-----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, TRvgGDflebddTe8J0WForMnFQ/WydvlGTEue12YVpOyP7lN9oW3MfUAQe0QeNQ4D KE564XVKZkEKvoB3jEIB5w== /in/edgar/work/0000005907-00-000038/0000005907-00-000038.txt : 20001115 0000005907-00-000038.hdr.sgml : 20001115 ACCESSION NUMBER: 0000005907-00-000038 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 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: 764900 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 THIRD QUARTER 10-Q REPORT 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 September 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 October 31, 2000, the following shares of stock were outstanding: AT&T common stock - 3,753,409,021 shares AT&T Wireless Group common stock - 360,971,000 shares Liberty Media Group Class A common stock - 2,369,760,656 shares Liberty Media Group Class B common stock - 206,221,288 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 Nine Months Ended Months Ended September 30, September 30, 2000 1999 2000 1999 Revenue $16,975 $16,333 $49,097 $46,202 Operating Expenses Access and other connection 3,255 3,654 10,460 11,054 Costs of services and products 4,547 3,932 12,578 10,660 Selling, general and administrative 3,397 3,442 9,796 10,060 Depreciation and other amortization 1,919 1,558 5,182 4,408 Amortization of goodwill, franchise costs and other purchased intangibles 879 358 1,661 900 Net restructuring and other charges 24 - 797 702 Total operating expenses 14,021 12,944 40,474 37,784 Operating income 2,954 3,389 8,623 8,418 Equity earnings (losses) from Liberty Media Group 1,756 (217) 2,965 (818) Other income (expense) 71 (375) 486 (254) Interest expense 946 493 2,158 1,188 Income before income taxes 3,835 2,304 9,916 6,158 Provision for income taxes 763 888 2,127 2,679 Net income $ 3,072 $ 1,416 $ 7,789 $ 3,479 AT&T Common Stock Group: Earnings per share: Basic $ 0.35 $ 0.51 $ 1.41 $ 1.41 Diluted $ 0.35 $ 0.50 $ 1.40 $ 1.39 Dividends declared $ 0.22 $ 0.22 $ 0.66 $ 0.66 AT&T Wireless Group: (Loss) earnings per share: Basic and diluted $ (0.01) $ - $ 0.05 $ - Liberty Media Group: Earnings (loss) per share: Basic and diluted $ 0.68 $ (0.09) $ 1.15 $ (0.33) 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) September 30, December 31, 2000 1999 ASSETS Cash and cash equivalents $ 316 $ 1,024 Receivables, less allowances of $1,341 and $1,281 11,686 10,453 Deferred income taxes 1,386 1,287 Other current assets 2,064 1,120 TOTAL CURRENT ASSETS 15,452 13,884 Property, plant and equipment, net of accumulated depreciation of $31,453 and $30,057 48,165 39,618 Franchise costs, net of accumulated amortization of $1,413 and $697 48,452 32,693 Licensing costs, net of accumulated amortization of $1,685 and $1,491 10,457 8,548 Goodwill, net of accumulated amortization of $3,535 and $363 33,407 7,445 Investment in Liberty Media Group and related receivables, net 39,229 38,460 Other investments and related advances 46,429 19,366 Prepaid pension costs 2,978 2,464 Other assets 7,783 6,928 TOTAL ASSETS $252,352 $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) September 30, December 31, 2000 1999 LIABILITIES Accounts payable $ 5,344 $ 6,771 Payroll and benefit-related liabilities 2,362 2,651 Debt maturing within one year 32,342 12,633 Dividends payable 826 703 Other current liabilities 10,470 5,449 TOTAL CURRENT LIABILITIES 51,344 28,207 Long-term debt 29,443 23,217 Long-term benefit-related liabilities 3,923 3,964 Deferred income taxes 39,141 24,199 Other long-term liabilities and deferred credits 4,639 3,801 TOTAL LIABILITIES 128,490 83,388 Minority Interest 9,046 2,391 Company-Obligated Convertible Quarterly Income Preferred Securities of Subsidiary Trust Holding Solely Subordinated Debt Securities of AT&T 4,708 4,700 SHAREOWNERS' EQUITY Common Stock: AT&T Common Stock, $1 par value, authorized 6,000,000,000 shares; issued and outstanding 3,753,642,726 shares (net of 297,563,162 treasury shares) at September 30, 2000, and 3,196,436,757 shares (net of 287,866,419 treasury shares) at December 31, 1999 3,754 3,196 AT&T Wireless Group Common Stock, $1 par value, authorized 6,000,000,000 shares; issued and outstanding 360,648,000 shares at September 30, 2000 361 - Liberty Media Group Class A Common Stock, $1 par value, authorized 4,000,000,000 shares; issued and outstanding 2,369,760,656 shares (net of 51,729,408 treasury shares) at September 30, 2000, and 2,313,557,460 shares at December 31, 1999 2,370 2,314 Liberty Media Group Class B Common Stock, $1 par value, authorized 400,000,000 shares; issued and outstanding 206,221,288 shares (net of 10,607,776 treasury shares) at September 30, 2000, and 216,842,228 shares at December 31, 1999 206 217 Additional paid-in capital 90,344 59,526 Guaranteed ESOP obligation - (17) Retained earnings 10,724 6,712 Accumulated other comprehensive income 2,349 6,979 TOTAL SHAREOWNERS' EQUITY 110,108 78,927 TOTAL LIABILITIES & SHAREOWNERS' EQUITY $252,352 $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 Nine Months Ended September 30, 2000 1999 AT&T Common Shares Balance at beginning of year $ 3,196 $ 2,630 Shares issued (acquired), net: Under employee plans - 1 For acquisitions 607 565 Other* (49) - Balance at end of period 3,754 3,196 AT&T Wireless Group Common Stock Balance at beginning of year - - Shares issued (acquired), net: For initial public offering 360 - Under employee plans 1 Balance at end of period 361 - Liberty Media Group Class A Common Stock Balance at beginning of year 2,314 - Shares issued (acquired), net: For acquisitions 61 2,280 Other (5) 33 Balance at end of period 2,370 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 15 37 For acquisitions 22,769 42,374 Other* (2,514) 324 Proceeds in excess of par value from issuance of AT&T Wireless common stock 9,915 - Common stock warrants issued - 306 Gain on issuance of common stock by affiliates 480 534 Other 153 134 Balance at end of period 90,344 58,904 Guaranteed ESOP Obligation Balance at beginning of year (17) (44) Amortization 17 27 Balance at end of period - (17) Retained Earnings Balance at beginning of year 6,712 7,800 Net income 7,789 3,479 Dividends declared (2,344) (2,104) Treasury shares issued at less than cost (1,433) (1,584) Balance at end of period 10,724 7,591 (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 Nine Months Ended September 30, 2000 1999 Accumulated Other Comprehensive Income Balance at beginning of year 6,979 (59) Other comprehensive income (4,630) 2,618 Balance at end of period 2,349 2,559 Total Shareowners' Equity $110,108 $74,763 Summary of Total Comprehensive Income: Net income $ 7,789 $ 3,479 Net foreign currency translation adjustment (net of taxes of $(177) and $109) (305) 188 Net revaluation of securities (net of taxes of $(2,730) and $1,586) (4,325) 2,430 Total Comprehensive Income $ 3,159 $ 6,097 * Activity in 2000 primarily represents AT&T stock received from Cox Communications, Inc., in exchange for an entity owning certain cable systems and other assets. Other comprehensive income for the nine months ended September 30, 2000, included Liberty Media Group's foreign currency translation adjustments totaling $(193), net of applicable taxes, revaluation of Liberty Media Group's available-for-sale securities totaling $(1,825), net of applicable taxes and 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 $88, net of applicable taxes, and revaluation of Liberty Media Group's available-for-sale securities totaling $2,320, net of applicable taxes. AT&T accounts for treasury stock as retired stock, and as of September 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 Nine Months Ended September 30, 2000 1999 Operating Activities Net income $ 7,789 $ 3,479 Adjustments to reconcile net income to net cash provided by operating activities: Gains on sales of businesses and investments (1,051) (495) Net restructuring and other charges 630 581 Depreciation and amortization 6,843 5,308 Provision for uncollectibles 985 1,077 Net equity (earnings) losses from Liberty Media Group (2,965) 818 Net losses from other equity investments 970 846 Increase in accounts receivable (2,705) (2,529) Decrease in accounts payable (248) (318) Net change in other operating assets and liabilities (1,025) (1,718) Other adjustments (49) 1 Net cash provided by operating activities 9,174 7,050 Investing Activities Capital expenditures and other additions (10,913) (8,770) Proceeds from sale or disposal of property, plant and equipment 547 192 (Increase) decrease in other receivables (981) 11 Net (acquisitions) dispositions of licenses (218) 1 Equity investment distributions and sales 1,104 936 Equity investment contributions and purchases (2,867) (6,878) Net acquisitions of businesses including cash acquired (19,791) (6,830) Other investing activities, net (57) (15) Net cash used in investing activities (33,176) (21,353) Financing Activities Proceeds from long-term debt issuances 739 8,396 Retirements of long-term debt (1,954) (2,134) Issuance of convertible securities - 4,694 Dividends paid on convertible securities (147) (75) Issuance of AT&T Wireless Group common stock 10,291 - Redemption of subsidiary preferred stock (156) - Net acquisition of treasury shares (588) (4,476) Dividends paid on common stock (2,221) (2,009) Increase in short-term borrowings, net 17,363 6,313 Other financing activities, net (33) 434 Net cash provided by financing activities 23,294 11,143 Net decrease in cash and cash equivalents (708) (3,160) Cash and cash equivalents at beginning of year 1,024 3,160 Cash and cash equivalents at end of period $ 316 $ - 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 includes 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), AT&T's Form 10-Q for the quarter ended June 30, 2000, (which includes the financial results of Liberty Media Group and AT&T Wireless Group for quarter and year-to-date periods ended June 30, 2000, attached as exhibits thereto) and the financial statements of Liberty Media Group and AT&T Wireless Group for the quarter and year-to-date periods ended September 30, 2000, included as Exhibits 99.1 and 99.2, respectively, to this AT&T quarterly report on Form 10-Q. On April 27, 2000, AT&T created a new class of stock when we 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 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 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 for the third quarter and 15.6% of the earnings from April 27, 2000, the date of the initial public offering, through September 30, 2000, for the year-to-date period. 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 LMG declared a two-for-one stock split of LMG tracking stock, paid on June 9, 2000. All references to number of shares and per share information for LMG in the consolidated financial statements have been adjusted to reflect the stock split on a retroactive basis. We have reclassified certain prior period amounts to conform to our current presentation. AT&T Form 10-Q - Part I (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. For each share of MediaOne stock, MediaOne shareholders received, in the aggregate, 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, which was below a predetermined amount. AT&T issued approximately 603 million shares of common stock, of which approximately 60 million were treasury shares. The AT&T shares had an aggregate market value of approximately $21 billion and cash payments totaled approximately $24 billion. In addition, the transaction included debt and other obligations of MediaOne totaling approximately $11 billion. The merger was accounted for under the purchase method of accounting, accordingly the results of MediaOne have been included in the accompanying consolidated financial statements since the date of acquisition as part of our Broadband segment. Approximately $17 billion of the purchase price of $56 billion has been 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 $29 billion related to nonconsolidated investments, including investments in Time Warner Entertainment (TWE) and Vodafone Group, plc, approximately $5 billion related to property, plant and equipment, approximately $10 billion attributable to MediaOne debt, and approximately $1 billion of minority interest in Centaur Funding Corporation (Centaur), a subsidiary of MediaOne. 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. 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 in 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 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. AT&T Form 10-Q - Part I 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 Nine Months Ended September 30, 2000 1999 Revenue $50,422 $49,145 Net income 8,658 3,081 Weighted-average AT&T common shares 3,765 3,780 Weighted-average AT&T common shares and potential common shares 3,842 3,871 Weighted-average AT&T Wireless Group shares 360 - Weighted-average Liberty Media Group Shares 2,573 2,514 AT&T Common Stock Group earnings per common share: Basic $ 1.51 $ 1.09 Diluted $ 1.49 $ 1.07 AT&T Wireless Group earnings per common share: Basic and diluted $ 0.05 $ - Liberty Media Group earnings (loss) per common share: Basic and diluted $ 1.15 $ (0.41) 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. (c) OTHER ACQUISITIONS, EXCHANGES AND DISPOSITIONS AT HOME CORPORATION (EXCITE@HOME) On August 28, 2000, AT&T and Excite@Home announced shareholder approval of a new board of directors and governance structure for Excite@Home and completion of the extension of distribution contracts with AT&T, Cox Communications (Cox) and Comcast Corporation (Comcast). AT&T was given the right to designate six of the 11 Excite@Home board members. In addition, Excite@Home converted approximately 50 million AT&T's Series A shares into Series B shares, each of which has ten votes. As a result of these governance changes, AT&T gained a controlling financial interest and began consolidating Excite@Home's results upon the closing of the transaction on September 1, 2000, at which time we had an approximate 24% economic interest and 74% voting interest, compared with our previous 56% voting interest. As of September 30, 2000, AT&T had an approximate 23% economic interest in Excite@Home. AT&T Form 10-Q - Part I In exchange for Cox and Comcast relinquishing their rights under the shareholder agreement, AT&T granted put options to Cox and Comcast on a combined total of 60.4 million shares of Excite@Home Series A common stock. The put options provide Cox and Comcast with the right to convert their Excite@Home shares into either AT&T stock or cash at their option, at any time between January 1, 2001 and June 4, 2002, at the higher of (i) $48 per share or (ii) the 30 day average trading price at the time of exercise (beginning 15 trading days prior to the exercise date and ending 15 days after the exercise date). If the average price is above $48 per share, the number of Excite@Home shares that AT&T would acquire would be reduced proportionately from the original 60.4 million shares. The maximum amount that AT&T would be required to pay in cash or stock is approximately $2.9 billion based on the $48 strike price. The obligation under these put options was recorded as other long-term liabilities on the balance sheet at fair value, with gains or losses resulting from changes in fair value being recorded as a component of other income (expense). A charge of approximately $21 was recorded in the third quarter of 2000 to reflect the increase in fair value of the put options. Also, in connection with the distribution agreements through 2008, AT&T obtained the right to purchase up to approximately 25 million Excite@Home Series A shares and 25 million Series B shares. In addition, Cox and Comcast each will receive new warrants to purchase two Series A shares for each home its system passes. These warrants will vest in installments every six months beginning in June 2001, and be fully vested in June 2006, if Cox and Comcast elect to continue their extended non-exclusive distribution agreements through that period. As a result of the consolidation of Excite@Home, AT&T's balance sheet as of September 30, 2000, reflected minority interest of approximately $5.4 billion, goodwill of approximately $8.7 billion, short-term liabilities of approximately $2.4 billion, other net assets of approximately $1.0 billion and the removal of our investment in Excite@Home of approximately $1.9 billion. (d) NET RESTRUCTURING AND OTHER CHARGES During the quarter AT&T recorded $24 of net restructuring and other charges. These charges represent cash severance costs for approximately 490 employees recorded in conjunction with the synergies created by the MediaOne merger. Approximately one-half of the individuals were management employees and one-half were non-management employees. Approximately 30% of the affected employees have left their positions as of September 30, 2000, and the remaining employees will leave the company by the end of 2000. Net restructuring and other charges for the nine months ended September 30, 2000, totaled $797. The charge included restructuring and exit costs of $706 and a $91 charge related to the mandated disposition of AT&T Communications (U.K.) Ltd. (Comms U.K.), which would have competed directly with Concert, our global venture with British Telecommunication plc. The restructuring and exits costs related to actions across several of our business units. These actions were primarily driven by our continuing efforts to streamline operations and reduce costs by $2 billion by the end of the year. AT&T Form 10-Q - Part I The charge for the nine months ended September 30, 2000, included cash termination benefits of $482 associated with the involuntary separation of about 6,700 employees. Approximately one-half of the individuals were management employees and one-half were non-management employees. Approximately 50% of the affected employees have left their positions as of September 30, 2000. The charge also included $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 liability accounts from January 1, 2000, to September 30, 2000: Jan. 1, Sept. 30, 2000 2000 Type of Cost Balance Additions Deductions Balance Employee separations $150 $482 $(333) $299 Facility closings 239 - (53) 186 Other 21 62 (39) 44 Total $410 $544 $(425) $529 Deductions reflect cash payments of $337 and noncash utilization of $88. The cash outlay was primarily funded through cash from operations. Noncash utilization included deferred severance primarily related to executive terminations. Also included in the charge for the nine months ended September 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 expect to record additional restructuring charges for exit and separation plans in the fourth quarter. Net restructuring and other charges for the nine months ended September 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 our exit from certain joint ventures that would have competed directly with Concert and a $50 pretax charge related to a contribution agreement entered into by Broadband to satisfy certain liabilities of Phoenixstar, Inc. 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. AT&T Form 10-Q - Part I (e) EARNINGS PER COMMON SHARE AND POTENTIAL COMMON SHARE Earnings (losses) attributable to the different classes of AT&T common stock is as follows: For the Three For the Nine Months Ended Months Ended September 30, September 30, 2000 1999 2000 1999 AT&T Common Stock Group $1,319 $1,633 $4,805 $4,297 AT&T Wireless Group (3) - 19 - Liberty Media Group 1,756 (217) 2,965 (818) Net income $3,072 $1,416 $7,789 $3,479 Basic earnings per share (EPS) for AT&T Common Stock Group for the three and nine months ended September 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, convertible debt securities of a subsidiary, convertible put options, 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 approximately 67 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 Nine Months Ended Months Ended September 30, September 30, 2000 1999 2000 1999 AT&T Common Stock Group: Income available $1,319 $1,633 $4,805 $4,297 Income impact of assumed conversion of preferred stock of subsidiary 8 8 24 18 Income impact of mark-to-market on convertible put options 13 - 13 - Income available adjusted for conversion of securities $1,340 $1,641 $4,842 $4,315 AT&T Form 10-Q - Part I Shares in millions Weighted-average common shares 3,752 3,195 3,397 3,045 Stock options 17 32 23 37 Preferred stock of subsidiary 40 40 40 30 Convertible debt securities of subsidiary - - - 2 Convertible put options 33 - 11 - Weighted-average common shares and potential common shares 3,842 3,267 3,471 3,114 Basic EPS for AT&T Wireless Group for the third quarter and for the period from the date of the initial public offering through September 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 73 million stock options, which were antidilutive at September 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 2,578 million and 2,530 million, for the three months ended September 30, 2000 and 1999, respectively, and 2,573 million and 2,514 million for the nine months ended September 30, 2000, and from the date of acquisition through September 30, 1999, respectively. 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 98 million and 104 million of these potentially dilutive securities outstanding at September 30, 2000 and 1999, respectively. The diluted earnings per share calculation for the third quarter of 2000 also excludes approximately 700 thousand warrants outstanding at September 30, 2000, which were antidilutive. 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. (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 $1,055 $2,395 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. 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. AT&T Form 10-Q - Part I 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 September 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. 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 September 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 Financing I 9.30% 2025 - MediaOne Finance II 9.50% 2036 214 MediaOne Finance III 9.04% 2038 504 Total $ 776 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 AT&T Form 10-Q - Part I 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 became redeemable after September 11, 2000, and the 9.30% securities were fully redeemed by the end of the third quarter. 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 sheet. (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. The carrying value of the collars at September 30, 2000, was $515. 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 $441 as of September 30, 2000. AT&T Form 10-Q - Part I LETTERS OF CREDIT At September 30, 2000, we had letters of credit of $641. 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. EQUITY HEDGES We enter into equity hedges to manage our exposure to changes in equity prices associated with stock appreciation rights of affiliated companies. The fair value of our equity hedges as of September 30, 2000, was approximately $4. (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 September 30, 2000, as follows: Dividend Rate Maturity Date Carrying Amount Series A Variable None $ 100 Series B 9.08% 4/21/2020 927 Series C None 4/21/2020 115 Total $1,142 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) RELATED PARTY TRANSACTIONS AT&T has various related party transactions with Concert as a result of the closure of this global venture in early January. Included in revenue for the three and nine months ended September 30, 2000, are $269 and $819, respectively, for services provided to Concert. Included in access and other connection expenses for the three and nine months ended September 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 $568 and $1,728, 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 sheet. Interest income of $18 and $48 was recognized for the three and nine months ended September 30, 2000, respectively. Included in accounts receivable and other current assets at September 30, 2000, was $455 and $908, respectively, related to transactions with Concert. Included in accounts payable and other current liabilities at September 30, 2000, was $413 and $1,259, respectively, also related to transactions with Concert. In addition, Broadband had various related party transactions with LMG. Included in costs of services and products were programming expenses related to services from LMG which amounted to $69 and $184 for the three and nine months ended September 30, 2000, respectively, and $55 and $168 for the three and nine months ended September 30, 1999, respectively. Included in investment in LMG and related receivables was $113 and $27 at September 30, 2000, and December 31, 1999, respectively, primarily related to taxes pursuant to a tax sharing agreement between LMG and Broadband, which existed prior to the TCI merger. AT&T pays certain expenses on behalf of LA Cellular, which is owned through our equity interest in AB Cellular Holding LLC (AB Cellular). Accounts receivable included approximately $167 related to these receivables at September 30, 2000. (j) 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 September 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. AT&T Form 10-Q - Part I For the Nine For the Seven Months Ended Months Ended September 30, 2000 September 30, 1999 Revenue $ 4,755 $ 3,489 Operating loss (226) (744) Net income (loss) 1,775 (2,406) As of As of September 30, 2000 December 31, 1999 Current assets $ 802 $ 468 Noncurrent assets 98,460 93,798 Current liabilities 4,803 2,814 Noncurrent liabilities 39,898 37,853 Minority interest 7,450 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. AT&T provides a full and unconditional guarantee on these outstanding securities issued by MediaOne. At September 30, 2000, $4,227 of the 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 period from June 15, 2000 to September 30, 2000 Revenue $ 914 Operating loss (303) Net loss (286) As of September 30, 2000 Current assets $ 6,267 Noncurrent assets 65,442 Current liabilities 3,793 Noncurrent liabilities 22,700 Minority interest 1,143 (k) 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 Nine Months Ended Months Ended September 30, September 30, 2000 1999 2000 1999 Business services external revenue $ 6,895 $ 6,859 $20,818 $19,715 Business services internal revenue 213 197 573 553 Total business services revenue 7,108 7,056 21,391 20,268 Consumer services external revenue 4,672 5,578 14,715 16,527 Wireless services external revenue 2,799 2,050 7,474 5,490 Broadband external revenue 2,417 1,505 5,691 3,479 Total reportable segments revenue 16,996 16,189 49,271 45,764 Corporate and Other revenue (a) (21) 144 (174) 438 Total revenue $16,975 $16,333 $49,097 $46,202 (a) Included in Corporate and Other is revenue from international operations and ventures, Excite@Home, other corporate operations and the elimination of internal revenue. RECONCILIATION OF EARNINGS BEFORE INTEREST AND TAXES (EBIT) TO INCOME BEFORE INCOME TAXES Three Nine Months Ended Months Ended September 30, September 30, 2000 1999 2000 1999 Business services $1,733 $1,509 $4,870 $4,536 Consumer services 1,854 2,159 5,425 5,852 Wireless services 105 54 551 128 Broadband (627) (310) (717) (1,187) Total reportable segments' EBIT 3,065 3,412 10,129 9,329 Corporate and Other EBIT (40) (398) (1,020) (1,165) Liberty Media Group equity earnings (losses) 1,756 (217) 2,965 (818) Interest expense 946 493 2,158 1,188 Total income before income taxes $3,835 $2,304 $9,916 $6,158 AT&T Form 10-Q - Part I ASSETS At Sept. 30, At Dec. 31, 2000 1999 Business services $ 33,360 $ 32,010 Consumer services 4,945 6,279 Wireless services 33,045 23,312 Broadband 117,289 53,810 Total reportable segments 188,639 115,411 Corporate and Other: Other segments 6,962 3,386 Prepaid pension costs 2,978 2,464 Deferred taxes 1,183 899 Other corporate assets 13,361 8,786 Investment in Liberty Media Group and related receivables, net 39,229 38,460 Total assets $252,352 $169,406 (l) 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. The impact of the adoption of SFAS No. 133, as amended by SFAS No. 138, on AT&T's results of operations is dependent upon the fair values of our derivatives and related financial instruments at the date of adoption and could result in more pronounced quarterly fluctuations in other income (expense) in future periods. However, had we adopted SFAS No. 133 in the third quarter of 2000, we would have recorded a cumulative effect of an accounting change, net of applicable taxes, of approximately $325 of income, or $0.08 per diluted share, primarily attributable to fair value adjustments of debt instruments acquired in conjunction with the MediaOne merger, as well as to our warrant portfolio. AT&T Form 10-Q - Part I Management does not expect the impact of the adoption of SFAS No. 133 on our interest rate swap and foreign exchange portfolios to be material to AT&T's results of operations, financial condition, or cash flows. In addition, management is currently reassessing the appropriate classification of certain investment securities that support debt, which is indexed to those securities. Had these securities been reclassified from available-for-sale to trading securities during the third quarter, a charge of $235, or $0.06 per diluted share, net of applicable taxes, would have been recorded to other income (expense), concurrently with the adoption of SFAS No. 133. As an available-for-sale security, changes in fair value are included within other comprehensive income. 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. Management does not expect the adoption of SAB No. 101 to have a material impact on our results of operations. (m) SUBSEQUENT EVENTS RESTRUCTURING PLAN On October 25, 2000, AT&T announced a restructuring plan designed to create four publicly traded companies from each of our major operating units. AT&T shareowners would ultimately own stock in each of the four businesses. Upon completion of the plan, AT&T Wireless, AT&T Broadband, AT&T Consumer and AT&T Business will all be represented by asset-based or tracking stocks. In the first phase of the restructuring plan, AT&T intends to offer AT&T shareowners the opportunity to exchange their AT&T common stock for AT&T Wireless Group tracking stock. We plan to distribute our remaining interest in AT&T Wireless Group to AT&T shareowners in 2001. AT&T also plans to create a new class of stock to track the economic performance of our AT&T Consumer business and plans to distribute 100% of the tracking stock to AT&T shareowners in the second half of 2001. In addition, depending on market conditions, AT&T plans to conduct an initial public offering of stock that will track the economic performance of our Broadband unit during the summer of 2001. AT&T's ownership interest in Excite@Home will be part of the Broadband entity. AT&T plans to recapitalize the Broadband tracking stock into an asset-based common stock within twelve months of the initial public offering. AT&T Form 10-Q - Part I AT&T Business will be the legal owner of the AT&T brand, which it will license to the other companies. It will also be the parent company of the AT&T Consumer business. The board of directors is reviewing the dividend policy of AT&T before the end of 2000 and AT&T expects that AT&T's dividend prior to the creation of the four new companies as well as the combined dividend of the four new companies will be substantially lower than our current dividend. AT&T does not expect significant downsizing to result from our plans, although each company will continue to size its operations as appropriate. AT&T expects these transactions will be tax-free to U.S. shareholders. Certain aspects of the above transactions remain subject to regulatory and other approvals. OTHER EVENTS AT&T currently holds a 55.62% equity interest in AB Cellular, which was formed in 1998 with BellSouth, with each party having a 50% voting interest. AB Cellular owns, controls and supervises wireless properties in Los Angeles, Houston and Galveston. Public documents filed by BellSouth indicate that BellSouth anticipates exercising an option available to them pursuant to the AB Cellular LLC Agreement, which would result in AB Cellular redeeming AT&T's interest in AB Cellular in consideration of 100% of the net assets of the Los Angeles property. If this transaction takes place, AT&T anticipates recording a gain and will begin consolidating the results of the Los Angeles property. On November 13, 2000, two of AT&T's wireless affiliates, TeleCorp PCS, Inc. (TeleCorp) and Tritel, Inc., merged as part of a stock transaction. In connection with the merger, AT&T contributed to TeleCorp rights to acquire wireless licenses in Wisconsin and Iowa and $20 in cash in exchange for approximately 9.3 million shares of common stock in the newly merged entity. In a separate transaction, AT&T exchanged certain wireless licenses and rights to acquire licenses in the Wisconsin and Iowa markets, and made a cash payment of approximately $80 in return for certain TeleCorp PCS licenses and wireless systems in several New England markets. AT&T expects that these transactions will result in a gain. 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. For each share of MediaOne stock, MediaOne shareholders received, in the aggregate, 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, which was below a predetermined amount. AT&T issued approximately 603 million shares of 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 as part of our Broadband segment. On April 27, 2000, AT&T created a new class of stock when we 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 the 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 84.4% 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 AT&T's consolidated financial statements. The earnings attributable to AT&T Wireless Group represent 15.6% of the earnings for the third quarter, and 15.6% of the earnings from April 27, 2000, the date of the initial public offering, through September 30, 2000, for the year-to-date period. 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. AT&T Form 10-Q - Part I On January 5, 2000, AT&T and British Telecommunications, plc (BT) announced financial closure of Concert, their global communications joint venture. 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 nine months ended September 30, 2000 and 1999, and financial condition as of September 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. CONSOLIDATED RESULTS OF OPERATIONS REVENUE Three Months Nine Months Ended Ended September 30, September 30, 2000 1999 2000 1999 Dollars in Millions Business Services $ 7,108 $ 7,056 $21,391 $20,268 Consumer Services 4,672 5,578 14,715 16,527 Wireless Services 2,799 2,050 7,474 5,490 Broadband 2,417 1,505 5,691 3,479 Corporate and Other (21) 144 (174) 438 Total revenue $16,975 $16,333 $49,097 $46,202 Revenue increased $642 million in the third quarter of 2000, or 3.9%, to $16,975 million compared with the third quarter of 1999, and increased $2,895 million in the first nine months of 2000, or 6.3%, to $49,097 million compared with the first nine months of 1999. Normalized revenue, which adjusts revenue for the acquisitions of MediaOne and the IBM Global Network (renamed AT&T Global Network Services, or AGNS), the impact of businesses contributed to Concert, the elimination of per-line charges by the FCC, the consolidation of At Home Corp. (Excite@Home), certain international divestments, and closed cable partnerships, increased $612 million in the third quarter of 2000, or 3.7%, from $16,363 million in the third quarter of 1999. AT&T Form 10-Q - Part I The increase was led by Wireless Services, Broadband, and Business Services, partially offset by a decline in Consumer Services. For the first nine months of 2000 normalized revenue, which also adjusts for the acquisition of TCI, rose $2,261 million, or 4.7%, from $48,234 million in the first nine months of 1999. The increase was led by Wireless Services, Business Services, and Broadband, partially offset by a decline in Consumer Services. OPERATING EXPENSES Three Months Nine Months Ended September 30, Ended September 30, 2000 1999 2000 1999 Dollars in Millions Access and other connection $3,255 $3,654 $10,460 $11,054 Access and other connection expenses decreased 10.9%, to $3,255 million for the three months ended September 30, 2000. Included within access and other connection expenses are costs that we pay to connect domestic calls on the facilities of other service providers. These costs decreased primarily due to mandated reductions in per-minute access costs and decreased per-line charges (Primary Interexchange Carrier Charges). Effective July 1, 2000, per-line charges AT&T pays for residential and single-line business customers were eliminated by the FCC. These decreases were partially offset by volume increases and higher Universal Service Fund contributions. Also included within access and other connection expenses are costs paid to foreign telephone companies to connect calls made to foreign countries (international settlements). As result of the commencement of operations of Concert, most of our international settlements are incurred by Concert. In addition, most 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. Access and other connection expenses decreased 5.4%, to $10,460 million for the nine months ended September 30, 2000. The decrease was primarily attributable to lower net interconnection expense largely related to the commencement of operations of Concert. Also contributing to the decrease were mandated reductions in per-minute access costs as well as the sale of ACC International, more efficient network usage and reduced Primary Interexchange Carrier Charges resulting from the elimination of certain per-line charges by the FCC effective July 1, 2000. These decreases were partially offset by volume increases and higher Universal Service Fund contributions. Three Months Nine Months Ended September 30, Ended September 30, 2000 1999 2000 1999 Dollars in Millions Costs of services and products $4,547 $3,932 $12,578 $10,660 Costs of services and products increased 15.7%, to $4,547 million in the third quarter of 2000 compared with the third quarter of 1999. Excluding the impact of AT&T Form 10-Q - Part I the acquisitions of MediaOne and AGNS, the formation of Concert, certain international divestments and the consolidation of Excite@Home, costs of services and products increased approximately 8% in the third quarter. The increase was primarily due to higher equipment costs associated with the growth of the wireless subscriber base, increased costs to support growth in outsourcing contracts and increased broadband programming expenses due to rate increases. These increases were partially offset by continued cost control efforts and a higher pension credit in 2000, primarily driven by a higher pension trust asset base resulting from increased investment returns. Costs of services and products increased 18.0%, to $12,578 million in the first nine months of 2000 compared with the same period in 1999. Excluding the impact of the acquisitions of TCI, MediaOne and AGNS, the formation of Concert, certain international divestments and the consolidation of Excite@Home, costs of services and products increased approximately 8%. This increase was primarily due to higher costs associated with our growing wireless subscriber base and wireless network, increased costs to support growth in outsourcing contracts and higher video programming costs principally due to rate increases. These increases were partially offset by continued cost control efforts, a higher pension credit and a lower provision for uncollectible receivables primarily in Consumer Services. Three Months Nine Months Ended September 30, Ended September 30, 2000 1999 2000 1999 Dollars in Millions Selling, general and administrative $3,397 $3,442 $9,796 $10,060 Selling, general and administrative (SG&A) expenses decreased 1.3% in the third quarter of 2000, and decreased 2.6% for the first nine months of 2000 compared with the same periods of 1999. Excluding the impact of the acquisitions of TCI, MediaOne and AGNS, the formation of Concert, certain international divestments and the consolidation of Excite@Home, SG&A expenses declined approximately 6% in both periods. The decrease was primarily the result of cost control efforts as well as a larger pension credit in 2000. These were partially offset by increased customer acquisition and customer care expenses associated with our growth businesses of wireless and broadband. Three Months Nine Months Ended September 30, Ended September 30, 2000 1999 2000 1999 Dollars in Millions Depreciation and other amortization $1,919 $1,558 $5,182 $4,408 Depreciation and other amortization expenses increased 23.2% in the third quarter of 2000 and increased 17.5% in the first nine months of 2000 compared with the same periods in 1999. Excluding the impact of the acquisitions of TCI, MediaOne and AGNS, the formation of Concert, certain international divestments and the consolidation of Excite@Home, depreciation and other amortization expenses increased approximately 12% in the third quarter of 2000 and increased approximately 11% in the first nine months of 2000. These increases were primarily due to a higher asset base resulting from continued infrastructure investment. Capital expenditures were $3.6 billion for the third quarter, bringing year-to-date capital expenditures to $10.1 billion. We continue to focus the majority of our capital spending on our growth businesses of wireless, broadband, data and Internet Protocol (IP) and local voice. AT&T Form 10-Q - Part I Three Months Nine Months Ended September 30, Ended September 30, 2000 1999 2000 1999 Dollars in Millions Amortization of goodwill, franchise costs and other purchased intangibles $879 $358 $1,661 $900 Amortization of goodwill, franchise costs, and other purchased intangibles increased $521 million to $879 million in the third quarter of 2000 compared with the third quarter of 1999. The increase was primarily attributable to the consolidation of Excite@Home beginning September 1, 2000, and the acquisition of MediaOne in 2000. In the first nine months of 2000, amortization of goodwill, franchise costs and other purchased intangibles increased $761 million to $1,661 million compared with the first nine months of 1999, primarily due to the acquisition of MediaOne in 2000, the acquisitions of TCI and AGNS in 1999, and the consolidation of Excite@Home in 2000. AT&T also has amortization of goodwill associated with nonconsolidated investments recorded as a reduction of other income. This totaled $238 million and $164 million in the third quarter of 2000, and 1999, respectively, and totaled $471 million and $356 million for the first nine months of 2000 and 1999, respectively. Three Months Nine Months Ended September 30, Ended September 30, 2000 1999 2000 1999 Dollars in Millions Net restructuring and other charges $24 $ - $797 $702 During the third quarter of 2000, AT&T recorded $24 million of net restructuring and other charges, which had a minimal impact on diluted earnings per share. The charge resulted from synergies associated with the MediaOne merger and related to cash termination benefits associated with the involuntary separation of about 490 employees. Approximately one-half of the individuals were management employees and one-half were nonmanagement employees. This restructuring initiative is projected to yield a net cash payout of approximately $18 million in 2000, with approximately $27 million per year in cash savings per year thereafter, as well as earnings before interest and taxes (EBIT) savings of approximately $6 million in 2000 and approximately $27 million per year thereafter. We expect that increased spending in growth businesses will largely offset these cash and EBIT savings. The EBIT savings, primarily attributable to reduced personnel-related expenses, will be realized in SG&A expenses and costs of services and products. Net restructuring and other charges for the nine months ended September 30, 2000, totaled $797 million, which had an approximate $0.14 impact on earnings per diluted share. The charge included restructuring and exit costs of $706 million and 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. The restructuring and exit costs related to actions across several of our business units and included severance costs associated with about 6,700 employees. These actions were primarily driven by our continuing efforts to streamline operations and reduce costs by $2 billion by the end of the year. AT&T Form 10-Q - Part I The charge for the nine months ended September 30, 2000, also included $62 million of network lease and other contract termination costs associated with penalties incurred as part of notifying vendors of the termination of these contracts during the first quarter of 2000. Additionally, the charge 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. Net restructuring and other charges for the nine months ended September 30, 1999, totaled $702 million, which had an approximate $0.21 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 from certain joint ventures that would have competed directly with Concert and a $50 million pretax charge related to a contribution agreement entered into by Broadband to satisfy certain liabilities of Phoenixstar, Inc. 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 Excite@Home. We expect to test IP telephony equipment for field deployment and begin field trials related to our product integration efforts for set-top devices late in the fourth quarter into early 2001. In addition, trials related to our telephony cost reductions are complete and implementation has begun in certain markets. Three Months Nine Months Ended September 30, Ended September 30, 2000 1999 2000 1999 Dollars in Millions Operating Income $2,954 $3,389 $8,623 $8,418 Operating income decreased 12.9% in the third quarter of 2000 primarily due to a decline in Consumer Services revenue, the acquisition of MediaOne and the consolidation of Excite@Home. These decreases were partially offset by a higher pension credit in 2000 and cost control efforts within Business Services. Operating income increased 2.4% for the first nine months 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 MediaOne, a decline in Consumer Services revenue, the consolidation of Excite@Home, the acquisition of TCI and higher restructuring charges. Operating income margin (operating income as a percent of revenue) was 17.4% for the third quarter and 17.6% for the nine months ended September 30, 2000, compared with 20.8% and 18.2% in the comparable 1999 periods, respectively. AT&T Form 10-Q - Part I Three Months Nine Months Ended September 30, Ended September 30, 2000 1999 2000 1999 Dollars in Millions Other income (expense) $71 $(375) $486 $(254) Other income (expense) increased $446 million to income of $71 million in the third quarter of 2000, compared with an expense of $375 million in the third quarter of 1999. The increase was primarily attributable to higher minority interest and lower equity losses on investments associated with the consolidation of Excite@Home effective September 1, 2000. Also contributing to the increase was higher interest and dividend income and greater gains on sales of businesses and investments. Other income (expense) increased $740 million to income of $486 million for the nine months ended September 30, 2000, compared with an expense of $254 million for the same prior year period. The increase was primarily attributable to greater gains on sales of businesses and investments and higher interest and dividend income. Further contributing to the increase were equity earnings from Concert. These increases were partially offset by higher losses on equity investments, primarily from Excite@Home through August 31, 2000. Three Months Nine Months Ended September 30, Ended September 30, 2000 1999 2000 1999 Dollars in Millions EBIT, excluding LMG $3,025 $3,014 $9,109 $8,164 EBIT, excluding LMG, remained essentially flat for the third quarter of 2000 compared with the third quarter of 1999, with the increase in other income being virtually offset by the decrease in operating income. For the first nine months of 2000, EBIT grew 11.6% compared with the same period in 1999, which was attributable to increases in both other income and operating income. The EBIT growth was impacted by gains on sales of businesses and investments, our ownership interests in Cablevision Systems Corp. (Cablevision) and Time Warner Entertainment (TWE) and net restructuring and other charges. Excluding these items, EBIT increased 6.8% and 11.3% for the third quarter and year-to-date periods, respectively. The improvement for the third quarter was primarily attributable to increased other income partially offset by a decrease in operating income. The improvement for the year-to-date period was primarily due to both higher other income and operating income. Three Months Nine Months Ended September 30, Ended September 30, 2000 1999 2000 1999 Dollars in Millions Equity earnings (losses) from Liberty Media Group $1,756 $(217) $2,965 $(818) Equity earnings from Liberty Media Group were $1,756 million in the third quarter of 2000, compared with losses of $217 million in the same prior year quarter. The increase was primarily due to a gain associated with the acquisition of TV Guide by Gemstar - TV Guide International, Inc. (Gemstar) reflecting the difference between the carrying value of LMG's interest in TV AT&T Form 10-Q - Part I Guide, Inc. (TV Guide) and the fair value of the Gemstar securities received in the acquisition. Equity earnings from LMG for the nine months ended September 30, 2000, were $2,965 million compared with losses of $818 million in 1999. In addition to the gain associated with the TV Guide acquisition, the increase in equity earnings for the nine months ended September 30, 2000, was also impacted by a gain associated with the acquisition of Flextech p.l.c. (Flextech) by Telewest Communications plc (Telewest) and a gain associated with the acquisition of General Instrument Corporation (General Instrument) by Motorola, Inc. (Motorola). These gains also 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. These gains were partially offset by impairment charges recorded on Liberty Media's investments in Teligent, Inc. (Teligent) and ICG Communications, Inc. (ICG) to reflect other than temporary declines in value. Three Months Nine Months Ended September 30, Ended September 30, 2000 1999 2000 1999 Dollars in Millions Interest expense $946 $493 $2,158 $1,188 Interest expense increased 92.2% to $946 million in the third quarter of 2000 compared with the third quarter of 1999, primarily due to a higher average debt balance as a result of our June 15, 2000, acquisition of MediaOne, including outstanding debt of MediaOne and debt issued to fund the MediaOne acquisition. Interest expense increased 81.6% to $2,158 million for the nine months ended September 30, 2000, compared with the nine months ended September 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, including outstanding debt of MediaOne and debt issued to fund the MediaOne acquisition. Three Months Nine Months Ended September 30, Ended September 30, 2000 1999 2000 1999 Dollars in Millions Provision for income taxes $763 $888 $2,127 $2,679 The provision for income taxes decreased $125 million, or 14.2%, to $763 million in the third quarter of 2000 compared with the third quarter of 1999. The decrease was primarily due to lower earnings before taxes, partially offset by a slightly higher effective tax rate. The effective tax rate for the third quarter of 2000 was 36.7%, up from 35.2% in the third quarter of 1999. The increase was due to impact of the consolidation of Excite@Home, which is unable to record tax benefits on its pretax losses, as well as the positive impact of certain foreign legal entity restructurings in 1999. The provision for income taxes for the nine months ended September 30, 2000, decreased $552 million compared with the same period in 1999. The effective tax rate for the nine months ended September 30, 2000, was 30.6%, down from 38.4% for the same prior year period. In 2000, the effective tax rate was positively impacted by a tax-free gain resulting from an exchange of AT&T stock for an entity owning certain cable systems and other assets with Cox Communications Inc. (Cox), and the benefit of the write-off of the related deferred tax liability. The 1999 effective rate was negatively impacted by an in-process research and development charge which was not tax deductible, which was offset by the positive AT&T Form 10-Q - Part I impact of a change in net operating loss utilization tax rules. Excluding the impacts of the Cox transaction, the in-process research and development charge, and the change in the net operating loss rules, the effective income tax rates were 36.8% and 36.4% for the nine months ended September 30, 2000 and 1999, respectively. Three Months Nine Months Ended September 30, Ended September 30, 2000 1999 2000 1999 AT&T Common Stock Group earnings per AT&T common share: Basic $ 0.35 $ 0.51 $1.41 $ 1.41 Diluted $ 0.35 $ 0.50 $1.40 $ 1.39 AT&T Wireless Group earnings per AT&T common share: Basic and diluted $(0.01) - $0.05 $ - Liberty Media Group earnings (loss) per share: Basic and diluted $ 0.68 $(0.09) $1.15 $(0.33) As reported, diluted earning per share (EPS) attributable to AT&T Common Stock Group decreased 30.0% to $0.35 in the third quarter of 2000, compared with the third quarter of 1999. The decrease was primarily driven by the acquisition of MediaOne, including the impact of shares issued, additional interest expense and operating losses generated by MediaOne largely attributable to depreciation expense and amortization of franchise costs, goodwill and other purchased intangibles. The decrease was partially offset by an increase in other income primarily associated with higher interest and dividend income and gains on sales of businesses and investments. As reported, diluted EPS attributable to AT&T Common Stock Group increased 0.7% to $1.40 in the nine months ended September 30, 2000, compared with the nine months ended September 30, 1999. The increase was primarily due to higher other income, and improved operating income in the period resulting from margin improvements. These improvements were partially offset by the acquisition of MediaOne, including the impact of shares issued, additional interest expense and operating losses generated by MediaOne largely attributable to depreciation expense and amortization of franchise costs, goodwill and other purchased intangibles. Included in EPS for the third quarter are the following items: ..Losses of $0.03 in the third quarter of 2000 and $0.02 in the third quarter of 1999, reflecting the earnings impact of our investments in TWE and Cablevision; ..Gain on sale of a business of $0.02 in the third quarter of 1999. Included in EPS for the first nine months of 2000 and 1999 are the following items: ..Net restructuring and other charges of $0.14 in the first nine months of 2000 and $0.21 in the same period of 1999; ..Losses of $0.05 in the first nine months of 2000 and $0.05 in the same period of 1999, reflecting the earnings impact of our investments in Cablevision and TWE; ..Net gains on sales of businesses and investments and other of $0.21 in the first nine months of 2000 and $0.07 in the same period of 1999; ..A $0.02 benefit in the first nine months of 1999 from changes in tax rules with respect to the utilization of acquired net operating losses. AT&T Form 10-Q - Part I The total impact of these items to diluted EPS was a decrease of $0.03 for the three months ended September 30, 2000, and an increase of $0.02 for the nine months ended September 30, 2000. These items had no net impact to diluted EPS for the third quarter of 1999 and decreased diluted EPS by $0.17 for the nine months ended September 30, 1999. We quantify the impact on our results of our investments in Cablevision and TWE 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 $0.38 per diluted share in the third quarter of 2000, a decrease of 24.0%, or $0.12, over the comparable prior year quarter. EPS excluding these items was $1.38 per diluted share for the nine months ended September 30, 2000, compared with $1.56 for the same period in 1999, a decrease of 11.5%. EPS for Liberty Media Group was $0.68 per share for the three months ended September 30, 2000, compared with a loss of $0.09 per share for the three months ended September 30, 1999. The increase in EPS for the third quarter of 2000, is primarily due to a gain associated with the acquisition of TV Guide by Gemstar reflecting the difference between the carrying value of LMG's interest in TV Guide and the fair value of the Gemstar securities received in the acquisition. EPS for Liberty Media Group was $1.15 per share for the first nine months of 2000, compared with a loss of $0.33 per share in 1999. The first nine months of 2000 results include nine months of Liberty Media Group results compared with seven months in 1999, reflecting the March 1999 acquisition of TCI by AT&T. In addition to the gain associated with the TV Guide acquisition, the increase in EPS for the nine months ended September 30, 2000, was also impacted by a gain associated with the acquisition of Flextech by Telewest and a gain associated with the acquisition of General Instrument by Motorola. These gains also represent the difference between the carrying value of LMG's interest in the acquired company and the fair value of securities received in the mergers. These gains were partially offset by impairment charges recorded on Liberty Media's investments in Teligent and ICG to reflect other than temporary declines in value. 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 and Excite@Home. 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 (expense). Total assets for each segment generally exclude intercompany assets. Prepaid pension assets and corporate-owned or leased real estate are generally held at the corporate level and therefore are included in the Corporate and Other group. Shared network assets are allocated to the segments and reallocated each January, based on two years of volumes. Capital additions for each segment include capital expenditures for property, plant and equipment, acquisitions of licenses, additions to nonconsolidated investments, increases in franchise costs and additions to internal-use software. AT&T Form 10-Q - Part I 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 and MediaOne and certain international divestments are normalized as if those acquisitions/dispositions occurred on January 1, 1999. The elimination of per-line charges by the FCC is normalized in 1999 results as if the elimination occurred on July 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. For the Three For the Nine Months Ended Months Ended September 30, September 30, Dollars in Millions 2000 1999 2000 1999 External revenue $ 6,895 $ 6,859 $20,818 $19,715 Internal revenue 213 197 573 553 Total revenue 7,108 7,056 21,391 20,268 EBIT 1,733 1,509 4,870 4,536 EBITDA 2,664 2,347 7,594 6,948 AT&T Form 10-Q - Part I OTHER ITEMS Capital additions $ 1,517 $ 1,963 $ 4,169 $ 4,544 At September 30, At December 31, 2000 1999 Total assets $33,360 $32,010 REVENUE Business Services revenue increased $52 million, or 0.7%, in the third quarter of 2000, and increased $1,123 million, or 5.5%, for the first nine months of 2000, compared with the prior year. Normalized for the impact of Concert, the 1999 acquisition of AGNS and the elimination of PICC for single-line business customers by the FCC, revenue increased 2.5% and 4.1% for the quarter and year-to-date periods, respectively. The increases were driven primarily by strength in data/IP and outsourcing services, partially offset by a decline in long distance voice services. Normalized data/IP services revenue grew over 20% for the quarter, led by growth in frame relay, high-speed private line and IP services. For the year-to-date period, normalized data/IP services revenue grew at a high-teens rate led by 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 over 50% for both the three and nine months ended September 30, 2000, compared with the same periods in 1999. On a combined basis, packet services (frame relay, ATM (Asynchronous Transfer Mode) and IP) grew over 50% for the quarter and over 45% for the year-to-date period, compared with the same periods in 1999. AT&T Solutions outsourcing revenue, normalized for the acquisition of AGNS, grew 20.2% in the third quarter of 2000, and grew 22.5% for the first nine 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. Normalized long distance voice revenue declined at a mid single-digit rate for the third quarter, as pricing declines outpaced high single-digit volume increases. For the year-to-date period, normalized long distance voice revenue declined at a low single-digit rate, as pricing declines outpaced volume increases of over 10%. Business services revenue continues to shift to higher growth products such as data/IP and outsourcing. This shift, and the continued pricing pressures, have resulted in a decline in long distance voice revenue. We expect competition and the resulting pricing pressures to continue to negatively impact Business Services long distance voice revenue. Normalized local voice revenue grew at a mid-teen rate for the quarter, and grew over 20% for the year-to-date period. Revenue growth was negatively impacted, in the year-to-date period, by the settlement of public utility commission rulings. There were eight additional switches activated in third quarter, for a total of 29 new local switches activated year-to-date through September 30, 2000. These local switches enhance AT&T's network capacity for the provision of business local voice services. AT&T's integrated business local operations added over 130 thousand access lines in the third quarter bringing total access lines in service as of September 30, 2000, to almost 2.1 million. Access lines enable AT&T to provide local service to customers by allowing direct connection from customer equipment to the AT&T network. On-net buildings (buildings where AT&T owns the fiber that runs into the building) totaled 5,969 at September 30, 2000, a 4.1% increase over September 30, 1999. AT&T Form 10-Q - Part I EBIT/EBITDA EBIT increased $224 million, or 14.8%, in the third quarter of 2000, and increased $334 million, or 7.4%, in the first nine months of 2000, compared with the same prior year periods. EBITDA increased $317 million, or 13.5%, in the third quarter of 2000, and increased $646 million, or 9.3%, in the first nine months of 2000, compared with the same prior year periods. Excluding a first quarter 2000 restructuring charge of $93 million, EBIT increased 9.4% and EBITDA increased 10.6% in the first nine months of 2000, compared with the same period of 1999. The quarterly increases were primarily due to continued SG&A cost control efforts and revenue growth, partially offset by the impact of the customers contributed to Concert. The year-to-date increases were primarily due to revenue growth and continued SG&A cost control efforts, partially offset by the impact of the customers contributed to Concert. In addition, higher depreciation expense also partially offset the EBIT improvement. The equity earnings of Concert are reported within Corporate and Other. OTHER ITEMS Capital additions decreased $446 million, or 22.7%, to $1,517 million in the third quarter of 2000 compared with the third quarter of 1999. The decrease was primarily driven by reduced capital expenditures for network assets that support long distance voice and data services. For the first nine months of 2000, capital additions decreased $375 million, or 8.2%, to $4,169 million compared with the first nine months 1999. The decrease was primarily driven by reduced capital expenditures for network assets that support long distance voice services. Total assets increased $1,350 million, or 4.2%, to $33,360 million at September 30, 2000, compared with December 31, 1999. The increase was primarily driven by a higher accounts receivable balance due to timing of cash receipts, an increase in the age of outstanding receivables and higher revenue in our outsourcing business. In addition, property, plant and equipment increased as a result of capital expenditures, partially offset by depreciation expense for the period, as well as the contribution of assets to Concert. 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. For the Three For the Nine Months Ended Months Ended September 30, September 30, Dollars in Millions 2000 1999 2000 1999 Revenue $4,672 $5,578 $14,715 $16,527 EBIT 1,854 2,159 5,425 5,852 EBITDA 1,996 2,352 5,853 6,425 OTHER ITEMS Capital additions $ 76 $ 133 $ 204 $ 341 At September 30, At December 31, 2000 1999 Total assets $4,945 $ 6,279 AT&T Form 10-Q - Part I REVENUE Consumer Services revenue decreased 16.2% in the third quarter of 2000, and declined 11.0% for the first nine months of 2000, compared with the same periods in 1999. Normalized for the impact of Concert and the elimination of per-line charges, revenue decreased 10.9% in the third quarter and declined 7.9% for the first nine months of the year as long distance calling volumes continued to decline at a mid 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 and product substitution to continue to negatively impact Consumer Services revenue. EBIT/EBITDA EBIT declined 14.1% and EBITDA declined 15.2% in the third quarter of 2000, compared with the same period of 1999. For the first nine months of the year, EBIT decreased 7.3% and EBITDA decreased 8.9%, 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 EBITDA margins continue to improve. The EBIT margin was 39.7% and the EBITDA margin was 42.7% in the third quarter of 2000, compared with an EBIT margin of 38.7% and an EBITDA margin of 42.2% for the same period in 1999. EBIT and EBITDA include a $96 million restructuring charge for the first nine months of 2000, and include a $153 million gain on the sale of Language Line Services in the first nine months of 1999. Excluding these items, the EBIT and EBITDA margins improved to 37.5% and 40.4%, respectively, for the first nine months of 2000, compared with 34.5% and 37.9%, respectively, for the same period in 1999, primarily due to our cost control initiatives, partially offset by lower revenue. OTHER ITEMS Capital additions declined $57 million, or 43.0%, to $76 million in the third quarter of 2000, compared with the third quarter of 1999. For the first nine months of 2000, capital additions decreased $137 million, or 40.1%, compared with the first nine months of 1999. These decreases were primarily attributable to reduced capital expenditures for network assets that support long distance voice services and decreased spending on internal-use software. Total assets decreased $1,334 million, or 21.3%, to $4,945 million at September 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. AT&T Form 10-Q - Part I For the Three For the Nine Months Ended Months Ended September 30, September 30, Dollars in Millions 2000 1999 2000 1999 Revenue $ 2,799 $2,050 $ 7,474 $5,490 EBIT 105 54 551 128 EBITDA excluding other income 472 397 1,381 902 OTHER ITEMS Capital additions $ 1,028 $ 704 $ 3,782 $1,564 At September 30, At December 31, 2000 1999 Total assets $33,045 $23,312 REVENUE Wireless Services revenue grew $749 million, or 36.6%, to $2,799 million in the third quarter of 2000, compared with the third quarter of 1999, including growth in services revenue of 34.3% to $2,509 million. Revenue increased $1,984 million, or 36.2%, to $7,474 million in the first nine months of 2000, compared with the same period of 1999, including growth in services revenue of 36.8% to $6,741 million. Revenue, adjusted to exclude the June 2000 acquisition of properties in the San Francisco Bay area from the quarter and year-to-date 2000 periods as well as the year-to-date impact of Vanguard Cellular Systems, Inc. for the months prior to the May 1999 acquisition, grew 27.3% in the quarter and 29.7% for the first nine months of 2000. The increases were due to subscriber growth reflecting 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. In addition, an increase in average monthly revenue per user contributed to the year-to-date growth. Equipment revenue grew 59.9% to $290 million in the third quarter of 2000, and grew 30.6% to $733 million for the first nine months of 2000, compared with the respective prior year periods. AT&T continues to experience strong growth in wireless subscribers. Consolidated subscribers grew to over 12.6 million at September 30, 2000, representing an increase of 38.4% over the prior year quarter, including approximately 1.3 million subscribers associated with the completed acquisitions of our remaining interest in CMT Partners (which owned wireless properties in the San Francisco Bay area), Wireless One Network, L.P. (which owned wireless properties in northwest and southwest Florida) and properties in the San Diego area. Net consolidated wireless subscriber additions in the third quarter totaled approximately 750,000, a 195.1% increase over the prior year quarter. Total subscribers, including partnership markets in which AT&T does not own a controlling interest, were nearly 15 million at the end of the third quarter, a 26.2% 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 third quarter of 2000 was 2.9%, compared with 2.6% in the third quarter of 1999. AT&T's average monthly churn rate in the first nine months of 2000 was 2.8% compared with 2.6% in the first nine months of 1999. AT&T Form 10-Q - Part I EBIT/EBITDA EXCLUDING OTHER INCOME EBIT increased $51 million, or 97.2%, to $105 million in the third quarter of 2000, and increased $423 million, or 331.1%, to $551 million in the first nine months of the year, compared with the same prior year periods. The year-to-date increase was 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 $416 million to $456 million for the first nine months of the year. The improvement for both periods was primarily the result of revenue growth, as well as higher other income due to intercompany interest income on the initial public offering proceeds attributed to AT&T Wireless Group. These were partially offset by increased customer acquisition and customer care costs and higher depreciation and amortization expenses as a result of an increased asset base. Also partially offsetting the improvements were higher network costs attributable to the growth in subscribers and their minutes of use, as well as higher information technology costs associated with growth in the subscriber base. EBITDA, excluding other income, increased $75 million, or 18.6%, to $472 million in the third quarter of 2000, and increased $479 million, or 53.1%, to $1,381 million for the first nine months of the year, compared with the same prior year periods. The improvement for both periods was primarily driven by higher revenue, partially offset by increased customer acquisition and customer care costs, as well as higher network costs and increased information technology costs. OTHER ITEMS In the third quarter of 2000, capital additions increased $324 million to $1,028 million compared with the third quarter of 1999. For the first nine months of 2000, capital additions increased $2,218 million to $3,782 million compared with the first nine months of 1999. These increases were primarily driven by capital expenditures on capacity upgrades and improvements to network quality. Also contributing to the increase in capital additions for the first nine months of the year was our investment in American Cellular in the first quarter of 2000. Total assets increased $9,733 million, or 41.8%, to $33,045 million at September 30, 2000, compared with December 31, 1999. The increase was primarily driven by the acquisitions of our remaining interest in CMT Partners, Wireless One Network, L.P. and properties in the San Diego area. These acquisitions resulted in increases to licensing costs, goodwill, property, plant and equipment and other assets. Also contributing to the increase in assets was an intercompany note receivable for the remaining initial public offering proceeds attributed to the AT&T Wireless Group, as well as higher property, plant and equipment as a 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 Nine Months Ended Months Ended September 30, September 30, Dollars in Millions 2000 1999 2000 1999 Revenue $ 2,417 $1,505 $ 5,691 $ 3,479 EBIT (627) (310) (717) (1,187) EBITDA excluding other income 514 389 1,253 420 OTHER ITEMS Capital additions $ 1,247 $1,007 $ 3,577 $ 2,155 At September 30, At December 31, 2000 1999 Total assets $117,289 $53,810 The three months ended September 30, 2000, includes the results of MediaOne for the full quarter and the nine months ended September 30, 2000, includes the results of MediaOne since the June 15, 2000, date of acquisition, while the comparable periods for 1999 do not include any results of MediaOne. In addition, year-to-date 2000 results include a full nine months of TCI results, while 1999 includes only seven months of TCI results reflecting the March 1999 acquisition. REVENUE Broadband's revenue increased $912 million, or 60.7%, for the third quarter of 2000, and increased $2,212 million, or 63.6%, for the nine months ended September 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, higher revenue from new services (digital video, high-speed data and telephony) and a basic cable rate increase. In addition, revenue for the nine months ended September 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 10.8% in the third quarter of 2000 compared with the third quarter of 1999. Revenue for the nine months ended September 30, 2000, on this same basis and normalized for the TCI acquisition, increased 9.9% compared with the same prior year period. Broadband ended the third quarter of 2000 with 16.1 million basic cable customers, passing approximately 28 million homes, more than 2.5 million digital-video customers, approximately 888,000 high-speed data customers, and provided telephony service to nearly 350,000 customers. While we expect Broadband revenue to continue to grow, the rate of growth may be impacted by slower than anticipated telephony and basic subscriber additions due to increased competition. EBIT/EBITDA EXCLUDING OTHER INCOME EBIT was a deficit of $627 million for the quarter ended September 30, 2000, compared with a deficit of $310 million in 1999. Excluding the impact of our ownership interests in Cablevision and TWE and restructuring and other charges, EBIT for the third quarter of 2000, was a deficit of $431 million, a decline of $233 million from the third quarter of 1999. This decrease was primarily due to the acquisition of MediaOne, increased spending associated with cable telephony and high-speed data services and higher programming costs. These were partially offset by higher revenue and lower equity losses due to dispositions of certain investments in 1999. EBIT for the nine months ended September 30, 2000, was a deficit of $717 million compared with a deficit of $1,187 million in 1999. AT&T Form 10-Q - Part I Excluding the impact of our ownership interests in Cablevision and TWE, certain gains and restructuring and other charges, EBIT was a deficit of $720 million for the nine months ended September 30, 2000, compared with a deficit of $439 million in 1999. The decrease was primarily due to higher expenses associated with high-speed data and telephony services, the acquisition of MediaOne and increased programming costs. Partially offsetting these decreases to EBIT was higher revenue and lower equity losses due to the disposition of certain investments in 1999. EBITDA, excluding other income, for the third quarter was $514 million, an increase of 32.1%, compared with the third quarter of 1999. Excluding the 2000 restructuring and other charges, EBITDA, excluding other income, increased 38.2% to $538 million in the third quarter of 2000. This increase was primarily due to the MediaOne acquisition and higher revenue, partially offset by higher expenses associated with high-speed data and telephony services as well as increased programming costs. EBITDA, excluding other income for the nine months ended September 30, 2000, was $1,253 million compared with $420 million for the same period of 1999. Excluding the 2000 and 1999 restructuring and other charges, EBITDA, excluding other income, increased 42.1% to $1,293 million in 2000. This increase was primarily due to higher revenue, the inclusion of a full nine months of TCI and the acquisition of MediaOne. These increases were partially offset by higher expenses associated with high-speed data and telephony services as well as increased programming costs. OTHER ITEMS Capital additions in the third quarter of 2000 increased 23.8% to $1,247 million, and increased 66.0% to $3,577 million for the nine months ended September 30, 2000. The increases were due to capital expenditures for the launch of new services as well as the MediaOne acquisition. In addition, capital expenditures for the year-to-date period increased due to spending on the upgrade of the cable plant. Capital additions for the year-to-date period were also impacted by increased contributions to various nonconsolidated investments. Total assets were $117,289 million at September 30, 2000, compared with $53,810 million at December 31, 1999. The increase was due to the MediaOne acquisition, and an increase in property, plant and equipment as a result of capital expenditures, partially offset by depreciation expense for the period. These increases were partially offset by a decrease in the mark-to-market valuation of certain investments and lower franchise costs and property, plant property and equipment as a result of the exchange of an entity owning certain cable systems and other assets with Cox for AT&T stock. CORPORATE AND OTHER This group reflects corporate staff functions, the elimination of transactions between segments as well as the results of international operations and ventures and Excite@Home. For the Three For the Nine Months Ended Months Ended September 30, September 30, Dollars in Millions 2000 1999 2000 1999 Revenue $ (21) $144 $ (174) $ 438 EBIT (40) (398) (1,020) (1,165) EBITDA 219 (180) (398) (642) AT&T Form 10-Q - Part I OTHER ITEMS Capital additions $ 1,763 $832 $ 1,955 $ 1,298 At September 30, At December 31, 2000 1999 Total assets $24,484 $15,535 REVENUE Revenue for Corporate and Other primarily includes the elimination of inter-segment revenue of negative $222 million (an increase of $32 million from the third quarter of 1999), revenue from Excite@Home of $79 million (which was consolidated beginning on September 1, 2000), and revenue from our international operations and ventures of $78 million (a decline of $242 million from the third 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, the impact of Concert and Excite@Home was negative $21 million in the third quarter of 2000, compared with negative $47 million for the third quarter of 1999. The improvement was primarily due to higher revenue from Excite@Home. For the first nine months of 2000, revenue for Corporate and Other primarily included the elimination of inter-segment revenue of negative $585 million (an increase of $29 million from the first nine months of 1999), revenue from our international operations and ventures of $262 million (a decline of $682 million from the first nine months of 1999) and revenue from Excite@Home of $79 million (which was consolidated beginning September 1, 2000). 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, the impact of Concert and Excite@Home, was negative $174 million in the first nine months of 2000 compared with negative $223 million for the first nine months of 1999, primarily due to higher revenue from Excite@Home as well as higher revenue from international operations and ventures. EBIT/EBITDA EBIT and EBITDA for Corporate and Other improved $358 million to a deficit of $40 million and improved $399 million to $219 million, respectively, in the third quarter of 2000, compared with the third quarter of 1999. Excluding the third quarter 1999 gain on the sale of AT&T Canada of $110 million, EBIT and EBITDA for Corporate and Other increased $468 million and $509 million, respectively, in the third quarter of 2000, compared with the third 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, lower SG&A expenses, including cost control efforts, and higher other income as a result of increased gains on sales of miscellaneous investments. In addition, equity earnings for Concert were $25 million during the third quarter. EBIT and EBITDA for Corporate and Other improved $145 million to a deficit of $1,020 million and improved $244 million to a deficit of $398 million in the first nine months of 2000, compared with the same period in 1999, respectively. AT&T Form 10-Q - Part I Excluding net restructuring charges of $568 million in 2000 and $212 million in 1999, as well as the 1999 gain on the sale of AT&T Canada of $110 million, EBIT and EBITDA increased $611 million to a deficit of $452 million and increased $710 million to $170 million in the first nine months of 2000, compared with the same period in 1999, respectively. 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 other income as a result of increased gains on sales of miscellaneous investments and higher interest and dividend income as well as cost control efforts. In addition, equity earnings for Concert were $91 million during the first nine months of 2000. Partially offsetting these improvements were higher equity losses from Excite@Home and greater distributions on trust preferred securities. OTHER ITEMS Capital additions for corporate and other increased $931 million, or 111.8%, to $1,763 million in the third quarter of 2000, compared with the same quarter of 1999. For the first nine months of 2000, capital additions increased $657 million, or 50.6%, to $1,955 million compared with the first nine months of 1999. The increase in both periods was primarily driven by our investment in Net2Phone, partially offset by lower investments in international nonconsolidated subsidiaries. Total assets increased $8,949 million during the first nine months of 2000, to $24,484 million primarily due to the consolidation of Excite@Home, our investment in Concert, including the assets contributed by Business Services and Consumer Services, and our investment in Net2Phone. 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 $1,756 million for the quarter ended September 30, 2000, and were $(217) million in the comparable 1999 period. Equity earnings (losses) from LMG were $2,965 million for the first nine months of 2000, compared with $(818) million for the period from the date of acquisition through September 30, 1999. These increases were 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 acquisitions. In particular, TV Guide was acquired by Gemstar in the third quarter of 2000, Flextech was acquired by Telewest in the second quarter of 2000 and General Instrument was acquired by Motorola in the first quarter of 2000. These gains were partially offset by the impairment charges recorded on LMG's investments in Teligent and ICG to reflect other than temporary declines in value. AT&T Form 10-Q - Part I LIQUIDITY For the Nine Months Ended September 30, Dollars in Millions 2000 1999 CASH FLOWS: Provided by operating activities $ 9,174 $ 7,050 Used in investing activities (33,176) (21,353) Provided by financing activities 23,294 11,143 EBITDA $ 16,448 $ 13,921 Net cash provided by operating activities increased $2,124 million for the nine months ended September 30, 2000, compared with the prior year period. The increase was primarily driven by an increase in operating income before depreciation and amortization expense and a decrease in cash tax payments primarily resulting from the first quarter 1999 tax payment on the gain on the 1998 sale of Universal Card Services Inc. These were partially offset by higher interest payments in 2000. Net cash used by investing activities for the nine months ended September 30, 2000, increased $11,823 million compared with the prior year period. The increase was primarily driven by increased acquisitions in 2000, particularly MediaOne and various wireless properties, increased capital expenditures in 2000 primarily attributable to growth in Wireless and Broadband, and our investment in Net2Phone, partially offset by the contribution of $5.5 billion of cash to LMG in 1999. During the first nine months of 2000, net cash provided by financing activities increased by $12,151 million compared with the prior year period. 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 were partially offset by lower proceeds from the issuance of long-term debt and redeemable securities in 1999. At September 30, 2000, we had current assets of $15.5 billion and current liabilities of $51.3 billion. A significant portion of the current liabilities, $32.3 billion, relate to short-term notes, the majority of which was commercial paper or debt with an original maturity of one year or less. We expect that we will retire a portion of the short-term debt with funds that will be generated from the expected mid-2001 initial public offering of AT&T Broadband tracking stock. In addition, we continue to investigate and negotiate other financing alternatives including, the monetization of publicly-held securities, sales of certain non-strategic assets and investments, securitization of certain accounts receivable, and a potential separate debt offering by AT&T Wireless. Since September 30, 2000, we have monetized certain publicly held securities through the issuance of approximately $1 billion of asset-backed debt. Lastly, we are presently in negotiations to increase our $10 billion line of credit to $25 billion. At September 30, 2000, all of the $10 billion line of credit was available for our use. There can be no assurance that we will be able to obtain financing on terms that are acceptable to us. AT&T Form 10-Q - Part I As a result of the announced restructuring plans to create four new companies, AT&T's debt ratings have been under review by the applicable rating agencies. As a result of this review, AT&T's ratings have been either downgraded and /or put on credit watch with negative outlook. These actions will result in an increased cost of future borrowings. Also in connection with our restructuring, we are reviewing our dividend policy as it relates to each of the new companies we will create. The board of directors' review of AT&T's dividend policy will be completed and implemented by the end of the year. We expect that AT&T's dividend prior to the creation of the four new companies as well as the combined dividend of the four new companies will be substantially lower than our current dividend. During the quarter, we granted put options to Cox and Comcast Corporation (Comcast) on shares of Excite@Home Series A common stock having a maximum combined put price of $2.9 billion. The put options provide Cox and Comcast with the right to convert their Excite@Home shares into either AT&T stock or cash at their option, at any time between January 1, 2001 and June 4, 2002, at the higher of (i) $48 per share or (ii) the 30 day average trading price at the time of the exercise. As a result, AT&T could be required to pay the maximum aggregate $2.9 billion put price in January, 2001. Assuming a put price of $48 per share, the maximum number of Excite@Home shares covered by the put would be approximately 60.4 million shares. 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 $16,448 million for the first nine months of the year, an increase of 18.1% over the first nine months of last year. The EBITDA growth was impacted by gains on sales of businesses and investments and other, net restructuring and other charges, and our ownership interests in Cablevision and TWE. Excluding these items, EBITDA increased $2,441 million, or 16.9%, over the first nine months of last year to $16,841 million. The improvement was primarily due to operational efficiencies which resulted in higher operating income before depreciation and amortization, and increased other income. AT&T Form 10-Q - Part I 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 $82,946 million, or 49.0%, to $252,352 million at September 30, 2000, compared with December 31, 1999, primarily due to the impact of the MediaOne acquisition and the consolidation of Excite@Home. Other significant activity included increased property, plant and equipment due to capital expenditures, net of depreciation expense; an increase in licenses resulting from our wireless acquisitions, increased accounts receivable attributable to transactions with Concert; our investment in Net2Phone; and AT&T's investment in Concert, consisting of $1.7 billion of property, plant and equipment and a loan of $1.0 billion. Total liabilities increased $45,102 million, or 54.1%, to $128,490 million at September 30, 2000, compared with December 31, 1999, primarily due to the impact of the MediaOne acquisition and the consolidation of Excite@Home. In addition, total debt increased due to borrowings to fund the MediaOne acquisition. Minority interest increased $6,655 million to $9,046 million primarily reflecting the minority interest of Excite@Home. Total shareowners' equity increased $31,181 million, or 39.5%, to $110,108 million at September 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 AT&T Wireless Group tracking stock. The ratio of total debt to total capital, excluding LMG (debt divided by total debt and equity of AT&T, excluding LMG) was 45.0% at September 30, 2000, compared with 44.3% at December 31, 1999. The equity portion of this calculation includes convertible trust preferred securities. The increase was primarily driven by higher debt associated with the MediaOne merger, almost entirely offset by a higher equity base associated with the MediaOne merger and the AT&T Wireless Group initial public offering. Included in debt is approximately $5.2 billion of notes, which are exchangeable into or collaterialized by Vodafone American Depository Receipts (ADRs) we own. Excluding this debt, the ratio of debt to total capital at September 30, 2000, was 42.8%. The ratio of debt (net of cash) to operational EBITDA was 2.74X at September 30, 2000, compared with 1.75X at December 31, 1999, reflecting additional debt associated with the MediaOne merger. 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 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. AT&T Form 10-Q - Part I Assuming a 10% downward shift in interest rates at September 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 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 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. The impact of the adoption of SFAS No. 133, as amended by SFAS No. 138, on AT&T's results of operations is dependent upon the fair values of our derivatives and related financial instruments at the date of adoption and could result in more pronounced quarterly fluctuations in other income (expense) in future periods. However, had we adopted SFAS No. 133 in the third quarter of 2000, we would have recorded a cumulative effect of an accounting change, net of applicable taxes, of approximately $325 million of income, or $0.08 per diluted share, primarily attributable to fair value adjustments of monetized debt instruments acquired in conjunction with the MediaOne merger, as well as to our warrant portfolio. Management does not expect the impact of the adoption of SFAS No. 133 on our interest rate swap and foreign exchange portfolios to be material to AT&T's results of operations, financial condition, or cash flows. In addition, management is currently reassessing the appropriate classification of certain investment securities that support debt which is indexed to those securities. Had these securities been reclassified from available-for-sale to trading securities during the third quarter, a charge of $235 million, or $0.06 per diluted share, net of applicable taxes, would have been recorded to other income (expense), concurrently with the adoption of SFAS No. 133. As an available-for-sale security, changes in fair value are included within other comprehensive income. 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. Management does not expect the adoption of SAB No. 101 to have a material impact on our results of operations. AT&T Form 10-Q - Part I SUBSEQUENT EVENTS RESTRUCTURING PLAN On October 25, 2000, AT&T announced a restructuring plan designed to create four publicly traded companies from each of our major operating units. AT&T shareowners would ultimately own stock in each of the four businesses. Upon completion of the plan, AT&T Wireless, AT&T Broadband, AT&T Consumer and AT&T Business will all be represented by asset-based or tracking stocks. In the first phase of the restructuring plan, AT&T intends to offer AT&T shareowners the opportunity to exchange their AT&T common stock for AT&T Wireless Group tracking stock. We plan to distribute our remaining interest in AT&T Wireless Group to AT&T shareowners in 2001. AT&T also plans to create a new class of stock to track the economic performance of our AT&T Consumer business and plans to distribute 100% of the tracking stock to AT&T shareowners in the second half of 2001. In addition, depending on market conditions, AT&T plans to conduct an initial public offering of stock that will track the economic performance of our Broadband unit during the summer of 2001. AT&T's ownership interest in Excite@Home will be part of the Broadband entity. AT&T plans to recapitalize the Broadband tracking stock into an asset-based common stock within twelve months of the initial public offering. AT&T Business will be the legal owner of the AT&T brand, which it will license to the other companies. It will also be the parent company of the AT&T Consumer business. The board of directors is reviewing the dividend policy of AT&T before the end of 2000 and AT&T expects that AT&T's dividend prior to the creation of the four new companies as well as the combined dividend of the four new companies will be substantially lower than our current dividend. AT&T does not expect significant downsizing to result from our plans, although each company will continue to size its operations as appropriate. AT&T expects these transactions will be tax-free to U.S. shareholders. Certain aspects of the above transactions remain subject to regulatory and other approvals. OTHER EVENTS AT&T currently holds a 55.62% equity interest in AB Cellular Holding LLC (AB Cellular), which was formed in 1998 with BellSouth, with each party having a 50% voting interest. AB Cellular owns, controls and supervises wireless properties in Los Angeles, Houston and Galveston. Public documents filed by BellSouth indicate that BellSouth anticipates exercising an option available to them pursuant to the AB Cellular LLC Agreement, which would result in AB Cellular redeeming AT&T's interest in AB Cellular in consideration of 100% of the net assets of the Los Angeles property. If this transaction takes place, AT&T anticipates recording a gain and will begin consolidating the results of the Los Angeles property. On November 13, 2000, two of AT&T's wireless affiliates, TeleCorp PCS, Inc. (TeleCorp) and Tritel, Inc., merged as part of a stock transaction. In connection with the merger, AT&T contributed to TeleCorp rights to acquire wireless licenses in Wisconsin and Iowa and $20 million in cash in exchange for approximately 9.3 million shares of common stock in the newly merged entity. In a separate transaction, AT&T exchanged certain wireless licenses and rights to acquire licenses in the Wisconsin and Iowa markets, and made a cash payment of approximately $80 million in return for certain TeleCorp PCS licenses and wireless systems in several New England markets. AT&T expects that these transactions will result in a gain. AT&T Form 10-Q - Part II PART II - OTHER INFORMATION Item 1. Legal Proceedings. MEDIAONE SHAREHOLDER LITIGATION In March 1999, several putative class action complaints were filed against MediaOne Group, Inc. and certain of its officers and directors in Delaware Chancery Court, subsequently consolidated under the caption, In re MediaOne Group Inc. Shareholders Litigation, C.A. No. 17037, alleging that the MediaOne directors had breached their fiduciary duties to MediaOne shareholders by causing MediaOne to enter into a merger agreement with Comcast Corp. without taking the necessary steps to obtain the best price available upon a sale of control of MediaOne. A similar suit was filed in New York Supreme Court, New York County, under the caption Krim v. Cote, et al., No. 99-602028. After the suits were filed, MediaOne terminated the Comcast merger agreement in order to accept a superior proposal from AT&T. Thereafter, on August 13, 1999, a Consolidated and Amended Class Action Complaint was filed in the Delaware action alleging that the MediaOne directors could only fulfill their fiduciary duties in connection with the AT&T merger if, among other things, they caused AT&T to issue one or more tracking stocks as part of the consideration in the merger. On December 6, 1999, with the consent of MediaOne, AT&T announced plans to issue a new class of common stock to track its wireless operations. MediaOne's consent was conditioned upon the agreement of AT&T that no distribution, or setting of a record date for the distribution, of this tracking stock to holders of common stock of AT&T occur prior to the effective time of MediaOne's merger with AT&T. On June 15, 2000, MediaOne consummated its merger with AT&T and became a wholly-owned subsidiary of AT&T. In light of these events, plaintiffs in the MediaOne shareholder actions stipulated to the dismissal of the actions as moot. As part of the stipulation, AT&T agreed to pay and plaintiffs' attorneys agreed to accept the sum of $340 thousand in full satisfaction and discharge of their claim for compensation for legal services performed and reimbursement of expenses incurred in connection with the prosecution of the actions. On August 28, 2000, the Delaware Chancery Court approved the dismissal of the Delaware actions on mootness grounds, conditioned upon the dismissal of the New York action and the provision of notice of the terms of the stipulation in AT&T's next Form 10-Q. OTHER LITIGATION On July 6, 1997, MCI Telecommunications Corp. and Ronald A. Katz Technology Licensing, L.P. filed suit in United States District Court in Philadelphia, Pennsylvania against AT&T. The suit alleged that a number of AT&T services infringe patents owned by Katz but licensed to MCI for enforcement against AT&T. On November 1, 2000, without any admission of liability or wrongdoing of any kind, AT&T settled this matter for an undisclosed amount. In October and November 2000, the Company was named as a defendant in several purported securities class action lawsuits filed in the United States District Courts for the District of New Jersey and for the Southern District of New York purportedly filed on behalf of persons who purchased securities of the Company for various periods from October 25, 1999 through May 1, 2000. These lawsuits assert claims under Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and allege, among other things, that during the period referenced above, the Company made materially false and misleading statements and omitted to state material facts concerning its future business prospects. The complaints seek unspecified damages. The Company believes that the lawsuits are without merit and intends to defend them vigorously. 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 nine months ended September 30, 2000 and 1999 99.2 AT&T Wireless Group financial results and Management's Discussion and Analysis for the three and nine months ended September 30, 2000 and 1999 (b) Reports on Form 8-K Form 8-K-A dated June 15, 2000 was filed pursuant to Item 5 (Other Events) and Item 7 (Financial Statements and Exhibits) on August 29, 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: November 13, 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 nine months ended September 30, 2000 and 1999 99.2 AT&T Wireless Group financial results and Management's Discussion and Analysis for the three and nine months ended September 30, 2000 and 1999 EX-12 2 0002.txt COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Exhibit 12 Form 10-Q For the Nine Months Ended September 30, 2000 AT&T Corp. Computation of Ratio of Earnings to Fixed Charges (Dollars in Millions) (Unaudited) Income before income taxes $9,916 Add net equity investment losses, net of distributions of less than 50% owned affiliates 755 Add fixed charges, excluding capitalized interest 2,671 Total earnings before income taxes and fixed charges $13,342 Fixed Charges: Total interest expense $2,158 Capitalized interest 224 Interest portion of rental expense 243 Dividend requirements on subsidiary preferred stock and interest on trust preferred securities 270 Total fixed charges $ 2,895 Ratio of earnings to fixed charges 4.6 EX-27 3 0003.txt ART. 5 FDS FOR 3RD QUARTER 10-Q
5 This schedule contains summary financial information extracted from the unaudited consolidated balance sheet of AT&T Corp. at September 30, 2000 and the unaudited consolidated statement of income for the nine-month period ended September 30, 2000 and is qualified in its entirety by reference to such financial statements. 1,000,000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 316 0 13,027 1,341 0 15,452 79,618 31,453 252,352 51,344 27,062 7,089 0 6,691 103,417 252,352 0 49,097 0 40,474 0 985 2,158 9,916 2,127 7,789 0 0 0 7,789 1.41 1.40
EX-99 4 0004.txt EXHIBIT 99.1 - LIBERTY MEDIA GROUP FINANCIALS "LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Combined Balance Sheets (unaudited) September 30, December 31, 2000 1999 ------------- -------------- Assets amounts in millions - ------ Current assets: Cash and cash equivalents $ 1,223 1,714 Cash collateral under securities lending agreement (note 7) 208 -- Short-term investments 461 378 Trade and other receivables, net 330 134 Prepaid expenses and committed program rights 501 406 Deferred income tax assets 496 750 Other current assets 22 5 ----------- ------------ Total current assets 3,241 3,387 ----------- ------------ Investments in affiliates, accounted for under the equity method, and related receivables (notes 3 and 4) 20,679 15,922 Investments in available-for-sale securities and others (notes 5, 6 and 7) 26,063 28,601 Property and equipment, at cost 828 162 Less accumulated depreciation 91 19 ----------- ------------ 737 143 ----------- ------------ Intangible assets: Excess cost over acquired net assets (note 6) 11,101 9,973 Franchise costs 190 273 ----------- ------------ 11,291 10,246 Less accumulated amortization 882 454 ----------- ------------ 10,409 9,792 ----------- ------------ Other assets, at cost, net of accumulated amortization 719 839 ----------- ------------ Total assets $ 61,848 58,684 =========== ============ (continued) Combined Balance Sheets (unaudited) September 30, December 31, 2000 1999 ------------- -------------- Liabilities and Combined Equity amounts in millions - ------------------------------- Current liabilities: Accounts payable and accrued liabilities $ 382 245 Accrued stock compensation 1,706 2,405 Program rights payable 179 166 Current portion of debt 237 554 ----------- -------------- Total current liabilities 2,504 3,370 ----------- -------------- Long-term debt (note 7) 5,632 2,723 Deferred income tax liabilities 14,120 14,107 Other liabilities 74 23 ----------- -------------- Total liabilities 22,330 20,223 ----------- -------------- Minority interests in equity of attributed subsidiaries 252 1 Obligation to redeem AT&T Class A Liberty Media Group common stock (note 8) 37 -- Combined equity (note 8): Combined equity 36,048 31,876 Accumulated other comprehensive earnings, net of taxes 3,060 6,557 ----------- -------------- 39,108 38,433 Due to related parties 121 27 ----------- -------------- Total combined equity 39,229 38,460 ----------- -------------- Commitments and contingencies (note 9) Total liabilities and combined equity $ 61,848 58,684 =========== ============== See accompanying notes to combined financial statements. Combined Statements of Operations and Comprehensive Earnings (unaudited) Three months Three months ended ended September 30, September 30, 2000 1999 ------------- ------------- amounts in millions Revenue $ 436 214 Operating costs and expenses: Operating, selling, general and administrative 336 168 Stock compensation (248) (23) Depreciation and amortization 201 164 ------------- ------------- 289 309 ------------- ------------- Operating income (loss) 147 (95) Other income (expense): Interest expense (101) (41) Adjustment to interest expense for contingent portion of exchangeable debentures (note 7) 317 -- Dividend and interest income 53 66 Share of losses of affiliates, net (note 3) (490) (238) Impairment of investments (note 4) (1,350) -- Minority interests in losses of attributed subsidiaries 17 3 Gain on dispositions, net (note 3) 4,395 12 Unrealized losses on financial instruments, net (77) -- Other, net (5) (4) ------------- ------------- 2,759 (202) ------------- ------------- Earnings (loss) before income taxes 2,906 (297) Income tax (expense) benefit (1,150) 80 ------------- ------------- Net earnings (loss) $ 1,756 (217) ------------- ------------- Other comprehensive (loss) earnings, net of taxes: Foreign currency translation adjustments (75) 131 Unrealized holding (losses) gains arising during the period, net of reclassification adjustments (1,861) 308 ------------- ------------- Other comprehensive (loss) earnings (1,936) 439 ------------- ------------- Comprehensive (loss) earnings $ (180) 222 ============= ============= See accompanying notes to combined financial statements.
Combined Statements of Operations and Comprehensive Earnings (unaudited) New Liberty Old Liberty ----------------------------------------------- --------------------- (note 1) (note 1) Nine months Seven months Two months ended ended ended September 30, September 30, February 28, 2000 1999 1999 ---------------------- ---------------------- --------------------- amounts in millions Revenue $ 1,053 506 282 Operating costs and expenses: Operating, selling, general and administrative 805 408 227 Stock compensation (487) 432 183 Depreciation and amortization 604 394 47 ---------------- ---------------- --------------------- 922 1,234 457 ---------------- ---------------- --------------------- Operating income (loss) 131 (728) (175) Other income (expense): Interest expense (276) (87) (28) Adjustment to interest expense for contingent portion of exchangeable debentures (note 7) 153 -- -- Dividend and interest income 218 172 12 Share of losses of affiliates, net (note 3) (1,284) (597) (66) Impairment of investments (note 4) (1,350) -- -- Minority interests in losses of attributed subsidiaries 45 15 4 Gain on dispositions, net (notes 3, 5 and 6) 7,450 10 14 Gains on issuance of equity by affiliates and subsidiaries (note 3) -- -- 389 Unrealized losses on financial instruments, net (77) -- -- Other, net 2 (8) -- ---------------- ---------------- --------------------- 4,881 (495) 325 ---------------- ---------------- --------------------- Earnings (loss) before income taxes 5,012 (1,223) 150 Income tax (expense) benefit (2,047) 405 (209) ---------------- ---------------- --------------------- Net earnings (loss) $ 2,965 (818) (59) ---------------- ---------------- --------------------- Other comprehensive (loss) earnings, net of taxes: Foreign currency translation adjustments (193) 88 (15) Unrealized holding (losses) gains arising during the period, net of reclassification adjustments (3,304) 2,320 971 ---------------- ---------------- --------------------- Other comprehensive (loss) earnings (3,497) 2,408 956 ---------------- ---------------- --------------------- Comprehensive (loss) earnings $ (532) 1,590 897 ================ ================ ===================== See accompanying notes to combined financial statements.
"LIBERTY MEDIA GROUP" (a combination of certain assets, as defined in note 1) Combined Statement of Equity Nine months ended September 30, 2000 (unaudited) Accumulated other comprehensive Due to 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 2,965 -- -- 2,965 Issuance of AT&T Class A Liberty Media Group common stock for acquisitions (note 6) 1,031 -- -- 1,031 Issuances of common stock by attributed subsidiaries and affiliates, net of taxes 322 -- -- 322 Purchase of AT&T Class A Liberty Media Group common stock (112) -- -- (112) Premium received in connection with put obligation, net 7 -- -- 7 Reclassification of redemption amount of AT&T Class A Liberty Media Group common stock subject to put obligation (37) -- -- (37) Utilization of net operating losses of Liberty Media Group by AT&T (4) -- -- (4) Foreign currency translation adjustments -- (193) -- (193) Recognition of previously unrealized gains on available-for-sale securities, net -- (1,479) -- (1,479) Unrealized losses on available-for-sale securities -- (1,825) -- (1,825) Other transfers from related parties, net -- -- 94 94 ------------- ---------------- ----------- ------------- Balance at September 30, 2000 $ 36,048 3,060 121 39,229 ============= ================ =========== ============= 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) Nine months Seven months Two months ended ended ended September 30, September 30, February 28, 2000 1999 1999 ---------------------- ---------------------- --------------------- amounts in millions (see note 2) Cash flows from operating activities: Net earnings (loss) $ 2,965 (818) (59) Adjustments to reconcile net earnings (loss) to net cash (used) provided by operating activities: Depreciation and amortization 604 394 47 Stock compensation (487) 432 183 Payments of stock compensation (292) (42) (126) Share of losses of affiliates, net 1,284 597 66 Deferred income tax expense (benefit) 2,092 (356) 205 Intergroup tax allocation (44) (49) -- Cash payment from AT&T pursuant to tax sharing agreement 138 19 -- Minority interests in losses of attributed subsidiaries (45) (15) (4) Gain on disposition of assets, net (7,450) (10) (14) Impairment of investments 1,350 -- -- Gains on issuance of equity by affiliates and subsidiaries -- -- (389) Noncash interest (143) -- -- Other noncash charges -- 6 9 Changes in operating assets and liabilities, net of the effect of acquisitions and dispositions: Change in receivables (55) (3) (19) Change in prepaid expenses and committed program rights (109) (120) (10) Change in payables and accruals 39 70 4 ----------------- ----------------- ----------------- Net cash (used) provided by operating activities (153) 105 (107) ----------------- ----------------- ----------------- Cash flows from investing activities: Cash paid for acquisitions (669) (3) -- Capital expended for property and equipment (130) (28) (21) Investments in and loans to affiliates and others (2,496) (1,952) (45) Purchases of marketable securities (832) (6,894) (132) Sales and maturities of marketable securities 1,720 3,923 34 Cash proceeds from dispositions 372 90 43 Cash balances of deconsolidated subsidiaries -- -- (53) Other, net 4 1 (9) ----------------- ----------------- ----------------- Net cash used by investing activities (2,031) (4,863) (183) ----------------- ----------------- ----------------- (continued)
Combined Statements of Cash Flows, continued (unaudited) New Liberty Old Liberty ----------------------------------------------- --------------------- (note 1) (note 1) Nine months Seven months Two months ended ended ended September 30, September 30, February 28, 2000 1999 1999 ---------------------- ---------------------- --------------------- amounts in millions (see note 2) Cash flows from financing activities: Borrowings of debt 3,620 2,216 156 Repayments of debt (1,768) (2,166) (148) Premium received on put contracts, net 7 -- -- Purchase of AT&T Class A Liberty Media Group common stock (112) -- -- Cash transfers (to) from related parties (59) (156) 132 Net proceeds from issuance of stock by subsidiaries 33 27 -- Repurchase of stock of subsidiaries -- -- (45) Other, net (28) 17 (1) ----------------- ----------------- --------------------- Net cash provided (used) by financing activities 1,693 (62) 94 ----------------- ----------------- --------------------- Net decrease in cash and cash equivalents (491) (4,820) (196) Cash and cash equivalents at beginning of period 1,714 5,319 407 ----------------- ----------------- --------------------- Cash and cash equivalents at end of period $ 1,223 499 211 ================= ================= ===================== 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 September 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, assets and liabilities attributed to Liberty Media Group 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. For convenience of discussion, assets and properties acquired, owned, or disposed of by subsidiaries of AT&T that are attributed to Liberty Media Group are referred to herein as being acquired, owned or disposed of by Liberty Media Group. At September 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. (continued) 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 of Liberty Media Group 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. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Certain prior period amounts have been reclassified for comparability with the 2000 presentation. (2) Supplemental Disclosures to Combined Statements of Cash Flows Cash paid for interest was $262 million for the nine months ended September 30, 2000, $75 million for the seven month period ended September 30, 1999 and $32 million for the two month period ended February 28, 1999. Cash paid for income taxes for the nine months ended September 30, 2000, the seven months ended September 30, 1999 and the two months ended February 28, 1999 was not significant.
New Liberty Old Liberty ----------------------------------------- ----------------- (note 1) (note 1) Nine months Seven months Two months ended ended ended September 30, September 30, February 28, 2000 1999 1999 -------------------- ------------------- ----------------- amounts in millions Cash paid for acquisitions (note 6): Fair value of assets acquired $ 3,612 5 -- Net liabilities assumed (1,120) (2) -- Deferred tax liability recorded (322) -- -- Minority interests in equity of acquired attributed subsidiaries (470) -- -- AT&T Class A Liberty Media Group common stock issued (1,031) -- -- -------------------- ------------------- ----------------- Cash paid for acquisitions $ 669 3 -- ==================== =================== ================= (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 5) (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:
September 30, December 31, 2000 1999 -------------------------- ------------------------- amounts in millions Gemstar-TV Guide International, Inc. ("Gemstar") $ 6,030 -- Discovery Communications, Inc. ("Discovery") 3,222 3,441 Telewest Communications plc ( "Telewest ") 2,869 1,996 USA Networks, Inc. ( "USAI ") and related investments 2,847 2,699 QVC Inc. ( "QVC ") 2,515 2,515 UnitedGlobalCom, Inc. ("UnitedGlobalCom") 402 505 Teligent, Inc. ( "Teligent") 249 -- TV Guide -- 1,732 Various foreign equity investments (other than Telewest) 1,648 2,190 Other 897 844 ------------------- ------------------- $ 20,679 15,922 =================== =================== (continued)
The following table reflects Liberty Media Group's share of (losses) earnings of affiliates:
New Liberty Old Liberty ------------------------------------------ ----------------- (note 1) (note 1) Nine months Seven months Two months ended ended ended September 30, September 30, February 28, 2000 1999 1999 --------------------- ------------------- ----------------- amounts in millions Gemstar $ (71) -- -- Discovery (219) (154) (8) Telewest (262) (154) (38) USAI and related investments (18) (13) 10 QVC -- (17) 13 UnitedGlobalCom (132) -- -- Teligent (267) -- -- TV Guide (25) (24) -- Other foreign investments (219) (123) (27) Other (71) (112) (16) ------------------ ---------------- ------------------ $ (1,284) (597) (66) ================== ================ ==================
Summarized unaudited combined financial information for affiliates is as follows:
Nine months Seven months Two months ended ended ended September 30, September 30, February 28, 2000 1999 1999 --------------------- ------------------- ------------------ amounts in millions Revenue $ 11,557 6,947 2,341 Operating expenses (10,552) (5,901) (1,894) Depreciation and amortization (2,346) (929) (353) --------------- ---------------- --------------- Operating income (loss) (1,341) 117 94 Interest expense (1,542) (558) (281) Other, net 154 (322) (127) --------------- ---------------- --------------- Net loss $ (2,729) (763) (314) =============== ================ =============== (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 owned on an economic basis approximately 44%, 44% and 12%, respectively, of TV Guide. Immediately following such transactions, News Corp. and Liberty Media Group each had 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). On July 12, 2000, TV Guide and Gemstar completed a merger whereby Gemstar acquired TV Guide. TV Guide shareholders received .6573 shares of Gemstar common stock in exchange for each share of TV Guide. As a result of this transaction, 133 million shares of TV Guide held by Liberty Media Group were exchanged for 87.5 million shares of Gemstar common stock. Following the merger, Liberty Media Group owns approximately 21.4% of Gemstar. Liberty Media Group recognized a $4.4 billion gain (before deducting deferred income taxes of $1.7 billion) on such transaction during the third quarter of 2000 based on the difference between the carrying value of Liberty Media Group's interest in TV Guide and the fair value of the Gemstar securities received. Gemstar is a leading global technology and media company focused on consumer entertainment. The common stock of Gemstar is publicly traded. At September 30, 2000, Liberty Media Group held 87.5 million shares of Gemstar common stock. Gemstar's stock reported a closing price of $87-3/16 per share on September 30, 2000. Telewest currently operates and constructs cable television and telephone systems in the UK. Flextech p.l.c. ("Flextech") develops and sells a variety of television programming in the UK. In April 2000, Telewest acquired Flextech in a merger transaction. 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 has 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 September 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 $1.95 per share on September 30, 2000. (continued) USAI owns and operates businesses in network and television production, television broadcasting, electronic retailing, ticketing operations, and internet services. At September 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 the shares in subsidiaries of USAI 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 September 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 $21-15/16 per share on September 30, 2000. UnitedGlobalCom is a global broadband communications provider of video, voice and data services with operations in over 20 countries throughout the world. At September 30, 2000, Liberty Media Group owned an approximate 10.9% economic ownership interest representing an approximate 36.8% voting interest in UnitedGlobalCom. Liberty Media Group owns 10.5 million shares of UnitedGlobalCom Class B common stock, which stock is convertible, on a one-for-one basis, into UnitedGlobalCom Class A common stock. UnitedGlobalCom's Class A common stock reported a closing price of $30.00 per share on September 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 6). At September 30, 2000, Liberty Media Group held 21.4 million shares of Teligent Class A common stock. Teligent's Class A common stock reported a closing price of $13.00 per share on September 30, 2000. During the third quarter of 2000, Liberty Media Group recognized an impairment charge on their investment in Teligent (see note 4). The $16 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 principally over estimated useful lives of 20 years. (4) Impairment of Investments During the third quarter of 2000, Liberty Media Group determined that its investments in ICG Communications, Inc. and Teligent experienced other than temporary declines in value. As a result, the carrying amounts of these investments were adjusted to their respective fair values at September 30, 2000 based on recent quoted market prices. These adjustments resulted in an impairment charge of approximately $1.35 billion, before deducting a deferred income tax benefit of $534 million. (continued) (5) Investments in Available-for-sale Securities and Others Investments in available-for-sale securities and others are summarized as follows:
September 30, December 31, 2000 1999 --------------------- -------------------- amounts in millions Sprint Corporation ("Sprint PCS") $ 7,580 10,186 Time Warner, Inc. ("Time Warner") 8,842 8,202 News Corp. 3,748 2,403 Motorola, Inc. ("Motorola") 2,146 3,430 Other available-for-sale securities 2,951 3,773 Other investments, at cost, and related receivables 1,257 985 ------------------ ----------------- 26,524 28,979 Less short-term investments 461 378 ------------------ ----------------- $ 26,063 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 connection with the merger Liberty Media Group received 54 million shares and warrants to purchase 37 million shares of Motorola common stock in exchange for its holdings in General Instrument. Liberty Media Group recognized a $2.2 billion gain (excluding related deferred 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. The right to exercise warrants to purchase 18.4 million shares of Motorola common stock is subject to AT&T satisfying the terms of a purchase commitment in 2000. AT&T has agreed to pay Liberty Media Group $4.78 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:
September 30, December 31, 2000 1999 --------------------- -------------------- amounts in millions Equity securities: Fair value $ 23,958 24,472 Gross unrealized holding gains 7,144 11,457 Gross unrealized holding losses (2,013) (646) Debt securities: Fair value 1,109 1,995 Gross unrealized holding gains -- -- Gross unrealized holding losses (9) (22) (continued)
Management estimates the fair market value of all of its investments in available-for-sale securities and others aggregated $26.8 billion and $29.2 billion at September 30, 2000 and December 31, 1999, respectively. Management calculates market values 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. No independent appraisals were conducted for those assets. (6) 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 common 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 common stock, (3) approximately 10.6 million shares of AT&T Class B Liberty Media Group common 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 common stock and AT&T Class B Liberty Media Group common 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 Class A Liberty Media Group common stock, net of the shares of AT&T Class A Liberty Media Group common 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. in exchange for Liberty Media Group's economic interest in approximately 5 million shares of Sprint PCS Group Stock, valued at $300 million. During the third quarter of 2000, TCI Satellite Entertainment, Inc. changed its name to Liberty Satellite & Technology, Inc. ("LSAT"). Liberty Media Group received 150,000 shares of LSAT Series A 12% Cumulative Preferred Stock and 150,000 shares of LSAT 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 LSAT. In connection with this transaction, Liberty Media Group realized a $211 million gain (before related deferred 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 $252 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 common stock and a warrant to purchase approximately 700,000 shares of AT&T Class A Liberty Media Group common 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 $276 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 common stock. The acquisition was accounted for as a purchase. In connection with this acquisition, Liberty Media Group recorded a $108 million increase to combined equity and the $96 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 ("Liberty Livewire"). (continued) On July 19, 2000, Liberty Media Group purchased all of the assets relating to the post production, content and sound editorial businesses of Soundelux Entertainment Group ("Soundelux") for $90 million. Immediately following such transaction, the assets of Soundelux were contributed to Liberty Livewire in exchange for approximately 8.2 million additional shares of Liberty Livewire Class B Common Stock. Following this contribution, Liberty Media Group's ownership in Liberty Livewire increased to approximately 88% of the equity and approximately 99% of the voting power of Liberty Livewire outstanding immediately following the contribution. (7) Long-Term Debt Debt is summarized as follows:
September 30, December 31, 2000 1999 --------------------- -------------------- amounts in millions Parent company debt: Senior notes (a) $ 741 741 Senior debentures (a) 1,486 494 Senior exchangeable debentures (b) 1,679 1,022 Securities lending agreement (c) 595 -- Bank credit facilities 177 390 ----------------- ---------------- 4,678 2,647 Debt of subsidiaries: Bank credit facilities 924 573 Senior notes 174 -- Other debt, at varying rates 93 57 ----------------- ---------------- 1,191 630 ----------------- ---------------- Total debt 5,869 3,277 Less current maturities 237 554 ----------------- ---------------- Total long-term debt $ 5,632 2,723 ================= ================
(a) On July 7, 1999, Liberty Media Group received net cash proceeds of approximately $741 million and $494 million from the issuance of 7-7/8% Senior Notes due 2009 (the "Senior Notes") and 8-1/2% Senior Debentures due 2029 (the "8-1/2% Senior Debentures"), respectively. The Senior Notes, which are stated net of an unamortized discount of $9 million, have an aggregate principal amount of $750 million and the 8-1/2% Senior Debentures, which are stated net of an unamortized discount of $6 million, have an aggregate principal amount of $500 million. Interest on the Senior Notes and the 8-1/2% Senior Debentures is payable on January 15 and July 15 of each year. 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 "8-1/4% Senior Debentures"). The 8-1/4% Senior Debentures, which are stated net of an unamortized discount of $8 million, have an aggregate principal amount of $1 billion. Interest on the 8-1/4% Senior Debentures is payable on February 1 and August 1 of each year. (continued) (b) On November 16, 1999, Liberty Media Group received net cash proceeds of $854 million from the issuance of 4% Senior Exchangeable Debentures due 2030 (the "4% Senior Exchangeable Debentures"). The 4% Senior Exchangeable Debentures have an aggregate principal amount of $869 million. Each debenture has a $1,000 face amount and is exchangeable at the holder's option for the value of 22.9486 shares of Sprint PCS Group Stock. This exchange value will be paid only in cash until the later of December 31, 2001 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 exchange value in cash, Sprint PCS Group Stock or a combination thereof. Interest on the 4% Senior Exchangeable Debentures is payable on May 15 and November 15 of each year. 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 (the "3-3/4% Senior Exchangeable Debentures"). 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. 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 exchange value 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 exchange value in cash, Sprint PCS Group Stock or a combination thereof. Interest on the 3-3/4% Senior Exchangeable Debentures is payable on February 15 and August 15 of each year. The carrying amount of the senior exchangeable debentures is adjusted based on the fair value of the underlying Sprint PCS Group Stock. Increases or decreases in the value of the underlying Sprint PCS Group Stock above the principal amount of the senior exchangeable debentures (the "Contingent Portion") is recorded as an adjustment to interest expense in the combined statements of operations and comprehensive earnings. If the value of the underlying Sprint PCS Group Stock decreases below the principal amount of the senior exchangeable debentures there is no effect on the principal amount of such debentures. (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, which was $595 million at September 30, 2000. 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 unutilized cash collateral of $208 million at September 30, 2000 included $105 million of restricted cash. At September 30, 2000, Liberty Media Group had utilized $387 million of the cash collateral under the securities lending agreement. At September 30, 2000, Liberty Media Group had approximately $414 million in unused lines of credit under its bank credit facilities. The bank credit facilities generally contain restrictive covenants which require the borrowers and certain of their subsidiaries, among other things, to maintain 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 September 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 September 30, 2000 is as follows (amounts in millions): Senior notes of parent company $ 738 Senior debentures of parent company 1,415 Senior exchangeable debentures of parent company 1,448 Senior notes of attributed subsidiary 188 Liberty Media Group believes that the carrying amount of the remainder of its debt approximated its fair value at September 30, 2000. (8) Combined Equity AT&T Class A Liberty Media Group Common Stock In conjunction with a stock repurchase program or similar transaction, Liberty Media Group elected to sell put options on AT&T Class A Liberty Media Group common stock. Proceeds from sales of such put options with respect to AT&T Class A Liberty Media Group common stock are reflected as an increase to combined equity, and an amount equal to the maximum redemption amount under unexpired put options with respect to such common stock is reflected as an "Obligation to redeem AT&T Class A Liberty Media Group common stock" in the accompanying combined balance sheets. (continued) During the nine months ended September 30, 2000, pursuant to a stock repurchase program, 5 million shares of AT&T Class A Liberty Media Group common stock were purchased at an aggregate cost of $112 million. Such amount is reflected as a decrease to combined equity in the accompanying combined financial statements. Stock Issuances of Subsidiaries and Equity Affiliates During the nine months ended September 30, 2000, consolidated subsidiaries and equity affiliates attributed to Liberty Media Group issued shares of common stock in connection with certain acquisitions and the exercise of certain employee stock options. In connection with the increase in the issuers' equity, net of the dilution of Liberty Media Group's ownership interest, that resulted from such stock issuances, Liberty Media Group recorded increases to combined equity as follows (amounts in millions): Stock issuances by consolidated subsidiaries $ 240 Stock issuances by equity affiliates (net of deferred tax expense of $42 million) 82 $ 322 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. In September 2000, certain officers of Liberty Media Group purchased a 6% common stock interest in an attributed subsidiary for $1.3 million. Such subsidiary owns an indirect interest in an entity that holds certain of Liberty Media Group's investments in satellite and technology related assets. Liberty Media Group and the officers entered into a shareholders agreement in which the officers could require an attributed subsidiary of Liberty Media Group to purchase, after five years, all or part of their common stock interest in exchange for AT&T Class A Liberty Media Group common stock at the then fair market value. In addition, Liberty Media Group has the right to repurchase the common stock interests held by the officers at fair market value at any time. Transactions with AT&T 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 $184 million, $125 million and $43 million for the nine months ended September 30, 2000, the seven months ending September 30, 1999 and the two month period ending February 28, 1999, respectively. AT&T allocates certain corporate general and administrative costs to Liberty Media Group pursuant to an intergroup agreement. Management believes such allocation methods are reasonable. In addition, there are arrangements between subsidiaries attributed to Liberty Media Group and AT&T and its other subsidiaries for satellite transponder services, marketing support, programming, and hosting services. These expenses aggregated $26 million, $21 million and $3 million during the nine months ended September 30, 2000, the seven months ended September 30, 1999 and the two months ended February 28, 1999, respectively, and are included in operating, selling, general and administrative expenses in the accompanying combined statements of operations and comprehensive earnings. 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. (9) Commitments and Contingencies Starz Encore Group LLC ("Starz Encore Group"), a subsidiary that is attributed to the Liberty Media 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 2013 (the "Film Licensing Obligations"). Based on customer levels at September 30, 2000, these agreements require minimum payments aggregating approximately $1.3 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. Certain subsidiaries attributed to Liberty Media Group have guaranteed various loans, notes payable, letters of credit and other obligations (the "Guaranteed Obligations") of certain affiliates. At September 30, 2000, the Guaranteed Obligations aggregated approximately $583 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 PCS Securities") of Sprint PCS 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 PCS Securities sufficient to cause Liberty Media Group to beneficially own no more than 10% of the outstanding Series 1 PCS Stock of Sprint PCS on a fully diluted basis on such date. On or before May 23, 2004, the Trustee must divest the remainder of the Sprint PCS Securities beneficially owned by Liberty Media Group. The Final Judgment requires that the Trustee vote the Sprint PCS 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 PCS Securities, with certain exceptions, without the prior written consent of the DOJ. Subsidiaries attributed to Liberty Media Group lease business offices, have entered into pole rental and transponder lease agreements and use certain equipment under lease arrangements. Subsidiaries attributed to Liberty Media Group have contingent liabilities related to legal proceedings and other matters arising in the ordinary course of business. Although it is reasonably possible that these subsidiaries 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 5 0005.txt EXHIBIT 99.2 - AT&T WIRELESS SERVICES FINANCIALS AT&T WIRELESS GROUP COMBINED STATEMENTS OF OPERATIONS (Dollars in Millions) (Unaudited) For the Three For the Nine Months Ended Months Ended September 30, September 30, 2000 1999 2000 1999 REVENUE Services revenue $2,509 $1,867 $6,741 $4,928 Equipment revenue 290 182 733 562 Total revenue 2,799 2,049 7,474 5,490 OPERATING EXPENSES Costs of services and products 1,381 993 3,639 2,743 Selling, general and administrative 946 655 2,459 1,833 Depreciation and amortization 445 333 1,216 917 Total operating expenses 2,772 1,981 7,314 5,493 OPERATING INCOME (LOSS) 27 68 160 (3) Other income (expense) 78 (4) 386 180 Interest expense 4 32 73 102 Income before income taxes 101 32 473 75 Provision for income taxes 80 14 226 31 Net income $ 21 $ 18 $ 247 $ 44 Dividend requirements on preferred stock held by AT&T, net 42 14 88 41 Net (loss) income after preferred stock dividends $ (21) $ 4 $ 159 $ 3 See Notes to Combined Financial Statements AT&T WIRELESS GROUP COMBINED BALANCE SHEETS (Dollars in Millions) September 30, December 31, 2000 1999 (Unaudited) ASSETS Cash and cash equivalents $ 5 $ 5 Accounts receivable, less allowances of $156 and $130 1,845 1,300 Note receivable from AT&T 2,794 - Inventories 366 162 Deferred income taxes 145 127 Prepaid expenses and other current assets 68 34 TOTAL CURRENT ASSETS 5,223 1,628 Property, plant and equipment, net of accumulated depreciation of $4,927 and $4,033 8,654 6,349 Licensing costs, net of accumulated amortization of $1,685 and $1,519 10,457 8,571 Investments 4,918 4,502 Goodwill and other assets, net of accumulated amortization of $461 and $385 3,793 2,462 TOTAL ASSETS $33,045 $23,512 LIABILITIES Accounts payable $ 906 $ 921 Payroll and benefit-related liabilities 373 291 Debt maturing within one year 154 154 Other current liabilities 1,183 931 TOTAL CURRENT LIABILITIES 2,616 2,297 Long-term debt due to AT&T 1,800 3,400 Deferred income taxes 3,950 3,750 Other long-term liabilities 176 48 TOTAL LIABILITIES 8,542 9,495 MINORITY INTEREST 1 20 EQUITY Preferred stock held by AT&T 3,000 1,000 Combined equity 21,491 12,971 Accumulated other comprehensive income 11 26 TOTAL EQUITY 24,502 13,997 TOTAL LIABILITIES AND EQUITY $33,045 $23,512 See Notes to Combined Financial Statements AT&T WIRELESS GROUP COMBINED STATEMENTS OF CHANGES IN EQUITY (Dollars in Millions) (Unaudited) For the Nine Months Ended September 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 after preferred stock dividends 159 3 Proceeds attributed from initial public offering 7,000 - Proceeds from shares issued for employee plans 16 - Transfers from AT&T, net 1,345 2,261 Balance at end of period 21,491 12,799 ACCUMULATED OTHER COMPREHENSIVE INCOME Balance at beginning of period 26 (3) Net revaluation of investments (15) 22 Balance at end of period 11 19 TOTAL EQUITY $24,502 $13,818 SUMMARY OF TOTAL COMPREHENSIVE INCOME Net income after preferred stock dividends $ 159 $ 3 Dividend requirements on preferred stock held by AT&T, net 88 41 Net income 247 44 Net revaluation of investments (net of taxes of $10 and ($14)) (15) 22 TOTAL COMPREHENSIVE INCOME $ 232 $ 66 See Notes to Combined Financial Statements AT&T WIRELESS GROUP COMBINED STATEMENTS OF CASH FLOWS (Dollars in Millions) (Unaudited) For the Nine Months Ended September 30, 2000 1999 Operating Activities Net income $ 247 $ 44 Adjustments to reconcile net income to net cash provided by operating activities: Gains on sale/exchange of investments (167) (99) Depreciation and amortization 1,216 917 Deferred income taxes 193 (21) Net equity earnings from investments (72) (69) Minority interests in consolidated subsidiaries (18) (10) Provision for uncollectibles 200 137 Increase in accounts receivable (634) (375) (Increase) decrease in inventories (186) 84 Decrease in accounts payable (195) (169) Net change in other operating assets and liabilities 277 88 NET CASH PROVIDED BY OPERATING ACTIVITIES 861 527 INVESTING ACTIVITIES Net increase in note receivable from AT&T (2,794) - Capital expenditures and other additions (3,010) (1,376) Net acquisitions of licenses (218) (32) Equity investment distributions and sales 319 178 Equity investment contributions and purchases (122) (172) Net (acquisitions) dispositions of businesses including cash acquired (3,168) 244 NET CASH USED IN INVESTING ACTIVITIES (8,993) (1,158) Financing Activities Increase in short-term borrowings - 48 Increase in long-term debt due to AT&T 400 700 Proceeds attributed from initial public offering 7,000 - Proceeds from shares issued for employee plans 16 - Dividend requirements on preferred stock, net (88) (41) Transfers from (to) AT&T, net 806 (71) Other financing activities, net (2) (16) NET CASH PROVIDED BY FINANCING ACTIVITIES 8,132 620 Net decrease in cash and cash equivalents - (11) Cash and cash equivalents at beginning of period 5 27 Cash and cash equivalents at end of period $ 5 $ 16 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 September 30, 2000. See note (f) for additional information on the exchange and distribution of the remaining interest held by AT&T. 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, June 30, 2000, and September 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 September 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 does not expect the adoption of SAB No. 101 to have a material impact on the AT&T Wireless Group's results of operations, financial position or cash flows. 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. Based on the types of contracts we currently have, 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. Based on the types of contracts we currently have, management does not expect this statement to have a material impact on the AT&T Wireless Group's results of operations, financial position or cash flows. (c) ACQUISITIONS AND DIVESTITURES In November 1998, the AT&T Wireless Group and BellSouth combined their jointly owned cellular properties in Los Angeles, Houston and Galveston, plus cash, to form AB Cellular Holding, LLC (AB Cellular), which continues to own, control and supervise all three properties. The AT&T Wireless Group holds a 55.62% equity interest in AB Cellular, however, holds a 50% voting interest, therefore, this investment is accounted for under the equity method. Pursuant to the AB Cellular Limited Liability Company Agreement, there are redemption provisions that allow BellSouth, during the 30-day period commencing December 13, 2000, to alter the ownership structure of AB Cellular pursuant to one of three options. The AT&T Wireless Group has similar rights that commence December 13, 2001. Public documents filed by BellSouth, reflect that BellSouth anticipates selecting the structure that would result in AB Cellular redeeming the AT&T Wireless Group's interest in AB Cellular in consideration of 100% of the net assets of the Los Angeles property. If this option is selected, the AT&T Wireless Group anticipates that it will recognize a significant gain on the redemption of its interest in AB Cellular and is currently assessing the impact to its financial statements as a result of the consolidation of the Los Angeles property. On September 29, 2000, AT&T Wireless Group signed an agreement to exercise its options to purchase additional shares of stock in its 14% equity investment in Taiwan, Far EasTone Telecommunications, ltd. The number of shares received and the total exercise price are dependent on the number of options exercised by all optionees, however the maximum commitment for the AT&T Wireless Group is not expected to exceed $250 or to increase the AT&T Wireless Group's ownership interest above 30%. The transaction is expected to close during the fourth quarter of 2000. 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 September 29, 2000, the AT&T Wireless Group completed the acquisition of the wireless system in San Diego, for approximately $500 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 (the Bay Area Properties), which holds a 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. These transactions were recorded under the purchase method of accounting. The excess of aggregate purchase price over the fair value of net tangible assets acquired, based on preliminary allocations, totaled $2,094 and has been assigned to licensing costs, goodwill and other intangible assets and is being amortized over periods of five to 40 years. This allocation includes adjustments made during the third quarter of 2000, related to valuation adjustments for the Bay Area Properties. We may make refinements to the allocations of the purchase prices 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 transaction related to the Houston wireless system has been approved by the boards of directors of AT&T and the selling entity, however, is subject to certain federal regulatory approvals, which the AT&T Wireless Group expects will result in ownership adjustments in an existing Houston market. This transaction is expected to close during the fourth quarter 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 $792 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, 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. 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 September 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 September 30, 2000, would not be material to the combined financial statements. The AT&T Wireless Group has a commitment to purchase handsets totaling $132 at September 30, 2000. 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 the three and nine months ended September 30, 2000, totaled $60 and $127, respectively. The intercompany interest income was determined based upon the methodology described in Note (a) and is included within other income (expense) 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 September 30, 2000 and December 31, 1999, respectively. Intercompany interest expense was $37 and $52 for the three months ended September 30, 2000, and 1999, respectively, of which $36 and $22, respectively, was capitalized. Intercompany interest expense was $158 and $155 for the nine months ended September 30, 2000 and 1999, respectively, of which $94 and $59, respectively, was capitalized. As of September 30, 2000, $37 of intercompany interest payable was included within other current liabilities on the accompanying combined balance sheet. The 9% cumulative preferred stock was $3.0 billion as of September 30, 2000, and $1.0 billion as of December 31, 1999. Dividend requirements were $42 and $14 for the three months ended September 30, 2000 and 1999, respectively, and $88 and $41 for the nine months ended September 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 months ended September 30, 2000 and 1999, these amounts totaled $63 and $39, respectively. For the nine months ended September 30, 2000 and 1999, these amounts totaled $179 and $111, 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 $15 and $10 for the three months ended September 30, 2000 and 1999, respectively, and $41 and $30 for the nine months ended September 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. Effective April 1, 2000, the aforementioned sales force became employees of the AT&T Wireless Group. These charges amounted to $52 for the three months ended September 30, 1999, and $67 and $156 for the nine months ended September 30, 2000 and 1999, respectively. The AT&T Wireless Group purchases their administrative telephone services from AT&T. These amounts are included within selling, general and administrative expenses and totaled $27 and $19 for the three months ended September 30, 2000 and 1999, respectively, and $75 and $50 for the nine months ended September 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 $85, as of September 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 for both the three months ended September 30, 2000 and 1999, respectively, and costs of services and products included $9 and $4 for the three months ended September 30, 2000 and 1999, respectively, for the billing and collection fees charged by AT&T. Selling, general and administrative expenses included $29 and $25 for the nine months ended September 30, 2000 and 1999, respectively, and costs of services and products included $28 and $20 for the nine months ended September 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 $6 and $8, to AT&T for reimbursement of its costs associated with these services for the three months ended September 30, 2000 and 1999, respectively. The AT&T Wireless Group paid $16, to AT&T for reimbursement of its costs associated with these services for each of the nine months ended September 30, 2000 and 1999. The AT&T Wireless Group incurs various operating expenses on behalf of LA Cellular, which the AT&T Wireless Group owns through its equity interest in AB Cellular, which are reimbursed to the AT&T Wireless Group. Accounts receivable, on the accompanying combined balance sheet, includes $167 related to these receivables at September 30, 2000. (f) SUBSEQUENT EVENTS On November 13, 2000, TeleCorp PCS, Inc. (Telecorp) completed its merger agreement with Tritel, Inc., as part of a stock transaction. Pursuant to the terms of the agreement, each company merged with a separate newly formed subsidiary of a new holding company named TeleCorp PCS, Inc., upon consummation of the transaction. Prior to the merger, the AT&T Wireless Group held equity interests in each of TeleCorp and Tritel which were both affiliates of the AT&T Wireless Group. In connection with the merger, the AT&T Wireless Group contributed to TeleCorp PCS, Inc., rights to acquire additional wireless licenses in Wisconsin and Iowa, paid approximately $20 in cash and extended the term of its brand license agreement through July 2005, in exchange for approximately 9.3 million common shares in the newly combined company. This transaction will bring the AT&T Wireless Group's equity stake in the combined company to approximately 23%, assuming the conversion of all currently convertible preferred stock to common stock. In a separate transaction with TeleCorp, the AT&T Wireless Group completed an exchange of certain wireless licenses and rights to acquire licenses in the Wisconsin and Iowa markets, as well as made a cash payment of approximately $80. In return, the AT&T Wireless Group received TeleCorp's PCS licenses and wireless systems in several New England markets. The AT&T Wireless Group anticipates it will recognize a significant gain on the transactions. On October 25, 2000, AT&T announced its intention to dispose of its remaining interest in the AT&T Wireless Group tracking stock, which has been approved by AT&T's Board of Directors. AT&T intends to offer AT&T common shareowners the opportunity to exchange AT&T common stock for AT&T Wireless Group tracking stock. AT&T plans to distribute its remaining interest in the AT&T Wireless group tracking stock to AT&T common shareowners in 2001. Upon completion of the exchange offer and distribution, AT&T intends to convert the AT&T Wireless Group tracking stock into an asset-based AT&T Wireless common stock and distribute to its shareowners. On October 2, 2000, the AT&T Wireless Group completed its acquisition of several equity interests in international ventures acquired by AT&T as a result of its acquisition of MediaOne in June 2000. The AT&T Wireless Group acquired these interests from AT&T for approximately $1 billion in cash, which was determined based upon a third party valuation. Additionally, the AT&T Wireless Group assumed deferred tax liabilities totaling approximately $220 which were transferred from AT&T. On October 2, 2000, the AT&T Wireless Group completed its acquisition of a wireless system in Indianapolis for approximately $530 in cash. The transaction was recorded under the purchase method of accounting. 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 September 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. On October 25, 2000, AT&T announced its intention to dispose of its remaining interest in the AT&T Wireless Group tracking stock, which has been approved by AT&T's Board of Directors. AT&T intends to offer AT&T common shareowners the opportunity to exchange AT&T common stock for AT&T Wireless Group tracking stock. AT&T plans to distribute its remaining interest in the AT&T Wireless group tracking stock to AT&T common shareowners in 2001. Upon completion of the exchange offer and distribution, AT&T intends to convert the AT&T Wireless Group tracking stock into an asset-based AT&T Wireless common stock and distribute to its shareowners. 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. On September 29, 2000, the AT&T Wireless group completed the acquisition of a wireless system in San Diego, which covers a population base of 3 million potential customers. Also, during the third quarter, the AT&T Wireless Group completed its acquisition of a wireless system on the Big Island of Hawaii. Combined, these two markets served more than 180 thousand subscribers as of September 30, 2000. In June 2000, the AT&T Wireless Group closed the acquisition of the remaining 50% partnership interest it 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 the acquisition date, served nearly 1 million subscribers. The acquisition of the wireless systems in San Diego and the Bay Area was announced in conjunction with the signing of an agreement to purchase a wireless system in Houston, which is expected to close during the fourth quarter of 2000. 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 thousand subscribers as of the acquisition date. 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 mid-west markets by adding approximately 450 thousand subscribers as of the acquisition date. 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, revenue, 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 NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THE THREE AND NINE MONTHS ENDED SEPTEMBER 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 36.6% to $2,799 million, and increased 36.2% to $7,474 million for the three and nine months ended September 30, 2000, respectively, compared with the respective prior year periods. The AT&T Wireless Group's results include the revenue associated with the Bay Area Properties since June 29, 2000, and Vanguard Cellular Systems, Inc. (Vanguard Cellular) since its acquisition on May 3, 1999. Total revenue increased 29.7% for the nine months ended September 30, 2000, compared with the same period for 1999, adjusted to exclude the Bay Area Properties for the three months ended September 30, 2000, and 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 for both the three and nine months ended September 30, 2000, were primarily due to growth in our mobility business revenue, driven by strong consolidated subscriber growth. Additionally, an increase in average monthly revenue per user (ARPU) for the nine months ended September 30, 2000, compared with the respective prior year period, contributed to the year-to-date revenue growth. AT&T Digital One Rate service, including additional calling plans introduced in August 2000 as well as the AT&T Regional and Digital advantage plans announced during the second quarter of 2000, continues to contribute to growth in subscribers as well as an increase in ARPU. Services revenue for the three months ended September 30, 2000, was $2,509 million, an increase of $642 million, or 34.3%, compared with the respective period in 1999. Services revenue for the nine months ended September 30, 2000, was $6,741 million, an increase of $1,813 million, or 36.8%, compared with the respective period in 1999. As of September 30, 2000, the AT&T Wireless Group had over 12.6 million consolidated subscribers, an increase of 38.4%, compared with the prior year, of which 87.5% were digital subscribers, up from 73.5% as of September 30, 1999. Included in these figures were over 180 thousand subscribers from our acquisitions of the San Diego and Hawaii wireless systems during the third quarter of 2000, 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 thousand subscribers from our acquisition of Wireless One in June 2000. Net consolidated wireless subscriber additions in the third quarter totaled 750 thousand, a 195.1% increase over the prior year quarter. AT&T Wireless Group's average monthly churn rate in the third quarter of 2000 was 2.9% compared with 2.6% in the third quarter of 1999. The AT&T Wireless Group's average monthly churn for the nine months ended September 30, 2000, was 2.8% compared with 2.6% in the respective period in 1999. Total subscribers, including partnership markets in which the AT&T Wireless Group does not own a controlling interest, were nearly 15 million at the end of the third quarter of 2000, a 26.2% increase over the prior year quarter. Ending total subscribers included approximately 450 thousand 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 September 30, 2000, was $68.5, an increase of $0.3, or 0.4%, compared with the same period in 1999, and for the nine months ended September 30, 2000, ARPU was $69.1, an increase of $3.7, or 5.7%, compared with the same period in 1999. The increase was 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 three and nine months ended September 30, 2000, excluding the AT&T Wireless Group. Equipment revenue for the three months ended September 30, 2000, was $290 million, an increase of $108 million, or 59.9%, compared with the same period in 1999. Equipment revenue for the nine months ended September 30, 2000, was $733 million, an increase of $171 million, or 30.6%, compared with the same period in 1999. These increases were primarily due to 85.5% and 47.4% increases in gross consolidated subscriber additions in the three and nine months ended September 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 nine months ended September 30, 2000, were $1,381 million and $3,639 million, respectively. This was an increase of $388 million, or 39.2%, for the three months ended September 30, 2000, and $896 million, or 32.7%, for the nine months ended September 30, 2000, compared with the same periods in 1999. These increases were due primarily to increases in the handsets provided to subscribers which were attributable to the increase in gross subscriber additions. Additionally, growth in the subscriber base and increased minutes of use per subscriber 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 12.5% and 3.0% for the three and nine months ended September 30, 2000, respectively, compared with the same periods 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 nine months ended September 30, 2000, were $946 million and $2,459 million, respectively, compared with $655 million and $1,833 million for the three and nine months ended September 30, 1999. These increases were largely attributable to higher marketing and selling costs, primarily advertising and commissions, associated with the increase in gross consolidated subscriber additions for the three and nine months ended September 30, 2000, compared to 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 $359 and $357 for the three and nine months ended September 30, 2000, compared with $369 and $353 for the three and nine months ended September 30, 1999. In addition, growth in the wireless customer base resulted in an increase in information technology and customer care related expenses. Depreciation and amortization Depreciation and amortization expenses for the three months ended September 30, 2000, were $445 million, an increase of $112 million, or 33.4%, compared with the third quarter of 1999. Depreciation and amortization expenses for the nine months ended September 30, 2000, were $1,216 million, an increase of $299 million, or 32.5%, compared with the first nine months 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. Additionally, amortization expense increased for the nine months ended September 30, 2000, as a result of the 1999 acquisitions of Vanguard Cellular and Honolulu Cellular, and the acquisitions of the Bay Area Properties and Wireless One in 2000. Total capital expenditures were $920 million and $3,043 million for the three and nine months ended September 30, 2000, respectively. Other income (expense) Other income (expense) 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 (expense) for the three and nine months ended September 30, 2000, was $78 million and $386 million, respectively. Other income (expense) for the three and nine months ended September 30, 1999, was expense of $4 million and income of $180 million, respectively. The increase for the three months ended September 30, 2000 was due primarily to intercompany interest income on the note receivable from AT&T. The increase for the nine months ended September 30, 2000, was due primarily to intercompany interest income on the note receivable from AT&T, as well as higher gains on the sales of assets. Interest expense Interest expense consists primarily of interest on intercompany debt due to AT&T less interest expense capitalized. Interest expense for the third quarter of 2000, was $4 million, a decrease of $28 million, or 88.5%, compared with the third quarter of 1999. Interest expense for the first nine months of 2000 was $73 million, a decrease of $29 million, or 28.4%, compared with the first nine months of 1999. The decrease for the third quarter of 2000, compared with the third 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 third quarter of 2000 versus the prior year quarter. For the nine months ended September 30, 2000, the decrease in interest expense was due to decreased levels of outstanding debt, as well as increased capitalized interest, partially offset by a higher interest rate. Provision for income taxes The provision for income taxes for the three and nine months ended September 30, 2000, was $80 million and $226 million, respectively, compared with $14 million and $31 million for the same periods in 1999, respectively. The increases for both the three and nine month periods were due to higher income before taxes and higher effective tax rates. The effective income tax rates for the three and nine month periods ended September 30, 2000 were 78.9% and 47.8%, respectively, compared with 49.3% and 41.2%, for the same periods in 1999, respectively. The effective income tax rate for the three months ended September 30, 2000, was impacted by the increase in the estimated annual effective tax rate. The annual estimated effective income tax rate of 47.8% increased from the estimated rate of 39.3% as of June 30, 2000. The annual estimated effective income tax rate was impacted by acquisitions closed during the quarter as well as foreign equity investments. The effective income tax rate for each of the 1999 periods presented was impacted by the benefit from a 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 September 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 nine months ended September 30, 2000, were $42 million and $88 million, respectively, and for the corresponding periods in 1999 were $14 million and $41 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 $2,332 million for the nine months ended September 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 may issue short term floating rate debt to the AT&T Wireless Group. In addition, AT&T is considering a debt offering by 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. 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. 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, including short term floating rate debt from AT&T and/or third-party debt. 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 nine months ended September 30, 2000, was $861 million, compared with $527 million for the same period in 1999. The increase in cash provided by operating activities was primarily due to an increase in operating income excluding depreciation and amortization, resulting from revenue growth and expense leveraging, an increase in deferred income taxes, and an increase in other operating and payroll related liabilities, partially offset by increases in inventories and accounts receivable. Net cash used in investing activities for the nine months ended September 30, 2000, was $8,993 million, compared with $1,158 million for the nine months ended September 30, 1999. The increase was due primarily to the issuance of a note receivable from AT&T, acquisitions of the Bay Area Properties, Wireless One, and the San Diego property, 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 nine months ended September 30, 2000, was $8,132 million, compared with $620 million for the nine months September 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 nine months ended September 30, 2000, was $472 million and $1,376 million, respectively, compared with $401 million and $914 million for the same periods in 1999. The increases were primarily the result of revenue growth and lower off-network roaming expenses. These improvements were partially offset by increased customer acquisition costs associated with the increase in gross subscriber additions, increased network costs attributable to the growth in subscribers and their minutes of use, and increased information technology costs to support growth in the subscriber base. For our mobility business, EBITDA, excluding other income, for the three and nine months ended September 30, 2000, was $522 million and $1,503 million, respectively, compared with $421 million and $973 million for the same periods in 1999. For our fixed wireless business, EBITDA, excluding other income, for the three and nine months ended September 30, 2000, were deficits of $49 million and $123 million, respectively, compared with deficits of $17 million and $49 million for the same periods in 1999. EBITDA, excluding other income, margins were 16.8% and 18.4% for the third quarter and first nine months of 2000, respectively, compared with 19.6% and 16.6% for the third quarter and first nine months of 1999, respectively. The decline in EBITDA, excluding other income, margins for the third quarter of 2000, compared to the third quarter of 1999, was primarily due to increased customer acquisition costs associated with the 85.5% quarter over quarter growth in gross consolidated subscriber additions, as well as increased cost of handsets sold, partially offset by declining roaming expenses. The improvement in EBITDA, excluding other income, margins for the first nine months of 2000, compared to the first nine months of 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 associated with growth in the subscriber base. EBITDA, excluding other income, margins for our mobility business were 18.7% and 20.1% for the third quarter and first nine months of 2000, respectively, compared with 20.5% and 17.7% for the third quarter and first nine months of 1999, respectively. FINANCIAL CONDITION Total assets were $33,045 million as of September 30, 2000, an increase of $9,533 million, or 40.5%, compared with December 31, 1999. The increase was due primarily to increases in goodwill, licensing costs, property, plant and equipment, and other assets associated with the acquisitions of the Bay Area Properties, Wireless One, and the San Diego property, the initial public offering proceeds attributed to the AT&T Wireless Group from AT&T in the form of an intercompany note receivable, and increased property, plant and equipment as a result of significant capital spending in the first nine months 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 $8,542 million as of September 30, 2000, a decrease of $953 million, or 10.0%, 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 nine months ended September 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 September 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 $24,502 million as of September 30, 2000, an increase of $10,505 million, or 75.1%, 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 does not expect the adoption of SAB No. 101 to have a material impact on the AT&T Wireless Group's results of operations, financial position or cash flows. 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. Based on the types of contracts we currently have, 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. Based on the types of contracts we currently have, management does not expect this statement to have a material impact on the AT&T Wireless Group's results of operations, financial position or cash flows. SUBSEQUENT EVENTS On November 13, 2000, TeleCorp PCS, Inc. (Telecorp) completed its merger agreement with Tritel, Inc., as part of a stock transaction. Pursuant to the terms of the agreement, each company merged with a separate newly formed subsidiary of a new holding company named TeleCorp PCS, Inc., upon consummation of the transaction. Prior to the merger, the AT&T Wireless Group held equity interests in each of TeleCorp and Tritel which were both affiliates of the AT&T Wireless Group. In connection with the merger, the AT&T Wireless Group contributed to TeleCorp PCS, Inc., rights to acquire additional wireless licenses in Wisconsin and Iowa, paid approximately $20 million in cash and extended the term of its brand license agreement through July 2005, in exchange for approximately 9.3 million common shares in the newly combined company. This transaction will bring the AT&T Wireless Group's equity stake in the combined company to approximately 23%, assuming the conversion of all currently convertible preferred stock to common stock. In a separate transaction with TeleCorp, the AT&T Wireless Group completed an exchange of certain wireless licenses and rights to acquire licenses in the Wisconsin and Iowa markets, as well as made a cash payment of approximately $80 million. In return, the AT&T Wireless Group received TeleCorp's PCS licenses and wireless systems in several New England markets. The AT&T Wireless Group anticipates it will recognize a significant gain on the transactions. On October 25, 2000, AT&T announced its intention to dispose of its remaining interest in the AT&T Wireless Group tracking stock, which has been approved by AT&T's Board of Directors. AT&T intends to offer AT&T common shareowners the opportunity to exchange AT&T common stock for AT&T Wireless Group tracking stock. AT&T plans to distribute its remaining interest in the AT&T Wireless group tracking stock to AT&T common shareowners in 2001. Upon completion of the exchange offer and distribution, AT&T intends to convert the AT&T Wireless Group tracking stock into an asset-based AT&T Wireless common stock and distribute to its shareowners. On October 2, 2000, the AT&T Wireless Group completed its acquisition of several equity interests in international ventures acquired by AT&T as a result of its acquisition of MediaOne in June 2000. The AT&T Wireless Group acquired these interests from AT&T for approximately $1 billion in cash, which was determined based upon a third party valuation. Additionally, the AT&T Wireless Group assumed deferred tax liabilities totaling approximately $220 million which were transferred from AT&T. On October 2, 2000, the AT&T Wireless Group completed its acquisition of a wireless system in Indianapolis for approximately $530 million in cash. The transaction was recorded under the purchase method of accounting. -----END PRIVACY-ENHANCED MESSAGE-----