-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BCBhDjHqHzNWddepaxC5PbKT5YN2/CJkN7u+M5+3HD/ug9O1ufuLdH6ZNys9WhTR ianbidXqRTYvyGyW3S0/aQ== /in/edgar/work/20000814/0000005907-00-000031/0000005907-00-000031.txt : 20000921 0000005907-00-000031.hdr.sgml : 20000921 ACCESSION NUMBER: 0000005907-00-000031 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AT&T CORP CENTRAL INDEX KEY: 0000005907 STANDARD INDUSTRIAL CLASSIFICATION: [4813 ] IRS NUMBER: 134924710 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-01105 FILM NUMBER: 697996 BUSINESS ADDRESS: STREET 1: 295 NO MAPLE AVENUE CITY: BASKINGRIDGE STATE: NJ ZIP: 07920 BUSINESS PHONE: 9082214268 MAIL ADDRESS: STREET 1: 295 NO MAPLE AVENUE CITY: BASKINGRIDGE STATE: NJ ZIP: 07920 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN TELEPHONE & TELEGRAPH CO DATE OF NAME CHANGE: 19920703 10-Q 1 0001.txt AT&T FORM 10-Q FOR SECOND QUARTER 2000 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 June 30, 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 July 31, 2000, the following shares of stock were outstanding: AT&T common stock - 3,756,102,185 shares AT&T Wireless Group common stock - 360,000,000 shares Liberty Media Group Class A common stock - 2,373,148,192 shares Liberty Media Group Class B common stock - 206,234,452 shares AT&T Form 10-Q - Part I PART I - FINANCIAL INFORMATION AT&T CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Dollars in Millions Except Per Share Amounts) (Unaudited) For the Three For the Six Months Ended Months Ended June 30, June 30, 2000 1999 2000 1999 Revenue $16,221 $15,752 $32,122 $29,869 Operating Expenses Access and other connection 3,617 3,668 7,205 7,400 Costs of services and products 4,116 3,835 8,031 6,728 Selling, general and administrative 3,110 3,461 6,399 6,618 Depreciation and other amortization 1,697 1,546 3,263 2,850 Amortization of goodwill, franchise costs and other purchased intangibles 414 358 782 542 Net restructuring and other charges - (29) 773 702 Total operating expenses 12,954 12,839 26,453 24,840 Operating income 3,267 2,913 5,669 5,029 Equity earnings (losses) from Liberty Media Group 267 (543) 1,209 (601) Other income (expense) 119 (40) 415 121 Interest expense 623 493 1,212 695 Income before income taxes 3,030 1,837 6,081 3,854 Provision for income taxes 996 792 1,364 1,791 Net income $ 2,034 $ 1,045 $ 4,717 $ 2,063 AT&T Common Stock Group: Earnings per share: Basic $ 0.54 $ 0.50 $ 1.08 $ 0.90 Diluted $ 0.53 $ 0.49 $ 1.07 $ 0.88 Dividends declared $ 0.22 $ 0.22 $ 0.44 $ 0.44 AT&T Wireless Group: Earnings per share: Basic and diluted $ 0.06 $ - $ 0.06 $ - Liberty Media Group: Earnings (loss) per share: Basic and diluted $ 0.10 $ (0.21) $ 0.47 $ (0.24) See Notes to Consolidated Financial Statements AT&T Form 10-Q - Part I AT&T CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in Millions Except Share Amounts) (Unaudited) June 30, December 31, 2000 1999 ASSETS Cash and cash equivalents $ 426 $ 1,024 Receivables, less allowances of $1,335 and $1,281 11,988 10,453 Deferred income taxes 1,351 1,287 Other current assets 1,118 1,120 TOTAL CURRENT ASSETS 14,883 13,884 Property, plant and equipment, net of accumulated depreciation of $29,801 and $30,057 46,557 39,618 Franchise costs, net of accumulated amortization of $1,104 and $697 51,467 32,693 Licensing costs, net of accumulated amortization of $1,614 and $1,491 9,994 8,548 Goodwill, net of accumulated amortization of $507 and $363 23,417 7,445 Investment in Liberty Media Group and related receivables, net 39,295 38,460 Other investments and related advances 48,032 19,366 Prepaid pension costs 2,785 2,464 Other assets 7,134 6,928 TOTAL ASSETS $243,564 $169,406 (CONTINUED) AT&T Form 10-Q - Part I AT&T CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) (Dollars in Millions Except Share Amounts) (Unaudited) June 30, December 31, 2000 1999 LIABILITIES Accounts payable $ 6,815 $ 6,771 Payroll and benefit-related liabilities 2,360 2,651 Debt maturing within one year 25,735 12,633 Dividends payable 826 703 Other current liabilities 6,928 5,449 TOTAL CURRENT LIABILITIES 42,664 28,207 Long-term debt 31,986 23,217 Long-term benefit-related liabilities 3,979 3,964 Deferred income taxes 41,655 24,199 Other long-term liabilities and deferred credits 4,839 3,801 TOTAL LIABILITIES 125,123 83,388 Minority Interest 3,573 2,391 Company-Obligated Convertible Quarterly Income Preferred Securities of Subsidiary Trust Holding Solely Subordinated Debt Securities of AT&T 4,705 4,700 SHAREOWNERS' EQUITY Common Stock: AT&T Common Stock, $1 par value, authorized 6,000,000,000 shares; issued and outstanding 3,755,183,978 shares (net of 297,622,645 treasury shares) at June 30, 2000, and 3,196,436,757 shares (net of 287,866,419 treasury shares) at December 31, 1999 3,755 3,196 AT&T Wireless Group Common Stock, $1 par value, authorized 6,000,000,000 shares; issued and outstanding 360,000,000 shares at June 30, 2000 360 - Liberty Media Group Class A Common Stock, $1 par value, authorized 4,000,000,000 shares; issued and outstanding 2,374,272,992 shares (net of 47,103,908 treasury shares) at June 30, 2000, and 2,313,557,460 shares at December 31, 1999 2,374 2,314 Liberty Media Group Class B Common Stock, $1 par value, authorized 400,000,000 shares; issued and outstanding 206,234,452 shares (net of 10,607,776 treasury shares) at June 30, 2000, and 216,842,228 shares at December 31, 1999 206 217 Additional paid-in capital 90,031 59,526 Guaranteed ESOP obligation - (17) Retained earnings 8,549 6,712 Accumulated other comprehensive income 4,888 6,979 TOTAL SHAREOWNERS' EQUITY 110,163 78,927 TOTAL LIABILITIES & SHAREOWNERS' EQUITY $243,564 $169,406 See Notes to Consolidated Financial Statements AT&T Form 10-Q - Part I AT&T CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY (Dollars in Millions Except Share Amounts) (Unaudited) For the Six Months Ended June 30, 2000 1999 AT&T Common Shares Balance at beginning of year $ 3,196 $ 2,630 Shares issued (acquired), net: Under employee plans (1) 1 For acquisitions 610 565 Other* (50) - Balance at end of period 3,755 3,196 AT&T Wireless Group Common Stock Balance at beginning of year - - Shares issued 360 - Balance at end of period 360 - Liberty Media Group Class A Common Stock Balance at beginning of year 2,314 - Shares issued, net: For acquisitions 60 2,280 Other - 33 Balance at end of period 2,374 2,313 Liberty Media Group Class B Common Stock Balance at beginning of year 217 - Shares issued (acquired), net: For acquisitions - 220 Other (11) (3) Balance at end of period 206 217 Additional Paid-In Capital Balance at beginning of year 59,526 15,195 Shares issued (acquired), net: Under employee plans (24) 36 For acquisitions 23,014 42,374 Other* (2,620) 324 Proceeds in excess of par value from issuance of AT&T Wireless common stock 9,926 - Common stock warrants issued - 306 Gain on issuance of common stock by affiliates 103 510 Other 106 89 Balance at end of period 90,031 58,834 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 4,717 2,063 Dividends declared (1,519) (1,401) Treasury shares issued at less than cost (1,361) (1,469) Balance at end of period 8,549 6,993 (CONTINUED) AT&T Form 10-Q - Part I AT&T CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY (CONTINUED) (Dollars in Millions Except Share Amounts) (Unaudited) For the Six Months Ended June 30, 2000 1999 Accumulated Other Comprehensive Income Balance at beginning of year 6,979 (59) Other comprehensive income (2,091) 2,025 Balance at end of period 4,888 1,966 Total Shareowners' Equity $110,163 $73,488 Summary of Total Comprehensive Income: Net income $ 4,717 $ 2,063 Net foreign currency translation adjustment (net of taxes of $100 and $(23)) 141 (43) Net revaluation of investments (net of taxes of $(676) and $1,351) (2,232) 2,068 Total Comprehensive Income $ 2,626 $ 4,088 * Activity in 2000 represents AT&T stock received from Cox Communications, Inc., in exchange for an entity owning certain cable systems and other assets. Other comprehensive income in the first half of 2000 included Liberty Media Group's foreign currency translation adjustments totaling $(118), net of applicable taxes, and revaluation of Liberty Media Group's available-for-sale securities totaling $36, net of applicable taxes, partially offset by the recognition of previously unrecognized available for sale securities of $1,479, net of applicable taxes. Other comprehensive income in 1999 included Liberty Media Group's foreign currency translation adjustments totaling $(43), net of applicable taxes, and revaluation of Liberty Media Group's available-for-sale securities totaling $2,012, net of applicable taxes. AT&T accounts for treasury stock as retired stock, and as of June 30, 2000, had 298 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. See Notes to Consolidated Financial Statements AT&T Form 10-Q - Part I AT&T CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Millions) (Unaudited) For the Six Months Ended June 30, 2000 1999 Operating Activities Net income $ 4,717 $ 2,063 Adjustments to reconcile net income to net cash provided by operating activities: Gains on sales of businesses and investments (849) (371) Net restructuring and other charges 648 778 Depreciation and amortization 4,045 3,392 Provision for uncollectibles 625 733 Net equity (earnings) losses from Liberty Media Group (1,209) 601 Net losses from other equity investments 601 397 Increase in accounts receivable (1,854) (1,462) Decrease in accounts payable (70) (488) Net change in other operating assets and liabilities (969) (1,761) Other adjustments (385) (527) Net cash provided by operating activities 5,300 3,355 Investing Activities Capital expenditures and other additions (7,069) (5,129) Proceeds from sale or disposal of property, plant and equipment 543 162 (Increase) decrease in other receivables (977) 6 Net (acquisitions) dispositions of licenses (105) 5 Equity investment distributions and sales 711 439 Equity investment contributions and purchases (1,096) (6,054) Acquisitions of businesses including cash acquired (18,846) (5,763) Other investing activities, net (28) (56) Net cash used in investing activities (26,867) (16,390) Financing Activities Proceeds from long-term debt issuances 739 7,948 Retirements of long-term debt (1,061) (1,643) Issuance of convertible securities - 4,694 Issuance of AT&T Wireless Group common stock 10,286 - Net acquisition of treasury shares (539) (4,320) Dividends paid on common stock (1,396) (1,306) Increase in short-term borrowings, net 13,087 4,506 Other financing activities, net (147) 414 Net cash provided by financing activities 20,969 10,293 Net decrease in cash and cash equivalents (598) (2,742) Cash and cash equivalents at beginning of year 1,024 3,160 Cash and cash equivalents at end of period $ 426 $ 418 See Notes to Consolidated Financial Statements AT&T Form 10-Q - Part I AT&T CORP. AND SUBSIDIARIES 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, filed on March 27, 2000, which include the financial statements of Liberty Media Group for the year ended December 31, 1999, AT&T's Form 10-Q for the quarter ended March 31, 2000, (which includes the financial results of Liberty Media Group for this period, attached as an exhibit thereto) and the financial statements of Liberty Media Group and AT&T Wireless Group for the quarter and year-to-date periods ended June 30, 2000, included as Exhibits 99.1 and 99.2, respectively, to this AT&T quarterly report on Form 10-Q. During the second quarter, AT&T created a new class of stock when it completed an initial public offering of 360 million shares of AT&T Wireless Group tracking stock at a price of $29.50 per share. This stock is designed to track the performance of AT&T's wireless services business and represented a 15.6% interest in that business. AT&T retained the remaining 84.4% interest in AT&T Wireless Group. In addition to AT&T Wireless Group tracking stock, AT&T has two other classes of stock, Liberty Media Group (LMG) tracking stock and AT&T common stock. Liberty Media Group tracking stock is intended to reflect the performance of Liberty Media Group. AT&T common stock is intended to reflect the performance of all other businesses of AT&T, referred to as AT&T Common Stock Group, including AT&T's retained interest in AT&T Wireless Group. The earnings attributable to AT&T Wireless Group represent 15.6% of the earnings from April 27, 2000, the date of the initial public offering, through June 30, 2000. The remaining earnings of AT&T's wireless services business are included in the earnings attributable to AT&T Common Stock Group. Similarly, the earnings or losses related to LMG are excluded from earnings available to AT&T Common Stock Group. The Board of Directors of Liberty Media Group declared a two-for-one stock split of Liberty Media Group tracking stock, paid on June 9, 2000. At the AT&T Corp. annual meeting on May 24, 2000, shareowners approved an amendment to increase the number of authorized shares of Class A Liberty Media Stock from 2.5 billion to 4 billion, and to increase the number of Class B Liberty Media Stock from 250 million to 400 million. All references to number of shares and per share information for Liberty Media Group in the consolidated financial statements have been adjusted to reflect the stock split on a retroactive basis. AT&T Form 10-Q - Part I We have reclassified certain prior period amounts to conform with our current presentation. (b) MERGERS MERGER WITH MEDIAONE GROUP, INC. (MEDIAONE) On June 15, 2000, AT&T completed a merger with MediaOne in a cash and stock transaction valued at approximately $56 billion. In the aggregate, each share of MediaOne stock received 0.95 of a share of AT&T common stock and $36.27 per share in cash, consisting of $30.85 per share as stipulated in the merger agreement and $5.42 per share based on AT&T's stock price preceding the merger being below a predetermined amount. AT&T issued approximately 606 million shares of common stock, of which approximately 60 million were treasury shares. The total shares had an aggregate market value of approximately $21 billion. In addition, the cash payments totaled approximately $24 billion and AT&T assumed debt and other obligations of approximately $11 billion. The merger was accounted for under the purchase method of accounting, accordingly the results of MediaOne have been included in the financial results of AT&T since the date of acquisition. The operating results of MediaOne, which are part of our Broadband segment, have been included in the accompanying consolidated financial statements at their preliminary fair value at June 15, 2000. Approximately $19 billion of the purchase price of $56 billion was attributed to agreements with local franchise authorities that allow access to homes in our broadband service areas ("franchise costs") and is being amortized on a straight-line basis over 40 years. Also included in the $56 billion purchase price was approximately $28 billion related to nonconsolidated investments, including investments in Time Warner Entertainment and Vodaphone Group, plc, approximately $6 billion related to property, plant and equipment, approximately $10 billion attributable to MediaOne debt, and approximately $1 billion of minority interest in Centaur Funding. The purchase resulted in preliminary goodwill of $16 billion, which is being amortized on a straight-line basis over 40 years. We may make refinements to the allocation of the purchase price in future periods as the related fair value appraisals of certain assets and liabilities are finalized. AT&T Form 10-Q - Part I MERGER WITH TELE-COMMUNICATIONS, INC. (TCI) In March 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 acquisition. In connection with the closing, AT&T issued a 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. PRO FORMA RESULTS Following is a summary of the pro forma results of AT&T as if the mergers with MediaOne and TCI had closed effective January 1, 1999: (Unaudited) Shares in millions For the Six Months Ended June 30, 2000 1999 Revenue $33,447 $32,137 Net income 5,543 1,892 Weighted-average AT&T common shares 3,774 3,759 Weighted-average AT&T common shares and potential common shares 3,849 3,868 Weighted-average AT&T Wireless Group shares 360 - Weighted-average Liberty Media Group Shares 2,570 2,500 AT&T Common Stock Group earnings per common share: Basic $ 1.14 $ 0.72 Diluted $ 1.12 $ 0.71 AT&T Wireless Group earnings per common share: Basic and diluted $ 0.06 $ - Liberty Media Group earnings (loss) per common share: Basic and diluted $ 0.47 $ (0.33) Pro forma data may not be indicative of the results that would have been obtained had these events actually occurred at the beginning of the periods presented, nor does it intend to be a projection of future results. AT&T Form 10-Q - Part I (c) NET RESTRUCTURING AND OTHER CHARGES During the second quarter of 1999, we recorded restructuring and other charges that netted to a pretax benefit of $29. The benefit included a $68 net gain primarily related to the exit of certain joint ventures that would have competed with Concert, our joint venture with British Telecommunications plc (BT). Also included was an $11 gain from the settlement of pension obligations from AT&T's voluntary retirement incentive program. Partially offsetting these gains was a $50 pretax charge related to a contribution agreement entered into by Broadband to satisfy certain liabilities of Phoenixstar, Inc. (formerly PrimeStar, Inc.). Net restructuring and other charges for the six months ended June 30, 2000, totaled $773. The charge included restructuring and exit costs of $682 relating to actions across several of our business units. These actions were primarily driven by the company's continuing efforts to streamline operations and reduce costs by $2 billion by the end of the year. Also recorded in the six months ended June 30, 2000, was a $91 charge related to the mandated disposition of AT&T Communications (U.K.) Ltd., which would have competed directly with Concert. The charge included cash termination benefits of $458 associated with the involuntary separation of about 6,200 employees. Approximately one-half of the individuals were management employees and one-half were nonmanagement employees. Over 35% of the affected employees have left their positions as of June 30, 2000, and the remaining employees will leave the company in the second half of the year. 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 first quarter of 2000. The following table displays the activity and balances of the restructuring reserve account from January 1, 2000, to June 30, 2000: Jan. 1, June 30, 2000 2000 Type of Cost Balance Additions Deductions Balance Employee separations $150 $458 $(258) $350 Facility closings 239 - (35) 204 Other 21 62 (17) 66 Total $410 $520 $(310) $620 Deductions reflect cash payments of $253 related to employee separations and noncash utilization of $57. The cash outlay was primarily funded through cash from operations. Noncash utilization included deferred severance primarily related to executives. AT&T Form 10-Q - Part I Also included in restructuring and exit costs for the six months ended June 30, 2000, 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 merger with MediaOne and as part of our objective to benefit from the synergies created by the merger, we will record further charges for exit and separation plans in the second half of the year. Net restructuring and other charges for the six months ended June 30, 1999, totaled $702. The charge included a pretax in-process research and development charge of $594 related to the TCI acquisition, a $128 pretax net charge primarily related to the exit of certain joint ventures that would have competed directly with Concert and a $50 pretax charge related to the Phoenixstar agreement noted above. These charges were partially offset by a $70 pretax gain related to the settlement of pension obligations for former employees who accepted AT&T's voluntary retirement incentive program offer. (d) EARNINGS PER COMMON SHARE AND POTENTIAL COMMON SHARE Earnings (losses) attributable to the different classes of AT&T common stocks is as follows: For the Three For the Six Months Ended Months Ended June 30, June 30, 2000 1999 2000 1999 AT&T Common Stock Group $1,745 $1,588 $3,486 $2,664 AT&T Wireless Group 22 - 22 - Liberty Media Group 267 (543) 1,209 (601) Net income $2,034 $1,045 $4,717 $2,063 Basic earnings per share (EPS) for AT&T Common Stock Group for the three and six-month periods ended June 30, 2000 and 1999, were computed by dividing earnings attributable to AT&T Common Stock Group shareowners by the weighted-average number of AT&T common shares outstanding during the period. Diluted EPS for AT&T Common Stock Group was computed by dividing earnings attributable to AT&T Common Stock Group shareowners, adjusted for the conversion of securities, by the weighted-average number of AT&T common shares and dilutive potential common shares outstanding 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, AT&T Form 10-Q - Part I 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 convertible quarterly income preferred securities were antidilutive and were excluded from the computation of diluted EPS. The dividends on these securities 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. A reconciliation of the income and share components for diluted EPS calculations with respect to AT&T Common Stock Group is as follows: For the Three For the Six Months Ended Months Ended June 30, June 30, 2000 1999 2000 1999 AT&T Common Stock Group: Income available $1,745 $1,588 $3,486 $2,664 Income impact of assumed conversion of preferred stock of subsidiary 8 10 16 10 Income available adjusted for conversion of securities $1,753 $1,598 $3,502 $2,674 Shares in millions Weighted-average common shares 3,253 3,189 3,219 2,970 Stock options 21 38 26 40 Preferred stock of subsidiary 40 40 40 25 Convertible debt securities of subsidiary - - - 3 Weighted-average common shares and potential common shares 3,314 3,267 3,285 3,038 Basic EPS for AT&T Wireless Group for the period from the date of the initial public offering through June 30, 2000, was computed by dividing the income attributable to AT&T Wireless Group shareowners by the weighted-average number of shares outstanding of AT&T Wireless Group of 360 million. Potentially dilutive securities consisted of approximately 70 million stock options, which were antidilutive at June 30, 2000. Basic EPS for LMG was computed by dividing the earnings (loss) attributable to LMG shareowners by the weighted-average number of shares outstanding of LMG of 2,576 million and 2,528 million, for the three months ended June 30, 2000 and 1999, respectively, and 2,570 million and 2,500 million for the six months ended June 30, 2000 and from the date of acquisition through June 30, 1999, respectively. AT&T Form 10-Q - Part I Potentially dilutive securities, including fixed and nonvested performance awards and stock options, have not been factored into the dilutive calculations because past history has indicated that these contracts are generally settled in cash. There were 95 million and 108 million of these potentially dilutive securities outstanding at June 30, 2000 and 1999, respectively. The diluted earnings per share calculation for the second quarter of 2000 does include approximately one million warrants outstanding at June 30, 2000, which were assumed in a recent acquisition. Since LMG had a loss in the quarter and year-to-date periods of 1999, the impact of any potential shares would have been antidilutive. (e) 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 three and six-month periods ended June 30, 2000, are $284 and $550, respectively, for services provided to Concert. Included in access and other connection expenses for the three and six-month periods ended June 30, 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 $581 and $1,160, respectively. 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. Interest income of $17 and $30 was recognized for the three and six-month periods ended June 30, 2000, respectively. Included in accounts receivable and accounts payable at June 30, 2000, are $1,064 and $1,138, respectively, related to transactions with Concert. (f) LONG-TERM DEBT EXCHANGEABLE NOTES During 1999 and 1998, MediaOne issued debt (the Exchangeable Notes) which is mandatorily redeemable at MediaOne's option into (i) Vodafone American Depository Receipts (ADRs) held by MediaOne, (ii) the cash equivalent, or (iii) a combination of cash and Vodafone ADRs. The maturity value of the Exchangeable Notes varies based upon the fair market value of a Vodafone ADR. AT&T Form 10-Q - Part I Following is a summary of the Exchangeable Notes outstanding by year of issue: Year of Issue EXCHANGEABLE NOTES 1999 1998 Proceeds $1,129 $1,686 Interest Rate 7.0% 6.25% Maturity Date Nov. 15, 2002 Aug. 15, 2001 Carrying Value $2,664 $1,085 The redemption formula for the 1999 Exchangeable Notes is as follows: (a) If the fair market value of a Vodafone ADR is greater than or equal to $51.2563, each 1999 Exchangeable Note is equivalent to 0.8475 of a Vodafone ADR; (b) If the fair market value of a Vodafone ADR is less than or equal to $43.4375, each 1999 Exchangeable Note is equivalent to one Vodafone ADR; or (c) If the fair market value of a Vodafone ADR is less than $51.2563 but greater than $43.4375 per share, each 1999 Exchangeable Note is equivalent to a fraction of a Vodafone ADR equal to (i) $43.4375 divided by (ii) the fair market value of one Vodafone ADR. The number of Vodafone ADRs to be exchanged at maturity for each 1998 Exchangeable Note will be based upon a redemption value of $9.00 in cash plus 2 1/2 times the fair market value of a Vodafone ADR (the Maturity Price), as follows: (a) If the Maturity Price is greater than or equal to $71.75 per share, each 1998 Exchangeable Note is equivalent to 0.8101 of the Maturity Price; (b) If the Maturity Price is less than or equal to $58.125 per share, each 1998 Exchangeable Note is equivalent to the Maturity Price; or (c) If the Maturity Price is less than $71.75 per share but greater than $58.125 per share, each 1998 Exchangeable Note is equivalent to $58.125. AT&T Form 10-Q - Part I The Exchangeable Notes are being accounted for as indexed debt instruments since the maturity value of the Exchangeable Notes is dependent upon the fair market value of the underlying Vodafone ADRs. For the 1999 debt issuance, the market risk of a decline in value of Vodafone ADRs below $43.4375 per share on 26.0 million of the 148.3 million Vodafone ADRs held by MediaOne has been eliminated. In addition, MediaOne has limited the market gains it may earn to 15.25% of the fair market value in excess of $51.2563 per share on 26.0 million Vodafone ADRs. For the 1998 debt issuance, the market risk of a decline in value of Vodafone ADRs below $19.65 per share on 72.5 million of the 148.3 million Vodafone ADRs held by MediaOne has been eliminated. In addition, MediaOne has limited the market gains it may earn to approximately 19% of the fair market value in excess of $25.10 per share on 72.5 million Vodafone ADRs. Since the Vodafone ADRs are a cost method investment being accounted for as "available-for-sale" securities under Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," changes in the maturity value of the Exchangeable Notes are being recorded as unrealized gains or losses, net of tax, within other comprehensive income as a component of shareowners' equity. The Exchangeable Notes are unsecured obligations of MediaOne, ranking equally in right of payment with all other unsecured and unsubordinated obligations of MediaOne. FLOATING RATE DEBT Two subsidiaries of MediaOne, MediaOne SPC IV and MediaOne SPC VI, entered into a series of purchased and written options on Vodafone ADRs contributed to them by MediaOne and issued floating rate debt. The carrying value of debt outstanding at June 30, 2000, was $1,739, which pays interest at three-month London Inter-Bank Offering Rate (LIBOR) plus 0.5%. This debt matures in equal quarterly installments beginning in 2003 and ending in 2005. The assets of MediaOne SPC IV, which are primarily 29.1 million Vodafone ADRs, are only available to pay the creditors of MediaOne SPC IV. Likewise, the assets of MediaOne SPC VI, which are primarily 18.0 million Vodafone ADRs, are only available to pay the creditors of MediaOne SPC VI. AT&T Form 10-Q - Part I SUBSIDIARY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY SUBORDINATED DEBT SECURITIES OF AN AT&T SUBSIDIARY Certain subsidiary trusts of MediaOne (the MediaOne Trusts) had preferred securities outstanding at June 30, 2000, as follows: Interest Maturity Carrying Subsidiary Trust Rate Date Amount MediaOne Financing I 7.96% 2025 $ 30 MediaOne Financing II 8.25% 2036 28 MediaOne Finance I 9.30% 2025 267 MediaOne Finance II 9.50% 2036 215 MediaOne Finance III 9.04% 2038 503 Total $1,043 The MediaOne Trusts exist for the exclusive purpose of issuing the Trust Preferred Securities and investing the proceeds thereof into Subordinated Deferrable Interest Notes (the Subordinated Debt Securities) of MediaOne Group Funding, Inc, a wholly-owned subsidiary of MediaOne. The Subordinated Debt Securities have the same interest rate and maturity date as the Trust Preferred Securities to which they relate. The Subordinated Debt Securities are fully and unconditionally guaranteed by MediaOne. All of the Subordinated Debt Securities are redeemable by MediaOne Group Funding, Inc. or MediaOne at a redemption price of $25.00 per security, plus accrued and unpaid interest. Upon redemption of the Subordinated Debt Securities, the Trust Preferred Securities will be mandatorily redeemable, at a price of $25.00 per share, plus accrued and unpaid distributions. The 9.30% and 7.96% Subordinated Debt Securities are redeemable after September 11, 2000. The 9.50% and 8.25% Subordinated Debt Securities are redeemable after October 29, 2001. The 9.04% Subordinated Debt Securities are redeemable after October 28, 2003. The Trust Preferred Securities are recorded within long-term debt in the accompanying consolidated balance sheets. (g) FINANCIAL INSTRUMENTS COLLARS Two subsidiaries of MediaOne, MediaOne SPC IV and MediaOne SPC VI, entered into a series of purchased and written options (collectively the collars) on Vodafone ADRs contributed to them by MediaOne and issued floating rate debt. The collars have been designated and are effective as a hedge of the market risk associated with the investment in Vodafone ADRs. The collars are therefore carried at intrinsic value, with unrealized gains or losses, net of tax, being recorded within other comprehensive income as a component of shareowners' equity, together with any change in the fair value of the Vodafone ADRs. AT&T Form 10-Q - Part I At the expiration of the MediaOne SPC IV collar, we will receive cash if the market value of a Vodafone ADR is less than approximately $34.00 per share, effectively eliminating downside risk on the stock below $34.00 per share. Conversely, if the market value of a Vodafone ADR is greater than approximately $49.00 per share, we will be required to pay cash, which will be offset by the corresponding increase in the value of the Vodafone ADR. This collar expires quarterly beginning in 2003 and ending in 2005. At the expiration of the MediaOne SPC VI collar, we will receive cash if the market value of a Vodafone ADR is less than approximately $40.00 per share, effectively eliminating downside risk on the stock below $40.00 per share. Conversely, if the market value of a Vodafone ADR is greater than approximately $58.00 per share, we will be required to pay cash, which will be offset by the corresponding increase in the value of the Vodafone ADR. This collar expires quarterly beginning in 2003 and ending in 2005. INTEREST RATE SWAPS In connection with the floating rate debt issued by MediaOne SPC IV and VI, interest rate swaps were entered into to swap the floating rate debt to fixed rate debt. The interest rate swaps have the same maturities as the debt and mature in equal quarterly installments beginning in 2003 and ending in 2005. MediaOne prepaid the fixed interest payments pursuant to the swap agreements; the costs of which were deferred and are amortized as adjustments to the interest expense over the term of the debt. As a result of the swaps and related amortization, MediaOne expects to have a fixed effective interest rate of 5.91% on the MediaOne SPC IV debt and 6.02% on the MediaOne SPC VI debt. The unamortized prepaid interest rate swap balance was approximately $475 as of June 30, 2000. LETTERS OF CREDIT At June 30, 2000, we had letters of credit of $685. The increase from December 31, 1999, was primarily related to letters of credit to support subsidiary debt as well as letters of credit MediaOne had entered into prior to the merger. AT&T Form 10-Q - Part I (h) MINORITY INTEREST IN CENTAUR FUNDING CORPORATION Centaur Funding Corporation (Centaur), a subsidiary of MediaOne, issued three series of preferred shares prior to AT&T's acquisition of MediaOne. Centaur was created for the principal purpose of raising capital through the issuance of preferred shares and investing those proceeds into notes issued by MediaOne SPC II, a subsidiary of MediaOne. Principal and interest payments from the notes are expected to be Centaur's principal source of funds to make dividend and redemption payments on the preferred shares. In addition, the dividend and certain redemption payments on the preferred shares will be determined by reference to the dividend and redemption activity of the preferred stock of AirTouch Communications, Inc. (ATI Shares) held by MediaOne SPC II. Payments on the preferred shares are neither guaranteed nor secured by MediaOne or AT&T. The assets of MediaOne SPC II, which includes the ATI shares, are only available to pay the creditors of MediaOne SPC II. These securities remained outstanding at June 30, 2000, as follows: Dividend Rate Maturity Date Carrying Amount Series A Variable None $ 100 Series B 9.08% 4/21/2020 926 Series C None 4/21/2020 110 Total $1,136 The Auction Market Preference Shares, Series A, have a liquidation value of $250 thousand per share and dividends are payable quarterly when declared by Centaur's Board of Directors out of funds legally available. The 9.08% Cumulative Preference Shares, Series B, have a liquidation value of $1 thousand per share and dividends are payable quarterly in arrears when declared by Centaur's Board of Directors out of funds legally available. In addition, dividends may be declared and paid only to the extent that dividends have been declared and paid on the ATI shares. The Preference Shares, Series C, have a liquidation value of $1 thousand per share at maturity. The value of the Series C will be accreted to reach its liquidation value upon maturity. The preferred shares issued by Centaur are recorded within Minority Interest in the accompanying consolidated balance sheets. AT&T Form 10-Q - Part I (i) GUARANTEE OF PREFERRED SECURITIES TCI Securities: Prior to the consummation of the TCI merger, TCI issued mandatorily redeemable preferred securities through subsidiary trusts that held subordinated debt securities of TCI. AT&T provides a full and unconditional guarantee on the outstanding securities issued by TCI Communications Financing I, II and IV. At June 30, 2000, $1,247 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 Six For the Four Months Ended Months Ended June 30, 2000 June 30, 1999 Revenue $ 3,100 $ 1,985 Operating loss 22 785 Net income (loss) 527 (1,770) As of As of June 30, December 31, 2000 1999 Current assets $ 546 $ 468 Noncurrent assets 91,096 93,798 Current liabilities 2,399 2,814 Noncurrent liabilities 38,645 37,853 Minority interests 2,170 2,175 MediaOne Securities: Prior to the consummation of the MediaOne merger, MediaOne issued mandatorily redeemable exchangeable notes and mandatorily redeemable preferred securities through subsidiary trusts that held subordinated debt securities of MediaOne. Subsequent to June 30, 2000, AT&T provided a full and unconditional guarantee on these outstanding securities issued by MediaOne. At June 30, 2000, $4,792 of the AT&T Form 10-Q - Part I guaranteed securities remained outstanding. Following is a summary of the results of MediaOne which have been included in the financial results of AT&T since the date of acquisition on June 15, 2000. The summarized financial information includes transactions with AT&T that were eliminated in consolidation. For the 15 Days Ended June 30, 2000 Revenue $ 126 Operating loss (43) Net loss (35) As of June 30, 2000 Current assets $ 5,840 Noncurrent assets 68,802 Current liabilities 980 Noncurrent liabilities 27,539 Minority interest 1,156 (j) SEGMENT REPORTING AT&T's results are segmented according to the way we manage our business: Business Services, Consumer Services, Wireless Services and Broadband. Our existing segments reflect certain managerial changes since the publication of our 1999 annual results. All prior period results have been restated to reflect these changes. In addition, 2000 results reflect the acquisition of MediaOne, included in the Broadband segment, from the June 15, 2000, date of acquisition and 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. AT&T Form 10-Q - Part I REVENUE Three Six Months Ended Months Ended June 30, June 30, 2000 1999 2000 1999 Business services external revenue $ 6,965 $ 6,571 $13,923 $12,856 Business services internal revenue 182 193 360 356 Total business services revenue 7,147 6,764 14,283 13,212 Consumer services external revenue 4,984 5,479 10,043 10,949 Wireless services external revenue 2,477 1,878 4,675 3,440 Broadband external revenue 1,717 1,480 3,274 1,984 Total reportable segments revenue 16,325 15,601 32,275 29,585 Corporate and Other revenue (a) (104) 151 (153) 284 Total revenue $16,221 $15,752 $32,122 $29,869 (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 Three Six Months Ended Months Ended June 30, June 30, 2000 1999 2000 1999 Business services $1,612 $1,435 $3,137 $3,027 Consumer services 1,852 1,842 3,571 3,693 Wireless services 335 125 446 74 Broadband (542) (526) (553) (1,187) Total reportable segments' EBIT 3,257 2,876 6,601 5,607 Corporate and Other EBIT 129 (3) (517) (457) Liberty Media Group equity earnings (losses) 267 (543) 1,209 (601) Interest expense 623 493 1,212 695 Total income before income taxes $3,030 $1,837 $ 6,081 $3,854 AT&T Form 10-Q - Part I ASSETS At June 30, At Dec. 31, 2000 1999 Business services $ 32,569 $ 32,010 Consumer services 5,301 6,279 Wireless services 28,782 23,312 Broadband 123,091 56,536 Total reportable segments 189,743 118,137 Corporate and Other: Other segments 5,708 3,386 Prepaid pension costs 2,785 2,464 Deferred taxes 1,142 899 Other corporate assets 4,891 6,060 Investment in Liberty Media Group and related receivables, net 39,295 38,460 Total assets $243,564 $169,406 (k) NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." Among other provisions, it requires that entities recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Gains and losses resulting from changes in the fair values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The effective date for this standard was delayed via the issuance of SFAS No. 137. The effective date for SFAS No. 133 is now for fiscal years beginning after June 15, 2000, though earlier adoption is encouraged and retroactive application is prohibited. For AT&T, this means that the standard must be adopted no later than January 1, 2001. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" as an amendment to SFAS No. 133. This statement provides clarification with regard to certain implementation issues under SFAS No. 133 on specific types of hedges. We are currently assessing the impact of SFAS Nos. 133 and 138 on AT&T, including an assessment of the impact resulting from our merger with MediaOne. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB No. 101), "Revenue Recognition in Financial Statements." The SEC delayed the date by which registrants must apply the accounting and disclosures described in SAB No. 101 until the fourth quarter of 2000. We are currently assessing the impact of SAB No. 101 on our results of operations. AT&T Form 10-Q - Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OVERVIEW AT&T Corporation (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. We also provide directory and calling-card services to support our communications business. On June 15, 2000, AT&T completed a merger with MediaOne Group, Inc. (MediaOne) in a cash and stock transaction valued at approximately $56 billion. In the aggregate, each share of MediaOne received 0.95 of a share of AT&T common stock and $36.27 per share in cash, consisting of $30.85 per share as stipulated in the merger agreement and $5.42 per share based on AT&T's stock price preceding the merger being below a predetermined amount. AT&T issued approximately 606 million shares of AT&T common stock, of which approximately 60 million were treasury shares. The merger with MediaOne was accounted for under the purchase method of accounting, accordingly the operating results of MediaOne have been included in the accompanying consolidated financial statements since the date of acquisition. The results of MediaOne are included within the Broadband segment. Periods prior to the merger were not restated to include the results of MediaOne. On April 27, 2000, AT&T completed an initial public offering of 360 million shares of AT&T Wireless Group tracking stock. This stock is designed to track the economic performance of AT&T's wireless services business and represented a 15.6% interest in that business. AT&T retained the remaining 84.4% interest in AT&T Wireless Group. 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. All other businesses of AT&T comprise AT&T Common Stock Group, including AT&T's retained interest in AT&T Wireless Group, the economic performance of which is represented by AT&T common stock. The consolidated results of AT&T include AT&T Wireless Group in its entirety on a fully consolidated basis. 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. AT&T Form 10-Q - Part I Earnings attributable to AT&T Wireless Group represent 15.6% of the earnings from April 27, 2000, the date of the initial public offering, through June 30, 2000. The remaining earnings of AT&T's wireless services business are included in the earnings attributable to AT&T Common Stock Group. Similarly, the earnings or losses related to LMG are excluded from the earnings available to AT&T Common Stock Group. Ownership of shares of AT&T common stock, AT&T Wireless Group tracking stock or Liberty Media Group tracking stock does not represent a direct legal interest in the assets and liabilities of any of these groups, but an ownership of AT&T in total. Each of these shares represents an interest in the economic performance of each of these groups. 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, we contributed our international settlement business (revenue and expenses) to Concert. Results for 2000 reflect the impact of these contributions. 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 and six-month periods ended June 30, 2000 and 1999, and financial condition as of June 30, 2000 and December 31, 1999. 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. AT&T Form 10-Q - Part I CONSOLIDATED RESULTS OF OPERATIONS REVENUE Three Months Six Months Ended June 30, Ended June 30, 2000 1999 2000 1999 Dollars in Millions Business Services $ 7,147 $ 6,764 $14,283 $13,212 Consumer Services 4,984 5,479 10,043 10,949 Wireless Services 2,477 1,878 4,675 3,440 Broadband 1,717 1,480 3,274 1,984 Corporate and Other (104) 151 (153) 284 Total revenue $16,221 $15,752 $32,122 $29,869 Revenue increased 3.0% in the second quarter of 2000, compared with the second quarter of 1999. Revenue for the quarter was negatively impacted by the formation of Concert, our global venture with BT, and positively impacted by the acquisition of MediaOne. Revenue increased 7.5% in the first half of 2000, compared with the first half of 1999. Revenue for the six months was positively impacted by the acquisitions of TCI, the IBM Global Network (renamed AT&T Global Network Services, or AGNS) and MediaOne, and was negatively impacted by the formation of Concert. Normalized revenue, which adjusts for the acquisitions of MediaOne, TCI, adjusted for all closed cable partnerships, and AGNS, various divestments of international businesses, and the impact of businesses contributed to Concert, increased 4.5% in the second quarter of 2000, and 5.2% for the six months ended June 30, 2000, compared with the respective periods in 1999. These increases were led by Wireless Services, Business Services, and Broadband, partially offset by declines in Consumer Services. Effective July 1, 2000, the Federal Communications Commission (FCC) eliminated the per-line charges AT&T pays for residential and single-line business customers. Since AT&T bills its customers for these charges, the elimination of the charge will negatively impact revenue in the second half of 2000, primarily in the Consumer Services business. OPERATING EXPENSES Three Months Six Months Ended June 30, Ended June 30, 2000 1999 2000 1999 Dollars in Millions Access and other connection $3,617 $3,668 $7,205 $7,400 Access and other connection expenses decreased 1.4% and decreased 2.6% for the three and six-month periods ended June 30, 2000, respectively. 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. 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. Concert bills us a net expense comprised of international settlement (interconnection) expense and foreign billed revenue. Partially offsetting the decline were costs incurred related to Concert products that AT&T now sells to its customers. AT&T Form 10-Q - Part I Also partially offsetting the decrease were higher access and other connection expenses associated with connecting domestic calls on the facilities of other service providers. These costs rose primarily due to increased per-line charges (Primary Interexchange Carrier Charges), Universal Service Fund contributions and local connectivity charges as well as volume increases, partially offset by mandated reductions in per-minute access costs, more efficient network usage and the sale of ACC International. Effective July 1, 2000, per-line charges AT&T pays for residential and single-line business customers were eliminated by the FCC. Accordingly, access and other connection charges will decrease in the second half of 2000. Three Months Six Months Ended June 30, Ended June 30, 2000 1999 2000 1999 Dollars in Millions Costs of services and products $4,116 $3,835 $8,031 $6,728 Costs of services and products increased 7.3% in the second quarter of 2000, compared with the second quarter of 1999, and was impacted by our acquisition of MediaOne and the formation of Concert in 2000, as well as our 1999 acquisition of AGNS. Excluding these items, costs of services and products increased slightly due to higher costs associated with our growing wireless subscriber base and wireless network as well as increased costs to support growth in outsourcing contracts. Also contributing to the increase were higher Broadband programming costs principally due to rate increases. These increases were partially offset by continued cost control initiatives. Costs of services and products increased 19.4% in the first half of 2000, compared with the first half of 1999, largely due to our acquisitions of TCI, MediaOne, and AGNS, partially offset by the impact of Concert. Excluding these items, costs of services and products increased slightly due to higher costs associated with our growing wireless subscriber base and wireless network and increased costs to support growth in outsourcing contracts. These increases were partially offset by cost control initiatives and a lower provision for uncollectible receivables in Consumer and Business Services. Three Months Six Months Ended June 30, Ended June 30, 2000 1999 2000 1999 Dollars in Millions Selling, general and administrative $3,110 $3,461 $6,399 $6,618 Selling, general and administrative (SG&A) expenses decreased 10.1% in the second quarter of 2000, compared with the second quarter of 1999. Increases to second quarter 2000 SG&A expenses as a result of the MediaOne and AGNS acquisitions were essentially offset by the impact of the formation of Concert. The decrease was primarily the result of cost control initiatives such as headcount reductions, and a larger pension credit in 2000, primarily driven by a higher pension trust asset base resulting from increased investment returns. These decreases were partially offset by an increase in expenses associated with our growing wireless subscriber base. AT&T Form 10-Q - Part I SG&A expenses decreased 3.3% for the six months ended June 30, 2000, compared with the same period of 1999. Excluding the impacts of the TCI, AGNS, and Media One acquisitions as well as the formation of Concert, SG&A expenses decreased approximately 6%, compared with the first six months of 1999. This decrease was primarily the result of cost control initiatives, including headcount reductions, and a larger pension credit in 2000, primarily driven by a higher pension trust asset base resulting from increased investment returns. These decreases were partially offset by an increase in expenses associated with our growing wireless subscriber base and our other growth businesses. Three Months Six Months Ended June 30, Ended June 30, 2000 1999 2000 1999 Dollars in Millions Depreciation and other amortization $1,697 $1,546 $3,263 $2,850 Depreciation and other amortization expenses increased 9.8% in the second quarter of 2000, compared with the second quarter of 1999. Increases to second quarter 2000 depreciation and other amortization expenses as a result of the MediaOne and AGNS acquisitions were essentially offset by the impact of the formation of Concert. For the first six months of 2000, depreciation and other amortization expenses increased 14.5% compared with the first six months of 1999. Excluding the impact of the TCI, AGNS and MediaOne acquisitions as well as the formation of Concert, depreciation and other amortization expenses increased approximately 10% for the six months ended June 30, 2000. These quarter and year-to-date increases were due to the increased asset base resulting from the continued infrastructure investment. Capital expenditures were $3.6 billion for the quarter ended June 30, 2000, bringing year-to-date capital expenditures to $6.5 billion. We continue to focus the vast majority of our capital spending on our growth businesses of wireless, broadband, data/IP and local voice. Three Months Six Months Ended June 30, Ended June 30, 2000 1999 2000 1999 Dollars in Millions Amortization of goodwill, franchise costs and other purchased intangibles $414 $358 $782 $542 Amortization of goodwill, franchise costs, and other purchased intangibles increased 15.6% in the second quarter of 2000, compared with the second quarter of 1999. The increase was largely attributable to the acquisitions of AGNS in 1999 and MediaOne on June 15, 2000. In the first six months of 2000, amortization of goodwill, franchise costs and other purchased intangibles increased 44.2% compared with the first six months of 1999, largely attributable to the acquisitions of TCI and AGNS in 1999 and MediaOne in 2000. AT&T also has amortization of goodwill associated with nonconsolidated investments recorded as a reduction of other income. This totaled $113 million and $152 million in the second quarters of 2000 and 1999, respectively, and totaled $233 million and $192 million for the first half of 2000 and 1999, respectively. Three Months Six Months Ended June 30, Ended June 30, 2000 1999 2000 1999 Dollars in Millions Net restructuring and other charges $ - $(29) $773 $702 AT&T Form 10-Q - Part I During the second quarter of 2000, no restructuring and other charges were recorded. For the second quarter of 1999, such charges netted to a pretax benefit of $29 million. The benefit included a $68 million pretax net gain primarily related to the exit of certain joint ventures that would have competed directly with Concert. Also included was an $11 million pretax gain from the settlement of pension obligations from AT&T's voluntary retirement incentive program offer. Partially offsetting these gains was a $50 million pretax charge related to a contribution agreement entered into by Broadband to satisfy certain liabilities of Phoenixstar, Inc. (formerly Primestar, Inc.). Net restructuring and other charges for the six months ended June 30, 2000, totaled $773 million, which had an approximate $0.14 impact on earnings per diluted share. The charge included restructuring and exit costs of $682 million relating to actions across many of our business units and includes severance costs associated with about 6,200 employees. These actions were primarily driven by the company's continuing efforts to streamline operations and reduce costs by $2 billion by the end of the year. Also recorded in the six months ended June 30, 2000, was a $91 million charge related to the mandated disposition of AT&T Communications (U.K.) Ltd. (Comms U.K.), which would have competed directly with Concert. In the first half of 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. 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. As a result of our merger with MediaOne and as part of our objective to benefit from the synergies created by this merger, we will record further charges for exit and separation plans in the second half of the year. Net restructuring and other charges for the six months ended June 30, 1999, totaled $702 million, which had an approximate $0.22 impact on earnings per diluted share. The charge included a pretax in-process research and development charge of $594 million related to the TCI acquisition, a $128 million pretax net charge primarily related to the exit of certain joint ventures that would have competed directly with Concert and a $50 million pretax charge related to the Phoenixstar agreement noted above. These charges were partially offset by a $70 million pretax gain related to the settlement of pension obligations for former employees who accepted AT&T's voluntary retirement incentive program offer. The $594 million in-process research and development 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 At Home Corporation (Excite@Home). We expect to test IP telephony equipment for field deployment, begin field trials related to our product integration efforts for set-top devices, and test and deploy devices related to our telephony cost reductions by the end of 2000. AT&T Form 10-Q - Part I Three Months Six Months Ended June 30, Ended June 30, 2000 1999 2000 1999 Dollars in Millions Operating Income $3,267 $2,913 $5,669 $5,029 Operating income increased 12.1% in the second quarter of 2000, and increased 12.7% for the first half of 2000, primarily due to operational efficiencies within Business Services and Wireless Services as well as corporate staff functions, and a higher pension credit in 2000. The year-to-date increase was partially offset by the acquisition of TCI. Operating income margin (operating income as a percent of revenue) was 20.1% for the second quarter and 17.6% for the first half of the year compared with 18.5% and 16.8% in the comparable 1999 periods. Three Months Six Months Ended June 30, Ended June 30, 2000 1999 2000 1999 Dollars in Millions Other income (expense) $119 $(40) $415 $121 Other income (expense) increased $159 million in the second quarter of 2000, compared with the second quarter of 1999. The increase was primarily attributable to higher interest income, greater gains on sales of businesses and investments, and equity earnings from Concert. These increases were partially offset by greater distributions on quarterly trust preferred securities, which were issued in June of 1999. Other income (expense) increased $294 million for the first half of 2000, compared with the first half of 1999. The increase was primarily attributable to greater gains on sales of businesses and investments, higher interest income and equity earnings from Concert. These increases were partially offset by higher losses on other equity investments, including Excite@Home partially as a result of the inclusion of a full six months of results in 2000, and greater distributions on quarterly trust preferred securities which were issued in June of 1999. Three Months Six Months Ended June 30, Ended June 30, 2000 1999 2000 1999 Dollars in Millions Earnings before interest and taxes (EBIT), excluding LMG $3,386 $2,873 $6,084 $5,150 EBIT, excluding LMG, increased 17.8% for the second quarter and increased 18.1% for the first half of 2000. The EBIT growth was impacted by gains on sales of businesses and investments, our investments in Excite@Home and Cablevision Systems Corp. (Cablevision) and net restructuring and other charges. Excluding these items, EBIT increased 21.2% and 18.5% for the second quarter and year-to-date periods, respectively. The improvement was primarily due to operational efficiencies which resulted in higher operating income, and increased other income. AT&T Form 10-Q - Part I Three Months Six Months Ended June 30, Ended June 30, 2000 1999 2000 1999 Dollars in Millions Equity earnings (losses) from Liberty Media Group $267 $(543) $1,209 $(601) Equity earnings from Liberty Media Group were $267 million in the second quarter of 2000, compared with losses of $543 million in the year-ago quarter. The increase was primarily due to a gain associated with the acquisition of Flextech p.l.c. (Flextech) by Telewest Communications plc (Telewest) reflecting the difference between the carrying value of LMG's interest in Flextech and the fair value of the Telewest securities received in the merger. Equity earnings from LMG for the six months ended June 30, 2000, were $1,209 million compared with losses of $601 million in 1999. In addition to the gain associated with the Flextech acquisition, the increase in earnings for the six months ended June 30, 2000, was also impacted by 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. Three Months Six Months Ended June 30, Ended June 30, 2000 1999 2000 1999 Dollars in Millions Interest expense $623 $493 $1,212 $695 Interest expense increased 25.8% in the second quarter of 2000 compared with the second quarter of 1999. The increase was primarily due to a higher average debt balance as a result of our June 15, 2000, acquisition of MediaOne and due to the issuance of $3 billion in notes in July 1999 and another $3 billion in March 2000. Interest expense increased 74.2% for the six months ended June 30, 2000, compared with the six months ended June 30, 1999. The increase was primarily due to a higher average debt balance as a result of our March 1999 acquisition of TCI and our June 2000 acquisition of MediaOne. Three Months Six Months Ended June 30, Ended June 30, 2000 1999 2000 1999 Dollars in Millions Provision for income taxes $996 $792 $1,364 $1,791 The provision for income taxes increased $204 million in the second quarter of 2000, compared with the second quarter of 1999. The effective tax rate, excluding Liberty Media Group, for the quarter was 36.1%, up from 33.3% in the second quarter of 1999. During the second quarter of 1999, a change in the net operating loss utilization tax rules resulted in a $75 million reduction in the income tax provision. Excluding the benefit of this change, the effective tax rate in the second quarter of 1999 was 36.4%. AT&T Form 10-Q - Part I The provision for income taxes for the six months ended June 30, 2000, decreased $427 million compared with the same period in 1999. The effective tax rate, excluding Liberty Media Group, for the six months ended June 30, 2000, was 28.0%, down from 40.2% for the first six months of 1999. In 2000 the effective tax rate was impacted by the exchange with Cox Communications, Inc. (Cox) of an entity owning certain cable systems and other assets for AT&T stock (Cox transaction), which was tax-free, and the benefit of the write-off of the related deferred tax liability. During 1999, AT&T recorded an in-process research and development charge which was not tax deductible. Excluding the impacts of the Cox transaction, the in-process research and development charge, and the change in the net operating loss utilization tax rules, the effective income tax rate was 36.9% for both six-month periods ended June 30, 2000 and 1999. Three Months Six Months Ended June 30, Ended June 30, 2000 1999 2000 1999 AT&T Common Stock Group earnings per AT&T common share: Basic $0.54 $ 0.50 $1.08 $ 0.90 Diluted $0.53 $ 0.49 $1.07 $ 0.88 AT&T Wireless Group earnings per AT&T common share: Basic and diluted $0.06 - $0.06 $ - Liberty Media Group earnings (loss) per share: Basic and diluted $0.10 $(0.21) $0.47 $(0.24) As reported, diluted EPS attributable to AT&T Common Stock Group grew 8.2% to $0.53 in the second quarter 2000, compared with the second quarter 1999. The increase was primarily due to improved operating income in the second quarter 2000, as a result of margin improvements, and higher other income. The increases were partially offset by the second quarter 1999 benefit of a change in the net operating loss utilization tax rules. As reported, diluted EPS attributable to AT&T Common Stock Group grew 21.6% to $1.07 in the six months ended June 30, 2000, compared with the six months ended June 30, 1999. The increase was primarily due to improved operating income, a lower provision for taxes and higher other income. These improvements were partially offset by higher average shares outstanding in 2000 reflecting the impact of shares issued for the TCI and MediaOne acquisitions. Included in EPS for the second quarter are the following items: ..Losses of $0.05 in the second quarter of 2000 and $0.04 in the second quarter of 1999 reflecting the earnings impact of our investments in Excite@Home and Cablevision. ..Net gains on sales and other of $0.01 in the second quarter of 2000 and $0.02 in the second quarter of 1999; ..A $0.02 benefit in the second quarter of 1999 from changes in tax rules with respect to the utilization of acquired net operating losses. AT&T Form 10-Q - Part I Included in EPS for the first half of 2000 and 1999 are the following items: ..Net restructuring and other charges of $0.14 in the first half of 2000 and $0.22 in the first half of 1999; ..Losses of $0.12 in the first half of 2000 and $0.06 in the first half of 1999 reflecting the earnings impact of our investments in Excite@Home and Cablevision; ..Net gains on sales and other of $0.23 in the first half of 2000 and $0.05 in the first half of 1999. ..A $0.02 benefit in the second quarter of 1999 from changes in tax rules with respect to the utilization of acquired net operating losses. The total impact of the these items was a decrease to diluted EPS of $0.04 and $0.03 for the second quarter and first half of 2000, respectively. These items had no impact to diluted EPS for the second quarter of 1999 and decreased diluted EPS by $0.21 for the first half 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 $0.57 per diluted share in the second quarter of 2000, an increase of 16.4%, or $0.08, over the comparable prior year quarter. EPS excluding these items was $1.10 per diluted share for the six months ended June 30, 2000, compared with $1.09 for the same period in 1999. EPS for Liberty Media Group was $0.10 per share for the three months ended June 30, 2000, compared with a loss of $0.21 per share for the three months ended June 30, 1999. The increase in EPS for the second quarter of 2000, is primarily due to a gain associated with the acquisition of Flextech by Telewest reflecting the difference between the carrying value of LMG's interest in Flextech and the fair value of the Telewest securities received in the merger. EPS for Liberty Media Group was $0.47 per share for the first half of 2000, compared with a loss of $0.24 per share in 1999. The first half of 2000 results include six months of Liberty Media Group results compared with four months in 1999, reflecting the March 1999 acquisition of TCI by AT&T. In addition to the gain associated with the Flextech acquisition, the increase in EPS for the six months ended June 30, 2000, was also impacted by 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. 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, and minority interest (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 AT&T Form 10-Q - Part I 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 and minority interest. 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 is used by AT&T's chief operating decision makers and provides a measure of return on total capitalization. We believe EBITDA is meaningful to investors as a measure of each segment's liquidity and is 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. All prior period results have been restated to reflect these changes. To provide comparability, we normalize revenue to reflect the impact of certain 1999 and 2000 transactions. For example, when we normalize for Concert, we remove the revenue associated with businesses/customers contributed to Concert from 1999 results. The acquisitions of TCI, AGNS, MediaOne and certain international divestments are normalized as if those acquisitions/dispositions occurred January 1, 1999. Finally, certain 2000 Broadband cable swaps are normalized in 1999 results as if those swaps happened on the corresponding date in 1999. BUSINESS SERVICES Our Business Services segment offers a variety of global communications services including long distance, local and data and Internet Protocol (IP) networking to small and medium-sized businesses, large domestic and multinational businesses and government agencies. Business Services is also a provider of voice, data and IP transport to service resellers (wholesale services). Also included in 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. AT&T Form 10-Q - Part I For the Three For the Six Months Ended Months Ended June 30, June 30, Dollars in Millions 2000 1999 2000 1999 External revenue $ 6,965 $6,571 $13,923 $12,856 Internal revenue 182 193 360 356 Total revenue 7,147 6,764 14,283 13,212 EBIT 1,612 1,435 3,137 3,027 EBITDA 2,546 2,269 4,930 4,601 OTHER ITEMS Capital additions $ 1,392 $1,669 $2,652 $2,581 At June 30, At December 31, 2000 1999 Total assets $32,569 $32,010 REVENUE Business Services revenue increased $383 million, or 5.7%, in the second quarter of 2000, and increased $1,071 million, or 8.1%, for the first six months of 2000, compared with the prior year. Normalized for the 1999 acquisition of AGNS and the impact of Concert, revenue increased 4.0% and 5.0% for the quarter and year-to-date periods, respectively. The increases for both the quarter and year-to-date periods were driven primarily by growth in data/IP and outsourcing services, partially offset by a decline in voice services. Normalized data/IP services revenue grew at a mid-teens rate for both the quarter and year-to-date periods led by continued growth in frame relay, IP and high-speed private line services. IP services, which include AT&T WorldNet services and Virtual Private Network Services (VPN), grew approximately 50% for both the three and six-month periods ended June 30, 2000, as compared with the same periods in 1999. On a combined basis, packet services (frame relay, ATM (Asynchronous Transfer Mode) and IP) grew nearly 50% for the quarter and nearly 45% for the first half of 2000, compared with the same periods in 1999. AT&T Solutions outsourcing revenue, normalized for the acquisition of AGNS, grew 23.2% in the second quarter of 2000, and grew 23.9% for the first six months of 2000, compared with the same periods in the prior year. These increases were primarily due to growth from new contract signings and add-on business from existing clients. During the quarter, AT&T Solutions signed four new outsourcing deals with an aggregate contract value of approximately $600 million over the life of the contract. Voice revenue, normalized for the impact of Concert and the AGNS acquisition, was down slightly for both the quarter and year-to-date periods, as pricing declines outpaced increases in volumes, which grew at a low-teens rate for the quarter and a mid-teens rate for the year. Business services revenue continues to shift to higher growth products such as data/IP and outsourcing, resulting in a decline in long distance voice revenue as a percent of total revenue. Revenue associated with 800 business, for example, is shifting from voice to IP as the e-business industry expands. As a component of voice revenue, local revenue grew approximately 20% and 25% for the quarter and year-to-date periods, respectively. Revenue growth was negatively impacted, in both the quarter and year-to-date periods, by the settlement of public utility commission rulings. AT&T's integrated business AT&T Form 10-Q - Part I local operations added 300 thousand access lines in the second quarter bringing total access lines in service as of June 30, 2000, to almost 2.0 million. During the quarter, we refined the way we count access lines to more accurately reflect the total number of lines carrying local AT&T Digital Link traffic through 4ESS switches. On-net buildings totaled 5,913 at June 30, 2000, a 4.7% increase over June 30, 1999. EBIT/EBITDA EBIT increased $177 million, or 12.4%, in the second quarter of 2000, and increased $110 million, or 3.6%, in the first half of 2000, compared with the same prior year periods. EBITDA increased $277 million, or 12.2%, in the second quarter of 2000, and increased $329 million, or 7.2%, in the first half of 2000, compared with the same prior year periods. Excluding a first quarter 2000 restructuring charge of $93 million, EBIT increased 6.7% and EBITDA increased 9.2% in the first half of 2000, compared with the same periods of 1999. The quarterly and year-to-date increases were primarily due to revenue growth combined with continued cost reductions, partially offset by the impact of the customers contributed to Concert. The earnings impact of our equity interest in Concert is reported within Corporate and Other. OTHER ITEMS Capital additions decreased $277 million, or 16.6%, to $1,392 million in the second quarter of 2000 compared with the second quarter of 1999. The decrease was primarily driven by reduced capital expenditures on plant, property, and equipment associated with long distance voice services. However, for the first half of 2000, capital additions increased $71 million, or 2.7%, to $2,652 million compared with the first half of 1999. The increase was primarily driven by additions to plant, property and equipment for our local network and AGNS. Total assets increased $559 million, or 1.7%, to $32,569 million at June 30, 2000, compared with December 31, 1999. The increase was primarily driven by an increase in accounts receivable due to higher revenue in our outsourcing business and timing of cash receipts. In addition, increases in internal use software contributed to the increase in assets. These increases were partially offset by a decrease in plant, property, and equipment as a result of the contribution of assets to Concert combined with depreciation for the period, offset in part 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. AT&T Form 10-Q - Part I For the Three For the Six Months Ended Months Ended June 30, June 30, Dollars in Millions 2000 1999 2000 1999 Revenue $4,984 $5,479 $10,043 $10,949 EBIT 1,852 1,842 3,571 3,693 EBITDA 1,987 2,029 3,857 4,073 OTHER ITEMS Capital additions $ 74 $ 120 $ 128 $ 208 At June 30, At December 31, 2000 1999 Total assets $5,301 $ 6,279 REVENUE Consumer Services revenue decreased 9.0% in the second quarter of 2000, and declined 8.3% for the first half of 2000, compared with the same periods in 1999. Normalized for the impact of Concert, revenue decreased 7.2% in the second quarter and declined 6.4% for the first half of the year as long distance calling volumes continued to decline at a high single-digit rate during these periods. These results reflect the ongoing competitive nature of the consumer long distance industry, which has resulted in pricing pressures and a loss of market share. Also negatively impacting revenue was product substitution and market migration away from direct dial wireline and calling card services to the rapidly growing wireless services. We expect competition to continue to negatively impact Consumer Services revenue. Also, revenue growth for Consumer Services will be negatively impacted by the elimination of per-line charges that AT&T pays for residential customers since AT&T bills these charges to its customers. EBIT/EBITDA EBIT was up 0.5% and EBITDA was down 2.0% in the second quarter of 2000, compared with the same period of 1999. For the first half of the year, EBIT decreased 3.3% and EBITDA decreased 5.3%, compared with the same period in 1999. EBIT and EBITDA continue to be negatively impacted by the decline in revenue, however reflecting our cost control initiatives, EBIT and EBITA margins continue to improve. The EBIT margin was 37.1% and the EBITDA margin was 39.9% in the second quarter of 2000, compared with an EBIT margin of 33.6% and an EBITDA margin of 37.0% for the same period in 1999. EBIT and EBITDA include a $96 million restructuring charge for the first half of 2000, and include a $153 million gain on the sale of Language Line Services in the first half of 1999. Excluding these items, the EBIT and EBITDA margins improved to 36.5% and 39.4%, respectively, for the first half of 2000, compared with 32.3% and 35.8%, respectively, for the same period in 1999, due primarily to our cost control initiatives. OTHER ITEMS Capital additions declined $46 million, or 38.4%, to $74 million in the second quarter of 2000, compared with the second quarter of 1999. For the first half of 2000, capital additions decreased $80 million, or 38.3%, compared with the first half of 1999. These decreases were primarily attributable to lower capital expenditures associated with our consumer long distance business and internal-use software. AT&T Form 10-Q - Part I Total assets decreased $978 million, or 15.6%, to $5,301 million at June 30, 2000, compared with 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. In addition, accounts receivable declined as a result of lower revenue. WIRELESS SERVICES Our Wireless Services segment offers wireless voice and data services and products to customers in our 850 megahertz (cellular) and 1900 megahertz (Personal Communications Services, or PCS) markets. Wireless Services also includes certain interests in partnerships and affiliates that provide wireless services in the United States and internationally, aviation communications services, and fixed wireless. Fixed wireless provides high-speed Internet access and any-distance voice services using wireless technology to residential and small business customers. For the Three For the Six Months Ended Months Ended June 30, June 30, Dollars in Millions 2000 1999 2000 1999 Revenue $ 2,477 $1,878 $ 4,675 $3,440 EBIT 335 125 446 74 EBITDA excluding other income 508 321 909 505 OTHER ITEMS Capital additions $ 1,364 $ 670 $ 2,754 $ 860 At June 30, At December 31, 2000 1999 Total assets $28,782 $23,312 REVENUE Wireless Services revenue increased $599 million, or 31.9%, to $2,477 million in the second quarter of 2000, compared with the first quarter of 1999, including growth in services revenue of 32.7% to $2,240 million. Revenue increased $1,235 million, or 35.9%, to $4,675 million in the first half of 2000, compared with the first half of 1999, including growth in services revenue of 38.3% to $4,232 million. Total revenue grew 29.4% for the quarter and 31.1% for the first half of the year, adjusted to exclude Vanguard Cellular Systems, Inc., for months prior to May 2000 to correlate results with 1999, due to the May 1999 acquisition of Vanguard. 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 25.2% to $237 million in the second quarter of 2000, and grew 16.6% to $443 million for the first half of 2000, compared with the respective prior year periods. AT&T continues to experience strong growth in wireless subscribers. Consolidated subscribers grew to 11.7 million at June 30, 2000, representing an increase of 33.8% over the prior year quarter, including approximately 1.2 million subscribers associated with the completed acquisitions of our remaining interest in CMT Partners (which owned wireless properties in the San Francisco Bay area) AT&T Form 10-Q - Part I and Wireless One Network, L.P. (which owned wireless properties in northwest and southwest Florida). Net consolidated wireless subscriber additions in the second quarter totaled 532,000, a 14.2% increase over the prior year quarter. Total subscribers, including partnership markets in which AT&T does not own a controlling interest, were nearly 14 million at the end of the second quarter, a 22.3% increase over the prior year quarter. This includes approximately 450,000 subscribers associated with the acquisition of American Cellular in February 2000. AT&T's average monthly churn rate in the second quarter of 2000, was 2.7% compared with 2.3% in the second quarter of 1999, and 2.9% in the first quarter of 2000. AT&T's average monthly churn in the first half of 2000 was 2.8% compared with 2.5% in the first half of 1999. EBIT/EBITDA EXCLUDING OTHER INCOME EBIT increased $210 million, or 166.2%, to $335 million in the second quarter of 2000, and increased $372 million to $446 million in the first half of the year, compared with the same prior year periods. The increases were impacted by a second quarter 2000 gain of $95 million on the sale of Celumovil and a second quarter 1999 gain of $88 million on the sale of WOOD-TV. Excluding these gains, EBIT improved $203 million to $240 million for the quarter and improved $365 million to $351 million for the first half of the year. The improvement for both periods was primarily the result of revenue growth and expense leveraging, primarily off-network roaming expenses, as well as higher other income due to interest income on the initial public offering proceeds attributed to Wireless Group. The reduction in off-network expenses reflects continued efforts to migrate more minutes onto AT&T's wireless network, as well as reductions in intercarrier roaming rates. These were partially offset by increased customer acquisition and customer care costs, as well as higher information technology costs associated with growth in the subscriber base. EBITDA, excluding other income, increased $187 million, or 58.5%, to $508 million in the second quarter of 2000, and increased $404 million, or 80.1%, to $909 million for the first six months of the year, compared with the same prior year periods. The improvement for both periods was primarily driven by higher revenue and an improving cost structure. OTHER ITEMS In the second quarter of 2000, capital additions increased $694 million to $1,364 million compared with the same quarter of 1999. For the first six months of 2000, capital additions increased $1,894 million to $2,754 million compared with the first six months of 1999. These increases were primarily driven by capital expenditure on capacity upgrades and improvements to network quality. Also contributing to the increase in capital additions was our investment in American Cellular in the first quarter of 2000. Total assets increased $5,470 million, or 23.5%, to $28,782 million at June 30, 2000, compared with December 31, 1999. The increase was primarily due to the acquisition of our remaining interest in CMT Partners and our acquisition of Wireless One Network, L.P., which resulted in increases to licensing costs, goodwill, property, plant and equipment and other assets. In addition, the increase in property, plant and equipment was also the result of capital expenditures in support of the continued expansion and build out of our wireless network, partially offset by depreciation expense for the period. BROADBAND Our Broadband segment offers a variety of services through our cable broadband network, including traditional analog video and new services such as digital video service, high-speed data service and telephony service. AT&T Form 10-Q - Part I For the Three For the Six Months Ended Months Ended June 30, June 30, Dollars in Millions 2000 1999 2000 1999 Revenue $ 1,717 $1,480 $ 3,274 $ 1,984 EBIT (542) (526) (553) (1,187) EBITDA excluding other income 389 266 739 (126) OTHER ITEMS Capital additions $ 986 $ 838 $ 2,330 $ 1,148 At June 30, At December 31, 2000 1999 Total assets $123,091 $56,536 The results for Broadband include MediaOne since June 15, 2000. Therefore, the three months and six months ended June 30, 2000, include 2 weeks of operations for MediaOne, while the comparable periods for 1999 do not include any results of MediaOne. In addition, the first half of 2000 includes a full six months of TCI results, while the first half of 1999 includes only four months of TCI results reflecting the March 1999 acquisition. REVENUE Broadband's revenue increased $237 million, or 15.9%, for the second quarter of 2000, and increased $1,290 million, or 65.0%, for the six months ended June 30, 2000, compared with the same periods of last year. The increase in revenue was primarily due to the inclusion of MediaOne results since the date of acquisition, a basic cable rate increase, higher revenue from new services (digital video, high-speed data and telephony) and higher advertising revenue. These increases were partially offset by the impact of net dispositions of cable properties. In addition, revenue for the six months ended June 30, 2000, was impacted by the acquisition of TCI in March of 1999. Revenue, normalized for the MediaOne acquisition and adjusted for the net disposition of cable properties, increased 10.5% in the second quarter of 2000 compared with the second quarter of 1999. Revenue for the first half of 2000, on this same basis and normalized for the TCI acquisition, increased 9.4% compared with the same prior year period. Broadband ended the second quarter of 2000 with 16.1 million basic cable customers, passing approximately 27.9 million homes, more than 2.2 million digital-video customers, approximately 689,000 high-speed data customers, and provided telephony service to nearly 224,000 customers. EBIT/EBITDA EXCLUDING OTHER INCOME EBIT was a deficit of $542 million for the quarter ended June 30, 2000, compared with a deficit of $526 million in 1999. Excluding the impact of our ownership interest in Cablevision and Excite@Home in both periods, certain gains in 2000, and restructuring and other charges in 1999, EBIT for the second quarter of 2000, was a deficit of $194 million, a 16.5% improvement over the same period of 1999. This increase was due to higher revenue, lower stock appreciation rights expense and increased gains on sales of businesses and investments, partially offset by higher expenses associated with high-speed data and telephony services as well as increased programming and depreciation expenses. In addition, EBIT was negatively impacted by MediaOne. EBIT for the six months ended June 30, 2000, was a deficit of $553 million compared with a deficit of $1,187 million in 1999. Excluding the impact of our ownership interest in Cablevision and AT&T Form 10-Q - Part I Excite@Home in both periods, certain gains in 2000 and restructuring and other charges in 2000 and 1999, EBIT was a deficit of $273 million for the first half of 2000, compared with a deficit of $224 million for the first half 1999. The decrease was due to higher expenses associated with high-speed data and telephony services as well as increased programming and depreciation expenses. Offsetting these decreases to EBIT was higher revenue and increased gains on sales of businesses and investments. EBITDA, excluding other income, for the second quarter was $389 million, an increase of 46.6% compared with the second quarter of 1999. EBITDA, excluding other income, for the six months ended June 30, 2000, was $739 million compared with a deficit of $126 million for the same period of 1999. Excluding the 2000 and 1999 restructuring and other charges, EBITDA, excluding other income, increased 23.4% in the second quarter of 2000, and increased 45.1% in the first half of 2000. These increases are due to higher revenue and the impact of the MediaOne acquisition, partially offset by higher expenses associated with high-speed data and telephony services as well as increased programming costs. In addition, EBITDA, excluding other income, was favorably impacted in the second quarter and first half of 2000 by lower stock appreciation rights expense and by the inclusion of a full six months of TCI, respectively. OTHER ITEMS Capital additions were $986 million in the second quarter of 2000, and $2,330 million for the six months ended June 30, 2000, comprised primarily of capital expenditures directed towards the launch of new services as well as spending on the upgrade of cable plants. Capital additions also included contributions to various nonconsolidated investments. The significant increase in capital additions in the first half of 2000, compared with 1999, reflects the timing of the TCI acquisition in March of 1999. Total assets were $123,091 million at June 30, 2000, compared with $56,536 million at December 31, 1999. The increase is due to the MediaOne acquisition, partially offset 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. 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. For the Three For the Six Months Ended Months Ended June 30, June 30, Dollars in Millions 2000 1999 2000 1999 Revenue $ (104) $ 151 $ (153) $ 284 EBIT 129 (3) (517) (457) EBITDA 248 99 (247) (266) OTHER ITEMS Capital additions $ 87 $ 131 $ 192 $ 466 At June 30, At December 31, 2000 1999 Total assets $14,526 $12,809 AT&T Form 10-Q - Part I REVENUE Revenue for Corporate and Other primarily includes the elimination of inter-segment revenue of negative $185 million (a decrease of $11 million compared with second quarter of 1999) and revenue from our international operations and ventures of $70 million (a decline of $264 million compared with the second quarter of 1999). The international operations and ventures revenue decrease was largely due to the revenue impact of businesses contributed to Concert and due to lower revenue associated with the divestment of certain international businesses. Corporate and Other revenue, normalized for the divestments of international businesses and for the impact of Concert, increased 7.4% in the second quarter of 2000, compared with the second quarter of 1999. For the first half of 2000, revenue for Corporate and Other primarily included the elimination of inter-segment revenue of negative $363 million (a decrease of $2 million compared with the first half of 1999) and revenue from our international operations and ventures of $184 million (a decline of $440 million compared with the first half of 1999). The international operations and ventures revenue decrease was largely due to the impact of businesses contributed to Concert and due to lower revenue associated with the divestment of certain international businesses. Corporate and Other revenue, normalized for the divestments of international businesses and for the impact of Concert, increased 13.1% in the first half of 2000, compared with the first half of 1999. EBIT/EBITDA EBIT for Corporate and Other increased $132 million to $129 million in the second quarter of 2000, compared with the second quarter of 1999. EBITDA for Corporate and Other increased $149 million to $248 million in the second quarter of 2000 compared with the second quarter of 1999. The increases were primarily due to a larger pension credit in 2000 primarily driven by a higher pension trust asset base resulting from increased investment returns, higher interest income in 2000 and $31 million of earnings from our equity interest in Concert. These increases were partially offset by the second quarter 1999 net restructuring and other charge benefits. In addition, EBIT was negatively impacted by increased distributions on trust preferred securities. EBIT for Corporate and Other declined $60 million to a deficit of $517 million for the six months ended June 30, 2000, compared with the six months ended June 30, 1999. EBITDA for Corporate and Other improved $19 million to a deficit of $247 million for the six months ended June 30, 2000, compared with the six months ended June 30, 1999. Excluding net restructuring charges in 2000 and 1999, EBIT increased $450 million to $51 million and EBITDA increased $529 million to $321 million. The improvement was primarily due to a larger pension credit in 2000 primarily driven by a higher pension trust asset base resulting from increased investment returns, higher interest income in 2000, earnings of $66 million from our equity interest in Concert, cost control initiatives and gains in 2000 on the sale of miscellaneous investments. These improvements were partially offset by distributions on trust preferred securities. OTHER ITEMS Capital additions for corporate and other declined $44 million, or 33.4%, to $87 million, in the second quarter of 2000, compared with the same quarter of 1999. For the first six months of 2000, capital additions declined $274 million, or 58.8%, to $192 million compared with the first six months of 1999. This decline reflects decreased investment in international nonconsolidated subsidiaries primarily as a result of the disposition of certain non-strategic investments during 1999. AT&T Form 10-Q - Part I Total assets increased $1,717 million during the first half of 2000, to $14,526 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 $267 million for the three months ended June 30, 2000, and were $(543) million in the comparable 1999 period. Equity earnings (losses) from LMG were $1,209 million for the first half of 2000, compared with $(601) million for the period from the date of acquisition through June 30, 1999. These increases are primarily due to gains associated with the acquisition of companies that LMG has an investment in. The gains represent the difference between the carrying value of LMG's interest in the acquired company and the fair value of securities received in the merger. In particular, Flextech was acquired by Telewest in the second quarter of 2000 and General Instruments was acquired by Motorola in the first quarter of 2000. LIQUIDITY For the Six Months Ended June 30, Dollars in Millions 2000 1999 CASH FLOWS: Provided by operating activities $ 5,300 $ 3,355 Used in investing activities (26,867) (16,390) Provided by financing activities 20,969 10,293 EBITDA $ 10,505 $ 8,748 Net cash provided by operating activities increased $1,945 million for the first six months ended June 30, 2000, compared with the prior year period. 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 1998 sale of Universal Card Services Inc. and an increase in operational earnings excluding depreciation and amortization, partially offset by higher accounts receivable. Net cash used by investing activities for the first half of 2000 increased by $10,477 million compared with the first half of 1999. The increase was primarily driven by the increased acquisitions in 2000, particularly MediaOne and CMT Partners, and increased capital expenditures in 2000 primarily attributable to growth in Wireless and Broadband, partially offset by the contribution of $5.5 billion of cash to LMG in 1999. During the first half of 2000, net cash provided by financing activities increased by $10,676 million compared with the first half of 1999. The increase was primarily due to higher proceeds from issuance of short-term debt, the proceeds from the initial public offering of AT&T Wireless Group shares and a decrease in the purchase of treasury stock. These increases were partially offset by lower proceeds from the issuance of long-term debt and the issuance of redeemable securities in 1999. At June 30, 2000, we had $25.7 billion in short-term notes outstanding, the majority of which was commercial paper and debt with an original maturity of one year or less. We expect to finance the repayment of this short-term debt through a combination of other short-term borrowings and our long-term borrowing capacity. AT&T Form 10-Q - Part I Earnings, including other income, before interest, taxes, depreciation and amortization, and minority interest (EBITDA) is a measure of our ability to generate cash flow and should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with generally accepted accounting principles. EBITDA was $10,505 million for the first half of the year, an increase of 20.1% over the first half of last year. The EBITDA growth was impacted by gains on sales of businesses and investments, our investments in Excite@Home and Cablevision and net restructuring and other charges. Excluding these items, EBITDA increased $1,920 million, or 20.6%, over the first half of last year to $11,243 million. The improvement was primarily due to operational efficiencies which resulted in higher operating income, and increased other income. 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 $74,158 million, or 43.8%, to $243,564 million at June 30, 2000, compared with December 31, 1999, primarily due to the impact of the MediaOne acquisition. Other significant activity included AT&T's investment in Concert, consisting of $1.7 billion of property, plant and equipment and a loan of $1.0 billion; increased accounts receivable attributable to transactions with Concert; and an increase in licenses resulting from wireless acquisitions. Total liabilities increased $41,735 million, or 50.0%, to $125,123 million at June 30, 2000, compared with December 31, 1999, primarily due to the impact of the MediaOne acquisition. In addition, $7.7 billion of commercial paper and $5.5 billion of one-year notes were issued in the first half of the year. Total shareowners' equity increased $31,236 million, or 39.6%, to $110,163 million at June 30, 2000, compared with December 31, 1999. The increase was primarily driven by the issuance of AT&T common stock for the MediaOne acquisition as well the issuance of the AT&T Wireless Group tracking stock which generated $10.3 billion in net proceeds. The ratio of total debt to total capital, excluding LMG, (debt divided by total debt and equity of AT&T, excluding LMG) was 43.3% at June 30, 2000, compared with 44.3% at December 31, 1999. The equity portion of this calculation includes the convertible quarterly trust preferred securities. The improvement was primarily driven by a higher equity base associated with the MediaOne merger and the AT&T Wireless Group initial public offering, largely offset by an increase in borrowings primarily associated with the MediaOne merger as well as the issuance of commercial paper and notes during the first half of 2000. Included in debt is approximately $5.5 billion of notes, which are exchangeable into or collateralized by Vodafone ADRs we own. Excluding this debt, the ratio of debt to total capital at June 30, 2000, was 40.8%. RISK MANAGEMENT We are exposed to market risk from changes in interest, foreign exchange rates, and equity prices. On a limited basis we use certain derivative financial AT&T Form 10-Q - Part I 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 June 30, 2000, the fair value of unhedged debt would have increased by approximately $1.1 billion. 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. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" as an amendment to SFAS No. 133. This statement provides clarification with regard to certain implementation issues under SFAS No. 133 on specific types of hedges. We are currently assessing the impact of SFAS Nos. 133 and 138 on AT&T, including an assessment of the impact resulting from our merger with MediaOne. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB No. 101), "Revenue Recognition in Financial Statements." The SEC delayed the date by which registrants must apply the accounting and disclosures described in SAB No. 101 until the fourth quarter of 2000. We are currently assessing the impact of SAB No. 101 on our results of operations. AT&T Form 10-Q - Part II PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security-Holders. (a) The annual meeting of the shareholders of the registrant was held on May 24, 2000. (b) Election of Directors* Votes (Millions) Nominee For Withheld C. Michael Armstrong 2,643 31 Kenneth T. Derr 2,643 31 M. Kathryn Eickhoff 2,643 31 Walter Y. Elisha 2,642 32 George M. C. Fisher 2,643 31 Donald V. Fites 2,641 32 Amos B. Hostetter 2,644 30 Ralph S. Larsen 2,644 30 John C. Malone 2,643 31 Donald F. McHenry 2,642 32 Michael I. Sovern 2,641 32 Sanford I. Weill 2,642 32 John D. Zeglis 2,643 31 (c) Holders of common shares voted at this meeting on the following matters, which were set forth in the registrant's proxy statement dated March 27, 2000. (i) Ratification of Auditors For Against Abstain Ratification of the firm 2,651 9 13 of PricewaterhouseCoopers (99.65%) (.35%) as the independent auditors to audit the registrant's financial statements for the year 2000.(*) (ii) Directors Proposals that the Shareholders approve an increase in the number of authorized common shares.(**) For Against Abstain AT&T and Liberty Media Combined 2,465 188 20 (74.42%) (5.68%) (.61%) Liberty Media as a separate class 139 3 .09 (83.71%) (1.96%) (.05%) *Percentages are based on the total common shares voted. Approval of this proposal required a majority of the common shares voted. **Percentages are based on total number of outstanding common shares. Approval of this proposal required a majority of (i) the outstanding common shares of AT&T Common Stock and Liberty Media Group Class A and Class B Tracking Stock voting on a combined basis as well as (ii) the outstanding shares of Liberty Media Group Class A and Class B Tracking Stock voting together as a single class. AT&T Form 10-Q - Part II (iii) Shareholder Proposals Broker For Against Abstain Non-Votes That the Company adopt 115 1,921 105 534 a position of political (5.63%) (94.37%) non-partisanship.(*) That the Company discontinue 153 1,943 45 534 all bonuses and severance (7.29%) (92.71%) contracts. (*) That the Company create 63 1,971 106 534 a Stockholder Matching (3.09%) (96.91%) Gift Program.(*) That the Company freeze 155 1,918 67 534 executive pay during (7.47%) (92.53%) periods of significant downsizing.(*) That the Company prepare 111 1,960 69 534 a report outlining financial (5.36%) (94.64%) benefits received from government sources.(*) That the Company provide 58 2,003 79 534 each Director with a (2.80%) (97.20%) resident analyst.(*) That the Company develop 172 1,900 68 534 employee satisfaction (8.32%) (91.68%) standards that determine executive compensation.(*) *Percentages are based on the total common shares voted. Approval of this proposal required a majority of the common shares voted. 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 99.1 Liberty Media Group financial results for the three and six-month periods ended June 30, 2000 and 1999 99.2 AT&T Wireless Group financial results and Management's Discussion and Analysis for the three and six-month periods ended June 30, 2000 and 1999 99.3 AT&T Wireless Group combined statements of operations and combined balance sheets for the three-month periods ended March 30, 2000 and 1999 (b) Reports on Form 8-K Form 8-K dated April 24, 2000 was filed pursuant to Item 5 (Other Events) and Item 7 (Financial Statements and Exhibits) on April 24, 2000. Form 8-K dated May 2, 2000 was filed pursuant to Item 5 and Item 7 on May 5, 2000. Form 8-K dated June 15, 2000 was filed pursuant to Item 5 and Item 7 on June 15, 2000. AT&T Form 10-Q - Part II 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: August 14, 2000 AT&T Form 10-Q Exhibit Index Exhibit Number 12 Computation of Ratio of Earnings to Fixed Charges 27 Financial Data Schedule 99.1 Liberty Media Group financial results for the three and six-month periods ended June 30, 2000 and 1999 99.2 AT&T Wireless Group financial results and Management's Discussion and Analysis for the three and six-month periods ended June 30, 2000 and 1999 99.3 AT&T Wireless Group combined statements of operations and combined balance sheets for the three month periods ended March 30, 2000 and 1999 EX-12 2 0002.txt COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Exhibit 12 Form 10-Q For the Six Months Ended June 30, 2000 AT&T Corp. Computation of Ratio of Earnings to Fixed Charges (Dollars in Millions) (Unaudited) Income before income taxes $6,081 Add net equity investment losses, net of distributions of less than 50% owned affiliates 610 Add fixed charges, excluding capitalized interest 1,530 Total earnings before income taxes and fixed charges $8,221 Fixed Charges: Total interest expense $1,212 Capitalized interest 141 Interest portion of rental expense 153 Dividend requirements on subsidiary preferred stock and interest on trust preferred securities 165 Total fixed charges $ 1,671 Ratio of earnings to fixed charges 4.9 EX-27 3 0003.txt ART. 5 FDS FOR 2ND QUARTER 10-Q
5 This schedule contains summary financial information extracted from the unaudited consolidated balance sheet of AT&T Corp. at June 30, 2000 and the unaudited consolidated statement of income for the six-month period ended June 30, 2000 and is qualified in its entirety by reference to such financial statements. 0000005907 AT&T CORP. 1,000,000 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 426 0 13,323 1,335 0 14,883 76,358 29,801 243,564 42,664 29,337 4,705 0 6,695 103,468 243,564 0 32,122 0 26,453 0 341 1,212 6,081 1,364 4,717 0 0 0 4,717 1.08 1.07
EX-99.1 4 0004.txt EXHIBIT 99.1 - LIBERTY MEDIA GROUP FINANCIALS Exhibit 99.1 "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Combined Balance Sheets (unaudited)
June 30, December 31, 2000 1999 ---------------- ----------------- amounts in millions Assets - ------ Current assets: Cash and cash equivalents $ 1,271 1,714 Cash collateral under securities lending agreement (note 6) 423 -- Short-term investments 369 378 Trade and other receivables, net 243 134 Prepaid expenses and committed program rights 517 406 Deferred income tax assets 595 750 Other current assets 15 5 ---------------- ----------------- Total current assets 3,433 3,387 ---------------- ----------------- Investments in affiliates, accounted for under the equity method, and related receivables (note 3) 17,943 15,922 Investments in available-for-sale securities and others (notes 4, 5 and 6) 29,567 28,601 Property and equipment, at cost 783 162 Less accumulated depreciation 84 19 ---------------- ----------------- 699 143 ---------------- ----------------- Intangible assets: Excess cost over acquired net assets (note 5) 10,953 9,973 Franchise costs 269 273 ---------------- ----------------- 11,222 10,246 Less accumulated amortization 735 454 ---------------- ----------------- 10,487 9,792 ---------------- ----------------- Other assets, at cost, net of accumulated amortization 897 839 ---------------- ----------------- Total assets $ 63,026 58,684 ================ =================
(continued) Combined Balance Sheets (unaudited)
June 30, December 31, 2000 1999 ---------------- ---------------- amounts in millions Liabilities and Combined Equity - ------------------------------- Current liabilities: Accounts payable $ 81 44 Accrued liabilities 355 201 Accrued stock compensation 1,978 2,405 Program rights payable 179 166 Current portion of debt 203 554 ---------------- ---------------- Total current liabilities 2,796 3,370 ---------------- ---------------- Long-term debt (note 6) 6,340 2,723 Deferred income tax liabilities 14,242 14,107 Other liabilities 32 23 ---------------- ---------------- Total liabilities 23,410 20,223 ---------------- ---------------- Minority interests in equity of attributed subsidiaries 266 1 Obligation to redeem AT&T Liberty Media Group tracking stock (note 7) 55 -- Combined equity (note 7): Combined equity 34,212 31,876 Accumulated other comprehensive earnings, net of taxes 4,996 6,557 ---------------- ---------------- 39,208 38,433 Due to related parties 87 27 ---------------- ---------------- Total combined equity 39,295 38,460 ---------------- ---------------- Commitments and contingencies (note 8) Total liabilities and combined equity $ 63,026 58,684 ================ ================ See accompanying notes to combined financial statements.
Combined Statements of Operations and Comprehensive Earnings (unaudited)
Three months Three months ended ended June 30, 2000 June 30, 1999 ---------------- ---------------- Revenue $ 382 221 Operating costs and expenses: Operating, selling, general and administrative 295 184 Stock compensation (216) 496 Depreciation and amortization 236 177 ---------------- ---------------- 315 857 ---------------- ---------------- Operating income (loss) 67 (636) Other income (expense): Interest expense (100) (33) Adjustment to interest expense for contingent portion of exchangeable debentures (note 6) 200 -- Dividend and interest income 85 82 Share of losses of affiliates, net (note 3) (412) (279) Minority interests in losses of attributed subsidiaries 36 12 Gain (loss) on dispositions, net (note 3) 611 (2) Other, net 2 (4) ---------------- ---------------- 422 (224) ---------------- ---------------- Earnings (loss) before income taxes 489 (860) Income tax benefit (expense) (222) 317 ---------------- ---------------- Net earnings (loss) $ 267 (543) ---------------- ---------------- Other comprehensive earnings (loss), net of taxes: Foreign currency translation adjustments (87) (55) Unrealized holding gains (losses) arising during the period, net of reclassification adjustments (3,224) 1,118 ---------------- ---------------- Other comprehensive earnings (loss) (3,311) 1,063 ---------------- ---------------- Comprehensive earnings (loss) $ (3,044) 520 ================ ================ See accompanying notes to combined financial statements.
Combined Statements of Operations and Comprehensive Earnings (unaudited)
New Liberty Old Liberty ----------------------------------------------- --------------------- (note 1) (note 1) Six months Four months Two months ended ended ended June 30, 2000 June 30, 1999 February 28, 1999 ---------------------- ---------------------- --------------------- amounts in millions Revenue $ 617 292 282 Operating costs and expenses: Operating, selling, general and administrative 469 240 227 Stock compensation (239) 455 183 Depreciation and amortization 403 230 47 ---------------- ---------------- --------------- 633 925 457 ---------------- ---------------- --------------- Operating income (loss) (16) (633) (175) Other income (expense): Interest expense (175) (46) (28) Adjustment to interest expense for contingent portion of exchangeable debentures (note 6) (164) -- -- Dividend and interest income 165 106 12 Share of losses of affiliates, net (note 3) (794) (359) (66) Minority interests in losses of attributed subsidiaries 28 12 4 Gain (loss) on dispositions, net (notes 3, 4 and 5) 3,055 (2) 14 Gains on issuance of equity by affiliates and subsidiaries (note 3) -- -- 389 Other, net 7 (4) -- ---------------- ---------------- --------------- 2,122 (293) 325 ---------------- ---------------- --------------- Earnings (loss) before income taxes 2,106 (926) 150 Income tax (expense) benefit (897) 325 (209) ---------------- ---------------- --------------- Net earnings (loss) $ 1,209 (601) (59) ---------------- ---------------- --------------- Other comprehensive earnings (loss), net of taxes: Foreign currency translation adjustments (118) (43) (15) Unrealized holding gains (losses) arising during the period, net of reclassification adjustments (1,443) 2,012 971 ---------------- ---------------- --------------- Other comprehensive earnings (loss) (1,561) 1,969 956 ---------------- ---------------- --------------- Comprehensive earnings (loss) $ (352) 1,368 897 ================ ================ =============== See accompanying notes to combined financial statements.
"LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Combined Statement of Equity Six months ended June 30, 2000 (unaudited)
Accumulated other Due to comprehensive (from) Total Combined earnings, related combined equity net of taxes parties equity ------------- --------------- ------------- ---------- amounts in millions Balance at January 1, 2000 $ 31,876 6,557 27 38,460 Net earnings 1,209 -- -- 1,209 Issuance of AT&T Liberty Media Group tracking stock for acquisitions (note 5) 1,024 -- -- 1,024 Issuances of common stock by attributed subsidiaries and affiliates, net of taxes 167 -- -- 167 Purchase of AT&T Liberty Media Group tracking stock (9) -- -- (9) Premium received in connection with put obligation, net 4 -- -- 4 Reclassification of redemption amount of AT&T Liberty Media Group tracking stock subject to put obligation (55) -- -- (55) Utilization of net operating losses of Liberty Media Group by AT&T (4) -- -- (4) Foreign currency translation adjustments -- (118) -- (118) Recognition of previously unrealized gains on available-for-sale securities, net -- (1,479) -- (1,479) Unrealized gains on available-for-sale securities -- 36 -- 36 Other transfers from related parties, net -- -- 60 60 ------------- --------------- ------------- ---------- Balance at June 30, 2000 $ 34,212 4,996 87 39,295 ============= =============== =========== ========== See accompanying notes to combined financial statements.
"LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Combined Statements of Cash Flows (unaudited)
New Liberty Old Liberty ----------------------------------------------- ------------------------ (note 1) (note 1) Six months Four months Two months ended ended ended June 30, 2000 June 30, 1999 February 28, 1999 ---------------------- ---------------------- ------------------------ amounts in millions (see note 2) Cash flows from operating activities: Net earnings (loss) $ 1,209 (601) (59) Adjustments to reconcile net earnings (loss) to net cash provided (used) by operating activities: Depreciation and amortization 403 230 47 Stock compensation (239) 455 183 Payments of stock compensation (283) (27) (126) Share of losses of affiliates, net 794 359 66 Deferred income tax expense (benefit) 930 (314) 205 Intergroup tax allocation (34) (14) -- Cash payment from AT&T pursuant to tax sharing agreement 123 45 -- Minority interests in losses of attributed subsidiaries (28) (12) (4) Loss (gain) on disposition of assets, net (3,055) 2 (14) Gains on issuance of equity by affiliates and subsidiaries -- -- (389) Noncash interest 169 -- -- Other noncash charges -- -- 9 Changes in operating assets and liabilities, net of the effect of acquisitions and dispositions: Change in receivables 24 (12) (19) Change in prepaid expenses and committed program rights (102) (7) (10) Change in payables and accruals 88 67 4 ----------------- ----------------- ------------------- Net cash provided (used) by operating activities (1) 171 (107) ----------------- ----------------- ------------------- Cash flows from investing activities: Cash paid for acquisitions (546) (1) -- Capital expended for property and equipment (82) (16) (21) Investments in and loans to affiliates and others (2,336) (434) (45) Purchases of marketable securities (735) (6,172) (132) Sales and maturities of marketable securities 1,326 2,759 34 Cash proceeds from dispositions 87 2 43 Cash balances of deconsolidated subsidiaries -- -- (53) Other, net 8 (12) (9) ----------------- ----------------- ------------------- Net cash used by investing activities (2,278) (3,874) (183) ----------------- ----------------- -------------------
(continued) Combined Statements of Cash Flows, continued (unaudited)
New Liberty Old Liberty ----------------------------------------------- --------------------- (note 1) (note 1) Six months Four months Two months ended ended ended June 30, 2000 June 30, 1999 February 28, 1999 ---------------------- ---------------------- --------------------- amounts in millions (see note 2) Cash flows from financing activities: Borrowings of debt 3,022 495 156 Repayments of debt (1,123) (463) (148) Premium received on put contracts, net 4 -- -- Purchase of AT&T Liberty Media Group tracking stock (9) -- -- Cash transfers (to) from related parties (59) (160) 132 Repurchase of stock of subsidiaries -- -- (45) Other, net 1 16 (1) ---------------- ----------------- ---------------- Net cash provided (used) by financing activities 1,836 (112) 94 ---------------- ----------------- ---------------- Net decrease in cash and cash equivalents (443) (3,815) (196) Cash and cash equivalents at beginning of period 1,714 5,319 407 ---------------- ----------------- ---------------- Cash and cash equivalents at end of period $ 1,271 1,504 211 ================ ================= ================ See accompanying notes to combined financial statements.
"LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Notes to Combined Financial Statements June 30, 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 therefor, 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 June 30, 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 interests in technology and Internet businesses; 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) 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. Effective June 9, 2000, AT&T issued stock dividends to holders of AT&T Liberty Media Group tracking stock (the "Liberty Dividend"). The Liberty Dividend consisted of one share of AT&T Liberty Media Group tracking stock for every one share of AT&T Liberty Media Group tracking stock owned. The Liberty Dividend has been treated as a stock split, and accordingly, all share amounts have been restated to reflect the Liberty Dividend. 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 $121 million for the six months ended June 30, 2000, $58 million for the four month period ended June 30, 1999 and $32 million for the two month period ended February 28, 1999. Cash paid for income taxes for the six months ended June 30, 2000, the four months ended June 30, 1999 and the two months ended February 28, 1999 was not material.
New Liberty Old Liberty --------------------------- ------------- (note 1) (note 1) Six months Four months Two months ended ended ended June 30, June 30, February 28, 2000 1999 1999 ---------- ----------- ------------ amounts in millions Cash paid for acquisitions (note 5): Fair value of assets acquired $ 3,415 3 -- Net liabilities assumed (1,119) (2) -- Deferred tax liability recorded (347) -- -- Minority interests in equity of acquired attributed subsidiaries (379) -- -- AT&T Liberty Media Group tracking stock issued (1,024) -- -- ---------- ----------- ------------ Cash paid for acquisitions $ 546 1 -- ========== =========== ============
(continued) The following table reflects the change in cash and cash equivalents resulting from the AT&T Merger and related restructuring transactions (amounts in millions): Cash and cash equivalents prior to the AT&T Merger $ 211 Cash received in restructuring transactions, net of cash balances transferred 5,284 Cash paid to TCI Group for certain warrants (note 4) (176) ------------- Cash and cash equivalents subsequent to the AT&T Merger $ 5,319 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): 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 ============= (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:
June 30, 2000 December 31, 1999 ---------------------- ----------------------- amounts in millions USA Networks, Inc. ( "USAI ") and related investments $ 2,848 2,699 Telewest Communications plc ( "Telewest ") 3,048 1,996 Discovery Communications, Inc. ("Discovery") 3,313 3,441 TV Guide 1,708 1,732 QVC Inc. ( "QVC ") 2,510 2,515 Teligent, Inc. ( "Teligent") 1,202 -- Flextech p.l.c. ("Flextech") -- 727 UnitedGlobalCom, Inc. ("UnitedGlobalCom") 445 505 Various foreign equity investments (other than Telewest and Flextech) 1,536 1,463 Other 1,333 844 ------------------- -------------------- $ 17,943 15,922 =================== ====================
(continued) The following table reflects Liberty Media Group's share of earnings (losses) of affiliates:
New Liberty Old Liberty ------------------------------------------ ----------------- (note 1) (note 1) Six months Four months Two months ended ended ended June 30, June 30, February 28, 2000 1999 1999 -------------------- ------------------- ----------------- amounts in millions USAI and related investments $ (16) (9) 10 Telewest (168) (97) (38) Discovery (128) (76) (8) TV Guide (25) (11) -- QVC (5) (9) 13 Teligent (152) -- -- Flextech (18) (13) (5) UnitedGlobalCom (88) -- -- Other foreign investments (130) (56) (22) Other (64) (88) (16) -------------------- ------------------- ----------------- $ (794) (359) (66) ==================== =================== =================
Summarized unaudited combined financial information for affiliates is as follows:
New Liberty Old Liberty ------------------------------------------ ----------------- (note 1) (note 1) Six months Four months Two months ended ended ended June 30, June 30, February 28, 2000 1999 1999 --------------------- ------------------- ----------------- amounts in millions Revenue $ 7,896 4,060 2,341 Operating expenses (7,296) (3,451) (1,894) Depreciation and amortization (1,545) (520) (353) --------------------- ------------------- ----------------- Operating income (loss) (945) 89 94 Interest expense (1,167) (323) (281) Other, net 125 (244) (127) --------------------- ------------------- ----------------- Net loss $ (1,987) (478) (314) ===================== =================== =================
(continued) USAI owns and operates businesses in network and television production, television broadcasting, electronic retailing, ticketing operations, and internet services. At June 30, 2000, Liberty Media Group directly and indirectly held 74.4 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 June 30, 2000, Liberty Media Group would own 153.4 million shares or approximately 21% (on a fully-diluted basis) of USAI common stock. USAI's common stock reported a closing price of $21-5/8 per share on June 30, 2000. Telewest currently operates and constructs cable television and telephone systems in the UK. Flextech develops and sells a variety of television programming in the UK. In April 2000, Telewest acquired Flextech. As a result, each share of Flextech was exchanged for 3.78 new Telewest shares. Prior to the acquisition, Liberty Media Group owned an approximate 37% equity interest in Flextech and a 22% equity interest in Telewest. As a result of the acquisition, Liberty Media Group owns an approximate 24.6% equity interest in Telewest. Liberty Media Group recognized a $649 million gain (excluding related tax expense of $227 million) on the acquisition during the second quarter of 2000 based on the difference between the carrying value of Liberty Media Group's interest in Flextech and the fair value of the Telewest shares received. At June 30, 2000, Liberty Media Group indirectly owned 724 million of the issued and outstanding Telewest ordinary shares. Telewest's ordinary shares reported a closing price of $3.46 per share on June 30, 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 The Associated Group, Inc. (the "Associated Group") (see note 5). At June 30, 2000, Liberty Media Group held 21 million shares of Teligent Class A common stock. Teligent's Class A common stock reported a closing price of $23-5/8 per share on June 30, 2000. (continued) On March 1, 1999, United Video Satellite Group, Inc. ("UVSG") and The News Corporation Limited ("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, 45 million shares of TV Guide's Class A common stock and 75 million shares of TV Guide's Class B common stock valued at an average of $9.325 per share. In addition, News Corp. purchased approximately 13 million additional shares of TV Guide's 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). The Class A common stock of TV Guide is publicly traded. At June 30, 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. TV Guide's Class A common stock reported a closing price of $34.25 per share on June 30, 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 June 30, 2000, Liberty Media Group owned an approximate 11% economic ownership interest representing an approximate 37% voting interest in UnitedGlobalCom. UnitedGlobalCom's Class A common stock reported a closing price of $46.75 per share on June 30, 2000. Liberty Media Group owns 9.9 million shares of UnitedGlobalCom Class B common stock, which stock is convertible, on a one-for-one basis, into UnitedGlobalCom Class A common stock. The $13 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. (continued) (4) Investments in Available-for-sale Securities and Others ------------------------------------------------------- Investments in available-for-sale securities and others are summarized as follows:
June 30, December 31, 2000 1999 -------------- ---------------- amounts in millions Sprint Corporation ("Sprint") $ 11,575 10,186 Time Warner, Inc. ("Time Warner") 8,564 8,202 News Corp. 2,804 2,403 Motorola, Inc. ("Motorola") 2,059 3,430 Other available-for-sale securities 3,806 3,773 Other investments, at cost, and related receivables 1,128 985 -------------- ---------------- 29,936 28,979 Less short-term investments 369 378 -------------- ---------------- $ 29,567 28,601 ============== ================
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 1.725 shares (as adjusted for a subsequent stock split) of Motorola common stock. In connection with the merger Liberty Media Group received 54 million shares (as adjusted for a subsequent stock split) and warrants to purchase 37 million shares (as adjusted for a subsequent stock split) 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 18.4 million shares (as adjusted for a subsequent stock split) 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 $4.78 (as adjusted for a subsequent stock split) 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:
June 30, December 31, 2000 1999 --------------- ------------------ amounts in millions Equity securities: Fair value $ 25,834 24,472 Gross unrealized holding gains 10,730 11,457 Gross unrealized holding losses (2,388) (646) Debt securities: Fair value 1,410 1,995 Gross unrealized holding gains 35 -- Gross unrealized holding losses (51) (22)
(continued) 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 $30.9 billion and $29.2 billion at June 30, 2000 and December 31, 1999, respectively. No independent appraisals were conducted for those assets. (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 2.41422 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 46.8 million shares of AT&T Class A Liberty Media Group tracking stock, (3) approximately 10.6 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 transmitter, 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 $17 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 economic interest in the Sprint PCS Group Stock exchanged. (continued) 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. On June 8, 2000, Liberty Media Group completed its acquisition of 100% of Ascent for an additional $67 million. Such transaction was accounted for as a purchase and the $283 million excess of the purchase price over the fair value of the net assets acquired is being amortized over 20 years. On April 10, 2000, Liberty Media Group acquired all of the outstanding common stock of Four Media Company ("Four Media") in exchange for approximately $123 million, 6.4 million shares of AT&T Class A Liberty Media Group tracking stock and a warrant to purchase approximately 700,000 shares of AT&T Class A Liberty Media Group tracking stock at an exercise price of $23 per share. The acquisition was accounted for as a purchase. In connection with this acquisition, Liberty Media Group recorded a $145 million increase to combined equity and the $307 million excess of the purchase price over the fair value of the net assets acquired is being amortized over 20 years. Four Media provides technical and creative services to owners, producers and distributors of television programming, feature films and other entertainment products both domestically and internationally. On June 9, 2000, Liberty Media Group acquired a controlling interest in The Todd-AO Corporation ("Todd-AO"), consisting of approximately 6.5 million shares of Class B Common Stock of Todd-AO, representing 60% of the equity and approximately 94% of the voting power of Todd-AO outstanding immediately prior to the closing, in exchange for approximately 5.4 million shares of AT&T Class A Liberty Media Group tracking stock. The acquisition was accounted for as a purchase. In connection with this acquisition, Liberty Media Group recorded a $101 million increase to combined equity and the $94 million excess of the purchase price over the fair value of the net assets acquired is being amortized over 20 years. Todd-AO provides sound, video and ancillary post production and distribution services to the motion picture and television industries in the United States and Europe. Immediately following the closing of such transaction, Liberty Media Group contributed to Todd-AO 100% of the capital stock of Four Media, in exchange for approximately 16.6 million shares of the Class B Common Stock of Todd-AO increasing Liberty Media Group's ownership interest in Todd-AO to approximately 84% of the equity and approximately 98% of the voting power of Todd-AO outstanding immediately following the closing. Following Liberty Media Group's acquisition of Todd-AO, and the contribution by Liberty Media Group to Todd-AO of Liberty Media Group's ownership in Four Media, Todd-AO changed its name to Liberty Livewire Corporation. (continued) (6) Long-Term Debt Debt is summarized as follows:
June 30, December 31, 2000 1999 ---------------- ----------------- amounts in millions Parent company debt: Senior notes $ 741 741 Senior debentures (a) 1,486 494 Senior exchangeable debentures (b) 1,996 1,022 Securities lending agreement (c) 1,026 -- Bank credit facilities -- 390 ---------------- ----------------- 5,249 2,647 Debt of subsidiaries: Bank credit facilities 924 573 Senior notes 170 -- Other debt, at varying rates 200 57 ---------------- ----------------- 1,294 630 ---------------- ----------------- Total debt 6,543 3,277 Less current maturities 203 554 ---------------- ----------------- Total long-term debt $ 6,340 2,723 ================ ================= (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 adjustment to interest expense in the combined statement of operations and comprehensive earnings. (continued) (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 $423 million at June 30, 2000 included $205 million of restricted cash. At June 30, 2000, Liberty Media Group had utilized $603 million of the cash collateral under the securities lending agreement.
At June 30, 2000, Liberty Media Group had approximately $236 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 June 30, 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. Based on quoted market prices, the fair value of Liberty Media Group's debt at June 30, 2000 is as follows (amounts in millions): Senior notes of parent company $ 720 Senior debentures of parent company 1,392 Senior exchangeable debentures of parent company 2,134 Senior notes of attributed subsidiary 183 Liberty Media Group believes that the carrying amount of the remainder of its debt approximated its fair value at June 30, 2000. (7) Combined Equity AT&T Liberty Media Group Tracking Stock In conjunction with a stock repurchase program or similar transaction, the issuer may elect to sell put options on it own common stock. Proceeds from any sales of puts with respect to AT&T Liberty Media Group tracking stock is reflected as an increase to combined equity, and an amount equal to the maximum redemption amount under unexpired put options with respect to such tracking stock is reflected as an "Obligation to redeem AT&T Liberty Media Group tracking stock" in the accompanying combined balance sheets. During the six months ended June 30, 2000, pursuant to a stock repurchase program, 400,000 shares of AT&T Liberty Media Group tracking stock were purchased at an aggregate cost of $9 million. Such amount is reflected as a decrease to combined equity in the accompanying combined financial statements. (continued) Stock Issuances of Subsidiary During the six months ended June 30, 2000, Liberty Digital, Inc. ("Liberty Digital") issued approximately 4.2 million shares of common stock in connection with certain acquisitions 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 $169 million increase to combined equity. Transactions with Officers and Directors Prior to the AT&T Merger, a limited liability company owned by Dr. John C. Malone (Chairman of the Board of Liberty Media Corporation) 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 paid 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 six months ended June 30, 2000, the four months ended June 30, 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, selling, general and administrative 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 $111 million, $71 million and $43 million for the six months ended June 30, 2000, the four months ending June 30, 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 six months ended June 30, 2000 and the four months ended June 30, 1999 aggregated $9 million and $10 million, respectively, and are included in operating expenses in the accompanying combined statements of operations and comprehensive earnings. (continued) Liberty Media Group makes marketing support payments to AT&T. Charges by AT&T for such arrangements were $1 million for the six months ended June 30, 2000 and less than $1 million for each of the four months ended June 30, 1999 and the two months ended February 28, 1999. A certain subsidiary attributed to Liberty Media Group 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 subsidiary, aggregated $4 million, $2 million and $1 million during the six months ended June 30, 2000, the four months ended June 30, 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. During the quarter ended June 30, 2000, a subsidiary of Liberty Media Group entered into an agreement for AT&T to provide dedicated hosting services to the subsidiary. As of June 30, 2000, no amounts have been paid to AT&T for such services. Due to Related Parties The amounts included in "Due 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 LLC ("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 June 30, 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. Liberty Media Group has guaranteed various loans, notes payable, letters of credit and other obligations (the "Guaranteed Obligations") of certain affiliates. At June 30, 2000, the Guaranteed Obligations aggregated approximately $774 million. Currently, Liberty Media Group is not certain of the likelihood of being required to perform under such guarantees. (continued) 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, requires 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 Group 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. EX-99.2 5 0005.txt EXHIBIT 99.2 - AWE FINANCIALS EX-99.2 AT&T WIRELESS GROUP COMBINED STATEMENTS OF OPERATIONS (Dollars in Millions) (Unaudited)
For the Three For the Six Months Ended Months Ended June 30, June 30, 2000 1999 2000 1999 REVENUE Services revenue $2,240 $1,689 $4,232 $3,061 Equipment revenue 237 189 443 380 Total revenue 2,477 1,878 4,675 3,441 OPERATING EXPENSES Costs of services and products 1,205 940 2,258 1,750 Selling, general and administrative 763 614 1,513 1,178 Depreciation and amortization 402 308 771 584 Total operating expenses 2,370 1,862 4,542 3,512 OPERATING INCOME (LOSS) 107 16 133 (71) Other income 227 140 308 184 Interest expense 18 38 69 70 Income before income taxes 316 118 372 43 Provision for income taxes 116 43 146 17 Net income $ 200 $ 75 $ 226 $ 26 Dividend requirements on preferred stock held by AT&T, net 33 13 46 27 Net income (loss) after preferred stock dividends $ 167 $ 62 $ 180 $ (1) See Notes to Combined Financial Statements
AT&T WIRELESS GROUP COMBINED BALANCE SHEETS (Dollars in Millions)
June 30, December 31, 2000 1999 (Unaudited) ASSETS Cash and cash equivalents $ 6 $ 5 Accounts receivable, less allowances of $143 and $130 1,606 1,300 Note receivable from AT&T 3,962 - Inventories 418 162 Deferred income taxes 144 127 Prepaid expenses and other current assets 65 34 TOTAL CURRENT ASSETS 6,201 1,628 Property, plant and equipment, net of accumulated depreciation of $4,666 and $4,033 8,213 6,349 Licensing costs, net of accumulated amortization of $1,614 and $1,519 9,994 8,571 Investments 4,946 4,502 Goodwill and other assets, net of accumulated amortization of $426 and $385 3,489 2,462 TOTAL ASSETS $32,843 $23,512 LIABILITIES Accounts payable $ 997 $ 921 Payroll and benefit-related liabilities 292 291 Debt maturing within one year 154 154 Other current liabilities 1,030 931 TOTAL CURRENT LIABILITIES 2,473 2,297 Long-term debt due to AT&T 1,800 3,400 Deferred income taxes 3,881 3,750 Other long-term liabilities 156 48 TOTAL LIABILITIES 8,310 9,495 MINORITY INTEREST 11 20 EQUITY Preferred stock held by AT&T 3,000 1,000 Combined equity 21,496 12,971 Accumulated other comprehensive income 26 26 TOTAL EQUITY 24,522 13,997 TOTAL LIABILITIES AND EQUITY $32,843 $23,512 See Notes to Combined Financial Statements
AT&T WIRELESS GROUP COMBINED STATEMENTS OF CHANGES IN EQUITY (Dollars in Millions) (Unaudited)
For the Six Months Ended June 30, 2000 1999 PREFERRED STOCK HELD BY AT&T Balance at beginning of period $ 1,000 $ 1,000 Preferred stock issued to AT&T 2,000 - Balance at end of period 3,000 1,000 COMBINED EQUITY Balance at beginning of period 12,971 10,535 Net income (loss) after preferred stock dividends 180 (1) Proceeds attributed from initial public offering 7,000 - Transfers from AT&T, net 1,345 1,577 Balance at end of period 21,496 12,111 ACCUMULATED OTHER COMPREHENSIVE INCOME Balance at beginning of period 26 (3) Net revaluation of investments (net of taxes of $12) - 21 Balance at end of period 26 18 TOTAL EQUITY $24,522 $13,129 SUMMARY OF TOTAL COMPREHENSIVE INCOME Net income (loss) after preferred stock dividends $ 180 $ (1) Dividend requirements on preferred stock held by AT&T, net 46 27 Net income 226 26 Net revaluation of investments (net of taxes of $12) - 21 TOTAL COMPREHENSIVE INCOME $ 226 $ 47 See Notes to Combined Financial Statements
AT&T WIRELESS GROUP COMBINED STATEMENTS OF CASH FLOWS (Dollars in millions) (Unaudited)
For the Six Months Ended June 30, 2000 1999 OPERATING ACTIVITIES Net income $ 226 $ 26 Adjustments to reconcile net income to net cash provided by operating activities: Gains on sale/exchange of investments (167) (99) Depreciation and amortization 771 584 Deferred income taxes 116 13 Net equity earnings from investments (67) (71) Minority interests in consolidated subsidiaries (8) (12) Provision for uncollectibles 115 88 Increase in accounts receivable (328) (210) (Increase) decrease in inventories (238) 32 Decrease in accounts payable (252) (116) Net change in other operating assets and liabilities 55 42 NET CASH PROVIDED BY OPERATING ACTIVITIES 223 277 INVESTING ACTIVITIES Net increase in note receivable from AT&T (3,962) - Capital expenditures and other additions (1,879) (792) Net acquisitions of licenses (105) (17) Equity investment distributions and sales 245 99 Equity investment contributions and purchases (77) (134) Net (acquisitions) dispositions of businesses including cash acquired (2,602) 244 NET CASH USED IN INVESTING ACTIVITIES (8,380) (600) FINANCING ACTIVITIES Increase in short-term borrowings - 33 Increase in long-term debt due to AT&T 400 500 Proceeds attributed from initial public offering 7,000 - Dividend requirements on preferred stock, net (46) (27) Transfers from (to) AT&T, net 806 (85) Other financing activities, net (2) (10) NET CASH PROVIDED BY FINANCING ACTIVITIES 8,158 411 Net increase in cash and cash equivalents 1 88 Cash and cash equivalents at beginning of year 5 27 Cash and cash equivalents at end of period $ 6 $ 115 See Notes to Combined Financial Statements
AT&T WIRELESS GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (Dollars in Millions) (Unaudited) (a) BACKGROUND AND BASIS OF PRESENTATION Background On April 27, 2000, AT&T completed an initial public offering of 15.6%, or 360 million shares, of the AT&T Wireless Group tracking stock at an initial public offering price of $29.50 per share. This stock is designed to track the performance of AT&T's wireless services businesses. The AT&T Wireless Group tracking stock issued in the initial public offering reflected only a portion of the economic interest of the AT&T Wireless Group. AT&T retained the remaining interest in the economic performance of the AT&T Wireless Group in the form of an inter-group interest which represented an 84.4% interest as of the date of the initial public offering and at June 30, 2000. Basis of Presentation The AT&T Wireless Group is a fully integrated business unit of AT&T. There are differences between the results reported for the AT&T Wireless Group and the AT&T wireless segment results reported by AT&T, for periods prior to the initial public offering. The AT&T Wireless Group includes the results of its mobility and fixed wireless businesses, as well as its international operations, which primarily include the earnings or losses associated with equity interests in international wireless communications ventures and partnerships. The combined financial statements reflect the results of operations, financial position, changes in equity and cash flows of the AT&T Wireless Group as if it were a separate entity for all periods presented. The financial information included herein may not necessarily reflect the combined results of operations, financial position, changes in equity and cash flows of the AT&T Wireless Group had it been a separate, stand-alone entity during the periods presented. Additionally, the combined results for the interim periods presented are not necessarily indicative of results for the full year. The combined financial statements of the AT&T Wireless Group should be read in conjunction with AT&T's registration statement filed on Form S-3 dated February 2, 2000, including the prospectus filed on April 27, 2000, related to the initial public offering of the AT&T Wireless Group tracking stock. In addition, these combined financial statements should be read in conjunction with AT&T's Form 10-K for the year ended December 31, 1999 and AT&T's Form 10-Q for the quarters ended March 31, 2000, and June 30, 2000. The combined financial statements of the AT&T Wireless Group conform to generally accepted accounting principles. The combined financial statements reflect the assets, liabilities, revenue and expenses directly attributable to the AT&T Wireless Group, as well as allocations deemed reasonable by management, to present the results of operations, financial position and cash flows of the AT&T Wireless Group on a stand-alone basis. The allocation methodologies have been described within the notes to the combined financial statements where appropriate. The initial public offering of the AT&T Wireless Group tracking stock resulted in net proceeds to AT&T, after deducting underwriter's discount and related fees and expenses, of $10.3 billion. AT&T attributed $7.0 billion of the net proceeds to the AT&T Wireless Group in the form of an intercompany note receivable which is included in the accompanying combined balance sheet as of June 30, 2000, as "Note receivable from AT&T". Changes in the note receivable reflect transfers between the AT&T Wireless Group and AT&T subsequent to the initial public offering, primarily to fund acquisitions and capital expansion. Interest on the note receivable is calculated based upon the average daily balance outstanding at a rate equal to the one month London InterBank Offered Rate (LIBOR) minus 6 basis points, a rate designed to be equivalent to the rate the AT&T Wireless Group would receive if it were a stand-alone entity. Prior to the initial public offering, the capital structure of the AT&T Wireless Group had been assumed based upon AT&T's historical capital ratio adjusted for certain items. This resulted in $3.4 billion in intercompany indebtedness at December 31, 1999, paying annual interest at 7.25%. In addition, as of December 31, 1999, the AT&T Wireless Group had issued and outstanding, $1.0 billion of 9% cumulative preferred stock to AT&T that, subject to the approval of the AT&T Wireless Group capital stock committee, is redeemable at the option of AT&T. On May 1, 2000, following the initial public offering of the AT&T Wireless Group tracking stock, $2.0 billion of the AT&T Wireless Group's outstanding intercompany indebtedness to AT&T was recapitalized into an additional $2.0 billion of 9% cumulative preferred stock. In conjunction with the recapitalization, the remaining long term debt due to AT&T of $1.8 billion was recapitalized to be 10 year term debt that bears interest at a fixed rate of 8.1% per annum. The interest rate is designed to be substantially equivalent to the interest rate that the AT&T Wireless Group would be able to obtain from third parties, including the public markets, as a non-affiliate of AT&T without the benefit of any guaranty by AT&T. Changes in combined equity prior to the initial public offering represented net transfers to or from AT&T, after giving effect to the net income or loss of the AT&T Wireless Group during the period, and were assumed to be settled in cash. AT&T's capital contributions for purchase business combinations and initial investments in joint ventures and partnerships which AT&T attributed to the AT&T Wireless Group have been treated as noncash transactions prior to the initial public offering. (b) RECENT ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements". SAB No. 101 provides guidance on revenue recognition, including service activation fees, and certain related costs, which requires adoption by the end of fiscal year 2000. Management is currently assessing the impact of SAB No. 101 to the combined results of operations and financial position of the AT&T Wireless Group. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities". Among other provisions, it requires that entities recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Gains and losses resulting from changes in the fair values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The effective date of this standard was delayed via the issuance of SFAS No. 137. The effective date for SFAS No. 133 is now for fiscal years beginning after June 15, 2000, though earlier adoption is encouraged and retroactive application is prohibited. For the AT&T Wireless Group, this means that the standard must be adopted no later than January 1, 2001. Management does not expect the adoption of this standard will have a material impact on the AT&T Wireless Group's results of operations, financial position or cash flows. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" as an amendment to SFAS No. 133. This statement provides clarification with regard to certain implementation issues under SFAS No. 133 on specific types of hedges. It is not expected to have a material impact on the AT&T Wireless Group's results of operations, financial position or cash flows. (c) ACQUISITIONS AND DIVESTITURES On June 19, 2000, the AT&T Wireless Group announced that it had signed definitive agreements to acquire wireless systems in the San Francisco Bay Area, San Diego and Houston for $3.3 billion in cash. On June 29, 2000, the AT&T Wireless Group completed the acquisition of Vodafone Airtouch plc's 50% partnership interest in CMT Partners (Bay Area Properties), which holds controlling interest in five Bay Area markets including San Francisco and San Jose, for approximately $1.8 billion in cash, thereby giving the AT&T Wireless Group a 100% ownership interest in this partnership. The transaction was recorded under the purchase method of accounting. The excess of aggregate purchase price over the fair value of net tangible assets acquired, based on a preliminary allocation, totaled $1,457, and has been assigned to licensing costs, goodwill and other intangible assets and is being amortized over periods of five to 40 years. We may make refinements to the allocation of the purchase price in future periods as the related fair value appraisals of certain assets and liabilities are finalized. Prior to consummation of this transaction, the AT&T Wireless Group's 50% ownership interest in CMT Partners was accounted for as an equity investment. Accordingly, as a result of the transaction, $190 was reclassified from investments to goodwill on the accompanying combined balance sheet. The transactions related to the Houston and San Diego markets have been approved by the boards of directors of AT&T and the selling entities, however, are subject to certain federal regulatory approvals, which the AT&T Wireless Group expects will result in ownership adjustments in an existing Houston market. These transactions are expected to close by the end of 2000. On June 1, 2000, the AT&T Wireless Group completed its acquisition of the assets of Wireless One Network, L.P., for approximately $850 in cash, acquiring wireless systems in northwest and southwest Florida. The transaction was recorded under the purchase method of accounting. Accordingly, the operating results of Wireless One Network, L.P., have been included in the accompanying combined financial statements since the date of acquisition. The excess of aggregate purchase price over the fair value of net tangible assets acquired, based on a preliminary allocation, totaled $780 and has been assigned to licensing costs, goodwill and other intangible assets and is being amortized over periods of five to 40 years. We may make refinements to the allocation of the purchase price in future periods as the related fair value appraisals of certain assets and liabilities are finalized. On February 28, 2000, AT&T and Dobson Communications Corporation (Dobson) acquired American Cellular Corporation (American Cellular), through a joint venture, for approximately $2.4 billion. AT&T contributed its interest in the joint venture to the AT&T Wireless Group as of the date of the acquisition. The acquisition was funded with non-recourse bank debt by the joint venture and cash equity contributions of approximately $400 from each of the two partners. Dobson is responsible for day-to-day management of the joint venture, which is equally owned and jointly controlled by Dobson and the AT&T Wireless Group. Accordingly, this investment is accounted for as an equity method investment in the accompanying combined financial statements. On February 29, 2000, TeleCorp PCS, Inc. announced that it had signed a definitive merger agreement with Tritel, Inc. as part of stock transaction valued at approximately $5.3 billion. Pursuant to the terms of the agreement, each company will merge with a separate newly formed subsidiary of a new holding company that will be named TeleCorp PCS, Inc. upon consummation of the transaction. The AT&T Wireless Group currently holds equity interests in each of TeleCorp and Tritel which are both affiliates of the AT&T Wireless Group. In connection with the merger, the AT&T Wireless Group will contribute to TeleCorp rights to acquire additional wireless licenses in Wisconsin and Iowa, approximately $20 in cash and extend the term of its network membership license agreement to the merged entity or its operating subsidiaries in exchange for approximately $410 of common shares in the newly combined company. This transaction will bring the AT&T Wireless Group's equity stake in the combined TeleCorp and Tritel to approximately 23%. Additionally, in a separate transaction, the AT&T Wireless Group agreed to exchange certain wireless properties and rights to acquire licenses in Wisconsin and Iowa markets, as well as a cash payment of approximately $80. In return, the AT&T Wireless Group will receive TeleCorp's Boston operating segment, which includes PCS licenses in several New England markets. The boards of directors of AT&T, TeleCorp and Tritel have approved the transactions. Both the exchange transactions and the merger transactions are subject to regulatory approval and are expected to close in the fourth quarter of 2000. In June 2000, the AT&T Wireless Group sold its interest in two equity investments for cash resulting in pretax gains of approximately $141. (d) COMMITMENTS In the normal course of business, the AT&T Wireless Group is subject to proceedings, lawsuits and other claims. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. Consequently, the AT&T Wireless Group is unable to ascertain the ultimate aggregate amount of monetary liability or financial impact with respect to these matters at June 30, 2000. The AT&T Wireless Group also makes routine filings with the Federal Communications Commission and the state regulatory authorities. These matters could affect the operating results of any one quarter when resolved in future periods. However, the AT&T Wireless Group believes that after final disposition any monetary liability or financial impact beyond that provided for as of June 30, 2000, would not be material to the combined financial statements. In the second quarter of 1999, the AT&T Wireless Group entered into a four-year commitment to purchase $1 billion in wireless network equipment. As of June 30, 2000, the AT&T Wireless Group had fulfilled its commitment. The AT&T Wireless Group has agreements with other wireless carriers regarding subscriber activity on other carriers' wireless systems. These agreements establish general terms and charges for system usage, and in some cases also establish minimum usage requirements. The AT&T Wireless Group also has various other purchase commitments for materials, supplies and other items incidental to the ordinary course of business which are not significant individually, nor in the aggregate. (e) RELATED PARTY TRANSACTIONS As discussed in Note (a), AT&T has provided necessary working capital requirements to the AT&T Wireless Group through an attribution of a portion of the initial public offering proceeds, intercompany debt and preferred stock, as well as capital contributions prior to the initial public offering. These amounts are reflected in the accompanying combined balance sheets as "Note receivable from AT&T", "Long-term debt due to AT&T" and "Preferred stock held by AT&T". Intercompany interest income on the note receivable from AT&T for each of the three and six month periods ended June 30, 2000, totaled $67. The intercompany interest income was determined based upon the methodology described in Note (a) and is included within other income in the accompanying combined statements of operations. Intercompany debt and interest expense was assumed based upon the methodology discussed in Note (a). Intercompany debt was $1,800 and $3,400 at June 30, 2000 and December 31, 1999, respectively. Intercompany interest expense was $49 and $55 for the three month periods ended June 30, 2000, and 1999, respectively, of which $34 and $20, respectively, was capitalized. Intercompany interest expense was $121 and $103 for the six month periods ended June 30, 2000 and 1999, respectively, of which $58 and $37, respectively, was capitalized. The 9% cumulative preferred stock was $3.0 billion as of June 30, 2000, and $1.0 billion as of December 31, 1999. Dividend requirements were $33 and $13 for the three month periods ended June 30, 2000 and 1999, respectively, and $46 and $27 for the six month periods ended June 30, 2000 and 1999, respectively. The AT&T Wireless Group purchases long distance and other network-related services from AT&T at market-based prices. For the three month periods ended June 30, 2000 and 1999, these amounts totaled $64 and $38, respectively. For the six months ended June 30, 2000 and 1999, these amounts totaled $116 and $72, respectively. These amounts are reflected within costs of services and products in the accompanying combined statements of operations. AT&T has allocated general corporate overhead expenses, including finance, legal, marketing, use of the AT&T brand, planning and strategy and human resources to the AT&T Wireless Group, as well as costs for AT&T employees who directly support the AT&T Wireless Group, amounting to $13 and $10 for the three month periods ended June 30, 2000 and 1999, respectively, and $26 and $20 for the six month periods ended June 30, 2000 and 1999, respectively. These amounts are included within selling, general and administrative expenses in the accompanying combined statements of operations. Also included in selling, general and administrative expenses are charges paid to AT&T related to the AT&T Wireless Group's direct sales force who were employees of AT&T, as well as commissions and marketing support costs reimbursed to AT&T for costs incurred to acquire customers on our behalf. These charges amounted to $7 and $58 for the three month periods ended June 30, 2000 and 1999, respectively, and $67 and $104 for the six month periods ended June 30, 2000 and 1999, respectively. Effective April 1, 2000, the aforementioned sales force became employees of the AT&T Wireless Group. The AT&T Wireless Group purchases their administrative telephone services from AT&T. These amounts are included within selling, general and administrative expenses and totaled $24 and $16 for the three month periods ended June 30, 2000 and 1999, respectively, and $48 and $31 for the six month periods ended June 30, 2000 and 1999, respectively. The AT&T Wireless Group sells receivables to AT&T for wireless customers whose wireless charges are combined ("bundled") with their long distance charges into one bill. Accounts receivable in the accompanying combined balance sheets included $90, as of June 30, 2000, and $83, as of December 31, 1999, associated with receivables from AT&T for these bundled customers. Selling, general and administrative expenses included $9 and $7 for the three month periods ended June 30, 2000 and 1999, respectively, and costs of services and products included $9 and $11 for the three month periods ended June 30, 2000 and 1999, respectively, for the billing and collection fees charged by AT&T. Selling, general and administrative expenses included $20 and $16 for the six month periods ended June 30, 2000 and 1999, respectively, and costs of services and products included $19 and $16 for the six month periods ended June 30, 2000 and 1999, respectively, for the billing and collection fees charged by AT&T. The AT&T Wireless Group utilizes the AT&T remittance processing organization to process customer payments into AT&T's lockbox. The AT&T Wireless Group paid $5 and $4, to AT&T for reimbursement of its costs associated with these services for the three month periods ended June 30, 2000 and 1999, respectively. The AT&T Wireless Group paid $10 and $8, to AT&T for reimbursement of its costs associated with these services for the six month periods ended June 30, 2000 and 1999, respectively. (f) SUBSEQUENT EVENTS On July 24, 2000, the AT&T Wireless Group announced it had signed a definitive agreement with SBC Communications to acquire its Indianapolis wireless system for approximately $530 in cash. The transaction has been approved by the boards of directors of AT&T and SBC Communications, however, remains subject to certain federal regulatory approvals and is expected to close by the end of 2000. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OVERVIEW On April 27, 2000, AT&T completed an initial public offering of 15.6%, or 360 million shares, of the AT&T Wireless Group tracking stock at an initial public offering price of $29.50 per share. This stock is designed to track the performance of AT&T's wireless services businesses. The AT&T Wireless Group tracking stock issued in the initial public offering reflected only a portion of the economic interest of the AT&T Wireless Group. AT&T retained the remaining interest in the economic performance of the AT&T Wireless Group in the form of an inter-group interest which represented an 84.4% interest as of the date of the initial public offering and at June 30, 2000. The results included herein represent the AT&T Wireless Group in its entirety for all periods presented. For the portion of the AT&T Wireless Group's results attributed to the public shareholders, see AT&T's Form 10-Q. AT&T currently intends to dispose of a portion of the remaining interest in the AT&T Wireless Group in the second half of this year. Such disposition will include a distribution in the form of a dividend to AT&T Common Stock Group (which represents the results of AT&T excluding the results attributable to tracking stocks) shareowners for at least a portion of such interest, but may also include an exchange offer, a further sale of the AT&T Wireless Group tracking stock or a combination thereof. The method, timing and sequence of the distribution options, which could occur in stages, will be based on the AT&T Board of Directors' assessment of the market conditions and other circumstances, as appropriate, with the goal of maximizing value for all AT&T shareowners. Following the distribution we expect that the outstanding shares of the AT&T Wireless Group tracking stock will reflect 100% of the economic performance of the AT&T Wireless Group. The AT&T Wireless Group is a fully integrated business unit of AT&T. The AT&T Wireless Group includes the results of its mobility and fixed wireless businesses, as well as its international operations, which primarily include the earnings or losses associated with equity interests in international wireless communications ventures and partnerships. In June 2000, the AT&T Wireless Group closed the acquisition of the remaining 50% partnership interest they previously did not own in CMT Partners (Bay Area Properties). The Bay Area Properties cover a population base exceeding 7 million potential customers and, as of June 30, 2000, served nearly 1 million subscribers. The acquisition of this entity was announced in conjunction with the signing of agreements to purchase wireless systems in Houston and San Diego, which are anticipated to close later this year. The three systems combined cover a population of approximately 15 million potential customers and, as of June 30, 2000, served more than 1.3 million subscribers. Also in June, the AT&T Wireless Group completed its acquisition of Wireless One Network, L.P. (Wireless One). Wireless One owns and operates wireless systems in northwest and southwest Florida covering a population base of 1.6 million potential customers and had approximately 190,000 subscribers as of June 30, 2000. In February 2000, AT&T and Dobson Communications Corporation, through a joint venture, acquired American Cellular Corporation. AT&T contributed its interest in the joint venture to the AT&T Wireless Group as of the date of the acquisition. This acquisition increased the AT&T Wireless Group's coverage in New York State and several midwest markets by adding approximately 450,000 subscribers. FORWARD-LOOKING STATEMENTS Except for the historical statements and discussions contained herein, statements herein constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including without limitation, statements concerning future business prospects, revenues, operating performance, working capital, liquidity, capital needs, and general industry growth rates and the AT&T Wireless Group's performance relative thereto. These forward-looking statements rely on a number of assumptions concerning future events, including the AT&T Wireless Group's ability to achieve a significant market penetration in new markets. These forward-looking statements are subject to a number of uncertainties and other factors, many of which are outside the AT&T Wireless Group's control, that could cause actual results to differ materially from such statements. The AT&T Wireless Group disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. COMBINED RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2000 COMPARED WITH THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1999 Revenue Total revenue includes wireless voice and data services, the sale of handsets and accessories, and revenue associated with the aviation communications and fixed wireless operations. The AT&T Wireless Group records revenue as services are provided or when the product is sold. Services revenue primarily includes monthly recurring charges, airtime and toll usage charges, and roaming charges billed to subscribers for usage outside of the AT&T Wireless Group network as well as charges billed to other wireless providers for roaming on the AT&T Wireless Group network. Total revenue increased 31.9% to $2,477 million, and increased 35.9% to $4,675 million for the three and six month periods ended June 30, 2000, respectively, compared with the respective prior year periods. The AT&T Wireless Group's results include the revenue associated with Vanguard Cellular since its acquisition on May 3, 1999. Total revenue increased 29.4% and 31.1% for the three and six month periods ended June 30, 2000, respectively, compared with the same periods for 1999, adjusted to exclude Vanguard Cellular for the period January 2000 to April 2000, to correlate results with 1999, due to the May 1999 acquisition. The revenue increases were primarily due to growth in our mobility business revenue, driven by strong consolidated subscriber growth and continued rising average monthly revenue per user (ARPU). AT&T Digital One Rate service continues to contribute to the increase in ARPU and subscribers by acquiring and retaining high value customers, who have a significantly higher ARPU than an average subscriber. As of June 30, 2000, the number of subscribers using AT&T Digital One Rate service was 2.4 million, an increase of 66.2%, compared with June 30, 1999, of which nearly 73% were new subscribers to the AT&T Wireless Group for the six months ended June 30, 2000. Services revenue for the three month period ended June 30, 2000, was $2,240 million, an increase of $551 million, or 32.7%, compared with the respective period in 1999. Services revenue for the six month period ended June 30, 2000, was $4,232 million, an increase of $1,171 million, or 38.3%, compared with the respective period in 1999. As of June 30, 2000, the AT&T Wireless Group had 11.7 million consolidated subscribers, an increase of 33.8%, compared with the prior year, of which 85.1% were digital subscribers, up from 69.2% as of June 30, 1999. Included in these figures were nearly 1 million subscribers from our acquisition of the Bay Area Properties in June 2000 (which were previously reported as partnership subscribers) and approximately 190,000 subscribers from our acquisition of Wireless One in June 2000. Net consolidated wireless subscriber additions in the second quarter totaled 532,000, a 14.2% increase over the prior year quarter. AT&T Wireless Group's average monthly churn rate in the second quarter of 2000 was 2.7% compared with 2.3% in the second quarter of 1999. The AT&T Wireless Group's average monthly churn in the first half of 2000 was 2.8% compared with 2.5% in the first half of 1999. Total subscribers, including partnership markets in which the AT&T Wireless Group does not own a controlling interest, were nearly 14 million at the end of the second quarter of 2000, a 22.3% increase over the prior year. Ending total subscribers included approximately 450,000 subscribers associated with the AT&T Wireless Group's acquisition of American Cellular in February 2000. The AT&T Wireless Group's ARPU for the three months ended June 30, 2000 was $71.5, an increase of $4.9, or 7.7%, compared with the second quarter of 1999, and for the six months ended June 30, 2000 was $69.4, an increase of $5.7, or 8.9%, compared with the first half of 1999. These increases were primarily due to increased minutes of use per subscriber, driven in part by the continued success of AT&T Digital One Rate service. The AT&T Wireless Group's ARPU remained significantly higher than the wireless industry average during the quarter and half year ended June 30, 2000, excluding the AT&T Wireless Group. Equipment revenue for the three month period ended June 30, 2000, was $237 million, an increase of $48 million, or 25.2%, compared with the same period in 1999. Equipment revenue for the six month period ended June 30, 2000, was $443 million, an increase of $63 million, or 16.6%, compared with the same period in 1999. These increases were primarily due to 30.8% and 29.2% increases in gross consolidated subscriber additions in the three and six month periods ended June 30, 2000, respectively, compared with the same periods in 1999. As an integral part of the wireless service offering, the AT&T Wireless Group supplies to its subscribers a selection of handsets at competitive prices, which are generally offered at or below cost. Costs of services and products Costs of services and products include the costs to place calls over the network (including the costs to operate and maintain the AT&T Wireless Group's network as well as roaming costs paid to other wireless providers), the costs of handsets and accessories provided to the AT&T Wireless Group's customers and the charges paid to connect calls on other networks, including those of AT&T. Costs of services and products for the three and six month periods ended June 30, 2000, were $1,205 million and $2,258 million, respectively. This was an increase of $265 million, or 28.3%, for the three month period ended June 30, 2000, and $508 million, or 29.0%, for the six month period ended June 30, 2000, compared with the same periods in 1999. These increases were due primarily to increases in the cost of handsets provided to subscribers which was attributable to a 30.8% and 29.2% increase, respectively, in gross subscriber additions for the three and six month periods ended June 30, 2000, compared with the same periods in the prior year. Additionally, growth in the subscriber base and increased minutes of usage resulted in an increase in the access and other connection charges paid to connect calls on other networks, including AT&T, as well as the costs to maintain the AT&T Wireless Group's network. Roaming expenses decreased 4.4% for the quarter ended June 30, 2000, compared with the same period for 1999, despite continued growth in off-network roaming minutes. The decrease in roaming expenses was driven primarily by a significant decrease in the roaming rate per minute of usage, as well as initiatives to aggressively migrate more minutes onto the AT&T Wireless Group's network. Selling, general and administrative Selling, general and administrative (SG&A) expenses for the three and six month periods ended June 30, 2000, were $763 million and $1,513 million, respectively, compared with $614 million and $1,178 million for the three and six month periods ended June 30, 1999. These increases were primarily attributable to higher marketing and selling costs associated with the increase in consolidated subscriber additions in the second quarter and first half of 2000, compared with the respective periods in 1999. Cost per gross subscriber addition (CPGA), which includes the cost of handset subsidies recorded in costs of services and products in the accompanying combined statement of operations, was $352 and $356 for the three and six month periods ended June 30, 2000, compared with $338 and $345 for the three and six month periods ended June 30, 1999. In addition, growth in the wireless customer base resulted in an increase in customer care and information technology expenses. Depreciation and amortization Depreciation and amortization expenses for the three month period ended June 30, 2000, were $402 million, an increase of $94 million, or 30.5%, compared with the second quarter of 1999. Depreciation and amortization expenses for the six month period ended June 30, 2000, were $771 million, an increase of $187 million, or 31.9%, compared with the first half of 1999. These increases primarily resulted from the growth in the AT&T Wireless Group's depreciable asset base resulting from capital expenditures to increase the capacity of the network and improve call quality as well as the acquisition of Vanguard Cellular in May 1999. Total capital expenditures were $1,291 million and $2,123 million for the three and six month periods ended June 30, 2000. Other income Other income primarily includes gains or losses on sales or exchanges of assets, net equity earnings from investments, intercompany interest income on the note receivable from AT&T, and minority interests in consolidated subsidiaries. Other income for the three and six month periods ended June 30, 2000, was $227 million and $308 million, respectively. Other income for the three and six month periods ended June 30, 1999, was $140 million and $184 million, respectively. The increase for the three and six month periods ended June 30, 2000, was due primarily to higher gains on the sales of assets as well as intercompany interest income on the note receivable from AT&T of $67 million, related to the attribution of $7.0 billion of initial public offering proceeds to the AT&T Wireless Group. Partially offsetting these increases, were lower equity earnings primarily as a result of increased losses associated with affiliate investments. Interest expense Interest expense consists primarily of interest on intercompany debt due to AT&T less interest expense capitalized. Interest expense for the second quarter of 2000, was $18 million, a decrease of $20 million, or 51.6%, compared with the second quarter of 1999. Interest expense for the first half of 2000 was $69 million, a decrease of $1 million, or 1.0%, compared with the first half of 1999. The decrease for the second quarter of 2000, compared with the second quarter of 1999, was due to higher levels of capitalized interest as a result of increased capital expenditures, as well as lower levels of average outstanding debt due to AT&T. The decrease in the average outstanding debt due to AT&T was attributable to the recapitalization of $2.0 billion of long term debt due to AT&T into 9% cumulative preferred stock subsequent to the initial public offering of the AT&T Wireless Group tracking stock. These decreases were partially offset by a higher rate of interest charged on the intercompany debt in the second quarter of 2000 versus the prior year quarter. For the six months ended June 30, 2000, higher levels of outstanding debt, as well as a higher interest rate, offset the increase in capitalized interest. Provision for income taxes The provision for income taxes for the three and six month periods ended June 30, 2000, was $116 million and $146 million, respectively, compared with $43 million and $17 million for the same periods in 1999, respectively. The increase in the provision for income taxes was due to higher income before income taxes and a higher effective tax rate. The effective income tax rates for the three and six month periods ended June 30, 2000 were 36.9% and 39.3%, respectively, compared with 35.5% and 35.3%, for the same periods in 1999, respectively. The effective income tax rate for each of the 2000 periods presented was impacted by the amortization of intangibles and unutilized equity investment losses, partially offset by a benefit due to the disposition of an equity method investment. The effective income tax rate for each of the 1999 periods presented was impacted by the benefit from the change in the valuation allowance and other estimates, offset by unutilized foreign equity losses and amortization of intangibles. Dividend requirements on preferred stock held by AT&T At June 30, 2000, and December 31, 1999, the AT&T Wireless Group had outstanding $3.0 billion and $1.0 billion, respectively, of preferred stock held by AT&T that pays dividends at 9% per annum. Intercompany indebtedness of $2.0 billion was recapitalized into an additional $2.0 billion of 9% cumulative preferred stock following the initial public offering. Dividend requirements on this preferred stock for the three and six month periods ended June 30, 2000, were $33 million and $46 million, respectively, and for the corresponding periods in 1999 were $13 million and $27 million, respectively, net of amounts recorded in accordance with the tax sharing agreement. LIQUIDITY AND CAPITAL RESOURCES The continued expansion of the AT&T Wireless Group's network, footprint and service offerings, and the marketing and distribution of its products and services, will continue to require substantial capital. The AT&T Wireless Group has funded its operations by initial public offering proceeds attributed from AT&T, intercompany borrowings from AT&T and internally generated funds, as well as capital contributions from AT&T prior to the initial public offering. Capital contributions from AT&T prior to the initial public offering included acquisitions made by AT&T that have been attributed to the AT&T Wireless Group. Noncash capital contributions from AT&T to the AT&T Wireless Group related to acquisitions and initial investments funded by AT&T totaled $539 million and $1,662 million for the six month periods ended June 30, 2000 and 1999, respectively. The initial public offering of the AT&T Wireless Group tracking stock resulted in net proceeds to AT&T after deducting underwriter's discount and related fees and expenses of $10.3 billion. AT&T attributed $7.0 billion of the net proceeds to the AT&T Wireless Group in the form of an intercompany note receivable. Net transfers to and from the AT&T Wireless Group and AT&T subsequent to the initial public offering are reflected as changes in the intercompany note receivable. After the attributed $7.0 billion of initial public offering proceeds are fully utilized, AT&T intends to issue short term floating rate debt to the AT&T Wireless Group. On May 1, 2000, following the initial public offering, the AT&T Wireless Group recapitalized $2.0 billion of outstanding intercompany indebtedness to AT&T into an additional $2.0 billion of 9% cumulative preferred stock held by AT&T. In conjunction with the recapitalization, the AT&T Wireless Group's long term debt due to AT&T was recapitalized to be 10 year term debt that bears interest at a fixed rate of 8.1% per annum. AT&T has provided financing at interest rates and on terms and conditions that are consistent with those the AT&T Wireless Group would receive as a stand-alone entity. Sources for the AT&T Wireless Group's future financing requirements may include the issuance of additional AT&T Wireless Group tracking stock and the borrowing of funds. Financing activities for the AT&T Wireless Group are managed by AT&T on a centralized basis and are subject to the review of the AT&T Wireless Group capital stock committee. Loans from AT&T to any member of the AT&T Wireless Group will be made at interest rates and on other terms and conditions designed to be substantially equivalent to the interest rates and other terms and conditions that the AT&T Wireless Group would be able to obtain from third parties, including the public markets, as a non-affiliate of AT&T without the benefit of any guaranty by AT&T. This policy contemplates that these loans will be made on the basis set forth above regardless of the interest rates and other terms and conditions on which AT&T may have acquired the funds. If, however, AT&T incurs any fees or charges in order to keep available funds for use by the AT&T Wireless Group, those fees or charges will be allocated to the AT&T Wireless Group. Net cash provided by operating activities for the six months ended June 30, 2000, was $223 million, compared with $277 million for the same period in 1999. The decrease in cash provided by operating activities was primarily due to increases in inventories and accounts receivable, as well as a decrease in accounts payable, partially offset by increased income excluding depreciation and amortization, resulting from revenue growth and expense leveraging for the first half of 2000 compared with the first half of 1999. Net cash used in investing activities for the six months ended June 30, 2000, was $8,380 million, compared with $600 million for the six months ended June 30, 1999. The increase was due primarily to the issuance of a note receivable from AT&T, acquisitions of the Bay Area Properties and Wireless One, and higher capital expenditures to upgrade and increase network capacity in existing markets as well as to expand the national footprint. Net cash provided by financing activities for the six months ended June 30, 2000, was $8,158 million, compared with $411 million for the six months June 30, 1999. The increase was primarily due to proceeds attributed from the initial public offering of the AT&T Wireless Group tracking stock and increased transfers from AT&T prior to the initial public offering to fund acquisitions and higher capital expenditures. EBITDA, excluding other income, is the primary measure used by the chief operating decision-makers to measure our ability to generate cash flow. EBITDA, excluding other income, defined as operating income plus depreciation and amortization, may or may not be consistent with the calculation of EBITDA for other public companies and should not be viewed by investors as an alternative to generally accepted accounting principles, measures of performance or to cash flows from operating, investing and financing activities as a measure of liquidity. EBITDA, excluding other income, for the three and six month periods ended June 30, 2000, was $509 million and $904 million, respectively, compared with $324 million and $513 million for the same periods in 1999. These increases were attributable to increases in total revenue and an improving margin as SG&A expenses declined as a percentage of revenues, primarily for our mobility business. For our mobility business, EBITDA, excluding other income, for the three and six month periods ended June 30, 2000, was $550 million and $981 million, respectively, compared with $347 million and $552 million for the same periods in 1999. For our fixed wireless business, EBITDA, excluding other income, for the three and six month periods ended June 30, 2000, was a deficit of $40 million and $74 million, respectively, compared with deficits of $17 million and $32 million for the same periods in 1999. EBITDA, excluding other income, margins were 20.5% and 19.3% for the second quarter and first half of 2000, respectively, compared with 17.3% and 14.9% for the second quarter and first half of, 1999, respectively. The improvement in EBITDA, excluding other income, margins in the second quarter and first half of 2000 compared with the respective periods in 1999 was driven primarily by revenue growth and expense leveraging, primarily off-network roaming expenses, partially offset by increased customer acquisition and customer care costs, as well as higher information technology costs associated with growth in the subscriber base. EBITDA, excluding other income, margins for our mobility business were 22.2% and 21.0% for the second quarter and first half of 2000, respectively, compared with 18.5% and 16.0% for the second quarter and first half of 1999, respectively. The improvement in EBITDA, excluding other income, margins in the second quarter and first half of 2000 compared with the respective periods in 1999 was driven primarily by positive EBITDA, excluding other income, for the 1900 megahertz markets for the three and six month periods ended June 30, 2000, compared with losses for the respective periods in 1999, as well as increased EBITDA, excluding other income, margins in the 850 megahertz markets. FINANCIAL CONDITION Total assets were $32,843 million as of June 30, 2000, an increase of $9,331 million, or 39.7%, compared with December 31, 1999. The increase was due primarily to the $7.0 billion of initial public offering proceeds attributed to the AT&T Wireless Group from AT&T in the form of an intercompany note receivable, increases in goodwill, licensing costs, property, plant and equipment, and other assets associated with the acquisitions of the Bay Area Properties and Wireless One, and increased property, plant and equipment as a result of significant capital spending in the first half of 2000. Additionally, non-consolidated investments increased as a result of the investment in American Cellular during 2000, partially offset by the acquisition of the remaining 50% interest in CMT Partners, which is now consolidated. Total liabilities were $8,310 million as of June 30, 2000, a decrease of $1,185 million, or 12.5%, compared with December 31, 1999. The decrease was primarily due to the decrease in long term debt due to AT&T resulting from the recapitalization of the AT&T Wireless Group subsequent to the initial public offering, partially offset by increases in deferred income taxes, other long-term liabilities, and other current liabilities. Deferred incomes taxes increased due to the deferred tax provision recognized for the six months ended June 30, 2000. Other long-term liabilities increased due to proceeds received in consideration for a long-term leasing arrangement, and other current liabilities increased due to increased business taxes and operating accruals. Total preferred stock held by AT&T increased to $3.0 billion at June 30, 2000, from $1.0 billion at December 31, 1999, due to the recapitalization of $2.0 billion of intercompany debt into preferred stock subsequent to the initial public offering. Dividends payable on the preferred stock were paid at 9% per annum. Total equity was $24,522 million as of June 30, 2000, an increase of $10,525 million, or 75.2%, compared with December 31, 1999. The increase was primarily due to increased combined equity associated with the attribution of initial public offering proceeds to the AT&T Wireless Group, as well as net transfers from AT&T prior to the initial public offering to fund capital expansion and acquisitions, and the additional $2.0 billion of preferred stock issued to AT&T. RECENT ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements". SAB No. 101 provides guidance on revenue recognition, including service activation fees, and certain related costs, which requires adoption by the end of fiscal year 2000. Management is currently assessing the impact of SAB No. 101 to the combined results of operations and financial position of the AT&T Wireless Group. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities". Among other provisions, it requires that entities recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Gains and losses resulting from changes in the fair values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The effective date of this standard was delayed via the issuance of SFAS No. 137. The effective date for SFAS No. 133 is now for fiscal years beginning after June 15, 2000, though earlier adoption is encouraged and retroactive application is prohibited. For the AT&T Wireless Group, this means that the standard must be adopted no later than January 1, 2001. Management does not expect the adoption of this standard will have a material impact on the AT&T Wireless Group's results of operations, financial position or cash flows. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" as an amendment to SFAS No. 133. This statement provides clarification with regard to certain implementation issues under SFAS No. 133 on specific types of hedges. It is not expected to have a material impact on the AT&T Wireless Group's results of operations, financial position or cash flows. SUBSEQUENT EVENTS On July 24, 2000, the AT&T Wireless Group announced it had signed a definitive agreement with SBC Communications to acquire its Indianapolis wireless system for approximately $530 million in cash. The transaction has been approved by the boards of directors of AT&T and SBC Communications, however, remains subject to certain federal regulatory approvals and is expected to close by the end of 2000. EX-99.3 6 0006.txt EXHIBIT 99.3 Exhibit 99.3
AT&T WIRELESS GROUP COMBINED STATEMENTS OF OPERATIONS (Dollars in Millions) (Unaudited) For the Three Months Ended March 31, March 31, 2000 1999 REVENUE Services revenue $1,992 $ 1,372 Equipment revenue 206 191 Total revenue 2,198 1,563 OPERATING EXPENSES Costs of services and products 1,052 810 Selling, general and administrative 750 564 Depreciation and amortization 369 276 Total operating expenses 2,171 1,650 OPERATING INCOME(LOSS) 27 (87) Other income 81 44 Interest expense 51 32 Income (loss) before income taxes 57 (75) Provisions (benefit) for income taxes 30 (26) Net income (loss) 27 (49) Dividend requirements on preferred stock held by AT&T, net 14 14 Net income (loss) after preferred stock dividends $ 13 $ (63)
AT&T WIRELESS GROUP COMBINED BALANCE SHEETS (Dollars in Millions) March 31, December 31, 2000 1999 (unaudited) ASSETS Cash and cash equivalents $ 10 $ 5 Accounts receivable, less allowances of $141 and $130 1,330 1,300 Inventories 146 162 Deferred income taxes 141 127 Prepaid expenses and other current assets 46 34 Total Current Assets 1,673 1,628 Property, plant and equipment, net of accumulated depreciation of $4,316 and $4,033 6,896 6,349 Licensing costs, net of accumulated amortization of $1,583 and $ 1,519 8,598 8,571 Investments 5,233 4,502 Goodwill and other assets, net of accumulated Amortization of $407 and $335 2,490 2,462 TOTAL ASSETS $24,890 $23,512 LIABILITIES Accounts payable $ 850 $ 921 Payroll and benefit-related liabilities 212 291 Debt maturing within one year 154 154 Other current liabilities 986 931 Total Current Liabilities 2,202 2,297 Long-term debt due to AT&T 3,700 3,400 Deferred income taxes 3,812 3,750 Other long-term liabilities 134 48 TOTAL LIABILITIES 9,848 9,495 MINORITY INTEREST 15 20 EQUITY Preferred stock held by AT&T 1,000 1,000 Combined Equity 13,975 12,971 Accumulated other comprehensive income 52 26 TOTAL EQUITY 15,027 13,997 TOTAL LIABILITIES AND EQUITY $24,890 $23,512
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