -- WIRELESS GROUP COMMON STOCK
1. Voting Rights.
(a) The voting rights of the Wireless Group Common Stock are to be
determined.
(b) Except as may otherwise be required by the laws of the State of New
York or, with respect to additional or special voting rights (which may include,
without limitation, rights of any such holders of any such class or series to
elect one or more directors voting separately as a class) of any class or series
of Preferred Stock or any other class of common shares, in this Certificate of
Incorporation of the corporation, as the same may be amended from time to time
(this "Certificate") (including the terms of the Liberty Media Group Common
Stock, any class or series of Preferred Stock and any resolution or resolutions
providing for the establishment of such class or series pursuant to authority
vested in the Board of Directors by this Certificate and the terms of any other
class of common shares), the holders of shares of Common Stock, the holders of
shares of Wireless
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Group Common Stock, the holders of shares of Class A Liberty Media Group Common
Stock, the holders of shares of Class B Liberty Media Group Common Stock, the
holders of shares of each other class of common shares, if any, entitled to vote
thereon, and the holders of shares of each class or series of Preferred Stock,
if any, entitled to vote thereon, shall vote as one class with respect to all
matters to be voted on by shareholders of the corporation, and no separate vote
or consent of the holders of shares of Common Stock, the holders of shares of
Wireless Group Common Stock, the holders of shares of Class A Liberty Media
Group Common Stock, the holders of shares of Class B Liberty Media Group Common
Stock or the holders of shares of any such class of common shares or any such
class or series of Preferred Stock shall be required for the approval of any
such matter, except, in the case of Liberty Media Group Common Stock, under the
circumstances described in paragraph 1(b) of Part B of this Article Third.
2. Dividends.
(a) DIVIDENDS ON COMMON STOCK. Dividends on Common Stock may be declared
and paid only to the extent of (i) the assets of the corporation legally
available therefor minus (ii) the sum of (A) the Liberty Media Group Available
Dividend Amount (as defined in paragraph 9 of Part B of this Article Third), and
(B) the Wireless Group Available Dividend Amount (such amount available for the
payment of dividends on Common Stock is referred to in this Part C of this
Article Third as the "Common Stock Available Dividend Amount(W)").
(b) DIVIDENDS ON WIRELESS GROUP COMMON STOCK. Dividends on Wireless Group
Common Stock may be declared and paid only out of the lesser of (i) the excess,
if any, of (A) the assets of the corporation legally available therefor, over
(B) the Liberty Media Group Available Dividend Amount, and (ii) the Wireless
Group Available Dividend Amount. Concurrently with the payment of any dividend
on shares of Wireless Group Common Stock, at the election of the Board of
Directors, either (x) the Common Stock Group(W) shall receive from the Wireless
Group an aggregate payment of the same kind of cash and/or property that is the
subject of such dividend, which payment shall be equal to the excess, if any, of
(i) the quotient obtained by dividing (A) the aggregate amount of such dividend,
as determined by the Board of Directors, by (B) the Wireless Group Allocation
Fraction, over (ii) the aggregate amount of such dividend, as so determined, or
(y) the Wireless Group Allocation Fraction will be adjusted as described in
paragraph 9 of this Part C of this Article Third. The payment to be made to the
Common Stock Group(W) pursuant to the preceding sentence may, at the discretion
of the Board of Directors, be reflected by an allocation or by a direct transfer
of cash or other property.
(c) DISCRIMINATION BETWEEN OR AMONG CLASSES OF COMMON SHARES. The Board of
Directors, subject to the provisions of paragraphs 2(a) and 2(b) of this Part C
of this Article Third and paragraph 3(b) of Part B of this Article Third, shall
have the sole authority and discretion to declare and pay dividends (or to
refrain from declaring or paying the same) exclusively to the holders of Common
Stock, exclusively to the holders of Wireless Group Common Stock, exclusively to
the holders of Liberty Media Group Common Stock, exclusively to the holders of
any other class of common shares or to the holders of any two or more of such
classes in equal or unequal amounts, notwithstanding the relationship between
the Common Stock Available Dividend Amount(W), the Wireless Group Available
Dividend Amount and the Liberty Media Group Available Dividend Amount, the
respective amounts of prior dividends declared on, or the liquidation rights of,
Common Stock, Wireless Group Common Stock, Class A Liberty Media Group Common
Stock and Class B Liberty Media Group Common Stock, or any other factor.
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3. Share Distributions.
Subject to the provisions of paragraph 4 of Part B of this Article Third,
the corporation may declare and pay a distribution consisting of shares of
Common Stock, Wireless Group Common Stock or any other securities of the
corporation or any other Person (hereinafter sometimes called a "share
distribution") to holders of Common Stock or Wireless Group Common Stock only in
accordance with this paragraph 3 of this Part C of this Article Third.
(a) DISTRIBUTIONS ON COMMON STOCK OR WIRELESS GROUP COMMON STOCK. Except
as set forth in paragraph 4 of Part B of this Article Third, the corporation may
declare and pay a share distribution to holders of Common Stock, Wireless Group
Common Stock or any other class of common shares (other than Liberty Media Group
Common Stock) consisting of any securities of the corporation, any Subsidiary of
the corporation, or any other Person, including, without limitation, a share
distribution consisting of shares of any class or series of Preferred Stock or
shares of Common Stock, Wireless Group Common Stock or any other class of common
shares (other than Liberty Media Group Common Stock) (or Convertible Securities
convertible into or exercisable or exchangeable for shares of any class or
series of Preferred Stock or shares of Common Stock, Wireless Group Common Stock
or any other class of common shares (other than Liberty Media Group Common
Stock)).
Concurrently with the making of any share distribution with respect to
Wireless Group Common Stock, at the election of the Board of Directors, either
(x) the Common Stock Group(W) shall receive from the Wireless Group an aggregate
payment of the same kind of property that is the subject of such distribution,
which payment shall be equal to the excess, if any, of (i) the quotient obtained
by dividing (A) the aggregate amount of such distribution, as determined by the
Board of Directors, by (B) the Wireless Group Allocation Fraction, over (ii) the
aggregate amount of such dividend, as so determined, or (y) the Wireless Group
Allocation Fraction shall be adjusted as described in paragraph 9 of this Part C
of this Article Third. Any payment to be made to the Common Stock Group(W)
pursuant to the preceding sentence may, at the discretion of the Board of
Directors, be reflected by an allocation or by a direct transfer of cash or
other property.
(b) DISCRIMINATION BETWEEN OR AMONG CLASSES OF COMMON SHARES. The Board of
Directors, subject to the foregoing provisions of this paragraph 3 of this Part
C of this Article Third and the provisions of paragraph 4 of Part B of this
Article Third, shall have the sole authority and discretion to declare and pay
(or to refrain from declaring or paying) share distributions exclusively to
holders of Common Stock, exclusively to holders of Wireless Group Common Stock,
exclusively to holders of Liberty Media Group Common Stock, exclusively to the
holders of any other class of common shares or to holders of any two or more of
such classes in equal or unequal amounts, notwithstanding the relationship
between the Common Stock Available Dividend Amount(W), the Wireless Group
Available Dividend Amount and the Liberty Media Group Available Dividend Amount,
the respective amounts of prior share distributions declared on, or the
liquidation rights of, Common Stock, Wireless Group Common Stock, Class A
Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock or
any other factor.
4. Exchange of Wireless Group Common Stock.
(a) EXCHANGE AT OPTION OF BOARD OF DIRECTORS. At any time following either
the occurrence of a Tax Event or the second anniversary of the date of initial
issuance of any shares of Wireless Group Common Stock (the "Initial Issuance
Date"), the Board of Directors, in its sole discretion, may, at any time, effect
a recapitalization of the corporation (a "Board Required Exchange") by declaring
that all of the outstanding shares of Wireless Group Common Stock shall be
exchanged for fully paid and nonassessable shares of Common Stock in accordance
with the Exchange Rate. In addition, at
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any time following the Initial Issuance Date, so long as all of the assets and
liabilities included in the Wireless Group are held, directly or indirectly, by
one or more Qualifying Subsidiaries of the corporation (which shall not include
any Subsidiary that is a part of the Liberty Media Group as defined in paragraph
9 of Part B of this Article Third) that hold no other material assets or
liabilities (the "Wireless Group Subsidiaries"), the Board of Directors may,
subject to the availability of assets of the corporation legally available
therefor, effect a Board Required Exchange by exchanging, on a pro rata basis,
all of the outstanding shares of Wireless Group Common Stock in exchange for an
aggregate number of outstanding fully paid and nonassessable shares of common
stock of such Wireless Group Subsidiary or Subsidiaries at the applicable
Exchange Rate, provided that no such exchange may occur unless the exchange is
tax free to the holders of Wireless Group Common Stock (except with respect to
any cash received by such holders in lieu of fractional shares). For purposes of
this paragraph 4 of this Part C of this Article Third, the term "Exchange
Shares" shall mean the shares of Common Stock or shares of the one or more
Wireless Group Subsidiaries, as the case may be, into which shares of Wireless
Group Common Stock may be exchanged pursuant to a Board Required Exchange.
(b) EXCHANGE IN CONNECTION WITH CERTAIN SIGNIFICANT TRANSACTIONS. In the
event of a Disposition other than a Wireless Group Related Business Transaction
by the corporation in a transaction or series of related transactions of all or
substantially all of the properties and assets (as defined below) of the
Wireless Group to any Person(s) or group(s) of which the corporation is not a
majority owner (whether by merger, consolidation, sale of assets or stock,
liquidation, dissolution, winding up or otherwise) (a "Significant
Transaction"), effective upon the consummation of such sale, transfer,
assignment or other disposition and automatically without any action on the part
of the corporation or the Board of Directors or on the part of the holders of
shares of Wireless Group Common Stock, the corporation shall be recapitalized (a
"Significant Transaction Exchange") by exchanging all outstanding shares of
Wireless Group Common Stock for, at the sole discretion of the Board of
Directors, either (i) fully paid and nonassessable shares of Common Stock at the
Exchange Rate or (ii) other consideration, as described in paragraph 4(c) of
this Part C of this Article Third. Notwithstanding the preceding sentence, the
corporation shall be under no obligation to effect a Significant Transaction
Exchange that it might otherwise be required to effect pursuant to such sentence
(and the Exchange Rate shall not apply) if (i) the underlying Significant
Transaction is conditioned upon the affirmative vote of a majority of the
holders of Wireless Group Common Stock, voting as a separate class, (ii) in
connection with a spin-off or similar disposition of the corporation's entire
interest in the Wireless Group to the holders of Wireless Group Common Stock,
including any such disposition that is made in connection with a Board Required
Exchange, or (iii) in connection with the liquidation, dissolution or winding up
of the corporation, whether voluntary or involuntary.
(c) ALTERNATE CONSIDERATION IN CONNECTION WITH SIGNIFICANT TRANSACTION
EXCHANGE. In connection with any Significant Transaction Exchange, the
corporation may, at the sole discretion of the Board of Directors, (i) in lieu
of issuing shares of Common Stock in exchange for shares of Wireless Group
Common Stock, either (x) subject to the limitations described in paragraph 2(b)
of this Part C of this Article Third and to the other provisions described in
this paragraph 4(c) of this Part C of this Article Third, declare and pay a
dividend in cash and/or in securities or other property (determined as provided
below) to holders of the outstanding shares of Wireless Group Common Stock
equally on a share for share basis in an aggregate amount equal to the Wireless
Group Net Proceeds of such Significant Transaction; or (y) provided that there
are assets of the corporation legally available therefor and to the extent the
Wireless Group Available Dividend Amount would have been sufficient to pay a
dividend in lieu thereof as described in clause (x) of this paragraph 4(c) of
this Part C of this Article Third, then (A) if such Significant Transaction
involves the Disposition of all (not merely substantially all) of the properties
and assets of the Wireless
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Group, redeem all outstanding shares of Wireless Group Common Stock in exchange
for cash and/or securities or other property (determined as provided below) in
an aggregate amount equal to the Wireless Group Net Proceeds; or (B) if such
Significant Transaction involves the Disposition of substantially all (but not
all) of the properties and assets of the Wireless Group, apply an aggregate
amount of cash and/or securities or other property (determined as provided
below) equal to the Wireless Group Net Proceeds to the redemption of outstanding
shares of Wireless Group Common Stock, the number of shares to be redeemed to
equal the lesser of (1) the whole number nearest the number determined by
dividing the aggregate amount so allocated to the redemption of Wireless Group
Common Stock by the average Market Value of one share of Wireless Group Common
Stock during the 10-Trading Day period beginning on the 15th Trading Day
following the consummation of such Disposition, and (2) the number of shares of
Wireless Group Common Stock outstanding, and (ii) in lieu of issuing solely
shares of Common Stock in exchange for shares of Wireless Group Common Stock,
subject to the limitations described in paragraph 2(b) of this Part C of this
Article Third and to the other provisions described in paragraph 4(c) of this
Part C of this Article Third, combine the issuance of shares of Common Stock in
exchange for shares of Wireless Group Common Stock with the payment of a
dividend on or the redemption of shares of Wireless Group Common Stock for cash
and/or other securities or other property as described below.
In the event that the Board of Directors elects the option described in
(ii) of the preceding paragraph, the outstanding shares of Wireless Group Common
Stock exchanged for fully paid and nonassessable shares of Common Stock shall be
exchanged at the Exchange Rate and a dividend shall be paid on all the remaining
shares of Wireless Group Common Stock equally on a share for share basis, or
some or all of the remaining outstanding shares of Wireless Group Common Stock
shall be exchanged for cash and/or other securities or other property, as
follows. The aggregate amount of such dividend, in the case of a dividend, or
the portion of the Wireless Group Net Proceeds to be applied to such an
exchange, in the case of an exchange, shall equal (A) an amount equal to the
total Wireless Group Net Proceeds multiplied by (B) one minus a fraction, the
numerator of which shall be the number of shares of Wireless Group Common Stock
exchanged for shares of Common Stock and the denominator of which shall be the
total number of outstanding shares of Wireless Group Common Stock. In the event
of an exchange, if the Significant Transaction involves the Disposition of all
(not merely substantially all) of the properties and assets of the Wireless
Group, then all remaining outstanding shares of Wireless Group Common Stock will
be redeemed in exchange for cash and/or securities or other property in an
aggregate amount equal to the portion of the Wireless Group Net Proceeds to be
applied to the exchange. If the Significant Transaction involves the Disposition
of substantially all (but not all) of the properties and assets of the Wireless
Group, then the portion of the Wireless Group Net Proceeds to be applied to the
exchange will be used to redeem a number of shares equal to the lesser of (1)
the whole number nearest the number determined by dividing the aggregate amount
so allocated to the redemption of Wireless Group Common Stock by the average
Market Value of one share of Wireless Group Common Stock during the 10-Trading
Day period beginning on the 15th Trading Day following consummation of the
Disposition, and (2) the number of shares of Wireless Group Common Stock
outstanding.
For purposes of this paragraph 4 of this Part C of this Article Third, in
the case of a Significant Transaction involving a Disposition of properties and
assets in a series of related transactions, such Disposition shall not be deemed
to have been consummated until the consummation of the last of such
transactions. Any exchange described in this paragraph 4 of this Part C of this
Article Third shall be effected in accordance with the applicable provisions set
forth in paragraph 5 of this Part C of this Article Third. In the event that, at
the time of any Significant Transaction, there are outstanding any Convertible
Securities convertible into or exercisable for shares of Wireless Group Common
Stock that would give the holders rights to receive any dividend or exchange
consideration related to the Significant Transaction upon exercise, conversion
or otherwise, or would adjust as a
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result of such dividend or exchange to give the holder equivalent economic
rights, then the shares of Wireless Group Common Stock underlying such
Convertible Securities will be taken into account for purposes of determining
the terms of any dividend payment or exchange effected in lieu of a Significant
Transaction Exchange.
(d) PAYMENT TO COMMON STOCK GROUP(W). Concurrently with the payment of any
dividend referred to in paragraph 4(c) of this Part C of this Article Third, at
the election of the Board of Directors, either (A) the Common Stock Group(W)
shall receive from the Wireless Group an aggregate payment of the same kind of
property that is the subject of such dividend, which payment shall be equal to
the excess of (i) the quotient obtained by dividing (x) the aggregate amount of
such dividend, as determined by the Board of Directors, by (y) the Wireless
Group Allocation Fraction, over (ii) the aggregate amount of such dividend, as
so determined, or (B) the Wireless Group Allocation Fraction will be adjusted as
described in paragraph 9 of this Part C of this Article Third. Any payment to be
made to the Common Stock Group(W) pursuant to the preceding sentence may, at the
discretion of the Board of Directors, be reflected by an allocation or by a
direct transfer of cash or other property.
(e) EXCHANGE RATE. For purposes of this paragraph 4 of this Part C of this
Article Third, the term "Exchange Rate" shall mean the number of Exchange Shares
for which each share of Wireless Group Common Stock shall be exchangeable
pursuant to a Board Required Exchange or a Significant Transaction Exchange,
determined as follows. If the shares of Wireless Group Common Stock are to be
exchanged for shares of Common Stock, each share of Wireless Group Common Stock
shall be exchangeable for such number of shares of Common Stock (calculated to
the nearest 1/10,000), subject to paragraph 5 below, equal to 110% of the ratio
of the Average Market Price Per Share of such Wireless Group Common Stock to the
Average Market Price Per Share of Common Stock. For purposes of computing the
Exchange Rate, the "Average Market Price Per Share" of Common Stock or Wireless
Group Common Stock, as the case may be, shall mean (i) in the case of a Board
Required Exchange, the average of the daily Market Value per share for such
Common Stock or Wireless Group Common Stock for the 40 consecutive Trading Days
ending on the 15th Trading Day prior to the date an Exchange Notice is mailed,
or (ii) in the case of a Significant Transaction Exchange, the average of the
daily Market Value per share for such Common Stock or Wireless Group Common
Stock for the 10 consecutive Trading Days beginning on the 15th Trading Day
following consummation of the Significant Transaction. If the shares of Wireless
Group Common Stock are to be exchanged for shares of one or more Wireless Group
Subsidiaries, such shares of Wireless Group Common Stock shall be exchanged, on
a pro rata basis, for an aggregate number of outstanding fully paid and
nonassessable shares of common stock of each such Wireless Group Subsidiary
equal to the number of outstanding shares of common stock of such Subsidiary
held by the corporation multiplied by the Wireless Group Allocation Fraction
and, if the Board of Directors so determines, the remaining shares of such
Subsidiary shall be distributed on a pro rata basis to the holders of shares of
Common Stock (or shares of Common Stock shall be exchanged for such remaining
shares of such Subsidiary); provided that no such distribution (or mandatory
exchange) may occur unless the distribution (or mandatory exchange) is tax free
to the holders of Common Stock (except with respect to any cash received by such
holders in lieu of fractional shares). If at the time of such an exchange for
shares of one or more Wireless Group Subsidiaries, there are outstanding any
Convertible Securities convertible into or exercisable for shares of Wireless
Group Common Stock that would become exercisable or convertible for shares of
one or more Wireless Group Subsidiaries as a result of such exchange, and the
obligation to issue such shares under such options, warrants, convertible
securities or similar rights is not assumed or otherwise provided for by one or
more Wireless Group Subsidiaries, then the shares of Wireless Group Common Stock
underlying such Convertible Securities will be taken into account for purposes
of determining the Exchange Rate for such exchange.
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For purposes of this Paragraph 4 of this Part C of this Article Third,
"substantially all of the properties and assets" of the Wireless Group as of any
date shall mean a portion of such properties and assets that represents at least
80% of the Fair Value of the properties and assets attributed to the Wireless
Group as of such date.
5. Certain Procedures Relating to Exchanges.
(a) The Board of Directors may, in its sole discretion, elect to issue
fractional Exchange Shares in connection with an exchange or to make a cash
payment in lieu of fractional shares, as described below. If the Board of
Directors elects not to issue fractional Exchange Shares, then no such
fractional shares shall be issued in connection with the exchange of shares of
Wireless Group Common Stock into Exchange Shares, and, in lieu thereof, each
holder of Wireless Group Common Stock who would otherwise be entitled to a
fractional interest of an Exchange Share shall, upon surrender of such holder's
certificate or certificates representing shares of Wireless Group Common Stock,
receive a cash payment (without interest) (the "Fractional Payment") equal to
(i) in the case of an exchange for shares of Common Stock, the product resulting
from multiplying (A) the fraction of a share of Common Stock to which such
holder would otherwise have been entitled by (B) the Average Market Price Per
Share of Common Stock on the Exchange Date, or (ii) in the case of an exchange
for shares of one or more Wireless Group Subsidiaries, such value as is
determined by the Board of Directors.
(b) No adjustments in respect of dividends shall be made upon the exchange
of any shares of Wireless Group Common Stock; provided, however, that, if the
Exchange Date with respect to Wireless Group Common Stock shall be subsequent to
the record date for the payment of a dividend or other distribution thereon or
with respect thereto but prior to the payment or distribution thereof, the
registered holders of such shares at the close of business on such record date
shall be entitled to receive the dividend or other distribution payable on such
shares on the date set for payment of such dividend or other distribution,
notwithstanding the exchange of such shares or the corporation's default in
payment of the dividend or distribution due on such date.
(c) At such time or times as the corporation exercises its right to cause a
Board Required Exchange, and at the time of any Significant Transaction
Exchange, the corporation shall give notice of such exchange to the holders of
Wireless Group Common Stock whose shares are to be exchanged, by mailing by
first-class mail a notice of such exchange (an "Exchange Notice"), in the case
of an exchange at the discretion of the Board of Directors, not less than 30 nor
more than 60 days prior to the date fixed for such exchange (the "Exchange
Date"), and, in the case of any other required exchange, as soon as practicable
before or after the Exchange Date, in either case, to their last addresses as
they appear upon the corporation's books. Each such Exchange Notice shall
specify the Exchange Date and the Exchange Rate applicable to such exchange, and
shall state that issuance of certificates representing the applicable type of
Exchange Shares to be received upon exchange of shares of Wireless Group Common
Stock shall be upon surrender of certificates representing such shares of
Wireless Group Common Stock.
(d) Before any holder of shares of Wireless Group Common Stock shall be
entitled to receive certificates representing such Exchange Shares, such holder
must surrender, at such office as the corporation shall specify, certificates
for such shares of Wireless Group Common Stock duly endorsed to the corporation
or in blank or accompanied by proper instruments of transfer to the Corporation
or in blank, unless the corporation shall waive such requirement. The
corporation shall, as soon as practicable after such surrender of certificates
representing such shares of Wireless Group Common Stock, issue and deliver, at
the office of the transfer agent representing Exchange Shares, to the holder for
whose account such shares of Wireless Group Common Stock were so surrendered, or
to
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such holder's nominee or nominees, certificates representing the number of
Exchange Shares to which such holder shall be entitled, together with the
Fractional Payment, if any.
(e) From and after any Exchange Date, all rights of a holder of shares of
Wireless Group Common Stock shall cease except for the right, upon surrender of
the certificates representing such shares of Wireless Group Common Stock, to
receive certificates representing Exchange Shares together with a Fractional
Payment, if any, as described in paragraphs 5(a) and 5(d) of this Part C of this
Article Third and rights to dividends as described in paragraph 5(b) of this
Part C of this Article Third. No holder of a certificate that immediately prior
to the applicable Exchange Date represented shares of Wireless Group Common
Stock shall be entitled to receive any dividend or other distribution with
respect to Exchange Shares until surrender of such holder's certificate for a
certificate or certificates representing Exchange Shares. Upon surrender, the
holder shall receive the amount of any dividends or other distributions (without
interest) that were payable with respect to a record date after the Exchange
Date, but that were not paid by reason of the foregoing with respect to the
number of Exchange Shares represented by the certificate or certificates issued
upon such surrender. From and after an Exchange Date applicable to Wireless
Group Common Stock, the corporation shall, however, be entitled to treat
certificates for Wireless Group Common Stock that have not yet been surrendered
for exchange as evidencing the ownership of the number of Exchange Shares for
which the shares of Wireless Group Common Stock represented by such certificates
have been exchanged, notwithstanding the failure to surrender such certificates.
(f) If any certificate for Exchange Shares is to be issued in a name other
than that in which the certificate representing shares of Wireless Group Common
Stock surrendered in exchange therefor is registered, it shall be a condition of
such issuance that the person requesting the issuance pays any transfer or other
taxes required by reason of the issuance of certificates for such Exchange
Shares in a name other than that of the record holder of the certificate
surrendered, or establishes, to the satisfaction of the corporation or its
agent, that such tax has been paid or is not applicable. Under no circumstances
shall the corporation be liable to a holder of shares of Wireless Group Common
Stock for any Exchange Shares or dividends or distributions thereon delivered to
a public official pursuant to any applicable abandoned property, escheat or
similar law.
(g) At the time an Exchange Notice is delivered with respect to any shares
of Wireless Group Common Stock, or at the time of the Exchange Date, if earlier,
the corporation shall have reserved and kept available, solely for the purpose
of issuance upon exchange of the outstanding shares of Wireless Group Common
Stock, such number of Exchange Shares as shall be issuable upon the exchange of
the number of shares of Wireless Group Common Stock specified or to be specified
in the applicable Exchange Notice, provided that the corporation shall not under
any circumstances be precluded from satisfying its obligation in respect of the
exchange of the outstanding shares of Wireless Group Common Stock by delivery of
purchased Exchange Shares that are held in the treasury of the corporation.
6. Liquidation.
In the event of a liquidation, dissolution or winding up of the
corporation, whether voluntary or involuntary, after payment or provision for
payment of the debts and other liabilities of the corporation and subject to the
prior payment in full of the preferential amounts to which any class or series
of Preferred Stock is entitled, (a) as provided in paragraph 6 of Part B of this
Article Third, the holders of the shares of Class A Liberty Media Group Common
Stock and the holders of the shares of Class B Liberty Media Group Common Stock
shall share equally, on a share for share basis, in a percentage of the funds of
the corporation remaining for distribution to its common shareholders equal to
100% multiplied by the average daily ratio (expressed as a decimal) of Y/Z for
the 20-Trading Day period ending on the Trading Day prior to the date of the
public announcement
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of such liquidation, dissolution or winding up, (b) the holders of the shares of
Common Stock shall share in the aggregate in a percentage of the funds of the
corporation remaining for distribution to its common shareholders equal to 100%
multiplied by the average daily ratio (expressed as a decimal) of X/Z for such
20-Trading Day period, (c) the holders of the shares of Wireless Group Common
Stock shall share in the aggregate in a percentage of the funds of the
corporation remaining for distribution to its common shareholders equal to 100%
multiplied by the average daily ratio (expressed as a decimal) of W/Z for such
20-Trading Day period, and (d) if applicable, the holders of the shares of any
other class of common shares of the corporation (other than Common Stock,
Wireless Group Common Stock or Liberty Media Group Common Stock), on the basis
that may be set forth in this Certificate with respect to any such shares, shall
share in the aggregate in a percentage of the funds of the corporation remaining
for distribution to its common shareholders equal to 100% multiplied by the
average daily ratio (expressed as a decimal) of V/Z for such 20-Trading Day
period, where Y is the aggregate Market Capitalization of the Class A Liberty
Media Group Common Stock and the Class B Liberty Media Group Common Stock, X is
the aggregate Market Capitalization of the Common Stock, W is the aggregate
Market Capitalization of the Wireless Group Common Stock, V is the aggregate
Market Capitalization, if applicable, of any other class of common shares (other
than Common Stock, Liberty Media Group Common Stock and Wireless Group Common
Stock), and Z is the aggregate Market Capitalization of (i) the Class A Liberty
Media Group Common Stock and the Class B Liberty Media Group Common Stock, (ii)
the Common Stock, (iii) the Wireless Group Common Stock and (iv) any other class
of common shares of the corporation (other than Common Stock, Liberty Media
Group Common Stock and Wireless Group Common Stock). Neither the consolidation
or merger of the corporation with or into any other corporation or corporations
nor the sale, transfer or lease of all or substantially all of the assets of the
corporation shall itself be deemed to be a liquidation, dissolution or winding
up of the corporation within the meaning of this paragraph 6 of this Part C of
this Article Third. Notwithstanding the foregoing, any transaction or series of
related transactions that results in all of the assets and liabilities included
in the Wireless Group being held by one or more Wireless Group Subsidiaries, and
the distribution of some or all of the shares of such Wireless Group
Subsidiaries (and no other material assets or liabilities) to the holders of the
outstanding Wireless Group Common Stock shall not constitute a voluntary or
involuntary liquidation, dissolution or winding up of the corporation for
purposes of this paragraph 6 of this Part C of this Article Third, but shall be
subject to paragraph 4 of this Part C of this Article Third. Notwithstanding the
foregoing, any transaction or series of related transactions that results in all
of the assets and liabilities included in the Liberty Media Group being held by
one or more Liberty Media Group Subsidiaries (as defined in paragraph 5(a) of
Part B of this Article Third), and the distribution of such Liberty Media Group
Subsidiaries (and no other material assets or liabilities) to the holders of the
outstanding Liberty Media Group Common Stock shall not constitute a voluntary or
involuntary liquidation, dissolution or winding up of the corporation for
purposes of this paragraph 6 of this Part C of this Article Third, but shall be
subject to paragraph 5(a) of Part B of this Article Third.
7. Determinations by the Board of Directors.
Any determinations made by the Board of Directors under any provision of
this Part C of this Article Third shall be final and binding on all shareholders
of the corporation, except as may otherwise be required by law. The corporation
shall prepare a statement of any determination by the Board of Directors,
respecting the fair market value of any properties, assets or securities, and
shall file such statement with the Secretary of the corporation.
8. Adjustment of the Wireless Group Allocation Fraction.
(a) The denominator of the Wireless Group Allocation Fraction shall be
adjusted from time to time as deemed appropriate by the Board of Directors (i)
to reflect subdivisions (by stock split or
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otherwise) and combinations (by reverse stock split or otherwise) of Wireless
Group Common Stock and stock dividends payable in shares of Wireless Group
Common Stock, (ii) to reflect the fair market value of contributions or
allocations by the corporation of cash or property or other assets or
liabilities from the Common Stock Group(W) to the Wireless Group (or vice
versa), or of cash or property or other assets or liabilities of the Common
Stock Group(W) to, or for the benefit of, employees of the Wireless Group in
connection with employee benefit plans or arrangements of the corporation or any
of its subsidiaries (or vice versa), (iii) to reflect the number of shares of
capital stock of the corporation contributed to, or for the benefit of,
employees of the Wireless Group in connection with benefit plans or arrangements
of the corporation or any of its Subsidiaries, (iv) to reflect repurchases by
the corporation of shares of Wireless Group Common Stock for the account of the
Wireless Group, (v) to reflect issuances of Wireless Group Common Stock for the
account of the Wireless Group, (vi) to reflect dividends or other distributions
to holders of the Wireless Group Common Stock to the extent no payment is made
to the Common Stock Group(W), and (vii) under such other circumstances as the
Board of Directors determines appropriate to reflect the economic substance of
any other event or circumstance, provided that, in each case, the adjustment
shall be made in a manner that is fair and equitable to holders of Common Stock
and Wireless Group Common Stock (and intended to reflect the relative deemed
economic ownership interest, if any, of the Common Stock Group(W) in the
Wireless Group). Any adjustment made by the Board of Directors pursuant to the
preceding sentence shall, subject to the foregoing, be at the sole discretion of
the Board of Directors, and all such determinations shall be final and binding
on all shareholders of the corporation. For purposes of this paragraph 9 of this
Part C of this Article Third, the consideration paid by the Common Stock
Group(W) to acquire any assets or other property contributed or allocated to the
Wireless Group shall be presumed to be the "fair market value" as of its
acquisition.
(b) Without duplication of any adjustment pursuant to paragraph 9(a) of
this Part C of this Article Third, in the event that the corporation shall issue
shares of Wireless Group Common Stock for the account of the Wireless Group,
then the denominator of the Wireless Group Allocation Fraction shall be
increased by the number of shares of Wireless Group Common Stock so issued.
(c) Without duplication of any adjustment pursuant to paragraph 9(a) of
this Part C of this Article Third, if, in connection with any share issuance
described in paragraph 9(b) of this Part C of this Article Third, or otherwise,
the corporation contributes or allocates cash or other property or assets from
the Common Stock Group(W) to the Wireless Group, the denominator of the Wireless
Group Allocation Fraction shall be increased (or further increased) by an amount
obtained by dividing (i) the fair market value of such cash, property or assets
(as determined by the Board of Directors) by (ii) the net per share offering
price of the Wireless Group Common Stock.
9. Certain Definitions.
Unless the context otherwise requires, the terms defined in this paragraph
10 of this Part C of this Article Third shall have, for all purposes of this
Part C of this Article Third, the meanings herein specified:
"Common Stock Group(W)" shall mean, as of any date, the interest of the
corporation in all of the businesses in which the corporation is or has been
engaged, directly or indirectly (either itself or through direct or indirect
subsidiaries, affiliates, joint ventures or other investments or any of their
predecessors or successors), and the respective assets and liabilities of the
corporation therein, other than (a) the Wireless Group Allocated Portion of the
Wireless Group, and (b) any businesses, assets or liabilities of the Liberty
Media Group.
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"Convertible Securities" shall mean any securities of the corporation
(other than Liberty Media Group Common Stock) or any Subsidiary of the
corporation that are convertible into, exchangeable for or evidence the right to
purchase any shares of Common Stock, Wireless Group Common Stock or of any class
of Liberty Media Group Common Stock, whether upon conversion, exercise or
exchange, or pursuant to anti-dilution provisions of such securities or
otherwise.
"Disposition" shall mean the sale, transfer, assignment or other
disposition (whether by merger, consolidation, sale or contribution of assets or
stock, or otherwise) by the corporation (or its successors) or any of its
Subsidiaries or properties or assets. Disposition shall not include a merger,
consolidation, exchange of shares or other business combination transaction
involving the corporation in which the corporation (or its successors)
continues, immediately following such transaction, to hold the same, direct and
indirect, interest in the business, assets and liabilities comprising the
Wireless Group that it held immediately prior to such transaction (other than as
a result of any action by any Person included in the Wireless Group).
"Fair Value" shall mean, in the case of equity securities or debt
securities of a class that has previously been publicly traded for a period of
at least three months, the Market Value thereof (if such Market Value, as so
defined, can be determined) or, in the case of an equity security or debt
security that has not been publicly traded for at least such period, means the
fair value per share of stock or per other unit of such other security, on a
fully distributed basis, as determined by an independent investment banking firm
experienced in the valuation of securities selected in good faith by the Board
of Directors; provided, however, that, in the case of property other than
securities, the "Fair Value" thereof shall be determined in good faith by the
Board of Directors based upon such appraisals or valuation reports of such
independent experts as the Board of Directors shall in good faith determine to
be appropriate in accordance with good business practice. Any such determination
of Fair Value shall be described in a statement filed with the records of the
actions of the Board of Directors.
"Group" shall mean the Common Stock Group(W), the Liberty Media Group or
the Wireless Group.
"Initial Issuance Date" shall mean the date of first issuance of any
shares of Wireless Group Common Stock.
"Market Capitalization" of any class or series of capital stock of the
corporation on any Trading Day shall mean the product of (a) the Market Value of
one share of such class or series on such Trading Day and (b) the number of
shares of such class or series outstanding on such Trading Day.
"Market Value" of any class or series of capital stock of the corporation
on any day shall mean the average of the high and low reported sales prices
regular way of a share of such class or series on such day (if such day is a
Trading Day, and, if such day is not a Trading Day, on the Trading Day
immediately preceding such day), or, in case no such reported sale takes place
on such Trading Day, the average of the reported closing bid and asked prices
regular way of a share of such class or series on such Trading Day, in either
case, on the New York Stock Exchange or, if the shares of such class or series
are not quoted on the New York Stock Exchange on such Trading Day, on the Nasdaq
National Market, or, if the shares of such class or series are not quoted on the
Nasdaq National Market on such Trading Day, the average of the closing bid and
asked prices of a share of such class or series in the over-the-counter market
on such Trading Day as furnished by any New York Stock Exchange member firm
selected from time to time by the corporation, or, if such closing bid and asked
prices are not made available by any such New York Stock Exchange member firm on
such Trading Day (including, without limitation, because such securities are not
publicly held), the market
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value of a share of such class or series as determined by the Board of
Directors; provided that, for purposes of determining the ratios set forth in
paragraph 6 of this Part C of this Article Third, (a) the "Market Value" of any
share of Common Stock, Wireless Group Common Stock or of any class of Liberty
Media Group Common Stock on any day prior to the "ex" date or any similar date
for any dividend or distribution paid or to be paid with respect to Common
Stock, Wireless Group Common Stock or such class of Liberty Media Group Common
Stock, as applicable, shall be reduced by the fair market value of the per share
amount of such dividend or distribution as determined by the Board of Directors,
and (b) the "Market Value" of any share of Common Stock, any share of Wireless
Group Common Stock or of any class of Liberty Media Group Common Stock on any
day prior to (i) the effective date of any subdivision (by stock split or
otherwise) or combination (by reverse stock split or otherwise) of outstanding
shares of Common Stock, Wireless Group Common Stock or of such class of Liberty
Media Group Common Stock, as applicable, or (ii) the "ex" date or any similar
date for any dividend or distribution with respect to the Common Stock, Wireless
Group Common Stock or any such class of Liberty Media Group Common Stock in
shares of Common Stock, Wireless Group Common Stock or such class of Liberty
Media Group Common Stock, as applicable, shall be appropriately adjusted to
reflect such subdivision, combination, dividend or distribution.
"Person" shall mean any individual, corporation, partnership, limited
liability company, joint venture, association, joint stock company, trust,
unincorporated organization, government or agency or political subdivision
thereof, or other entity, whether acting in an individual, fiduciary or other
capacity.
"Qualifying Subsidiary" of a Person shall mean a Subsidiary of such Person
in which such Person's ownership and voting interest is sufficient to satisfy
the ownership and voting requirements of the Internal Revenue Code of 1986, as
amended, and the regulations thereunder, for a distribution of such Person's
interest in such Subsidiary to the holders of Wireless Group Common Stock and,
in the event that the Wireless Group Allocation Fraction is less than one, the
holders of Common Stock (or any such securities into which the Wireless Group
Common Stock or the Common Stock may have been converted, reclassified or
changed or for which they may have been exchanged), as the case may be, to be
tax free to such holders.
"Subsidiary" shall mean, with respect to any Person, any corporation,
limited liability company or partnership 50% or more of whose outstanding voting
securities or membership or partnership interests, as the case may be, are,
directly or indirectly, owned by such Person.
"Trading Day" shall mean each weekday other than any day on which any
relevant class or series of capital stock of the corporation is not available
for trading on the New York Stock Exchange or the Nasdaq National Market or in
the over-the-counter market.
"Tax Event" shall mean receipt by the corporation of an opinion of tax
counsel of the corporation's choice, to the effect that, as a result of any
amendment to, clarification of, or change (including a prospective change) in,
the laws (or any interpretation or application of the laws) of the United States
or any political subdivision or taxing authority thereof or therein (including
enactment of any legislation and the publication of any judicial or regulatory
decision, determination or pronouncement) which amendment, clarification or
change is effective, announced, released, promulgated or issued on or after the
date of initial issuance of the Wireless Group Common Stock, regardless of
whether such amendment, clarification or change is issued to or in connection
with a
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proceeding involving the corporation, the Common Stock Group(W) or the Wireless
Group and whether or not subject to appeal, there is more than an insubstantial
risk that:
(i) for tax purposes, any issuance of Wireless Group Common Stock
would be treated as a sale or other taxable disposition by the corporation
or any of its Subsidiaries of any of the assets, operations or relevant
subsidiaries to which the Wireless Group Common Stock relates,
(ii) the existence of the Wireless Group Common Stock would subject
the corporation, its Subsidiaries or affiliates, or any of their respective
successors or shareholders to the imposition of tax or to other adverse tax
consequences, or
(iii) for tax purposes, either Common Stock or Wireless Group Common
Stock is not or, at any time in the future, will not be treated solely as
common stock of the corporation.
"Wireless Group" shall mean, as of any date that any shares of Wireless
Group Common Stock have been issued and continue to be outstanding, without
duplication, the direct or indirect interest of the corporation (either itself
or through direct or indirect subsidiaries, affiliates, joint ventures or other
investments, or any of their predecessors or successors) (a) in all of the
businesses, assets and liabilities reflected in the financial statements of the
Wireless Group dated , publicly filed by the corporation,
including any successor to the Wireless Group by merger, consolidation or sale
of all or substantially all of its assets (whether or not in connection with a
Wireless Group Related Business Transaction), (b) the other assets and
liabilities (contingent or otherwise) of the corporation and its Subsidiaries
primarily related to the businesses, assets and liabilities described in clause
(a) and all net income and net losses arising in respect thereof after such
date, (c) all assets, liabilities and businesses acquired by the Wireless Group
or acquired by the corporation or any of its Subsidiaries for the account of, or
contributed, allocated or otherwise transferred to, the Wireless Group
(including the net proceeds of any new issuance for the account of the Wireless
Group of any new shares of Wireless Group Common Stock or Convertible
Securities), in each case, after the date of such financial statements and as
determined by the Board of Directors in accordance with the provisions of
paragraph 9 of this Part C of this Article Third, and (d) the proceeds of any
Disposition of any of the foregoing; provided, however, that the Wireless Group
shall not include (a) any assets, liabilities or businesses disposed of after
the date of such financial statements or (b) any assets, liabilities or
businesses allocated to the Common Stock Group(W) or otherwise distributed or
otherwise transferred from the Wireless Group, whether to the Common Stock
Group(W), to holders of shares of Wireless Group Common Stock or otherwise, in
each case after the date of such financial statements and as determined by the
Board of Directors in accordance with the provisions of paragraph 9 of this Part
C of this Article Third. The Wireless Group shall not include any business,
assets or liabilities of the Liberty Media Group.
"Wireless Group Allocated Portion" shall mean, with respect to the
Wireless Group as a whole, or any dividend, distribution, payment, consideration
or other amount or allocation requiring apportionment between the holders of
Wireless Group Common Stock (other than the corporation and its Subsidiaries),
on the one hand, and the Common Stock Group(W), on the other hand, the
following: (a) in the case of the Wireless Group as a whole, the proportion of
such Group represented by the Wireless Group Allocation Fraction, and (b) in the
case of any other amount or allocation, the product of (i) such amount or
allocation and (ii) the Wireless Group Allocation Fraction.
"Wireless Group Allocation Fraction" shall mean, as of any date of
determination, a fraction, the numerator of which shall be the number of shares
of Wireless Group Common Stock outstanding on such date and the denominator of
which shall be a number initially determined by the Board of Directors, in its
sole discretion, prior to the Initial Issuance Date, subject to adjustment from
time to
A-14
<PAGE> 153
time as described in paragraph 9 of this Part C of this Article Third, provided
that such fraction shall in no event be greater than one. If the holders of any
securities of the corporation or any other Person that are convertible into or
exercisable or exchangeable for shares of Wireless Group Common Stock are
entitled to participate in any dividend or other distribution with respect to
the Wireless Group Common Stock, such shares so issuable upon such conversion,
exercise or exchange shall be taken into account in calculating the Wireless
Group Allocation Fraction and any amount payable to the Common Stock Group(W) in
such manner as the Board of Directors determines to be appropriate.
"Wireless Group Available Dividend Amount" shall mean, as of any date, the
Wireless Group Allocated Portion of the excess of (a) the amount by which the
total assets of the Wireless Group exceed the total liabilities of the Wireless
Group as of such date over (b) the sum of (i) the par value of all issued shares
of Wireless Group Common Stock and each class or series of Preferred Stock
attributed to the Wireless Group, (ii) the amount of the consideration received
for any shares of Preferred Stock attributed to the Wireless Group without par
value that have been issued, except such part of the consideration therefor as
may have been allocated to surplus in a manner permitted by law, and (iii) any
amount not included in subclauses (i) and (ii) above that the corporation (by
appropriate action of the Board of Directors) has transferred to stated capital
specifically in respect of Wireless Group Common Stock, minus (c) all reductions
from such sums set forth in clauses (i), (ii) and (iii) above as have been
effected in a manner permitted by law; provided, however, that, in the event
that the law governing the corporation changes from that governing the
corporation on the date the adoption of the Amendment to this Certificate
pursuant to which the Wireless Group Common Stock was authorized (whether
because of amendment of the applicable law or because of a change in the
jurisdiction of incorporation of the corporation through merger or otherwise),
the Wireless Group Available Dividend Amount shall mean the amount of dividends,
as determined by the Board of Directors, that could be paid by a corporation
(governed under such applicable law) having the assets and liabilities of the
Wireless Group, an amount of outstanding common stock (and having an aggregate
par value) equal to the amount (and aggregate par value) of the outstanding
Wireless Group Common Stock and of each class or series of Preferred Stock
attributed to the Wireless Group and having an amount of earnings or loss or
other relevant corporate attributes as reasonably determined by the Board of
Directors in light of all factors deemed relevant by the Board of Directors.
"Wireless Group Net Proceeds" shall mean, as of any date, with respect to
any Disposition of any of the properties and assets of the Wireless Group, an
amount, if any, equal to the Wireless Group Allocated Portion of the gross
proceeds of such Disposition after any payment of, or reasonable provision for,
(a) any taxes payable by the corporation or any other member of the Common Stock
Group in respect of such Disposition or in respect of any mandatory dividend or
redemption resulting from such Disposition (or that would have been payable but
for the utilization of tax benefits attributable to the Common Stock Group(W) or
the Liberty Media Group), (b) any transaction costs borne by the Common Stock
Group(W) in connection with such Disposition, including, without limitation, any
legal, investment banking and accounting fees and expenses borne by the Common
Stock Group(W) in connection with such Disposition, (c) any liabilities and
other obligations (contingent or otherwise) of the Wireless Group borne by the
Common Stock Group(W) in connection with such Disposition, including, without
limitation, any indemnity or guarantee obligations incurred by the Common Stock
Group(W) in connection with the Disposition or any liabilities assumed by the
Common Stock Group(W) for future purchase price adjustments, and (d) any
preferential amounts, accumulated and unpaid dividends and other obligations in
respect of Preferred Stock attributed to the Wireless Group. To the extent the
proceeds of any Disposition include any securities or other property other than
cash, the Board of Directors shall determine the value of such securities or
property; provided that the value of any marketable securities included in
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such proceeds shall be the average of the daily Market Value of such securities
for the 10 consecutive Trading Days beginning on the 15th Trading Day following
consummation of the Disposition.
"Wireless Group Related Business Transaction" shall mean any Disposition
of all or substantially all the properties and assets attributed to the Wireless
Group in a transaction or series of related transactions that results in the
corporation or one or more of its Subsidiaries receiving in consideration of
such properties and assets primarily equity securities (including, without
limitation, capital stock, debt securities convertible into or exchangeable for
equity securities or interests in a general or limited partnership or limited
liability company, without regard to the voting power or other management or
governance rights associated therewith) of any entity that (a) acquires such
properties or assets or succeeds (by merger, formation of a joint venture or
otherwise) to the business conducted with such properties or assets or controls
such acquiror or successor, and (b) which the Board of Directors determines is
primarily engaged or proposes to engage primarily in one or more businesses
similar or complementary to the businesses conducted by the Wireless Group prior
to such Disposition.
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<PAGE> 155
APPENDIX B
FORM OF BY-LAW AMENDMENT
[NOTE: THE AT&T WIRELESS GROUP CAPITAL STOCK COMMITTEE WILL BE ADDED TO THE
BY-LAW PROVISION ESTABLISHING STANDING COMMITTEES SUCH AS THE AUDIT COMMITTEE
AND THE COMPENSATION COMMITTEE.]
AT&T Wireless Group Capital Stock Committee. The board of directors shall
form an AT&T Wireless Group Capital Stock Committee, the members of which shall
be selected by the board of directors of the Corporation. The board of directors
of the Corporation shall delegate to the AT&T Wireless Group Capital Stock
Committee the authority to, and the AT&T Wireless Group Capital Stock Committee
will have the authority to, (i) interpret, make determinations under, and
oversee the implementation of the policies set forth in the Policy Statement
Regarding AT&T Wireless Group Tracking Stock Matters; (ii) review the policies,
programs and practices of the Corporation relating to (a) the business and
financial relationships between the Corporation or any of its units (other than
the Liberty Media Group) and the AT&T Wireless Group, (b) dividends in respect
of, disclosures to shareholders and the public concerning, and transactions by
the Corporation or any of its subsidiaries (other than subsidiaries included in
the Liberty Media Group) in, shares of AT&T Wireless Group Common Stock, and (c)
any matters arising in connection therewith, all to the extent the AT&T Wireless
Group Capital Stock Committee may deem appropriate; and (iii) recommend such
changes in such policies, programs and practices as the AT&T Wireless Group
Capital Stock Committee may deem appropriate. In performing this function, the
AT&T Wireless Group Capital Stock Committee's role shall not be to make
decisions concerning matters referred to its attention, but, rather, to oversee
the process by which decisions concerning such matters are made. The AT&T
Wireless Group Capital Stock Committee shall have and may exercise such other
powers, authority and responsibilities as may be determined from time to time by
the board of directors of the Corporation.
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<PAGE> 156
AT&T CORP.
BOARD OF DIRECTORS
POLICY STATEMENT REGARDING
WIRELESS GROUP TRACKING STOCK MATTERS
1. GENERAL POLICY. It is the policy of the Board of Directors (the
"BOARD") of AT&T Corp. ("AT&T") that:
(a) all material matters as to which the holders of the Common Stock
and the holders of Wireless Group Common Stock may have potentially
divergent interests shall be resolved in a manner that the Board (or the
Wireless Group Capital Stock Committee) determines to be in the best
interests of AT&T and all of its common shareholders, after giving fair
consideration to the potentially divergent interests and all other relevant
interests of the holders of the separate classes of common stock of AT&T;
and
(b) a process of fair dealing will govern the relationship between the
Common Stock Group and the Wireless Group and the means by which the terms
of any material transaction between them will be determined.
2. RELATIONSHIP BETWEEN THE GROUPS.
AT&T will seek to manage the Common Stock Group and the Wireless Group in a
manner designed to maximize the operations, unique assets and value of both
Groups, and with complementary deployments of capital and facilities. AT&T
expects that the operating relationship between the two Groups will include the
coordination and use of bundled offers, network services, marketing, sales,
branding, and other intellectual property and technology. In addition, there
will be various financial arrangements between the two groups, including with
respect to debt, other financings and taxes.
(a) General. Except as otherwise provided in this policy statement,
all material commercial transactions between the Common Stock Group and the
Wireless Group will be on commercially reasonable terms taken as a whole
and will be subject to the review and approval of the Wireless Group
Capital Stock Committee.
(b) Allocation of Corporate Overhead and Support Services. Each Group
will have access to the support services of the other Group, including
customer care and billing platforms.
With respect to shared corporate services that arise as a result of
being part of a combined entity (e.g., securities filing and financial
reporting services), costs relating to such services will be directly
attributed to the Group utilizing such services, and to the extent such
costs are not directly attributable, allocated between the Groups on a fair
and reasonable basis as determined by the Board. With respect to other
support services (e.g., billing and purchasing services), while the Groups
will seek to obtain for the combined Groups the lowest aggregate cost for
all such services, each Group will be entitled to procure such services
from the other Group or from third parties.
(c) Sourcing and Provision of Other Services. Other than corporate
overhead and support services, each of the Common Stock Group and the
Wireless Group shall use exclusively the services offered by the other
group for use in their respective multi-product bundles. Such services will
be provided by the Group supplying the services at the best price offered
by that Group to third parties in similar situations when taking into
account all relevant factors (e.g., availability of wholesale pricing,
volumes, peak/off-peak usage and length of commitment).
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<PAGE> 157
(c) Marketing of Services. As a general matter, each Group will
continue to design, develop, deploy, produce, market, sell and service
their own service offerings and choose their own selected sales channels.
In addition, each Group will be able to negotiate for the use of the sales
channels of the other Group to offer their services. Notwithstanding the
foregoing, the Wireless Group will not develop, deploy, produce, market or
sell: (i) fixed wireless voice and data services to residences located in
the Common Stock Group's currently owned and operated broadband service
areas or after acquired owned and operated broadband service areas in which
fixed wireless has not begun deployment at the time of acquisition, (ii)
fixed wireless voice and data services to businesses that are otherwise
connected by AT&T fiber or broadband, and (iii) fixed wireless voice
services to residences located in broadband service areas served by a cable
operator in which the Common Stock Group has or has contracted for, as of
the initial issuance of Wireless Group Common Stock, a substantial equity
interest if such operator offers AT&T branded residential telephony
services within a commercially reasonable time, unless prior thereto the
Wireless Group has received the approval of the Board. Such approval will
be based on the value and likelihood, considering all terms and conditions,
of any actual or prospective AT&T branded telephony offers by such cable
operator. Furthermore, the Wireless Group is subject to all existing
agreements and arrangements (including reasonable amendments thereto)
entered into by AT&T with third parties. With respect to residences located
in the same marketing areas as AT&T's broadband service areas, the Wireless
Group will, to the extent practical, conform its voice and data offers to
those of the Common Stock Group and the Common Stock Group will have the
non-exclusive right to market the Wireless Group's fixed wireless services
for which it will receive a sales agency fee. Marketing areas may include
those markets in which AT&T has significant cable licenses and in which
geographic proximity, marketing overlap or other factors support
coordinated marketing and sales activities, including development of
specific consumer and business service offers. Each Group will work
collaboratively with the other Group to understand and take into account
the other's expansion, acquisition, deployment, marketing and sales plans,
with the goal of minimizing overlaps and conflicts between the two Groups.
When the combined services of the two Groups are bundled or offered
together and the total cost to consumers of each of those services are
separately identified on a billing statement, each of the Common Stock
group and the Wireless Group will control the pricing of its respective
services and receive the associated revenues. The Group which sells the
service to the public will receive an appropriate fee from the other Group
for selling the service.
In a bundled product offering where the services of the two Groups are
integrated and the total cost to consumers of each of those services are
not separately identified on a billing statement, the Groups will work
collaboratively to determine the nature of their arrangements and may also
source the services of the other Group as described above; provided,
however, that neither Group may offer a bundle of services comprised
primarily of the services of the other Group without that other Group's
agreement.
(d) No Inter-Group Interest in Common Stock Group. The Wireless Group
shall not acquire an Inter-Group Interest in the Common Stock Group.
3. CORPORATE OPPORTUNITIES. The Board will allocate any business
opportunities and operations, any acquired assets and businesses and any assumed
liabilities between the Common Stock Group and the Wireless Group, in whole or
in part, as it considers to be in the best interests of AT&T and its
shareholders as a whole and as contemplated by the provisions of these policies.
To the extent a business opportunity or operation, an acquired asset or
business, or an assumed liability would be suitable to be undertaken by or
allocated to either Group, it will be allocated by the Board in its business
judgment or in accordance with procedures adopted by the Board from time to time
to
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ensure that decisions will be made in the best interests of AT&T and its
shareholders as a whole. Any such allocation may involve the consideration of a
number of factors that the Board determines to be relevant, including, without
limitation, whether the business opportunity or operation, the acquired asset or
business, or the assumed liability is principally within the existing scope of a
Group's business and whether a Group is better positioned to undertake or have
allocated to it such business opportunity or operation, acquired assets or
business or assumed liability. Subject to and without limiting the foregoing,
and subject to pre-existing agreements relating to international markets, the
Board currently intends to allocate future mobile and fixed wireless
opportunities to the Wireless Group.
4. DIVIDEND POLICY. Subject to the limitations set forth in the Charter,
including any preferential rights of any series of preferred stock of AT&T, and
to the limitations of applicable law, holders of shares of Common Stock or
Wireless Group Common Stock will be entitled to receive dividends on such stock
when, as and if authorized and declared by the Board. The payment of dividends
on the Common Stock will be a business decision to be made by the Board from
time to time based upon the results of operations, financial condition and
capital requirements of AT&T and such other factors as the Board considers
relevant. Payment of dividends on the Common Stock may be restricted by loan
agreements, indentures and other transactions entered into by AT&T from time to
time.
With respect to the Wireless Group Common Stock, because the Wireless Group
is expected to require significant capital commitments to finance its operations
and fund its future growth, AT&T does not expect to pay any dividends on shares
of Wireless Group Common Stock for the foreseeable future. If and when the Board
does determine to pay any dividends on shares of Wireless Group Common Stock,
any such determination will also be subject to factors similar to those
described above with respect to the payment of dividends on the Common Stock.
5. FINANCIAL REPORTING. AT&T will prepare and include in its filings with
the Securities and Exchange Commission under the Securities Exchange Act of
1934, as amended, consolidated financial statements of AT&T and combined
financial statements of the Wireless Group (for so long as the Wireless Group
Common Stock is outstanding). The combined financial statements of the Wireless
Group will reflect the combined financial position, results of operations and
cash flows of the businesses attributed thereto and in the case of annual
financial statements shall be audited.
6. WIRELESS GROUP CAPITAL STOCK COMMITTEE. AT&T's by-laws will provide for
a standing committee of the Board to be known as the Wireless Group Capital
Stock Committee. The Wireless Group Capital Stock Committee will have and
exercise such powers, authority and responsibilities as the Board may delegate
to such Committee, which will initially include authority to (a) interpret, make
determinations under, and oversee the implementation of these policies, other
than as they relate to dividends, with respect to which all determinations will
be made solely by the Board, (b) adopt additional general policies governing the
relationship between the Wireless Group and the Common Stock Group, and (c)
engage the services of accountants, investment bankers, appraisers, attorneys
and other service providers to assist it in discharging its duties. In making
determinations in connection with these policies, the members of the Board and
the Wireless Group Capital Stock Committee will act in a fiduciary capacity and
pursuant to legal guidance concerning their respective obligations under
applicable law. The delegation of responsibilities to the Wireless Group Capital
Stock Committee will be subject to such changes as may be determined by the
Board.
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7. DEFINITIONS. Capitalized terms not defined in this policy statement
shall have the meanings set forth in the Charter. References throughout this
policy statement to "ARTICLES," set in all capital letters, are references to
ARTICLES in the Charter.
7.1 Charter.
"Charter" means the Restated Certificate of Incorporation of AT&T, as
amended from time to time.
7.2 Common Stock.
"Common Stock" means the Common Stock as defined in Part A of ARTICLE THIRD
of the Charter.
7.3 Common Stock Group.
"Common Stock Group" means the Common Stock Group(W) as defined in Part C
of ARTICLE THIRD of the Charter.
7.4 Wireless Group.
"Wireless Group" means the Wireless Group as defined in Part C of ARTICLE
THIRD of the Charter.
7.5 Wireless Group Common Stock.
"Wireless Group Common Stock" means the Wireless Group Common Stock as
defined in Part A of ARTICLE THIRD of the Charter.
8. AMENDMENT AND MODIFICATION OF THESE POLICIES. These policies and any
resolution implementing the provisions hereof may at any time and from time to
time be amended, modified or rescinded by the Board, and the Board may adopt
additional or other policies or make exceptions with respect to the application
of these policies in connection with particular facts and circumstances, all as
the Board may determine, consistent with its fiduciary duties to AT&T and all of
its shareholders.
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APPENDIX C
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HISTORICAL FINANCIAL STATEMENTS
AT&T WIRELESS GROUP
Report of Independent Accountants......................... C-2
Combined Statements of Income for the years ended December
31, 1998, 1997 and 1996................................ C-3
Combined Balance Sheets as of December 31, 1998 and
1997................................................... C-4
Combined Statements of Changes in Shareowner's Equity for
the years ended December 31, 1998, 1997 and 1996....... C-5
Combined Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996....................... C-6
Notes to Combined Financial Statements.................... C-7
Unaudited Combined Statements of Income for the three and
nine months ended September 30, 1999 and 1998.......... C-25
Unaudited Combined Balance Sheets as of September 30, 1999
and December 31, 1998.................................. C-26
Unaudited Combined Statements of Changes in Shareowner's
Equity for the nine months ended September 30, 1999 and
1998................................................... C-27
Unaudited Combined Statements of Cash Flows for the nine
months ended September 30, 1999 and 1998............... C-28
Notes to Unaudited Combined Financial Statements.......... C-29
PRO FORMA FINANCIAL STATEMENTS
AT&T WIRELESS GROUP
Unaudited Pro Forma Condensed Combined Financial
Statements............................................. C-34
Unaudited Pro Forma Condensed Combined Statement of Income
for the year ended December 31, 1998................... C-35
Unaudited Pro Forma Condensed Combined Statement of Income
for the nine months ended September 30, 1999........... C-36
Unaudited Pro Forma Condensed Combined Balance Sheet as of
September 30, 1999..................................... C-37
Notes to Unaudited Pro Forma Condensed Combined Financial
Statements............................................. C-38
AT&T COMMON STOCK GROUP
Unaudited Pro Forma Condensed Combined Financial
Statements............................................. C-39
Unaudited Pro Forma Condensed Combined Statement of Income
for the year ended December 31, 1998................... C-40
Unaudited Pro Forma Condensed Combined Statement of Income
for the nine months ended September 30, 1999........... C-41
Unaudited Pro Forma Condensed Combined Balance Sheet as of
September 30, 1999..................................... C-42
Notes to Unaudited Pro Forma Condensed Combined Financial
Statements............................................. C-44
</TABLE>
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<PAGE> 161
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareowner of the AT&T Wireless Group:
In our opinion, the accompanying combined balance sheets and the related
combined statements of income and changes in shareowner's equity and of cash
flows present fairly, in all material respects, the financial position of the
AT&T Wireless Group at December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with accounting principles generally accepted
in the United States. These financial statements are the responsibility of the
AT&T Wireless Group's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The AT&T Wireless Group is a fully integrated business unit of AT&T Corp.;
consequently, as indicated in Note 1, these combined financial statements have
been derived from the consolidated financial statements and accounting records
of AT&T Corp. and reflect certain assumptions and allocations. Moreover, as
indicated in Note 1, the AT&T Wireless Group relies on AT&T Corp. for
administrative, management and other services. The financial position, results
of operations and cash flows of the AT&T Wireless Group could differ from those
that would have resulted had the AT&T Wireless Group operated autonomously or as
an entity independent of AT&T Corp. As more fully discussed in Note 1, the
combined financial statements of the AT&T Wireless Group should be read in
conjunction with the audited consolidated financial statements of AT&T Corp.
PRICEWATERHOUSECOOPERS LLP
January 6, 2000
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<PAGE> 162
AT&T WIRELESS GROUP
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1998 1997 1996
------ ------ ------
DOLLARS IN MILLIONS
<S> <C> <C> <C>
REVENUES
Services revenues........................................... $4,779 $4,249 $3,887
Equipment revenues.......................................... 627 419 359
Total revenues.............................................. 5,406 4,668 4,246
OPERATING EXPENSES
Network and other costs of services......................... 2,428 1,770 1,629
Depreciation and amortization............................... 1,079 826 660
Selling, general and administrative......................... 2,122 1,982 1,723
Asset impairment and restructuring charges.................. 120 160 --
Total operating expenses.................................... 5,749 4,738 4,012
OPERATING (LOSS) INCOME..................................... (343) (70) 234
Other income, net........................................... 764 288 346
Interest expense............................................ 120 -- --
Income before income taxes.................................. 301 218 580
Provision for income taxes.................................. 137 93 263
NET INCOME.................................................. 164 125 317
Dividend requirements on preferred stock held by AT&T,
net....................................................... 56 56 56
NET INCOME ATTRIBUTABLE TO AT&T'S RESIDUAL INTEREST......... $ 108 $ 69 $ 261
</TABLE>
The notes are an integral part of these combined financial statements.
C-3
<PAGE> 163
AT&T WIRELESS GROUP
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------
1998 1997
-------- --------
DOLLARS IN MILLIONS
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 27 $ 6
Accounts receivable, less allowances of $74 and $74......... 885 638
Inventories................................................. 206 189
Deferred income taxes....................................... 91 107
Prepaid expenses and other current assets................... 29 36
TOTAL CURRENT ASSETS........................................ 1,238 976
Property, plant and equipment, net.......................... 5,182 5,073
Licensing costs, net of accumulated amortization of $1,290
and $1,083................................................ 7,928 8,403
Investments................................................. 3,795 3,233
Goodwill, net and other assets.............................. 1,317 1,355
TOTAL ASSETS................................................ $19,460 $19,040
LIABILITIES
Accounts payable............................................ $ 628 $ 476
Payroll and benefit-related liabilities..................... 202 242
Debt maturing within one year............................... 89 47
Other current liabilities................................... 707 717
TOTAL CURRENT LIABILITIES................................... 1,626 1,482
Long-term debt due to AT&T.................................. 2,500 2,400
Deferred income taxes....................................... 3,662 3,771
Other long-term liabilities................................. 35 35
TOTAL LIABILITIES........................................... 7,823 7,688
MINORITY INTEREST........................................... 105 165
SHAREOWNER'S EQUITY
Preferred stock held by AT&T................................ 1,000 1,000
AT&T's residual interest.................................... 10,535 10,139
Accumulated other comprehensive income...................... (3) 48
TOTAL SHAREOWNER'S EQUITY................................... 11,532 11,187
TOTAL LIABILITIES AND SHAREOWNER'S EQUITY................... $19,460 $19,040
</TABLE>
The notes are an integral part of these combined financial statements.
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AT&T WIRELESS GROUP
COMBINED STATEMENTS OF CHANGES IN SHAREOWNER'S EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
DOLLARS IN MILLIONS
<S> <C> <C> <C>
PREFERRED STOCK HELD BY AT&T.............................. $ 1,000 $ 1,000 $ 1,000
AT&T'S RESIDUAL INTEREST
Balance at beginning of year............................ 10,139 9,433 8,697
Net income attributable to AT&T's residual interest..... 108 69 261
Transfers from parent, net.............................. 288 637 475
------- ------- -------
Balance at end of year.................................... 10,535 10,139 9,433
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at beginning of year............................ 48 64 70
Other comprehensive income (net of taxes of $31, $10,
$4).................................................. (51) (16) (6)
------- ------- -------
Balance at end of year.................................... (3) 48 64
------- ------- -------
TOTAL SHAREOWNER'S EQUITY................................. $11,532 $11,187 $10,497
======= ======= =======
SUMMARY OF TOTAL COMPREHENSIVE INCOME:
Net income attributable to AT&T's residual interest..... $ 108 $ 69 $ 261
Dividend requirements on preferred stock held by AT&T,
net.................................................. 56 56 56
------- ------- -------
Net income.............................................. 164 125 317
Other comprehensive income.............................. (51) (16) (6)
------- ------- -------
TOTAL COMPREHENSIVE INCOME................................ $ 113 $ 109 $ 311
======= ======= =======
</TABLE>
The notes are an integral part of these combined financial statements.
C-5
<PAGE> 165
AT&T WIRELESS GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
DOLLARS IN MILLIONS
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................................ $ 164 $ 125 $ 317
Adjustments to reconcile net income to net cash provided
by operating activities:
Gains on sale/exchange of wireless investments.......... (600) (57) (159)
Asset impairment and restructuring charges.............. 120 80 --
Depreciation and amortization........................... 1,079 826 660
Undistributed equity earnings........................... (114) (222) (205)
Minority interest in consolidated subsidiaries.......... (35) 11 18
Provision for uncollectibles............................ 99 116 106
Increase in accounts receivable......................... (307) (90) (163)
Increase in accounts payable............................ 174 152 97
Net (increase) decrease in other operating assets and
liabilities.......................................... (143) 82 62
Other adjustments, net.................................. (23) 315 450
NET CASH PROVIDED BY OPERATING ACTIVITIES................. 414 1,338 1,183
INVESTING ACTIVITIES
Capital expenditures...................................... (1,219) (1,931) (1,832)
Acquisitions of licenses.................................. (65) (443) (327)
Equity investment distributions and sales................. 1,354 294 176
Equity investment contributions and purchases............. (156) (84) (32)
Net dispositions of businesses............................ 324 -- 156
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES....... 238 (2,164) (1,859)
FINANCING ACTIVITIES
Increase (decrease) in short-term borrowings.............. 43 -- (4)
Increase in long-term debt due to AT&T.................... 100 200 200
Dividend requirements on preferred stock, net............. (56) (56) (56)
Transfers (to) from parent, net........................... (694) 611 476
Other financing activities, net........................... (24) (13) 94
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES....... (631) 742 710
Net increase (decrease) in cash and cash equivalents...... 21 (84) 34
Cash and cash equivalents at beginning of year............ 6 90 56
Cash and cash equivalents at end of year.................. $ 27 $ 6 $ 90
</TABLE>
The notes are an integral part of these combined financial statements.
C-6
<PAGE> 166
AT&T WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The AT&T Wireless Group is a fully integrated business unit of AT&T Corp.
The AT&T Wireless Group provides domestic wireless voice and data services in
the 850 megahertz cellular markets and 1900 megahertz Personal Communications
Services (PCS) markets. The AT&T Wireless Group also sells handsets and
accessories to its customers, which generally result in a loss. In addition, the
AT&T Wireless Group results include their aviation communications business,
earnings or losses associated with equity interests in wireless communications
ventures and partnerships, both in the United States and internationally, and
the costs associated with the development of fixed wireless technology. The
results of the messaging services business are included through October 2, 1998
(date of sale). The combined financial statements reflect the results of
operations, financial position, changes in shareowner's equity and cash flows of
these businesses of AT&T as if these combined businesses 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 shareowner's equity and cash flows of the AT&T Wireless Group had it
been a separate, stand-alone entity during the periods presented. The combined
financial statements of the AT&T Wireless Group should be read in conjunction
with the audited consolidated financial statements of AT&T.
As an integrated business unit of AT&T, the AT&T Wireless Group does not
prepare separate financial statements in accordance with generally accepted
accounting principles (GAAP) in the normal course of operations. However, these
combined financial statements were prepared in accordance with GAAP for purposes
of this filing. The combined financial statements of the AT&T Wireless Group
reflect the assets, liabilities, revenues and expenses directly attributable to
the AT&T Wireless Group, as well as allocations deemed reasonable by management,
to present the financial position, results of operations 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, and management considers the allocations to be reasonable. Changes
in AT&T's residual interest represent net transfers to or from AT&T, after
giving effect to the net income or loss attributable to AT&T's residual interest
in the AT&T Wireless Group during the period and have been 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. Earnings per
share disclosure has not been presented as the AT&T Wireless Group is a business
unit of AT&T and earnings per share data is not considered meaningful.
The capital structure of the AT&T Wireless Group has been assumed based
upon AT&T's historical capital ratio adjusted for certain items. This has
resulted in $2,500, $2,400 and $2,200 in intercompany indebtedness at December
31, 1998, 1997 and 1996, respectively, paying annual interest at 7.75%. The
interest rate charged is designed to be substantially equivalent to the interest
rates 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. In addition, the AT&T Wireless Group has issued to AT&T $1
billion of 9% cumulative preferred stock that, subject to the approval of the
AT&T Wireless Group capital stock committee, is redeemable at the option of
AT&T. At the time of the initial public offering, $2 billion of the intercompany
indebtedness is
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<PAGE> 167
AT&T WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
anticipated to be converted into $2 billion of 9% cumulative preferred stock.
Interest expense presented is net of $75, $178 and $163 amounts capitalized for
the years ended December 31, 1998, 1997 and 1996, respectively.
General corporate overhead related to AT&T's corporate headquarters and
common support divisions has been allocated to the AT&T Wireless Group based on
the ratio of the AT&T Wireless Group's external costs and expenses to AT&T's
consolidated external costs and expenses, adjusted for any functions that the
AT&T Wireless Group performs on its own. However, the costs of these services
charged to the AT&T Wireless Group are not necessarily indicative of the costs
that would have been incurred if the AT&T Wireless Group had performed these
functions entirely as a stand-alone entity, nor are they indicative of costs
that will be charged in the future.
Consolidated income tax provisions, related tax payments or refunds, and
deferred tax balances of AT&T have been allocated to the AT&T Wireless Group
based principally on the taxable income and tax credits directly attributable to
the AT&T Wireless Group. These allocations reflect the AT&T Wireless Group's
contribution to AT&T's consolidated taxable income and the consolidated tax
liability and tax credit position. Prior to the issuance of any shares of the
AT&T Wireless Group tracking stock, the AT&T Common Stock Group and the AT&T
Wireless Group have agreed to enter into a tax sharing agreement that will
provide for tax sharing payments based on the taxes or tax benefits of a
hypothetical affiliated group consisting of the AT&T Common Stock Group and the
AT&T Wireless Group. Based on this agreement, the consolidated tax liability
before credits will be allocated between the groups, based on each group's
contribution to consolidated taxable income of the hypothetical group. For
purposes of the tax sharing agreement, the 9% cumulative preferred stock held by
AT&T will be treated as if it were an intercompany debt instrument and,
accordingly, tax sharing payments will be calculated by treating coupon payments
on the preferred stock as interest expense to the AT&T Wireless Group and
interest income to the AT&T Common Stock Group. The preferred stock dividends,
net of the amounts recorded in accordance with the methodology contained in the
tax sharing agreement, have been recorded in AT&T Wireless Group's equity.
Consolidated tax credits of the hypothetical group will be allocated between
groups based on each group's contribution to each tax credit.
CASH EQUIVALENTS
All highly liquid investments with original maturities of generally three
months or less are considered to be cash equivalents.
CASH FLOWS
For purposes of the combined statements of cash flows, all transactions
between the AT&T Wireless Group and AT&T, except for purchase business
combinations and initial investments in joint ventures and partnerships which
were funded by AT&T and contributed by AT&T to the AT&T Wireless Group, have
been accounted for as having been settled in cash at the time the transaction
was recorded by the AT&T Wireless Group.
INVENTORIES
Inventories, which consist principally of handsets and accessories, are
recorded at the lower of cost or market. Cost is principally determined by the
first-in, first-out (FIFO) method.
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<PAGE> 168
AT&T WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost, unless impaired, and
depreciation is determined based upon the assets' estimated useful lives.
Depreciation is calculated on a straight-line basis according to the following
useful lives:
<TABLE>
<S> <C>
Wireless communications systems and other equipment 3-15 years
Building and improvements 5-20 years
</TABLE>
When the AT&T Wireless Group sells, disposes or retires assets, the related
gains or losses are included in operating results.
During 1998, the AT&T Wireless Group completed a review of the estimated
service lives of certain wireless communications equipment. As a result,
effective January 1, 1998, the estimated service lives of such equipment were
changed from 12 years to varying periods ranging primarily from seven to ten
years, with certain assets being changed to 15 years, depending on the nature of
the equipment. The net impact of these changes to 1998 results is an annual
increase in depreciation expense of approximately $42 and an annual reduction in
net income of approximately $26.
The AT&T Wireless Group capitalizes costs associated with software
development in accordance with Statement of Financial Accounting Standards
(SFAS) No. 86, "Accounting for Costs of Capitalized Software to be Sold, Leased
or Otherwise Marketed" and related guidance. In accordance with this standard,
the AT&T Wireless Group capitalizes costs associated with the development of
application software incurred from the time technological feasibility is
established until the software is ready to provide service to customers.
In 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." Among other provisions, the SOP
requires that entities capitalize certain internal-use software costs once
certain criteria are met. The SOP is effective for financial statements for
fiscal years beginning after December 15, 1998, though early adoption is
encouraged. The AT&T Wireless Group elected to early adopt this SOP in 1998. The
annual impact of this adoption was a reduction of approximately $12 in selling,
general and administrative expenses and an annual increase in net income of
approximately $7 for the year ended December 31, 1998.
LICENSING COSTS
Licensing costs are primarily incurred to develop or acquire cellular (850
megahertz) and PCS (1900 megahertz) licenses. In addition, licensing costs
include costs incurred to develop or acquire 38 gigahertz licenses. Amortization
begins with the commencement of service to customers and is computed using the
straight-line method over periods ranging from 35 to 40 years.
CAPITALIZED INTEREST
The AT&T Wireless Group capitalizes interest which is applicable to the
construction of significant additions to property, plant, and equipment and with
the acquisitions of licenses until the assets are placed into service. These
costs are amortized over the related assets' estimated useful lives.
C-9
<PAGE> 169
AT&T WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
INVESTMENTS
Investments in which the AT&T Wireless Group exercises significant
influence but which the AT&T Wireless Group does not control are accounted for
under the equity method of accounting. Investments in which the AT&T Wireless
Group has no significant influence over the investee are accounted for under the
cost method of accounting. Under the equity method, investments are stated at
cost and are adjusted for the AT&T Wireless Group's share of earnings or losses,
contributions and distributions. The excess of the investment over the
underlying book value of the investees' net assets is being amortized over
periods ranging from 35 to 40 years.
Investments covered under the scope of SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," are classified as "available
for sale" and are carried at fair value with any unrealized gain or loss, net of
tax, being included as a component of shareowner's equity.
GOODWILL
Goodwill is the excess of the purchase price over the fair value of net
assets acquired in business combinations accounted for as purchases. Goodwill is
amortized on a straight-line basis over periods not exceeding 40 years.
VALUATION OF LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. It is
reasonably possible that these assets could become impaired as a result of
technological or other industry changes. For assets the AT&T Wireless Group
intends to hold for use, if the total of the expected future undiscounted cash
flows is less than the carrying amount of the asset, a loss is recognized for
the difference between the fair value and carrying value of the asset. For
assets the AT&T Wireless Group intends to dispose of, a loss is recognized for
the amount that the estimated fair value, less costs to sell, is less than the
carrying value of the assets.
REVENUE RECOGNITION
Wireless services revenues are recognized based upon minutes of traffic
processed and contracted fees. Equipment and other services revenues are
recognized when the products are delivered and accepted by customers and when
services are provided in accordance with contract terms.
ADVERTISING AND PROMOTIONAL COSTS
Costs of advertising and promotions are expensed as incurred. Advertising
and promotional expenses were $344, $305 and $288 in 1998, 1997 and 1996,
respectively.
INCOME TAXES
The AT&T Wireless Group is not a separate taxable entity for federal and
state income tax purposes and its results of operations are included in the
consolidated federal and state income tax returns of AT&T and its affiliates.
The AT&T Wireless Group's provision for income taxes is based upon its
contribution to the overall income tax liability or benefit of AT&T and its
affiliates.
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<PAGE> 170
AT&T WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
GAINS ON SALES OF STOCK OF SUBSIDIARIES
The AT&T Wireless Group accounts for gains on the sales of the common stock
by its nonconsolidated subsidiaries as equity transactions.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and revenues and expenses during the period reported. Actual results
could differ from those estimates. Estimates are used when accounting for
certain items such as the allowance for doubtful accounts, depreciation and
amortization, taxes, valuation of equity investments and asset impairment and
restructuring charges. Additionally, the AT&T Wireless Group evaluates the
useful lives of its wireless communications systems and other equipment based on
changes in technological and industry conditions.
CONCENTRATIONS
The AT&T Wireless Group purchases a substantial portion of its wireless
infrastructure equipment from two major suppliers. Additionally, two primary
vendors provide the multi-network handsets. Further, the AT&T Wireless Group
relies primarily on one vendor to provide substantially all of its billing
services. Loss of any of these suppliers could adversely impact operations
temporarily until a comparable substitute could be found. The AT&T Wireless
Group does not have a concentration of available sources of labor or services,
nor does the AT&T Wireless Group have any significant concentration of business
transacted with a particular customer, that could, if suddenly eliminated,
severely impact operations.
2. RECENT ACCOUNTING PRONOUNCEMENT
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. 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.
3. ACQUISITIONS AND DIVESTITURES
During 1998, 1997 and 1996, the AT&T Wireless Group completed certain
transactions as part of its overall strategy to expand its wireless footprint
and divest itself of non-core interests. The net pretax gains recognized were
$600, $57 and $159 in 1998, 1997 and 1996, respectively. The pretax
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<PAGE> 171
AT&T WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
gains and losses from the sale and exchange transactions are included in other
income, net in the accompanying combined statements of income. A summary of the
significant transactions follows:
In the fourth quarter of 1998, the AT&T Wireless Group sold its net assets,
in the geographic area of Norfolk, Virginia, including a portion of the PCS
license, to Triton PCS Holdings, Inc. for cash and preferred stock of Triton and
recognized a pretax gain of $29.
Also in the fourth quarter of 1998, the AT&T Wireless Group sold a portion
of its net assets in the geographic areas of Cincinnati and Dayton, Ohio,
including a portion of the PCS licenses, to Cincinnati Bell Wireless LLC for
cash and an ownership interest. A pretax gain of $24 was recognized on this
transaction.
On October 2, 1998, the AT&T Wireless Group sold its one-way messaging
services business and a narrowband PCS license to Metrocall, Inc. in exchange
for cash and preferred stock of Metrocall, Inc. The AT&T Wireless Group
subsequently contributed its investment in the preferred stock of Metrocall to
AT&T. A pretax loss of $5 was recognized on this transaction.
In the second quarter of 1998, the AT&T Wireless Group sold for cash its
interest in PriceCellular Corp. and recognized a pretax gain of $67.
In the second quarter of 1998, the AT&T Wireless Group sold for cash its
remaining equity interest in SmarTone Telecommunications Holdings Limited for a
pretax gain of $128.
In the first quarter of 1998, the AT&T Wireless Group sold for cash its
equity interest in LIN Television Corp. and recognized a pretax gain of $342.
In the fourth quarter of 1997, the AT&T Wireless Group sold for cash a
portion of its equity interest in SmarTone and recognized a pretax gain of $45.
During 1996, the AT&T Wireless Group closed transactions with SBC
Communications, Inc related to the sale and exchanges of several wireless
properties. The AT&T Wireless Group sold its interest in Little Rock Cellular
for cash. In addition, the AT&T Wireless Group exchanged assets, including
licenses in several of their cellular markets, in exchange for cash and two 1900
megahertz PCS licenses. The above transactions resulted in a pretax gain of
$131.
Also during 1996, the AT&T Wireless Group sold for cash its equity
investment in Movitel Del Noroeste, S.A. and recognized a pretax gain of $28.
4. ASSET IMPAIRMENT AND RESTRUCTURING CHARGES
During 1998, the AT&T Wireless Group recorded a pretax asset impairment
charge of $120, which represented the write-down of unrecoverable assets
associated with non-strategic businesses.
During 1997, the AT&T Wireless Group recorded a pretax charge of $160
related to the decision to no longer pursue a two-way messaging business. This
charge included costs associated with the write-down of unrecoverable assets, as
well as costs related to contractual obligations and termination penalties.
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<PAGE> 172
AT&T WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. SUPPLEMENTARY FINANCIAL INFORMATION
SUPPLEMENTARY INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
INCLUDED IN DEPRECIATION AND AMORTIZATION
Amortization of licensing costs............................. $210 $184 $170
Amortization of goodwill.................................... 33 33 33
OTHER INCOME
Interest income............................................. $ 15 $ 9 $ 9
Minority interests in consolidated subsidiaries............. 35 (11) (18)
Net equity earnings from investments........................ 114 222 205
Sale/exchange of wireless investments....................... 600 57 159
Miscellaneous, net.......................................... -- 11 (9)
Total other income -- net................................... $764 $288 $346
</TABLE>
SUPPLEMENTARY BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------
1998 1997
------ -------
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT
Wireless communications systems and other equipment......... $7,658 $ 6,912
Land, buildings and improvements............................ 222 203
Total property, plant and equipment......................... 7,880 7,115
Accumulated depreciation.................................... (2,698) (2,042)
Property, plant and equipment, net.......................... $5,182 $ 5,073
GOODWILL AND OTHER ASSETS
Goodwill.................................................... $1,312 $ 1,320
Accumulated amortization.................................... (118) (88)
Goodwill, net............................................... $1,194 $ 1,232
Other assets................................................ 123 123
Goodwill, net and other assets.............................. $1,317 $ 1,355
INCLUDED IN OTHER CURRENT LIABILITIES
Advertising and promotion accruals.......................... $ 94 $ 100
Business taxes accrued...................................... 127 88
</TABLE>
SUPPLEMENTARY CASH FLOW INFORMATION
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------
1998 1997 1996
---- ----- -----
<S> <C> <C> <C>
Interest payments, net of amounts capitalized............... $120 $ -- $ --
Income tax payments (refunds)............................... 177 (161) (137)
</TABLE>
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<PAGE> 173
AT&T WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. INVESTMENTS
The AT&T Wireless Group holds investments in ventures and partnerships that
gain the AT&T Wireless Group access to additional domestic and international
wireless markets. Substantially all of these investments are accounted for under
the equity method.
At December 31, 1998 and 1997, the AT&T Wireless Group had equity method
investments of $3,766 and $3,128, respectively. Amortization of excess carrying
value of $52, $66 and $62 in 1998, 1997 and 1996, respectively, is reflected as
a component of other income, net in the accompanying combined statements of
income. At December 31, 1998 and 1997 the carrying value of investments
accounted for under the equity method exceeded our share of the underlying
reported net assets by approximately $511 and $2,041, respectively.
Ownership of significant equity investments is as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
AB Cellular............................................. 55.62%(1) N/A
CMT Partners............................................ 50.00%(2) 50.00%(2)
Triton PCS Holdings, Inc................................ 18.66%(3) N/A
Telecorp PCS, Inc....................................... 17.28%(4) N/A
Cincinnati Bell Wireless, LLC........................... 19.90%(5) N/A
Houston Cellular Telephone Company...................... N/A 56.25%(1)
Los Angeles Cellular Telephone Company.................. N/A 39.90%(1)
</TABLE>
- -------------------------
(1) On November 13, 1998, the AT&T Wireless Group and BellSouth Corp. combined
their jointly owned cellular properties in Los Angeles Cellular Telephone
Company, Houston Cellular Telephone Company and Galveston Cellular Telephone
Company. Under the terms of the agreement, the ownership interests of the
AT&T Wireless Group and BellSouth in LA Cellular, Houston Cellular and
Galveston Cellular were folded into a single company, AB Cellular, which
continues to own, control and supervise all three properties. AT&T
contributed cash of approximately $1 billion to the new jointly controlled
company and subsequently contributed this interest to the AT&T Wireless
Group which now has an overall ownership interest of 55.62%. The AT&T
Wireless Group's voting interest in the new company, however, is 50% and
therefore this investment is accounted for under the equity method. Voting
interest in both Houston Cellular and LA Cellular was 50% at December 31,
1997.
(2) Ownership percentages reflect voting and equity interests in a partnership
which owns and operates several licenses in Northern California, including
San Francisco/San Jose, and Kansas City, Missouri, and also owns a minority
interest in Dallas, Texas. See Note 13 regarding subsequent transactions
associated with CMT Partners.
(3) During 1998, the AT&T Wireless Group entered into a venture with Triton PCS
Holdings, Inc. to build and operate digital wireless networks in the
Southeast and MidAtlantic areas of the United States. The AT&T Wireless
Group contributed licenses to the venture in exchange for
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<PAGE> 174
AT&T WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
preferred stock. The effect of the above transaction resulted in a
reclassification of license balances of approximately $101 to investments in
1998. Additionally during the fourth quarter of 1998, the AT&T Wireless
Group sold its net assets in the geographic area of Norfolk, Virginia,
including a portion of the PCS license, to Triton for cash and preferred
stock. Ownership percentage reflects the AT&T Wireless Group ownership of
common stock, assuming conversion of all currently convertible preferred
shares to common. In addition, the AT&T Wireless Group holds redeemable
preferred shares in these investments, which are not currently convertible
to common. The preferred shares have certain liquidation preference rights.
(4) During 1998, the AT&T Wireless Group entered into a venture with Telecorp
PCS, Inc. to build and operate digital wireless networks in portions of New
England and the Midwestern and Southeastern U.S. The AT&T Wireless Group
contributed licenses to the venture in exchange for preferred stock. The
effect of the above transaction resulted in a reclassification of license
balances of approximately $40 to investments in 1998. See Note 13 regarding
subsequent transactions associated with Telecorp. Ownership percentage
reflects the AT&T Wireless Group ownership of common stock, assuming
conversion of all currently convertible preferred shares to common. In
addition, the AT&T Wireless Group holds redeemable preferred shares in these
investments, which are not currently convertible to common. The preferred
shares have certain liquidation preference rights.
(5) During the fourth quarter of 1998, the AT&T Wireless Group sold a portion of
its net assets in the geographic areas of Cincinnati and Dayton, Ohio,
including a portion of the PCS licenses, to Cincinnati Bell Wireless LLC for
cash and an ownership interest. The effect of this transaction resulted in a
reclassification of license balances of approximately $20 to investments in
1998.
The combined results of operations and the financial position of the
significant equity method investments are summarized as follows:
CONDENSED INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Revenues.................................................... $1,717 $1,712 $1,647
Operating income............................................ 477 560 546
Net income.................................................. 464 571 560
</TABLE>
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<PAGE> 175
AT&T WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
----------------
1998 1997
------ ------
<S> <C> <C>
Current assets.............................................. $1,782 $ 342
Noncurrent assets........................................... 4,990 1,311
Current liabilities......................................... 562 293
Noncurrent liabilities...................................... 811 18
Net equity.................................................. 5,399 1,342
</TABLE>
Current assets are comprised primarily of cash and accounts receivable.
Noncurrent assets are comprised of net goodwill and other assets, net property,
plant and equipment and net licenses. Current liabilities are comprised
primarily of operating accruals and accounts payable. Noncurrent liabilities are
comprised primarily of long-term debt.
C-16
<PAGE> 176
AT&T WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES
The following table shows the principal reasons for the difference between
the effective income tax rate and the United States federal statutory income tax
rate:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
1998 1997 1996
----- ----- ------
<S> <C> <C> <C>
U.S. federal statutory income tax rate...................... 35% 35% 35%
Federal income tax at statutory rate........................ $ 105 $ 76 $ 203
State and local income taxes, net of federal income tax
effect.................................................... 12 9 20
Dividends received deduction................................ (2) (6) (8)
Amortization of intangibles................................. 12 14 15
Unutilized foreign equity losses............................ 34 10 13
Change in valuation allowance and other estimates........... (17) (13) 25
Other differences -- net.................................... (7) 3 (5)
Provision for income taxes.................................. $ 137 $ 93 $ 263
Effective income tax rate................................... 45.5% 42.7% 45.3%
PROVISION FOR INCOME TAXES
CURRENT
Federal..................................................... $ 152 $(149) $ (143)
State and local............................................. 25 (12) 6
$ 177 $(161) $ (137)
DEFERRED
Federal..................................................... $ (39) $ 229 $ 369
State and local............................................. (1) 25 31
$ (40) $ 254 $ 400
Provision for income taxes.................................. $ 137 $ 93 $ 263
</TABLE>
Deferred income tax liabilities are taxes the AT&T Wireless Group expects
to pay in future periods. Similarly, deferred income tax assets are recorded for
expected reductions in taxes payable in future periods. Deferred income taxes
arise because of differences in the book and tax bases of certain assets and
liabilities.
C-17
<PAGE> 177
AT&T WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax liabilities and assets consist of the following:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------
1998 1997
------- -------
<S> <C> <C>
LONG-TERM DEFERRED INCOME TAX LIABILITIES
Property, plant and equipment and licenses.................. $(2,817) $(2,662)
Investments............................................... (731) (901)
Other..................................................... (174) (267)
Total long-term deferred income tax liabilities............. $(3,722) $(3,830)
LONG-TERM DEFERRED INCOME TAX ASSETS
Net operating loss/credit carryforwards................... $ 75 $ 69
Valuation allowance....................................... (15) (10)
Total net long-term deferred income tax assets.............. $ 60 $ 59
Net long-term deferred income tax liabilities............... $(3,662) $(3,771)
CURRENT DEFERRED INCOME TAX LIABILITIES
Total current deferred income tax liabilities............... $ -- $ --
CURRENT DEFERRED INCOME TAX ASSETS
Employee benefits......................................... 10 11
Reserves and allowances................................... 77 90
Other..................................................... 4 6
Total current deferred income tax assets.................. $ 91 $ 107
Current deferred income tax assets.......................... $ 91 $ 107
</TABLE>
At December 31, 1998, the AT&T Wireless Group had net operating loss
carryforwards for federal and state income tax purposes of $34 and $614,
respectively, expiring through 2018. AT&T Wireless also has federal tax credit
carryforwards of $29 which are not subject to expiration. The AT&T Wireless
Group recorded a valuation allowance to reflect the estimated amount of deferred
tax assets which, more likely than not, will not be realized by AT&T.
8. EMPLOYEE BENEFIT PLAN
The AT&T Wireless Group sponsors a savings plan for the majority of its
employees. The plan allows employees to contribute a portion of their pretax
income in accordance with specified guidelines. The plan matches a percentage of
the employee contributions up to certain limits. In addition, the AT&T Wireless
Group may make discretionary or profit sharing contributions. Contributions
amounted to $31 in 1998, $32 in 1997 and $23 in 1996.
9. STOCK-BASED COMPENSATION PLANS
Under the AT&T 1997 Long-Term Incentive Program, which was effective June
1, 1997, AT&T grants stock options, performance shares, restricted stock and
other awards. There are 150 million
C-18
<PAGE> 178
AT&T WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
shares of common stock available for grant with a maximum of 22.5 million common
shares that may be used for awards other than stock options. The exercise price
of any stock option is equal to the stock price when the option is granted.
Generally, the options vest over three years and are exercisable up to ten years
from the date of grant. Under the AT&T 1987 Long-Term Incentive Program, which
expired in April 1997, AT&T granted the same awards, and on January 1 of each
year 0.6% of the outstanding shares of AT&T's common stock became available for
grant.
Under the AT&T 1997 Long-Term Incentive Program, performance share units
are awarded to key employees in the form of either common stock or cash at the
end of a three-year period based on AT&T's total shareholder return as measured
against a peer group of industry competitors. Under the AT&T 1987 Long-Term
Incentive Program, performance share units with the same terms were also awarded
to key employees based on AT&T's return-to-equity performance compared with a
target.
On August 1, 1997, substantially all of the AT&T Wireless Group's employees
were granted a stock option award to purchase 150 shares representing a total of
1.8 million shares of AT&T's common stock. The options vest after three years
and are exercisable up to ten years from the grant date.
Under the AT&T 1996 Employee Stock Purchase Plan, which was effective July
1, 1996, AT&T is authorized to issue up to 75 million shares of common stock to
its eligible employees. Under the terms of the Plan, employees may have up to
10% of their earnings withheld to purchase AT&T's common stock. The purchase
price of the stock on the date of exercise is 85% of the average high and low
sale prices of shares on the New York Stock Exchange for that day. Under the
Plan, AT&T sold approximately 535 thousand shares to the AT&T Wireless Group
employees in 1998, approximately 600 thousand shares in 1997 and approximately
300 thousand in 1996.
AT&T applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations in accounting for its
plans. Accordingly, no compensation expense has been recognized for its
stock-based compensation plans other than for our performance-based and
restricted stock awards, SARs, and prior to July 1, 1996, for the stock purchase
plan for former McCaw Cellular Communications, Inc. employees. Compensation
costs charged against the AT&T Wireless Group's net income were not material in
1998, 1997 or 1996.
AT&T has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." If AT&T had elected to recognize
compensation costs based on the fair value at the date of grant for awards in
1998, 1997 and 1996, consistent with the provisions of SFAS No. 123, the AT&T
Wireless Group's net income would have been adjusted to reflect additional
compensation expense to the following pro forma amounts:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income....................................... $127 $107 $303
</TABLE>
Effective on the dates of spin-off of Lucent Technologies Inc. and NCR
Corp., AT&T stock options held by Lucent and NCR employees were canceled. For
the holders of unexercised AT&T stock options, the number of options were
adjusted and all exercise prices were decreased
C-19
<PAGE> 179
AT&T WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
immediately following each spin-off date to preserve the economic values of the
options that existed prior to those dates.
The pro forma effect on net income for 1998, 1997 and 1996 may not be
representative of the pro forma effect on net income of future years because the
SFAS No. 123 method of accounting for pro forma compensation expense has not
been applied to options granted prior to January 1, 1995.
At the date of grant, the weighted average exercise price for options
granted during 1998, 1997 and 1996 were $41.86, $27.31 and $31.17, respectively.
The weighted-average fair values at date of grant for options granted to
AT&T Wireless Group employees during 1998, 1997 and 1996 were $9.80, $6.37 and
$9.17, respectively, and were estimated using the Black-Scholes option-pricing
model. The weighted average risk-free interest rates applied for 1998, 1997 and
1996 were 5.27%, 6.14% and 5.35%, respectively. The following assumptions were
applied for 1998, 1997, and periods subsequent to the Lucent spin-off through
December 31, 1996, respectively: (i) expected dividend yields of 2.1%, 2.2% and
2.8% (ii) expected volatility rates of 23.8%, 21.8% and 21.0%, and (iii)
expected lives of 4.5 years.
10. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable are a reasonable estimate of their fair value due to the
short-term nature of these instruments. The fair value of the long term debt due
to AT&T approximates its carrying value.
11. COMMITMENTS AND CONTINGENCIES
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 December
31, 1998. The AT&T Wireless Group also makes routine filings with the Federal
Communications Commission and 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 to us beyond that provided for at
year-end would not be material to our annual combined financial statements.
The AT&T Wireless Group leases land, buildings and equipment through
contracts that expire in various years through 2032. Rental expense under
operating leases was $181 in 1998, $149 in 1997 and $103 in 1996. The following
table shows the future minimum lease payments due under noncancelable operating
leases at December 31, 1998.
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 LATER YEARS
---- ---- ---- ---- ---- -----------
<S> <C> <C> <C> <C> <C>
$135 $122 $104 $81 $63 $471
</TABLE>
In addition, 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.
C-20
<PAGE> 180
AT&T WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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. See Note
13 for subsequent transactions regarding commitments.
12. RELATED PARTY TRANSACTIONS
As discussed in Note 1, AT&T has provided necessary working capital
requirements through intercompany debt, preferred stock and cash contributions
to the AT&T Wireless Group. These amounts are reflected in the accompanying
combined balance sheets as 9% cumulative preferred stock held by AT&T and
intercompany debt due to AT&T. Preferred stock was reflected at $1 billion and
the dividend requirements were $56 for each of the years ended December 31,
1998, 1997 and 1996, respectively, net of amounts recorded in accordance with
the methodology contained in the tax sharing agreement described in Note 1.
Intercompany debt and interest was assumed based upon the methodology
outlined in Note 1. Intercompany debt was reflected as $2,500, and $2,400 at
December 31, 1998 and 1997. Intercompany interest was $190, $178 and $163, in
1998, 1997, and 1996, respectively, of which $75, $178, and $163, respectively,
was capitalized.
The AT&T Wireless Group purchases long distance and other network related
services from AT&T at market-based prices. For the years ended December 31,
1998, 1997 and 1996, these amounts totaled $65, $58 and $67 respectively, and
are reflected within network and other costs of services expenses in the
accompanying combined statements of income.
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 amounting to $42, $47 and $41 for the years
ended December 31, 1998, 1997 and 1996, respectively which are included within
selling, general and administrative expenses in the accompanying combined
statements of income.
Also included in selling, general and administrative expenses are charges
received from AT&T related to our direct sales force who are 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 $65, $36
and $12 for the years ended December 31, 1998, 1997 and 1996, respectively.
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 $50, $33, and $41 as of December 31, 1998, 1997 and 1996,
respectively. Accounts payable in the accompanying combined balance sheets
include $12 and $28, as of December 31, 1998 and 1997, respectively, associated
with the purchases of these services.
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
includes $59 and $11, as of December 31, 1998 and 1997, respectively, associated
with receivables from AT&T for these bundled customers. Selling, general and
administrative expenses include $39 and $6, for the years ended December 31,
1998 and 1997, respectively, for the billing and collection fees charged by
AT&T. Additionally, selling, general and administrative expenses include
reimbursement to the AT&T Wireless Group from AT&T
C-21
<PAGE> 181
AT&T WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
totaling $26, $37, and $26 for the years ended December 31, 1998, 1997 and 1996,
respectively, for costs incurred by the AT&T Wireless Group to develop bundled
billing systems.
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 $12 to AT&T for reimbursement of their costs associated with these
services for the year ended December 31, 1998.
13. SUBSEQUENT EVENTS (UNAUDITED)
On October 6, 1999, AT&T and Dobson Communications Corporation announced
the signing of a definitive agreement to acquire American Cellular Corporation
through a newly created joint venture for $2.32 billion. AT&T will attribute its
interest in this joint venture interest to the AT&T Wireless Group. If the joint
venture defaults in its obligations to close the American Cellular acquisition,
the joint venture will be liable for damages incurred by American Cellular up to
$500. The AT&T Wireless Group will be required to pay its share of any damages
that the joint venture may be required to pay to American Cellular. Dobson will
be responsible for day to day management of the joint venture, which will be
equally owned and jointly controlled by Dobson and the AT&T Wireless Group. The
acquisition will be funded with non-recourse bank debt by the joint venture and
cash equity contributions of up to approximately $370 from each of the two
partners. To the extent that Dobson is unable to obtain funding for its equity
contribution to the joint venture, the AT&T Wireless Group has committed to fund
the shortfall through an investment in Dobson. The boards of AT&T, Dobson, and
American Cellular have approved the transaction. The acquisition, which is
expected to close in the first quarter of 2000, is subject to federal regulatory
approval and certain other conditions.
On October 1, 1999, CMT Partners distributed certain assets including its
ownership interest in Kansas City, Missouri and Dallas, Texas to its partners.
Through this distribution, the AT&T Wireless Group received CMT Partners'
ownership interest in Dallas, Texas and Vodafone Airtouch obtained ownership of
Kansas City, Missouri. The AT&T Wireless Group continues to hold a 50% equity
and voting interest in the remaining assets of CMT Partners.
In August 1999, AT&T and British Telecommunications plc jointly acquired a
33.3% ownership interest in Rogers Cantel Mobile Communications Inc. in Canada
for approximately $934 in cash. AT&T contributed its interest in Rogers Cantel
to the AT&T Wireless Group as of the date of acquisition. The investment is
owned equally by the AT&T Wireless Group and BT.
On August 2, 1999, AT&T completed its acquisition of Honolulu Cellular
Telephone Company for cash. AT&T contributed its interest in Honolulu Cellular
to the AT&T Wireless Group as of the acquisition date. This transaction was
accounted for as a purchase.
On May 3, 1999, AT&T acquired Vanguard Cellular Systems, Inc. and has
contributed its interest in Vanguard to the AT&T Wireless Group as of the date
of acquisition. 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. 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.
C-22
<PAGE> 182
AT&T WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The merger with Vanguard was recorded as a purchase. Accordingly the
operating results of Vanguard have been included in the accompanying combined
financial statements since the date of acquisition. The excess of aggregate
purchase price over the fair market value of net assets acquired has been
assigned to licenses, goodwill and other intangible assets and will be amortized
over periods of ten to 40 years.
The following pro forma consolidated results of operations for the years
ended December 31, 1998 and 1997 assume the Vanguard acquisition occurred as of
January 1, 1997:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1998 1997
------ ------
<S> <C> <C>
Revenues.................................................... $5,868 $5,084
Net income.................................................. 254 112
Capital expenditures........................................ 1,223 1,787
</TABLE>
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.
In April 1999, the AT&T Wireless Group acquired Bakersfield Cellular in
exchange for several cellular markets in Texas and cash. The acquisition of
Bakersfield Cellular was accounted for as a purchase.
In addition to the acquisitions of Vanguard, Honolulu Cellular and
Bakersfield Cellular, the AT&T Wireless Group acquired other cellular markets in
Utah, Oregon, California, Idaho and Louisiana. All of the above acquisitions
were accounted for under the purchase method. The pro forma operating results of
these acquisitions other than Vanguard have not been presented as they are not
material to the overall operating results of the AT&T Wireless Group.
The following is a summary of all consideration paid for the completed
acquisitions through November 30, 1999, including the acquisition of Vanguard:
<TABLE>
<S> <C>
Fair value of AT&T stock issued............................. $ 531
Cash paid by AT&T........................................... 926
Liabilities assumed......................................... 555
Fair value of cellular markets exchanged.................... 51
Total purchase price........................................ $2,063
</TABLE>
The assets and liabilities of the acquired entities were recorded at their
estimated fair market values at the dates of acquisition. The initial
allocations of fair market values are preliminary and
C-23
<PAGE> 183
AT&T WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
subject to adjustments during the first year following the acquisitions. The
initial allocations were as follows:
<TABLE>
<S> <C>
License costs............................................... $ 856
Goodwill.................................................... 994
Other intangibles........................................... 100
Property, plant and equipment............................... 365
Net current assets.......................................... 4
Deferred tax liabilities.................................... (256)
Total purchase price........................................ $2,063
</TABLE>
In June 1999, the AT&T Wireless Group sold its interest in WOOD-TV for cash
resulting in a pretax gain of $88.
In May 1999, the AT&T Wireless Group sold its net assets in the geographic
area of San Juan, Puerto Rico, including a portion of the PCS license, to
Telecorp for cash and preferred stock. This transaction resulted in a pretax
gain of $11.
In January 1999, the AT&T Wireless Group entered into a venture with Tritel
PCS, Inc. to build a digital wireless network across parts of the southeastern
United States. The AT&T Wireless Group contributed licenses in exchange for
preferred stock. This transaction resulted in a reclassification of license
balances of approximately $94 to investments.
During 1999, the AT&T Wireless Group purchased minority interests in
several of the markets that they did not wholly own. The total of these
purchases, including both cash paid and stock issued by AT&T on the AT&T
Wireless Group's behalf totaled $87.
The AT&T Wireless Group has a signed agreement to sell one of its equity
investments for an expected gain of approximately $40. This transaction is
expected to close in the first quarter of 2000.
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. For
the year ended December 31, 1999, the AT&T Wireless Group spent over $500 in
satisfaction of this commitment.
As part of a multi-vendor program, the AT&T Wireless Group finalized its
plans during the fourth quarter of 1999 to replace significant portions of its
wireless infrastructure equipment in the western United States and in the
metropolitan New York area. The replacement of this wireless infrastructure
equipment is intended to increase the capacity and operating efficiency of the
wireless network and is anticipated to be significantly completed by December
31, 2000.
The planned disposals of the existing wireless infrastructure equipment
require an evaluation of asset impairment in accordance with SFAS 121. As a
result, a charge of $531 ($328 after tax) will be recorded during the fourth
quarter of 1999 to write these assets down to their fair value which was
estimated by discounting the expected future cash flows of these assets through
the date of disposal. Since the assets will remain in service from the date of
the decision to dispose of these assets to the disposal date, the remaining net
book value of the assets will be depreciated over this period.
C-24
<PAGE> 184
AT&T WIRELESS GROUP
COMBINED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- ----------------
1999 1998 1999 1998
------ ------ ------ ------
DOLLARS IN MILLIONS
<S> <C> <C> <C> <C>
REVENUES
Services revenues.................................. $1,867 $1,265 $4,928 $3,472
Equipment revenues................................. 182 156 562 425
Total revenues..................................... 2,049 1,421 5,490 3,897
OPERATING EXPENSES
Network and other costs of services................ 993 641 2,743 1,662
Depreciation and amortization...................... 333 280 917 802
Selling, general and administrative................ 655 536 1,833 1,550
Asset impairment and restructuring charges......... -- -- -- 60
Total operating expenses........................... 1,981 1,457 5,493 4,074
OPERATING INCOME (LOSS)............................ 68 (36) (3) (177)
Other (expense) income, net........................ (4) 56 180 705
Interest expense................................... 32 34 102 85
Income (loss) before income taxes.................. 32 (14) 75 443
Provision (benefit) for income taxes............... 14 (6) 31 197
NET INCOME (LOSS).................................. 18 (8) 44 246
Dividend requirements on preferred stock held by
AT&T, net........................................ 14 14 41 41
NET INCOME (LOSS) ATTRIBUTABLE TO AT&T'S RESIDUAL
INTEREST......................................... $ 4 $ (22) $ 3 $ 205
</TABLE>
The notes are an integral part of these combined financial statements.
C-25
<PAGE> 185
AT&T WIRELESS GROUP
COMBINED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
DOLLARS IN MILLIONS
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 16 $ 27
Accounts receivable, less allowances of $98 and $74......... 1,223 885
Inventories................................................. 109 206
Deferred income taxes....................................... 126 91
Prepaid expenses and other current assets................... 32 29
TOTAL CURRENT ASSETS........................................ 1,506 1,238
Property, plant and equipment, net.......................... 6,143 5,182
Licensing costs, net of accumulated amortization of $1,459
and $1,290................................................ 8,366 7,928
Investments................................................. 4,477 3,795
Goodwill, net and other assets.............................. 2,364 1,317
TOTAL ASSETS................................................ $22,856 $19,460
LIABILITIES
Accounts payable............................................ $ 502 $ 628
Payroll and benefit-related liabilities..................... 231 202
Debt maturing within one year............................... 137 89
Other current liabilities................................... 920 707
TOTAL CURRENT LIABILITIES................................... 1,790 1,626
Long-term debt due to AT&T.................................. 3,200 2,500
Deferred income taxes....................................... 3,922 3,662
Other long-term liabilities................................. 49 35
TOTAL LIABILITIES........................................... 8,961 7,823
MINORITY INTEREST........................................... 77 105
SHAREOWNER'S EQUITY
Preferred stock held by AT&T................................ 1,000 1,000
AT&T's residual interest.................................... 12,799 10,535
Accumulated other comprehensive income...................... 19 (3)
TOTAL SHAREOWNER'S EQUITY................................... 13,818 11,532
TOTAL LIABILITIES AND SHAREOWNER'S EQUITY................... $22,856 $19,460
</TABLE>
The notes are an integral part of these combined financial statements.
C-26
<PAGE> 186
AT&T WIRELESS GROUP
COMBINED STATEMENTS OF CHANGES IN SHAREOWNER'S EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
--------------------
1999 1998
-------- --------
DOLLARS IN MILLIONS
<S> <C> <C>
PREFERRED STOCK HELD BY AT&T................................ $ 1,000 $ 1,000
AT&T'S RESIDUAL INTEREST
Balance at beginning of year.............................. 10,535 10,139
Net income attributable to AT&T's residual interest....... 3 205
Transfers from (to) parent, net........................... 2,261 (373)
------- -------
Balance at end of period.................................... 12,799 9,971
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at beginning of year.............................. (3) 48
Other comprehensive income (net of taxes of $(14), $31)... 22 (51)
------- -------
Balance at end of period.................................... 19 (3)
------- -------
TOTAL SHAREOWNER'S EQUITY................................... $13,818 $10,968
======= =======
SUMMARY OF TOTAL COMPREHENSIVE INCOME:
Net income attributable to AT&T's residual interest....... $ 3 $ 205
Dividend requirements on preferred stock held by AT&T,
net.................................................... 41 41
------- -------
Net income................................................ 44 246
Other comprehensive income................................ 22 (51)
TOTAL COMPREHENSIVE INCOME................................ $ 66 $ 195
======= =======
</TABLE>
The notes are an integral part of the combined financial statements.
C-27
<PAGE> 187
AT&T WIRELESS GROUP
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
-------------------
1999 1998
-------- -------
DOLLARS IN MILLIONS
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 44 $ 246
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Gains on sale/exchange of wireless investments............ (99) (552)
Asset impairment and restructuring charges................ -- 60
Depreciation and amortization............................. 917 802
Undistributed equity earnings............................. (69) (128)
Minority interest in consolidated subsidiaries............ (10) (21)
Provision for uncollectibles.............................. 137 65
Increase in accounts receivable........................... (375) (154)
Decrease in accounts payable.............................. (169) (357)
Net increase (decrease) in other operating assets and
liabilities............................................ 213 (76)
Other adjustments, net.................................... (62) 19
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES......... 527 (96)
INVESTING ACTIVITIES
Capital expenditures...................................... (1,376) (439)
Net acquisitions of licenses.............................. (32) (24)
Equity investment distributions and sales................. 178 1,150
Equity investment contributions and purchases............. (172) (20)
Net dispositions of businesses including cash acquired in
acquisitions........................................... 244 --
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES......... (1,158) 667
FINANCING ACTIVITIES
Increase in short-term borrowings........................... 48 41
Increase (decrease) in long-term debt due to AT&T........... 700 (100)
Dividend requirements on preferred stock, net............... (41) (41)
Transfers to parent, net.................................... (71) (414)
Other financing activities, net............................. (16) (19)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES......... 620 (533)
Net (decrease) increase in cash and cash equivalents........ (11) 38
Cash and cash equivalents at beginning of year.............. 27 6
Cash and cash equivalents at end of period.................. $ 16 $ 44
</TABLE>
The notes are an integral part of these combined financial statements.
C-28
<PAGE> 188
AT&T WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
(a) BASIS OF PRESENTATION
The AT&T Wireless Group is a fully integrated business unit of AT&T Corp.
The AT&T Wireless Group provides domestic wireless voice and data services in
the 850 megahertz cellular markets and 1900 megahertz Personal Communications
Services (PCS) markets. The AT&T Wireless Group also sells handsets and
accessories to its customers, which generally result in a loss. In addition, the
AT&T Wireless Group results include their aviation communications business,
earnings or losses associated with equity interests in wireless communications
ventures and partnerships, both in the United States and internationally, and
the costs associated with the development of fixed wireless technology. The
results of the messaging services business are included through October 2, 1998
(date of sale). The combined financial statements reflect the results of
operations, financial position, changes in shareowner's equity and cash flows of
these businesses of AT&T as if these combined businesses 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 shareowner's equity and cash flows of the AT&T Wireless Group had it
been a separate, stand-alone entity during the periods presented. The combined
financial statements of the AT&T Wireless Group should be read in conjunction
with the audited consolidated financial statements of AT&T.
As an integrated business unit of AT&T, the AT&T Wireless Group does not
prepare separate financial statements in accordance with generally accepted
accounting principles (GAAP) in the normal course of operations. However, these
combined financial statements were prepared in accordance with GAAP for purposes
of this filing. The combined financial statements of the AT&T Wireless Group
reflect the assets, liabilities, revenues and expenses directly attributable to
the AT&T Wireless Group, as well as allocations deemed reasonable by management,
to present the financial position, results of operations 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, and management considers the allocations to be reasonable. Changes
in AT&T's residual interest represent net transfers to or from AT&T, after
giving effect to the net income or loss attributable to AT&T's residual interest
in the AT&T Wireless Group during the period and have been 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. Earnings per
share disclosure has not been presented as the AT&T Wireless Group is a business
unit of AT&T and earnings per share data is not considered meaningful.
The capital structure of the AT&T Wireless Group has been assumed based
upon AT&T's historical capital ratio adjusted for certain items. This has
resulted in $3,200 and $2,500 in intercompany indebtedness at September 30, 1999
and December 31, 1998, respectively, paying annual interest at 7.25% and 7.75%
in 1999 and 1998, respectively. The interest rate charged is designed to be
substantially equivalent to the interest rates 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. In addition,
the AT&T Wireless Group has issued to AT&T $1 billion of 9% cumulative preferred
stock that, subject to the approval of the AT&T Wireless Group capital stock
committee, is redeemable at the option of AT&T. At the time of the initial
C-29
<PAGE> 189
AT&T WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
public offering, $2 billion of the intercompany indebtedness is anticipated to
be converted into $2 billion of 9% cumulative preferred stock.
General corporate overhead related to AT&T's corporate headquarters and
common support divisions has been allocated to the AT&T Wireless Group based on
the ratio of the AT&T Wireless Group's external costs and expenses to AT&T's
consolidated external costs and expenses, adjusted for any functions that the
AT&T Wireless Group performs on its own. However, the costs of these services
charged to the AT&T Wireless Group are not necessarily indicative of the costs
that would have been incurred if the AT&T Wireless Group had performed these
functions entirely as a stand-alone entity, nor are they indicative of costs
that will be charged in the future.
Consolidated income tax provisions, related tax payments or refunds, and
deferred tax balances of AT&T have been allocated to the AT&T Wireless Group
based principally on the taxable income and tax credits directly attributable to
the AT&T Wireless Group. These allocations reflect the AT&T Wireless Group's
contribution to AT&T's consolidated taxable income and the consolidated tax
liability and tax credit position. Prior to the issuance of any shares of the
AT&T Wireless Group tracking stock, the AT&T Common Stock Group and the AT&T
Wireless Group have agreed to enter into a tax sharing agreement that will
provide for tax sharing payments based on the taxes or tax benefits of a
hypothetical affiliated group consisting of the AT&T Common Stock Group and the
AT&T Wireless Group. Based on this agreement, the consolidated tax liability
before credits will be allocated between the groups, based on each group's
contribution to consolidated taxable income of the hypothetical group. For
purposes of the tax sharing agreement, the 9% cumulative preferred stock held by
AT&T will be treated as if it were an intercompany debt instrument and,
accordingly, tax sharing payments will be calculated by treating coupon payments
on the preferred stock as interest expense to the AT&T Wireless Group and
interest income to the AT&T Common Stock Group. The preferred stock dividends,
net of amounts recorded in accordance with the methodology contained in the tax
sharing agreement, have been recorded in AT&T Wireless Group's equity.
Consolidated tax credits of the hypothetical group will be allocated
between groups based on each group's contribution to each tax credit.
(b) ACQUISITIONS AND DIVESTITURES
In August 1999, AT&T and British Telecommunications plc jointly acquired a
33.3% ownership interest in Rogers Cantel Mobile Communications Inc. in Canada
for approximately $934 in cash. AT&T contributed its interest in Rogers Cantel
to the AT&T Wireless Group as of the date of acquisition. The investment is
owned equally by the AT&T Wireless Group and BT.
On August 2, 1999, AT&T completed its acquisition of Honolulu Cellular
Telephone Company for cash. AT&T contributed its interest in Honolulu Cellular
to the AT&T Wireless Group as of the acquisition date. This transaction was
accounted for as a purchase.
On May 3, 1999, AT&T acquired Vanguard Cellular Systems, Inc. and has
contributed its interest in Vanguard to the AT&T Wireless Group as of the date
of acquisition. 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. 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.
C-30
<PAGE> 190
AT&T WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The merger with Vanguard was recorded as a purchase. Accordingly the
operating results of Vanguard have been included in the accompanying combined
financial statements since the date of acquisition. The excess of aggregate
purchase price over the fair market value of net assets acquired has been
assigned to licenses, goodwill and other intangible assets and will be amortized
over periods of ten to 40 years.
The following unaudited pro forma consolidated results of operations for
the nine months ended September 30, 1999 and 1998 assume the Vanguard
acquisition occurred as of January 1, 1998:
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
----------------
1999 1998
------ ------
<S> <C> <C>
Revenues.................................................... $5,647 $4,251
Net income.................................................. 14 383
Capital expenditures........................................ 1,409 638
</TABLE>
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.
In April 1999, the AT&T Wireless Group acquired Bakersfield Cellular in
exchange for several cellular markets in Texas and cash. The acquisition of
Bakersfield Cellular was accounted for as a purchase.
In addition to the acquisitions of Vanguard, Honolulu Cellular and
Bakersfield Cellular, the AT&T Wireless Group acquired other cellular markets in
Utah and Oregon. All of the above acquisitions were accounted for under the
purchase method. The pro forma operating results of these acquisitions other
than Vanguard have not been presented as they are not material to the overall
operating results of the AT&T Wireless Group.
The following is a summary of all consideration paid for the completed
acquisitions through September 30, 1999, including the acquisition of Vanguard:
<TABLE>
<S> <C>
Fair value of AT&T stock issued............................. $ 489
Cash paid by AT&T........................................... 839
Liabilities assumed......................................... 555
Fair value of cellular markets exchanged.................... 51
Total purchase price........................................ $1,934
</TABLE>
The assets and liabilities of the acquired entities were recorded at their
estimated fair market values at the dates of acquisition. The initial
allocations of fair market values are preliminary and
C-31
<PAGE> 191
AT&T WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
subject to adjustments during the first year following the acquisitions. The
initial allocations were as follows:
<TABLE>
<S> <C>
License costs............................................... $ 727
Goodwill.................................................... 979
Other intangibles........................................... 100
Property, plant and equipment............................... 359
Net current assets.......................................... 10
Deferred tax liabilities.................................... (241)
Total purchase price........................................ $1,934
</TABLE>
In June 1999, the AT&T Wireless Group sold its interest in WOOD-TV for cash
resulting in a pretax gain of $88.
In May 1999, the AT&T Wireless Group sold its net assets in the geographic
area of San Juan, Puerto Rico, including a portion of the PCS license, to
Telecorp for cash and preferred stock resulting in a pre-tax gain of $11.
In January 1999, the AT&T Wireless Group entered into a venture with Tritel
PCS, Inc. to build a digital wireless network across parts of the Southeastern
U.S. The AT&T Wireless Group contributed licenses in exchange for preferred
stock. This transaction resulted in a reclassification of license balances of
approximately $94 to investments.
(c) 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
September 30, 1999. The AT&T Wireless Group also makes routine filings with the
Federal Communications Commission and 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 to us beyond that
currently provided for would not be material to our combined financial
statements.
The AT&T Wireless Group has various purchase commitments for materials,
supplies and other items incidental to the ordinary course of business which are
not significant individually, nor in the aggregate.
In addition, 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.
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. For
the year ended December 31, 1999, the AT&T Wireless Group spent over $500 in
satisfaction of this commitment.
C-32
<PAGE> 192
AT&T WIRELESS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(d) SUBSEQUENT EVENTS
On October 6, 1999, AT&T and Dobson Communications Corporation announced
the signing of a definitive agreement to acquire American Cellular Corporation
through a newly created joint interest venture for $2.32 billion. AT&T will
attribute its interest in this joint venture interest to the AT&T Wireless
Group. If the joint venture defaults in its obligations to close the American
Cellular acquisition, the joint venture will be liable for damages incurred by
American Cellular up to $500. The AT&T Wireless Group will be required to pay
its share of any damages that the joint venture may be required to pay to
American Cellular. Dobson will be responsible for day-to-day management of the
joint venture, which will be equally owned and jointly controlled by Dobson and
the AT&T Wireless Group. The acquisition will be funded with non-recourse bank
debt by the joint venture and cash equity contributions of up to approximately
$370 from each of the two partners. To the extent that Dobson is unable to
obtain funding for its equity contribution to the joint venture, the AT&T
Wireless Group has committed to fund the shortfall through an investment in
Dobson. The boards of AT&T, Dobson and American Cellular have approved the
transaction. The acquisition, which is expected to close in the first quarter of
2000, is subject to federal regulatory approval and certain other conditions.
On October 1, 1999, CMT Partners distributed certain assets including its
ownership interest in Kansas City, Missouri and Dallas, Texas to its partners.
Through this distribution, the AT&T Wireless Group received CMT Partners'
ownership interest in Dallas, Texas and Vodafone Airtouch obtained ownership of
Kansas City, Missouri. The AT&T Wireless Group continues to hold a 50% equity
and voting interest in the remaining assets of CMT Partners.
During November 1999, the AT&T Wireless Group also acquired other cellular
markets in California, Idaho and Louisiana. These acquisitions were accounted
for under the purchase method. The pro forma operating results of these
acquisitions are not material to the overall operating results of the AT&T
Wireless Group.
Subsequent to September 1999, the AT&T Wireless Group purchased minority
interests in several of their markets that they did not wholly own. These
purchases totaled $61.
The AT&T Wireless Group has a signed agreement to sell one of its equity
investments for an expected gain of approximately $40. This transaction is
expected to close in the first quarter of 2000.
As part of a multi-vendor program, the AT&T Wireless Group finalized its
plans during the fourth quarter of 1999 to replace significant portions of its
wireless infrastructure equipment in the western United States and in the
metropolitan New York area. The replacement of this wireless infrastructure
equipment is intended to increase the capacity and operating efficiency of the
wireless network and is anticipated to be significantly completed by December
31, 2000.
The planned disposals of the existing wireless infrastructure equipment
require an evaluation of asset impairment in accordance with SFAS 121. As a
result, a charge of $531 ($328 after tax) will be recorded during the fourth
quarter of 1999 to write these assets down to their fair value which was
estimated by discounting the expected future cash flows of these assets through
the date of disposal. Since the assets will remain in service from the date of
the decision to dispose of these assets to the disposal date, the remaining net
book value of the assets will be depreciated over this period.
C-33
<PAGE> 193
AT&T WIRELESS GROUP
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The unaudited pro forma information set forth below have been prepared
assuming the AT&T Wireless Group was a separate group as of January 1, 1998 for
income statement purposes, and as of September 30, 1999 for balance sheet
purposes, subject to the assumptions and adjustments in the accompanying notes
to the pro forma information. The unaudited pro forma condensed combined balance
sheet does not purport to represent what the AT&T Wireless Group financial
position actually would have been had the AT&T Wireless Group been a separate
group on September 30, 1999 or to project the financial position for any future
date. The unaudited pro forma condensed combined statements of income for the
year ended December 31, 1998 and the nine-month period ended September 30, 1999
does not purport to represent what the AT&T Wireless Group operations actually
would have been had the AT&T Wireless Group been a separate group on January 1,
1998 or to project operating results for any future period.
The pro forma adjustments do not reflect any operating efficiencies and
cost savings that may be achieved with respect to the combined AT&T Common Stock
Group and AT&T Wireless Group. The pro forma adjustments do not include any
adjustments to historical sales for any future price changes nor any adjustments
to selling, marketing or any other expenses for any future operating changes.
C-34
<PAGE> 194
AT&T WIRELESS GROUP
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
TWELVE MONTHS ENDED DECEMBER 31, 1998
(MILLIONS)
<TABLE>
<CAPTION>
AT&T PRO FORMA
WIRELESS PRO FORMA AT&T WIRELESS
GROUP(1) ADJUSTMENTS GROUP
-------- ----------- -------------
<S> <C> <C> <C>
REVENUES.......................................... $5,406 -- $5,406
OPERATING EXPENSES
Network and other costs of services............... 2,428 -- 2,428
Depreciation and amortization..................... 1,079 -- 1,079
Selling, general and administrative............... 2,122 -- 2,122
Asset impairment and restructuring charges........ 120 -- 120
------ ---- ------
Total operating expenses.......................... 5,749 -- 5,749
OPERATING LOSS.................................... (343) -- (343)
Other income, net................................. 764 -- 764
Interest expense.................................. 120 $(94)(2) 26
Income before income taxes........................ 301 94 395
Provision for income taxes........................ 137 36(3) 173
------ ---- ------
NET INCOME........................................ 164 58 222
Dividend requirements on preferred stock held by
AT&T, net....................................... 56 111 167
------ ---- ------
NET INCOME ATTRIBUTABLE TO AT&T'S RESIDUAL
INTEREST........................................ $ 108 $(53)(2) $ 55
====== ==== ======
</TABLE>
See Notes to Unaudited Pro Forma AT&T Wireless Group
Condensed Combined Financial Statements.
C-35
<PAGE> 195
AT&T WIRELESS GROUP
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1999
(MILLIONS)
<TABLE>
<CAPTION>
AT&T PRO FORMA
WIRELESS PRO FORMA AT&T WIRELESS
GROUP(1) ADJUSTMENTS GROUP
-------- ----------- -------------
<S> <C> <C> <C>
REVENUES.......................................... $5,490 -- $5,490
OPERATING EXPENSES
Network and other costs of services............... 2,743 -- 2,743
Depreciation and amortization..................... 917 -- 917
Selling, general and administrative............... 1,833 -- 1,833
------ ---- ------
Total operating expenses.......................... 5,493 -- 5,493
OPERATING LOSS.................................... (3) -- (3)
Other income, net................................. 180 -- 180
Interest expense.................................. 102 $(68)(2) 34
Income before income taxes........................ 75 68 143
Provision for income taxes........................ 31 26(3) 57
------ ---- ------
NET INCOME........................................ 44 42 86
Dividend requirements on preferred stock held by
AT&T, net....................................... 41 84(2) 125
------ ---- ------
NET INCOME (LOSS) ATTRIBUTABLE TO AT&T'S RESIDUAL
INTEREST........................................ $ 3 $(42) $ (39)
====== ==== ======
</TABLE>
See Notes To Unaudited Pro Forma AT&T Wireless Group
Condensed Combined Financial Statements.
C-36
<PAGE> 196
AT&T WIRELESS GROUP
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 30, 1999
(IN MILLIONS)
<TABLE>
<CAPTION>
AT&T PRO FORMA
WIRELESS PRO FORMA AT&T WIRELESS
GROUP(1) ADJUSTMENTS GROUP
-------- ----------- -------------
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents......................... $ 16 -- $ 16
Accounts receivable, net.......................... 1,223 -- 1,223
Other current assets.............................. 267 -- 267
------- -------
TOTAL CURRENT ASSETS.............................. 1,506 -- 1,506
Property, plant and equipment, net................ 6,143 -- 6,143
Licensing cost, net............................... 8,366 -- 8,366
Investments....................................... 4,477 -- 4,477
Goodwill, net and other assets.................... 2,364 -- 2,364
------- -------
TOTAL ASSETS...................................... $22,856 -- $22,856
======= ======= =======
LIABILITIES:
Accounts payable.................................. $ 502 -- $ 502
Debt maturing within one year..................... 137 -- 137
Other current liabilities......................... 1,151 -- 1,151
------- -------
TOTAL CURRENT LIABILITIES......................... 1,790 -- 1,790
Long-term debt due to AT&T........................ 3,200 $(2,000)(2) 1,200
Deferred income taxes............................. 3,922 -- 3,922
Other long-term liabilities....................... 49 -- 49
------- ------- -------
TOTAL LIABILITIES................................. 8,961 (2,000) 6,961
MINORITY INTEREST................................. 77 -- 77
SHAREOWNER'S EQUITY:
Preferred stock held by AT&T...................... 1,000 2,000(2) 3,000
AT&T's residual interest.......................... 12,799 -- 12,799
Accumulated other comprehensive income............ 19 -- 19
TOTAL SHAREOWNER'S EQUITY......................... 13,818 2,000 15,818
------- ------- -------
TOTAL LIABILITIES AND SHAREOWNER'S EQUITY......... $22,856 -- $22,856
======= ======= =======
</TABLE>
C-37
<PAGE> 197
AT&T WIRELESS GROUP FOOTNOTES:
1. This column reflects the historical combined results of operations and
financial position of AT&T Wireless Group.
2. Gives effect to the conversion of $2 billion of debt due to AT&T into
preferred stock held by AT&T and related adjustments to interest expense and
preferred stock dividends.
3. Reflects the federal statutory and blended state tax effect on the pro forma
adjustments.
C-38
<PAGE> 198
AT&T COMMON STOCK GROUP
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The unaudited pro forma information set forth below for the AT&T Common
Stock Group has been prepared assuming the AT&T Wireless Group was a separate
group as of January 1, 1998 for income statement purposes, and as of September
30, 1999 for balance sheet purposes, subject to the assumptions and adjustments
in the accompanying notes to the pro forma information. The AT&T Common Stock
Group will continue to have 100% legal ownership of the AT&T Wireless Group.
Accordingly, the AT&T Common Stock Group pro forma condensed combined financial
statements are presented solely for the purpose of reporting the results of
operations and financial position of the AT&T Common Stock Group after
attributing the domestic and international mobile and fixed wireless
communications operations and certain other adjustments to the AT&T Wireless
Group.
The unaudited pro forma condensed combined balance sheet does not purport
to represent what the AT&T Common Stock Group financial position actually would
have been had the AT&T Wireless Group been a separate group on September 30,
1999 or to project the AT&T Common Stock Group financial position for any future
date. The unaudited pro forma condensed combined statements of operations for
the year ended December 31, 1998 and the nine-month period ended September 30,
1999 does not purport to represent what the AT&T Common Stock Group operations
actually would have been had the AT&T Wireless Group been a separate group on
January 1, 1998 or to project operating results for any future period.
The pro forma adjustments do not reflect any operating efficiencies and
cost savings that may be achieved with respect to the combined AT&T Common Stock
Group and AT&T Wireless Group. The pro forma adjustments do not include any
adjustments to historical sales for any future price changes nor any adjustments
to selling, marketing or any other expenses for any future operating changes.
C-39
<PAGE> 199
AT&T COMMON STOCK GROUP
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
AT&T
WITH TCI AND AT&T PRO FORMA
MEDIAONE WIRELESS PRO FORMA AT&T COMMON
GROUP(1) GROUP(2) ADJUSTMENTS STOCK GROUP
------------ -------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES................................. $62,308 $5,406 73(3) $56,975
OPERATING EXPENSES
Access and other interconnection......... 15,328 -- 15,328
Network and other costs of services...... 13,855 2,428 66(3) 11,493
Depreciation and amortization............ 8,805 1,079 27(5) 7,753
Selling, general and administrative...... 15,581 2,122 7(3) 13,466
Asset impairment and restructuring
charges................................ 2,514 120 2,394
------- ------ ---- -------
Total operating expenses................. 56,083 5,749 100 50,434
OPERATING INCOME (LOSS).................. 6,225 (343) (27) 6,541
Other income, net........................ 4,512 764 56(4) 3,950
190(4)
111(6)
(155)(6)
Interest expense......................... 3,233 120 190(4) 3,319
16(5)
Income from continuing operations before
income taxes........................... 7,504 301 (31) 7,172
Provision for income taxes............... 3,269 137 (76)(7) 3,056
------- ------ ---- -------
INCOME FROM CONTINUING OPERATIONS........ 4,235 164 45 4,116
Dividend requirements on preferred
stocks, net............................ 66 56 56 66
------- ------ ---- -------
INCOME FROM CONTINUING OPERATIONS AFTER
CONSIDERATION OF DIVIDEND REQUIREMENTS
ON PREFERRED STOCKS.................... $ 4,169 $ 108 (11) $ 4,050
======= ====== ==== =======
AT&T EARNINGS PER SHARE (EPS)
CALCULATION:
Income from continuing operations
attributable to AT&T common
shareowners............................ $ 4,169 $ 4,050
Weighted average shares outstanding
(basic)................................ 3,760 3,760
Basic EPS................................ $ 1.11 $ 1.08
Income from continuing operations
attributable to AT&T common
shareowners............................ $ 4,169 $ 4,050
Weighted average shares outstanding
(diluted).............................. 3,874 3,874
Diluted EPS.............................. $ 1.08 $ 1.05
</TABLE>
See Notes To Unaudited Pro Forma AT&T Common Stock Group
Condensed Combined Financial Statements.
C-40
<PAGE> 200
AT&T COMMON STOCK GROUP
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
AT&T
WITH
TCI AND AT&T PRO FORMA
MEDIAONE WIRELESS PRO FORMA AT&T COMMON
GROUP(1) GROUP(2) ADJUSTMENTS STOCK GROUP
--------- -------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES................................. $49,000 $5,490 $ 199(3) $43,709
OPERATING EXPENSES
Access and other interconnection......... 11,054 -- 11,054
Network and other costs of services...... 11,783 2,743 152(3) 9,192
Depreciation and amortization............ 7,046 917 6,129
Selling, general and administrative...... 11,026 1,833 47(3) 9,240
Asset impairment and restructuring
charges................................ 702 -- 702
------- ------ ----- -------
Total operating expenses................. 41,611 5,493 199 36,317
OPERATING INCOME (LOSS).................. 7,389 (3) -- 7,392
Other income, net........................ 2,356 180 41(4) 2,347
155(4)
84(6)
(109)(6)
Interest expense......................... 2,291 102 155(4) 2,285
(59)(5)
Income from continuing operations before
income taxes........................... 7,454 75 75 7,454
Provision for income taxes............... 3,062 31 (19) 3,012
------- ------ ----- -------
INCOME FROM CONTINUING OPERATIONS........ 4,392 44 94 4,442
Dividend requirements on preferred
stocks................................. 34 41 41 34
------- ------ ----- -------
INCOME FROM CONTINUING OPERATIONS AFTER
CONSIDERATION OF DIVIDEND REQUIREMENTS
ON PREFERRED STOCKS.................... $ 4,358 $ 3 $ 53 $ 4,408
======= ====== ===== =======
AT&T EARNINGS PER SHARE (EPS)
CALCULATION:
Income from continuing operations
attributable to AT&T common
shareowners............................ $ 4,358 $ 4,408
Weighted average shares outstanding
(basic)................................ 3,791 3,791
Basic EPS................................ $ 1.15 $ 1.16
Income from continuing operations
attributable to AT&T common
shareowners............................ $ 4,423 $ 4,473
Weighted average shares outstanding
(diluted).............................. 3,911 3,911
Diluted EPS.............................. $ 1.13 $ 1.14
</TABLE>
See Notes To Unaudited Pro Forma AT&T Common Stock Group
Condensed Combined Financial Statements.
C-41
<PAGE> 201
AT&T COMMON STOCK GROUP
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PRO FORMA
AT&T AT&T PRO FORMA
WITH MEDIAONE WIRELESS PRO FORMA AT&T COMMON
GROUP(1) GROUP(2) ADJUSTMENTS STOCK GROUP
------------- -------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents......... $ 777 $ 16 -- $ 761
Receivables, net.................. 11,040 1,223 $ 86(3) 9,903
Other current assets.............. 3,251 267 -- 2,984
-------- ------- ------ --------
TOTAL CURRENT ASSETS.............. 15,068 1,506 86 13,648
Property, plant and equipment,
net............................. 41,265 6,143 82(5) 35,204
Franchise costs, net.............. 53,124 -- -- 53,124
Licensing cost, net............... 8,353 8,366 13(5) --
Goodwill, net..................... 31,691 2,364 -- 29,327
Preferred stock investment in AT&T
Wireless Group.................. -- -- 1,000(4) 3,000
2,000(6)
Receivable from AT&T Wireless
Group........................... -- -- 3,200(4) 1,200
(2,000)(6)
Investments....................... 42,394 4,477 -- 37,917
Other assets...................... 8,611 -- -- 8,611
Assets held for sale.............. 15,556 -- -- 15,556
-------- ------- ------ --------
TOTAL ASSETS...................... $216,062 $22,856 $4,381 $197,587
======== ======= ====== ========
</TABLE>
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<TABLE>
<CAPTION>
PRO FORMA
AT&T AT&T PRO FORMA
WITH MEDIAONE WIRELESS PRO FORMA AT&T COMMON
GROUP(1) GROUP(2) ADJUSTMENTS STOCK GROUP
------------- -------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
LIABILITIES
Accounts payable.................. $ 6,240 $ 502 $ 86 5,824
Debt maturing within one year..... 29,312 137 -- 29,175
Other current liabilities......... 9,740 1,151 -- 8,589
-------- ------- ------ --------
TOTAL CURRENT LIABILITIES......... 45,292 1,790 86 43,588
Long-term debt.................... 29,518 3,200 3,200 29,518
Deferred income taxes............. 46,849 3,922 -- 42,927
Other long-term liabilities and
deferred credits................ 8,144 49 -- 8,095
-------- ------- ------ --------
TOTAL LIABILITIES................. 129,803 8,961 3,286 124,128
MINORITY INTEREST................. 3,562 77 -- 3,485
Company-obligated convertible
quarterly income preferred
securities of subsidiary trust
holding solely subordinated debt
securities of AT&T.............. 4,697 -- -- 4,697
Subsidiary-obligated mandatorily
redeemable preferred securities
of subsidiaries holding solely
subordinated debt securities of
subsidiaries.................... 2,698 -- -- 2,698
Preferred stock subject to
mandatory redemption............ 50 -- -- 50
Total Shareowners' Equity......... 75,252 13,818 1,000(4) 62,529
95(5)
TOTAL LIABILITIES AND SHAREOWNERS'
EQUITY.......................... $216,062 $22,856 $4,381 $197,587
======== ======= ====== ========
</TABLE>
See Notes To Unaudited Pro Forma AT&T Common Stock Group
Condensed Combined Financial Statements.
C-43
<PAGE> 203
AT&T COMMON STOCK GROUP
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
1. The unaudited pro forma information set forth in this column gives effect to
the MediaOne and TCI mergers as if they had been completed on January 1, 1998
for income statement purposes, and as if the MediaOne merger had been
completed on September 30, 1999 for balance sheet purposes. AT&T's historical
balance sheet at September 30, 1999 includes the merger with TCI which
occurred on March 1, 1999 for accounting purposes. This column excludes the
results of operations and financial position of Liberty Media Group.
2. This column deducts the historical combined results of operations and
combined financial position of the AT&T Wireless Group.
3. Reflects certain Inter-Group transactions appropriately reflected in the
separate financial statements of the AT&T Common Stock Group that are
eliminated in the AT&T consolidated financial statements.
4. Reflects the impact of the AT&T Common Stock Group investment in preferred
stock of the AT&T Wireless Group and receivable from the AT&T Wireless Group
and related income impacts, all of which are eliminated in the AT&T
consolidated financial statements. The preferred stock has an annual dividend
rate of 9% in both periods and is recorded net of amounts in accordance with
the methodology contained in the tax sharing agreement. The receivable has an
annual rate of 7.25% for the nine months ended September 30, 1999 and 7.75%
for the year ended December 31, 1999 and interest is calculated based on the
average receivable balance.
5. Reflects adjustments made to capitalized interest on the intercompany debt on
the AT&T Wireless Group financial statements.
6. Reflects the conversion of $2 billion of intercompany receivable to preferred
stock of AT&T Wireless Group held by the AT&T Common Stock Group which is
expected to occur in connection with the initial public offering of AT&T
Wireless Group tracking stock.
7. Reflects the statutory tax effect on the pro forma adjustments.
C-44
<PAGE> 204
[AT&T LOGO]
32 Avenue of the Americas
New York, NY 10013-2412
(LOGO)
Recycled Paper
<PAGE> 205
PRELIMINARY COPY
FORM OF PROXY CARD
SPECIAL MEETING AGENDA
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<CAPTION>
<S> <C> <C>
Doors Open
[AT&T LOGO] Welcome, Chairman's Remarks, Notice of Meeting, Discussion,
and Voting
Voting Results and Adjournment
</TABLE>
Hearing-amplification equipment and sign interpretation will be available.
- --------------------------------------------------------------------------------
(Travel Directions) [To Come] (Site Map) [To Come]
PUBLIC TRANSPORTATION INFO
& SITE PUBLIC PHONE NUMBER
................................................................................
AT&T CORP.
32 AVENUE OF THE AMERICAS, NEW YORK, NY 10013-2412
[AT&T LOGO]
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS FOR THE SPECIAL MEETING ON
----------------------------------------------------------------------
The undersigned hereby appoints C.M. Armstrong, M.I. Sovern, and T.H.
Wyman and each of them, proxies, with the powers the undersigned would
possess if personally present, and with full power of substitution, to
P vote all common shares of the undersigned in AT&T Corp. at the Special
R Meeting of Shareholders to be held at the ,
O , at a.m. on , 2000, and at any
X adjournment thereof, upon all subjects that may properly come before
Y the special meeting, including the matters described in the proxy
statement furnished with the proxy card, subject to any directions
indicated on the other side of the proxy card. IF NO DIRECTIONS ARE
GIVEN, THE PROXIES WILL VOTE IN ACCORD WITH THE DIRECTORS'
RECOMMENDATIONS ON THE SUBJECTS LISTED ON THE OTHER SIDE OF THE PROXY
CARD.
This card also provides voting instructions for shares held in the
dividend reinvestment plan and, if registrations are identical, shares
held in the various employee stock purchase and savings plans as
described in the proxy statement. PLEASE SIGN ON THE OTHER SIDE AND
RETURN PROMPTLY TO AT&T CORP., C/O PROXY SERVICES, P.O. BOX 9390,
BOSTON, MA 02205-9968. IF YOU DO NOT SIGN AND RETURN A PROXY CARD,
VOTE BY TELEPHONE OR INTERNET, OR ATTEND THE MEETING AND VOTE BY
BALLOT, YOUR SHARES CANNOT BE VOTED.
<PAGE> 206
PRELIMINARY COPY
FORM OF PROXY CARD
[ADMISSION TICKET]
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<S> <C> <C>
[AT&T LOGO] SPECIAL MEETING OF SHAREHOLDERS 2000 SPECIAL MEETING
, 2000 ADMISSION TICKET
</TABLE>
AT&T CORP. : A.M. LOCAL TIME
C/O PROXY SERVICES (ADDRESS)
P.O. BOX 9398 TEL.
BOSTON, MA 02205 (MAP ON REVERSE)
Please present this ticket for admittance of shareholder(s) named above.
Admittance will be based upon availability of seating.
................................................................................
VOTE BY TELEPHONE OR INTERNET
Your telephone or Internet vote authorizes the Proxy Committee to vote your
shares in the same manner as if you marked, signed, and returned your proxy
card. For telephone or Internet voting, you will need to enter the 9-digit
Control Number located above your name and address in the lower left of this
form.
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VOTE BY PHONE: CALL TOLL-FREE ON A TOUCH-TONE TELEPHONE 1-800-273-1174 ANYTIME.
OPTION A: To vote as the Board of Directors recommends on BOTH items, press 1.
OPTION B: If you prefer to hear your voting choices, press 0. You will hear these instructions:
ITEM 1: To vote FOR, press 1; AGAINST, press 9; ABSTAIN, press 0.
ITEM 2: To vote FOR, press 1; AGAINST, press 9; ABSTAIN, press 0.
ITEM 3: To vote FOR, press 1; AGAINST, press 9; ABSTAIN, press 0.
WHEN ASKED, YOU MUST CONFIRM YOUR VOTE BY PRESSING 1.
VOTE BY INTERNET: THE WEB ADDRESS IS http://att.proxyvoting.com
</TABLE>
THANK YOU FOR VOTING
DETACH CARD IF MAILING
................................................................................
PLEASE MARK
[X] VOTES AS IN THIS
EXAMPLE.
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" ITEMS 1, 2 & 3.
<TABLE>
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1. To approve an amendment to AT&T's charter to create AT&T FOR AGAINST ABSTAIN
Wireless Group tracking stock and to amend other provisions [ ] [ ] [ ]
of our charter.
2. To approve an amendment to our 1997 Long Term Incentive FOR AGAINST ABSTAIN
Program to enable us to grant incentive awards based on [ ] [ ] [ ]
shares of AT&T Wireless Group tracking stock to officers and
employees of the AT&T Common Stock Group and the AT&T
Wireless Group and to permit non-employee directors of AT&T
to participate under the plan.
3. In the event that any other matter may properly come before FOR AGAINST ABSTAIN
the special meeting, or any adjournment or postponement [ ] [ ] [ ]
thereof, the Proxy Committee is authorized, at their
discretion, to vote the matter.
</TABLE>
MARK HERE IF YOU
PLAN TO ATTEND [ ]
THE SPECIAL
MEETING
Signature(s): Date [ ]
------------------------------------------- --------------
Please sign this proxy as name(s) appears above and return it promptly whether
or not you plan to attend the special meeting. If signing for a corporation or
partnership or as agent, attorney or fiduciary, indicate the capacity in which
you are signing. If you do attend the special meeting and decide to vote by
ballot, such vote will supercede this proxy.
