UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
..X.. QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
..... TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________to _____________
Commission file number 1-1105
AT&T CORP.
A New York I.R.S. Employer
Corporation No. 13-4924710
32 Avenue of the Americas, New York, New York 10013-2412
Telephone - Area Code 212-387-5400
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ..X No ...
At April 30, 2000, the following shares of stock were outstanding:
AT&T common stock - 3,145,338,509 shares
Liberty Media Group Class A tracking stock - 1,184,602,868 shares
Liberty Media Group Class B tracking stock - 103,117,226 shares AT&T
Wireless Group tracking stock - 360,000,000 shares
<PAGE>
AT&T Form 10-Q - Part I
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
For the Three
Months Ended
March 31,
2000 1999
Revenue $15,836 $14,096
Operating Expenses
Access and other connection 3,588 3,732
Costs of services and products 3,850 2,872
Selling, general and administrative 3,289 3,157
Depreciation and other amortization 1,566 1,304
Amortization of goodwill, franchise costs
and other purchased intangibles 368 184
Net restructuring and other charges 773 731
Total operating expenses 13,434 11,980
Operating income 2,402 2,116
Equity earnings (losses) from Liberty Media Group 942 (58)
Other income 262 149
Interest expense 555 190
Income before income taxes 3,051 2,017
Provision for income taxes 368 999
Net income $ 2,683 $ 1,018
AT&T Group earnings per AT&T common share:
Basic $ 0.55 $ 0.39
Diluted $ 0.54 $ 0.38
Dividends declared per AT&T common share $ 0.22 $ 0.22
Liberty Media Group earnings (loss) per share:
Basic and diluted $ 0.73 $ (0.05)
See Notes to Consolidated Financial Statements
<PAGE>
AT&T Form 10-Q - Part I
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions Except Share Amounts)
(Unaudited)
March 31, December 31,
2000 1999
ASSETS
Cash and cash equivalents $ 102 $ 1,024
Receivables, less allowances of $1,267 and $1,507 10,943 10,453
Deferred income taxes 1,499 1,287
Other current assets 1,075 1,120
TOTAL CURRENT ASSETS 13,619 13,884
Property, plant and equipment, net of accumulated
depreciation of $28,884 and $30,057 38,853 39,618
Franchise costs, net of accumulated amortization
of $883 and $697 32,194 32,693
Licensing costs, net of accumulated amortization
of $1,551 and $1,491 8,578 8,548
Goodwill, net of accumulated amortization of
$426 and $363 7,390 7,445
Investment in Liberty Media Group and related
receivables, net 41,983 38,460
Other investments and related advances 21,567 19,366
Prepaid pension costs 2,571 2,464
Other assets 6,927 6,928
TOTAL ASSETS $173,682 $169,406
(CONTINUED)
<PAGE>
AT&T Form 10-Q - Part I
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Dollars in Millions Except Share Amounts)
(Unaudited)
March 31, December 31,
2000 1999
LIABILITIES
Accounts payable $ 6,401 $ 6,771
Payroll and benefit-related liabilities 2,457 2,651
Debt maturing within one year 15,195 12,633
Dividends payable 692 703
Other current liabilities 5,968 5,449
TOTAL CURRENT LIABILITIES 30,713 28,207
Long-term debt 21,886 21,591
Long-term benefit-related liabilities 3,943 3,964
Deferred income taxes 23,846 24,199
Other long-term liabilities and deferred credits 3,884 3,801
TOTAL LIABILITIES 84,272 81,762
Minority Interest in Equity of Consolidated
Subsidiaries 2,378 2,391
Company-Obligated Convertible Quarterly Income
Preferred Securities of Subsidiary Trust Holding
Solely Subordinated Debt Securities of AT&T 4,702 4,700
Subsidiary-Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trusts Holding Solely
Subordinated Debt Securities of an AT&T Subsidiary 1,625 1,626
SHAREOWNERS' EQUITY Common Stock:
AT&T Common Stock, $1 par value, authorized 6,000,000,000 shares; issued and
outstanding 3,146,934,773 shares (net of 357,151,160 treasury shares) at March
31, 2000, and 3,196,436,757 shares (net of 287,866,419 treasury shares) at
December 31, 1999 3,147 3,196
Liberty Media Group Class A Tracking Stock, $1 par
value, authorized 2,500,000,000 shares; issued and outstanding 1,181,420,568
shares (net of 23,368,954 treasury shares) at March 31, 2000,
and 1,156,778,730 shares at December 31, 1999 1,181 1,157
Liberty Media Group Class B Tracking Stock, $1 par value, authorized 250,000,000
shares; issued and outstanding 103,117,226 shares (net of 5,303,888 treasury
shares) at March 31, 2000,
and 108,421,114 shares at December 31, 1999 103 108
Additional paid-in capital 58,921 60,792
Guaranteed ESOP obligation - (17)
Retained earnings 8,553 6,712
Accumulated other comprehensive income 8,800 6,979
TOTAL SHAREOWNERS' EQUITY 80,705 78,927
TOTAL LIABILITIES & SHAREOWNERS' EQUITY $173,682 $169,406
See Notes to Consolidated Financial Statements
<PAGE>
AT&T Form 10-Q - Part I
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
(Dollars in Millions Except Share Amounts)
(Unaudited)
For the Three
Months Ended
March 31,
2000 1999
AT&T Common Shares
Balance at beginning of year $ 3,196 $ 2,630
Shares issued (acquired), net:
Under employee plans 1 (2)
For acquisitions - 553
Other* (50) -
Balance at end of period 3,147 3,181
Liberty Media Group Class A Tracking Stock
Balance at beginning of year 1,157 -
Shares issued, net:
For acquisitions 24 1,140
Other - 2
Balance at end of period 1,181 1,142
Liberty Media Group Class B Tracking Stock
Balance at beginning of year 108 -
Shares issued (acquired), net:
For acquisitions - 110
Other (5) -
Balance at end of period 103 110
Additional Paid-In Capital
Balance at beginning of year 60,792 15,195
Shares issued (acquired), net:
Under employee plans 50 (103)
For acquisitions 756 43,144
Other* (2,619) 47
Gain on issuance of common stock
by affiliates (95) -
Other 37 64
Balance at end of period 58,921 58,347
Guaranteed ESOP Obligation
Balance at beginning of year (17) (44)
Amortization 17 13
Balance at end of period - (31)
Retained Earnings
Balance at beginning of year 6,712 7,800
Net income 2,683 1,018
Dividends declared (692) (699)
Treasury shares issued at less
than cost (150) (1,360)
Balance at end of period 8,553 6,759
(CONTINUED)
<PAGE>
AT&T Form 10-Q - Part I
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY (CONTINUED)
(Dollars in Millions Except Share Amounts)
(Unaudited)
For the Three
Months Ended
March 31,
2000 1999
Accumulated Comprehensive Income
Balance at beginning of year 6,979 (59)
Other comprehensive income 1,821 913
Balance at end of year 8,800 854
Total Shareowners' Equity $80,705 $70,362
Summary of Total Comprehensive Income:
Net income $ 2,683 $ 1,018
Net foreign currency translation adjustment
(net of taxes of $(34) and $(2)) (58) (1)
Net revaluation of investments (net of
taxes of $1,227 and $597) 1,879 914
Comprehensive Income $ 4,504 $ 1,931
* Represents AT&T stock received from Cox Communications, Inc., in exchange for
certain cable systems and other assets.
In the first quarter of 2000, other comprehensive income included Liberty Media
Group's foreign currency translation adjustments totaling $(31), net of
applicable taxes, and revaluation of Liberty Media Group's available-for-sale
securities totaling $3,259, net of applicable taxes, partially offset by the
recognition of previously unrecognized available for sale securities of $1,478.
In the first quarter of 1999, other comprehensive income included Liberty Media
Group's foreign currency translation adjustments totaling $12, net of applicable
taxes, and revaluation of Liberty Media Group's available-for-sale securities
totaling $894, net of applicable taxes.
AT&T accounts for treasury stock as retired stock, and as of March 31, 2000,
had 357 million treasury shares of which 225 million shares were owned by AT&T
Broadband subsidiaries and 70 million shares related to the purchase of AT&T
shares previously owned by Liberty Media Group.
We have 100 million authorized shares of preferred stock at $1 par value. No
preferred stock is currently issued or outstanding.
We have 6 billion authorized shares of AT&T Wireless Group tracking stock at
$1 par value, none of which were issued or outstanding as of the end of the
first quarter, however, 360 million were issued and outstanding as a result of
the initial public offering on April 27, 2000.
See Notes to Consolidated Financial Statements
<PAGE>
AT&T Form 10-Q - Part I
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
For the Three
Months Ended
March 31,
2000 1999
Operating Activities
Net income $ 2,683 $ 1,018
Adjustments to reconcile net income to net
cash provided by operating activities:
Gains on sales (594) (158)
Net restructuring and other charges 748 731
Depreciation and amortization 1,934 1,488
Provision for uncollectibles 284 386
Net equity (earnings) losses from Liberty
Media Group (942) 58
Net losses from other equity investments 301 81
Increase in accounts receivable (890) (622)
Decrease in accounts payable (73) (742)
Net change in other operating assets
and liabilities (483) (1,460)
Other adjustments (592) (34)
Net cash provided by operating activities 2,376 746
Investing Activities
Capital expenditures and other additions (3,236) (1,913)
Proceeds from sale or disposal of
property, plant and equipment 143 16
(Increase) decrease in other receivables (980) 4
Net (acquisitions) dispositions of
licenses (82) 9
Equity investment distributions and sales 417 69
Equity investment contributions and
purchases (1,059) (5,821)
(Acquisitions) dispositions of businesses
including cash acquired in acquisitions (188) 797
Other investing activities, net (16) (52)
Net cash used in investing activities (5,001) (6,891)
Financing Activities
Proceeds from long-term debt issuances 739 7,948
Retirements of long-term debt (1,007) (493)
Net acquisition of treasury shares (393) (4,344)
Dividends paid on common stock (703) (603)
Distributions on trust preferred securities (97) (12)
Increase in short-term borrowings, net 3,179 1,834
Other financing activities, net (15) 118
Net cash provided by financing activities 1,703 4,448
Net decrease in cash and cash equivalents (922) (1,697)
Cash and cash equivalents at beginning
of year 1,024 3,160
Cash and cash equivalents at end of period $ 102 $ 1,463
See Notes to Consolidated Financial Statements
<PAGE>
AT&T Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
(a) BASIS OF PRESENTATION
The consolidated financial statements have been prepared by AT&T Corp.
(AT&T) pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC) and, in the opinion of management, include
all adjustments necessary for a fair statement of the consolidated
results of operations, financial position and cash flows for each
period presented. The consolidated results for interim periods are not
necessarily indicative of results for the full year. These financial
results should be read in conjunction with AT&T's Form 10-K for the
year ended December 31, 1999, the financial statements of Liberty Media
Group for the year ended December 31, 1999, included in AT&T's Form
10-K filed on March 27, 2000, and the financial statements of Liberty
Media Group for the quarter ended March 31, 2000, included as Exhibit
99 to this AT&T quarterly report on Form 10-Q.
We have reclassified certain prior period amounts to conform with our
current presentation.
(b) MERGER WITH TELE-COMMUNICATIONS, INC. (TCI)
On March 9, 1999, AT&T completed a merger with TCI, renamed AT&T
Broadband (Broadband), in an all-stock transaction valued at
approximately $52 billion. The merger was accounted for under the
purchase method of accounting and, accordingly, the results of
Broadband have been included with the financial results of AT&T since
the date of acquisition.
In connection with the closing, AT&T issued separate tracking stock
designed to reflect the economic performance of Liberty Media Group
(LMG), TCI's former programming and technology investment business.
AT&T does not have a controlling financial interest for financial
accounting purposes in LMG; therefore, our investment in LMG is
accounted for under the equity method in the accompanying consolidated
financial statements. The amounts attributable to LMG are reflected as
separate line items "Equity earnings (losses) from Liberty Media Group"
and "Investment in Liberty Media Group and related receivables, net,"
in the accompanying consolidated financial statements. As a separate
tracking stock, all of the earnings or losses related to LMG are
excluded from the earnings attributable to the holders of AT&T common
stock, referred to as AT&T Group.
The $52 billion aggregate value assigned to Broadband's net assets was
composed of AT&T common stock of approximately $27 billion, Liberty
Media Group tracking stock of approximately $23 billion, and assumption
of convertible notes and preferred stock of approximately $2 billion.
Approximately $20 billion of the purchase price of $52 billion was
attributed to franchise costs. Also included was approximately $11
billion related to nonconsolidated investments, approximately $5
billion related to property, plant and equipment, approximately $11
billion of Broadband long-term debt and approximately $7 billion
related to other net liabilities. In addition, our investment in LMG
was recorded at approximately $34 billion.
<PAGE>
AT&T Form 10-Q - Part I
Following is a summary of the pro forma results of AT&T as if the
merger had closed effective January 1, 1999:
For the Three Months
Ended March 31, 1999
Shares in millions (unaudited)
Revenue $15,037
Net income 446
Weighted-average AT&T Group common shares 3,147
Weighted-average AT&T Group common shares
and potential common shares 3,253
Weighted-average Liberty Media Group shares 1,190
Earnings per AT&T common share:
Basic $ 0.23
Diluted $ 0.22
Liberty Media Group loss per share:
Basic and diluted $ 0.24
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 period presented, nor does it intend to be a projection of future
results.
(c) OTHER ACQUISITIONS, EXCHANGES AND DISPOSITIONS
EXCITE@HOME
On March 29, 2000, AT&T and At Home Corporation (Excite@Home), along
with Comcast Corporation (Comcast) and Cox Communications, Inc. (Cox),
agreed to new extended distribution arrangements and a reorganization
of the governance of Excite@Home. Under the agreement, Comcast and Cox
will give up certain veto rights at the Excite@Home board level and
their representatives will resign from the board. AT&T will have the
right to elect a majority of the board members and Excite@Home will
amend the charter to allow board action by simple majority. As a
result, AT&T will continue to have 25% of the economic interest in
Excite@Home on a fully diluted basis, however our voting interest will
increase to 74% compared with the 56% voting interest we currently
have. As a result of the governance changes, AT&T will gain a
controlling financial interest and will begin consolidating
Excite@Home's results upon the close of these transactions.
Also, in connection with the new distribution agreements, AT&T will
have the right through 2008 to purchase up to approximately 25 million
Series A shares and 25 million Series B shares. In addition, on July 1,
2000, AT&T will sell a put option to Comcast and Cox that gives Comcast
and Cox the right to sell their shares in Excite@Home to AT&T for a
minimum price of $48 a share any time between January 1, 2001, and June
4, 2002. Comcast and Cox each own approximately 30 million Series A
shares, or about 8% each of Excite@Home. AT&T's purchase obligation is
limited to an aggregate value of approximately $3 billion.
<PAGE>
AT&T Form 10-Q - Part I
COX COMMUNICATIONS, INC.
On March 15, 2000, AT&T received 50.3 million shares of AT&T common
stock held by Cox in exchange for an entity owning cable television
systems serving approximately 312,000 customers and certain other net
assets. Specifically, AT&T exchanged $1.1 billion of investments and
related advances, $0.9 billion of franchise costs and $0.5 billion of
other net assets for stock valued at $2.7 billion on March 15, 2000.
The transaction resulted in a pretax gain of $211.
LENFEST COMMUNICATIONS, INC.
On January 18, 2000, AT&T sold its ownership in Lenfest Communications,
Inc., to a subsidiary of Comcast. In connection with the sale, we
received 48.6 billion shares of Comcast Class Special A common stock.
The transaction resulted in a pretax gain of $231.
CONCERT
On January 5, 2000, AT&T and British Telecommunication, plc (BT)
announced financial closure of Concert, their global communications
joint venture. AT&T contributed all of its international
gateway-to-gateway assets, which had a book value of $1.6 billion, as
well as the economic value of approximately 270 multinational customers
specifically targeted for direct sales by Concert. In addition, we
contributed our international settlement business (revenue and
expenses) to Concert.
(d) NET RESTRUCTURING AND OTHER CHARGES
During the quarter AT&T recorded $773 of net restructuring and other
charges, which included $682 for restructuring and exit costs
associated with AT&T's initiative to reduce costs by the end of 2000,
and $91 related to the government-mandated disposition of AT&T
Communications (U.K.) Ltd., which would have competed directly with
Concert.
Included in restructuring and exit costs was $458 of cash termination
benefits associated with the involuntary separation of approximately
6,200 employees. Approximately one-half of the individuals were
management employees and one-half were nonmanagement employees. Nearly
10% of the affected employees have left their positions as of March 31,
2000, and the remaining employees will leave the company during 2000.
We also recorded $62 of network lease and other contract termination
costs associated with penalties incurred as part of notifying vendors
of the termination of these contracts during the quarter.
<PAGE>
AT&T Form 10-Q - Part I
The following table displays the activity and balances of the
restructuring reserve account from January 1, 2000, to March 31, 2000:
Jan. 1, Mar. 31,
2000 2000
Type of Cost Balance Additions Deductions Balance
Employee
separations $150 $458 $(109) $499
Facility closings 239 - (18) 221
Other 21 62 (11) 72
Total $410 $520 $(138) $792
Deductions reflect cash payments of $89 related to employee separations
and noncash utilization of $49. The cash outlay was primarily funded
through cash from operations. Noncash utilization included deferred
severance payments primarily related to executives.
Also included in restructuring and exit costs was $144 of benefit
curtailment costs associated with employee separations as part of these
exit plans. We also recorded an asset impairment charge of $18 related
to the write-down of unrecoverable assets in certain businesses in
which the carrying value is no longer supported by future cash flows.
As a result of our planned merger with MediaOne Group, Inc. and as part
of our continuing efforts to reduce costs, we may record further
charges for exit and separation plans.
During the first quarter of 1999, we recorded $731 of net restructuring
and other charges, which included a $594 in-process research and
development charge related to the TCI acquisition. This charge
reflected the estimated value, as of the acquisition date, of research
and development projects at TCI which had not yet reached technological
feasibility and which had no alternative future use. The projects
identified related to TCI's efforts to offer voice over Internet
protocol, cost savings efforts for cable telephony implementation,
product integration efforts for advanced set-top devices that would
enable TCI to offer next-generation digital services and in-process
research and development related to Excite@Home.
Also included in the 1999 first quarter charge was $196 primarily
related to a settlement associated with the government-mandated
disposition of a joint venture that would have competed directly with
Concert. In addition, we recorded a benefit of $59 related to the
settlement of pension obligations for former employees who accepted
AT&T's 1998 voluntary retirement incentive program offer.
<PAGE>
AT&T Form 10-Q - Part I
(e) EARNINGS PER COMMON SHARE AND POTENTIAL COMMON SHARE
Basic earnings per share (EPS) for AT&T Group for the three months
ended March 31, 2000 and 1999, were computed by dividing earnings
attributable to AT&T Group common shareowners by the weighted-average
number of common shares outstanding of AT&T Group during the period.
Diluted EPS for AT&T Group was computed by dividing earnings
attributable to AT&T Group common shareowners, adjusted for the
conversion of securities, by the weighted-average number of common
shares and dilutive potential common shares outstanding of AT&T Group
during the period, assuming conversion of the potential common shares
at the beginning of the periods presented. Shares issuable upon
conversion of preferred stock of subsidiaries, convertible debt
securities of a subsidiary, stock options and other performance awards
have been included in the diluted calculation of weighted-average
shares to the extent that the assumed issuance of such shares would
have been dilutive, as illustrated below. The quarterly income
preferred securities were antidilutive and were excluded from the
computation of diluted EPS. The dividends have an after-tax impact to
quarterly earnings of approximately $40. Assuming the conversion of
these securities, the dividends would no longer be included as a
reduction to net income and the securities would convert into 66.667
million shares of AT&T common stock.
Income for the three months ended March 31, 2000 and 1999, of $2,683
and $1,018, respectively, included income attributable to AT&T Group of
$1,741 and $1,076, respectively, as well as earnings (losses) from LMG
of $942 and $(58), respectively.
A reconciliation of the income and share components for diluted EPS
calculations with respect to AT&T Group is as follows:
Three Months Ended
March 31,
2000 1999
Income attributable to AT&T Group $1,741 $1,076
Income impact of assumed conversion of
preferred stock of subsidiary 8 -
Income attributable to AT&T Group adjusted
for conversion of securities $1,749 $1,076
Shares in millions
AT&T Group weighted-average common shares 3,185 2,751
Stock options 31 41
Preferred stock of subsidiary 40 10
Convertible debt securities of subsidiary - 7
AT&T Group weighted-average common shares and
potential common shares 3,256 2,809
Basic EPS for LMG for the three months ended March 31, 2000, and for
the period from the date of acquisition through March 31, 1999, was
computed by dividing the earnings (loss) attributable to LMG
shareowners by the weighted-average number of shares outstanding of LMG
of 1,282 million and 1,194 million, respectively. Potentially dilutive
securities have not been factored into the dilutive calculations
because past history has indicated that these contracts are generally
settled in cash. In addition, since LMG had a loss in the first quarter
of 1999, the impact of any potential shares would have been
antidilutive. There were 50 million and 180 million potentially
<PAGE>
AT&T Form 10-Q - Part I
dilutive securities outstanding at March 31, 2000 and 1999,
respectively. Subject to shareowner approval, the board of directors
has approved a two-for-one stock split of Liberty Media stock to
shareowners of record on May 25, 2000. The shares will be distributed
on or after June 9, 2000.
(f) GUARANTEE OF PREFERRED SECURITIES
Prior to the consummation of the TCI merger, TCI issued mandatorily
redeemable preferred securities through subsidiary trusts that held
subordinated debt securities of TCI. AT&T provides a full and
unconditional guarantee on the outstanding securities issued by TCI
Communications Financing I, II and IV. At March 31, 2000, $1,266 of the
guaranteed redeemable preferred securities remained outstanding.
Following is a summary of the results of TCI which have been included
in the financial results of AT&T for each corresponding period. The
summarized financial information includes transactions with AT&T that
were eliminated in consolidation.
For the Three For the One
Months Ended Month Ended
March 31, 2000 March 31, 1999
Revenue $ 1,490 $ 483
Operating loss 96 544
Net loss 616 740
As of As of
March 31, December 31,
2000 1999
Current assets $ 489 $ 468
Noncurrent assets 93,780 93,798
Current liabilities 2,587 2,814
Noncurrent liabilities 36,050 36,227
Minority interests 2,170 2,175
(g) RELATED PARTY TRANSACTIONS
AT&T has various related party transactions with Concert as a result of
the closure of the global venture in early January.
Included in revenue in the first quarter of 2000 is $266 for services
provided to Concert.
Included in access and other connection expenses in the first quarter
of 2000 are charges from Concert representing costs incurred on our
behalf to connect calls made to foreign countries (international
settlements) and costs paid by AT&T to Concert for distributing Concert
products totaling $579.
During the first quarter of 2000, AT&T loaned $1.0 billion to Concert
which is included within investments and related advances in the
accompanying consolidated balance sheets.
Included in accounts receivable and accounts payable are $510 and $845,
respectively, related to transactions with Concert.
<PAGE>
AT&T Form 10-Q - Part I
(h) SEGMENT REPORTING
AT&T's results are segmented according to the way we manage our
business: Business Services, Consumer Services, Wireless Services and
Broadband. Our existing segments reflect certain managerial changes
since the publication of our 1999 annual results. The Business Services
segment was expanded to include the AT&T Solutions outsourcing unit,
AT&T Global Network Services (AGNS), and the AT&T Information
Technology Services unit, formerly all part of the Solutions Group. The
results of fixed wireless have been moved from the Consumer Services
segment to the Wireless Services segment, and management of the
business sales force that supports wireless products was transferred
from Business Services to Wireless Services. Additionally WOOD-TV
(which was sold in 1999) was transferred and corporate overhead was
allocated to Wireless Services from Corporate and Other, to align the
Wireless Services segment with the results to be included in the AT&T
Wireless Group. All prior period results have been restated to reflect
these changes. In addition, 2000 results reflect the impact of assets
and businesses contributed to Concert, which were included in 1999
results.
Reflecting the dynamics of our business, we continuously review our
management model and structure, which may result in additional
adjustments to our operating segments in the future.
REVENUE
For the Three Months Ended March 31, 2000 1999
Business services external revenue $ 6,958 $6,285
Business services internal revenue 178 163
Total business services revenue 7,136 6,448
Consumer services external revenue 5,059 5,470
Wireless services external revenue 2,198 1,562
Broadband external revenue 1,492 483
Total reportable segments 15,885 13,963
Corporate and Other revenue (a) (49) 133
Total revenue $15,836 $14,096
(a) Included in Corporate and Other is revenue from international
operations and ventures, other corporate operations and the
elimination of internal revenue.
RECONCILIATION OF EARNINGS BEFORE INTEREST AND TAXES (EBIT) TO
INCOME BEFORE INCOME TAXES
For the Three Months Ended March 31, 2000 1999
Business services $1,525 $1,592
Consumer services 1,719 1,851
Wireless services 111 (51)
Broadband (45) (673)
Total reportable segments' EBIT 3,310 2,719
Corporate and Other EBIT (646) (454)
Liberty Media Group equity earnings
(losses) 942 (58)
Interest expense 555 190
Total income before income taxes $3,051 $2,017
<PAGE>
AT&T Form 10-Q - Part I
ASSETS
At Mar. 31, At Dec. 31,
2000 1999
Business services $ 31,855 $ 32,010
Consumer services 5,418 6,279
Wireless services 24,666 23,312
Broadband 53,826 56,536
Total reportable segments 115,765 118,137
Corporate and Other:
Other segments 5,185 3,386
Prepaid pension costs 2,571 2,464
Deferred taxes 1,258 899
Other corporate assets 6,920 6,060
Investment in Liberty Media Group
and related receivables, net 41,983 38,460
Total assets $173,682 $169,406
(i) SUBSEQUENT EVENTS
On April 27, 2000, AT&T completed an initial public offering of
360,000,000 shares of AT&T Wireless Group tracking stock at an initial
public offering price of $29.50 per share. This stock is designed to
track the performance of AT&T's wireless services businesses. The net
proceeds to AT&T after deducting underwriter's discount and related
fees and expenses, were $10.3 billion. AT&T has allocated $7.0 billion
of net proceeds to the AT&T Wireless Group to expand its network,
pursue acquisition opportunities, make capital expenditures and for
general corporate purposes. The remaining net proceeds of $3.3 billion
have been allocated to the AT&T Common Stock Group for general
corporate purposes. Holders of AT&T Wireless Group tracking stock are
entitled to one-half of a vote per share.
The AT&T Wireless Group tracking stock issued in the initial public
offering reflected only a portion of the economic performance of the
AT&T Wireless Group. AT&T retained the remaining interest in the
economic performance of the AT&T Wireless Group in the form of an
inter-group interest. AT&T currently intends to distribute a portion of
the AT&T Common Stock Group's interest in the AT&T Wireless Group in
the second half of this year. Such disposition will include a
distribution in the form of a dividend to holders of AT&T Common Stock
Group shares for at least a portion of such interest, but may also
include an exchange offer, a further sale of AT&T Wireless Group
tracking stock or a combination thereof. The method, timing and
sequence of the distribution options, which could occur in stages, will
be based on the AT&T Board of Directors' assessment of the market
conditions and other circumstances, as appropriate, with the goal of
maximizing value for all AT&T shareowners. Following the distribution
we expect that the outstanding shares of AT&T Wireless Group tracking
stock will reflect 100% of the economic performance of the AT&T
Wireless Group. The AT&T Wireless Group tracking stock is listed on the
New York Stock Exchange under the symbol "AWE."
<PAGE>
AT&T Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
AT&T is among the world's communications leaders, providing voice, data and
video telecommunications services to large and small businesses, consumers and
government agencies. We provide domestic and international long distance,
regional, local and wireless communications services, cable television and
Internet communications services. AT&T also provides billing, directory and
calling-card services to support our communications business.
On January 5, 2000, AT&T and British Telecommunications, plc (BT) announced
financial closure of Concert, their global communications joint venture. Concert
began operations as a leading global telecommunications company, serving
multinational business customers, international carriers and Internet service
providers worldwide, providing them with voice, data and Internet services. AT&T
contributed all of its international gateway-to-gateway assets and the economic
value of approximately 270 multinational customers. In addition, AT&T
contributed our international settlement business (revenue and expenses) to
Concert. Results for 2000 reflect the impact of these contributions.
In connection with our first quarter 1999 merger with Tele-Communications, Inc.,
(TCI) renamed AT&T Broadband (Broadband), we issued a separate tracking stock to
reflect the economic performance of Liberty Media Group (LMG), Broadband's
former programming and technology investment businesses. We do not have a
controlling financial interest in Liberty Media Group for financial accounting
purposes; therefore, our ownership in LMG is reflected as an investment
accounted for under the equity method in the AT&T consolidated financial
statements. All other businesses of AT&T comprise the AT&T Group, the economic
performance of which is represented by AT&T common stock. References to AT&T
common stock do not include the LMG tracking stock.
Ownership of shares of AT&T common stock or Liberty Media tracking stock does
not represent a direct legal interest in the assets and liabilities of either of
the groups, but an ownership of AT&T in total. Each of these shares represents
an interest in the economic performance of the net assets of each of these
groups. Accordingly, the earnings and losses related to LMG are excluded from
earnings attributable to AT&T Group, and earnings and losses related to AT&T
Group are excluded from earnings attributable to LMG.
Because we account for LMG as an equity investment, revenue, operating expenses,
other income, interest expense and provision for taxes for AT&T Group are the
same as for consolidated AT&T.
On March 14, 2000, AT&T shareowners approved the creation of a stock that will
track the economic performance of the AT&T Wireless Group. An initial public
offering of the AT&T Wireless Group tracking stock was completed on April 27,
2000, with the issuance of 360,000,000 shares, which represented 15.6% of the
economic interest of the AT&T Wireless Group. The issuance of the tracking stock
had no impact on results of operations or financial condition for the first
quarter of 2000.
The discussion and analysis that follows provides information management
believes is relevant to an assessment and understanding of AT&T's consolidated
results of operations and cash flows for the three months ended March 31, 2000
and 1999, and financial condition as of March 31, 2000 and December 31, 1999.
<PAGE>
AT&T Form 10-Q - Part I
FORWARD-LOOKING STATEMENTS
Except for the historical statements and discussions contained herein,
statements herein constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including statements concerning future operating
performance, AT&T's share of new and existing markets, AT&T's short- and
long-term revenue and earnings growth rates, and general industry growth rates
and AT&T's performance relative thereto. These forward-looking statements rely
on a number of assumptions concerning future events, including the adoption and
implementation of balanced and effective rules and regulations by the Federal
Communications Commission (FCC) and the state public regulatory agencies, and
AT&T's ability to achieve a significant market penetration in new markets. These
forward-looking statements are subject to a number of uncertainties and other
factors, many of which are outside AT&T's control, that could cause actual
results to differ materially from such statements. AT&T disclaims any intention
or obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
CONSOLIDATED RESULTS OF OPERATIONS
REVENUE
For the Three Months
Ended March 31,
2000 1999
Dollars in Millions
Business services $ 7,136 $ 6,448
Consumer services 5,059 5,470
Wireless services 2,198 1,562
Broadband 1,492 483
Corporate and Other (49) 133
Total revenue $15,836 $14,096
Revenue increased $1,740 million in the first quarter of 2000, or 12.3%, to
$15,836 million compared with the first quarter of 1999. Revenue was impacted by
the 1999 acquisitions of TCI and the IBM Global Network (renamed AT&T Global
Network Services, or AGNS), and the formation of Concert, our global venture
with BT. Normalized revenue, which adjusts 1999 revenue for the acquisition of
TCI, including all closed cable partnerships and Excite@Home, the acquisition of
AGNS, various divestments of international businesses, and the impact of
businesses contributed to Concert, increased $862 million in the first quarter
of 2000, or 5.8%, from $14,974 million in the first quarter of 1999. The
increase was primarily driven by Wireless Services, Business Services and
Broadband, partially offset by a decline in Consumer Services.
OPERATING EXPENSES
For the Three Months Ended March 31, 2000 1999
Dollars in Millions
Access and other connection $3,588 $3,732
Access and other connection expenses decreased $144 million, or 3.9%, to $3,588
million in the first quarter of 2000 compared with the first quarter of 1999.
Included within access and other connection expenses are costs that we pay to
connect domestic calls on the facilities of other service providers. These costs
declined during the quarter primarily due to mandated reductions in per-minute
access costs and the sale of ACC International, partially offset by increased
per-line charges (Primary Interexchange Carrier Charges) and Universal Service
Fund contributions.
<PAGE>
AT&T Form 10-Q - Part I
Also included within access and other connection expenses are costs paid to
foreign telephone companies to connect calls made to foreign countries
(international settlements). As result of the commencement of operations of
Concert, all of our international settlements are incurred by Concert. In
addition, all of our foreign billed revenue is now earned by Concert. Concert
bills us a net expense comprised of international settlement (interconnection)
expense and foreign billed revenue. The amount charged by Concert in 2000 is
lower than interconnection expense incurred in 1999, since AT&T recorded these
transactions within revenue and expense, as applicable. Partially offsetting
this decline were costs incurred related to Concert products that AT&T now sells
to its customers.
For the Three Months Ended March 31, 2000 1999
Dollars in Millions
Costs of services and products $3,850 $2,872
Costs of services and products, previously called "network and other costs of
services," increased $978 million, or 34.0%, to $3,850 million in the first
quarter of 2000 compared with the same quarter last year, largely due to our
1999 acquisitions of TCI and AGNS, partially offset by the impact of the
businesses contributed to Concert. Excluding these items, costs of services and
products increased slightly. The increase resulted from higher costs associated
with our growing wireless subscriber base, increased costs to support growth in
outsourcing contracts and an increase in per-call compensation expense as a
result of a favorable impact of a first quarter 1999 FCC ruling. These increases
were partially offset by a lower provision for uncollectible receivables in
Business and Consumer Services and cost control initiatives.
For the Three Months Ended March 31, 2000 1999
Dollars in Millions
Selling, general and administrative $3,289 $3,157
Selling, general and administrative (SG&A) expenses were up $132 million, or
4.2%, to $3,289 million in the first quarter of 2000 compared with the year-ago
quarter. The increase was primarily driven by our 1999 acquisitions of TCI and
AGNS, partially offset by the impact of businesses contributed to Concert.
Excluding these items, SG&A expenses declined by approximately 2%. The decline
was primarily due to our cost control initiatives, such as headcount reductions,
and lower customer acquisition and retention spending in Consumer Services,
partially offset by an increase in expenses associated with our growing wireless
subscriber base.
For the Three Months Ended March 31, 2000 1999
Dollars in Millions
Depreciation and other amortization $1,566 $1,304
Depreciation and other amortization expenses increased $262 million, or 20.1%,
in the first quarter of 2000 compared with the first quarter of 1999. The
increase primarily resulted from the acquisitions of TCI and AGNS and the growth
in AT&T Group's depreciable asset base resulting from continued infrastructure
investments throughout 1999. Capital expenditures were $2.8 billion in the first
quarter of 2000. We continue to focus the vast majority of our capital spending
to support our growth products of wireless, broadband, data, and local services.
<PAGE>
AT&T Form 10-Q - Part I
For the Three Months Ended March 31, 2000 1999
Dollars in Millions
Amortization of goodwill, franchise costs
and other purchased intangibles $368 $184
Amortization of goodwill, franchise costs, and other purchased intangibles
increased $184 million, or 99.8%, in the first quarter of 2000 compared with the
same quarter of 1999. The increase was largely attributable to the 1999
acquisitions of TCI and AGNS. AT&T also has amortization of goodwill associated
with nonconsolidated investments recorded as a reduction of other income which
amounted to $120 million and $40 million in the first quarter of 2000 and 1999,
respectively.
For the Three Months Ended March 31, 2000 1999
Dollars in Millions
Net restructuring and other charges $773 $731
During the quarter AT&T recorded $773 million of net restructuring and other
charges, which had an approximate $0.14 impact on diluted earnings per share.
Included in the charges was $682 million for restructuring and exit costs
recorded as part of AT&T's initiative to reduce costs by the end of 2000. The
restructuring and exit plans primarily focus on cost controls through headcount
reductions across many of AT&T's businesses. Also included in the charges was
$91 million related to the government-mandated disposition of AT&T
Communications (U.K.) Ltd., which would have competed directly with Concert.
Included in restructuring and exit costs was $458 million of cash termination
benefits associated with the involuntary separation of approximately 6,200
employees. Approximately one-half of the individuals were management employees
and one-half were nonmanagement employees. Nearly 10% of the affected employees
have left their positions as of March 31, 2000, and the remaining employees will
leave the company throughout 2000.
We also recorded $62 million of network lease and other contract termination
costs associated with penalties incurred as part of notifying vendors of the
termination of these contracts during the quarter.
Additionally, restructuring and exit costs included $144 million of benefit
curtailment costs associated with employee separations as part of these exit
plans. We also recorded an $18 million asset impairment charge related to the
write-down of unrecoverable assets in certain businesses in which the carrying
value is no longer supported by future cash flows.
This restructuring initiative is projected to yield cash savings of
approximately $10 million in 2000 (net of severance benefit pay-outs of
approximately $350 million) and approximately $600 million per year thereafter,
as well as EBIT savings of approximately $420 million in 2000 and nearly $650
million per year thereafter. We expect increased spending in growth businesses
will largely offset these cash and EBIT savings. The EBIT savings, primarily
attributable to reduced personnel-related expenses, will be realized in costs of
services and products and SG&A expenses.
As a result of our planned merger with MediaOne and as part of our continuing
efforts to reduce costs, we may record further charges for exit and separation
plans.
<PAGE>
AT&T Form 10-Q - Part I
During the first quarter of 1999, we recorded $731 million of net restructuring
and other charges, which had an approximate $0.24 impact on earnings per diluted
share. The charges included $594 million of in-process research and development
costs related to the TCI acquisition. The charge reflected the estimated fair
value of research and development projects at TCI, as of the date of the
acquisition, which had not yet reached technological feasibility or that had no
alternative future use. Although there are technological issues to overcome to
successfully complete the acquired in process research and development, we
believe we are on track for successful completion. The projects identified
related to efforts to offer voice over Internet Protocol (IP),
product-integration efforts for advanced set-top devices, cost-savings efforts
for cable telephony implementation and in-process research and development
related to Excite@Home. We expect to test IP telephony equipment for field
deployment in late 2000, begin field trials related to our product integration
efforts for set-top devices in mid 2000, and test and deploy devices related to
our telephony cost reductions by the end of 2000.
Also included in the 1999 first quarter charge was $196 million primarily
related to a settlement associated with the government-mandated disposition of a
joint venture that would have competed directly with Concert. In addition, we
recorded a benefit of $59 million related to the settlement of pension
obligations for former employees who accepted AT&T's 1998 voluntary retirement
incentive program offer.
For the Three Months Ended March 31, 2000 1999
Dollars in Millions
Operating Income $2,402 $2,116
Operating income increased 13.6% in the first quarter of 2000 compared with
1999. The improvement was primarily due to operational efficiencies across most
of AT&T's business units, partially offset by the impact of our 1999 TCI
acquisition and the impact of Concert, which began operations in January 2000.
Operating income margin (operating income as a percent of revenue) was 15.2% in
the first quarter of 2000 compared with 15.0% in the same quarter of 1999.
For the Three Months Ended March 31, 2000 1999
Dollars in Millions
Other income $262 $149
Other income was $262 million in the first quarter of 2000, an increase of 75.7%
from the year-ago quarter. The increase was primarily attributable to greater
gains on sales of businesses and investments, including a gain on the sale of
<PAGE>
AT&T Form 10-Q - Part I
Lenfest Communications, Inc. (Lenfest), to Comcast Corporation of $231 million
and a gain on the exchange with Cox Communications, Inc. (Cox), of certain cable
systems and other assets for AT&T stock (Cox transaction) of $211 million in the
first quarter of 2000, partially offset by a gain on the sale of Language Line
Services of $153 million in the first quarter of 1999. Additionally, we recorded
earnings from our equity interest in Concert of $43 million, partly offset by $8
million of amortization of goodwill on our investment in Concert. These
increases were partially offset by higher net losses from other investments,
largely due to the inclusion of a full quarter of losses in 2000 of At Home
Corporation (Excite@Home) and Cablevision Systems Corp. (Cablevision), and
greater distributions on trust preferred securities also due to the inclusion of
a full quarter in 2000.
For the Three Months Ended March 31, 2000 1999
Dollars in Millions
AT&T Group earnings before interest
and taxes (EBIT) $2,664 $2,265
AT&T Group EBIT increased 17.7% to $2,664 million in the first quarter of 2000
compared with the first quarter of 1999. AT&T Group EBIT was impacted by net
restructuring and other charges, gains on sales of Lenfest and Language Line, a
gain on the Cox transaction, and our investments in Excite@Home and Cablevision.
Excluding these items, AT&T Group EBIT was $3,353 million in the first quarter
of 2000, an increase of 15.0% compared with first quarter of 1999. The
improvement was primarily due to cost control initiatives in our long distance
businesses, Wireless Services, and corporate staff functions, partially offset
by the impact of the 1999 TCI acquisition.
For the Three Months Ended March 31, 2000 1999
Dollars in Millions
Equity earnings (losses) from Liberty
Media Group $942 $(58)
Equity earnings from Liberty Media Group were $942 million in the first quarter
of 2000 compared with losses of $58 million in the year-ago quarter. The
difference is primarily due to a gain associated with the acquisition of General
Instrument Corporation (General Instrument) by Motorola, Inc. (Motorola)
reflecting the difference between the carrying value of LMG's interest in
General Instrument and the fair value of the Motorola securities received in the
merger.
For the Three Months Ended March 31, 2000 1999
Dollars in Millions
Interest expense $555 $190
Interest expense was $555 million in the first quarter of 2000 compared with
$190 million in the first quarter of 1999. The increase in interest expense was
primarily due to a higher average debt balance as a result of our 1999
acquisition of TCI.
For the Three Months Ended March 31, 2000 1999
Dollars in Millions
Provision for income taxes $368 $999
The provision for income taxes decreased $631 million, or 63.2%, to $368 million
in the first quarter of 2000 compared with the first quarter of 1999 due to a
lower effective income tax rate. Effective income tax rates for the first
quarter of 2000 and 1999 were 17.4% and 48.1%, respectively. The first quarter
<PAGE>
AT&T Form 10-Q - Part I
2000 effective income tax rate was positively impacted by the Cox transaction,
which was tax-free, and the benefit of the write-off of the related deferred tax
liabilities previously recorded on these assets. The 1999 effective income tax
rate was negatively impacted by the in-process research and development charge,
which was not tax deductible. Excluding the Cox transaction in the first quarter
of 2000 and the in-process research and development charge in the first quarter
of 1999, the effective income tax rates were 38.0% and 37.4% in the first
quarter of 2000 and 1999, respectively.
For the Three Months Ended March 31, 2000 1999
AT&T Group earnings per AT&T common share:
Basic $ 0.55 $ 0.39
Diluted $ 0.54 $ 0.38
Liberty Media Group earnings (loss) per share:
Basic and diluted $ 0.73 $ (0.05)
AT&T Group earnings per share (EPS) on a diluted basis increased 42.1% in the
first quarter of 2000 to $0.54, compared with the same quarter in 1999. The
increase was principally due to higher gains on the sales of businesses and
investments, lower net restructuring charges, revenue growth and operational
efficiencies across most AT&T business units. The increases were partially
offset by the impact of the TCI acquisition.
Included in EPS are the following items:
..Net restructuring and other charges of $0.14 in the first quarter of 2000 and
$0.24 in the first quarter of 1999; ..Gains on the sale of Lenfest and the
exchange with Cox of $0.22 in the first quarter of 2000 and a gain on the sale
of Language Line Services of $0.03 in the first quarter of 1999;
..Losses of $0.07 in the first quarter of 2000 and $0.02 in the first quarter of
1999 reflecting the earnings impact of our investments in Excite@Home and
Cablevision.
The total impact of the these items was an increase to diluted EPS of $0.01 for
the first quarter of 2000 and a decrease of $0.23 to diluted EPS for the first
quarter of 1999. We quantify the impact on our results of our investments in
Excite@Home and Cablevision since these businesses have financial information
publicly available and their results can be reviewed independently of AT&T's
results.
EPS, excluding these items, was $0.53 per diluted share in the first quarter of
2000, a decrease of 13.1%, or $0.08, over the comparable prior year quarter,
primarily as a result of the impact of the TCI acquisition, including shares
issued, partially offset by operational efficiencies across most of AT&T's
business units.
EPS for Liberty Media Group was $0.73 per share for the three months ended March
31, 2000, compared with a loss of $0.05 per share for the three months ended
March 31, 1999. First quarter of 2000 reflects three months of Liberty Media
Group results compared with one month in the first quarter of 1999, reflecting
the March 1999 acquisition of TCI by AT&T. Included in first quarter 2000
results is a gain associated with the acquisition of General Instrument by
Motorola reflecting the difference between the carrying value of LMG's interest
in General Instrument and the fair value of the Motorola securities received in
the merger.
<PAGE>
AT&T Form 10-Q - Part I
SEGMENT RESULTS
In support of the services we provide, we segment our results by the business
units that support our primary lines of business: Business Services, Consumer
Services, Wireless Services and Broadband. A fifth category, Corporate and
Other, includes corporate staff functions, the elimination of inter-segment
business as well as the results of international operations and ventures.
Although not a segment, we also discuss the results of LMG.
The discussion of segment results includes revenue; earnings, including other
income, before interest and taxes (EBIT); earnings, including other income,
before interest, taxes, depreciation and amortization (EBITDA); total assets;
and capital additions. The discussion of EBITDA for Wireless Services and
Broadband is modified to exclude other income. Total assets for each segment
include all assets, except intercompany receivables. Prepaid pension assets and
corporate-owned or leased real estate are generally held at the corporate level
and therefore are included in the Corporate and Other group. Shared network
assets are allocated to the segments and reallocated each January, based on two
years of volumes. Capital additions for each segment include capital
expenditures for property, plant and equipment, acquisitions of licenses,
additions to nonconsolidated investments, increases in franchise costs and
additions to internal-use software.
EBIT is the primary measure used by AT&T's chief operating decision makers to
measure AT&T's operating results and to measure segment profitability and
performance. AT&T calculates EBIT as operating income plus other income. In
addition, management also uses EBITDA as a measure of segment profitability and
performance, and is defined as EBIT plus depreciation and amortization. Interest
and taxes are not factored into the profitability measure used by the chief
operating decision makers; therefore, trends for these items are discussed on a
consolidated basis. Management believes EBIT is meaningful to investors because
it provides analysis of operating results using the same measures used by AT&T's
chief operating decision makers and provides a return on total capitalization
measure. We believe EBITDA is meaningful to investors as a measure of each
segment's liquidity consistent with the measure utilized by our chief operating
decision makers. In addition, we believe that both EBIT and EBITDA allow
investors a means to evaluate the financial results of each segment in relation
to AT&T. Our calculation of EBIT and EBITDA may or may not be consistent with
the calculation of these measures by other public companies. EBIT and EBITDA
should not be viewed by investors as an alternative to generally accepted
accounting principles (GAAP) measures of income as a measure of performance or
to cash flows from operating, investing and financing activities as a measure of
liquidity. In addition, EBITDA does not take into account changes in certain
assets and liabilities that can affect cash flow.
Our existing segments reflect certain managerial changes since the publication
of our 1999 annual results. The Business Services segment was expanded to
include the AT&T Solutions outsourcing unit, AT&T Global Network Services
(AGNS), and the AT&T Information Technology Services unit, formerly all part of
the Solutions Group. The results of fixed wireless have been moved from the
Consumer Services segment to the Wireless Services segment, and management of
the business sales force that supports wireless products was transferred from
Business Services to Wireless Services. Additionally WOOD-TV (which was sold in
1999) was transferred and corporate overhead was allocated to Wireless Services
from Corporate and Other, to align the Wireless Services segment with the
results to be included in the AT&T Wireless Group. All prior period results have
been restated to reflect these changes.
<PAGE>
AT&T Form 10-Q - Part I
BUSINESS SERVICES
Our Business Services segment offers a variety of global communications services
including long distance, local and data and IP networking to small and
medium-sized businesses, large domestic and multinational businesses and
government agencies. Business Services is also a provider of voice, data and IP
transport to service resellers (wholesale services). Also included in this
segment is AT&T Solutions, which is composed of the Solutions outsourcing and
network management business unit and the internal AT&T Information Technology
Services unit.
Three months
ended
March 31,
Dollars in Millions 2000 1999
External revenue $ 6,958 $ 6,285
Internal revenue 178 163
Total revenue 7,136 6,448
EBIT 1,525 1,592
EBITDA 2,384 2,332
OTHER ITEMS
Capital additions $ 1,260 $ 912
At March 31, At Dec. 31,
2000 1999
Total assets $31,855 $32,010
REVENUE
Business Services revenue increased $688 million, or 10.7%, in the first quarter
of 2000 compared with the first quarter of 1999. Normalized for the 1999
acquisition of AGNS and the impact of Concert, revenue increased 6.0%
quarter-over-quarter. The increase was driven primarily by strength in data/IP
and outsourcing services.
Normalized data/IP services revenue grew at a mid-teens rate in the first
quarter of 2000 led by continued strength in frame relay, IP and growth in
high-speed private line services. Excluding low-speed private line, data/IP grew
at a high-teens rate. IP services, which includes AT&T WorldNet services and
Virtual Private Network Services (VPN), grew almost 50% during the first quarter
of 2000 and almost 60% excluding AGNS. On a combined basis, packet services
(frame relay, ATM and IP) grew approximately 40% during the quarter.
In the first quarter of 2000, AT&T Solutions outsourcing revenue grew by $483
million, or 161.4%, to $782 million compared with the first quarter of 1999.
Normalized for the 1999 acquisition of AGNS, revenue grew by $155 million, or
24.6%, versus the prior year. Excluding the impact of the IBM outsourcing
contract, revenue grew over 35% in the first quarter of 2000 compared with the
year-ago quarter primarily due to growth from new contract signings and add-on
business from existing clients.
Normalized voice revenue growth was up slightly in the first quarter of 2000
compared with the first quarter of 1999 as high-teens volume increases were
offset by pricing declines. The price declines reflect competition and product
mix. Growth in domestic long distance and local voice revenue was partially
offset by a decline in international voice revenue.
<PAGE>
AT&T Form 10-Q - Part I
As a component of voice revenue, local revenue grew over 30% as compared to the
first quarter a year-ago. AT&T's integrated business local operations added
170,000 access lines in the first quarter bringing total access lines in service
as of March 31, 2000, to almost 1.5 million. On-net buildings totaled almost
5,900 at the end of the first quarter of 2000, a 5.5% increase over the first
quarter of 1999.
EBIT/EBITDA
EBIT declined $67 million, or 4.2%, and EBITDA increased $52 million, or 2.3%,
in the first quarter of 2000 compared with the same period last year. Excluding
a $93 million restructuring charge in the first quarter of 2000, EBIT was $1,618
million, an increase of 1.6%, and EBITDA was $2,477 million, an increase of
6.3%, compared with the prior year quarter. These increases were primarily due
to revenue growth combined with continued cost reductions partially offset by
the EBIT and EBITDA impact of customers contributed to Concert. The earnings
impact of our equity interest in Concert is reported within Corporate and Other.
OTHER ITEMS
Capital additions increased $348 million, or 38.2%, to $1,260 million in the
first quarter of 2000 compared with the first quarter of 1999, primarily driven
by additions to property, plant and equipment to enhance our data/IP and local
networks.
Total assets decreased $155 million, or 0.5%, to $31,855 million at March 31,
2000, compared with December 31, 1999, primarily resulting from a decrease in
property, plant and equipment as a result of the contribution of assets to
Concert combined with depreciation for the period, partially offset by capital
expenditures.
CONSUMER SERVICES
Our Consumer Services segment provides a variety of any-distance communications
services including long distance, local toll (intrastate calls outside the
immediate local area) and Internet access to residential customers. In addition,
Consumer Services provides transaction services such as prepaid calling-card and
operator-handled calling services. Local phone service is also provided in
certain areas.
Three months
ended
March 31,
Dollars in Millions 2000 1999
Revenue $5,059 $5,470
EBIT 1,719 1,851
EBITDA 1,870 2,044
OTHER ITEMS
Capital additions $ 54 $ 88
At March 31, At Dec. 31,
2000 1999
Total assets $5,418 $6,279
REVENUE
Consumer services revenue decreased 7.5% compared with the first quarter of
1999. Normalized for the impact of Concert, revenue declined 5.6% as long
distance calling volumes declined at a high-single digit rate. These results
reflect the ongoing competitive nature of the consumer long distance industry,
which has resulted in pricing pressures and a loss of customers. Also negatively
impacting revenue was product substitution and market migration away from direct
dial wireline and calling card services to rapidly growing wireless services.
<PAGE>
AT&T Form 10-Q - Part I
EBIT/EBITDA
EBIT and EBITDA for Consumer Services declined 7.1% and 8.5%, respectively, in
the first quarter of 2000 compared with the first quarter of last year. The
declines were impacted by a $96 million restructuring charge in the first
quarter of 2000 and a first quarter 1999 gain of $153 million on the sale of
Language Line Services. Excluding these items, EBIT and EBITDA improved 6.9% and
4.0% to $1,815 million and $1,966 million, respectively, over the comparable
prior year quarter. These improvements were due to cost control initiatives,
primarily in SG&A and costs of services and products expenses. These cost
reductions were partially offset by lower revenue and higher costs associated
with our efforts to penetrate local markets.
OTHER ITEMS
Capital additions were $54 million in the first quarter of 2000 compared with
$88 million in the year-ago quarter primarily due to decreased additions to
internal use software and lower capital expenditures.
Total assets decreased $861 million, or 13.7%, to $5,418 million at March 31,
2000, from December 31, 1999, primarily due to a decrease in property, plant and
equipment as a result of the contribution of certain assets to Concert, coupled
with depreciation expense during the period.
WIRELESS SERVICES
Our Wireless Services segment offers wireless voice and data services and
products to customers in our 850 megahertz (cellular) and 1900 megahertz
(Personal Communications Services, or PCS) markets. Wireless Services also
includes certain interests in partnerships and affiliates that provide wireless
services in the United States and internationally, aviation communications
services, and fixed wireless. Fixed wireless provides residential and small
business customers high-speed Internet access and any-distance voice services
using wireless technology. Three months ended March 31, Dollars in Millions 2000
1999 Revenue $ 2,198 $ 1,562 EBIT 111 (51) EBITDA excluding other income 401 184
OTHER ITEMS
Capital additions $ 1,390 $ 190
At March 31, At Dec. 31,
2000 1999
Total assets $24,666 $23,312
REVENUE
Wireless Services revenue increased $636 million, or 40.7%, to $2,198 million in
the first quarter of 2000 compared with the first quarter of 1999, including
growth in services revenue of 45.2% to $1,992 million. Adjusted to exclude the
acquisition of Vanguard Cellular Systems, Inc., in May 1999, total revenue grew
33.1% compared with the year-ago quarter. The growth reflects the continued
successful execution of AT&T's wireless strategy of targeting and retaining
specific customer segments, expanding the national wireless footprint, focusing
on digital service, and offering simple rate plans. This has resulted in an
increase in consolidated subscribers and an increase in average monthly revenue
per user (ARPU). Equipment revenue grew 8.0% to $206 million in the first
quarter of 2000 compared with the year-ago quarter.
<PAGE>
AT&T Form 10-Q - Part I
AT&T continues to experience strong growth in wireless subscribers. Consolidated
subscribers grew to nearly 10 million at March 31, 2000, representing an
increase of 32.3% over the year-ago quarter. Net subscriber additions totaled
418,000 during the first quarter of 2000, a 12.3% increase over the year-ago
quarter. Total subscribers, including partnership markets in which AT&T does not
own a controlling interest, were more than 13.1 million at March 31, 2000, a
30.2% increase over the year-ago quarter. AT&T's churn rate in the first quarter
of 2000 was 2.9% compared with 2.8% in the first quarter of 1999.
The company continues to rapidly migrate customers to digital service, which
generates more efficient use of the network and a lower churn rate compared with
analog service. At the end of the first quarter, 84.8% of AT&T's nearly 10
million consolidated subscribers were on digital service, up from 67.5% on
digital service a year ago.
AT&T's focus on high-value subscribers has helped generate rising usage by
customers, increasing ARPU quarter over quarter. ARPU across all of AT&T's
wireless markets was $67.20 in the first quarter of 2000, an increase of 10.5%
from the year-ago quarter.
EBIT/EBITDA EXCLUDING OTHER INCOME
EBIT was $111 million in the first quarter of 2000 compared with a deficit of
$51 million in the first quarter of 1999. The improvement resulted from
increased revenue and an improving cost structure, mostly off-network roaming
expenses. Our average off-network rate per minute declined approximately 34%
quarter over quarter. These improvements were partially offset by increased
customer acquisition and customer care costs associated with growth in the
wireless subscriber base as well as higher other income due to a gain on the
redemption of certain securities and increased earnings from equity investments.
EBIT was negatively impacted by the results of fixed wireless, which had a
deficit of $44 million and a deficit of $21 million in the first quarter of 2000
and 1999, respectively.
EBITDA excluding other income was $401 million in the first quarter of 2000, an
increase of 117.9% from the year-ago quarter. The improvement was primarily the
result of revenue growth and an improving cost structure. EBITDA excluding other
income was impacted by the results of fixed wireless, which had a deficit of $34
million and a deficit of $15 million in the first quarter of 2000 and 1999,
respectively.
OTHER ITEMS
In the first quarter of 2000 capital additions increased $1,200 million to
$1,390 million compared with the same quarter last year, primarily driven by
capital expenditures related to network capacity upgrades and improvements to
network quality. Also contributing to the increase in capital additions was our
acquisition of American Cellular through a joint venture during the quarter.
Total assets increased $1,354 million, or 5.8%, to $24,666 million at March 31,
2000, compared with December 31, 1999. The increase was primarily driven by
higher equity investments as a result of our acquisition of American Cellular
through a joint venture and the attribution of 50% of AT&T's investment in Japan
Telecom from international operations and ventures, which is part of Corporate
and Other. Also contributing to the increase in assets was higher property,
plant and equipment resulting from capital expenditures in support of the
continued expansion and build out of our wireless network, partially offset by
depreciation expense for the period.
<PAGE>
AT&T Form 10-Q - Part I
BROADBAND
Our Broadband segment offers a variety of services through our cable broadband
network, including traditional analog video and new services such as digital
cable and AT&T@Home, our high-speed cable Internet access service. Also included
in this segment are the results associated with providing, developing and
installing the infrastructure that supports broadband telephony.
Three months One month
ended ended
March 31, March 31,
Dollars in Millions 2000 1999
Revenue $ 1,492 $ 483
EBIT (45) (673)
EBITDA excluding other income 350 (392)
OTHER ITEMS
Capital additions $ 1,344 $ 310
At March 31, At Dec. 31,
2000 1999
Total assets $53,826 $56,536
First quarter 2000 includes a full quarter of Broadband results while first
quarter of 1999 includes only one month of Broadband results reflecting the
March 1999 acquisition of TCI.
REVENUE
Broadband's revenue was $1,492 million for the first quarter of 2000 and $483
million for the one month ended March 31, 1999. Revenue for the first quarter
increased $110 million, or 7.9%, from $1,382 million, normalized for the impact
of the TCI acquisition, including adjustments for all closed cable partnerships
and Excite@Home. Broadband ended the first quarter of 2000 with 11.1 million
basic cable customers, passing approximately 19.2 million homes, and had more
than 1.9 million digital-cable customers. Broadband's high-speed cable Internet
service, AT&T@Home, ended the first quarter of 2000 with approximately 294,000
customers, compared with approximately 207,000 at the end of 1999.
During the first quarter of 2000, AT&T expanded its presence and provisioning of
its telephony offering. At the end of the quarter, AT&T offered its telephony
service to 39,500 customers in ten markets. At the end of 1999, AT&T had nearly
8,300 broadband telephony customers.
EBIT/EBITDA EXCLUDING OTHER INCOME
EBIT was a deficit of $45 million and EBITDA excluding other income was $350
million for the first quarter of 1999. The amortization of franchise costs and
other purchased intangibles as well as equity losses associated with Excite@Home
and Cablevision, partially offset by the gains on the sale of Lenfest and the
Cox transaction, contributed to the EBIT deficit.
EBIT and EBITDA excluding other income were deficits of $673 million and $392
million for the one month ended March 31, 1999. These deficits were primarily
the result of a charge for in-process research and development projects at
Broadband.
<PAGE>
AT&T Form 10-Q - Part I
OTHER ITEMS
Capital additions were $1,344 million in the first quarter of 2000, comprised
primarily of capital expenditures directed towards the launch of advanced new
services as well as spending on the upgrade of cable plants. Capital additions
also included contributions to various nonconsolidated investments.
Total assets were $53,826 million at March 31, 2000, compared with $56,536
million at December 31, 1999, which represents a 4.8% decrease. The decrease was
primarily driven by decreased investments and franchise costs as a result of the
exchange of certain cable systems and other assets with Cox for AT&T stock, and
the disposition of our investment in Lenfest. In addition, investments declined
as a result of losses on our equity investments recognized during the quarter.
CORPORATE AND OTHER
This group reflects corporate staff functions and elimination of transactions
between segments as well as the results of international operations and
ventures.
Three months
ended
March 31,
Dollars in Millions 2000 1999
Revenue $ (49) $ 133
EBIT (646) (454)
EBITDA (559) (365)
OTHER ITEMS
Capital additions $ 105 $ 335
At March 31, At Dec. 31,
2000 1999
Total assets $15,934 $12,836
REVENUE
Revenue for Corporate and Other primarily includes revenue from our
international operations and ventures of $114 million, a decline of $176 million
from the first quarter of 1999, and the elimination of inter-segment revenue of
$178 million, an increase of $9 million from the first quarter of 1999. In the
first quarter of 2000, Corporate and Other revenue declined $182 million to
negative $49 million. The decrease was largely due to the impact of Concert and
due to lower international operations and ventures revenue associated with the
divestment of certain businesses. Corporate and Other revenue, normalized for
the divestments of international businesses and for the impact of Concert, was
negative $49 million in the first quarter of 2000 compared with a negative $64
million for the first quarter of 1999. International operations and ventures
normalized revenue grew 28.8%, to $114 million, in the first quarter of 2000 as
a result of strong growth in frame relay services and interconnection services.
EBIT/EBITDA
EBIT and EBITDA for Corporate and Other declined $192 million and $194 million
to deficits of $646 million and $559 million, respectively. The declines were
largely due to the first quarter 2000 charge of $568 million, primarily
associated with business restructuring, which was in excess of the first quarter
1999 charge of $137 million, primarily associated with the government-mandated
disposition of an international business that would have competed directly with
Concert. Excluding the charges in the first quarter of 2000 and 1999, EBIT and
EBITDA improved $239 million and $237 million to a deficit of $78 million and
income of $9 million, respectively. These improvements were primarily due to
sales of miscellaneous investments, a larger pension credit in 2000 as a result
of a higher pension trust asset base and an increased discount rate used to
measure the pension and postretirement obligations, continued expense reductions
and earnings from our equity interest in Concert. These improvements were
partially offset by distributions on trust securities.
<PAGE>
AT&T Form 10-Q - Part I
OTHER ITEMS
Capital additions decreased $230 million to $105 million in the first quarter of
2000 compared with the first quarter of 1999 reflecting decreased investment in
international nonconsolidated subsidiaries primarily as a result of the
disposition of certain non-strategic investments during 1999.
Assets increased $3,098 million during the first quarter of 2000 to $15,934
million primarily due to our investment in Concert, including the assets
contributed by Business Services and Consumer Services.
LIBERTY MEDIA GROUP RESULTS
Liberty Media Group (LMG) produces, acquires and distributes entertainment,
educational and informational programming services through all available formats
and media. LMG is also engaged in electronic retailing services, direct
marketing services, advertising sales relating to programming services,
infomercials and transaction processing. Equity earnings (losses) from Liberty
Media Group were $942 million for the three months ended March 31, 2000, and
were $(58) million for the period from the date of acquisition through March 31,
1999. The difference primarily resulted from a first quarter 2000 gain
associated with the acquisition of General Instrument by Motorola reflecting the
difference between the carrying value of LMG's interest in General Instrument
and the fair value of the Motorola securities received in the merger.
LIQUIDITY
Three months
ended
March 31,
Dollars in Millions 2000 1999
CASH FLOWS:
Provided by operating activities $ 2,376 $ 746
Used in investing activities (5,001) (6,891)
Provided by financing activities 1,703 4,448
AT&T GROUP EBITDA $ 4,718 $ 3,793
In the first quarter of 2000 net cash provided by operating activities increased
$1,630 million to $2,376 million. The increase was primarily driven by a
decrease in cash tax payments resulting from the first quarter 1999 tax payment
on the gain on the sale of Universal Card Services Inc. and greater access
payments made in March 1999 as a result of timing differences.
AT&T's investing activities resulted in a net use of cash of $5,001 million for
the first quarter 2000 compared with a net use of cash of $6,891 million for the
first quarter of 1999. During the first quarter of 2000 AT&T used $3.2 billion
for capital expenditures and other additions and loaned $1.0 billion to Concert.
During the first quarter of 1999 AT&T transferred $5.5 billion of cash to LMG
and used $1.9 billion for capital expenditures and other additions.
During the first quarter of 2000 net cash provided by financing activities was
$1,703 million compared with $4,448 million for the first quarter of 1999. The
decrease was primarily due to lower proceeds from the issuance of long-term debt
and the net issuance of short-term debt in the first quarter of 2000 compared
with the first quarter 1999. The decline was partially offset by cash used in
the first quarter of 1999 to fund the purchase of treasury stock.
<PAGE>
AT&T Form 10-Q - Part I
Earnings, including other income, before interest, taxes, depreciation and
amortization (EBITDA) is a measure of our ability to generate cash flow and
should be considered in addition to, but not as a substitute for, other measures
of financial performance reported in accordance with generally accepted
accounting principles. AT&T Group EBITDA increased $925 million, or 24.4%, to
$4,718 million for the first quarter of 2000 compared with the first quarter of
1999. EBITDA was impacted by net restructuring and other charges, gains on the
sales of Lenfest and Language Line, a gain on the Cox transaction, and our
investments in Excite@Home and Cablevision. Excluding these items, EBITDA was
$5,305 million in the first quarter of 2000, an increase of 20.8% compared with
first quarter of 1999. The improvement was primarily due to cost control
initiatives in our long distance businesses, Wireless Services, and corporate
staff functions, and the impact of our 1999 TCI acquisition.
EURO CONVERSION
On January 1, 1999, certain members of the European Union established fixed
conversion rates between their existing currencies and the European Union's
currency (Euro). The transition period is anticipated to extend between January
1, 1999, and July 1, 2002. We have assessed the impact of the conversion on
information-technology systems, currency exchange rate risk, derivatives and
other financial instruments, continuity of material contracts as well as income
tax and accounting issues. We do not expect the conversion during the transition
period to have a material impact on our consolidated financial statements.
FINANCIAL CONDITION
Total assets increased $4,276 million, or 2.5%, to $173,682 million at March 31,
2000, compared with December 31, 1999. Our investment in LMG increased due to
greater combined equity of LMG, driven primarily by increased market value of
investments held by LMG and increased income. Investments and related advances
increased $2,201 million principally due to the establishment of our investment
in Concert, consisting of $1.6 billion of property, plant and equipment and a
loan of $1.0 billion. The decrease in property, plant and equipment principally
related to the Concert contribution, partly offset by capital expenditures. The
increase in accounts receivable was primarily attributable to transactions with
Concert and lower franchise costs resulted from the exchange with Cox of certain
cable systems and other assets for AT&T stock (Cox transaction).
Total liabilities increased $2,510 million, or 3.1%, to $84,272 million at March
31, 2000, compared with December 31, 1999. The increase was primarily due to
increased short-term debt as a result of the issuance of $3.0 billion of
one-year notes and increased current liabilities as a result of higher accrued
income taxes. Partially offsetting these increases were declines in accounts
payable and deferred income taxes. Accounts payable decreased primarily due to
timing of payments, partly offset by increased payables to Concert. Lower
deferred income taxes resulted from the Cox transaction.
Total shareowners' equity increased $1,778 million, or 2.3%, to $80,705 million
at March 31, 2000, compared with December 31, 1999. Total shareowners' equity
includes equity attributable to both AT&T common shareowners' (AT&T Group) and
Liberty Media Group. AT&T Group equity at March 31, 2000, was $38,635 million, a
decrease of 4.4% from $40,406 million at December 31, 1999. The decrease was
primarily due to the receipt of AT&T stock in connection with the Cox
transaction. Liberty Media Group's equity at March 31, 2000, was $42,070
million, an increase of 9.2% from $38,521 million at December 31, 1999.
The ratio of total debt to total AT&T Group capital (debt divided by debt plus
equity of AT&T Group) was 47.2% at March 31, 2000, compared with 44.3% at
December 31, 1999. Equity includes the convertible trust preferred securities
and debt includes redeemable non-convertible trust preferred securities. The
increase was primarily driven by an increase in borrowings and lower equity.
<PAGE>
AT&T Form 10-Q - Part I
RISK MANAGEMENT
We are exposed to market risk from changes in interest and foreign exchange
rates. On a limited basis we use certain derivative financial instruments,
including interest rate swaps, options, forwards and other derivative contracts
to manage these risks. We do not use financial instruments for trading or
speculative purposes. All financial instruments are used in accordance with
board-approved policies.
Assuming a 10% downward shift in interest rates at March 31, 2000, the fair
value of unhedged debt would have increased by approximately $950 million.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Among other provisions, it requires that
entities recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Gains and losses resulting from changes in the fair values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. The effective date for this standard was delayed
via the issuance of SFAS No. 137. The effective date for SFAS No. 133 is now for
fiscal years beginning after June 15, 2000, though earlier adoption is
encouraged and retroactive application is prohibited. For AT&T, this means that
the standard must be adopted no later than January 1, 2001. Based on the types
of derivatives we currently have, we do not expect the adoption of this standard
will have a material impact on AT&T's results of operations, financial position
or cash flows.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements." The SEC delayed the effective
date of this SAB in the first quarter of 2000, so that the SAB must now be
adopted by June 30, 2000. We are currently assessing the impact of SAB 101 on
our results of operations.
OTHER MATTERS
On March 31, 2000, an AT&T-led consortium announced it will acquire a 39% voting
stake in Net2Phone, the leading provider of Internet telephony and other
Web-based communications services. Under the terms of the agreement, the
consortium will purchase four million newly-issued Class A shares from Net2Phone
at a price of $75 per share. In addition, the consortium will purchase 14.9
million Class A Net2Phone shares from Net2Phones's controlling shareholder for
$75 per share. Following these transactions, the consortium will have a 39%
voting stake and a 32% economic stake in Net2Phone for a total cash investment
of approximately $1.4 billion. AT&T plans to invest $725 million for a 51% stake
in the consortium. Other partners, including Liberty Media and BT, are expected
to purchase the remaining partnership interest. AT&T and Net2Phone plan to
jointly develop new Internet voice applications for cable telephony and the
business communications market.
SUBSEQUENT EVENTS
On April 27, 2000, AT&T completed an initial public offering of 360 million
shares of AT&T Wireless Group tracking stock at an initial public offering price
of $29.50 per share. This stock is designed to track the performance of AT&T's
wireless services businesses. The net proceeds to AT&T after deducting
underwriter's discount and related fees and expenses, were $10.3 billion.
Holders of AT&T Wireless Group tracking stock are entitled to one-half of a vote
per share.
<PAGE>
AT&T Form 10-Q - Part I
The AT&T Wireless Group tracking stock issued in the initial public offering
reflected only a portion of the economic performance of the AT&T Wireless Group.
AT&T retained the remaining interest in the economic performance of the AT&T
Wireless Group in the form of an inter-group interest. AT&T currently intends to
distribute a portion of the AT&T Common Stock Group's interest in the AT&T
Wireless Group in the second half of this year. Such disposition will include a
distribution in the form of a dividend to holders of AT&T Common Stock Group
shares for at least a portion of such interest, but may also include an exchange
offer, a further sale of AT&T Wireless Group tracking stock or a combination
thereof. The method, timing and sequence of the distribution options, which
could occur in stages, will be based on the AT&T Board of Directors' assessment
of the market conditions and other circumstances, as appropriate, with the goal
of maximizing value for all AT&T shareowners. Following the distribution we
expect that the outstanding shares of AT&T Wireless Group tracking stock will
reflect 100% of the economic performance of the AT&T Wireless Group. The AT&T
Wireless Group tracking stock is listed on the New York Stock Exchange under the
symbol "AWE."
<PAGE>
AT&T Form 10-Q - Part II
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
A special meeting of the shareholders of the registrant was held on March 14,
2000.
(c) Holders of common shares voted at this meeting on the following director's
proposals, which were set forth in the registrant's proxy statement/prospectus
dated January 26, 2000.
(i) To approve an amendment to AT&T's charter to create AT&T Wireless Group
tracking stock and to amend other provisions of the charter:
% of Shares Voted % of Shares Outstanding
For: 2,261,022,285 shares 97.63 67.77
Against: 35,326,322 shares 1.53 1.06
Abstain: 19,337,362 shares 0.84 0.58
(ii) To approve an amendment to the 1997 Long Term Incentive Program 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 with employees
under the plan:
% of Shares Voted % of Shares Outstanding
For: 1,829,541,981 shares 79.00 54.83
Against: 457,315,125 shares 19.75 13.71
Abstain: 28,828,863 shares 1.25 0.87
(ii) In the event that any other matter may properly come before the special
meeting, or any adjournment or postponement thereof, the Proxy Committee is
authorized, at their discretion, to vote the matter:
% of Shares Voted % of Shares Outstanding
For: 1,416,674,206 shares 61.17 42.46
Against: 628,678,454 shares 27.15 18.85
Abstain: 270,333,309 shares 11.68 8.10
<PAGE>
AT&T Form 10-Q - Part II
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit Number
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
99 Liberty Media Group financial results for the
three months ended March 31, 2000 and the period
ended March 31, 1999
(b) Reports on Form 8-K
Form 8-K dated January 6, 2000 was filed pursuant to Item 5
(Other Events) on January 6, 2000. Form 8-K dated January
11, 2000 was filed pursuant to Item 5 and Item 7 (Financial
Statements and Exhibits) on January 14, 2000. Form 8-K
dated March 13, 2000 was filed pursuant to Item 5 and Item
7 on March 13, 2000. Form 8-K dated March 17, 2000 was
filed pursuant to Item 5 and Item 7 on March 17, 2000. Form
8-K dated March 27, 2000 was filed pursuant to Item 5 and
Item 7 on March 27, 2000. Form 8-K dated March 27, 2000 was
filed pursuant to Item 5 on March 27, 2000. Form 8-K dated
March 29, 2000 was filed pursuant to Item 5 and Item 7 on
April 4, 2000.
<PAGE>
AT&T Form 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AT&T Corp.
/s/ N. S. Cyprus
------------------------------
By: N. S. Cyprus
Vice President and Controller
(Principal Accounting Officer)
Date: May 12, 2000
<PAGE>
AT&T Form 10-Q
Exhibit Index
Exhibit
Number
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
99 Liberty Media Group Financial Results for the three
months ended March 31, 2000 and period ended March 31,
1999
Exhibit 12
Form 10-Q
For the Three
Months Ended
March 31, 2000
AT&T Corp.
Computation of Ratio of Earnings to Fixed Charges
(Dollars in Millions)
(Unaudited)
Income before income taxes $3,051
Add equity investment losses, net of
distributions of less than 50% owned
affiliates 312
Add fixed charges, excluding capitalized interest 742
Total earnings before income taxes and
fixed charges $4,105
Fixed Charges:
Total interest expense excluding capitalized
interest $ 555
Capitalized interest 68
Interest portion of rental expense 73
Dividend requirements on subsidiary preferred
stock and interest on trust preferred
securities 114
Total fixed charges $ 810
Ratio of earnings to fixed charges 5.1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited consolidated balance sheet of AT&T Corp. at March 31, 2000 and the
unaudited consolidated statement of income for the three-month period ended
March 31, 2000 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 102
<SECURITIES> 0
<RECEIVABLES> 12,210
<ALLOWANCES> 1,267
<INVENTORY> 0
<CURRENT-ASSETS> 13,619
<PP&E> 67,737
<DEPRECIATION> 28,884
<TOTAL-ASSETS> 173,682
<CURRENT-LIABILITIES> 30,713
<BONDS> 21,886
6,327
0
<COMMON> 4,431
<OTHER-SE> 76,274
<TOTAL-LIABILITY-AND-EQUITY> 173,682
<SALES> 0
<TOTAL-REVENUES> 15,836
<CGS> 0
<TOTAL-COSTS> 13,434
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 284
<INTEREST-EXPENSE> 555
<INCOME-PRETAX> 3,051
<INCOME-TAX> 368
<INCOME-CONTINUING> 2,683
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,683
<EPS-BASIC> 0.55
<EPS-DILUTED> 0.54
</TABLE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
<TABLE>
Combined Balance Sheets
(unaudited)
<CAPTION>
March 31, December 31,
2000 1999
---------------- -----------------
amounts in millions
<S> <C> <C>
Assets
- ------
Current assets:
Cash and cash equivalents $ 2,177 1,714
Cash collateral under securities lending agreement (note 6)
1,013 --
Short-term investments 525 378
Trade and other receivables, net 175 134
Prepaid expenses and committed program rights 495 406
Deferred income tax assets 731 750
Other current assets 11 5
---------------- -----------------
Total current assets 5,127 3,387
---------------- -----------------
Investments in affiliates, accounted for under the equity method, and
related receivables (note 3) 17,040 15,922
Investments in available-for-sale securities and others (notes 4, 5
and 6) 34,564 28,601
Property and equipment, at cost 465 162
Less accumulated depreciation 24 19
---------------- -----------------
441 143
---------------- -----------------
Intangible assets:
Excess cost over acquired net assets 10,169 9,973
Franchise costs 269 273
---------------- -----------------
10,438 10,246
Less accumulated amortization 592 454
---------------- -----------------
9,846 9,792
---------------- -----------------
Other assets, at cost, net of accumulated amortization
1,196 839
---------------- -----------------
Total assets $ 68,214 58,684
================ =================
</TABLE>
(continued)
<PAGE>
<TABLE>
Combined Balance Sheets, continued
(unaudited)
<CAPTION>
March 31, December 31,
2000 1999
-------------------- -------------
amounts in millions
<S> <C> <C>
Liabilities and Combined Equity
- -------------------------------
Current liabilities:
Accounts payable and accrued liabilities $ 329 245
Accrued stock compensation 2,179 2,405
Program rights payable 174 166
Current portion of debt 1,573 554
---------------- ----------------
Total current liabilities 4,255 3,370
---------------- ----------------
Long-term debt (note 6) 5,237 2,723
Deferred income tax liabilities 16,331 14,107
Other liabilities 136 23
---------------- ----------------
Total liabilities 25,959 20,223
---------------- ----------------
Minority interests in equity of attributed subsidiaries
286 1
Combined equity (note 7):
Combined equity 33,675 31,876
Accumulated other comprehensive earnings, net of taxes
8,307 6,557
---------------- ----------------
41,982 38,433
Due (from) to related parties (13) 27
---------------- ----------------
Total combined equity 41,969 38,460
---------------- ----------------
Commitments and contingencies (note 8)
Total liabilities and combined equity $ 68,214 58,684
============= ================
See accompanying notes to combined financial statements.
</TABLE>
<PAGE>
<TABLE>
Combined Statements of Operations and Comprehensive Earnings
(unaudited)
<CAPTION>
New Liberty Old Liberty
----------------------------------------------- ---------------------
(note 1) (note 1)
Three months One month Two months
ended ended ended
March 31, 2000 March 31, 1999 February 28, 1999
---------------------- ---------------------- ------------------------
amounts in millions
<S> <C> <C> <C>
Revenue $ 235 71 282
Operating costs and expenses:
Operating, selling, general and administrative
174 56 227
Stock compensation (23) (41) 183
Depreciation and amortization 167 53 47
-------------- ---------------- ----------------
318 68 457
-------------- ---------------- ----------------
Operating income (loss) (83) 3 (175)
Other income (expense):
Interest expense (439) (13) (28)
Dividend and interest income 80 24 12
Share of losses of affiliates, net (note 3) (382) (80) (66)
Minority interests in (earnings) losses of attributed
subsidiaries (8) -- 4
Gains on dispositions, net (notes 4 and 5)
2,444 -- 14
Gains on issuance of equity by affiliates and
subsidiaries (note 3) -- -- 389
Other, net 5 -- --
-------------- ---------------- ----------------
1,700 (69) 325
-------------- ---------------- ----------------
Earnings (loss) before income taxes 1,617 (66) 150
Income tax benefit (expense) (675) 8 (209)
-------------- ---------------- ----------------
Net earnings (loss) $ 942 (58) (59)
============== ================ ================
Other comprehensive earnings, net of taxes:
Foreign currency translation adjustments
(31) 12 (15)
Unrealized holding gains arising during the period, net
of reclassification adjustments
1,781 894 971
-------------- ---------------- ----------------
Other comprehensive earnings 1,750 906 956
-------------- ---------------- ----------------
Comprehensive earnings $ 2,692 848 897
============== ================ ================
See accompanying notes to combined financial statements.
</TABLE>
<PAGE>
<TABLE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statement of Equity
Three months ended March 31, 2000
(unaudited)
<CAPTION>
Accumulated
other Due to
comprehensive (from) Total
Combined earnings, related combined
equity net of taxes parties equity
------------- ---------------- ------------ -----------
amounts in millions
<S> <C> <C> <C> <C>
Balance at January 1, 2000 $ 31,876 6,557 27 38,460
Net earnings 942 -- -- 942
Foreign currency translation adjustments -- (31) -- (31)
Recognition of previously unrealized gains on
available-for-sale securities, net -- (1,478) -- (1,478)
Unrealized gains on available-for-sale securities
-- 3,259 -- 3,259
Issuance of AT&T Liberty Media Group tracking stock for
acquisition (note 5) 778 -- -- 778
Issuances of common stock by attributed subsidiary and
affiliate, net of taxes 79 -- -- 79
Other transfers to related parties, net -- -- (40) (40)
------------- ---------------- ------------ -----------
Balance at March 31, 2000 $ 33,675 8,307 (13) 41,969
============= ================ ============ ===========
See accompanying notes to combined financial statements.
</TABLE>
<PAGE>
<TABLE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Cash Flows
(unaudited)
<CAPTION>
New Liberty Old Liberty
----------------------------------------------- ---------------------
(note 1) (note 1)
Three months One month Two months
ended ended ended
March 31, 2000 March 31, 1999 February 28, 1999
---------------------- ---------------------- ---------------------
amounts in millions
(see note 2)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 942 (58) (59)
Adjustments to reconcile net earnings (loss) to net cash
used by operating activities:
Depreciation and amortization 167 53 47
Stock compensation (23) (41) 183
Payments of stock compensation (183) (1) (126)
Share of losses of affiliates, net 382 80 66
Deferred income tax expense 721 3 205
Intergroup tax allocation (46) (12) --
Cash payment from AT&T pursuant to tax sharing
agreement 33 -- --
Minority interests in earnings (losses) of
attributed subsidiaries 8 -- (4)
Gains on disposition of assets, net (2,444) -- (14)
Noncash interest 364 -- --
Gains on issuance of equity by affiliates and
subsidiaries -- -- (389)
Other noncash charges -- -- 9
Changes in operating assets and liabilities, net of
the effect of acquisitions and dispositions:
Change in receivables 15 2 (19)
Change in prepaid expenses and committed
program rights (88) (5) (10)
Change in payables and accruals 7 (32) 4
----------------- ----------------- ---------------------
Net cash used by operating activities
(145) (11) (107)
----------------- ----------------- ---------------------
Cash flows from investing activities:
Cash paid for acquisitions (342) -- --
Capital expended for property and equipment
(12) (4) (21)
Investments in and loans to affiliates and others
(808) (88) (45)
Purchases of marketable securities (337) (3,217) (132)
Sales and maturities of marketable securities
511 -- 34
Cash proceeds from dispositions 8 3 43
Cash balances of deconsolidated subsidiaries
-- -- (53)
Other, net 15 4 (9)
----------------- ----------------- ---------------------
Net cash used by investing activities
(965) (3,302) (183)
----------------- ----------------- ---------------------
(continued)
</TABLE>
<PAGE>
<TABLE>
Combined Statements of Cash Flows, continued
(unaudited)
<CAPTION>
New Liberty Old Liberty
----------------------------------------------- ---------------------
(note 1) (note 1)
Three months One month Two months
ended ended ended
March 31, 2000 March 31, 1999 February 28, 1999
---------------------- ---------------------- ---------------------
amounts in millions
(see note 2)
<S> <C> <C> <C>
Cash flows from financing activities:
Borrowings of debt 2,410 495 156
Repayments of debt (772) (448) (148)
Cash transfers (to) from related parties (41) (80) 132
Repurchase of stock of subsidiaries -- -- (45)
Other, net (24) -- (1)
----------------- ----------------- -------------------
Net cash provided (used) by financing
activities 1,573 (33) 94
----------------- ----------------- -------------------
Net increase (decrease) in cash and
cash equivalents
463 (3,346) (196)
Cash and cash equivalents at beginning
of period 1,714 5,319 407
----------------- ----------------- -------------------
Cash and cash equivalents at end of
period $ 2,177 1,973 211
================= ================= ===================
See accompanying notes to combined financial statements.
</TABLE>
<PAGE>
"LIBERTY MEDIA GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
March 31, 2000
(unaudited)
(1) Basis of Presentation
The accompanying combined financial statements include the accounts of
the subsidiaries and assets of AT&T Corp. ("AT&T") that are attributed
to Liberty Media Group, as defined below. On March 9, 1999, AT&T
acquired Tele-Communications, Inc. ("TCI"), the former owner of the
assets attributed to Liberty Media Group, in a merger transaction (the
"AT&T Merger"). The AT&T Merger has been accounted for using the
purchase method. Accordingly, Liberty Media Group's assets and
liabilities have been recorded at their respective fair market values
therefore, creating a new cost basis. For financial reporting purposes
the AT&T Merger and related restructuring transactions are deemed to
have occurred on March 1, 1999. Accordingly, for periods prior to March
1, 1999 the assets and liabilities attributed to Liberty Media Group
and the related combined financial statements are sometimes referred to
herein as "Old Liberty", and for periods subsequent to February 28,
1999 the assets and liabilities attributed to Liberty Media Group and
the related combined financial statements are sometimes referred to
herein as "New Liberty". The "Company" and "Liberty Media Group" refer
to both New Liberty and Old Liberty.
At March 31, 2000, Liberty Media Group consisted principally of the
following:
o AT&T's assets and businesses which provide programming services
including production, acquisition and distribution through all
available formats and media of branded entertainment, educational
and informational programming and software, including multimedia
products;
o AT&T's assets and businesses engaged in electronic retailing,
direct marketing, advertising sales relating to programming
services, infomercials and transaction processing;
o certain of AT&T's assets and businesses engaged in international
cable, telephony and programming businesses; and,
o AT&T's holdings in a class of tracking stock of Sprint Corporation
(the "Sprint PCS Group Stock").
All significant intercompany accounts and transactions have been
eliminated. The combined financial statements of Liberty Media Group
are presented for purposes of additional analysis of the consolidated
financial statements of AT&T and should be read in conjunction with
such consolidated financial statements.
The accompanying interim combined financial statements are unaudited
but, in the opinion of management, reflect all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation of the
results for such periods. The results of operations for any interim
period are not necessarily indicative of results for the full year.
These combined financial statements should be read in conjunction with
the combined financial statements and notes thereto included as an
exhibit to AT&T's Report on Form 10-K for the year ended December 31,
1999.
(continued)
<PAGE>
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Certain prior period amounts have been reclassified for comparability
with the 2000 presentation.
(2) Supplemental Disclosures to Combined Statements of Cash Flows
Cash paid for interest was $70 million for the three months ended March
31, 2000, $16 million for the one month period ended March 31, 1999 and
$32 million for the two month period ended February 28, 1999. Cash paid
for income taxes for the three months ended March 31, 2000, the one
month ended March 31, 1999 and the two months ended February 28, 1999
was not material.
<TABLE>
<CAPTION>
New Liberty Old Liberty
----------------------------------------- -----------------
(note 1) (note 1)
Three months One month Two months
ended ended ended
March 31, March 31, February 28,
2000 1999 1999
-------------------- ------------------- -------------
amounts in millions
<S> <C> <C> <C>
Cash paid for acquisitions (note 5):
Fair value of assets acquired
$ 2,510 -- --
Net liabilities assumed (743) -- --
Deferred tax liability recorded
(362) -- --
Minority interests in equity of
acquired attributed
subsidiaries (285) -- --
AT&T Liberty Media Group tracking
stock issued
(778) -- --
---------------- ---------------- -----------------
Cash paid for acquisitions
$ 342 -- --
================ ================ =================
</TABLE>
<TABLE>
<CAPTION>
The following table reflects the change in cash and cash equivalents
resulting from the AT&T Merger and related restructuring transactions
(amounts in millions):
<S> <C>
Cash and cash equivalents prior to the AT&T Merger $ 211
Cash received in restructuring transactions, net of cash balances transferred
5,284
Cash paid to TCI Group for certain warrants (176)
----------
Cash and cash equivalents subsequent to the AT&T Merger $ 5,319
==========
</TABLE>
(continued)
<PAGE>
<TABLE>
<CAPTION>
Liberty Media Group ceased to include TV Guide, Inc. ("TV Guide") in
its combined financial results and began to account for TV Guide using
the equity method of accounting, effective March 1, 1999 (see note 3).
The effect of changing the method of accounting for Liberty Media
Group's ownership interest in TV Guide from the consolidation method to
the equity method is summarized below (amounts in millions):
<S> <C>
Assets (other than cash and cash equivalents) reclassified to
investments in affiliates $ (200)
Liabilities reclassified to investments in affiliates 190
Minority interests in equity of attributed subsidiaries reclassified to
investments in affiliates 63
--------------
Decrease in cash and cash equivalents $ 53
==============
</TABLE>
(3) Investments in Affiliates Accounted for under the Equity Method
---------------------------------------------------------------
Liberty Media Group has various investments accounted for under the
equity method. The following table includes Liberty Media Group's
carrying amount of the more significant investments in affiliates:
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------------------- -----------------------
amounts in millions
<S> <C> <C>
USA Networks, Inc. ("USAI") and related
investments $ 2,682 2,699
Telewest Communications plc ("Telewest")
1,884 1,996
Discovery Communications, Inc. ("Discovery")
3,378 3,441
TV Guide 1,719 1,732
QVC Inc. ("QVC") 2,514 2,515
Teligent, Inc. ("Teligent") 1,317 --
Flextech p.l.c. ("Flextech") 707 727
UnitedGlobalCom, Inc. ("UnitedGlobalCom")
453 505
Various foreign equity investments (other than
Telewest and Flextech)
1,440 1,463
Other 946 844
-------------- ----------------
$ 17,040 15,922
============== ================
</TABLE>
(continued)
<PAGE>
The following table reflects Liberty Media Group's share of earnings
(losses) of affiliates:
<TABLE>
<CAPTION>
New Liberty Old Liberty
------------------------------------------ -----------------
(note 1) (note 1)
Three months One month Two months
ended ended ended
March 31, March 31, February 28,
2000 1999 1999
--------------------- ------------------- -----------------
amounts in millions
<S> <C> <C> <C>
USAI and related investments
$ (7) 3 10
Telewest (87) (25) (38)
Discovery (63) (16) (8)
TV Guide (13) (4) --
QVC (1) (1) 13
Teligent (71) -- --
Flextech (10) (5) (5)
UnitedGlobalCom (50) -- --
Other foreign investments (47) (15) (22)
Other (33) (17) (16)
------------- ------------- ---------------
$ (382) (80) (66)
============= ============= ===============
</TABLE>
Summarized unaudited combined financial information for affiliates is
as follows:
<TABLE>
<CAPTION>
New Liberty Old Liberty
------------------------------------------ ----------------
(note 1) (note 1)
Three months One month Two months
ended ended ended
March 31, March 31, February 28,
2000 1999 1999
--------------------- ------------------- ----------------
amounts in millions
<S> <C> <C> <C>
Revenue $ 3,610 993 2,341
Operating expenses (3,333) (849) (1,894)
Depreciation and amortization
(641) (124) (353)
--------------- ----------------- ----------------
Operating income (loss)
(364) 20 94
Interest expense (465) (37) (281)
Other, net (4) (89) (127)
--------------- ---------------- -----------------
Net loss $ (833) (106) (314)
============ ================ ================
</TABLE>
(continued)
<PAGE>
USAI owns and operates businesses in network and television production,
television broadcasting, electronic retailing, ticketing operations,
and internet services. At March 31, 2000, Liberty Media Group directly
and indirectly held 66.5 million shares of USAI's common stock. Liberty
Media Group also held shares directly in certain subsidiaries of USAI
which are exchangeable into 79.0 million shares of USAI common stock.
Liberty Media Group's direct ownership of USAI is currently restricted
by Federal Communications Commission ("FCC") regulations. The exchange
of these shares can be accomplished only if there is a change to
existing regulations or if Liberty Media Group obtains permission from
the FCC. If the exchange of subsidiary stock into USAI common stock was
completed at March 31, 2000, Liberty Media Group would own 145.5
million shares or approximately 21% (on a fully-diluted basis) of USAI
common stock. USAI's common stock had a closing market value of $22.56
per share on March 31, 2000.
Telewest currently operates and constructs cable television and
telephone systems in the UK. At March 31, 2000, Liberty Media Group
indirectly owned 506 million of the issued and outstanding Telewest
ordinary shares. The reported closing price on the London Stock
Exchange of Telewest ordinary shares was $7.66 per share at March 31,
2000.
Teligent is a full-service, facilities based communications company in
which Liberty Media Group acquired an approximate 40% equity interest
in its January 14, 2000 acquisition of Associated Group, Inc. (the
"Associated Group") (see note 5). At March 31, 2000, Liberty Media
Group held 21 million shares of Teligent Class A common stock. The
closing price for Teligent Class A common stock was $66.81 per share on
March 31, 2000.
On March 1, 1999, UVSG and News Corp. completed a transaction whereby
UVSG acquired News Corp.'s TV Guide properties, creating a broader
platform for offering television guide services to consumers and
advertisers, and UVSG was renamed TV Guide. News Corp. received total
consideration of $1.9 billion including $800 million in cash, 22.5
million shares of UVSG's Class A common stock and 37.5 million shares
of UVSG's Class B common stock valued at an average of $18.65 per
share. In addition, News Corp. purchased approximately 6.5 million
additional shares of UVSG Class A common stock for $129 million in
order to equalize its ownership with that of Liberty Media Group. As a
result of these transactions, and another transaction completed on the
same date, News Corp, Liberty Media Group and TV Guide's public
stockholders own on an economic basis approximately 44%, 44% and 12%,
respectively, of TV Guide. Following such transactions, News Corp. and
Liberty Media Group each have approximately 49% of the voting power of
TV Guide's outstanding stock. In connection with the increase in TV
Guide's equity, net of dilution of Liberty Media Group's ownership
interest in TV Guide, Liberty Media Group recognized a gain of $372
million (before deducting deferred income taxes of $147 million).
(continued)
<PAGE>
The Class A common stock of TV Guide is publicly traded. At March 31,
2000, Liberty Media Group held 58 million shares of TV Guide Class A
common stock and 75 million shares of TV Guide Class B common stock.
The TV Guide Class B common stock is convertible, one-for-one, into TV
Guide Class A common stock. The closing price for TV Guide Class A
common stock was $48.06 per share on March 31, 2000.
Flextech develops and sells a variety of television programming in the
UK. At March 31, 2000, Liberty Media Group indirectly owned 58 million
Flextech ordinary shares. The reported closing price on the London
Stock Exchange of the Flextech ordinary shares was $28.34 per share at
March 31, 2000.
UnitedGlobalCom is the largest global broadband communications provider
of video, voice and data services with operations in over 20 countries
throughout the world. At March 31, 2000, Liberty Media Group owned an
approximate 10% economic ownership interest representing an approximate
36% voting interest in UnitedGlobalCom. The closing price for
UnitedGlobalCom Class A common stock was $75.06 per share on March 31,
2000. The UnitedGlobalCom Class B common stock is convertible, on a
one-for-one basis, into UnitedGlobalCom Class A common stock.
The $14 billion aggregate excess of Liberty Media Group's aggregate
carrying amount in its affiliates over Liberty Media Group's
proportionate share of its affiliates' net assets is being amortized
over an estimated useful life of 20 years.
(4) Investments in Available-for-sale Securities and Others
-------------------------------------------------------
Investments in available-for-sale securities and others are summarized
as follows:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------------- -----------------
amounts in millions
<S> <C> <C>
Sprint Corporation ("Sprint") $ 12,513 10,186
Time Warner, Inc. ("Time Warner") 10,975 8,202
News Corp. 2,801 2,403
Motorola, Inc. ("Motorola") 3,308 3,430
Other available-for-sale securities 4,427 3,773
Other investments, at cost, and related receivables
1,065 985
---------------- -----------------
35,089 28,979
Less short-term investments 525 378
---------------- -----------------
$ 34,564 28,601
============== =================
</TABLE>
(continued)
<PAGE>
On January 5, 2000, Motorola completed the acquisition of General
Instrument Corporation ("General Instrument") through a merger of
General Instrument with a wholly owned subsidiary of Motorola. In the
merger, each outstanding share of General Instrument common stock was
converted into the right to receive 0.575 shares of Motorola common
stock. In connection with the merger Liberty Media Group received 18
million shares and warrants to purchase 12 million shares of Motorola
common stock in exchange for its holdings in General Instrument.
Liberty Media Group recognized a $2.2 billion gain (excluding related
tax expense of $883 million) on such transaction during the first
quarter of 2000 based on the difference between the carrying value of
Liberty Media Group's interest in General Instrument and the fair value
of the Motorola securities received.
Liberty Media Group's right to exercise warrants to purchase 6.1
million shares of Motorola common stock is subject to AT&T satisfying
the terms of a purchase commitment in 2000. AT&T has agreed to pay
Liberty Media Group $14.35 for each warrant that does not vest as a
result of the purchase commitment not being met.
Investments in available-for-sale securities are summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------------ -----------------
amounts in millions
<S> <C> <C>
Equity securities:
Fair value $ 30,663 24,472
Gross unrealized holding gains 15,440 11,457
Gross unrealized holding losses (1,684) (646)
Debt securities:
Fair value 1,820 1,995
Gross unrealized holding gains 1 --
Gross unrealized holding losses (21) (22)
</TABLE>
Management of Liberty Media Group estimates the market value,
calculated using a variety of approaches including multiple of cash
flow, per subscriber value, a value of comparable public or private
businesses or publicly quoted market prices, of all of Liberty Media
Group's investments in available-for-sale securities and others
aggregated $33.3 billion and $29.2 billion at March 31, 2000 and
December 31, 1999, respectively. No independent appraisals were
conducted for those assets.
(continued)
<PAGE>
(5) Acquisitions
On January 14, 2000, Liberty Media Group completed its acquisition of
Associated Group pursuant to a merger agreement among AT&T, Liberty
Media Group and Associated Group. Under the merger agreement, each
share of Associated Group's Class A common stock and Class B common
stock was converted into 0.49634 shares of AT&T common stock and
1.20711 shares of AT&T Class A Liberty Media Group tracking stock.
Prior to the merger, Associated Group's primary assets were (1)
approximately 19.7 million shares of AT&T common stock, (2)
approximately 23.4 million shares of AT&T Class A Liberty Media Group
tracking stock, (3) approximately 5.3 million shares of AT&T Class B
Liberty Media Group tracking stock, (4) approximately 21.4 million
shares of common stock, representing approximately a 40% interest, of
Teligent, and (5) all of the outstanding shares of common stock of
TruePosition, Inc., which provides location services for wireless
carriers and users designed to determine the location of any wireless
transmitters, including cellular and PCS telephones. Immediately
following the completion of the merger, all of the assets and
businesses of Associated Group were transferred to Liberty Media Group.
All of the shares of AT&T common stock, AT&T Class A Liberty Media
Group tracking stock and AT&T Class B Liberty Media Group tracking
stock previously held by Associated Group were retired by AT&T.
The acquisition of Associated Group was accounted for as a purchase and
the $20 million excess of the fair value of the net assets acquired
over the purchase price is being amortized over ten years. As a result
of the issuance of AT&T Liberty Media Group tracking stock, net of the
shares of AT&T Liberty Media Group tracking stock acquired in this
transaction, Liberty Media Group recorded a $778 million increase to
combined equity.
On March 16, 2000, Liberty Media Group purchased shares of preferred
stock in TCI Satellite Entertainment, Inc. ("TSAT") in exchange for
Liberty Media Group's economic interest in approximately 5 million
shares of Sprint PCS Group Stock, valued at $300 million. Liberty Media
Group received 150,000 shares of TSAT Series A 12% Cumulative Preferred
Stock and 150,000 shares of TSAT Series B 8% Cumulative Convertible
Voting Preferred Stock. The Series A preferred stock does not have
voting rights, while the Series B preferred stock gives Liberty Media
Group approximately 85% of the voting power of TSAT. In connection with
this transaction, Liberty Media Group realized a $211 million gain
(before related tax expense of $84 million) during the first quarter of
2000 based on the difference between the cost basis and fair value of
the Sprint PCS Group Stock exchanged.
On March 28, 2000, Liberty Media Group announced that it had completed
its cash tender offer for the outstanding common stock of Ascent
Entertainment Group, Inc. ("Ascent") at a price of $15.25 per share.
Approximately 85% of the outstanding shares of common stock of Ascent
were tendered in the offer and Liberty Media Group paid approximately
$385 million. Such transaction was accounted for as a purchase and the
$216 million excess of the purchase price over the fair value of the
net assets acquired is being amortized over 20 years.
(continued)
<PAGE>
(6) Long-Term Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------------- ----------------
amounts in millions
<S> <C> <C>
Parent company debt:
Bank credit facilities $ 288 390
Senior notes 741 741
Senior debentures (a) 1,486 494
Senior exchangeable debentures (b) 2,196 1,022
Securities lending agreement (c) 1,116 --
--------------- ----------------
5,827 2,647
Debt of subsidiaries:
Bank credit facilities 770 573
Senior notes 165 --
Other debt, at varying rates 48 57
--------------- ----------------
983 630
--------------- ----------------
Total debt 6,810 3,277
Less current maturities 1,573 554
--------------- ----------------
Total long-term debt $ 5,237 2,723
=============== ================
<FN>
(a) On February 2, 2000, Liberty Media Group received net cash
proceeds of approximately $983 million from the issuance of
8-1/4% Senior Debentures due 2030. The senior debentures have
an aggregate principal amount of $1 billion. Interest on the
senior debentures is payable on February 1 and August 1 of
each year.
(b) On February 10, 2000, Liberty Media Group received net cash
proceeds of $735 million from the issuance of $750 million
principal amount of 3-3/4% Senior Exchangeable Debentures due
2030. On March 8, 2000, Liberty Media Group received net cash
proceeds of $59 million from the issuance of an additional $60
million principal amount of 3-3/4% Senior Exchangeable
Debentures due 2030. Each debenture has a $1,000 face amount
and is exchangeable at the holder's option for the value of
16.7764 shares of Sprint PCS Group Stock. This amount will be
paid only in cash until the later of February 15, 2002 and the
date the direct and indirect ownership level of Sprint PCS
Group Stock owned by Liberty Media Group falls below a
designated level, after which, at Liberty Media Group's
election, Liberty Media Group may pay the amount in cash,
Sprint PCS Group Stock or a combination thereof. Interest on
these exchangeable debentures is payable on February 15 and
August 15 of each year. The carrying amount of the
exchangeable debentures in excess of the principal amount (the
"Contingent Portion) is based on the fair value of the
underlying Sprint PCS Group Stock. The increase or decrease in
the Contingent Portion is recorded as an increase or decrease
to interest expense in the combined statement of operations
and comprehensive earnings.
(continued)
<PAGE>
(c) On January 7, 2000, a trust, which holds Liberty Media Group's
investment in Sprint, entered into agreements to loan 18
million shares of Sprint PCS Group stock to a third party, as
Agent. The obligation to return those shares is secured by
cash collateral equal to 100% of the market value of that
stock. During the period of the loan, which is terminable by
either party at any time, the cash collateral is to be
marked-to-market daily. The trust, for the benefit of Liberty
Media Group, has the use of 80% of the cash collateral plus
any interest earned thereon during the term of the loan, and
is required to pay a rebate fee equal to the Federal funds
rate less 30 basis points to the borrower of the loaned
shares. The cash collateral of $1,013 million at March 31,
2000 included $223 million of restricted cash. At March 31,
2000, Liberty Media Group had utilized $103 million of the
cash collateral under the securities lending agreement.
</FN>
</TABLE>
At March 31, 2000, Liberty Media Group had approximately $161 million
in unused lines of credit under its bank credit facilities. The bank
credit facilities of Liberty Media Group generally contain restrictive
covenants which require, among other things, the maintenance of certain
financial ratios, and include limitations on indebtedness, liens,
encumbrances, acquisitions, dispositions, guarantees and dividends.
Liberty Media Group was in compliance with its debt covenants at March
31, 2000. Additionally, Liberty Media Group pays fees ranging from .15%
to .375% per annum on the average unborrowed portions of the total
amounts available for borrowings under bank credit facilities.
<TABLE>
<CAPTION>
Based on quoted market prices, the fair value of Liberty Media Group's
debt at March 31, 2000 is as follows (amounts in millions):
<S> <C>
Senior notes of parent company $ 742
Senior debentures of parent company 1,483
Senior exchangeable debentures of parent company
2,295
Senior notes of attributed subsidiary 178
</TABLE>
Liberty Media Group believes that the carrying amount of the remainder
of its debt approximated its fair value at March 31, 2000.
(7) Combined Equity
Stock Issuances of Subsidiary
During the first quarter of 2000, Liberty Digital, Inc. ("Liberty
Digital") issued approximately 1.5 million shares of common stock in
connection with a certain acquisition and the exercise of certain
employee stock options. In connection with the increase in Liberty
Digital's equity, net of the dilution of Liberty Media Group's interest
in Liberty Digital, that resulted from such stock issuances, Liberty
Media Group recorded a $75 million increase to combined equity.
(continued)
<PAGE>
Transactions with Officers and Directors
Prior to the AT&T Merger, a limited liability company owned by Dr. John
C. Malone (Liberty Media Corporation's Chairman) acquired, from certain
attributed subsidiaries of Liberty Media Group, for $17 million,
working cattle ranches located in Wyoming. No gain or loss was
recognized on such acquisition. The purchase price was paid by such
limited liability company in the form of a 12-month note in the amount
of $17 million having an interest rate of 7%. Such note was repaid in
March 2000.
In connection with the AT&T Merger, Liberty Media Group paid two of its
directors and one other individual, all three of whom were directors of
TCI, an aggregate of $12 million for services rendered in connection
with the AT&T Merger. Such amount is included in operating, selling,
general and administrative expenses for the two months ended February
28, 1999 in the accompanying combined statements of operations and
comprehensive earnings.
Transactions with AT&T
Certain AT&T corporate general and administrative costs are charged to
Liberty Media Group based on the cost of services provided. Management
believes this allocation method is reasonable. During the three months
ended March 31, 2000, the one month ended March 31, 1999 and the two
months ended February 28, 1999 Liberty Media Group was charged less
than $1 million, less than $1 million and $2 million, respectively, in
corporate general and administrative costs by AT&T. These costs are
included in operating expenses in the accompanying combined statements
of operations and comprehensive earnings.
Certain subsidiaries attributed to Liberty Media Group produce and/or
distribute programming and other services to cable distribution
operators (including AT&T) and others. Charges to AT&T are based upon
customary rates charged to others. Amounts included in revenue for
services provided to AT&T were $52 million, $18 million and $43 million
for the three months ended March 31, 2000, one month period ending
March 31, 1999 and the two month period ending February 28, 1999,
respectively.
Subsidiaries of Liberty Media Group lease satellite transponder
facilities from a subsidiary of AT&T. Charges for such arrangements and
other related operating expenses for the three months ended March 31,
2000, and the one month ended March 31, 1999 aggregated $5 million and
$2 million, respectively, and are included in operating expenses in the
accompanying combined statements of operations and comprehensive
earnings.
Liberty Media Group makes marketing support payments to AT&T. Charges
by AT&T for such arrangements were less than $1 million for each of the
three months ended March 31, 2000, the one month ended March 31, 1999
and the two months ended February 28, 1999.
(continued)
<PAGE>
The Puerto Rico Subsidiary purchases programming services from AT&T.
The charges, which approximate AT&T's cost and are based on the
aggregate number of subscribers served by the Puerto Rico Subsidiary,
aggregated $2 million, less than $1 million and $1 million during the
three months ended March 31, 2000, the one month ended March 31, 1999
and the two months ended February 28, 1999, respectively, and are
included in operating expenses in the accompanying combined statements
of operations and comprehensive earnings.
Due (from) to Related Parties
The amounts included in "Due (from) to related parties" represent a
non-interest bearing intercompany account which includes income tax
allocations that are to be settled at some future date. All other
amounts included in the intercompany account are to be settled within
thirty days following notification.
(8) Commitments and Contingencies
Starz Encore Group provides premium programming distributed by cable,
direct satellite, TVRO and other distributors throughout the United
States. Starz Encore Group is obligated to pay fees for the rights to
exhibit certain films that are released by various producers through
2017 (the "Film Licensing Obligations"). Based on customer levels at
March 31, 2000, these agreements require minimum payments aggregating
approximately $1.2 billion. The aggregate amount of the Film Licensing
Obligations under these license agreements is not currently estimable
because such amount is dependent upon the number of qualifying films
released theatrically by certain motion picture studios as well as the
domestic theatrical exhibition receipts upon the release of such
qualifying films. Nevertheless, required aggregate payments under the
Film Licensing Obligations could prove to be significant.
Flextech has undertaken to finance the working capital requirements of
a joint venture (the "Principal Joint Venture") formed with BBC
Worldwide, and is obligated to provide the Principal Joint Venture with
a primary credit facility of (pound)88 million and, subject to certain
restrictions, a standby credit facility of (pound)30 million. As of
March 31, 2000, the Principal Joint Venture had borrowed (pound)59
million under the primary credit facility. If Flextech defaults in its
funding obligation to the Principal Joint Venture and fails to cure
within 42 days after receipt of notice from BBC Worldwide, BBC
Worldwide is entitled, within the following 90 days, to require that
Liberty Media Group assume all of Flextech's funding obligations to the
Principal Joint Venture.
Liberty Media Group has guaranteed various loans, notes payable,
letters of credit and other obligations (the "Guaranteed Obligations")
of certain affiliates. At March 31, 2000, the Guaranteed Obligations
aggregated approximately $679 million. Currently, Liberty Media Group
is not certain of the likelihood of being required to perform under
such guarantees.
(continued)
<PAGE>
Pursuant to a final judgment (the "Final Judgment") agreed to by
Liberty Media Corporation, AT&T and the United States Department of
Justice (the "DOJ") on December 31, 1998, Liberty Media Group
transferred all of its beneficially owned securities (the "Sprint
Securities") of Sprint to a trustee (the "Trustee") prior to the AT&T
Merger. The Final Judgment, which was entered by the United States
District Court for the District of Columbia on August 23, 1999, would
require the Trustee, on or before May 23, 2002, to dispose of a portion
of the Sprint Securities sufficient to cause Liberty Media Group to
beneficially own no more than 10% of the outstanding Series 1 PCS Stock
of Sprint on a fully diluted basis on such date. On or before May 23,
2004, the Trustee must divest the remainder of the Sprint Securities
beneficially owned by Liberty Media Group.
The Final Judgment requires that the Trustee vote the Sprint Securities
beneficially owned by Liberty Media Group in the same proportion as
other holders of Sprint's PCS Stock so long as such securities are held
by the trust. The Final Judgment also prohibits the acquisition by
Liberty Media Group of additional Sprint Securities, with certain
exceptions, without the prior written consent of the DOJ.
Liberty Media Group leases business offices, has entered into pole
rental and transponder lease agreements and uses certain equipment
under lease arrangements.
Liberty Media Group has contingent liabilities related to legal
proceedings and other matters arising in the ordinary course of
business. Although it is reasonably possible Liberty Media Group may
incur losses upon conclusion of such matters, an estimate of any loss
or range of loss cannot be made. In the opinion of management, it is
expected that amounts, if any, which may be required to satisfy such
contingencies will not be material in relation to the accompanying
combined financial statements.
