-----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, NIiVFsOqww8hPXa8Zc9apB01B5OaI/wU7Iv82zJOXEYxvQIMHxs4X9GY7W8vuSVi OpvIjVZGURzBr9iu1es4xw== 0000005907-01-000012.txt : 20010409 0000005907-01-000012.hdr.sgml : 20010409 ACCESSION NUMBER: 0000005907-01-000012 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 19 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AT&T CORP CENTRAL INDEX KEY: 0000005907 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 134924710 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-01105 FILM NUMBER: 1589806 BUSINESS ADDRESS: STREET 1: 32 AVENUE OF AMERICAS CITY: NEW YORK STATE: NY ZIP: 10013-2412 BUSINESS PHONE: 9082214268 MAIL ADDRESS: STREET 1: 32 AVENUE OF AMERICAS CITY: NEW YORK STATE: NY ZIP: 10012-2412 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN TELEPHONE & TELEGRAPH CO DATE OF NAME CHANGE: 19920703 10-K405 1 0001.txt 10K REPORT FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Fiscal Year Ended December 31, 2000 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Transition Period From _________ to _________ Commission File Number 1-1105 AT&T CORP. A NEW YORK I.R.S. EMPLOYER CORPORATION NO. 13-4924710 32 Avenue of the Americas, New York, New York 10013-2412 Telephone Number 212-387-5400 Securities registered pursuant to Section 12(b) of the Act: See attached SCHEDULE A. Securities registered pursuant to Section 12(g) of the Act: None. 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........ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not con-tained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] At February 28, 2001, the aggregate market value of voting common stock held by non-affiliates was approximately $129.7 billion. At February 28, 2001, 3,807,460,036 shares of AT&T common stock, 362,750,025 shares of AT&T Wireless Group tracking stock, 2,363,738,198 shares of Class A Liberty Media Group tracking stock and 206,221,288 shares of Class B Liberty Media Group tracking stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the registrant's definitive proxy statement dated March 29, 2001 issued in connection with the annual meeting of shareholders (Part III) SCHEDULE A Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered Common Shares # New York, Boston, Chicago, (Par Value $1 Per Share) #### Philadelphia and Pacific # Stock Exchanges AT&T Wireless Group Tracking Stock # (common, Par Value $1 Per Share) # # Class A Liberty Media Group Tracking #### New York Stock Exchange Shares (common, Par Value $1 Per Share) # # Class B Liberty Media Group Tracking # Shares (common, Par Value $1 Per Share) # Thirty-Five Year 5-1/8% Debentures, due # April 1, 2001 # # Ten Year 7-1/8% Notes, due January 15, 2002 # # Three Year 61/2% Notes due September 15, 2002 # # Five Year 5 5/8% Notes due March 15, 2004 # # Ten Year 6-3/4% Notes, due April 1, 2004 # # Ten Year 7% Notes, due May 15, 2005 # # Twelve Year 7-1/2% Notes, due June 1, 2006 ###### New York Stock Exchange # Twelve Year 7-3/4% Notes, due March 1, 2007 # # Ten Year 6% Notes due March 15, 2009 # # Thirty Year 8-1/8% Debentures, due # January 15, 2022 # # Thirty Year 8.35% Debentures, due # January 15, 2025 # # Thirty-Two Year 8-1/8% Debentures, due # July 15, 2024 # # Thirty Year 61/2% Notes due March 15, 2029 # # Forty Year 8-5/8% Debentures, due # December 1, 2031 # PART I ITEM 1. BUSINESS. GENERAL AT&T Corp. was incorporated in 1885 under the laws of the State of New York and has its principal executive offices at 32 Avenue of the Americas, New York, New York 10013-2412 (telephone number 212-387-5400). AT&T is among the world's communications leaders, providing voice, data and video communications services to large and small businesses, consumers and government entities. AT&T and its subsidiaries furnish domestic and international long distance, regional, local and wireless communications services, cable (broadband) television and Internet communications services. AT&T also provides billing, directory, and calling card services to support its communications business. AT&T's primary lines of business are business services; consumer services; broadband services; and wireless services. In addition, AT&T's other lines of business include network management and professional services through AT&T Solutions and international operations and ventures. Internet users can access information about AT&T and its services at www.att.com. Our web site is not a part of this Form 10-K. AT&T has four classes or series of common stock outstanding. Throughout this document: o AT&T Wireless Group refers to the business, assets and liabilities whose financial performance and economic value we intend to reflect in the AT&T Wireless Group Tracking Stock; o Liberty Media Group refers to the business, assets and liabilities whose financial performance and economic value we intend to reflect in the Liberty Media Group tracking stock; o AT&T, the Company or the AT&T Common Stock Group refers to the business, assets and liabilities whose financial performance and economic value is not reflected in either of the two tracking stocks and that we intend to reflect in the Common Stock; and o AT&T Corp. refers to the combined legal entity. RESTRUCTURING On October 25, 2000, AT&T Corp. announced its intention to split-off the AT&T Wireless Group from AT&T. In addition, AT&T announced its intention to fully separate, or issue separate tracking stocks intended to reflect the financial performance and economic value of, each of AT&T's other major units: AT&T Broadband, AT&T Business Services and AT&T Consumer Services. AT&T Corp. also announced its plan to distribute all the common stock it holds in Liberty Media Corporation in exchange for all the outstanding shares of Liberty Media Group tracking stock. AT&T Corp. expects the separations of AT&T Wireless Group and Liberty Media Corporation to occur around the middle of 2001. Later in the year, AT&T Corp. plans to create and issue new tracking stocks intended to reflect the financial performance and economic value of the AT&T Broadband unit and the AT&T Consumer Services unit. Within about a year after the issuance of these new tracking stocks, AT&T Broadband is expected to be fully separated from the rest of AT&T. Upon that separation, the AT&T Business Services unit and the separately tracked AT&T Consumer Services unit would constitute one publicly traded company, and AT&T Broadband would constitute a separate publicly traded company. The various elements of the plan are not conditioned on the successful completion of all elements of the plan. Many of these steps, however, are subject to conditions, including IRS rulings, shareholder approvals and other uncertainties. If we fail to satisfy any conditions, or if other unforeseen events intervene, some or all of our currently planned steps could occur on a different timetable or on different terms than we currently contemplate, or might not occur at all. AT&T Wireless Group is a part of AT&T Corp. However, in connection with AT&T Corp.'s restructuring plan, subject to specified conditions, AT&T Corp. intends to split-off AT&T Wireless Group from AT&T Corp. These conditions include the receipt of a favorable ruling on the split-off from the IRS and satisfaction of conditions contained in AT&T's new $25 billion credit agreement, including the repayment of AT&T Wireless Group's intercompany obligations to AT&T. AT&T Corp. expects that this split-off would be accomplished through the following steps, any or all of which may be effected simultaneously: o Transfer all of the assets and liabilities of AT&T Wireless Group to AT&T Wireless Services, Inc. o Mandatorily exchange, in accordance with the terms of AT&T's charter, all issued and outstanding shares of AT&T Wireless Group tracking stock for shares of AT&T Wireless Services common stock. o Mandatorily convert DoCoMo's interest in AT&T Corp., including its warrants, into shares of AT&T Wireless Services common stock, or in the case of the warrants, into warrants to purchase AT&T Wireless Services common stock. o Distribute on a pro rata basis to holders of AT&T common stock all shares of AT&T Wireless Services held by AT&T other than any of these shares retained by AT&T or shares subject to certain adjustment arrangements. After the mandatory exchange is completed, holders of AT&T Wireless Group tracking stock who do not hold shares of AT&T common stock will no longer be shareholders of AT&T. In the mandatory exchange, those holders of AT&T Wireless Group tracking stock will receive shares of common stock of AT&T Wireless Services. AT&T has announced its intention to retain up to $3 billion of the shares of AT&T Wireless Services, Inc. for its own account for sale, exchange or monetization within six months of the split-off, subject to receipt of a satisfactory IRS ruling. AT&T Corp. does not plan to seek any vote of holders of AT&T common stock or AT&T Wireless Group tracking stock for the split-off of AT&T Wireless Services from AT&T Corp. DEVELOPMENT OF BUSINESS DURING PAST FIVE YEARS Separation In 1996 AT&T separated its business into three publicly held stand-alone companies: the current AT&T, focused on communications and information services; Lucent Technologies Inc. (Lucent), focused on communications systems and technology; and NCR Corporation (NCR), focused on transaction-intensive computing. AT&T distributed to its shareowners all of the shares AT&T owned of Lucent on September 30, 1996 and all of the shares of NCR on December 31, 1996. Asset Sales Following the separation, AT&T focused on its core businesses and disposed of assets and businesses that were not strategic. In October 1996, AT&T completed the sale of its majority interest in AT&T Capital Corporation (leasing services business). In 1997, AT&T completed the sales of AT&T Skynet (satellite services), AT&T Tridom (satellite data and video communications services), and its submarine systems business, as well as its investment in DirectTV (direct-broadcast television service and DSS equipment business). In addition, in 1998 AT&T sold AT&T Universal Card Services, Inc. (credit card services business), American Transtech Inc. (customer care services), its investment in LIN Television Corporation (commercial television broadcasting), and its investment in SmarTone Telecommunications Holdings Limited (a wireless joint venture in Hong Kong). In 1999, AT&T sold its interest in Wood-TV (commercial television broadcasting), AT&T Language Line Services (over the phone interpretation business) and ACC Corp.'s operations in Europe (telecommunications services). TCG Acquisition During 1998, AT&T engaged in a series of transactions to further transform the Company from one dominated by a single product, domestic long distance telecommunications, to a fully integrated, any distance, broadband communications service provider. In July 1998, AT&T completed the merger with Teleport Communications Group (TCG) pursuant to which each share of TCG was exchanged for AT&T Common Stock in an all-stock transaction. TCG was the largest competitive local exchange carrier (CLEC) in the United States, offering comprehensive telecommunications services in major metropolitan markets throughout the United States. TCI Acquisition On March 9, 1999, AT&T completed the acquisition of Tele-Communications, Inc. (TCI) in a merger. In the merger, AT&T acquired all the business and assets of the TCI Group (now referred to as AT&T Broadband), which consisted primarily of TCI's domestic cable and telecommunications operations, as well as TCI's interest in At Home Corporation (Excite@Home) in exchange for approximately 664 million shares of Common Stock. AT&T Common Stock continues to represent an interest in the business and assets of the historical AT&T together with those assets acquired in the merger. In addition, at the time of the merger TCI combined Liberty Media Group, its programming arm, and TCI Ventures Group, its technology investments unit, to form the new Liberty Media Group. The shareowners of the new Liberty Media Group were issued separate tracking stock rather than traditional Common Stock by AT&T Corp. in exchange for the shares held in Liberty Media Group and TCI Ventures Group. Under the tracking stock arrangement, the Liberty Media Group's earnings and losses are excluded from earnings available to the holders of Common Stock and the Liberty Media Group's businesses and assets are managed by a separate operating Board of Directors. As a result, although the Liberty Media Group is wholly owned by AT&T Corp., it is accounted for as an investment under the equity method of accounting in the consolidated financial statements of AT&T Corp. since AT&T does not have a "controlling financial interest" in the Liberty Media Group. IBM Global Network Acquisition On April 30, 1999, AT&T completed the first phase of its acquisition of the IBM Global Network business (renamed AT&T Global Network Services or AGNS) by obtaining the IBM Global Network assets in the United States. The non-U.S. assets were acquired in phases throughout 1999 and during the first quarter 2000. Under the terms of the agreement, AT&T acquired the global network of IBM, and the two companies entered into outsourcing agreements with each other. At the time of acquisition, AGNS served the networking needs of several hundred large global companies, tens of thousands of mid-sized businesses and more than one million individual Internet users in 59 countries. Vanguard Acquisition On May 3, 1999, AT&T acquired Vanguard Cellular Systems, Inc. (Vanguard), an independent operator of wireless telephone systems in the United States with over 700,000 subscribers and which operates in markets with a population of approximately 6.9 million. Vanguard served 26 markets in the Eastern United States. Consummation of the acquisition resulted in the issuance of approximately 12.6 million shares of AT&T common stock and the payment of approximately $485 million in cash. Comcast Corporation Exchange On May 4, 1999, AT&T and Comcast announced an agreement to exchange various cable systems, designed to improve each company's geographic coverage by better clustering its systems. On January 2, 2001 AT&T and Comcast completed the transfer of cable systems serving a total of nearly 1.5 million customers. With the completion of this transaction, Comcast assumed the ownership of AT&T Broadband systems serving about 773,000 customers in the areas of Avalon, N.J.; Detroit, Mich.; Naples and Fort Myers, Fla.; Pottsville, Penn.; Royal Oak, Mich; and Washington, D.C. AT&T Broadband assumed ownership of select Comcast cable systems serving approximately 700,000 customers in the areas of Atlanta, Ga.; Broward County, Fla.; Chicago, Ill.; Longmont, Colo.; Sacramento, Calif.; and Westmoreland, Penn. Cox Communications, Inc. Exchange On July 6, 1999, AT&T and Cox Communications, Inc. (Cox) signed an agreement whereby AT&T would redeem approximately 50.3 million shares of AT&T common stock held by Cox in exchange for cable television systems serving approximately 312,000 customers, our interest in certain investments and approximately $750 million in other consideration, including cash. The transaction is valued at approximately $2.7 billion. The transaction closed in March 2000. Concert On January 5, 2000 AT&T and British Telecommunications plc (BT) announced the financial closure of a global venture to serve the communications needs of multinational companies and the international calling needs of businesses around the world. The venture, named Concert, is owned equally by AT&T and BT and combined transborder assets and operations of each company, including their existing international networks, their international traffic, their transborder products for business customers -- including an expanding set of Concert services -- and AT&T and BT's multinational accounts in selected industry sectors. MediaOne Group, Inc. Acquisition On June 15, 2000, AT&T completed a merger with MediaOne Group, Inc. (MediaOne) in a cash and stock transaction valued at approximately $45 billion. At the time of the acquisition, MediaOne was one of the largest broadband communications companies in the United States. 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. Wireless Acquistions 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 million 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. On December 29, 2000, the AT&T Wireless Group completed the acquisition of the Houston wireless system for approximately $984 million in cash. At Home Corporation 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 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 of AT&T's Series A shares into Series B shares, each of which has 10 votes. As a result of these governance changes, AT&T gained a controlling interest and began consolidating Excite@Home's results upon the closing of the transaction on September 1, 2000. As of December 31, 2000, AT&T had, on a fully diluted basis, approximately 23% of the economic interest and 74% of the voting interest in Excite@Home. 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). 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. In January 2001, Cox and Comcast exercised their put options in exchange for AT&T common stock. AT&T is currently in discussions to renegotiate the terms of the put options which may result in a change to the number of shares. 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 will each 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 distribution agreements through that period. AB Cellular On December 29, 2000, AT&T Wireless completed the disposition of its equity interest in AB Cellular to BellSouth. Prior to this date, AT&T held 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 owned, controlled and supervised wireless properties in Los Angeles, Houston and Galveston. BellSouth exercised an option available to them, which resulted in AB Cellular redeeming AT&T's interest in AB Cellular in exchange for 100% of the net assets of the Los Angeles property. BUSINESS SERVICES Business Services provides a variety of global communications services to large domestic and multinational businesses, small and medium-sized businesses, and government agencies. Business units within this group provide regular and custom voice services (including local, long distance, and international outbound, 800, 877, and 888 and 900 services), Data and Internet Protocol Services (including private line, frame relay, asynchronous transfer mode services) as well as hosting, outsourcing and other consulting services. Business Services has a dedicated sales force through which it markets its voice and data communication services. Sales forces predominantly are divided into geographic markets, and in each market focus on large, multinational corporations, small businesses, government markets, and value-added resellers and other wholesalers. Business Services employs full service support teams to provide significant customer support and service to ensure customer satisfaction and retention. A small number of its larger accounts are served directly by Concert, with Business Services as an underlying supplier to Concert. Business Services offers its regulated services in most cases in accordance with applicable tariffs filed with the Federal Communications Commission (FCC) and various states. Rates can vary by a number of factors, including the volume and nature of service committed to AT&T. AT&T expects to offer its interstate services on a detariffed basis later this year. AT&T Business Services offers voice and data services individually and in combination with other offerings. Through combined offerings, AT&T provides customers with benefits such as single billing, unified services for multilocation companies and customized calling plans. Voice Services Long distance voice services. Business Services' voice communication offerings include the traditional "one plus" dialing of domestic and international long distance for customers that select AT&T as their primary long distance carrier. Business Services also offers toll free (800, 888 or 877) inbound service, where the receiving party pays for the call. This is used in a wide variety of applications, many of which generate revenue for the user (such as reservation centers or customer service centers). AT&T offers a variety of features to enhance customers' toll free service, including call routing by origination point and time of day routing. Business Services also offers a variety of calling cards which allow the user to place calls from virtually anywhere in the world. Additional features include prepaid calling cards, conference calling, international origination, information service access (such as weather or stock quotes), speed dialing and voice messaging. Business Local Services. Local carriers provide local exchange, exchange access, toll, and resold services; sell, install and maintain customer premises equipment; and provide operator and directory services. The market for local exchange services consists of a number of distinct service components. These service components are defined by specific regulatory tariff classifications including: (i) local network services, which generally include basic dial tone charges and private line services; (ii) network access services, which consist of access charges received by local exchange carriers (LECs) from long distance carriers for the local transport and termination portion of long distance telephone calls; (iii) long distance network services, which include the variable portion of charges received by local exchange carriers for intra-LATA long distance calls; and (iv) additional value added services such as caller identification, call waiting, call forwarding, three way calling and voice mail. AT&T Business Local's customers are principally telecommunications-intensive businesses, healthcare, and educational institutions, governmental agencies, long distance carriers and resellers, Internet service providers, disaster recovery service providers and wireless communications and financial services companies. AT&T Business Local's centrally managed customer care and support operations are designed to facilitate the installation of new services and the processing of orders for changes and upgrades in customer services. With a direct sales force in each of its markets, AT&T Business Local initially targets the large telecommunications-intensive businesses concentrated in the major metropolitan markets served by its networks. AT&T Business Local also serves small- and medium-sized business customers. AT&T Business Local generally offers its services in accordance with applicable tariffs filed with state regulatory agencies (for intrastate services). AT&T Business Local typically offers local service as part of a package of services, which can include any combination of other AT&T offerings. Customers also choose among analog, digital voice-only and ISDN Centrex telephone lines to their desktops. AT&T owns, houses, manages and maintains the switch, while customers retain control over network configurations, allowing customers to add, delete and move lines as needed. For local service, customers are billed a fixed charge plus usage. Data and Internet Services Business Services' data services include private line and special access services that use high-capacity digital circuits to carry voice, data and video (or multimedia) transmission from point-to-point in multiple configurations. These services provide high-volume customers with a direct connection to an AT&T switch instead of switched access shared by many users. These services permit customers to create internal computer networks, access external computer networks and the Internet, as well as reduce originating access costs. Enhanced Data Communications. Enhanced data services consist of interexchange data networks utilizing packet switching and transmission technologies and application services, such as Internet access and Web Site hosting and management, which utilize the frame relay network. Enhanced data services enable customers to economically and securely transmit large volumes of data typically sent in bursts from one site to another. Enhanced data services are utilized for local area network (LAN) interconnection, remote site, point of sale and branch office communications solutions. AT&T utilizes both IP and ATM systems. Both technologies offer significant efficiencies over circuit switched systems which use a single, dedicated circuit to complete each transmission. ATM switching is also a more efficient method of switching and transmitting comingled or multimedia information. The packet switching technology breaks up a transmission into short pieces, or packets, which are encoded and transmitted with other packets on the same circuit, and reassembled at the desired destination. ATM differs from IP in that the data packets used in ATM (called cells) are one size (53 bytes) whereas in IP the data packets vary in length. Also, whereas ATM establishes virtual circuits to ensure that the information sent is reassembled at its destination in its proper sequence, IP ships each packet of information to its destination by a different path. While AT&T will continue to have both circuit and packet switching and transmission technologies for some time, significant future capital expenditures are not scheduled for circuit switching. AT&T Business Internet Services. AT&T WorldNet Business Services provides IP connectivity and IP value-added services, messaging, and electronic commerce services to businesses. AT&T offers Managed Internet Services, which gives customers dedicated, high-speed access to the public Internet for business applications at a variety of speeds and types of access, as well as Business Dial Service, a dial-up version of Internet access designed to meet the needs of small- and medium-sized businesses. AT&T Virtual Private Network (VPN) Service allows businesses to obtain remote access to e-mail, order entry systems, employee directories, human resources and other databases, or to create an Intranet and extranets with their clients, suppliers and business partners, and enables customers to tailor their VPNs to accommodate specific business applications, performance requirements or the need to integrate with existing data networks. AT&T Web Services are a family of hosting and transaction services and platforms serving the web needs of thousands of businesses. Offers include AT&T Shared Hosting Services, an economical way for businesses to establish a presence on the World Wide Web, and AT&T Enhanced Web Development Package for businesses that want to create web sites that require higher performance and can support greater user demand. AT&T Dedicated Hosting Service provides customizable and pre-packaged Web hosting solutions. AT&T SecureBuy Service provides the backoffice infrastructure required to electronically process credit card transactions online, high-speed links into two of the leading credit card processing services, and management reports that measure a site's success. Other IP services AT&T offers let Web site visitors click on a "call me now" icon if they wish to speak to a customer service agent; connect enterprise networks that use host or LAN-based and browser-based e-mail systems to AT&T's value-added messaging services such as e-mail and fax; and enhanced fax services. Transport Business Services is one of the leaders in providing wholesale networking services to other carriers, providing both network capacity and switched services. AT&T offers a combination of high-volume transmission capacity, conventional dedicated line services and dedicated switched services to Internet service providers (ISPs) and Tier 1 and Tier 2 carriers on a national or regional basis, as well as switchless resale services to Tier 3 carriers. Wholesale networking service is typically provided pursuant to long-term service agreements for terms of one year or longer. These agreements generally provide for payments at fixed rates based on the capacity and length of the circuit used. Customers are typically billed on a monthly basis and also may incur an installation charge or certain ancillary charges for equipment. After contract expiration, the contracts may be renewed or the services may be provided on a month-to-month basis. Switched services agreements are generally offered on a month-to-month basis and the service is billed on a minutes-of-use basis. More recently, AT&T has also sold network capacity through indefeasible rights of use agreements under which capacity is furnished for contract terms as long as 25 years. CONSUMER SERVICES Long Distance Voice AT&T is the leading provider of domestic and international long distance service to residential consumers in the United States. AT&T provides regular and custom long distance communications services which it offers individually and in combination with other services. AT&T provides interstate and intrastate long distance telecommunications services throughout the continental United States and provides, or joins in providing with other carriers, telecommunications services to and from Alaska, Hawaii, Puerto Rico and the Virgin Islands and international telecommunications services to and from virtually all nations and territories around the world. Consumers can use AT&T domestic and international long distance services by the traditional "one plus" dialing of the desired call destination, by dial-up access or through the use of AT&T calling cards. AT&T purchases transport services from Concert for the delivery and receipt of AT&T's international service. In accordance with the terms of the operating agreements Concert has with foreign carriers throughout the world, the cost of transporting AT&T's traffic is sensitive to changes in international settlement rates and international traffic routing patterns. In the continental United States, AT&T provides long distance telecommunications services over AT&T's backbone network. International telecommunications services are provided by submarine cable systems in which AT&T holds investment positions, satellites and facilities of other domestic and foreign carriers. AT&T markets its consumer long distance services in a variety of ways, including by means of television advertising, direct mail solicitations and telephonic solicitations, as well as through brand awareness. AT&T charges customers based on applicable tariffs filed with the FCC and individual states. Customers select different services and from various rate plans which determine the price per minute that they pay on their long distance calls. Rates typically vary based on a variety of factors, particularly the volume of usage and the day and time that calls are made. Consumer Local Services Local carriers provide local exchange, calling features (such as call waiting and three-way calling), voice mail, exchange access, toll, and other services, including operator and directory assistance and emergency services (911/E-911). Increasingly, local carriers are adding high speed data services to their offerings, using digital subscriber loop ("DSL") technology. By attaching extra electronics to both ends of a copper loop, local carriers can transform the loop into a broadband gateway capable of supporting upstream and downstream data feeds at high rates of speed. By the end of 2000, AT&T offered local service to residential customers using non facilities-based connectivity (resold/combined incumbent LEC (ILECs) networks and services) in 8 states, and offered facilities-based cable telephony services in 16 states. AT&T currently is testing DSL-based offerings to add to its package of services. Notwithstanding its substantial efforts, AT&T continues to experience significant difficulty entering local markets. AT&T's ability to purchase combined network elements from the ILECs, one of the primary methods AT&T intends to use to provide local service to residential customers, continued to be severely hampered by, among other factors, ILEC-sponsored regulatory and judicial actions, and lack of operating interfaces necessary to process network element orders with ILECs. Despite strong customer demand for competitive choice in local markets outside of AT&T's cable footprint, AT&T has suspended sales of resold local service, and continues to provide network element non facilities-based local service only in New York and Texas. AT&T will continue its regulatory efforts to improve operating margins in the states where it offers non-facilities-based local services, and will seek to open other states to competitive opportunities (both for voice and data services) by improving the rates, rules and operating interfaces that govern carrier relationships. AT&T also has pursued local entry by transforming the cable footprint of one-way cable plant into a two-way, broadband network capable of meeting the full spectrum of residential customer communications needs, including a richly featured all distance (i.e., local, long distance, international) voice telephony offering. AT&T uses existing circuit switched technology to provide telephony service offers over the cable plant in 18 markets spanning 16 states. AT&T expects to begin to transition to an integrated Internet protocol (IP) packet data architecture by the end of 2003 that affords cost and feature benefits over the older circuit-switched technology. In addition, AT&T, through AT&T Consumer Services as well as its other business units, may pursue other economically feasible transport options, including: o Expanding AT&T's ability to offer the full range of consumer services beyond our existing cable footprint through a variety of partnership and investment initiatives; o Continued investment in alternative narrowband, wideband and broadband access technologies, including the fixed wireless technology that AT&T is currently testing in select markets, and the construction of dedicated, high-capacity access facilities to serve the broadband communication needs of residential customers living in multiple dwelling units (MDUs); and o Using combinations of ILEC unbundled network elements, as well as ILEC unbundled loops (which can be combined with switching, transport and other network elements) to support differentiated voice and data services. AT&T uses the AT&T Broadband sales force actively to solicit cable customers as local service customers. AT&T intends to offer cable and local telephony as a services package to those customers who find this appealing. AT&T will market local service in other areas as it rolls out its local telephony capabilities. AT&T currently offers its local subscribers a suite of offers including "blocks of time" for toll and long distance calls at a flat price, or per minute charges using one of AT&T's competitive service offerings. AT&T WorldNet(R) Consumer Services AT&T offers dial-up Internet access to consumers through its award-winning AT&T WorldNet Services, a leading provider of Internet access service in the United States. At December 31, 2000, AT&T WorldNet Service had approximately 1.423 million customers. In 1999, AT&T WorldNet Service began offering members an AT&T branded search engine as part of a redesign of the Company's web site, and enhanced several other subscriber features, including increasing the disk storage space for personal web pages to 10 megabytes for each e-mail id (six e-mail ids per account, 60 megabytes of disk storage) and providing a template that helps members build personal web pages quickly and easily. In 2000, AT&T WorldNet Service began offering members Internet service that includes a persistently present toolbar that displays advertising to subscribers even when they were on web sites other than those operated by AT&T. This new service was marketed directly by AT&T WorldNet Service and indirectly through several major distribution arrangements. J.D. Power and Associates ranked AT&T WorldNet Service #1 in Customer Satisfaction among the largest national Internet Service Providers in their 2000 National Internet Service Provider Customer Satisfaction StudySM based on 4,173 responses. AT&T earned its top position of overall customer satisfaction based on seven factors, including speed/availability, cost/billing/image, suitability of services/content, customer care/technical support, e-mail services, navigation/access to other portals and ease of use. In November, PC World gave AT&T WorldNet Service their Best Buy award, noting AT&T's outstanding dial-up speed, high connection success rate, extras like multiple e-mail boxes, and superior support. AT&T WorldNet Services generates revenues principally through subscription and usage fees, as well as from electronic commerce and advertising revenues. AT&T WorldNet Service offers a variety of pricing plan options, including bundled options with AT&T Long Distance and AT&T Wireless offers. Generally, customers are charged a flat rate for a certain number of hours with charges for each additional hour of usage. In addition, WorldNet offers a plan without a usage restriction. AT&T WorldNet Service's marketing programs are designed to attract and retain profitable customers. AT&T seeks to build brand recognition and customer loyalty and to make it easy for consumers to try, and stay with, AT&T WorldNet Service. In addition to direct marketing through brand name mass advertising, direct mail and magazine insert promotions and bundling offers, AT&T WorldNet Service maintains a large indirect channel marketing effort. Through this indirect channel AT&T WorldNet Service software is bundled in new computers produced by major manufacturers, and is included on millions of software titles published by independent software vendors. AT&T WorldNet Service also has a co-branded ISP offer enabling businesses to offer customers their own branded, full-featured Internet access in affiliation with AT&T. BROADBAND SERVICES AT&T Broadband offers a variety of services through its cable broadband network, including traditional analog video and new services such as digital cable, AT&T@Home and RoadRunner (which AT&T has agreed to divest, as described below), which offers high-speed cable Internet service. Also included in AT&T Broadband are the operations associated with developing and refining the infrastructure that support broadband telephony. Cable television systems receive video, audio and data signals transmitted by nearby television and radio broadcast stations, terrestrial microwave relay services and communications satellites. Such signals are then amplified and distributed by coaxial cable and optical fiber to the premises of customers who pay a fee for the service. In many cases, cable television systems also originate and distribute local programming. At December 31, 2000 over 75% of AT&T Broadband's cable television systems had bandwidth capacities of at least 550 megahertz, with the majority of the network upgraded to 750 megahertz. The Company's cable television systems generally carry up to 80 analog channels. Compressed digital video technology converts on average twelve analog signals (now used to transmit video and voice) into a digital format and compresses such signals (which is accomplished primarily by eliminating the redundancies in television imagery) into the space normally occupied by one analog signal. The digitally compressed signal is uplinked to a satellite, which retransmits the signal to a customer's satellite dish or to a cable system's headend to be distributed, via optical fiber and coaxial cable, to the customer's home. At the home, a set-top video terminal converts the digital signal into analog channels that can be viewed on a normal television set. Domestic Basic-TV cable customers served by AT&T Broadband are summarized as follows (amounts in millions):
Basic-TV customers at December 31, ---------------------------------------------- 2000 1999 1998 1997 1996 ---- -------- -------- -------- ------ Managed through AT&T Broadband's operating divisions 16.0 11.4 11.4 14.2 13.4 Other non-managed subsidiaries of AT&T Broadband 7.6 0.1 0.5 0.2 0.5 ----- ------- ------- ------- ------- 23.6 11.5 11.9 14.4 13.9 ==== ======= ======= ======= =======
In addition to the above, the FCC has taken the position that AT&T Broadband is attributed with the subscribers of (i) Time Warner Entertainment and Time Warner, Inc. as a consequence of the acquisition of MediaOne, Inc. and (ii) various other entities as a consequence of AT&T's investments in those entities. As of December 31, 2000 the aggregate attributable subscribers is 11.22 million. AT&T Broadband had approximately 2.9 million digital video customers and 1.1 million high speed cable Internet customers through Excite@Home and Road Runner as of December 31, 2000. AT&T Broadband completed a significant number of transactions in 2000 which substantially changed the size and profile of its cable system network. On January 18, 2000, a subsidiary of AT&T Broadband sold its entire 50 percent interest in Lenfest Communications, Inc. to a subsidiary of Comcast. In consideration for its 50 percent interest, AT&T Broadband received 47,289,843 shares of Comcast Special Class A common stock, which had a value of $2.51 billion at the time of the transaction. On February 14, 2000, AT&T Broadband redeemed a portion of its interest in Bresnan for $285 million in cash. AT&T Broadband then contributed its remaining interest in Bresnan to CC VIII, LLC, in exchange for a preferred ownership interest. On March 15, 2000, AT&T Broadband redeemed approximately 50.3 million shares of Common Stock held by Cox in exchange for stock of a subsidiary of AT&T Broadband owning cable television systems serving over 300,000 customers, AT&T Broadband's interest in certain investments, and $750 million in other assets, including cash. This transaction was valued at approximately $2.7 billion. On April 7, 2000, AT&T Broadband contributed 103,000 subscribers into a joint venture with Midcontinent Communications, Inc. in exchange for a 50 percent interest in Midcontinent Communications, a general partnership. On June 15, 2000, MediaOne Group, Inc. merged into a direct subsidiary of AT&T Broadband. With the addition of MediaOne's five million cable subscribers, AT&T Broadband became the country's largest cable television operator. Effective December 31, 2000, AT&T Broadband transferred systems serving approximately 733,000 subscribers and located primarily in Michigan and Naples, Florida, to Comcast in exchange for systems serving approximately 700,000 subscribers and located primarily in Florida and Chicago, Illinois. On January 5, 2001, AT&T Broadband sold 99,000 subscribers to Insight Communications, Inc. (Insight Communications). In a subsequent transaction, AT&T Broadband contributed 250,000 additional subscribers in the Illinois markets to Insight Midwest, L.P., and Insight Communications also contributed additional subscribers. Insight Midwest, L.P. remained a partnership owned 50 percent by AT&T Broadband and 50 percent by Insight Communications. The expanded joint venture will continue to be managed by Insight Communications. Also on January 5, 2001, AT&T and Cablevision announced the completion of two separate agreements for the transfer of cable systems. In the transactions, AT&T received cable systems serving 358,000 subscribers in Boston and Eastern Massachusetts. In return, Cablevision acquired systems serving approximately 130,000 subscribers in the northern New York suburbs, and approximately $870 million in stock, or 44 million shares of AT&T common stock, and approximately $300 million in cash. On February 27, 2001, AT&T Broadband announced that AT&T Broadband had entered into definitive asset purchase agreements with Mediacom Communications Corporation (Mediacom) pursuant to which AT&T Broadband will sell to Mediacom cable television systems serving about 840,000 basic subscribers in Georgia, Illinois, Iowa and Missouri, for $2.215 billion in cash. On February 28, 2001, AT&T Broadband announced that AT&T Broadband and Charter Communications, Inc. (Charter) had signed definitive agreements pursuant to which (i) Charter will receive cable systems from AT&T serving approximately 574,000 customers in the St. Louis area; areas of Auburn, Birmingham, Montgomery and Selma, Alabama; and the Reno area of Nevada and California; and (ii) AT&T Broadband will receive $1.79 billion consisting of Charter cable systems valued at $249 million serving 62,000 customers in Miami Beach and Sebastian, Florida; up to $500 million in Charter common stock; and the balance in cash. The decline in total basic service customers between 1997 and 1998 is attributable to certain contribution transactions entered into in 1998. In the most significant of these transactions, on March 4, 1998, AT&T Broadband contributed to Cablevision certain of its cable television systems serving approximately 830,000 customers in exchange for approximately 48.9 million newly issued Cablevision Class A common shares (the Cablevision Transaction) and the assumption of indebtedness. In addition to the Cablevision Transaction, during 1998 AT&T Broadband also completed eight transactions whereby AT&T Broadband contributed cable television systems serving in the aggregate approximately 1,924,000 customers to eight separate joint ventures (collectively, the 1998 Joint Ventures) in exchange for non-controlling ownership interests in each of the 1998 Joint Ventures, and the assumption and repayment by the 1998 Joint Ventures of indebtedness. AT&T Broadband operates cable television systems throughout the United States. Service Charges AT&T Broadband offers a limited "basic service" (primarily comprised of local broadcast signals and public, educational and governmental (PEG) access channels) and a "standard package" (primarily comprised of basic service and specialized programming services, in such areas as health, family entertainment, religion, news, weather, public affairs, education, shopping, sports and music). The monthly fee for basic service generally ranges from $7.50 to $12.00, and the monthly service fee for the standard package generally ranges from $22.50 to $36.00. Many of the systems acquired in the MediaOne acquisition also offered a third tier of service which generally ranged from $2.00 to $6.00. AT&T Broadband offers "premium services" (referred to in the cable television industry as "Pay-TV" and "pay-per-view") to its customers. Such services consist principally of feature films, as well as live and taped sports events, concerts and other programming. AT&T Broadband also offers Pay-TV services for a monthly fee. Charges are usually discounted when multiple Pay-TV services are ordered. Customers may also elect to subscribe to digital video services comprised of up to 80 additional video channels and between 10 and 30 additional audio channels featuring additional specialized programming and premium services at an average incremental monthly charge of $10.00. As further enhancements to their cable services, for a monthly charge customers may generally rent converters or converters with remote control devices, as well as purchase a channel guide. Also a nonrecurring installation charge is usually charged. Monthly fees for basic services, standard package services and Pay-TV services to commercial customers vary widely depending on the nature and type of service. Except under the terms of certain contracts to provide service to commercial accounts, customers are free to discontinue service at any time without penalty. AT&T Broadband also offers AT&T@Home and Road Runner high speed cable Internet services in some markets. Monthly charges for AT&T@Home and Road Runner range from $29.95 to $49.95, which includes, under certain offerings, the charge for rental of cable modem equipment. The Cable Television Consumer Protection and Competition Act of 1992 (the 1992 Cable Act) and the Telecommunications Act of 1996 (the Telecommunications Act, together with the 1992 Cable Act, the Cable Acts), established rules under which AT&T Broadband's basic service rates and equipment and installation charges are regulated if the appropriate franchise authority is certified. Local Franchises Cable television systems generally are constructed and operated under the authority of nonexclusive permits or "franchises" granted by local and/or state governmental authorities. Federal law, including the Cable Communications Policy Act of 1984 (the 1984 Cable Act) and the 1992 Cable Act, limits the power of the franchising authorities to impose certain conditions upon cable television operators as a condition of the granting or renewal of a franchise. Franchises contain varying provisions relating to construction and operation of cable television systems, such as time limitations on commencement and/or completion of construction; quality of service, including (in certain circumstances) requirements as to the number of channels and broad categories of programming offered to customers; rate regulation; provision of service to certain institutions; provision of channels for public access; and maintenance of insurance and/or indemnity bonds. AT&T Broadband's franchises also typically provide for periodic payments of fees, not to exceed 5% of revenue, to the governmental authority granting the franchise. Additionally, many franchises require payments to the franchising authority for the funding of public, educational and governmental access channels. Franchises usually require the consent of the franchising authority prior to a transfer of the franchise or a transfer or change in ownership or operating control of the franchisee. Subject to applicable law, a franchise may be terminated prior to its expiration date if the cable television operator fails to comply with the material terms and conditions thereof. Under the 1984 Cable Act, if a franchise is lawfully terminated, and if the franchising authority acquires ownership of the cable television system or effects a transfer of ownership to a third party, such acquisition or transfer must be at an equitable price or, in the case of a franchise existing on the effective date of the 1984 Cable Act, at a price determined in accordance with the terms of the franchise, if any. In connection with a renewal of a franchise, the franchising authority may require the cable operator to comply with different and more stringent conditions than those originally imposed, subject to the provisions of the 1984 Cable Act and other applicable federal, state and local law. The 1984 Cable Act, as supplemented by the renewal provisions of the 1992 Cable Act, establishes an orderly process for franchise renewal which protects cable operators against unfair denials of renewals when the operator's past performance and proposal for future performance meet the standards established by the 1984 Cable Act. AT&T Broadband believes that its cable television systems generally have been operated in a manner which satisfies such standards and allows for the renewal of such franchises; however, there can be no assurance that the franchises for such systems will be successfully renewed as they expire. Most of AT&T Broadband's present franchises had initial terms of approximately 10 to 15 years. The duration of AT&T Broadband's outstanding franchises presently varies from a period of months to an indefinite period of time. More than fifteen hundred of AT&T Broadband's franchises expire within the next three years. This represents more than 35% percent of the franchises held by AT&T Broadband and involves over four million basic customers. Cable Telephony AT&T Broadband's telephony market initiatives progressed substantially in 2000. As of December 31, 2000, AT&T Broadband had approximately 547,000 telephony customers in 17 markets. The markets in which Broadband telephony service is available are: Atlanta, Boston, the California Bay Area, Chicago, Dallas, Denver, Detroit, Florida, Pittsburgh, Richmond, Seattle, Salt Lake City, St. Louis, Southern California and Portland, Oregon. AT&T Broadband's Telephony offerings include AT&T Digital Phone local phone service, unlimited local calling, low in-state long distance calling rates, By the Minute (BTM) and Block of Time (BOT) calling plans, up to 4 lines, custom calling feature selections, and feature packages. The features available are Call Waiting, Caller ID, Anonymous Call Rejection, Call Forwarding, Custom Ring, 3-Way Calling, Speed Dialing, LD Alert, Distinctive Call Ringing, and Voice Mail, among others. AT&T Broadband offers a variety of options and calling plans with various price points to meet our customer's needs. They range from basic one line service to multiple lines with full feature functionality. Joint Ventures AT&T Broadband possesses a number of investments in publicly held companies, joint ventures or partnerships, the three most significant of which are At Home Corporation, Time Warner Entertainment Company, L.P., and Road Runner LLC. At Home Corporation. At Home Corporation is a provider of content and cable internet services over the cable television infrastructure and leased digital telecommunication lines to consumers and businesses. On September 1, 2000, Excite@Home converted approximately 50 million of the Excite@Home Series A shares held by AT&T Broadband into Series B shares, each of which has ten votes. As a result, AT&T Broadband has, on a fully diluted basis, approximately 23 percent of the economic interest and 74 percent of the voting interest in Excite@Home. AT&T's interest reflects modifications to Excite@Home's governance structure which were effective on September 1, 2000. Based upon these governance changes, Excite@Home's financial results, which previously were accounted for by AT&T as a nonoperational equity investment are now fully consolidated and included in AT&T's financial results. On January 12, 2001, Comcast and Cox exercised their right to sell a total of approximately 60 million shares of Excite@Home to AT&T as part of the agreement to reorganize Excite@Home governance. Time Warner Entertainment Company, L.P. ("TWE"). TWE is a Delaware limited partnership that was formed in 1992 to own and operate substantially all of the business of Warner Bros., Home Box Office and the cable television businesses owned and operated by Time Warner prior to such time. AT&T's current interest in TWE was initially acquired by U S WEST, Inc. in 1993, and was acquired by AT&T in connection with its 2000 acquisition of MediaOne Group, Inc. Currently, AT&T, through its wholly owned subsidiaries, owns general and limited partnership interests in 25.51% of the pro rata priority capital ("Series A Capital") and residual equity capital ("Residual Capital") of TWE. The remaining 74.49% limited partnership interests in the Series A Capital and Residual Capital of TWE are held by subsidiaries of AOL Time Warner Inc. AT&T has an option to increase its Series A Capital and Residual Capital interests from 25.51% to up to 31.84% in certain events. Subsidiaries of AOL Time Warner Inc. act as the general partners of TWE, and AT&T has only certain protective governance rights pertaining to certain limited significant matters relating to TWE. On February 28, 2001, AT&T submitted a request to TWE, pursuant to the TWE partnership agreement, that TWE reconstitute itself as a corporation and register for sale in an initial public offering an amount of partnership interests held by AT&T (up to the full amount held by AT&T) determined by an independent investment banking firm so as to provide sufficient trading liquidity and minimize the initial public offering discount, if any (the "Registrable Amount"). Under the TWE partnership agreement, upon such request, AT&T and Time Warner Inc. are to cause an independent investment banker to determine both the Registrable Amount and the price at which the Registrable Amount could be sold in a public offering (the "Appraised Value"). Upon determination of the Registrable Amount and the Appraised Value, TWE may elect not to register such interests but instead to allow AT&T the option to require that TWE purchase the Registrable Amount at the Appraised Value, subject to certain adjustments. If AT&T does put the Registrable Amount to TWE under such circumstances, TWE may call the remainder of AT&T's interest in TWE at a price described in the TWE partnership agreement. If TWE elects to register the interests, TWE may have an option to purchase such interests immediately prior to the time such public offering would otherwise have been declared effective by the Securities and Exchange Commission at the proposed public offering price less underwriting fees and discounts, if the proposed public offering price (as determined by the managing underwriter) is less than 92.5% of the Appraised Value. If at the conclusion of this process, AT&T has any remaining interests in TWE, AT&T will have the right to request registration of such interests for public sale within 60 days of July 1, 2002. Road Runner LLC. Road Runner LLC is a limited liability company formed in 1998 by affiliates of MediaOne Group, Time Warner, Advance/Newhouse, Microsoft and Compaq, for purposes of developing and distributing internet services over the cable television infrastructure. AT&T acquired a 25.1% interest in Road Runner as part of its 2000 acquisition of MediaOne Group, Inc. As a condition to its approval of AT&T's acquisition of MediaOne, the Department of Justice required that AT&T agree to divest its ownership its interest in Road Runner within certain specified time frames specified. AT&T, Time Warner and Advance Newhouse approved a resolution of the Members' Committee of Road Runner effective December 29, 2000, declaring the dissolution of Road Runner. As a result of such resolution, Road Runner commenced the winding up of its business in accordance with its organizational documents, which winding up is expected to be completed approximately March 31, 2001. AT&T has a 31.4% residual interest in all Road Runner assets and liabilities following the winding up. AT&T has entered into a Transitional Affiliation Agreement with an affiliate of AOL Time Warner effective December 15, 2000, under which AT&T will receive transition support services sufficient to provide uninterrupted internet service to AT&T's existing Road Runner subscribers. WIRELESS SERVICES The AT&T Wireless Group Tracking Stock On April 27, 2000, AT&T created a new class of stock and completed a public stock offering of 360 million shares, which represented 15.6%, of AT&T Wireless Group tracking stock at a price of $29.50 per share. This stock is intended to track the financial performance and economic value of AT&T's wireless services. The net proceeds to AT&T after deducting underwriter's discount and related fees and expenses, were $10.3 billion. AT&T allocated $7.0 billion of the net proceeds to AT&T Wireless Group, which were used for acquisitions, network expansion, capital expenditures and for general corporate purposes. The remaining net proceeds of $3.3 billion were utilized by AT&T for general corporate purposes. Holders of AT&T Wireless Group tracking stock are entitled to one-half of a vote per share. The AT&T Wireless Group tracking stock is listed on the New York Stock Exchange under the symbol "AWE." AT&T Wireless Group tracking stock is designed to reflect the separate economic performance of the AT&T Wireless Group. Except as described below, we attribute all of AT&T's current wireless operations to the AT&T Wireless Group, including: o all mobile and fixed wireless licenses, o all wireless networks, operations, cell sites, retail operations, wireless customer care facilities and customer location assets, and o interests in partnerships and affiliates providing wireless mobile communications in the United States and internationally. The AT&T Common Stock Group retains: o existing and future wireless activities that stem from country-specific joint venture relationships that are predominantly non-wireless, and o incidental wireless capabilities or links in any backbone or other communications network that is predominantly non-wireless. We currently intend, until and through the date of the proposed split-off, to include all future wireless activities in the AT&T Wireless Group. Our board of directors may, however, in its discretion, but subject to the AT&T Wireless Group policy statement, direct new businesses and assets to the AT&T Wireless Group or the AT&T Common Stock Group or dispose of or transfer businesses or assets of either group. Please see Exhibit (99)a to this Form 10-K for supplemental information concerning the AT&T Wireless Group. Business of the AT&T Wireless Group AT&T Wireless Group is one of the largest wireless service providers in the United States. AT&T Wireless Group seeks to provide high quality, innovative wireless services and to expand its customer base and revenue stream by attracting subscribers who are heavy users of communication services. As of, or for the year ended, December 31, 2000, AT&T Wireless Group had: o 15.2 million consolidated subscribers, o $10.4 billion of combined revenues, and o $1.6 billion of combined operational EBITDA. AT&T Wireless Group operates one of the largest U.S. digital wireless networks. As of December 31, 2000, AT&T Wireless Group and its affiliates and partners held 850 megahertz and 1900 megahertz licenses to provide wireless services covering 98% of the U.S. population. As of December 31, 2000, approximately 77% of the U.S. population was covered by at least 30 megahertz of wireless spectrum owned by AT&T Wireless Group, its affiliates or its partners. At the end of 2000, AT&T Wireless Group's networks and those of its affiliates and partners operated in markets including over 76% of the U.S. population and in 49 of the 50 largest U.S. metropolitan areas. AT&T Wireless group supplements its operations with roaming agreements that allow its subscribers to use other providers' wireless services in regions where it does not have operations. With these roaming agreements, AT&T Wireless Group is able to offer customers wireless services covering over 95% of the U.S. population. AT&T Wireless Group plans to continue to increase its coverage and the quality of its services by expanding its footprint and the capacity of its network through new network construction, acquisitions, and partnerships with other wireless providers. Services and products AT&T Wireless Group offers a variety of services for both voice and data communications. Service can include wireless voice transmission as well as custom calling services for digital services, such as extended battery life, message waiting indicator, text messaging and caller ID. AT&T Wireless Group also offers a variety of other enhanced features, including enhanced directory assistance, which enables callers to be connected to the party whose number was sought without hanging up and redialing. As a packet-switched data network, AT&T Wireless Group's current data network takes advantage of the fact that with many data applications, data is sent in bursts with intermittent quiet periods, which allows many users to share the network channel. As a result, relative to data services carried over circuit-switched analog or digital wireless networks, AT&T Wireless Group's packet-switched data service is a significantly more cost-effective means of sending data for the majority of applications because it allows a channel to be shared by many users. For example, for many applications, AT&T Wireless Group's packet-switched data network allows it to offer its customers unlimited usage, most often for a flat monthly fee. This makes the data service on this network service attractive for a variety of new applications. AT&T Wireless Group has created applications and offers using the cellular digital packet data network for businesses, public agencies and consumers. To date, corporations and public agencies have been significant users of AT&T Wireless Group's packet data service. These customers typically use this service to carry industry-specific applications. Examples of such applications include public safety applications, dispatch applications, wireless credit card validation and automated vehicle location services. New devices are driving the development of broader applications targeted to consumers. Users may access these applications with hand held devices, like the Palm Vx, as well as phones and laptop computers. For hand held devices, AT&T Wireless Group now has access to new CDPD-standard modems that work with the Palm Vx device. Users can access Internet-based information from devices equipped with these modems. A leading example of this is the OmniSky service available for the Palm Vx. With a Palm Vx equipped with a modem that connects to AT&T Wireless Group's current packet data network, an OmniSky subscriber can access email as well as several hundred content providers that have created information specifically for hand held devices. AT&T Wireless Group offers a variety of products as complements to its wireless service, including handsets and accessories, such as chargers, headsets, belt clips, faceplates and batteries. As part of its basic service offering, AT&T Wireless Group provides easy-to-use, interactive menu-driven handsets that can be activated over the air. These handsets primarily feature word prompts and menus rather than numeric codes to operate handset functions. Some handsets allow mobile access to the Internet. In addition, AT&T Wireless Group offers tri-mode handsets, which are handsets compatible with analog and digital networks, the latter with 850 and 1900 megahertz frequencies and service modes. Tri-mode handsets permit customers to roam across a variety of wireless networks and incorporate AT&T Wireless Group's proprietary intelligent roaming data base system, which is designed to provide service in more areas at favorable roaming rates. AT&T Wireless Group offers its customers use of Nokia, Ericsson, Mitsubishi and Motorola handsets. AT&T Wireless Group markets its wireless services in its managed markets under the AT&T brand name. It markets wireless services to business and residential customers through a direct sales force of 2,100, through sales points of presence in approximately 520 AT&T Wireless Group company-owned stores located in 37 states, and kiosks and other customer points of presence, including the Internet and inbound call centers, and through local and national non-affiliated retailers throughout the United States. AT&T's sales force may sell wireless services to business and residential customers as part of bundled offerings with services of AT&T when agreed upon by the companies. AT&T Wireless Group also relies upon dealers to market its services in some locations. AT&T Wireless Group charges may include fees for service activation, monthly access, per-minute airtime and customer-calling features, which may include a fixed number of minutes or packets of data per month at a set price and generally offers a variety of pricing options, most of which combine a fixed monthly access fee for a fixed number of minutes or packets of data and additional charges for usage in excess of those allotted. Customers may also incur long distance and roaming fees. AT&T Wireless Group manages its exposure to bad debt by reviewing prospective customers for creditworthiness and by deactivating accounts which reach a specific date past due. In calendar year 2000, AT&T Wireless Group adjusted its credit policies to be more competitive, thereby increasing the number of customers with lower credit ratings. AT&T Wireless Group expects that this may result in an increase in the number of deactivations and, consequently, churn. Fixed Wireless Fixed wireless service provides customers with high speed packet data channel which can be used by up to five data devices simultaneously (for example, five personal computers simultaneously accessing the Internet) at download speeds of up to one megabit per second. In addition, fixed wireless can provide up to four lines of wireline quality voice telephony, including custom calling features (e.g., call waiting, caller ID, three-way calling) available today over wireline networks. As of December 31, 2000, AT&T Wireless Group was serving fixed wireless customers in Anchorage, Alaska, Dallas/Ft. Worth and Houston, Texas, and San Diego, California. Other assets The AT&T Wireless Group also possesses certain other assets not described above. The most significant of these assets include a number of equity interests in domestic and international wireless operations and an air-to-ground wireless operation. Domestically, the AT&T Wireless Group has joint ventures with or interests in a number of wireless operators, including American Cellular Corporation, Cincinnati Bell Wireless, LLC, Telecorp PCS and Triton PCS. Internationally, the AT&T Wireless Group owns one half of the 33.3% equity stake in Rogers Cantel it holds jointly with British Telecommunications. The AT&T Wireless Group is the operating partner in wireless ventures in Colombia, India and Taiwan. In 2000, the AT&T Wireless Group was also allocated one half the interest that AT&T possesses in Japan Telecom, which it agreed to sell in February 2001. The Aviation Communications Division (ACD) of the AT&T Wireless Group provides air-to-ground communications services. A minority ownership interest in ACD is held by Rogers Cantel. ACD owns and operates a network of ground-based and airborne telecommunications equipment and related assets that deliver digital telephone service to commercial and private aircraft in North America. Wireless network The AT&T Wireless Group's ownership position in U.S. markets was obtained through FCC auctions and the FCC lottery and settlement process as well as through acquisitions of, and purchases and exchanges of, operating systems and licenses from or with other wireless service licensees. AT&T Wireless Group has made certain commitments to provide funding for successful bids of Alaska Native Wireless, L.L.C. for the C and F Block reauction (FCC Auction 35) which ended January 26, 2001. At the conclusion of the auction, Alaska Native Wireless was the high bidder on approximately $2.9 billion in licenses. One auction participant challenged the qualifications of Alaska Native Wireless to acquire "closed" licenses, which constituted most of the licenses for which Alaska Native Wireless was the successful bidder. In addition, the trustee in NextWave Telecom, Inc.'s Chapter 11 bankruptcy proceeding, and the unsecured creditors of NextWave, are challenging the right of the FCC to re-auction the 1900 megahertz licenses that NextWave acquired in prior FCC auctions but which were later reclaimed by the FCC. Either of these proceedings could result in a delay in the grant of licenses to successful bidders or revocation of any licenses, including those won or acquired by Alaska Native Wireless. AT&T Wireless Group has committed to provide funding of $2.6 billion in exchange for a combination of a non-controlling equity interest and debt securities of Alaska Native Wireless to fund its purchase of these licenses. AT&T Wireless Group's own spectrum, together with the spectrum of its affiliates and the spectrum on which Alaska Native Wireless was the high bidder in the recently completed FCC spectrum auction, would be sufficient to serve over 85 of the top 100 markets with AT&T Wireless Group's selected third generation technology, UMTS. Although Alaska Native Wireless is obligated to use technology that is compatible and interoperable with AT&T Wireless Group's digital mobile wireless network, no commitments have been made by Alaska Native Wireless to AT&T Wireless Group concerning the deployment of the licenses for which it was high bidder, and not all affiliates may be obligated to implement AT&T Wireless Group's third generation technology strategy. Under certain conditions, and in addition to other means by which they may transfer their interests, the other owners of Alaska Native Wireless have the right to require us to purchase their equity interests. If this right were exercised five years after license grant, the price could be as much as approximately $950 million and would be payable, at our option, in cash or marketable securities. The amount would be less if the right were exercised earlier. Formal grant to Alaska Native Wireless of the licenses successfully bid upon in the auction has not yet occurred and is subject to administrative procedures. Mobile voice network Coverage. As of December 31, 2000, the AT&T Wireless Group's built network, including partnership and affiliate markets, covered 98% of the U.S. population, including operations in 49 of the 50 largest U.S. metropolitan areas. The AT&T Wireless operates using both 850 megahertz and 1900 megahertz licenses. Where agreements are in place, the AT&T Wireless Group is able to offer service to customers of other wireless providers when they travel through its service area, and AT&T Wireless Group subscribers can roam through other wireless providers' service areas. Analog and digital technologies. The AT&T Wireless Group offers both analog and digital service in its 850 megahertz markets and digital service in its 1900 megahertz markets. The AT&T Wireless Group believes that digital technology offers many advantages over analog technology, including substantially increased network capacity, greater call privacy, enhanced services and features, lower operating costs, reduced susceptibility to fraud and the opportunity to provide improved data transmissions. Moving customers to digital service has been a key component of the AT&T Wireless Group's overall wireless strategy. Digital service enables the AT&T Wireless Group to provide added benefits and services to its customers, including extended battery life, caller ID, text messaging and voicemail with message waiting indicator. TDMA network. The AT&T Wireless Group has chosen time division multiple access (TDMA) technology for its second generation voice digital network, although it does operate a small a number of markets using code division multiple access (CDMA) that were operating that technology when AT&T Wireless Group acquired them. TDMA permits the use of advanced tri-mode handsets that allow for roaming across analog and digital systems and across 850 megahertz and 1900 megahertz spectrums. TDMA digital technology allows for enhanced services and features, such as short alphanumeric message service, extended battery life, added call security and improved voice quality. TDMA's hierarchical cell structure enables the AT&T Wireless Group to enhance network coverage with lower incremental investment through the deployment of micro and pico, as opposed to macro, cell sites. This enables the AT&T Wireless Group to offer customized billing options and to track billing information per individual cell site, which is practical for advanced wireless applications such as fixed wireless and wireless office applications. TDMA served an estimated 35 million subscribers worldwide and 18 million subscribers in North America as of December 31, 1999, according to the Universal Wireless Communications Consortium, an association of TDMA service providers and manufacturers. TDMA equipment is available from leading telecommunication vendors such as Lucent, Ericsson and Nortel Networks Corporation. A number of other wireless service providers have chosen code division mobile access (CDMA) or global system for mobile communications (GSM) as their current digital wireless technology. AT&T Wireless Group intends to deploy an overlay of GSM technology to its TDMA network as part of its third generation development strategy, which will use a different technology (see below). CDPD network. The AT&T Wireless Group's CDPD network currently covers 104 million POPs, which represents over 60% of its built network, and its CDPD customers can roam on the CDPD networks of other wireless providers, which, together, cover an additional 74 million POPs. CDPD is an industry standard using Internet Protocol, which allows most applications written for the Internet as well as many corporate applications to run efficiently over the network without modification. Using CDPD, data files and transactions are divided into small packets and sent on a dedicated wireless channel. In many data applications, data is sent in bursts with intermittent quiet periods. Packet transmission technologies take advantage of this fact and allow user data to be efficiently carried on the same network channel. As a result, relative to data services carried over circuit-switched analog or digital wireless networks, the AT&T Wireless Group's packet-switched CDPD service is a significantly more cost-effective means of sending data for the majority of applications because it allows many users to share the same channel. Third generation development strategy. Third generation technologies will allow carriers to provide high-speed wireless packet data services and ultimately voice services using Internet Protocol. AT&T Wireless Group believes that a sound third generation strategy should allow the wireless provider to achieve a pervasive footprint quickly and cost effectively. In addition, AT&T Wireless Group believes third generation networks that achieve global economies of scale and allow for global roaming will have a significant advantage. AT&T Wireless Group had originally chosen TDMA-EDGE as its next generation wireless architecture. However, in November 2000, AT&T Wireless Group announced that it has selected for its eventual third generation services the technological standard that is the same global standard that has been selected by service providers throughout Europe, in Japan and in other parts of the world. This standard, known as UMTS (for universal mobile telecommunications system), has generally been accepted as the successor technology to the second generation digital technology known as GSM. UMTS is also known as W-CDMA, or wideband code division multiple access. Despite the similarity of the acronyms, CDMA 2000 and W-CDMA are not compatible. To accelerate the availability of enhanced data services offerings, AT&T Wireless Group recently announced plans to deploy a GSM platform for interim improvements in wireless data capabilities on the evolutionary path to third generation services, as well as associated voice services. This platform will be deployed as an overlay on AT&T Wireless Group's second generation voice network. GSM platform deployment is planned to begin in the second half of 2001. AT&T Wireless Group plans to make interim enhanced data services using GPRS technology deployed on the GSM network starting in 2001. Third generation EDGE technology service is expected to be available in 2002. AT&T Wireless Group currently plans to deploy third generation UMTS technology beginning in 2003, depending on the availability of network equipment and customer devices. By making services on GPRS technology available in 2001, AT&T Wireless Group expects to be able to make enhanced data services available to customers earlier than its originally planned deployment of TDMA-EDGE in 2002. Like AT&T Wireless Group's current packet data network, the technology standards AT&T Wireless Group has selected for its enhanced and third generation data services strategy are also Internet Protocol based. AT&T Wireless Group expects that all the applications developed and deployed today will migrate to GPRS-based and eventually to EDGE-based services as customers upgrade their equipment to the new technologies to be deployed. However, when deployed using GPRS and EDGE technologies, these applications are expected to operate at higher speeds than current systems where deployed. This plan is expected to enable AT&T Wireless Group to provide customers with earlier availability of a wide range of data service offerings on a broad array of devices (phones, personal data assistants, or PDA's, laptops, etc.). AT&T Wireless Group plans to sell handsets combining its current TDMA transmission technology and the GSM technology platform it plans to deploy with enhanced and third generation GPRS and EDGE technologies, which would provide customers the benefit of access to AT&T Wireless Group's current voice network as well as the new enhanced and high-speed data services when available. Industry specifications for the combined technology handsets were jointly developed by the Universal Wireless Communications Consortium and the North American GSM Alliance. AT&T Wireless Group is in discussions with manufacturers to develop such devices. In November 2000, AT&T announced nonbinding letters of intent with Ericsson, Lucent Technologies, Nokia and Nortel Networks for third generation network equipment and, in the case of Nokia and Ericsson, for future generation wireless customer terminals. AT&T Wireless Group began negotiating definitive agreements with these and other vendors during the fourth quarter of 2000 and has executed several of these agreements. DOCOMO STRATEGIC INVESTMENT On January 22, 2001 NTT DoCoMo, Inc., a leading Japanese wireless communications company, invested approximately $9.8 billion for shares of a new class of AT&T preferred stock that are convertible into 406,255,889 shares of AT&T Wireless Group tracking stock that are intended to reflect approximately 16% of the financial performance and economic value of AT&T Wireless Group. As part of this investment, DoCoMo also received five-year warrants to purchase the equivalent of an additional 41,748,273 shares of AT&T Wireless Group tracking stock at $35 per share, and DoCoMo and AT&T Wireless Services formed a strategic alliance to develop the next generation of mobile multimedia services on a global-standard, high-speed wireless network. Of the 406,255,889 AT&T Wireless Group tracking stock share equivalents issued to DoCoMo, 228,128,307 shares represented new share equivalents at $27.00 each, and the remaining 178,127,582 share equivalents represented a reduction of AT&T Common Stock Group's retained portion of the value of AT&T Wireless Group at $20.50 each. Accordingly, AT&T Common Stock Group retained $3,651,615,431 of the proceeds of the DoCoMo investment and allocated $6,159,464,289 to AT&T Wireless Group. The following is a summary of the material provisions of the agreements among DoCoMo, AT&T and AT&T Wireless Services, and the terms of the DoCoMo Wireless Tracking Stock. This summary is qualified in its entirety by reference to the full text of these documents, which have been filed as exhibits to AT&T's Form 8-K dated December 22, 2000. New Class of AT&T Wireless Group Tracking Stock DoCoMo purchased 812,511.778 shares of a new class of AT&T preferred stock, par value $1.00, that we call "DoCoMo wireless tracking stock." Each share of DoCoMo wireless tracking stock is convertible at any time into 500 shares of AT&T Wireless Group tracking stock and has the same voting and dividend rights as 500 shares of AT&T Wireless Group tracking stock. The DoCoMo wireless tracking stock also has some additional rights not available to holders of AT&T Wireless Group tracking stock. The following is a description of some of the rights and features of the DoCoMo wireless tracking stock. o Conversion. DoCoMo can convert all, and not less than all, of its shares of DoCoMo wireless tracking stock into AT&T Wireless Group tracking stock at a ratio of 500 shares of AT&T Wireless Group tracking stock for each share of DoCoMo wireless tracking stock, subject to anti-dilution protection. If the split-off occurs, then, immediately before the completion of the split-off, each share of DoCoMo wireless tracking stock automatically will be converted into 500 shares of AT&T Wireless Group tracking stock, subject to anti-dilution protection, and thereafter be exchanged on the same terms as all other shares of AT&T Wireless Group tracking stock in the split-off. o Liquidation Preference. The DoCoMo wireless tracking stock carries an aggregate liquidation preference of $3.65 billion in the event of an involuntary liquidation or dissolution of AT&T, and holders of DoCoMo wireless tracking stock are entitled to participate in this preference in proportion to the number of shares they hold. The holders of shares of DoCoMo wireless tracking stock also will be entitled to participate, on an as-converted basis, in any additional liquidation payments made to holders of AT&T Wireless Group tracking stock, less any amounts received out of the $3.65 billion liquidation preference. The DoCoMo wireless tracking stock has no preference in the event of a voluntary liquidation or dissolution of AT&T, but automatically would convert into shares of AT&T Wireless Group tracking stock and participate in any liquidation payments made to holders of AT&T Wireless Group tracking stock. o Dividends. Holders of DoCoMo wireless tracking stock are entitled to participate, on an as-converted basis, in any dividends or distributions paid to holders of AT&T Wireless Group tracking stock. o Voting Rights. Holders of DoCoMo wireless tracking stock are entitled to vote together with holders of AT&T common shares and not as a separate class. Each share of DoCoMo wireless tracking stock is entitled to the number of votes that could be cast by the shares of AT&T Wireless Group tracking stock into which the DoCoMo wireless tracking stock is convertible. Initially, each share of DoCoMo wireless tracking stock will be entitled to 250 votes. o Redemption at the Option of AT&T. There are two instances in which AT&T may redeem all, and not less than all, of the shares of DoCoMo wireless tracking stock and warrants owned by DoCoMo at DoCoMo's original purchase price plus a predetermined rate. First, if the proposed split-off does not occur before April 26, 2002 and thereafter AT&T redeems all AT&T Wireless Group tracking stock, AT&T may concurrently redeem the DoCoMo wireless tracking stock. In this case, if AT&T announces a sale of all or substantially all the assets of AT&T Wireless Group within a year of redemption and then completes the sale, DoCoMo will be entitled to receive a payment equal to the excess of the value from that sale that would have been attributable to the DoCoMo wireless tracking stock over the redemption price. Second, if specified adverse tax events occur before the split-off and, thereafter, all AT&T Wireless Group tracking stock is redeemed, AT&T may concurrently redeem the DoCoMo wireless tracking stock on the same terms as described above. In either case, if AT&T splits-off all or substantially all of the assets of AT&T Wireless Group within a year of redeeming the DoCoMo wireless tracking stock, DoCoMo will be entitled to reinvest in the spun off entity at the redemption price and otherwise on terms comparable to those set forth in the agreement. o Transfer. Shares of DoCoMo wireless tracking stock are not transferable other than by conversion into AT&T Wireless Group tracking stock or redemption by AT&T. Warrants DoCoMo has acquired 83,496.546 warrants, each of which initially represents the right to purchase one share of DoCoMo wireless tracking stock at an exercise price of $17,500 per share, or $35 per AT&T Wireless Group tracking stock share equivalent, subject to customary anti-dilution adjustments. These warrants may be exercised in any amount and at any time until the fifth anniversary of the issuance of the warrants. Upon transfer by DoCoMo to a third party, or if DoCoMo converts its DoCoMo wireless tracking stock into AT&T Wireless Group tracking stock, each of the warrants will be exercisable for 500 shares of AT&T Wireless Group tracking stock at an exercise price of $35 per share, and will no longer be exercisable for DoCoMo wireless tracking stock. After the split-off, each warrant will be exercisable for 500 shares of the AT&T Wireless Services common stock at an exercise price of $35 per share, subject to adjustments to reflect the exchange ratio and customary anti-dilution adjustments. The warrants are subject to the transfer restrictions described below. The shares of DoCoMo wireless tracking stock issuable upon exercise of the warrants, and any shares of AT&T Wireless Group tracking stock into which they are convertible, will represent new share equivalents. DoCoMo Investment Rights and Obligations In addition to the rights inherent in the shares of DoCoMo wireless tracking stock, under the agreements, DoCoMo has additional rights and obligations with respect to its investment in AT&T Wireless Group that will continue even if DoCoMo converts its shares of DoCoMo wireless tracking stock into AT&T Wireless Group tracking stock or if the split-off is completed. o Transfer Restrictions. Without the consent of AT&T before the split-off, or AT&T Wireless Services after the split-off, for 18 months following the investment, DoCoMo may not transfer any warrants or any shares of AT&T Wireless Group tracking stock or AT&T Wireless Services common stock that it receives on conversion of DoCoMo wireless tracking stock, except if specified events occur. Those events are: - a sale of all or substantially all of AT&T Wireless Group's assets or business through merger or other business combination unless AT&T Wireless Group shareholders continue to own two-thirds of the successor corporation; - the acquisition or acquisitions of business or assets, other than radio spectrum rights, by AT&T Wireless Group totaling more than $25 billion; or - a tender offer or exchange offer approved by AT&T's board of directors or AT&T Wireless Services board of directors, as applicable. In addition, subject to a limited exception, without AT&T's or AT&T Wireless Group's consent, as the case may be, DoCoMo may not transfer any AT&T Wireless Group securities to any person if after the transfer the recipient's interest in AT&T Wireless would exceed 6%, or in the case of recipients, principally financial institutions, who are eligible to report their interest on Schedule 13G under the Securities Exchange Act, 10%. None of DoCoMo's special rights are transferable by DoCoMo along with the shares, except that DoCoMo may transfer its demand registration rights described below to any transferee of more than $1 billion of AT&T Wireless Group securities, and DoCoMo may transfer one demand registration right to a transferee of the warrants. Any transfer of registration rights will be subject to overall limitations on the registration rights and will not increase AT&T's or AT&T Wireless Group's aggregate registration obligations. o Repurchase Obligations. - Failure to complete split-off within specified time frame. If the split-off is not completed by January 1, 2002, or March 15, 2002 if the reason it was not completed by January 1, 2002 was that the requisite IRS ruling had not been received and AT&T reasonably believes that it is possible to obtain such a ruling by, or effect the split-off without a ruling by, March 15, 2002 and is continuing to seek such a ruling or to effect the split-off without a ruling, then DoCoMo may require AT&T to repurchase DoCoMo wireless tracking stock, or AT&T Wireless Group tracking stock, and warrants, that DoCoMo still holds at that time. DoCoMo must exercise this right within 30 days of the January 1 or March 15, 2002 trigger date, whichever is applicable. The repurchase price will be DoCoMo's original purchase price plus a predetermined rate. This repurchase obligation will be allocated between AT&T and AT&T Wireless Group in proportion to the allocation of the proceeds received from the investment. Consequently, AT&T Wireless Group will be obligated to fund $6.2 billion of the repurchase price, plus interest. In lieu of receiving this repurchase price from AT&T, DoCoMo will have the right to cause AT&T to register for public sale all of the shares of AT&T Wireless Group tracking stock (including shares that DoCoMo would hold if it exercised its warrants and converted its shares of DoCoMo wireless tracking stock), and thereafter DoCoMo will be able to sell those shares and retain the proceeds from that sale or sales. - Failure to meet technology benchmarks within specified time frame. In some circumstances, if by June 30, 2004 (1) AT&T Wireless Group fails to launch service based on a wireless communications technology known as universal mobile telecommunications systems, or wideband code division multiple access, in at least 13 of the top 50 U.S. markets or (2) abandons wideband code division multiple access as its primary technology for third generation services, DoCoMo may require AT&T before the split-off, or AT&T Wireless Services after the split-off, to repurchase the warrants and DoCoMo wireless tracking stock, or AT&T Wireless Group tracking stock, and the warrants that DoCoMo still holds (or the AT&T Wireless Services common stock and related warrants if post split-off). The repurchase price will be DoCoMo's original purchase price plus interest of a predetermined rate. Before the split-off, the repurchase obligation will be allocated between AT&T and AT&T Wireless Group in proportion to the allocation of the proceeds received from the investment, which was approximately $3.6 billion for AT&T and $6.2 billion for AT&T Wireless Group. After the split-off, if DoCoMo requires repayment because of AT&T Wireless Group's failure to commence service using an agreed technology as described above, AT&T Wireless Services will be obligated to fund the entire amount of the repurchase obligation, which is $9.8 billion, plus interest, with AT&T being secondarily liable for up to $3.6 billion, plus interest, if AT&T Wireless Services is unable to satisfy the entire obligation. In lieu of paying all or a portion of the repurchase price, AT&T or AT&T Wireless Services, as the case may be, will have the right to cause DoCoMo to sell any portion of its shares in a registered sale, and to pay DoCoMo the difference between the repurchase price and the proceeds from the registered sales. o Standstill. Until the fifth anniversary of the closing of the investment, DoCoMo, its controlled subsidiaries, when acting on behalf of DoCoMo, its officers, directors or agents, or any subsidiary to which DoCoMo has disclosed confidential information regarding its investment may not take a number of actions, including the following, without AT&T's consent before the split-off or AT&T Wireless Services' consent after the split-off: - acquire or agree to acquire any voting securities of AT&T or AT&T Wireless Services, except in connection with DoCoMo's exercise of its preemptive rights, conversion rights or warrants; - solicit proxies with respect to AT&T's or AT&T Wireless Services' voting securities or become a participant in any election contest relating to the election of the directors of AT&T or AT&T Wireless Services; - call or seek to call a meeting of the AT&T or AT&T Wireless Services shareholders or initiate a shareholder proposal; - contest the validity of the standstill in a manner that would lead to public disclosure; - form or participate in a group that would be required to file a Schedule 13D with the SEC as a "person" within the meaning of the Section 13(d)(3) of the Securities Exchange Act; or - act in concert with any person for the purpose of electing a transaction that would result in a change of control of AT&T or AT&T Wireless Services. After the fifth year anniversary of the investor agreement, DoCoMo will continue to be subject to the standstill for so long as DoCoMo has the right to nominate at least one director. However, DoCoMo will be released from the standstill 91 days after the resignations of all of its representatives on AT&T's and AT&T Wireless Services' board of directors, as the case may be, all of DoCoMo's nominated AT&T Wireless Services committee members and all of DoCoMo's nominated management. After these resignations, AT&T Wireless may take steps to terminate or sequester all of the other DoCoMo nominated employees. If NTT, which owns approximately two-thirds of DoCoMo, or any of NTT's subsidiaries other than DoCoMo takes any action contrary to the standstill restrictions and the action leads to any vote of shareholders of AT&T before the split-off or AT&T Wireless Services after the split-off, then DoCoMo either must vote its shares as the board of directors of AT&T or AT&T Wireless Services directs, or must vote its shares in proportion to the votes cast by the shareholders that are not affiliated with either DoCoMo or NTT. In addition, if NTT or any of its subsidiaries commences a tender offer for AT&T or AT&T Wireless Services securities, DoCoMo cannot tender or transfer any of its securities into that offer until all of the conditions to that offer have been satisfied. The standstill provisions described above will terminate in the following circumstances: - a third party unaffiliated with AT&T Wireless commences a tender or exchange offer of 15% of AT&T Wireless Services' outstanding voting securities and AT&T Wireless Services does not publicly recommend that its shareholders reject to the offer; - AT&T Wireless Services enters into a definitive agreement to merge into or sell all or substantially all of its assets to a third party unless AT&T Wireless Services shareholders retain at least 50% of the economic and voting power of the surviving corporation; or - AT&T Wireless Services enters into a definitive agreement that would result in any one person or groups of persons acquiring more than 35% of the voting power of AT&T Wireless Services, unless, among other things, this person or group agrees to a standstill. The standstill provisions terminate with respect to AT&T two years after the split-off (or, if sooner, upon any of the foregoing three events as applied to AT&T). o Registration Rights. Subject to certain exceptions and conditions, DoCoMo is entitled to require AT&T before the split-off, and AT&T Wireless Services after the split-off, to register shares of AT&T Wireless Group tracking stock or AT&T Wireless Services common stock on up to six occasions, with each demand involving not less than $500 million worth of shares. DoCoMo cannot exercise more than one demand right in any seven and a half month period. DoCoMo also is entitled to require AT&T or AT&T Wireless Services, as the case may be, to register securities for resale in an unlimited number of incidental registrations, commonly known as piggy-back registrations. DoCoMo will cease to be entitled to these registration rights if it owns less than $1 billion of AT&T or AT&T Wireless Services securities, as the case may be, and securities reflecting less than 2% of the financial performance and economic value of AT&T Wireless Services. o Board Representation. Until the split-off, DoCoMo is entitled to nominate one representative to the AT&T board of directors, and that representative also will be a member of the AT&T Wireless Group capital stock committee. After the split-off, DoCoMo will be entitled to nominate a number of representatives on the AT&T Wireless Services board of directors proportional to its economic interest acquired as a result of this investment. The DoCoMo nominees for these board seats must be senior officers of DoCoMo that are reasonably acceptable to AT&T or AT&T Wireless Services, as the case may be. DoCoMo will lose these board representation rights if its economic interest in AT&T Wireless Services falls below 10% for 60 consecutive days. However, as long as it retains 62.5% of the shares of its original investment or shares of AT&T Wireless Group tracking stock into which such shares are convertible, DoCoMo will lose its board representation rights only if its economic interest in AT&T Wireless Services falls below 8% for 60 consecutive days. o Management Rights. Before the split-off, DoCoMo is entitled to appoint one of its senior executives that is reasonably acceptable to AT&T Wireless Group to AT&T Wireless Group's senior leadership team. In addition, subject to AT&T Wireless Group's reasonable approval, DoCoMo can appoint between two and five of its employees as employees of AT&T Wireless Group, including the Manager-Finance and Director of Technology. DoCoMo will lose these rights under the same circumstances as it would lose board representation rights. o Right to Approve Specified Actions. Before the split-off, AT&T may not take any of the following actions without DoCoMo's prior approval: - sell all or substantially all of AT&T Wireless Group's assets; - sell all or substantially all of AT&T Wireless Group's business through merger or other business combination, unless AT&T Wireless Group shareholders retain two-thirds of the successor corporation; - acquire business or assets for AT&T Wireless Group, other than radio spectrum rights, in excess of $17 billion; - subject to some exceptions, issue any further economic interests or rights to AT&T Wireless over 15% of AT&T Wireless Group's market capitalization as of the date of the letter agreement; - subject to some exceptions, pay cash dividends to or repurchase AT&T Wireless Group tracking stock; - amend AT&T's charter or by-laws so that the rights of the holders of DoCoMo wireless tracking stock would be adversely affected; or - change the split-off related agreements so that AT&T Wireless Services would be materially adversely affected or enter into new, material contracts among affiliated parties that do not have arm's-length terms. After the split-off, AT&T Wireless Services may not take any of the following actions without DoCoMo's prior approval: - change the scope of its business such that AT&T Wireless Group's businesses (including those in its business plan) cease to constitute the primary businesses of AT&T Wireless Services; or - enter into a strategic alliance with another wireless operator so that the wireless operator would own more than 15% but less than 50% of the economic interest in AT&T Wireless Services. DoCoMo will lose these approval rights under the same circumstances as it would lose board representation rights. o Preemptive Rights. DoCoMo has limited preemptive rights that entitle it to maintain its ownership interest by purchasing shares in some new equity issuances by AT&T or AT&T Wireless Services. In the event of a new equity issuance of the type covered by the preemptive right, then: - if DoCoMo holds 12% or more of the economic interest of AT&T Wireless Services at the time of the new issuance, DoCoMo may purchase a number of additional shares that would bring DoCoMo's economic interest back up to 16%; and - if DoCoMo holds less than 12% of the economic interest of AT&T Wireless Services at the time of the new issuance, DoCoMo may purchase a number of additional shares that would maintain DoCoMo's economic interest at the level it was at just before the new issuance. In most cases, the purchase price for these additional shares will be the issuance price. DoCoMo will lose these preemptive rights under the same circumstances as it would lose board representation rights. Strategic Alliance In connection with DoCoMo's investment, AT&T Wireless Services and DoCoMo formed a strategic alliance to develop the next generation of mobile multimedia services on a global-standard, high-speed wireless network. AT&T Wireless Services will create a new, wholly owned subsidiary to develop and encourage the development of multimedia content, applications and services able to be offered over AT&T Wireless Services' current network, as well as on new, high-speed wireless networks built to global standards for third generation services. AT&T Wireless Services will contribute, among other things, its rights to content and applications used in its PocketNet services to the new multimedia subsidiary. Both AT&T Wireless Services and DoCoMo plan to provide technical resources and support staffing. In addition, AT&T Wireless Services will be able to license from DoCoMo, without additional payment, certain rights to DoCoMo's "i-mode" service, which provides access to the Internet from wireless telephones, and related technology. The strategic alliance is expected to enable each of AT&T Wireless Services and DoCoMo to offer market-appropriate wireless services to customers throughout the United States and Japan, respectively. In addition, each has agreed, subject to technical and commercial feasibility, to recognize the other as its primary and preferred roaming partner in the other party's home territory. AT&T and AT&T Wireless Services on the one hand, and DoCoMo on the other hand, have agreed to certain non-competition commitments that restrict each other's ability to provide mobile wireless services in Japan and the United States, respectively. They have also agreed to limit the extent to which AT&T or AT&T Wireless Services on the one hand, and DoCoMo on the other hand, will be able to participate in certain mobile multimedia activities and investments in each other's home territory. Any such restrictions on AT&T would terminate upon the earlier of a split-off of AT&T Wireless Services or exercise by DoCoMo of any put, liquidation or registration right as a result of the non-occurrence of such a split-off. AT&T Wireless Services and DoCoMo will generally be bound by the non-competition commitments until DoCoMo loses its board representation and management rights, either due to any of the events described under "DoCoMo Investment Rights and Obligations - Board Representation" and "DoCoMo Investment Rights and Obligations -Management Rights", or due to voluntary relinquishment of such rights by DoCoMo. OTHER BUSINESSES AT&T Solutions AT&T Solutions, established as a unit in 1995, provides clients with a broad array of professional services to satisfy clients' complete networking technology needs. AT&T Solutions' professional services range from consulting to outsourcing and management of highly complex global data networks. The company designs, engineers and implements seamless solutions for clients that are designed to maximize the competitive advantage of networking-based electronic commerce applications. Working with best-in-breed partners, AT&T Solutions also provides a full range of custom, managed e-infrastructure, web hosting and high-availability services. AT&T Solutions' Global Enterprise Management System (GEMS) platform offers global, end-to-end networking management capabilities that extend all the way to the applications domain. It also enables AT&T to consult with clients in setting quality of service expectations and developing customized service level agreements based on performance requirements for individually managed applications, as well as the total networking environment. International AT&T has established a number of international alliances to increase the reach and scope of AT&T's services and network over time and has invested in certain countries in order to increase the range of services AT&T offers in those countries, such as Alestra in Mexico and AT&T Canada Corp. in Canada. In addition, AT&T has an interest in Japan Telecom in Japan that, on February, 26, 2001, AT&T agreed to sell to the Vodafone Group plc. On January 6, 2000 AT&T and BT created a global venture to serve the communications needs of multinational companies and the international calling needs of businesses around the world. The venture, called Concert and owned equally by AT&T and BT, combined transborder assets and operations of each company, including their existing international networks, their international traffic, their transborder products for business customers -- including an expanding set of Concert services -- and AT&T and BT's multinational accounts in selected industry sectors. On June 1, 1999, AT&T Canada Corp. merged with MetroNet Communications Corp., Canada's largest competitive local exchange carrier. Under the terms of the merger agreement, AT&T received 31 percent of the equity interest and 23 percent of the voting interest in the combined entity in exchange for AT&T Canada Corp. and ACC TelEnterprises Ltd. In addition, AT&T agreed to purchase all of the remaining shares at the greater of the then appraised fair market value or the accreted minimum price, which initially is C$37.50 accreting after June 30, 2000 at a rate of 16% per annum, compounded quarterly. If the acquisition is not completed by June 30, 2003, those shares, along with AT&T's shares, would be sold through an auction process and AT&T will make whole the other shareholders for the amount they would have been entitled to if AT&T had purchased the shares. The completion of the acquisition is subject to the condition that AT&T is permitted to acquire the shares under Canada's foreign ownership restrictions. AT&T may acquire the shares prior to a change in the ownership restrictions by developing a structure that addresses such ownership restrictions. On August 16, 1999, AT&T completed its sale to BT of 30% of AT&T's stake in AT&T Canada. In addition, BT has agreed to purchase 30% of the shares AT&T will be acquiring from the other stockholders, subject to BT's right to cap its purchase at $1.65 billion. On August 28, 2000, AT&T established AT&T Latin America, in connection with the merger of Netstream, a competitive local exchange company in Brazil, and FirstCom, a publicly traded company with competitive telecommunications operations in Chile, Colombia and Peru. AT&T owns 58 percent of AT&T Latin America; SL Participacoes, an affiliate of Promon Tecnologia, which is the former owner of Netstream, owns 7 percent of AT&T Latin America, and the former FirstCom shareholders own 34 percent of AT&T Latin America, on a fully diluted basis. Promon Tecnologia and the former FirstCom shareholders own Class A shares, and have one vote per share; AT&T owns Class B shares, and have ten votes per share. LEGISLATIVE AND REGULATORY DEVELOPMENTS Telecommunications Act of 1996 In February 1996, the Telecommunications Act became law. The Telecommunications Act, among other things, was designed to foster local exchange competition by establishing a regulatory framework to govern new competitive entry in local and long distance telecommunications services. The Telecommunications Act will permit the Regional Bell Operating Companies (RBOCs) to provide interexchange services originating in any state in its region after demonstrating to the FCC that such provision is in the public interest and satisfying the conditions for developing local competition established by the Telecommunications Act. In August 1996, the FCC adopted rules and regulations, including pricing rules (the "Pricing Rules") to implement the local competition provisions of the Telecommunications Act, including with respect to the terms and conditions of interconnection with LEC networks and the standards governing the purchase of unbundled network elements and wholesale services from LECs. These implementing rules rely on state public utilities commissions (PUCs) to develop the specific rates and procedures applicable to particular states within the framework prescribed by the FCC. On July 18, 1997, the United States Court of Appeals for the Eighth Circuit issued a decision holding that the FCC lacks authority to establish pricing rules to implement the sections of the local competition provisions of the Telecommunications Act applicable to interconnection with LEC networks and the purchase of unbundled network elements and wholesale services from LECs. Accordingly, the Court vacated the rules that the FCC had adopted in August 1996, and which had been stayed by the Court since September 1996. On October 14, 1997, the Eigth Circuit Court of Appeals vacated an FCC Rule that had prohibited incumbent LECs from separating network elements that are combined in the LEC's network, except at the request of the competitor purchasing the elements. This decision increased the difficulty and costs of providing competitive local service through the use of unbundled network elements purchased from the incumbent LECs. On January 25, 1999, the Unites States Supreme Court issued a decision reversing the Eighth Circuit Court of Appeal's holding that the FCC lacks jurisdiction to establish pricing rules applicable to interconnection and the purchase of unbundled network elements, and the Court of Appeal's decision to vacate the FCC's rule prohibiting incumbent LECs from separating network elements that are combined in the LEC's network. The effect of the Supreme Court's decision was to reinstate the FCC's rules governing pricing and the separation of unbundled network elements. The pricing issues were then remanded to the Eighth Circuit Court of Appeals to consider the incumbent LECs' claims that although the FCC has jurisdiction to adopt pricing rules, the rules it adopted are not consistent with the applicable provisions of the Act. The Supreme Court also vacated the FCC's rule identifying and defining the unbundled network elements that incumbent LECs are required to make available to new entrants, and directed the FCC to reexamine this issue in light of the standards mandated by the Act. In response to the Supreme Court's decision, the FCC completed its re-examination of and released an order identifying and defining the unbundled network elements that incumbent LECs are required to make available to new entrants. That order re-adopted the original list of elements, with certain exceptions. An association of incumbent LECs has appealed the FCC's order to the United States Court of Appeals for the District of Columbia Circuit, and asked the Court to hear the appeal on an expedited basis. A number of parties, including AT&T and other incumbent LECs, have petitioned the FCC to reconsider and/or clarify its order. The FCC has moved to hold the appeal in abeyance pending its disposition of the reconsideration petitions. In July 2000, the Eighth Circuit issued a decision addressing the incumbent LECs' claims that the FCC's pricing rules are not consistent with the applicable provisions of the Act. It rejected the incumbent LECs' claims that the prices for network elements must be based on their "historical costs" rather than, as the FCC had held, their "forward looking" costs. It also held, however, that the FCC rule providing that forward-looking costs should be calculated on the basis of the cost of the most efficient alternatives was contrary to the Act. The Eighth Circuit then stayed this ruling to enable the parties to seek review before the Supreme Court, so the FCC's rules remain in effect until the Supreme Court decides the case. The Supreme Court has agreed to review the Eighth Circuit's decision, and a decision by the Supreme Court is anticipated by the end of June 2002. The Supreme Court will be considering both the claim of AT&T, the FCC, and others that the Eighth Circuit erred by invalidating the FCC rule, and the claim by the incumbent LECs that the Eighth Circuit erred by not requiring prices based on their historical cost. The Eighth Circuit also invalidated the FCC's rules setting the pricing methodology for resold local services. That aspect of its decision was not stayed, and will not be reviewed by the Supreme Court. In view of the proceedings pending before the Supreme Court, the DC Circuit, FCC and state PUCs, there can be no assurance that the prices and other conditions established in each state will provide for effective local service entry and competition or provide AT&T with new market opportunities. The effect of the most recent decision by the Eighth Circuit is to increase the risks, costs, difficulties, and uncertainty of entering local markets through using the incumbent LECs' facilities and services. Notwithstanding its substantial efforts, AT&T continues to experience significant difficulty entering local markets. AT&T's ability to purchase combined network elements from the ILECs, one of the primary methods AT&T intends to use to provide local service to residential customers, continued to be severely hampered by, among other factors, ILEC-sponsored regulatory and judicial actions, and lack of operating interfaces necessary to process network element orders with ILECs. Despite strong customer demand for competitive choice in local markets outside of AT&T's cable footprint, AT&T has suspended sales of resold local service, and continues to provide network element non facilities-based local service only in New York and Texas. AT&T will continue its regulatory efforts to improve operating margins in the states where it offers non-facilities-based local services, and will seek to open other states to competitive opportunities (both for voice and data services) by improving the rates, rules and operating interfaces that govern carrier relationships. In December 1999, Bell Atlantic (now Verizon) obtained approval to offer long distance telecommunications service in New York state, the first time an RBOC had received this approval under the Telecommunications Act. Bell Atlantic began offering combined local and long distance service in January 2000. In July 2000, SBC Communications, Inc. became the second RBOC to receive such approval, this time for the state of Texas, and began providing combined local and long distance service in July 2000. In January 2001, the FCC approved SBC Communications' request for such authority for the states of Oklahoma and Kansas, and pursuant to the terms of that authority SBC will be free to begin providing combined local and long distance services in those states in March 2001. In January 2001, Verizon filed an application with the FCC for such authority for the state of Massachusetts. This is Verizon's second filing for the state of Massachusetts, and the FCC is required to issue a decision on the application in April 2001. Regulation of Rates AT&T is subject to the jurisdiction of the FCC with respect to interstate and international rates, lines and services, and other matters. From July 1989 to October 1995, the FCC regulated AT&T under a system known as "price caps" whereby AT&T's prices, rather than its earnings, were limited. On October 12, 1995, recognizing a decade of enormous change in the long distance market and finding that AT&T lacked market power in the interstate long distance market, the FCC reclassified AT&T as a "non-dominant" carrier for its domestic interstate services. As a result, AT&T became subject to the same regulations as its long distance competitors for such services. Thus, AT&T was no longer subject to price cap regulation for these services, was able to file tariffs that are presumed lawful on one day's notice, and was free of other regulations and reporting requirements that apply only to dominant carriers. In addition, on October 31, 1996, the FCC issued an order that would have prohibited non-dominant carriers, including AT&T, from filing tariffs for their domestic interstate services. Non-dominant carriers, including AT&T, have begun implementation of mechanisms other than tariffs to establish the terms and conditions that apply to domestic, interstate telecommunications services, and by August 1, 2001 will have to use such mechanisms for virtually all domestic, interstate telecommunications services. In March 2001, the FCC adopted an order applying detariffing requirements to international services. Furthermore, in May 1997, the FCC adopted three orders relating to Price Caps, Access Reform, and Universal Service that substantially revised the level and structure of access charges that AT&T as a long distance carrier pays to incumbent LECs. Under the Price Cap Order, LECs were required to reduce their price cap indices by 6.5 percent annually, less an adjustment for inflation, which has resulted in significant reductions in access charges that long distance companies pay to LECs. The Access Reform Order permitted increased flat-rate assessments to multiline business customers and to residential customers other than for the primary telephone line. AT&T has agreed to pass through to consumers any savings to AT&T as a result of these access charge reforms. Consequently, AT&T's results after June 1997 reflect lower revenue per minute of usage and lower access and other interconnection costs per minute of usage. In May 2000, the FCC adopted the CALLS Order for the price cap LECs which made additional significant access and price cap changes. The CALLS Order reduced by $3.2 billion during 2000 the interstate access charges that AT&T and other long distance carriers pay to these LECs for access to their networks, and established target access rates for these companies, which over the next two years will result in further reductions, albeit of a much smaller magnitude. Once the target rates are reached, the annual price reductions required by the Price Cap Order no longer apply. In addition, the CALLS Order removed implicit subsidies from access charges and converted them into an explicit, portable subsidy administered as part of the universal service program described below. Also, under CALLS, the caps on certain line-based costs that do not vary with usage have been increased so that these costs are increasingly recovered from end user customers. These restructurings allowed the reduction in access charges assessed on long distance carriers on a usage basis. As part of the CALLS Order, AT&T agreed to flowthrough to customers access charge reductions over the five-year life of the CALLS plan and made certain other commitments regarding the rate structure of certain residential long distance offerings. Under the August 1999 LEC Pricing Flexibility Order, which was affirmed by the D.C. Circuit in February 2001, the FCC established certain triggers that enable the price cap LECs to obtain pricing flexibility for their interstates access services, including Phase II relief that permits them to remove these services from price cap regulation. Although these triggers supposedly indicate a competitive presence sufficient to constrain monopoly pricing by the LECs, in fact, they may allow for premature deregulation which could force access rates upwards. Finally, in the Universal Service Order, the FCC adopted a new mechanism for funding universal service, which includes programs that defray the costs of telephone service in high-cost areas, for low-income consumers, and for schools, libraries and rural health care providers. Specifically, the FCC expanded the set of carriers that must contribute to support universal service from only long distance carriers to all carriers, including LECs, that provide interstate telecommunications services. Similarly, the set of carriers eligible for the universal service support has been expanded from only LECs to any eligible carrier providing local service to a customer, including AT&T as a new entrant in local markets. The Universal Service Order also adopted measures to provide discounts on telecommunications services, Internet access and inside wire to for eligible schools and libraries and on telecommunications services only for rural health care providers. AT&T remains subject to the statutory requirements of Title II of the Communications Act. AT&T must offer service under rates, terms and conditions that are just, reasonable and not unreasonably discriminatory; it is subject to the FCC's complaint process, and it must give notice to the FCC and affected customers prior to discontinuance, reduction, or impairment of service. Commitments made by AT&T to address concerns that had been raised about declaring AT&T to be non-dominant have been satisfied or otherwise expired. In addition to the matters described above with respect to the Telecommunications Act, state public service commissions or similar authorities having regulatory power over intrastate rates, lines and services and other matters regulate AT&T's local and intrastate communications services. The system of regulation used in many states is rate-of-return regulation. In recent years, many states have adopted different systems of regulation, such as: complete removal of rate-of-return regulation, pricing flexibility rules, price caps and incentive regulation. Wireless Regulatory Environment The FCC regulates the licensing, construction, operation, acquisition, sale and resale of wireless systems in the United States pursuant to the Communications Act of 1934 and the associated rules, regulations and policies promulgated by the FCC. FCC terminology distinguishes between "cellular" licenses, which utilize a frequency of 850 megahertz, and ""PCS" licenses, which utilize a frequency of 1900 megahertz. The different types of licenses and their associated systems may have differing technical characteristics. Licensing of wireless services systems AT&T Wireless Group owns protected geographic service area licenses granted by the FCC to provide cellular service and PCS. It also owns licenses granted by the FCC to provide point-to-multi-point communications services in various bands, including significant licenses in the 37 to 39 gigahertz bands. A cellular system operates on one of two 25 megahertz frequency blocks that the FCC allocates for cellular radio service. Cellular systems generally are used for two-way mobile voice applications, although they may be used for data applications and fixed wireless services as well. Cellular license areas are issued for either metropolitan service areas or rural service areas. Initially, one of the two cellular licenses available in each metropolitan service area or rural service area was awarded to a local exchange telephone company by the FCC, while the other license was awarded either through competitive processes or lotteries. Licenses were issued beginning in 1983, and over the years numerous license transfers and corporate reorganizations have obscured the original pattern of distributing one set of licenses to local telephone company affiliates and the other to companies that do not have local exchange service in the license area. A PCS system operates on one of six frequency blocks allocated for personal communications services. PCS systems generally are used for two-way voice applications although they may carry two-way data communications as well. For the purpose of awarding PCS licenses, the FCC has segmented the United States into 51 large regions called major trading areas, which are comprised of 493 smaller regions called basic trading areas. The FCC awarded two PCS licenses for each major trading area and four licenses for each basic trading area. The two major trading area licenses authorize the use of 30 megahertz of spectrum. One of the basic trading area licenses is for 30 megahertz of spectrum, and the other three are for 10 megahertz each. The FCC permits licensees to split their licenses and assign a portion, on either a geographic or frequency basis or both, to a third party. The FCC awarded initial PCS licenses by auction. Auctions began with the 30 megahertz major trading area licenses and concluded in 1998 with the last of the basic trading area licenses. However, in March 1998, the FCC adopted an order that allowed financially troubled entities that won PCS 30 megahertz C-Block licenses at auction to obtain financial relief from their payment obligations and to return some or all of their C-Block licenses to the FCC for reauctioning. The FCC completed the reauction of the returned licenses in April 1999. In addition, certain of the C-block licenses are currently in bankruptcy proceedings. The FCC cancelled some of these licenses, and completed the reauction of the licenses in January 2001. The FCC's cancellation of the licenses has been challenged by one of the bankrupt licensees, and there is no guarantee that the reauction or the award of any licenses pursuant to the reauction will not be affected by this challenge. Under the FCC's current spectrum aggregation rules, no entity may hold attributable interests, generally 20% or more of the equity of, or an officer or director position with, the licensee, in licenses for more than 45 megahertz of PCS, cellular and certain specialized mobile radio services where there is significant overlap in any geographic area. Significant overlap will occur when at least 10% of the population of the PCS licensed service area is within the cellular and/or specialized mobile radio service area(s). The FCC recently increased this limit to 55 megahertz for rural areas. These spectrum aggregation rules are subject to a pending FCC proceeding that could revise or eliminate them. All wireless licenses have a 10-year term, at the end of which term they must be renewed. The FCC will award a renewal expectancy to a wireless licensee that has provided substantial service during its past license term, and has substantially complied with applicable FCC rules and policies and the Communications Act. Licenses may be revoked for cause and license renewal applications denied if the FCC determines that a renewal would not serve the public interest. FCC rules provide that competing renewal applications for licenses will be considered in comparative hearings, and establish the qualifications for competing applications and the standards to be applied in hearings. All wireless licenses must satisfy specified coverage requirements. Cellular licenses were required, during the five years following the grant of the initial license, to construct their systems to provide service (at a specified signal strength) to the territory encompassed by their service area. Failure to provide such coverage resulted in reduction of the relevant license area by the FCC. All A, B and C block PCS licensees must construct facilities that offer coverage to one-third of the population of the service area within five years of the initial license grants and to two-thirds of the population within ten years. All D, E and F block PCS licensees must construct facilities that offer coverage to one-fourth of the population of the licensed area or "make a showing of substantial service in their license area" within five years of the original license grants. Other point-to-multi-point licenses require a showing of substantial service at renewal. Licensees that fail to meet the coverage requirements may be subject to forfeiture of the license. In an effort to balance the competing interests of existing microwave users in the PCS bands and newly authorized PCS licensees, the FCC has adopted a transition plan to relocate such microwave operators to other spectrum blocks and a cost sharing plan so that if the relocation of an incumbent benefits more than one PCS licensee, those licensees will share the cost of the relocation. The transition period contemplates negotiations between microwave licensees and PCS licensees to accomplish the transition and to govern the terms and conditions of the transition of microwave licensees from the PCS spectrum. Generally, there is a "voluntary" negotiation period during which incumbent microwave licensees can, but do not have to negotiate with PCS licensees. This is followed by a "mandatory" negotiation period during which incumbent microwave licensees must negotiate in good faith with PCS licensees. Wireless systems are subject to certain FAA regulations governing the location, lighting and construction of transmitter towers and antennas and are subject to regulation under federal environmental laws and the FCC's environmental regulations. State or local zoning and land use regulations also apply to tower siting and construction activities. We expect to use common carrier point-to-point microwave facilities to connect certain wireless cell sites, and to link them to the main switching office. The FCC licenses these facilities separately and they are subject to regulation as to technical parameters and service. The Communications Act preempts state and local regulation of the entry of, or the rates charged by, any provider of private mobile radio service or of commercial mobile radio service, which includes PCS and cellular service. The FCC does not regulate commercial mobile radio service or private mobile radio service rates. However, commercial mobile radio service providers are common carriers and are required under the Communications Act to offer their services to the public without unreasonable discrimination. The FCC's rules currently require providers to permit others to resell their services for a profit; however, these rules will expire in 2002. Transfers and assignments of spectrum licenses Except for transfers of control or assignments that are considered pro forma, the Communications Act and FCC rules require the FCC's prior approval for the assignment of a license or transfer of control of a licensee for a PCS or cellular system and other types of wireless licenses. In addition, the FCC has established transfer disclosure requirements that require licensees who assign or transfer control of a PCS license within the first three years of their license terms to file associated sale contracts, option agreements, management agreements or other documents disclosing the total consideration that the licensee would receive in return for the transfer or assignment of its license. Non-controlling interests in an entity that holds an FCC license generally may be bought or sold without FCC approval subject to the FCC's spectrum aggregation limits. However, notification and expiration or earlier termination of the applicable waiting period under Section 7A of the Clayton Act by either the Federal Trade Commission or the Department of Justice may be required if we sell or acquire interests over a certain size. Approval by state or local regulatory authorities having competent jurisdiction may also be required in some circumstances. Foreign ownership Under existing law, no more than 20% of an FCC licensee's capital stock may be owned, directly or indirectly, or voted by non-U.S. citizens or their representatives, by a foreign government or its representatives or by a foreign corporation. If an FCC licensee is controlled by another entity, as is the case with our ownership structure, up to 25% of that entity's capital stock may be owned or voted by non-U.S. citizens or their representatives, by a foreign government or its representatives or by a foreign corporation. Foreign ownership above the 25% level may be allowed should the FCC and such higher levels not inconsistent with the public interest. The FCC has ruled that higher levels of foreign ownership, even up to 100%, are presumptively consistent with the public interest with respect to investors from certain nations. If our foreign ownership were to exceed the permitted level, the FCC could revoke our FCC licenses, although we could seek a declaratory ruling from the FCC allowing the foreign ownership or take other actions to reduce our foreign ownership percentage in order to avoid the loss of our licenses. We have no knowledge of any present foreign ownership in violation of these restrictions. Recent regulatory developments The FCC has announced rules for making emergency 911 services available by cellular, PCS and other commercial mobile radio service providers, including enhanced 911 services that provide the caller's telephone number, location and other useful information. Commercial mobile radio service providers are required to take actions enabling them to relay a caller's automatic number identification and location (initially the location of the cell site first transmitting the call, and ultimately by an approximation of the caller's actual location) if requested to do so by a public safety dispatch agency. Providers may use either network or handset-based technologies to provide the approximation of the caller's actual location. There is no requirement that dispatch agencies reimburse provider for their costs of deploying such technologies. 911 service must be made available to users with speech or hearing disabilities, but this requirement does not apply to providers of digital wireless services until 2002. Finally, wireless handsets capable of receiving analog signals must be able to complete 911 calls using the strongest analog signal available to the caller, even if the caller does not subscribe to the carrier providing the strongest signal. State actions incompatible with the FCC rules are subject to preemption by the FCC. On August 8, 1996, the FCC released its order implementing the interconnection provisions of the Telecommunications Act. Although many of the provisions of this order were struck down by the U.S. Court of Appeals for the Eighth Circuit, on January 25, 1999, the U.S. Supreme Court reversed the Eighth Circuit and upheld the FCC in all respects material to our operations. On June 10, 1999, the Eighth Circuit issued an order requesting briefs on certain issues it did not address in its earlier order, including the pricing regime for interconnection. While appeals have been pending, the rationale of the FCC's order has been adopted by many states' public utility commissions, with the result that the charges that cellular and PCS operators pay to interconnect their traffic to the public switched telephone network have declined significantly from pre-1996 levels. In July 2000, the Eighth Circuit rejected certain aspects of the FCC's pricing methodology, but stayed its order pending appeal by affected parties to the U.S. Supreme Court. The U.S. Supreme Court has agreed to review this case. In its implementation of the Telecommunications Act, the FCC established federal universal service requirements that affect commercial mobile radio service operators. Under the FCC's rules, commercial mobile radio service providers are potentially eligible to receive universal service subsidies for the first time; however, they are also required to contribute to the federal universal service fund and can be required to contribute to state universal funds. Many states are moving forward to develop state universal service fund programs. A number of these state funds require contributions, varying greatly from state to state, from commercial mobile radio service providers. The FCC's universal service order was modified on appeal in the U.S. Court of Appeals for the Fifth Circuit. The court's ruling has had the effect of reducing commercial mobile radio service provider support payments required for the federal universal service programs. The U.S. Supreme Court has agreed to address the constitutionality of the FCC's universal service order, in particular as it affects the amount of funds to which telephone companies are entitled to help defray the costs of providing basic telephone service. The Court's determination may also affect the FCC's interconnection pricing methodology. On August 1, 1996, the FCC released a report and order expanding the flexibility of cellular, PCS and other commercial mobile radio service providers to provide fixed as well as mobile services. These fixed services include, but need not be limited to, wireless local loop services, for example, to apartment and office buildings, and wireless backup services to private branch exchange or switchboards and local area networks, to be used in the event of interruptions due to weather or other emergencies. If the fixed services are provided as an ancillary service to a carrier's mobility services, the FCC has decided that such fixed services should be regulated as commercial mobile radio services. The FCC declined to render a prospective ruling on how fixed services provided on a co-primary basis with mobility services should be regulated or if they should be subjected to universal service obligations. Rather, it has announced its intention to decide such matters on a case-by-case basis depending on the characteristics of a provider's fixed service offering. The FCC has been presented with one such case, but has not yet ruled on it. It is unclear what effect, if any, such a ruling would have on the business of AT&T Wireless Group. The FCC has adopted rules on telephone number portability that will enable customers to migrate their landline and cellular telephone numbers to cellular or PCS providers and from a cellular or PCS provider to another service provider. On February 8, 1999, the FCC extended the deadline for compliance with this requirement to November 24, 2002, subject to any later determination that number portability is necessary to conserve telephone numbers. The FCC has also adopted rules requiring cellular and PCS providers to provide certain functions to facilitate electronic surveillance by law enforcement officials by June 30, 2000. Carriers must be able to provide additional surveillance capabilities by September 30, 2001. AT&T Wireless Group has sought permission for a flexible deployment schedule from the FCC. The FCC has not ruled on the request and there can be no assurance that the FCC will grant the request. In addition, in August 2000, the U.S. Court of Appeals for the District of Columbia Circuit invalidated some of these rules and remanded them to the FCC for further consideration. Various other petitions are pending before the FCC seeking suspension or further extensions of the deadlines applicable to providing surveillance capabilities. It is not known how the FCC will revise its rules or whether it will extend either or both of the compliance deadlines or what the scope of penalties for failing to comply may be. In 1997, the FCC determined that the rate integration requirement of the Communications Act applies to the interstate, interexchange services of commercial mobile radio service providers. Rate integration requires a carrier to provide service between the continental U.S. and offshore U.S. states and territories under the same rate structure applicable to service between two points in the continental U.S. The FCC delayed implementation of the rate integration requirements with respect to wide area rate plans we offer pending further reconsideration of its rules. The FCC also delayed the requirement to integrate commercial mobile radio service long distance rates among commercial mobile radio service affiliates. On December 31, 1998, the FCC reaffirmed, on reconsideration, that its interexchange rate integration rules apply to interexchange commercial mobile radio service services. The FCC announced it would initiate a further proceeding to determine how integration requirements apply to typical commercial mobile radio service offerings, including one-rate plans. In July 2000, the U.S. Court of Appeals for the District of Columbia Circuit reversed the FCC's holding that the Communications Act unambiguously extends rate integration to providers of commercial mobile services. The court remanded the matter to the FCC for further consideration. Pending conclusion of this further proceeding, the rate integration requirement does not apply to commercial mobile services. To the extent that AT&T Wireless Group is required to offer services subject to the FCC's rate integration requirements, its pricing flexibility will be reduced. We cannot assure you that the FCC will decline to impose rate integration requirements on AT&T Wireless Group or decline to require it to integrate its commercial mobile radio service long distance rates across its commercial mobile radio service affiliates. In 1998, the FCC adopted new rules limiting the use of customer proprietary network information by telecommunications carriers in marketing a broad range of telecommunications and other services to their customers and the customers of affiliated companies. The rules were struck down by the U.S. Court of Appeals for the Tenth Circuit in 1999, and their effectiveness has been stayed pending the court's review of a petition to the FCC for reconsideration. Even if the rules are reinstated, AT&T Wireless Group does not anticipate that they will result in a significant adverse impact on its financial position, results of operation or liquidity. State commissions have become increasingly aggressive in their efforts to conserve numbering resources. Examples of state conservation methods include: number pooling, number rationing and code sharing. A number of states have petitioned the FCC for authority to adopt "technology specific" overlays that would require wireless providers to obtain telephone numbers out of a separate area code and may require wireless providers to change their customers' telephone numbers. These efforts may impact wireless service providers by imposing additional costs or limiting access to numbering resources. The FCC has adopted detailed billing rules for landline telecommunications service providers and applied a number of these rules to commercial mobile radio services providers. The FCC is considering whether carriers that decide to pass through their mandatory universal service contributions to their customers should be required to provide a full explanation of the program, and whether to ensure that the carriers that pass through their contribution do not recover amounts greater than their mandatory contributions from their customers. Adoption of some of the FCC's proposals could increase the complexity of our billing processes and restrict our ability to bill customers for services in the most commercially advantageous way. The FCC has adopted an order that determines the obligations of telecommunications carriers to make their services accessible to individuals with disabilities. The order requires telecommunications services providers to offer equipment and services that are accessible to and useable by persons with disabilities. While the rules exempt telecommunications carriers from meeting general disability access requirements if such results are not readily achievable, it is not clear how liberally the FCC will construe this exemption. Accordingly, the rules could require us to make material changes to our network, product line, or services at our expense. In June 1999, the FCC initiated an administrative rulemaking proceeding to help facilitate the offering of calling party pays as an optional wireless service. Under the calling party pays service, the party placing the call to a wireless customer pays the wireless airtime charges. Most wireless customers in the United States now pay both to place calls and to receive them. Adoption of a calling party pays system on a widespread basis could make commercial mobile radio service providers more competitive with traditional landline telecommunications providers for the provision of regular telephone service. The FCC has adopted rules specifying standards and the methods to be used in evaluating radiofrequency emissions from radio equipment, including network equipment and handsets used in connection with commercial mobile radio service. These rules were upheld on appeal by the U.S. Court of Appeals for the Second Circuit. The U.S. Supreme Court declined to review the Second Circuit's ruling. AT&T Wireless Group's network facilities and the handsets it sells to customers comply with these standards. Media reports have suggested that some radio frequency emissions from wireless handsets may be linked to health concerns, including the incidence of cancer. Although some studies have suggested that radio frequency emissions may cause certain biological effects, all of the expert reviews conducted to date have concluded that the evidence does not support a finding of adverse health effects but that further research is appropriate. Earlier this year, CTIA entered into a Cooperative Research and Development Agreement to sponsor such research. Studies have shown that some hand-held digital telephones may interfere with some medical devices, including hearing aids and pacemakers. The FDA has recently issued guidelines for the use of wireless phones by pacemaker wearers. Additional studies are underway to evaluate and improve the compatibility of hearing aids and digital wireless phones. State and local regulation State and local governments are preempted from regulating either market entry by, or the rates of, wireless operators. However, state governments can regulate other terms and conditions of wireless service and several states have imposed, or have proposed legislation that will impose, various consumer protection regulations on the wireless industry. As noted above, States also may impose their own universal service support regimes on wireless and other telecommunications carriers, similar to the requirements that have been established by the FCC and have been delegated certain authority by the FCC in the area of number allocation and administration. At the local level, wireless facilities typically are subject to zoning and land use regulation. However, under the federal Telecommunications Act, neither local nor state governments may categorically prohibit the construction of wireless facilities in any community or unreasonably discriminate against a carrier. Numerous State and local jurisdictions have considered imposing conditions on a driver's use of wireless technology while operating a motor vehicle, and a few have actually done so. Cable Regulation and Legislation The operation of cable television systems is extensively regulated by the FCC, some state governments and most local governments. The Telecommunications Act altered the regulatory structure governing the nation's telecommunications providers. It removes barriers to competition in both the cable television market and the local telephone market. Among other things, it reduces the scope of cable rate regulation. The Telecommunications Act required the FCC to implement numerous rulemakings, some of which are still subject to court challenges. Moreover, Congress and the FCC have frequently revisited the subject of cable television regulation and may do so again. Future legislative and regulatory changes could adversely affect AT&T Broadband's operations. This section briefly summarizes key laws and regulations currently affecting the growth and operation of AT&T Broadband's cable systems. Cable Rate Regulation The 1992 Cable Act imposed an extensive rate regulation regime on the cable television industry, which limited the ability of cable companies to increase subscriber fees. Under that regime, all cable systems were subjected to rate regulation, unless they face "effective competition" in their local franchise area. Federal law now defines "effective competition" on a community-specific basis as requiring satisfaction of conditions not typically satisfied in the current marketplace. Although the FCC establishes all cable rate rules, local government units (commonly referred to as local franchising authorities or "LFAs") are primarily responsible for administering the regulation of the lowest level of cable - the basic service tier ("BST"), which typically contains local broadcast stations and PEG access channels. Before an LFA begins BST rate regulation, it must certify to the FCC that it will follow applicable federal rules, and many LFAs have voluntarily declined to exercise this authority. LFAs also have primary responsibility for regulating cable equipment rates. Under federal law, charges for various types of cable equipment must be unbundled from each other and from monthly charges for programming services, and priced no higher than the operator's actual cost, plus an 11.25% rate of return. The FCC historically administered rate regulation of any cable programming service tiers ("CPST"), which typically contain satellite-delivered programming. Under the Telecommunications Act, however, the FCC's authority to regulate CPST rates sunset on March 31, 1999. Cable Entry Into Telecommunications The Telecommunications Act provides that no state or local laws or regulations may prohibit or have the effect of prohibiting any entity from providing any interstate or intrastate telecommunications service. States are authorized, however, to impose "competitively neutral" requirements regarding universal service, public safety and welfare, service quality, and consumer protection. State and local governments also retain their authority to manage the public rights-of way. Although the Telecommunications Act clarifies that traditional cable franchise fees may be based only on revenues related to the provision of cable television services, it also provides that LFAs may require reasonable, competitively neutral compensation for management of the public rights-of-way when cable operators provide telecommunications service." The Telecommunications Act prohibits LFAs from requiring cable operators to provide telecommunications service or facilities as a condition of a franchise grant, renewal or transfer, except that LFAs argue they can seek "institutional networks" as part of such franchise negotiations. The favorable pole attachment rates afforded cable operators under federal law can be increased by utility companies owning the poles during a five year phase-in period beginning in 2001 if the cable operator provides telecommunications service, as well as cable service, over its plant. The FCC clarified that a cable operator's provision of cable Internet service does not affect the favorable pole rates, but a recent decision by the Eleventh Circuit Court of Appeals disagreed and suggested that Internet traffic is neither cable service nor telecommunications service and might leave cable attachments that carry Internet traffic ineligible for the federal rate structure. This decision could lead to substantial increases in pole attachment rates, and certain utilities have already proposed vastly higher pole attachment rates based in part on the existing court decision. The United States Supreme Court is now reviewing this decision. The Eleventh Circuit mandate has been stayed pending Supreme Court action, and a variety of cable operators, including AT&T Broadband, are challenging certain increased pole attachment rates at the FCC. Cable entry into telecommunications will be affected by the regulatory landscape now being fashioned by the FCC and state regulators. One critical component of the Telecommunications Act intended to facilitate the entry of new telecommunications providers (including cable operators) is the interconnection obligation imposed on all telecommunications carriers. This requires, for example, that the incumbent local telephone company must allow new competing telecommunications providers to connect to the local telephone distribution system. A number of implementation details are subject to ongoing regulatory and judicial review, but the basic requirement is now well established. Cable Systems Providing Internet Service Although there is at present no significant federal regulation of cable system delivery of Internet services, and the Federal Communications Commission recently issued several reports finding no immediate need to impose such regulation, this situation may change as cable systems expand their broadband delivery of Internet services. In particular, proposals have been advanced at the Federal Communications Commission and Congress that would require cable operators to provide access to unaffiliated Internet service providers and online service providers. The Federal Trade Commission and the FCC recently imposed certain open access requirements on Time Warner and AOL in connection with their merger, but those requirements are not applicable to other cable operators. Some states and local franchising authorities are considering the imposition of mandatory Internet access requirements as part of cable franchise renewals or transfers. In June 2000, the Ninth Circuit Court of Appeals rejected an attempt by the City of Portland, Oregon to impose mandatory Internet access requirements on the local cable operator. AT&T Broadband has commenced a technical and operational trial to test how multiple Internet service providers can offer high-speed, always-on cable Internet service over a hybrid fiber coaxial network. Telephone Company Entry Into Cable Television The Telecommunications Act allows telephone companies to compete directly with cable operators by repealing the historic telephone company/cable company cross-ownership ban and the FCC's video dial tone regulations. This will allow LECs, including the RBOCs, to compete with cable operators both inside and outside their telephone service areas. Because of their resources, LECs could be formidable competitors to traditional cable operators, and certain LECs have begun offering cable service. Under the Telecommunications Act, a LEC or other entity providing video programming to customers will be regulated as a traditional cable operator (subject to local franchising and federal regulatory requirements), unless it elects to provide its programming via an "open video system" ("OVS"). It was anticipated that the primary benefit of using an OVS regulatory model was to avoid the need to obtain a local franchise prior to providing services. However, a January 1999 federal court of appeals decision held that OVS providers can be required to obtain such a franchise. To be eligible for OVS status, the provider cannot occupy more than one-third of the system's activated channels when demand for channels exceeds supply. Nor can it discriminate among programmers or establish unreasonable rates, terms or conditions for service. Although LECs and cable operators can now expand their offerings across traditional service boundaries, the general prohibitions remain on LEC buyouts (i.e., any ownership interest exceeding10 percent) of co-located cable systems, cable operator buyouts of co-located LEC systems, and joint ventures among cable operators and LECs in the same market. The Telecommunications Act provides a few limited exceptions to this buyout prohibition. Electric Utility Entry Into Telecommunications/Cable Television The Telecommunications Act provides that registered utility holding companies and subsidiaries may provide telecommunications services, information services, and other services or products subject to the jurisdiction of the FCCs notwithstanding the public Utilities Holding Company Act. Electric utilities must establish separate subsidiaries, known as "exempt telecommunications companies" and must apply to the FCC for operating authority. Again, because of their resources, electric utilities could be formidable competitors to traditional cable systems. Cable Television Ownership Restrictions Pursuant to the 1992 Cable Act, the FCC adopted regulations establishing a 30% limit on the number of multichannel video subscribers (including cable and DBS subscribers) nationwide that a cable operator may reach through cable systems in which it holds an attributable interest, with an increase to 35% if the additional cable systems are minority controlled. The FCC stayed the effectiveness of its ownership limits pending judicial review. The Federal Communications Commission directly addressed the 30% ownership rule (and the applicable ownership attribution standards) in its June 2000 ruling on AT&T's merger with MediaOne. The FCC allowed the merger to go forward, but required AT&T to elect one of three divestiture options to come into compliance with the 30% ownership cap. Compliance (or arrangements for compliance) is required by May, 2001. The FCC previously adopted regulations limiting carriage by the cable operator of national programming services in which that operator holds an attributable interest to 40% of the activated channels on each of the cable operator's systems. The rules provide for the use of two additional channels or a 45% limit, whichever is greater, provided that the additional channels carry minority controlled programming services. The regulations also grandfather existing carriage arrangements which exceed the channel limits, but require new channel capacity to be devoted to unaffiliated programming services until the system achieves compliance with the regulations. These channel occupancy limits apply only up to75 activated channels on the cable system, and the rules do not apply to local or regional programming services. In March, 2001, the D.C. Circuit Court of Appeals struck down the rules adopted by the FCC pertaining to ownership and programming carriage and remanded the issues back to the FCC for further review. The impact of this decision, including its impact on the MediaOne Order, is not yet known. The Telecommunications Act eliminates statutory restrictions on broadcast/cable cross-ownership (including broadcast network/cable restrictions), but leaves in place existing FCC regulations prohibiting local cross-ownership between television stations and cable systems. The Telecommunications Act leaves in place existing restrictions on cable cross-ownership with SMATV and MMDS facilities, but lifts those restrictions where the cable operator is subject to effective competition. In January 1995, however, the FCC adopted regulations which permit cable operators to own and operate SMATV systems within their franchise area, provided that such operation is consistent with local cable franchise requirements. Must Carry/Retransmission Consent The 1992 Cable Act contains broadcast signal carriage requirements that allow local commercial television broadcast stations to elect once every three years between requiring a cable system to carry the station ("must carry") or negotiating for payments for granting permission to the cable operator to carry the station ("retransmission consent"). Less popular stations typically elect must carry, and more popular stations typically elect retransmission consent. Must carry requests can dilute the appeal of a cable system's programming offerings, and retransmission consent demands may require substantial payments or other concessions (e.g. a requirement that the cable system also carry the local broadcaster's affiliated cable programming service). Either option has a potentially adverse effect on AT&T Broadband's business. The burden associated with must-carry obligations could dramatically increase if television broadcast stations proceed with planned conversions to digital transmissions and if the FCC determines that cable systems must carry simultaneously all analog and digital signals transmitted by the television stations during the multi-year transition in which a single broadcast license is authorized to transmit both an analog and a digital signal. The FCC tentatively decided against imposition of dual digital and analog must carry in a January 2001 ruling. At the same time, however, it initiated further fact-gathering which ultimately could lead to a reconsideration of that tentative conclusion. Access Channels LFAs can include franchise provisions requiring cable operators to set aside certain channels for non-commercial public, educational and governmental ("PEG") access programming. Federal law also requires a cable system with 36 or more channels to designate a portion of its activated channel capacity (up to 15%) for commercial leased access by unaffiliated third parties. The FCC has adopted rules regulating the terms, conditions and maximum rates a cable operator may charge for use of this designated channel capacity, but use of commercial leased access channels has been relatively limited. "Anti-Buy Through" Provisions Federal law requires each cable system to permit customers to purchase premium or pay-per-view video programming offered by the operator on a per-channel or a per-program basis without the necessity of subscribing to any tier of service (other than the basic service tier) unless the system's lack of addressable converter boxes or other technological limitations does not permit it to do so. The statutory exemption for cable systems that do not have the technological capability to comply expires in October 2002, but the FCC may extend that period if deemed necessary. Access to Programming To spur the development of independent cable programmers and competition to incumbent cable operators, the 1992 Cable Act imposed restrictions on the dealings between cable operators and cable programmers. Of special significance from a competitive business posture, the 1992 Cable Act precludes satellite video programmers affiliated with cable operators from favoring cable operators over competing multichannel video programming distributors (such as DBS and MMDS distributors). This provision limits the ability of vertically integrated satellite cable programmers to offer exclusive programming arrangements to AT&T Broadband. Both Congress and the FCC have considered proposals that would expand the program access rights of cable's competitors, including the possibility of subjecting both terrestrially delivered video programming and video programmers who are not affiliated with cable operators to all program access requirements. Pursuant to the Satellite Home Viewer Improvement Act, the FCC has adopted regulations governing retransmission consent negotiations between broadcasters and all multichannel video programming distributors, including cable and DBS. Inside Wiring; Subscriber Access Federal Communications Commission rules require an incumbent cable operator upon expiration of a multiple dwelling unit service contract to sell, abandon, or remove "home run" wiring that was installed by the cable operator in a multiple dwelling unit building. These inside wiring rules are expected to assist building owners in their attempts to replace existing cable operators with new programming providers who are willing to pay the building owner a higher fee, where such a fee is permissible. The Federal Communications Commission has also proposed abrogating all exclusive multiple dwelling unit service agreements held by incumbent operators, but allowing such contracts when held by new entrants. In another proceeding, the Federal Communications Commission has preempted restrictions on the deployment of private antenna on rental property within the exclusive use of a tenant, such as balconies and patios. This Federal Communications Commission ruling may limit the extent to which multiple dwelling unit owners may enforce certain aspects of multiple dwelling unit agreements which otherwise prohibit, for example, placement of digital broadcast satellite receiver antennae in multiple dwelling unit areas under the exclusive occupancy of a renter. These developments may make it more difficult for AT&T Broadband to provide service in multiple dwelling unit complexes. Other Regulations of the Federal Communications Commission In addition to the Federal Communications Commission regulations noted above, there are other regulations of the Federal Communications Commission covering such areas as: o equal employment opportunity (currently suspended as a result of a judicial ruling), o subscriber privacy, o programming practices, including, among other things: (1) syndicated program exclusivity, which requires a cable system to delete particular programming offered by a distant broadcast signal carried on the system which duplicates the programming for which a local broadcast station has secured exclusive distribution rights, (2) network program nonduplication, (3) local sports blackouts, (4) indecent programming, (5) lottery programming, (6) political programming, (7) sponsorship identification, (8) children's programming advertisements, and (9) closed captioning, o registration of cable systems and facilities licensing, o maintenance of various records and public inspection files, o aeronautical frequency usage, o lockbox availability, o antenna structure notification, o tower marking and lighting, o consumer protection and customer service standards, o technical standards, o consumer electronics equipment compatibility, and o emergency alert systems. The Federal Communications Commission recently ruled that cable customers must be allowed to purchase cable converters from third parties and established a multi-year phase-in during which security functions, which would remain in the operator's exclusive control, would be unbundled from basic converter functions, which could then be satisfied by third party vendors. The first phase implementation date was July 1, 2000. Compliance was technically and operationally difficult in some locations, so AT&T Broadband and several other cable operators filed a request at the FCC that the requirement be waived in those systems. The request resulted in a temporary deferral of the compliance deadline for those systems. The FCC recently initiated an inquiry to determine whether the cable industry's future provision of interactive services should be subject to regulations ensuring equal access and competition among service vendors. The inquiry, which grew out of the Commission's review of the AOL-Time Warner merger, is in its earliest stages. The Federal Communications Commission has the authority to enforce its regulations through the imposition of substantial fines, the issuance of cease and desist orders and/or the imposition of other administrative sanctions, such as the revocation of Federal Communications Commission licenses needed to operate certain transmission facilities used in connection with cable operations. Copyright Cable television systems are subject to federal copyright licensing covering carriage of television and radio broadcast signals. In exchange for filing certain reports and contributing a percentage of their revenue to a federal copyright royalty pool (such percentage varies depending on the size of the system and the number of distant broadcast television signals carried), cable operators can obtain blanket permission to retransmit copyrighted material on broadcast signals. The possible modification or elimination of this compulsory copyright license is subject to continuing review and could adversely affect AT&T Broadband's ability to obtain desired broadcast programming. In addition, the cable industry pays music licensing fees to Broadcast Music, Inc. and the American Society of Composers, Authors and Publishers. Copyright clearances for nonbroadcast programming services are arranged through private negotiations. State and Local Regulation Cable television systems generally are operated pursuant to nonexclusive franchises granted by a municipality or other state or local government entity. The Telecommunications Act clarified that the need for an entity providing cable services to obtain a local franchise depends solely on whether the entity crosses public rights of way. Federal law now prohibits franchise authorities from granting exclusive franchises or from unreasonably refusing to award additional franchises covering an existing cable system's service area. Cable franchises generally are granted for fixed terms and in many cases are terminable if the franchisee fails to comply with material provisions. Non-compliance by the cable operator with franchise provisions may also result in monetary penalties. The terms and conditions of franchises vary materially from jurisdiction to jurisdiction. Each franchise generally contains provisions governing cable operations, service rates, franchise fees, system construction and maintenance obligations, system channel capacity, design and technical performance, customer service standards, and indemnification protections. A number of states subject cable television systems to the jurisdiction of centralized state governmental agencies. Although LFAs have considerable discretion in establishing franchise terms, there are certain federal limitations. For example, LFAs cannot insist on franchise fees exceeding 5% of the system's gross revenue, cannot dictate the particular technology used by the system, and cannot specify video programming other than identifying broad categories of programming. Federal law contains renewal procedures designed to protect incumbent franchisees against arbitrary denials of renewal. Even if a franchise is renewed, the franchise authority may seek to impose new and more onerous requirements such as significant upgrades in facilities and services or increased franchise fees and funding for PEG channels as a condition of renewal. Similarly, if a franchise authority's consent is required for the purchase or sale of a cable system or franchise, such authority may attempt to impose more burdensome or onerous franchise requirements in connection with a request for consent. Historically, franchises have been renewed for cable operators that have provided satisfactory services and have complied with the terms of their franchises. Proposed Changes in Regulation The regulation of cable television systems at the federal, state and local levels is subject to the political process and has been in constant flux over the past decade. Material changes in the law and regulatory requirements must be anticipated and there can be no assurance that AT&T Broadband's business will not be affected adversely by future legislation, new regulation or deregulation. COMPETITION Competition in long distance and local telecommunications services is based on price and pricing plans, the types of services offered, customer service, access to customer premises, and communications quality, reliability and availability, as well as, for business customers, the ability to provide high quality data communication services and technical support. AT&T's principal competitors include MCIWorldcom, Inc., Sprint Corporation, the RBOCs and GTE Corporation. AT&T also experiences significant competition in long distance from a number of newer entrants, such as Qwest, and a large number of smaller entities, including dial around resellers. In addition, long distance telecommunications providers have been facing competition from non-traditional sources, including as a result of technological substitutions, such as Internet telephony, e-mail, and wireless services. The ILECs have very substantial capital and other resources, long standing customer relationships and extensive existing facilities and network rights-of-way and are AT&T's primary competitors in the local services market. Additionally, a number of long distance telecommunication, wireless, cable and other service providers have entered the local services market in competition with AT&T. Some of these actual and potential competitors have substantial financial and other resources. AT&T also competes in the local services market with a number of CLECs, a few of which have existing local networks and significant financial resources. Competition for subscribers among wireless service providers is based principally upon the services and features offered, call quality, customer service, system coverage and price. AT&T Wireless Group's ability to compete successfully will depend, in part, on its ability to anticipate and respond to various competitive factors affecting the industry, including new services that may be introduced, changes in consumer preferences, demographic trends, economic conditions and pricing strategies. Increased competitive pressures, the introduction or popularity of new products and services, including prepaid phone products, as well as a general softening of the economy, could adversely affect our results, increase our churn and decrease our average revenue per user. AT&T Wireless Group's primary national competitors are Cingular, Verizon Wireless, Nextel Communications, Inc., VoiceStream Communications and Sprint PCS. In addition, the wireless communications industry has been experiencing significant consolidation and the AT&T Wireless Group expects that this consolidation will continue. The previously announced, or recently completed, mergers or joint ventures of Bell Atlantic/GTE/Vodafone AirTouch (now called Verizon), SBC/Bell South/Ameritech (now called Cingular) have created large, well-capitalized competitors with substantial financial, technical, marketing and other resources to respond to AT&T Wireless Group's offerings. In addition, in July 2000, VoiceStream Communications and Deutsche Telekom announced a proposed transaction. These mergers or ventures have caused AT&T Wireless Group's ranking to decline to third in U.S. revenue and U.S. subscriber share. In terms of U.S. population covered by licenses, or POPs, AT&T Wireless Group, including partnerships and affiliates, ranks third. As a result, these competitors may be able to offer nationwide services and plans more quickly and more economically than the AT&T Wireless Group and to obtain roaming rates that are more favorable than those obtained by AT&T Wireless Group, and may be better able to respond to offers of AT&T Wireless Group. AT&T Wireless Group's cellular operations have always experienced direct competition from the second cellular licensee in each market. Beginning in 1997, AT&T Wireless Group began experiencing competition from as many as six license holders in certain markets. Competition from new providers in AT&T Wireless Group's markets will continue to increase as the networks of license holders are built out over the next several years. In addition, the FCC is likely to offer additional spectrum for wireless mobile licenses in the future using existing or new technologies. Cable television competes for customers in local markets with other providers of entertainment, news and information. The competitors in these markets include broadcast television and radio, newspapers, magazines and other printed material, motion picture theatres, video cassettes and other sources of information and entertainment including directly competitive cable television operations and internet service providers. The Cable Acts are designed to increase competition in the cable television industry. There are alternative methods of distributing the same or similar video programming offered by cable television systems. These include direct broadcast satellite, known as DBS, (allowing the subscriber to receive video services directly via satellite using a relatively small dish), telephone networks (whether it is through wireless cable, or through upgraded telephone networks), utility company networks, MMDS (which deliver programming services over microwave channels received by customers with special antennas), competitive, non-exclusive franchises, city provided cable services, SMATV systems (which provide multichannel program services directly to hotel, motel, apartment, condominium and similar multi-unit complexes within a cable television system's franchise area, generally free of any regulation by state and local governmental authorities). In addition to competition for customers, the cable television industry competes with broadcast television, radio, the print media and other sources of information and entertainment for advertising revenue. Additionally, as AT&T Broadband begins to offer new services such as high speed Internet access and telephone services, there will be significant competition from both the local telephone companies and new providers of such services. DBS has emerged as significant competition to cable systems. The DBS industry has grown rapidly over the last several years, far exceeding the growth rate of the cable television industry, and now serves approximately 14 million subscribers nationwide DBS companies historically were prohibited from retransmitting popular local broadcast programming, but a change to the existing copyright laws in November 1999 eliminated this legal impediment. DBS companies now need to secure retransmission consent from the popular broadcast stations they wish to carry, and they will face mandatory carriage obligations of less popular broadcast stations as of January 2002. In response to the legislation, DirecTV, Inc. and EchoStar Communications Corporation already have begun carrying the major network stations in the nation's top television markets. DBS, however, is limited in the local programming it can provide because of the current capacity limitations of satellite technology. It is, therefore, expected that DBS companies will offer local broadcast programming only in the larger U.S. markets for the foreseeable future. The DBS industry recently initiated a judicial challenge to the statutory requirement mandating carriage of less popular broadcast stations. This lawsuit alleges that the must carry requirement (similar to the one already applicable to cable systems) is unconstitutional. EchoStar began providing high-speed Internet access in late 2000, and DirecTV, who has partnered with AOL, reports that it will begin providing its own version of high-speed Internet access shortly. These developments will provide significant new competition to AT&T Broadband's offering of high speed Internet access. AT&T currently faces significant competition and expects that the level of competition will continue to increase. As competitive, regulatory and technological changes occur, including those occasioned by the Telecommunications Act, AT&T anticipates that new and different competitors will enter and expand their positions in the communications services markets. These may include entrants from other segments of the communications and information services industry or global competitors seeking to expand their market opportunities. Many such new competitors are likely to enter with a strong market presence, well recognized names and pre-existing direct customer relationships. The Telecommunications Act has already had a significant impact on the competitive environment. Anticipating changes in the industry, non-RBOC LECs, which are not required to implement the Telecommunications Act's competitive checklist prior to offering long distance in their home markets, have integrated their local service offerings with long distance offerings in advance of AT&T offering combined local and long distance service in these areas, and continue to adversely affect AT&T's revenues and earnings in these service regions. In addition, the Telecommunications Act permits RBOCs to provide interLATA interexchange services after demonstrating to the FCC that such provision is in the public interest, and that it has satisfied the conditions for developing local competition established by the Telecommunications Act. The RBOCs have petitioned the FCC for permission to provide interLATA interexchange services in one or more states within their home market; to date the FCC has granted four of these petitions. In December 1999, Verizon became the first RBOC to obtain approval to provide long distance in a state within its home territory, in New York. The FCC authorized SBC Communications, Inc.'s Texas application in April 2000. More recently, in February 2001, the FCC approved SBC applications in Kansas and Oklahoma. To the extent that the RBOCs obtain in-region interLATA authority before the Telecommunications Act's checklist of conditions have been fully or satisfactorily implemented and adequate facilities-based local exchange competition exists, there is a substantial risk that AT&T and other interexchange service providers would be at a disadvantage to the RBOCs in providing both local service and combined service packages. Because it is widely anticipated that substantial numbers of long distance customers will seek to purchase local, interexchange and other services from a single carrier as part of a combined or full service package, any competitive disadvantage, inability to profitably provide local service at competitive rates or delays or limitations in providing local service or combined service packages could adversely affect AT&T's future revenue and earnings. In any event, the simultaneous entrance of numerous new competitors for interexchange and combined service packages is likely to adversely affect AT&T's future long distance revenue and could adversely affect future earnings. In addition, the substitution of data and Internet services for voice services is likely to depress earnings because of the smaller margin these services contain. Furthermore, in February 1997, a General Agreement on Trade in Services (GATS) was reached under the World Trade Organization. The GATS, which became effective January 1, 1998, is designed to open each country's domestic telecommunications markets to foreign competitors. The GATS, and future trade agreements, may accelerate the entrance into the U.S. market of foreign telecommunications providers, certain of whom are likely to possess dominant home market positions in which there is not effective competition. The GATS may also permit AT&T's entrance into other markets as only a small number of countries refused to eliminate their foreign ownership restrictions. In addition to the matters referred to above, various other factors, including technological hurdles, market acceptance, start-up and ongoing costs associated with the provision of new services and local conditions and obstacles, could adversely affect the timing and success of AT&T's entrance into the local exchange services market and AT&T's ability to offer combined service packages that include local service. EMPLOYEES At December 31, 2000 AT&T employed approximately 166,000 persons in its operations, approximately 97% of whom are located domestically. About 22% of the domestically located employees of AT&T are represented by unions. Of those so represented, about 94% are represented by the Communications Workers of America (CWA), which is affiliated with the AFL-CIO; about 5% by the International Brotherhood of Electrical Workers (IBEW), which is also affiliated with the AFL-CIO. In addition, there is a very small remainder of domestic employees represented by other unions. Labor agreements with most of these unions extend through May 2002. Of AT&T's employees, approximately 29,000 persons were employed by the AT&T Wireless Group in its operations, virtually all of whom are located in the United States. SEGMENT, OPERATING REVENUE AND RESEARCH AND DEVELOPMENT EXPENSE INFORMATION For information about the Company's research and development expense, see Note 3 to the Consolidated Financial Statements included in Item 8 to this Annual Report. For information about the consolidated operating revenues contributed by the Company's major classes of products and services, see the revenue tables and descriptions following the caption "Segment Results" in the Management's Discussion and Analysis of Financial Condition and Results of Operations included in Item 7. LIBERTY MEDIA GROUP The economic performance of the Liberty Media Group are reflected in the Liberty Media Group tracking stock. A description of the Liberty Media Group is included as Exhibit (99)b to this Form 10-K. SPECIAL CONSIDERATIONS Investors should carefully consider the following factors regarding their investment in AT&T Corp. securities, including AT&T Common Stock and AT&T Wireless Group Tracking Stock. SPECIAL CONSIDERATIONS RELATING TO THE FACT THAT AT&T WIRELESS GROUP TRACKING STOCK IS A TRACKING STOCK The market price of AT&T Common Stock, AT&T Wireless Group tracking stock and Liberty Media Group tracking stock may not reflect the financial performance and economic value of each groups as we intend and may not effectively track the separate performance of each group The market price of AT&T Common Stock, AT&T Wireless Group tracking stock and Liberty Media Tracking Stock may not in fact reflect the financial performance and economic value of each group as we intend. Holders of AT&T Common Stock, AT&T Wireless Group tracking stock and Liberty Media Group tracking stock will continue to be common shareholders of AT&T Corp. and, as such, will be subject to all risks associated with an investment in AT&T Corp. and all of its businesses, assets and liabilities. The performance of AT&T Corp. as a whole may affect the market price of each stock or the market price could more independently reflect the performance of the business of each group. Investors may discount the value of each stock because each group is part of a common enterprise with the rest of the operations of AT&T Corp. rather than a stand-alone entity. Holders of AT&T common stock, AT&T Wireless Group tracking stock and Liberty Media Group tracking stock are shareholders of one company and, therefore, financial impacts on one group could affect the other groups Holders of AT&T common stock, AT&T Wireless Group tracking stock and Liberty Media Group tracking stock are all common shareholders of AT&T Corp., and are subject to risks associated with an investment in a single company and all of AT&T Corp.'s businesses, assets and liabilities. Financial effects arising from one group that affect AT&T Corp.'s consolidated results of operations or financial condition could, if significant, affect the combined results of operations or financial position of the other groups or the market price of the class of common shares relating to the other groups. In addition, if AT&T Corp. or any of its subsidiaries were to incur significant indebtedness on behalf of a group, including indebtedness incurred or assumed in connection with an acquisition or investment, it could affect the credit rating of AT&T Corp. and its subsidiaries. This, in turn, could increase the borrowing costs of the other groups and AT&T Corp. as a whole. Net losses of any group and dividends or distributions on shares of any class of common or preferred stock will reduce the funds of AT&T Corp. legally available for payment of future dividends on each of AT&T common stock, AT&T Wireless Group tracking stock and Liberty Media Group tracking stock. For these reasons, you should read AT&T's consolidated financial information together with the financial information of AT&T Wireless Group and Liberty Media Group. The complex nature of the terms of AT&T Wireless Group tracking stock and Liberty Media Group tracking stock, or confusion in the marketplace about what a tracking stock is, could adversely affect the market prices of AT&T Wireless Group tracking stock or Liberty Media Group tracking stock Tracking stocks, like AT&T Wireless Group tracking stock and Liberty Media Group tracking stock, are more complex than traditional common stock and are not directly comparable to common stock of companies that have been spun off by their parent companies. The complex nature of the terms of the tracking stock, and the potential difficulties investors may have in understanding these terms, may adversely affect the market price of such tracking stock. Examples of these terms include: o discretion of AT&T's board of directors to make determinations affecting AT&T Wireless Group tracking stock, o redemption and conversion rights in the event AT&T disposes of substantially all the assets attributed to AT&T Wireless Group, o ability of AT&T to convert shares of AT&T Wireless Group tracking stock into shares of AT&T common stock, or o voting rights of AT&T Wireless Group tracking stock, Liberty Media Group tracking stock and AT&T common stock. Confusion in the marketplace about what a tracking stock is and what it is intended to represent could also adversely affect the market price of AT&T Wireless Group tracking stock and Liberty Media Group tracking stock. Holders of AT&T Wireless Group tracking stock will have limited separate shareholder rights, and will have no additional rights specific to AT&T Wireless Group, including direct voting rights Holders of AT&T Wireless Group tracking stock do not have any direct voting rights in AT&T Wireless Group, except to the extent required under AT&T's charter or by New York law. Separate meetings for holders of AT&T Wireless Group tracking stock are not held. When a vote is taken on any matter as to which all of our common shares are voting together as one class, any class or series of our common shares that is entitled to more than the number of votes required to approve the matter being voted upon is in a position to control the outcome of the vote on that matter. Currently: o each share of AT&T common stock has one vote, o each share of Class B Liberty Media Group tracking stock has 0.375 of a vote, o each share of Class A Liberty Media Group tracking stock has 0.0375 of a vote and o each share of AT&T Wireless Group tracking stock has 0.5 of a vote. The voting power of each class is subject to adjustment for stock splits, stock dividends and combinations, including any distribution of AT&T Wireless Group tracking stock to holders of AT&T common stock. There is no board of directors or committee that owes any separate fiduciary duties to holders of tracking stock, apart from those owed to AT&T shareholders generally AT&T does not have a separate board of directors to represent solely the interests of the holders of AT&T Wireless Group tracking stock or Liberty Media Group tracking stock. Each of AT&T Corp.'s board of directors, the AT&T Wireless Group capital stock committee and the Liberty Media Group capital stock committee owes fiduciary duties to AT&T Corp. and its shareholders as a whole. Consequently, there is no separate board of directors or committee that owes any separate duties to the holders of tracking stock. Until the split-off, AT&T Wireless Group will be controlled by AT&T Subject to fiduciary duties, our policy statements and inter-company agreements, our board of directors could make operational and financial decisions or implement policies that affect disproportionately the businesses of a group. These decisions could include: o allocation of financing opportunities in the public markets, o allocation of business opportunities, resources and personnel, and o transfers of services, including sales agency, resale and other arrangements, funds or assets between groups and other inter-group transactions that, in each case, may be suitable for one or more groups. Any of these decisions may benefit one group more than the other groups. In addition, AT&T Wireless Group is, and may continue to be, subject to AT&T Corp.'s existing agreements or arrangements with third parties and consent decrees, as well as new agreements or decrees. These agreements or arrangements or decrees currently may benefit AT&T Wireless Group, as in the case of purchasing arrangements, or may have the effect of limiting or impairing its business opportunities. For example, AT&T and British Telecommunications plc have entered into a joint venture agreement for the provision of global communications services. As part of that joint venture agreement, among other things, AT&T has agreed to various restrictions on its businesses and activities, including non-competition provisions and exclusive purchasing requirements, all of which apply to AT&T Wireless Group. Holders of tracking stock may have potentially diverging interests from holders of other classes of AT&T Corp. capital stock The existence of separate classes of our common stock could give rise to occasions when the interests of the holders of AT&T common stock, AT&T Wireless Group tracking stock and/or Liberty Media Group tracking stock diverge, conflict or appear to diverge or conflict. Examples include determinations by AT&T Corp.'s board of directors to: o set priorities for use of capital and debt capacity, o pay or omit the payment of dividends on AT&T common stock, AT&T Wireless Group tracking stock or Liberty Media Group tracking stock, except where such dividends are required, o redeem shares of AT&T Wireless Group tracking stock for shares of AT&T common stock or stock of qualifying subsidiaries of AT&T Corp., o approve dispositions of assets attributed to any group, o allocate the proceeds of issuances of AT&T Wireless Group tracking stock either to AT&T Common Stock Group with a corresponding reduction in the AT&T Common Stock Group's retained portion, if any, or to the equity of AT&T Wireless Group, o formulate public policy positions for AT&T, o establish material commercial relationships between groups, and o make operational and financial decisions with respect to one group that could be considered to be detrimental to another group. In addition, decisions regarding distribution and other commercial arrangements between the groups may affect costs, service alternatives and marketing approaches for each group. When making decisions with regard to matters that create potential diverging interests, our board of directors will act in accordance with: o the terms of AT&T Corp.'s charter, the AT&T Wireless Group policy statement, the Liberty Media Group policy statement and the inter-group agreement between AT&T and Liberty Media Group, which governs the relationship between AT&T Common Stock Group and Liberty Media Group, to the extent applicable, and o its fiduciary duties, which require our board of directors to consider the impact of these decisions on all shareholders of AT&T Corp. Our board of directors also could, from time to time, refer to the Liberty Media Group capital stock committee and the AT&T Wireless Group capital stock committee matters involving any conflict, and have those committees report to our board of directors on those matters or decide those matters to the extent permitted by AT&T's by-laws and applicable law. AT&T's board of directors may redeem tracking stock in exchange for stock of another subsidiary AT&T Corp.'s charter provides that AT&T Corp. may, at any time, redeem all outstanding shares of AT&T Wireless Group tracking stock or Liberty Media Group tracking stock in exchange for a specified number of outstanding shares of common stock of a subsidiary of AT&T Corp. that satisfies certain requirements under the Internal Revenue Code and that holds, directly or indirectly, all of the assets and liabilities of such group. This type of redemption may only be made on a pro rata basis, and must be tax free to the holders of tracking stock, except with respect to any cash that holders receive in lieu of fractional shares. If we complete the proposed split-off of AT&T Wireless Group and Liberty Media Group in the manner we contemplate, our Board of Directors will use this redemption right to exchange all shares of AT&T Wireless Group tracking stock for shares of AT&T Wireless Services and all shares of Liberty Media Group tracking stock for shares of Liberty Media Corporation. In this case, shareholders of AT&T Wireless Group tracking stock and Liberty Media Group tracking stock would no longer be shareholders of AT&T but would be shareholders of a AT&T Wireless Services or Liberty Media Corporation, respectively. A decision by AT&T Corp.'s board of directors to dispose of assets attributed to AT&T Wireless Group could have an adverse impact on the trading price of AT&T Wireless Group tracking stock Assuming AT&T Wireless Group's assets represent less than substantially all of the properties and assets of AT&T Corp. as a whole, our board of directors could, in its sole discretion and without shareholder approval, approve sales and other dispositions of any amount of the properties and assets of AT&T Wireless Group because the New York Business Corporation Law, or NYBCL, requires shareholder approval only for a sale or other disposition of all or substantially all of the properties and assets of all of AT&T Corp. However, in the event of a disposition of all or substantially all of the properties and assets attributed to AT&T Wireless Group, generally defined as 80% or more of the fair value of that group, AT&T will be required under its charter to: o convert each outstanding share of AT&T Wireless Group tracking stock into shares of AT&T common stock at a 10% premium, or o distribute cash and/or securities, other than AT&T common stock, or other property equal to the fair value of the net proceeds from that disposition allocable to AT&T Wireless Group tracking stock, either by special dividend or by redemption of all or part of the outstanding shares of AT&T Wireless Group tracking stock, or o take a combination of the actions described in the preceding bullet points whereby AT&T Corp. would convert some shares of AT&T Wireless Group tracking stock into AT&T common stock at a 10% premium and pay a dividend on the remaining shares of AT&T Wireless Group tracking stock or redeem all or part of the remaining shares of AT&T Wireless Group tracking stock for cash and/or property equal to the fair value of a portion of the net proceeds of the disposition allocable to AT&T Wireless Group tracking stock. Our board of directors is not required to select the option that would result in the distribution with the highest value to the holders of AT&T Wireless Group tracking stock. In addition, under New York law, our board of directors could decline to dispose of AT&T Wireless Group assets even if a majority of the holders of AT&T Wireless Group tracking stock request such a disposition. AT&T Corp. may take positions on public policy or regulatory matters that benefit one group more than another Because of the nature of the businesses of AT&T Common Stock Group, and AT&T Wireless Group, the groups may have diverging interests as to the position AT&T Corp. should take with respect to various regulatory issues. For example, FCC regulations that may advance the interests of one group may not advance the interests of the other groups. Under the AT&T Wireless Group policy statement, we will resolve material matters involving potentially divergent interests in a manner that our board of directors, or the AT&T Wireless Group capital stock committee, determines to be in the best interests of AT&T Corp. and all of our common shareholders after giving fair consideration to the potentially divergent interests and all other relevant interests of the holders of the separate classes of our common shares. Nevertheless, our board of directors could take positions on any given issue that may benefit one group more than another. The fiduciary duties of our board of directors to more than one class of common stock are not clear under New York law Although we are not aware of any legal precedent under New York law involving the fiduciary duties of directors of corporations having two or more classes of common stock, or separate classes or series of capital stock, principles of Delaware law established in cases involving differing treatment of two classes of capital stock or two groups of holders of the same class of capital stock provide that a board of directors owes an equal duty to all shareholders regardless of class or series, and does not have separate or additional duties to either group of shareholders. Under these principles of Delaware law and the related principle known as the "business judgment rule," absent abuse of discretion, a good faith business decision made by a disinterested and adequately informed board of directors, or a committee of the board of directors, with respect to any matter having disparate impacts upon holders of AT&T common stock, AT&T Wireless Group tracking stock or Liberty Media Group tracking stock would be a defense to any challenge to a determination made by or on behalf of the holders of any class of our common shares. Nevertheless, a New York court hearing a case involving this type of a challenge may decide to apply principles of New York law different from the principles of Delaware law discussed above, or may develop new principles of law, in order to decide that case. Any future shareholder litigation over the meaning or application of the terms of the tracking stock or our board's policies may be costly and time consuming to AT&T, AT&T Wireless Group and Liberty Media Group. Our board of directors has the ability to control inter-group transactions between AT&T Common Stock Group and AT&T Wireless Group Our board of directors may decide to transfer funds or other assets between groups. Transfers of assets from AT&T Common Stock Group to AT&T Wireless Group that our board of directors designates as an equity contribution by AT&T Common Stock Group to AT&T Wireless Group will result in an increase in AT&T Common Stock Group's retained portion of the value of AT&T Wireless Group. Under the AT&T Wireless Group policy statement, AT&T Common Stock Group may make loans to AT&T Wireless Group at interest rates and on terms and conditions substantially equivalent to the interest rates and terms and conditions that AT&T Wireless Group would be able to obtain from third parties, including the public markets, as a non-affiliate of AT&T without the benefit of any guaranty by AT&T or any member of AT&T Common Stock Group. The AT&T Wireless Group policy statement contemplates that these terms will apply regardless of the interest rates and terms and conditions on which AT&T or members of AT&T Common Stock Group may have acquired the subject funds. We anticipate that interest rates payable by AT&T Wireless Group initially will be higher than those payable by AT&T or the AT&T Common Stock Group. Any increase in AT&T Common Stock Group's retained portion of AT&T Wireless Group resulting from an equity contribution, or any decrease in that retained portion resulting from a transfer of funds from AT&T Wireless Group to AT&T Common Stock Group, would be determined by reference to the then-current market value of AT&T Wireless Group tracking stock. Such an increase or decrease, however, could occur at a time when those shares are considered under- or over-valued and such a decrease could occur at a time when those shares are considered under- or over-valued. Our board of directors may change the AT&T Wireless Group Policy Statement or our By-Laws without shareholder approval The AT&T Wireless Group policy statement governs the relationship between AT&T Common Stock Group and AT&T Wireless Group and AT&T Corp.'s by-laws create a capital stock committee that oversees the interaction between the two groups. Our board of directors may modify, suspend or rescind the policies set forth in the policy statement or make additions or exceptions to them, in the sole discretion of our board of directors, without approval of our shareholders, although there is no present intention to do so. Our board of directors may also adopt additional policies, depending upon the circumstances. AT&T Corp.'s by-laws may similarly be modified, suspended or rescinded. Our board of directors would make any determination to modify, suspend or rescind these policies or our by-laws, or to make exceptions to them or adopt additional policies or by-laws, including any decision that would have disparate impacts upon holders of AT&T common stock and AT&T Wireless Group tracking stock, in a manner consistent with its fiduciary duties to AT&T Corp. and all of our common shareholders after giving fair consideration to the potentially divergent interests and all other relevant interests of the holders of the separate classes of our common shares, including the holders of AT&T common stock, AT&T Wireless Group tracking stock and Liberty Media Group tracking stock. It will be difficult for a third party to acquire AT&T Wireless Group without AT&T Corp.'s consent If AT&T Wireless Group were an independent entity, any person interested in acquiring it without negotiation with our management could seek control of the outstanding stock of that entity by means of a tender offer or proxy contest. Although AT&T Wireless Group tracking stock is a class of our common shares that is intended to reflect the financial performance and economic value of AT&T Wireless Group, a person interested in acquiring only AT&T Wireless Group without negotiation with our management still would be required to seek control of the voting power represented by all of the outstanding capital stock of AT&T Corp. entitled to vote on that acquisition, including the classes of common shares related to the other groups. As a result, this may discourage potential interested bidders from seeking to acquire AT&T Wireless Group. Future sales of AT&T Wireless Group tracking stock and AT&T common stock could adversely affect their respective market prices and the ability to raise capital in the future Sales of substantial amounts of AT&T Wireless Group tracking stock, including any sale by AT&T of AT&T Wireless Services shares it retains in the split-off, and AT&T common stock in the public market could hurt the market price of AT&T Wireless Group tracking stock. This also could hurt AT&T's ability to raise capital in the future. The shares of AT&T Wireless Group tracking stock that we sold to the public in April 2000 and the shares AT&T Wireless Group tracking stock to be issued in the exchange offer AT&T expects to conduct in the second quarter 2001 are or will be freely tradable without restriction under the Securities Act of 1933 by persons other than "affiliates" of AT&T, as defined under the Securities Act. Any sales of substantial amounts of AT&T Wireless Group tracking stock or AT&T common stock in the public market, or the perception that those sales might occur, could materially adversely affect the market price of AT&T Wireless Group tracking stock. The approval of the shareholders of AT&T and AT&T Wireless Group will not be solicited for the issuance of authorized but unissued shares of AT&T Wireless Group tracking stock unless this approval is deemed advisable by our board of directors or is required by applicable law, regulation or stock exchange listing requirements. The issuance of those shares could dilute the value of shares of AT&T Wireless Group tracking stock. We do not expect to pay dividends on AT&T Wireless Group tracking stock or AT&T Wireless Services common stock Determinations as to the future dividends on AT&T Wireless Group tracking stock primarily will be based upon the financial condition, results of operations and business requirements of AT&T Wireless Group and AT&T Corp. as a whole. We currently do not expect to pay any dividends on AT&T Wireless Group tracking stock for the foreseeable future, nor do we expect AT&T Wireless Services to pay any dividends on AT&T Wireless Services common stock for the foreseeable future following the split-off. Changes in the tax law or in the interpretation of current tax law may result in redemption of AT&T Wireless Group tracking stock or may prevent us from issuing further shares From time to time, there have been legislative and administrative proposals that, if effective, would have resulted in the imposition of corporate level or shareholder level tax upon the issuance of tracking stock. As of the date of this document, no such proposals are outstanding. If there are adverse tax consequences associated with the issuance of AT&T Wireless Group tracking stock, it is possible that we would cease issuing additional shares of AT&T Wireless Group tracking stock. This could affect the value of AT&T Wireless Group tracking stock then outstanding. Furthermore, we are entitled to convert AT&T Wireless Group tracking stock into AT&T common stock at a premium of 10% if, based upon the opinion of tax counsel, adverse U.S. federal income tax law developments related to AT&T Wireless Group tracking stock occur. In some instances, we may optionally redeem AT&T Wireless Group tracking stock, including as a result of an adverse tax law change Our board of directors may, at any time after either the occurrence of tax-related events, such as the ones described above, or May 2, 2002, redeem all outstanding shares of AT&T Wireless Group tracking stock for shares of AT&T common stock at a 10% premium. We could decide to redeem shares of AT&T Wireless Group tracking stock at a time when either or both of AT&T common stock and AT&T Wireless Group tracking stock may be considered to be overvalued or undervalued. In addition, a redemption at any premium would preclude holders of AT&T Wireless Group tracking stock from retaining their investment in a security intended to reflect separately the economic performance of AT&T Wireless Group. It would also give holders of shares of converted AT&T Wireless Group tracking stock an amount of consideration that may differ from the amount of consideration a third-party buyer pays or would pay for all or substantially all of the assets of the AT&T Wireless Group. If we liquidate AT&T, amounts distributed to holders of each class of common stock may not bear any relationship to the value of the assets attributed to the groups Under our charter, we would determine the liquidation rights of the holders of the respective classes of stock in accordance with each group's respective market capitalization at the time of liquidation. However, the relative market capitalization of each group may not correctly reflect the value of the net assets remaining and attributed to the groups after satisfaction of outstanding liabilities. SPECIAL CONSIDERATIONS RELATING TO THE BUSINESS OF AT&T WIRELESS GROUP AT&T Wireless Group may substantially increase its debt level in the future, which could subject it to various restrictions and higher interest costs and decrease its cash flow and earnings AT&T Wireless Group may substantially increase its debt level in the future, which could subject it to various restrictions and higher interest costs and decrease its cash flow and earnings. It may also be difficult for AT&T Wireless Group to obtain all the financing it needs to fund its business and growth strategy on desirable terms. AT&T Wireless Group currently anticipates requiring substantial additional financing for the foreseeable future to fund capital expenditures, license purchases and costs and expenses in connection with funding its operations, domestic and international investments and its growth strategy and in order to repay indebtedness and preferred equity owed to or held by AT&T and affiliated entities at the time of the split-off. As of December 31, 2000, the aggregate amount of this intercompany debt and preferred equity was approximately $5.4 billion. AT&T's relationship with DoCoMo contains features that could adversely affect the financial condition of AT&T Wireless Group or the way in which it conducts its business The terms of the DoCoMo investment enable DoCoMo to terminate its investment and require repayment of its $9.8 billion investment, plus interest, if AT&T Corp. does not complete the split-off of AT&T Wireless Services within a specified time frame or if by June 30, 2004 AT&T Wireless Group either fails to commence service using an agreed technology in at least 13 of the top 50 domestic markets or abandons wideband code division multiple access, also known as Universal Mobile Telecommunications System, as its primary technology for third generation services. If AT&T must repay DoCoMo's investment before the split-off, AT&T Wireless Group will fund approximately $6.2 billion, plus interest. After the split-off, if DoCoMo requires repayment, AT&T Wireless Services will fund the entire repurchase obligation. If DoCoMo requires repayment of its investment, it may also terminate the technology rights provided to AT&T Wireless Group in connection with its investment. Before the split-off, AT&T will need to obtain DoCoMo's consent in order to undertake a number of business actions relating to AT&T Wireless Group. After the split-off, AT&T Wireless Services will need to obtain DoCoMo's consent in order to make any fundamental change in the nature of its business or to allow another wireless operator to acquire more than 15% but less than 50% of AT&T Wireless Services' equity. These limitations could prevent AT&T Wireless Group or AT&T Wireless Services from taking advantage of some business opportunities or relationships that it might otherwise pursue. AT&T Wireless Group has substantial capital requirements that it may not be able to fund AT&T Wireless Group's strategy and business plan will continue to require substantial capital, which AT&T Wireless Group may not be able to obtain or to obtain on favorable terms. A failure to obtain necessary capital would have a material adverse effect on AT&T Wireless Group, and result in the delay, change or abandonment of AT&T Wireless Group's development or expansion plans and the failure to meet regulatory build-out requirements. AT&T Wireless Group currently estimates that its capital expenditures for the build out of its networks, including expenditures related to its fixed wireless operations during 2001, will total approximately $5.5 billion, as compared to $4.1 billion in 2000. AT&T Wireless Group expects these 2001 capital expenditure amounts to include approximately $5 billion of mobility expenditures and approximately $450 million for fixed wireless. AT&T Wireless Group also expects to incur substantial capital expenditures in future years. The actual amount of the funds required to finance this network build out and other capital expenditures may vary materially from management's estimate. AT&T Wireless Group has entered into various contractual commitments associated with the development of its third generation strategy totaling approximately $2.1 billion as of the dates the agreements were executed. These include purchase commitments for network equipment. Additionally, AT&T Wireless Group anticipates that it will enter into material purchase commitments in the future. AT&T Wireless Group also may require substantial additional capital for, among other uses, acquisitions of providers of wireless services, spectrum license or system acquisitions, system development and network capacity expansion. AT&T Wireless Group has also entered into agreements for investments and ventures which have required or will require substantial capital, including agreements to invest $2.6 billion in exchange for a combination of a non-controlling equity interest in and debt securities issued by Alaska Native Wireless, which was the successful bidder for licenses costing approximately $2.9 billion in the recently concluded 1900 megahertz auction. These agreements also may contain provisions potentially requiring substantial additional capital in future circumstances, such as allowing the other investors to require AT&T Wireless Group to purchase assets or investments. The actual amount of funds necessary to implement AT&T Wireless Group's business plan may materially exceed current estimates, which could have a material adverse effect on AT&T Wireless Group's financial condition and results of operations The actual amount of funds necessary to implement AT&T Wireless Group's business plan may materially exceed AT&T Wireless current estimates in the event of various factors including: o departures from AT&T Wireless Group's current business plan, o unforeseen delays, o cost overruns, o unanticipated expenses, o regulatory developments, o engineering design changes, and o technological and other risks. If actual costs do materially exceed AT&T Wireless Group's current estimates for these or other reasons, this could have a material adverse effect on AT&T Wireless Group's financial condition and results of operations. AT&T Wireless Group's significant network build out requirements may not be completed as planned AT&T Wireless Group needs to complete significant remaining build-out activities, including completion of regulatorily required build-out activities in some of its existing wireless markets. Failure or delay to complete the build out of the network and launch operations, or increased costs of this build out and launch of operations, could have a material adverse effect on the operations and financial condition of AT&T Wireless Group. As AT&T Wireless Group continues to build out its network, it must, among other things, continue to: o lease, acquire or otherwise obtain rights to a large number of cell and switch sites, o obtain zoning variances or other local governmental or third-party approvals or permits for network construction, o complete the radio frequency design, including cell site design, frequency planning and network optimization, for each of its markets, o complete the fixed network implementation, which includes designing and installing network switching systems, radio systems, interconnecting facilities and systems, and operating support systems, and o expand and maintain customer care, network management, billing and other financial and management systems. In addition, over the next several years, AT&T Wireless Group will be implementing upgrades to its network to access the next generation of digital technology. These events may not occur in the time frame AT&T Wireless Group assumes or that the FCC requires, or at the cost AT&T Wireless Group assumes, or at all. Additionally, problems in vendor equipment availability, technical resources or system performance could delay the launch of new or expanded operations in new or existing markets or result in increased costs in all markets. AT&T Wireless Group intends to rely on the services of various companies that are experienced in design and build out of wireless networks in order to accomplish its build out schedule. However, AT&T Wireless Group may not be able to obtain satisfactory contractors on economically attractive terms or ensure that the contractors obtained will perform as expected. AT&T Wireless Group's business and operations would be adversely affected if it fails to acquire adequate radio spectrum in FCC auctions or through other transactions AT&T Wireless Group's domestic business depends on the ability to use portions of the radio spectrum licensed by the FCC. AT&T Wireless Group could fail to obtain sufficient spectrum capacity in new and existing markets, whether through FCC auctions or other transactions, in order to meet the expanded demands for existing services, as well as to enable development of third generation services. This type of a failure would have a material adverse impact on the quality of AT&T Wireless Group's services and its ability to roll out such future services in certain markets. AT&T Wireless Group intends to continue to acquire more spectrum through a combination of alternatives, including participation in spectrum auctions, purchase of spectrum licenses from companies that own them or purchase of these companies outright. As required by law, the FCC periodically conducts auctions for licenses to use certain parts of the radio spectrum. The decision to conduct auctions, and the determination of what spectrum frequencies will be made available for auction, are provided for by laws administered by the FCC. The FCC may not allocate spectrum sufficient to meet the demands of all those wishing to obtain licenses. Even if the FCC conducts further auctions in the future, AT&T Wireless Group may not be successful in those future auctions in obtaining the spectrum that it believes is necessary to implement its business and technology strategies. AT&T Wireless Group may also seek to acquire radio spectrum through purchases and swaps with other spectrum licensees or otherwise, including by purchases of other licensees outright. However, AT&T Wireless Group may not be able to acquire sufficient spectrum through these types of transactions, and it may not be able to complete any of these transactions on favorable terms. AT&T Wireless Group's business and operations could be hurt if it is unable to establish new affiliates to expand its digital network or if its existing or any new affiliates do not or cannot develop their systems in a manner consistent with AT&T Wireless Group's In order to accelerate the build-out of widescale coverage of the United States by a digital mobile wireless network operating on the technical standards AT&T Wireless Group has adopted, AT&T Wireless Group has entered into affiliation agreements with other entities that provide wireless service or hold spectrum licenses. Through contractual arrangements between AT&T Wireless Group and these affiliates, AT&T Wireless Group's customers are able to obtain service in the affiliates' territories, and the affiliates' customers are able to obtain service in AT&T Wireless Group's territory. In all markets where these affiliates operate, AT&T Wireless Group is at risk because it does not control the affiliates. As a result, these affiliates are not obligated to implement AT&T Wireless Group's third generation strategy. AT&T Wireless Group's ability to provide service on a nationwide level and to implement its third generation strategy would be adversely affected if these affiliates decide not to participate in the further development of AT&T Wireless Group's digital network. AT&T Wireless Group may establish additional affiliate relationships to accelerate build-out of its digital mobile network. If AT&T Wireless Group is unable to establish such affiliate relationships, or if any such affiliates are unable or do not develop their systems in a manner consistent with AT&T Wireless Group's network, AT&T Wireless Group's ability to service its customers and expand the geographic coverage of its digital network could be adversely affected. If the FCC denies Alaska Native Wireless' application to acquire licenses for which it was the successful bidder in the recent spectrum auction or, in the future, revokes licenses awarded to Alaska Native Wireless, AT&T Wireless Group's ability to implement its third generation strategy could be adversely affected or AT&T Wireless Group could become obligated to repurchase other investors interests in Alaska Native Wireless AT&T Wireless Group has agreed to invest $2.6 billion in exchange for a combination of a non-controlling equity interest in and debt securities issued by Alaska Native Wireless, which was the successful bidder for licenses costing approximately $2.9 billion in the recently concluded 1900 megahertz auction. One auction participant has challenged the qualifications of Alaska Native Wireless to acquire "closed" licenses, which constituted most of the licenses for which Alaska Native Wireless was the successful bidder. If the FCC determines that Alaska Native Wireless was not qualified, the FCC could refuse to grant Alaska Native Wireless the closed licenses. If this occurs, it could have a significant adverse impact on AT&T Wireless Group's ability to provide or enhance services in key new and existing markets. The Trustee in NextWave Telecom, Inc.'s Chapter 11 bankruptcy proceeding, and the unsecured creditors of NextWave, have commenced litigation relating to the 1900 megahertz auction that could result in a delay in the grant of licenses to successful bidders or revocation of any licenses, including those won or acquired by Alaska Native Wireless and cause Alaska Native Wireless to postpone the development and use of any licenses awarded to it. If this occurs, it could have a significant adverse impact on AT&T Wireless Group's plans to provide or enhance services in key new and existing markets. In specified circumstances, if a winning bid of Alaska Native Wireless in the recently concluded 1900 megahertz spectrum auction is rejected or if any license granted to it is revoked, AT&T Wireless Group would become obligated to compensate other investors for making capital available to the venture. In specified circumstances, if the grant of those licenses is challenged, AT&T Wireless Group may be obligated to purchase the interests of other investors. If AT&T Wireless Group is unable to reach agreement with Alaska Native Wireless regarding the development and use of licenses for which it was the successful bidder in the recent spectrum auction, AT&T Wireless Group s ability to implement its third generation strategy may be adversely affected AT&T Wireless Group has not reached any agreements with Alaska Native Wireless as to whether it will participate in AT&T Wireless Group's digital mobile wireless network. Alaska Native Wireless is not obligated to use or develop any spectrum it acquires in a manner which will further, or be consistent with, AT&T Wireless Group's strategic objectives, although Alaska Native Wireless is obligated to use technology that is compatible and interoperable with AT&T Wireless Group's digital mobile wireless network. If Alaska Native Wireless does not enter into agreements with AT&T Wireless Group regarding the use and development of this spectrum similar to those AT&T Wireless Group has entered into with its affiliates for its existing network, it could have a material adverse impact on the timing and cost of implementing AT&T Wireless Group's third generation strategy. Potential acquisitions may require AT&T Wireless Group to incur substantial additional debt and integrate new technologies, operations and services, which may be costly and time consuming An element of AT&T Wireless Group's strategy is to expand its network, which AT&T Wireless Group may do through the acquisition of licenses, systems and wireless providers. These acquisitions may cause AT&T Wireless Group to incur substantial additional indebtedness to finance the acquisitions or to assume indebtedness of the entities that are acquired. In addition, AT&T Wireless Group may encounter difficulties in integrating those acquired operations into its own operations, including as a result of different technologies, systems, services or service offerings. These actions could prove costly or time consuming or divert management's attention from other business matters. Failure to develop future business opportunities may have an adverse effect on AT&T Wireless Group's growth potential AT&T Wireless Group intends to pursue a number of new growth opportunities, which involve new services for which there are no proven markets. In addition, the ability to deploy and deliver these services relies, in many instances, on new and unproven technology. AT&T Wireless Group's existing technology may not perform as expected and that AT&T Wireless Group may not be able to successfully develop new technology to effectively and economically deliver these services. In addition, these opportunities require substantial capital outlays and spectrum availability to deploy on a large scale. This capital or spectrum may not be available to support these services. Furthermore, each of these opportunities entails additional specific risks. For example, the delivery of fixed wireless services requires AT&T Wireless Group to provide installation and maintenance services, which the AT&T Wireless Group has never provided previously. This will require AT&T Wireless Group to hire, employ, train and equip technicians to provide installation and repair in each market served, or rely on subcontractors to perform these services. AT&T Wireless Group may not be able to hire and train sufficient numbers of qualified employees or subcontract these services, or do so on economically attractive terms. The success of wireless data services, on the other hand, is substantially dependent on the ability of others to develop applications for wireless devices and to develop and manufacture devices that support wireless applications. These applications or devices may not be developed or developed in sufficient quantities to support the deployment of wireless data services. These services may not be widely introduced and fully implemented at all or in a timely fashion. These services may not be successful when they are in place, and customers may not purchase the services offered. If these services are not successful or costs associated with implementation and completion of the roll out of these services materially exceed those currently estimated by AT&T Wireless Group, AT&T Wireless Group's financial condition and prospects could be materially adversely affected. AT&T Wireless Group faces substantial competition There is substantial competition in the wireless telecommunications industry. AT&T Wireless Group expects competition to intensify as a result of the entrance of new competitors and the development of new technologies, products and services. Other two-way wireless providers, including other cellular and personal communications services, operators and resellers, serve each of the markets in which AT&T Wireless Group competes. A majority of markets will have five or more commercial mobile radio service providers, and all of the top 50 metropolitan markets have at least four, and in some cases as many as seven or more, facilities-based wireless service providers offering wireless services on cellular, personal communications services or specialized mobile radio frequency. Competition also may increase to the extent that smaller, stand-alone wireless providers transfer licenses to larger, better capitalized and more experienced wireless providers. Market prices for wireless services may decline in the future AT&T Wireless Group anticipates that market prices for two-way wireless services generally will decline in the future due to increased competition. We expect significant competition among wireless providers, including from new entrants, to continue to drive service and equipment prices lower. AT&T Wireless Group also expects that there will be increases in advertising and promotional spending, along with increased demands on access to distribution channels. All of this may lead to greater choices for customers, possible consumer confusion, and increasing movement of customers between competitors, which we refer to as "churn." AT&T Wireless Group may also adopt customer policies or programs to be more competitive, which may also affect churn. AT&T Wireless Group's ability to compete successfully also will depend on marketing, and on its ability to anticipate and respond to various competitive factors affecting the industry, including new services, changes in consumer preferences, demographic trends, economic conditions and discount pricing strategies by competitors. Consolidation in the wireless communications industry may adversely affect AT&T Wireless Group The wireless communications industry has been experiencing significant consolidation and AT&T Wireless Group expects that this consolidation will continue. The previously announced mergers or joint ventures of Bell Atlantic Corporation/GTE Corporation/Vodafone AirTouch, now called Verizon, SBC/BellSouth, now called Cingular, have created large, well-capitalized competitors with substantial financial, technical, marketing and other resources to respond to AT&T Wireless Group's offerings. In addition, in July 2000, VoiceStream Communications and Deutsche Telekom publicly announced a planned merger. These mergers or ventures have caused AT&T Wireless Group's ranking to decline to third in U.S. revenue and U.S. subscriber share. In terms of U.S. population covered by licenses, AT&T Wireless Group, including partnerships and affiliates, ranks third. As a result, these competitors may be able to offer nationwide services and plans more quickly and more economically than AT&T Wireless Group, to obtain roaming rates that are more favorable than those obtained by AT&T Wireless Group, and may be better able to respond to offers of AT&T Wireless Group. Significant changes in the wireless industry could materially adversely affect AT&T Wireless Group The wireless communications industry is experiencing significant technological change. This change includes the increasing pace of digital upgrades in existing analog wireless systems, evolving industry standards, ongoing improvements in the capacity and quality of digital technology, shorter development cycles for new products, and enhancements and changes in end-user needs and preferences and increased importance of data and broadband capabilities. The pace and extent of customer demand may not continue to increase, and airtime and monthly recurring charges may continue to decline. As a result, the future prospects of the industry and AT&T Wireless Group and the success of its competitive services remain uncertain. Also, alternative technologies may develop for the provision of services to customers that may provide wireless communications service or alternative service superior to that available from AT&T Wireless Group. Technological developments may therefore materially adversely affect AT&T Wireless Group. Termination or impairment of AT&T Wireless Group's relationship with a small number of key suppliers could adversely affect AT&T Wireless Group's revenues and results of operations AT&T Wireless Group has developed relationships with a small number of key vendors, including Nokia Mobile Phones, Inc., Telefonaktiebolaget LM Ericsson, Mitsubishi Corporation and Motorola, Inc. for its supply of wireless handsets, Lucent Technologies, Inc., Nortel Networks, Inc., Ericsson and Nokia Networks, Inc. for its supply of telecommunications infrastructure equipment and Convergys Information Management Group for its billing services. AT&T Wireless Group does not have operational or financial control over its key suppliers, and has limited influence with respect to the manner in which these key suppliers conduct their businesses. If these key suppliers were unable to honor their obligations to AT&T Wireless Group, it could disrupt the business of AT&T Wireless Group and adversely impact its revenues and results of operations. AT&T Wireless Group's technology may not be competitive with other technologies or be compatible with next generation technology There are three existing digital transmission technologies, none of which is compatible with the others. AT&T Wireless Group selected time division multiple access technology for its second generation network because it believes that this technology offers several advantages over other second generation technologies. However, a number of other wireless service providers chose code division multiple access or global system for mobile communications as their digital wireless technology. For its path to the next generation technology, AT&T Wireless Group has chosen a global system for mobile communications platform to make available enhanced data services using general packet radio service technology, and third generation capabilities using enhanced data rates for global evolution and ultimately universal mobile telecommunications systems technologies. These technologies may not provide the advantages AT&T Wireless Group expects. Other wireless providers have chosen a competing wideband technology as their third generation technology. If the universal mobile telecommunications systems does not gain widespread acceptance, it would materially adversely affect the business, financial condition and prospects of AT&T Wireless Group. As AT&T Wireless Group implements its plans for deployment of technology for third generation capabilities, it will continue to incur substantial costs associated with maintaining its time division multiple access networks. Also, these networks are not compatible, and customers with phones that operate on one network will not initially be able to use those phones on the other network. There are risks inherent in the development of new third generation equipment and AT&T Wireless Group may face unforeseen costs, delays or problems that may have a material adverse affect. AT&T Wireless Group relies on favorable roaming arrangements, which it may be unable to continue to obtain AT&T Wireless Group may not continue to be able to obtain or maintain roaming agreements with other providers on terms that are acceptable to it. AT&T Wireless Group's customers automatically can access another provider's analog cellular or digital system only if the other provider allows AT&T Wireless Group's customers to roam on its network. AT&T Wireless Group relies on agreements to provide roaming capability to its customers in many areas of the United States that AT&T Wireless Group's network does not serve. Some competitors, because of their call volumes or their affiliations with, or ownership of, wireless providers, however, may be able to obtain roaming rates that are lower than those rates obtained by AT&T Wireless Group. In addition, the quality of service that a wireless provider delivers during a roaming call may be inferior to the quality of service AT&T Wireless Group or an affiliated company provides, the price of a roaming call may not be competitive with prices of other wireless providers for such call, and AT&T Wireless Group's customer may not be able to use any of the advanced features, such as voicemail notification, that the customer enjoys when making calls within AT&T Wireless Group's network. Finally, AT&T Wireless Group may not be able to obtain favorable roaming agreements for its third generation products and services that it intends to offer using the technologies it plans to deploy for interim enhanced data and third generation services. AT&T Wireless Group's business is seasonal and it depends on fourth quarter results, which may not continue to be strong The wireless industry, including AT&T Wireless Group, has experienced a trend of generating a significantly higher number of customer additions and handset sales in the fourth quarter of each year as compared to the other three fiscal quarters. A number of factors contribute to this trend, including the increasing use of retail distribution, which is dependent upon the year-end holiday shopping season, the timing of new product and service announcements and introductions, competitive pricing pressures, and aggressive marketing and promotions. Strong fourth quarter results for customer additions and handset sales may not continue for the wireless industry or for AT&T Wireless Group. In the future, the number of customer additions and handset sales for AT&T Wireless Group in the fourth quarter could decline for a variety of reasons, including AT&T Wireless Group's inability to match or beat pricing plans offered by competitors, failure to adequately promote AT&T Wireless Group's products, services and pricing plans, or failure to have an adequate supply or selection of handsets. If in any year fourth quarter results fail to significantly improve upon customer additions and handset sales from the year's previous quarters, this could adversely impact AT&T Wireless Group's results for the following year. Media reports have suggested radio frequency emissions may be linked to various health concerns and interfere with various medical devices and AT&T Wireless Group may be subject to potential litigation relating to these health concerns Media and other reports have linked radio frequency emissions from wireless handsets to various health concerns, including cancer, and to interference with various electronic medical devices, including hearing aids and pacemakers. These concerns over radio frequency emissions may discourage the use of wireless handsets or expose AT&T Wireless Group to potential litigation, which could have a material adverse effect on AT&T Wireless Group's results of operations. Additionally, research and studies are ongoing, and may demonstrate a link between radio frequency emissions and health concerns. The operations of AT&T Wireless Group are subject to government regulation, which regulation could have adverse effects on its business The licensing, construction, operation, sale, resale and interconnection arrangements of wireless communications systems are regulated to varying degrees by the FCC, and, depending on the jurisdiction, state and local regulatory agencies. These regulations may include, among other things, required service features and capabilities, such as number portability or emergency 911 service. In addition, the FCC, together with the U.S. Federal Aviation Administration regulates tower marking and lighting. Any of these agencies having jurisdiction over AT&T Wireless Group's business could adopt regulations or take other actions that could adversely affect the business of AT&T Wireless Group. FCC licenses to provide wireless services or personal communications services are subject to renewal and revocation. There may be competition for AT&T Wireless Group's licenses upon their expiration and we cannot assure you that the FCC will renew them. FCC rules require all wireless and personal communications services licensees to meet specified build-out requirements. AT&T Wireless Group may not be able to meet these requirements in each market. Failure to comply with these requirements in a given license area could result in revocation or forfeiture of AT&T Wireless Group's license for that license area or the imposition of fines on AT&T Wireless Group by the FCC. State and local legislation restricting or prohibiting wireless phone use while driving could cause subscriber usage to decline Some state and local legislative bodies have proposed legislation restricting or prohibiting the use of wireless phones while driving motor vehicles. Similar laws have been enacted in other countries, and, to date, a small number of communities in the United States have passed restrictive local ordinances. If laws are passed prohibiting or restricting the use of wireless phones while driving, it could have the effect of reducing subscriber usage, which could cause a material adverse effect on AT&T Wireless Group's results of operations. AT&T Wireless Group may be subject to potential litigation relating to the use of wireless phones while driving Some studies have indicated that some aspects of using wireless phones while driving may impair drivers' attention in certain circumstances, making accidents more likely. These concerns could lead to potential litigation relating to accidents, deaths or serious bodily injuries, which also could have material adverse effects on AT&T Wireless Group's results of operations. SPECIAL CONSIDERATIONS RELATING TO AT&T'S BUSINESS AT&T's business units face intense competitive pressures Communications Services o AT&T currently faces significant competition in each of its consumer and business communications services business units and expects that the level of competition in each of these businesses will continue to increase. In each of these units, AT&T faces competition from numerous other national and regional domestic and international companies, some of which have advantages over AT&T. Competitive conditions impose a variety of significant challenges including pressures that could require future price cuts and affect the desirability of products and services. These conditions create a risk of market share loss and the risk that customers shift to less profitable, lower margin services. Competitive pressures also create challenges for AT&T's ability to grow new businesses or introduce new services successfully and execute on its business plan, including, most significantly, the ability to purchase fairly priced access services. Each of these business units faces the risk of potential price cuts by its competitors that could materially adversely affect both market share and margins. We believe that it is unlikely that we will sustain existing price or margin levels. These business units also face the risk of increasing competition from entities that own their own access facilities, including entities that have access facilities across vast regions of the United States with the ability to control cost, cycle time, and functionality for most end-to-end services in their regions. These entities can preserve large market share and high margins on access services as they enter new markets, including long distance and end-to-end services. This places them in a superior position vis-a-vis AT&T and other competitors which must purchase such high margin access services. Additionally, each of these business units may initiate price cuts in order to seek to retain market share or to seek to slow decline of market share. The cost structure of AT&T's business units also affects its competitiveness. Each of these business units faces the risk that it will not be able to maintain a competitive cost structure if newer technologies favor newer competitors who do not have legacy infrastructure and as technology substitution continues. Each of these units' ability to make critical investments to improve cost structure may also be impaired by AT&T's current significant debt obligations. Broadband Services AT&T also faces competitive risks in its Broadband Services business. These risks include the growth of satellite services, regional bell operating companies services and/or companies providing digital subscriber lines which compete directly for customers in most markets. They also include the emergence of new combinations, such as AOL Time Warner, which seek both to commoditize cable access and provide their own differentiated product, and escalating costs for programming and other areas which may materially adversely affect margins. In addition, AT&T's Broadband Services business faces risks relating to the acceptance and costs of potential new services. The regulatory and legislative environment creates challenges for AT&T's business units Communications Services Each of AT&T's consumer and business communications services business units faces the risk of the impact of the implementation of current regulations and legislation, unfavorable changes in regulation or the introduction of new onerous regulation. These risks include the impact of the following: o current law has been implemented in a manner which has not allowed effective entry into local markets due to non-competitive pricing of access and local service and regional bell operating company systems that do not permit rapid large-scale customer changes from the regional bell operating companies to new service providers, and o AT&T faces new head-on competition as regional bell operating companies begin to enter the long distance business. At present, AT&T does not believe that many market entry rules have been applied or enforced to allow the economic viability of the various local market access alternatives or effective large scale management of customers. Further, few facilities-based competitors to the regional bell operating companies have emerged and there is no significant alternate source of supply for most access and local services. One consequence of this is that AT&T remains ultimately dependent on the regional bell operating companies for supply as regional bell operating companies still represent substantially all of the access and still control, cost cycle times, and functionality. This dependency on supply adversely impacts both AT&T's cost structure and its ability to create and market desirable and competitive end-to-end products for customers. Absent more effective application of rules and regulations, the regional bell operating companies will be well-positioned to deter new entrants to local service. In addition, regional bell operating companies will be entering the long distance business while they still control substantially all the access facilities in their regions. This will likely result in an increased level of competition for long distance or end-to-end services as the services offered by regional bell operating companies expand. Broadband Services In the case of broadband services, the possibility of forced open access for cable plant resulting in the commodization of high-speed data on cable could materially adversely affect AT&T's business. Also, further cable regulation regarding pricing, ownership limitations and other matters could impede growth or raise costs. New Legislation and regulation may increase competition In addition, there is the possibility that either new regulations or new legislation will further erode the rules that apply to many of our largest competitor and suppliers, including the regional bell operating companies. These changes could give these companies more streamlined regulations that apply to their access services. These changes could also exclude services, so-called "advanced" or data services, from the market-opening rules of the applicable legislation. The consequences of these changes could be to accelerate head-on competition against AT&T from the regional bell operating companies in both the communications services and broadband units. AT&T may be adversely affected by its increased overall debt levels AT&T currently is pursuing various measures to seek to reduce its debt level. However, if these efforts cannot be completed successfully or at levels, on the terms and within the time frame contemplated, or if AT&T's liquidity needs increase as a result of further revenue or margin deterioration, AT&T's financial condition would be materially adversely affected. AT&T would be materially adversely affected by a weakening of the overall market for corporate credit or ratings downgrades. AT&T's current debt level itself may materially adversely affect the company and each of its business units by impairing its financial flexibility, its ability to pursue acquisitions or make capital expenditures and by otherwise impacting investment decisions that could materially impair each unit's growth and ability to compete. AT&T may not be able to obtain financing on terms that are acceptable to it. AT&T's debt ratings have been under review by 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 and can limit access to financing. AT&T's failure to complete the restructuring plan as contemplated may impact its liquidity. At December 31, 2000, AT&T had total indebtedness of approximately $65 billion, with the short term portion of that at $31.9 billion. AT&T's ability to meet these obligations depend upon its credit ratings, market conditions and business results. AT&T continues to investigate and negotiate other financing alternatives including the monetization of publicly held securities, sales of certain non-strategic assets and investments, and securitization of certain accounts receivable, as well as a $6.5 billion debt offering by AT&T Wireless Services in the first quarter 2001. AT&T has increased its $10 billion line of credit to $25 billion, which was subsequently reduced to $18.4 billion following the DoCoMo investment and the AT&T Wireless Services debt offering. In addition, AT&T plans to retire a portion of the short-term debt with all or a part of the funds from a planned 2001 offering of a security intended to reflect the financial performance and economic value of AT&T's Broadband unit, although that offering may not occur as expected. AT&T may be adversely affected by further ratings downgrades AT&T's senior debt ratings and two of its short-term debt ratings were reduced in late 2000 by Standard & Poor's Rating Services to A andA1; by Moody's Investors Service, Inc. to A2 andP1; and by Fitch, Inc. to A-and F1. Both AT&T's short-term and long-term ratings remain under review for further downgrade at Standard & Poor's and Moody's Investors Service. Late last year, AT&T initiated a debt reduction plan, against which it has continued to make progress. However, at the same time, AT&T has seen deterioration in the results of its core communication services businesses. It is unclear as to how the rating agencies will balance these developments in their ratings assessment, but there is a material risk that AT&T could be further downgraded. We expect to review with the rating agencies in the near future the financial results and long-term financial projections of the AT&T businesses to be separated. A ratings action could occur in advance of the meetings, during the meeting period, or following the meetings. If AT&T were to be further downgraded, access to capital could be disrupted and the cost of capital would likely increase. AT&T has access to the commercial paper market today which is sufficient to satisfy its short-term borrowing needs. In the event of a further short-term rating downgrade or downgrades, the level of issuance capacity available to AT&T would likely contract and could be exceeded by our short-term borrowing needs. In this case, AT&T could access the $25 billion bank credit facility put in place on December 28, 2000 to serve as a commercial paper back-up source of liquidity. The $25 billion bank credit facility was reduced to $18.3 billion during March 2001 as we made progress in our deleveraging efforts. The cost of any short-term borrowing under the bank facility would likely be higher than the cost of commercial paper borrowings for AT&T today, and could be even higher depending upon market conditions. In addition, the access to this bank facility extends only until December 28, 2001 and could be reduced to as low as $10 billion if we continue to make progress in our deleveraging efforts. To the extent that the combined outstanding short-term borrowings under the bank credit facility and AT&T's commercial paper program were to exceed the market capacity for such borrowings at the expiration of the bank credit facility, AT&T's continued liquidity would depend upon our ability to reduce such short-term debt through a combination of capital market borrowings, asset sales, operational cash generation, capital expenditure reduction and other means. Our ability to achieve such objectives is subject to a risk of execution and such execution could materially impact AT&T's operational results. In addition, the cost of any capital market financing could be significantly in excess of AT&T's historical financing costs. Also, AT&T could suffer negative banking, investor, and public relations repercussions if we were to draw upon the bank facility, which is intended to serve as a back-up source of liquidity only. Such impacts could cause further deterioration in our cost and access to capital. Furthermore, according to the terms of the bank credit facility, AT&T's ability to split off AT&T Wireless Group is contingent upon AT&T's senior debt rating, as determined by Standard and Poor's and Moody's Investors Service, not falling below BBB+ and Baa1, respectively. Failure to split off AT&T Wireless Group by early 2002 would permit NTT DoCoMo to elect to require AT&T to repurchase its interest in AT&T for an aggregate purchase price of $9.8 billion plus a predetermined rate of interest, which could further limit the availability and increase the cost of financing. AT&T may not be able to attract and retain management AT&T's business units face other risks, including risks related to the difficulties in attracting, retaining and motivating key employees, particularly in the consumer and business communications services units. There is also a risk that it will be more difficult to attract, retain and motivate key employees as growth declines and opportunities and compensation become limited and after the restructuring is completed as desired hires may be less interested in working for smaller companies. AT&T may be unable to engage in potentially desirable strategic transactions AT&T from time to time explores strategic alternatives with respect to some of its assets and businesses and may engage in discussions or negotiations with third parties regarding these possible transactions. For example, AT&T owns an approximately 25.5% interest in Time Warner Entertainment, L.P., which AT&T has previously announced it intends to divest. This interest is not part of or allocated to the AT&T Wireless Group. On February 28, 2001, AT&T exercised registration rights it has under the Time Warner Entertainment partnership agreement, to have Time Warner Entertainment reconstitute itself as a corporation and then to register up to AT&T's full interest for sale in an initial public offering. Under the Time Warner Entertainment partnership agreement, Time Warner Entertainment may determine not to effect a public offering but instead to allow AT&T certain put rights to have Time Warner Entertainment buy back the shares that would have been sold in such an offering at an appraised price. AT&T is simultaneously pursuing discussions with AOL Time Warner concerning alternative potential arrangements for the redemption of AT&T's partnership interest in Time Warner Entertainment as well as certain commercial arrangements with AOL Time Warner. We cannot predict whether these discussions will continue, whether any of these transactions will be completed or the timing or terms of any of these transactions. SPECIAL CONSIDERATIONS RELATING TO AT&T CORP.'S RESTRUCTURING PLAN AT&T Corp.'s restructuring plan requires fundamental changes to our businesses that may be hard to implement If we complete our restructuring plan, each of our four businesses will need to make changes in its operations that will require substantial effort and involve substantial risks and costs. If any of these businesses is unable to make this transition smoothly or is not able to operate as effectively after the restructuring, the financial position and results of operations of that business could suffer and cause the trading value of securities intended to reflect the financial performance and economic value of that business to decline materially. The total value of the securities issued in our restructuring plan might be less than the value of AT&T common stock without that plan If we complete our restructuring plan as we currently contemplate, holders of AT&T common stock who do not dispose of their shares of AT&T common stock eventually will receive securities issued by or intended to reflect the financial performance and economic value of four businesses: AT&T Business Services, AT&T Consumer Services, AT&T Broadband and AT&T Wireless Services. The aggregate value of these shares could be less than what the value of AT&T common stock would be without AT&T's restructuring. The trading price of AT&T common stock may decline as a result of the implementation of AT&T's restructuring plan or as a result of other factors. If we complete the restructuring, these new securities will begin trading publicly for the first time. Until orderly trading markets develop for each of these new securities, and after that time as well, there may be significant fluctuations in price. Also, we have not yet determined many of the details of AT&T's restructuring plan and these details could materially adversely impact the value of AT&T common stock or AT&T Wireless Group tracking stock. If we do not complete AT&T's restructuring plan as we plan, there may be adverse consequences to AT&T and AT&T Wireless Group AT&T's restructuring plan is complicated, and involves a substantial number of steps and transactions. The implementation of AT&T's restructuring plan will require various approvals and be subject to various conditions, including IRS rulings. In addition, future financial conditions, superior alternatives or other factors may arise or occur that make it inadvisable to proceed with part or all of AT&T's restructuring plan. If we are unable to complete AT&T's restructuring plan as we expect, or the implementation of AT&T's restructuring plan is more complex than we expect, this could have a material adverse effect on AT&T, its business or the trading prices of its securities. Any or all of the elements of AT&T's restructuring plan may not occur as we currently expect or in the time frames that we currently contemplate, or at all. Alternative forms of restructuring, including sales of interests in these businesses, would reduce what is available for distribution to shareholders in the restructuring. AT&T's restructuring may adversely impact the competitive position of AT&T's business units In connection with the restructuring, there is a risk that AT&T's separated business units may not be able to create effective intercompany agreements to facilitate effective cost sharing or enter into mutually desirable bundling arrangements. Competition between AT&T's units in overlapping markets, including the consumer markets where cable telephone, fixed wireless, and digital subscriber line solutions may all be available at the same time, although generally not all under the AT&T brand, could result in more downward price pressure. It is expected that the different businesses and companies will share the AT&T brand after the restructuring, which will likely increase this level of competition. In addition, any incremental costs associated with implementing AT&T's restructuring plan may materially adversely affect the different businesses and companies. SPECIAL CONSIDERATIONS RELATING TO THE AT&T WIRELESS GROUP SPLIT-OFF We may not complete the AT&T Wireless Group split-off as we plan We intend to separate AT&T Wireless Group from AT&T in the middle of 2001, but the split-off is subject to a number of conditions. We must obtain a favorable IRS ruling, which we may not receive. In addition, AT&T's new $25 billion credit facility includes as conditions to the split-off that it maintain a public debt rating for its long-term senior debt of at least BBB+ by Standard & Poor's Rating Services and Baa1 by Moody's Investors Services, Inc. and that AT&T Wireless Group repay intercompany obligations to AT&T, including debt and preferred equity which totaled $5.4 billion at December 31, 2000. In order to facilitate the receipt of the IRS ruling, we have undertaken a reorganization of our business structure which requires receipt of various local franchise regulatory approvals. While we currently intend to complete the split-off, we may not be able to satisfy these conditions to the split-off. Even if we do satisfy these conditions, other events or circumstances, including litigation, could occur that could affect the timing or terms of the split-off or our ability or plans to complete the split-off. For example, several large shareholders of AT&T associated with unions that represent AT&T employees have publicly announced their opposition to AT&T's restructuring plan. As a result of these factors, the split-off may not occur and, if it does occur, it may not occur on the terms or in the manner described, or in the time frame contemplated. In this event, there may be adverse consequences, such as the obligation to repurchase DoCoMo's investment in AT&T, or limits on AT&T Wireless Group's capital funding, as described below. AT&T's intention to retain $3 billion of shares of AT&T Wireless Services for sale, exchange or monetization after the split-off could adversely affect the market value of AT&T Wireless Group tracking stock AT&T currently intends to retain $3 billion of shares of AT&T Wireless Services for its own account for sale, exchange or monetization within six months of the split-off, subject to a satisfactory IRS ruling. If AT&T does so, the sale of these shares could adversely affect the market price of AT&T Wireless Services common stock. In addition, AT&T's retention of these shares would reduce the number of shares of AT&T Wireless Services that we would distribute to holders of AT&T common stock in the split-off. If we do not complete the split-off by early 2002 or if AT&T Wireless Group does not meet specified technology benchmarks, AT&T or AT&T Wireless Services may have to repurchase DoCoMo's $9.8 billion investment In connection with DoCoMo's investment in AT&T, AT&T has agreed, if DoCoMo so elects, to repurchase DoCoMo's interest in AT&T for an aggregate purchase price of $9.8 billion plus a predetermined interest rate if AT&T does not complete the split-off of AT&T Wireless Group by January 1, 2002, or March 15, 2002 if AT&T is trying to obtain an IRS ruling, or if by June 30, 2004 AT&T Wireless Group either fails to commence service using an agreed technology in at least 13 of the top 50 domestic markets or abandons wideband code division multiple access as its primary technology for third generation services. Before the split-off, AT&T Wireless Group would be required to fund its proportionate share, consisting of $6.2 billion plus interest. After the split-off, AT&T Wireless Services would be required to fund the entire repurchase obligation, with AT&T being secondarily liable for $3.6 billion plus interest if AT&T Wireless Services is unable to satisfy the entire obligation. If we do not complete the split-off, AT&T Wireless Group may not be able to meet its substantial capital needs that are key to its business strategy AT&T's desire to reduce debt levels and maintain its overall credit rating limits the ability of each of AT&T's business units, including AT&T Wireless Group, to incur substantial indebtedness. As a result, if the split-off does not occur in the time frame contemplated, and AT&T does not otherwise succeed in deleveraging by disposition of assets and other debt restructuring, AT&T Wireless Group may face significant capital constraints. These constraints would make it difficult for AT&T Wireless Group to continue to pursue its growth strategy in a capital intensive and highly competitive industry, including by making it necessary to scale back plans for third generation services and international investments. These constraints may have a material adverse effect on AT&T Wireless Group's business. If we complete the split-off, AT&T Wireless Services will need to obtain financing on a stand-alone basis Historically, all financing for AT&T Wireless Group was done by AT&T at the parent level. AT&T was able to use its overall balance sheet to finance the operations of AT&T Wireless Group. If we complete the split-off, AT&T Wireless Services will have to raise financing on a stand-alone basis without reference to AT&T's overall balance sheet. Following the split-off, AT&T Wireless Services may not be able to secure adequate debt or equity financing on desirable terms. If concerns generally affecting the wireless industry arise, AT&T Wireless Services will lose the benefit of AT&T's current diverse business profile to support its debt. The cost to AT&T Wireless Services of stand-alone financing may be materially higher than the cost of financing that AT&T Wireless Group incurred as part of AT&T. The credit ratings of AT&T Wireless Services are currently and may continue to be different than the historical ratings of AT&T. After the split-off, AT&T Wireless Services' credit ratings may be different from what they are now. Differences in credit ratings affect the interest rate charged on financings, as well as the amounts of indebtedness, types of financing structures and debt markets that may be available to AT&T Wireless Services. AT&T Wireless Services may not be able to raise the capital it requires on desirable terms. If we complete the split-off, AT&T Wireless Services may be unable to make the changes necessary to operate as an independent entity and may incur greater costs AT&T Wireless Group historically has been part of an integrated telecommunications provider since its acquisition by AT&T in 1994. If we complete the split-off, the separation of AT&T Wireless Services from the other telecommunications businesses of AT&T may adversely affect AT&T Wireless Services. In particular, following the split-off, AT&T will have no obligation to provide financial, operational or organizational assistance to AT&T Wireless Services other than limited services. AT&T Wireless Services may not be able to implement successfully the changes necessary to operate independently. AT&T Wireless Services may also incur additional costs relating to operating independently that would cause its cash flow and results of operations to decline materially. In addition, although AT&T Wireless Services may be able to participate in some of AT&T's supplier arrangements where those arrangements permit this or the vendors agree to this, its supplier arrangements may not be as favorable as has historically been the case. Agreements to be entered into in connection with the split-off provide that the business of AT&T Wireless Group will be conducted differently and that its relationship with AT&T will be different from that which has historically been the case. These differences may have a detrimental effect on the results of operations or financial condition of AT&T or AT&T Wireless Services. The historical financial information of AT&T Wireless Group may not be representative of its results as an independent entity, and, therefore, may not be reliable as an indicator of its historical or future results The historical financial information we have included and incorporated in this document may not reflect what the results of operations, financial position and cash flows of AT&T Wireless Group would have been had it been an independent entity during the periods presented. This is because the combined financial statements reflect allocations for services provided to AT&T Wireless Group by AT&T, which allocations may not reflect the costs AT&T Wireless Group will incur for similar or incremental services as an independent entity. This historical financial information also is not reliable as an indicator of future results. If we complete the split-off, AT&T Wireless Services' financing needs will increase as a result of intercompany repayment obligations Before the split-off, AT&T Wireless Services will repay all intercompany indebtedness owed to AT&T and will redeem all of the AT&T Wireless Group preferred equity held by AT&T. As of December 31, 2000, these amounts were approximately $2.4 billion and $3.0 billion, respectively, or an aggregate of approximately $5.4 billion. If we complete the split-off, AT&T Wireless Services will generally be responsible for tax liability if the split-off is taxable Under the separation and distribution agreement to be entered into between AT&T and AT&T Wireless Services, subject to limited exceptions, AT&T Wireless Services will be responsible for any tax liability and any related liability that results from the split-off failing to qualify as a tax-free transaction, subject to limited exceptions. If the split-off failed to qualify as a tax-free transaction, this liability would have a material adverse effect on AT&T Wireless Group. AT&T Wireless Group may no longer receive tax sharing payments from AT&T when it ceases to be a member of the AT&T consolidated tax return group, and AT&T Wireless Group may incur other tax liabilities as a result of the split-off and pre-split-off transactions As a result of the split-off, AT&T Wireless Services will cease to be a member of the consolidated federal income tax return group of which AT&T is the common parent. Consequently, taxable income and losses, and other tax attributes of AT&T Wireless Group in post split-off taxable periods could generally no longer offset taxable income or losses and other tax attributes of the AT&T consolidated tax return group. For two taxable years after the split-off, under federal income tax rules, AT&T Wireless Group would generally be able to carry back any such tax losses, subject to limitations, against taxable income, if any, of members of AT&T Wireless Group for pre split-off periods. Under the tax sharing agreement between AT&T and AT&T Wireless Group, however, AT&T Wireless Group generally may only carry back net operating losses (and not other tax attributes) from post split-off taxable periods to pre split-off taxable periods, and only if those losses are significant and with the consent of AT&T, which consent AT&T has agreed not to withhold unreasonably. To the extent AT&T Wireless Group has tax losses in post split-off taxable periods, it would generally no longer receive current tax sharing payments with respect to those losses. Instead, except where those losses can be carried back, it would benefit from those losses only if and when AT&T Wireless Group generated sufficient taxable income in future years to utilize those tax losses on a stand-alone basis. In addition, there may be tax costs associated with the split-off that result from AT&T Wireless Services ceasing to be a member of the AT&T consolidated tax return group, as well as from pre-split-off transactions. If incurred, these costs could be material to AT&T Wireless Services' results. If we complete the split-off, various factors may interfere with AT&T Wireless Services' ability to engage in desirable strategic transactions and equity issuances AT&T Wireless Services may not be able to engage in some strategic transactions after the split-off. The Internal Revenue Code restricts the ability of a company which has undergone a tax-free split-off from certain issuances of shares generally within a two-year period after the split-off. In addition, the separation and distribution agreement prohibits AT&T Wireless Services for a period of 30 months following the split-off, from entering into certain transactions that could render the split-off taxable. This may discourage, delay or prevent a merger, change of control, or other strategic or capital raising transaction involving the issuance of equity by AT&T Wireless Services. Provisions of AT&T Wireless Services charter and bylaws, its rights plan, applicable law, and the DoCoMo agreements may also have the effect of discouraging, delaying or preventing change of control transactions that its shareholders find desirable. If we complete the split-off, AT&T Wireless Services may lose rights under agreements with AT&T if a change of control occurs We expect that some of the agreements that AT&T and AT&T Wireless Services expect to enter into in connection with the split-off, including the brand license agreement, network services agreement and other commercial agreements, will contain provisions that give one party rights in the event of a change of control of the other party that triggered these rights. These provisions may deter a change of control. In the event of a change of control, the exercise of these rights could have a material adverse effect on AT&T Wireless Services or AT&T. The market price and trading volume of AT&T Wireless Services common stock maybe volatile and may face negative pressure Before the split-off, there will be no trading market for the shares of AT&T Wireless Services common stock that holders of AT&T common stock and AT&T Wireless Group tracking stock will receive in the split-off. Investors' interest may not lead to a liquid trading market and the market price of AT&T Wireless Services common stock may be volatile. Also, after the split-off, the percentage of AT&T Wireless Services represented by publicly held shares will increase materially. AT&T has announced its intention to retain $3 billion of shares of AT&T Wireless Services for its own account for sale, exchange or monetization within six months of the split-off, subject to receipt of a satisfactory IRS ruling. These factors may result in short- or long-term negative pressure on the trading price of shares of AT&T Wireless Services common stock. The market price of AT&T Wireless Services common stock could fluctuate significantly for many reasons, including in response to the special considerations listed in this document or for specific reasons unrelated to the performance of AT&T Wireless Services. Investors may consider AT&T Wireless Services common stock as a technology stock. Technology stocks have recently experienced extreme price and volume fluctuations. Therefore, the market price and trading volume of AT&T Wireless Services common stock also may be extremely volatile. SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS This Form 10-K contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to: - AT&T's restructuring plan, including the split-off of AT&T Wireless Group, - financial condition, - results of operations, - cash flows, - dividends, - financing plans, - business strategies, - operating efficiencies or synergies, - budgets, - capital and other expenditures, - network build-out and upgrade, - competitive positions, - availability of capital, - growth opportunities for existing products, - benefits from new technologies, - availability and deployment of new technologies, - plans and objectives of management, - markets for stock of AT&T Corp., AT&T Common Stock Group and AT&T Wireless Group, and - other matters. Statements in this Form 10-K that are not historical facts are hereby identified as "forward looking statements" for the purpose of the safe harbor provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Any Form 10-K, Annual Report to Shareholders, Form 10-Q or Form 8-K of AT&T may include forward looking statements. In addition, other written or oral statements which constitute forward looking statements have been made and may in the future be made by or on behalf of AT&T, including, without limitation, those relating to the future business prospects, revenues, working capital, liquidity, capital needs, network build out, interest costs and income, in each case, relating to AT&T Corp., AT&T Common Stock Group and AT&T Wireless Group. These forward looking statements are necessarily estimates reflecting the best judgment of senior management that rely on a number of assumptions concerning future events, many of which are outside of AT&T's control, and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. These forward-looking statements should, therefore, be considered in light of various important factors, including those set forth in this Form 10-K. Important factors that could cause actual results to differ materially from estimates or projections contained in the forward-looking statements include, without limitation: o the risks associated with the implementation of a third-generation network and business strategy for AT&T Wireless Group, including risks relating to the operations of new systems and technologies, substantial required expenditures and potential unanticipated costs, the need to enter into roaming agreements with third parties, uncertainties regarding the adequacy of suppliers on whom these groups must rely to provide both network and consumer equipment and consumer acceptance of the products and services to be offered, o the potential impact of DoCoMo's investment in AT&T Corp., including provisions of the agreements that restrict AT&T Wireless Group's future operations, and provisions that may require the repurchase of DoCoMo's investment if AT&T Corp. or AT&T Wireless Group fail to meet specified conditions, o the risks associated with the implementation of AT&T Corp.'s restructuring plan, which is complicated and which involves a substantial number of different transactions each with separate conditions, any or all of which may not occur as we currently intend, or which may not occur in the timeframe we currently expect, o the risks associated with each of AT&T Corp.'s main business units, including AT&T Wireless Group, operating as an independent entity as opposed to as part of an integrated telecommunications provider following completion of AT&T Corp.'s restructuring plan, including the inability of these groups to rely on the financial and operational resources of the combined company and these groups having to provide services that were previously provided by a different part of the combined company, o the impact of existing and new competitors in the markets in which these groups compete, including competitors that may offer less expensive products and services, desirable or innovative products, technological substitutes, or have extensive resources or better financing; o the introduction or popularity of new products and services, including pre-paid phone products in the case of wireless services, which could increase churn, o the impact of oversupply of capacity resulting from excessive deployment of network capacity, o the ongoing global and domestic trend towards consolidation in the telecommunications industry, which trend may have the effect of making the competitors larger and better financed and afford these competitors with extensive resources and greater geographic reach, allowing them to compete more effectively, o the effects of vigorous competition in the markets in which these groups operate and for each group's more valuable customers, which may decrease prices charged, increase churn and change the group's customer mix, profitability and average revenue per user, o the ability to enter into agreements to provide, and the cost of entering new markets necessary to provide, nationwide services, o the ability to establish a significant market presence in new geographic and service markets, o the availability and cost of capital and the consequences of increased leverage, o successful execution of plans to dispose of non-strategic assets as part of an overall corporate deleveraging plan, o the impact of any unusual items resulting from ongoing evaluations of the business strategies of these groups, o the requirements imposed on these groups or latitude allowed to competitors by the FCC or state regulatory commissions under the Telecommunications Act of 1996 or other applicable laws and regulations, o the risks and costs associated with the need to acquire additional spectrum for current and future services, o the risks associated with technological requirements, technology substitution and changes and other technological developments, o the results of litigation filed or to be filed against these groups, o the possibility of one or more of the markets in which these groups compete being impacted by changes in political, economic or other factors, such as monetary policy, legal and regulatory changes or other external factors over which these groups have no control, o the risks related to AT&T's investments in Liberty Media Group and joint ventures, and o those factors listed under "Special Considerations." The words "estimate," "project," "intend," "expect," "believe," "plan" and similar expressions are intended to identify forward-looking statements. These forward-looking statements are found at various places throughout this document and throughout the other documents incorporated herein by reference. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Moreover, in the future, AT&T Corp., through its senior management team, may make forward-looking statements about the matters described in this document or other matters concerning AT&T Corp., AT&T Wireless Group or AT&T Common Stock Group. AT&T Corp. undertakes no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. ITEM 2. PROPERTIES. The properties of AT&T Corp. consist primarily of plant and equipment used to provide long distance and wireless telecommunications services and cable television services and administrative office buildings. AT&T's owns and leases properties to support its offices, facilities and equipment. Telecommunications plant and equipment consists of: central office equipment, including switching and transmission equipment; connecting lines (cables, wires, poles, conduits, etc.); wireless cell sites, antennas and wireless switching facilities; land and buildings; and miscellaneous properties (work equipment, furniture, plant under construction, etc.). The majority of the connecting lines are on or under public roads, highways and streets and international and territorial waters. The remainder are on or under private property. Physical cable television properties, which are located throughout the United States, consist of system components, motor vehicles, miscellaneous hardware, spare parts and other components. AT&T also operates a number of sales offices, customer care centers, and other facilities, such as research and development laboratories. AT&T continues to manage the deployment and utilization of its assets in order to meet its global growth objectives while at the same time ensuring that these assets are generating value for the shareholder. AT&T will continue to manage its asset base consistent with globalization initiatives, marketplace forces, productivity growth and technology change. ITEM 3. LEGAL PROCEEDINGS. In the normal course of business, AT&T Corp. is subject to proceedings, lawsuits and other claims, including proceedings under government laws and regulations related to environmental and other matters. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. Consequently, AT&T Corp. is unable to ascertain the ultimate aggregate amount of monetary liability or financial impact with respect to these matters at December 31, 2000. While these matters could affect operating results of any one quarter when resolved in future periods, it is management's opinion that after final disposition, any monetary liability or financial impact to AT&T Corp. beyond that provided for at year-end would not be material to AT&T Corp.'s annual consolidated financial position or results of operations. The Company has been 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 11 of the Securities Act of 1933, as amended, and 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. Several lawsuits have been filed asserting claims that AT&T Wireless Group collected charges for local government taxes from customers that were not properly subject to those charges. AT&T Wireless Group has entered into a settlement of one of these cases, although the settlement has been challenged on appeal. AT&T Wireless Group has asserted in those cases that any recovery should come from the municipalities to which the taxes were paid. Several class action lawsuits have been filed in which claims have been asserted that AT&T Wireless Group did not have suffcient network capacity to support the influx of new subscribers who signed up for AT&T Digital One Rate service beginning in May 1998 and therefore has failed to provide service of a quality allegedly promised to subscribers. The plaintiffs in these cases have not asserted specific claims for damages, with the exception of one case filed in Texas in which the named plaintiffs have asserted claims for compensatory and punitive damages totaling $100 million. Several other class action or representative lawsuits have been filed against AT&T Wireless Group that allege, depending on the case, breach of contract, misrepresentation or unfair practice claims relating to AT&T Wireless Group's billing practices (including rounding up of partial minutes of use to full minute increments and billing send to end), coverage, dropped calls, price fixing and/or mistaken bills. Although the plaintiffs in these cases have not specified alleged damages, the damages in two of the cases are alleged to exceed $100 million. One of these two cases was dismissed and the dismissal was affirmed in part on appeal. Settlement negotiations are ongoing in both cases. AT&T Wireless Group is involved in litigation in which the Cellular One Group claims that use of the name ""AT&T Digital One Rate" infringes a trademarked name, ""DIGITALONE" for which the Cellular One Group has obtained trademark registration. The Cellular One Group has not specified amounts of claimed damages. AT&T Wireless Group is involved in a patent infringement action against GTE in the U.S. District Court in Seattle, Washington. GTE claims that the Nokia phones manufactured for AT&T Wireless Group infringe a GTE patent for over-the-air activation and over-the-air programming. AT&T Wireless Group is seeking a declaratory judgment that its use of over-the-air activation does not infringe GTE's patent. GTE has not specified amounts of claimed damages. Stockholders of a former competitor of AT&T Wireless Group air-to-ground business are plaintiffs in a lawsuit filed in 1993, alleging that AT&T Wireless Group breached a confidentiality agreement, used trade secrets to unfairly compete, and tortiously interfered with the business and potential business of the competitor. Plaintiffs sought damages in an unspecified amount in excess of $3.5 billion. AT&T Wireless Group obtained partial summary judgment and then prevailed on the remainder of the claims at a trial on the validity of a release of plaintiffs' claims. Final judgment was entered against plaintiffs on their claims, and plaintiffs appealed. On appeal, the Appellate Court of Illinois, Second District, reversed and remanded the case for trial indicating that certain issues decided by the judge needed to be resolved by a jury. AT&T Wireless Group is vigorously defending each of the claims described above. AT&T Wireless Group cannot predict the final outcome of these disputes. AT&T is also a named party in a number of environmental actions, none of which is material to the consolidated financial statements or business of the Company. In addition, pursuant to the Separation and Distribution Agreement by and among AT&T, Lucent, and NCR, dated as of February 1, 1996, and amended and restated as of March 29, 1996, Lucent has assumed liability, subject to the liability sharing provisions of that agreement, for a number of actions in which AT&T remains a named party. AT&T is working to be released as a party to these actions, although there can be no assurance that it will be successful in this regard. There are four environmental proceedings which are required to be reported pursuant to Instruction 5.C. of Item 103 of Regulation S-K; for the first three below, Lucent has assumed liability, as described above. First, on July 31, 1991, the United States Environmental Protection Agency Region III issued a complaint pursuant to Section 3008a of the Resource Conservation and Recovery Act alleging violations of various waste management regulations at the Company's Richmond Works, Richmond, Virginia. The complaint seeks a total of $4.2 million in penalties. Second, on July 31, 1991, the United States Environmental Protection Agency filed a civil complaint in the U.S. District Court for the Southern District of Illinois against the Company and nine other parties seeking enforcement of its Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") Section 106 cleanup order, issued in November 1990 for the NL Granite City Superfund site, Granite, Illinois, past costs, civil penalties of $25,000 per day and treble damages related to certain United States' costs. Third, during 1994, AT&T Nassau Metals Corporation ("Nassau"), a wholly owned subsidiary of AT&T, and the New York State Department of Environmental Conservation ("NYSDEC") were engaged in negotiations over a study and cleanup of the Nassau plant located on Richmond Valley Road in Staten Island, New York. During these negotiations, in June 1994, NYSDEC presented Nassau with a draft consent order that included not only provisions relating to site investigation and remediation but also a provision for payment of a $3.5 million penalty for alleged violations of hazardous waste management regulations. No formal proceeding has been commenced by NYSDEC. Last, the U.S. Department of Justice is using a grand jury sitting in the District Court of the Virgin Islands to investigate the purported 1996 release of non-toxic bentonite drilling mud within the coastal region of St. Croix. Requests for documents or testimony or both have been directed to numerous entities including AT&T, affiliated companies, contractors involved in the work, and individual employees. The prosecutor contemplates seeking criminal penalties or other sanctions from any party that evidence suggests either knowingly discharged pollutants in violation of permits or knowingly made false statements in violation of federal law. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. No matter was submitted to a vote of security holders in the fourth quarter of the fiscal year covered by this report. Executive Officers of the Registrant (as of March 17, 2001)
Became AT&T Name Age Executive Officer On - ---- --- -------------------- C. Michael Armstrong*. . 62 Chairman of the Board and Chief Executive Officer . . . . 10-97 Harold W. Burlingame . . 60 Executive Vice President, AT&T Wireless Group. . . . . . . 9-86 James Cicconi . . . . . 48 Executive Vice President-Law & Government Affairs and General Counsel . . . . . . . . . . . . . . . . . . . . 12-98 David W. Dorman . . . . 46 President . . . . . . . . . . . . . . . . . . . . . . . . 12-00 Mirian Graddick-Weir . . 46 Executive Vice President, Human Resources . . . . . . . . 3-99 Mohan Gyani . . . . . . 49 Executive Vice President and President & CEO, AT&T Wireless Services . . . . . . . . . . . . . . . . . . . 1-00 Frank Ianna . . . . . . 51 Executive Vice President and President, AT&T Network Services . . . . . . . . . . . . . . . . . . . . . . . . 3-97 Michael G. Keith . . . . 52 Executive Vice President and President and CEO, AT&T Wireless Services . . . . . . . . . . . . . . . . . 12-98 Richard J. Martin . . . 54 Executive Vice President, Public Relations and Employee Communication . . . . . . . . . . . . . . . . . 11-97 John C. Malone** . . . . 60 Chairman of the Board, Liberty Media Corporation . . . . . 3-99 David C. Nagel . . . . . 56 President, AT&T Labs & Chief Technology Officer. . . . . . 3-97 Charles H. Noski . . . . 48 Senior Executive Vice President and Chief Financial Officer . . . . . . . . . . . . . . . . . . . . . . . . 12-99 John C. Petrillo . . . . 51 Executive Vice President, Corporate Strategy and Business Development . . . . . . . . . . . . . . . . . . 1-96 Daniel E. Somers . . . . 53 President and CEO, AT&T Broadband . . . . . . . . . . . . 5-97 John D. Zeglis** . . . . 53 Chairman and Chief Executive Officer, AT&T Wireless Group. 9-86
----------- *Chairman of the Board of Directors and Chairman of the Executive and Proxy Committees. **Member of the Board of Directors. All of the above executive officers have held high level managerial positions with AT&T or its affiliates for more than the past five years, except Messrs. Armstrong, Cicconi, Dorman, Gyani, Malone, Nagel, Noski and Somers. Prior to joining AT&T in October 1997, Mr. Armstrong was Chairman and Chief Executive Officer of Hughes Electronics from 1993. Prior to joining AT&T in September 1998 as Senior Vice President-Law and Government Affairs, Mr. Cicconi was a partner at the law firm of Akin, Gump, Strauss, Houer and Feld, L.L.P. from 1991. Prior to joining AT&T in December 2000, Mr. Dorman was Chief Executive Officer of Concert, a global venture created by AT&T and BT, from 1999 and from 1998 to 1999 Mr. Dorman was Chairman, President and CEO of PointCast, an Internet-based news and information service company and from 1996 to 1998 he was Executive Vice President of SBC Communications and from 1994 to 1996 he was Chief Executive Officer of Pacific Bell. Prior to joining AT&T in January 2000, Mr. Gyani was Executive Vice President and Chief Financial Officer of Airtouch Communications from 1995 to 1999, and following the merger of Vodafone and Airtouch, was head of strategy and corporate development at Vodafone Airtouch plc. Prior to joining AT&T, Dr. Malone was President, Chairman and Chief Executive Officer of TCI from 1994. In addition, Dr. Malone served as director of TCI Pacific Communications, Inc. since 1996. Prior to joining AT&T in April 1996, Mr. Nagel was with Apple Computer, serving as Senior Vice President from 1995 and General Manager from 1988 through 1995. Prior to joining AT&T in December 1999, Mr. Noski was with Hughes Electronics serving as President and Chief Operating Officer and Director from 1997 and Vice Chairman and Chief Financial Officer from 1996 to 1997 and Sr. Vice President and Chief Financial Officer from 1992 to 1996. Prior to joining AT&T in May 1997, Mr. Somers was Chairman and Chief Executive Officer for Bell Cablemedia, plc, of London from 1995. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. AT&T (ticker symbol "T") is listed on the New York Stock Exchange, as well as the Boston, Chicago, Cincinnati, Pacific and Philadelphia exchanges in the United States, and on stock exchanges in Brussels, London, Paris and Geneva. As of December 31, 2000, AT&T had approximately 3.8 billion shares outstanding, held by more than 4.8 million shareowners. AT&T Wireless Group common stock (ticker symbol "AWE"), a tracking stock of AT&T, is listed on the New York Stock Exchange. As of December 31, 2000, there were approximately 361.8 million registered shareowners of AT&T Wireless Group. Liberty Media Group Class A and Class B common stock (ticker symbols "LMG.A" and "LMG.B"), tracking stocks of AT&T, are listed on the New York Stock Exchange. As of December 31, 2000, Liberty Media Class A had approximately 2.4 billion shares outstanding, held by 6,842 shareowners; Liberty Media Class B had approximately 206.2 million shares outstanding, held by 375 shareowners. For additional information about the market for the Company's common equity, see Note 21 to the Consolidated Financial Statements included in Item 8 to this Annual Report. ITEM 6. SELECTED FINANCIAL DATA. AT&T Corp. and Subsidiaries SEVEN-YEAR SUMMARY OF SELECTED FINANCIAL DATA (UNAUDITED) Dollars in millions (except per share amounts)
2000(1) 1999(2) 1998 1997 1996 1995 1994 ----- ----- ---- ---- ---- ---- ---- RESULTS OF OPERATIONS AND EARNINGS PER SHARE Revenue............................ $65,981 $62,600 $53,223 $51,577 $50,688 $48,449 $46,063 Operating income................... 4,277 10,859 7,487 6,836 8,709 5,169 7,393 Income from continuing operations.. 4,669 3,428 5,235 4,249 5,458 2,981 4,230 AT&T Common Stock Group: Income from continuing operations 3,105 5,450 5,235 4,249 5,458 2,981 4,230 Earnings per basic share........ 0.89 1.77 1.96 1.59 2.07 1.15 1.65 Earnings per diluted share...... 0.88 1.74 1.94 1.59 2.07 1.14 1.64 Dividends declared per share.... 0.6975 0.88 0.88 0.88 0.88 0.88 0.88 AT&T Wireless Group(3): Income.......................... 76 -- -- -- -- -- -- Earnings per basic and diluted share........................ 0.21 -- -- -- -- -- -- Liberty Media Group(3),(4): Income (loss)................... 1,488 (2,022) -- -- -- -- -- Earnings (loss) per basic and diluted share................ 0.58 (0.80) -- -- -- -- -- ASSETS AND CAPITAL Property, plant and equipment, net. $51,161 $39,618 $26,903 $24,203 $20,803 $16,453 $14,721 Total assets-continuing operations. 242,223 169,406 59,550 59,994 55,838 54,365 47,926 Total assets....................... 242,223 169,406 59,550 61,095 57,348 62,864 57,817 Long-term debt..................... 33,092 23,217 5,556 7,857 8,878 8,913 9,138 Total debt......................... 65,039 35,850 6,727 11,942 11,351 21,081 18,720 Mandatorily redeemable preferred securities...................... 2,380 1,626 -- -- -- -- -- Shareowners' equity................ 103,198 78,927 25,522 23,678 21,092 17,400 18,100 Debt ratio(5)...................... 46.2% 43.0% 20.9% 33.5% 35.0% 54.8% 50.8% Gross capital expenditures......... 14,566 13,511 7,981 7,714 7,084 4,659 3,504 OTHER INFORMATION Operating income as a percent of revenue......................... 6.5% 17.3% 14.1% 13.3% 17.2% 10.7% 16.1% Income from continuing operations attributable to AT&T Common Stock Group as a percent of revenue... 4.8% 8.7% 9.8% 8.2% 10.8% 6.2% 9.2% Return on average common equity(6). 6.2% 15.2% 25.3% 19.7% 27.1% 0.4% 29.5% Employees-continuing operations(6). 165,600 147,800 107,800 130,800 128,700 126,100 116,400 Data at year-end: AT&T stock price per share...... 17.25 50.81 50.50 40.87 27.54 29.60 22.97 AT&T Wireless Group stock price per share.................... 17.31 -- -- -- -- -- -- Liberty Media Group A stock price per share(4)................. 13.56 28.41 -- -- -- -- -- Liberty Media Group B stock price per share(4)................. 18.75 34.38 -- -- -- -- --
- ---------- 1. On April 27, 2000, AT&T issued 15.6% of AT&T Wireless Group (AWE) tracking stock. AT&T Common Stock Group results exclude the portion of AT&T Wireless Group that is represented by the tracking stock and exclude Liberty Media Group (LMG). In addition, on June 15, 2000, AT&T completed the acquisition of MediaOne Group, Inc. 2. In connection with the March 9, 1999, merger with Tele-Communications, Inc., AT&T issued separate tracking stock for LMG. LMG is accounted for as an equity investment. 3. No dividends have been declared for AWE or LMG tracking stocks. 4. LMG earnings per share amounts and stock prices have been restated to reflect the June 2000 two-for-one stock split. 5. Debt ratio reflects debt as a percent of total capital (debt plus equity, excluding LMG). For purposes of this calculation, equity includes convertible quarterly trust preferred securities as well as redeemable preferred stock of subsidiary. 6. Data provided excludes LMG. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW AT&T Corp. (AT&T or the company) is among the world's communications leaders, providing voice, data, video and broadband 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 communication services. AT&T also provides billing, directory and calling-card services to support our communications businesses. MERGER WITH MEDIAONE GROUP, INC. We completed the merger with MediaOne Group, Inc. (MediaOne) on June 15, 2000, in a cash and stock transaction valued at approximately $45 billion. We issued approximately 603 million shares, of which 60 million were treasury shares, and made cash payments of approximately $24 billion. The merger was recorded under the purchase method of accounting, and accordingly, the results of MediaOne have been included with the financial results of AT&T, within our Broadband segment, since the date of acquisition. Periods prior to the merger were not restated to include the results of MediaOne. TRACKING STOCKS On April 27, 2000, AT&T issued a new class of stock to track the performance of AT&T Wireless Group. AT&T sold 360 million shares of AT&T Wireless Group tracking shares at a price of $29.50 per share. The 360 million shares track approximately 16% of the financial performance of AT&T Wireless Group. In addition, in connection with the 1999 acquisition of Tele-Communications, Inc. (TCI), renamed AT&T Broadband (Broadband), AT&T issued a separate tracking stock to reflect the financial performance of Liberty Media Group (LMG), TCI's former programming and technology investment businesses. The outstanding Liberty Media Group tracking stock tracks 100% of the financial performance of LMG. The remaining results of operations of AT&T, including approximately 84% of the financial performance of AT&T Wireless Group, are referred to as the AT&T Common Stock Group and are represented by AT&T common stock. A tracking stock is designed to provide financial returns to its holders based on the financial performance and economic value of the assets it tracks. Ownership of shares of AT&T common stock, AT&T Wireless Group tracking stock or Liberty Media Class A or B tracking stock does not represent a direct legal interest in the assets and liabilities of any of the groups, but an ownership of AT&T in total. The specific shares represent an interest in the economic performance of the net assets of each of the groups. The earnings attributable to AT&T Wireless Group represent approximately 16% of the earnings from April 27, 2000, through December 31, 2000, and are excluded from the earnings available to AT&T Common Stock Group. Similarly, the earnings and losses related to LMG are excluded from the earnings available to AT&T Common Stock Group. We do not have a controlling financial interest in LMG 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 amounts attributable to LMG are reflected in the accompanying consolidated financial statements as "Equity earnings (losses) from Liberty Media Group" and "Investment in Liberty Media Group and related receivables, net". RESTRUCTURING OF AT&T On October 25, 2000, we announced a restructuring plan designed to fully separate or issue separately tracked stocks intended to reflect the financial performance and economic value of each of the company's four major operating units. Upon completion of the plan, AT&T Wireless, AT&T Broadband, AT&T Business and AT&T Consumer will all be represented by asset-based or tracking stocks. As part of the first phase of the restructuring plan, we are planning an exchange offer that will give AT&T shareowners the opportunity to exchange any portion of their AT&T common shares for shares of AT&T Wireless Group tracking stock, subject to pro-ration. Following the exchange offer and subject to specified conditions, AT&T plans to split-off AT&T Wireless Group from AT&T. We intend, however, to retain up to $3 billion of shares of AT&T Wireless for future sale, exchange or monetization within six months following the split-off. We expect AT&T Wireless will become an independent, publicly-held company in mid-2001, upon receipt of appropriate tax and other approvals. In addition to the split-off of AT&T Wireless, we intend to fully separate or issue separate tracking stocks to reflect the financial performance and economic value of each of our other major business units. We plan to create and issue new classes of stock to track the financial performance and economic value of our AT&T Broadband unit and AT&T Consumer unit. We plan to sell some percentage of shares of the AT&T Broadband unit in the fall of 2001. Within 12 months of such sale, we intend to completely separate AT&T Broadband from AT&T, as an asset-based stock. The AT&T Consumer tracking stock is expected to be fully distributed to AT&T shareowners in the second half of 2001. AT&T expects that these transactions will be tax-free to U.S. shareholders. AT&T's restructuring plan is complicated and involves a substantial number of steps and transactions, including obtaining various conditions, such as Internal Revenue Service (IRS) rulings. In addition, future financial conditions, superior alternatives or other factors may arise or occur that make it inadvisable to proceed with part or all of AT&T's restructuring plan. Any or all of the elements of AT&T's restructuring plan may not occur as we currently expect or in the timeframes that we currently contemplate, or at all. Alternative forms of restructuring, including sales of interests in these businesses, would reduce what is available for distribution to shareowners in the restructuring. On November 15, 2000, we announced that our board of directors voted to split-off LMG. A new asset-based security will be issued to holders of LMG tracking stock in exchange for their LMG tracking shares. The split-off remains subject to receipt of a favorable tax ruling from the IRS. We expect this split-off to be completed in mid-2001. FORWARD-LOOKING STATEMENTS This document may contain forward-looking statements with respect to AT&T's restructuring plan, financial condition, results of operations, cash flows, dividends, financing plans, business strategies, operating efficiencies or synergies, budgets, capital and other expenditures, network build out and upgrade, competitive positions, availability of capital, growth opportunities for existing products, benefits from new technologies, availability and deployment of new technologies, plans and objectives of management, and other matters. These forward-looking statements, including, without limitation, those relating to the future business prospects, revenue, working capital, liquidity, capital needs, network build out, interest costs and income, are necessarily estimates reflecting the best judgment of senior management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. These forward-looking statements should, therefore, be considered in light of various important factors that could cause actual results to differ materially from estimates or projections contained in the forward-looking statements including, without limitation: o the risks associated with the implementation of AT&T's restructuring plan, which is complicated and involves a substantial number of different transactions each with separate conditions, any or all of which may not occur as we currently intend, or which may not occur in the timeframe we currently expect, o the risks associated with each of AT&T's main business units, operating as independent entities as opposed to as part of an integrated telecommunications provider following completion of AT&T's restructuring plan, including the inability of these groups to rely on the financial and operational resources of the combined company and these groups having to provide services that were previously provided by a different part of the combined company, o the impact of existing and new competitors in the markets in which these groups compete, including competitors that may offer less expensive products and services, desirable or innovative products, technological substitutes, or have extensive resources or better financing. o the impact of oversupply of capacity resulting from excessive deployment of network capacity, o the ongoing global and domestic trend towards consolidation in the telecommunications industry, which trend may have the effect of making the competitors of these entities larger and better financed and afford these competitors with extensive resources and greater geographic reach, allowing them to compete more effectively, o the effects of vigorous competition in the markets in which the company operates, which may decrease prices charged, increase churn and change customer mix, profitability and average revenue per user, o the ability to enter into agreements to provide, and the cost of entering new markets necessary to provide, nationwide services, o the ability to establish a significant market presence in new geographic and service markets, o the availability and cost of capital and the consequences of increased leverage, o the successful execution of plans to dispose of non-strategic assets as part of an overall corporate deleveraging plan, o the potential impact of NTT DoCoMo's investment in AT&T, including provisions of the agreements that restrict AT&T Wireless Group's future operations, and provisions that may require AT&T to repurchase DoCoMo's interest in AT&T if AT&T or AT&T Wireless Group fail to meet specified conditions, o the impact of any unusual items resulting from ongoing evaluations of the business strategies of the company, o the requirements imposed on the company or latitude allowed to competitors by the Federal Communications Commission (FCC) or state regulatory commissions under the Telecommunications Act of 1996 or other applicable laws and regulations, o the risks and costs associated with the need to acquire additional wireless spectrum for current and future services, o the risks associated with technological requirements, technology substitution and changes and other technological developments, o the results of litigation filed or to be filed against the company, o the possibility of one or more of the markets in which the company competes being impacted by changes in political, economic or other factors, such as monetary policy, legal and regulatory changes or other external factors over which these groups have no control, and o the risks related to AT&T's investments in LMG and joint ventures. The words "estimate," "project," "intend," "expect," "believe," "plan" and similar expressions are intended to identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document. Moreover, in the future, AT&T, through its senior management, may make forward-looking statements about the matters described in this document or other matters concerning AT&T. 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 for the years ended December 31, 2000, 1999 and 1998, and financial condition as of December 31, 2000 and 1999. CONSOLIDATED RESULTS OF OPERATIONS The comparison of 2000 results with 1999 was impacted by events, such as acquisitions and dispositions that occurred during these two years. For example, in 2000 we acquired MediaOne and wireless properties in the San Francisco Bay area, which were both included in our 2000 results for part of the year, but were not in 1999 results. In 1999, we acquired TCI, the IBM Global Network (now AT&T Global Network Services, or AGNS) and Vanguard Cellular Systems, Inc. (Vanguard). These businesses were included in 2000 results for a full year, but only a part of 1999 (since their respective dates of acquisition). Further, we disposed of certain international businesses during 1999 and 2000. The results of businesses sold in 1999 were included in 1999 results for part of the year, and were not in 2000 results. Likewise, businesses sold in 2000 were included in 1999 results for the full year and in 2000 results for part of the year. Year-over-year comparison was also impacted by the consolidation of At Home Corp. (Excite@Home) beginning September 1, 2000, due to corporate-governance changes which gave AT&T a controlling interest. At that time and on December 31, 2000, we had an approximate 23% economic interest and 74% voting interest in Excite@Home. Prior to September 1, 2000, we accounted for our ownership in Excite@Home under the equity method of accounting, which means our investment was included in "Other investments and related advances" in the 1999 Consolidated Balance Sheet and any earnings or losses were included as a component of "Net losses from other equity investments" in the Consolidated Statements of Income. The consolidation of Excite@Home resulted in the inclusion of 100% of its results in each line item of AT&T's Consolidated Balance Sheet and Consolidated Income Statement. The approximate 77% we do not own is shown in the 2000 Consolidated Balance Sheet within "Minority interest" and as a component of "Minority interest income (expense)" in the 2000 Consolidated Statement of Income. On January 5, 2000, we launched Concert, our global joint venture with British Telecommunications plc (BT). AT&T contributed all of its international gateway-to-gateway assets and the economic value of approximately 270 multinational customers specifically targeted for direct sales by Concert. As a result, 2000 results do not include the revenue and expenses associated with these customers and businesses, while 1999 does, and 2000 results include our proportionate share of Concert's earnings in "Net losses from other equity investments." Effective July 1, 2000, the FCC eliminated Primary Interexchange Carrier Charges (PICC or per-line charges) that AT&T pays for residential and single-line business customers. The elimination of these per-line charges resulted in lower access expense as well as lower revenue, since AT&T has historically billed its customers for these charges. The comparison of 1999 results with 1998 was also impacted by the 1999 acquisitions of TCI, AGNS and Vanguard, since 1999 results include these businesses for part of the year, while 1998 does not include them. This comparison is also impacted by the 1999 dispositions of international businesses, which were included in 1999 results for part of the year, but were in 1998 results for the full year.
For the Years Ended December 31, 2000 1999 1998 ---- ---- ---- Dollars in millions Business Services..................................................... $28,488 $27,480 $24,285 Consumer Services..................................................... 18,976 21,854 22,885 Wireless Services..................................................... 10,448 7,627 5,406 Broadband............................................................. 8,217 5,070 -- Other and Corporate................................................... (148) 569 647 Total revenue......................................................... $65,981 $62,600 $53,223
Total revenue increased 5.4%, or $3.4 billion, in 2000 compared with the prior year. Approximately $2.1 billion of the increase was due to the impact of acquisitions and the consolidation of Excite@Home, offset by the impact of Concert, dispositions and the elimination of PICC. The remaining $1.3 billion increase was primarily driven by a growing demand for our wireless and data and Internet protocol (IP) products, and outsourcing services, partially offset by continued and accelerating declines in long distance voice revenue. We expect long distance revenue to continue to be negatively impacted by ongoing competition and product substitution. Total revenue in 1999 increased $9.4 billion, or 17.6%, compared with 1998. Nearly three-quarters of the increase was due to acquisitions, net of dispositions. The remaining increase was fueled by growth in wireless, business data, business long distance voice and outsourcing revenue, partially offset by the continued decline of consumer long distance voice revenue. Revenue by segment is discussed in greater detail in the segment results section.
For the Years Ended December 31, 2000 1999 1998 ---- ---- ---- Dollars in millions Costs of services and products........................................ $17,587 $14,594 $10,495
Costs of services and products include the costs of operating and maintaining our networks, costs to support our outsourcing contracts, fees paid to other wireless carriers for the use of their networks (off-network roaming), programming and licensing costs for cable services, costs of wireless handsets sold, the provision for uncollectible receivables and other service-related costs. These costs increased $3.0 billion, or 20.5%, in 2000 compared with 1999. Nearly $2.1 billion of the increase was due to acquisitions and the impact of consolidating Excite@Home, net of the impact of Concert and divestments of international businesses. The higher costs associated with our growing wireless subscriber base and wireless network as well as new outsourcing contracts increased expenses by approximately $1.5 billion. The higher wireless expenses primarily related to higher costs of handsets sold, due to a 53.5% increase in gross subscriber additions in 2000 compared with 1999. Expenses also increased due to higher video-programming costs principally due to rate increases, and higher costs associated with new broadband services of approximately $0.3 billion. These increases were partially offset by approximately $0.9 billion of costs savings from continued cost control initiatives 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 rose $4.1 billion, or 39.1%, in 1999 compared with 1998, primarily due to acquisitions, net of dispositions, which accounted for approximately $3.7 billion of the increase. The higher costs associated with our growing wireless subscriber base as well as new outsourcing contracts increased expenses by approximately $1.5 billion. Partially offsetting the 1999 increases were network cost-control initiatives of approximately $0.4 billion, and approximately $0.3 billion of lower expenses in Business Services related to per-call compensation expense, provision for uncollectible receivables and gross receipts and property taxes.
For the Years Ended December 31, 2000 1999 1998 ---- ---- ---- Dollars in millions Access and other connection........................................... $13,518 $14,686 $15,328
Access and other connection expenses decreased 8.0%, to $13.5 billion in 2000, compared with $14.7 billion in 1999. Included within access and other connection expenses are costs that we pay to connect domestic calls on the facilities of other service providers. Mandated reductions in per-minute access costs and decreased per-line charges resulted in lower costs of approximately $1.5 billion. Also contributing to the decrease was more efficient network usage. These decreases were partially offset by approximately $0.7 billion of higher costs due to volume increases, and $0.5 billion as a result of higher Universal Service Fund contributions. Since most of these charges are passed through to the customer, the per-minute access-rate and per-line charge reductions and the increased Universal Service Fund contributions have generally resulted in a corresponding impact on revenue. Costs paid to telephone companies outside of the United States to connect calls made to countries outside of the United States (international settlements) are also included within access and other connection expenses. These costs decreased approximately $0.5 billion in 2000, as result of the commencement of operations of Concert. Concert now incurs most of our international settlements as well as earns most of our foreign-billed revenue, previously incurred and earned directly by AT&T. In 2000, Concert billed us a net expense composed of international settlement (interconnection) expense and foreign-billed revenue. The amount charged by Concert in 2000 was lower than interconnection expense incurred in 1999, since AT&T recorded these transactions as revenue and expense, as applicable. Partially offsetting the decline were costs incurred related to Concert products that AT&T now sells to its customers. Access and other connection expenses declined $0.6 billion, or 4.2%, in 1999 compared with the prior year. This decline resulted from $0.9 billion of mandated reductions in per-minute access rates in 1999 and 1998, and $0.6 billion of lower international settlement rates resulting from our negotiations with international carriers. Additionally, we continue to manage these costs through more efficient network usage. These reductions were partially offset by $0.8 billion of higher costs due to volume growth, and $0.3 billion as a result of increased per-line charges and Universal Service Fund contributions.
For the Years Ended December 31, 2000 1999 1998 ---- ---- ---- Dollars in millions Selling, general and administrative................................... $13,303 $13,516 $12,770
Selling, general and administrative (SG&A) expenses decreased $0.2 billion, or 1.6%, in 2000 compared with 1999. Approximately $2.0 billion of the decrease was due to savings from continued cost-control initiatives and a higher pension credit in 2000, primarily driven by a higher pension trust asset base, resulting from increased investment returns. Largely offsetting this decrease was more than $1.4 billion of higher expenses associated with our growing wireless and broadband businesses, and nearly $0.7 billion of expenses associated with acquisitions and the consolidation of Excite@Home, net of the impact of Concert and dispositions. SG&A expenses increased $0.7 billion, or 5.8%, in 1999 compared with 1998. This increase was primarily due to acquisitions, net of dispositions, which resulted in an increase in SG&A expenses of approximately $1.4 billion. Also contributing to the increase was approximately $0.4 billion of higher costs to support our growing wireless subscriber base. Partially offsetting these increases were our continued efforts to control costs on a companywide basis, which resulted in lower SG&A expenses of approximately $0.9 billion, including lower spending for consumer long distance acquisition-programs.
For the Years Ended December 31, 2000 1999 1998 ---- ---- ---- Dollars in millions Depreciation and other amortization....................................... $7,274 $6,138 $4,378
Depreciation and other amortization expenses rose $1.1 billion, or 18.5%, in 2000 compared with 1999 and increased $1.8 billion, or 40.2%, in 1999 compared with 1998. Approximately one-half of the increase in both years was due to acquisitions and the consolidation of Excite@Home, net of dispositions and the impact of Concert, as applicable. The remaining increase was primarily due to a higher asset base resulting from continued infrastructure investment. Total capital expenditures for 2000, 1999 and 1998 were $14.6 billion, $13.5 billion and $8.0 billion, respectively. We continue to focus the vast majority of our capital spending on our growth businesses of broadband, wireless, data and IP and local.
For the Years Ended December 31, 2000 1999 1998 ---- ---- ---- Dollars in millions Amortization of goodwill, franchise costs and other purchased intangibles.... $2,993 $1,301 $251
Amortization of goodwill, franchise costs and other purchased intangibles increased $1.7 billion, or 130.1%, in 2000 compared with the prior year. This increase was largely attributable to the consolidation of Excite@Home, as well as acquisitions, primarily MediaOne and TCI. Franchise costs represent the value attributable to agreements with local authorities that allow access to homes in Broadband's service areas. Other purchased intangibles arising from business combinations primarily included customer relationships and licenses. Amortization of goodwill, franchise costs and other purchased intangibles increased $1.1 billion in 1999 compared with 1998 due primarily to the acquisition of TCI and, to a lesser extent, AGNS.
For the Years Ended December 31, 2000 1999 1998 ---- ---- ---- Dollars in millions Net restructuring and other charges....................................... $7,029 $1,506 $2,514
During 2000, we recorded $7.0 billion of net restructuring and other charges, which had an approximate $0.90 earnings per diluted share impact to the AT&T Common Stock Group. The 2000 charge included $6.2 billion of asset impairment charges related to Excite@Home, $759 million for restructuring and exit costs associated with AT&T's initiative to reduce costs, and $91 million related to the government-mandated disposition of AT&T Communications (U.K.) Ltd., which would have competed directly with Concert. The asset impairment charges related to Excite@Home resulted from the deterioration of the market conditions and market valuations of Internet-related companies during the fourth quarter of 2000, which caused Excite@Home to conclude that intangible assets related to their acquisitions of Internet-related companies may not be recoverable. Accordingly, Excite@Home conducted a detailed assessment of the recoverability of the carrying amounts of acquired intangible assets. This assessment resulted in a determination that certain acquired intangible assets, including goodwill, related to these acquisitions, including Excite, were impaired as of December 31, 2000. As a result, Excite@Home recorded impairment charges of $4.6 billion in December 2000, representing the excess of the carrying amount of the impaired assets over their fair value. The impairment was allocated to each asset group based on a comparison of carrying values and fair values. The impairment write-down within each asset group was allocated first to goodwill, and if goodwill was reduced to zero, to identifiable intangible assets in proportion to carrying values. Since we own approximately 23% of Excite@Home, 77% of the charge recorded by Excite@Home was not included as a reduction to AT&T's net income, but rather was eliminated in our 2000 Consolidated Statement of Income as "Minority interest income (expense)." Also as a result of the foregoing, AT&T recorded a goodwill and acquisition-related impairment charge of $1.6 billion associated with the acquisition of our investment in Excite@Home. The write-down of our investment to fair value was determined utilizing discounted expected future cash flows. The $759 million charge for restructuring and exit plans was primarily due to headcount reductions, mainly in network operations and Business Services, including the consolidation of customer-care and call centers, as well as synergies created by the MediaOne merger. Included in exit costs was $503 million of cash termination benefits associated with the separation of approximately 7,300 employees as part of voluntary and involuntary termination plans. Approximately one-half of the separations were management employees and one-half were nonmanagement employees. Approximately 6,700 employee separations were related to involuntary terminations and approximately 600 to voluntary terminations. We also recorded $62 million of network lease and other contract termination costs associated with penalties incurred as part of notifying vendors of the termination of these contracts during the year, and net losses of $32 million related to the disposition of facilities primarily due to synergies created by the MediaOne merger. Also included in restructuring and exit costs in 2000 was $144 million of benefit plan curtailment costs associated with employee separations as part of these exit plans. Further, we recorded an asset impairment charge of $18 million related to the write-down of unrecoverable assets in certain businesses where the carrying value was no longer supported by estimated future cash flows. The 2000 restructuring initiatives are projected to yield cash savings of approximately $690 million per year, as well as EBIT (earnings before interest and taxes, including pretax minority interest and net pretax losses from other equity investments) savings of approximately $700 million per year. We expect increased spending in growth businesses will largely offset these cash and EBIT savings. The EBIT savings, primarily attributable to reduced personnel-related expenses, will be realized in SG&A expenses and costs of services and products. During 1999, we recorded $1.5 billion of net restructuring and other charges, which had an approximate $0.37 earnings per diluted share impact to the AT&T Common Stock Group. A $594 million in-process research and development charge was recorded reflecting 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 had no alternative future use. The projects identified related to efforts to offer voice over IP, product-integration efforts for advanced set-top devices, cost-savings efforts for broadband-telephony implementation, and in-process research and development related to Excite@Home. We estimated the fair value of in-process research and development for each project using an income approach, which was adjusted to allocate fair value based on the project's percentage of completion. Under this approach, the present value of the anticipated future benefits of the projects was determined using a discount rate of 17%. For each project, the resulting net present value was multiplied by a percentage of completion based on effort expended to date versus projected costs to complete. The charge associated with voice-over-IP technology, which allows voice telephony traffic to be digitized and transmitted in IP data packets, was $225 million as of the date of acquisition. Current voice-over-IP equipment does not yet support many of the features required to connect customer premises equipment to traditional phone networks. Further technical development is also needed to ensure voice quality that is comparable to conventional circuit-switched telephony and to reduce the power consumption of the IP-telephony equipment. We started testing IP-telephony equipment in the field in late-2000 and will continue tests throughout 2001. The charge associated with product-integration efforts for advanced set-top devices, which will enable us to offer next-generation digital services, was $114 million as of the acquisition date. The associated technology consists of the development and integration work needed to provide a suite of software tools to run on the digital set-top box hardware platform. It is anticipated that field trials will begin in late-2001 for next-generation digital services. The charge associated with cost-savings efforts for broadband-telephony implementation was $101 million as of the date of acquisition. Telephony cost reductions primarily consist of cost savings from the development of a "line of power switch," which allows us to cost effectively provide power for customer telephony equipment through the cable plant. This device will allow us to provide line-powered telephony without burying the cable line to each house. Trials related to our telephony cost reductions are complete, and implementation has begun in certain markets. Additionally, the in-process research and development charge related to Excite@Home was valued at $154 million. This charge related to projects to allow for self-provisioning of devices and the development of next-generation client software, network and back-office infrastructure to enable a variety of network devices beyond personal computers and improved design for the regional data centers' infrastructure. Although there are technological issues to overcome to successfully complete the acquired in-process research and development, we expect successful completion. We estimate the costs to complete the identified projects will not have a material impact on our results of operations. If, however, we are unable to establish technological feasibility and produce commercially viable products/services, anticipated incremental future cash flows attributable to expected profits from such new products/services may not be realized. A $531 million asset impairment charge was recorded in 1999 associated with the planned disposal of certain wireless communications equipment resulting from a program to increase the capacity and operating efficiency of our wireless network. As part of a multivendor program, contracts have been executed with select vendors to replace significant portions of our wireless infrastructure equipment in the western United States and the metropolitan New York markets. The program is intended to provide Wireless Services with the newest technology available and allow us to evolve to new, next-generation digital technology, which is designed to provide high-speed data capabilities. Since the assets will remain in service from the date of the decision to dispose of these assets to the disposal date, the remaining net book value of the assets will be depreciated over this period. Also in 1999, a $145 million charge for restructuring and exit costs was recorded as part of AT&T's initiative to reduce costs. The restructuring and exit plans primarily focused on the maximization of synergies through headcount reductions in Business Services and network operations, including the consolidation of customer-care and call centers. Included in exit costs was $142 million of cash termination benefits associated with the separation of approximately 2,800 employees as part of voluntary and involuntary termination plans. Approximately one-half of the separations were management employees and one-half were nonmanagement employees. Approximately 1,700 employee separations were related to involuntary terminations and approximately 1,100 to voluntary terminations. The 1999 restructuring initiatives are projected to yield cash savings of approximately $250 million per year. This restructuring yielded EBIT savings of approximately $200 million in 2000, and is expected to save nearly $400 million per year thereafter. We expect increased spending in growth businesses will largely offset these cash and EBIT savings. The EBIT savings, primarily attributable to reduced personnel-related expenses, will be realized in SG&A expenses and costs of services and products. We also recorded net losses of $307 million related to the government-mandated disposition of certain international businesses that would have competed directly with Concert, and $50 million related to a contribution agreement Broadband entered into with Phoenixstar, Inc. That agreement requires Broadband to satisfy certain liabilities owed by Phoenixstar and its subsidiaries. The remaining obligation under this contribution agreement and an agreement that MediaOne had is $57 million, which was fully accrued for at December 31, 2000. In addition, we recorded benefits of $121 million related to the settlement of pension obligations for former employees who accepted AT&T's 1998 voluntary retirement incentive program (VRIP) offer. During 1998, we recorded $2.5 billion of net restructuring and other charges, which had an approximate $0.59 earnings per diluted share impact to the AT&T Common Stock Group. The bulk of the charge was associated with our overall cost-reduction program and the approximately 15,300 management employees who accepted the VRIP offer. A restructuring charge of $2,724 million was composed of $2,254 million and $169 million for pension and postretirement special-termination benefits, respectively, $263 million of benefit plan curtailment losses and $38 million of other administrative costs. We also recorded charges of $125 million for related facility costs and $150 million for executive-separation costs. These charges were partially offset by benefits of $940 million as we settled pension benefit obligations for 13,700 of the total VRIP employees. In addition, the VRIP charges were partially offset by the reversal of $256 million of 1995 business restructuring reserves primarily resulting from the overlap of VRIP on certain 1995 projects. Also included in the 1998 net restructuring and other charges were asset impairment charges totaling $718 million, of which $633 million was related to our decision not to pursue Total Service Resale (TSR) as a local-service strategy. We also recorded an $85 million asset impairment charge related to the write-down of unrecoverable assets in certain international operations where the carrying value was no longer supported by future cash flows. This charge was made in connection with the review of certain operations that would have competed directly with Concert. Additionally, $85 million of merger-related expenses were recorded in 1998 in connection with the Teleport Communications Group Inc. (TCG) merger, which was accounted for as a pooling of interests. Partially offsetting these charges was a $92 million reversal of the 1995 restructuring reserve. This reversal reflected reserves no longer deemed necessary. The reversal primarily included separation costs attributed to projects completed at a cost lower than originally anticipated. Consistent with the three-year plan, the 1995 restructuring initiatives were substantially completed by the end of 1998.
For the Years Ended December 31, 2000 1999 1998 ---- ---- ---- Dollars in millions Operating income......................................................... $4,277 $10,859 $7,487
Operating income decreased $6.6 billion, or 60.6%, in 2000 compared with 1999. The decrease was primarily due to higher net restructuring and other charges of $5.5 billion. Also contributing to the decrease was the impact of the acquisition of MediaOne and the consolidation of Excite@Home, which lowered operating income by $1.5 billion. A majority of the impact of operating losses and the restructuring charge generated by Excite@Home was offset in minority interest income (expense), reflecting the approximate 77% of Excite@Home we do not own. Partially offsetting these decreases were cost-control initiatives and a larger pension credit associated with our mature long distance businesses and related support groups, partially offset by lower long distance revenue. Operating income rose $3.4 billion, or 45.0%, in 1999 compared with 1998. The increase was driven by approximately $2.3 billion of operating income improvements in Business Services and Consumer Services, reflecting operating expense efficiencies. Also contributing to the increase was $1.0 billion of lower net restructuring and other charges.
For the Years Ended December 31, 2000 1999 1998 ---- ---- ---- Dollars in millions Other income................................................................. $1,514 $931 $1,281
Other income increased $0.6 billion, or 62.4%, in 2000 compared with 1999. This increase was primarily due to greater net gains on sales of businesses and investments of approximately $1.0 billion, and higher investment-related income of approximately $0.3 billion. The higher gains on sales were driven by significant gains associated with the swap of cable properties with Comcast Corporation (Comcast) and Cox Communications, Inc. (Cox), the sale of our investment in Lenfest Communications, Inc. (Lenfest) and Celumovil, and a gain recorded as a result of the merger of TeleCorp PCS, Inc. (TeleCorp) and Tritel, Inc. (Tritel) and related transactions. These gains aggregated approximately $1.0 billion and had an approximate $0.29 earnings per diluted share impact to the AT&T Common Stock Group. In 1999, we recorded significant gains associated with the sale of our Language Line Services business, a portion of our ownership interest in AT&T Canada as well as our investment in Wood-TV. These gains aggregated approximately $0.4 billion and had an approximate $0.07 earnings per diluted share impact to the AT&T Common Stock Group. Offsetting the increases to other income in 2000 was an approximate $0.5 billion charge reflecting the increase in the fair value of put options held by Comcast and Cox related to Excite@Home stock, and approximately $0.2 billion of higher investment impairment charges. Other income decreased $0.4 billion, or 27.3%, in 1999 compared with 1998. The decrease was due to lower net gains on sales of businesses and investments of approximately $0.3 billion as well as lower investment-related income of approximately $0.2 billion. In 1999, we recorded significant gains associated with the sale of our Language Line Services business, a portion of our ownership interest in AT&T Canada as well as our investment in Wood-TV. These gains aggregated approximately $0.4 billion and had an approximate $0.07 earnings per diluted share impact to the AT&T Common Stock Group. In 1998, we recorded significant gains associated with the sale of AT&T Solutions Customer Care, LIN Television Corp. and SmarTone Telecommunications Holdings Limited. These gains aggregated approximately $0.8 billion and had an approximate $0.18 earnings per diluted share impact to the AT&T Common Stock Group.
For the Years Ended December 31, 2000 1999 1998 ---- ---- ---- Dollars in millions Interest expense............................................................. $3,183 $1,765 $427
Interest expense increased 80.3%, or $1.4 billion, in 2000 compared with 1999. The increase was primarily due to a higher average debt balance as a result of our June 2000 acquisition of MediaOne, including outstanding debt of MediaOne and debt issued to fund the MediaOne acquisition, and our March 1999 acquisition of TCI, partially offset by higher capitalized interest. Interest expense increased $1.3 billion in 1999 compared with 1998, due to a higher average debt balance associated with our acquisitions, including debt outstanding of TCI at the date of acquisition.
For the Years Ended December 31, 2000 1999 1998 ---- ---- ---- Dollars in millions Provision for income taxes................................................ $3,342 $3,695 $3,049
The effective income tax rate is the provision for income taxes as a percent of income from continuing operations before income taxes. The effective income tax rate was 128.1% in 2000, 36.9% in 1999 and 36.6% in 1998. In 2000, the effective tax rate was negatively impacted by Excite@Home, which is unable to record tax benefits associated with its pretax losses. Therefore the $4.6 billion restructuring charges taken by Excite@Home in 2000 had no associated tax benefit. The 2000 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 and the benefit of the write-off of the related deferred tax liability. The 1999 effective tax rate was negatively impacted by a non-tax-deductible research and development charge, but positively impacted by a change in the net operating loss utilization tax rules that resulted in a reduction in the valuation allowance and the income tax provision.
For the Years Ended December 31, 2000 1999 1998 ---- ---- ---- Dollars in millions Minority interest income (expense)........................................... $4,120 $(115) $21
Minority interest income (expense), which is recorded net of income taxes, represents an adjustment to AT&T's income to reflect the less than 100% ownership of consolidated subsidiaries as well as dividends on preferred stock issued by subsidiaries of AT&T. The $4.2 billion increase in minority interest in 2000 resulted from the consolidation of Excite@Home effective September 1, 2000. The minority interest income in 2000 primarily reflects losses generated by Excite@Home, including the goodwill impairment charge, that were attributable to the approximate 77% of Excite@Home not owned by AT&T. The decrease in minority interest in 1999 compared with 1998 was primarily due to dividends on preferred securities issued by a subsidiary trust of AT&T in 1999.
For the Years Ended December 31, 2000 1999 1998 ---- ---- ---- Dollars in millions Equity earnings (losses) from Liberty Media Group......................... $1,488 $(2,022) --
Equity earnings from LMG, which are recorded net of income taxes, were $1.5 billion in 2000, compared with losses of $2.0 billion in 1999. The increase was primarily due to gains on dispositions, including gains associated with the mergers of various companies that LMG had investments in. Gains were recorded for the difference between the carrying value of LMG's interest in the acquired company and the fair value of securities received in the merger. In addition, lower stock compensation expense in 2000 compared with 1999 contributed to the increase. These were partially offset by impairment charges recorded on LMG's investments to reflect other than temporary declines in value and higher losses relating to LMG's equity affiliates.
For the Years Ended December 31, 2000 1999 1998 ---- ---- ---- Dollars in millions Net losses from other equity investments........................................... $205 $765 $78
Net losses from other equity investments, which are recorded net of income taxes, were $0.2 billion in 2000, a 73.2% improvement compared with 1999. This improvement was primarily a result of the redemption of our investment in AB Cellular which resulted in the distribution of wireless properties in the Los Angeles area to AT&T, which caused AB Cellular to record a gain on the distribution. Our pro rata share of this gain was approximately $0.4 billion. In addition, in 2000, earnings from our investment in Cablevision Systems Corp. (Cablevision) were approximately $0.2 billion higher than 1999 due to gains from cable-system sales. Offsetting these increases were losses from our stake in Time Warner Entertainment Company, L.P. (TWE) which we acquired in connection with the MediaOne merger and greater equity losses from Excite@Home, which aggregated approximately $0.1 billion. Net losses from equity investments were $0.8 billion in 1999 compared with $78 million in 1998, primarily due to losses we recorded on investments we acquired through TCI, largely Cablevision and Excite@Home.
For the Years Ended December 31, 2000 1999 1998 ---- ---- ---- (Dollars in millions, except per share amounts) AT&T Common Stock Group: Income from continuing operations.................................... $3,105 $5,450 $5,235 Earnings from continuing operations per share: Basic............................................................. 0.89 1.77 1.96 Diluted........................................................... 0.88 1.74 1.94 AT&T Wireless Group: Income............................................................... $76 -- -- Earnings per share: Basic and diluted................................................. 0.21 -- -- Liberty Media Group: Income (loss)........................................................ $1,488 $(2,022) -- Earnings (loss) per share: Basic and diluted................................................. 0.58 (0.80) --
Earnings per diluted share (EPS) attributable to the AT&T Common Stock Group were $0.88 in 2000 compared with $1.74 in 1999, a decrease of 49.4%. The decrease was primarily due to higher restructuring and asset impairment charges and the MediaOne acquisition, including the impact of shares issued, operating losses of MediaOne and additional interest expense. Also contributing to the decrease was the impact of Excite@Home, including the mark-to-market adjustment related to the put options held by Comcast and Cox. These were partially offset by lower losses from equity investments and an increase in other income, primarily associated with higher net gains on sales of businesses and investments, and higher investment-related income. Also impacting EPS was higher operating income associated with our mature long distance businesses. EPS from continuing operations attributable to the AT&T Common Stock Group on a diluted basis declined 10.3% in 1999, to $1.74, compared with 1998. The decline was primarily due to the impact of the TCI and AGNS acquisitions, including the impact of shares issued and equity losses of Excite@Home and Cablevision. Partially offsetting these declines were increased income from the remaining operations due to revenue growth and operating expense efficiencies, as well as lower net restructuring and other charges. EPS for Liberty Media Group was $0.58 in 2000, compared with a loss of $0.80 per share for 1999. The increase in EPS was primarily due to gains on dispositions, including gains associated with the mergers of various companies that LMG had investments in. Gains were recorded for the difference between the carrying value of LMG's interest in the acquired company and the fair value of securities received in the merger. In addition, lower stock compensation expense in 2000 compared with 1999 contributed to the increase. These were partially offset by impairment charges recorded on LMG's investments to reflect other than temporary declines in value and higher losses relating to LMG's equity affiliates. Discontinued Operations Pursuant to Accounting Principles Board Opinion No. 30 "Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," the consolidated financial statements of AT&T reflect the disposition of AT&T Universal Card Services (UCS), which was sold on April 2, 1998, as discontinued operations. Accordingly, the revenue, costs and expenses, and cash flows of UCS have been excluded from the respective captions in the 1998 Consolidated Statement of Income and Consolidated Statement of Cash Flows, and have been reported through the April 2, 1998 date of disposition as "Income from discontinued operations," net of applicable income taxes; and as "Net cash provided by discontinued operations." The gain associated with the sale of UCS is recorded as "Gain on sale of discontinued operations," net of applicable income taxes. Extraordinary Items In August 1998, AT&T extinguished approximately $1.0 billion of TCG's debt. The $217 million pretax loss on the early extinguishment of debt was recorded as an extraordinary loss. The after-tax impact was $137 million, or $0.05 per diluted share. SEGMENT RESULTS In support of the services we provided in 2000, we segment our results by the business units that support our primary lines of business: Business Services, Consumer Services, Wireless Services and Broadband. The balance of AT&T's operations, excluding LMG, is included in a Corporate and Other category. Although not a segment, we also discuss the results of LMG. The discussion of segment results includes revenue; EBIT (earnings before interest and taxes, including pretax minority interest and net pretax losses of other equity investments); EBITDA (EBIT plus depreciation, amortization and minority interest income (expense) other than Excite@Home); total assets, and capital additions. The discussion of EBITDA for Wireless Services and Broadband is modified to exclude other income and net losses from equity investments. Total assets for each segment generally include all assets, except intercompany receivables. However, our Wireless Services segment included intercompany receivables from AT&T and the related interest income since these assets relate to the results of the AT&T Wireless Group tracked business. Prepaid pension assets and corporate-owned or leased real estate are generally held at the corporate level, and therefore are included in the Corporate and Other group. Shared network assets are allocated to the segments and reallocated each January, based on two years of volumes. Capital additions for each segment include capital expenditures for property, plant and equipment, acquisitions of licenses, additions to nonconsolidated investments, increases in franchise costs and additions to internal-use software. EBIT is the primary measure used by AT&T's chief operating decision makers to measure AT&T's operating results and to measure segment profitability and performance. AT&T calculates EBIT as operating income plus net pretax losses from equity investments, pretax minority interest income (expense) and other income. In addition, management also uses EBITDA as a measure of segment profitability and performance, and is defined as EBIT, excluding minority interest income (expense) other than Excite@Home, plus depreciation and amortization. Interest and taxes are not factored into the segment profitability measure used by the chief operating decision makers; therefore, trends for these items are discussed on a consolidated basis. Management believes EBIT is meaningful to investors because it provides analysis of operating results using the same measures used by AT&T's chief operating decision makers and provides a return on total capitalization measure. We believe EBITDA is meaningful to investors as a measure of each segment's liquidity consistent with the measure utilized by our chief operating decision makers. In addition, we believe that both EBIT and EBITDA allow investors a means to evaluate the financial results of each segment in relation to total AT&T. EBIT for AT&T was $9.4 billion, $10.5 billion and $8.7 billion for the years ended December 31, 2000, 1999 and 1998, respectively. EBITDA for AT&T was $19.8 billion, $18.6 billion and $13.4 billion for the years ended December 31, 2000, 1999 and 1998, respectively. 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 as well as interest and taxes which can affect cash flow. Reflecting the dynamics of our business, we continually review our management model and structure and make adjustments accordingly. BUSINESS SERVICES Our Business Services segment offers a variety of global communications services, including long distance, local, and data and IP networking to small and medium-sized businesses, large domestic and multinational businesses and government agencies. Business Services is also a provider of voice, data and IP transport to service resellers (wholesale services). Business Services includes AT&T Solutions, the company's professional-services outsourcing business, which provides seamless solutions that maximize the competitive advantage of networking-based electronic applications for global clients. AT&T Solutions also provides e-infrastructure and high-availability services to enterprise clients, and manages AT&T's unified global network.
For the Years Ended December 31, 2000 1999 1998 ---- ---- ---- Dollars in millions External revenue...................................................... $27,691 $26,749 $23,807 Internal revenue...................................................... 797 731 478 Total revenue......................................................... 28,488 27,480 24,285 EBIT.................................................................. 6,548 6,136 4,994 EBITDA................................................................ 10,260 9,488 7,548 Capital additions..................................................... 6,223 7,511 6,130 At December 31, 2000 1999 ---- ---- Total assets.......................................................... $34,804 $32,010
REVENUE In 2000, Business Services revenue grew $1.0 billion, or 3.7%, compared with 1999. Approximately $0.4 billion of the increase was due to the impact of acquisitions, partially offset by the formation of Concert. Strength in data and IP services as well as growth in our outsourcing business contributed $1.8 billion to the increase. This growth, however, was offset by an approximate $0.9 billion decline in long distance voice services as a result of continued pricing pressures in the industry. Revenue in 1999 grew $3.2 billion, or 13.2%. The acquisition of AGNS contributed approximately $1.1 billion to the growth. Data, IP and outsourcing services grew approximately $1.5 billion in 1999 compared with 1998, while long distance voice services and local services contributed approximately $0.6 billion to the revenue increase. Data services, which represent the transportation of data, rather than voice, along our network, was impacted by acquisitions and the formation of Concert. Excluding these impacts, data services grew at a high-teens percentage rate in 2000. Growth was led by the continued strength of frame relay services; IP services, which include IP-connectivity services and virtual private network (VPN) services; and high-speed private-line services. Excluding the impact of AGNS, data services grew at a high-teens percentage rate in 1999, led by strength in frame relay and high-speed private-line services. AT&T Solutions outsourcing revenue grew 47.9% in 2000 and 146.0% in 1999. More than one-half of the 2000 growth and approximately 65% of the 1999 growth was driven by our acquisition of AGNS. The remaining growth in both years was primarily due to growth from new contract signings and add-on business from existing clients. Excluding the impact of Concert, long distance voice services revenue declined at a mid single-digit percentage rate in 2000 due to a declining average price per minute reflecting the competitive forces within the industry which are expected to continue. Partially offsetting this decline was a high single-digit percentage growth rate in minutes. In 1999, long distance voice revenue grew at a low single-digit percentage rate, as volumes grew at a high-teens percentage rate, which was largely offset by a declining average rate per minute. Local voice services revenue grew nearly 20% in 2000 and more than 50% in 1999. During 2000, AT&T added more than 867,000 access lines, with the total reaching nearly 2.3 million at the end of the year. During 1999, AT&T added more than 719,000 access lines. Access lines enable AT&T to provide local service to customers by allowing direct connection from customer equipment to the AT&T network. AT&T serves more than 6,000 buildings on-network (buildings where AT&T owns the fiber that runs into the building), representing an increase of approximately 3.5% over 1999. At the end of 1999, AT&T served just over 5,800 buildings on-network compared with approximately 5,200 buildings at the end of 1998. Business Services internal revenue increased $66 million, or 9.1%, in 2000 and $253 million, or 52.8%, in 1999. The increase in 2000 was the result of greater sales of business long distance services to other AT&T units that resell such services to their external customers, primarily Broadband and Wireless Services. The increase in 2000 was partially offset by a decline in sales related to international businesses divested. In 1999, the increase in internal revenue was primarily due to greater sales of long distance services to Wireless Services. EBIT/EBITDA EBIT improved $0.4 billion, or 6.7%, and EBITDA improved $0.8 billion, or 8.1%, in 2000 compared with 1999. This improvement reflects an increase in revenue and lower costs as a result of our continued cost-control efforts, partially offset by the formation of Concert and the acquisition of AGNS. Additionally, the EBIT increase was partially offset by an increase in depreciation and amortization expense in 2000 compared with 1999 primarily due to a higher network asset base. In 1999, EBIT improved $1.1 billion, or 22.9%, and EBITDA improved $1.9 billion, or 25.7%, compared with 1998. These increases were driven by revenue growth combined with margin improvement resulting from ongoing cost-control initiatives. The increase in EBIT was offset somewhat by increased depreciation and amortization expenses resulting from increased capital expenditures aimed at data, IP and local services. OTHER ITEMS Capital additions decreased $1.3 billion in 2000, and increased $1.4 billion in 1999. In 2000, the decrease was a result of lower spending for our long distance network (including the data network). In 1999, the increase was primarily due to additional spending for the build out of our local services SONET transport network. Total assets increased $2.8 billion, or 8.7%, at December 31, 2000, compared with December 31, 1999. The increase was primarily due to net increases in property, plant and equipment as a result of capital additions, and a higher accounts receivable balance. CONSUMER SERVICES Our Consumer Services segment provides residential customers with a variety of any-distance communications services, including long distance, local toll (intrastate calls outside the immediate local area) and Internet access. 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 Years Ended December 31, 2000 1999 1998 ---- ---- ---- Dollars in millions Revenue............................................................... $18,976 $21,854 $22,885 EBIT.................................................................. 7,090 7,909 6,570 EBITDA................................................................ 7,650 8,692 7,263 Capital additions..................................................... 302 656 459 At December 31, 2000 1999 ---- ---- Total assets.......................................................... $4,801 $6,279
REVENUE Consumer Services revenue declined 13.2%, or $2.9 billion, in 2000 compared with 1999. Approximately $0.9 billion of the decline was due to the elimination of per-line charges in 2000 and the impact of Concert. The remainder of the decline was primarily due to a decline in traditional voice services, such as Domestic Dial 1, reflecting 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 higher-priced calling-card services to the rapidly growing wireless services and lower-priced prepaid-card services. As a result, calling volumes declined at a mid single-digit percentage rate in 2000. We expect competition and product substitution to continue to negatively impact Consumer Services revenue. In August 1999, we introduced AT&T One Rate, which allows customers to make long distance calls, 24 hours a day, seven days a week, for the same rate. These One Rate offers continue to be well received in the market with more than 12 million customers enrolled since the plan's introduction. In addition, AT&T has been successful in packaging services in the consumer market by giving customers the option of intraLATA service with its One Rate offers. More than 60% of the customers enrolled in One Rate have chosen AT&T as their intraLATA provider. AT&T's any distance New York Local One Rate offer, which combines both local and long distance service, has experienced high customer acceptance. AT&T ended the year with nearly 760,000 customers under this plan. In 1999, Consumer Services revenue decreased $1.0 billion, or 4.5%, on a mid single-digit percentage decline in volumes. The 1999 decline reflects the ongoing competitive nature of the consumer long distance industry, as well as product substitution and market migration away from direct dial and higher-priced calling-card services to rapidly growing wireless services and lower-priced prepaid-card services. EBIT/EBITDA EBIT declined $0.8 billion, or 10.4%, and EBITDA declined $1.0 billion, or 12.0%, in 2000 compared with 1999. The declines in EBIT and EBITDA primarily reflect the decline in the long distance business, offset somewhat by cost-control initiatives. In addition, the declines reflect $0.2 billion of lower gains on sales of businesses, primarily the 1999 sale of Language Line Services, and higher restructuring charges. Reflecting our cost-control initiatives, EBIT and EBITDA margins in 2000 improved to 37.4% and 40.3%, respectively, compared with 36.2% and 39.8%, respectively, in 1999. EBIT grew $1.3 billion, or 20.4%, and EBITDA grew $1.4 billion, or 19.7%, in 1999. The EBIT margin improved to 36.2% in 1999 (excluding the gain on the sale of Language Line Services, the 1999 EBIT margin was 35.5%) from 28.7% in the prior year. The EBIT and EBITDA growth for 1999 reflects ongoing cost-reduction efforts, particularly in marketing spending, as well as lower negotiated international settlement rates. OTHER ITEMS Capital additions decreased $0.4 billion, or 54.0%, in 2000 as a result of a planned reduction in spending on the voice network and reduced spending on internal-use software as most of the functionality upgrades were completed in 1999. In 1999, capital additions increased $0.2 billion, or 42.9%, primarily due to increased spending on internal-use software to add more functionality to our services and in support of AT&T WorldNet Services subscriber growth. Total assets declined $1.5 billion, or 23.5%, during 2000. The decline was primarily due to assets transferred to Concert during 2000, as well as lower accounts receivable, reflecting 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 the results of our messaging business through the October 2, 1998 date of sale. Also included are fixed wireless services providing high-speed Internet access and any-distance voice services using wireless technology to residential and small business customers.
For the Years Ended December 31, 2000 1999 1998 ---- ---- ---- Dollars in millions Revenue................................................................. $10,448 $7,627 $5,406 EBIT.................................................................... 1,131 (473) 418 EBITDA*................................................................. 1,653 581 856 Capital additions....................................................... 5,553 2,739 2,395 At December 31, 2000 1999 ---- ---- Total assets............................................................ $35,184 $23,312
* EBITDA for Wireless Services excludes net earnings (losses) from equity investments and other income. REVENUE Wireless Services revenue grew $2.8 billion, or 37.0%, in 2000, and $2.2 billion, or 41.1%, in 1999. Approximately $0.6 billion of the 2000 growth was due to acquisitions, and approximately $0.2 billion of the 1999 growth was due to the net impact of acquisitions and dispositions. The remaining 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 (ARPU) contributed to the growth. Consolidated subscribers grew 58.5% during 2000 to approximately 15.2 million, and grew 33.4% to approximately 9.6 million in 1999. This growth included approximately 3.0 million subscribers from acquisitions closed during 2000, and approximately 900,000 from acquisitions closed during 1999. ARPU was $68.20 for 2000, a 3.6% increase compared with 1999. ARPU in 1999 was $65.80, a 14.2% increase from 1998. The average monthly subscriber churn rate in 2000 was 2.9% compared with 2.6% in 1999. Average monthly subscriber churn increased during 2000 as a result of competitive pressures, as well as our efforts to expand to a broader base of consumer segments served (e.g., prepaid wireless services). We expect these factors to continue, which will result in a decline in ARPU. EBIT/EBITDA In 2000, EBIT improved $1.6 billion from a deficit of $0.5 billion in 1999. Approximately one-half of the improvement was due to higher pretax earnings on equity investments and greater gains on sales of businesses and investments. These items included higher equity earnings due to a gain recorded relating to the redemption of our investment in AB Cellular, as well as a gain on transactions associated with our affiliate investments in TeleCorp and Tritel, and a gain on the sale of Celumovil in 2000. In 1999, we recorded a gain on the sale of WOOD-TV. Also positively impacting the EBIT growth in 2000 was a 1999 asset impairment charge of $0.5 billion and higher intercompany interest income in 2000 resulting from the AT&T Wireless Group tracking stock offering proceeds attributed to Wireless Services. The remaining EBIT increase was primarily due to increased revenue, partially offset by a related increase in expenses. In 1999, EBIT declined $0.9 billion from $0.4 billion in 1998. The EBIT decline was primarily due to the 1999 asset impairment charge of approximately $0.5 billion and lower gains on sales of businesses and investments of approximately $0.5 billion. EBITDA, which excludes net earnings (losses) from equity investments and other income, increased $1.1 billion in 2000 to $1.7 billion. Approximately one-half of the increase was due to the 1999 impairment charge and the remainder was due to increased revenue, partially offset by a related increase in expenses. In 1999, EBITDA, which excludes net earnings (losses) from equity investments and other income, declined $0.3 billion to $0.6 billion. The decline was primarily due to the 1999 asset impairment charge, partially offset by an increase in revenue net of related expenses. OTHER ITEMS Capital additions increased $2.8 billion in 2000, and increased $0.3 billion in 1999. Spending in both years focused on increasing the capacity and quality of our national wireless network. Total assets were $35.2 billion as of December 31, 2000, an increase of $11.8 billion, or 50.3%, compared with December 31, 1999. The increase was primarily due to increases in licensing costs, goodwill, and property, plant and equipment associated with the acquisitions that closed in 2000. In addition, property, plant and equipment increased as a result of significant capital expenditures in 2000. These increases were partially offset by a decrease in investments, as Wireless Services previously held equity interests in portions of wireless properties in the San Francisco Bay area and Los Angeles through AB Cellular. These markets were consolidated as of December 31, 2000. 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 broadband telephony service.
For the Years Ended December 31, 2000 1999 ---- ---- Dollars in millions Revenue.......................................................................... $8,217 $5,070 EBIT............................................................................. (1,175) (1,475) EBITDA*.......................................................................... 1,709 802 Capital additions................................................................ 4,963 4,759 At December 31, 2000 1999 ---- ---- Total assets..................................................................... $114,681 $53,810
* EBITDA for Broadband excludes net losses from equity investments and other income. Results of operations for the year ended December 31, 2000, include the results of MediaOne since its acquisition on June 15, 2000, while the year ended December 31, 1999, does not include any results of MediaOne. Additionally, the results of operations for the year ended December 31, 1999, include 10 months of TCI's results, reflecting its acquisition in March 1999, while 2000 includes a full 12 months of TCI's results. REVENUE Broadband revenue grew $3.1 billion in 2000, or 62.1%, compared with 1999. Approximately $2.8 billion of the increase in revenue was due to the acquisition of MediaOne in 2000 and TCI in 1999. In addition, revenue from new services (digital video, high-speed data, and broadband telephony) and a basic-cable rate increase contributed approximately $0.4 billion to the revenue increase. At December 31, 2000, Broadband serviced approximately 16.0 million basic-cable customers, passing approximately 28.3 million homes, compared with 11.4 million basic-cable customers, passing approximately 19.7 million homes at December 31, 1999. The increase reflects the acquisition of MediaOne. At December 31, 2000, we provided digital video service to approximately 2.8 million customers, high-speed data service to approximately 1.1 million customers, and broadband telephony service to approximately 547,000 customers. This compares with approximately 1.8 million digital-video customers, approximately 207,000 high-speed data customers, and nearly 8,300 broadband telephony customers at the end of 1999. EBIT/EBITDA EBIT in 2000 was a deficit of $1.2 billion, an improvement of $0.3 billion, or 20.4%. This improvement was due to approximately $0.5 billion of higher gains on sales of businesses and investments, primarily gains on the swap of cable properties with Cox and Comcast and the sale of our investment in Lenfest, and $0.4 billion lower restructuring charges primarily associated with an in-process research and development charge recorded in connection with the 1999 acquisition of TCI. Also contributing to the improvement were lower pretax losses from equity investments of $0.5 billion, due in part to a $0.3 billion improvement from our investment in Cablevision due to gains from cable-system sales. These improvements were largely offset by the impact of the acquisition of MediaOne as well as TCI of approximately $0.5 billion and higher expenses associated with high-speed data and broadband telephony services of approximately $0.4 billion. EBITDA, which excludes net losses from equity investments and other income, was $1.7 billion in 2000, an improvement of $0.9 billion compared with 1999. This improvement was due to the impact of the MediaOne and TCI acquisitions of $0.7 billion and lower restructuring charges of $0.4 billion. Higher expenses associated with high-speed data and broadband telephony of approximately $0.2 billion offset these increases. OTHER ITEMS Capital additions increased 4.3% to approximately $5.0 billion in 2000, from $4.8 billion in 1999. The increase was due to higher capital expenditures of $0.8 billion primarily due to MediaOne, which was almost entirely offset by decreased contributions to various nonconsolidated investments of $0.7 billion. In 1999, spending was largely directed toward cable-distribution systems, focusing on the upgrade of cable plant-assets, as well as equity infusions into various investments. Total assets at December 31, 2000, were $114.7 billion compared with $53.8 billion at December 31, 1999. The increase in total assets was primarily due to the MediaOne acquisition and an increase in property, plant and equipment as a result of capital expenditures, net of depreciation expense. These increases were partially offset by a decrease in the mark-to-market valuation of certain investments. CORPORATE AND OTHER This group reflects the results of corporate staff functions, the elimination of transactions between segments, as well as the results of international operations and ventures and Excite@Home.
For the Years Ended December 31, 2000 1999 1998 ---- ---- ---- Dollars in millions Revenue.............................................................. $(148) $569 $647 EBIT................................................................. (4,167) (1,625) (3,248) EBITDA............................................................... (3,171) (871) (2,916) Capital additions.................................................... 2,150 1,494 594 At December 31, 2000 1999 ---- ---- Total assets......................................................... $18,463 $15,535
REVENUE Revenue for corporate and other primarily includes the elimination of intercompany revenue of negative $0.8 billion (an increase of $0.1 billion from 1999), revenue from Excite@Home of $0.2 billion (which was consolidated beginning on September 1, 2000), and revenue from our international operations and ventures of $0.3 billion (a decline of $0.9 billion from 1999). The international operations and ventures revenue decrease was largely due to the revenue impact of businesses contributed to Concert and due to the impact of the divestment of certain businesses. For 1999, revenue decreased $0.1 billion, or 12.0%. The decline was driven by an increase in the elimination of intercompany revenue and the sale of AT&T Solutions Customer Care (ASCC) in 1998, partially offset by growth in international operations and ventures. EBIT/EBITDA EBIT and EBITDA deficits in 2000 increased $2.5 billion and $2.3 billion to $4.2 billion and $3.2 billion, respectively. The increases in the deficits were largely related to Excite@Home. In 2000, restructuring and other charges, net of minority interest, were $2.8 billion higher primarily due to goodwill impairment charges recorded by Excite@Home and AT&T related to Excite@Home. Other impacts included a charge of approximately $0.5 billion for the fair market value increase of put options held by Comcast and Cox related to Excite@Home, and operating losses from Excite@Home. Partially offsetting these declines were an increase in the pension credit due to a higher pension trust asset base resulting from increased investment returns, and lower expenses associated with our continued efforts to reduce costs, which aggregated approximately $1.0 billion. In addition, higher net gains on sales of investments and an increase in interest income increased EBIT and EBITDA by approximately $0.6 billion. In 1999, EBIT and EBITDA deficits improved by $1.6 billion and $2.0 billion to $1.6 billion and $0.9 billion, respectively. The improvements were driven by $2.1 billion of lower net restructuring and other charges in 1999 compared with 1998, partially offset by lower gains on the sales of businesses and lower interest income, which negatively impacted EBIT and EBITDA by $0.3 billion. Additionally, EBIT was impacted by dividends on trust preferred securities. In 1998, AT&T recorded a gain on the sale of ASCC. OTHER ITEMS Capital additions increased $0.7 billion in 2000. The increase was driven by our investment in 2000 in Net2Phone, Inc. (Net2Phone), partially offset by lower investments in international nonconsolidated subsidiaries. Capital additions increased $0.9 billion in 1999 reflecting increased international equity investments that support our global strategy. Total assets increased $2.9 billion at December 31, 2000, primarily due to our investments in Concert and Net2Phone. 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. Earnings from LMG were $1.5 billion in 2000 compared with losses of $2.0 billion from the date of acquisition through December 31, 1999. The increase was primarily due to gains on dispositions, including gains associated with the mergers of various companies that LMG had investments in. Gains were recorded for the difference between the carrying value of LMG's interest in the acquired company and the fair value of securities received in the merger. In addition, lower stock compensation expense in 2000 compared with 1999 contributed to the increase. These were partially offset by impairment charges recorded on LMG's investments to reflect other than temporary declines in value and higher losses relating to LMG's equity affiliates. LIQUIDITY
For the Years Ended December 31, 2000 1999 1998 ---- ---- ---- Dollars in millions CASH FLOW OF CONTINUING OPERATIONS: Provided by operating activities........................... $13,307 $11,521 $10,217 (Used in) provided by investing activities................. (39,934) (27,043) 3,582 Provided by (used in) financing activities................. 25,729 13,386 (11,049)
In 2000, net cash provided by operating activities of continuing operations increased $1.8 billion. The increase was primarily driven by an increase in net income excluding the noncash impact of depreciation and amortization, net restructuring and other charges and minority interest income (expense). In 1999, net cash provided by operating activities of continuing operations increased $1.3 billion, primarily due to an increase in net income, excluding the noncash impact of depreciation and amortization, net restructuring and other charges and the impact of earnings and losses from equity investments. This increase was partially offset by higher receivables, due primarily to higher revenue, and an increase in tax payments from the gain on the 1998 sale of UCS. AT&T's investing activities resulted in a net use of cash of $39.9 billion in 2000, compared with a net use of cash of $27.0 billion in 1999. During 2000, AT&T used approximately $21.4 billion for acquisitions of businesses, primarily MediaOne, and spent $15.5 billion on capital expenditures. During 1999, AT&T spent approximately $14.3 billion on capital expenditures, approximately $6.7 billion on acquisitions of businesses, primarily AGNS, and contributed $5.5 billion of cash to LMG. During 1998, we received $10.8 billion related to the sales of businesses, including receivables from UCS, partially offset by capital expenditures of $7.8 billion. During 2000, net cash provided by financing activities was $25.7 billion, compared with $13.4 billion in 1999. In 2000, AT&T received $10.3 billion from the AT&T Wireless Group tracking stock offering and borrowed an additional $17.0 billion of short-term debt and $2.5 billion of net long-term debt. These were partially offset by the payment of $3.0 billion in dividends. In 1999, AT&T received $10.2 billion from the issuance of commercial paper and short-term debt, $5.6 billion from the net issuance of long-term debt and $4.6 billion from the issuance of redeemable preferred securities. These sources of cash were partially offset by the acquisition of treasury shares of $4.6 billion and the payment of dividends of $2.7 billion. Cash used in financing activities in 1998 primarily related to repayment of long-term and short-term debt, the acquisition of treasury shares and dividends paid on common stock. At December 31, 2000, we had current assets of $17.1 billion and current liabilities of $50.9 billion. A significant portion of the current liabilities, $31.9 billion, relates to short-term notes, the majority of which were 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 other financing arrangements, including the monetization of publicly-held securities, sales of certain non-strategic assets and investments, and securitization of certain accounts receivable. At December 31, 2000, we had a current liability of $2.6 billion, reflecting our obligation under put options held by Comcast and Cox. In January 2001, Comcast and Cox exercised their rights under the put options and elected to receive AT&T stock in lieu of cash. Since December 31, 2000, we have announced the sale of investments or assets, which will result in gross cash proceeds of approximately $4.6 billion. In addition, on February 28, 2001, we exercised our registration rights in TWE and formally requested TWE to begin the process of converting the limited partnership into a corporation with registered equity securities. We have, however, continued our ongoing discussions with AOL Time Warner for the sale of our stake in TWE. In connection with the planned split-off of AT&T Wireless, we announced that we will retain up to $3.0 billion in shares of AT&T Wireless, which we will dispose of within six months following the split-off. Also in connection with the split-off, on March 6, 2001, AT&T Wireless completed a $6.5 billion global bond offering. AT&T Wireless will ultimately use the proceeds to repay $4.8 billion in notes receivable and preferred stock that AT&T Common Stock Group holds in AT&T Wireless. In addition on March 23, 2001, AT&T Wireless entered into $2.5 billion in revolving credit facilities. The facilities include a 364-day tranche and a 5-year tranche. The facilities are for general corporate purposes. Another aspect of our restructuring is the expected sale, in late-2001, of a new class of stock which will track our Broadband business. AT&T is in a joint venture with Alaska Native Wireless (ANW). At December 31, 2000, AT&T had committed to fund ANW up to $2.4 billion based on the outcome of FCC license spectrum auction. In January 2001, the auction was completed and ANW was the highest bidder on approximately $2.9 billion in licenses. Since the announced restructuring plans to create four new businesses, 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 downgraded and continued to be on credit watch with negative outlook. These actions will result in an increased cost of future borrowings and will limit our access to the capital markets. AT&T is pursuing various measures to reduce its debt level. However, there can be no assurance that we will be able to obtain financing on terms that are acceptable to us. If these efforts cannot be completed successfully, or on terms and within the timeframe contemplated, AT&T's financial condition would be materially adversely affected. Some of these adverse conditions include the company's ability to pursue acquisitions, make capital expenditures to expand its network and cable plant, or pay dividends. On December 28, 2000, we entered into a 364-day, $25 billion revolving-credit facility syndicated to 39 banks, which was unused at December 31, 2000. As a result of certain transactions subsequent to December 31, 2000, specifically the investment by NTT DoCoMo of $9.8 billion for a new class of AT&T preferred stock, and the $6.5 billion AT&T Wireless bond offering, this credit facility was reduced to $18.3 billion. Also in connection with our restructuring, we have reviewed our dividend policy as it relates to each of the new businesses. On December 20, 2000, we announced that the board of directors reduced AT&T's quarterly dividend to $0.0375 per share, from $0.22 per share. RISK MANAGEMENT We are exposed to market risk from changes in interest and foreign exchange rates, as well as changes in equity prices associated with affiliate companies. In addition, we are exposed to market risk from fluctuations in the prices of securities which we monetized through the issuance of debt. On a limited basis, we use certain derivative financial instruments, including interest rate swaps, options, forwards, equity hedges 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. We use interest rate swaps to manage the impact of interest rate changes on earnings and cash flows and also to lower our overall borrowing costs. We monitor our interest rate risk on the basis of changes in fair value. Assuming a 10% downward shift in interest rates, the fair value of interest rate swaps and the underlying hedged debt would have changed by $10 million and $3 million at December 31, 2000 and 1999, respectively. In 2000, we entered into a combined interest rate, forward contract to hedge foreign-currency-denominated debt. Assuming a 10% downward shift in both interest rates and the foreign currency, the fair value of the contract and the underlying hedged debt would have changed by $88 million. In addition, certain debt is indexed to the market prices of securities we own. Changes in the market prices of these securities result in changes in the fair value of this debt. Assuming a 10% downward change in the market price of these securities, the fair value of the underlying debt and securities would have decreased by $534 million at December 31, 2000. Assuming a 10% downward shift in interest rates at December 31, 2000 and 1999, the fair value of unhedged debt would have increased by $1.2 billion and $938 million, respectively. We use forward and option contracts to reduce our exposure to the risk of adverse changes in currency exchange rates. We are subject to foreign exchange risk for foreign-currency-denominated transactions, such as debt issued. In addition, in 1999 we were subject to foreign exchange risk related to reimbursements to foreign telephone companies for their portion of the revenue billed by AT&T for calls placed in the United States to a foreign country. We monitor our foreign exchange rate risk on the basis of changes in fair value. Assuming a 10% appreciation in the U.S. dollar at December 31, 2000 and 1999, the fair value of these contracts would have resulted in additional unrealized losses of $6 million and $29 million, respectively. Because these contracts are entered into for hedging purposes, we believe that these losses would be largely offset by gains on the underlying firmly committed or anticipated transactions. We use equity hedges to manage our exposure to changes in equity prices associated with stock appreciation rights (SARs) of affiliated companies. Assuming a 10% decrease in equity prices of affiliated companies, the fair value of the equity hedges would have decreased by $29 million and $81 million at December 31, 2000 and 1999, respectively. Because these contracts are entered into for hedging purposes, we believe that the decrease in fair value would be largely offset by gains on the underlying transaction. In order to determine the changes in fair value of our various financial instruments, we use certain modeling techniques, namely Black-Scholes, for our SARs and equity collars. We apply rate sensitivity changes directly to our interest rate swap transactions and forward rate sensitivity to our foreign currency forward contracts. The changes in fair value, as discussed above, assume the occurrence of certain adverse market conditions. They do not consider the potential effect of favorable changes in market factors and do not represent projected losses in fair value that we expect to incur. Future impacts would be based on actual developments in global financial markets. We do not foresee any significant changes in the strategies used to manage interest rate risk, foreign currency rate risk or equity price risk in the near future. FINANCIAL CONDITION
At December 31, 2000 1999 ---- ---- Dollars in millions Total assets.................................................................... $242,223 $169,406 Total liabilities............................................................... 129,432 83,388 Total shareowners' equity....................................................... 103,198 78,927
Total assets increased $72.8 billion, or 43.0%, at December 31, 2000, primarily due to the impact of the MediaOne acquisition, which resulted in increased goodwill, franchise costs, other investments including TWE and Vodafone Group plc; and the addition of property, plant and equipment. Property, plant and equipment also increased due to capital expenditures made during the year, net of depreciation expense and equipment contributed to Concert. This equipment contribution, as well as a $1.0 billion loan to Concert, and our investment in Net2Phone are reflected as an increase to other investments. Additionally, other receivables increased due to Concert. Wireless acquisitions, including the impact of consolidating former equity investments, resulted in increased licensing costs. Total liabilities at December 31, 2000, increased $46.0 billion, or 55.2%, primarily due to the impact of the MediaOne acquisition, including debt of MediaOne and borrowings to fund the acquisition, as well as the consolidation of Excite@Home. In addition, total debt increased due to the monetization of our investments in Microsoft Corporation and Comcast. Minority interest increased $2.5 billion to $4.9 billion, primarily reflecting the minority interest of our ownership of Excite@Home resulting from the consolidation of Excite@Home beginning September 1, 2000, and the preferred stock outstanding of a MediaOne subsidiary. Total shareowners' equity was $103.2 billion at December 31, 2000, an increase of 30.8% from December 31, 1999. This increase was primarily due to the issuance of AT&T common stock for the MediaOne acquisition as well as 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, excluding LMG) was 46.2% at December 31, 2000, compared with 43.0% at December 31, 1999. The equity portion of this calculation includes convertible trust preferred securities, as well as subsidiary redeemable preferred stock. The increase was primarily driven by higher debt associated with the MediaOne merger, largely offset by a higher equity base associated with the MediaOne merger and the AT&T Wireless Group tracking stock offering. The ratio of debt (net of cash) to EBITDA was 3.28X at December 31, 2000, compared with 1.88X at December 31, 1999, reflecting additional debt associated with the MediaOne merger. Included in debt was approximately $8.7 billion of notes, which are exchangeable into or collateralized by securities we own. Excluding this debt, the ratio of net-debt-to-EBITDA at December 31, 2000, was 2.84X. 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. On January 1, 2001, AT&T adopted SFAS No. 133. We recorded a cumulative effect of an accounting change, net of applicable income taxes, of approximately $1.4 billion of income, or approximately $0.34 per diluted share, primarily attributable to fair value adjustments of debt instruments, including those acquired in conjunction with the MediaOne merger, as well as to our warrant portfolio. In addition, in connection with the adoption of SFAS No. 133, we reclassified certain investment securities, which support debt that is indexed to those securities, from "available-for-sale" to "trading." This reclassification resulted in the recognition of a charge of $2.8 billion ($1.7 billion after income taxes), or approximately $0.43 per diluted share, which was recorded as a reduction of other income. As available-for-sale securities, changes in fair value were previously included within other comprehensive income as a component of shareowners' equity. In addition, LMG recorded a cumulative effect of an accounting change, net of applicable income taxes, of approximately $0.8 billion of income, or approximately $0.31 per share. The impact of the adoption of SFAS No. 133, as amended by SFAS No. 138, on AT&T's future results of operations is dependent upon the fair values of our derivatives and related financial instruments and could result in pronounced quarterly fluctuations in other income in future periods. In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - -- a Replacement of FASB Statement No. 125." This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. Under these standards, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. This statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. AT&T does not expect that the adoption of SFAS No. 140 will have a material impact on AT&T's results of operations, financial position or cash flows. SUBSEQUENT EVENTS On January 12, 2001, AT&T announced that Cox and Comcast had exercised their rights to sell a combined total of 60.4 million shares of Excite@Home Series A common stock to AT&T as part of an agreement announced in August 2000 to reorganize Excite@Home's governance. Cox and Comcast elected to receive shares of AT&T common stock in exchange for their Excite@Home shares. AT&T is currently in discussions to renegotiate the terms of the put options which may result in a change to the number of shares of AT&T stock that Cox and Comcast will receive, as well as the number of Excite@Home shares, if any AT&T receives. There can be no assurances that an agreement will be reached with Cox and Comcast. On January 22, 2001, AT&T and NTT DoCoMo (DoCoMo) finalized an agreement whereby DoCoMo invested approximately $9.8 billion for a new class of AT&T preferred stock, termed DoCoMo Wireless tracking stock, that is economically equivalent to 406 million shares of AT&T Wireless Group tracking stock and reflects approximately 16% of the financial performance and economic value of AT&T Wireless Group. AT&T allocated $6.2 billion of the proceeds to AT&T Wireless Group. Each share of DoCoMo Wireless tracking stock is convertible at any time into AT&T Wireless Group tracking stock. Upon the conversion of the DoCoMo Wireless tracking stock, AT&T will reduce its portion of the financial performance and economic value in AT&T Wireless Group by 178 million shares, and the balance of the 406 million shares will come from the issuance of 228 million new shares of AT&T Wireless Group tracking stock. Additionally, upon completion of the planned split-off of AT&T Wireless, the DoCoMo Wireless tracking stock and related warrants will automatically be converted into AT&T Wireless Group tracking stock and thereafter be exchanged on the same terms as all other shares of AT&T Wireless Group tracking stock in the split-off. In the event that AT&T has not split-off AT&T Wireless by specified dates beginning January 1, 2002, DoCoMo will have the right, at its election, to require AT&T to repurchase from DoCoMo the preferred shares initially issued to them at DoCoMo's original purchase price plus interest up to the date of payment. The interest under this right will be treated as preferred stock dividends with charges recorded as a reduction of AT&T Common Stock Group earnings. In addition, DoCoMo acquired five-year warrants to purchase the equivalent of an additional 41.7 million shares of AT&T Wireless Group tracking stock at $35 per share. As part of the agreement, DoCoMo obtained a seat on AT&T's board of directors until AT&T Wireless is split-off from AT&T as a separate public company, which is expected to occur later in 2001. At that time, DoCoMo will retain representation on the new public AT&T Wireless board. In January 2001, AT&T entered into agreements with certain network equipment vendors, which extend through 2004, to purchase next-generation wireless network equipment for a total of approximately $1.8 billion. On February 27, 2001, AT&T entered into an agreement with Vodafone Group plc to sell our 10% stake in Japan Telecom Co. Ltd for approximately $1.35 billion in cash. The transaction is expected to be completed in April 2001 and will result in a gain. On March 1, 2001, AT&T Wireless completed a private placement of $6.5 billion in notes. The notes pay interest at rates ranging from 7.35% to 8.75% per annum, with maturity dates ranging from 2006 to 2031. The notes include customary covenants and registration rights. On March 23, 2001, AT&T Wireless entered into $2.5 billion in revolving credit facilities. The facilities consist of a 364-day facility of $1.25 billion and a five-year revolving credit facility of $1.25 billion. The facilities may be used for general corporate purposes and are subject to customary covenants and events of default. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. REPORT OF MANAGEMENT Management is responsible for the preparation, integrity and objectivity of the consolidated financial statements and all other financial information included in this report. Management is also responsible for maintaining a system of internal controls as a fundamental requirement for the operational and financial integrity of results. The financial statements, which reflect the consolidated accounts of AT&T Corp. and subsidiaries (AT&T) and other financial information shown, were prepared in conformity with generally accepted accounting principles. Estimates included in the financial statements were based on judgments of qualified personnel. To maintain its system of internal controls, management carefully selects key personnel and establishes the organizational structure to provide an appropriate division of responsibility. We believe it is essential to conduct business affairs in accordance with the highest ethical standards as set forth in the AT&T Code of Conduct. These guidelines and other informational programs are designed and used to ensure that policies, standards and managerial authorities are understood throughout the organization. Our internal auditors monitor compliance with the system of internal controls by means of an annual plan of internal audits. On an ongoing basis, the system of internal controls is reviewed, evaluated and revised as necessary in light of the results of constant management oversight, internal and independent audits, changes in AT&T's business and other conditions. Management believes that the system of internal controls, taken as a whole, provides reasonable assurance that (1) financial records are adequate and can be relied upon to permit the preparation of financial statements in conformity with generally accepted accounting principles, and (2) access to assets occurs only in accordance with management's authorizations. The Audit Committee of the Board of Directors, which is composed of directors who are not employees, meets periodically with management, the internal auditors and the independent accountants to review the manner in which these groups of individuals are performing their responsibilities and to carry out the Audit Committee's oversight role with respect to auditing, internal controls and financial reporting matters. Periodically, both the internal auditors and the independent accountants meet privately with the Audit Committee and have access to its individual members at any time. The consolidated financial statements in this annual report have been audited by PricewaterhouseCoopers LLP, Independent Accountants. Their audits were conducted in accordance with generally accepted auditing standards and include an assessment of the internal control structure and selective tests of transactions. Their report follows. C. Michael Armstrong Charles H. Noski Chairman of the Board, Senior Executive Vice President, Chief Executive Officer Chief Financial Officer REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareowners of AT&T Corp.: In our opinion, based on our audits and the report of other auditors, the accompanying consolidated balance sheets and the related consolidated statements of income, changes in shareowners' equity and of cash flows present fairly, in all material respects, the financial position of AT&T Corp. and its subsidiaries (AT&T) at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of AT&T's management; our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Liberty Media Group, an equity method investee, which was acquired by AT&T on March 9, 1999. AT&T's financial statements include an investment of $34,290 million and $38,460 million as of December 31, 2000 and 1999, respectively, and equity method earnings (losses) of $1,488 million and $(2,022) million, for the years ended December 31, 2000 and 1999, respectively. Those statements were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for Liberty Media Group, as of and for the years ended December 31, 2000 and 1999, is based solely on the report of the other auditors. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP New York, New York March 16, 2001
AT&T CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 2000 1999 1998 ---- ---- ---- Dollars in millions (except per share amounts) Revenue $65,981 $62,600 $53,223 Operating Expenses Costs of services and products (excluding depreciation of $5,457, $4,947 and $3,362 included below) 17,587 14,594 10,495 Access and other connection 13,518 14,686 15,328 Selling, general and administrative 13,303 13,516 12,770 Depreciation and other amortization 7,274 6,138 4,378 Amortization of goodwill, franchise costs and other purchased intangibles 2,993 1,301 251 Net restructuring and other charges 7,029 1,506 2,514 Total operating expenses 61,704 51,741 45,736 Operating income 4,277 10,859 7,487 Other income 1,514 931 1,281 Interest expense 3,183 1,765 427 Income from continuing operations before income taxes, minority interest and earnings (losses) from equity investments 2,608 10,025 8,341 Provision for income taxes 3,342 3,695 3,049 Minority interest income (expense) 4,120 (115) 21 Equity earnings (losses) from Liberty Media Group 1,488 (2,022) -- Net losses from other equity investments 205 765 78 Income from continuing operations 4,669 3,428 5,235 Discontinued Operations Income from discontinued operations (net of income taxes of $6) -- -- 10 Gain on sale of discontinued operations (net of income taxes of $799) -- -- 1,290 Income before extraordinary loss 4,669 3,428 6,535 Extraordinary loss (net of income taxes of $80) -- -- 137 Net income $4,669 $3,428 $6,398 ------ ------ ------ AT&T Common Stock Group--per basic share: Income from continuing operations $0.89 $1.77 $1.96 Income from discontinued operations -- -- -- Gain on sale of discontinued operations -- -- 0.48 Extraordinary loss -- -- 0.05 AT&T Common Stock Group earnings $0.89 $1.77 $2.39 ----- ----- ----- AT&T Common Stock Group--per diluted share: Income from continuing operations $0.88 $1.74 $1.94 Income from discontinued operations -- -- -- Gain on sale of discontinued operations -- -- 0.48 Extraordinary loss -- -- 0.05 AT&T Common Stock Group earnings $0.88 $1.74 $2.37 ----- ----- ----- AT&T Wireless Group: Earnings per share: Basic and diluted $0.21 $-- $-- Liberty Media Group: Earnings (loss) per share: Basic and diluted $0.58 $(0.80) $--
The notes are an integral part of the consolidated financial statements.
AT&T CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS At December 31, 2000 1999 ---- ---- Dollars in millions ASSETS Cash and cash equivalents.............................................................................. $126 $1,024 Receivables, less allowances of $1,379 and $1,281...................................................... 11,144 9,813 Other receivables...................................................................................... 1,703 640 Investments............................................................................................ 2,102 -- Deferred income taxes.................................................................................. 812 1,287 Other current assets................................................................................... 1,200 1,120 TOTAL CURRENT ASSETS................................................................................... 17,087 13,884 Property, plant and equipment, net..................................................................... 51,161 39,618 Franchise costs, net of accumulated amortization of $1,664 and $697.................................... 48,218 32,693 Licensing costs, net of accumulated amortization of $1,762 and $1,491.................................. 13,626 8,548 Goodwill, net of accumulated amortization of $850 and $363............................................. 31,478 7,445 Investment in Liberty Media Group and related receivables, net......................................... 34,290 38,460 Other investments and related advances................................................................. 34,261 19,366 Prepaid pension costs.................................................................................. 3,003 2,464 Other assets........................................................................................... 9,099 6,928 TOTAL ASSETS........................................................................................... $242,223 $169,406 -------- -------- LIABILITIES Accounts payable....................................................................................... $6,455 $6,771 Payroll and benefit-related liabilities................................................................ 2,423 2,651 Debt maturing within one year.......................................................................... 31,947 12,633 Liability under put options............................................................................ 2,564 -- Other current liabilities.............................................................................. 7,478 6,152 TOTAL CURRENT LIABILITIES.............................................................................. 50,867 28,207 Long-term debt......................................................................................... 33,092 23,217 Long-term benefit-related liabilities.................................................................. 3,670 3,964 Deferred income taxes.................................................................................. 36,713 24,199 Other long-term liabilities and deferred credits....................................................... 5,090 3,801 TOTAL LIABILITIES...................................................................................... 129,432 83,388 Minority Interest...................................................................................... 4,883 2,391 Company-Obligated Convertible Quarterly Income Preferred Securities of Subsidiary Trust Holding Solely Subordinated Debt Securities of AT&T................................................................ 4,710 4,700 SHAREOWNERS' EQUITY Common Stock: AT&T Common Stock, $1 par value, authorized 6,000,000,000 shares; issued and outstanding 3,760,151,185 shares (net of 416,887,452 treasury shares) at December 31, 2000, and 3,196,436,757 shares (net of 287,866,419 treasury shares) at December 31, 1999................................................... 3,760 3,196 AT&T Wireless Group Common Stock, $1 par value, authorized 6,000,000,000 shares; issued and outstanding 361,802,200 shares at December 31, 2000......................................... 362 -- Liberty Media Group Class A Common Stock, $1 par value, authorized 4,000,000,000 shares; issued and outstanding 2,363,738,198 shares (net of 59,512,496 treasury shares) at December 31, 2000, and 2,313,557,460 shares at December 31, 1999........................................................... 2,364 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 December 31, 2000, and 216,842,228 shares at December 31, 1999............................................................. 206 217 Additional paid-in capital............................................................................. 90,496 59,526 Guaranteed ESOP obligation............................................................................. -- (17) Retained earnings...................................................................................... 7,408 6,712 Accumulated other comprehensive income................................................................. (1,398) 6,979 TOTAL SHAREOWNERS' EQUITY.............................................................................. 103,198 78,927 TOTAL LIABILITIES AND SHAREOWNERS' EQUITY.............................................................. $242,223 $169,406 -------- --------
The notes are an integral part of the consolidated financial statements.
AT&T CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY For the Years Ended December 31, 2000 1999 1998 ---- ---- ---- Dollars in millions AT&T Common Shares Balance at beginning of year............................................................. $3,196 $2,630 $2,684 Shares issued (acquired), net: Under employee plans.................................................................. 3 -- 2 For acquisitions...................................................................... 607 566 (56) Other*................................................................................ (46) -- -- Balance at end of year...................................................................... 3,760 3,196 2,630 AT&T Wireless Group Common Stock Balance at beginning of year............................................................. -- -- -- Shares issued: For stock offering.................................................................... 360 -- -- Under employee plans.................................................................. 2 -- -- Balance at end of year...................................................................... 362 -- -- Liberty Media Group Class A Common Stock Balance at beginning of year............................................................. 2,314 -- -- Shares issued (acquired), net: For acquisitions...................................................................... 62 2,280 -- Other................................................................................. (12) 34 -- Balance at end of year...................................................................... 2,364 2,314 -- Liberty Media Group Class B Common Stock Balance at beginning of year............................................................. 217 -- -- Shares issued (acquired), net: For acquisitions...................................................................... (11) 220 -- Other................................................................................. -- (3) -- Balance at end of year...................................................................... 206 217 -- Additional Paid-In Capital Balance at beginning of year............................................................. 59,526 15,195 17,121 Shares issued (acquired), net: Under employee plans.................................................................. 98 431 67 For acquisitions...................................................................... 23,097 42,425 (2,105) Other*................................................................................ (2,767) 323 112 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........................................... 530 667 -- Other.................................................................................... 97 179 -- Balance at end of year...................................................................... 90,496 59,526 15,195 Guaranteed ESOP Obligation Balance at beginning of year............................................................. (17) (44) (70) Amortization............................................................................. 17 27 26 Balance at end of year...................................................................... -- (17) (44) Retained Earnings Balance at beginning of year............................................................. 6,712 7,800 3,981 Net income............................................................................... 4,669 3,428 6,398 Dividends declared....................................................................... (2,485) (2,807) (2,230) Treasury shares issued at less than cost................................................. (1,488) (1,709) (370) Other changes............................................................................ -- -- 21 Balance at end of year...................................................................... 7,408 6,712 7,800 Accumulated Comprehensive Income Balance at beginning of year............................................................. 6,979 (59) (38) Other comprehensive income............................................................... (8,377) 7,038 (21) Balance at end of year...................................................................... (1,398) 6,979 (59) Total Shareowners' Equity................................................................... $103,198 $78,927 $25,522 -------- ------- ------- Summary of Total Comprehensive Income: Net income.................................................................................. $4,669 $3,428 $6,398 Other comprehensive income [net of income taxes of $(5,348), $4,600 and $(53)].............. (8,377) 7,038 (21) Comprehensive Income........................................................................ $(3,708) $10,466 $6,377 -------- ------- -------
- ----------- * Activity in 2000 primarily represents AT&T stock received from Cox Communications, Inc. in exchange for an entity owning cable systems and certain other assets. AT&T accounts for treasury stock as retired stock, and as of December 31, 2000 and 1999, had 417 million and 288 million treasury shares, respectively, of which 346 million and 216 million shares, respectively, were owned by AT&T Broadband subsidiaries. In addition, 70 million treasury 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 was issued or outstanding. The notes are an integral part of the consolidated financial statements.
AT&T CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2000 1999 1998 ---- ---- ---- Dollars in millions OPERATING ACTIVITIES Net income............................................................................ $4,669 $3,428 $6,398 Deduct: Income from discontinued operations........................................... -- -- 10 Gain on sale of discontinued operations....................................... -- -- 1,290 Add: Extraordinary loss on retirement of debt.................................. -- -- 137 Income from continuing operations..................................................... 4,669 3,428 5,235 Adjustments to reconcile net income to net cash provided by operating activities of continuing operations: Net gains on sales of businesses and investments................................... (1,683) (682) (959) Net restructuring and other charges................................................ 6,793 1,209 2,362 Depreciation and amortization...................................................... 10,267 7,439 4,629 Provision for uncollectible receivables............................................ 1,393 1,416 1,389 Deferred income taxes.............................................................. 1,054 145 (128) Minority interest (income) expense................................................. (4,357) 8 (55) Net equity (earnings) losses from Liberty Media Group.............................. (1,488) 2,022 -- Net losses from other equity investments........................................... 395 1,155 68 Increase in receivables............................................................ (3,350) (2,891) (1,577) (Decrease) increase in accounts payable............................................ (773) 116 (467) Net change in other operating assets and liabilities............................... 4 (1,679) 5 Other adjustments, net............................................................. 383 (165) (285) NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS.................... 13,307 11,521 10,217 INVESTING ACTIVITIES Capital expenditures and other additions.............................................. (15,524) (14,306) (7,817) Proceeds from sale or disposal of property, plant and equipment....................... 600 286 104 (Increase) decrease in other receivables.............................................. (1,052) 17 6,403 Net acquisitions of licenses.......................................................... (247) (6) (97) Sales of marketable securities........................................................ 96 -- 2,003 Purchases of marketable securities.................................................... -- -- (1,696) Equity investment distributions and sales............................................. 1,352 1,875 1,516 Equity investment contributions and purchases......................................... (3,412) (8,121) (1,281) Net (acquisitions) dispositions of businesses including cash acquired................. (21,410) (6,711) 4,507 Other investing activities, net....................................................... (337) (77) (60) NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES OF CONTINUING OPERATIONS.......... (39,934) (27,043) 3,582 FINANCING ACTIVITIES Proceeds from long-term debt issuances................................................ 4,601 8,396 17 Retirement of long-term debt.......................................................... (2,118) (2,807) (2,610) Issuance of convertible securities.................................................... -- 4,638 -- Redemption of redeemable securities................................................... (152) -- -- Issuance of AT&T common shares........................................................ 99 -- 32 Issuance of AT&T Wireless Group common shares......................................... 10,314 -- -- Net acquisition of treasury shares.................................................... (581) (4,624) (3,321) Dividends paid on common stock........................................................ (3,047) (2,712) (2,187) Dividends on preferred securities..................................................... (294) (135) -- Increase (decrease) in short-term borrowings, net..................................... 16,973 10,238 (3,033) Other financing activities, net....................................................... (66) 392 53 NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES OF CONTINUING OPERATIONS.......... 25,729 13,386 (11,049) NET CASH PROVIDED BY DISCONTINUED OPERATIONS.......................................... -- -- 92 Net (decrease) increase in cash and cash equivalents.................................. (898) (2,136) 2,842 Cash and cash equivalents at beginning of year........................................ 1,024 3,160 318 Cash and cash equivalents at end of year.............................................. $126 $1,024 $3,160 -------- -------- -------- The notes are an integral part of the consolidated financial statements.
AT&T CORP. AND SUBSIDIARIES (AT&T) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Dollars in millions unless otherwise noted (except per share amounts) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION The consolidated financial statements include all controlled subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Investments in majority-owned subsidiaries where control does not exist and investments in which we exercise significant influence but do not control (generally a 20% to 50% ownership interest) are accounted for under the equity method of accounting. This represents the majority of our investments. Investments in which we have less than a 20% ownership interest and in which there is no significant influence are accounted for under the cost method of accounting. FOREIGN CURRENCY TRANSLATION For operations outside the United States that prepare financial statements in currencies other than the U.S. dollar, we translate income statement amounts at average exchange rates for the year, and we translate assets and liabilities at year-end exchange rates. We present these translation adjustments as a component of accumulated other comprehensive income within shareowners' equity. Gains and losses from foreign currency transactions are included in results of operations. REVENUE RECOGNITION We recognize long distance, local and wireless services revenue based upon minutes of traffic processed or contracted fee schedules. Cable installation revenue is recognized in the period the installation services are provided to the extent of direct selling costs. Any remaining amount is deferred and recognized over the estimated average period that customers are expected to remain connected to the cable distribution systems. Customer activation fees, along with the related costs, are deferred and amortized over the customer relationship period. The revenue and related expenses associated with the sale of wireless handsets and accessories are recognized when the products are delivered and accepted by customers, as this is considered to be a separate earnings process from the sale of wireless services. We recognize other products and services revenue when the products are delivered and accepted by customers and when services are provided in accordance with contract terms. During 2000, we adopted Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements". The adoption did not have a material impact on our results of operations or financial condition. ADVERTISING AND PROMOTIONAL COSTS We expense costs of advertising and promotions, including cash incentives used to acquire customers, as incurred. Advertising and promotional expenses were $1,995, $1,804 and $1,920 in 2000, 1999 and 1998, respectively. Of these amounts, $288, $320 and $622 were cash incentives to acquire customers in 2000, 1999 and 1998, respectively. INVESTMENT TAX CREDITS We amortize investment tax credits as a reduction to the provision for income taxes over the useful lives of the assets that produced the credits. CASH EQUIVALENTS We consider all highly liquid investments with original maturities of generally three months or less to be cash equivalents. PROPERTY, PLANT AND EQUIPMENT We state property, plant and equipment at cost and determine depreciation based upon the assets' estimated useful lives using either the group or unit method. The useful lives of communications and network equipment range from three to 15 years. The useful lives of other equipment ranges from three to seven years. The useful lives of buildings and improvements range from 10 to 40 years. The group method is used for most depreciable assets, including the majority of communications and network equipment. When we sell or retire assets depreciated using the group method, the cost is deducted from property, plant and equipment and charged to accumulated depreciation, without recognition of a gain or loss. The unit method is primarily used for large computer systems and support assets. When we sell assets that were depreciated using the unit method, we include the related gains or losses in other income. We use accelerated depreciation methods primarily for certain high-technology computer-processing equipment and digital equipment used in the telecommunications network, except for switching equipment placed in service before 1989, where a straight-line method is used. All other plant and equipment, including capitalized software, is depreciated on a straight-line basis. LICENSING COSTS Licensing costs are costs incurred to acquire cellular and personal communications services (PCS) licenses. Amortization begins with the commencement of service to customers and is computed using the straight-line method over periods of 35 or 40 years. FRANCHISE COSTS Franchise costs include the value attributed to agreements with local authorities that allow access to homes in cable service areas acquired in connection with business combinations. Such amounts are amortized on a straight-line basis over 40 years. GOODWILL Goodwill is the excess of the purchase price over the fair value of net assets acquired in business combinations accounted for under the purchase method. We amortize goodwill on a straight-line basis over the periods benefited, ranging from five to 40 years. SOFTWARE CAPITALIZATION Certain direct development costs associated with internal-use software are capitalized, including external direct costs of material and services, and payroll costs for employees devoting time to the software projects. These costs are included within other assets and are amortized over a period not to exceed five years beginning when the asset is substantially ready for use. Costs incurred during the preliminary project stage, as well as maintenance and training costs, are expensed as incurred. AT&T also capitalizes initial operating-system software costs and amortizes them over the life of the associated hardware. AT&T also capitalizes costs associated with the development of application software incurred from the time technological feasibility is established until the software is ready to provide service to customers. These capitalized costs are included in property, plant and equipment and are amortized over a useful life not to exceed five years. VALUATION OF LONG-LIVED ASSETS Long-lived assets, such as property, plant and equipment, licensing costs, franchise costs, goodwill, investments and software, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the total of the expected future undiscounted cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying value of the asset. In addition, in accordance with Accounting Principles Board (APB) Opinion No. 17, "Intangible Assets", we continue to evaluate the amortization periods to determine whether events or circumstances warrant revised amortization periods. DERIVATIVE FINANCIAL INSTRUMENTS We use various financial instruments, including derivative financial instruments, for purposes other than trading. We do not use derivative financial instruments for speculative purposes. Derivatives, used as part of our risk-management strategy, must be designated at inception as a hedge and measured for effectiveness both at inception and on an ongoing basis. Gains and losses related to qualifying hedges of foreign currency firm commitments are deferred in current assets or liabilities and recognized as part of the underlying transactions as they occur. All other foreign exchange contracts are marked to market on a current basis, and the respective gains or losses are recognized in other income. Interest rate differentials associated with interest rate swaps used to hedge AT&T's debt obligations are recorded as an adjustment to interest payable or receivable, with the offset to interest expense over the life of the swaps. If we terminate an interest rate swap agreement, the gain or loss is deferred and amortized over the remaining life of the liability. Cash flows from financial instruments are classified in the Consolidated Statements of Cash Flows under the same categories as the cash flows from the related assets, liabilities or anticipated transactions. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and revenue and expenses during the period reported. Actual results could differ from those estimates. Estimates are used when accounting for certain items such as long-term contracts, allowance for doubtful accounts, depreciation and amortization, employee benefit plans, taxes, restructuring reserves and contingencies. CONCENTRATIONS As of December 31, 2000, we do not have any significant concentration of business transacted with a particular customer, supplier or lender that could, if suddenly eliminated, severely impact our operations. We also do not have a concentration of available sources of labor, services, franchises, or licenses or other rights that could, if suddenly eliminated, severely impact our operations. We invest our cash with several high-quality credit institutions. ISSUANCE OF COMMON STOCK BY AFFILIATES Changes in our proportionate share of the underlying equity of a subsidiary or equity method investee, which result from the issuance of additional equity securities by such entity, are recognized as increases or decreases to additional paid-in capital in the Consolidated Statements of Shareowners' Equity. RECLASSIFICATIONS AND RESTATEMENTS We reclassified certain amounts for previous years to conform to the 2000 presentation. In addition, we restated prior year share and per share amounts to reflect the June 2000 two-for-one split of Liberty Media Group common stock. 2. RESTRUCTURING OF AT&T On October 25, 2000, we announced a restructuring plan designed to fully separate or issue separately tracked stocks intended to reflect the financial performance and economic value of each of AT&T's four major operating units. Upon completion of the plan, AT&T Wireless, AT&T Broadband, AT&T Business and AT&T Consumer will all be represented by asset-based or tracking stocks. As part of the first phase of the restructuring plan, we are planning an exchange offer that will give AT&T shareowners the opportunity to exchange any portion of their AT&T common shares for shares of AT&T Wireless Group tracking stock, subject to pro-ration. Following the exchange offer and subject to specified conditions, AT&T plans to split-off AT&T Wireless Group from AT&T. We intend, however, to retain up to $3 billion of shares of AT&T Wireless for future sale, exchange or monetization within six months following the split-off. We expect AT&T Wireless will become an independent, publicly-held company in mid-2001, upon receipt of appropriate tax and other approvals. In addition to the split-off of AT&T Wireless, we intend to fully separate or issue separate tracking stocks to reflect the financial performance and economic value of each of our other major business units. We plan to create and issue new classes of stock to track the financial performance and economic value of our AT&T Broadband unit and AT&T Consumer unit. We plan to sell some percentage of shares of the AT&T Broadband unit in the fall of 2001. Within 12 months of such sale, we intend to completely separate AT&T Broadband from AT&T, as an asset-based stock. The AT&T Consumer tracking stock is expected to be fully distributed to AT&T shareowners in the second half of 2001. AT&T expects that these transactions will be tax-free to U.S. shareholders. AT&T's restructuring plan is complicated and involves a substantial number of steps and transactions, including obtaining various conditions, such as Internal Revenue Service (IRS) rulings. In addition, future financial conditions, superior alternatives or other factors may arise or occur that make it inadvisable to proceed with part or all of AT&T's restructuring plans. Any or all of the elements of AT&T's restructuring plan may not occur as we currently expect or in the timeframes that we currently contemplate, or at all. Alternative forms of restructuring, including sales of interests in these businesses, would reduce what is available for distribution to shareowners in the restructuring. On November 15, 2000, AT&T announced that our board of directors voted to split-off Liberty Media Group (LMG), which we acquired through our acquisition of Tele-Communications, Inc. A new asset-based security will be issued to holders of LMG tracking stock in exchange for their LMG tracking shares. The split-off remains subject to receipt of a favorable tax ruling from the IRS. We expect this split-off to be completed in mid-2001. 3. SUPPLEMENTARY FINANCIAL INFORMATION SUPPLEMENTARY INCOME STATEMENT INFORMATION
For the Years Ended December 31, 2000 1999 1998 ---- ---- ---- INCLUDED IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Research and development expenses................................................................... $402 $550 $513 OTHER INCOME Investment-related income........................................................................... $514 $222 $389 Net gains on sales of businesses and investments.................................................... 1,683 682 959 Mark-to-market charge on put options................................................................ (537) -- -- Investment impairment charges....................................................................... (248) (40) -- Miscellaneous, net.................................................................................. 102 67 (67) Total other income.................................................................................. $1,514 $931 $1,281 DEDUCTED FROM INTEREST EXPENSE Capitalized interest................................................................................ $299 $143 $197 ------ ---- ------
SUPPLEMENTARY BALANCE SHEET INFORMATION
At December 31, 2000 1999 ---- ---- PROPERTY, PLANT AND EQUIPMENT Communications, network and other equipment......................................................... $74,550 $60,985 Buildings and improvements.......................................................................... 8,951 8,104 Land and improvements............................................................................... 531 586 Total property, plant and equipment................................................................. 84,032 69,675 Accumulated depreciation............................................................................ (32,871) (30,057) Property, plant and equipment, net.................................................................. $51,161 $39,618 -------- --------
SUPPLEMENTARY SHAREOWNERS' EQUITY INFORMATION
For the Years Ended December 31, 2000 1999 1998 ---- ---- ---- OTHER COMPREHENSIVE INCOME Net foreign currency translation adjustment[net of income taxes of $(181), $87 and $(3)]........ $(309) $148 $(5) Net revaluation of securities [net of income taxes of $(5,166), $4,506 and $(35)]............... (8,067) 6,878 (25) Net minimum pension liability adjustment [net of income taxes of $(1), $7 and $(15)]............ (1) 12 9 Total other comprehensive income................................................................ $(8,377) $7,038 $(21) -------- ------ -----
In 2000, other comprehensive income included LMG's foreign currency translation adjustments totaling $(202), net of applicable income taxes, revaluation of LMG's available-for-sale securities totaling $(6,117), net of applicable income taxes, and the recognition of previously unrecognized available-for-sale securities totaling $(635), net of applicable income taxes. In 1999, other comprehensive income included LMG's foreign currency translation adjustments totaling $60, net of applicable income taxes, and revaluation of LMG's available-for-sale securities totaling $6,497, net of applicable income taxes. SUPPLEMENTARY CASH FLOW INFORMATION
For the Years Ended December 31, 2000 1999 1998 ---- ---- ---- Interest payments, net of amounts capitalized..................................................... $3,453 $1,425 $422 Income tax payments............................................................................... 1,976 3,906 2,881
4. MERGERS WITH MEDIAONE GROUP, INC. AND TELE-COMMUNICATIONS, INC. MERGER WITH MEDIAONE GROUP, INC. On June 15, 2000, AT&T completed a merger with MediaOne Group, Inc. (MediaOne) in a cash and stock transaction valued at approximately $45 billion. For each share of MediaOne stock, MediaOne shareowners 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 in the transaction, 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. The merger was accounted for under the purchase method. 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 $16 billion of the purchase price of $45 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 purchase price was approximately $22 billion related to nonconsolidated investments, including investments in Time Warner Entertainment Company, L.P. (TWE) and Vodafone Group plc (Vodafone), approximately $5 billion related to property, plant and equipment, and approximately $7 billion of other net assets. In addition, included was approximately $14 billion in deferred income liabilities, approximately $10 billion attributable to MediaOne debt, and approximately $1 billion of minority interest in Centaur Funding Corporation, a subsidiary of MediaOne. The purchase resulted in preliminary goodwill of approximately $20 billion, which is being amortized on a straight-line basis over 40 years. AT&T 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. On March 9, 1999, AT&T completed a merger with Tele-Communications, Inc. (TCI), renamed AT&T Broadband, in an all-stock transaction valued at approximately $52 billion. Each share of TCI Group Series A common stock was converted into 1.16355 shares of AT&T common stock, and each share of TCI Group Series B common stock was converted into 1.27995 shares of AT&T common stock. AT&T issued approximately 664 million shares of common stock in the transaction, of which approximately 149 million were treasury shares. The AT&T shares had an aggregate market value of approximately $27 billion. Certain subsidiaries of TCI held TCI Group Series A common stock, which was converted into 216 million shares of AT&T common stock. These subsidiaries continue to hold these shares, which are reflected as treasury stock in the accompanying Consolidated Balance Sheets. In addition, TCI simultaneously combined its Liberty Media Group programming business with its TCI Ventures Group technology investment business, forming LMG. In connection with the closing, AT&T issued separate tracking stock in exchange for the TCI Liberty Media Group and TCI Ventures Group tracking shares previously outstanding. We issued 2,280 million shares of Liberty Media Group Class A tracking stock (including 120 million shares related to the conversion of convertible notes) and 220 million shares of Liberty Media Group Class B tracking stock. The tracking stock is designed to reflect the separate financial performance and economic value of LMG. These shares had an aggregate market value of approximately $23 billion. AT&T does not have a controlling financial interest for financial accounting purposes in LMG. Therefore, our investment in LMG has been reflected as an investment accounted for under the equity method in the accompanying consolidated financial statements. The amounts attributable to LMG are reflected as "Equity earnings (losses) from Liberty Media Group" and "Investment in Liberty Media Group and related receivables, net" in the accompanying consolidated financial statements. As a separate tracking stock, all of the earnings or losses related to LMG are excluded from the earnings available to the holders of AT&T common stock. Each share of Liberty Media Group Class A common stock is entitled to 0.0375 of a vote, and each share of Liberty Media Group Class B common stock is entitled to 0.375 of a vote. The TCI merger was accounted for under the purchase method. Accordingly, the results of TCI have been included in the financial results of AT&T since the date of acquisition. The operating results of TCI have been included in the accompanying consolidated financial statements at their fair value since March 1, 1999, the deemed effective date of acquisition for accounting purposes. The impact of the results from March 1 through March 9, 1999, were deemed immaterial to our consolidated results. Approximately $20 billion of the purchase price of $52 billion was attributed to franchise costs and is being amortized on a straight-line basis over 40 years. Pursuant to Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," AT&T recorded an approximate $13 billion deferred tax liability in connection with this franchise intangible, which is also included in franchise costs. We do not expect that this deferred tax liability will ever be paid. This deferred tax liability is being amortized on a straight-line basis over 40 years and is included in the provision for income taxes. Also included was approximately $11 billion related to nonconsolidated investments, approximately $5 billion related to property, plant and equipment, approximately $11 billion of TCI long-term debt and approximately $7 billion related to other net liabilities. In addition, our investment in LMG was recorded at approximately $34 billion, including approximately $11 billion of goodwill that is being amortized on a straight- line basis over 20 years as a component of "Equity earnings (losses) from Liberty Media Group." 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:
For the Years Ended December 31, 2000 1999 - -------------------------------- ---- ---- Shares in millions (Unaudited) Revenue............................................................................ $67,306 $66,236 Net income......................................................................... 5,617 6,452 Weighted-average AT&T common shares................................................ 3,762 3,784 Weighted-average AT&T common shares and potential common shares........................................................ 3,821 3,906 Weighted-average AT&T Wireless Group shares........................................ 361 -- Weighted-average Liberty Media Group shares........................................ 2,572 2,519 AT&T Common Stock Group earnings per common share: Basic........................................................................... $1.08 $2.30 Diluted......................................................................... $1.07 $2.23 AT&T Wireless Group earnings per common share: Basic and diluted............................................................... $0.21 $-- Liberty Media Group earnings (loss) per share: Basic and diluted............................................................... $0.58 $(0.89)
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. 5. OTHER MERGERS, ACQUISITIONS, STOCK OFFERING, VENTURE, DISPOSITIONS AND DISCONTINUED OPERATIONS AB CELLULAR On December 29, 2000, AB Cellular completed the redemption of AT&T's equity interest in AB Cellular. Prior to that date, AT&T held 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 owned, controlled and supervised wireless properties in Los Angeles, Houston, and Galveston, Texas. BellSouth exercised an option available to it, which resulted in AB Cellular redeeming AT&T's interest in AB Cellular in exchange for 100% of the net assets of the Los Angeles property. AB Cellular recognized a significant gain upon completion of the transaction. Accordingly, net losses from other equity investments included $603 representing our portion of this gain, and other income included a net pretax loss of $184 related to the difference between the carrying value of our investment in AB Cellular and the fair market value of the Los Angeles property. As a result of this transaction, we consolidated the Los Angeles property. The consolidation resulted in licensing costs of $2.2 billion, goodwill of $0.8 billion, other net assets of $0.6 billion and the removal of our investment in AB Cellular of $3.8 billion. TELECORP PCS, INC. 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, paid approximately $20 in cash and extended the term of its brand license agreement through July 2005, in exchange for approximately 9.3 million additional common shares in the newly merged entity. In a separate transaction, AT&T exchanged certain additional wireless licenses and rights to acquire licenses in the Wisconsin and Iowa markets, and made a cash payment of approximately $80 for certain TeleCorp PCS licenses and wireless systems in several New England markets. These transactions resulted in a net pretax gain of $379. The acquisition of the wireless systems was accounted for under the purchase method. The pro forma impact of the wireless systems on historical AT&T results is not material. AT HOME CORPORATION On August 28, 2000, AT&T and At Home Corporation (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, Inc. (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 of AT&T's Series A shares into Series B shares, each of which has 10 votes. As a result of these governance changes, AT&T gained a controlling interest and began consolidating Excite@Home's results upon the closing of the transaction on September 1, 2000. As of December 31, 2000, AT&T had, on a fully diluted basis, approximately 23% of the economic interest and 74% of the voting interest in Excite@Home. 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). 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 at fair value, with gains or losses resulting from changes in fair value being recorded as a component of other income. For the year, changes in fair market value resulted in a pretax expense of $537. Subsequent to December 31, 2000, Cox and Comcast exercised their put options, electing to receive AT&T common shares (see Note 23). Also, in connection with the distribution agreements which extend 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 will each receive new warrants to purchase two Series A shares for each home its cable system passes. These warrants will vest in installments every six months beginning in June 2001, and will be fully vested by June 2006 if Cox and Comcast elect to continue their extended non-exclusive distribution agreements through that period. The consolidation of Excite@Home resulted in minority interest of approximately $2.2 billion, goodwill of approximately $2.4 billion, short-term liabilities of approximately $2.4 billion (including an initial put option liability), other net assets of approximately $1.2 billion and the removal of our investment in Excite@Home of approximately $1.9 billion. AT&T WIRELESS GROUP On April 27, 2000, AT&T created a new class of stock and completed a public stock offering of 360 million shares, which represented 15.6% of AT&T Wireless Group tracking stock at a price of $29.50 per share. This stock is intended to track the financial performance and economic value of AT&T's wireless services' business. The net proceeds to AT&T after deducting underwriter's discount and related fees and expenses were $10.3 billion. AT&T allocated $7.0 billion of the net proceeds to AT&T Wireless Group, which were used for acquisitions, network expansion, capital expenditures and for general corporate purposes. The remaining net proceeds of $3.3 billion were utilized by AT&T for general corporate purposes. Holders of AT&T Wireless Group tracking stock are entitled to one-half of a vote per share. The AT&T Wireless Group tracking stock is listed on the New York Stock Exchange under the symbol "AWE." COX COMMUNICATIONS, INC. On March 15, 2000, AT&T received 50.3 million shares of AT&T common stock held by Cox in exchange for an entity owning cable television systems serving approximately 312,000 customers and certain other net assets. Specifically, AT&T exchanged $1.1 billion of investments and related advances, $0.9 billion of franchise costs and $0.5 billion of other net assets for stock valued at $2.7 billion on March 15, 2000. The transaction resulted in a pretax gain of $189. LENFEST COMMUNICATIONS, INC. On January 18, 2000, AT&T sold its ownership in Lenfest Communications, Inc. to a subsidiary of Comcast. In connection with the sale, we received 47.3 million shares of Comcast Class A Special common stock. The transaction resulted in a pretax gain of $224. CONCERT 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, as well as the economic value of approximately 270 multinational customers specifically targeted for direct sales by Concert. ACC EUROPE On November 5, 1999, AT&T sold ACC Corp. (ACC) in Europe, including ACC's principal operations in the United Kingdom as well as ACC's operating companies in France, Germany and Italy, to WORLDxCHANGE Communications. We were required to dispose of this investment pursuant to a government mandate since it would have competed directly with Concert. The transaction resulted in a pretax loss of $179. IBM GLOBAL NETWORK On April 30, 1999, AT&T completed its acquisition of the IBM Global Network business (renamed AT&T Global Network Services or AGNS) and its assets in the United States. The non-U.S. acquisitions were completed in phases throughout 1999 and during the first quarter of 2000. Under the terms of the agreement, AT&T acquired the global network of IBM, and the two companies entered into outsourcing agreements with each other. The acquisition was accounted for under the purchase method. Accordingly, the operating results of AGNS have been included in the accompanying consolidated financial statements since the date of acquisition. The pro forma impact of AGNS on historical AT&T results is not material. TELEPORT COMMUNICATIONS GROUP INC. On July 23, 1998, AT&T completed a merger with Teleport Communications Group Inc. (TCG) pursuant to an agreement and plan of merger dated January 8, 1998. Each share of TCG common stock was exchanged for 1.4145 shares of AT&T common stock, resulting in the issuance of 272.4 million shares in the transaction. The merger was accounted for as a pooling of interests, and accordingly, AT&T's results of operations, financial position and cash flows were restated to reflect the merger. In 1998, we recognized $85 of merger-related expenses. Premerger TCG revenue was $455, and net losses were $118, for the six months ended June 30, 1998. Elimination entries between AT&T and TCG were not material. On April 22, 1998, TCG purchased ACC for an aggregate value of approximately $1,100, including approximately $700 in goodwill. OTHER DISPOSITIONS On March 3, 1998, AT&T sold its 45% common share interest in LIN Television Corp., a subsidiary of LIN Broadcasting Company, for $742 to Hicks, Muse, Tate and Furst Inc. We recognized a pretax gain of $317. Also on March 3, 1998, AT&T sold AT&T Solutions Customer Care to MATRIXX Marketing Inc., a teleservices unit of Cincinnati Bell, for $625. AT&T recognized a pretax gain of $350 in 1998 on the sale. DISCONTINUED OPERATIONS On April 2, 1998, AT&T sold AT&T Universal Card Services Inc. (UCS) for $3,500 to Citigroup, Inc. The after-tax gain resulting from the disposal of UCS was $1,290, or $0.48 per diluted share. Included in the transaction was a cobranding and joint-marketing agreement. In addition, we received $5,722 in settlement of receivables from UCS. The consolidated financial statements of AT&T reflect UCS as a discontinued operation. Accordingly, the revenue, costs and expenses, and cash flows of this business have been excluded from the respective captions in the 1998 Consolidated Statement of Income and Consolidated Statement of Cash Flows, and have been reported through the date of disposition as "Income from discontinued operations," net of applicable income taxes, and as "Net cash provided by discontinued operations" for all periods presented. The gain associated with this sale is reflected as "Gain on sale of discontinued operations," net of applicable income taxes. Summarized financial information for UCS was as follows: 1998 ---- For the Year Ended December 31, Revenue.......................................................... $365 Income before income taxes....................................... 16 Net income....................................................... 10 No interest expense was allocated to UCS in 1998 due to the immateriality of the amounts; however, UCS recorded direct interest expense of $85 in 1998, primarily related to amounts payable to AT&T. 6. EARNINGS PER COMMON SHARE AND POTENTIAL COMMON SHARE Income (loss) from continuing operations attributable to the different classes of AT&T common stock is as follows:
For the Years Ended December 31, 2000 1999 1998 ---- ---- ---- AT&T Common Stock Group................................................. $3,105 $5,450 $5,235 AT&T Wireless Group..................................................... 76 -- -- Liberty Media Group..................................................... 1,488 (2,022) -- Income from continuing operations....................................... $4,669 $3,428 $5,235
Basic earnings per share (EPS) for AT&T Common Stock Group for 2000, 1999 and 1998 were computed by dividing AT&T Common Stock Group income by the weighted- average number of shares outstanding during the year. Diluted EPS for AT&T Common Stock Group was computed by dividing AT&T Common Stock Group income, adjusted for the conversion of securities, by the weighted-average number of shares and dilutive potential shares outstanding during the year, assuming conversion of the potential shares at the beginning of the years presented. Shares issuable upon conversion of preferred stock of subsidiaries, convertible debt securities of subsidiary, stock options and other performance awards have been included in the diluted calculation of weighted-average shares to the extent that the assumed issuance of such shares would have been dilutive, as illustrated below. The convertible quarterly income preferred securities were antidilutive and were excluded from the computation of diluted EPS. Computed on a yearly basis, the dividends would have an after-tax impact to earnings of approximately $155. Assuming conversion of the securities, the dividends would no longer be included as a reduction to net income and the securities would convert into 67 million shares of AT&T common stock. A reconciliation of the income and share components for basic and diluted EPS calculations with respect to AT&T Common Stock Group continuing operations is as follows:
For the Years Ended December 31, 2000 1999 1998 ---- ---- ---- Income.................................................................... $3,105 $5,450 $5,235 Income impact of assumed conversion of preferred stock of subsidiary...... 32 26 -- Income adjusted for conversion of securities.............................. $3,137 $5,476 $5,235 Shares in millions Weighted-average common shares............................................ 3,486 3,082 2,676 Stock options............................................................. 19 35 24 Preferred stock of subsidiary............................................. 40 33 -- Convertible debt securities of subsidiary................................. -- 2 -- Weighted-average common shares and potential common shares................ 3,545 3,152 2,700
Basic EPS for AT&T Wireless Group for the period from April 27, 2000, the stock offering date, through December 31, 2000, was computed by dividing AT&T Wireless Group income by the weighted-average number of shares outstanding of AT&T Wireless Group of 361 million. There were no potentially dilutive securities outstanding at December 31, 2000. Basic EPS for LMG was computed by dividing LMG income (loss) by the weighted-average number of shares outstanding of LMG of 2,572 million in 2000 and 2,519 million from the March 9, 1999, date of issuance through December 31, 1999. 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 96 million and 124 million of these potentially dilutive securities outstanding at December 31, 2000 and 1999, respectively. The diluted earnings per share calculation for 2000 also excludes approximately 700,000 warrants outstanding at December 31, 2000, which were antidilutive. In addition, since LMG had a loss in 1999, the impact of any potential shares would have been antidilutive. 7. NET RESTRUCTURING AND OTHER CHARGES During 2000, we recorded $7,029 of net restructuring and other charges, which included $6,179 of asset impairment charges related to Excite@Home, $759 for restructuring and exit costs associated with AT&T's initiative to reduce costs, and $91 related to the government-mandated disposition of AT&T Communications (U.K.) Ltd., which would have competed directly with Concert. The charges related to Excite@Home included $4,609 of asset impairment charges recorded by Excite@Home associated with the impairment of goodwill from various acquisitions, including Excite, and a related goodwill impairment charge of $1,570 recorded by AT&T associated with goodwill from the acquisition of our investment in Excite@Home. The impairments resulted from the deterioration of the market conditions and market valuations of Internet-related companies during the fourth quarter of 2000, which caused Excite@Home to conclude that intangible assets related to their acquisitions of Internet-related companies may not be recoverable. In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", Excite@Home conducted a detailed assessment of the recoverability of the carrying amounts of acquired intangible assets. This assessment resulted in a determination that certain acquired intangible assets, including goodwill, related to these acquisitions, including Excite, were impaired as of December 31, 2000. As a result, we recorded impairment charges of $4,609 in December 2000, representing the excess of the carrying amount of the impaired assets over their fair value. The review for impairment included a review of publicly-traded Internet companies that are comparable to the companies that Excite@Home acquired. These companies experienced a substantial decline in stock price and market capitalization during the fourth quarter of 2000. Excite@Home also reviewed the business climate for Internet advertising and web-based infrastructure companies as of December 31, 2000, and observed the following: (1) investor and consumer enthusiasm for the Internet sector severely deteriorated during the fourth quarter of 2000; (2) many Internet companies, including those acquired by Excite@Home, experienced significant decelerations in their growth both as a result of economic conditions and due to Internet-sector specific issues such as competition and the weakening of the Internet advertising market; and (3) funding sources for Internet-based consumer businesses, which require considerable amounts of capital, had substantially evaporated as of December 31, 2000. As a result, Excite@Home concluded that fundamental, permanent and significant adverse changes had occurred during the fourth quarter of 2000 in the business climate for companies providing Internet advertising and other web-based services. In addition, Excite@Home reviewed operating and cash flow projections that existed at the time Excite@Home made the acquisitions and that were used as a basis upon which the decisions to complete the acquisitions were made. These operating and cash flow projections indicated that the acquired companies, over their useful lives, would be profitable and generate positive cash flows. The operating and cash flow projections were compared to operating results after the date of the acquisitions through December 31, 2000, as well as to projected operating results for 2001. These comparisons indicated that certain acquisitions generated operating and cash flow losses through the end of 2000, and were projected to continue generating operating and cash flow losses for the foreseeable future. As a result of these factors, Excite@Home determined that the intangible assets related to the acquisitions might not be recoverable and conducted impairment tests. Generally, the impairment tests were performed at an asset group level corresponding to the lowest level at which cash flows independent of other assets could be identified. Each asset group consisted of the goodwill and acquired identifiable intangible assets related to a specific acquisition. Acquired intangible assets were combined for those acquisitions where separately identifiable cash flows that are largely independent of the cash flows of other groups of assets could not be identified. For each of the asset groups to be tested for impairment, Excite@Home projected undiscounted cash flows over a future projection period of five years, based on Excite@Home's determination of the current remaining useful lives of the asset groups, plus an undiscounted terminal period cash flow to reflect disposition of the entities at the end of their useful lives. Undiscounted future cash flows were estimated using projected net realizable value in a sales transaction (undiscounted cash flows during the expected remaining holding period until disposition were estimated as negligible). The undiscounted future cash flows were compared to the carrying amount of each asset group and for those asset groups where the carrying amount exceeded the undiscounted future cash flows, Excite@Home concluded that the asset group was impaired. Excite@Home measured the impairment loss related to impaired asset groups based on the amount by which the carrying amount of the asset group exceeded the fair value of the asset group. Measurement of fair value was based on an analysis by Excite@Home utilizing the best information available in the circumstances using reasonable and supportable assumptions and projections, and including the discounted cash flow and market comparison valuation techniques. The discounted cash flow analysis considered the likelihood of possible outcomes and was based on Excite@Home's best estimate of projected future cash flows, including terminal value cash flows expected to result from the disposition of the asset at the end of its useful life, discounted at our weighted average cost of capital. Weighted average cost of capital was based on historical risk premiums required by investors for companies of Excite@Home's size, industry and capital structure and included risk factors specific to Excite@Home. The market comparison model represented Excite@Home's estimate of the prices that a buyer would be willing to pay currently for similar assets, based on comparable products and services, customer base, risks, earnings capabilities and other factors. Based on the foregoing, Excite@Home recorded an impairment write-down of $4,609 in the aggregate, which was allocated to each asset group based on a comparison of carrying values and fair values. The impairment write-down within each asset group was allocated first to goodwill, and if goodwill was reduced to zero, to identifiable intangible assets in proportion to carrying values. Also as a result of the foregoing, AT&T recorded a goodwill and acquistion-related impairment charge associated with the acquisition of our investment in Excite@Home. The write-down of our investment to fair value was determined utilizing discounted expected future cash flows. Since we own approximately 23% of Excite@Home, 77% of the charge recorded by Excite@Home was not included as a reduction to AT&T's net income, but rather was eliminated in our 2000 Consolidated Statement of Income as "Minority interest income (expense)." The $759 charge for restructuring and exit plans was primarily due to headcount reductions, mainly in network operations and Business Services, including the consolidation of customer-care and call centers, as well as synergies created by the MediaOne merger. Included in exit costs was $503 of cash termination benefits associated with the separation of approximately 7,300 employees as part of voluntary and involuntary termination plans. Approximately one-half of the separations were management employees and one-half were nonmanagement employees. Approximately 6,700 employee separations were related to involuntary terminations and approximately 600 to voluntary terminations. We also recorded $62 of network lease and other contract termination costs associated with penalties incurred as part of notifying vendors of the termination of these contracts during the year, and net losses of $32 related to the disposition of facilities primarily due to synergies created by the MediaOne merger. The following table displays the activity and balances of the restructuring reserve account: Type of Cost Employee Facility Separations Closings Other Total ----------- ------------ ----- ----- Balance at January 1, 1998.... $413 $434 $60 $907 Additions.................. 150 125 -- 275 Deductions................. (445) (190) (30) (665) Balance at December 31, 1998.. 118 369 30 517 Additions.................. 142 -- 3 145 Deductions................. (110) (130) (12) (252) Balance at December 31, 1999.. 150 239 21 410 Additions.................. 503 32 62 597 Deductions................. (394) (98) (47) (539) Balance at December 31, 2000.. $259 $173 $36 $468 Deductions reflect cash payments of $245, $209 and $369, for 1998, 1999 and 2000, respectively. These payments included cash termination benefits of $124, $40 and $257, respectively, which were primarily funded through cash from operations. Deductions also reflect noncash utilization of $420, $43 and $170 for 1998, 1999 and 2000, respectively. Noncash utilization included deferred severance payments primarily related to executives, and a reversal in 1998 of $348 related to the 1995 restructuring plan. Nearly 75% of the employees affected by the 1999 and 2000 restructuring charges have left their positions as of December 31, 2000. Also included in restructuring and exit costs in 2000 was $144 of benefit plan curtailment costs associated with employee separations as part of these exit plans. Further, we recorded an asset impairment charge of $18 related to the write-down of unrecoverable assets in certain businesses where the carrying value was no longer supported by estimated future cash flows. During 1999, we recorded $1,506 of net restructuring and other charges. A $594 in-process research and development charge was recorded reflecting the estimated fair value of research and development projects at TCI, as of the date of acquisition, which had not yet reached technological feasibility or had no alternative future use. The projects identified related to efforts to offer voice over Internet protocol (IP), product-integration efforts for advanced set-top devices that would enable the offering of next-generation digital services and cost-savings efforts for broadband-telephony implementation. In addition, Excite@Home had research and development efforts underway, including projects to allow for self-provisioning of devices and the development of next-generation client software, network and back-office infrastructure to enable a variety of network devices beyond personal computers, and improved design for the regional data centers' infrastructure. We began testing IP-telephony equipment in the field in late-2000, we anticipate beginning field trials for next-generation digital services in late-2001, and have completed trials related to our telephony cost reductions and implementation has begun in certain markets. Although there are technological issues to overcome to successfully complete the acquired in-process research and development, we expect successful completion. If, however, AT&T is unable to establish technological feasibility and produce commercially viable products/services, anticipated incremental future cash flows attributable to expected profits from such new products/services may not be realized. A $531 asset impairment charge was recorded in 1999 associated with the planned disposal of certain wireless communications equipment resulting from a program to increase the capacity and operating efficiency of our wireless network. As part of a multivendor program, contracts have been executed with select vendors to replace significant portions of our wireless infrastructure equipment in the western United States and the metropolitan New York markets. The program is intended to provide Wireless Services with the newest technology available and allow it to evolve to new, next-generation digital technology, which is designed to provide high-speed data capabilities. The planned disposal of the existing wireless infrastructure equipment required an evaluation of asset impairment in accordance with SFAS No. 121 to write-down these assets to their fair value, which was estimated by discounting the expected future cash flows of these assets through the date of disposal. Since the assets will remain in service from the date of the decision to dispose of these assets to the disposal date, the remaining net book value of the assets will be depreciated over this period. As of December 31, 2000, approximately $320 of the asset impairment reserve has been utilized for assets that have been disposed of and written off. The remaining net book value of these assets was approximately $23 at December 31, 2000, which will be depreciated over an estimated remaining useful life of three months. Also in 1999, a $145 charge for restructuring and exit costs was recorded as part of AT&T's initiative to reduce costs. The restructuring and exit plans primarily focused on the maximization of synergies through headcount reductions in Business Services and network operations, including the consolidation of customer-care and call centers. Included in exit costs was $142 of cash termination benefits associated with the separation of approximately 2,800 employees as part of voluntary and involuntary termination plans. Approximately one-half of the separations were management employees and one-half were nonmanagement employees. Approximately 1,700 employee separations were related to involuntary terminations and approximately 1,100 to voluntary terminations. We also recorded net losses of $307 related to the government-mandated disposition of certain international businesses that would have competed directly with Concert, and $50 related to a contribution agreement Broadband entered into with Phoenixstar, Inc. That agreement requires Broadband to satisfy certain liabilities owed by Phoenixstar and its subsidiaries. In addition, we recorded benefits of $121 related to the settlement of pension obligations for former employees who accepted AT&T's 1998 voluntary retirement incentive program (VRIP) offer. During 1998, we recorded $2,514 of net restructuring and other charges. The bulk of the charge was associated with our overall cost-reduction program and the approximately 15,300 management employees who accepted the VRIP offer. A restructuring charge of $2,724 was composed of $2,254 and $169 for pension and postretirement special-termination benefits, respectively, $263 of benefit plan curtailment losses and $38 of other administrative costs. We also recorded charges of $125 for related facility costs and $150 for executive-separation costs. These charges were partially offset by benefits of $940 as we settled pension benefit obligations of 13,700 of the total VRIP employees. In addition, the VRIP charges were partially offset by the reversal of $256 of 1995 business restructuring reserves primarily resulting from the overlap of VRIP on certain 1995 projects. Also included in the 1998 net restructuring and other charges were asset impairment charges totaling $718, of which $633 was related to our decision not to pursue Total Service Resale (TSR) as a local-service strategy. We also recorded an $85 asset impairment charge related to the write-down of unrecoverable assets in certain international operations where the carrying value was no longer supported by future cash flows. This charge was made in connection with the review of certain operations that would have competed directly with Concert. Additionally, $85 of merger-related expenses was recorded in 1998 in connection with the TCG merger, which was accounted for as a pooling of interests. Partially offsetting these charges was a $92 reversal of the 1995 restructuring reserve. This reversal reflected reserves no longer deemed necessary. The reversal primarily included separation costs attributed to projects completed at a cost lower than originally anticipated. Consistent with the three-year plan, the 1995 restructuring initiatives were substantially completed by the end of 1998. 8. INVESTMENT IN LIBERTY MEDIA GROUP As a result of our merger with TCI, we acquired Liberty Media Group, a wholly-owned investment accounted for under the equity method (see Note 4). Summarized results of operations for Liberty Media Group were as follows:
For the Year Ended For the Ten Months Ended December 31, 2000 December 31, 1999 Revenue................................................ $1,526 $729 Operating income (loss)................................ 436 (2,214) Net income (loss)...................................... 1,488 (2,022) At December 31, 2000 1999 ---- ---- Current assets......................................... $2,954 $3,387 Noncurrent assets...................................... 51,314 55,297 Current liabilities.................................... 2,962 3,370 Noncurrent liabilities................................. 16,668 16,853 Minority interest...................................... 348 1
During 2000 and 1999, certain investees of Liberty Media Group issued common stock. Changes in the equity of the investees, net of the dilution of LMG's ownership interest, resulted in an increase to AT&T's additional paid-in capital of $355 and $109 in 2000 and 1999, respectively. 9. OTHER INVESTMENTS We have investments in various companies and partnerships that are accounted for under the equity method and included within "Other investments and related advances" in the accompanying Consolidated Balance Sheets. Under the equity method, investments are stated at initial cost, and are adjusted for subsequent contributions and our share of earnings, losses and distributions. At December 31, 2000 and 1999, we had equity investments (other than LMG) of $13,624 and $18,454, respectively. The carrying value of these investments exceeded our share of the underlying reported net assets by approximately $8,720 and $12,530, at December 31, 2000 and 1999, respectively. The goodwill is being amortized over periods ranging from 15 to 40 years. Pretax amortization of goodwill was $571, $495, and $52 in 2000, 1999, and 1998, respectively. The amortization is shown net of income taxes as a component of "Net losses from other equity investments" in the accompanying Consolidated Statements of Income. Distributions from equity investments totaled $214, $317 and $360, for the years ended December 31, 2000, 1999 and 1998, respectively. Ownership of significant equity investments was as follows:
At December 31, 2000 1999 ---- ---- Cablevision Systems Corporation................................................ 27.98%(a) 32.04%(a) Concert........................................................................ 50.00%(b) -- Time Warner Texas.............................................................. 50.00% 50.00% Net2Phone, Inc................................................................. 31.34%(c) -- Insight Midwest LP............................................................. 50.00% 50.00% EuroTel Praha, spol. s.r.o..................................................... 24.50% -- Century-TCI California, LP..................................................... 25.00% 25.00% Rogers Wireless Communications, Inc............................................ 16.65%(d) 16.65%(d) TeleCorp PCS, Inc.............................................................. 22.99% 15.67% Kansas City Cable Partners..................................................... 50.00% 50.00% Parnassos, LP.................................................................. 33.33% 33.33% ACC Acquisitions, LLC.......................................................... 50.00% -- Far EasTone Telecommunications, ltd............................................ 22.70% 13.87% AB Cellular.................................................................... -- (e) 55.62%(e) At Home Corporation............................................................ -- (f) 25.00%(f) Lenfest Communications, Inc.................................................... -- 50.00% Bresnan Communications Group LLC............................................... -- 50.00%
(a) At December 31, 2000 and 1999, we owned 48,942,172 shares of Cablevision Systems Corporation Class A common stock, which had a closing market price of $84.94 and $75.50 per share, respectively, on those dates. Cablevision Systems Corporation (Cablevision) redeemed all of its outstanding preferred stock and issued additional common stock, and issued shares of its common stock for acquisitions. As a result of these transactions, AT&T's ownership interest in Cablevision decreased from 32.04% to 27.98%. Due to the dilution of AT&T's ownership interest in Cablevision, net of the increase in Cablevision's equity, AT&T recorded a net decrease to additional paid-in capital of $170 in 2000. (b) On January 5, 2000, we formed Concert, our global-communications joint venture with BT. (c) At December 31, 2000, we owned 18,900,000 shares of Net2Phone, Inc. Class A common stock, which had a closing market price of $7.38 per share on that date. (d) This investment is accounted for under the equity method because of our ability to elect certain members of the board of directors of this entity, which we believe provides us with significant influence. (e) On December 29, 2000, AB Cellular completed the redemption of our equity interest in AB Cellular. Voting interest in AB Cellular was 50% at December 31, 1999. (f) On August 28, 2000, AT&T and Excite@Home announced the closing of their extension contracts and governance reorganization. As a result of the governance changes, AT&T gained a controlling interest and began consolidating Excite@Home's results on September 1, 2000. As of December 31, 2000, AT&T had an approximate 23% economic interest and 74% voting interest in Excite@Home. We owned 7,924,422 and 63,720,000 shares of Excite@Home Class A common stock at December 31, 2000 and 1999, respectively, which had closing market prices of $5.53 and $42.88 per share, respectively, on those dates. We also owned 86,595,578 and 30,800,000 shares of Excite@Home Class B common stock at December 31, 2000 and 1999, respectively, which are not publicly traded. During 2000 and 1999, Excite@Home issued shares of its common stock for various acquisitions. As a result of these transactions, AT&T's economic interest in Excite@Home decreased from 25% to 23% in 2000, and from 38% to 25% in 1999, respectively. Due to the resulting increase in Excite@Home's equity, net of the dilution of AT&T's ownership interest in Excite@Home, AT&T recorded an increase to additional paid-in capital of $116 and $527 in 2000 and 1999, respectively. Summarized unaudited combined financial information for investments accounted for under the equity method was as follows:
For the Years Ended December 31, 2000 1999 1998 ---- ---- ---- (Unaudited) Revenue................................................................. $32,663 $12,751 $4,488 Operating (loss) income................................................. (583) (1,384) 239 (Loss) income from continuing operations before extraordinary items and cumulative effect of a change in accounting principle................ (1,005) (2,701) 147 Net (loss) income....................................................... (1,373) (2,897) 53
At December 31, 2000 1999 ---- ---- (Unaudited) Current assets.......................................................... $12,274 $7,616 Noncurrent assets....................................................... 44,748 38,008 Current liabilities..................................................... 12,181 6,209 Noncurrent liabilities.................................................. 26,337 19,422 Redeemable preferred stock.............................................. 7,316 6,457 Minority interest....................................................... 621 1,740
In addition, we have a 25.51% interest in TWE. This investment is "held-for-sale" at December 31, 2000. Accordingly, we are no longer recording equity earnings (losses) on this investment. We also have investments accounted for under the cost method of accounting. Under this method, investments are stated at cost, and earnings are recognized to the extent distributions are received from the accumulated earnings of the investee. Distributions received in excess of accumulated earnings are recognized as a reduction of our investment balance. These investments, which are covered under the scope of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," are classified as "available-for-sale" and are carried at fair value with any unrealized gain or loss, net of income taxes, being included within other comprehensive income as a component of shareowners' equity. Approximately $2,102 of these investments have been classified as current assets since they are indexed to certain currently maturing debt instruments. 10. DEBT OBLIGATIONS DEBT MATURING WITHIN ONE YEAR
At December 31, 2000 1999 ---- ---- Commercial paper........................................................ $16,234 $5,974 Short-term notes........................................................ 11,505 5,000 Currently maturing long-term debt....................................... 3,724 1,355 Other................................................................... 484 304 Total debt maturing within one year..................................... $31,947 $12,633 Weighted-average interest rate of short-term debt....................... 6.5% 5.3%
In February 2000, we entered into a 364-day, $10 billion syndicated credit facility upon the expiration of existing credit facilities. On December 28, 2000, we entered into a new 364-day, $25 billion credit facility syndicated to 39 banks. As a result, the outstanding $10 billion credit facility was terminated. The credit facility is for commercial paper back-up and was unused at December 31, 2000. The credit facility agreement contains a financial covenant that requires AT&T to maintain a net debt-to-EBITDA ratio (as defined in the credit agreement) not exceeding 3.00 to 1.00 for four consecutive quarters ending on the last day of each fiscal quarter. At December 31, 2000, we were in compliance with this covenant. At December 31, 1999, we had a 364-day, $7 billion revolving-credit facility with a consortium of 42 lenders. We also had additional 364-day, revolving-credit facilities of $3 billion. These lines were for commercial paper back-up and were unused at December 31, 1999. LONG-TERM OBLIGATIONS
At December 31, 2000 1999 ---- ---- DEBENTURES, NOTES AND TRUST PREFERRED SECURITIES(a) Interest Rates(b) Maturities 4.00% - 6.00% 2001-2018....................................... $6,639 $5,251 6.25% - 6.50% 2001-2029....................................... 6,660 4,367 6.55% - 7.50% 2001-2037....................................... 7,840 3,701 7.53% - 8.50% 2001-2097....................................... 5,267 4,762 8.60% - 11.13% 2001-2045....................................... 7,320 5,389 Variable rate 2001-2054....................................... 2,794 867 Total debentures, notes and trust preferred securities................. 36,520 24,337 Other.................................................................. 360 362 Unamortized discount, net.............................................. (64) (127) Total long-term obligations............................................ 36,816 24,572 Less: Currently maturing long-term debt................................ 3,724 1,355 Net long-term obligations.............................................. $33,092 $23,217
(a) Included in these balances was $946 and $975 representing the remaining excess of the fair value over the recorded value of debt in connection with the TCI and MediaOne mergers at December 31, 2000 and December 31, 1999, respectively. The excess is being amortized over the remaining lives of the underlying debt obligations. (b) The actual interest paid on our debt obligations may have differed from the stated amount due to our entering into interest rate swap contracts to manage our exposure to interest rate risk and our strategy to reduce finance costs (see Note 12). On January 26, 1999, AT&T filed a registration statement with the SEC for the offering and sale of up to $10 billion of notes and warrants to purchase notes, resulting in a total available shelf registration of $13.1 billion. On March 26, 1999, AT&T issued $8 billion in notes. We received net proceeds of approximately $7.9 billion from the sale of the notes. The proceeds were utilized to repay commercial paper issued in connection with the TCI merger and toward funding the share repurchase program. On September 14, 1999, AT&T completed a $450 bond offering in connection with the same registration statement. The proceeds from the issuance were utilized for general corporate purposes. Included in long-term debt are subsidiary-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely subordinated debt securities, exchangeable notes and other exchangeable debt acquired in connection with the TCI and MediaOne mergers. SUBSIDIARY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY SUBORDINATED DEBT SECURITIES Certain subsidiary trusts of TCI (TCI Trusts) had preferred securities outstanding at December 31, 2000 and 1999, as follows:
Interest Maturity Carrying Amount Rate Date 2000 1999 -------- -------- ---- ---- TCI Communications Financing I...... 8.72% 2045 $528 $528 TCI Communications Financing II..... 10.00% 2045 514 521 TCI Communications Financing III.... 9.65% 2027 357 360 TCI Communications Financing IV..... 9.72% 2036 204 217 Total............................... $1,603 $1,626 ------ ------
The TCI Trusts were created for the exclusive purpose of issuing trust preferred securities and investing the proceeds thereof into subordinated deferrable interest notes (subordinated debt securities) of TCI. The subordinated debt securities have interest rates equal to the interest rate of the corresponding trust preferred securities and have maturity dates ranging from 30 to 49 years from the date of issuance. The preferred securities are mandatorily redeemable upon repayment of the subordinated debt securities, and are callable by AT&T. The Financing I and II trust preferred securities are callable at face value beginning in January and May 2001, respectively. Financing III trust preferred securities are callable at 104.825% of face value beginning in March 2007. Financing IV trust preferred securities are callable at face value beginning in March 2002. TCI effectively provides a full and unconditional guarantee of the TCI Trusts' obligations under the trust preferred securities. In 2000, AT&T provided a full and unconditional guarantee of the trust preferred securities for TCI Communications Financing I, II and IV subsidiary trusts (see Note 19). AT&T has the right to defer interest payments up to 20 consecutive quarters; as a consequence, dividend payments on the trust preferred securities can be deferred by the trusts during any such interest-payment period. Certain subsidiary trusts of MediaOne (MediaOne Trusts) had preferred securities outstanding at December 31, 2000, as follows:
Interest Maturity Carrying Rate Date Amount -------- -------- -------- MediaOne Financing I............... 7.96% 2025 $30 MediaOne Financing II.............. 8.25% 2036 28 MediaOne Finance II................ 9.50% 2036 214 MediaOne Finance III............... 9.04% 2038 504 Total.............................. $776 ----
The MediaOne Trusts exist for the purpose of issuing the trust preferred securities and investing the proceeds thereof into subordinated deferrable interest notes (subordinated deferrable notes) of MediaOne Group Funding, Inc., a wholly owned subsidiary of MediaOne. The subordinated deferrable notes have the same interest rate and maturity date as the trust preferred securities to which they relate. All of the subordinated deferrable notes 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 deferrable notes, the trust preferred securities will be mandatorily redeemable, at a price of $25.00 per share, plus accrued and unpaid distributions. The 7.96% subordinated deferrable notes became redeemable after September 11, 2000. The 9.50% and 8.25% subordinated deferrable notes are redeemable after October 29, 2001. The 9.04% subordinated deferrable notes are redeemable after October 28, 2003. MediaOne has effectively provided a full and unconditional guarantee of the MediaOne Trusts' obligations under the trust preferred securities. In 2000, AT&T provided a full and unconditional guarantee of MediaOne's trust preferred securities (see Note 19) AT&T has the right to defer interest payments up to 20 consecutive quarters; as a consequence, dividend payments on the trust preferred securities can be deferred by the trusts during any such interest-payment period. EXCHANGEABLE NOTES During 2000, we issued debt (exchangeable notes) which is mandatorily redeemable at AT&T's option into shares of Comcast and Microsoft Corporation (Microsoft) common stock, as applicable, or its cash equivalent. During 1999 and 1998, MediaOne issued exchangeable notes which are 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 these exchangeable notes varies based upon the fair market value of the security it is indexed to. Following is a summary of the exchangeable notes outstanding at December 31, 2000, which are indexed to 25 million shares of Comcast common stock:
Maturity Date 2003 2004 2005 - ------------- ---- ---- ---- Face value..................................................... $371 $314 $329 Interest rate.................................................. 6.75% 5.50% 4.63% Put price...................................................... 41.50 41.06 39.13 Call price..................................................... 49.80 49.27 46.96 Carrying value at December 31, 2000............................ $371 $314 $329
At maturity, the exchangeable notes will be redeemed, at AT&T's option, with (i) a number of shares of Comcast common stock equal to the underlying shares multiplied by the exchange ratio, or (ii) its equivalent cash value. The exchange ratio will be calculated at maturity in the following manner: (a) If the fair market value of a share of Comcast common stock is greater than the call price, the exchange ratio will be 0.8333; (b) If the fair market value of a share of Comcast common stock is less than or equal to the put price, the exchange ratio will be 1; (c) If the fair market value of a share of Comcast common stock is less than or equal to the call price but greater than the put price, the exchange ratio will be be a fraction, the numerator of which is equal to the put price, and the denominator of which is equal to the fair market value of a share of Comcast common stock. Following is a summary of the exchangeable notes outstanding at December 31, 2000, which are indexed to 10 million shares of Microsoft common stock:
Maturity Date 2003 2004 2005 - ------------- ---- ---- ---- Face value..................................................... $227 $226 $226 Interest rate.................................................. 6.96% 7.00% 7.04% Put price...................................................... 67.87 67.87 67.87 Call price..................................................... 97.39 111.64 128.60 Carrying value at December 31, 2000............................ $145 $144 $144
At maturity, the exchangeable notes will be redeemed, at AT&T's option, with (i) a number of shares of Microsoft common stock equal to the underlying shares multiplied by the exchange ratio, or (ii) its equivalent cash value. The exchange ratio will be calculated at maturity in the following manner: (a) If the fair market value of a share of Microsoft common stock is greater than the call price, the exchange ratio will be a fraction, the numerator of which is equal to the sum of (i) the put price, plus (ii) the excess of the fair market value of a share of Microsoft common stock over the call price, and the denominator of which is equal to the fair market value of a share of Microsoft common stock; (b) If the fair market value of a share of Microsoft common stock is less than or equal to the put price, the exchange ratio will be 1; (c) If the fair market value of a share of Microsoft common stock is less than or equal to the call price but greater than the put price, the exchange ratio will be a fraction, the numerator of which is equal to the put price, and the denominator of which is equal to the fair market value of a share of Microsoft common stock. Following is a summary of the exchangeable notes outstanding at December 31, 2000, which are indexed to 22.3 million shares of Comcast common stock:
Maturity Date 2003 2004 2005 - ------------- ---- ---- ---- Face value..................................................... $267 $267 $267 Interest rate.................................................. 6.76% 6.80% 6.84% Put price...................................................... 35.89 35.89 35.89 Call price..................................................... 50.64 58.39 67.97 Carrying value at December 31, 2000............................ $267 $267 $267
At maturity, the exchangeable notes will be redeemed, at AT&T's option, with (i) a number of shares of Comcast common stock equal to the underlying shares multiplied by the exchange ratio, or (ii) its equivalent cash value. The exchange ratio will be calculated at maturity in the following manner: (a) If the fair market value of a share of Comcast common stock is greater than or equal to the call price, the exchange ratio will be a fraction, the numerator of which is equal to the sum of (i) the put price, plus (ii) the excess of the fair market value of a share of Comcast common stock over the call price, and the denominator of which is equal to the fair market value of a share of Comcast common stock; (b) If the fair market value of a share of Comcast common stock is less than or equal to the put price, the exchange ratio will be 1; (c) If the fair market value of a share of Comcast common stock is less than the call price but greater than the put price, the exchange ratio will be a fraction, the numerator of which is equal to the put price, and the denominator of which is equal to the fair market value of a share of Comcast common stock. Following is a summary of the exchangeable notes outstanding at December 31, 2000, which are indexed to Vodafone ADRs:
Maturity Date 2001 2002 - ------------- ---- ---- Face value........................................................................... $1,686 $1,129 Interest rate........................................................................ 6.25% 7.00% Put price............................................................................ 19.65 43.44 Call price........................................................................... 25.10 51.26 Carrying value at December 31, 2000.................................................. $2,337 $1,012
The exchangeable notes that mature in 2001 are indexed to 29 million Vodafone ADRs, and will be exchanged at maturity based upon a redemption value of $9.00 in cash plus 21/2 times the fair market value of a Vodafone ADR (maturity price), as follows: (a) If the maturity price is greater than or equal to $9.00 plus 21/2 times the call price per share, each exchangeable note is equivalent to 0.8101 of the maturity price; (b) If the maturity price is less than or equal to $9.00 plus 21/2 times the put price per share, each 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 exchangeable note is equivalent to $58.125. The exchangeable notes that mature in 2002 are indexed to 26 million Vodafone ADRs, and will be exchanged at maturity as follows: (a) If the fair market value of a Vodafone ADR is greater than or equal to the call price, each 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 the put price, each exchangeable note is equivalent to one Vodafone ADR; or (c) If the fair market value of a Vodafone ADR is less than the call price but greater than the put price, each exchangeable note is equivalent to a fraction of a Vodafone ADR equal to (i) the put price divided by (ii) the fair market value of a Vodafone ADR. The exchangeable notes are being accounted for as indexed debt instruments since the maturity value of the debt is dependent upon the fair market value of the underlying Comcast, Microsoft and Vodafone securities. The exchangeable notes contain embedded options that hedge the market risk of a decline in value of Comcast, Microsoft and Vodafone securities. The market risk of a decline in Comcast and Microsoft stock, and Vodafone ADRs, below the respective put prices has been eliminated. In addition, any market gains we may earn have been limited to the call prices, with the exception of certain debt indexed to Comcast stock and the debt indexed to the Vodafone ADRs, which provides for our participation in a portion of the market gains above the call price. Since the Comcast, Microsoft, and Vodafone securities are cost method investments being accounted for as "available-for-sale" securities under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," changes in the maturity value of the exchangeable notes and the underlying securities are being recorded as unrealized gains or losses, net of income taxes, within other comprehensive income as a component of shareowners' equity. The exchangeable notes indexed to Comcast common stock and Microsoft common stock are secured by the Comcast and Microsoft investments AT&T owns. The exchangeable notes indexed to Vodafone ADRs are unsecured obligations, ranking equally in right of payment with all other unsecured and unsubordinated obligations of AT&T. OTHER EXCHANGEABLE DEBT During 2000, we entered into a series of purchased and written options on 21.9 million shares of Microsoft common stock, and issued floating rate debt. The carrying value of the debt at December 31, 2000, was $1,369, which pays interest at the three-month London Inter-Bank Offered Rate (LIBOR) plus 0.4%. The debt matures annually with $458 maturing in 2003 and 2004, and $453 maturing in 2005, and is repayable at AT&T's option in either Microsoft stock or cash. In addition, during 1999 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 the debt at December 31, 2000, was $1,739, which pays interest at the three-month 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 available only to pay the creditors of MediaOne SPC IV. Likewise, the assets of MediaOne SPC VI, which are primarily 18.0 million Vodafone ADRs, are available only to pay the creditors of MediaOne SPC VI. This table shows the maturities at December 31, 2000, of the $36,816 in total long-term obligations: 2001 2002 2003 2004 2005 Later Years ---- ---- ---- ---- ---- ----------- $3,724 $2,661 $3,093 $4,112 $4,182 $19,044 11. OTHER SECURITIES PREFERRED STOCK OF SUBSIDIARIES Prior to the TCI merger, TCI Pacific Communications Inc. (Pacific) issued 5% Class A Senior Cumulative Exchangeable preferred stock, which remains outstanding. There were 6.3 million shares authorized and outstanding at December 31, 2000 and 1999. Each share is exchangeable, from and after August 1, 2001, for approximately 6.3 shares of AT&T common stock, subject to certain antidilution adjustments. Additionally, Pacific may elect to make any dividend, redemption or liquidation payment in cash, shares of AT&T common stock or a combination of the foregoing. The Pacific preferred stock is reflected within "Minority Interest" in the accompanying Consolidated Balance Sheets, and aggregated $2.1 billion at December 31, 2000 and 1999. Prior to the TCI merger, TCI issued Class B 6% Cumulative Redeemable Exchangeable Junior preferred stock (Class B preferred stock). There were 1.6 million shares outstanding as of December 31, 1999, net of shares held by a subsidiary, out of an authorized 1.7 million shares. Class B preferred stock and accumulated dividends aggregated $152 at December 31, 1999, and were reflected within "Minority Interest" in the accompanying 1999 Consolidated Balance Sheet. On February 22, 2000, all outstanding shares of Class B preferred stock were redeemed at $105.88 per share. COMPANY-OBLIGATED CONVERTIBLE QUARTERLY INCOME PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY SUBORDINATED DEBT SECURITIES OF AT&T AND RELATED WARRANTS On June 16, 1999, AT&T Finance Trust I (AT&T Trust), a wholly owned subsidiary of AT&T, completed the private sale of 100 million shares of 5.0% cumulative quarterly income preferred securities (quarterly preferred securities) to Microsoft. Proceeds of the issuance were invested by the AT&T Trust in junior subordinated debentures (debentures) issued by AT&T due 2029, which represent the sole asset of the AT&T Trust. The quarterly preferred securities pay dividends at an annual rate of 5.0% of the liquidation preference of $50 per security, and are convertible at any time prior to maturity into 66.667 million shares of AT&T common stock. The quarterly preferred securities are subject to mandatory redemption upon repayment of the debentures at maturity or their earlier redemption. The conversion feature can be terminated, under certain conditions, after three years. The debentures will make a quarterly payment in arrears of 62.5 cents per security on the last day of March, June, September and December of each year. AT&T has the right to defer such interest payments up to 20 consecutive quarters. As a consequence, quarterly dividend payments on the quarterly preferred securities can be deferred by the AT&T Trust during any such interest-payment period. If AT&T defers any interest payments, we may not, among other things, pay any dividends on our common stock until all interest in arrears is paid to the AT&T Trust. Dividends on the quarterly preferred securities were $250 and $135 for the years ended December 31, 2000 and 1999, respectively, and are reported within "Minority interest income (expense)" in the accompanying Consolidated Statements of Income. On June 16, 1999, AT&T also issued to Microsoft 40 million warrants, each to purchase one share of AT&T common stock at a price of $75 per share at the end of three years. Alternatively, the warrants are exercisable on a cashless basis. If the warrants are not exercised on the three-year anniversary of the closing date, the warrants expire. A discount on the quarterly preferred securities equal to the value of the warrants of $306 was recognized and is being amortized over the 30-year life of the quarterly preferred securities as a component of "Minority interest income (expense)" in the accompanying Consolidated Statements of Income. 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 primary 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 include the ATI shares, are available only to pay the creditors of MediaOne SPC II. These securities remained outstanding at December 31, 2000 as follows:
Dividend Rate Maturity Date Carrying Amount ------------- ------------- --------------- Series A.................................. Variable None $100 Series B.................................. 9.08% April 21, 2020 927 Series C.................................. None April 21, 2020 118 Total..................................... $1,145 ------
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 Series B shares rank equally with the Series C shares as to redemption payments and upon liquidation, and the Series B and Series C shares rank senior to the Series A shares as to redemption payments and upon liquidation. The preference shares issued by Centaur are reflected within "Minority interest" in the accompanying 2000 Consolidated Balance Sheet. Dividends on the preferred shares were $55 for the period ended December 31, 2000, and were included within "Minority interest income (expense)" in the Consolidated Statement of Income. 12. FINANCIAL INSTRUMENTS In the normal course of business, we use various financial instruments, including derivative financial instruments, for purposes other than trading. We do not use derivative financial instruments for speculative purposes. These instruments include letters of credit, guarantees of debt, interest rate swap agreements, foreign currency exchange contracts, option contracts and equity hedges. Collateral is generally not required for these types of instruments. By their nature, all such instruments involve risk, including the credit risk of nonperformance by counterparties, and our maximum potential loss may exceed the amount recognized in our balance sheet. However, at December 31, 2000 and 1999, in management's opinion, there was no significant risk of loss in the event of nonperformance of the counterparties to these financial instruments. We control our exposure to credit risk through credit approvals, credit limits and monitoring procedures. We do not have any significant exposure to any individual customer or counterparty, nor do we have any major concentration of credit risk related to any financial instruments. LETTERS OF CREDIT Letters of credit are purchased guarantees that ensure our performance or payment to third parties in accordance with specified terms and conditions. Letters of credit do not create any additional risk to AT&T. GUARANTEES OF DEBT From time to time, we guarantee the debt of our subsidiaries and certain unconsolidated joint ventures. Prior to the merger, TCI had agreed to take certain steps to support debt compliance with respect to obligations aggregating $1,461 and $1,720 at December 31, 2000 and 1999, respectively, of certain cable television partnerships in which TCI has a non-controlling ownership interest. Although there can be no assurance, management believes that it will not be required to meet its obligations under such guarantees. Additionally, in connection with the restructuring of AT&T in 1996, we issued guarantees for certain debt obligations of our former subsidiaries AT&T Capital Corp. and NCR. The amount of guaranteed debt associated with AT&T Capital Corp. and NCR was $48 and $56 at December 31, 2000 and 1999, respectively. INTEREST RATE SWAP AGREEMENTS We enter into interest rate swaps to manage our exposure to changes in interest rates and to lower our overall costs of financing. We enter into swap agreements to manage the fixed/floating mix of our debt portfolio in order to reduce aggregate risk to interest rate movements. Interest rate swaps also allow us to raise funds at floating rates and effectively swap them into fixed rates that are lower than those available to us if fixed-rate borrowings were made directly. These agreements involve the exchange of floating-rate for fixed-rate payments, fixed-rate for floating-rate payments or floating-rate for other floating-rate payments without the exchange of the underlying principal amount. Fixed interest rate payments at December 31, 2000, were at rates ranging from 6.05% to 8.20%. Floating-rate payments are based on rates tied to the LIBOR. In addition, we also have combined interest rate, foreign currency swap agreements for foreign-currency-denominated debt, which hedge our risk to both interest rate and currency movements. The following table indicates the types of swaps in use at December 31, 2000 and 1999, and their weighted-average interest rates. Average variable rates are those in effect at the reporting date and may change significantly over the lives of the contracts.
2000 1999 ---- ---- Fixed to variable swaps--notional amount........................................... $750 $1,800 Average receive rate............................................................ 8.16% 6.89% Average pay rate................................................................ 8.16% 6.67% Variable to fixed swaps--notional amount........................................... $218 $229 Average receive rate............................................................ 6.81% 6.30% Average pay rate................................................................ 7.31% 6.77% Variable to variable swaps--notional amount........................................ $739 $495 Average receive rate............................................................ 1.74% 6.63% Average pay rate................................................................ 5.42% 6.53%
The weighted-average remaining terms of the swap contracts were 11 and seven years at December 31, 2000 and 1999, respectively. FOREIGN EXCHANGE We enter into foreign currency exchange contracts, including forward and option contracts, to manage our exposure to changes in currency exchange rates related to foreign-currency-denominated transactions. In 2000, this consisted principally of Brazilian reais and Swiss francs related to debt. In 1999, this consisted principally of European Union currency (Euro), British pounds sterling and Japanese Yen contracts related to the reimbursement to foreign telephone companies for their portion of the revenue billed by AT&T for calls placed in the United States to a foreign country and other foreign currency payables and receivables. In addition, we are subject to foreign exchange risk related to other foreign-currency-denominated transactions. COLLARS We enter into option agreements to hedge our exposure on debt that is indexed to securities we own. During 2000, we entered into a series of purchased and written options related to a portion of our holdings in Microsoft stock (Microsoft collar), which is indexed to floating rate debt. The collar has been designated and is effective as a hedge of the market risk associated with our investment in Microsoft stock. The Microsoft collar is carried at fair value, with unrealized gains or losses, net of income taxes, being recorded within other comprehensive income as a component of shareowners' equity, together with any change in the fair value of the Microsoft stock. The carrying value of the Microsoft collar was $419 at December 31, 2000. At the expiration of the Microsoft collar, if the price of a Microsoft share is equal to or less than the put price of $62.48, we would exercise the put option and deliver all underlying shares of Microsoft common stock and receive cash equal in value to (i) the put price, multiplied by (ii) the underlying share amount. Alternatively, at our option, we can elect not to deliver the underlying shares and instead settle the put option by receiving cash equal in value to the (i) the difference between the put price minus the fair value of one Microsoft share, multiplied by (ii) the underlying share amount. If the price of a Microsoft share is greater then the call price, which range from $86.26 to $118.36, then the call option would be exercised and we would deliver all underlying shares and receive cash equal in value to (i) the call price, multiplied by (ii) the underlying share amount. At our option, we can elect not to deliver the underlying shares and instead settle the call option by paying cash equal in value to the (i) the difference between the call price minus the fair value of one Microsoft share, multiplied by (ii) the underlying share amount. Any cash received by AT&T from the exercise or settlement of either put or call option would be used to retire the floating rate debt. We would retain cash in excess of the call price from a call option exercise. If the price of a Microsoft share is between the put price and the call price, the collar will expire without value. Prior to our merger with MediaOne, two subsidiaries of MediaOne, MediaOne SPC IV and MediaOne SPC VI, entered into a series of purchased and written options (Vodafone collars) on Vodafone ADRs contributed to them by MediaOne, and issued floating rate debt. The Vodafone collars have been designated and are effective as a hedge of the market risk associated with our investment in Vodafone ADRs. The Vodafone collars are carried at fair value, with unrealized gains or losses, net of income taxes, 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 Vodafone collars was $453 at December 31, 2000. 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 Vodafone 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 Vodafone collar expires quarterly beginning in 2003 and ending in 2005. EQUITY HEDGES We enter into equity hedges to manage our exposure to changes in equity prices associated with stock appreciation rights of affiliated companies. FAIR VALUES OF FINANCIAL INSTRUMENTS INCLUDING DERIVATIVE FINANCIAL INSTRUMENTS The following table summarizes the notional amounts of material financial instruments. The notional amounts represent agreed-upon amounts on which calculations of dollars to be exchanged are based. They do not represent amounts exchanged by the parties and, therefore, are not a measure of our exposure. Our exposure is limited to the fair value of the contracts with a positive fair value plus interest receivable, if any, at the reporting date.
DERIVATIVES AND OFF BALANCE SHEET INSTRUMENTS 2000 1999 ---- ---- Contract/ Contract/ Notional Notional Amount Amount --------- --------- Interest rate swap agreements................................................ $968 $2,524 Combined interest rate foreign currency swap agreements...................... 739 -- Foreign exchange forward contracts........................................... 71 1,881 Option contracts............................................................. 3,108 -- Equity hedges................................................................ 392 495 Letters of credit............................................................ 852 243 Guarantees of debt........................................................... 1,607 1,848
The following tables show the valuation methods, the carrying amounts and estimated fair values of material financial instruments.
FINANCIAL INSTRUMENT VALUATION METHOD Debt excluding capital leases Market quotes or rates available to us for debt with similar terms and maturities Letters of credit Fees paid to obtain the obligations Guarantees of debt There are no quoted market prices for similar agreements available Interest rate swap agreements Market quotes obtained from dealers Combined interest rate foreign currency swap agreements Market quotes obtained from dealers Foreign exchange contracts Market quotes Option contracts Black-Scholes option-pricing model Equity hedges Market quotes Preferred securities Market quotes*
* It is not practicable to estimate the fair market value of our quarterly preferred securities that aggregated $4,710 and $4,700 at December 31, 2000 and 1999, respectively. There are no current market quotes available on this private placement. 2000 1999 ---- ---- Carrying Fair Carrying Fair Amount Value Amount Value -------- ----- -------- ----- Debt excluding capital leases..... $64,542 $61,686 $35,507 $34,092 Pacific preferred stock........... 2,121 595 2,121 1,929
2000 1999 ---- ---- Carrying Amount Fair Value Carrying Amount Fair Value --------------- ---------- --------------- ---------- Asset Liab. Asset Liab. Asset Liab. Asset Liab. ----- ----- ----- ----- ----- ----- ----- ----- Interest rate swap agreements......................... $4 $5 $4 $5 $28 $27 $6 $29 Combined interest rate foreign currency swap agreements 1 3 1 3 -- -- -- -- Foreign exchange forward contracts.................... -- 1 1 2 -- 26 1 28 Equity hedges......................................... 2 100 2 100 313 2 313 --
13. PENSION, POSTRETIREMENT AND OTHER EMPLOYEE BENEFIT PLANS We sponsor noncontributory, defined benefit pension plans covering the majority of our employees. Pension benefits for management employees are based principally on career-average pay. Pension benefits for occupational employees are not directly related to pay. Pension trust contributions are made to trust funds held for the sole benefit of plan participants. Our benefit plans for current and certain future retirees include health-care benefits, life insurance coverage and telephone concessions. The following table shows the components of the net periodic benefit costs included in our Consolidated Statements of Income:
Pension Benefits Postretirement Benefits ---------------- ----------------------- For the Years Ended December 31, 2000 1999 1998 2000 1999 1998 ---- ---- ---- ---- ---- ---- Service cost benefits earned during the period........... $248 $247 $275 $35 $54 $56 Interest cost on benefit obligations..................... 991 919 940 352 324 322 Amortization of unrecognized prior service cost.......... 174 159 135 4 13 (2) Credit for expected return on plan assets................ (1,821) (1,458) (1,570) (230) (200) (173) Amortization of transition asset......................... (156) (158) (175) -- -- -- Amortization of gains.................................... (332) (10) -- (16) (1) -- Charges for special termination benefits*................ -- -- 2,254 16 5 169 Net curtailment losses (gains)*.......................... 121 -- 140 (14) -- 141 Net settlement losses (gains)*........................... 8 (121) (921) -- -- -- Net periodic benefit (credit) cost....................... $(767) $(422) $1,078 $147 $195 $513
* Primarily included in "Net restructuring and other charges" in the Consolidated Statements of Income. On January 26, 1998, we offered a voluntary retirement incentive program (VRIP) to employees who were eligible participants in the AT&T Management Pension Plan. Approximately 15,300 management employees accepted the VRIP offer. In connection with the VRIP, we recorded pretax charges in 1998 for pension and postretirement plan special-termination benefits of $2,254 and $169, respectively. We also recorded pension and postretirement plan pretax charges of $120 and $143, respectively, which are included within net curtailment losses in 1998. The special-termination benefits reflect the value of pension benefit improvements and expanded eligibility for postretirement benefits. The VRIP also permitted employees to choose either a total lump-sum distribution of their pension benefits or periodic future annuity payments. As of December 31, 1999, all 15,300 employees had terminated employment under the VRIP. AT&T has settled the pension obligations covering about 15,100 of these employees, the remainder of which either chose to defer commencing their pension benefits or elected to receive an annuity distribution. Lump-sum pension settlements totaling $5.2 billion, including a portion of the special-pension termination benefits referred to above, resulted in settlement gains of $121 and $940 recorded in 1999 and 1998, respectively. The following tables provide a reconciliation of the changes in the plans' benefit obligations and fair value of assets, and a statement of the funded status:
Pension Benefits Postretirement Benefits ---------------- ----------------------- For the Years Ended December 31, 2000 1999 2000 1999 ---- ---- ---- ---- Change in benefit obligations: Benefit obligation, beginning of year.......................................... $12,868 $14,443 $4,642 $5,168 Service cost................................................................... 248 247 35 54 Interest cost.................................................................. 991 919 352 324 Plan amendments................................................................ 32 558 (45) 4 Actuarial losses (gains)....................................................... 5 (1,683) 203 (579) Acquisition.................................................................... 204 -- 38 -- Benefit payments............................................................... (1,228) (1,062) (362) (334) Special termination benefits................................................... -- -- 16 5 Settlements.................................................................... (57) (554) -- -- Curtailment losses............................................................. -- -- 7 -- Benefit obligation, end of year................................................ $13,063 $12,868 $4,886 $4,642 ------- ------- ------ ------ Change in fair value of plan assets: Fair value of plan assets, beginning of year................................... $21,854 $18,567 $2,852 $2,476 Actual return on plan assets................................................... 995 4,855 (128) 385 Employer contributions......................................................... 94 48 159 325 Acquisition.................................................................... 205 -- 5 -- Benefit payments............................................................... (1,228) (1,062) (362) (334) Settlements.................................................................... (57) (554) -- -- Fair value of plan assets, end of year......................................... $21,863 $21,854 $2,526 $2,852 ------- ------- ------ ------ At December 31, Funded (unfounded) benefit obligation.......................................... $8,800 $8,986 $(2,360) $(1,790) Unrecognized net gain.......................................................... (7,301) (8,457) (188) (800) Unrecognized transition asset.................................................. (123) (279) -- -- Unrecognized prior service cost................................................ 1,100 1,362 (9) 55 Net amount recorded............................................................ $2,476 $1,612 $(2,557) $(2,535) ------ ------ -------- --------
At December 31, 2000, our pension plan assets included $34 of AT&T common stock, $26 of Liberty Media Group Series A common stock, and $2 of AT&T Wireless Group common stock. At December 31, 1999, our pension plan assets included $82 of AT&T common stock and $34 of Liberty Media Group Series A common stock. The following table provides the amounts recorded in our Consolidated Balance Sheets:
Pension Benefits Postretirement Benefits ---------------- ----------------------- At December 31, 2000 1999 2000 1999 ---- ---- ---- ---- Prepaid pension cost............................................................. $3,003 $2,464 $-- $-- Benefit related liabilities...................................................... (579) (918) (2,557) (2,535) Intangible asset................................................................. 30 46 -- -- Accumulated other comprehensive income........................................... 22 20 -- -- Net amount recorded.............................................................. $2,476 $1,612 $(2,557) $(2,535) ------ ------ -------- --------
Our nonqualified pension plans had an unfunded accumulated benefit obligation of $125 and $118 at December 31, 2000 and 1999, respectively. Our postretirement health and telephone concession benefit plans had accumulated postretirement benefit obligations of $4,282 and $4,021 at December 31, 2000 and 1999, respectively, which were in excess of plan assets of $1,413 and $1,635 at December 31, 2000 and 1999, respectively. The assumptions used in the measurement of the pension and postretirement benefit obligations are shown in the following table:
At December 31, 2000 1999 1998 ---- ---- ---- Weighted-average assumptions: Discount rate................................ 7.5% 7.75% 6.5% Expected return on plan assets............... 9.5% 9.5% 9.5% Rate of compensation increase................ 4.5% 4.5% 4.5%
We assumed a rate of increase in the per capita cost of covered health-care benefits (the health-care cost trend rate) of 7.6%. This rate was assumed to gradually decline after 2000 to 4.5% by 2010 and then remain level. Assumed health-care cost trend rates have a significant effect on the amounts reported for the health-care plans. A one percentage point increase or decrease in the assumed health-care cost trend rate would increase or decrease the total of the service and interest-cost components of net periodic postretirement health-care benefit cost by $9 and $9, respectively, and would increase or decrease the health-care component of the accumulated postretirement benefit obligation by $125 and $122, respectively. We also sponsor savings plans for the majority of our employees. The plans allow employees to contribute a portion of their pretax and/or after-tax income in accordance with specified guidelines. We match a percentage of the employee contributions up to certain limits. Our contributions amounted to $280 in 2000, $234 in 1999 and $204 in 1998. 14. STOCK-BASED COMPENSATION PLANS Under the 1997 Long-term Incentive Program (Program), which was effective June 1, 1997, and amended on May 19, 1999 and March 14, 2000, we grant stock options, performance shares, restricted stock and other awards on AT&T common stock as well as stock options on AT&T Wireless Group tracking stock. Under the Program, there were 150 million shares of AT&T common stock available for grant with a maximum of 22.5 million common shares that could be used for awards other than stock options. Beginning with January 1, 2000, the remaining shares available for grant at December 31 of the prior year, plus 1.75% of the shares of AT&T common stock outstanding on January 1 of each year, become available for grant. There are a maximum of 37.5 million shares that may be used for awards other than stock options. The exercise price of any stock option is equal to the stock price when the option is granted. Generally, the options vest over three or four years and are exercisable up to 10 years from the date of grant. Under the Program, performance share units are awarded to key employees in the form of either common stock or cash at the end of a three-year period, based on AT&T's total shareholder return and certain financial-performance targets. Under the 1987 Long-term Incentive Program, performance share units with the same terms were also awarded to key employees based on AT&T's return-to-equity performance compared with a target. On April 27, 2000, AT&T created a new class of stock and completed an offering of AT&T Wireless Group tracking stock. Under the Program, 5% of the outstanding AT&T Wireless Group shares became available for grant with a maximum of 1.25% of the outstanding shares that may be used for awards other than options. Beginning with January 1, 2001, the remaining AT&T Wireless Group shares available for grant at December 31 of the prior year, plus 2% of the outstanding AT&T Wireless Group shares on January 1 of each year, become available for grant. The exercise price of any stock option is equal to the stock price when the option is granted. Generally, the options vest over two to three and one-half years and are exercisable up to 10 years from the date of grant. In 2000, there were no grants of awards other than stock options. On April 27, 2000, substantially all employees were granted AT&T Wireless Group tracking stock options. Under the AT&T 1996 Employee Stock Purchase Plan (Plan), which was effective July 1, 1996, we are authorized to sell up to 75 million shares of AT&T common stock to our eligible employees. Under the terms of the Plan, employees may have up to 10% of their earnings withheld to purchase AT&T's common stock. The purchase price of the stock on the date of exercise is 85% of the average high and low sale prices of shares on the New York Stock Exchange for that day. Under the Plan, we sold approximately 6 million shares to employees in 2000 and 3 million shares to employees in both 1999 and 1998. We apply APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for our plans. Accordingly, no compensation expense has been recognized for our stock-based compensation plans other than for our performance-based and restricted stock awards and stock appreciation rights (SARs). Stock based-compensation income (expense) was $253, $(462) and $(157) in 2000, 1999 and 1998, respectively. These amounts included income (expense) of $269 and $(382) in 2000 and 1999, respectively, related to grants of SARs of affiliated companies held by certain employees subsequent to the TCI merger. We also entered into an equity hedge in 1999 to offset potential future compensation costs associated with these SARs. (Expense) income related to this hedge was $(297) and $247 in 2000 and 1999, respectively. A summary of the AT&T common stock option transactions is shown below:
Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares in thousands 2000 Price 1999 Price 1998 Price ---- ----- ---- ----- ---- ----- Outstanding at January 1,........................ 168,763 $37.42 131,904 $30.41 110,972 $24.77 Options assumed in mergers....................... 29,613 $24.71 11,770 $14.79 -- -- Options granted.................................. 74,570 $36.12 47,927 $57.13 46,148 $41.69 Options and SARs exercised....................... (11,446) $22.07 (17,858) $22.87 (18,894) $21.95 Options canceled or forfeited.................... (12,474) $45.61 (4,980) $42.44 (6,322) $31.64 At December 31: Options outstanding.............................. 249,026 $35.82 168,763 $37.42 131,904 $30.41 Options exercisable.............................. 131,450 $30.44 57,894 $28.21 35,472 $23.13 Shares available for grant....................... 34,204 41,347 91,838
All of the 11.8 million stock options assumed in connection with the TCI merger were in tandem with SARs, which were canceled on April 30, 1999. During 1999, 386,000 SARs (including 137,000 for TCI) were exercised. At December 31, 2000, there were no AT&T SARs outstanding. The following table summarizes information about the AT&T common stock options outstanding at December 31, 2000:
Options Outstanding Options Exercisable ------------------- ------------------- Number Weighted- Exercisable Average Weighted- at Weighted- Number Outstanding Remaining Average December 31, Average Range of Exercise Prices at December 31, 2000 Contractual Life Exercise Price 2000 Exercise Price - ------------------------ -------------------- ---------------- -------------- ----------- -------------- (in thousands) (in thousands) $2.69 - $18.08....................... 21,182 5.0 $11.23 20,206 $10.99 $18.15 - $24.49...................... 16,914 6.2 $22.51 11,808 $22.57 $24.50............................... 15,451 6.6 $24.50 15,451 $24.50 $24.55 - $26.18...................... 8,664 6.2 $25.33 8,664 $25.33 $26.21............................... 17,299 6.1 $26.21 17,299 $26.21 $26.33 - $31.97...................... 20,246 6.6 $30.31 12,501 $29.98 $32.09............................... 25,551 9.6 $32.09 141 $32.09 $32.19 - $42.04...................... 26,908 8.5 $36.91 10,147 $39.57 $42.10............................... 26,975 7.1 $42.10 17,531 $42.10 $42.19 - $45.44...................... 20,017 9.1 $45.25 1,927 $44.45 $45.48 - $59.75...................... 23,581 8.6 $51.33 9,293 $50.40 $59.88 - $62.13...................... 26,238 8.1 $59.89 6,482 $59.89 249,026 7.5 $35.82 131,450 $30.44 -------------------- -----------
A summary of the AT&T Wireless Group tracking stock option transactions is shown below:
Weighted- Average Exercise Shares in thousands 2000 Price ---- --------- Outstanding at January 1,................................................................................ -- $-- Options granted.......................................................................................... 76,983 $29.29 Options exercised........................................................................................ -- $-- Options canceled or forfeited............................................................................ (3,357) $29.43 At December 31: Options outstanding...................................................................................... 73,626 $29.29 Options exercisable...................................................................................... 12,391 $29.48 Shares available for grant............................................................................... 41,874
The following table summarizes information about the AT&T Wireless Group tracking stock options outstanding at December 31, 2000:
Options Outstanding Options Exercisable ------------------- ------------------- Number Weighted- Exercisable Average Weighted- at Weighted- Number Outstanding at Remaining Average December 31, Average Range of Exercise Prices December 31, 2000 Contractual Life Exercise Price 2000 Exercise Price - ------------------------ ----------------- ---------------- -------------- ----- -------------- (in thousands) (in thousands) $17.06 - $21.00...................... 305 9.9 $17.91 -- $-- $24.47............................... 1,741 9.8 $24.47 -- $-- $26.00 - $28.53...................... 1,865 9.5 $27.62 122 $27.21 $29.50............................... 69,715 9.3 $29.50 12,269 $29.50 73,626 9.3 $29.29 12,391 $29.48 ------------ -------------
AT&T has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." If AT&T had elected to recognize compensation costs based on the fair value at the date of grant for awards in 2000, 1999 and 1998, consistent with the provisions of SFAS No. 123, net income and earnings per share amounts would have been as follows:
For the Years Ended December 31, 2000 1999 1998 ---- ---- ---- AT&T Common Stock Group: Income from continuing operations................................................................. $2,625 $5,193 $5,078 Income from discontinued operations............................................................... -- -- 7 Gain on sale of discontinued operations........................................................... -- -- 1,290 Extraordinary loss................................................................................ -- -- 137 Income............................................................................................ $2,625 $5,193 $6,238 Earnings per AT&T Common Stock Group common share-basic: Continuing operations............................................................................. $0.75 $1.68 $1.90 Discontinued operations........................................................................... -- -- -- Gain on sale of discontinued operations........................................................... -- -- 0.48 Extraordinary loss................................................................................ -- -- 0.05 AT&T Common Stock Group earnings.................................................................. $0.75 $1.68 $2.33 Earnings per AT&T Common Stock Group common share-diluted: Continuing operations............................................................................. $0.74 $1.65 $1.88 Discontinued operations........................................................................... -- -- -- Gains on sale of discontinued operations.......................................................... -- -- 0.48 Extraordinary loss................................................................................ -- -- 0.05 AT&T Common Stock Group earnings.................................................................. $0.74 $1.65 $2.31 AT&T Wireless Group: Income............................................................................................ $51 $-- $-- Earnings per share: Basic and diluted................................................................................. $0.14 $-- $--
The pro forma effect on net income for 1998 may not be representative of the pro forma effect on net income of future years because the SFAS No. 123 method of accounting for pro forma compensation expense has not been applied to options granted prior to January 1, 1995. The weighted-average fair values at date of grant for AT&T common stock options granted during 2000, 1999 and 1998 were $12.10, $15.64 and $9.75, respectively, and were estimated using the Black-Scholes option-pricing model. The weighted-average risk-free interest rates applied for 2000, 1999 and 1998 were 6.29%, 5.10% and 5.33%, respectively. The following assumptions were applied for 2000, 1999 and 1998, respectively: (i) expected dividend yields of 1.6%, 1.7% and 2.1%, (ii) expected volatility rates of 33.5%, 28.3% and 23.8% and (iii) expected lives of 4.7 years in 2000 and 4.5 years for 1999 and 1998. The weighted-average fair values at date of grant for AT&T Wireless Group tracking stock options granted during 2000 was $14.20 and was estimated using the Black-Scholes option-pricing model. The following weighted-average assumptions were applied for 2000: (i) risk-free rate of 6.53%, (ii) expected volatility rate of 55.0% and (iii) expected life of 3.9 years. 15. INCOME TAXES The following table shows the principal reasons for the difference between the effective income tax rate and the U.S. federal statutory income tax rate:
For the Years Ended December 31, 2000 1999 1998 ---- ---- ---- U.S. federal statutory income tax rate............................................................ 35% 35% 35% Federal income tax at statutory rate.............................................................. $913 $3,509 $2,920 Amortization of investment tax credits............................................................ (23) (10) (14) State and local income taxes, net of federal income tax effect.................................... 176 247 199 In-process research and development write-off..................................................... -- 208 -- Amortization of intangibles....................................................................... 111 43 28 Foreign rate differential......................................................................... 104 56 30 Taxes on repatriated and accumulated foreign income, net of tax credits........................... (84) (45) (36) Research and other credits........................................................................ (40) (64) (91) Valuation allowance............................................................................... -- (78) 37 Investment dispositions, acquisitions and legal entity restructurings............................. (477) (94) (153) Operating losses and charges relating to Excite@Home.............................................. 2,757 -- -- Other differences, net............................................................................ (95) (77) 129 Provision for income taxes........................................................................ $3,342 $3,695 $3,049 Effective income tax rate......................................................................... 128.1% 36.9% 36.6%
The U.S. and foreign components of income from continuing operations before income taxes and the provision for income taxes are presented in this table:
For the Years Ended December 31, 2000 1999 1998 ---- ---- ---- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES United States................................................................................... $3,014 $9,595 $8,047 Foreign......................................................................................... (406) 430 294 Total........................................................................................... $2,608 $10,025 $8,341 ------ ------- ------ PROVISION FOR INCOME TAXES CURRENT Federal...................................................................................... $1,878 $2,691 $2,784 State and local.............................................................................. 196 415 232 Foreign...................................................................................... 89 100 41 2,163 3,206 3,057 DEFERRED Federal...................................................................................... 1,136 527 (68) State and local.............................................................................. 71 (36) 74 Foreign...................................................................................... (5) 8 -- 1,202 499 6 Deferred investment tax credits................................................................. (23) (10) (14) Provision for income taxes...................................................................... $3,342 $3,695 $3,049 ------ ------ ------
- ----------- In addition, we also recorded current and deferred income tax expenses (benefits) related to minority interest and net equity losses on other equity investments in the amounts of $(154) and $(125) in 2000, $(94) and $(344) in 1999 and $143 and $(120) in 1998, respectively. Deferred income tax liabilities are taxes we expect to pay in future periods. Similarly, deferred income tax assets are recorded for expected reductions in taxes payable in future periods. Deferred income taxes arise because of differences in the book and tax bases of certain assets and liabilities. Deferred income tax liabilities and assets consist of the following:
At December 31, 2000 1999 ---- ---- LONG-TERM DEFERRED INCOME TAX LIABILITIES Property, plant and equipment.......................................................................... $9,123 $7,678 Investments............................................................................................ 10,716 7,304 Franchise costs........................................................................................ 18,571 11,998 Other.................................................................................................. 2,826 1,156 Total long-term deferred income tax liabilities........................................................ 41,236 28,136 LONG-TERM DEFERRED INCOME TAX ASSETS Business restructuring................................................................................. 127 120 Net operating loss/credit carryforwards................................................................ 710 710 Employee pensions and other benefits, net.............................................................. 1,470 1,359 Reserves and allowances................................................................................ 99 376 Other.................................................................................................. 2,867 1,603 Valuation allowance.................................................................................... (750) (231) Total net long-term deferred income tax assets............................................................ 4,523 3,937 Net long-term deferred income tax liabilities............................................................. $36,713 $24,199 ------- ------- CURRENT DEFERRED INCOME TAX LIABILITIES Investments............................................................................................ $670 $-- Other.................................................................................................. 309 427 Total current deferred income tax liabilities.......................................................... 979 427 CURRENT DEFERRED INCOME TAX ASSETS Business restructuring................................................................................. 155 47 Employee pensions and other benefits................................................................... 436 562 Reserves and allowances................................................................................ 639 682 Other.................................................................................................. 600 423 Valuation allowance.................................................................................... (39) -- Total net current deferred income tax assets.............................................................. 1,791 1,714 Net current deferred income tax assets.................................................................... $812 $1,287 ------- -------
At December 31, 2000, we had net operating loss carryforwards (tax-effected), excluding Excite@Home, for federal and state income tax purposes of $79 and $164, respectively, expiring through 2015. In addition, we had federal tax credit carryforwards of $145, of which $64 have no expiration date and $81 expire through 2005. We also had state tax credit carryforwards (tax-effected) of $32 expiring through 2003. In connection with the TCI merger, we acquired certain federal and state net operating loss carryforwards subject to a valuation allowance of $59. If, in the future, the realization of these acquired deferred tax assets becomes more likely than not, any reduction of the associated valuation allowance will be allocated to reduce franchise costs and other purchased intangibles. At December 31, 2000, Excite@Home had net operating loss carryforwards (tax effected) for federal and state income tax purposes of $290 expiring through 2020. Utilization of Excite@Home's net operating loss carryforwards may be subject to a minor annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of a portion of Excite@Home's net operating loss carryforwards before utilization. The realization of Excite@Home's net deferred tax asset is dependent upon Excite@Home's future earnings, if any, the timing and amount of which are uncertain. In addition, Excite@Home is a separate taxpayer and is not a member of the AT&T consolidated tax group. Accordingly, Excite@Home provided a valuation allowance in an amount equal to its net deferred tax assets of $702 as of December 31, 2000. Approximately $142 of Excite@Home's valuation allowance at December 31, 2000, is attributable to stock option deductions, the benefit of which will be credited to paid-in capital when realized. Approximately $269 of Excite@Home's valuation allowance at December 31, 2000, is attributable to deferred tax assets that, if realized, will be allocated to first reduce goodwill, then other purchased intangibles, and then income tax expense. On November 15, 2000, we announced our intention to split-off LMG. The split-off of LMG remains subject to the receipt of necessary approvals, including a favorable tax ruling from the IRS. Pursuant to the tax-sharing agreement dated March 9, 1999 between AT&T and LMG, in the event LMG is split-off, AT&T would be required to reimburse LMG approximately $830 for the value of certain TCI pre-acquisition net operating loss carryforwards. Also, in connection with a tax-sharing agreement between LMG and TCI that was executed prior to AT&T's acquisition of TCI, LMG would be obligated to pay AT&T approximately $138 upon its split-off from AT&T. 16. COMMITMENTS AND CONTINGENCIES In the normal course of business we are subject to proceedings, lawsuits and other claims, including proceedings under laws and regulations related to environmental and other matters. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. Consequently, we are unable to ascertain the ultimate aggregate amount of monetary liability or financial impact with respect to these matters at December 31, 2000. These matters could affect the operating results of any one quarter when resolved in future periods. However, we believe that after final disposition, any monetary liability or financial impact to us beyond that provided for at year-end would not be material to our annual consolidated financial statements. We lease land, buildings and equipment through contracts that expire in various years through 2037. Our rental expense under operating leases was $980 in 2000, $827 in 1999 and $742 in 1998. The total of minimum rentals to be received in the future under noncancelable operating subleases as of December 31, 2000, was $209. The following table shows our future minimum commitments due under noncancelable operating and capital leases at December 31, 2000: Operating Leases Capital Leases 2001........................................... $830 $149 2002........................................... 700 137 2003........................................... 602 87 2004........................................... 519 66 2005........................................... 413 63 Later years.................................... 1,218 175 Total minimum lease payments................... $4,282 677 ------ Less: Amount representing interest............. (179) Present value of net minimum lease payments.... $498 ----- AT&T has an agreement with Motorola, Inc. to purchase a minimum of 1.25 million digital set-top devices at an average price of $248 per unit in 2001. During 2000, AT&T satisfied its obligation under a previous agreement with Motorola, Inc. to purchase set-top devices. AT&T has entered into various purchase commitments for wireless network equipment and handsets. The commitments totaled $432 as of December 31, 2000, and extend through 2004. AT&T has committed to provide funding to a joint venture with other investors, Alaska Native Wireless (ANW), which was formed in November 2000 to participate in the Federal Communication Commission's recent license spectrum auction. The auction was concluded in January 2001 and ANW was the highest bidder on approximately $2.9 billion in licenses. AT&T has committed to fund approximately $2.6 billion to ANW to fund ANW's purchase of licenses. At December 31, 2000, AT&T had provided approximately $229 of funding and has committed to provide additional funding of approximately $2.4 billion consisting primarily of debt securities of ANW. At the fifth anniversary of the first date on which licenses are granted to ANW, the other owners of ANW have rights to require AT&T to purchase their equity interests. If such rights are exercised five years after the license grant date, the purchase price would be approximately $950 and would be payable, at our option, in either cash or marketable securities. In the event that these rights are exercised before the fifth anniversary, or in the event that the winning bid is rejected, or if any licenses granted to ANW are revoked or challenged, the amount that AT&T would be required to pay would be less than $950. Through a joint venture (70% owned by AT&T and 30% owned by BT), AT&T and BT have a 31% ownership of AT&T Canada Corp. as a result of the 1999 merger between AT&T Canada Corp. and MetroNet Communications, Corp. In connection with this merger, the AT&T and BT joint venture has the right to call, or arrange for another entity to call, the remaining 69% of AT&T Canada for the greater of Cdn$40.56 per share, which represented the projected value as of December 31, 2000, with an accretion of 4% each quarter that began on June 30, 2000, or the then-appraised fair market value. If we do not exercise our call rights by June 30, 2003, the shares would be put up for auction, and the AT&T and BT joint venture would have to make the shareholders whole for the difference between the proceeds received in auction and the greater of the fair market value or the accreted value. The exact timing of any purchase will likely be partially dependent upon the future status of Canadian foreign-ownership regulations. 17. 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 2000. Included in revenue for the year ended December 31, 2000, is $1,080, for services provided to Concert. Included in access and other connection expenses for the year ended December 31, 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 $2,364. During the first quarter of 2000, AT&T contributed property, plant and equipment of approximately $1,600 to Concert. AT&T also loaned $1,000 to Concert; that loan is included within "Other investments and related advances" in the accompanying 2000 Consolidated Balance Sheet. Interest income of $67 was recognized for the year ended December 31, 2000. At December 31, 2000, AT&T had a floating rate loan payable to Concert in the amount of $126. The loan, which is due on demand, is included in "Debt maturing within one year" in the accompanying Consolidated Balance Sheet. Interest expense was $6 for the year ended December 31, 2000. Included in accounts receivable and accounts payable at December 31, 2000, was $462 and $518, respectively, related to transactions with Concert. Included in other receivables and other current liabilities at December 31, 2000, was $1,106 and $1,032, respectively, related to transactions associated with Concert. In addition, we had various related party transactions with LMG. Included in costs of services and products were programming expenses related to services from LMG. These expenses amounted to $239 for the year ended December 31, 2000 and $184 for the 10 months ended December 31, 1999, respectively. Included in "Investment in Liberty Media Group and related receivables, net" was $155 and $27 at December 31, 2000 and 1999, respectively, primarily related to taxes pursuant to a tax-sharing agreement between LMG and Broadband. That agreement existed prior to the TCI merger. 18. 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 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 the Business Services segment is AT&T Solutions, our outsourcing and network-management business. 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 prepaid calling card and operator-handled calling services. Local phone service is also provided in certain areas. 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 services. Fixed wireless provides high-speed Internet access and any-distance voice services using wireless technology to residential and small business customers. Our Broadband segment offers a variety of services through our cable broadband network, including traditional analog video and new services such as digital video, high-speed data and broadband telephony. The balance of AT&T's operations (excluding LMG) is included in a "Corporate and Other" category. This category reflects corporate staff functions and the elimination of transactions between segments, as well as the results of Excite@Home and international operations and ventures. LMG is not an operating segment of AT&T because AT&T does not have a controlling financial interest in LMG for financial accounting purposes. Therefore, we account for this investment under the equity method. Additionally, LMG's results are not reviewed by the chief operating decision-makers for purposes of determining resources to be allocated. Total assets for our reportable segments generally include all assets, except intercompany receivables. However, our Wireless Services segment included intercompany receivables from AT&T and the related interest income since these assets relate to the results of the AT&T Wireless Group tracked business. 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 category. 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. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 1). AT&T evaluates performance based on several factors, of which the primary financial measure is earnings before interest and taxes, including pretax minority interest and net pretax losses from other equity investments (EBIT). Generally, AT&T accounts for Business Services' and Broadband's intersegment transactions at market prices. REVENUE
For the Years Ended December 31, 2000 1999 1998 ---- ---- ---- Business Services external revenue......................................................... $27,691 $26,749 $23,807 Business Services internal revenue......................................................... 797 731 478 Total Business Services revenue............................................................... 28,488 27,480 24,285 Consumer Services external revenue............................................................ 18,976 21,854 22,885 Wireless Services external revenue............................................................ 10,448 7,627 5,406 Broadband external revenue................................................................. 8,203 5,069 -- Broadband internal revenue................................................................. 14 1 -- Total Broadband revenue....................................................................... 8,217 5,070 -- Total reportable segments............................................................... 66,129 62,031 52,576 Corporate and Other........................................................................... (148) 569 647 Total revenue................................................................................. $65,981 $62,600 $53,223 ------- ------- -------
DEPRECIATION AND AMORTIZATION*
For the Years Ended December 31, 2000 1999 1998 ---- ---- ---- Business Services............................................................................. $3,714 $3,352 $2,554 Consumer Services............................................................................. 561 783 693 Wireless Services............................................................................. 1,678 1,246 1,051 Broadband..................................................................................... 3,068 1,636 -- Total reportable segments............................................................... 9,021 7,017 4,298 Corporate and Other........................................................................... 1,246 422 331 Total depreciation and amortization........................................................... $10,267 $7,439 $4,629 ------- ------ ------
* Includes the amortization of goodwill, franchise costs and other purchased intangibles. EARNINGS (LOSSES) FROM OTHER EQUITY INVESTMENTS
For the Years Ended December 31, 2000 1999 1998 ---- ---- ---- Wireless Services............................................................................. $382 $(10) $30 Broadband..................................................................................... (215) (396) -- Total reportable segments............................................................... 167 (406) 30 Corporate and Other........................................................................... (372) (359) (108) Total net losses from other equity investments................................................ $(205) $(765) $(78) ------ ------ -----
RECONCILIATION OF EBIT TO INCOME BEFORE INCOME TAXES
For the Years Ended December 31, 2000 1999 1998 ---- ---- ---- Business Services.......................................................................... $6,548 $6,136 $4,994 Consumer Services.......................................................................... 7,090 7,909 6,570 Wireless Services.......................................................................... 1,131 (473) 418 Broadband.................................................................................. (1,175) (1,475) -- Total reportable segments............................................................ 13,594 12,097 11,982 Corporate and Other........................................................................ (4,167) (1,625) (3,248) Less: Pretax minority interest income (expense)............................................ 4,031 (163) 34 Add: Pretax losses from other equity investments........................................... 395 1,155 68 Interest expense........................................................................... (3,183) (1,765) (427) Total income before income taxes........................................................... $2,608 $10,025 $8,341 ------ ------- ------
ASSETS
At December 31, 2000 1999 1998 ---- ---- ---- Business Services.......................................................................... $34,804 $32,010 $22,189 Consumer Services.......................................................................... 4,801 6,279 6,185 Wireless Services.......................................................................... 35,184 23,312 19,416 Broadband.................................................................................. 114,681 53,810 -- Total reportable segments............................................................... 189,470 115,411 47,790 Corporate and Other assets: Other segments.......................................................................... 6,892 3,386 3,016 Prepaid pension costs................................................................... 3,003 2,464 2,074 Deferred income taxes................................................................... 720 899 1,156 Other corporate assets.................................................................. 7,848 8,786 5,514 Investment in Liberty Media Group and related receivables, net............................. 34,290 38,460 -- Total assets............................................................................... $242,223 $169,406 $59,550 -------- -------- -------
EQUITY INVESTMENTS (EXCLUDING LMG)
At December 31, 2000 1999 1998 ---- ---- ---- Wireless Services.......................................................................... $3,080 $4,409 $3,766 Broadband.................................................................................. 6,470 10,327 -- Total reportable segments............................................................... 9,550 14,736 3,766 Corporate and Other........................................................................ 4,074 3,718 491 Total equity investments................................................................... $13,624 $18,454 $4,257 ------- ------- ------
CAPITAL ADDITIONS
For the Years Ended December 31, 2000 1999 1998 ---- ---- ---- Business Services......................................................................... $6,223 $7,511 $6,130 Consumer Services......................................................................... 302 656 459 Wireless Services......................................................................... 5,553 2,739 2,395 Broadband................................................................................. 4,963 4,759 -- Total reportable segments.............................................................. 17,041 15,665 8,984 Corporate and Other....................................................................... 2,150 1,494 594 Total capital additions................................................................... $19,191 $17,159 $9,578 ------- ------- ------
Geographic information is not presented due to the immateriality of revenue attributable to international customers. Reflecting the dynamics of our business, we continually review our management model and structure and make adjustments accordingly. 19. 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 December 31, 2000, $1,246 of the guaranteed redeemable preferred securities remained outstanding. MediaOne Securities: Prior to the consummation of the MediaOne merger, MediaOne issued mandatorily redeemable preferred securities through subsidiary trusts that held subordinated debt securities of MediaOne. At December 31, 2000, $776 of the guaranteed securities remained outstanding. AT&T provides a full and unconditional guarantee on the outstanding securities issued by TCI Communications Financing I, II and IV and the outstanding securities issued by MediaOne Financing I and II and MediaOne Finance II and III. Following are the condensed consolidating financial statements of AT&T Corp., which include the financial results of TCI and MediaOne for each of the corresponding periods. The results of MediaOne have been included in the financial results of AT&T since the date of acquisition on June 15, 2000, and the results of TCI have been included since the March 9, 1999, date of acquisition. CONSOLIDATING CONDENSED BALANCE SHEET As of December 31, 2000
Guarantor Guarantor Guarantor TCI TCI TCI Media- Media- Media- Media- Non- Elimination Consol- AT&T Subsidiary Subsidiary Finan- Finan- Finan- One One One Fin One Guaran- and idated Parent TCI MediaOne cing cing cing Finan Finan ance Finance tor Consolidation AT&T I II IV cing I cing II II III Subsidiaries Adjustments Corp. ------- --- -------- ---- ---- --- ----- ------ ---- --- --------- --------- ------ ASSETS Cash and cash $126 $126 equivalents......... Receivables........... 11,424 2,577 78 50,788 (52,020) 12,847 Investments........... 2,102 2,102 Deferred income taxes. 811 1 812 Other current assets.. 1,103 11 90 (4) 1,200 TOTAL CURRENT ASSETS.. 13,338 2,588 78 53,107 (52,024) 17,087 Property, plant & 9,064 93 22 41,985 (3) 51,161 equipment, net...... Franchise costs, net.. 838 47,380 48,218 Licensing costs, net.. 30 13,596 13,626 Goodwill, net......... 161 19,786 11,531 31,478 Investment in Liberty Media Group and 34,290 34,290 related receivables, net.... Other investments and 164,844 35,358 29,325 23,059 (218,325) 34,261 related advances.... Other assets.......... 5,500 528 514 204 51 44 230 516 17,020 (12,505) 12,102 TOTAL ASSETS.......... $193,745 $72,359 $49,211 $528 $514 $204 $51 $44 $230 $516 $207,678 $(282,857) $242,223 LIABILITIES Debt maturing within $52,556 $435 $2,337 $6,409 $(29,790) $31,947 one year............ Liability under put 2,564 2,564 options............. Other current 9,535 1,166 76 13,972 (8,393) 16,356 liabilities......... TOTAL CURRENT 62,091 1,601 2,413 22,945 (38,183) 50,867 LIABILITIES......... Long-term debt........ 21,333 30,096 2,168 528 514 204 30 28 214 504 3,895 (26,422) 33,092 Deferred income taxes. 569 230 35,914 36,713 Other long-term liabilities and 7,341 939 129 431 (80) 8,760 deferred credits.... TOTAL LIABILITIES..... 91,334 32,636 4,940 528 514 204 30 28 214 504 63,185 (64,685) 129,432 Minority interest..... 1,462 1,147 2,274 4,883 Company-Obligated Convertible Quarterly Income Preferred 4,710 4,710 Securities of a Subsidiary Trust Holding Solely Subordinated Debt Securities of AT&T.. SHAREOWNERS' EQUITY AT&T Common Stock..... 4,176 (416) 3,760 AT&T Wireless Group 362 362 common stock........ Liberty Media Group 2,364 2,364 Class A Common Stock Liberty Media Group 206 206 Class B Common Stock Other shareowners' 90,593 38,261 43,124 21 16 16 12 142,635 (218,172) 96,506 equity.............. TOTAL SHAREOWNERS' 97,701 38,261 43,124 21 16 16 12 142,219 (218,172) 103,198 EQUITY.............. TOTAL LIABILITIES AND SHAREOWNERS' EQUITY. $193,745 $72,359 $49,211 $528 $514 $204 $51 $44 $230 $516 $207,678 $(282,857) $242,223
CONSOLIDATING CONDENSED INCOME STATEMENT For the year ended December 31, 2000
Guarantor Guarantor Guarantor TCI TCI TCI Media- Media- Media- Media- Non- Elimination Consol- AT&T Subsidiary Subsidiary Finan- Finan- Finan- One One One Fin One Guaran- and idated Parent TCI MediaOne cing cing cing Finan Finan ance Finance tor Consolidation AT&T I II IV cing I cing II II III Subsidiaries Adjustments Corp. ------- --- -------- ---- ---- --- ----- ------ ---- --- --------- --------- ------- Revenue......................... $22,234 $0 $0 $45,834 $(2,087) $65,981 Operating Expenses Costs of services and products.. 2,961 6 16,359 (1,739) 17,587 Access and other connection..... 7,047 6,803 (332) 13,518 Selling, general and 2,071 (378) 29 11,597 (16) 13,303 administrative................ Depreciation and other 1,791 45 7 5,431 7,274 amortization.................. Amortization of goodwill, franchise costs and other 50 3 226 2,714 2,993 purchased intangibles......... Net restructuring and other 443 60 6,526 7,029 charges....................... Total operating expenses........ 14,363 (264) 262 49,430 (2,087) 61,704 Operating income (loss)......... 7,871 264 (262) (3,596) 0 4,277 Other income (expense).......... 971 30 64 43 46 18 2 2 11 25 4,749 (4,447) 1,514 Interest expense (benefit)...... 4,786 1,974 194 43 46 18 1 1 11 24 421 (4,336) 3,183 Income (loss) before income taxes, minority interest and earnings (losses) from equity 4,056 (1,680) (392) 0 0 0 1 1 0 1 732 (111) 2,608 investments................... Provision (benefit) for income 1,505 (72) (46) 1 1,954 3,342 taxes......................... Minority interest income (161) (23) 4,304 4,120 (expenses).................... Equity earnings from Liberty 1,488 1,488 Media Group................... Net earnings (losses) from other equity investments...... 5,371 (2,437) (168) (203) (2,768) (205) Net income (loss)............... 7,761 (2,580) (514) 0 0 0 1 1 0 0 2,879 (2,879) 4,669 Dividend requirements on preferred stock held by AT&T, 111 (111) 0 net........................... Net income (loss) after preferred stock dividends..... $7,761 $(2,580)$(514) $0 $0 $0 $1 $1 $0 $0 $2,768 $(2,768) $4,669
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS For the year ended December 31, 2000
Guarantor Guarantor Guarantor TCI TCI TCI Media- Media- Media- Media- Non- Elimination Consol- AT&T Subsidiary Subsidiary Finan- Finan- Finan- One One One Fin One Guaran- and idated Parent TCI MediaOne cing cing cing Finan Finan ance Finance tor Consolidation AT&T I II IV cing I cing II II III Subsidiaries Adjustments Corp. ------- --- -------- ---- ---- --- ----- ------ ---- --- --------- --------- ------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES... $3,131 $(634) $1,792 $43 $53 $31 $2 $2 $11 $25 $9,129 $(278) $13,307 INVESTING ACTIVITIES Capital expenditures and (51) (10) (21) (14,842) (14,924) other additions............ Equity investment 363 989 1,352 distributions and sales.... Equity investment contributions and purchases (1,700) (6,904) (1,712) 6,904 (3,412) Net acquisitions of businesses including cash (23,943) 2,533 (21,410) acquired................... Other........................ (2,057) (34) (6,376) 6,927 (1,540) NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES.... (27,388)(6,948) (21) 0 0 0 0 0 0 0 (19,408) 13,831 (39,934) FINANCING ACTIVITIES Proceeds from long-term debt 739 3,862 4,601 issuances.................. Proceeds from debt from AT&T. 5,867 13,715 4,898 (24,480) 0 Retirement of long-term debt. (498) (1,143) (477) (2,118) Retirement of AT&T debt...... (4,990) (1,500) 6,490 0 Issuance of AT&T Wireless Group common stock......... 10,314 10,314 Dividends paid............... (3,047) (3,047) Increase in short-term 12,108 (271) 977 4,159 16,973 borrowings, net............ Other........................ (830) (43) (53) (31) (2) (2) (11) (25) (275) 278 (994) NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES... 24,653 7,582 (1,771) (43) (53) (31) (2) (2) (11) (25) 8,985 (13,553) 25,729 Net (decrease) increase in cash and cash equivalents.. 396 0 0 0 0 0 0 0 0 0 (1,294) 0 (898) Cash and cash equivalents at beginning of year.......... (396) 1,420 1,024 Cash and cash equivalents at end of period.............. $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $126 $0 $126
CONSOLIDATING CONDENSED BALANCE SHEET As of December 31, 1999
Guarantor Guarantor TCI TCI TCI Non- Elimination AT&T Subsidiary Finan- Finan-cinFinancing Guarantor and Parent TCI cing I II IV Subsidiarie Consolidation Consolidated Adjustments AT&T Corp. ----- --- ------ -- -- ----------- ---------- ---------- ASSETS Cash and cash equivalents......... $1,024 $1,024 Receivables....................... 12,513 5 42,270 (44,335) 10,453 Deferred income taxes............. 945 342 1,287 Other current assets.............. 381 3 741 (5) 1,120 TOTAL CURRENT ASSETS.............. 13,839 8 44,377 (44,340) 13,884 Property, plant & equipment, net.. 10,974 128 28,516 39,618 Franchise costs, net.............. 33 32,660 32,693 Licensing costs, net.............. 38 8,510 8,548 Goodwill, net..................... 88 7,357 7,445 Investment in Liberty Media Group and related receivables, net.... 38,460 38,460 Other investments and related 111,056 35,694 23,338 (150,722) 19,366 advances........................ Other assets...................... 5,105 528 521 217 9,809 (6,788) 9,392 TOTAL ASSETS...................... $141,100 $74,323 $528 $521 $217 $154,567 $(201,850) $169,406 LIABILITIES Debt maturing within one year..... $40,246 $1,136 $6,141 $(34,890) $12,633 Other current liabilities......... 6,319 1,262 16,097 (8,104) 15,574 TOTAL CURRENT LIABILITIES......... 46,565 2,398 22,238 (42,994) 28,207 Long-term debt.................... 13,429 18,873 528 521 217 891 (11,242) 23,217 Deferred income taxes............. 78 24,121 24,199 Other long-term liabilities & 6,600 333 935 (103) 7,765 deferred credits................ TOTAL LIABILITIES................. 66,672 21,604 528 521 217 48,185 (54,339) 83,388 Minority Interest................. 5 1,462 924 2,391 Company-Obligated Convertible Quarterly Income Preferred Securities of a Subsidiary Trust Holding Solely Subordinated Debt 4,700 4,700 Securities of AT&T.............. SHAREOWNERS' EQUITY AT&T Common Stock................. 3,483 (287) 3,196 Liberty Media Group Class A Common 2,314 2,314 Stock........................... Liberty Media Group Class B Common 217 217 Stock........................... Other Shareowners' Equity......... 63,709 51,257 105,745 (147,511) 73,200 TOTAL SHAREOWNERS' EQUITY......... 69,723 51,257 105,458 (147,511) 78,927 TOTAL LIABILITIES AND SHAREOWNERS' EQUITY.......................... $141,100 $74,323 $528 $521 $217 $154,567 $(201,850) $169,406
CONSOLIDATING CONDENSED INCOME STATEMENT For the year ended December 31, 1999
Guarantor Guarantor TCI TCI TCI Non- Elimination AT&T Subsidiary Finan- Finan-cinFinancing Guarantor and Parent TCI cing I II IV Subsidiarie Consolidation Consolidated Adjustments AT&T Corp. ----- --- ------ -- -- ----------- ---------- ------- Revenue........................... $24,755 $0 $39,506 $(1,661) $62,600 Operating Expenses Costs of services and products.... 1,536 (59) 14,372 (1,255) 14,594 Access and other connection....... 8,403 6,479 (196) 14,686 Selling, general and administrative 4,363 380 8,777 (4) 13,516 Depreciation and other amortization 2,056 56 4,026 6,138 Amortization of goodwill, franchise costs and other purchased 34 4 1,263 1,301 intangibles..................... Net restructuring and other charges 18 440 1,048 1,506 Total operating expenses.......... 16,410 821 35,965 (1,455) 51,741 Operating income (loss)........... 8,345 (821) 3,541 (206) 10,859 Other income (expense)............ 539 (33) 36 40 16 2,916 (2,583) 931 Interest expense (benefit)........ 3,186 1,008 36 40 16 268 (2,789) 1,765 Income (loss) before income taxes, minority interest and earnings (losses) from equity investments 5,698 (1,862) 0 0 0 6,189 0 10,025 Provision (benefit) for income taxes 2,118 (1,580) 3,157 3,695 Minority interest income (expense) (87) (14) (14) (115) Equity loss from Liberty Media Group 2,022 2,022 Net earnings (losses) from other equity investments.............. 4,155 (1,902) (788) (2,230) (765) Net income (loss)................. $7,648 $(4,220) $0 $0 $0 $2,230 $(2,230) $3,428
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS For the year ended December 31, 1999
Guarantor Guarantor TCI TCI TCI Non- Elimination AT&T Subsidiary Finan- Finan-cinFinancing Guarantor and Parent TCI cing I II IV Subsidiarie Consolidation Consolidated Adjustments AT&T Corp. ----- --- ------ -- -- ----------- ---------- ------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES............ $2,672 $(2,807) $44 $75 $24 $11,370 $143 $11,521 INVESTING ACTIVITIES Capital expenditures and other (1,733) (60) (12,227) (14,020) additions....................... Equity investment distributions and 61 1,814 1,875 sales........................... Equity investment contributions and (5,473) (2,648) (8,121) purchases....................... Net acquisitions of businesses including cash acquired......... (6,405) (306) (6,711) Other............................. (203) (130) (16,343) 16,610 (66) NET CASH (USED IN) PROVIDED BY IVESTING ACTIVITIES............. (13,753) (190) 0 0 0 (29,710) 16,610 (27,043) FINANCING ACTIVITIES Proceeds from long-term debt 8,396 8,396 issuances....................... Proceeds from debt from AT&T...... 6,176 5,055 (11,231) 0 Retirement of long-term debt...... (1,014) (1,070) (723) (2,807) Retirement of AT&T debt........... (2,109) 2,109 0 Issuance of AT&T convertible 4,694 (56) 4,638 securities Net acquisitions of treasury shares (4,624) (4,624) Dividends paid.................... (2,685) (27) (2,712) Increase in short-term borrowings, 19,154 (1,142) (7,774) 10,238 net............................. Other............................. (13,215) 0 (44) (75) (24) 13,472 143 257 NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES............ 10,706 2,997 (44) (75) (24) 16,579 (16,753) 13,386 Net (decrease) in cash and cash (375) 0 0 0 0 (1,761) 0 (2,136) equivalents..................... Cash and cash equivalents at 375 2,785 3,160 beginning of year............... Cash and cash equivalents at end of $0 $0 $0 $0 $0 $1,024 $0 $1,024 period..........................
20. CONSOLIDATING CONDENSED FINANCIAL INFORMATION In conjunction with the issuance of AT&T Wireless Group and Liberty Media Group tracking stocks, AT&T has separated for financial reporting purposes in all periods the AT&T Common Stock Group, Liberty Media Group and AT&T Wireless Group. Below is the consolidating financial information reflecting the businesses of these individual groups, including the allocation of expenses between the groups in accordance with our allocation policies, as well as other related party transactions such as sales of services between groups and interest income and expense on intercompany borrowings. The AT&T Common Stock Group presented below excludes its retained portion of the value of AT&T Wireless Group. AT&T does not have a controlling financial interest in LMG for financial accounting purposes; therefore, our ownership in LMG is reflected as an investment accounted for under the equity method and is reflected as such in the consolidating financial statements below. AT&T Wireless Group, purchases long distance and other network-related services from AT&T at market-based prices and accordingly such amounts are eliminated. Prior to the offering of AT&T Wireless Group tracking stock, the capital structure of AT&T Wireless Group had been assumed based upon AT&T's historical capital ratio adjusted for certain items. Intercompany interest rates are intended to be substantially equivalent to the interest rate that AT&T Wireless Group would be able to obtain or receive if it were a stand-alone entity. General corporate overhead related to AT&T's corporate headquarters and common support divisions has been allocated to AT&T Wireless Group based on the ratio of AT&T Wireless Group's external costs and expenses to AT&T's consolidated external costs and expenses, adjusted for any functions that AT&T Wireless Group performs on its own. The consolidated income tax provision, related tax payments or refunds, and deferred tax balances of AT&T have been alloated to AT&T Wireless Group based principally on the taxable income and tax credits directly attributable to AT&T Wireless Group. Pursuant to the Inter-Group agreement, AT&T does not allocate general overhead expenses to Libery Media Group and only charges Liberty Media Group for specific services that Liberty Media Group receives from AT&T pursuant to service agreements or similar arrangements. Additionally, as Liberty Media Group operates independent of AT&T, there is no cash or debt allocated to them. Condensed Income Statement For the year ended December 31, 2000
AT&T AT&T Common Stock Wireless Liberty Media Eliminations/ Group Group Group Reclassifications(1) Consolidated AT&T Corp. ----- ----- ----- -------------------- ----------------------- External Revenue............. $55,533 $10,448 $ $ $65,981 Inter-group revenue.......... 321 (321) Total Revenue................ 55,854 10,448 (321) $65,981 Operating Expenses Costs of services and products 13,001 4,969 (383) 17,587 Access and other connection.. 13,140 378 13,518 Selling, general and administrative............ 10,001 3,302 13,303 Depreciation and other amortization.............. 5,923 1,686 (335) 7,274 Amortization of goodwill, franchise costs and other purchased intangibles..... 2,665 328 2,993 Net restructuring and other charges................... 7,029 7,029 Inter-group expenses......... (208) 529 (321) Total operating expenses..... 51,551 10,486 (333) 61,704 Operating income (loss)...... 4,303 (38) 12 4,277 Other income (expense)....... 1,150 391 (27) 1,514 Inter-group interest income.. 326 143 (469) Interest expense............. 3,294 (111) 3,183 Inter-group interest expense. 143 196 (339) Income before income taxes, minority interest and earnings (losses) from equity investments........ 2,342 411 (145) 2,608 Provision for income taxes... 3,199 141 2 3,342 Minority interest income..... 4,092 28 4,120 Equity earnings from Liberty Media Group............... 1,488 1,488 Net earnings (losses) from other equity investments.. (585) 388 (8) (205) Net income................... 2,650 658 1,488 (127) 4,669 Dividend requirements on preferred stock held by AT&T, net................. 130 (130) Net income after preferred stock dividends........... $2,650 $528 $1,488 $3 $4,669
- ----------- (1) Includes the elimination of inter-group transactions, consolidating entries as well as reclassifications and adjustments related to AT&T Wireless Group tracking stock. Consolidating Condensed Balance Sheet As of December 31, 2000
AT&T AT&T Common Stock Wireless Liberty Media Eliminations/ Group Group Group Reclassifications(1) Consolidated AT&T Corp. ----- ----- ----- -------------------- ----------------------- ASSETS Cash and cash equivalents.... $64 $62 $ $ $126 Receivables.................. 11,053 2,010 (216) 12,847 Deferred income taxes........ 719 93 812 Other current assets......... 2,890 417 (5) 3,302 Short-term note due from related party............. 638 (638) TOTAL CURRENT ASSETS......... 15,364 2,582 (859) 17,087 Property, plant and equipment, net....................... 41,269 9,892 51,161 Franchise costs, net......... 48,218 48,218 Licensing costs, net......... 13,627 (1) 13,626 Goodwill, net................ 26,782 5,816 (1,120) 31,478 Investment in Liberty Media Group and related receivables, net.......... 34,290 34,290 Other investments and related advances.................. 30,876 3,385 34,261 Other assets................. 10,984 1,118 12,102 Long-term assets due from related party............. 4,800 (4,800) TOTAL ASSETS................. $178,293 $35,302 $34,290 $(5,662) $242,223 LIABILITIES Debt maturing within one year $31,838 $109 $ $ $31,947 Short-term debt due to related party..................... 638 (638) Liability under put options.. 2,564 2,564 Other current liabilities.... 13,709 2,907 (260) 16,356 TOTAL CURRENT LIABILITIES.... 48,111 3,654 (898) 50,867 Long-term debt............... 33,089 3 33,092 Long-term debt due to related party..................... 1,800 (1,800) Deferred income taxes........ 32,054 4,659 36,713 Other long-term liabilities and deferred credits...... 8,493 271 (4) 8,760 TOTAL LIABILITIES............ 121,747 10,384 (2,699) 129,432
- ----------- (1) Includes the elimination of inter-group transactions, consolidating entries as well as reclassifications and adjustments related to AT&T Wireless Group tracking stock. Consolidating Condensed Balance Sheet As of December 31, 2000
AT&T AT&T Common Stock Wireless Liberty Media Eliminations/ Group Group Group Reclassifications(1) Consolidated AT&T Corp. ----- ----- ----- -------------------- ----------------------- Minority Interest............ 4,842 41 4,883 Company-Obligated Convertible Quarterly Income Preferred Securities of a Subsidiary Trust Holding Solely Subordinated Debt Securities of AT&T................... 4,710 4,710 SHAREOWNERS' EQUITY AT&T Common Stock............ 3,760 3,760 AT&T Wireless Group Common Stock..................... 362 362 Liberty Media Group Class A Common Stock.............. 2,364 2,364 Liberty Media Group Class B Common Stock.............. 206 206 Other shareowners' equity.... 46,994 21,877 34,290 (6,655) 96,506 Other shareowners' equity due to related party.......... 3,000 (3,000) TOTAL SHAREOWNERS' EQUITY.... 46,994 24,877 34,290 (2,963) 103,198 TOTAL LIABILITIES AND SHAREOWNERS' EQUITY....... $178,293 $35,302 $34,290 $(5,662) $242,223
- ----------- (1) Includes the elimination of inter-group transactions, consolidating entries as well as reclassifications and adjustments related to AT&T Wireless Group tracking stock. Consolidating Condensed Statement of Cash Flows
For the year ended December 31, 2000 AT&T AT&T Common Stock Wireless Liberty Media Eliminations/ Consolidated Group Group Group Reclassifications(1) AT&T Corp. ----- ----- ----- -------------------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES.... $11,684 $1,635 $ $(12) $13,307 INVESTING ACTIVITIES Capital expenditures and other additions......... (10,912) (4,012) (14,924) Equity investment distributions and sales. 992 360 1,352 Equity investment contributions and purchases............... (1,767) (1,645) (3,412) Net acquisitions of businesses including cash acquired................ (16,647) (4,763) (21,410) Other...................... (2,113) (465) 1,038 (1,540) NET CASH USED IN INVESTING ACTIVITIES.............. (30,447) (10,525) 1,038 (39,934) FINANCING ACTIVITIES Proceeds from long-term debt issuance................ 4,601 4,601 Retirement of long-term debt (2,118) (2,118) Issuance of AT&T Wireless Group common stock...... 3,314 7,000 10,314 Dividends paid............. (3,047) (3,047) Increase in short-term borrowings, net......... 17,009 638 (674) 16,973 Other...................... (1,951) 1,309 (352) (994) NET CASH PROVIDED BY FINANCING ACTIVITIES.... 17,808 8,947 (1,026) 25,729 Net (decrease) increase in cash and cash equivalents (955) 57 (898) Cash and cash equivalents at beginning of year....... 1,019 5 1,024 Cash and cash equivalents at end of period........... $64 $62 $ $ $126
- ----------- (1) Includes the elimination of inter-group transactions, consolidating entries as well as reclassifications and adjustments related to AT&T Wireless Group tracking stock. Consolidating Condensed Income Statement For the year ended December 31, 1999
AT&T AT&T Common Stock Wireless Liberty Media Eliminations/ Group Group Group Reclassifications(1) Consolidated AT&T Corp. ----- ----- ----- -------------------- ----------------------- Revenue...................... $54,973 $7,627 $ $ $62,600 Inter-group revenue.......... 227 (227) Total Revenue................ 55,200 7,627 (227) 62,600 Operating Expenses Costs of services and products 11,158 3,676 (240) 14,594 Access and other connection.. 14,439 247 14,686 Selling, general and administrative............ 11,243 2,273 13,516 Depreciation and other amortization.............. 5,137 1,253 (252) 6,138 Amortization of goodwill, franchise costs and other purchased intangibles..... 1,057 244 1,301 Net restructuring and other charges................... 976 531 (1) 1,506 Inter-group expenses......... (333) 560 (227) Total operating expenses..... 43,677 8,293 (229) 51,741 Operating income (loss)...... 11,523 (666) 2 10,859 Other income (expense)....... 824 122 (15) 931 Inter-group interest income.. 270 (270) Interest expense............. 1,755 (78) 88 1,765 Inter-group interest expense. 214 (214) Income (loss) before income taxes, minority interest and earnings (losses) from equity investments........ 10,862 (680) (157) 10,025 Provision for income taxes... 4,016 (294) (27) 3,695 Minority interest income (expense)................. (132) 17 (115) Equity earnings from Liberty Media Group............... (2,022) (2,022) Net earnings (losses) from other equity investments.. (760) (19) 14 (765) Income (loss)................ 5,954 (405) (2,022) (99) 3,428 Dividend requirements on preferred stock held by AT&T, net................. 56 (56) Net income (loss) after preferred stock dividends. $5,954 $(461) $(2,022) $(43) $3,428
- ----------- (1) Includes the elimination of inter-group transactions, consolidating entries as well as reclassifications and adjustments related to AT&T Wireless Group tracking stock. Consolidating Condensed Balance Sheet As of December 31, 1999
AT&T AT&T Common Stock Wireless Liberty Media Eliminations/ Group Group Group Reclassifications(1) Consolidated AT&T Corp. ----- ----- ----- -------------------- ----------------------- ASSETS Cash and cash equivalent..... $1,019 $5 $ $ $1,024 Receivables.................. 9,241 1,300 (88) 10,453 Deferred income taxes........ 1,160 127 1,287 Other current assets......... 929 196 (5) 1,120 TOTAL CURRENT ASSETS......... 12,349 1,628 (93) 13,884 Property, plant and equipment, net....................... 33,366 6,349 (97) 39,618 Franchise costs, net......... 32,693 32,693 Licensing costs, net......... 8,571 (23) 8,548 Goodwill, net................ 5,310 2,462 (327) 7,445 Investment in Liberty Media Group and related receivables, net.......... 38,460 38,460 Other investments and related advances.................. 14,856 4,502 8 19,366 Other assets................. 9,065 327 9,392 Long-term assets due from related party............. 4,400 (4,400) TOTAL ASSETS................. $112,039 $23,512 $38,460 $(4,605) $169,406 LIABILITIES Debt maturing within one year $12,479 $154 $ $ $12,633 Other current liabilities.... 13,711 2,143 (280) 15,574 TOTAL CURRENT LIABILITIES.... 26,190 2,297 (280) 28,207 Long-term debt............... 23,213 4 23,217 Long-term debt due to related party..................... 3,400 (3,400) Deferred income taxes........ 20,507 3,750 (58) 24,199 Other long-term liabilities and deferred credits...... 7,722 48 (5) 7,765 TOTAL LIABILITIES............ 77,632 9,495 (3,739) 83,388
- ----------- (1) Includes the elimination of inter-group transactions, consolidating entries as well as reclassifications and adjustments related to AT&T Wireless Group tracking stock. Consolidating Condensed Balance Sheet As of December 31, 1999
AT&T AT&T Common Stock Wireless Liberty Media Eliminations/ Group Group Group Reclassifications(1) Consolidated AT&T Corp. ----- ----- ----- -------------------- ----------------------- Minority Interest............ 2,371 20 2,391 Company-Obligated Convertible Quarterly Income Preferred Securities of a Subsidiary Trust Holding Solely Subordinated Debt Securities of AT&T........ 4,700 4,700 SHAREOWNERS' EQUITY AT&T Common Stock............ 3,196 3,196 AT&T Wireless Group Common Stock Liberty Media Group Class A Common Stock.............. 2,314 2,314 Liberty Media Group Class B Common Stock.............. 217 217 Other shareowners' equity.... 27,336 12,997 38,460 (5,593) 73,200 Other shareowners' equity due to related party.......... 1,000 (1,000) TOTAL SHAREOWNERS' EQUITY.... 27,336 13,997 38,460 (866) 78,927 TOTAL LIABILITIES AND SHAREOWNERS' EQUITY....... $112,039 $23,512 $38,460 $(4,605) $169,406
- ----------- (1) Includes the elimination of inter-group transactions, consolidating entries as well as reclassifications and adjustments related to AT&T Wireless Group tracking stock. Consolidating Condensed Statement of Cash Flows For the year ended December 31, 1999
AT&T AT&T Common Stock Wireless Liberty Media Eliminations/ Consolidated Group Group Group Reclassifications(1) AT&T Corp. ----- ----- ----- -------------------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES $10,907 $867 $ $(253) $11,521 INVESTING ACTIVITIES Capital expenditures and other additions......... (11,795) (2,272) 47 (14,020) Equity investment distributions and sales. 1,639 236 1,875 Equity investment contributions and purchases............... (7,837) (284) (8,121) Net acquisitions of businesses including cash acquired................ (6,955) 244 (6,711) Other...................... (960) (47) 941 (66) NET CASH USED IN INVESTING ACTIVITIES.............. (25,908) (2,123) 988 (27,043) FINANCING ACTIVITIES Proceeds from long-term debt issuance................ 8,396 8,396 Retirement of long-term debt (2,807) (2,807) Issuance of convertible securities.............. 4,638 4,638 Net acquisition of treasury shares.................. (4,624) (4,624) Dividends paid............. (2,712) (2,712) Increase in short-term borrowings, net......... 10,173 65 10,238 Other...................... (177) 1,169 (735) 257 NET CASH PROVIDED BY FINANCING ACTIVITIES.... 12,887 1,234 (735) 13,386 Net decrease in cash and cash equivalents........ (2,114) (22) (2,136) Cash and cash equivalents at beginning of year....... 3,133 27 3,160 Cash and cash equivalents at end of period........... $1,019 $5 $ $ $1,024
- ----------- Includes the elimination of inter-group transactions, consolidating entries as well as reclassifications and adjustments related to AT&T Wireless Group tracking stock. Consolidating Condensed Income Statement For the year ended December 31, 1998
AT&T AT&T Common Stock Wireless Eliminations/ Consolidated Group Group Reclassifications(1) AT&T Corp. ----- ----- -------------------- ---------- Revenue........................................ $47,817 $5,406 $ $53,223 Inter-group revenue............................ 73 (73) Total Revenue.................................. 47,890 5,406 (73) 53,223 Operating Expenses: Costs of services and products................. 8,336 2,363 (204) 10,495 Access and other connection.................... 15,117 211 15,328 Selling, general and administrative............ 10,845 1,931 (6) 12,770 Depreciation and other amortization............ 3,534 1,079 (235) 4,378 Amortization of goodwill, franchise costs and other purchased intangibles................. 44 207 251 Net restructuring and other charges............ 2,514 120 (120) 2,514 Inter-group expenses........................... (183) 256 (73) Total operating expenses....................... 40,207 5,749 (220) 45,736 Operating income (loss)........................ 7,683 (343) 147 7,487 Other income................................... 811 650 (180) 1,281 Inter-group interest income.................... 246 (246) Interest expense............................... 515 (70) (18) 427 Inter-group interest expense................... 190 (190) Income from continuing operations before income taxes, minority interest and earnings (losses) from equity investments............ 8,225 187 (71) 8,341 Provision for income taxes..................... 2,996 59 (6) 3,049 Minority interest income....................... 21 21 Net earnings (losses) from other equity investments................................. (108) 36 (6) (78) Income from continuing operations.............. 5,121 164 (50) 5,235 Dividend requirements on preferred stock held by AT&T, net................................... 56 (56) Income from continuing operations after preferred stock dividends................... $5,121 $108 $6 $5,235
- ----------- (1) Includes the elimination of inter-group transactions, consolidating entries as well as reclassifications and adjustments related to AT&T Wireless Group tracking stock. Consolidating Condensed Statement of Cash Flows For the year ended December 31, 1998
AT&T AT&T Common Stock Wireless Eliminations/ Consolidated Group Group Reclassifications(1) AT&T Corp. ----- ----- -------------------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES...... $9,928 $414 $(125) $10,217 INVESTING ACTIVITIES Capital expenditures and other additions....... (6,509) (1,219) 15 (7,713) Decrease in other receivables.................. 6,303 100 6,403 Net sales of marketable securities............. 307 307 Equity investment distributions and sales...... 148 1,354 14 1,516 Equity investment contributions and purchases.. (1,118) (156) (7) (1,281) Net acquisitions of businesses including cash acquired.................................... 4,183 324 4,507 Other.......................................... (60) (65) (32) (157) NET CASH PROVIDED BY INVESTING ACTIVITIES...... 3,254 238 90 3,582 FINANCING ACTIVITIES Proceeds from long-term debt issuance Retirement of long-term debt................... (2,610) (2,610) Net acquisition of treasury shares............. (3,321) (3,321) Dividends paid................................. (2,187) (2,187) Increase in short-term borrowings, net......... (3,076) 43 (3,033) Other.......................................... 833 (674) (57) 102 NET CASH USED IN FINANCING ACTIVITIES.......... (10,361) (631) (57) (11,049) NET CASH PROVIDED BY DISCONTINUED OPERATIONS... 92 92 Net increase in cash and cash equivalents...... 2,821 21 2,842 Cash and cash equivalents at beginning of year. 312 6 318 Cash and cash equivalents at end of period..... $3,133 $27 $ $3,160
- ----------- (1) Includes the elimination of inter-group transactions, consolidating entries as well as reclassifications and adjustments related to AT&T Wireless Group tracking stock. 21. QUARTERLY INFORMATION (UNAUDITED)
First Second Third Fourth 2000 Revenue1......................................................................... $15,901 $16,221 $16,975 $16,884 Operating income (loss)2......................................................... 2,402 3,267 2,954 (4,346) Net income....................................................................... $2,683 $2,034 $3,072 $(3,120) AT&T Common Stock Group: Earnings (loss) per share: Basic......................................................................... $.55 $.54 $.35 $(.45) Diluted....................................................................... .54 .53 .35 (.45) Dividends declared............................................................ $.22 $.22 $.22 $.0375 AT&T Wireless Group3: Earnings (loss) per share: Basic and diluted............................................................. $-- $.06 $(.01) $.16 Liberty Media Group3: Earnings (loss) per share: Basic and diluted4............................................................ $.37 $.10 $.68 $(.57) Stock price5: AT&T common stock High.......................................................................... $61.00 $58.81 $35.19 $30.00 Low........................................................................... 44.31 31.25 27.25 16.50 Quarter-end close............................................................. 56.25 31.63 29.38 17.25 AT&T Wireless Group common stock High.......................................................................... -- 36.00 29.56 24.94 Low........................................................................... -- 23.56 20.50 16.38 Quarter-end close............................................................. -- 27.88 20.88 17.31 Liberty Media Group Class A common stock4 High.......................................................................... 30.72 29.94 26.56 19.25 Low........................................................................... 24.44 19.19 17.44 10.75 Quarter-end close............................................................. 29.63 24.25 18.00 13.56 Liberty Media Group Class B common stock4 High.......................................................................... 36.56 32.69 32.63 20.63 Low........................................................................... 27.00 22.13 18.75 12.75 Quarter-end close............................................................. 32.81 32.50 18.75 18.75
1999 Revenue1......................................................................... $14,117 $15,752 $16,333 $16,398 Operating income2................................................................ 2,116 2,913 3,389 2,441 Net income (loss)................................................................ $1,018 $1,045 $1,416 $(51) AT&T Common Stock Group: Earnings per share: Basic......................................................................... $.39 $.50 $.51 $.36 Diluted....................................................................... $.38 $.49 $.50 $.36 Dividends declared............................................................... $.22 $.22 $.22 $.22 Liberty Media Group3: Loss per share: Basic and diluted4............................................................ $.02 $.21 $.09 $.48 Stock price5: AT&T common stock High.......................................................................... $64.08 $63.00 $59.00 $61.00 Low........................................................................... 50.58 50.06 41.81 41.50 Quarter-end close............................................................. 53.20 55.81 43.50 50.81 Liberty Media Group Class A common stock4 High.......................................................................... 14.53 18.52 19.84 28.34 Low........................................................................... 10.95 13.13 15.44 17.94 Quarter-end close............................................................. 13.15 18.38 18.66 28.41 Liberty Media Group Class B common stock4 High.......................................................................... 14.56 18.63 19.88 34.38 Low........................................................................... 11.13 13.69 16.00 19.31 Quarter-end close............................................................. 13.44 18.63 19.88 34.38
- ----------- 1. Results have been restated to reflect certain franchise tax expenses as revenue and expense in the amount of $21 in first quarter 1999, $61 in second quarter 1999, $63 in third quarter 1999, $64 in fourth quarter 1999 and $65 in first quarter 2000. This restatement had no impact on operating income or net income. 2. Operating income (loss) included net restructuring and other charges of $773 in first quarter 2000, $24 in third quarter 2000, $6,232 in fourth quarter 2000, $731 in first quarter 1999 and $804 in fourth quarter 1999. Second quarter 1999 included a net restructuring and other charges benefit of $29. 3. No dividends have been declared on AT&T Wireless Group or Liberty Media Group (LMG) common stocks. 4. Amounts have been restated to reflect the June 2000 two-for-one split of LMG common stock. 5. Stock prices obtained from the New York Stock Exchange Composite Tape. 22. 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. On January 1, 2001, AT&T adopted SFAS No. 133. We recorded a cumulative effect of an accounting change, net of applicable income taxes, of approximately $1,370 of income, or approximately $0.34 per diluted share, primarily attributable to fair value adjustments of debt instruments, including those acquired in conjunction with the MediaOne merger, as well as to our warrant portfolio. In addition, in connection with the adoption of SFAS No. 133, we reclassified certain investment securities, which support debt that is indexed to those securities, from "available-for-sale" to "trading." This reclassification resulted in the recognition of a charge of $1,724, or approximately $0.43 per diluted share, net of applicable taxes, which was recorded as a reduction of other income. As available-for-sale securities, changes in fair value were previously included within other comprehensive income as a component of shareowners' equity. In addition, LMG recorded a cumulative effect of an accounting change, net of applicable income taxes, of approximately $800 of income, or approximately $0.31 per share. The impact of the adoption of SFAS No. 133, as amended by SFAS No. 138, on AT&T's future results of operations is dependent upon the fair values of our derivatives and related financial instruments and could result in pronounced quarterly fluctuations in other income in future periods. In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - -- a Replacement of FASB Statement No. 125." This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. Under these standards, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. This statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. AT&T does not expect that the adoption of SFAS No. 140 will have a material impact on AT&T's results of operations, financial position or cash flows. 23. SUBSEQUENT EVENTS On January 12, 2001, AT&T announced that Cox and Comcast had exercised their rights to sell a combined total of 60.4 million shares of Excite@Home Series A common stock to AT&T as part of an agreement announced in August 2000 to reorganize Excite@Home's governance. Cox and Comcast elected to receive shares of AT&T common stock in exchange for their Excite@Home shares. AT&T is currently in discussions to renegotiate the terms of the put options which may result in a change to the number of shares of AT&T stock that Cox and Comcast will receive, as well as the number of Excite@Home Shares, if any AT&T receives. There can be no assurance that an agreement will be reached with Cox and Comcast. On January 22, 2001, AT&T and NTT DoCoMo (DoCoMo) finalized an agreement whereby DoCoMo invested approximately $9.8 billion for a new class of AT&T preferred stock, termed DoCoMo Wireless tracking stock, that is economically equivalent to 406 million shares of AT&T Wireless Group tracking stock and reflects approximately 16% of the financial performance and economic value of AT&T Wireless Group. AT&T allocated $6.2 billion of the proceeds to AT&T Wireless Group. Each share of DoCoMo Wireless tracking stock is convertible at any time into AT&T Wireless Group tracking stock. Upon the conversion of the DoCoMo Wireless tracking stock, AT&T will reduce its portion of the financial performance and economic value in AT&T Wireless Group by 178 million shares, and the balance of the 406 million shares will come from the issuance of 228 million new shares of AT&T Wireless Group tracking stock. Additionally, upon completion of the planned split-off of AT&T Wireless, the DoCoMo Wireless tracking stock and related warrants will automatically be converted into AT&T Wireless Group tracking stock and thereafter be exchanged on the same terms as all other shares of AT&T Wireless Group tracking stock in the split-off. In the event that AT&T has not split-off AT&T Wireless by specified dates beginning January 1, 2002, DoCoMo will have the right, at its election, to require AT&T to repurchase from DoCoMo the preferred shares initially issued to them at DoCoMo's original purchase price plus interest up to the date of payment. The interest under this right will be treated as preferred stock dividends, with charges recorded as a reduction of AT&T Common Stock Group earnings. In addition, DoCoMo acquired five-year warrants to purchase the equivalent of an additional 41.7 million shares of AT&T Wireless Group tracking stock at $35 per share. As part of the agreement, DoCoMo obtained a seat on AT&T's board of directors until AT&T Wireless Group is split-off from AT&T as a separate public company, which is expected to occur later in 2001. At that time, DoCoMo will retain representation on the new public AT&T Wireless board. Receipt of the DoCoMo proceeds reduced AT&T's existing $25 billion credit facility by $1.8 billion. In January 2001, AT&T entered into agreements with certain network equipment vendors, which extend through 2004, to purchase next-generation wireless network equipment for a total of approximately $1.8 billion. On February 27, 2001, AT&T entered into an agreement with Vodafone Group plc to sell our 10% stake in Japan Telecom Co. Ltd for approximately $1.35 billion in cash. The transaction is expected to be completed in April 2001 and will result in a gain. On March 1, 2001, AT&T Wireless completed a private placement of $6.5 billion in notes. The notes pay interest at rates ranging from 7.35% to 8.75% per annum, with maturity dates ranging from 2006 to 2031. The notes include customary covenants and registration rights. As a result of the issuance of these notes, AT&T's existing $25 billion credit facility was reduced by $4.8 billion. On March 23, 2001, AT&T Wireless entered into $2.5 billion in revolving credit facilities. The facilities consist of a 364-day facility of $1.25 billion and a five-year revolving credit facility of $1.25 billion. The facilities may be used for general corporate purposes and are subject to customary covenants and events of default. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There have been no changes in independent accountants and no disagreements with independent accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure during the last two years. PART III ITEMS 10. THROUGH 13. Information regarding executive officers required by Item 401 of Regulation S-K is furnished in a separate disclosure in Part I of this report because the Company did not furnish such information in its definitive proxy statement prepared in accordance with Schedule 14A. The other information required by Items 10 through 13 is included in the Company's definitive proxy statement dated March 29, 2001: the last two paragraphs on page 4, the first two paragraphs on page 5, the last paragraph on page 5 through the first two paragraphs on page 14, and the second paragraph on page 28 through page 50. Such information is incorporated herein by reference, pursuant to General Instruction G(3). PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K. (a) Documents filed as a part of the report: (1) The following consolidated financial statements are included in Part II, Item 8: Pages ------ Report of Management .................................... 113 Report of Independent Accountants ....................... 114 Statements: Consolidated Statements of Income ....................... 115 Consolidated Balance Sheets ............................. 116 Consolidated Statements of Changes in Shareowners' Equity ................................................ 118 Consolidated Statements of Cash Flows ................... 120 Notes to Consolidated Financial Statements .............. 121 (2) Financial Statement Schedule: Report of Independent Accountants ....................... 197 Schedule: II -- Valuation and Qualifying Accounts ................. 198 All other schedules are omitted because they are not applicable, not required or the required information is included in the consolidated financial statements or notes thereto. Separate financial statements of Liberty Media Group, which is a "significant subsidiary" pursuant to the provisions of Regulation S-X, Article 3-9, are included as Exhibit (99)b. (3) Exhibits: Exhibits identified in parentheses below, on file with the Securities and Exchange Commission ("SEC"), are incorporated herein by reference as exhibits hereto. Exhibit Number: (3)a Restated Certificate of Incorporation of the registrant filed January 10, 1989, Certificate of Correction of the registrant filed June 8, 1989, Certificate of Change of the registrant filed March 18, 1992, Certificate of Amendment of the registrant filed June 1, 1992, Certificate of Amendment of the registrant filed April 20, 1994, Certificate of Amendment of the registrant filed June 8, 1998, Certificate of Amendment of the registrant filed March 9, 1999, Certificate of Amendment of the registrant filed April 12, 2000 and Certificate of Amendment of the registrant filed June 2, 2000. (3)b By-Laws of the registrant, as amended January 25, 2001. (4) No instrument which defines the rights of holders of long term debt, of the registrant and all of its consolidated subsidiaries, is filed herewith pursuant to Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this regulation, the registrant hereby agrees to furnish a copy of any such instrument to the SEC upon request. (10)(i)1 Form of Separation and Distribution Agreement by and among AT&T Corp., Lucent Technologies Inc. and NCR Corporation, dated as of February 1, 1996 and amended and restated as of March 29, 1996 (Exhibit (10)(i)1 to Form 10-K for 1996, File No. 1-1105). (10)(i)2 Form of Distribution Agreement, dated as of November 20, 1996, by and between AT&T Corp. and NCR Corporation (Exhibit (10)(i)2 to Form 10-K for 1996, File No. 1-1105). (10)(i)3 Tax Sharing Agreement by and among AT&T Corp., Lucent Technologies Inc. and NCR Corporation, dated as of February 1, 1996 and amended and restated as of March 29, 1996 (Exhibit (10)(i)3 to Form 10-K for 1996, File No. 1-1105). (10)(i)4 Employee Benefits Agreement by and between AT&T Corp. and Lucent Technologies Inc., dated as of February 1, 1996 and amended and restated as of March 29, 1996 (Exhibit (10)(i)4 to Form 10-K for 1996, File No. 1-1105). (10)(i)5 Form of Employee Benefits Agreement, dated as of November 20, 1996, between AT&T Corp. and NCR Corporation (Exhibit (10)(i)5 to Form 10-K for 1996, File No. 1-1105). (10)(i)6 Securities Purchase Agreement by and among AT&T Corp., AT&T Wireless Services, Inc. and NTT DoCoMo, Inc., dated December 20, 2000 (Exhibit 10.1 to Form 8-K filed December 22, 2000, File No. 1-1105). (10)(i)7 Investor Agreement by and among AT&T Corp., AT&T Wireless Services, Inc. and NTT DoCoMo, Inc., dated December 20, 2000 (Exhibit 10.2 to Form 8-K filed December 22, 2000, File No. 1-1105). (10)(i)8 Warrant Agreement by and among AT&T Wireless Services, Inc., NTT DoCoMo, Inc. and AT&T Corp., dated December 20, 2000 (Exhibit 10.3 to Form 8-K filed December 22, 2000, File No. 1-1105). (10)(i)9 364-Day Competitive Advance and Revolving Credit Facility Agreement, dated as of December 28, 2000, among AT&T Corp., the Lenders party thereto, THE CHASE MANHATTAN BANK, CREDIT SUISSE FIRST BOSTON and GOLDMAN SACHS CREDIT PARTNERS L.P., as Administrative Agents, and THE CHASE MANHATTAN BANK, as Paying Agent (Exhibit 10 to Form 8-K filed February 16, 2001, File No. 1-1105). (10)(ii)(B)1 General Purchase Agreement between AT&T Corp. and Lucent Technologies Inc., dated February 1, 1996 and amended and restated as of March 29, 1996 (Exhibit (10)(ii)(B)1 to Form 10-K for 1996, File No. 1-1105). (10)(ii)(B)2 Form of Volume Purchase Agreement, dated as of November 20, 1996, by and between AT&T Corp. and NCR Corporation (Exhibit (10)(ii)(B)2 to Form 10-K for 1996, File No. 1-1105). (10)(iii)(A)1 AT&T Short Term Incentive Plan as amended March, 1994 (Exhibit (10)(iii)(A)1 to Form 10-K for 1994, File No. 1-1105). (10)(iii)(A)2 AT&T 1987 Long Term Incentive Program as amended December 17, 1997 (Exhibit 10)(iii)(A)2 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)3 AT&T Senior Management Individual Life Insurance Program as amended March 3, 1998 (Exhibit (10)(iii)(A)3 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)4 AT&T Senior Management Long Term Disability and Survivor Protection Plan, as amended and restated effective January 1, 1995 (Exhibit (10)(iii)(A)4 to Form 10-K for 1996, File No. 1-1105). . (10)(iii)(A)5 AT&T Senior Management Financial Counseling Program dated December 29, 1994 (Exhibit (10)(iii)(A)5 to Form 10-K for 1994, File No. 1-1105). (10)(iii)(A)6 AT&T Deferred Compensation Plan for Non-Employee Directors, as amended December 15, 1993 (Exhibit (10) (iii)(A)6 to Form 10-K for 1993, File No. 1-1105). (10)(iii)(A)7 The AT&T Directors Individual Life Insurance Program as amended March 2, 1998 (Exhibit (10)(iii)(A)1 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)8 AT&T Plan for Non-Employee Directors' Travel Accident Insurance (Exhibit (10)(iii)(A)8 to Form 10-K for 1990, File No. 1-1105). (10)(iii)(A)9 AT&T Excess Benefit and Compensation Plan, as amended and restated effective October 1, 1996 (Exhibit (10)(iii)(A)9 to Form 10-K for 1996, File No. 1-1105). (10)(iii)(A)10 AT&T Non-Qualified Pension Plan, as amended and restated January 1, 1995 (Exhibit (10)(iii)(A)10 to Form 10-K for 1996, File No. 1-1105). (10)(iii)(A)11 AT&T Senior Management Incentive Award Deferral Plan, as amended January 21, 1998 (Exhibit (10)(iii)(A)11 to Form 10-K for 1998, File No. 1-1105). (10)(iii)(A)12 AT&T Mid-Career Hire Program revised effective January 1, 1988 (Exhibit (10)(iii)(A)4 to Form SE, dated March 25, 1988, File No. 1-1105) including AT&T Mid-Career Pension Plan, as amended and restated July 1, 1999 (Exhibit (10)(iii)(A)12 to Form 10-K for 1999, File No. 1-1105). (10)(iii)(A)13 AT&T 1997 Long Term Incentive Program as amended through March 14, 2000 (Exhibit (10)(iii)(A)13 to Form 10-K for 1999, File No. 1-1105). (10)(iii)(A)14 Form of Indemnification Contract for Officers and Directors (Exhibit (10)(iii)(A)6 to Form SE, dated March 25, 1987, File No. 1-1105). (10)(iii)(A)15 Pension Plan for AT&T Non-Employee Directors revised February 20, 1989 (Exhibit 10)(iii)(A)15 to Form 10-K for 1993, File No. 1-1105). (10)(iii)(A)16 AT&T Corp. Senior Management Universal Life Insurance Program effective October 1, 1999. (10)(iii)(A)17 Form of AT&T Benefits Protection Trust Agreement as amended and restated as of November 1993, including the first amendment thereto dated December 23, 1997 (Exhibit (10)(iii)(A)17 to Form 10-K for 1999, File No. 1-1105). (10)(iii)(A)18 AT&T Senior Officer Severance Plan effective October 9, 1997, as amended October 30, 1997 (Exhibit (10)(iii)(A)18 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)19 Form of Pension Agreement between AT&T Corp. and Frank Ianna dated October 30, 1997 (Exhibit (10)(iii)(A)19 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)20 Form of Pension Agreement between AT&T Corp. and John C. Petrillo dated October 30, 1997 (Exhibit (10)(iii)(A)21 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)21 Form of Pension Agreement between AT&T Corp. and John Zeglis dated May 7, 1997 (Exhibit (10)(iii)(A)22 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)22 Form of Employment Agreement between AT&T Corp. and C. Michael Armstrong dated October 17, 1997 (Exhibit (10)(iii)(A)23 to Form 10-K for 1997, File No. 1-1105). (10)(iii)(A)23 Form of Employment Agreement between AT&T Corp. and Daniel E. Somers dated April, 1997 (Exhibit (10)(iii)(A)23 to Form 10-K for 1998, File No. 1-1105). (10)(iii)(A)24 Liberty Media 401(K) Savings Plan (Incorporation herein by reference to Exhibit 99.1 to Post-Effective Amendment No. 2 on Form S-8 to the Registration Statement on Form S-4 of AT&T Corp. (Commission File No. 333-70279) filed March 10, 1999). (10)(iii)(A)25 AT&T Corp. Directors' Universal Life Insurance Program effective June 1, 2000. (10)(iii)(A)26 AT&T Corp. Senior Management Universal Life Insurance Program for Former Executives effective October 1, 1999. (10)(iii)(A)27 Form of Employment Agreement between AT&T Corp. and Charles H. Noski dated December 8, 1999. (10)(iii)(A)28 Form of Special Deferral Agreement between AT&T Corp. and Charles H. Noski dated January 26, 2001. (10)(iii)(A)29 Form of Special Deferral Agreement between AT&T Corp. and Frank Ianna dated January 16, 2001. (10)(iii)(A)30 Form of Loan Agreement between AT&T Corp. and David Dorman dated December 21, 2000. (10)(iii)(A)31 Form of Loan Agreement between AT&T Corp. and David Dorman dated December 21, 2000. (10)(iii)(A)32 AT&T Corp. board resolutions adopting change in control provision to various plans effective October 23, 2000. (12) Computation of Ratio of Earnings to Fixed Charges. (21) List of subsidiaries of AT&T. (23)a Consent of PricewaterhouseCoopers, LLP (23)b Consent of KPMG, LLP (24) Powers of Attorney executed by officers and directors who signed this report. (99)a Supplemental Information regarding AT&T Wireless Group. (99)b Supplemental Information regarding Liberty Media Group. AT&T will furnish, without charge, to a shareholder upon request a copy of the annual report to shareholders and the proxy statement, portions of which are incorporated herein by reference thereto. AT&T will furnish any other exhibit at cost. (b) Reports on Form 8-K: During the fourth quarter 2000, Form 8-K dated October 23, 2000 was filed pursuant to Item 5 (Other Events) and Item 7 (Financial Statements and Exhibits), Form 8-K dated November 15, 2000 was filed pursuant to Item 5 (Other Events) and Item 7 (Financial Statements and Exhibits), Form 8-K dated December 1, 2000 was filed pursuant to Item 5 (Other Events) and Item 7 (Financial Statements and Exhibits), Form 8-K dated December 18, 2000 was filed pursuant to Item 5 (Other Events), Form 8-K dated December 20, 2000 was filed pursuant to Item 5 (Other Events) and Item 7 (Financial Statements and Exhibits) and Form 8-K dated December 22, 2000 was filed pursuant to Item 5 (Other Events) and Item 7 (Financial Statements and Exhibits). REPORT OF INDEPENDENT ACCOUNTANTS ON CONSOLIDATED FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Shareowners of AT&T Corp.: Our audits of the consolidated financial statements referred to in our report dated March 16, 2001 appearing in the 2000 Annual Report to Shareholders of AT&T Corp. (which report and consolidated financial statements appear in this Annual Report on Form 10-K) also included an audit of the consolidated financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this consolidated financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP New York, New York March 16, 2001 Schedule II--Sheet 1 AT&T CORP. AND ITS CONSOLIDATED SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (Millions of Dollars) - ------------------------------------------------------------------------------ COL. A COL. B COL. C COL. D COL. E - ------------------------------------------------------------------------------ Balance at Charged to Balance Beginning Costs and at End Description of Period Expenses Deductions(a) of Period - ------------------------------------------------------------------------------ Year 2000 Allowances for doubtful accounts (b) $1,334 $1,393 $1,292 $1,435 Deferred tax asset valuation allowance (c) $ 231 $ 826 $ 268 $ 789 Year 1999 Allowances for doubtful accounts (b) $1,106 $1,416 $1,188 $1,334 Deferred tax asset valuation allowance (c) $ 278 $ 124 $ 171 $ 231 Year 1998 Allowances for doubtful accounts (b) $1,037 $1,389 $1,320 $1,106 Deferred tax asset valuation allowance (c) $ 361 $ 23 $ 106 $ 278 - ------------ (a) Amounts written off as uncollectible, net of recoveries. (b) Includes allowances for doubtful accounts on long-term receivables of $56, $53 and $46 at December 31, 2000, 1999 and 1998, respectively (included in other assets in the Consolidated Balance Sheets). (c) End of period balances at December 31, 2000 and 1998, include $39 and $18, respectively, which represent the current portion of the deferred tax valuation allowance. There was no current portion at December 31, 1999. The increase in the deferred tax asset valuation allowance in 2000 was primarily due to the consolidation of At Home Corporation and the merger with MediaOne Group, Inc. The increase in 1999 was primarily due to the merger with Tele-Communications, Inc. These increases are shown within the charged to costs and expenses column. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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/ M. J. Wasser ------------------------------- By: M. J. Wasser Vice President - Law and Secretary March 29, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Principal Executive Officers: # # C. Michael Armstrong Chairman of the Board and # Chief Executive Officer # # John Zeglis Director and Chief Executive # Officer, AT&T Wireless Group # # Principal Financial Officer: # # Charles H. Noski Senior Executive Vice President# and Chief Financial Officer # # Principal Accounting Officer: # # Nicholas S. Cyprus Vice President and Controller ## By M. J. Wasser # (attorney-in-fact)* Directors: # # March 29, 2001 Kenneth T. Derr # M. Kathryn Eickhoff # Walter Y. Elisha # George M. C. Fisher # Donald V. Fites # Amos B. Hostetter, Jr. # Ralph S. Larsen # John C. Malone # Donald F. McHenry # Louis A. Simpson # Michael I. Sovern # Sanford I. Weill # Masaki Yoshikawa # EX-3.(I) 2 0002.txt EXHIBIT (3)A AT&T CORP. ---------- RESTATED CERTIFICATE OF INCORPORATION OF AMERICAN TELEPHONE AND TELEGRAPH COMPANY FILED JANUARY 10, 1989 ---------- WITH AMENDMENTS DATED JUNE 8, 1989, MARCH 18, 1992, JUNE 1, 1992, APRIL 20, 1994, JUNE 8, 1998, MARCH 9, 1999, APRIL 12, 2000 AND JUNE 2, 2000 RESTATED CERTIFICATE OF INCORPORATION OF AMERICAN TELEPHONE AND TELEGRAPH COMPANY UNDER SECTION 807 OF THE BUSINESS CORPORATION LAW We, the undersigned, being a Vice President and the Secretary, respectively, of American Telephone and Telegraph Company, do hereby certify as follows: 1. The name of the corporation is "American Telephone and Telegraph Company." 2. The Certificate of Incorporation of the corporation was filed in the office of the Secretary of State of New York on March 3, 1885. 3. The text of the Certificate of Incorporation (1) is hereby amended pursuant to authority vested in the Board of Directors by the Certificate of Incorporation of the corporation, as heretofore amended, and in accordance with Section 502 of the Business Corporation Law to delete in its entirety Article EIGHTH thereof stating the number, designation, relative rights, preferences, and limitations pertaining to four series of preferred shares, all of which shares have been redeemed by the corporation, and renumber the articles subsequent thereto sequentially following Article SEVENTH; and (2) as so amended and as amended heretofore is hereby restated to read as herein set forth in full: "We do hereby associate ourselves together for the purpose of constructing, buying, owning, leasing, or otherwise obtaining, lines of electric telegraph partly within and party beyond the limits of the State of New York, and of equipping, using, operating, or otherwise maintaining, the same; and of becoming a body politic and corporate under and by virtue of the provisions of an act of the Legislature of the State of New York entitled `An Act to provide for the incorporation and regulation of telegraph companies,' passed April 12, 1848, and the various acts amendatory thereof or supplemental thereto; and of having and exercising all and every of the powers, privileges, franchises and immunities in and by said acts conferred. And in pursuance of the requirements of the various acts aforesaid, and for the purposes above set forth, we do hereby declare and certify as follows, "FIRST. The name assumed to distinguish such association and to be used in its dealings, and by which it may sue and be sued, is the American Telephone and Telegraph Company. "SECOND. The general route of the lines of telegraph of said association will be from a point or points in the city of New York along all rail roads, bridges, highways and other practicable, suitable and convenient ways or courses, leading thence to the cities of Albany, Boston, and the intermediate cities, towns and places, also from a point or points in and through the city of New York, and thence through and across the Hudson and East rivers and the bay and harbor of New York, to Jersey City, Long Island City and Brooklyn, and along all rail roads, bridges, highways and other practicable, suitable and convenient ways and courses to the cities of Philadelphia, Baltimore, Washington, Richmond, Charleston, Mobile and New Orleans, and to all intermediate cities, towns and places; and in like manner to the cities of Buffalo, Pittsburgh, Cleveland, Cincinnati, Louisville, Memphis, Indianapolis, Chicago, Saint Louis, Kansas City, Keokuk, Des Moines, Detroit, Milwaukee, Saint Paul, Minneapolis, Omaha, Cheyenne, Denver, Salt Lake City, San Francisco and Portland, and to all intermediate cities, towns and places, and also along all rail roads, bridges, highways and other practicable, suitable and convenient ways and courses as may be necessary or proper for the purpose of connecting with each other one or more points in said city of New York, and in each of the cities, towns and places hereinabove specifically or generally designated. "And it is further declared and certified that the general route of the lines of this association, in addition to those hereinbefore described or designated, will connect one or more points in each and every city, town or place in the State of New York with one or more points in each and every other city, town or place in said State, and in each and every other of the United States, and in Canada and Mexico, and each and every of said cities, towns and places is to be connected with each and every other city, town or place in said States and Countries, and also by cable and other appropriate means with the rest of the known world as may hereafter become necessary or desirable in conducting the business of this association. "THIRD. The aggregate number of shares which the corporation is authorized to issue is 1,600,000,000 shares, consisting of 1,500,000,000 common shares having a par value of $1 pre share and 100,000,000 preferred shares having a par value of $1 per share. "The preferred shares may be issued from time to time in one or more series. All preferred shares of all series shall rank equally and be identical in all respects except that the Board of Directors is authorized to fix the number of shares in each series, the designation thereof and, subject to the provisions of this Article Third, the relative rights, preferences and limitations of each series and the variations in such rights, preferences and limitations as between series and specifically is authorized to fix with respect to each series: "(a) the dividend rate on the shares of such series and the date or dates from which dividends shall be cumulative; "(b) the times when, the prices at which, and all other terms and conditions upon which, shares of such series shall be redeemable; "(c) the amounts which the holders of shares of such series shall be entitled to receive upon the liquidation, dissolution or winding up of the corporation, which amounts may vary depending on whether such liquidation, dissolution or winding up is voluntary or involuntary and, if voluntary, may vary at different dates; "(d) whether or not the shares of such series shall be subject to the operation of a purchase, retirement or sinking fund and, if so, the extent to and manner n which such purchase, retirement or sinking fund shall be applied to the purchase or redemption of the shares of such series for retirement or for other corporate purposes and the terms and provisions relative to the operation of the said fund or funds; "(e) whether or not the shares of such series shall be convertible into or exchangeable for shares of any other class or series and, if so, the price or prices or the rate or rates of conversion or exchange and the method, if any, of adjusting the same; "(f) the restrictions, if any, upon the payment of dividends or making of other distributions on, and upon the purchase or other acquisition of, common shares; "(g) the restrictions, if any, upon the creation of indebtedness, and the restrictions, if any, upon the issue of any additional shares ranking on a parity with or prior to the shares of such series in addition to the restrictions provided for in this Article Third; "(h) the voting powers, if any, of the shares of such series in addition to the voting powers provided for in this Article Third; and "(i) such other rights, preferences and limitations as shall not be inconsistent with this Article Third. "All shares of any particular series shall rank equally and be identical in all respects except that shares of any one series issued at different times may differ as to the date from which dividends shall be cumulative. "Dividends on preferred shares of each series shall be cumulative from the date or dates fixed with respect to such series and shall be paid or declared or set apart for payment for all past dividend periods and for the current dividend period before any dividends (other than dividends payable in common shares) shall be declared or paid or set apart for payment on common shares. Whenever, at any time, full cumulative dividends for all past dividend periods and for the current dividend period shall have been paid or declared and set apart for payment on all then outstanding preferred shares and all requirements with respect to any purchase, retirement or sinking fund or funds for all series of preferred shares shall have been complied with, the Board of Directors may declare dividends on the common shares and the preferred shares shall not be entitled to share therein. "Upon any liquidation, dissolution or winding up of the corporation, the holders of preferred shares of each series shall be entitled to receive the amounts to which such holders are entitled as fixed with respect to such series, including all dividends accumulated to the date of final distribution, before any payment or distribution of assets of the corporation shall be made to or set apart for the holders of common shares and after such payments shall have been made in full to the holders of preferred shares, the holders of common shares shall be entitled to receive any and all assets remaining to be paid or distributed to shareholders and the holders of preferred shares shall not be entitled to share therein. For the purposes of this paragraph, the voluntary sale, conveyance, lease, exchange or transfer of all or substantially all the property or assets of the corporation or a consolidation or merger of the corporation with one or more other corporations (whether or not the corporation is the corporation surviving such consolidation or merger) shall not be deemed to be a liquidation, dissolution or winding up, voluntary or involuntary. "The aggregate amount which all preferred shares outstanding at any time shall be entitled to receive on involuntary liquidation, dissolution or winding up shall not exceed $8,000,000,000. "So long as any preferred shares are outstanding, the corporation will not (a) without the affirmative vote or consent of the holders of at least 66-2/3% of all the preferred shares at the time outstanding, (i) authorize shares of stock ranking prior to the preferred shares, or (ii) change any provision of this Article Third so as to affect adversely the preferred shares; (b) without the affirmative vote or consent of the holders of at least 66-2/3% of any series of preferred shares at the time outstanding, change any of the provisions of such series so as to affect adversely the shares of such series; (c) without the affirmative vote or consent of the holders of at least a majority of all the preferred shares at the time outstanding, (i) increase the authorized number of preferred shares or (ii) authorize shares of any other class of stock ranking on a parity with the preferred shares. "Whenever, at any time or times, dividends payable on preferred shares shall be in default in an aggregate amount equivalent to six full quarterly dividends on any series of preferred shares at the time outstanding, the number of directors then constituting the Board of Directors of the corporation shall ipso facto be increased by two, and the outstanding preferred shares shall, in addition to any other voting rights, have the exclusive right, voting separately as a class and without regard to series, to elect two directors of the corporation to fill such newly created directorships and such right shall continue until such time as all dividends accumulated on all preferred shares to the latest dividend payment date shall have been paid or declared and set apart for payment. "No holder of preferred shares of any series, irrespective of any voting or other rights of shares of such series, shall have, as such holder, any preemptive right to purchase any other shares of the corporation or any securities convertible into or entitling the holder to purchase such other shares. "If in any case the amounts payable with respect to any requirements to retire preferred shares are not paid in full in the case of all series with respect to which such requirements exist, the number of shares to be retired in each series shall be in proportion to the respective amounts which would be payable on account of such requirements if all amounts payable were paid in full. "FOURTH. The number of directors shall be as provided for in the By-Laws. "FIFTH. The duration of the corporation shall be perpetual. "SIXTH. The office of the corporation is located in the Borough of Manhattan, City and County of New York, State of New York. "SEVENTH. The Secretary of State of the State of New York is designated as agent of the corporation upon whom process against it may be served. The post office address to which the Secretary of State shall mail a copy of any process served upon him as agent of the corporation is American Telephone and Telegraph Company, 550 Madison Avenue, New York, New York 10022. "EIGHTH. No holder of common shares shall have, as such holder, any preemptive right to purchase any shares or other securities of the corporation. "NINTH. No director shall be personally liable to the Corporation or any of its shareholders for damages for any breach of duty as a director; provided, however, that the foregoing provision shall not eliminate or limit (i) the liability of a director if a judgment or other final adjudication adverse to him or her establishes that his or her acts or omissions were in bad faith or involved intentional misconduct or a knowing violation of law or that he or she personally gained in fact a financial profit or other advantage to which he or she was not legally entitled or that his or her acts violated Section 719 of the New York Business Corporation Law; or (ii) the liability of a director for any act or omission prior to the adoption of this Article NINTH by the shareholders of the Corporation. 4. The manner in which this restatement of the Certificate of Incorporation was authorized was by a resolution of the Board of Directors of the corporation. In Witness Whereof, we have signed and verified this Restated Certificate of Incorporation of American Telephone and Telegraph Company this 9th day of January 1989. /s/ S. L. Prendergast ----------------------------------- By: S. L. Prendergast Corporate Vice President and Treasurer /s/ R. E. Scannell ------------------------------------------ By: R. E. Scannell Corporate Vice President - Law and Secretary State of New York ss.: County of New York R. E. Scannell, being duly sworn, deposes and says that he is the Corporate Vice President - Law and Secretary of American Telephone and Telegraph Company, that he signed the foregoing Certificate as Corporate Vice President - Law and Secretary of such corporation, that he knows the contents thereof, and that the statements therein contained are true. /s/ R. E. Scannell ------------------------------------------ By: R. E. Scannell Corporate Vice President - Law and Secretary Subscribed and sworn to before me this 9th day of January 1989. Janet M. Kirpan Notary Public Janet M. Kirpan Notary Public, State of New York No. 31-4624682 Qualified in New York County Commission expires March 30, 1990 CERTIFICATE OF CORRECTION OF THE RESTATED CERTIFICATE OF INCORPORATION OF AMERICAN TELEPHONE AND TELEGRAPH COMPANY UNDER SECTION 105 OF THE BUSINESS CORPORATION LAW We, the undersigned, Robert E. Scannell and B. Ward White, being respectively the Corporate Vice President - Law and Secretary and the Assistant Secretary of American Telephone and Telegraph Company for the purpose of correcting the date appearing in the citation to `An Act to provide for the incorporation and regulation of telegraph companies,' passed April 12, 1848 (stated correctly as 1948) which appears on the face of the Restated Certificate of Incorporation of American Telephone and Telegraph Company under Section 807 of the Business Corporation Law hereby certify: 1. The name of the corporation is American Telephone and Telegraph Company. 2. The Restated Certificate of Incorporation of American Telephone and Telegraph Company under Section 807 of the Business Corporation Law was filed by the Department of State on January 10, 1989. 3. The last paragraph of the first page of the certificate is corrected to read as follows: "We do hereby associate ourselves together for the purpose of constructing, buying, owning, leasing, or otherwise obtaining, lines of electric telegraph partly within and partly beyond the limits of the State of New York, and of equipping, using, operating, or otherwise maintaining, the same; and of becoming a body politic and corporate under and by virtue of the provisions of an act of the Legislature of the State of New York entitled `An Act to provide for the incorporation and regulation of telegraph companies.' passed April 12, 1848, and the various acts amendatory thereof or supplemental thereto; and of having and exercising all and every of the powers, privileges, franchises and immunities in and by said acts conferred. And in pursuance of the requirements of the various acts aforesaid, and for the purposes above set forth, we do hereby declare and certify as follows, IN WITNESS WHEREOF, we have signed and verified this certificate on the 31st day of May, 1989 and we affirm the statements contained herein as true under penalties of perjury. AMERICAN TELEPHONE AND TELEGRAPH COMPANY /s/ Robert E. Scannell ----------------------------------------- By: Robert E. Scannell Corporate Vice President - Law and Secretary /s/ B. Ward White -------------------------- By: B. Ward White Assistant Secretary CERTIFICATE OF CHANGE OF THE RESTATED CERTIFICATE OF INCORPORATION OF AMERICAN TELEPHONE AND TELEGRAPH COMPANY UNDER SECTION 805-A OF THE BUSINESS CORPORATION LAW 1. The name of the corporation is "American Telephone and Telegraph Company." 2. The Certificate of Incorporation was filed in the office of the Secretary of State of the State of New York on March 3, 1885. 3. The change in the Certificate of Incorporation effected by this Certificate of Change is as follows: To change the post office address to which the Secretary of State of the State of New York shall mail a copy of any process against the corporation served upon said Secretary of State. 4. To accomplish the foregoing change, Article SEVENTH of the Certificate of Incorporation, relating to service of process, is hereby stricken out in its entirety, and the following new Article SEVENTH is substituted in lieu thereof: "SEVENTH. The Secretary of State of the State of New York is designated as agent of the corporation upon whom process against it may be served. The post office address to which the Secretary of State shall mail a copy of any process served upon him as agent of the corporation is American Telephone and Telegraph Company, 32 Avenue of the Americas, New York, New York, 10013. 5. The manner in which this Certificate of Change was authorized was by resolution of the Board of Directors of the corporation. IN WITNESS WHEREOF, we have signed and verified this Certificate of Change of American Telephone and Telegraph Company this 16th day of March 1992. /s/ S. L. Prendergast -------------------------- By: S. L. Prendergast Corporate Vice President and Treasurer /s/ R. E. Scannell ------------------------------------ By: R. E. Scannell Vice President - Law and Secretary State of New York ss.: County of New York R. E. Scannell, being duly sworn, deposes and says that he is the Vice President - Law and Secretary of American Telephone and Telegraph Company, that he signed the foregoing Certificate as Vice President - Law and Secretary of such corporation, that he knows the contents thereof, and that the statements therein contained are true. /s/ R. E. Scannell ------------------------------------ By: R. E. Scannell Vice President - Law and Secretary Subscribed and sworn to before me this 16th day of March 1992. Janet M. Kirpan Notary Public Janet M. Kirpan Notary Public, State of New York No. 31-4624682 Qualified in New York County Commission expires March 30, 1994 CERTIFICATE OF AMENDMENT OF THE RESTATED CERTIFICATE OF INCORPORATION OF AMERICAN TELEPHONE AND TELEGRAPH COMPANY UNDER SECTION 805 OF THE BUSINESS CORPORATION LAW We, the undersigned, being a Vice President and Secretary, respectively, of American Telephone and Telegraph Company, do hereby certify as follows: 1. The name of the corporation is "American Telephone and Telegraph Company." 2. The Certificate of Incorporation of the corporation was filed in the office of the Secretary of State of the State of New York on March 3, 1885. 3. Said Certificate of Incorporation is amended to increase the authorized number of common shares of the capital stock of the corporation having a par value of $1 from 1,500,000,000 to 2,000,000,000 shares. 4. To effect the foregoing, the first paragraph of Article THIRD of said Certificate of Incorporation, relating to the aggregate number of shares the corporation is authorized to issue, the par value thereof, and the classes into which the shares are divided is hereby stricken out in its entirety, and the following new first paragraph of Article THIRD is substituted in lieu thereof: "THIRD. The aggregate number of shares which the corporation is authorized to issue is 2,100,000,000 shares, consisting of 2,000,000,000 common shares having a par value of $1 per share and 100,000,000 preferred shares having a par value of $1 per share. 5. The manner in which the foregoing amendment of said Certificate of Incorporation was authorized was by vote of the holders of a majority of all outstanding shares of the corporation entitled to vote thereon at a meeting of shareholders, subsequent to the unanimous vote of the Board of Directors. IN WITNESS WHEREOF, we have signed and verified this Certificate of Amendment of said Certificate of Incorporation of American Telephone and Telegraph Company this 13th day of May, 1992. /s/ S. L. Prendergast ------------------------------ By: S. L. Prendergast Vice President and Treasurer /s/ R. E. Scannell ------------------------------ By: R. E. Scannell Vice President - Law and Secretary Certificate of Amendment of the Certificate of Incorporation of American Telephone and Telegraph Company Under Section 805 of the Business Corporation Law We, the undersigned, being a Vice President and an Assistant Secretary respectively, of American Telephone and Telegraph Company, do hereby certify as follows: FIRST: The name of the corporation is American Telephone and Telegraph Company. SECOND: The Certificate of Incorporation of the corporation was filed by the Department of State on March 3, 1885. THIRD: The Certificate of Incorporation of the corporation is hereby amended by changing the name of the corporation to AT&T Corp. FOURTH: To accomplish the foregoing amendment, Article FIRST of the Certificate of Incorporation of the corporation is amended to read as follows: "FIRST. The name of the corporation is AT&T Corp." FIFTH: The manner in which the foregoing amendment of said Certificate of Incorporation of the corporation was authorized was by vote of the holders of a majority of all outstanding shares of the corporation entitled to vote thereon at a meeting of shareholders, subsequent to the unanimous vote of the Board of Directors. IN WITNESS WHEREOF, we have subscribed this document on April 20, 1994 and do hereby affirm, under the penalties of perjury, that the statements contained therein have been examined by us and are true and correct. /s/ Jim G. Kilpatric -------------------------------------- By: Jim G. Kilpatric Senior Vice President - Law /s/ Robert A. Maynes -------------------------- By: Robert A. Maynes Assistant Secretary CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF AT&T CORP. UNDER SECTION 805 OF THE BUSINESS CORPORATION LAW We, the undersigned, being a Vice President and Assistant Secretary, respectively, of AT&T Corp., do hereby certify as follows: 1. The name of the corporation is AT&T Corp. The name under which the Corporation was formed is American Telephone and Telegraph Company. 2. The Certificate of Incorporation of the corporation was filed in the office of the Secretary of State of the State of New York on March 3, 1885. 3. Said Certificate of Incorporation is amended to increase the authorized number of common shares of the capital stock of the corporation having a par value of $1 from 2,000,000,000 shares to 6,000,000,000 shares. 4. To effect the foregoing, the first paragraph of Article THIRD of said Certificate of Incorporation, relating to the aggregate number of shares the corporation is authorized to issue, the par value thereof, and the classes into which the shares are divided is hereby stricken out in its entirety, and the following new first paragraph of Article THIRD is substituted in lieu thereof: "THIRD. The aggregate number of shares which the corporation is authorized to issue is 6,100,000,000 shares, consisting of 6,000,000,000 common shares having a par value of $1 per share and 100,000,000 preferred shares having a par value of $1 per share. 5. The manner in which the foregoing amendment of said Certificate of Incorporation was authorized was by vote of the holders of a majority of all outstanding shares of the corporation entitled to vote thereon at a meeting of shareholders, subsequent to the unanimous vote of the Board of Directors. IN WITNESS WHEREOF, we have signed this Certificate of Amendment of said Certificate of Incorporation of AT&T Corp. this 22th day of May, 1998 and we affirm the statements contained therein as true under penalties of perjury. /s/ Marilyn J. Wasser ----------------------------- M. J. Wasser Vice President-Law and Secretary /s/ Robert A. Maynes ----------------------------- R. A. Maynes Assistant Secretary Certificate of Amendment of the Certificate of Incorporation Under Section 805 of the Business Corporation Law We, the undersigned, being a Vice President and an Assistant Secretary respectively, of AT&T Corp., do hereby certify as follows: FIRST: The name of the corporation is AT&T Corp. SECOND: The Certificate of Incorporation of the corporation was filed by the Department of State on March 3, 1885 under the name American Telephone and Telegraph Company. THIRD: (a) The Certificate of Incorporation of the corporation is hereby amended to create two new classes of common stock, Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock, each having the number, designation, relative rights, preferences, and limitations as set forth herein. (b) To effect the foregoing, Article THIRD is hereby amended and restated in its entirety as follows: ARTICLE THIRD CAPITAL STOCK PART A--AUTHORIZED SHARES The aggregate number of shares which the corporation is authorized to issue is eight billion eight hundred fifty million (8,850,000,000) shares, consisting of one hundred million (100,000,000) preferred shares having a par value of $1.00 per share ("Preferred Stock") and eight billion seven hundred fifty million (8,750,000,000) common shares, of which six billion (6,000,000,000) common shares shall be Common Stock having a par value of $1.00 per share ("Common Stock"), two billion five hundred million (2,500,000,000) common shares shall be Class A Liberty Media Group Common Stock having a par value of $1.00 per share ("Class A Liberty Media Group Common Stock") and two hundred fifty million (250,000,000) common shares shall be Class B Liberty Media Group Common Stock having a par value of $1.00 per share ("Class B Liberty Media Group Common Stock"). The Class A Liberty Media Group Common Stock and the Class B Liberty Media Group Common Stock are collectively referred to herein as the "Liberty Media Group Common Stock". The authorized shares of Class B Liberty Media Group Common Stock will only be issued (i) pursuant to the Agreement and Plan of Restructuring and Merger, dated June 23, 1998 (the "Merger Agreement"), among Tele-Communications, Inc., Italy Merger Corp. and the corporation, (ii) upon conversion, exercise or exchange of Pre-Merger Convertible Securities, (iii) in a subdivision (by stock split or otherwise) of outstanding shares of Class B Liberty Media Group Common Stock, or (iv) as a stock dividend or share distribution (as defined in paragraph 4 of Part B of this Article Third). PART B--COMMON STOCK AND LIBERTY GROUP COMMON STOCK Each share of Common Stock, each share of Class A Liberty Media Group Common Stock and each share of Class B Liberty Media Group Common Stock shall, except as otherwise provided in this Article Third, be identical in all respects and shall have equal rights, powers and privileges. 1. Voting Rights. (a) Holders of Common Stock shall be entitled to one vote for each share of such stock held, holders of Class A Liberty Media Group Common Stock shall be entitled to one-tenth of a vote for each share of such stock held, and holders of Class B Liberty Media Group Common Stock shall be entitled to one vote for each share of such stock held, on all matters presented to such shareholders. (b) Except as may otherwise be required by the laws of the State of New York or, with respect to additional or special voting rights (which may include, without limitation, rights of any such holders of any such class or series to elect one or more directors voting separately as a class) of any class or series of Preferred Stock or any other class of common shares, in the Certificate of Incorporation of the corporation as the same may be amended from time to time (this "Certificate") (including the terms of any class or series of Preferred Stock and any resolution or resolutions providing for the establishment of such class or series pursuant to authority vested in the Board of Directors by this Certificate and the terms of any other class of common shares), the holders of shares of Common Stock, the holders of shares of each other class of common shares, if any, entitled to vote thereon, the holders of shares of Class A Liberty Media Group Common Stock and the holders of shares of Class B Liberty Media Group Common Stock, and the holders of shares of each class or series of Preferred Stock, if any, entitled to vote thereon, shall vote as one class with respect to all matters to be voted on by shareholders of the corporation, and no separate vote or consent of the holders of shares of Common Stock, the holders of shares of Class A Liberty Media Group Common Stock, the holders of shares of Class B Liberty Media Group Common Stock or the holders of shares of any such class of common shares or any such class or series of Preferred Stock shall be required for the approval of any such matter, except that: (i) any amendment, alteration or repeal of any of the provisions of this Certificate which would (x) increase or decrease the aggregate number of authorized shares of Liberty Media Group Common Stock, (y) increase or decrease the par value of the shares of Liberty Media Group Common Stock or (z) alter or change the powers, preferences, privileges or special rights of the shares of Liberty Media Group Common Stock so as to affect them adversely shall require the approval of both (A) the holders of a majority of the combined voting power of the shares of Common Stock, Liberty Media Group Common Stock and any other class of common shares entitled to vote with respect to such matter and any class or series of Preferred Stock entitled to vote with respect to such matter then outstanding, voting together as a single class, and (B) the holders of a majority of the combined voting power of the shares of Liberty Media Group Common Stock, voting separately as a class (without any vote of the holders of the Common Stock, any other class of common shares or any class or series of Preferred Stock of the corporation); (ii) a Covered Disposition shall require, in addition to any other approval that may be required pursuant to law or this Certificate, the approval of the holders of a majority of the combined voting power of the shares of Liberty Media Group Common Stock, voting separately as a class; and (iii) any merger, consolidation, combination, binding share exchange, reclassification, reorganization or other transaction in or pursuant to which the Liberty Media Group Common Stock is converted, reclassified or changed into or otherwise exchanged for any consideration (other than a conversion described in paragraph 2 of this Part B of this Article Third or a redemption described in paragraph 5 of this part B of this Article Third) shall be subject to approval by both (x) the holders of a majority of the combined voting power of the shares of Common Stock, Liberty Media Group Common Stock, any other class of common shares entitled to vote with respect to such matter and any class or series of Preferred Stock entitled to vote with respect to such matter then outstanding, voting together as a single class, and (y) the holders of a majority of the combined voting power of the shares of Liberty Media Group Common Stock then outstanding, voting separately as a class (without any vote of the holders of the Common Stock, any other class of common shares or any class or series of Preferred Stock of the corporation), unless each of the following requirements is met (in which event the approval set forth in subclause (y) of this clause (iii) shall not be required): (A) the consideration into which the Liberty Media Group Common Stock is converted, reclassified or changed or for which it is exchanged in such transaction includes shares of a class of the common stock of the surviving, resulting or acquiring corporation in such transaction or of the corporation, if applicable, (it being understood that if the Common Stock will be converted in such transaction into any class or series of common shares of any Person, then the term "acquiring corporation" shall mean such Person if such Person directly or indirectly owns the assets comprising the Liberty Media Group after giving effect to such transaction), (B) such class of common stock is intended to reflect the separate performance of the businesses, assets and liabilities comprising the Liberty Media Group (as it existed prior to such transaction and no other material businesses, assets or liabilities) and has powers, preferences, privileges and special rights equivalent to those of the shares of Liberty Media Group Common Stock, (C) such businesses, assets and liabilities comprising the Liberty Media Group are owned directly or indirectly by the issuer of the shares of such class of common stock and if prior to such transaction all of the businesses, assets and liabilities comprising the Liberty Media Group were held, directly or indirectly, by one or more Qualifying Subsidiaries of the corporation (or by Subsidiaries that are not held directly by the corporation but would be Qualifying Subsidiaries if they were held directly by the corporation) that hold no other material assets or liabilities, then immediately following such transaction, such businesses, assets and liabilities comprising the Liberty Media Group are owned, directly or indirectly, by one or more Qualifying Subsidiaries of the issuer of the shares of such class of common stock (or by Subsidiaries of such issuer that are not held directly by such issuer but would be Qualifying Subsidiaries if they were held directly by such issuer) that hold no other material assets or liabilities, and (D) the shares of such class of common stock immediately after such transaction are held only by Persons that were holders of shares of Liberty Media Group Common Stock (or Convertible Securities that were convertible into or exercisable or exchangeable for Liberty Media Group Common Stock) immediately prior to such transaction. (c) If the corporation shall in any manner subdivide (by stock split or otherwise) or combine (by reverse stock split or otherwise) the outstanding shares of Common Stock or Liberty Media Group Common Stock, or pay a stock dividend in shares of any class to holders of that class or shall otherwise effect a share distribution (as defined in paragraph 4 of this Part B of this Article Third) of Common Stock or Liberty Media Group Common Stock, the per share voting rights specified in paragraph 1(a) of this Part B of this Article Third of Liberty Media Group Common Stock relative to Common Stock shall be appropriately adjusted so as to avoid any dilution in the aggregate voting rights of any class. 2. Conversion Rights of Liberty Media Group Common Stock. Each share of Class B Liberty Media Group Common Stock shall be convertible, at the option of the holder thereof, into one share of Class A Liberty Media Group Common Stock. Any such conversion may be effected by any holder of Class B Liberty Media Group Common Stock by surrendering such holder's certificate or certificates for the Class B Liberty Media Group Common Stock to be converted, duly endorsed, at the office of the corporation or any transfer agent for the Class B Liberty Media Group Common Stock, together with a written notice to the corporation at such office that such holder elects to convert all or a specified number of shares of Class B Liberty Media Group Common Stock represented by such certificate and stating the name or names in which such holder desires the certificate or certificates for Class A Liberty Media Group Common Stock to be issued. If so required by the corporation, any certificate for shares surrendered for conversion shall be accompanied by instruments of transfer, in form satisfactory to the corporation, duly executed by the holder of such shares or the duly authorized representative of such holder. Promptly thereafter, the corporation shall issue and deliver to such holder or such holder's nominee or nominees, a certificate or certificates for the number of shares of Class A Liberty Media Group Common Stock to which such holder shall be entitled as herein provided. Such conversion shall be deemed to have been made at the close of business on the date of receipt by the corporation or any such transfer agent of the certificate or certificates, notice and, if required, instruments of transfer referred to above, and the person or persons entitled to receive the Class A Liberty Media Group Common Stock issuable on such conversion shall be treated for all purposes as the record holder or holders of such Class A Liberty Media Group Common Stock on that date. A number of shares of Class A Liberty Media Group Common Stock equal to the number of shares of Class B Liberty Media Group Common Stock outstanding from time to time shall be set aside and reserved for issuance upon conversion of shares of Class B Liberty Media Group Common Stock. Shares of Class A Liberty Media Group Common Stock shall not be convertible into shares of Class B Liberty Media Group Common Stock. 3. Dividends. (a) Dividends on Common Stock. Dividends on the Common Stock may be declared and paid only to the extent of (i) the assets of the corporation legally available therefor minus (ii) the Liberty Media Group Available Dividend Amount (such amount, the "Common Stock Available Dividend Amount"). (b) Dividends on Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock. Dividends on the Class A Liberty Media Group Common Stock and the Class B Liberty Media Group Common Stock may be declared and paid only out of the lesser of (i) assets of the corporation legally available therefor and (ii) the Liberty Media Group Available Dividend Amount. Subject to paragraph 4 of this Part B of this Article Third, whenever a dividend is paid to the holders of Class A Liberty Media Group Common Stock, the corporation shall also pay to the holders of Class B Liberty Media Group Common Stock a dividend per share equal to the dividend per share paid to the holders of Class A Liberty Media Group Common Stock, and whenever a dividend is paid to the holders of Class B Liberty Media Group Common Stock, the corporation shall also pay to the holders of Class A Liberty Media Group Common Stock a dividend per share equal to the dividend per share paid to the holders of Class B Liberty Media Group Common Stock. (c) Discrimination Between or Among Classes of Common Shares. The Board of Directors, subject to the provisions of paragraphs 3(a) and 3(b) of this Part B of this Article Third, shall have the sole authority and discretion to declare and pay dividends on (i) the Common Stock, (ii) any other class of common shares or (iii) the Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock, in equal or unequal amounts (including declaring and paying no dividends on the Liberty Media Group Common Stock while declaring and paying dividends on the Common Stock or any other class of common shares and declaring and paying no dividends on the Common Stock or any other class of common shares while declaring and paying dividends on the Liberty Media Group Common Stock), notwithstanding the relationship between the Common Stock Available Dividend Amount and the Liberty Media Group Available Dividend Amount, the respective amounts of prior dividends declared on, or the liquidation rights of, the Common Stock, any other class of common shares or the Class A Liberty Media Group Common Stock and the Class B Liberty Media Group Common Stock, or any other factor. 4. Share Distributions. The corporation may declare and pay a distribution consisting of shares of Common Stock, Class A Liberty Media Group Common Stock, Class B Liberty Media Group Common Stock or any other securities of the corporation or any other Person (hereinafter sometimes called a "share distribution") to holders of the Common Stock, Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock only in accordance with the provisions of this paragraph 4 of this Part B of this Article Third. (a) Distributions on Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock. If at any time a share distribution is to be made with respect to the Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock, such share distribution may be declared and paid only as follows (or as permitted by paragraph 5 of this Part B of this Article Third with respect to the redemptions and other distributions referred to therein): (i) a share distribution consisting of shares of Class A Liberty Media Group Common Stock (or Convertible Securities convertible into or exercisable or exchangeable for shares of Class A Liberty Media Group Common Stock) to holders of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock, on an equal per share basis; or consisting of shares of Class A Liberty Media Group Common Stock (or Convertible Securities convertible into or exercisable or exchangeable for shares of Class A Liberty Media Group Common Stock) to holders of Class A Liberty Media Group Common Stock and, on an equal per share basis, shares of Class B Liberty Media Group Common Stock (or like Convertible Securities convertible into or exercisable or exchangeable for shares of Class B Liberty Media Group Common Stock) to holders of Class B Liberty Media Group Common Stock; (ii) a share distribution consisting of shares of Common Stock or any other class of common shares of the corporation (other than Liberty Media Group Common Stock), or Convertible Securities convertible into or exercisable or exchangeable for shares of Common Stock or any other class of common shares of the corporation (other than Liberty Media Group Common Stock), to holders of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock, on an equal per share basis; (iii) a share distribution consisting of any class or series of securities of the corporation or any other Person other than Class A Liberty Media Group Common Stock, Class B Liberty Media Group Common Stock, Common Stock or any other class of common shares of the corporation (or Convertible Securities convertible into or exercisable or exchangeable for shares of Class A Liberty Media Group Common Stock, Class B Liberty Media Group Common Stock or Common Stock or any other class of common shares of the corporation), (x) if a single class or series of securities is to be distributed, on the basis of a distribution of identical securities, on an equal per share basis, to holders of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock and (y) if more than one class or series of securities is to be distributed, then, if and to the extent practicable, in accordance with the following provisions of this clause (y) and, otherwise, in accordance with clause (x) above: on the basis of a distribution of one class or series of securities to holders of Class A Liberty Media Group Common Stock and another class or series of securities to holders of Class B Liberty Media Group Common Stock, provided that the securities so distributed (and, if the distribution consists of Convertible Securities, the securities into which such Convertible Securities are convertible or for which they are exercisable or exchangeable) do not differ in any respect other than their relative voting rights and related differences in designation, conversion, redemption and share distribution provisions, with holders of shares of Class B Liberty Media Group Common Stock receiving the class or series having the higher relative voting rights (without regard to whether such rights differ to a greater or lesser extent than the corresponding differences in voting rights, designation, conversion, redemption and share distribution provisions between the Class A Liberty Media Group Common Stock and the Class B Liberty Media Group Common Stock), provided that if the securities so distributed constitute capital stock of a Subsidiary of the corporation, such rights shall not differ to a greater extent than the corresponding differences in voting rights, designation, conversion, redemption and share distribution provisions between the Class A Liberty Media Group Common Stock and the Class B Liberty Media Group Common Stock, and provided in each case that such distribution is otherwise made on an equal per share basis. The corporation shall not reclassify, subdivide or combine the Class A Liberty Media Group Common Stock without reclassifying, subdividing or combining the Class B Liberty Media Group Common Stock, on an equal per share basis, and the corporation shall not reclassify, subdivide or combine the Class B Liberty Media Group Common Stock without reclassifying, subdividing or combining the Class A Liberty Media Group Common Stock, on an equal per share basis. The corporation shall not effect a share distribution to the holders of Liberty Media Group Common Stock of any class or series of securities of a Subsidiary of the corporation or any other Person unless such share distribution is tax-free to the holders of Liberty Media Group Common Stock (except with respect to cash received by such holders in lieu of fractional shares). (b) Distributions on Common Stock. The corporation shall not declare and pay a share distribution with respect to the Common Stock or any other class of common shares (other than the Liberty Media Group Common Stock) consisting of Class A Liberty Media Group Common Stock, Class B Liberty Media Group Common Stock, any class or series of Preferred Stock attributed to the Liberty Media Group or securities of any Person included in the Liberty Media Group (or Convertible Securities convertible into or exercisable or exchangeable for shares of Class A Liberty Media Group Common Stock, Class B Liberty Media Group Common Stock, any such class or series of Preferred Stock or securities of any such Person). Except as set forth in the immediately preceding sentence, the corporation may declare and pay a share distribution to holders of Common Stock or any other class of common shares (other than Liberty Media Group Common Stock) consisting of any securities of the corporation, any Subsidiary of the corporation, or any other Person, including without limitation a share distribution consisting of shares of any class or series of Preferred Stock or shares of Common Stock or any other class of common shares (other than Liberty Media Group Common Stock) (or Convertible Securities convertible into or exercisable or exchangeable for shares of any class or series of Preferred Stock or shares of Common Stock or any other class of common shares (other than Liberty Media Group Common Stock)). 5. Redemption and Other Provisions Relating to the Liberty Media Group Common Stock. (a) Redemption in Exchange for Stock of Qualifying Subsidiaries. At any time at which all of the assets and liabilities included in the Liberty Media Group are held directly or indirectly by one or more Qualifying Subsidiaries of the corporation that hold no other material assets or liabilities (the "Liberty Media Group Subsidiaries"), the Board of Directors may, subject to the availability of assets of the corporation legally available therefor, redeem, on a pro rata basis, all of the outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock in exchange for an aggregate number of outstanding fully paid and nonassessable shares of common stock of a Liberty Media Group Subsidiary that is the beneficial owner of all other Liberty Media Group Subsidiaries (or, if applicable, of each Liberty Media Group Subsidiary that is not a Subsidiary of one or more other Liberty Media Group Subsidiaries) equal to the number of outstanding shares of common stock of such Liberty Media Group Subsidiary (or Liberty Media Group Subsidiaries, as the case may be) held by the corporation; provided that no such redemption pursuant to this paragraph 5(a) of this Part B of this Article Third may occur unless the redemption is tax-free to the holders of Liberty Media Group Common Stock (except with respect to cash received by such holders in lieu of fractional shares). Any such redemption shall occur on a Redemption Date set forth in a notice to holders of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock and Convertible Securities convertible into or exercisable or exchangeable for shares of either such series (unless provision for notice is otherwise made pursuant to the terms of such Convertible Securities) pursuant to paragraph 5(d)(v) of this Part B of this Article Third. In effecting such a redemption, the corporation shall (i) if and to the extent practicable, redeem shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock in exchange for shares of separate classes or series of common stock of each Liberty Media Group Subsidiary with relative voting rights and related differences in designation, conversion, redemption and share distribution provisions not greater than the corresponding differences in voting rights, designation, conversion, redemption and share distribution provisions between the Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock, with holders of shares of Class B Liberty Media Group Common Stock receiving the class or series having the higher relative voting rights, and (ii) to the extent redemption in accordance with clause (i) above is not practicable, redeem shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock in exchange for shares of a single class of common stock of each Liberty Media Group Subsidiary without distinction between the shares distributed to the holders of the Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock. (b) Mandatory Dividend or Redemption in Case of Disposition of Liberty Media Group Assets. In the event of the Disposition, in one transaction or a series of related transactions, by the corporation and its subsidiaries of all or substantially all of the properties and assets of the Liberty Media Group to one or more Persons or groups (other than (w) in connection with the Disposition by the corporation of all of the corporation's properties and assets in one transaction or a series of related transactions in connection with the liquidation, dissolution or winding up of the corporation within the meaning of paragraph 6 of this Part B of this Article Third, (x) a dividend, other distribution or redemption in accordance with any provision of paragraph 3, paragraph 4, paragraph 5(a) or paragraph 6 of this Part B of this Article Third, (y) to any Person or group which the Liberty Media Group, directly or indirectly, after giving effect to the Disposition, controls and which is included in the Liberty Media Group or (z) in connection with a Related Business Transaction), the corporation shall, on or prior to the 85th Trading Day following the consummation of such Disposition, either: (i) subject to paragraph 3(b) of this Part B of this Article Third, declare and pay a dividend in cash and/or in securities or other property (determined as provided below) to the holders of the outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock equally on a share for share basis (subject to the last sentence of this paragraph5 (b) of this Part B of this Article Third), in an aggregate amount equal to the Liberty Media Group Net Proceeds of such Disposition (provided that if such Disposition involves all (not merely substantially all) of the properties and assets of the Liberty Media Group, then the aggregate amount of such dividend shall equal the product of the Liberty Media Group Full Dilution Fraction and the Liberty Media Group Net Proceeds of such Disposition and the difference between the aggregate amount of such dividend and such Liberty Media Group Net Proceeds shall be reserved by the corporation for payment or delivery to holders of Pre-Merger Convertible Securities on conversion, exercise or exchange thereof); or (ii) provided that there are assets of the corporation legally available therefor and to the extent the Liberty Media Group Available Dividend Amount would have been sufficient to pay a dividend in lieu thereof pursuant to clause (i) of this paragraph 5(b) of this Part B of this Article Third, then: (A) if such Disposition involves all (not merely substantially all) of the properties and assets of the Liberty Media Group, redeem all outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock in exchange for cash and/or securities or other property (determined as provided below) in an aggregate amount equal to the product of the Liberty Media Group Full Dilution Fraction and the Liberty Media Group Net Proceeds, such aggregate amount to be allocated (subject to the last sentence of this paragraph 5(b) of this Part B of this Article Third) to shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock in the ratio of the number of shares of each such series outstanding (so that the amount of consideration paid for the redemption of each share of Class A Liberty Media Group Common Stock and each share of Class B Liberty Media Group Common Stock is the same); or (B) if such Disposition involves substantially all (but not all) of the properties and assets of the Liberty Media Group, apply an aggregate amount of cash and/or securities or other property (determined as provided below) equal to the Liberty Media Group Net Proceeds to the redemption of outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock, such aggregate amount to be allocated (subject to the last sentence of this paragraph 5(b) of this Part B of this Article Third) to shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock in the ratio of the number of shares of each such series outstanding, and the number of shares of each such series to be redeemed to equal the lesser of (x) the whole number nearest the number determined by dividing the aggregate amount so allocated to the redemption of such series by the average Market Value of one share of Class A Liberty Media Group Common Stock during the ten-Trading Day period beginning on the 16th Trading Day following the consummation of such Disposition and (y) the number of shares of such series outstanding (so that the amount of consideration paid for the redemption of each share of Class A Liberty Media Group Common Stock and each share of Class B Liberty Media Group Common Stock is the same); such redemption to be effected in accordance with the applicable provisions of paragraph 5(d) of this Part B of this Article Third; For purposes of this paragraph 5(b): (x) as of any date, "substantially all of the properties and assets of the Liberty Media Group" shall mean a portion of such properties and assets that represents at least 80% of the then-current market value (as determined by the Board of Directors) of the properties and assets of the Liberty Media Group as of such date; (y) in the case of a Disposition of properties and assets in a series of related transactions, such Disposition shall not be deemed to have been consummated until the consummation of the last of such transactions; and (z) the corporation shall pay the dividend or redemption price referred to in clause (i) or (ii) of this paragraph 5(b) of this Part B of this Article Third in the same form as the proceeds of the Disposition were received. If the dividend or redemption price is paid in the form of securities of an issuer other than the corporation, the corporation shall (1) if more than one class or series of securities is to be distributed, if and to the extent practicable, pay the dividend or redemption price in the form of separate classes or series of securities, with one class or series of such securities to holders of Class A Liberty Media Group Common Stock and another class or series of securities to holders of Class B Liberty Media Group Common Stock, provided that such securities (and, if such securities are convertible into or exercisable or exchangeable for shares of another class or series of securities, the securities so issuable upon such conversion, exercise or exchange) do not differ in any respect other than their relative voting rights and related differences in designation, conversion, redemption and share distribution provisions, with holders of shares of Class B Liberty Media Group Common Stock receiving the class or series having the higher relative voting rights (without regard to whether such rights differ to a greater or lesser extent than the corresponding differences in voting rights, designation, conversion, redemption and share distribution provisions between the Class A Liberty Media Group Common Stock and the Class B Liberty Media Group Common Stock), provided that if such securities constitute capital stock of a Subsidiary of the corporation, such rights shall not differ to a greater extent than the corresponding differences in voting rights, designation, conversion, redemption and share distribution provisions between the Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock, and otherwise such securities shall be distributed on an equal per share basis, and (2) otherwise pay the dividend or redemption price in the form of a single class of securities without distinction between the shares received by the holders of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock. (c) Certain Provisions Respecting Convertible Securities. Unless the provisions of any class or series of Pre-Merger Convertible Securities provide specifically to the contrary, after any Redemption Date on which all outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock were redeemed, any share of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock that is issued on conversion, exercise or exchange of any Pre-Merger Convertible Securities shall, immediately upon issuance pursuant to such conversion, exercise or exchange and without any notice or any other action on the part of the corporation or its Board of Directors or the holder of such share of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock, be redeemed in exchange for the kind and amount of shares of capital stock, cash and/or other securities or property that a holder of such Pre-Merger Convertible Securities would have been entitled to receive pursuant to the terms of such securities had such terms provided that the conversion, exercise or exchange privilege in effect immediately prior to any such redemption of all outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock would be adjusted so that the holder of any such Pre-Merger Convertible Securities thereafter surrendered for conversion, exercise or exchange would be entitled to receive the kind and amount of shares of capital stock, cash and/or other securities or property such holder would have received as a result of such redemption had such securities been converted, exercised or exchanged immediately prior thereto. Unless the provisions of any class or series of Convertible Securities (other than Pre-Merger Convertible Securities) which are or become convertible into or exercisable or exchangeable for shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock provide specifically to the contrary, after any Redemption Date on which all outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock were redeemed, any share of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock that is issued on conversion, exercise or exchange of any such Convertible Securities shall, immediately upon issuance pursuant to such conversion, exercise or exchange and without any notice or any other action on the part of the corporation or its Board of Directors or the holder of such share of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock, be redeemed in exchange for, to the extent assets of the corporation are legally available therefor, the amount of $.01 per share in cash. (d) General. (i) Not later than the 10th Trading Day following the consummation of a Disposition referred to in paragraph 5(b) of this Part B of this Article Third, the corporation shall announce publicly by press release (A) the Liberty Media Group Net Proceeds of such Disposition, (B) the number of outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock, (C) the number of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock into or for which Convertible Securities are then convertible, exercisable or exchangeable and the conversion, exercise or exchange prices thereof (and stating which, if any, of such Convertible Securities constitute Pre-Merger Convertible Securities), and (D) if the Disposition is of all (not merely substantially all) of the properties and assets of the Liberty Media Group, the Liberty Media Group Full Dilution Fraction as of a recent date preceding the date of such notice. Not earlier than the 26th Trading Day and not later than the 30th Trading Day following the consummation of such Disposition, the corporation shall announce publicly by press release which of the actions specified in clauses (i) or (ii) of paragraph 5(b) of this Part B of this Article Third it has irrevocably determined to take. (ii) If the corporation determines to pay a dividend pursuant to clause (i) of paragraph 5(b) of this Part B of this Article Third, the corporation shall, not later than the 30th Trading Day following the consummation of such Disposition, cause to be given to each holder of outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock, and to each holder of Convertible Securities convertible into or exercisable or exchangeable for shares of either such series (unless provision for notice is otherwise made pursuant to the terms of such Convertible Securities), a notice setting forth (A) the record date for determining holders entitled to receive such dividend, which shall be not earlier than the 40th Trading Day and not later than the 50th Trading Day following the consummation of such Disposition, (B) the anticipated payment date of such dividend (which shall not be more than 85 Trading Days following the consummation of such Disposition), (C) the kind of shares of capital stock, cash and/or other securities or property to be distributed in respect of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock, (D) the Liberty Media Group Net Proceeds of such Disposition, (E) if the Disposition is of all (not merely substantially all) the properties and assets of the Liberty Media Group, the Liberty Media Group Full Dilution Fraction as of a recent date preceding the date of such notice, (F) the number of outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock and the number of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock into or for which outstanding Convertible Securities are then convertible, exercisable or exchangeable and the conversion, exercise or exchange prices thereof, (G) in the case of a notice to holders of Convertible Securities (other than Pre-Merger Convertible Securities, in the case of a Disposition of all (not merely substantially all) the properties and assets of the Liberty Media Group), a statement to the effect that holders of such Convertible Securities shall be entitled to receive such dividend only if they appropriately convert, exercise or exchange such Convertible Securities prior to the record date referred to in clause (A) of this sentence, and (H) if the Disposition is of all (not merely substantially all) the properties and assets of the Liberty Media Group, in the case of a notice to holders of Pre-Merger Convertible Securities, a statement to the effect that the holders of such Pre-Merger Convertible Securities shall be entitled to receive such dividend (without interest) upon conversion, exercise or exchange of such Pre-Merger Convertible Securities. Such notice shall be sent by first-class mail, postage prepaid, at such holder's address as the same appears on the transfer books of the corporation. (iii) If the corporation determines to undertake a redemption of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock following a Disposition of all (not merely substantially all) of the properties and assets of the Liberty Media Group pursuant to clause (ii) (A) of paragraph 5(b) of this Part B of this Article Third, the corporation shall cause to be given to each holder of outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock and to each holder of Convertible Securities convertible into or exercisable or exchangeable for shares of either such series (unless provision for notice is otherwise made pursuant to the terms of such Convertible Securities), a notice setting forth (A) a statement that all shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock outstanding on the Redemption Date shall be redeemed, (B) the Redemption Date (which shall not be more than 85 Trading Days following the consummation of such Disposition), (C) the kind of shares of capital stock, cash and/or other securities or property to be paid as a redemption price in respect of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock outstanding on the Redemption Date, (D) the Liberty Media Group Net Proceeds of such Disposition, (E) the Liberty Media Group Full Dilution Fraction as of a recent date preceding the date of such notice, (F) the place or places where certificates for shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock, properly endorsed or assigned for transfer (unless the corporation waives such requirement), are to be surrendered for delivery of certificates for shares of such capital stock, cash and/or other securities or property, (G) the number of outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock and the number of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock into or for which outstanding Convertible Securities are then convertible, exercisable or exchangeable and the conversion, exercise or exchange prices thereof (and stating which, if any, of such Convertible Securities constitute Pre-Merger Convertible Securities), and (H) in the case of a notice to holders of Convertible Securities (other than Pre-Merger Convertible Securities), a statement to the effect that holders of such Convertible Securities shall be entitled to participate in such redemption only if such holders appropriately convert, exercise or exchange such Convertible Securities on or prior to the Redemption Date referred to in clause (B) of this sentence and a statement as to what, if anything, such holders shall be entitled to receive pursuant to the terms of such Convertible Securities or, if applicable, paragraph 5(c) of this Part B of this Article Third if such holders convert, exercise or exchange such Convertible Securities following such Redemption Date. Such notice shall be sent by first-class mail, postage prepaid, not less than 35 Trading Days nor more than 45 Trading Days prior to the Redemption Date, at such holder's address as the same appears on the transfer books of the corporation. (iv) If the corporation determines to undertake a redemption of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock following a Disposition of substantially all (but not all) of the properties and assets of the Liberty Media Group pursuant to clause (ii)(B) of paragraph 5(b) of Part B of this Article Third, the corporation shall, not later than the 30th Trading Day following the consummation of such Disposition, cause to be given to each holder of record of outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock, and to each holder of Convertible Securities convertible into or exercisable or exchangeable for shares of either such series (unless provision for notice is otherwise made pursuant to the terms of such Convertible Securities), a notice setting forth (A) a date not earlier than the 40th Trading Day and not later than the 50th Trading Day following the consummation of such Disposition which shall be the date on which shares of the Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock then outstanding shall be selected for redemption, (B) the anticipated Redemption Date (which shall not be more than 85 Trading Days following the consummation of such Disposition), (C) the kind of shares of capital stock, cash and/or other securities or property to be paid as a redemption price in respect of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock selected for redemption, (D) the Liberty Media Group Net Proceeds of such Disposition, (E) the number of outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock and the number of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock into or for which outstanding Convertible Securities are then convertible, exercisable or exchangeable and the conversion or exercise prices thereof, and (F) in the case of a notice to holders of Convertible Securities, a statement to the effect that holders of such Convertible Securities shall be entitled to participate in such selection for redemption only if such holders appropriately convert, exercise or exchange such Convertible Securities on or prior to the date referred to in clause (A) of this sentence and a statement as to what, if anything, such holders shall be entitled to receive pursuant to the terms of such Convertible Securities if such holders convert, exercise or exchange such Convertible Securities following such date. Promptly following the date referred to in clause (A) of the preceding sentence, but not earlier than the 40th Trading Day and not later than the 50th Trading Day following the consummation of such Disposition, the corporation shall cause to be given to each holder of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock to be so redeemed, a notice setting forth (A) the number of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock held by such holder to be redeemed, (B) a statement that such shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock shall be redeemed, (C) the Redemption Date (which shall not be more than 85 Trading Days following the consummation of such Disposition), (D) the kind and per share amount of shares of capital stock, cash and/or other securities or property to be received by such holder with respect to each share of such Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock to be redeemed, including details as to the calculation thereof, and (E) the place or places where certificates for shares of such Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock, properly endorsed or assigned for transfer (unless the corporation waives such requirement), are to be surrendered for delivery of certificates for shares of such capital stock, cash and/or other securities or property. The notices referred to in this clause (iv) shall be sent by first-class mail, postage prepaid, at such holder's address as the same appears on the transfer books of the corporation. The outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock to be redeemed shall be redeemed by the corporation pro rata among the holders of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock or by such other method as may be determined by the Board of Directors to be equitable. (v) If the corporation determines to redeem shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock pursuant to paragraph 5(a) of this Part B of this Article Third, the corporation shall promptly cause to be given to each holder of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock and to each holder of Convertible Securities convertible into or exercisable or exchangeable for shares of either such series (unless provision for such notice is otherwise made pursuant to the terms of such Convertible Securities), a notice setting forth (A) a statement that all outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock shall be redeemed in exchange for shares of common stock of the Liberty Media Group Subsidiaries, (B) the Redemption Date, (C) the place or places where certificates for shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock, properly endorsed or assigned for transfer (unless the corporation shall waive such requirement), are to be surrendered for delivery of certificates for shares of common stock of the Liberty Media Group Subsidiaries, (D) the number of outstanding shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock and the number of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock into or for which outstanding Convertible Securities are then convertible, exercisable or exchangeable and the conversion, exercise or exchange prices thereof (and stating which, if any, of such Convertible Securities constitute Pre-Merger Convertible Securities) and (E) in the case of a notice to holders of Convertible Securities (other than Pre-Merger Convertible Securities), a statement to the effect that holders of such Convertible Securities shall be entitled to participate in such redemption only if such holders appropriately convert, exercise or exchange such Convertible Securities on or prior to the Redemption Date referred to in clause (B) of this sentence and a statement as to what, if anything, such holders shall be entitled to receive pursuant to the terms of such Convertible Securities or, if applicable, paragraph 5(c) of this Part B of this Article Third if such holders convert, exercise or exchange such Convertible Securities following the Redemption Date. Such notice shall be sent by first-class mail, postage prepaid, not less than 35 Trading Days nor more than 45 Trading Days prior to the Redemption Date, at such holder's address as the same appears on the transfer books of the corporation. (vi) Neither the failure to mail any notice required by this paragraph 5(d) to any particular holder of Class A Liberty Media Group Common Stock, Class B Liberty Media Group Common Stock or of Convertible Securities nor any defect therein shall affect the sufficiency thereof with respect to any other holder of outstanding shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock or of Convertible Securities, or the validity of any redemption. (vii) The corporation shall not be required to issue or deliver fractional shares of any class of capital stock or any fractional securities to any holder of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock upon any redemption, dividend or other distribution pursuant to this paragraph 5. In connection with the determination of the number of shares of any class of capital stock that shall be issuable or the amount of securities that shall be deliverable to any holder of record upon any such redemption, dividend or other distribution (including any fractions of shares or securities), the corporation may aggregate the number of shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock held at the relevant time by such holder of record. If the number of shares of any class of capital stock or the amount of securities remaining to be issued or delivered to any holder of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock is a fraction, the corporation shall, if such fraction is not issued or delivered to such holder, pay a cash adjustment in respect of such fraction in an amount equal to the fair market value of such fraction on the fifth Trading Day prior to the date such payment is to be made (without interest). For purposes of the preceding sentence, "fair market value" of any fraction shall be (A) in the case of any fraction of a share of capital stock of the corporation, the product of such fraction and the Market Value of one share of such capital stock and (B) in the case of any other fractional security, such value as is determined by the Board of Directors. (viii) No adjustments in respect of dividends shall be made upon the redemption of any shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock; provided, however, that if the Redemption Date with respect to the Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock shall be subsequent to the record date for the payment of a dividend or other distribution thereon or with respect thereto, the holders of shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock at the close of business on such record date shall be entitled to receive the dividend or other distribution payable on or with respect to such shares on the date set for payment of such dividend or other distribution, notwithstanding the redemption of such shares or the corporation's default in payment of the dividend or distribution due on such date. (ix) Before any holder of shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock shall be entitled to receive certificates representing shares of any kind of capital stock or cash and/or securities or other property to be received by such holder with respect to shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock pursuant to this paragraph 5 of this Part B of this Article Third, such holder shall surrender at such place as the corporation shall specify certificates for such shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock, properly endorsed or assigned for transfer (unless the corporation shall waive such requirement). The corporation shall as soon as practicable after such surrender of certificates representing shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock deliver to the person for whose account shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock were so surrendered, or to the nominee or nominees of such person, certificates representing the number of whole shares of the kind of capital stock or cash and/or securities or other property to which such person shall be entitled as aforesaid, together with any payment for fractional securities contemplated by paragraph 5(d)(vii) of this Part B of this Article Third. If less than all of the shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock represented by any one certificate are to be redeemed, the corporation shall issue and deliver a new certificate for the shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock not redeemed. The corporation shall not be required to register a transfer of any shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock selected or called for redemption. (x) From and after any applicable Redemption Date, all rights of a holder of shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock that were redeemed shall cease except for the right, upon surrender of the certificates representing shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock, to receive certificates representing shares of the kind and amount of capital stock or cash and/or securities or other property for which such shares were redeemed, together with any payment for fractional securities contemplated by paragraph 5(d)(vii) of this Part B of this Article Third and such holder shall have no other or further rights in respect of the shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock so redeemed, including, but not limited to, any rights with respect to any cash, securities or other properties which are reserved or otherwise designated by the corporation as being held for the satisfaction of the corporation's obligations to pay or deliver any cash, securities or other property upon the conversion, exercise or exchange of any Convertible Securities that were convertible into or exercisable or exchangeable for Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock and outstanding as of the date of such redemption. No holder of a certificate that, immediately prior to the applicable Redemption Date for the Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock, represented shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock shall be entitled to receive any dividend or other distribution with respect to shares of any kind of capital stock into or in exchange for which the Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock was redeemed until surrender of such holder's certificate for a certificate or certificates representing shares of such kind of capital stock. Upon such surrender, there shall be paid to the holder the amount of any dividends or other distributions (without interest) which theretofore became payable with respect to a record date after the Redemption Date but that were not paid by reason of the foregoing, with respect to the number of whole shares of the kind of capital stock represented by the certificate or certificates issued upon such surrender. From and after a Redemption Date for any shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock, the corporation shall, however, be entitled to treat the certificates for shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock that have not yet been surrendered for redemption as evidencing the ownership of the number of whole shares of the kind or kinds of capital stock for which the shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock represented by such certificates shall have been redeemed, notwithstanding the failure to surrender such certificates. (xi) The corporation shall pay any and all documentary, stamp or similar issue or transfer taxes that may be payable in respect of the issue or delivery of any shares of capital stock and/or other securities on redemption of shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock pursuant to this Part B of this Article Third. The corporation shall not, however, be required to pay any tax that may be payable in respect of any transfer involved in the issue and delivery of any shares of capital stock in a name other than that in which the shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock so redeemed were registered and no such issue or delivery shall be made unless and until the person requesting such issue has paid to the corporation the amount of any such tax, or has established to the satisfaction of the corporation that such tax has been paid. 6. Liquidation. In the event of a liquidation, dissolution or winding up of the corporation, whether voluntary or involuntary, after payment or provision for payment of the debts and other liabilities of the corporation and subject to the prior payment in full of the preferential amounts to which any class or series of Preferred Stock is entitled, (a) the holders of the shares of Common Stock and (on the basis that may be set forth in this Certificate with respect to any such shares) the holders of any other class of common shares (other than the Liberty Media Group Common Stock) shall share in the aggregate in a percentage of the funds of the corporation remaining for distribution to its common shareholders equal to 100% multiplied by the average daily ratio (expressed as a decimal) of X/Z for the 20-Trading Day period ending on the Trading Day prior to the date of the public announcement of such liquidation, dissolution or winding up, and (b) the holders of the shares of Class A Liberty Media Group Common Stock and the holders of the shares of Class B Liberty Media Group Common Stock shall share equally, on a share for share basis, in a percentage of the funds of the corporation remaining for distribution to its common shareholders equal to 100% multiplied by the average daily ratio (expressed as a decimal) of Y/Z for such 20-Trading Day period, where X is the aggregate Market Capitalization of the Common Stock and any other class of common shares (other than the Liberty Media Group Common Stock), Y is the aggregate Market Capitalization of the Class A Liberty Media Group Common Stock and the Class B Liberty Media Group Common Stock, and Z is the aggregate Market Capitalization of the Common Stock, any other class of common shares (other than the Liberty Media Group Common Stock), the Class A Liberty Media Group Common Stock and the Class B Liberty Media Group Common Stock. Neither the consolidation or merger of the corporation with or into any other corporation or corporations nor the sale, transfer or lease of all or substantially all of the assets of the corporation shall itself be deemed to be a liquidation, dissolution or winding up of the corporation within the meaning of this paragraph 6 of this Part B of this Article Third. Notwithstanding the foregoing, any transaction or series of related transactions which results in all of the assets and liabilities included in the Liberty Media Group being held by one or more Liberty Media Group Subsidiaries, and the distribution of such Liberty Media Group Subsidiaries (and no other material assets or liabilities) to the holders of the outstanding Liberty Media Group Common Stock shall not constitute a voluntary or involuntary liquidation, dissolution or winding up of the corporation for purposes of this paragraph 6 of this Part B of this Article Third, but shall be subject to paragraph 5(a) of this Part B of this Article Third. 7. Determinations by the Board of Directors. Any determinations made by the Board of Directors under any provision in this Part B of this Article Third shall be final and binding on all shareholders of the corporation, except as may otherwise be required by law. The corporation shall prepare a statement of any such determination by the Board of Directors respecting the fair market value of any properties, assets or securities and shall file such statement with the Secretary of the corporation. 8. Relationship Between the Liberty Media Group and the Common Stock Group. (a) In furtherance and not in limitation of the provisions of Article Ninth, neither the Liberty Media Group on the one hand, nor the Common Stock Group on the other hand, shall have any duty, responsibility or obligation to refrain from (and none of the directors or officers of the corporation, the Liberty Media Group or the Common Stock Group shall have any duty, responsibility or obligation to cause the Liberty Media Group or the Common Stock Group to refrain from) (i) engaging in the same or similar activities or lines of business as any member of the other Group, (ii) doing business with any potential or actual supplier or customer of any member of any other Group or (iii) engaging in, or refraining from, any other activities whatsoever relating to any of the potential or actual suppliers or customers of any member of the other Group. (b) In furtherance and not in limitation of the provisions of Article Ninth, neither the Liberty Media Group on the one hand, nor the Common Stock Group on the other hand, shall have any duty, responsibility or obligation (and none of the directors or officers of the corporation, the Liberty Media Group or the Common Stock Group shall have any duty, responsibility or obligation to cause the Liberty Media Group or the Common Stock Group) (i) to communicate or offer any business or other corporate opportunity to any other Person (including any business or other corporate opportunity which may arise which either Group may be financially able to undertake, and which is, from its nature, in the line of more than one Group's business and is of practical advantage to more than one Group), (ii) to provide financial support to the other Group (or any member thereof) or (iii) otherwise to assist the other Group. (c) In furtherance and not in limitation of the provisions of Article Ninth, no director or officer of the corporation shall be liable to the corporation or any holder of any securities of the corporation in respect of any failure or alleged failure of such officer or director to offer to (or to cause the Liberty Media Group or the Common Stock Group to offer to) either Group any corporate opportunity of any kind or nature that is pursued by the other Group. (d) Nothing in this paragraph 8 of this Part B of this Article Third shall prevent any members of the Liberty Media Group from entering into written agreements with the Common Stock Group to define or restrict any aspect of the relationship between the Groups. 9. Certain Definitions. Unless the context otherwise requires, the terms defined in this Part B of this Article Third shall have, for all purposes of this Part B of this Article Third, the meanings herein specified: "Common Stock Group" shall mean, as of any date, the interest of the corporation or any of its subsidiaries in all of the businesses in which the corporation or any of its subsidiaries (or any of their predecessors or successors) is or has been engaged, directly or indirectly, and the respective assets and liabilities of the corporation or any of its subsidiaries, other than any businesses, assets or liabilities of the Liberty Media Group. "Convertible Securities" shall mean any securities of the corporation (other than the Liberty Media Group Common Stock) or any Subsidiary thereof that are convertible into, exchangeable for or evidence the right to purchase any shares of Common Stock or of any series of Liberty Media Group Common Stock, whether upon conversion, exercise, exchange, pursuant to antidilution provisions of such securities or otherwise. "Covered Disposition" shall mean (x) any direct or indirect sale, transfer or conveyance by the corporation of any of its equity interest in Liberty Media Corporation or any Covered Entity or (y) any grant of any pledge or other security interest in the equity interest of the corporation in Liberty Media Corporation or any Covered Entity; provided, however, that the foregoing shall not apply to (i) any issuance or sale by the corporation of its own securities, (ii) any issuance or sale by Liberty Media Corporation of its own securities or any sale, transfer or conveyance by Liberty Media Corporation or any other Person included in the Liberty Media Group of any securities of any Person included in the Liberty Media Group, (iii) with respect to any Covered Entity, any transaction duly authorized by the board of directors of such Covered Entity, or (iv) any merger, consolidation, exchange of shares or other business combination transaction involving the corporation in which the corporation (or its successors) continues immediately following such transaction to hold the same direct or indirect interest in the business, assets and liabilities comprising the Liberty Media Group that it held immediately prior to such transaction (other than as a result of any action by any Person included in the Liberty Media Group). If a contribution of assets of Liberty Media Corporation to Liberty Media Group LLC occurs (other than the initial contribution made on formation thereof), then from and after the date of such contribution all references in the preceding sentence of this definition of Covered Disposition to Liberty Media Corporation shall be deemed to refer to Liberty Media Group LLC. "Covered Entity" shall mean, as of any date of determination, each of the following Persons (and any successor to such Person, by merger, consolidation, sale of all or substantially all of its assets or otherwise, whether or not in connection with a Related Business Transaction) unless all of the Corporation's equity interest in such Person or all of the assets of such Person are held by (i) Liberty Media Corporation, if such date of determination is prior to the contribution of assets of Liberty Media Corporation to Liberty Media Group LLC (other than the initial contribution made on formation thereof) or (ii) Liberty Media Group LLC, if such date of determination is after the contribution referred to in clause (i): Tele-Communications International, Inc., TCI Wireless Holdings, Inc., TCIP, Inc., Silver Spur Land and Cattle Co., and TCI Interactive, Inc. "Disposition" shall mean the sale, transfer, assignment or other disposition (whether by merger, consolidation, sale or contribution of assets or stock or otherwise) by the corporation (or its successors) or any of its Subsidiaries of properties or assets. Disposition shall not include a merger, consolidation, exchange of shares or other business combination transaction involving the corporation in which the corporation (or its successors) continues immediately following such transaction to hold the same direct and indirect interest in the business, assets and liabilities comprising the Liberty Media Group that it held immediately prior to such transaction (other than as a result of any action by any Person included in the Liberty Media Group). "Group" shall mean either the Common Stock Group or the Liberty Media Group. "Liberty Media Group" shall mean, as of any date that any shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock have been issued and continue to be outstanding, each of the following, without duplication: (a) the proceeds of any issuances or sales of Class A Liberty Media Group Common Stock, Class B Liberty Media Group Common Stock or any Convertible Securities that are convertible into or exercisable or exchangeable for Liberty Media Group Common Stock or of any Preferred Stock that is attributed to the Liberty Media Group; (b) the interest of the corporation or any of its subsidiaries in the Associated Group, Inc., a Delaware corporation, and the proceeds of any disposition thereof; (c) the interest of the Corporation or any of its subsidiaries in each Covered Entity or any subsidiary of a Covered Entity and their respective properties and assets (including, without limitation, the Sprint PCS Investment) and the proceeds of any disposition thereof; and (d) the interest of the corporation or of any of its subsidiaries in Liberty Media Corporation or any of its subsidiaries (including any successor thereto by merger, consolidation or sale of all or substantially all of its assets, whether or not in connection with a Related Business Transaction) and their respective properties and assets and the proceeds of any disposition thereof; provided, however, that if a contribution of assets of Liberty Media Corporation to Liberty Media Group LLC occurs (other than the initial contribution made on formation thereof), then from and after the date of such contribution, the Liberty Media Group shall mean, as of any date that any shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock continue to be outstanding, in addition to the assets referred to in clauses (a), (b) and (c) above and in clause (e) below, the interest of the corporation or any of its subsidiaries in (i) the Retained Business and (ii) Liberty Media Group LLC or any of its subsidiaries (including any successor thereto by merger, consolidation or sale of all or substantially all of its assets, whether or not in connection with a Related Business Transaction) and their respective properties and assets and the proceeds of any disposition thereof; and (e) the interest of the corporation in all dividends and distributions from Liberty Media Group LLC to Liberty Media Corporation or any of its subsidiaries (including any such successor) or from Liberty Media Corporation (or any such successor) to its shareholders or from any Covered Entity to its shareholders. For purposes hereof, "Retained Businesses" means the businesses, assets and liabilities of Liberty Media Corporation immediately following the contribution referred to in the preceding sentence (or, if there is more than one such contribution after the initial contribution made on formation, then the first of such contributions). "Liberty Media Group Available Dividend Amount," as of any date, shall mean the excess of (i) the amount by which the total assets of the Liberty Media Group exceed the total liabilities of the Liberty Media Group as of such date over (ii) the sum of (A) the par value of all issued shares of Liberty Media Group Common Stock and each class or series of Preferred Stock attributed to the Liberty Media Group, (B) the amount of the consideration received for any shares of Preferred Stock attributed to the Liberty Media Group without par value that have been issued, except such part of the consideration therefor as may have been allocated to surplus in a manner permitted by law, and (C) any amount not included in clauses (A) and (B) that the corporation (by appropriate action of its Board of Directors) has transferred to stated capital specifically in respect of Liberty Media Group Common Stock, minus (D) all reductions from such sums set forth in clauses (A), (B) and (C) as have been effected in a manner permitted by law; provided, however, that in the event that the law governing the corporation changes from that governing the corporation on the date of the adoption of the Amendment to this Certificate pursuant to which the Liberty Media Group Common Stock was authorized (whether because of amendment of the applicable law or because of a change in the jurisdiction of incorporation of the corporation through merger or otherwise), the Liberty Media Group Available Dividend Amount shall mean that amount of dividends, as determined by the Board of Directors, that could be paid by a corporation (governed under such applicable law) having the assets and liabilities of the Liberty Media Group, an amount of outstanding common stock (and having an aggregate par value) equal to the amount (and aggregate par value) of the outstanding Liberty Media Group Common Stock and of each class or series of Preferred Stock attributed to the Liberty Media Group and having an amount of earnings or loss or other relevant corporate attributes as reasonably determined by the Board of Directors in light of all factors deemed relevant by the Board. "Liberty Media Group Full Dilution Fraction" shall mean, as of any date, a fraction the numerator of which is the aggregate number of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock outstanding on such date and the denominator of which is the sum of (a) such aggregate number of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock outstanding on such date and (b) the aggregate number of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock issuable, determined as of such date, upon conversion, exercise or exchange of Pre-Merger Convertible Securities. "Liberty Media Group LLC" shall mean Liberty Media Group LLC, a Delaware limited liability company, of which Liberty Media Corporation and Liberty Management LLC are the members, and any successor thereto (by merger, consolidation, sale of all or substantially all of its assets or otherwise, whether or not in connection with a Related Business Transaction). "Liberty Media Group Net Proceeds" shall mean, as of any date, with respect to any Disposition of any of the properties and assets of the Liberty Media Group, an amount, if any, equal to the gross proceeds of such Disposition after any payment of, or reasonable provision for, (a) any taxes payable by the corporation in respect of such Disposition or in respect of any resulting dividend or redemption pursuant to clause (i) or (ii), respectively, of paragraph 5(b) of this Part B of this Article Third (or which would have been payable but for the utilization of tax benefits attributable to the Common Stock Group) reduced by any offset to such liability of the Liberty Media Group allowed pursuant to the Tax Sharing Agreement entered into pursuant to the Merger Agreement, (b) any transaction costs borne by the Common Stock Group in connection with such Disposition, including, without limitation, any legal, investment banking and accounting fees and expenses borne by the Common Stock Group in connection with such Disposition, (c) any liabilities and other obligations (contingent or otherwise) of the Liberty Media Group borne by the Common Stock Group in connection with such Disposition, including, without limitation, any indemnity or guarantee obligations incurred by the Common Stock Group in connection with the Disposition or any liabilities assumed by the Common Stock Group for future purchase price adjustments, and (d) any preferential amounts, accumulated and unpaid dividends and other obligations (other than with respect to Pre-Merger Convertible Securities) in respect of Preferred Stock attributed to the Liberty Media Group; provided, however, that the net amount determined in accordance with the foregoing provisions of this sentence shall, without duplication, be increased by the net amount, if any, payable by the Common Stock Group to the Liberty Media Group, or decreased by the net amount, if any, payable by the Liberty Media Group to the Common Stock Group, pursuant to the Tax Sharing Agreement referred to above, as applicable, as a result of the deconsolidation of the properties and assets of the Liberty Media Group disposed of in such Disposition. For purposes of this definition, any properties and assets of the Liberty Media Group remaining after such Disposition shall constitute "reasonable provision" for such amount of taxes, costs and liabilities (contingent or otherwise) as can be supported by such properties and assets. To the extent the proceeds of any Disposition include any securities or other property other than cash, the Board of Directors shall determine the value of such securities or property. "Liberty Media Corporation" shall mean Liberty Media Corporation, a Delaware corporation, and any successor thereto (by merger, consolidation, sale of all or substantially all of its assets or otherwise, whether or not in connection with a Related Business Transaction). "Market Capitalization" of any class or series of capital stock of the corporation on any Trading Day shall mean the product of (i) the Market Value of one share of such class or series on such Trading Day and (ii) the number of shares of such class or series outstanding on such Trading Day. "Market Value" of any class or series of capital stock of the corporation on any day shall mean the average of the high and low reported sales prices regular way of a share of such class or series on such day (if such day is a Trading Day, and if such day is not a Trading Day, on the Trading Day immediately preceding such day) or in case no such reported sale takes place on such Trading Day the average of the reported closing bid and asked prices regular way of a share of such class or series on such Trading Day, in either case on the New York Stock Exchange or, if the shares of such class or series are not quoted on the New York Stock Exchange on such Trading Day, on the Nasdaq National Market, or if the shares of such class or series are not quoted on the Nasdaq National Market on such Trading Day, the average of the closing bid and asked prices of a share of such class or series in the over-the-counter market on such Trading Day as furnished by any New York Stock Exchange member firm selected from time to time by the corporation, or if such closing bid and asked prices are not made available by any such New York Stock Exchange member firm on such Trading Day (including without limitation because such securities are not publicly held), the market value of a share of such class or series as determined by the Board of Directors; provided that for purposes of determining the ratios set forth in paragraph 6 of this Part B of this Article Third, (a) the "Market Value" of any share of Common Stock or of any class of Liberty Media Group Common Stock on any day prior to the "ex" date or any similar date for any dividend or distribution paid or to be paid with respect to the Common Stock or such class of Liberty Media Group Common Stock, as applicable, shall be reduced by the fair market value of the per share amount of such dividend or distribution as determined by the Board of Directors and (b) the "Market Value" of any share of Common Stock or of any class of Liberty Media Group Common Stock on any day prior to (i) the effective date of any subdivision (by stock split or otherwise) or combination (by reverse stock split or otherwise) of outstanding shares of Common Stock or of such class of Liberty Media Group Common Stock, as applicable, or (ii) the "ex" date or any similar date for any dividend or distribution with respect to the Common Stock or any such class of Liberty Media Group Common Stock in shares of the Common Stock or such class of Liberty Media Group Common Stock, as applicable, shall be appropriately adjusted to reflect such subdivision, combination, dividend or distribution. "Person" shall mean any individual, corporation, partnership, limited liability company, joint venture, association, joint stock company, trust, unincorporated organization, government or agency or political subdivision thereof, or other entity, whether acting in an individual, fiduciary or other capacity. "Pre-Merger Convertible Securities" shall mean Convertible Securities that were outstanding immediately following the Effective Time (as such term is defined in the Merger Agreement) and were, at such date convertible into or exercisable or exchangeable for shares of Class A Liberty Media Group Common Stock or Class B Liberty Media Group Common Stock. "Qualifying Subsidiary" of a Person shall mean a Subsidiary of such Person in which such Person's ownership and voting interest is sufficient to satisfy the ownership and voting requirements of the Internal Revenue Code and the regulations thereunder for a distribution of such Person's interest in such Subsidiary to the holders of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock to be tax free to such holders. "Redemption Date" shall mean any date fixed for a redemption or purchase of shares of Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock as set forth in a notice to holders of such series pursuant to this Certificate. "Related Business Transaction" shall mean any Disposition of all or substantially all of the properties and assets of the Liberty Media Group in which the corporation receives as proceeds of such Disposition primarily equity securities (including, without limitation, capital stock, convertible securities, partnership or limited partnership interests, limited liability company membership interests and other types of equity securities, without regard to the voting power or contractual or other management or governance rights related to such equity securities) of the purchaser or acquiror of such assets and properties of the Liberty Media Group, any entity which succeeds (by merger, formation of a joint venture enterprise or otherwise) to such assets and properties of the Liberty Media Group, or a third party issuer, which purchaser, acquiror or other issuer is engaged or proposes to engage primarily in one or more businesses similar or complementary to the businesses conducted by the Liberty Media Group prior to such Disposition, as determined in good faith by the Board of Directors, and upon consummation of such transaction is included in the Liberty Media Group. "Sprint PCS Investment" shall mean the common equity securities (and securities convertible into or exercisable or exchangeable for such common equity securities) of Sprint Corporation acquired by Tele-Communications, Inc. ("TCI") and its affiliates pursuant to that certain Restructuring and Merger Agreement, dated as of May 26, 1998, among TCI, Sprint Corporation, Comcast Corporation and Cox Communications, Inc. (the "PCS Restructuring Agreement") (as well as any indebtedness of Sprint Corporation or any of its affiliates to TCI or any of its affiliates remaining following the consummation of the transactions contemplated by the PCS Restructuring Agreement). "Subsidiary" shall mean, with respect to any Person, any corporation, limited liability company or partnership 50% or more of whose outstanding voting securities or membership or partnership interests, as the case may be, are directly or indirectly owned by such Person. "Trading Day" shall mean each weekday other than any day on which any relevant class or series of capital stock of the corporation is not traded on the New York Stock Exchange or the Nasdaq National Market or in the over-the-counter market. PART C--PREFERRED STOCK The Preferred Stock may be issued from time to time in one or more series. All shares of Preferred Stock of all series shall rank equally and be identical in all respects except that the Board of Directors is authorized to fix the number of shares in each series, the designation thereof and, subject to the provisions of this Article Third, the relative rights, preferences and limitations of each series and the variations in such rights, preferences and limitations as between series and specifically is authorized to fix with respect to each series: (a) the dividend rate on the shares of such series and the date or dates from which dividends shall be cumulative; (b) the times when, the prices at which, and all other terms and conditions upon which, shares of such series shall be redeemable; (c) the amounts which the holders of shares of such series shall be entitled to receive upon the liquidation, dissolution or winding up of the corporation, which amounts may vary depending on whether such liquidation, dissolution or winding up is voluntary or involuntary and, if voluntary, may vary at different dates; (d) whether or not the shares of such series shall be subject to the operation of a purchase, retirement or sinking fund and, if so, the extent to and manner in which such purchase, retirement or sinking fund shall be applied to the purchase or redemption of the shares of such series for retirement or for other corporate purposes and the terms and provisions relative to the operation of the said fund or funds; (e) whether or not the shares of such series shall be convertible into or exchangeable for shares of any other class or series or for any class of common shares and, if so, the price of prices or the rate or rates of conversion or exchange and the method, if any, of adjusting the same; (f) the restrictions, if any, upon the payment of dividends or making of other distributions on, and upon the purchase or other acquisition of, common shares; (g) the restrictions, if any, upon the creation of indebtedness, and the restrictions, if any, upon the issue of any additional shares ranking on a parity with or prior to the shares of such series in addition to the restrictions provided for in this Article Third; (h) the voting powers, if any, of the shares of such series in addition to the voting powers provided for in this Article Third; and (i) such other rights, preferences and limitations as shall not be inconsistent with this Article Third. All shares of any particular series shall rank equally and be identical in all respects except that shares of any one series issued at different times may differ as to the date from which dividends shall be cumulative. Dividends on shares of Preferred Stock of each series shall be cumulative from the date or dates fixed with respect to such series and shall be paid or declared or set apart for payment for all past dividend periods and for the current dividend period before any dividends (other than dividends payable in common shares) shall be declared or paid or set apart for payment on common shares. Whenever, at any time, full cumulative dividends for all past dividend periods and for the current dividend period shall have been paid or declared and set apart for payment on all then outstanding shares of Preferred Stock and all requirements with respect to any purchase, retirement or sinking fund or funds for all series of Preferred Stock shall have been complied with, the Board of Directors may declare dividends on the common shares and the shares of Preferred Stock shall not be entitled to share therein. Upon any liquidation, dissolution or winding up of the corporation, the holders of shares of Preferred Stock of such series shall be entitled to receive the amounts to which such holders are entitled as fixed with respect to such series, including all dividends accumulated to the date of final distribution, before any payment or distribution of assets of the corporation shall be made to or set apart for the holders of common shares and after such payments shall have been made in full to the holders of shares of Preferred Stock, the holders of common shares shall be entitled to receive any and all assets remaining to be paid or distributed to shareholders and the holders of shares of Preferred Stock shall not be entitled to share therein. For the purposes of this paragraph, the voluntary sale, conveyance, lease, exchange or transfer of all or substantially all the property or assets of the corporation or a consolidation or merger of the corporation with one or more other corporations (whether or not the corporation is the corporation surviving such consolidation or merger) shall not be deemed to be a liquidation, dissolution or winding up, voluntary or involuntary. The aggregate amount which all shares of Preferred Stock outstanding at any time shall be entitled to receive on involuntary liquidation, dissolution or winding up shall not exceed $8,000,000,000. So long as any shares of Preferred Stock are outstanding, the corporation will not (a) without the affirmative vote or consent of the holders of at least 66 2/3% of all the shares of Preferred Stock at the time outstanding, (i) authorize shares of stock ranking prior to the shares of Preferred Stock, or (ii) change any provision of this Article Third so to affect adversely the shares of Preferred Stock; (b) without the affirmative vote or consent of the holders of at least 66 2/3% of any series of Preferred Stock at the time outstanding, change any of the provisions of such series so as to affect adversely the shares of such series; (c) without the affirmative vote or consent of the holders of at least a majority of all the shares of Preferred Stock at the time outstanding, (i) increase the authorized number of shares of Preferred Stock or (ii) increase the authorized number of shares of any class of stock ranking on a parity with the Preferred Stock. Whenever, at any time or times, dividends payable on shares of Preferred Stock shall be in default in an aggregate amount equivalent to six full quarterly dividends on any series of Preferred Stock at the time outstanding, the number of directors then constituting the Board of Directors of the corporation shall ipso facto be increased by two, and the outstanding shares of Preferred Stock shall, in addition to any other voting rights, have the exclusive right, voting separately as a class and without regard to series, to elect two directors of the corporation to fill such newly created directorships and such right shall continue until such time as all dividends accumulated on all shares of Preferred Stock to the latest dividend payment date shall have been paid or declared and set apart for payment. No holder of shares of Preferred Stock of any series, irrespective of any voting or other right of shares of such series, shall have, as such holder, any preemptive right to purchase any other shares of the corporation or any securities convertible into or entitling the holder to purchase such other shares. If in any case the amounts payable with respect to any requirements to retire shares of Preferred Stock are not paid in full in the case of all series with respect to which such requirements exist, the number of shares to be retired in each series shall be in proportion to the respective amounts which would be payable on account of such requirements if all amounts payable were paid in full. **** FOURTH: The manner in which the foregoing amendment of said Certificate of Incorporation of the corporation was authorized was by the vote of the holders of a majority of all outstanding shares of the corporation entitled to vote thereon at a meeting of shareholders, subsequent to the unanimous vote of the Board of Directors. IN WITNESS WHEREOF, we have subscribed this document on March 9, 1999 and do hereby affirm, under the penalties of perjury, that the statements contained herein have been examined by us and are true and correct. By: /s/ Marilyn J. Wasser --------------------------- Name: Marilyn J. Wasser Title: Vice President By: /s/ Robert S. Feit ------------------------- Name: Robert S. Feit Title: Assistant Secretary Certificate of Amendment of the Certificate of Incorporation Under Section 805 of the New York State Business Corporation Law We, the undersigned, being a Vice President and an Assistant Secretary respectively, of AT&T Corp., do hereby certify as follows: FIRST: The name of the corporation is AT&T Corp. SECOND: The Certificate of Incorporation of the corporation was filed by the Department of State on March 3, 1885 under the name American Telephone and Telegraph Company. THIRD: (a) The Certificate of Incorporation of the corporation is hereby amended to create one new class of common stock, AT&T Wireless Group common stock, having the number, designation, relative rights, preferences, and limitations as set forth herein. (b) To effect the foregoing, Article THIRD is hereby amended as set forth below: PART A of Article THIRD is hereby amended to read in its entirety as follows: PART A - Authorized Shares The aggregate number of shares which the corporation is authorized to issue is fourteen billion eight hundred fifty million (14,850,000,000) shares, consisting of one hundred million (100,000,000) preferred shares having a par value of $1.00 per share ("Preferred Stock") and fourteen billion seven hundred fifty million (14,750,000,000) common shares, of which six billion (6,000,000,000) common shares shall be Common Stock having a par value of $1.00 per share ("Common Stock"), two billion five hundred million (2,500,000,000) common shares shall be Class A Liberty Media Group Common Stock having a par value of $1.00 per share ("Class A Liberty Media Group Common Stock"), two hundred fifty million (250,000,000) common shares shall be Class B Liberty Media Group Common Stock having a par value of $1.00 per share ("Class B Liberty Media Group Common Stock") and six billion (6,000,000,000) common shares shall be Wireless Group Common Stock having a par value of $1.00 per share ("Wireless Group Common Stock"). The Class A Liberty Media Group Common Stock and the Class B Liberty Media Group Common Stock are collectively referred to herein as the "Liberty Media Group Common Stock". The authorized shares of Class B Liberty Media Group Common Stock will only be issued (i) pursuant to the Agreement and Plan of Restructuring and Merger, dated June 23, 1998 (the "Merger Agreement"), among Tele-Communications, Inc., Italy Merger Corp. and the corporation, (ii) upon conversion, exercise or exchange of Pre-Merger Convertible Securities (as defined in paragraph 9 of Part B of this Article Third), (iii) in a subdivision (by stock split or otherwise) of outstanding shares of Class B Liberty Media Group Common Stock, or (iv) as a stock dividend or share distribution (as defined in paragraph 4 of Part B of this Article Third). Part B of Article THIRD shall remain unchanged. Part C of Article THIRD is hereby redesignated as Part D of Article THIRD and shall otherwise remain unchanged, and a new Part C shall be added to Article THIRD, so that Part C of Article THIRD shall read in its entirety as follows: PART C - Wireless Group Common Stock 1. Voting Rights. (a) Subject to the following two sentences and to paragraph 1(c) of this Part C of this Article Third, holders of Wireless Group Common Stock shall be entitled to a number of votes or fraction of a vote for each share of such stock held (calculated to the nearest 1/10), on all matters presented to such shareholders, the numerator of which shall be the price per share of Wireless Group Common Stock used in the initial public offering of Wireless Group Common Stock and the denominator of which shall be the average daily Market Value of a share of Common Stock during the 10-Trading Day period ending on the 20th Trading Day prior to the effective date of the registration statement for such initial public offering. In the event that AT&T Wireless Group tracking stock is first distributed without an initial public offering, holders of Wireless Group Common Stock shall be entitled to a number of votes or fraction of a vote for each share of such stock held (calculated to the nearest 1/10), on all matters presented to such shareholders, the numerator of which shall be the average daily Market Value of a share of Wireless Group Common Stock during the 10-Trading Day period beginning on the 20th Trading Day following such initial distribution and the denominator of which shall be the average daily Market Value of a share of Common Stock during the 10-Trading Day period beginning on the 20th Trading Day following such initial distribution. Notwithstanding the foregoing, if the fraction resulting from the applicable formula set forth in the preceding two sentences is greater than 0.8 and less than 1.2, holders of Wireless Group Common Stock shall be entitled to one vote for each share of such stock held, and if the fraction resulting from the applicable formula set forth in the preceding two sentences is greater than 0.4 and less than 0.6, holders of Wireless Group Common Stock shall be entitled to one-half of a vote for each share of such stock held, in each case on all matters presented to such shareholders. (b) Except as may otherwise be required by the laws of the State of New York or, with respect to additional or special voting rights (which may include, without limitation, rights of any such holders of any such class or series to elect one or more directors voting separately as a class) of any class or series of Preferred Stock or any other class of common shares, in this Certificate of Incorporation of the corporation, as the same may be amended from time to time (this "Certificate") (including the terms of the Liberty Media Group Common Stock, any class or series of Preferred Stock and any resolution or resolutions providing for the establishment of such class or series pursuant to authority vested in the Board of Directors by this Certificate and the terms of any other class of common shares), the holders of shares of Common Stock, the holders of shares of Wireless Group Common Stock, the holders of shares of Class A Liberty Media Group Common Stock, the holders of shares of Class B Liberty Media Group Common Stock, the holders of shares of each other class of common shares, if any, entitled to vote thereon, and the holders of shares of each class or series of Preferred Stock, if any, entitled to vote thereon, shall vote as one class with respect to all matters to be voted on by shareholders of the corporation, and no separate vote or consent of the holders of shares of Common Stock, the holders of shares of Wireless Group Common Stock, the holders of shares of Class A Liberty Media Group Common Stock, the holders of shares of Class B Liberty Media Group Common Stock or the holders of shares of any such class of common shares or any such class or series of Preferred Stock shall be required for the approval of any such matter, except, in the case of Liberty Media Group Common Stock, under the circumstances described in paragraph 1(b) of Part B of this Article Third. (c) If the corporation shall in any manner subdivide (by stock split or otherwise) or combine (by reverse stock split or otherwise) the outstanding shares of Common Stock, Wireless Group Common Stock or Liberty Media Group Common Stock, or pay a stock dividend in shares of any class to holders of that class or shall otherwise effect a share distribution (as defined in paragraph 3 of this Part C of this Article Third) of Common Stock, Wireless Group Common Stock or Liberty Media Group Common Stock, the per share voting rights of Common Stock and Liberty Media Group Common Stock specified in paragraph 1(a) of Part B of this Article Third and/or the per share voting rights of Wireless Group Common Stock specified in paragraph 1(a) of this Part C of this Article Third shall be appropriately adjusted so as to avoid any dilution in the aggregate voting rights of any one class relative to the other classes. 2. Dividends. (a) Dividends on Common Stock. Dividends on Common Stock may be declared and paid only to the extent of (i) the assets of the corporation legally available therefor minus (ii) the sum of (A) the Liberty Media Group Available Dividend Amount (as defined in paragraph 9 of Part B of this Article Third), and (B) the Wireless Group Available Dividend Amount (such amount available for the payment of dividends on Common Stock is referred to in this Part C of this Article Third as the "Common Stock Available Dividend Amount(W)"). (b) Dividends on Wireless Group Common Stock. Dividends on Wireless Group Common Stock may be declared and paid only out of the lesser of (i) the excess, if any, of (A) the assets of the corporation legally available therefor, over (B) the Liberty Media Group Available Dividend Amount, and (ii) the Wireless Group Available Dividend Amount. Concurrently with the payment of any dividend on shares of Wireless Group Common Stock, at the election of the Board of Directors, either (x) the Common Stock Group(W) shall receive from the Wireless Group an aggregate payment of the same kind of cash and/or property that is the subject of such dividend, which payment shall be equal to the excess, if any, of (i) the quotient obtained by dividing (A) the aggregate amount of such dividend, as determined by the Board of Directors, by (B) the Wireless Group Allocation Fraction, over (ii) the aggregate amount of such dividend, as so determined, or (y) the Wireless Group Allocation Fraction will be adjusted as described in paragraph 9 of this Part C of this Article Third. The payment to be made to the Common Stock Group(W) pursuant to the preceding sentence may, at the discretion of the Board of Directors, be reflected by an allocation or by a direct transfer of cash or other property. (c) Discrimination Between or Among Classes of Common Shares. The Board of Directors, subject to the provisions of paragraphs 2(a) and 2(b) of this Part C of this Article Third and paragraph 3(b) of Part B of this Article Third, shall have the sole authority and discretion to declare and pay dividends (or to refrain from declaring or paying the same) exclusively to the holders of Common Stock, exclusively to the holders of Wireless Group Common Stock, exclusively to the holders of Liberty Media Group Common Stock, exclusively to the holders of any other class of common shares or to the holders of any two or more of such classes in equal or unequal amounts, notwithstanding the relationship between the Common Stock Available Dividend Amount(W), the Wireless Group Available Dividend Amount and the Liberty Media Group Available Dividend Amount, the respective amounts of prior dividends declared on, or the liquidation rights of, Common Stock, Wireless Group Common Stock, Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock, or any other factor. 3. Share Distributions. Subject to the provisions of paragraph 4 of Part B of this Article Third, the corporation may declare and pay a distribution consisting of shares of Common Stock, Wireless Group Common Stock or any other securities of the corporation or any other Person (hereinafter sometimes called a "share distribution") to holders of Common Stock or Wireless Group Common Stock only in accordance with this paragraph 3 of this Part C of this Article Third. (a) Distributions on Common Stock or Wireless Group Common Stock. Except as set forth in paragraph 4 of Part B of this Article Third, the corporation may declare and pay a share distribution to holders of Common Stock, Wireless Group Common Stock or any other class of common shares (other than Liberty Media Group Common Stock) consisting of any securities of the corporation, any Subsidiary of the corporation, or any other Person, including, without limitation, a share distribution consisting of shares of any class or series of Preferred Stock or shares of Common Stock, Wireless Group Common Stock or any other class of common shares (other than Liberty Media Group Common Stock) (or Convertible Securities convertible into or exercisable or exchangeable for shares of any class or series of Preferred Stock or shares of Common Stock, Wireless Group Common Stock or any other class of common shares (other than Liberty Media Group Common Stock)). Concurrently with the making of any share distribution with respect to Wireless Group Common Stock, at the election of the Board of Directors, either (x) the Common Stock Group(W) shall receive from the Wireless Group an aggregate payment of the same kind of property that is the subject of such distribution, which payment shall be equal to the excess, if any, of (i) the quotient obtained by dividing (A) the aggregate amount of such distribution, as determined by the Board of Directors, by (B) the Wireless Group Allocation Fraction, over (ii) the aggregate amount of such dividend, as so determined, or (y) the Wireless Group Allocation Fraction shall be adjusted as described in paragraph 9 of this Part C of this Article Third. Any payment to be made to the Common Stock Group(W) pursuant to the preceding sentence may, at the discretion of the Board of Directors, be reflected by an allocation or by a direct transfer of cash or other property. (b) Discrimination Between or Among Classes of Common Shares. The Board of Directors, subject to the foregoing provisions of this paragraph 3 of this Part C of this Article Third and the provisions of paragraph 4 of Part B of this Article Third, shall have the sole authority and discretion to declare and pay (or to refrain from declaring or paying) share distributions exclusively to holders of Common Stock, exclusively to holders of Wireless Group Common Stock, exclusively to holders of Liberty Media Group Common Stock, exclusively to the holders of any other class of common shares or to holders of any two or more of such classes in equal or unequal amounts, notwithstanding the relationship between the Common Stock Available Dividend Amount(W), the Wireless Group Available Dividend Amount and the Liberty Media Group Available Dividend Amount, the respective amounts of prior share distributions declared on, or the liquidation rights of, Common Stock, Wireless Group Common Stock, Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock or any other factor. 4. Exchange of Wireless Group Common Stock. (a) Exchange at Option of Board of Directors. At any time following either the occurrence of a Tax Event or the second anniversary of the date of initial issuance of any shares of Wireless Group Common Stock (the "Initial Issuance Date"), the Board of Directors, in its sole discretion, may, at any time, effect a recapitalization of the corporation (a "Board Required Exchange") by declaring that all of the outstanding shares of Wireless Group Common Stock shall be exchanged for fully paid and nonassessable shares of Common Stock in accordance with the Exchange Rate. In addition, at any time following the Initial Issuance Date, so long as all of the assets and liabilities included in the Wireless Group are held, directly or indirectly, by one or more Qualifying Subsidiaries of the corporation (which shall not include any Subsidiary that is a part of the Liberty Media Group as defined in paragraph 9 of Part B of this Article Third) that hold no other material assets or liabilities (the "Wireless Group Subsidiaries"), the Board of Directors may, subject to the availability of assets of the corporation legally available therefor, effect a Board Required Exchange by exchanging, on a pro rata basis, all of the outstanding shares of Wireless Group Common Stock in exchange for an aggregate number of outstanding fully paid and nonassessable shares of common stock of such Wireless Group Subsidiary or Subsidiaries at the applicable Exchange Rate, provided that no such exchange may occur unless the exchange is tax free to the holders of Wireless Group Common Stock (except with respect to any cash received by such holders in lieu of fractional shares). For purposes of this paragraph 4 of this Part C of this Article Third, the term "Exchange Shares" shall mean the shares of Common Stock or shares of the one or more Wireless Group Subsidiaries, as the case may be, into which shares of Wireless Group Common Stock may be exchanged pursuant to a Board Required Exchange. (b) Exchange in Connection with Certain Significant Transactions. In the event of a Disposition other than a Wireless Group Related Business Transaction by the corporation in a transaction or series of related transactions of all or substantially all of the properties and assets (as defined below) of the Wireless Group to any Person(s) or group(s) of which the corporation is not a majority owner (whether by merger, consolidation, sale of assets or stock, liquidation, dissolution, winding up or otherwise) (a "Significant Transaction"), effective upon the consummation of such sale, transfer, assignment or other disposition and automatically without any action on the part of the corporation or the Board of Directors or on the part of the holders of shares of Wireless Group Common Stock, the corporation shall be recapitalized (a "Significant Transaction Exchange") by exchanging all outstanding shares of Wireless Group Common Stock for, at the sole discretion of the Board of Directors, either (i) fully paid and nonassessable shares of Common Stock at the Exchange Rate or (ii) other consideration, as described in paragraph 4(c) of this Part C of this Article Third. Notwithstanding the preceding sentence, the corporation shall be under no obligation to effect a Significant Transaction Exchange that it might otherwise be required to effect pursuant to such sentence (and the Exchange Rate shall not apply) if (i) the underlying Significant Transaction is conditioned upon the affirmative vote of a majority of the holders of Wireless Group Common Stock, voting as a separate class, (ii) in connection with a spin-off or similar disposition of the corporation's entire interest in the Wireless Group to the holders of Wireless Group Common Stock, including any such disposition that is made in connection with a Board Required Exchange, or (iii) in connection with the liquidation, dissolution or winding up of the corporation, whether voluntary or involuntary. (c) Alternate Consideration in Connection with Significant Transaction Exchange. In connection with any Significant Transaction Exchange, the corporation may, at the sole discretion of the Board of Directors, (i) in lieu of issuing shares of Common Stock in exchange for shares of Wireless Group Common Stock, either (x) subject to the limitations described in paragraph 2(b) of this Part C of this Article Third and to the other provisions described in this paragraph 4(c) of this Part C of this Article Third, declare and pay a dividend in cash and/or in securities or other property (determined as provided below) to holders of the outstanding shares of Wireless Group Common Stock equally on a share for share basis in an aggregate amount equal to the Wireless Group Net Proceeds of such Significant Transaction; or (y) provided that there are assets of the corporation legally available therefor and to the extent the Wireless Group Available Dividend Amount would have been sufficient to pay a dividend in lieu thereof as described in clause (x) of this paragraph 4(c) of this Part C of this Article Third, then (A) if such Significant Transaction involves the Disposition of all (not merely substantially all) of the properties and assets of the Wireless Group, redeem all outstanding shares of Wireless Group Common Stock in exchange for cash and/or securities or other property (determined as provided below) in an aggregate amount equal to the Wireless Group Net Proceeds; or (B) if such Significant Transaction involves the Disposition of substantially all (but not all) of the properties and assets of the Wireless Group, apply an aggregate amount of cash and/or securities or other property (determined as provided below) equal to the Wireless Group Net Proceeds to the redemption of outstanding shares of Wireless Group Common Stock, the number of shares to be redeemed to equal the lesser of (1) the whole number nearest the number determined by dividing the aggregate amount so allocated to the redemption of Wireless Group Common Stock by the average Market Value of one share of Wireless Group Common Stock during the 10-Trading Day period beginning on the 15th Trading Day following the consummation of such Disposition, and (2) the number of shares of Wireless Group Common Stock outstanding, and (ii) in lieu of issuing solely shares of Common Stock in exchange for shares of Wireless Group Common Stock, subject to the limitations described in paragraph 2(b) of this Part C of this Article Third and to the other provisions described in paragraph 4(c) of this Part C of this Article Third, combine the issuance of shares of Common Stock in exchange for shares of Wireless Group Common Stock with the payment of a dividend on or the redemption of shares of Wireless Group Common Stock for cash and/or other securities or other property as described below. In the event that the Board of Directors elects the option described in (ii) of the preceding paragraph, the outstanding shares of Wireless Group Common Stock exchanged for fully paid and nonassessable shares of Common Stock shall be exchanged at the Exchange Rate and a dividend shall be paid on all the remaining shares of Wireless Group Common Stock equally on a share for share basis, or some or all of the remaining outstanding shares of Wireless Group Common Stock shall be exchanged for cash and/or other securities or other property, as follows. The aggregate amount of such dividend, in the case of a dividend, or the portion of the Wireless Group Net Proceeds to be applied to such an exchange, in the case of an exchange, shall equal (A) an amount equal to the total Wireless Group Net Proceeds multiplied by (B) one minus a fraction, the numerator of which shall be the number of shares of Wireless Group Common Stock exchanged for shares of Common Stock and the denominator of which shall be the total number of outstanding shares of Wireless Group Common Stock. In the event of an exchange, if the Significant Transaction involves the Disposition of all (not merely substantially all) of the properties and assets of the Wireless Group, then all remaining outstanding shares of Wireless Group Common Stock will be redeemed in exchange for cash and/or securities or other property in an aggregate amount equal to the portion of the Wireless Group Net Proceeds to be applied to the exchange. If the Significant Transaction involves the Disposition of substantially all (but not all) of the properties and assets of the Wireless Group, then the portion of the Wireless Group Net Proceeds to be applied to the exchange will be used to redeem a number of shares equal to the lesser of (1) the whole number nearest the number determined by dividing the aggregate amount so allocated to the redemption of Wireless Group Common Stock by the average Market Value of one share of Wireless Group Common Stock during the 10-Trading Day period beginning on the 15th Trading Day following consummation of the Disposition, and (2) the number of shares of Wireless Group Common Stock outstanding. For purposes of this paragraph 4 of this Part C of this Article Third, in the case of a Significant Transaction involving a Disposition of properties and assets in a series of related transactions, such Disposition shall not be deemed to have been consummated until the consummation of the last of such transactions. Any exchange described in this paragraph 4 of this Part C of this Article Third shall be effected in accordance with the applicable provisions set forth in paragraph 5 of this Part C of this Article Third. In the event that, at the time of any Significant Transaction, there are outstanding any Convertible Securities convertible into or exercisable for shares of Wireless Group Common Stock that would give the holders rights to receive any dividend or exchange consideration related to the Significant Transaction upon exercise, conversion or otherwise, or would adjust as a result of such dividend or exchange to give the holder equivalent economic rights, then the shares of Wireless Group Common Stock underlying such Convertible Securities will be taken into account for purposes of determining the terms of any dividend payment or exchange effected in lieu of a Significant Transaction Exchange. (d) Payment to Common Stock Group(W). Concurrently with the payment of any dividend referred to in paragraph 4(c) of this Part C of this Article Third, at the election of the Board of Directors, either (A) the Common Stock Group(W) shall receive from the Wireless Group an aggregate payment of the same kind of property that is the subject of such dividend, which payment shall be equal to the excess of (i) the quotient obtained by dividing (x) the aggregate amount of such dividend, as determined by the Board of Directors, by (y) the Wireless Group Allocation Fraction, over (ii) the aggregate amount of such dividend, as so determined, or (B) the Wireless Group Allocation Fraction will be adjusted as described in paragraph 9 of this Part C of this Article Third. Any payment to be made to the Common Stock Group(W) pursuant to the preceding sentence may, at the discretion of the Board of Directors, be reflected by an allocation or by a direct transfer of cash or other property. (e) Exchange Rate. For purposes of this paragraph 4 of this Part C of this Article Third, the term "Exchange Rate" shall mean the number of Exchange Shares for which each share of Wireless Group Common Stock shall be exchangeable pursuant to a Board Required Exchange or a Significant Transaction Exchange, determined as follows. If the shares of Wireless Group Common Stock are to be exchanged for shares of Common Stock, each share of Wireless Group Common Stock shall be exchangeable for such number of shares of Common Stock (calculated to the nearest 1/10,000), subject to paragraph 5 below, equal to 110% of the ratio of the Average Market Price Per Share of such Wireless Group Common Stock to the Average Market Price Per Share of Common Stock. For purposes of computing the Exchange Rate, the "Average Market Price Per Share" of Common Stock or Wireless Group Common Stock, as the case may be, shall mean (i) in the case of a Board Required Exchange, the average of the daily Market Value per share for such Common Stock or Wireless Group Common Stock for the 40 consecutive Trading Days ending on the 15th Trading Day prior to the date an Exchange Notice is mailed, or (ii) in the case of a Significant Transaction Exchange, the average of the daily Market Value per share for such Common Stock or Wireless Group Common Stock for the 10 consecutive Trading Days beginning on the 15th Trading Day following consummation of the Significant Transaction. If the shares of Wireless Group Common Stock are to be exchanged for shares of one or more Wireless Group Subsidiaries, such shares of Wireless Group Common Stock shall be exchanged, on a pro rata basis, for an aggregate number of outstanding fully paid and nonassessable shares of common stock of each such Wireless Group Subsidiary equal to the number of outstanding shares of common stock of such Subsidiary held by the corporation multiplied by the Wireless Group Allocation Fraction and, if the Board of Directors so determines, the remaining shares of such Subsidiary shall be distributed on a pro rata basis to the holders of shares of Common Stock (or shares of Common Stock shall be exchanged for such remaining shares of such Subsidiary); provided that no such distribution (or mandatory exchange) may occur unless the distribution (or mandatory exchange) is tax free to the holders of Common Stock (except with respect to any cash received by such holders in lieu of fractional shares). If at the time of such an exchange for shares of one or more Wireless Group Subsidiaries, there are outstanding any Convertible Securities convertible into or exercisable for shares of Wireless Group Common Stock that would become exercisable or convertible for shares of one or more Wireless Group Subsidiaries as a result of such exchange, and the obligation to issue such shares under such options, warrants, convertible securities or similar rights is not assumed or otherwise provided for by one or more Wireless Group Subsidiaries, then the shares of Wireless Group Common Stock underlying such Convertible Securities will be taken into account for purposes of determining the Exchange Rate for such exchange. For purposes of this Paragraph 4 of this Part C of this Article Third, "substantially all of the properties and assets" of the Wireless Group as of any date shall mean a portion of such properties and assets that represents at least 80% of the Fair Value of the properties and assets attributed to the Wireless Group as of such date. 5. Certain Procedures Relating to Exchanges. (a) The Board of Directors may, in its sole discretion, elect to issue fractional Exchange Shares in connection with an exchange or to make a cash payment in lieu of fractional shares, as described below. If the Board of Directors elects not to issue fractional Exchange Shares, then no such fractional shares shall be issued in connection with the exchange of shares of Wireless Group Common Stock into Exchange Shares, and, in lieu thereof, each holder of Wireless Group Common Stock who would otherwise be entitled to a fractional interest of an Exchange Share shall, upon surrender of such holder's certificate or certificates representing shares of Wireless Group Common Stock, receive a cash payment (without interest) (the "Fractional Payment") equal to (i) in the case of an exchange for shares of Common Stock, the product resulting from multiplying (A) the fraction of a share of Common Stock to which such holder would otherwise have been entitled by (B) the Average Market Price Per Share of Common Stock on the Exchange Date, or (ii) in the case of an exchange for shares of one or more Wireless Group Subsidiaries, such value as is determined by the Board of Directors. (b) No adjustments in respect of dividends shall be made upon the exchange of any shares of Wireless Group Common Stock; provided, however, that, if the Exchange Date with respect to Wireless Group Common Stock shall be subsequent to the record date for the payment of a dividend or other distribution thereon or with respect thereto but prior to the payment or distribution thereof, the registered holders of such shares at the close of business on such record date shall be entitled to receive the dividend or other distribution payable on such shares on the date set for payment of such dividend or other distribution, notwithstanding the exchange of such shares or the corporation's default in payment of the dividend or distribution due on such date. (c) At such time or times as the corporation exercises its right to cause a Board Required Exchange, and at the time of any Significant Transaction Exchange, the corporation shall give notice of such exchange to the holders of Wireless Group Common Stock whose shares are to be exchanged, by mailing by first-class mail a notice of such exchange (an "Exchange Notice"), in the case of an exchange at the discretion of the Board of Directors, not less than 30 nor more than 60 days prior to the date fixed for such exchange (the "Exchange Date"), and, in the case of any other required exchange, as soon as practicable before or after the Exchange Date, in either case, to their last addresses as they appear upon the corporation's books. Each such Exchange Notice shall specify the Exchange Date and the Exchange Rate applicable to such exchange, and shall state that issuance of certificates representing the applicable type of Exchange Shares to be received upon exchange of shares of Wireless Group Common Stock shall be upon surrender of certificates representing such shares of Wireless Group Common Stock. (d) Before any holder of shares of Wireless Group Common Stock shall be entitled to receive certificates representing such Exchange Shares, such holder must surrender, at such office as the corporation shall specify, certificates for such shares of Wireless Group Common Stock duly endorsed to the corporation or in blank or accompanied by proper instruments of transfer to the Corporation or in blank, unless the corporation shall waive such requirement. The corporation shall, as soon as practicable after such surrender of certificates representing such shares of Wireless Group Common Stock, issue and deliver, at the office of the transfer agent representing Exchange Shares, to the holder for whose account such shares of Wireless Group Common Stock were so surrendered, or to such holder's nominee or nominees, certificates representing the number of Exchange Shares to which such holder shall be entitled, together with the Fractional Payment, if any. (e) From and after any Exchange Date, all rights of a holder of shares of Wireless Group Common Stock shall cease except for the right, upon surrender of the certificates representing such shares of Wireless Group Common Stock, to receive certificates representing Exchange Shares together with a Fractional Payment, if any, as described in paragraphs 5(a) and 5(d) of this Part C of this Article Third and rights to dividends as described in paragraph 5(b) of this Part C of this Article Third. No holder of a certificate that immediately prior to the applicable Exchange Date represented shares of Wireless Group Common Stock shall be entitled to receive any dividend or other distribution with respect to Exchange Shares until surrender of such holder's certificate for a certificate or certificates representing Exchange Shares. Upon surrender, the holder shall receive the amount of any dividends or other distributions (without interest) that were payable with respect to a record date after the Exchange Date, but that were not paid by reason of the foregoing with respect to the number of Exchange Shares represented by the certificate or certificates issued upon such surrender. From and after an Exchange Date applicable to Wireless Group Common Stock, the corporation shall, however, be entitled to treat certificates for Wireless Group Common Stock that have not yet been surrendered for exchange as evidencing the ownership of the number of Exchange Shares for which the shares of Wireless Group Common Stock represented by such certificates have been exchanged, notwithstanding the failure to surrender such certificates. (f) If any certificate for Exchange Shares is to be issued in a name other than that in which the certificate representing shares of Wireless Group Common Stock surrendered in exchange therefor is registered, it shall be a condition of such issuance that the person requesting the issuance pays any transfer or other taxes required by reason of the issuance of certificates for such Exchange Shares in a name other than that of the record holder of the certificate surrendered, or establishes, to the satisfaction of the corporation or its agent, that such tax has been paid or is not applicable. Under no circumstances shall the corporation be liable to a holder of shares of Wireless Group Common Stock for any Exchange Shares or dividends or distributions thereon delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. (g) At the time an Exchange Notice is delivered with respect to any shares of Wireless Group Common Stock, or at the time of the Exchange Date, if earlier, the corporation shall have reserved and kept available, solely for the purpose of issuance upon exchange of the outstanding shares of Wireless Group Common Stock, such number of Exchange Shares as shall be issuable upon the exchange of the number of shares of Wireless Group Common Stock specified or to be specified in the applicable Exchange Notice, provided that the corporation shall not under any circumstances be precluded from satisfying its obligation in respect of the exchange of the outstanding shares of Wireless Group Common Stock by delivery of purchased Exchange Shares that are held in the treasury of the corporation. 6. Liquidation. In the event of a liquidation, dissolution or winding up of the corporation, whether voluntary or involuntary, after payment or provision for payment of the debts and other liabilities of the corporation and subject to the prior payment in full of the preferential amounts to which any class or series of Preferred Stock is entitled, (a) as provided in paragraph 6 of Part B of this Article Third, the holders of the shares of Class A Liberty Media Group Common Stock and the holders of the shares of Class B Liberty Media Group Common Stock shall share equally, on a share for share basis, in a percentage of the funds of the corporation remaining for distribution to its common shareholders equal to 100% multiplied by the average daily ratio (expressed as a decimal) of Y/Z for the 20-Trading Day period ending on the Trading Day prior to the date of the public announcement of such liquidation, dissolution or winding up, (b) the holders of the shares of Common Stock shall share in the aggregate in a percentage of the funds of the corporation remaining for distribution to its common shareholders equal to 100% multiplied by the average daily ratio (expressed as a decimal) of X/Z for such 20-Trading Day period, (c) the holders of the shares of Wireless Group Common Stock shall share in the aggregate in a percentage of the funds of the corporation remaining for distribution to its common shareholders equal to 100% multiplied by the average daily ratio (expressed as a decimal) of W/Z for such 20-Trading Day period, and (d) if applicable, the holders of the shares of any other class of common shares of the corporation (other than Common Stock, Wireless Group Common Stock or Liberty Media Group Common Stock), on the basis that may be set forth in this Certificate with respect to any such shares, shall share in the aggregate in a percentage of the funds of the corporation remaining for distribution to its common shareholders equal to 100% multiplied by the average daily ratio (expressed as a decimal) of V/Z for such 20-Trading Day period, where Y is the aggregate Market Capitalization of the Class A Liberty Media Group Common Stock and the Class B Liberty Media Group Common Stock, X is the aggregate Market Capitalization of the Common Stock, W is the aggregate Market Capitalization of the Wireless Group Common Stock, V is the aggregate Market Capitalization, if applicable, of any other class of common shares (other than Common Stock, Liberty Media Group Common Stock and Wireless Group Common Stock), and Z is the aggregate Market Capitalization of (i) the Class A Liberty Media Group Common Stock and the Class B Liberty Media Group Common Stock, (ii) the Common Stock, (iii) the Wireless Group Common Stock and (iv) any other class of common shares of the corporation (other than Common Stock, Liberty Media Group Common Stock and Wireless Group Common Stock). Neither the consolidation or merger of the corporation with or into any other corporation or corporations nor the sale, transfer or lease of all or substantially all of the assets of the corporation shall itself be deemed to be a liquidation, dissolution or winding up of the corporation within the meaning of this paragraph 6 of this Part C of this Article Third. Notwithstanding the foregoing, any transaction or series of related transactions that results in all of the assets and liabilities included in the Wireless Group being held by one or more Wireless Group Subsidiaries, and the distribution of some or all of the shares of such Wireless Group Subsidiaries (and no other material assets or liabilities) to the holders of the outstanding Wireless Group Common Stock shall not constitute a voluntary or involuntary liquidation, dissolution or winding up of the corporation for purposes of this paragraph 6 of this Part C of this Article Third, but shall be subject to paragraph 4 of this Part C of this Article Third. Notwithstanding the foregoing, any transaction or series of related transactions that results in all of the assets and liabilities included in the Liberty Media Group being held by one or more Liberty Media Group Subsidiaries (as defined in paragraph 5(a) of Part B of this Article Third), and the distribution of such Liberty Media Group Subsidiaries (and no other material assets or liabilities) to the holders of the outstanding Liberty Media Group Common Stock shall not constitute a voluntary or involuntary liquidation, dissolution or winding up of the corporation for purposes of this paragraph 6 of this Part C of this Article Third, but shall be subject to paragraph 5(a) of Part B of this Article Third. 7. Determinations by the Board of Directors. Any determinations made by the Board of Directors under any provision of this Part C of this Article Third shall be final and binding on all shareholders of the corporation, except as may otherwise be required by law. The corporation shall prepare a statement of any determination by the Board of Directors, respecting the fair market value of any properties, assets or securities, and shall file such statement with the Secretary of the corporation. 8. Adjustment of the Wireless Group Allocation Fraction. (a) The denominator of the Wireless Group Allocation Fraction shall be adjusted from time to time as deemed appropriate by the Board of Directors (i) to reflect subdivisions (by stock split or otherwise) and combinations (by reverse stock split or otherwise) of Wireless Group Common Stock and stock dividends payable in shares of Wireless Group Common Stock, (ii) to reflect the fair market value of contributions or allocations by the corporation of cash or property or other assets or liabilities from the Common Stock Group(W) to the Wireless Group (or vice versa), or of cash or property or other assets or liabilities of the Common Stock Group(W) to, or for the benefit of, employees of the Wireless Group in connection with employee benefit plans or arrangements of the corporation or any of its subsidiaries (or vice versa), (iii) to reflect the number of shares of capital stock of the corporation contributed to, or for the benefit of, employees of the Wireless Group in connection with benefit plans or arrangements of the corporation or any of its Subsidiaries, (iv) to reflect repurchases by the corporation of shares of Wireless Group Common Stock for the account of the Wireless Group, (v) to reflect issuances of Wireless Group Common Stock for the account of the Wireless Group, (vi) to reflect dividends or other distributions to holders of the Wireless Group Common Stock to the extent no payment is made to the Common Stock Group(W), and (vii) under such other circumstances as the Board of Directors determines appropriate to reflect the economic substance of any other event or circumstance, provided that, in each case, the adjustment shall be made in a manner that is fair and equitable to holders of Common Stock and Wireless Group Common Stock (and intended to reflect the relative deemed economic ownership interest, if any, of the Common Stock Group(W) in the Wireless Group). Any adjustment made by the Board of Directors pursuant to the preceding sentence shall, subject to the foregoing, be at the sole discretion of the Board of Directors, and all such determinations shall be final and binding on all shareholders of the corporation. For purposes of this paragraph 8 of this Part C of this Article Third, the consideration paid by the Common Stock Group(W) to acquire any assets or other property or contributed or allocated to the Wireless Group shall be presumed to be the "fair market value" as of its acquisition. (b) Without duplication of any adjustment pursuant to paragraph 8(a) of this Part C of this Article Third, in the event that the corporation shall issue shares of Wireless Group Common Stock for the account of the Wireless Group, then the denominator of the Wireless Group Allocation Fraction shall be increased by the number of shares of Wireless Group Common Stock so issued. (c) Without duplication of any adjustment pursuant to paragraph 8(a) of this Part C of this Article Third, if, in connection with any share issuance described in paragraph 8(b) of this Part C of this Article Third, or otherwise, the corporation contributes or allocates cash or other property or assets from the Common Stock Group(W) to the Wireless Group, the denominator of the Wireless Group Allocation Fraction shall be increased (or further increased) by an amount obtained by dividing (i) the fair market value of such cash, property or assets (as determined by the Board of Directors) by (ii) the net per share offering price of the Wireless Group Common Stock. 9. Certain Definitions. Unless the context otherwise requires, the terms defined in this paragraph 9 of this Part C of this Article Third shall have, for all purposes of this Part C of this Article Third, the meanings herein specified: "Common Stock Group(W)" shall mean, as of any date, the interest of the corporation in all of the businesses in which the corporation is or has been engaged, directly or indirectly (either itself or through direct or indirect subsidiaries, affiliates, joint ventures or other investments or any of their predecessors or successors), and the respective assets and liabilities of the corporation therein, other than (a) the Wireless Group Allocated Portion of the Wireless Group, and (b) any businesses, assets or liabilities of the Liberty Media Group. "Convertible Securities" shall mean any securities of the corporation (other than Liberty Media Group Common Stock) or any Subsidiary of the corporation that are convertible into, exchangeable for or evidence the right to purchase any shares of Common Stock, Wireless Group Common Stock or of any class of Liberty Media Group Common Stock, whether upon conversion, exercise or exchange, or pursuant to anti-dilution provisions of such securities or otherwise. "Disposition" shall mean the sale, transfer, assignment or other disposition (whether by merger, consolidation, sale or contribution of assets or stock, or otherwise) by the corporation (or its successors) or any of its Subsidiaries or properties or assets. Disposition shall not include a merger, consolidation, exchange of shares or other business combination transaction involving the corporation in which the corporation (or its successors) continues, immediately following such transaction, to hold the same, direct and indirect, interest in the business, assets and liabilities comprising the Wireless Group that it held immediately prior to such transaction (other than as a result of any action by any Person included in the Wireless Group). "Fair Value" shall mean, in the case of equity securities or debt securities of a class that has previously been publicly traded for a period of at least three months, the Market Value thereof (if such Market Value, as so defined, can be determined) or, in the case of an equity security or debt security that has not been publicly traded for at least such period, means the fair value per share of stock or per other unit of such other security, on a fully distributed basis, as determined by an independent investment banking firm experienced in the valuation of securities selected in good faith by the Board of Directors; provided, however, that, in the case of property other than securities, the "Fair Value" thereof shall be determined in good faith by the Board of Directors based upon such appraisals or valuation reports of such independent experts as the Board of Directors shall in good faith determine to be appropriate in accordance with good business practice. Any such determination of Fair Value shall be described in a statement filed with the records of the actions of the Board of Directors. "Group" shall mean the Common Stock Group(W), the Liberty Media Group or the Wireless Group. "Initial Issuance Date" shall mean the date of first issuance of any shares of Wireless Group Common Stock. "Market Capitalization" of any class or series of capital stock of the corporation on any Trading Day shall mean the product of (a) the Market Value of one share of such class or series on such Trading Day and (b) the number of shares of such class or series outstanding on such Trading Day. "Market Value" of any class or series of capital stock of the corporation on any day shall mean the average of the high and low reported sales prices regular way of a share of such class or series on such day (if such day is a Trading Day, and, if such day is not a Trading Day, on the Trading Day immediately preceding such day), or, in case no such reported sale takes place on such Trading Day, the average of the reported closing bid and asked prices regular way of a share of such class or series on such Trading Day, in either case, on the New York Stock Exchange or, if the shares of such class or series are not quoted on the New York Stock Exchange on such Trading Day, on the Nasdaq National Market, or, if the shares of such class or series are not quoted on the Nasdaq National Market on such Trading Day, the average of the closing bid and asked prices of a share of such class or series in the over-the-counter market on such Trading Day as furnished by any New York Stock Exchange member firm selected from time to time by the corporation, or, if such closing bid and asked prices are not made available by any such New York Stock Exchange member firm on such Trading Day (including, without limitation, because such securities are not publicly held), the market value of a share of such class or series as determined by the Board of Directors; provided that, for purposes of determining the ratios set forth in paragraph 6 of this Part C of this Article Third, (a) the "Market Value" of any share of Common Stock, Wireless Group Common Stock or of any class of Liberty Media Group Common Stock on any day prior to the "ex" date or any similar date for any dividend or distribution paid or to be paid with respect to Common Stock, Wireless Group Common Stock or such class of Liberty Media Group Common Stock, as applicable, shall be reduced by the fair market value of the per share amount of such dividend or distribution as determined by the Board of Directors, and (b) the "Market Value" of any share of Common Stock, any share of Wireless Group Common Stock or of any class of Liberty Media Group Common Stock on any day prior to (i) the effective date of any subdivision (by stock split or otherwise) or combination (by reverse stock split or otherwise) of outstanding shares of Common Stock, Wireless Group Common Stock or of such class of Liberty Media Group Common Stock, as applicable, or (ii) the "ex" date or any similar date for any dividend or distribution with respect to the Common Stock, Wireless Group Common Stock or any such class of Liberty Media Group Common Stock in shares of Common Stock, Wireless Group Common Stock or such class of Liberty Media Group Common Stock, as applicable, shall be appropriately adjusted to reflect such subdivision, combination, dividend or distribution. "Person" shall mean any individual, corporation, partnership, limited liability company, joint venture, association, joint stock company, trust, unincorporated organization, government or agency or political subdivision thereof, or other entity, whether acting in an individual, fiduciary or other capacity. "Qualifying Subsidiary" of a Person shall mean a Subsidiary of such Person in which such Person's ownership and voting interest is sufficient to satisfy the ownership and voting requirements of the Internal Revenue Code of 1986, as amended, and the regulations thereunder, for a distribution of such Person's interest in such Subsidiary to the holders of Wireless Group Common Stock and, in the event that the Wireless Group Allocation Fraction is less than one, the holders of Common Stock (or any such securities into which the Wireless Group Common Stock or the Common Stock may have been converted, reclassified or changed or for which they may have been exchanged), as the case may be, to be tax free to such holders. "Subsidiary" shall mean, with respect to any Person, any corporation, limited liability company or partnership 50% or more of whose outstanding voting securities or membership or partnership interests, as the case may be, are, directly or indirectly, owned by such Person. "Trading Day" shall mean each weekday other than any day on which any relevant class or series of capital stock of the corporation is not available for trading on the New York Stock Exchange or the Nasdaq National Market or in the over-the-counter market. "Tax Event" shall mean receipt by the corporation of an opinion of tax counsel of the corporation's choice, to the effect that, as a result of any amendment to, clarification of, or change (including a prospective change) in, the laws (or any interpretation or application of the laws) of the United States or any political subdivision or taxing authority thereof or therein (including enactment of any legislation and the publication of any judicial or regulatory decision, determination or pronouncement) which amendment, clarification or change is effective, announced, released, promulgated or issued on or after the date of initial issuance of the Wireless Group Common Stock, regardless of whether such amendment, clarification or change is issued to or in connection with a proceeding involving the corporation, the Common Stock Group(W) or the Wireless Group and whether or not subject to appeal, there is more than an insubstantial risk that: (i) for tax purposes, any issuance of Wireless Group Common Stock would be treated as a sale or other taxable disposition by the corporation or any of its Subsidiaries of any of the assets, operations or relevant subsidiaries to which the Wireless Group Common Stock relates, (ii) the existence of the Wireless Group Common Stock would subject the corporation, its Subsidiaries or affiliates, or any of their respective successors or shareholders to the imposition of tax or to other adverse tax consequences, or (iii) for tax purposes, either Common Stock or Wireless Group Common Stock is not or, at any time in the future, will not be treated solely as common stock of the corporation. "Wireless Group" shall mean, as of any date that any shares of Wireless Group Common Stock have been issued and continue to be outstanding, without duplication, the direct or indirect interest of the corporation (either itself or through direct or indirect subsidiaries, affiliates, joint ventures or other investments, or any of their predecessors or successors) (a) in all of the businesses, assets and liabilities reflected in the financial statements of the Wireless Group dated September 30, 1999, publicly filed by the corporation, including any successor to the Wireless Group by merger, consolidation or sale of all or substantially all of its assets (whether or not in connection with a Wireless Group Related Business Transaction), (b) the other assets and liabilities (contingent or otherwise) of the corporation and its Subsidiaries primarily related to the businesses, assets and liabilities described in clause (a) and all net income and net losses arising in respect thereof after such date, (c) all assets, liabilities and businesses acquired by the Wireless Group or acquired by the corporation or any of its Subsidiaries for the account of, or contributed, allocated or otherwise transferred to, the Wireless Group (including the net proceeds of any new issuance for the account of the Wireless Group of any new shares of Wireless Group Common Stock or Convertible Securities), in each case, after the date of such financial statements and as determined by the Board of Directors in accordance with the provisions of paragraph 8 of this Part C of this Article Third, and (d) the proceeds of any Disposition of any of the foregoing; provided, however, that the Wireless Group shall not include (a) any assets, liabilities or businesses disposed of after the date of such financial statements or (b) any assets, liabilities or businesses allocated to the Common Stock Group(W) or otherwise distributed or otherwise transferred from the Wireless Group, whether to the Common Stock Group(W), to holders of shares of Wireless Group Common Stock or otherwise, in each case after the date of such financial statements and as determined by the Board of Directors in accordance with the provisions of paragraph 9 of this Part C of this Article Third. The Wireless Group shall not include any business, assets or liabilities of the Liberty Media Group. "Wireless Group Allocated Portion" shall mean, with respect to the Wireless Group as a whole, or any dividend, distribution, payment, consideration or other amount or allocation requiring apportionment between the holders of Wireless Group Common Stock (other than the corporation and its Subsidiaries), on the one hand, and the Common Stock Group(W), on the other hand, the following: (a) in the case of the Wireless Group as a whole, the proportion of such Group represented by the Wireless Group Allocation Fraction, and (b) in the case of any other amount or allocation, the product of (i) such amount or allocation and (ii) the Wireless Group Allocation Fraction. "Wireless Group Allocation Fraction" shall mean, as of any date of determination, a fraction, the numerator of which shall be the number of shares of Wireless Group Common Stock outstanding on such date and the denominator of which shall be a number initially determined by the Board of Directors, in its sole discretion, prior to the Initial Issuance Date, subject to adjustment from time to time as described in paragraph 9 of this Part C of this Article Third, provided that such fraction shall in no event be greater than one. If the holders of any securities of the corporation or any other Person that are convertible into or exercisable or exchangeable for shares of Wireless Group Common Stock are entitled to participate in any dividend or other distribution with respect to the Wireless Group Common Stock, such shares so issuable upon such conversion, exercise or exchange shall be taken into account in calculating the Wireless Group Allocation Fraction and any amount payable to the Common Stock Group(W) in such manner as the Board of Directors determines to be appropriate. "Wireless Group Available Dividend Amount" shall mean, as of any date, the Wireless Group Allocated Portion of the excess of (a) the amount by which the total assets of the Wireless Group exceed the total liabilities of the Wireless Group as of such date over (b) the sum of (i) the par value of all issued shares of Wireless Group Common Stock and each class or series of Preferred Stock attributed to the Wireless Group, (ii) the amount of the consideration received for any shares of Preferred Stock attributed to the Wireless Group without par value that have been issued, except such part of the consideration therefor as may have been allocated to surplus in a manner permitted by law, and (iii) any amount not included in subclauses (i) and (ii) above that the corporation (by appropriate action of the Board of Directors) has transferred to stated capital specifically in respect of Wireless Group Common Stock, minus (c) all reductions from such sums set forth in clauses (i), (ii) and (iii) above as have been effected in a manner permitted by law; provided, however, that, in the event that the law governing the corporation changes from that governing the corporation on the date the adoption of the Amendment to this Certificate pursuant to which the Wireless Group Common Stock was authorized (whether because of amendment of the applicable law or because of a change in the jurisdiction of incorporation of the corporation through merger or otherwise), the Wireless Group Available Dividend Amount shall mean the amount of dividends, as determined by the Board of Directors, that could be paid by a corporation (governed under such applicable law) having the assets and liabilities of the Wireless Group, an amount of outstanding common stock (and having an aggregate par value) equal to the amount (and aggregate par value) of the outstanding Wireless Group Common Stock and of each class or series of Preferred Stock attributed to the Wireless Group and having an amount of earnings or loss or other relevant corporate attributes as reasonably determined by the Board of Directors in light of all factors deemed relevant by the Board of Directors. "Wireless Group Net Proceeds" shall mean, as of any date, with respect to any Disposition of any of the properties and assets of the Wireless Group, an amount, if any, equal to the Wireless Group Allocated Portion of the gross proceeds of such Disposition after any payment of, or reasonable provision for, (a) any taxes payable by the corporation or any other member of the Common Stock Group in respect of such Disposition or in respect of any mandatory dividend or redemption resulting from such Disposition (or that would have been payable but for the utilization of tax benefits attributable to the Common Stock Group(W) or the Liberty Media Group), (b) any transaction costs borne by the Common Stock Group(W) in connection with such Disposition, including, without limitation, any legal, investment banking and accounting fees and expenses borne by the Common Stock Group(W) in connection with such Disposition, (c) any liabilities and other obligations (contingent or otherwise) of the Wireless Group borne by the Common Stock Group(W) in connection with such Disposition, including, without limitation, any indemnity or guarantee obligations incurred by the Common Stock Group(W) in connection with the Disposition or any liabilities assumed by the Common Stock Group(W) for future purchase price adjustments, and (d) any preferential amounts, accumulated and unpaid dividends and other obligations in respect of Preferred Stock attributed to the Wireless Group. To the extent the proceeds of any Disposition include any securities or other property other than cash, the Board of Directors shall determine the value of such securities or property; provided that the value of any marketable securities included in such proceeds shall be the average of the daily Market Value of such securities for the 10 consecutive Trading Days beginning on the 15th Trading Day following consummation of the Disposition. "Wireless Group Related Business Transaction" shall mean any Disposition of all or substantially all the properties and assets attributed to the Wireless Group in a transaction or series of related transactions that results in the corporation or one or more of its Subsidiaries receiving in consideration of such properties and assets primarily equity securities (including, without limitation, capital stock, debt securities convertible into or exchangeable for equity securities or interests in a general or limited partnership or limited liability company, without regard to the voting power or other management or governance rights associated therewith) of any entity that (a) acquires such properties or assets or succeeds (by merger, formation of a joint venture or otherwise) to the business conducted with such properties or assets or controls such acquiror or successor, and (b) which the Board of Directors determines is primarily engaged or proposes to engage primarily in one or more businesses similar or complementary to the businesses conducted by the Wireless Group prior to such Disposition. FOURTH: (a) The Certificate of Incorporation of the corporation is hereby amended to modify the purposes for which the corporation is formed. (b) To effect the foregoing, Article SECOND is hereby amended to read in its entirety as set forth below: SECOND: The purposes for which the corporation is formed are to engage in any lawful act or activity for which corporations may be organized under the Business Corporation Law of the State of New York, provided that the corporation is not formed to engage in any act or activity which requires the consent or approval of any New York state official, department, board, agency or other body, without such consent or approval first being obtained. FIFTH: The manner in which the foregoing amendment of said Certificate of Incorporation of the corporation was authorized was by the vote of the holders of a majority of all outstanding shares of the corporation entitled to vote thereon at a meeting of shareholders, subsequent to the unanimous vote of our board of directors. IN WITNESS WHEREOF, we have subscribed this document on March 31, 2000 and do hereby affirm, under the penalties of perjury, that the statements contained herein have been examined by us and are true and correct. By /s/ Marilyn J. Wasser ------------------------------------ Name: Marilyn J. Wasser Title: Vice President By /s/ Robert S. Feit ------------------------------------ Name: Robert S. Feit Title: Assistant Secretary CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF AT&T CORP. UNDER SECTION 805 OF THE BUSINESS CORPORATION LAW We, the undersigned, being a Vice President and Assistant Secretary, respectively, of AT&T Corp., do hereby certify as follows: 1. The name of the corporation is AT&T Corp. The name under which the Corporation was formed is American Telephone and Telegraph Company. 2. The Certificate of Incorporation of the corporation was filed in the office of the Secretary of State of the State of New York on March 3, 1885. 3. Said Certificate of Incorporation is amended to increase the authorized number of common shares of the capital stock of the corporation having a par value of $1 from 14,750,000,000 shares to 16,400,000,000 shares, by increasing the Class A Liberty Media Group Common Stock (as defined below) by 1,500,000,000 and by increasing the Class B Liberty Media Common Stock (as defined below) by 150,000,000. 4. To effect the foregoing, the first paragraph of Article THIRD of said Certificate of Incorporation, relating to the aggregate number of shares of the corporation is authorized to issue, the par value thereof, and the classes into which the shares are divided is hereby stricken out in its entirety, and the following new first paragraph of Article THIRD is substituted in lieu thereof: "The aggregate number of shares which the corporation is authorized to issue is sixteen billion five hundred (16,500,000,000) shares, consisting of one hundred million (100,000,000) preferred shared having a par value of $1.00 per share ("Preferred Stock") and sixteen billion four hundred million (16,400,000,000) common shares, of which six billion (6,000,000,000) common shares shall be Common Stock having a par value of $1.00 per share ("Common Stock"), four billion (4,000,000,000) common shares shall be Class A Liberty Media Group Common Stock having a par value of $1.00 per share ("Class A Liberty Media Group Common Stock"), four hundred million (400,000,000) common shares shall be Class B Liberty Media Group Common Stock having a par value of $1.00 per share ("Class B Liberty Media Group Common Stock"), and six billion (6,000,000,000) common shares shall be Wireless Group Common Stock having a par value of $1.00 per share ("Wireless Group Common Stock"). The Class A Liberty Media Group Common Stock and Class B Liberty Media Group Common Stock are collectively referred to herein as the "Liberty Media Group Common Stock". 5. The manner in which the foregoing amendment of said Certificate of Incorporation was authorized was by vote of the holders of a majority of all outstanding shares of the corporation entitled to vote thereon at a meeting of shareholders, subsequent to the unanimous vote of the Board of Directors. IN WITNESS WHEREOF, we have signed this Certificate of Amendment of said Certificate of Incorporation of AT&T Corp. this 30th of May, 2000 and we affirm the statements contained herein as true under penalties of perjury. /s/ Marilyn J. Wasser --------------------------------- Marilyn J. Wasser Vice President and Secretary /s/ Robert A. Feit --------------------------------- Robert A. Feit Assistant Secretary EX-3.(II) 3 0003.txt EXHIBIT (3)B BY-LAWS AS AMENDED BY BOARD OF DIRECTORS, JANUARY 25, 2001 ARTICLE I. MEETING OF SHAREHOLDERS Section 1. The annual meeting of the shareholders of the company shall be held on such date, at such time and at such place as may be fixed by resolution of the Board of Directors. A notice of the annual meeting as approved by the Board of Directors shall be mailed not less than ten nor more than sixty days before the meeting, directed to each shareholder entitled to vote at said meeting at his address as it appears on the record of shareholders unless he shall have filed with the Secretary a written request that notices intended for him be mailed to some other address, in which case it shall be directed to him at such other address. Section 2. The Board of Directors may fix, in advance, a date not more than sixty nor less than ten days before the date of any meeting of the shareholders as the record date for determination of shareholders entitled to notice of or to vote at such meeting, and only shareholders of record on such date shall be entitled to notice of or to vote at such meeting. Section 3. Subject to the rights of the holders of any series of stock having a preference over the common stock and except as may otherwise be required by law, special meetings of the shareholders may be called at any time only by the Chairman of the Board or the Board of Directors. The meeting shall be held at such place within or without the State of New York as may be designated in the notice of the meeting. A notice of not less than ten nor more than sixty days shall be given by mail for each special meeting, in the manner provided for notice of the annual meeting. Such notice shall state the purpose or purposes for which the meeting is called and the time when and the place where it is to be held and shall indicate that the notice is being issued by or at the direction of the person or persons calling the meeting. Section 4. Failure to receive notice of any meeting shall not invalidate the meeting. Section 5. (A) Nominations of persons for election to the Board of Directors of the company and notice of shareholders business at meetings of shareholders shall be governed by the provisions of this By-Law. (1) Nominations of persons for election to the Board of Directors of the company, and the proposal of business to be considered by the shareholders, may be made at an annual meeting of shareholders only (a) pursuant to the company's notice of meeting pursuant to Article I of these By-Laws, (b) by or at the direction of the Board of Directors or (c) by any shareholder of the company who was a shareholder of record at the time of giving notice provided for in this By-Law, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this By-Law. (2) For nominations or other business to be properly brought before an annual meeting by a shareholder pursuant to clause (c) of paragraph (A)(1) of this By-Law, the shareholder must have given timely notice thereof in writing to the Secretary of the company and such other business must otherwise be a proper matter for shareholder action. To be timely, a shareholder's notice shall be delivered to the Secretary at the principal executive offices of the company not later than the close of business on the 90th calendar day nor earlier than the close of business on the 120th calendar day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 calendar days before or more than 60 calendar days after such anniversary date, notice by the shareholder to be timely must be so delivered not earlier than the close of business on the 120th calendar day prior to such annual meeting but not later than the close of business on the later of the 90th calendar day prior to such annual meeting or the 10th calendar day following the calendar day on which public announcement of the date of such meeting is first made by the company. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a shareholder's notice as described above. Such shareholder's notice shall set forth (a) as to each person whom the shareholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Rule 14a-11 thereunder (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) as to any description of any other business desired to be brought before the meeting, the reasons for conducting such other business at the meeting and any material interest in such other business of such shareholder and beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such shareholder, as they appear on the company's books, and of such beneficial owner and (ii) the class and number of shares of the company which are owned beneficially and of record by such shareholder and such beneficial owner. (3) Notwithstanding anything in the second sentence of paragraph (A)(2) of this By-Law to the contrary, in the event that the number of directors to be elected to the Board of Directors of the company is increased and there is no public announcement by the company naming all of the nominees for director or specifying the size of the increased Board of Directors at least 100 days prior to the first anniversary of the preceding year's annual meeting, a shareholder's notice required by this By-Law shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the company not later than the close of business on the 10th day following the day on which such public announcement is first made by the company. (B) Special Meetings of Stockholders. Nominations of persons for election to the Board of Directors may be made at a special meeting of shareholders at which directors are to be elected pursuant to the company's notice of meeting (a) by or at the direction of the Board of Directors or (b) provided that the Board of Directors has determined that directors shall be elected at such meeting, by any shareholder of the company who is a shareholder of record at the time of giving of notice provided for in this By-Law, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this By-Law. In the event the company calls a special meeting of shareholders for the purpose of electing one or more directors to the Board of Directors, any such shareholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the company's notice of meeting, if the shareholder's notice required by paragraph (A)(2) of this By-Law shall be delivered to the Secretary at the principal executive offices of the company not earlier than the close of business on the 120th day prior to such special meeting and not later than the close of business on the later of the 90th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of an adjournment of a special meeting commence a new time period for the giving of a shareholder's notice as described above. (C) General. (1) Only such persons who are nominated in accordance with the procedures set forth in this By-Law shall be eligible to serve as directors and only such business shall be conducted at a meeting of shareholders as shall have been brought before the meeting in accordance with the procedures set forth in this By-Law. Except as otherwise provided by law, the Chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this By-Law and, if any proposed nomination or business is not in compliance with this By-Law, to declare that such defective proposal or nomination shall be disregarded. (2) For purposes of this By-Law, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the company with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this By-Law, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this By-Law. Nothing in this By-Law shall be deemed to affect any rights (i) of shareholders to request inclusion of proposals in the company's proxy statement pursuant to Rule 14a-8 under the Exchange Act or (ii) of the holders of any series of Preferred Stock to elect directors under specified circumstances. Section 6. The Chairman of the Board of Directors may postpone or adjourn any meeting of the shareholders from time to time, whether or not a quorum is present. The chair of the meeting shall determine all matters relating to the efficient conduct of the meeting, including but not limited to the maintenance of order and decorum. ARTICLE II. THE CONDUCT OF SHAREHOLDERS' MEETINGS At all meetings of the shareholders, the holders of forty per centum of the shares entitled to vote thereat shall constitute a quorum, except as otherwise required by law; but the shareholders present may adjourn the meeting to another time or place despite the absence of a quorum. Every shareholder entitled to vote shall be entitled to one vote for each share standing in his name on the record of shareholders; and every shareholder entitled to vote may vote in person or by proxy. At all meetings of shareholders, a shareholder, or such person's duly authorized attorney in fact, may vote by proxy, executed in writing or granted or authorized in such other manner as is prescribed by the Business Corporation Law of the State of New York. Except as otherwise required by law or as specified in the company's certificate of incorporation, every shareholder entitled to vote shall be entitled to one vote for each share standing in his name on the record of shareholders; and every shareholder entitled to vote may vote in person or by proxy. ARTICLE III. INSPECTORS The Board of Directors, in advance of any shareholders' meeting, shall appoint one inspector to act at the meeting or any adjournment thereof. In case any person appointed fails to appear or act, the vacancy may be filled by appointment made by the Board in advance of the meeting or at the meeting by the person presiding thereat. ARTICLE IV. THE BOARD OF DIRECTORS Section 1. The business of the company shall be managed under the direction of its Board of Directors, who shall be elected by the shareholders at the annual meeting. Section 2. The number of Directors shall be not less than ten nor more than twenty-five, the exact number of Directors within such minimum and maximum limits to be fixed and determined by the vote of a majority of the entire Board. In case of any increase in the number of Directors, the additional Directors may be elected by a majority of the Directors then in office. Section 3. Any vacancy in the Board may be filled by a majority vote of the remaining Directors, though less than a quorum. ARTICLE V. MEETINGS OF DIRECTORS Section 1. Regular meetings shall be held at such times and places as the Board may determine. Section 2. Special meetings of the Directors may be called at any time by the Chairman of the Board, or by two members of the Executive Committee, and shall be called by the Chairman of the Board, or by the Secretary, forthwith upon request in writing signed by two Directors and specifying the object of the meeting. At least three days' notice of a special meeting shall be given in the manner provided for herein. Section 3. Any notice of a meeting of Directors required to be given may be given to each Director by mail or telegraph, addressed to him at his residence or usual place of business, or in person or by telephone, stating the time and place of the proposed meeting. Section 4. One-third of the entire Board shall constitute a quorum. Section 5. Meetings of the Directors may be held within or without the State of New York. Section 6. Any one or more members of the Board may participate in a meeting of the Board by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at a meeting. Any action required or permitted to be taken by the Board may be taken without a meeting if all members of the Board consent in writing to the adoption of a resolution authorizing the action. The resolution and the written consents thereto by the members of the Board shall be filed with the minutes of the proceedings of the Board. ARTICLE VI. EXECUTIVE COMMITTEE AND OTHER COMMITTEES The Board of Directors, by resolution adopted by a majority of the entire Board, may designate from their number an Executive Committee and other committees, and may determine the quorum thereof. Any such committee shall consist of three or more members and shall serve at the pleasure of the Board. The Chairman of the Board, one or more Vice Chairmen of the Board and the President, if any, shall be members of the Executive Committee. The Executive Committee shall, except as otherwise provided by law or by resolution of the Board, have all the authority of the Board of Directors during the intervals between the meetings of the Board. The Executive Committee shall keep a record of its proceedings, which shall from time to time be reported to the Board of Directors. The Chairman of the Board shall preside at the meetings of the Executive Committee. Committees other than the Executive Committee shall, except as otherwise provided by law, have such authority as shall be provided by resolution of the Board. The Board may designate from time to time one or more Directors as alternate members of the Executive Committee or of any other committee, who may replace any absent member or members at any meeting of the committee. Any one or more members of the Executive Committee or any other committee established by the Board pursuant to this Article VI may participate in a meeting of such committee by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at the meeting. Any action required or permitted to be taken by the Executive Committee or any other committee established by the Board pursuant to this Article VI may be taken without a meeting if all members of the committee consent in writing to the adoption of a resolution authorizing the action. The resolution and written consents thereto shall be filed with the minutes of the proceedings of the committee. The Board of Directors, by resolution adopted by a majority of the entire Board, may form a Liberty Media Group Capital Stock Committee, which committee shall consist of one director elected pursuant to Section 7.15 of the Agreement and Plan of Restructuring and Merger, dated June 23, 1998, among the company, Italy Merger Corp. and Tele-Communications, Inc. and up to two directors who are not current or former officers, directors or employees of the company or any of its affiliates, or otherwise affiliated with the company (other than as members of the Board of Directors or any committee thereof). The Liberty Media Group Capital Stock Committee shall have the authority of the Board of Directors to (i) interpret, make determinations under, and oversee the implementation of the policies set forth in the policy statement regarding Liberty Media Group tracking stock matters adopted by resolution of a majority of the entire Board, and (ii) to the extent permitted by law, to take all actions required to be taken by the Board of Directors of the company in connection with authorization of the issuance of shares of Liberty Media Group tracking stock. The Board of Directors may form an AT&T Wireless Group Capital Stock Committee, the members of which shall be selected by the board of directors. The Board may delegate to the AT&T Wireless Group Capital Stock Committee the authority to, and the AT&T Wireless Group Capital Stock Committee will thereby have the authority to, (i) interpret, make determinations under, and oversee the implementation of the policies set forth in the Policy Statement Regarding AT&T Wireless Group Tracking Stock Matters; (ii) review the policies, programs and practices of the company relating to (a) the business and financial relationships between the company or any of its units (other than the Liberty Media Group) and the AT&T Wireless Group, (b) dividends in respect of, disclosures to shareholders and the public concerning, and transactions by the company or any of its subsidiaries (other than subsidiaries included in the Liberty Media Group) in, shares of AT&T Wireless Group Tracking Stock, and (c) any matters arising in connection therewith, all to the extent the AT&T Wireless Group Capital Stock Committee may deem appropriate; and (iii) recommend such changes in such policies, programs and practices as the AT&T Wireless Group Capital Stock Committee may deem appropriate. In performing this function, the AT&T Wireless Group Capital Stock Committee's role shall not be to make decisions concerning matters referred to its attention, but, rather, to oversee the process by which decisions concerning such matters are made. The AT&T Wireless Group Capital Stock Committee shall have and may exercise such other powers, authority and responsibilities as may be determined from time to time by the Board of Directors. ARTICLE VII. OFFICERS OF THE COMPANY Section 1. The officers of the company shall be elected by the Board of Directors, and may consist of a Chairman of the Board, one or more Vice Chairmen of the Board, a President, such number of Executive Vice Presidents and Senior Vice Presidents as the Board of Directors shall from time to time determine, a Secretary, a Treasurer and a Controller. The officers shall hold office until their successors have been elected. Section 2. The Board of Directors may appoint one or more Assistant Secretaries, one or more Assistant Treasurers, one or more Assistant Controllers, and such other officers and agents as the Board may consider necessary. ARTICLE VIII. DUTIES OF THE CHAIRMAN OF THE BOARD, PRESIDENT, VICE CHAIRMEN OF THE BOARD, EXECUTIVE VICE PRESIDENTS AND SENIOR VICE PRESIDENTS Section 1. The Chairman of the Board shall be the chief executive officer of the company and shall have such authority and perform such duties as usually appertain to the chief executive office in business corporations. He shall preside at the meetings of the Board of Directors and he, or such officer as he may designate from time to time, shall preside at meetings of the shareholders. Section 2. The President, Vice Chairmen of the Board, Executive Vice Presidents and Senior Vice Presidents shall perform such duties as the Board of Directors or Chairman of the Board may from time to time determine. Section 3. In case of absence or inability of the Chairman of the Board, the President shall possess all the authority of the Chairman of the Board. ARTICLE IX. DUTIES OF THE TREASURER AND ASSISTANT TREASURERS Section 1. The Treasurer shall receive all the funds of the company, and shall disburse them under the direction of the Board of Directors. All disbursement instruments shall be signed by such person or persons and in such manner as the Board may from time to time provide. Section 2. The Treasurer shall keep full and regular books, showing all his receipts and disbursements, which books shall be open at all times to the inspection of the Chairman of the Board or of any member of the Board of Directors; and he shall make such reports and perform such other duties as the Chairman of the Board or Board of Directors may require. Section 3. The Treasurer shall deposit all moneys received by him, in the corporate name of the company, with such depositories as shall be approved from time to time by the Board of Directors or by the Chairman of the Board, the President, a Vice Chairman of the Board or the Treasurer. Section 4. Assistant Treasurers shall have such of the authority and perform such of the duties of the Treasurer as may be provided in these By-Laws or assigned to them by the Board of Directors or the Chairman of the Board or by the Treasurer upon the approval of the Chairman of the Board, the President or a Vice Chairman of the Board. During the Treasurer's absence or inability, his authority and duties shall be possessed by such Assistant Treasurer or Assistant Treasurers as the Board of Directors, the Chairman of the Board, the President or a Vice Chairman of the Board may designate. Section 5. The Board of Directors may require the Treasurer and Assistant Treasurers to give such security for the faithful performance of their duties as the Board shall from time to time determine. ARTICLE X. DUTIES OF THE SECRETARY AND ASSISTANT SECRETARIES Section 1. The Secretary shall send notice to the shareholders of all annual and special meetings, and to the Directors of meetings of the Board where notice is required to be given; and he shall perform such other duties as may be required of him by the Chairman of the Board or Board of Directors, and such as usually appertain to the office of Secretary. Section 2. The Secretary or in his absence an Assistant Secretary shall keep an accurate record of the proceedings of the Board of Directors and of the Executive Committee, and of all meetings of shareholders, and shall have the custody of the seal of the company and affix it to all instruments requiring the seal. Section 3. Assistant Secretaries shall have such of the authority and perform such of the duties of the Secretary as may be provided in these By-Laws or assigned to them by the Board of Directors or the Chairman of the Board or by the Secretary upon the approval of the Chairman of the Board, the President or a Vice Chairman of the Board. During the Secretary's absence or inability, his authority and duties shall be possessed by such Assistant Secretary or Assistant Secretaries as the Board of Directors, the Chairman of the Board, the President or a Vice Chairman of the Board may designate. ARTICLE XI. DUTIES OF THE CONTROLLER The Controller shall be the principal accounting officer of the company and shall perform such duties as may be required of him by the Chairman of the Board or Board of Directors. ARTICLE XII. TRANSFER OF SHARES Section 1. Certificates for shares shall be issued by the Treasurer. Shares shall be transferable only on the record of shareholders of the company by the holder thereof in person or by attorney, upon surrender of the outstanding certificate therefor. This requirement shall be embodied in each certificate. Section 2. In case of the loss of a certificate, a new certificate may be issued upon such terms as the Board of Directors may prescribe. ARTICLE XIII. INDEMNIFICATION OF DIRECTORS AND OFFICERS The company is authorized, by (i) a resolution of shareholders, (ii) a resolution of Directors, or (iii) an agreement providing for such indemnification, to the fullest extent permitted by applicable law, to provide indemnification and to advance expenses to its Directors and officers in respect of claims, actions, suits or proceedings based upon, arising from, relating to or by reason of the fact that any such Director or officer serves or served in such capacity with the company or at the request of the company in any capacity with any other enterprise. ARTICLE XIV. SEAL The common seal of the company shall be in the following form. ARTICLE XV. AMENDMENTS These By-Laws may be amended by the shareholders at any meeting; or by the Board of Directors at any meeting by a majority vote of the full Board, or at two successive meetings of the Board by a majority vote of a quorum present, provided that the third paragraph of Article II shall not be rescinded, amended or waived except at a shareholders meeting in accordance with applicable state law. The notice of a special meeting of the Board at which such action is to be taken shall set forth the substance of the proposed amendment. EX-10 4 0004.txt EXHIBIT (10)(III)(A)16 AT&T CORP. SENIOR MANAGEMENT UNIVERSAL LIFE INSURANCE PROGRAM Effective October 1, 1999 AT&T CORP. SENIOR MANAGEMENT UNIVERSAL LIFE INSURANCE PROGRAM Table of Contents SECTION 1 - DEFINITIONS ................................................... 1 1.0 Administrator ................................................ 1 1.1 Assignee ..................................................... 1 1.2 Beneficiary .................................................. 1 1.3 Benefit Amount ............................................... 1 1.4 Board ........................................................ 1 1.5 Company ...................................................... 1 1.6 Eligible Executive ........................................... 2 1.7 Employer ..................................................... 2 1.8 ERISA ........................................................ 2 1.9 Insurance Policy ............................................. 2 1.10 Insurer ...................................................... 2 1.11 Normal Termination Date ...................................... 2 1.12 Participant .................................................. 2 1.13 Policyholder ................................................. 3 1.14 Prior Programs ............................................... 3 1.15 Program ...................................................... 3 SECTION 2 - ELIGIBILITY AND PARTICIPATION .................................. 4 2.0 Eligibility Conditions ....................................... 4 2.1 Disability Prior to Normal Termination Date .................. 4 2.2 Retirement Prior to Normal Termination Date .................. 4 2.3 Recommencement of Participation .............................. 5 SECTION 3 - PROCUREMENT OF INSURANCE POLICY ................................ 6 3.0 Insurance Application Requirements ........................... 6 3.1 Cooperation Requirement for Eligible Executive ............... 6 3.2 Cooperation Requirement for Policyholder ..................... 6 3.3 Consequences of Failure to Cooperate ......................... 7 SECTION 4 - INCIDENTS OF OWNERSHIP ......................................... 8 4.0 Policy Ownership ............................................. 8 4.1 Rights of Policyholder and Company ........................... 9 4.2 Assignment of Insurance Policy by Policyholder ............... 9 4.3 Beneficiary Elections and Settlement Options ................. 9 4.4 No Ownership Interest by the Company ......................... 9 SECTION 5 - PAYMENT OF BENEFITS ........................................... 10 5.0 Source of Benefits ........................................... 10 5.1 Payment of Insurance Premiums ................................ 10 5.2 Benefit Amount ............................................... 10 5.3 Tax Adjustment ............................................... 11 5.4 Beneficiary Designations ..................................... 11 5.5 No Company or Employer Obligation ............................ 12 5.6 No Affect on Other Company Benefits .......................... 12 SECTION 6 - TERMINATION OF PARTICIPATION .................................... 13 6.0 Events that Cause Termination of Participation ................ 13 6.1 Death of Participant Prior to Normal Termination Date ......... 14 6.2 Attainment of Normal Termination Date ......................... 14 6.3 Discontinuance of Participation Prior to Normal Termination Date .............................................. 15 SECTION 7 - CLAIMS AND APPEALS .............................................. 16 7.0 Claims ........................................................ 16 7.1 Claim Decision ................................................ 16 7.2 Request for Review ............................................ 16 7.3 Review of Decision ............................................ 17 SECTION 8 - AMENDMENT AND TERMINATION ..................................... 18 8.0 Continuation of Program ....................................... 18 8.1 Amendment or Termination ...................................... 18 SECTION 9 - GENERAL PROVISIONS ............................................. 19 9.0 Named Fiduciary ............................................... 19 9.1 Effective Date ................................................ 19 9.2 Calendar Year Program ......................................... 19 9.3 Notice Under Program .......................................... 19 9.4 Binding Effect ................................................ 19 9.5 Welfare Plan Under ERISA ...................................... 19 9.6 Plan Document ................................................. 20 9.7 Governing Law ................................................. 20 9.8 Severability .................................................. 20 9.9 Headings ...................................................... 20 9.10 Procedural Rules .............................................. 20 9.11 Construction .................................................. 20 AT&T Corp. Senior Management Universal Life Insurance Program Purpose The purpose of the AT&T Corp. Senior Management Universal Life Insurance Program is to provide life insurance benefits to certain executives who contribute materially to the continued growth, development, and future business of AT&T Corp. Section 1. Definitions The following words and phrases, as used in this Plan, shall have the meanings set forth below unless a clearly different meaning is required by the context in which the word or phrase is used. 1.0 Administrator. "Administrator" means the Executive Vice President - Human Resources of the Company (or any successor to such position) having responsibility for personnel matters, or his or her designee. The Administrator shall manage and administer the Program in accordance with its terms and conditions. 1.1 Assignee. "Assignee" means the person, trust, entity or organization to whom or to which a Policyholder makes an irrevocable assignment on or after October 1, 1999, of all his or her rights, title, interest, and incidents of ownership, both present and future, to the Insurance Policy and any other assignable rights to the benefits under the Program. 1.2 Beneficiary. "Beneficiary" means the person, trust, entity, organization or the estate of a Policyholder designated pursuant to Section 5.4 that is entitled to receive benefits from an Insurance Policy upon the death of a Participant. 1.3 Benefit Amount. "Benefit Amount" means the amount of the life insurance benefit under the Insurance Policy for which premiums are payable by the Company under the Program. The "Benefit Amount" for a Participant shall be determined in accordance with Section 5.2. 1.4 Board. "Board" means the Board of Directors of the Company. 1.5 Company. "Company" means AT&T Corp., a New York corporation, and any successors to such entity. 1.6 Eligible Executive. "Eligible Executive" means either (a) an active employee of an Employer who, on September 30, 1999, is covered as an insured under one or more life insurance policies that are subject to a collateral assignment agreement with the Company under one or both of the Prior Programs; or (b) any other regular, full-time employee of the Company who, on or after October 1, 1999, is classified as a U.S. salary-based senior manager of the Company (or equivalent salary grade, as determined by the Company in accordance with its payroll practices) and is determined by the Administrator, in his or her sole discretion, to be eligible for participation in the Program. 1.7 Employer. "Employer" means the Company and certain of its subsidiaries and affiliates, as determined by the Company in its sole discretion. 1.8 ERISA. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 1.9 Insurance Policy. "Insurance Policy" means one or more life insurance contracts issued by the Insurer on the life of an Eligible Executive. 1.10 Insurer. "Insurer" means the insurance company or companies to which the Company shall apply for insurance on an Eligible Executive's life, and which issues an Insurance Policy. 1.11 Normal Termination Date. "Normal Termination Date" means the latest of (a) the date a Participant is eligible for retirement-related benefits from the Company as described in Section 2.2; (b) the date a Participant attains age 65; (c) the date as of which a Participant has been covered for a combined total of at least 15 years under the Prior Programs and the Program (for an Eligible Executive who had coverage under both of the Prior Programs, this 15-year period of coverage shall be measured beginning from the later of his or her coverage commencement dates under the respective Prior Programs); or (d) the date the Insurance Policy has sufficient cash value, as determined by the Company in its sole discretion, to provide life insurance coverage for the Participant's remaining life expectancy. 1.12 Participant. "Participant" means an Eligible Executive who has satisfied all of the eligibility and enrollment conditions in Section 2.0 and with respect to whom an Insurance Policy has been procured pursuant to Section 3.0 through Section 3.3. For purposes of this Section 1.12, "Participant" shall include (a) a Participant who subsequently becomes disabled and satisfies the requirements of Section 2.1; and (b) a Participant who retires from active employment with the Company and is then eligible for retirement-related benefits as described in Section 2.2. 1.13 Policyholder. "Policyholder" means the person, trust, entity or organization determined in accordance with Section 4.0 to be the owner of the Insurance Policy on an Eligible Executive's life. 1.14 Prior Programs. "Prior Programs" means the AT&T Senior Management Basic Life Insurance Program and the AT&T Senior Management Individual Life Insurance Program as in effect on September 30, 1999. The Prior Programs shall be terminated effective as of September 30, 1999, and replaced by the Program. 1.15 Program. "Program" means the AT&T Corp. Senior Management Universal Life Insurance Program, which shall be evidenced by this plan document, as amended from time to time. Section 2. Eligibility and Participation 2.0 Eligibility Conditions. Upon becoming an Eligible Executive, an individual may become a Participant by: (a) Completing, executing, and returning all of the enrollment applications and other documents required under the Program in the form approved by the Administrator; (b) Cooperating with the Company in obtaining the Insurance Policy on his or her life as required by Sections 3.0 and 3.1; and (c) Complying with such further conditions as may be established by the Administrator from time to time. Subject to the provisions of Sections 2.1, 2.2, 3.3 and 4.1, an Eligible Executive shall be eligible to continue to participate in the Program until the occurrence of any event described in Section 6.0 that causes the termination of his or her participation in the Program. 2.1 Disability Prior to Normal Termination Date. In the event that (a) a Participant becomes disabled (as determined under the AT&T Long Term Disability Plan for Management Employees), and (b) the Participant continues to be disabled until his or her Normal Termination Date (without regard to whether the Participant continues to receive payments under the AT&T Long Term Disability Plan for Management Employees through such date), the Participant shall be eligible to continue to participate in the Program until his or her Normal Termination Date. If, for any reason, the Participant ceases to be disabled (as determined under the terms of the AT&T Long Term Disability Plan for Management Employees) prior to reaching his or her Normal Termination Date and the Participant does not resume active employment with the Employer, the Participant's participation in the Program shall terminate as of the date of cessation of such disability status. 2.2 Retirement Prior to Normal Termination Date. In the event that a Participant (a) terminates employment prior to his or her Normal Termination Date, and (b) is eligible for retirement-related benefits from the Company, the Participant shall be eligible to continue to participate in the Program until his or her Normal Termination Date. Notwithstanding the foregoing, the Participant's participation in the Program may cease prior to his or her Normal Termination Date upon the occurrence of another event described in Section 6.0. For purposes of this Program, a Participant shall be considered eligible for retirement-related benefits if he or she has satisfied the eligibility conditions for receipt of postretirement medical benefits under the AT&T Medical Expense Plan for Retired Employees, as then in effect. 2.3 Recommencement of Participation. Once a Participant's participation in the Program has terminated as provided in Section 6.0 (other than due to the occurrence of an event described in Sections 6.0(a), (b) or (c)), he or she may recommence participation in the Program if he or she (a) is an Eligible Executive at the time participation is to recommence; and (b) satisfies any and all requirements for recommencement of participation established by the Administrator in his or her sole discretion. Section 3. Procurement of Insurance Policy 3.0 Insurance Application Requirements. The Company shall apply to the Insurer for an Insurance Policy on the life of each Eligible Executive in an amount determined by the Company to be sufficient to provide the applicable Benefit Amount for the Eligible Executive. 3.1 Cooperation Requirement for Eligible Executive. An Eligible Executive shall reasonably cooperate with the Company in its efforts to apply for and obtain the Insurance Policy on his or her life by: (a) Furnishing such information as the Insurer may require for completion of the insurance application and related forms and documents; (b) Taking such physical examinations and supplying medical history as may be requested by the Insurer; (c) Signing the application for the Insurance Policy as the insured; and (d) Doing any other act to comply with the underwriting and policy issuance requirements which may reasonably be requested by the Insurer or the Administrator. 3.2 Cooperation Requirement for Policyholder. A Policyholder shall reasonably cooperate with the Company in its efforts to apply for and obtain the Insurance Policy on the life of an Eligible Executive by: (a) Furnishing such information as the Insurer may require for completion of the insurance application and related forms and documents; (b) Signing the application for the Insurance Policy as the proposed policy owner; and (c) Doing any other act to comply with the underwriting and policy issuance requirements which may reasonably be requested by the Insurer or the Administrator. 3.3 Consequences of Failure to Cooperate. The Company shall have no obligation to the Eligible Executive, the Policyholder or the Policyholder's Beneficiary under the Program and the Eligible Executive's participation in the Program shall become null, void and of no force or effect if: (a) The Administrator, in his or her sole discretion, determines that an Eligible Executive or the Policyholder has not adequately cooperated in the process of procuring the Insurance Policy on the Eligible Executive's life as required by Section 3.1 and Section 3.2, respectively; or (b) The Company is, for any reason, unable to obtain insurance in the specified amount on an Eligible Executive's life at standard rates or rates otherwise acceptable to the Company. Section 4. Incidents of Ownership 4.0 Policy Ownership. The Insurance Policy shall, at all times, be owned solely and absolutely by the Policyholder, except in the event of an assignment to an Assignee as provided for in Section 4.2. The person, trust, entity or organization that will be the Policyholder with respect to a Participant shall be determined as follows: (a) Eligible Executive Who Participated in Prior Programs with Single Policy Owner. If on September 30, 1999 (i) an Eligible Executive was covered as an insured under one or more life insurance policies that are subject to a collateral assignment with the Company under one or both of the Prior Programs, and (ii) all such life insurance policies were owned by a single policy owner (or assignee), such policy owner (or assignee) shall be the Eligible Executive's Policyholder under the Program. (b) Eligible Executive Who Participated in Prior Programs with Multiple Policy Owners. If on September 30, 1999 (i) an Eligible Executive was covered as an insured under one or more life insurance policies that are subject to a collateral assignment agreement with the Company under one or both of the Prior Programs, and (ii) all such life insurance policies were owned by two or more different policy owners (or assignees), the Eligible Executive's Policyholder under the Program shall be the person, trust, entity or organization that all of such policy owners or assignees (excluding the Eligible Executive if he or she is one of the policy owners) agree upon and designate as the Policyholder with respect to the Eligible Executive. If, for any reason, an agreement among such policy owners (or assignees) cannot be reached by October 1, 1999, and/or no designation of Policyholder is received by the Administrator by October 1, 1999, the Eligible Executive shall be the Policyholder unless the Administrator, in his or her sole discretion, determines that one or more other persons, trusts, entities or organizations should be the Policyholder with respect to the Insurance Policy on the Eligible Executive's life. (c) Eligible Executive Who Did Not Participate in the Prior Programs. If on September 30, 1999, an Eligible Executive was not covered as an insured under one or more life insurance policies issued under one or both of the Prior Programs, the Eligible Executive's Policyholder under the Program shall be the person (including the Eligible Executive), trust, entity or organization that the Eligible Executive designates to be his or her Policyholder in the Eligible Executive's written enrollment application for participation in the Program. If, for any reason, an Eligible Executive who did not participate in either of the Prior Programs on September 30, 1999 fails to designate a Policyholder under the Program, the Eligible Executive shall be the Policyholder with respect to the Insurance Policy on his or her life. 4.1 Rights of Policyholder and Company. Prior to a Participant's Normal Termination Date, the Policyholder or his or her Assignee shall control all incidents of ownership with respect to the Insurance Policy including all policy cash values and death benefits under the Insurance Policy on the Participant's life. However, in the event the Policyholder or his or her Assignee surrenders the Insurance Policy, withdraws any cash value from the Insurance Policy or obtains a loan from the Insurance Policy, the Participant's participation in the Program shall immediately cease and the Company will not be obligated to continue to make any further premium payments as provided by Section 5.1 for the Insurance Policy. 4.2 Assignment of Insurance Policy by Policyholder. A Policyholder shall have the right, at any time, to absolutely and irrevocably assign his or her rights, title, interest, and incidents of ownership in and to the Insurance Policy and any other assignable rights to benefits under this Program to any person, trust, entity or organization. Any assignment shall be subject to the consent of the Insurer. Any such assignment shall be on a form approved by the Insurer. No assignment by a Policyholder shall be effective until acknowledged in writing by the Insurer. A copy of the written acknowledgment shall be returned to the Policyholder and the Assignee. Once the assignment of the Insurance Policy has been acknowledged by the Insurer, the Policyholder shall have no further rights, title, interest or incidents of ownership, both present and future, in or under the Insurance Policy or to any other rights to benefits under the Program covered by the assignment, and the Assignee shall have all such assigned rights, title, interest, and incidents of ownership, both present and future, under the Insurance Policy and the Program. 4.3 Beneficiary Elections and Settlement Options. A Policyholder or his or her Assignee, if any, may exercise (a) the right to designate or change the Beneficiary of life insurance proceeds under the Insurance Policy pursuant to Section 5.4; and (b) the right to elect any optional mode of settlement with respect to such life insurance proceeds. Upon request of a Policyholder or his or her Assignee, if any, the applicable form for any designation or change of Beneficiary or any election of an optional mode of settlement shall be sent to a Policyholder, an Assignee or a Beneficiary, as appropriate. 4.4 No Ownership Interest by the Company. No provision in the Program shall be construed or interpreted to permit or provide the Company with any rights, title, interest or incidents of ownership, both present or future, to the Insurance Policy. Section 5. Payment of Benefits 5.0 Source of Benefits. The sole benefit under the Program to a Participant shall be the premium payments made by the Company to the Insurer pursuant to Section 5.1 to maintain the Insurance Policy on his or her life and the tax adjustment made pursuant to Section 5.3. A Beneficiary's sole source of benefits under the Program shall be the Insurance Policy under which the Policyholder, or his or her Assignee, designates a Beneficiary to receive benefits payable upon the Participant's death. 5.1 Payment of Insurance Premiums. When the Company submits an application for the Insurance Policy on the life of an Eligible Executive, or as soon thereafter as is required by the Insurer, the Company shall pay the initial premium on the Insurance Policy to the Insurer. Thereafter, the Company shall annually (or more frequently as required by the Insurer) pay the premiums determined to be due under the Insurance Policy. While the Eligible Executive is a Participant, the amount of the premiums paid by the Company shall be sufficient, as determined by the Company in its sole discretion, to maintain life insurance coverage on the life of the Participant equal to the Benefit Amount. The Company's obligation to make premium payments on the Insurance Policy covering the life of a Participant shall cease upon the termination of the Participant's participation, as provided for in Section 6.0. 5.2 Benefit Amount. (a) The Benefit Amount under the Program with respect to a Participant who is actively employed by an Employer at any time on or after October 1, 1999 shall be determined as follows: (i) Prior to Age 65: The Benefit Amount for a Participant prior to age 65 shall be equal to 250 percent of the Participant's annual base salary (determined based on the Employer's records) paid to the Participant by the Employer, rounded up to the next $1,000. Any salary increase will be reflected in the Benefit Amount as soon as administratively practicable after the salary increase becomes effective. (ii) Age 65 and Older: The Benefit Amount for a Participant age 65 or older will be equal to the Participant's Benefit Amount at age 64. (b) Any Participant who is eligible for continued participation in the Program pursuant to the provisions of either Section 2.1 or Section 2.2 due to retirement or disability prior to attainment of his of her Normal Termination Date will have a Benefit Amount as described under Section 5.2(a)(i) and (ii) above, whichever is applicable, throughout the Participant's period of continued participation in the Program (under the terms of Section 2.1 or Section 2.2, as applicable); provided, however, that for purposes of determining such Participant's Benefit Amount, the Participant's "annual base salary" referred to in Section 5.2(a)(i) shall be the Participant's final "annual base salary" on the date of his or her retirement or disability. 5.3 Tax Adjustment. The Company shall make a tax adjustment with respect to each premium payment made to the Insurer pursuant to Section 5.1 on the Insurance Policy covering the life of a Participant. The amount and frequency of each tax adjustment, as determined by the Company in its sole discretion, is intended to be sufficient to cover the estimated amount of federal income taxes and FICA taxes that will be incurred by the Participant on the sum of the premium payment plus the tax adjustment itself. Each tax adjustment shall be equal to the sum of two amounts that are described below and referred to herein respectively as the "tax withholding portion" and the "excess portion": (a) Tax Withholding Portion of Tax Adjustment: The tax withholding portion of each tax adjustment shall be equal to the combined total amount of federal income taxes and FICA taxes required to be withheld with respect to (i) each premium payment made by the Company; and (ii) each corresponding tax adjustment. (b) Excess Portion of Tax Adjustment: The excess portion of each tax adjustment shall be equal to the applicable tax adjustment, reduced by the related tax withholding portion of such tax adjustment determined under Section 5.3(a) with respect to the premium payment and the related tax adjustment. The tax withholding portion of each tax adjustment payment, as described in Section 5.3(a) (above), shall be paid by the Company directly to the applicable federal tax authorities. The excess portion of each tax adjustment payment, as described in Section 5.3(b) (above), shall be paid in cash to the Participant (or if he or she is not then living, to his or her estate). The Company's obligation to make tax adjustment payments with respect to a Participant shall cease upon the termination of the Participant's participation in the Program pursuant to the provisions of Section 6.0. 5.4 Beneficiary Designations. A Policyholder or, if the Policyholder has assigned the Insurance Policy pursuant to Section 4.2, the Assignee may designate a Beneficiary to receive life insurance proceeds under the Insurance Policy upon the death of the Participant, or may change an existing designation of the Beneficiary to receive such insurance proceeds. Any designation of Beneficiary or change in the designated Beneficiary shall be accomplished in accordance with the applicable terms of the Insurance Policy using forms approved by the Insurer. If, for any reason, no valid Beneficiary designation is on file with the Insurer at the time of the Participant's death, the life insurance proceeds payable under the Insurance Policy shall be paid in accordance with the terms of the Insurance Policy. 5.5 No Company or Employer Obligation. Neither the Company nor any other Employer shall have any obligation of any nature whatsoever to a Policyholder or his or her Assignee or Beneficiary under this Program if the circumstances of the Participant's death, the terms and conditions of this Program, or any other reason, precludes payment of life insurance proceeds or any other benefits under the Insurance Policy or Program. 5.6 No Affect on Other Company Benefits: No portion of any premium payment on any Insurance Policy or any tax adjustment payment made with respect to a Participant as provided in this Section 5 shall be included or otherwise taken into consideration as pay, compensation or income for purposes of any other "employee welfare benefit plan" (within the meaning of Section 3(1) of ERISA), any "employee pension benefit plan" (within the meaning of Section 3(2) of ERISA), or any other compensation or benefit plan, program or arrangement of any Employer covering the Participant unless expressly provided for in such plan, program or arrangement. Section 6. Termination of Participation 6.0 Events that Cause Termination of Participation. A Participant's participation in the Program shall terminate when the first of any of the following events occurs: (a) The death of the Participant; (b) The Participant attains his or her Normal Termination Date; (c) The Board (or its delegate) terminates the Program pursuant to Section 8.1; (d) The termination of the Participant's employment with the Company, for any reason (other than death, disability as described in Section 2.1 or retirement with retirement-related benefits as described in Section 2.2), prior to his or her Normal Termination Date (unless otherwise agreed to by the Company in writing); (e) Cessation of the Participant's disability prior to his or her Normal Termination Date under circumstances described in Section 2.1, when the Participant does not recommence employment with the Employer; (f) Voluntary termination of the Participant's participation in the Program initiated by the Participant giving written notice to the Administrator prior to his or her Normal Termination Date; (g) The Policyholder or his or her Assignee, if any, takes any of the actions described in Section 4.1 (e.g., loans or withdrawals) that cause termination of the Participant's participation in the Program; (h) Demotion of the Participant to a position that is not classified or otherwise treated by the Company as being a senior manager-level position (or equivalent salary grade), as determined by the Administrator; or (i) The Participant is determined by the Executive Vice President-Human Resources of the Company, in his or her sole discretion, to have engaged in any competitive activity that violates the provisions of the AT&T Non-Competition Guideline, as amended from time to time, or any other non-competition commitment of the Participant to any Employer. Termination of a Participant's participation in the Program upon the occurrence of any of the events described in this Section 6.0 shall have the consequences described in Sections 6.1, 6.2 or 6.3, whichever is applicable. 6.1 Death of Participant Prior to Normal Termination Date. If a Participant continues to participate in the Program until his or her participation terminates due to death (as provided in Section 6.0(a)) prior to attainment of his or her Normal Termination Date, then effective as of the date of death: (a) The Company shall have no further obligation to make any premium payments with respect to the Insurance Policy on the Participant's life pursuant to Section 5.1. (b) The Policyholder's Beneficiary shall be entitled to receive the life insurance benefit payable by the Insurer under the Insurance Policy, subject to any binding settlement options elected by the Policyholder prior to the Participant's death. (c) The restrictions in Section 4.1 on the Policyholder or Assignee pertaining to the exercise of certain incidents of ownership of the Insurance Policy on the Participant's life (e.g., loans and withdrawals) shall no longer apply. 6.2 Attainment of Normal Termination Date. If a Participant continues to participate in the Program until his or her participation terminates by reason of his or her attainment of the Normal Termination Date (as provided in Section 6.0(b)), then effective as of the date of termination of participation: (a) The Company shall have no further obligation to make any premium payments with respect to the Insurance Policy on the Participant's life pursuant to Section 5.1. (b) The Insurance Policy will have sufficient cash value, as determined using reasonable actuarial assumptions chosen by the Company in its sole discretion, to provide life insurance coverage throughout the Participant's remaining life expectancy. (c) The restrictions in Section 4.1 on the Policyholder or Assignee pertaining to the exercise of certain incidents of ownership of the Insurance Policy on the Participant's life (e.g., loans and withdrawals) shall no longer apply. 6.3 Discontinuance of Participation Prior to Normal Termination Date. If a Participant's participation in the Program terminates due to the occurrence of any of the events described in Section 6.0(c) through Section 6.0(i), inclusive, then effective as of the date of such termination of participation: (a) The Company shall have no further obligation to make any premium payments with respect to the Insurance Policy on the Participant's life pursuant to Section 5.1. (b) The Participant, Policyholder, and any Assignee shall have no further rights under the Program and shall only be entitled to the Insurance Policy cash value as of the date of termination of participation in the Program. The Company shall have no obligation to pay additional premiums or increase the cash value so as to provide cash values sufficient to continue any level of coverage under the Insurance Policy throughout the Participant's remaining life expectancy. The Insurance Policy's cash value (whether above or below any estimates, projections or illustrations) shall be limited solely to the cash value of the Insurance Policy on the date of the Participant's termination of participation in the Program. (c) The restrictions in Section 4.1 on the Policyholder or Assignee pertaining to the exercise of certain incidents of ownership of the Insurance Policy on the Participant's life (e.g., loans and withdrawals) shall no longer apply. Section 7. Claims and Appeals 7.0 Claims. A person who believes that he or she is being denied a benefit to which he or she is entitled under this Program (hereinafter referred to as a "Claimant") may file a written request for such benefit with the Company's Executive Human Resources Department, setting forth his or her claim. The request must be addressed to the Company's Executive Human Resources Department at its then principal place of business. Notwithstanding the foregoing, any Beneficiary's claim for payment of life insurance proceeds from an Insurance Policy on a Participant's life shall not be considered a claim for benefits under this Program. Any such claim for life insurance proceeds should be filed with the Insurer in accordance with the terms and provisions of the applicable Insurance Policy. 7.1 Claim Decision. Upon receipt of a claim, the Company's Executive Human Resources Department shall advise the Claimant that a reply will be forthcoming within ninety (90) days and shall, in fact, deliver such reply within such period. The Company's Executive Human Resources Department may, however, extend the reply period for up to an additional ninety (90) days for reasonable cause. If the claim is denied by the Company's Executive Human Resources Department, in whole or in part, the Company's Executive Human Resources Department shall provide a written response using language calculated to be understood by the Claimant and setting forth: (a) the specific reason or reasons for such denial; (b) specific references to pertinent provisions of this Program on which such denial is based; (c) a description of any additional material or information necessary for the Claimant to perfect his or her claim and an explanation of why such material or such information is necessary; (d) appropriate information as to the steps to be taken if the Claimant wishes to submit the claim for review; and (e) the time limits for requesting a review under Section 7.2 and for review under Section 7.3. 7.2 Request for Review. Within sixty (60) days after the receipt by the Claimant of the written opinion described above, the Claimant may request in writing that the Administrator review the determination of the Company's Executive Human Resources Department. Such request must be addressed to the Administrator at the address for giving notice to the Administrator designated in Section 9.3. The Claimant or his or her duly authorized representative may, but need not, review the pertinent documents and submit issues and comments in writing for consideration by the Administrator. If the Claimant does not request a review of the Company's Executive Human Resources Department's determination by the Administrator within such sixty (60) day period, the Claimant shall be barred and estopped from challenging the determination of the Company's Executive Human Resources Department. 7.3 Review of Decision. Within sixty (60) days after the Administrator's receipt of a request for review, the Administrator will review the determination of the Company's Executive Human Resources Department. After considering all materials presented by the Claimant, the Administrator will render a written opinion, written in a manner designed to be understood by the Claimant, setting forth the specific reasons for the decision and containing specific references to the pertinent provisions of this Program on which the decision is based. If special circumstances require that the sixty (60) day time period be extended, the Administrator will so notify the Claimant and will render the decision as soon as possible, but no later than one hundred twenty (120) days after receipt of the request for review. The Administrator shall serve as the final review committee under the Program and shall have sole and complete discretionary authority to determine conclusively for all parties, and in accordance with the terms of the documents or instruments governing the Program, any and all questions arising from administration of the Program and interpretation of all Program provisions, determination of all questions relating to participation of Eligible Executives and eligibility for benefits, determination of all relevant facts, the amount and type of benefits payable to any Participant, Assignee or Beneficiary, and the construction of all terms of the Program. Decisions by the Administrator shall be conclusive and binding on all parties and not subject to further review. In any case, a Participant may have further rights under ERISA. The Program provisions require that Participants pursue all claim and appeal rights described above before they seek any other legal recourse regarding claims for benefits. Section 8. Amendment and Termination 8.0 Continuation of Program. The Company does not guarantee the continuation of the Program or any benefits during employment or at or during retirement, nor does the Company guarantee any specific level of benefits. Benefits are provided under the Program at the Company's discretion and do not create a contract of employment. Neither the establishment nor the continuance of the Plan shall be construed as conferring any legal rights upon any Eligible Executive or any other person for continuation of employment, nor shall such establishment or continuance interfere with the right of the Company to discharge any Eligible Executive without regard to the existence of the Program. The Company intends to continue the Program indefinitely; however, the Board reserves the right to amend or terminate the Program at any time pursuant to Section 8.1. 8.1 Amendment or Termination. The Board or pursuant to delegated authority, the Chairman of the Board (or in his absence the Executive Vice President - Human Resources) ("Delegate"), may amend, modify, suspend or change the Program from time to time, and the Board (or its Delegate) may terminate the Program at any time. Program amendments may include, but are not limited to, elimination or reduction in the level or type of benefits provided to any class or classes of employees. Section 9. General Provisions 9.0 Named Fiduciary. The Administrator is hereby designated as the "named fiduciary" under this Program. The named fiduciary shall have authority to control and manage the operation and administration of this Program. 9.1 Effective Date. The effective date of this Program shall be October 1, 1999. 9.2 Calendar Year Program. All Program records shall be maintained on a calendar-year basis, beginning January 1 and ending December 31, except that Program records for the year 1999 shall be maintained for the period beginning October 1, 1999 and ending December 31, 1999. 9.3 Notice Under Program. Any notice to be given under this Program shall be in writing and shall be either delivered in person or mailed by United States Mail, first-class postage pre-paid. If notice is to be given to the Administrator by mail, such notice shall be addressed as indicated below and mailed to the Administrator at the following address: Executive Vice President - Human Resources AT&T Corp. 295 North Maple Avenue Basking Ridge NJ 07920 If notice is to be given to a Participant, Policyholder or Assignee by United States Mail, such notice shall be addressed to the address shown as such Participant's, Policyholder's or Assignee's address then on file with the Company's Executive Human Resources Department. Any party may change the address to which notices shall be mailed by giving written notice of such change of address. 9.4 Binding Effect. This Program shall be binding upon the Company's successors and assigns, and upon the Participants, the Policyholders, and their Assignees, Beneficiaries, heirs, executors, and administrators. 9.5 Welfare Plan Under ERISA. The Program is intended to constitute an "employee welfare benefit plan" within the meaning of Section 3(1) of ERISA, covering a select group of management or highly compensated employees. 9.6 Plan Document. This Program document is the plan document required by ERISA. The information contained herein provides the final and exclusive statement of the terms of the Program. Unless otherwise authorized by the Board or its delegate, no amendment or modification to this Program shall be effective until reduced to writing and adopted pursuant to Section 8.1. This document legally governs the operation of the Program, and any claim of right or entitlement under the Program shall be determined solely in accordance with its provisions pursuant to the provisions of Section 7. To the extent that there are any inconsistencies between the terms of the Insurance Policy or any related materials and the terms of this document, the terms of this document shall control and govern the operation of the Program. No other evidence, whether written or oral, shall be taken into account in determining the right of an Eligible Executive, a Participant, a Policyholder, a Beneficiary or an Assignee, as applicable, to any benefit of any type provided under the Program. 9.7 Governing Law. To the extent not preempted by applicable federal law, the Program shall be governed by and construed and interpreted in accordance with the laws of the State of New Jersey (irrespective of the choice of laws principles of the State of New Jersey). 9.8 Severability. If any provision of this Program or the application thereof to any person or circumstance shall be held by a court of competent jurisdiction to be invalid or unenforceable under any applicable law, such event shall not affect or render invalid or unenforceable the remainder of the Program and shall not affect the application of any provision of the Program to any other person or circumstance. 9.9 Headings. The headings and subheadings preceding the Sections of this Program have been inserted solely as a matter of convenience and reference, and shall not, in any manner, define or limit the scope or intent of any provision of this Program. 9.10 Procedural Rules. The Administrator shall establish rules, forms and procedures for the administration of this Program from time to time. 9.11 Construction. The use of the singular form herein shall be deemed to include the plural form, and vice versa, as appropriate. All references to Sections contained herein refer to Sections of this Program, unless otherwise stated. The use of the words "hereof," "herein," "hereunder," and words of similar import shall refer to this entire Program, and not to any particular Section, subsection, clause, paragraph or other subdivision of this Program, unless the context clearly indicates otherwise. The word "or" shall not be exclusive; "may not" is prohibitive and not permissive. EX-10 5 0005.txt EXHIBIT (10)(III)(A)25 AT&T CORP. DIRECTORS' UNIVERSAL LIFE INSURANCE PROGRAM Effective June 1, 2000 AT&T CORP. DIRECTORS' UNIVERSAL LIFE INSURANCE PROGRAM Table of Contents SECTION 1 - DEFINITIONS ................................................... 1 1.0 Administrator ................................................ 1 1.1 Assignee ..................................................... 1 1.2 Beneficiary .................................................. 1 1.3 Benefit Amount ............................................... 1 1.4 Board ........................................................ 1 1.5 Company ...................................................... 1 1.6 Eligible Director ............................................ 2 1.7 Insurance Policy ............................................. 2 1.8 Insurer ...................................................... 2 1.9 Normal Termination Date ...................................... 2 1.10 Participant .................................................. 2 1.11 Policyholder ................................................. 2 1.12 Prior Policy ................................................. 2 1.13 Prior Program ................................................ 2 1.14 Program ...................................................... 3 1.15 Transition Benefit Amount .................................... 3 SECTION 2 - ELIGIBILITY AND PARTICIPATION .................................. 4 2.0 Eligibility Conditions ....................................... 4 2.1 Disability Prior to Normal Termination Date .................. 4 2.2 Retirement Prior to Normal Termination Date .................. 4 2.3 Recommencement of Participation .............................. 5 SECTION 3 - PROCUREMENT OF INSURANCE POLICY ................................ 6 3.0 Insurance Application Requirements ........................... 6 3.1 Cooperation Requirement for Eligible Director ................ 6 3.2 Cooperation Requirement for Policyholder ..................... 6 3.3 Consequences of Failure to Cooperate ......................... 6 SECTION 4 - INCIDENTS OF OWNERSHIP ......................................... 8 4.0 Policy Ownership ............................................. 8 4.1 Rights of Policyholder and Company ........................... 8 4.2 Assignment of Insurance Policy by Policyholder ............... 8 4.3 Beneficiary Elections and Settlement Options ................. 9 4.4 No Ownership Interest by the Company ......................... 9 SECTION 5 - PAYMENT OF BENEFITS ........................................... 10 5.0 Source of Benefits ........................................... 10 5.1 Payment of Insurance Premiums ................................ 10 5.2 Benefit Amount ............................................... 10 5.3 Tax Adjustment ............................................... 11 5.4 Beneficiary Designations ..................................... 11 5.5 No Company Obligation ........................................ 12 5.6 No Affect on Other Company Benefits .......................... 12 SECTION 6 - TERMINATION OF PARTICIPATION ................................... 13 6.0 Events that Cause Termination of Participation ............... 13 6.1 Death of Participant Prior to Normal Termination Date ........ 13 6.2 Attainment of Normal Termination Date ........................ 14 6.3 Discontinuance of Participation Prior to Normal Termination Date ......................................................... 14 SECTION 7 - CLAIMS AND APPEALS ............................................. 16 7.0 Claims ....................................................... 16 7.1 Claim Decision ............................................... 16 7.2 Request for Review ........................................... 16 7.3 Review of Decision ........................................... 17 SECTION 8 - AMENDMENT AND TERMINATION .................................... 18 8.0 Continuation of Program ...................................... 18 8.1 Amendment or Termination ..................................... 18 SECTION 9 - GENERAL PROVISIONS ............................................ 19 9.0 Named Fiduciary .............................................. 19 9.1 Effective Date ............................................... 19 9.3 Notice Under Program ......................................... 19 9.4 Binding Effect ............................................... 19 9.5 Plan Document ................................................ 19 9.6 Governing Law ................................................ 20 9.7 Severability ................................................. 20 9.8 Headings ..................................................... 20 9.9 Procedural Rules ............................................. 20 9.10 Construction ................................................. 20 AT&T Corp. Directors' Universal Life Insurance Program Purpose The purpose of the AT&T Corp. Directors' Universal Life Insurance Program is to provide life insurance benefits to non-employee members of the Board of Directors of AT&T Corp. Section 1. Definitions The following words and phrases, as used in this Program document, shall have the meanings set forth below unless a clearly different meaning is required by the context in which the word or phrase is used. 1.0 Administrator. "Administrator" means the Executive Vice President - Human Resources of the Company (or any successor to such position) having responsibility for benefit programs for non-employee members of the Board, or his or her designee. The Administrator shall manage and administer the Program in accordance with its terms and conditions. 1.1 Assignee. "Assignee" means the person, trust, entity or organization to whom or to which a Policyholder makes an irrevocable assignment on or after June 1, 2000, of all his or her rights, title, interest, and incidents of ownership, both present and future, to the Insurance Policy and any other assignable rights to the benefits under the Program. 1.2 Beneficiary. "Beneficiary" means the person, trust, entity, organization or the estate of a Policyholder designated pursuant to Section 5.4 that is entitled to receive benefits from the Insurance Policy upon the death of a Participant. 1.3 Benefit Amount. "Benefit Amount" means the amount of the life insurance benefit under the Insurance Policy for which premiums are payable by the Company under the Program. The "Benefit Amount" for a Participant shall be determined in accordance with Section 5.2. 1.4 Board. "Board" means the Board of Directors of the Company. 1.5 Company. "Company" means AT&T Corp., a New York corporation, and any successors to such entity. 1.6 Eligible Director. "Eligible Director" means (a) an individual who is an active non-employee member of the Board on May 31, 2000; (b) an individual who is a retired non-employee member of the Board on May 31, 2000, and who had not attained age 72 as of that date; or (c) an individual who becomes an active non-employee member of the Board on or after June 1, 2000. 1.7 Insurance Policy. "Insurance Policy" means one or more life insurance contracts issued by the Insurer on the life of an Eligible Director for purposes of this Program. 1.8 Insurer. "Insurer" means the insurance company to which the Company shall apply for insurance on an Eligible Director's life, and which issues an Insurance Policy. 1.9 Normal Termination Date. "Normal Termination Date" means the latest of (a) the date a Participant attains age 70; (b) the date as of which a Participant has been covered for a combined total of at least 15 years under the Prior Program and the Program; or (c) the date the Insurance Policy has sufficient cash value, as determined by the Company in its sole discretion, to provide life insurance coverage for the Participant's remaining life expectancy. 1.10 Participant. "Participant" means an Eligible Director who has satisfied all of the eligibility and enrollment conditions in Section 2.0 and with respect to whom an Insurance Policy has been procured pursuant to Section 3.0 through Section 3.3. For purposes of this Section 1.10, "Participant" shall include a Participant who subsequently becomes disabled and satisfies the requirements of Section 2.1. 1.11 Policyholder. "Policyholder" means the person, trust, entity or organization determined in accordance with Section 4.0 to be the owner of the Insurance Policy on an Eligible Director's life. 1.12 Prior Policy. "Prior Policy" means a life insurance policy that was (a) issued prior to June 1, 2000, on the life of an Eligible Director; and (b) subject to a collateral assignment agreement with the Company under the terms of the Prior Program on May 31, 2000. 1.13 Prior Program. "Prior Program" means the AT&T Directors Individual Life Insurance Program as in effect on May 31, 2000 (including any "Director's Individual Life Insurance Program and Collateral Assignment Agreement" with an Eligible Director that is in effect as of May 31, 2000). 1.14 Program. "Program" means the AT&T Corp. Directors' Universal Life Insurance Program, which shall be evidenced by this plan document, as amended from time to time. 1.15 Transition Benefit Amount. "Transition Benefit Amount" means the amount of life insurance death benefit determined as follows: (a) Participant Who Participated In Prior Program: If a Participant was covered under a Prior Policy on May 31, 2000, the Transition Benefit Amount shall be equal to the amount that was the Participant's death benefit amount under the Prior Program on January 1, 2000 (determined in accordance with the terms of the Prior Program). (b) Participant Serving on Board as of May 31, 2000 Who Did Not Participate in Prior Program: For a Participant who was an active non-employee member of the Board on May 31, 2000, and for whom no Prior Policy was purchased, the Transition Benefit Amount shall be the amount that would have been the Participant's death benefit amount under the Prior Program on January 1, 2000, if (i) the Participant had begun to participate in the Prior Program when he or she would otherwise have first become eligible to participate in the Prior Program, and (ii) the amount of the death benefit under the Prior Program had thereafter annually been increased by seven percent (7%) as of each successive January 1 (including January 1, 2000), in accordance with the terms of the Prior Program. Section 2. Eligibility and Participation 2.0 Eligibility Conditions. Upon becoming an Eligible Director, an individual may become a Participant by: (a) Completing, executing, and returning all of the enrollment applications and other documents required under the Program in the form approved by the Administrator; (b) Cooperating with the Company in obtaining the Insurance Policy on his or her life as required by Sections 3.1 and 3.2; and (c) Complying with such further conditions as may be established by the Administrator from time to time. Subject to the provisions of Sections 2.1, 2.2, 3.3 and 4.1, an Eligible Director shall be eligible to continue to participate in the Program until the occurrence of any event described in Section 6.0 that causes the termination of his or her participation in the Program. 2.1 Disability Prior to Normal Termination Date. In the event that (a) a Participant becomes disabled, and (b) the Participant continues to be disabled until his or her Normal Termination Date, the Participant shall be eligible to continue to participate in the Program until his or her Normal Termination Date. If, for any reason, the Participant ceases to be disabled prior to reaching his or her Normal Termination Date and the Participant does not resume active service as a non-employee member of the Board, the Participant's participation in the Program shall terminate as of the date of cessation of such disability status. 2.2 Retirement Prior to Normal Termination Date. In the event that a Participant retires from service as a non-employee member of the Board prior to his or her Normal Termination Date, the Participant shall be eligible to continue to participate in the Program until his or her Normal Termination Date. Notwithstanding the foregoing, the Participant's participation in the Program may cease prior to his or her Normal Termination Date upon the occurrence of another event described in Section 6.0. For purposes of this Program, a Participant will be deemed to retire as a non-employee member of the Board on the effective date of his or her resignation from the Board or the last day of a Participant's term as a non-employee member of the Board if he or she is not re-elected for a subsequent term on the Board. 2.3 Recommencement of Participation. Once a Participant's participation in the Program has terminated as provided in Section 6.0 (other than due to the occurrence of an event described in Sections 6.0(a), (b) or (c)), he or she may recommence participation in the Program if he or she is an Eligible Director at the time participation is to recommence. Section 3. Procurement of Insurance Policy 3.0 Insurance Application Requirements. The Company shall apply to the Insurer for an Insurance Policy on the life of each Eligible Director in an amount determined by the Company to be sufficient to provide the applicable Benefit Amount for the Eligible Director. 3.1 Cooperation Requirement for Eligible Director. An Eligible Director shall reasonably cooperate with the Company in its efforts to apply for and obtain the Insurance Policy on his or her life by: (a) Furnishing such information as the Insurer may require for completion of the insurance application and related forms and documents; (b) Taking such physical examinations and supplying medical history as may be requested by the Insurer; (c) Signing the application for the Insurance Policy as the insured; and (d) Doing any other act to comply with the underwriting and policy issuance requirements which may reasonably be requested by the Insurer or the Administrator. 3.2 Cooperation Requirement for Policyholder. A Policyholder shall reasonably cooperate with the Company in its efforts to apply for and obtain the Insurance Policy on the life of an Eligible Director by: (a) Furnishing such information as the Insurer may require for completion of the insurance application and related forms and documents; (b) Signing the application for the Insurance Policy as the proposed policy owner; and (c) Doing any other act to comply with the underwriting and policy issuance requirements which may reasonably be requested by the Insurer or the Administrator. 3.3 Consequences of Failure to Cooperate. The Company shall have no obligation to the Eligible Director, the Policyholder or the Policyholder's Beneficiary under the Program and the Eligible Director's participation in the Program shall become null, void and of no force or effect if: (a) The Administrator, in his or her sole discretion, determines that an Eligible Director or the Policyholder has not adequately cooperated in the process of procuring the Insurance Policy on the Eligible Director's life as required by Section 3.1 and Section 3.2, respectively; or (b) The Company is, for any reason, unable to obtain insurance in the specified amount on an Eligible Director's life at standard rates or rates otherwise acceptable to the Company. Section 4. Incidents of Ownership 4.0 Policy Ownership. The Insurance Policy shall, at all times, be owned solely and absolutely by the Policyholder, except in the event of an assignment to an Assignee as provided for in Section 4.2. The person, trust, entity or organization that will be the Policyholder with respect to a Participant shall be determined as follows: (a) Eligible Director Who Was Covered Under A Prior Policy. If an Eligible Director was a participant in the Prior Program and was covered as an insured under a Prior Policy on May 31, 2000, the policy owner (or assignee) of such Prior Policy on May 31, 2000 shall be the Eligible Director's Policyholder under the Program of the Insurance Policy on the Eligible Director's life to be procured in accordance with Section 3.0. (b) Eligible Director Who Was Not Covered Under A Prior Policy. If an Eligible Director was not covered as an insured under a Prior Policy on May 31, 2000, the Eligible Director's Policyholder under the Program shall be the person (including the Eligible Director), trust, entity or organization that the Eligible Director designates to be his or her Policyholder in the Eligible Director's written enrollment application for participation in the Program. If, for any reason, an Eligible Director who was not covered as an insured under a Prior Policy on May 31, 2000, fails to designate a Policyholder under the Program, the Eligible Director shall be the Policyholder with respect to the Insurance Policy on his or her life. 4.1 Rights of Policyholder and Company. Prior to a Participant's Normal Termination Date, the Policyholder or his or her Assignee shall control all incidents of ownership with respect to the Insurance Policy including all policy cash values and death benefits under the Insurance Policy on the Participant's life. However, in the event the Policyholder or his or her Assignee surrenders the Insurance Policy, withdraws any cash value from the Insurance Policy or obtains a loan from the Insurance Policy, the Participant's participation in the Program shall immediately cease and the Company will not be obligated to continue to make any further premium payments on the Insurance Policy as otherwise provided for by Section 5.1. 4.2 Assignment of Insurance Policy by Policyholder. A Policyholder shall have the right, at any time, to absolutely and irrevocably assign his or her rights, title, interest, and incidents of ownership in and to the Insurance Policy and any other assignable rights to benefits under this Program to any person, trust, entity or organization. Any assignment shall be subject to the consent of the Insurer. Any such assignment shall be on a form approved by the Insurer. No assignment by a Policyholder shall be effective until acknowledged in writing by the Insurer. A copy of the written acknowledgment shall be returned to the Policyholder and the Assignee. Once the assignment of the Insurance Policy has been acknowledged by the Insurer, the Policyholder shall have no further rights, title, interest or incidents of ownership, both present and future, in or under the Insurance Policy or to any other rights to benefits under the Program covered by the assignment, and the Assignee shall have all such assigned rights, title, interest, and incidents of ownership, both present and future, under the Insurance Policy and the Program. 4.3 Beneficiary Elections and Settlement Options. A Policyholder or his or her Assignee, if any, may exercise (a) the right to designate or change the Beneficiary of life insurance proceeds under the Insurance Policy pursuant to Section 5.4; and (b) the right to elect any optional mode of settlement with respect to such life insurance proceeds. Upon request of a Policyholder or his or her Assignee, if any, the applicable form for any designation or change of Beneficiary or any election of an optional mode of settlement shall be sent to a Policyholder, an Assignee or a Beneficiary, as appropriate. 4.4 No Ownership Interest by the Company. No provision in the Program shall be construed or interpreted to permit or provide the Company with any present or future rights, title, interest or incidents of ownership to the Insurance Policy. Section 5. Payment of Benefits 5.0 Source of Benefits. The sole benefits under the Program to a Participant shall be (a) the premium payments made by the Company to the Insurer pursuant to Section 5.1 to maintain the Insurance Policy on his or her life; and (b) the tax adjustments made pursuant to Section 5.3. A Beneficiary's sole source of benefits under the Program shall be the Insurance Policy under which the Policyholder, or his or her Assignee, designates a Beneficiary to receive benefits payable upon the Participant's death. 5.1 Payment of Insurance Premiums. The Company shall pay the premiums (if any) determined to be due on the Insurance Policy from time to time. While the Eligible Director is a Participant, the amount of the premiums paid by the Company on the Insurance Policy shall be sufficient, as determined by the Company in its sole discretion, to maintain life insurance coverage on the life of the Participant equal to the Benefit Amount. The Company's obligation to make premium payments on the Insurance Policy covering the life of a Participant shall cease upon the termination of the Participant's participation, as provided for in Section 6.0. 5.2 Benefit Amount. (a) Active Non-Employee Directors Prior to Age 70: The Benefit Amount for a Participant who is actively serving as a non-employee member of the Board prior to attainment of age 70 shall be determined as follows: (i) Individuals Who Are Active Non-Employee Directors on June 1, 2000: The Benefit Amount for a Participant who is actively serving as a non-employee member of the Board on June 1, 2000, shall be equal to his or her Transition Benefit Amount, increased annually by seven percent (7%) beginning on January 1, 2001, and on January 1 of each successive year occurring thereafter prior to the first to occur of the Participant's (A) Normal Termination Date; (B) attainment of age 70; or (C) death. (ii) Individuals Who Become Active Non-Employee Directors After June 1, 2000: The Benefit Amount for a Participant who first becomes an Eligible Director after June 1, 2000, shall be equal to $100,000, increased by seven percent (7%) annually thereafter on January 1 of each successive year occurring after he or she first becomes an Eligible Director and prior to the first to occur of the Participant's (A) Normal Termination Date; (B) attainment of age 70; or (C) death. (iii) Base for Percentage Increases in Benefit Amount: Each annual percentage increase in the Benefit Amount under Section 5.2(a)(i) and Section 5.2(a)(ii) shall be based on the Participant's Benefit Amount as of the immediately preceding December 31. (b) Individuals Who Are Active Non-Employee Directors Age 70 and Older: The Benefit Amount for a Participant who (i) is actively serving as a non-employee member of the Board, (ii) is age 70 or older, and (iii) has not attained his or her Normal Termination Date, shall be equal to his or her Benefit Amount determined under Section 5.2(a) on the January 1 coinciding with or immediately preceding the Participant's attainment of age 70. (c) Former Non-Employee Directors: The Benefit Amount for any Participant who has ceased to be an active non-employee member of the Board but who is eligible for continued participation in the Program (pursuant to the provisions of either Section 2.1 or Section 2.2 due to retirement or disability prior to attainment of his or her Normal Termination Date) will be equal to his or her Benefit Amount as of the January 1 immediately preceding his or her cessation of service as an active non-employee member of the Board. 5.3 Tax Adjustment. The Company shall make a tax adjustment with respect to each premium payment made to the Insurer pursuant to Section 5.1 on the Insurance Policy covering the life of a Participant. The amount and frequency of each tax adjustment, as determined by the Company in its sole discretion, is intended to be sufficient to cover the estimated amount of federal income taxes that will be incurred by the Participant on the sum of the premium payment plus the tax adjustment itself. Each tax adjustment payment shall be paid in cash to the Participant (or if he or she is not then living, to his or her estate). The Company's obligation to make tax adjustment payments with respect to a Participant shall cease upon the termination of the Participant's participation in the Program pursuant to the provisions of Section 6.0. 5.4 Beneficiary Designations. A Policyholder or, if the Policyholder has assigned the Insurance Policy pursuant to Section 4.2, the Assignee may designate a Beneficiary to receive life insurance proceeds under the Insurance Policy upon the death of the Participant, or may change an existing designation of the Beneficiary to receive such insurance proceeds. Any designation of Beneficiary or change in the designated Beneficiary shall be accomplished in accordance with the applicable terms of the Insurance Policy using forms approved by the Insurer. If, for any reason, no valid Beneficiary designation is on file with the Insurer at the time of the Participant's death, the life insurance proceeds payable under the Insurance Policy shall be paid in accordance with the terms of the Insurance Policy. 5.5 No Company Obligation. The Company shall have no obligation of any nature whatsoever to a Policyholder or his or her Assignee or Beneficiary under this Program if the circumstances of the Participant's death, the terms and conditions of this Program, or any other reason, precludes payment of life insurance proceeds or any other benefits under the Insurance Policy or Program. 5.6 No Affect on Other Company Benefits. No portion of any premium payment on any Insurance Policy or any tax adjustment payment made with respect to a Participant as provided in this Section 5 shall be included or otherwise taken into consideration as pay, compensation or income for purposes of any other compensation or benefit plan, program or arrangement of the Company (if any) covering the Participant unless expressly provided for in such plan, program or arrangement. Section 6. Termination of Participation 6.0 Events that Cause Termination of Participation. A Participant's participation in the Program shall terminate when the first of any of the following events occurs: (a) The death of the Participant; (b) The Participant attains his or her Normal Termination Date; (c) The Board (or its delegate) terminates the Program pursuant to Section 8.1; (d) The termination of the Participant's membership on the Board, for any reason (other than death, disability as described in Section 2.1 or retirement as described in Section 2.2), prior to his or her Normal Termination Date (unless otherwise agreed to by the Board (or its delegate) in writing); (e) Cessation of the Participant's disability prior to his or her Normal Termination Date under circumstances described in Section 2.1, when the Participant does not recommence service as a non-employee member of the Board; (f) Voluntary termination of the Participant's participation in the Program initiated by the Participant giving written notice to the Administrator prior to his or her Normal Termination Date; (g) The Policyholder or his or her Assignee, if any, takes any of the actions described in Section 4.1 (e.g., loans or withdrawals) that cause termination of the Participant's participation in the Program; or (h) The Participant is determined by the Executive Vice President-Human Resources of the Company, in his or her sole discretion, to have engaged in any competitive activity that violates the provisions of any non-competition commitment of the Participant to the Company. Termination of a Participant's participation in the Program upon the occurrence of any of the events described in this Section 6.0 shall have the consequences described in Sections 6.1, 6.2 or 6.3, whichever is applicable. 6.1 Death of Participant Prior to Normal Termination Date. If a Participant continues to participate in the Program until his or her participation terminates due to death (as provided in Section 6.0(a)) prior to attainment of his or her Normal Termination Date, then effective as of the date of death: (a) The Company shall have no further obligation to make any premium payments with respect to the Insurance Policy on the Participant's life pursuant to Section 5.1. (b) The Policyholder's Beneficiary shall be entitled to receive the life insurance benefit payable by the Insurer under the Insurance Policy, subject to any binding settlement options elected by the Policyholder prior to the Participant's death. (c) The restrictions in Section 4.1 on the Policyholder or Assignee pertaining to the exercise of certain incidents of ownership of the Insurance Policy on the Participant's life (e.g., loans and withdrawals) shall no longer apply. 6.2 Attainment of Normal Termination Date. If a Participant continues to participate in the Program until his or her participation terminates by reason of his or her attainment of the Normal Termination Date (as provided in Section 6.0(b)), then effective as of the date of termination of participation: (a) The Company shall have no further obligation to make any premium payments with respect to the Insurance Policy on the Participant's life pursuant to Section 5.1. (b) The Insurance Policy will have sufficient cash value, as determined using reasonable actuarial assumptions chosen by the Company in its sole discretion, to provide life insurance coverage throughout the Participant's remaining life expectancy at a level amount equal to the Participant's Benefit Amount as the time of his or her attainment of the Normal Termination Date. (c) The restrictions in Section 4.1 on the Policyholder or Assignee pertaining to the exercise of certain incidents of ownership of the Insurance Policy on the Participant's life (e.g., loans and withdrawals) shall no longer apply. 6.3 Discontinuance of Participation Prior to Normal Termination Date. If a Participant's participation in the Program terminates due to the occurrence of any of the events described in Section 6.0(c) through Section 6.0(h), inclusive, then effective as of the date of such termination of participation: (a) The Company shall have no further obligation to make any premium payments with respect to the Insurance Policy on the Participant's life pursuant to Section 5.1. (b) The Participant, Policyholder, and any Assignee shall have no further rights under the Program and shall only be entitled to retain the Insurance Policy with the cash value and policy rights and options as of the date of termination of participation in the Program. The Company shall have no obligation to pay additional premiums or increase the cash value so as to provide cash values sufficient to continue any level of coverage under the Insurance Policy throughout the Participant's remaining life expectancy. The Insurance Policy's cash value (whether above or below any estimates, projections or illustrations) shall be limited solely to the cash value of the Insurance Policy on the date of the Participant's termination of participation in the Program. (c) The restrictions in Section 4.1 on the Policyholder or Assignee pertaining to the exercise of certain incidents of ownership of the Insurance Policy on the Participant's life (e.g., loans and withdrawals) shall no longer apply. Section 7. Claims and Appeals 7.0 Claims. A person who believes that he or she is being denied a benefit to which he or she is entitled under this Program (hereinafter referred to as a "Claimant") may file a written request for such benefit with the Company's Executive Compensation & Benefits Department, setting forth his or her claim. The request must be addressed to the Company's Executive Compensation & Benefits Department at its then principal place of business. Notwithstanding the foregoing, any Beneficiary's claim for payment of life insurance proceeds from an Insurance Policy on a Participant's life shall not be considered a claim for benefits under this Program. Any such claim for life insurance proceeds should be filed with the Insurer in accordance with the terms and provisions of the applicable Insurance Policy. 7.1 Claim Decision. Upon receipt of a claim, the Company's Executive Compensation & Benefits Department shall advise the Claimant that a reply will be forthcoming within ninety (90) days and shall, in fact, deliver such reply within such period. The Company's Executive Compensation & Benefits Department may, however, extend the reply period for up to an additional ninety (90) days for reasonable cause. If the claim is denied by the Company's Executive Compensation & Benefits Department, in whole or in part, the Company's Executive Compensation & Benefits Department shall provide a written response using language designed to be understood by the Claimant and setting forth: (a) the specific reason or reasons for such denial; (b) specific references to pertinent provisions of this Program on which such denial is based; (c) a description of any additional material or information necessary for the Claimant to perfect his or her claim and an explanation of why such material or such information is necessary; (d) appropriate information as to the steps to be taken if the Claimant wishes to submit the claim for review; and (e) the time limits for requesting a review under Section 7.2 and for performance of the review under Section 7.3. 7.2 Request for Review. Within sixty (60) days after the receipt by the Claimant of the written opinion described above, the Claimant may request in writing that the Administrator review the determination of the Company's Executive Compensation & Benefits Department. Such request must be addressed to the Administrator at the address for giving notice to the Administrator designated in Section 9.3. The Claimant or his or her duly authorized representative may, but need not, review the pertinent documents and submit issues and comments in writing for consideration by the Administrator. If the Claimant does not request a review of the Company's Executive Compensation & Benefits Department's determination by the Administrator within such sixty (60) day period, the Claimant shall be barred and estopped from challenging the determination of the Company's Executive Compensation & Benefits Department. 7.3 Review of Decision. Within sixty (60) days after the Administrator's receipt of a request for review, the Administrator will review the determination of the Company's Executive Compensation & Benefits Department. After considering all materials presented by the Claimant, the Administrator will render a written opinion, written in a manner designed to be understood by the Claimant, setting forth the specific reasons for the decision and containing specific references to the pertinent provisions of this Program on which the decision is based. If special circumstances require that the sixty (60) day time period be extended, the Administrator will so notify the Claimant and will render the decision as soon as possible, but no later than one hundred twenty (120) days after receipt of the request for review. The Administrator shall serve as the final review committee under the Program and shall have sole and complete discretionary authority to determine conclusively for all parties, and in accordance with the terms of the documents or instruments governing the Program, any and all questions arising from administration of the Program and interpretation of all Program provisions, determination of all questions relating to participation of Eligible Directors and eligibility for benefits, determination of all relevant facts, the amount and type of benefits payable to any Participant, Assignee or Beneficiary, and the construction of all terms of the Program. Decisions by the Administrator shall be conclusive and binding on all parties and not subject to further review. The Program provisions require that Participants pursue all claim and appeal rights described above before they seek any other legal recourse regarding claims for benefits. Section 8. Amendment and Termination 8.0 Continuation of Program. The Company does not guarantee the continuation of the Program or any benefits during an Eligible Director's period of service as a non-employee member of the Board or at or during retirement, nor does the Company guarantee any specific level of benefits. Benefits are provided under the Program at the Company's discretion and do not create a contract of employment. Neither the establishment nor the continuance of the Plan shall be construed as conferring any legal rights upon any Eligible Director or any other person, nor shall such establishment or continuance interfere with the right to discharge any Eligible Director. The Company intends to continue the Program indefinitely; however, the Board reserves the right to amend or terminate the Program at any time pursuant to Section 8.1. 8.1 Amendment or Termination. The Board or pursuant to delegated authority, the Chairman of the Board (or in his absence the Executive Vice President - Human Resources) ("Delegate"), may amend, modify, suspend or change the Program from time to time, and the Board (or its Delegate) may terminate the Program at any time. Program amendments may include, but are not limited to, elimination or reduction in the level or type of benefits provided to any class or classes of non-employee members of the Board. Section 9. General Provisions 9.0 Named Fiduciary. The Administrator is hereby designated as the "named fiduciary" under this Program. The named fiduciary shall have authority to control and manage the operation and administration of this Program. 9.1 Effective Date. The effective date of this Program shall be June 1, 2000. 9.2 Calendar Year Program. All Program records shall be maintained on a calendar-year basis, beginning January 1 and ending December 31, except that Program records for the initial year shall be maintained for the period beginning June 1, 2000 and ending December 31, 2000. 9.3 Notice Under Program. Any notice to be given under this Program shall be in writing and shall be either delivered in person or mailed by United States Mail, first-class postage pre-paid. If notice is to be given to the Administrator by mail, such notice shall be addressed as indicated below and mailed to the Administrator at the following address: Executive Vice President - Human Resources AT&T Corp. 295 North Maple Avenue Basking Ridge, NJ 07920 If notice is to be given to a Participant, Policyholder or Assignee by United States Mail, such notice shall be addressed to the address shown as such Participant's, Policyholder's or Assignee's address then on file with the Company's Executive Compensation & Benefits Department. Any party may change the address to which notices shall be mailed by giving written notice of such change of address. 9.4 Binding Effect. This Program shall be binding upon the Company's successors and assigns, and upon the Participants, the Policyholders, and their Assignees, Beneficiaries, heirs, executors, and administrators. 9.5 Plan Document. This Program document constitutes the official plan document. The information contained herein provides the final and exclusive statement of the terms of the Program. Unless otherwise authorized by the Board or its delegate, no amendment or modification to this Program shall be effective until reduced to writing and adopted pursuant to Section 8.1. This document legally governs the operation of the Program, and any claim of right or entitlement under the Program shall be determined solely in accordance with its provisions pursuant to the procedures set forth in Section 7. To the extent that there are any inconsistencies between the terms of the Insurance Policy or any related materials and the terms of this document, the terms of this document shall control and govern the operation of the Program. No other evidence, whether written or oral, shall be taken into account in determining the right of an Eligible Director, a Participant, a Policyholder, a Beneficiary or an Assignee, as applicable, to any benefit of any type provided under the Program. 9.6 Governing Law. To the extent not preempted by applicable federal law, the Program shall be governed by and construed and interpreted in accordance with the laws of the State of New Jersey (irrespective of the choice of laws principles of the State of New Jersey). 9.7 Severability. If any provision of this Program or the application thereof to any person or circumstance shall be held by a court of competent jurisdiction to be invalid or unenforceable under any applicable law, such event shall not affect or render invalid or unenforceable the remainder of the Program and shall not affect the application of any provision of the Program to any other person or circumstance. 9.8 Headings. The headings and subheadings preceding the Sections of this Program have been inserted solely as a matter of convenience and reference, and shall not, in any manner, define or limit the scope or intent of any provision of this Program. 9.9 Procedural Rules. The Administrator shall establish rules, forms and procedures for the administration of this Program from time to time. 9.10 Construction. The use of the singular form herein shall be deemed to include the plural form, and vice versa, as appropriate. All references to Sections contained herein refer to Sections of this Program, unless otherwise stated. The use of the words "hereof," "herein," "hereunder," and words of similar import shall refer to this entire Program, and not to any particular Section, subsection, clause, paragraph or other subdivision of this Program, unless the context clearly indicates otherwise. The word "or" shall not be exclusive; "may not" is prohibitive and not permissive. EX-10 6 0006.txt EXHIBIT (10)(III)(A)26 AT&T CORP. SENIOR MANAGEMENT UNIVERSAL LIFE INSURANCE PROGRAM FOR FORMER EXECUTIVES Effective October 1, 1999 AT&T CORP. SENIOR MANAGEMENT UNIVERSAL LIFE INSURANCE PROGRAM FOR FORMER EXECUTIVES Table of Contents SECTION 1 - DEFINITIONS ................................................... 1 1.0 Administrator ................................................ 1 1.1 Assignee ..................................................... 1 1.2 Beneficiary .................................................. 1 1.3 Benefit Amount ............................................... 1 1.4 Board ........................................................ 1 1.5 Company ...................................................... 2 1.6 Eligible Former Executive .................................... 2 1.7 Employer ..................................................... 2 1.8 ERISA ........................................................ 2 1.9 Insurance Policy ............................................. 2 1.10 Insurer ...................................................... 2 1.11 Normal Termination Date ...................................... 2 1.12 Participant .................................................. 2 1.13 Policyholder ................................................. 2 1.14 Prior Programs ............................................... 3 1.15 Program ...................................................... 3 SECTION 2 - ELIGIBILITY AND PARTICIPATION .................................. 4 2.0 Eligibility Conditions ....................................... 4 SECTION 3 - PROCUREMENT OF INSURANCE POLICY ................................ 5 3.0 Insurance Application Requirements ........................... 5 3.1 Cooperation Requirement for Eligible Former Executive ........ 5 3.2 Cooperation Requirement for Policyholder ..................... 5 3.3 Consequences of Failure to Cooperate ......................... 6 SECTION 4 - INCIDENTS OF OWNERSHIP ......................................... 7 4.0 Policy Ownership ............................................. 7 4.1 Rights of Policyholder and Company ........................... 7 4.2 Assignment of Insurance Policy by Policyholder ............... 8 4.3 Beneficiary Elections and Settlement Options ................. 8 4.4 No Ownership Interest by the Company ......................... 8 SECTION 5 - PAYMENT OF BENEFITS ........................................... 9 5.0 Source of Benefits ........................................... 9 5.1 Payment of Insurance Premiums ................................ 9 5.2 Benefit Amount ............................................... 9 5.3 Tax Adjustment................................................ 9 5.4 Beneficiary Designations ..................................... 10 5.5 No Company or Employer Obligation ............................ 10 5.6 No Affect on Other Company Benefits .......................... 10 SECTION 6 - TERMINATION OF PARTICIPATION ................................... 12 6.0 Events that Cause Termination of Participation ............... 12 6.1 Death of Participant Prior to Normal Termination Date ........ 12 6.2 Attainment of Normal Termination Date ........................ 13 6.3 Discontinuance of Participation Prior to Normal Termination Date ........................................................ 13 SECTION 7 - CLAIMS AND APPEALS ............................................. 15 7.0 Claims ....................................................... 15 7.1 Claim Decision ............................................... 15 7.2 Request for Review ........................................... 15 7.3 Review of Decision ........................................... 16 SECTION 8 - AMENDMENT AND TERMINATION .................................... 17 8.0 Continuation of Program ...................................... 17 8.1 Amendment or Termination ..................................... 17 SECTION 9 - GENERAL PROVISIONS ............................................ 18 9.0 Named Fiduciary .............................................. 18 9.1 Effective Date ............................................... 18 9.2 Calendar Year Program ........................................ 18 9.3 Notice Under Program ......................................... 18 9.4 Binding Effect ............................................... 18 9.5 Welfare Plan Under ERISA ..................................... 18 9.6 Plan Document ................................................ 19 9.7 Governing Law ................................................ 19 9.8 Severability ................................................. 19 9.9 Headings ..................................................... 19 9.10 Procedural Rules ............................................. 19 9.11 Construction ................................................. 19 AT&T Corp. Senior Management Universal Life Insurance Program for Former Executives Purpose The purpose of the AT&T Corp. Senior Management Universal Life Insurance Program for Former Executives is to provide life insurance benefits to certain former executives who have contributed materially to the growth, development, and business of AT&T Corp. Section 1. Definitions The following words and phrases, as used in this Plan, shall have the meanings set forth below unless a clearly different meaning is required by the context in which the word or phrase is used. 1.0 Administrator. "Administrator" means the Executive Vice President - Human Resources of the Company (or any successor to such position) having responsibility for personnel matters, or his or her designee. The Administrator shall manage and administer the Program in accordance with its terms and conditions. 1.1 Assignee. "Assignee" means the person, trust, entity or organization to whom or to which a Policyholder makes an irrevocable assignment on or after October 1, 1999, of all his or her rights, title, interest, and incidents of ownership, both present and future, to the Insurance Policy and any other assignable rights to the benefits under the Program. 1.2 Beneficiary. "Beneficiary" means the person, trust, entity, organization or the estate of a Policyholder designated pursuant to Section 5.4 that is entitled to receive benefits from an Insurance Policy upon the death of a Participant. 1.3 Benefit Amount. "Benefit Amount" means the amount of the life insurance benefit under the Insurance Policy for which premiums are payable by the Company under the Program. The "Benefit Amount" for a Participant shall be determined in accordance with Section 5.2. 1.4 Board. "Board" means the Board of Directors of the Company. 1.5 Company. "Company" means AT&T Corp., a New York corporation, and any successors to such entity. 1.6 Eligible Former Executive. "Eligible Former Executive" means an individual who was formerly employed as a senior manager of an Employer and who (a) is not actively employed by an Employer on September 30, 1999; (b) is covered as an insured on September 30, 1999, under one or more life insurance policies that are subject to a collateral assignment agreement with the Company under one or both of the Prior Programs; and (c) is determined by the Administrator, in his or her sole discretion, to be eligible for participation in the Program. 1.7 Employer. "Employer" means the Company and certain of its subsidiaries and affiliates, as determined by the Company in its sole discretion. 1.8 ERISA. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 1.9 Insurance Policy. "Insurance Policy" means one or more life insurance contracts issued by the Insurer on the life of an Eligible Former Executive. 1.10 Insurer. "Insurer" means the insurance company or companies to which the Company shall apply for insurance on an Eligible Former Executive's life, and which issues an Insurance Policy. 1.11 Normal Termination Date. "Normal Termination Date" means the latest of (a) the date a Participant attains age 65; (b) the date as of which a Participant has been covered for a combined total of at least 15 years under the Prior Programs and the Program (for an Eligible Former Executive who had coverage under both of the Prior Programs, this 15-year period of coverage shall be measured beginning from the later of his or her two coverage commencement dates under the respective Prior Programs); or (c) the date the Insurance Policy has sufficient cash value, as determined by the Company in its sole discretion, to provide life insurance coverage for the Participant's remaining life expectancy. 1.12 Participant. "Participant" means an Eligible Former Executive who has satisfied all of the eligibility and enrollment conditions in Section 2.0 and with respect to whom an Insurance Policy has been procured pursuant to Section 3.0 and Section 3.1. 1.13 Policyholder. "Policyholder" means the person, trust, entity or organization determined in accordance with Section 4.0 to be the owner of the Insurance Policy on an Eligible Former Executive's life. 1.14 Prior Programs. "Prior Programs" means the AT&T Senior Management Basic Life Insurance Program and the AT&T Senior Management Individual Life Insurance Program as in effect on September 30, 1999. The Prior Programs shall be terminated effective as of September 30, 1999, and replaced by the Program. 1.15 Program. "Program" means the AT&T Corp. Senior Management Universal Life Insurance Program for Former Executives, which shall be evidenced by this plan document, as amended from time to time. Section 2. Eligibility and Participation 2.0 Eligibility Conditions. An Eligible Former Executive may become a Participant by: (a) Completing, executing, and returning all of the enrollment applications and other documents required under the Program in the form approved by the Administrator; (b) Cooperating with the Company in obtaining the Insurance Policy on his or her life as required by Sections 3.0 and 3.1; and (c) Complying with such further conditions as may be established by the Administrator from time to time. Subject to the provisions of Sections 3.3 and 4.1, an Eligible Former Executive shall be eligible to continue to participate in the Program until the occurrence of any event described in Section 6.0 that causes the termination of his or her participation in the Program. Section 3. Procurement of Insurance Policy 3.0 Insurance Application Requirements. The Company shall apply to the Insurer for an Insurance Policy on the life of each Eligible Former Executive in an amount determined by the Company to be sufficient to provide the applicable Benefit Amount for the Eligible Former Executive. 3.1 Cooperation Requirement for Eligible Former Executive. An Eligible Former Executive shall reasonably cooperate with the Company in its efforts to apply for and obtain the Insurance Policy on his or her life by: (a) Furnishing such information as the Insurer may require for completion of the insurance application and related forms and documents; (b) Taking such physical examinations and supplying such medical history as may be requested by the Insurer; (c) Signing the application for the Insurance Policy as the insured; and (d) Doing any other act to comply with the underwriting and policy issuance requirements which may reasonably be requested by the Insurer or the Administrator. 3.2 Cooperation Requirement for Policyholder. A Policyholder shall reasonably cooperate with the Company in its efforts to apply for and obtain the Insurance Policy on the life of an Eligible Former Executive by: (a) Furnishing such information as the Insurer may require for completion of the insurance application and related forms and documents; (b) Signing the application for the Insurance Policy as the proposed policy owner; and (c) Doing any other act to comply with the underwriting and policy issuance requirements which may reasonably be requested by the Insurer or the Administrator. 3.3 Consequences of Failure to Cooperate . The Company shall have no obligation to the Eligible Former Executive, the Policyholder or the Policyholder's Beneficiary under the Program and the Eligible Former Executive's participation in the Program shall become null, void and of no force or effect if: (a) The Administrator, in his or her sole discretion, determines that an Eligible Former Executive or the Policyholder has not adequately cooperated in the process of procuring the Insurance Policy on the Eligible Former Executive's life as required by Section 3.1 and Section 3.2, respectively; or (b) The Company is, for any reason, unable to obtain insurance in the specified amount on an Eligible Former Executive's life at standard rates or rates otherwise acceptable to the Company. Section 4. Incidents of Ownership 4.0 Policy Ownership. The Insurance Policy shall, at all times, be owned solely and absolutely by the Policyholder, except in the event of an assignment to an Assignee as provided for in Section 4.2. The person, trust, entity or organization that will be the Policyholder with respect to a Participant shall be determined as follows: (a) Eligible Former Executive Who Participated in Prior Programs with Single Policy Owner. If on September 30, 1999 (i) an Eligible Former Executive was covered as an insured under one or more life insurance policies that are subject to a collateral assignment with the Company under one or both of the Prior Programs, and (ii) all such life insurance policies were owned by a single policy owner (or assignee), such policy owner (or assignee) shall be the Eligible Former Executive's Policyholder under the Program. (b) Eligible Former Executive Who Participated in Prior Programs with Multiple Policy Owners. If on September 30, 1999 (i) an Eligible Former Executive was covered as an insured under one or more life insurance policies that are subject to a collateral assignment agreement with the Company under one or both of the Prior Programs, and (ii) all such life insurance policies were owned by two or more different policy owners (or assignees), the Eligible Former Executive's Policyholder under the Program shall be the person, trust, entity or organization that all of such policy owners or assignees (excluding the Eligible Former Executive if he or she is one of the policy owners) agree upon and designate as the Policyholder with respect to the Eligible Former Executive. If, for any reason, an agreement among such policy owners (or assignees) cannot be reached by October 1, 1999, and/or no designation of Policyholder is received by the Administrator by October 1, 1999, the Eligible Former Executive shall be the Policyholder unless the Administrator, in his or her sole discretion, determines that one or more other persons, trusts, entities or organizations should be the Policyholder with respect to the Insurance Policy on the Eligible Former Executive's life. 4.1 Rights of Policyholder and Company. Prior to a Participant's Normal Termination Date, the Policyholder or his or her Assignee shall control all incidents of ownership with respect to the Insurance Policy including all policy cash values and death benefits under the Insurance Policy on the Participant's life. However, in the event the Policyholder or his or her Assignee surrenders the Insurance Policy, withdraws any cash value from the Insurance Policy or obtains a loan from the Insurance Policy, the Participant's participation in the Program shall immediately cease and Company will not be obligated to continue to make any further premium payments as provided by Section 5.1 for the Insurance Policy. 4.2 Assignment of Insurance Policy by Policyholder. A Policyholder shall have the right, at any time, to absolutely and irrevocably assign his or her rights, title, interest, and incidents of ownership in and to the Insurance Policy and any other assignable rights to benefits under this Program to any person, trust, entity or organization. Any assignment shall be subject to the consent of the Insurer. Any such assignment shall be on a form approved by the Insurer. No assignment by a Policyholder shall be effective until acknowledged in writing by the Insurer. A copy of the written acknowledgment shall be returned to the Policyholder and the Assignee. Once the assignment of the Insurance Policy has been acknowledged by the Insurer, the Policyholder shall have no further rights, title, interest or incidents of ownership, both present and future, in or under the Insurance Policy or to any other rights to benefits under the Program covered by the assignment, and the Assignee shall have all such assigned rights, title, interest, and incidents of ownership, both present and future, under the Insurance Policy and the Program. 4.3 Beneficiary Elections and Settlement Options. A Policyholder or his or her Assignee, if any, may exercise (a) the right to designate or change the Beneficiary of life insurance proceeds under the Insurance Policy pursuant to Section 5.4; and (b) the right to elect any optional mode of settlement with respect to such life insurance proceeds. Upon request of a Policyholder or his or her Assignee, if any, the applicable form for any designation or change of Beneficiary or any election of an optional mode of settlement shall be sent to a Policyholder, an Assignee or a Beneficiary, as appropriate. 4.4 No Ownership Interest by the Company. No provision in the Program shall be construed or interpreted to permit or provide the Company with any rights, title, interest or incidents of ownership, both present or future, to the Insurance Policy. Section 5. Payment of Benefits 5.0 Source of Benefits. The sole benefit under the Program to a Participant shall be the premium payments made by the Company to the Insurer pursuant to Section 5.1 to maintain the Insurance Policy on his or her life and the tax adjustment to be made in accordance with Section 5.3. A Beneficiary's sole source of benefits under the Program shall be the Insurance Policy under which the Policyholder, or his or her Assignee, designates a Beneficiary to receive benefits payable upon the Participant's death. 5.1 Payment of Insurance Premiums. When the Company submits an application for the Insurance Policy on the life of an Eligible Former Executive, or as soon thereafter as is required by the Insurer, the Company shall pay the initial premium on the Insurance Policy to the Insurer. Thereafter, the Company shall annually (or more frequently as required by the Insurer) pay the premiums determined to be due under the Insurance Policy. While the Eligible Former Executive is a Participant, the amount of the premiums paid by the Company shall be sufficient, as determined by the Company in its sole discretion, to maintain life insurance coverage on the life of the Participant equal to the Benefit Amount. The Company's obligation to make premium payments on the Insurance Policy covering the life of a Participant shall cease upon the termination of the Participant's participation, as provided for in Section 6.0. 5.2 Benefit Amount. The Benefit Amount under the Program with respect to a Participant shall be equal to the Participant's aggregate life insurance benefit amount under the Prior Programs on September 30, 1999. 5.3 Tax Adjustment. The Company shall make a tax adjustment with respect to each premium payment made to the Insurer pursuant to Section 5.1 on the Insurance Policy covering the life of a Participant. The amount and frequency of each tax adjustment, as determined by the Company in its sole discretion, is intended to be sufficient to cover the estimated amount of federal income taxes and FICA taxes that will be incurred by the Participant on the sum of the premium payment plus the tax adjustment itself. Each tax adjustment shall be equal to the sum of two amounts that are described below and referred to herein respectively as the "tax withholding portion" and the "excess portion": (a) Tax Withholding Portion of Tax Adjustment: The tax withholding portion of each tax adjustment shall be equal to the combined total amount of federal income taxes and FICA taxes required to be withheld with respect to (i) each premium payment made by the Company; and (ii) each corresponding tax adjustment. (b) Excess Portion of Tax Adjustment: The excess portion of each tax adjustment shall be equal to the applicable tax adjustment, reduced by the related tax withholding portion of such tax adjustment determined under Section 5.3(a) with respect to the premium payment and the related tax adjustment. The tax withholding portion of each tax adjustment payment, as described in Section 5.3(a) (above), shall be paid by the Company directly to the applicable federal tax authorities. The excess portion of each tax adjustment payment, as described in Section 5.3(b) (above), shall be paid in cash to the Participant (or if he or she is not then living, to his or her estate). The Company's obligation to make tax adjustment payments with respect to a Participant shall cease upon the termination of the Participant's participation in the Program pursuant to the provisions of Section 6.0. 5.4 Beneficiary Designations. A Policyholder or, if the Policyholder has assigned the Insurance Policy pursuant to Section 4.2, the Assignee may designate a Beneficiary to receive life insurance proceeds under the Insurance Policy upon the death of the Participant, or may change an existing designation of the Beneficiary to receive such insurance proceeds. Any designation of Beneficiary or change in the designated Beneficiary shall be accomplished in accordance with the applicable terms of the Insurance Policy using forms approved by the Insurer. If, for any reason, no valid Beneficiary designation is on file with the Insurer at the time of the Participant's death, the life insurance proceeds payable under the Insurance Policy shall be paid in accordance with the terms of the Insurance Policy. 5.5 No Company or Employer Obligation. Neither the Company nor any other Employer shall have any obligation of any nature whatsoever to a Policyholder or his or her Assignee or Beneficiary under this Program if the circumstances of the Participant's death, the terms and conditions of this Program, or any other reason precludes payment of life insurance proceeds or any other benefits under the Insurance Policy or Program. 5.6 No Affect on Other Company Benefits: No portion of any premium payment on any Insurance Policy or any tax adjustment payment made with respect to a Participant as provided in this Section 5 shall be included or otherwise taken into consideration as pay, compensation or income for purposes of any other "employee welfare benefit plan" (within the meaning of Section 3(1) of ERISA), any "employee pension benefit plan" (within the meaning of Section 3(2) of ERISA), or any other compensation or benefit plan, program or arrangement of the Company covering the Participant unless expressly provided for in such plan, program or arrangement. Section 6. Termination of Participation 6.0 Events that Cause Termination of Participation. A Participant's participation in the Program shall terminate when the first of any of the following events occurs: (a) The death of the Participant; (b) The Participant attains his or her Normal Termination Date; (c) The Board (or its delegate) terminates the Program pursuant to Section 8.1; (d) Voluntary termination of the Participant's participation in the Program initiated by the Participant giving written notice to the Administrator prior to his or her Normal Termination Date (unless otherwise agreed to by the Company in writing); (e) The Policyholder or his or her Assignee, if any, takes any of the actions described in Section 4.1 (e.g., loans or withdrawals) that cause termination of the Participant's participation in the Program; or (f) The Participant is determined by the Executive Vice President-Human Resources of the Company, in his or her sole discretion, to have engaged in any competitive activity that violates the provisions of the AT&T Non-Competition Guideline, as amended from time to time, or any other non-competition commitment of the Participant to any Employer. Termination of a Participant's participation in the Program upon the occurrence of any of the events described in this Section 6.0 shall have the consequences described in Sections 6.1, 6.2 or 6.3, whichever is applicable. 6.1 Death of Participant Prior to Normal Termination Date. If a Participant continues to participate in the Program until his or her participation terminates due to death (as provided in Section 6.0(a)) prior to attainment of his or her Normal Termination Date, then effective as of the date of death: (a) The Company shall have no further obligation to make any premium payments with respect to the Insurance Policy on the Participant's life pursuant to Section 5.1. (b) The Policyholder's Beneficiary shall be entitled to receive the life insurance benefit payable by the Insurer under the Insurance Policy, subject to any binding settlement options elected by the Policyholder prior to the Participant's death. (c) The restrictions in Section 4.1 on the Policyholder or Assignee pertaining to the exercise of certain incidents of ownership of the Insurance Policy on the Participant's life (e.g., loans or withdrawals) shall no longer apply. 6.2 Attainment of Normal Termination Date. If a Participant continues to participate in the Program until his or her participation terminates by reason of his or her attainment of the Normal Termination Date (as provided in Section 6.0(b)), then effective as of the date of termination of participation: (a) The Company shall have no further obligation to make any premium payments with respect to the Insurance Policy on the Participant's life pursuant to Section 5.1. (b) The Insurance Policy will have sufficient cash value, as determined using reasonable actuarial assumptions chosen by the Company in its sole discretion, to provide life insurance coverage throughout the Participant's remaining life expectancy. (c) The restrictions in Section 4.1 on the Policyholder or Assignee pertaining to the exercise of certain incidents of ownership of the Insurance Policy on the Participant's life (e.g., loans or withdrawals) shall no longer apply. 6.3 Discontinuance of Participation Prior to Normal Termination Date. If a Participant's participation in the Program terminates due to the occurrence of any of the events described in Section 6.0(c) through Section 6.0(f), inclusive, then effective as of the date of such termination of participation: (a) The Company shall have no further obligation to make any premium payments with respect to the Insurance Policy on the Participant's life pursuant to Section 5.1. (b) The Participant, Policyholder, and any Assignee shall have no further rights under the Program and shall only be entitled to the Insurance Policy cash value as of the date of termination of participation in the Program. The Company shall have no obligation to pay additional premiums or increase the cash value so as to provide cash values sufficient to continue any level of coverage under the Insurance Policy throughout the Participant's remaining life expectancy. The Insurance Policy's cash value (whether above or below any estimates, projections or illustrations) shall be limited solely to the cash value of the Insurance Policy on the date of the Participant's termination of participation in the Program. (c) The restrictions in Section 4.1 on the Policyholder or Assignee pertaining to the exercise of certain incidents of ownership of the Insurance Policy on the Participant's life (e.g., loans or withdrawals) shall no longer apply. Section 7. Claims and Appeals 7.0 Claims. A person who believes that he or she is being denied a benefit to which he or she is entitled under this Program (hereinafter referred to as a "Claimant") may file a written request for such benefit with the Company's Executive Human Resources Department, setting forth his or her claim. The request must be addressed to the Company's Executive Human Resources Department at its then principal place of business. Notwithstanding the foregoing, any Beneficiary's claim for payment of life insurance proceeds from an Insurance Policy on a Participant's life shall not be considered a claim for benefits under this Program. Any such claim for life insurance proceeds should be filed with the Insurer in accordance with the terms and provisions of the applicable Insurance Policy. 7.1 Claim Decision. Upon receipt of a claim, the Company's Executive Human Resources Department shall advise the Claimant that a reply will be forthcoming within ninety (90) days and shall, in fact, deliver such reply within such period. The Company's Executive Human Resources Department may, however, extend the reply period for up to an additional ninety (90) days for reasonable cause. If the claim is denied by the Company's Executive Human Resources Department, in whole or in part, the Company's Executive Human Resources Department shall provide a written response using language calculated to be understood by the Claimant and setting forth: (a) the specific reason or reasons for such denial; (b) specific references to pertinent provisions of this Program on which such denial is based; (c) a description of any additional material or information necessary for the Claimant to perfect his or her claim and an explanation of why such material or such information is necessary; (d) appropriate information as to the steps to be taken if the Claimant wishes to submit the claim for review; and (e) the time limits for requesting a review under Section 7.2 and for review under Section 7.3. 7.2 Request for Review. Within sixty (60) days after the receipt by the Claimant of the written opinion described above, the Claimant may request in writing that the Administrator review the determination of the Company's Executive Human Resources Department. Such request must be addressed to the Administrator at the address for giving notice to the Administrator designated in Section 9.3. The Claimant or his or her duly authorized representative may, but need not, review the pertinent documents and submit issues and comments in writing for consideration by the Administrator. If the Claimant does not request a review of the Company's Executive Human Resources Department's determination by the Administrator within such sixty (60) day period, the Claimant shall be barred and estopped from challenging the determination of the Company's Executive Human Resources Department. 7.3 Review of Decision. Within sixty (60) days after the Administrator's receipt of a request for review, the Administrator will review the determination of the Company's Executive Human Resources Department. After considering all materials presented by the Claimant, the Administrator will render a written opinion, written in a manner designed to be understood by the Claimant, setting forth the specific reasons for the decision and containing specific references to the pertinent provisions of this Program on which the decision is based. If special circumstances require that the sixty (60) day time period be extended, the Administrator will so notify the Claimant and will render the decision as soon as possible, but no later than one hundred twenty (120) days after receipt of the request for review. The Administrator shall serve as the final review committee under the Program and shall have sole and complete discretionary authority to determine conclusively for all parties, and in accordance with the terms of the documents or instruments governing the Program, any and all questions arising from administration of the Program and interpretation of all Program provisions, determination of all questions relating to participation of Eligible Former Executives and eligibility for benefits, determination of all relevant facts, the amount and type of benefits payable to any Participant, Assignee or Beneficiary, and the construction of all terms of the Program. Decisions by the Administrator shall be conclusive and binding on all parties and not subject to further review. In any case, a Participant may have further rights under ERISA. The Program provisions require that Participants pursue all claim and appeal rights described above before they seek any other legal recourse regarding claims for benefits. Section 8. Amendment and Termination 8.0 Continuation of Program. The Company does not guarantee the continuation of the Program or any benefits, nor does the Company guarantee any specific level of benefits. Benefits are provided under the Program at the Company's discretion. The Company intends to continue the Program indefinitely; however, the Board reserves the right to amend or terminate the Program at any time pursuant to Section 8.1. 8.1 Amendment or Termination. The Board or pursuant to delegated authority, the Chairman of the Board (or in his absence the Executive Vice President - Human Resources) ("Delegate"), may amend, modify, suspend or change the Program from time to time, and the Board (or its Delegate) may terminate the Program at any time. Program amendments may include, but are not limited to, elimination or reduction in the level or type of benefits provided to any class or classes of employees. Section 9. General Provisions 9.0 Named Fiduciary. The Administrator, is hereby designated as the "named fiduciary" under this Program. The named fiduciary shall have authority to control and manage the operation and administration of this Program. 9.1 Effective Date. The effective date of this Program shall be October 1, 1999. 9.2 Calendar Year Program. All Program records shall be maintained on a calendar-year basis, beginning January 1 and ending December 31, except that Program records for the year 1999 shall be maintained for the period beginning October 1, 1999 and ending December 31, 1999. 9.3 Notice Under Program. Any notice to be given under this Program shall be in writing and shall be either delivered in person or mailed by United States Mail, first-class postage pre-paid. If notice is to be given to the Administrator by mail, such notice shall be addressed as indicated below and mailed to the Administrator at the following address: Executive Vice President - Human Resources AT&T Corp. 295 North Maple Avenue Basking Ridge NJ 07920 If notice is to be given to a Participant, Policyholder or Assignee by United States Mail, such notice shall be addressed to the address shown as such Participant's, Policyholder's or Assignee's address then on file with the Company's Executive Human Resources Department. Any party may change the address to which notices shall be mailed by giving written notice of such change of address. 9.4 Binding Effect. This Program shall be binding upon the Company's successors and assigns, and upon the Participants, the Policyholders, and their Assignees, Beneficiaries, heirs, executors, and administrators. 9.5 Welfare Plan Under ERISA. The Program is intended to constitute an "employee welfare benefit plan" within the meaning of Section 3(1) of ERISA, covering a select group of management or highly compensated employees. 9.6 Plan Document. This Program document is the plan document required by ERISA. The information contained herein provides the final and exclusive statement of the terms of the Program. Unless otherwise authorized by the Board or its delegate, no amendment or modification to this Program shall be effective until reduced to writing and adopted pursuant to Section 8.1. This document legally governs the operation of the Program, and any claim of right or entitlement under the Program shall be determined solely in accordance with its provisions pursuant to the provisions of Section 7. To the extent that there are any inconsistencies between the terms of the Insurance Policy or any related materials and the terms of this document, the terms of this document shall control and govern the operation of the Program. No other evidence, whether written or oral, shall be taken into account in determining the right of an Eligible Former Executive, a Participant, a Policyholder, a Beneficiary or an Assignee, as applicable, to any benefit of any type provided under the Program. 9.7 Governing Law. To the extent not preempted by applicable federal law, the Program shall be governed by and construed and interpreted in accordance with the laws of the State of New Jersey (irrespective of the choice of laws principles of the State of New Jersey). 9.8 Severability. If any provision of this Program or the application thereof to any person or circumstance shall be held by a court of competent jurisdiction to be invalid or unenforceable under any applicable law, such event shall not affect or render invalid or unenforceable the remainder of the Program and shall not affect the application of any provision of the Program to any other person or circumstance. 9.9 Headings. The headings and subheadings preceding the Sections of this Program have been inserted solely as a matter of convenience and reference, and shall not, in any manner, define or limit the scope or intent of any provision of this Program. 9.10 Procedural Rules. The Administrator shall establish rules, forms and procedures for the administration of this Program from time to time. 9.11 Construction. The use of the singular form herein shall be deemed to include the plural form, and vice versa, as appropriate. All references to Sections contained herein refer to Sections of this Program, unless otherwise stated. The use of the words "hereof," "herein," "hereunder," and words of similar import shall refer to this entire Program, and not to any particular Section, subsection, clause, paragraph or other subdivision of this Program, unless the context clearly indicates otherwise. The word "or" shall not be exclusive; "may not" is prohibitive and not permissive. EX-10 7 0007.txt EXHIBIT (10)(III)(A)27 [GRAPHIC OMITTED][GRAPHIC OMITTED] December 8, 1999 Charles H. Noski c/o AT&T Corp. 295 North Maple Avenue Basking Ridge, NJ 07920 Dear Chuck: It gives me great pleasure to offer you a Senior Management position within AT&T (the "Company"). In addition to confirming my offer, this letter will detail the terms and conditions of your employment and outline the current major features of AT&T's compensation and benefit plans and practices. Assumption of Duties: Effective no later than December 31, 1999, ("the Effective Date") you will assume the position of Senior Executive Vice President & Chief Financial Officer - AT&T. You will report to the Chairman and Chief Executive Officer - AT&T (currently Mike Armstrong) and your work location will be Basking Ridge, New Jersey. Base Salary: Your initial base salary will be $750,000 per year. This rate will be reviewed annually for increase to reflect individual performance and base salary structure changes applicable to Senior Managers. Your first review for your base salary level will be effective March, 2001. Your base salary shall not be reduced at any time. Annual Bonus: The Annual Bonus for Senior Managers is currently based on measures of Company, unit, and individual performance and is paid in cash. The 2000 target (not actual) Annual Bonus for your position is 100% of your base salary or $750,000. While the 2000 Annual Bonus will be prorated for any partial service in 2000, you will be provided a special lump sum amount at the time 2000 bonuses are paid such that the sum of your actual earned prorated bonus plus the special lump sum amount will equal what a full year earned 2000 Annual Bonus would have been for you if not for the prorate. In no event will your annual bonus for 2000 be less than $750,000. In the event any portion of your 1999 Annual Bonus to be paid by your current employer is forfeited, you will be provided a lump sum amount no later than March 30, 2000 equal to the difference between $650,000 and any amount actually paid by your current employer. This payment will not be credited for AT&T's Qualified Pension Plan, but will be considered compensation for purposes of calculating the Special Supplemental Pension. Hiring Bonus: You will be provided with a special, one-time hiring bonus of $2,000,000. This bonus will be paid 50% within 30 days from your effective date of hire and the remaining 50% will be paid after 6 months from your hire date whether or not you are then employed by AT&T (other than if you are terminated for Cause or voluntarily resign without Good Reason). Long Term Incentives Under the current guidelines for long-term incentives for comparable executives, your annual target long-term incentive opportunity is 3 times your base salary, or $2,250,000. This incentive is currently awarded in two forms; non-qualified stock options and performance share units and is calculated at 60% and 40% of the total long-term incentive, respectively. According to this current methodology the value of your stock option award equals $1,350,000. That value is divided by the AT&T Black-Scholes value of 33% of the stock price to derive the number of options. Likewise, the target value of your performance share award equals $900,000 and is converted into performance shares by dividing this value by the fair market value of a share of AT&T common stock. These awards are made as follows: AT&T Performance Shares: Effective on the regularly scheduled annual grant date for AT&T and subject to approval by the Compensation Committee of the Board of Directors, you will receive 18,900 AT&T Performance Shares covering the 2000-2002 performance period (payout, if any, is in the first quarter of 2003). Performance Shares are equivalent in value to AT&T common shares and historically, such awards have been made annually. o Assuming continued Company employment, payout of from 0% to 200% of such Performance Shares is made in the form of cash and AT&T shares at the end of the performance period based on a measure of AT&T's EPS and EBITDA versus commitment targets and Total Shareholder Return vs. Total Shareholder Return for the S&P500 companies (where Total Shareholder Return is defined as share price appreciation and dividends), or such other measure of financial performance as the Board may determine, during the three year performance period. o Dividend equivalents are paid quarterly on all undistributed Performance Shares. AT&T Stock Options: You will be awarded 86,000 AT&T Stock Options effective on your hire date as consideration for your 2000 long-term incentive award. Historically, standard stock option grants have been made in January of each year to Senior Managers. Currently, the term of the stock option grant is ten years. Assuming continued Company employment, stock options vest one-third per year beginning on the third anniversary of the grant. The option price is 100% of market price on date of grant. As with the Annual Bonus, Long-Term Incentives are closely linked with the Company's strategy to meet the challenges of an ever changing marketplace. Accordingly, other than the Initial grant, the Company cannot guarantee continuation of the Long Term Incentive Plan in its current format, nor can it guarantee annual grant levels to individual participants. In order to mitigate forfeitures associated with your departure from your prior employer, the Company will provide you with the following awards: Special One-Time Grant of "Seasoned" Performance Shares o 20,657 Performance Shares valued at $982,501 at grant and covering the 1997-1999 Performance Period (payout in First Quarter 2000) will be granted on date of hire provided the effective date is prior to December 31, 1999. In the event the date of hire is in 2000, a lump sum payment in an amount equivalent to the value of the above-referenced Performance Shares will be made no later than March 30, 2000. - Payout of 100% of such Performance Shares (No Performance Criteria) - Dividend equivalents are paid quarterly on all undistributed Performance Shares. o 20,287 Performance Shares valued at $964,889 at grant and covering the 1998-2000 Performance Period (payout in First Quarter 2001) will be granted on the date of hire. - Assuming continued Company employment, payout of from 0% to 200% of such Performance Shares is made in the form of cash and AT&T shares at the end of the performance period based on a measure of AT&T's Total Shareholder Return vs. Total Shareholder Return for a peer group of companies (where Total Shareholder Return is defined as share price appreciation and dividends), or such other measure of financial performance as the Board may determine, during the three year performance period. - Dividend equivalents are paid quarterly on all undistributed Performance Shares. o 21,330 Performance Shares valued at $1,014,501 at grant and covering the 1999-2001 Performance Period (payout in First Quarter 2002) will be granted no later than January 31, 2000. - Assuming continued Company employment, payout of from 0% to 200% of such Performance Shares is made in the form of cash and AT&T shares at the end of the performance period based on a measure of AT&T's EPS and EBITDA versus commitment targets and Total Shareholder Return vs. Total Shareholder Return for the S&P500 companies, (where Total Shareholder Return is defined as share price appreciation and dividends), or such other measure of financial performance as the Board may determine, during the three year performance period. - Dividend equivalents are paid quarterly on all undistributed Performance Shares. It is currently understood that the results against objectives for the Performance Stock Units of your current employer are estimated to pay out in an amount at least equal to the value at grant of the awards referenced above. In the event that the above AT&T Seasoned Performance Shares pay out an amount less than the value at grant of the awards referenced above, additional cash payments will be immediately made to offset that difference. Special Stock Options: A special grant of 868,308 AT&T Stock Options vesting 1/3 each year for three years from date of grant, with a term of 10 years, will be granted on the date of hire. This grant is to replace the lost future appreciation opportunity on your current employer's vested and unvested stock options. In the event the actual grant price exceeds $47.5625, the Company will grant additional special stock options to offset the difference between the grant price and $47.5625. Restricted Stock: A special grant equaling a total of 214,374 shares of Restricted Stock will be made on the date of hire to replace part of all but $2,000,000 of the forfeited bargain spread on certain of your current employer's unvested options, and the value of your outstanding restricted stock. The Restricted Stock award will vest as follows: - ---------------------- --------------- ---------------- Restricted Stock Vesting Shares Grant Dates Vesting - ---------------------- --------------- ---------------- 214,374 10/17/00 81,766 - ---------------------- --------------- ---------------- 10/17/01 123,816 - ---------------------- --------------- ---------------- 10/17/02 8,792 - ---------------------- --------------- ---------------- o The Restricted Stock will vest contingent upon continued Company employment (there are no performance criteria) or otherwise as provided under "Severance Benefit" below. Dividends on these shares are currently paid each quarter as part of the normal company dividend. Restricted Stock Units: A separate grant equaling a total of 117,513 Restricted Stock Units will be made on the date of hire to replace the forfeited bargain spread on certain of your current employer's unvested options, and the value of your outstanding restricted stock (not reflected in the above restricted stock award). The Restricted Stock Unit award will vest as follows: - --------------------- ----------------- -------------- Restricted Stock Unit Vesting Units Award Dates Vesting - --------------------- ----------------- -------------- 59,698 2/26/00 19,899 - --------------------- ----------------- -------------- 2/26/01 19,899 - --------------------- ----------------- -------------- 2/26/02 19,900 - --------------------- ----------------- -------------- 30,838 4/07/00 10,279 - --------------------- ----------------- -------------- 4/07/01 10,279 - --------------------- ----------------- -------------- 4/07/02 10,280 - --------------------- ----------------- -------------- 26,977 5/1/00 13,488 - --------------------- ----------------- -------------- 5/1/01 13,489 - --------------------- ----------------- -------------- o These Units will vest contingent upon continued Company employment (there are no performance criteria) or otherwise as provided under "Severance Benefit" below. Dividend equivalents on these Units are currently paid each quarter coincident with the normal company dividend. o The Restricted Stock and Stock Unit agreements (Attachment E as an example) will provide that certain activities which are detrimental to the Company (e.g., competing, raiding, suing) during employment or within 24 months after termination may result in forfeiture of unvested Restricted Stock or Restricted Stock Units, as provided in the AT&T Non-Competition Guidelines. Notwithstanding Attachment E, there shall be no forfeiture or clawback with regard to Restricted Stock or Restricted Stock Units that have vested. It is understood that you will exercise your currently vested outstanding stock options from your current employer, except those shares subject to clawback under your current long-term incentive plan (136,609 of the 10/17/97 Stock Options granted at $37.87/share as retention and vesting 25% per year beginning 10/17/98). To mitigate forfeitures associated with the vested portion of the above-referenced award subject to clawback, the Company will provide you with a special lump sum cash payment of $1,561,250 payable 30 days after your hire date and will grant you 96,274 Shares of Restricted Stock vesting 100% on the first anniversary of your hire date. The Restricted Stock will vest contingent upon continued Company employment (there are no performance criteria) or otherwise as provided under "Severance Benefit" below. Dividends on these shares are currently paid each quarter as part of the normal company dividend. In the event your current employer tries to clawback or otherwise prevent realization of your exercised long-term incentive plan awards, any additional forfeited bargain spread on your vested options or value of your vested restricted stock that cannot be recovered through mutually agreeable remedies available under your existing agreements will be replaced with an additional restricted stock award or a combination of deferred cash and restricted stock with a targeted replacement split of 25% cash with immediate vesting and 75% restricted stock vesting 12 months from the grant. In the event that your current employer's policies preclude you from a cashless exercise of certain vested options, for a period not to exceed 12 months, AT&T will protect the bargain spread (based on the average of the high and low stock prices recorded by the NYSE ("FMV")) on such options effective on the date of the stock option exercise, provided the exercise is no later than your last date of employment with your prior employer. In the event that the stock price on the Date of Sale is less than the protected price, AT&T will provide you with a lump sum payment equal to the difference between the "protected" price and the FMV on the Date of Sale multiplied by the number of options. For purposes of this protection provision only, the Date of Sale represents the date of actual sale or, if earlier, the date two (2) weeks after the first date after February 1, 2000 on which you may sell your former employer's stock (i.e., a new window initially opens). The Company shall also reimburse you for the carrying costs of exercising and holding these shares, including any applicable tax gross up. Severance Benefit (I) In the event of any Company-initiated termination, including termination for Good Reason, other than for "Long Term Disability" (as defined below) or for "Cause" (as defined below), you will be entitled to the following: 1. A "Severance Payment" equal to 200% of your annual base salary and target annual bonus in effect on the date of such termination, payable in the month following the month of termination or such greater amount as then being paid under the then existing policies and/or practices regarding Senior Manager Severance Benefits. 2. Bonuses: To the extent all or a portion of your cash hiring bonus has not been paid, the Company will pay such unpaid amount within 30 days of your date of termination. In addition, to the extent all or a portion of your annual incentive bonus for the current year and/or prior year if not yet paid has not been paid, the Company will pay an amount equal to the target bonus prorated for the total period of eligibility based on a formula, the numerator of which is equal to the number of days in the applicable calendar year for which the bonus is being paid and the denominator of which is 365 within 30 days of your termination, provided that, if the bonus for the prior year has been declared before your termination and is higher than the target bonus, it shall be paid in lieu of the target bonus for the prior year. 3. Long Term Incentive Awards: - Outstanding Performance Shares/Stock Units, including those granted upon your hire, are retained and distributed at the end of each 3-year cycle. Dividend equivalents continue to be paid until all units are paid out. - Outstanding Stock Options, including those granted upon your hire, are retained and unvested options continue to vest as if active and will remain exercisable until expiration of the original term. 4. Restricted Stock/Unit Hire Grants: - Any outstanding unvested restricted stock or stock units (including any associated cash or deferred cash amounts), including those granted upon your date of hire, will continue to vest as though you were an active employee. Dividend equivalents continue to be paid until all units are vested and paid out. 5. Cash Grants: - Any unvested cash awards or other cash make-ups shall continue to vest as if you were an active employee. (II) In the event of any Company-initiated termination, including termination for "Good Reason", prior to the vesting of your benefits under the AT&T Management Pension Plan and the AT&T Non-Qualified Pension Plan (including the Special Supplemental Pension) and the vesting of the Company match under the AT&T Long Term Savings Plan for Management Employees, other than for "Long Term Disability" (as defined below) or for "Cause" (as defined below), you will be entitled to the amount of the benefits accrued, but not vested, to the date of your termination under the above-mentioned plans (but with credit under the Special Supplemental Pension through age 57 if the termination is prior to that date) will be paid out under an individual pension arrangement from company operating income on the same basis as if you had remained in the plans. The Severance Benefits above due under this Severance Benefit provision (I AND II ABOVE) will be conditioned upon your signing (and not revoking) a release and agreement not to sue the Company, within 30 days of your termination. The form of this release and agreement will be that then in use for AT&T Senior Managers, but will cover no items except those purely related to the release and the release will not cover rights of indemnification or amounts due under benefit plans or programs. (III) At the time of termination of employment, relocation expenses associated with a move back to California, including home sale and tax assistance will be provided in accordance with the Relocation Policy in the same manner as it applies to your move to New Jersey. (IV) In the event of your death or disability termination, you will be entitled to items I (other than 1), II and III above. (V) In the event of your voluntary termination of employment within 12 months of a material restructuring of the executive leadership of the Company, or a good faith determination by you of an adverse change in the relationship between the CEO and CFO, any then vested and outstanding Stock Options, including those granted upon hire, will remain exercisable until the sooner of three years from the date of termination or until their original expiration date. (VI) In the event of your voluntary termination of employment for reasons not covered by the above-referenced provisions, and in acknowledgement of the material nature of Company information you will possess, you will have 30 days after the end of any prohibited trading period (to be determined by the General Counsel Office of the Company) to exercise any outstanding and vested stock options otherwise forfeitable after 90 days from termination, provided you in good faith believe the prohibited period precludes your ability to sell the shares issued upon an exercise within the 90 days and you so notify the General Counsel's Office. For purposes of this employment letter: "Cause" shall be defined as follows: (1) your conviction (including a plea of guilty or nolo contendere) of a felony involving theft, moral turpitude or relating to the business of the Company other than a felony predicated on your vicarious liability. Vicarious liability means any liability which is based on acts of the Company for which you are charged solely as a result of your office with the Company and in which: (i) you were not directly involved or did not have prior knowledge of such actions or inactions, or (ii) counsel had advised that the action or inaction was permissible, or (2) you engage in conduct that constitutes willful gross neglect or willful gross misconduct in carrying out your duties under this Agreement, resulting, in either case, in material economic harm to the Company, its subsidiaries and divisions. "Long Term Disability" shall mean termination of your employment with the Company with eligibility to receive a disability benefit allowance under any long-term disability plan of the Company or any affiliate of the Company. "Good Reason" shall mean any termination of Employee's Company employment, initiated by Employee, resulting from any of the following events, without Employee's express written consent, which are not cured by the Company within 20 days of Employee giving the Company written notice thereof: (i) A reduction in your base salary or annual total compensation (i.e., annual base salary rate, target annual incentive and "Long Term Incentive" (as valued below)) to less than $3,750,000. For purposes of the prior sentence, the dollar value of Employee's annual "Long Term Incentive" grants shall be determined by valuing Performance Shares, Performance Units, Stock Units, Restricted Stock, Restricted Stock Units, etc., at the fair market value price when the Compensation Committee approves such grants, and assuming 100% performance achievement if such grants include performance criteria, and by valuing Stock Options and SARs at 33% of the fair market price of the shares or related shares when the Compensation Committee approves such grants, as applicable. (ii) The assignment to you of any duties inconsistent with, or, any substantial alteration in, your status or responsibilities (other than as a result of your mental or physical incapacity) as in effect immediately prior thereto. (iii) A change in your reporting relationship that differs from the reporting relationship described herein. (iv) A change in your work location of more than 35 miles from the work location as of the Effective Date. (v) A diminution in title or a material diminution in duties, authority or responsibilities. (vi) A material breach of any provisions hereof by the Company. All severance amounts shall be paid without any obligation to mitigate or any offset for other amounts earned. Benefits and Special Mid-Career Benefits: You will, of course, be eligible for the benefit programs currently available to all AT&T executives at your level, and you will be eligible for future compensation and benefit plans established for executives at your level based on the then current eligibility requirements established for participation in such future benefits. In addition, you will be entitled to a one-time payment (grossed-up to reflect taxes), equivalent to premiums you will be charged for the Company Medical Expense Plan and Dental Plan during the period from your first eligibility (you are eligible to enroll effective the first of the month following your one month service anniversary), until you become eligible to participate in the AT&T flexible benefits plan after six months of service. In the event you want to continue coverage under COBRA from your prior employer for this six month period in lieu of the above provided payment, the Company will reimburse you for your COBRA premiums (grossed-up to reflect taxes) for up to six months. Until you are initially eligible to participate (as described above) in the AT&T Medical and Dental plans, you will need to make your own arrangements for medical and dental. After the initial six-month period, you will be eligible for the Company paid medical and dental care coverage provided to all management employees. In addition, you will be entitled to five weeks annual vacation. In the event of your termination by the Company for other than (a) Cause, (b) death, or (c) Long Term Disability, or in the event of your termination of employment for Good Reason or your voluntary termination of employment within 12 months of a material restructuring of the executive leadership of the Company, or a good faith determination by you of an adverse change in the relationship between the CEO and CFO, and to the extent you are not eligible to receive retiree medical benefits from AT&T, you and your then eligible dependents will be eligible for coverage under the AT&T Separation Medical Plan offered by the Company to certain former Senior Managers, who at the time of their separation of employment, are not eligible to participate in the AT&T Medical Expense Plan for Retired Employees. You will be responsible for a portion (30% currently) of the annual premium for this medical care coverage. As is the case under the AT&T Medical Expense Plan for Retired Employees, continuation of coverage under the AT&T Separation Medical Plan after your death is available to your spouse by her paying 100% of the annual premium for this coverage. In the event of your voluntary termination of employment for reasons not covered in the above-referenced provisions, and to the extent you are not eligible to receive retiree medical benefits from AT&T, you and your then eligible dependents will be eligible for coverage under the AT&T Separation Medical Plan offered by the Company to certain former Senior Managers, who at the time of their separation of employment, are not eligible to participate in the AT&T Medical Expense Plan for Retired Employees. You will be responsible for 100% of the annual premium for this medical care coverage. As is the case under the AT&T Medical Expense Plan for Retired Employees, continuation of coverage under the AT&T Separation Medical Plan after your death is available to your spouse by her paying 100% of the annual premium for this coverage. Attachment A outlines the benefits available to you under various Senior Management, mid-career and employee benefit plans, programs and practices. Special Pension: AT&T will establish a Special Supplemental Pension to address forfeitures from your current retirement benefit. This Special Supplemental Pension will be subject to the terms and conditions detailed in Attachment B. Relocation Plan: You will be provided relocation assistance under Plan B of the AT&T Management Relocation Plan as detailed in Attachment C. Special Temporary Allowance: In order to mitigate the costs associated with temporarily maintaining two residences and the commute required from your primary residence, the Company will pay you a monthly Special Temporary Allowance (STA) equivalent to the monthly rent you pay for the home (house/apartment/townhouse) you rent in the Basking Ridge, New Jersey area or an equivalent hotel up to a maximum of $4,500 per month or accommodations at the Short Hills, NJ Hilton hotel beginning with the first month of such rental and continuing as mutually agreed upon between you and the Company. The above monthly STA payments will be grossed-up for taxes, since such payments are taxable income subject to tax withholding. These STA payments are only during your continued employment with the Company and will not be included in the pay base for calculating any employee or Senior Manager benefits. Other Travel Related Expenses: In addition, you will have access to first class air travel or the corporate aircraft for travel to your home location during your interim living, provided the flight schedule permits and normal regularly scheduled flights are not disrupted as a result of your non-business travel. The Company will also reimburse you for reasonable travel expenses for you and/or your family for up to a maximum of one (1) visit every two (2) months during your interim living period. In the event any of the above travel expenses result in imputed income, the Company will provide tax gross-up. Other Provisions: It is agreed and understood that you will not disclose the specific terms of this employment letter or any fact concerning its negotiation or implementation, except in compliance with legal process, prior to the information being made public by the Company. You may, however, discuss the contents of this letter with your spouse, legal and/or financial counselor and the forfeiture provisions with any potential future employer. The Company agrees to indemnify you for all costs (including losses specifically associated with the compensation and benefits contained herein) relating to any action brought by your current employer related to: (1) your termination of employment with such employer, and/or (2) your employment with the Company. As indicated in the attached AT&T Non-Competition Guideline (Attachment D), a number of AT&T incentive arrangements and non-qualified pension and benefit plans are subject to non-competition constraints that result in the forfeiture of future amounts, benefits or rights if the Guidelines are violated. In no event will the Guidelines or any incentive arrangements or non-qualified benefits as it applies to you require you to agree to a prohibition as to certain activities as a condition of receiving (as opposed to the forfeiture if you violate the Guidelines), permit recapture of any amounts or benefits previously paid or provided to you or be broader than as currently set forth in the Guidelines as modified herein. This provision shall override any provision in any plan, program or grant. The Guidelines (and any "non-competition clause") shall be modified as follows: (1) Section 4 Subpart 2(c)(i) shall be deemed violated only if the violation is willful, with intent to damage, in a public forum (i.e., lectures, to the media, in published materials, to analysts or in comparable forums) and is of a material nature. (2) Section 4 Subpart 2(c)(2) shall only be violated if you, directly or indirectly, (i) recruit, solicit, induce or attempt to induce, or encourage others to recruit, solicit or induce, any employee of AT&T or an affiliate of AT&T to terminate their employment with AT&T or any affiliate, to join an entity with which you are affiliated or (ii) offer employment to any employee of AT&T, provided that the foregoing shall not be violated by the general advertising for employees or the hiring of employees by entities with which you are affiliated so long as you are not involved, either directly or indirectly, in recruiting, soliciting, inducing or attempting to induce, or in encouraging others in the recruiting, soliciting or inducing of, any employee to leave AT&T and join any entity with which you are affiliated. (3) Section 4 subpart 2(a) shall be modified by deleting "but shall not be limited to" and it shall not be violated by you owning less than three percent (3%) of the debt or equity of a publicly traded entity or you investing in private equity funds, investment pools or other similar vehicles so long as you own less than five percent (5%) of the equity in the vehicle. (4) The Guidelines shall not be violated by any activity or action more than two (2) years after any termination of employment (one (1) year in the case of "establishing a relationship with" limitation) or by establishment of a relationship with an entity that becomes a "competitor of the Company" after you established the relationship unless you were hired to assist the entity in becoming a competitor. (5) Section 4 Subpart 2(b) shall be modified so that it only applies to significant and direct competitors (such as currently MCI Worldcom, Sprint, any of the regional Bell operating companies and any of the major cable companies). (6) Notwithstanding anything in the Guidelines to the contrary, no forfeiture or cancellation shall take place unless AT&T shall have first given you written notice of its intent to so forfeit, or cancel or pay out and you have not, within 30 calendar days of giving of such notice to you, ceased such unpermitted competitive activity, provided that the foregoing prior notice procedure shall not be required with respect to a competitive activity which you instituted after AT&T informed you in writing that it believed such activity violated the Guidelines. Indemnification The Company will indemnify and hold harmless to the fullest extent permissible by applicable law with regard to any action or inaction of you as an officer or director of the Company or any affiliate or as a fiduciary of any benefit plan of the Company or any affiliate both during and after your term of employment. The Company shall cover you under director or officer liability insurance to the same extent it covers other officers and directors both during and after the term of employment. Dispute Resolution At your option or the Company's, any dispute, controversy, or question arising under, out of or relating to this Agreement or the breach thereof shall be referred for decision by arbitration in the State of New Jersey by a neutral arbitrator selected by the parties hereto. The proceeding shall be governed by the Rules of the American Arbitration Association then in effect or such rules last in effect (in the event such Association is no longer in existence). If the parties are unable to agree upon such a neutral arbitrator within thirty (30) days after either party has given the other written notice of the desire to submit the dispute, controversy or question for decision as aforesaid, then either party may apply to the American Arbitration Association for an appointment of a neutral arbitrator, or if such Association is not then in existence or does not act in the matter within 30 days of application, either party may apply to the Presiding Judge of the Superior Court of any county in New Jersey for an appointment of a neutral arbitrator to hear the parties and settle the dispute, controversy or question, and such Judge is hereby authorized to make such appointment. In the event that either party exercises the right to submit a dispute arising hereunder to arbitration, the decision of the neutral arbitrator shall be final, conclusive and binding on all interested persons and no action at law or equity shall be instituted or, if instituted, further prosecuted by either party other than to enforce the award of the neutral arbitrator. The award of the neutral arbitrator may be entered in any court that has jurisdiction. In the event that you are successful in pursuing any material claims or disputes arising out of this Agreement, the Company shall pay all of your attorneys' fees and costs reasonably incurred, including the compensation and expenses of any Arbitrator. In any other case, you and the Company shall each bear all their own costs and attorneys fees, except the Company shall in all events pay the costs of any arbitrator appointed hereunder. Assignment This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns, provided that the Company may not assign this Agreement except in connection with an assignment or disposition of all or substantially all of the assets or stock of the Company, or by law as a result of a merger or consolidation. In the event of such assignment, a failure by the successor to specifically assume in writing, delivered to you, the obligations and liabilities of the Company hereunder shall be deemed a material breach of this Agreement. This letter reflects the entire agreement regarding the terms and conditions of your employment. Accordingly, it supersedes and completely replaces any prior oral or written communication on this subject. This letter is not an employment contract and should not be construed or interpreted as containing any guarantee of continued employment. The employment relationship at AT&T is by mutual consent ("Employment-At-Will"). This means that managers have the right to terminate their employment at any time and for any reason. Likewise, the Company reserves the right to discontinue your employment with or without cause at any time and for any reason. The incentive plans as well as the employee and Senior Management benefit plans, programs and practices as briefly outlined in this letter, reflect their current provisions. Payments and benefits under these plans, programs, and practices, as well as other payments referred to in this letter, are subject to IRS rules and regulations with respect to withholding, reporting, and taxation, and will not be grossed-up unless specifically stated. The Company reserves the right to discontinue or modify any such plans, programs and practices and to assign any obligations under this agreement to a successor company. Moreover, the summaries contained herein are subject to the terms of such plans, programs and practices. For purposes of the Senior Management and employee benefit plans, the definition of compensation is as stated in the plans. Currently, pensions are based on base salary and annual incentives. Other benefits are based on either base salary or base salary plus annual incentives. All other compensation and payments reflected in this offer are not included in the calculation of any employee or Senior Management benefits (except for the AT&T Incentive Deferral Award Plan, which currently permits the deferral of Annual Incentives and Performance Shares). By acceptance of this offer, you agree that (1) no trade secret or proprietary information belonging to your previous employer will be disclosed or used by you at AT&T, and that no such information, whether in the form of documents, memoranda, software, drawings, etc., will be retained by you or brought with you to AT&T, and (2) you have brought to AT&T's attention and provided it with a copy of any agreement which may impact your future employment at AT&T, including non-disclosure, non-competition, invention assignment agreements or agreements containing future work restrictions. AT&T will not require or request you to do anything that would intentionally violate (1) above. Chuck, I feel the package we have developed for you is attractive and anticipates that you will make a critical contribution to AT&T. We look forward to having you join us. If you have any questions, please don't hesitate to call me or Brad Fusco. If you agree with the foregoing, and affirm that, to the best of your knowledge, there are no agreements or other impediments that would prevent you from providing exclusive service to the Company, please sign this letter in the space provided below and return the original executed copy to me. Sincerely, Attachments Agreed: /s/ Charles H. Noski Dated: December 8, 1999 - ------------------------- ------------------------ Charles H. Noski EX-10 8 0008.txt EXHIBIT (10)(III)(A)28 January 26, 2001 Mr. Charles Noski Dear Chuck, Pursuant to the terms of your employment agreement dated December 8, 1999, in the event that your 1998-2000 AT&T Seasoned Performance Shares pays out an amount less than the target award of your previous employer for the same performance period, you will be entitled to an additional amount to offset the difference. In such event AT&T will establish a special individual deferred account ("Deferred Account") in your name for such additional amount, if any. The maintenance, vesting and distribution of this Deferred Account shall be in accordance with the terms and conditions set forth below in this letter ("Agreement"). As of February 20, 2001, (hereinafter the "Effective Date"), the Company shall credit the Deferred Account with an initial balance equal to the additional amount, if any, as described above. Commencing as of the Effective Date, the Company shall credit interest to the Deferred Account, compounded as of the end of each calendar quarter at the rate of the sum of (x) one-quarter (1/4) of the average rate applicable to the 10-year Treasury Note for the prior calendar quarter, plus (y) .50%. The Deferred Account will be maintained as a bookkeeping account on the records of the Company and you will have no present ownership right or interest in the Deferred Account, or in any assets of the Company with respect thereto. You shall not have any right to receive any payment with respect to the Deferred Account, except as expressly provided below. The Deferred Account may not be assigned, pledged or otherwise alienated by you and any attempt to do so, or any garnishment, execution or levy of any kind with respect to the Deferred Account, will not be recognized. The Deferred Account shall vest 100% immediately upon the effective date. The vested Deferred Account, including interest, shall be paid in one (1) lump sum as soon as administratively feasible in the calendar quarter immediately following your retirement/termination date from AT&T. In the event of Long Term Disability or your death, prior to receipt of the Deferred Account balance, the entire amount then credited to the Deferred Account shall be distributed to you or your named beneficiary (or your estate if no beneficiary has been named), in a lump sum as soon as administratively feasible in the calendar quarter immediately following the calendar quarter in which your death, or Long Term Disability occurs. Since the amount credited to the Deferred Account is immediately vested as of the Effective Date, it is subject to FICA taxes at vesting under current IRS regulations. You will be notified of the amount of FICA taxes due. Payments from the Deferred Account are subject to payroll tax withholding and reporting, and are in addition to and not in lieu of any qualified or non-qualified pension, savings, or other retirement plan, program or arrangement covering you. Amounts credited to the Deferred Account are not included in the base for calculating benefits under the employee benefit plans, programs or practices of the Company or its affiliates. The December 8, 1999 employment agreement, as amended herein, shall remain in full force and effect. This Agreement may not be amended or waived, unless the amendment or waiver is in a writing, signed by you and AT&T's Executive Vice President - Human Resources. It is agreed and understood that you will not disclose the specific terms of this letter or any fact concerning its negotiation or implementation, except in compliance with legal process, prior to the information being made public by the Company. You may, however, discuss the contents of this letter with your spouse, legal and/or financial counselor and the forfeiture provisions with any potential future employer. The construction, interpretation and performance of this Agreement shall be governed by the laws of the State of New Jersey, without regard to its conflict of laws rule. If you agree with the terms and conditions detailed above, please sign in the space provided below and return the executed copy to me. Sincerely, /s/ Mirian Graddick-Weir -------------------------- Mirian Graddick-Weir Executive Vice President /s/ Charles Noski March 29, 2001 - ------------------------------- ---------------------------- Acknowledged and agreed to Date Charles Noski EX-10 9 0009.txt EXHIBIT (10)(III)(A)29 January 16, 2001 Mr. Frank Ianna Dear Frank: In recognition of the role AT&T Corp. (the "Company") anticipates that you will play during the AT&T restructuring and pursuant to the terms of the Executive Term Sheet signed by you on ----------------, the Company will establish a special individual deferred account (hereinafter the "Deferred Account") for you. The maintenance, vesting, forfeiture and distribution of the Deferred Account shall be in accordance with the following terms and conditions. The Company shall credit the Deferred Account with an initial balance of one million dollars ($1,000,000.00) retroactive to January 1, 2001, (hereinafter the "Effective Date"). The Deferred Account will be credited with an annual rate of interest equal to the annual rate applicable to actively traded 30-Year Treasury Bonds plus 2%, compounded quarterly (one-quarter (1/4) of the average rate for the prior calendar quarter plus .5%), retroactive to the Effective Date, and will be calculated in accordance with procedures determined by AT&T in its sole and absolute discretion. The Deferred Account will be maintained as a bookkeeping account on the records of the Company and you will have no present ownership right or interest in the Deferred Account, nor in any assets of the Company with respect thereto. You shall not have any right to receive any payment with respect to the Deferred Account, except as expressly provided below. The Deferred Account may not be assigned, pledged or otherwise alienated by you and any attempt to do so, or any garnishment, execution or levy of any kind with respect to the Deferred Account, will not be recognized. This Agreement may not be amended or waived, unless the amendment or waiver is in a writing signed by you and AT&T's Executive Vice President - Human Resources. The Deferred Account will vest 50% (including interest thereon) on December 31, 2001, and 50% (including interest thereon) on December 31, 2002, contingent upon your continued Company employment through each vesting date. As of each vesting date you will be responsible for applicable FICA and Medicare taxes on the amount vested on such date. In the event of your termination of employment for any reason on or after December 31, 2002, the entire amount then credited to the Deferred Account shall be distributed to you in a lump sum payment as soon as administratively feasible in the calendar quarter immediately following the calendar quarter in which your termination occurs. If, prior to December 31, 2001, you resign from the Company or are terminated for Cause, as defined below, the entire amount then credited to the Deferred Account shall be forfeited. If, on or after December 31, 2001, but prior to December 31, 2002, you resign from the Company or are terminated for Cause, as defined below, the unvested amount (including interest thereon) then credited to the Deferred Account shall be forfeited. The vested amount (including interest thereon) then credited to the Deferred Account shall be distributed to you in a lump sum payment as soon as administratively feasible in the calendar quarter immediately following the calendar quarter in which your termination occurs. In the event of your termination of employment from the Company due to Long Term Disability as defined below, or your death, prior to December 31, 2002, the entire amount then credited to the Deferred Account shall become vested and be distributed to you or your named beneficiary (or your estate if no beneficiary has been named), in a lump sum payment as soon as administratively feasible in the calendar quarter immediately following the calendar quarter in which your termination of employment occurs. In the event of your resignation for Good Reason (as defined below) or a Company-initiated termination for other than Cause (as defined below) prior to December 31, 2002, the entire amount then credited to the Deferred Account shall become vested and be distributed to you in a lump sum payment as soon as administratively feasible in the calendar quarter immediately following the calendar quarter in which your termination occurs. For purposes of this Agreement: a) "Cause" termination shall mean: (i) your conviction (including a plea of guilty or nolo contendere) of a crime involving theft, fraud, dishonesty or moral turpitude; (ii) violation by you of the Company's Code of Conduct or Non-Competition Guideline; (iii) gross omission or gross dereliction of any statutory, common law or other duty of loyalty to the Company or any of its affiliates; or (iv) repeated failure to carry out the duties of your position despite specific instruction to do so. b) "Good Reason" shall mean the occurrence without your express written consent of any of the following events: (i) Your demotion to a position which is not of a rank and responsibility comparable to members of the current Operations Group or those of a similar/replacing governance body; provided, however, that the Company's decision not to continue an Operations Group shall not be Good Reason, and provided, further, that (1) changes in reporting relationships shall not, alone, constitute Good Reason and/or (2) a reduction in your business unit's budget or a reduction your business unit's head count, by themselves, do not constitute Good Reason; or (ii) A reduction in your "Total Annual Compensation" (defined as the sum of your Annual Base Salary Rate, Target Annual Incentive and "Target Annual Long Term Incentive Grants") for any calendar or fiscal year, as applicable, to an amount that is less than the Total Annual Compensation that existed in the prior calendar or fiscal year, as applicable. For purposes of this Paragraph (b)(ii) the dollar value of the "Target Annual Long Term Incentive Grants" shall exclude the value of any special one-time or periodic long-term incentive grants, and shall be determined by valuing Performance Shares, Stock Units, Restricted Stock, Restricted Stock Units, etc., at the market share price utilized in valuing the annual Senior Management compensation structures in the materials presented to the Compensation and Employee Benefits Committee of the Company's Board of Directors ("the Committee") when authorizing such grants, and assuming 100% performance achievement if such grants include performance criteria. Stock Options and Stock Appreciation Rights will be valued by the Black-Scholes methodology (and related share price) as utilized in the materials presented to the Committee when authorizing such grants. Notwithstanding the foregoing, the Company may require you to change to an equivalent executive position within the Company with substantially similar levels of duties or responsibilities without causing Good Reason to occur. You must notify the Company within 60 days following knowledge of an event you believe constitutes Good Reason, or such event shall not constitute Good Reason hereunder. c) "Long Term Disability" shall mean termination of your employment with the Company with eligibility to receive a disability allowance under the AT&T Long Term Disability Plan for Management Employees or a replacement plan. It is understood and agreed that you will not talk about, write about or otherwise publicize the terms or existence of this Agreement or any fact concerning its execution or implementation unless required by law or to enforce the terms of this Agreement. You may, however, discuss its contents with your spouse, legal and/or financial counselor, provided that you advise them of your obligations of confidentiality and that any disclosures made by any of them may be treated by the Company as disclosures made by you for purposes of this provision. THIS AGREEMENT IS NOT AN EMPLOYMENT CONTRACT AND SHOULD NOT BE CONSTRUED OR INTERPRETED AS CONTAINING ANY GUARANTEE OF CONTINUED EMPLOYMENT. THE EMPLOYMENT RELATIONSHIP WITH THE COMPANY IS BY MUTUAL CONSENT ("EMPLOYMENT-AT-WILL"). THIS MEANS THAT EMPLOYEES HAVE THE RIGHT TO TERMINATE THEIR EMPLOYMENT AT ANY TIME AND FOR ANY REASON. LIKEWISE, THE COMPANY RESERVES THE RIGHT TO DISCONTINUE YOUR EMPLOYMENT WITH OR WITHOUT CAUSE AT ANY TIME AND FOR ANY REASON. Payments from the Deferred Account are in addition to and not in lieu (nor will it or anything in these agreements postpone, reduce or negatively impact) any qualified or non-qualified pension, savings, or other retirement plan, program or arrangement covering you. The Deferred Account payments provided under this Agreement are subject to payroll tax withholding and reporting, and amounts credited to the Deferred Account are not included in the base for calculating benefits (nor shall such amounts offset any benefits) under any employee or Senior Management benefit plan, program or practice. You understand that the terms of Agreement shall apply to the Company and its successors. The Company specifically reserves the right to assign the terms of this Agreement to any successor, whether the successor is the result of a sale, purchase, merger, consolidation, asset sale, divestiture or spin-off or any combination or form thereof. No sale, purchase, merger, consolidation, asset sale, divestiture or spin-off or any combination or form thereof by the Company shall be construed as a termination of your employment and will not be considered a termination for purposes of this Agreement. The construction, interpretation and performance of this Agreement shall be governed by the laws of the State of New Jersey, without regard to its conflict of laws rule. In addition, all of the benefits provided under this Agreement are subject to forfeiture if you violate the AT&T Non-Competition Guideline, a copy of which has been previously provided to you. Frank, I am happy to present this special arrangement to you. It recognizes the extraordinary contributions that we expect you to continue to make to our business. If you agree with the terms and conditions detailed above sign and date this Agreement in the spaces provided below and return the original executed copy to me. Sincerely, /s/ Frank Ianna January 17, 2001 - ------------------- ------------------- Acknowledged and Agreed to Date EX-10 10 0010.txt EXHIBIT (10)(III)(A)30 $3,790,520.99 32 Avenue of the Americas New York, New York 10013 December 21, 2000 For value received I, David Dorman, promise to pay on demand to the order of AT&T Corp. (AT&T) at AT&T Corporate Headquarters, 32 Avenue of the Americas, New York, New York 10013, the sum of three million, seven hundred ninety thousand, five hundred, twenty dollars and ninety-nine cents ($3,790,520.99). I understand that the interest for any month in which there is an unpaid balance shall be imputed to me as additional compensation at the applicable Federal short-term rate in effect for such month as established by the Internal Revenue Service, under Section 1274(d) of the Internal Revenue Code. If demand has not been made earlier, the full amount of unpaid principal shall immediately become due and payable on the earliest of December 31, 2002, my death or any termination of my employment. Following my death or other termination of employment, AT&T shall apply the following payments related to my employment, less any amounts required to be withheld for FICA, and for federal, state and local income taxes, to the unpaid principal: Payments of compensation, including but not limited to salary and vacation pay unpaid as of my termination of employment, non-qualified deferred compensation, Long Term and Annual Incentive Awards, and severance benefits. I shall continue to be obligated for any unpaid principal that remains after the applications of such payments. /s/ David Dorman December 21, 2000 -------------------- ----------------- David Dorman Date Witnessed by: /s/ Marie Miller December 21, 2000 ------------------ ------------------ Marie Miller Date EX-10 11 0011.txt EXHIBIT (10)(III)(A)31 $2,000,000 32 Avenue of the Americas New York, New York 10013 January 2, 2001 For value received I, David Dorman, promise to pay on demand to the order of AT&T Corp. (AT&T) at AT&T Corporate Headquarters, 32 Avenue of the Americas, New York, New York 10013, the sum of two million dollars ($2,000,000). I understand that the interest for any month in which there is an unpaid balance shall be imputed to me as additional compensation at the applicable Federal short-term rate in effect for such month as established by the Internal Revenue Service, under Section 1274(d) of the Internal Revenue Code. If demand has not been made earlier, the full amount of unpaid principal shall immediately become due and payable on the earliest of April 1, 2002, my death or any termination of my employment. Following my death or other termination of employment, AT&T shall apply the following payments related to my employment, less any amounts required to be withheld for FICA, and for federal, state and local income taxes, to the unpaid principal: Payments of compensation, including but not limited to salary and vacation pay unpaid as of my termination of employment, non-qualified deferred compensation, Long Term and Annual Incentive Awards, and severance benefits. I shall continue to be obligated for any unpaid principal that remains after the applications of such payments. /s/ David Dorman December 21, 2000 -------------------- ------------- David Dorman Date Witnessed by: /s/ Marie Miller December 21, 2000 ------------------ ------------------ Marie Miller Date EX-10 12 0012.txt EXHIBIT (10)(III)(A)32 RESOLVED: that, effective October 23, 2000, the following plans and programs, as set forth in the attached list of plans and programs (see Schedule "A"), attached to and made a part of these resolutions, are hereby amended (and the amendments set forth in these resolutions may not be further amended in any manner adverse to the interests of the participants without their consent) to provide the compensation and benefits described more fully below; RESOLVED: that, effective October 23, 2000, the following terms, when used in these resolutions, shall have the meanings set forth below, unless the context clearly requires a different meaning: Change in Control: "Change in Control" shall have the meaning set forth for such phrase in the AT&T 1997 Long Term Incentive Program as of the effective date of these resolutions. Eligible Employee: "Eligible Employee" shall mean a management employee of the Company (including its subsidiaries and affiliates, as applicable) who within two years following a Change in Control has his or her employment involuntarily terminated (other than for cause) or terminates his or her employment for Good Reason. Good Reason: "Good Reason" shall be determined, prior to a Change in Control, by the Company's Executive Vice President - Human Resources, in accordance with objective criteria, to mean: for senior managers and executive salary grade level ("E-Band") employees (or equivalent status in a non-banded employment environment), the reduction in authority, responsibility or compensation or a business relocation beyond a reasonable distance from the employee's then principal place of business following a Change in Control; for salary grade level "D" (or equivalent status in a non-banded employment environment), a reduction in compensation or a business relocation beyond a reasonable distance from the employee's then principal place of business following a Change in Control; and for salary grade levels "A" through "C" (or equivalent status in a non-banded employment environment), a reduction in compensation following a Change in Control. Special Pension Enhancement: "Special Pension Enhancement" shall mean the sum of (1) the present value of the portion of the Eligible Employee's cash balance account under the AT&T Management Pension Plan ("AT&TMPP") derived from the special CIC credit (as defined below) plus (2) the portion of the Eligible Employee's cash balance account under the AT&T Excess Benefit and Compensation Plan derived from the special excess CIC credit (as defined below). RESOLVED: that the AT&TMPP is hereby amended to provide that, as of the date an Eligible Employee terminates employment (for purposes of these resolutions, the Eligible Employee's "CIC termination date"): (1) the Eligible Employee shall be one hundred percent vested in his or her accrued benefit; (2) all unbridged net credited service (i.e., "term of employment" as defined in the AT&TMPP) (hereinafter "net credited service") of the Eligible Employee shall be bridged, provided that the unbridged net credited service otherwise would have been eligible for bridging under the bridging rules of the AT&TMPP; and (3) if the Eligible Employee has a portion of his or her pension under a prior formula that has not yet been converted to cash balance, the Eligible Employee shall be deemed to have completed any minimum period of net credited service that is required for the conversion; RESOLVED: that the AT&TMPP is hereby amended to provide that each Eligible Employee shall have credited to his or her cash balance account as of the last day of the month in which a Change in Control occurs a special credit (for purposes of these resolutions, a "special CIC credit") in an amount equal to the Eligible Employee's eligible pay (up to the applicable limit under Section 401(a)(17) of the Internal Revenue Code of 1986, as amended (the "Code")) for the calendar year immediately preceding the calendar year in which the Change in Control occurs, multiplied by the lesser of (1) five percent for each whole year of the Eligible Employee's net credited service as of the last day of the month in which a Change in Control occurs, or (2) one hundred percent; RESOLVED: that the AT&T Excess Benefit and Compensation Plan (the "Excess Plan") is hereby amended to provide that each Eligible Employee shall have credited to his or her cash balance account as of the last day of the month in which a Change in Control occurs, a special credit (for purposes of these resolutions, a "special excess CIC credit") in an amount equal to the Eligible Employee's eligible pay (in excess of the applicable limit under Code Section 401(a)(17)) for the calendar year immediately preceding the calendar year in which the Change in Control occurs, multiplied by the lesser of (1) five percent for each whole year of the Eligible Employee's net credited service as of the last day of the month in which the Change in Control occurs, or (2) one hundred percent; RESOLVED: that the AT&TMPP is hereby amended to provide that, on or after an Eligible Employee's CIC termination date, the Eligible Employee's accrued benefit shall equal the sum of (1) his or her accrued benefit determined in accordance with the AT&TMPP then in effect without regard to the special CIC credit, and (2) the accrued benefit determined in accordance with the AT&TMPP then in effect that would be derived only from the portion of his or her cash balance account attributable to the special CIC credit; RESOLVED: that the Excess Plan is hereby amended to provide that, on or after an Eligible Employee's CIC termination date, the Eligible Employee's accrued benefit shall equal the sum of (1) his or her accrued benefit determined in accordance with the Excess Plan then in effect without regard to the special excess CIC credit, and (2) the accrued benefit determined in accordance with the Excess Plan then in effect that would be derived only from the portion of his or her cash balance account attributable to the special excess CIC credit; RESOLVED: that the AT&TMPP is hereby amended to provide that an Eligible Employee may elect to receive his or her pension benefit after termination of employment under the forms of benefit then available under the AT&TMPP or, alternatively, in a lump sum equal to the sum of (1) the greater of (a) the present value of the Eligible Employee's pay base formula benefit, or (b) the lump sum derived from his or her cash balance account without regard to the special CIC credit, plus (2) the lump sum derived from the portion of his or her cash balance account attributable to the special CIC credit. The present value of the Eligible Employee's pay base formula benefit shall equal the present value of the monthly benefit that would be payable in the form of a single life annuity as of his or her pension commencement date under the applicable pay base formula and shall be calculated using the immediate annuity factors determined in accordance with Code Section 417(e)(3)(A) and Treasury Regulation Section 1.411(a)-11(a)(2). The lump sum derived from any portion of the Eligible Employee's cash balance account shall equal the greater of the lump sum determined in accordance with AT&TMPP (which is generally equal to that portion of his or her cash balance account) or the present value of his or her accrued benefit payable at normal retirement age derived from that portion of his or her cash balance account in accordance with the AT&TMPP and calculated using the deferred annuity factors determined in accordance with Code Section 417(e)(3)(A) and Treasury Regulation Section 1.411(a)-11(a)(2). For purposes of this resolution and in calculating the applicable annuity factors under Code Section 417(e)(3)(A), the interest rate shall be the applicable interest rate determined in accordance with temporary Treasury regulations with the "stability period" being the plan year containing the Eligible Employee's pension commencement date and the "lookback month" being the fifth calendar month preceding the stability period; RESOLVED: that the AT&TMPP is hereby amended to provide that the cash payment option of an Eligible Employee shall be determined based on the lump sum described in the immediately preceding resolution; RESOLVED: that the AT&T Long Term Savings Plan for Management Employees, the AT&T Long Term Savings Plan, the AT&T Retirement Savings and Profit Sharing Plan, the AT&T of Puerto Rico, Inc. Long Term Savings and Security Plan, the AT&T of Puerto Rico, Inc. Long Term Savings Plan for Management Employees, and the AT&T Wireless Services 401(k) Retirement Plan (hereinafter, collectively, the "Savings Plans") are hereby amended to provide that, as of the date a Change in Control occurs, each Eligible Employee shall be one hundred percent vested in his or her accrued benefit; RESOLVED: that the AT&T Non-Qualified Pension Plan is hereby amended to provide that, as of the date a Change in Control occurs, each participant shall be one hundred percent vested in his or her accrued benefit; RESOLVED: that the AT&T Senior Officer Severance Plan and the AT&T Senior Management Separation Plan are hereby amended to provide an Eligible Employee who is a senior manager (or equivalent status in a non-banded employment environment) with a severance benefit equal to the sum of the Eligible Employee's Special Pension Enhancement (determined as of the Eligible Employee's termination of employment) and a cash severance payment, where such cash severance payment is equal to (1) the sum of (a) three times the Eligible Employee's annual base salary (without regard to decreases) at termination of employment, (b) three times the Eligible Employee's target short-term bonus for the year in which the Change in Control occurs, and (c) with respect to Operations Group (OG) members, three times the value of the Eligible Employee's performance share target for the year in which the Change in Control occurs, minus (2) ninety percent of the Eligible Employee's Special Pension Enhancement; RESOLVED: that the AT&T Special Executive Separation Plan is hereby amended to provide an Eligible Employee who is at the executive salary grade level ("E-Band level") (or equivalent status in a non-banded employment environment) with a severance benefit equal to the sum of the Eligible Employee's Special Pension Enhancement (determined as of the Eligible Employee's termination of employment) and a cash severance payment, where such cash severance payment is equal to (1) the sum of (a) two times the Eligible Employee's annual base salary (without regard to decreases) at termination of employment, and (b) two times the Eligible Employee's target short-term bonus for the year in which the Change in Control occurs, minus (2) ninety percent of the Eligible Employee's Special Pension Enhancement; RESOLVED: that the AT&T Separation Plan is hereby amended to provide an Eligible Employee who is at a salary grade level "A" ("A-Band level") through salary grade level "D" ("D-Band level") (or equivalent status in a non-banded employment environment), inclusive, with a severance benefit equal to the sum of the Eligible Employee's Special Pension Enhancement (determined as of the Eligible Employee's termination of employment) and a cash severance payment, where such cash severance payment is equal to whichever of the following amounts is applicable to the Eligible Employee: (1) Salary Grade Level "D": An amount equal to (a) two times the Eligible Employee's annual base salary (without regard to decreases) at termination of employment, minus (b) ninety percent of the Eligible Employee's Special Pension Enhancement; (2) Salary Grade Level "C": An amount equal to (a) the greater of (i) twelve months base salary, or (ii) one month's base salary (without regard to decreases) times the Eligible Employee's years of net credited service (up to a maximum of twenty-four years of net credited service), minus (b) ninety percent of the Eligible Employee's Special Pension Enhancement; or (3) Salary Grade Levels "A" and "B": An amount equal to (a) the sum of (i) twelve weeks pay(without regard to decreases), plus (ii) two weeks pay (without regard to decreases) multiplied by his or her years of net credited service (up to a maximum of twenty-five years of net credited service), minus (b) ninety percent of the Eligible Employee's Special Pension Enhancement; RESOLVED: that to the extent an Eligible Employee has a "change in control" provision in his or her employment, retention, or other form of written agreement with the Company, such Eligible Employee shall be entitled to receive, as determined by the Executive Vice President - Human Resources, in her sole discretion, prior to a Change in Control, the greater of (1) the aggregate value of the benefits provided to such Eligible Employee under the plans and programs identified in Schedule "A", as amended by these resolutions, or (2) the value of the aggregate "change in control" benefit provided under his or her employment, retention or other form of written agreement. As determined by the Executive Vice President - Human Resources, in her sole discretion, prior to a Change in Control, no provision of these resolutions shall duplicate benefits under any other plan or arrangement of the Company; RESOLVED: that the Company shall provide a cash payment to the Eligible Employee (following a Change in Control), in an amount necessary to completely eliminate the adverse tax effect on the Eligible Employee of any excise taxes that the Eligible Employee may incur under Code Section 4999(a) as the recipient of an "excess parachute payment" (as defined in Code Section 280G(b)(1) and Proposed Treasury Regulation Section 1.280G-1, Q&A-3) and related gross-up payments; the amount to be reimbursed to the Eligible Employee shall be determined by the Company's independent accounting firm responsible for the Company's financial statements for the period immediately prior to the Change in Control; RESOLVED: that the AT&T Special Executive Separation Plan is hereby amended to provide that if an Eligible Employee is a participant (an "EBLIP Participant") in the AT&T Corp. Executive Basic Life Insurance Program (the "EBLIP") and has not attained his or her normal termination date (as defined in the EBLIP) at the time of his or her termination of employment from the Company, the Company shall make a lump sum present value payment to the EBLIP Participant (or his or her assignee, as applicable) equal to the sum of (1) the excess (if any) (the "EBLIP Payment") of (a) the estimated (but not guaranteed) amount (for purposes of these resolutions, the "EBLIP Paid Up Policy Amount") of the EBLIP life insurance policy (the "EBLIP Policy") cash value that would be sufficient to provide for continuation of insurance coverage under the EBLIP Policy (based on assumptions consistent with assumptions used under the EBLIP immediately prior to the Change in Control), with projected coverage equal to the applicable benefit amount (as defined in the EBLIP) as if the EBLIP Participant had continued to be an active management employee of the Company until attainment of his or her normal termination date (assuming annual base pay is fixed at his or her highest rate of pay as of the date of termination of employment), over (b) the cash value of the EBLIP Policy at the time of transfer to the EBLIP Participant or his or her assignee; and (2) as determined by the Company's Executive Vice President - Human Resources, prior to the occurrence of a Change in Control, a tax adjustment payment on the EBLIP Payment consistent with the tax adjustment provisions of the SMULIP (as defined below and as in effect immediately prior to the Change in Control); RESOLVED: that the EBLIP is hereby amended to provide that if an EBLIP Participant who is an Eligible Employee has not reached his or her normal termination date (as defined in the EBLIP) at the time of his or her termination of employment, then notwithstanding any provision of the EBLIP to the contrary, the EBLIP Policy shall be transferred to the EBLIP Participant (or his or her assignee, as applicable) as soon as administratively possible after the EBLIP Participant's employment termination date; the EBLIP Policy shall, at the time of transfer, have a cash value equal to the lesser of (1) the amount of the cash value of the EBLIP Policy at the time of the transfer, or (2) the EBLIP Paid Up Policy Amount (as described in a resolution that appears above). If the cash value of the EBLIP Policy immediately prior to the time of transfer to the EBLIP Participant or his or her assignee exceeds the EBLIP Paid Up Policy Amount, the Company shall withdraw such excess cash value before transferring the EBLIP Policy; RESOLVED: that the AT&T Senior Officer Severance Plan and the AT&T Senior Management Separation Plan are hereby amended to provide that if an Eligible Employee who is a participant (a "SMULIP Participant") in the AT&T Corp. Senior Management Universal Life Insurance Program (the "SMULIP") has not attained his or her normal termination date (as defined in the SMULIP) at the time of his or her termination of employment from the Company, the Company shall make a lump sum present value payment to the policyholder (as defined in the SMULIP) for the insurance policy on the Eligible Employee's life (the "SMULIP Policy") (or the policyholder's assignee, if any) equal to the sum of (1) the excess, if any, (the "SMULIP Payment") of (a) the estimated (but not guaranteed) amount (for purposes of these resolutions, the "SMULIP Paid Up Policy Amount") of SMULIP Policy cash value that would be sufficient to provide for continuation of insurance coverage under the SMULIP Policy (based on assumptions consistent with assumptions used under the SMULIP immediately prior to the Change in Control), with projected coverage equal to the applicable benefit amount (as defined in the SMULIP) that would have been applicable if the Eligible Employee had continued to be an active senior manager of the Company until attainment of his or her normal termination date (assuming annual base pay is fixed at his or her highest rate of pay as of the date of termination of employment) over (b) the cash value of the SMULIP Policy on the Eligible Employee's employment termination date, and (2) a tax adjustment payment on the SMULIP Payment (to be determined in an manner consistent with the tax adjustment provisions of the SMULIP in effect immediately prior to the Change in Control); RESOLVED: that the EBLIP and the SMULIP are each hereby amended to provide that the Company will continue to maintain the EBLIP and the SMULIP in accordance with their respective terms and conditions (including, but not limited to, the making of all required life insurance premium payments to the applicable insurance company), without any material reduction in any benefits, features or plan participant or policyholder rights for a minimum of two years after a Change in Control occurs; RESOLVED: that the AT&T Senior Officer Severance Plan, the AT&T Senior Management Separation Plan, the AT&T Special Executive Separation Plan and the AT&T Separation Plan are each hereby amended to provide for an Eligible Employee to receive a reimbursement for reasonable legal fees incurred in any dispute arising from the Eligible Employee's termination of employment with the Company if a final decision in connection with a material issue of the litigation (or arbitration) involving the termination of employment is issued in the Eligible Employee's favor by an arbitrator or court of competent jurisdiction; RESOLVED: that the AT&T Senior Officer Severance Plan, the AT&T Senior Management Separation Plan, and the AT&T Special Executive Separation Plan are each hereby amended to provide for an Eligible Employee to receive a lump sum cash payment in an amount sufficient, after taxes (as determined by the Company in its sole discretion), to pay for two years of financial counseling from a qualified financial counselor; RESOLVED: that the AT&T Senior Management Incentive Award Deferral Plan ("Deferral Plan") shall hereby be amended to provide that, upon the occurrence of a potential change in control or a change in control (as those terms are defined in the AT&T Corp. Benefits Protection Trust), the Deferral Plan shall (1) include the individual deferral agreements made between the Company and the senior managers as identified by the Executive Vice President - Human Resources, and (2) cause each of such individual deferral agreements to be treated in a manner consistent with their respective terms; RESOLVED: that the Deferral Plan is hereby amended to provide that the interest rate to be applied to an employee's (or former employee's) deferred account balance under the Deferral Plan at any time after a Change in Control occurs shall in no event be less than the rates of interest that were being applied to the respective employee's (or former employee's) deferred account balance under the terms of the Deferral Plan (or any individual deferral agreements) immediately prior to the occurrence of such Change in Control; RESOLVED: that the Deferral Plan (including any individual deferral agreements) is hereby amended to provide that any non-fully vested deferred account balance of any employee (or former employee) under the Deferral Plan shall become fully vested and nonforfeitable immediately upon the occurrence of a Change in Control; RESOLVED: that, notwithstanding anything to the contrary in the resolutions of the Board adopted at its meetings held on December 18, 1991 and November 17, 1993, once a determination is made that Trust Account "A" is fully funded (i.e., the "Full Funding Amount" as defined in the AT&T Corp. Benefits Protection Trust ("the "Trust")), Trust Account "B" of the Trust (currently covering the Deferral Plan, and for periods following a potential change in control or a change in control, as those terms are defined in the Trust, also covering the individual deferral agreements) shall be funded on a systematic actuarial basis, subject to the terms and conditions of the Trust (including the immediate funding obligations upon a potential change in control and a change in control). For purposes of this resolution, a "systematic actuarial basis" shall be determined as the net present value of benefits under the Deferral Plan based on active and retired plan participants' Deferral Plan account balances, projected to future payout dates in accordance with the payment schedule applicable to each plan participant, discounted to the date of the potential change in control or change in control (as those terms are defined in the Trust) using the interest rate assumptions (on an after-tax basis) utilized by the Company under the AT&TMPP as of the date of the potential change in control or change in control. For purposes of projecting current Deferral Plan account balances to future payout dates, a rate or set of rates equal to the interest crediting rate or rates (in use on the date of the potential change in control or change in control) applied to various balances under the Deferral Plan shall be used. In cases where a plan participant's date of retirement or termination or employment was elected as the future initial payout date for one or more deferral elections made under the Deferral Plan, the later of age 60 or the plan participant's age as of the date of the potential change in control or change in control shall be used; RESOLVED: that the terms and conditions of all outstanding performance share awards and other stock unit awards under the 1987 Long Term Incentive Program and the AT&T 1997 Long Term Incentive Program shall be amended to clarify that provisions stating that performance awards of shares shall be payable in full and immediately settled in the event of a Change in Control are not intended to infer that a pro rata settlement be made for the expired portion of any open performance period during which a Change in Control occurs, but rather are intended to provide that the payout and settlement of performance shares for any open performance periods at the time of a Change in Control shall be based on the greater of: (1) the target number of performance shares multiplied by the greater of (a) the fair market value of the shares on the grant date, or (b) the fair market value of the shares at time of the Change in Control, or (2) the number or performance shares based on the performance factor to date multiplied by the greater of (a) the fair market value of the shares on the grant date, or (b) the fair market value of the shares at time of the Change in Control; RESOLVED: that the Executive Vice President - Human Resources is hereby instructed and empowered to determine the specific terms and conditions of an amendment to each outstanding performance share award and other stock unit grant to effect the intent of the preceding resolution. RESOLVED: that the AT&T Short Term Incentive Plan (the "AT&TSTIP") is hereby amended to provide that an employee's short term incentive awards (if any) under the AT&TSTIP for the performance year during which a Change in Control occurs shall be pro rated through the date on which the Change in Control occurs and paid out as soon as administratively possible after the occurrence of the Change in Control (and the Deferral Plan is hereby amended to preclude the deferral of any such payment under the Deferral Plan) at the greater of (1) the target award (as defined in the AT&TSTIP), or (2) the current performance factor; RESOLVED: that AT&T's ancillary retirement-related benefit plans and programs (as identified in the resolutions that appear below) are each hereby amended to provide that, in addition to those employees who are otherwise eligible to participate in the plans, based on the plans' eligibility criteria, an Eligible Employee of a Participating Company (for purposes of these resolutions, a "Participating Company" is AT&T Corp. and any subsidiary or affiliated company of AT&T Corp. that is a participating company under the applicable terms of the respective plan immediately prior to the Change in Control) shall be eligible to participate in those plans and programs (subject to all existing terms and conditions of the respective ancillary retirement-related plans and programs) if the following conditions are satisfied (such conditions are collectively referred to herein as the "CIC Rule of 65"): (1) the sum of the Eligible Employee's age and net credited service (both expressed in days) determined as of the Eligible Employee's termination date is no less than 23,725 days (which equals the product of 65 years and 365 days per year), (2) the Eligible Employee has at least five years of net credited service as of the Eligible Employee's termination date, and (3) with respect to eligibility for Company-paid postretirement health benefits under the AT&T Medical Expense Plan for Retired Employees and the AT&T Dental Expense Plan for Retired Employees, and eligibility for postretirement life insurance benefits under the AT&T Group Life Insurance Plan, the Eligible Employee (a) was on the active payroll of a Participating Company or on an approved leave of absence with guaranteed right of reinstatement to any Participating Company on December 31, 1999, and (b) had five or more years of net credited service with any Participating Company as of December 31, 1999; RESOLVED: that, for purposes of the CIC Rule of 65 (as stated in the preceding resolution), an Eligible Employee's net credited service shall be as determined in accordance with the terms and conditions of AT&T's ancillary retirement-related benefit plans and programs, provided, however, that net credited service shall not include any service resulting from a transition leave of absence; RESOLVED: that the CIC Rule of 65 (as stated in a resolution that appears above) shall apply to the AT&T Medical Expense Plan for Retired Employees, the AT&T Dental Expense Plan for Retired Employees, the AT&T Group Life Insurance Plan (subject to the existing maximum limitation on benefits for employees terminating employment after December 31, 2000), and, upon the approval of the Executive Vice President - Human Resources, may be extended, in her sole discretion, prior to a Change in Control, to other applicable ancillary retirement-related benefit plans and programs of the Company; RESOLVED: that the AT&T Medical Expense Plan for Management Employees and the AT&T Dental Expense Plan for Active Employees, are each hereby amended to provide that (1) the Company shall pay the full amount of an Eligible Employee's premium payments for the cost of continuation of medical coverage or dental coverage under the AT&T Medical Expense Plan for Management Employees or the AT&T Dental Expense Plan for Active Employees, respectively, for the Eligible Employee, his or her lawful spouse, and eligible Class I dependents (provided that the lawful spouse and/or Class I dependents were covered under the respective plan immediately prior to the Eligible Employee's termination of employment) for a period of up to eighteen months following the end of the month during which the Eligible Employee's termination of employment occurs, and (2) such Company-paid continuation of coverage shall run concurrently with any rights to continuation of coverage the Eligible Employee, his or her lawful spouse, and eligible Class I dependents may otherwise have under the portions of the AT&T Medical Expense Plan for Management Employees and the AT&T Dental Expense Plan for Active Employees that implement the applicable provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"); RESOLVED: that the AT&T Group Life Insurance Plan is hereby amended to provide that if an Eligible Employee is not eligible for postretirement life insurance benefits under the AT&T Group Life Insurance Plan, as amended to include the CIC Rule of 65, the amount of basic life insurance coverage for such Eligible Employee in effect immediately prior to his or her termination of employment shall be continued, at Company expense, for a period of twelve months after the Eligible Employee's termination date; RESOLVED: that, unless required by applicable law, each of the above-referenced employee benefit plans, programs and perquisites of the Company are each hereby amended to provide that upon the occurrence of a Change in Control, no amendment may be made by the Board, the Company (including any successor to the Company), any committee, any officer, any employee of the Company or any other party to suspend, modify, or eliminate the severance provisions and the severance-related benefit provisions that are applicable upon the occurrence of a Change in Control; RESOLVED: that, the foregoing amendments to the above-referenced plans, programs and perquisites shall be subject to such changes, including retroactive changes, as may be necessary to conform to the above resolutions and, when applicable, to obtain an Internal Revenue Service (IRS) determination that such plans are qualified and their associated trusts tax exempt (the "Qualified Plans"), under the Code and such other changes as may be necessary to comply with applicable law; however, if the IRS determines that one or more of the Qualified Plans are not qualified and exempt by reason of any such amendment, then such amendment shall be of no force and effect; RESOLVED: that, the Executive Vice President - Human Resources (or her successor) or her delegate, with the concurrence of the Law Division and the Chairman of the Compensation and Employee Benefits Committee of the Board, is authorized, without further Board approval, to (1) incorporate appropriate language into the plan, program and perquisite documents identified above to reflect properly the provisions and intent of the foregoing amendments, (2) amend any other savings plan of the Company to provide for immediate vesting consistent with the intent of the design presented to the Board, (3) make such administrative amendments necessary or appropriate to implement the foregoing resolutions and that are consistent with the intent of the design presented to the Board, (4) include one or more companies within the AT&T controlled group of companies to participate in these Change in Control provisions, and (5) direct that AT&T Wireless, AT&T Broadband and such other controlled group companies that do not participate in the plans described above shall have their corresponding plans amended, as appropriate, with approval of, and to the extent determined by, the Executive Vice President - Human Resources and the AT&T Law Division to conform to these resolutions, effective as of October 23, 2000, (6) take such further action including, but not limited to, contracting with vendors, service providers (including retirement planning providers for Eligible Employees), and consultants, as she considers necessary or appropriate to implement the foregoing resolutions including compliance with legal, statutory, and regulatory requirements. Schedule "A" AT&T 1987 Long Term Incentive Plan AT&T 1997 Long Term Incentive Program AT&T Corp. Executive Basic Life Insurance Program AT&T Corp. Senior Management Universal Life Insurance Program AT&T Dental Expense Plan for Active Employees AT&T Dental Expense Plan for Retired Employees AT&T Group Life Insurance Plan AT&T Long Term Care Plan for Retired Employees AT&T Long Term Savings Plan for Management Employees AT&T Management Pension Plan AT&T Medical Expense Plan for Management Employees AT&T Medical Expense Plan for Retired Employees AT&T Merger & Acquisition Retirement Savings Plan AT&T Retirement Savings and Profit Sharing Plan AT&T Senior Management Incentive Award Deferral Plan AT&T Senior Management Separation Plan AT&T Senior Officer Severance Plan AT&T Separation Plan AT&T Special Executive Separation Plan AT&T Supplementary Life Insurance Plan AT&T Supplemental Variable Universal Life Insurance Program AT&T Long Term Savings Plan AT&T of Puerto Rico, Inc. Long Term Savings and Security Plan AT&T of Puerto Rico, Inc. Long Term Savings Plan for Management Employees AT&T Wireless Services 401(k) Retirement Plan and such other benefit plans , programs or perquisites as may be described, impacted or affected, directly or indirectly, by the resolutions set forth above. EX-12 13 0013.txt EXHIBIT 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AT&T Corp. Computation of Ratio of Earnings to Fixed Charges (Dollars in Millions) (Unaudited) For the years ended December 31, 2000 1999 1998 1997 1996 Income from continuing operations before income taxes $7,732 $6,685 $8,307 $6,972 $8,697 Add net equity investment losses, net of distributions of less than 50% owned affiliates 444 966 288 144 155 Add fixed charges, excluding capitalized interest 3,862 2,220 675 591 662 Total earnings from continuing operations before income taxes and fixed charges $12,038 $9,871 $9,270 $7,707 $9,514 Fixed Charges: Total interest expense $ 3,183 $1,765 $ 427 $ 307 $ 417 Capitalized interest 299 143 197 254 193 Interest portion of rental expense 326 276 248 284 245 Dividend requirements on subsidiary preferred stock and interest on trust preferred securities 353 179 - - - Total fixed charges $ 4,161 $2,363 $ 872 $ 845 $ 855 Ratio of earnings to fixed charges 2.9 4.2 10.6 9.1 11.1 EX-21 14 0014.txt EXHIBIT (21) Exhibit 21 - Subsidiary List List of Subsidiaries of AT&T Corp. As of 3/29/01 Jurisdiction of Incorporation ACC Corp.................................................Delaware Alascom, Inc.............................................Alaska AT&T Communications, Inc.................................Delaware AT&T Communications of California, Inc...................California AT&T Communications of Delaware, Inc.....................Delaware AT&T Communications of Hawaii, Inc.......................Hawaii AT&T Communications of Illinois, Inc.....................Illinois AT&T Communications of Indiana, Inc......................Indiana AT&T Communications of Maryland, Inc.....................Maryland AT&T Communications of Michigan, Inc.....................Michigan AT&T Communications of the Midwest, Inc..................Iowa AT&T Communications of the Mountain States, Inc..........Colorado AT&T Communications of Nevada, Inc.......................Nevada AT&T Communications of New England, Inc..................New York AT&T Communications of New Hampshire, Inc................New Hampshire AT&T Communications of New Jersey, Inc...................New Jersey AT&T Communications of New York, Inc.....................New York AT&T Communications of Ohio, Inc.........................Ohio AT&T Communications of the Pacific Northwest, Inc........Washington AT&T Communications of Pennsylvania, Inc.................Pennsylvania AT&T Communications of the South Central States, Inc.....Delaware AT&T Communications of the Southern States, Inc..........New York AT&T Communications of the Southwest, Inc................Delaware AT&T Communications of Virginia, Inc.....................Virginia AT&T Communications of Washington D.C., Inc..............New York AT&T Communications of West Virginia, Inc................West Virginia AT&T Communications of Wisconsin, Inc....................Wisconsin AT&T Communications Services International Inc...........Delaware AT&T Global Communications Services Inc..................Delaware AT&T Solutions Inc.......................................Delaware AT&T Global Network Services Inc.........................Delaware AT&T of Puerto Rico, Inc.................................New York AT&T Wireless Services, Inc..............................Delaware Teleport Communications Group Inc........................Delaware AT&T Broadband LLC ......................................Delaware MediaOne Group, Inc. ....................................Delaware EX-23 15 0015.txt EXHIBIT 23(A) CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the registration statements on Form S-3 for the Shareowner Dividend Reinvestment and Stock Purchase Plan (Registration No. 333-00573), Form S-8 for the AT&T Long Term Savings and Security Plan (Registration No. 333-47257), Forms S-8 for the AT&T Long Term Savings Plan for Management Employees (Registration Nos. 33-34264, 33-29256 and 33-21937), Form S-8 for the AT&T Retirement Savings and Profit Sharing Plan (Registration No. 33-39708), Form S-8 for Shares Issuable Under the Stock Option Plan of the AT&T 1987 Long Term Incentive Program (Registration No. 333-47251), Form S-8 for the AT&T of Puerto Rico, Inc. Long Term Savings Plan for Management Employees (Registration No. 33-50819), Form S-8 for the AT&T of Puerto Rico, Inc. Long Term Savings and Security Plan (Registration No. 33-50817), Post-Effective Amendment No. 1 to Form S-8 Registration Statement (Registration No. 33-54797) for the AT&T 1996 Employee Stock Purchase Plan, Form S-8 for the AT&T Shares for Growth Program (Registration No. 333-47255), Form S-8 for the AT&T 1997 Long Term Incentive Program (Registration No. 33-28665), Form S-3 for the AT&T $2,600,000,000 Notes and Warrants to Purchase Notes (Registration No. 33-49589), Form S-3 for the AT&T $3,000,000,000 Notes and Warrants to Purchase Notes (Registration No. 33-59495), Form S-4 for the AT&T 5,000,000 Common Shares (Registration No. 33-57745), and in Post-Effective Amendment Nos.1, 2 and 3 on Form S-8 to Form S-4 Registration Statement (Registration No. 33-42150) for the NCR Corporation 1989 Stock Compensation Plan (Registration No.33-42150-01), the NCR Corporation 1984 Stock Option Plan (Registration No. 33-42150-02) and the NCR Corporation 1976 Stock Option Plan (Registration No. 33-42150-03), respectively, and the Post-Effective Amendment Nos. 1, 2, 3 and 5 on Form S-8 to Form S-4 Registration Statement (Registration No. 33-52119) for the McCaw Cellular Communications, Inc. 1983 Non-Qualified Stock Option Plan (Registration No. 33-52119-01), the McCaw Cellular Communications, Inc. 1987 Stock Option Plan (Registration No. 33-52119-02), the McCaw Cellular Communications, Inc. Equity Purchase Plan (Registration No. 33-52119-03) and the McCaw Cellular Communications, Inc. Employee Stock Purchase Plan (Registration No. 33-52119-05), respectively, and Post-Effective Amendment No.1 on Form S-8 to Form S-4 Registration Statement (Registration No. 33-45302) for the Teradata Corporation 1987 Incentive and Other Stock Option Plan (Registration No. 33-45302-01), Form S-8 for the AT&T Amended and Restated 1969 Stock Option Plan for LIN Broadcasting Corp. (Registration No. 33-63195), and in Post Effective Amendment Nos. 1, 2, 3, 4 and 5 on Form S-8 to Form S-4 Registration Statement (Registration No. 333-49419) for the Teleport Communications Group Inc. 1993 Stock Option Plan (Registration No. 333-49419-01), Teleport Communications Group Inc. 1996 Equity Incentive Plan (Registration No. 333-49419-02), ACC CorpEmployee Long Term Incentive Plan (Registration No. 333-49419-03), ACC Corp. Non-Employee Directors' Stock Option Plan (Registration No. 333-49419-04) and ACC Corp. 1996 UK Sharesave Scheme (Registration No. 333-49419-05), and Form S-8 for AT&T Wireless Services, Inc. Employee Stock Purchase Plan (Registration No. 333-52757), and in Post-Effective Amendment Nos.1 and 2 on Form S-8 and Post-Effective Amendment No. 3 to Form S-4 Registration Statement (Registration No. 333-70279) for the Tele-Communications, Inc. 1998 Incentive Plan, the Tele-Communications, Inc. 1996 Incentive Plan (Amended and Restated), the Tele-Communications, Inc. 1995 Employee Stock Incentive Plan (Amended and Restated), the Tele-Communications, Inc. 1994 Stock Incentive Plan (Amended and Restated), the Tele-Communications, Inc. 1994 Nonemployee Director Stock Option Plan, the Tele-Communications International, Inc., the 1996 Nonemployee Director Stock Option Plan, the Tele-Communications International, Inc.1995 Stock Incentive Plan (Registration No. 333-70279-01), the Liberty Media 401(K) Savings Plan, the TCI 401(K) Stock Plan (Registration No. 333-70279-02), Form S-3 for the $13,080,000 Debt Securities and Warrants to Purchase Debt Securities (Registration No. 333-71167), Form S-4 for Vanguard Cellular Systems, Inc. (Registration No. 333-75083), Form S-4 for MediaOne Corp, (Registration No. 333-86019), Form S-4 for Four Media Corp. (Registration No. 333-30250), Form S-8 for AT&T Long Term Savings (Registration No. 333-87935), Form S-3/A for the AT&T Wireless Group Tracking Stock (Registration No. 333-96037), Form S-8 for the AT&T 1997 Long-Term Incentive Plan for AT&T Wireless (Registration No. 333-36130), Form S-4 for Todd AO Corp. (Registration No. 333-36458), Post-Effective Amendment No. 1 to Form S-8 Registration Statement for the AT&T Long Term Savings Plan for Management Employees, the AT&T Long Term Savings Plan - San Francisco, and the AT&T Wireless Services 401(K) Retirement Plan (Registration No. 33-34264-1), Post Effective Amendment No. 1 to Form S-8 Registration Statement for the AT&T Long Term Savings Plan for Management Employees, the AT&T Long Term Savings and Security Plan, the AT&T Retirement Savings and Profit Sharing Plan, the AT&T of Puerto Rico, Inc., Long Term Savings and Security Plan, the AT&T of Puerto Rico, Inc. Long Term Savings Plan for Management Employees, the AT&T Long Term Savings Plan - San Francisco, and the AT&T Wireless Services 401(K) Retirement Plan (Registration No. 333-87935-1), Post Effective Amendment No. 1 on Form S-8 to Form S-4 Registration Statement for the Four Media Company 1997 Stock Plan, the Four Media Company Amended and Restated 1997 Director Option Plan and Certain Additional Stock Option Agreements of Four Media Company (Registration No. 333-30250-1), Form S-4 for the AT&T Wireless Group Tracking Stock (Registration No. 333-41910), Post Effective Amendment No. 1 on Form S-8 to Form S-4 Registration Statement for the MediaOne Group 1999 Supplemental Stock Plan and the Amended MediaOne Group 1994 Stock Plan (Registration No. 333-86019-1), Post Effective Amendment No. 2 on Form S-8 to Form S-4 Registration Statement for MediaOne Group 401(K) Savings Plan (Registration No. 333-86019-2), Post Effective Amendment No. 1 on Form S-8 to Form S-4 Registration Statement for The Todd-AO Corporation 1986, 1994, 1995 and 1997 Stock Option Plan (Registration No. 333-36458-1), Form S-8 for the AT&T Long Term Savings Plan for Management employees, the AT&T Long Term Savings and Security Plan, the AT&T Retirement Savings and Profit Sharing Plan, the AT&T of Puerto Rico, Inc. Long Term Savings and Security Plan, the AT&T of Puerto Rico, Inc. Long Term Savings Plan for Management Employees, the AT&T Long Term Savings Plan, the AT&T Long Term Savings Plan - San Francisco, and the AT&T Wireless Services 401(K) Retirement Plan (Registration No. 333-43438), Form S-8 for the AT&T 1997 Long Term Incentive Plan (Registration No. 333-43440), Form S-4/A for Video Services Corporation (Registration No. 333-48606), Form S-4/A for the Wireless Exchange Offer (Registration No. 333-52670), Form S-8 for the AT&T Broadband Deferred Compensation Plan (Registration No. 333-53134), and Post Effective Amendment No. 1 on Form S-8 to Form S-4 Registration Statement for the International Post Limited 1993 Long Term Incentive Plan of AT&T Corp. (Registration No. 333-48606-1), of our reports dated March 16, 2001 relating to the consolidated financial statements of AT&T Corp. and its subsidiaries, and March 16, 2001 relating to the combined financial statements of AT&T Wireless Group, which appear in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated March 16, 2000 relating to the consolidated financial statement schedule, which appears in this Form 10-K. PricewaterhouseCoopers LLP New York, New York March 29, 2001 EX-23 16 0016.txt EXHIBIT 23(B) - CONSENT OF INDEPENDENT ACCOUNTANTS CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the following AT&T Corp. registration statements of our report dated February 26, 2001, relating to the combined balance sheets of Liberty Media Group ("New Liberty" or "Successor") as of December 31, 2000 and 1999, and the related combined statements of operations and comprehensive earnings, attributed net assets, and cash flows for the year ended December 31, 2000 and the period from March 1, 1999 to December 31, 1999 (Successor periods) and from January 1, 1999 to February 28, 1999 and for the year ended December 31, 1998 (Predecessor periods), which appears as an exhibit to the AT&T Corp. 2000 Annual Report on Form 10-K:
Form Registration Statement No. Description S-3 333-00573 Shareholder Dividend Reinvestment and Stock Purchase Plan S-8 333-47257 AT&T Long Term Savings and Security Plan S-8 33-34264, 33-29256, and 33-21937 AT&T Long Term Savings Plan for Management Employees S-8 33-39708 AT&T Retirement Savings and Profit Sharing Plan S-8 333-47251 Shares Issuable Under the Stock Option Plan of the AT&T 1987 Long Term Incentive Program S-8 33-50819 AT&T of Puerto Rico, Inc. Long Term Savings Plan for Management Employees S-8 33-50817 AT&T of Puerto Rico, Inc. Long Term Savings and Security Plan S-8 33-54797 (Post-Effective Amendment AT&T 1996 Employee Stock Purchase Plan No. 1) S-8 333-47255 AT&T Shares for Growth Program S-8 33-28665 AT&T 1997 Long Term Incentive Program S-3 33-49589 AT&T $2,600,000,000 Notes and Warrants to Purchase Notes S-3 33-59495 AT&T $3,000,000,000 Notes and Warrants to Purchase Notes S-4 33-57745 AT&T 5,000,000 Common Shares S-8 33-42150 (Post-Effective Amendment NCR Corporation 1989 Stock Compensation Plan No. 1 to Form S-4, (33-42150-01)) S-8 33-42150 (Post-Effective Amendment NCR Corporation 1984 Stock Compensation Plan No. 2 to Form S-4, (33-42150-02)) S-8 33-42150 (Post-Effective Amendment NCR Corporation 1976 Stock Compensation Plan No. 3 to Form S-4, (33-42150-03)) S-8 33-52119 (Post-Effective Amendment McCaw Cellular Communications, Inc. 1983 Non-Qualified Stock No. 1 to Form S-4, (33-52119-01)) Option Plan S-8 33-52119 (Post-Effective Amendment McCaw Cellular Communications, Inc. 1987 Stock Option Plan No. 2 to Form S-4, (33-52119-02)) S-8 33-52119 (Post-Effective Amendment McCaw Cellular Communications, Inc. Equity Purchase Plan No. 3 to Form S-4, (33-52119-03)) S-8 33-52119 (Post-Effective Amendment McCaw Cellular Communications, Inc. Employee Stock Purchase Plan No. 5 to Form S-4, (33-52119-05)) S-8 33-45302 (Post-Effective Amendment Teradata Corporation 1987 Incentive and Other Stock Option Plan No. 1 to Form S-4, (33-45302-01)) S-8 33-63195 AT&T Amended and Restated 1969 Stock Option Plan for LIN Broadcasting Corp. S-8 333-49419 (Post-Effective Teleport Communications Group Inc. 1993 Stock Option Plan Amendment No. 1 to Form S-4, (333-49419-01)) S-8 333-49419 (Post-Effective Teleport Communications Group Inc. 1996 Equity Incentive Plan Amendment No. 2 to Form S-4, (333-49419-02)) S-8 333-49419 (Post-Effective ACC Corp. Employee Long Term Incentive Plan Amendment No. 3 to Form S-4, (333-49419-03)) S-8 333-49419 (Post-Effective ACC Corp. Non-Employee Directors' Stock Option Plan Amendment No. 4 to Form S-4, (333-49419-04)) S-8 333-49419 (Post-Effective ACC Corp. 1996 UK Sharesave Scheme Amendment No. 5 to Form S-4, (333-49419-05)) S-8 333-52757 AT&T Wireless Services, Inc. Employee Stock Purchase Plan S-8 333-70279 (Post-Effective Tele-Communications, Inc. 1998 Incentive Plan Amendments Nos. 1 and 3 to Form S-4, (333-70279-01)) Tele-Communications, Inc. 1996 Incentive Plan (Amended and Restated) Tele-Communications, Inc. 1995 Employee Stock Incentive Plan (Amended and Restated) Tele-Communications, Inc. 1994 Stock Incentive Plan (Amended and Restated) Tele-Communications, Inc. 1994 Nonemployee Director Stock Option Plan Tele-Communications International, Inc., 1996 Nonemployee Director Stock Option Plan Tele-Communications International, Inc. 1995 Stock Incentive Plan S-8 333-70279 (Post-Effective Liberty Media 401(K) Savings Plan Amendment No. 2 to Form S-4, (333-70279-02)) TCI 401(K) Stock Plan S-3 333-71167 $13,080,000 Debt Securities and Warrants to Purchase Debt Securities S-4 333-75083 Vanguard Cellular Systems, Inc. S-4 333-86019 MediaOne Corp. S-4 333-30250 Four Media Corp. S-8 333-87935 AT&T Long Term Savings S-3/A 333-96037 AT&T Wireless Group Tracking Stock S-8 333-36130 AT&T 1997 Long-Term Incentive Plan for AT&T Wireless S-4 333-36458 Todd AO Corp. S-8 33-34264-1 (Post-Effective AT&T Long Term Savings Plan for Management Employees Amendment No. 1) AT&T Long Term Savings Plan - San Francisco AT&T Wireless Services 401(K) Retirement Plan S-8 333-87935-1 (Post-Effective AT&T Long Term Savings Plan for Management Employees Amendment No. 1) AT&T Long Term Savings and Security Plan AT&T Retirement Savings and Profit Sharing Plan AT&T of Puerto Rico, Inc. Long Term Savings and Security Plan AT&T of Puerto Rico, Inc. Long Term Savings Plan for Management Employees AT&T Long Term Savings Plan - San Francisco AT&T Wireless Services 401(K) Retirement Plan S-8 333-30250-1 (Post-Effective Four Media Company 1997 Stock Plan Amendment No. 1 to Form S-4) Four Media Company Amended and Restated 1997 Director Option Plan and Certain Additional Stock Option Agreements of Four Media Company S-4 333-41910 AT&T Wireless Group Tracking Stock S-8 333-86019-1 (Post-Effective MediaOne Group 1999 Supplemental Stock Plan Amendment No. 1 to Form S-4) Amended MediaOne Group 1994 Stock Plan S-8 333-86019-2 (Post-Effective MediaOne Group 401(K) Savings Plan Amendment No. 2 to Form S-4) S-8 333-36458-1 (Post-Effective Todd-AO Corporation 1986, 1994, 1995, and 1997 Stock Option Plan Amendment No. 1 to Form S-4) S-8 333-43438 AT&T Long Term Savings Plan for Management Employees AT&T Long Term Savings and Security Plan AT&T Retirement Savings and Profit Sharing Plan AT&T of Puerto Rico, Inc. Long Term Savings and Security Plan AT&T of Puerto Rico, Inc. Long Term Savings Plan for Management Employees AT&T Long Term Savings Plan AT&T Long Term Savings Plan - San Francisco AT&T Wireless Services 401(K) Retirement Plan S-8 333-43440 AT&T 1997 Long Term Incentive Plan S-4/A 333-48606 Video Services Corporation S-4/A 333-52670 Wireless Exchange Offer S-8 333-53134 AT&T Broadband Deferred Compensation Plan S-8 333-48606-1 (Post-Effective International Post Limited 1993 Long Term Incentive Plan of AT&T Amendment No. 1 to Form S-4) Corp.
As discussed in note 1 to the aforementioned combined financial statements, effective March 9, 1999, AT&T Corp., the owner of the assets comprising New Liberty, acquired Tele-Communications, Inc., the owner of the assets comprising Old Liberty, in a business combination accounted for as a purchase. As a result of the acquisition, the combined financial information for the periods after the acquisition is presented on a different cost basis than that for the periods before the acquisition and, therefore, is not comparable. KPMG LLP Denver, Colorado March 28, 2001 EX-24 17 0017.txt EXHIBIT (24) POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints C. H. NOSKI, N. S. CYPRUS AND M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 21st day of March, 2001. /s/ C. Michael Armstrong ----------------------------- C. Michael Armstrong Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints C. H. NOSKI, N. S. CYPRUS AND M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 21st day of March, 2001. /s/ Kenneth T. Derr ----------------------------- Kenneth T. Derr Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints C. H. NOSKI, N. S. CYPRUS AND M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 20th day of March, 2001. /s/ M. Kathryn Eickhoff ----------------------------- M. Kathryn Eickhoff Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints C. H. NOSKI, N. S. CYPRUS AND M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 20th day of March, 2001. /s/ Walter Y. Elisha ----------------------------- Walter Y. Elisha Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints C. H. NOSKI, N. S. CYPRUS AND M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 21st day of March, 2001. /s/ George M. C. Fisher ----------------------------- George M. C. Fisher Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints C. H. NOSKI, N. S. CYPRUS AND M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 21st day of March, 2001. /s/ Donald V. Fites ----------------------------- Donald V. Fites Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints C. H. NOSKI, N. S. CYPRUS AND M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 21st day of March, 2001. /s/ Amos B. Hostetter, Jr. ----------------------------- Amos B. Hostetter, Jr. Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints C. H. NOSKI, N. S. CYPRUS AND M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 21st day of March, 2001. /s/ Ralph S. Larsen ----------------------------- Ralph S. Larsen Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints C. H. NOSKI, N. S. CYPRUS AND M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 21st day of March, 2001. /s/ John C. Malone ----------------------------- John C. Malone Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints C. H. NOSKI, N. S. CYPRUS AND M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 21st day of March, 2001. /s/ Donald F. McHenry ----------------------------- Donald F. McHenry Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints C. H. NOSKI, N. S. CYPRUS AND M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 16th day of March, 2001. /s/ Louis A. Simpson ----------------------------- Louis A. Simpson Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints C. H. NOSKI, N. S. CYPRUS AND M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 21st day of March, 2001. /s/ Michael I. Sovern ----------------------------- Michael I. Sovern Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints C. H. NOSKI, N. S. CYPRUS AND M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 21st day of March, 2001. /s/ Sanford I. Weill ----------------------------- Sanford I. Weill Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints C. H. NOSKI, N. S. CYPRUS AND M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 21st day of March, 2001. /s/ Masaki Yoshikawa ----------------------------- Masaki Yoshikawa Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is a director of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints C. H. NOSKI, N. S. CYPRUS AND M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 21st day of March, 2001. /s/ John D. Zeglis ----------------------------- John D. Zeglis Director POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is an officer of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints C. H. NOSKI, AND M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 21st day of March, 2001. /s/ Nicholas S. Cyprus ----------------------------- Nicholas S. Cyprus Vice President and Controller POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, AT&T CORP., a New York corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K; and WHEREAS, the undersigned is an officer of the Company: NOW, THEREFORE, the undersigned hereby constitutes and appoints N. S. CYPRUS, AND M. J. WASSER and each of them, as attorneys for him or her and in his or her name, place and stead, and in his or her capacity as a director of the Company, to execute and file such annual report, and thereafter to execute and file any amendments or amendments thereto, hereby giving and granting to said attorneys, and each of them, full power and authority to do and perform each and every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 19th day of March, 2001. /s/ Charles H. Noski ----------------------------- Charles H. Noski Senior Executive Vice President and Chief Financial Officer EX-99 18 0018.txt EXHIBIT (99.A) AT&T WIRELESS GROUP FINANCIALS (an integrated business of AT&T) AT&T Wireless Group is an integrated business of AT&T Corp. and not a stand-alone entity. As AT&T Wireless Group is a tracking stock of AT&T, separate financial statements are not required to be filed. We are providing these financial statements to provide additional disclosures to investors to allow them to assess the financial performance of AT&T Wireless Group. Presenting separate financial statements for AT&T Wireless Group does not indicate that we have changed title to any assets or responsibility for any liabilities, and does not purport to affect the rights of any of AT&T's creditors. Holders of AT&T Wireless Group tracking stock do not have claims against the assets of AT&T Wireless Group. instead, AT&T Wireless Group shareholders own a separate class of AT&T common stock that is intended to reflect the financial performance and economic value of AT&T's wireless services' businesses. Management's Discussion and Analysis of Results of Operations and Financial Condition Overview AT&T Wireless Group is an integrated business of AT&T and is not a separate legal entity. On April 27, 2000, AT&T completed an offering of 15.6%, or 360 million shares, of AT&T Wireless Group tracking stock at an offering price of $29.50 per share. AT&T Wireless Group tracking stock is a class of AT&T common stock, which is intended to provide holders with financial returns based on the financial performance and economic value of AT&T's wireless services' businesses. AT&T Wireless Group tracking stock issued in the offering reflected only a portion of the authorized shares. The remaining 84.4% has been reserved for the benefit of AT&T Common Stock Group (which consists of the operations of AT&T other than those attributed to AT&T tracking stocks) and is intended to be reflected in AT&T common stock. 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 of AT&T Wireless Group primarily include the legal entity results of AT&T Wireless Services, Inc and its subsidiaries (AWS), AT&T Wireless Group, LLC (AWG), AT&T Wireless PCS, LLC and it subsidiaries (AWPCS), and Winston, Inc. and its subsidiaries (Winston), all of which are direct subsidiaries of AT&T Corp., as of December 31, 2000. In February 2001, the legal entities of Winston and AWPCS as well as certain assets of AWG were transferred to AWS. The remaining assets and liabilities of AWG will be transferred prior to the split-off. On October 25, 2000, AT&T announced its decision to present an exchange offer to AT&T common shareowners to allow them to exchange any portion of shares of AT&T common stock for shares of AT&T Wireless Group tracking stock. On December 22, 2000, AT&T filed a registration statement for the exchange offer with the Securities and Exchange Commission, which was amended on February 23, 2001. AT&T anticipates that the exchange offer will be completed during the second quarter of 2001. AT&T Wireless Group will continue to be a part of AT&T following the completion of the exchange offer. Also on October 25, 2000, AT&T announced its restructuring plan. In connection with their restructuring plan, following the completion of the exchange offer and subject to certain conditions, AT&T intends to split-off AT&T Wireless Group from AT&T. These conditions include the receipt of a favorable ruling on the split-off from the Internal Revenue Service (IRS) and satisfaction of conditions contained in AT&T's new $25 billion credit agreement, including the repayment of AT&T Wireless Group's intercompany obligations to AT&T. The split-off, which is anticipated to be completed in mid-2001, would include several steps. These steps include transferring substantially all of the assets and liabilities of AT&T Wireless Group to AT&T Wireless Services, Inc., mandatorily exchanging all issued and outstanding shares of AT&T Wireless Group tracking stock, including those issued in the exchange offer, for shares of AT&T Wireless Services common stock, and distributing a majority of the shares of AT&T Wireless Services common stock held by AT&T Common Stock Group, to holders of AT&T common stock on a pro rata basis. On February 14, 2001, AT&T announced its intention to retain up to $3 billion of shares of AT&T Wireless Services for its own account for sale or exchange within six months of the split-off, subject to receipt of a satisfactory IRS ruling. In January 2001, NTT DoCoMo, a leading Japanese wireless communications company, invested $9.8 billion in a security of AT&T that, like AT&T Wireless Group tracking stock, is intended to reflect a portion of the financial performance and economic value of AT&T Wireless Group. AT&T Wireless Group, through AT&T Wireless Group, LLC, was allocated $6.2 billion of the proceeds from DoCoMo's $9.8 billion investment in AT&T. AT&T retained the remaining $3.6 billion of the DoCoMo investment proceeds as consideration for the reduction in AT&T's retained portion of AT&T Wireless Group's value. Following the split-off, this investment will be converted into approximately 16% of AT&T Wireless Services' common shares. DoCoMo also received warrants at an exercise price of $35 per AT&T Wireless Group tracking share equivalent that would represent an approximate additional 1.6% of AT&T Wireless Services' common shares after the split-off. As part of this investment, AT&T Wireless Group, through AT&T Wireless Services, Inc., has entered into a strategic alliance with DoCoMo to develop mobile multimedia services on a global-standard, high-speed wireless network. DoCoMo may require the repurchase of its investment at DoCoMo's original purchase price, plus interest, if AT&T does not complete the split-off by specified dates beginning January 1, 2002 or if AT&T Wireless Group fails to meet specified technological milestones. Acquisitions On December 29, 2000, AT&T Wireless Group, through AWS and AWPCS, completed the acquisition of a wireless system in Houston, which covers a population base of approximately five million potential customers and served approximately 180 thousand subscribers as of the acquisition date. Also on December 29, 2000, AT&T Wireless Group's equity interest in AB Cellular, an entity which owned cellular properties in Los Angeles, Houston and Galveston, Texas, was redeemed. In consideration for their equity interest, AT&T Wireless Group, through AWS, received 100% of the net assets of the Los Angeles property. The Los Angeles property covers a population base of approximately 15 million potential customers and had approximately 1.3 million subscribers as of December 31, 2000. On November 14, 2000, AT&T Wireless Group, through AWPCS, completed a transaction with their affiliate Telecorp PCS which resulted in AT&T Wireless Group acquiring wireless systems in several New England markets. On October 2, 2000, AT&T Wireless Group, through AWPCS, completed the acquisition of a wireless system in Indianapolis. Combined, the New England and Indianapolis markets cover a population base of approximately 4 million potential customers, and served approximately 145 thousand subscribers as of their acquisition dates. On September 29, 2000, AT&T Wireless Group, through AWS, 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, AT&T Wireless Group, through AWS, 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 their acquisition dates. In June 2000, AT&T Wireless Group, through AWS, 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. Also in June, AT&T Wireless Group, through AWS, 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, AWS and Dobson Communications Corporation, through a joint venture, acquired American Cellular Corporation. AT&T contributed cash equal to AWS' interest in the joint venture to AT&T Wireless Group as of the date of the acquisition. This acquisition increased 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 21 E 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 AT&T Wireless Group's performance relative thereto. These forward-looking statements rely on a number of assumptions concerning future events, including 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 AT&T Wireless Group's control, that could cause actual results to differ materially from such statements. AT&T and AT&T Wireless Group disclaim 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 Year Ended December 31, 2000 Compared With the Year Ended December 31, 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. 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 AT&T Wireless Group's network as well as charges billed to other wireless providers for roaming on AT&T Wireless Group's network. The revenue and related expenses associated with the sales of wireless handsets and accessories are recognized when the products are delivered and accepted by the customer, as this is considered to be a separate earnings process from the sale of wireless services. Total revenue increased 37.0% to $10,448 million for the year ended December 31, 2000, compared with the prior year. Total revenue increased 29.6% for the year ended December 31, 2000, compared with 1999, adjusted to exclude the Bay Area Properties for the six months ended December 31, 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 increase for the year ended December 31, 2000, was primarily due to growth in our mobility business revenue, including both growth in services and equipment revenue. Services revenue for the year ended December 31, 2000, was $9,376 million, an increase of $2,553 million, or 37.4%, compared with 1999. The services revenue growth was driven by strong consolidated subscriber growth. Additionally, an increase in average monthly revenue per user (ARPU) for the year ended December 31, 2000, compared with the prior year, contributed to the 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, continue to contribute to growth in subscribers as well as an increase in ARPU. As of December 31, 2000, AT&T Wireless Group had nearly 15.2 million consolidated subscribers, an increase of 58.5%, compared with the prior year, of which 90.1% were digital subscribers, up from 79.2% as of December 31, 1999. Consolidated subscribers at December 31, 2000, included approximately 3.0 million subscribers associated with acquisitions that closed during 2000. Net consolidated wireless subscriber additions in the year ended December 31, 2000, totaled nearly 2.6 million, a 67.5% increase over the prior year, including 865 thousand during the fourth quarter. AT&T Wireless Group's average monthly churn rate for the year ended December 31, 2000, was 2.9% compared with 2.6% for the year ended December 31, 1999. AT&T Wireless Group's average monthly churn increased during 2000 as a result of competitive pressures, as well as AT&T Wireless Group's efforts to expand the customers they serve to a broader base of consumer segments. Total subscribers, including partnership markets in which AT&T Wireless Group does not own a controlling interest, were over 15.7 million at the end of 2000, a 28.9% increase over the prior year. Due to the redemption of AT&T Wireless Group's interest in AB Cellular during the fourth quarter of 2000, the Houston market subscribers of AB Cellular are no longer included in AT&T Wireless Group's total subscribers. Ending total subscribers included approximately 450 thousand subscribers associated with AT&T Wireless Group's acquisition of American Cellular in February 2000. AT&T Wireless Group's ARPU for the year ended December 31, 2000, was $68.2, an increase of $2.4, or 3.6%, compared with 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 and other rate plans introduced in 2000. AT&T Wireless Group's ARPU trended downward during the second half of 2000 as a result of market segmentation efforts. Despite this, AT&T Wireless Group's ARPU remained higher than the wireless industry average during the year ended December 31, 2000, excluding AT&T Wireless Group. As a result of our market segmentation efforts, AT&T Wireless Group anticipates that ARPU will decline in 2001 relative to 2000. Equipment revenue for the year ended December 31, 2000, was $1,072 million, an increase of $268 million, or 33.2%, compared with 1999. This increase was primarily due to a 53.6% increase in gross consolidated subscriber additions during the year ended December 31, 2000, compared with 1999. As an integral part of the wireless service offering, 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 Costs of services include the costs to place calls over the network (including the costs to operate and maintain AT&T Wireless Group's network as well as roaming costs paid to other wireless providers) and the charges paid to connect calls on other networks, including those of AT&T. Costs of services for the year ended December 31, 2000, were $3,169 million, an increase of $589 million, or 22.9%, compared with 1999. This increase was due primarily to growth in the mobility subscriber base and their increased minutes of use which 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 AT&T Wireless Group's network. The costs of services associated with AT&T Wireless Group's fixed wireless business increased during 2000 as a result of the commercial launch of service in several markets. Additionally, during the fourth quarter, AT&T Wireless Group's costs of services included asset write-offs associated with changes in AT&T Wireless Group's strategy for markets that overlap with AT&T's broadband markets Costs of equipment sales Costs of equipment sales include the costs of the handsets and accessories provided to AT&T Wireless Group customers. Costs of equipment sales for the year ended December 31, 2000 were $2,041 million. This was an increase of $775 million, or 61.2%, compared with 1999. This increase was due primarily to higher gross subscriber additions in 2000 compared with the prior year. Selling, general and administrative Selling, general and administrative expenses for the year ended December 31, 2000, were $3,590 million, compared with $2,663 million for the year ended December 31, 1999, representing an increase of 34.8%. This increase was largely attributable to higher marketing and selling costs, primarily advertising and commissions, associated with the increase in gross consolidated subscriber additions for the year ended December 31, 2000, compared to 1999. Cost per gross subscriber addition (CPGA), which includes the costs of handset subsidies recorded in costs of equipment sales, was $367 for both the year ended December 31, 2000, and 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 year ended December 31, 2000, were $1,686 million, an increase of $433 million, or 34.5%, compared with 1999. This increase primarily resulted from growth in AT&T Wireless Group's depreciable asset base resulting from capital expenditures to increase the capacity of the network and improve call quality. Total capital expenditures were $4,287 million and $2,476 million for the years ended December 31, 2000 and 1999, respectively. Additionally, amortization expense, which includes amortization of licensing costs, goodwill, and other intangibles, increased for the year ended December 31, 2000, as a result of the 1999 acquisitions of Vanguard Cellular and Honolulu Cellular, as well as the 2000 acquisitions, primarily the Bay Area Properties and Wireless One which closed during June 2000. Asset impairment and restructuring charges During the fourth quarter of 1999, AT&T Wireless Group recorded a $531 million asset impairment charge primarily associated with the planned disposal of wireless communications equipment resulting from a program to increase capacity and operating efficiency of the wireless network. Other income Other income primarily includes gains or losses on sales or exchanges of assets, intercompany interest income on the note receivable from AT&T, and minority interests in consolidated subsidiaries. Other income for the year ended December 31, 2000, was $534 million, compared with $122 million for the year ended December 31, 1999. The increase for the year ended December 31, 2000, was due primarily to the pretax gain of $379 million on the transactions associated with AT&T Wireless Group's affiliate investment in Telecorp PCS, interest income on the note receivable from AT&T, partially offset by a pretax loss of $184 million associated with the acquisition of the Los Angeles cellular property resulting from AB Cellular's redemption of AT&T Wireless Group's equity interest in AB Cellular, as well as pretax gains recorded in 1999. Interest expense Interest expense consists primarily of interest on intercompany debt due to AT&T less interest expense capitalized. Interest expense for the year ended December 31, 2000, was $85 million, a decrease of $51 million, or 37.4%, compared with 1999. The decrease 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 held by AT&T subsequent to the offering of AT&T Wireless Group tracking stock. These decreases were partially offset by a higher rate of interest charged on the intercompany debt in 2000 versus the prior year. Provision (benefit) for income taxes The provision for income taxes for the year ended December 31, 2000, was $141 million, compared with a benefit of $294 million for the year ended December 31, 1999. The effective income tax rate for the year ended December 31, 2000 was 34.1%, compared with 43.2%, for the year ended December 31, 1999. The effective rate for 2000 was impacted by increased goodwill and other purchased intangibles amortization expense associated with the 1999 and 2000 acquisitions as well as the sale of a foreign equity investment during 2000. The effective income tax rate for 1999 was impacted by the benefit from a change in the valuation allowance and other estimates, offset by amortization of goodwill and other purchased intangibles. Net equity earnings (losses) from investments Net equity earnings (losses) from investments, net of tax, was $388 million of earnings for the year ended December 31, 2000, compared with $19 million of losses for 1999. The increase was primarily due to a $372 million after-tax gain included in equity earnings for AT&T Wireless Group's portion of the gain recognized by AB Cellular on the redemption of AT&T Wireless Group's equity interest in AB Cellular. Dividend requirements on preferred stock held by AT&T At December 31, 2000 and 1999, 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. Long-term debt due to AT&T of $2.0 billion was recapitalized into an additional $2.0 billion of 9% cumulative preferred stock held by AT&T following the offering. Dividend requirements on this preferred stock for the year ended December 31, 2000, were $130 million and for the year ended December 31, 1999, were $56 million, net of amounts recorded in accordance with the tax sharing agreement. FOR THE YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1998 Revenue Total revenue for the year ended December 31, 1999, was $7,627 million, an increase of $2,221 million, or 41.1%, compared with 1998. AT&T Wireless Group's 1999 results included Vanguard Cellular since its acquisition on May 3,1999, and 1998 results included its messaging business until its sale on October 2, 1998. Adjusted to exclude both Vanguard Cellular and its messaging business, total revenue for AT&T Wireless Group increased by 39.0% compared with 1998. The revenue increase was driven primarily by consolidated subscriber growth and rising ARPU. As of December 31, 1999, ending consolidated subscribers increased 33.4% compared with 1998. AT&T Digital One Rate service significantly contributed to the increase in ARPU and subscribers by acquiring and retaining high value customers, who have a significantly higher ARPU than an average subscriber. Services revenue for the year ended December 31, 1999, was $6,823 million, an increase of $2,044 million, or 42.8%, compared with 1998. As of December 31, 1999, AT&T Wireless Group had 9.6 million consolidated subscribers, an increase of 33.4% compared with the prior year, of which 79.2% were digital subscribers, up from 60.7% as of December 31, 1998. Included in these figures were approximately 700 thousand subscribers from our acquisition of Vanguard Cellular in May 1999, approximately 125 thousand subscribers from our acquisition of Honolulu Cellular in August 1999 and approximately 45 thousand subscribers from our acquisition of Bakersfield Cellular in April 1999. Including AT&T Wireless Group's partnership markets, approximately 9.4 million of the 12.2 million total subscribers were digital subscribers as of December 31,1999. AT&T Wireless Group's ARPU for the year ended December 31, 1999 was $65.8, an increase of $8.2, or 14.2%, compared with 1998. The increase was primarily due to increased minutes of use per subscriber, driven in part by the success of AT&T Digital One Rate service. AT&T Wireless Group's ARPU remained significantly higher than the wireless industry average during 1999, excluding AT&T Wireless Group. Equipment revenue for the year ended December 31, 1999 was $804 million, an increase of $177 million, or 28.2%, compared with 1998. The increase was primarily due to a 25.1% increase in gross consolidated subscriber additions in 1999 compared with 1998. As an integral part of the wireless service offering, AT&T Wireless Group supplies to its new subscribers a selection of handsets at competitive prices, which are generally offered at or below cost. Costs of services Costs of services for the year ended December 31, 1999 were $2,580 million. This was an increase of $1,152 million, or 80.7%, compared with 1998. The increase was due primarily to roaming expenses associated with the success of AT&T Digital One Rate service as off-network roaming minutes of use increased by 194.7% for the year ended December 31, 1999, compared with 1998. Although roaming expenses continued to impact results for the year ended December 31, 1999, the rate of roaming expense growth declined significantly during the latter half of 1999, as AT&T Wireless Group introduced initiatives to aggressively migrate more minutes onto AT&T Wireless Group's network as well as reduced intercarrier roaming rates. AT&T Wireless Group continued to seek to decrease roaming expenses through capital spending for network expansion, acquisitions and affiliate launches. Roaming rates also declined significantly as a result of renegotiated roaming agreements and the deployment of IRDB technology, which assists in identifying favorable roaming partners in areas not included in AT&T Wireless Group's network. All of these efforts resulted in a reduction of approximately 18% in the average roaming rate per minute paid to other carriers for the year ended December 31, 1999, compared with 1998. Costs of equipment sales Costs of equipment sales for the year ended December 31, 1999 were $1,266 million. This was an increase of $266 million, or 26.6%, compared with 1998. This increase was primarily the result of increased gross subscriber additions in 1999 compared with 1998. Gross subscriber additions increased 25.1% for the year ended 1999 compared with the prior year. Selling, general and administrative SG&A expenses for the year ended December 31, 1999 were $2,663 million compared with $2,122 million for the year ended December 31,1998. This increase was due to higher marketing and selling costs associated with the increase in consolidated gross subscriber additions in 1999 compared with 1998, as well as the growth in customer care expenses associated with the larger consolidated subscriber base. Depreciation and amortization Depreciation and amortization expenses for the year ended December 31, 1999 were $1,253 million, an increase of $174 million, or 16.1%. This increase primarily resulted from a larger asset base and additional amortization of goodwill and other purchased intangibles associated with the acquisition of Vanguard Cellular. Capital expenditures for the year ended December 31, 1999 and 1998, were $2,476 million and $1,136 million, respectively. Asset impairment and restructuring charges During the fourth quarter of 1999, AT&T Wireless Group recorded a $531 million asset impairment charge primarily associated with the planned disposal of wireless communications equipment resulting from a program to increase capacity and operating efficiency of the wireless network. Asset impairment and restructuring charges for the year ended December 31, 1998 were $120 million, which represented the write-down of unrecoverable assets associated with non-strategic businesses. Other income Other income for the year ended December 31, 1999 was $122 million. Other income for the year ended December 31, 1998 was $650 million. The decrease was due primarily to the pretax gains on sales in 1998 of LIN Television Corporation of $342 million, SmarTone Telecommunications Holdings Limited of $128 million and PriceCellular of $67 million. Interest expense Interest expense consists primarily of interest on intercompany debt due to AT&T. Interest was charged at 7.25% per annum for the year ended December 31, 1999 and 7.75% per annum for the year ended December 31, 1998. Interest expense for the year ended December 31, 1999 was $136 million, an increase of $16 million, or 13.3%, compared with 1998. The increase was due to a higher level of average debt outstanding, partially offset by the impact of the lower rate charged by AT&T in 1999. Provision (benefit) for income taxes The benefit for income taxes for the year ended December 31, 1999 was $294 million, compared with a tax provision of $59 million for the year ended December 31, 1998. The benefit for income taxes in 1999 was primarily due to the pre-tax loss for the period coupled with changes in the valuation allowance and other estimates. The effective income tax rates for the years ended December 31, 1999 and 1998, were 43.2% and 31.6%, respectively. The effective income tax rate for 1998 was impacted by the effect of state taxes, net of federal benefit, and the amortization of intangibles, partially offset by the effects of changes in the valuation allowance and other estimates. Net equity earnings (losses) from investments Net equity earnings (losses) from investments, net of tax, was a loss of $19 million for the year ended December 31, 1999, compared with earnings of $36 million for 1998. The decrease was primarily a result of increased losses associated with affiliate investments. Additionally, equity losses increased in 1999 compared with 1998 due to losses associated with financial commitments related to certain investments. Dividend requirements on preferred stock held by AT&T AT&T Wireless Group had $1.0 billion of preferred stock held by AT&T, as of December 31, 1999 and 1998, that paid dividends at 9% per annum. Dividend requirements on this preferred stock for each of the years ended December 31, 1999 and 1998 were $56 million, net of amounts recorded in accordance with the tax sharing agreement. LIQUIDITY AND CAPITAL RESOURCES The continued expansion of AT&T Wireless Group's network and footprint, including spectrum auctions, and service offerings, and the marketing and distribution of its products and services, will continue to require substantial capital. AT&T Wireless Group has funded its operations by 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 offering. Capital contributions from AT&T prior to the offering included acquisitions made by AT&T that have been attributed to AT&T Wireless Group. Noncash capital contributions from AT&T to AT&T Wireless Group related to acquisitions and initial investments funded by AT&T totaled $539 million, $2,553 million, and $982 million for the years ended December 31, 2000, 1999, and 1998, respectively. The April 2000 offering of 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 AT&T Wireless Group in the form of an intercompany note receivable, which was repaid by December 31, 2000, and was used primarily to fund acquisitions and capital expenditures. On May 1, 2000, following the offering, 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, 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. Currently, financing activities for AT&T Wireless Group are managed by AT&T on a centralized basis and are subject to the review of AT&T Wireless Group's capital stock committee. AT&T Wireless Group capital stock committee is selected by AT&T's board of directors to oversee the interaction between businesses of AT&T Common Stock Group and AT&T Wireless Group in accordance with the AT&T Wireless Group Policy Statement. Under the AT&T Wireless Group Policy Statement, all material transactions between AT&T Common Stock Group and AT&T Wireless Group are determined and governed by a process of fair dealing. Sources for AT&T Wireless Group's future financing requirements may include the borrowing of funds, including additional short-term floating rate debt from AT&T and/or third-party debt. Loans from AT&T to any member of AT&T Wireless Group have been made at interest rates and on other terms and conditions intended to be substantially equivalent to the interest rates and other terms and conditions that 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 AT&T Wireless Group, those fees or charges will be allocated to AT&T Wireless Group. In association with the intended split-off of AT&T Wireless Group from AT&T announced on October 25, 2000, AT&T and AT&T Wireless Services, Inc. anticipate that they will enter into a separation and distribution agreement that will govern the terms of the split-off. As part of this agreement, AT&T Wireless Services will agree, upon completion of the split-off, to repay the full amount of the principal and accrued but unpaid interest or face value and accrued but unpaid dividends, of all outstanding indebtedness owned by AT&T Wireless Group to AT&T, and all preferred stock in AT&T Wireless Group held by AT&T. On January 22, 2001, AT&T closed their transaction with NTT DoCoMo. AT&T attributed $6.2 billion of the approximate $9.8 billion of proceeds received from DoComo to AT&T Wireless Group in the form of an intercompany note receivable. AT&T Wireless Group intends to utilize the proceeds to continue executing their strategy to expand their capacity, enlarge their footprint, create an advanced mobile internet and invest in other strategic growth initiatives, as well as to satisfy intercompany obligations. On March 23, 2001, AT&T Wireless Group, through AWS, entered into Competitive Advance and Revolving Credit Facilities (the "Facilities") in the aggregate amount of $2.5 billion consisting of an up to $1.25 billion 364-day Competitive Advance and Revolving Credit Facility and an up to $1.25 billion Five-Year Competitive Advance and Revolving Credit Facility. The facilities are subject to a facility fee and utilization fee and bear interest at variable rates based upon, in various cases, LIBOR, the prime rate or the rates on overnight Federal funds transactions. The Facilities may be used for general corporate purposes and are subject to customary covenants, representations and warranties and events of default. In addition, the Facilities contain financial covenants providing for a maximum total debt to total Consolidated Operational EBITDA ratio (as defined in the facilities agreement) not to exceed 4:0 to 1:0 for AT&T Wireless Group and a minimum interest coverage ratio of 3.5:1.0. From the date of the closing of the Facilities until the date of the split-off of AT&T Wireless Group, AWS will be prohibited from declaring and/or paying dividends. The Facility also specifies limitations on AT&T's and AT&T Wireless Group's ability to consummate the split-off including a provision that it will constitute an event of default if the split-off is consummated without obtaining a favorable tax ruling from the IRS or an unqualified tax opinion that the split-off will qualify as a tax-free transaction. In addition, the existence of an obligation by AT&T Wireless Group to repurchase equity interests from DoCoMo may under certain circumstances constitute an event of default. On March 1, 2001, AT&T Wireless Group, through AWS, completed a private placement of $6.5 billion in Senior Notes with maturity dates from 2006 to 2031. The notes pay interest at rates ranging from 7.350% to 8.750% per annum, and include customary covenants. The notes include registration rights, such that AWS is required to exchange the notes for a new issue of notes registered under the Securities Act of 1933 and are to be declared effect no later than 240 days after the issue date. AT&T performs cash management functions on behalf of AT&T Wireless Group. Substantially all of AT&T Wireless Group's cash balances are swept to AT&T on a daily basis, where they are managed and invested by AT&T. Prior to the offering of AT&T Wireless Group tracking stock, transfers of cash to and from AT&T were reflected as a component of combined attributed net assets, with no interest income or expense reflected. Subsequent to the offering, transfers are reflected as changes in the note receivable from AT&T. Cash balances maintained and reported by AT&T Wireless Group primarily represent cash balances for which no right of offset exists with AT&T. Net cash provided by operating activities for the year ended December 31, 2000, was $1,635 million, compared with $867 million for the year ended December 31, 1999. The increase in cash provided by operating activities was primarily due to an increase in operating income excluding depreciation and amortization, and the asset impairment and restructuring charge in 1999, resulting from revenue growth and expense leveraging, and an increase in operating and payroll related accruals, partially offset by increases in inventories and accounts receivable. Net cash used in investing activities for the year ended December 31, 2000, was $10,525 million, compared with $2,123 million for the year ended December 31, 1999. The investing activities included on AT&T Wireless Group's statements of cash flows include cash expenditures or receipts of cash for investing transactions directly attributable to the wireless group operations, and those legal entities that comprise the financial statements of AT&T Wireless Group. These amounts are representative of what AT&T Wireless Group would report on a stand-alone basis. The increase was due primarily to the acquisitions of wireless systems in Houston, Indianapolis and San Diego, the Bay Area Properties, and Wireless One. Equity investment purchases increased primarily due to the acquisition of equity interests in international ventures, acquired from AT&T in association with their acquisition of MediaOne. In addition, capital expenditures increased as a result of efforts to increase network capacity in existing markets as well as to expand the national footprint. Net cash provided by financing activities for the year December 31, 2000, was $8,947 million, compared with $1,234 million for the year ended December 31, 1999. The increase was primarily due to proceeds attributed from the offering of AT&T Wireless Group tracking stock, short-term debt borrowed from AT&T as well as increased transfers from AT&T prior to the offering, to fund acquisitions and higher capital expenditures. Net cash provided by operating activities for the year ended December 31, 1999 was $867 million compared with $414 million of cash provided by operating activities in 1998 primarily due to increased operating income excluding depreciation and amortization, and the asset impairment and restructuring charges and larger increases in operating accruals and accounts payable. These increases were offset by a higher increase in accounts receivable driven by strong revenue growth. Net cash used in investing activities for the year ended December 31,1999 was $2,123 million, compared with $238 million of cash provided by investing activities in 1998. The difference was due primarily to higher capital expenditures to upgrade and increase capacity in existing markets as well as to expand the national footprint, and lower cash proceeds associated with the sales of equity investments. Net cash provided by financing activities for the year ended December 31, 1999 was $1,234 million compared with $631 million of cash used in financing activities in 1998 due to increased transfers and debt financing from AT&T to fund the higher capital expenditures during 1999. EBITDA, defined as earnings before interest and taxes, excluding other income, plus depreciation and amortization, is the primary measure used by the chief operating decision-makers to measure our ability to generate cash flow. EBITDA may or may not be consistent with the calculation of EBITDA for other public companies and should not be viewed by investors as an alternative to generally accepted accounting principles, measures of performance or to cash flows from operating, investing and financing activities as a measure of liquidity. EBITDA for the year ended December 31, 2000, was $1,648 million, compared with $587 million for the year ended December 31, 1999. On an operational basis, adjusted to exclude the 1999 asset impairment and restructuring charge of $531 million, EBITDA increased $530 million or 47.3%. The increase was primarily the result of revenue growth and lower off-network roaming expenses. These increases 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 and customer care related costs to support growth in the subscriber base. For our mobility business, EBITDA for the year ended December 31, 2000, was $1,884 million, compared with $670 million for the year ended December 31, 1999. Excluding the 1999 asset impairment and restructuring charge, mobility EBITDA increased $686 million or 57.2%. For our fixed wireless business, EBITDA for the year ended December 31, 2000, was a deficit of $228 million, compared with a deficit of $75 million the year ended December 31, 1999. Excluding the 1999 asset impairment and restructuring charge, fixed wireless EBITDA decreased $156 million or 213.4%. EBITDA margins were 15.8% for the year ended December 31, 2000, compared with 14.7% for the year and December 31, 1999, excluding the 1999 asset impairment and restructuring charge. The improvement in EBITDA margins for the year ended December 31, 2000, compared to the year ended December 31, 1999, was primarily driven 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 margins for our mobility business were 18.0% for the year ended December 31, 2000, compared with 15.7% for the year ended December 31, 1999, excluding the 1999 asset impairment and restructuring charge. EBITDA for the year ended December 31, 1999 was $587 million compared with $736 million for the year ended December 31, 1998. Excluding pretax asset impairment and restructuring charges of $531 million in 1999 and $120 million in 1998, EBITDA was $1,118 million for 1999, which represented an increase of $262 million, or 30.6%, compared with 1998. This increase was attributable to increases in total revenue and an improving margin as SG&A expenses declined as a percentage of revenue. For our mobility business, EBITDA for the year ended December 31, 1999, was $670 million, compared with $794 million for the year ended December 31, 1998. Excluding pretax asset impairment and restructuring charges of $528 million in 1999 and $120 million in 1998, EBITDA was $1,198 million for 1999 compared with $914 million for 1998. Excluding the aforementioned pretax asset impairment and restructuring charges in 1999 and 1998, EBITDA margins were 14.7% for the year ended December 31, 1999, compared with 15.8% in 1998. The decline in EBITDA margins in 1999 compared with 1998 was driven primarily by increased roaming expenses, as well as increased sales and marketing expenses associated with a 25.1% increase in gross consolidated subscriber additions in 1999 compared with 1998. Excluding the aforementioned pretax asset impairment and restructuring charges in 1999 and 1998, EBITDA margins for our mobility business were 15.7% for the year ended December 31, 1999, compared with 16.9% for the year ended December 31, 1998. FINANCIAL CONDITION Total assets were $35,302 million as of December 31, 2000, an increase of $11,790 million, or 50.1%, compared with December 31, 1999. The increase was due primarily to increases in licensing costs, goodwill, and property, plant and equipment associated with the acquisitions closed in 2000, including the acquisitions of Wireless One, L.P. and wireless systems in the San Francisco Bay Area, San Diego, Indianapolis, Houston and Los Angeles. In addition, the increase in property, plant and equipment was a result of significant capital expenditures for the year ended December 31, 2000. These increases were partially offset by a decrease in investments as AT&T Wireless Group previously held equity interests in portions of the Bay Area Properties, and the Los Angeles market, through their interest in AB Cellular. These markets were consolidated as of December 31, 2000. Total liabilities were $10,384 million as of December 31, 2000, a increase of $889 million, or 9.4%, compared with December 31, 1999. The increase was primarily due to increases in deferred income taxes as a result of gains recorded during the fourth quarter, as well as increased marketing, business tax and other operating accruals. These increases were partially offset by a net decrease in intercompany indebtedness to AT&T. Combined attributed net assets was $24,887 million as of December 31, 2000, an increase of $10,880 million, or 77.7%, compared with December 31, 1999. The increase was primarily due to the attribution of offering proceeds to AT&T Wireless Group, net transfers from AT&T prior to the offering to fund capital expansion and acquisitions, as well as the additional $2.0 billion of preferred stock issued to AT&T. RECENT ACCOUNTING PRONOUNCEMENTS In September 2000, the Financial Accounting Standards Board (FASB) issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities--A Replacement of FASB No. 125". This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. Under these standards, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. This statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. AT&T Wireless Group does not expect that the adoption of SFAS No. 140 will have a material impact on its results of operations, financial position or cash flows. In June 1998, the 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 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 AT&T Wireless Group, 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 adoption of SFAS No. 133 in January 2001, did not have a material impact to the AT&T Wireless Group's results of operations, financial position or cash flows. In addition, based on the types of contracts we currently have, AT&T Wireless Group does not anticipate that this standard will have a material impact on future results of AT&T Wireless Group. SUBSEQUENT EVENTS In January 2001, AT&T Wireless Group executed agreements with certain network equipment vendors, related to the development of its next-generation network strategy. These agreements require AT&T Wireless Group to buy equipment from these vendors totaling approximately $1.8 billion through 2004. Effective January 1, 2001, AT&T Wireless Group implemented the results of a review of the estimated service lives of certain wireless communications equipment, primarily electronics. Lives were shortened to fully depreciate all such equipment within seven years. Similar equipment acquired after January 1, 2001, will have useful lives no longer than seven years. On January 22, 2001, AT&T Wireless Group, through AWS, completed its previously announced transaction with DoCoMo. See Note 1 for further discussion of the transaction. On November 17, 2000, AT&T Wireless Group announced that AT&T's board of directors had approved an agreement under which AT&T Wireless Group would purchase $200 in Series AA preferred stock from Dobson Communications Corporation. AT&T Wireless Group, through AWS, completed this transaction on February 8, 2001. The Series AA preferred stock acquired has a liquidation preference of $1,000 per share and is exchangeable into Series A convertible preferred stock. If the Series AA preferred stock is exchanged into Series A convertible preferred stock, AT&T Wireless Group will increase its ownership interest in Dobson, on an as converted to common stock basis, from its current ownership of 4.6% to approximately 11.6%. On March 23, 2001, AT&T Wireless Group, through AWS, entered into Competitive Advance and Revolving Credit Facilities (the "Facilities") in the aggregate amount of $2.5 billion consisting of and up to $1.25 billion 364-day Competitive Advance and Revolving Credit Facility and an up to $1.25 billion Five-Year Competitive Advance and Revolving Credit Facility. The facilities are subject to a facility fee and utilization fee and bear interest at variable rates based upon, in various cases, LIBOR, the prime rate or the rates on overnight Federal funds transactions. The Facilities may be used for general corporate purposes and are subject to customary covenants, representations and warranties and events of default. In addition, the Facilities contain financial covenants providing for a maximum total debt to total Consolidated Operational EBITDA ratio (as defined in the facilities agreement) not to exceed 4:0 to 1:0 for AT&T Wireless Group and a minimum interest coverage ratio of 3.5:1.0. From the date of the closing of the Facilities until the date of the split-off of AT&T Wireless Group, AWS will be prohibited from declaring and/or paying dividends. The Facility also specifies limitations on AT&T's and AT&T Wireless Group's ability to consummate the split-off including a provision that it will constitute an event of default if the split-off is consummated without obtaining a favorable tax ruling from the IRS or an unqualified tax opinion that the split-off will qualify as a tax-free transaction. In addition, the existence of an obligation by AT&T Wireless Group to repurchase equity interests from DoCoMo may under certain circumstances constitute an event of default. On February 26, 2001, AT&T agreed to sell its entire interest in Japan Telecom for approximately $1.35 billion. The net after-tax proceeds are expected to be approximately $1 billion. AT&T has indicated that the net after-tax proceeds will be split evenly between AT&T and AT&T Wireless Group. AT&T Wireless Group anticipates that it will recognize a significant gain on the transaction. On March 1, 2001, AT&T Wireless Group, through AWS, completed a private placement of $6.5 billion in Senior Notes with maturity dates from 2006 to 2031. The notes pay interest at rates ranging from 7.350% to 8.750% per annum, and include customary covenants. The notes include registration rights, such that AWS is required to exchange the notes for a new issue of notes registered under the Securities Act of 1933 and are to be declared effect no later than 240 days after the issue date. Report of Independent Accountants To the Board of Directors and Shareowners of AT&T Corp.: In our opinion, the accompanying combined balance sheets and the related combined statements of operations and changes in combined attributed net assets and of cash flows present fairly, in all material respects, the financial position of AT&T Wireless Group at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of AT&T Wireless Group's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. AT&T Wireless Group is a fully integrated business unit of AT&T Corp.; consequently, as indicated in Note 1, these combined financial statements have been derived from the consolidated financial statements and accounting records of AT&T Corp. and reflect certain assumptions and allocations. Moreover, as indicated in Note 1, AT&T Wireless Group relies on AT&T Corp. for administrative, management and other services. The financial position, results of operations and cash flows of AT&T Wireless Group could differ from those that would have resulted had AT&T Wireless Group operated autonomously or as an entity independent of AT&T Corp. As more fully discussed in Note 1, the combined financial statements of AT&T Wireless Group should be read in conjunction with the audited consolidated financial statements of AT&T Corp. PRICEWATERHOUSECOOPERS LLP March 16, 2001 New York, New York AT&T WIRELESS GROUP (an integrated business of AT&T) COMBINED STATEMENTS OF OPERATIONS (In Millions)
For the Years Ended December 31, 2000 1999 1998 Revenue Services revenue $ 9,376 $6,823 $4,779 Equipment revenue 1,072 804 627 ------ ------ ------ Total revenue 10,448 7,627 5,406 ------ ------ ------ Operating expenses Costs of services (excluding depreciation of $1,047, $732, $599, included below) 3,169 2,580 1,428 Costs of equipment sales 2,041 1,266 1,000 Selling, general and administrative 3,590 2,663 2,122 Depreciation and amortization 1,686 1,253 1,079 Asset impairment and restructuring charges -- 531 120 ------ ------ ------ Total operating expenses 10,486 8,293 5,749 ------ ------ ------ Operating loss (38) (666) (343) Other income 534 122 650 Interest expense 85 136 120 ------ ------ ------ Income (loss) before income taxes 411 (680) 187 Provision (benefit) for income taxes 141 (294) 59 Net equity earnings (losses) from investments 388 (19) 36 ------ ------ ------ Net income (loss) 658 (405) 164 Dividend requirements on preferred stock held by AT&T, net 130 56 56 ------ ------ ------ Net income (loss) after preferred stock dividends $ 528 $ (461) $ 108 ------ ------ ------
See Notes to Combined Financial Statements AT&T WIRELESS GROUP (an integrated business of AT&T) COMBINED BALANCE SHEETS (In Millions)
At December 31, 2000 1999 ASSETS Cash and cash equivalents $ 62 $ 5 Accounts receivable, less allowances of $193 and $130 1,892 1,300 Inventories 335 162 Income tax receivable 118 -- Deferred income taxes 93 127 Prepaid expenses and other current assets 82 34 ------ ------ Total Current Assets 2,582 1,628 ------ ------ Property, plant and equipment, net 9,892 6,349 Licensing costs, net of accumulated amortization of $1,761 and $1,519 13,627 8,571 Investments in and advances to unconsolidated subsidiaries 3,385 4,502 Goodwill and other assets, net 5,816 2,462 ------ ------ Total Assets $35,302 $23,512 ------ ------ LIABILITIES Accounts payable $ 1,080 $ 780 Payroll and benefit-related liabilities 432 291 Due on demand notes payable 109 154 Short-term debt due to AT&T 638 -- Other current liabilities 1,395 1,072 ----- ----- Total Current Liabilities 3,654 2,297 ----- ----- Long-term debt due to AT&T 1,800 3,400 Deferred income taxes 4,659 3,750 Other long-term liabilities 271 48 ------ ----- Total Liabilities 10,384 9,495 ------ ----- Minority Interest 41 20 Combined Attributed Net Assets 24,877 13,997 ------ ------ Total Liabilities and Combined Attributed Net Assets $35,302 $23,512 ------ ------
See Notes to Combined Financial Statements AT&T WIRELESS GROUP (an integrated business of AT&T) COMBINED STATEMENTS OF CHANGES IN COMBINED ATTRIBUTED NET ASSETS (In Millions)
For the Years Ended December 31, 2000 1999 1998 Combined Attributed Net Assets: Balance at beginning of year $13,997 $11,532 $11,187 Net income (loss) after preferred stock dividends 528 (461) 108 Proceeds attributed from offering of AT&T Wireless Group tracking stock 7,000 -- -- Proceeds from shares issued for employee plans 41 -- -- Preferred stock issued to AT&T 2,000 -- -- Transfers from AT&T, net 1,345 2,897 288 Net revaluation of investments (34) 29 (51) ------- ------- ------- Balance at end of year $24,877 $13,997 $11,532 ------- ------- ------- Summary of Total Comprehensive Income: Net income (loss) after preferred stock dividends $ 528 $ (461) $ 108 Dividend requirements on preferred stock held by AT&T, net 130 56 56 ------- ------- ------- Net income (loss) 658 (405) 164 ------- ------- ------- Net revaluation of investments (net of taxes of $(22), $18, and $(31)) (34) 29 (51) ------- ------- ------- Total Comprehensive Income $ 624 $ (376) $ 113 ------- ------- -------
See Notes to Combined Financial Statements AT&T WIRELESS GROUP (an integrated business of AT&T) COMBINED STATEMENTS OF CASH FLOWS (In Millions)
For the Years Ended December 31, -------------------------------- 2000 1999 1998 -------- -------- -------- Operating activities Net income (loss) $ 658 $ (405) $ 164 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Net gains on sale/exchange of businesses and investments (362) (99) (600) Asset impairment and restructuring charges -- 531 120 Depreciation and amortization 1,686 1,253 1,079 Deferred income taxes 585 (85) (39) Net equity earnings from investments (505) (149) (115) Minority interests in consolidated subsidiaries (28) (17) (35) Provision for uncollectible receivables 314 200 99 Increase in accounts receivable (853) (514) (307) (Increase) decrease in inventories (142) 27 (32) (Decrease) increase in accounts payable (48) (11) 123 Net change in other operating assets and liabilities 330 136 (43) --------- --------- --------- Net cash provided by operating activities 1,635 867 414 --------- --------- --------- Investing activities Capital expenditures and other additions (4,012) (2,272) (1,219) Net acquisitions of licenses (247) (47) (65) Equity investment distributions and sales 360 236 1,354 Equity investment contributions, advances and purchases (1,645) (284) (156) Net (acquisitions) dispositions of businesses including cash acquired (4,763) 244 324 Deposits on long-lived assets (218) -- -- --------- --------- --------- Net cash (used in) provided by investing activities (10,525) (2,123) 238 --------- --------- --------- Financing activities Increase in short-term borrowings -- 65 43 Net increase in short-term debt due to AT&T 638 -- -- Increase in long-term debt due to AT&T 400 900 100 Proceeds attributed from offering of AT&T Wireless Group tracking stock 7,000 -- -- Proceeds from shares issued for employee plans 41 -- -- Dividend requirements on preferred stock, net (130) (56) (56) Transfers from (to) AT&T, net 1,001 344 (694) Other financing activities, net (3) (19) (24) --------- --------- --------- Net cash provided by (used in) financing activities 8,947 1,234 (631) --------- --------- --------- Net increase (decrease) in cash and cash equivalents 57 (22) 21 --------- --------- --------- Cash and cash equivalents at beginning of year 5 27 6 --------- --------- --------- Cash and cash equivalents at end of year $ 62 $ 5 $ 27 --------- --------- ---------
See Notes to Combined Financial Statements AT&T WIRELESS GROUP (an integrated business of AT&T) NOTES TO COMBINED FINANCIAL STATEMENTS (In Millions Unless Otherwise Noted) 1. Background and Basis of Presentation Background AT&T Wireless Group is an integrated business of AT&T and is not a separate legal entity. On April 27, 2000, AT&T completed an offering of 15.6%, or 360 million shares, of AT&T Wireless Group tracking stock at an offering price of $29.50 per share. AT&T Wireless Group tracking stock is a class of AT&T common stock, which is intended to provide holders with financial returns based on the financial performance and economic value of AT&T's wireless services' businesses. AT&T Wireless Group tracking stock issued in the offering reflected only a portion of the authorized shares. The remaining 84.4% has been reserved for the benefit of AT&T Common Stock Group (which consists of the operations of AT&T other than those attributed to AT&T tracking stocks) and is intended to be reflected in AT&T common stock. On October 25, 2000, AT&T announced its decision to present an exchange offer to AT&T common shareowners to allow them to exchange any portion of shares of AT&T common stock for shares of AT&T Wireless Group tracking stock. On December 22, 2000, AT&T filed a registration statement for the exchange offer with the Securities and Exchange Commission, which was amended on February 23, 2001. AT&T anticipates that the exchange offer will be completed during the second quarter of 2001. AT&T Wireless Group will continue to be a part of AT&T following the completion of the exchange offer. Also on October 25, 2000, AT&T announced its restructuring plan. In connection with its restructuring plan, following the completion of the exchange offer and subject to certain conditions, AT&T intends to split-off AT&T Wireless Group from AT&T. These conditions include the receipt of a favorable ruling on the split-off from the Internal Revenue Service (IRS) and satisfaction of conditions contained in AT&T's new $25 billion credit agreement, including the repayment of AT&T Wireless Group's intercompany obligations to AT&T. The split-off, which is anticipated to be completed in mid-2001, would include several steps. These steps include transferring substantially all of the assets and liabilities of AT&T Wireless Group to AT&T Wireless Services, Inc., mandatorily exchanging all issued and outstanding shares of AT&T Wireless Group tracking stock, including those issued in the exchange offer, for shares of AT&T Wireless Services common stock, and distributing a majority of the shares of AT&T Wireless Services common stock held by AT&T Common Stock Group, to holders of AT&T common stock on a pro rata basis. On February 14, 2001, AT&T announced its intention to retain up to $3 billion of shares of AT&T Wireless Services for its own account for sale or exchange within six months of the split-off, subject to receipt of a satisfactory IRS ruling. In January 2001, NTT DoCoMo, a leading Japanese wireless communications company, invested $9.8 billion in a security of AT&T that, like AT&T Wireless Group tracking stock, is intended to reflect a portion of the financial performance and economic value of AT&T Wireless Group. AT&T Wireless Group, through AT&T Wireless Group, LLC, was allocated $6.2 billion of the proceeds from DoCoMo's $9.8 billion investment in AT&T. AT&T retained the remaining $3.6 billion of the DoCoMo investment proceeds as consideration for the reduction in AT&T's retained portion of AT&T Wireless Group's value. Following the split-off, this investment will be converted into approximately 16% of AT&T Wireless Services' common shares. DoCoMo also received warrants at an exercise price of $35 per AT&T Wireless Group tracking share equivalent that would represent an approximate additional 1.6% of AT&T Wireless Services' common shares after the split-off. As part of this investment, AT&T Wireless Group, through AT&T Wireless Services, Inc., has entered into a strategic alliance with DoCoMo to develop mobile multimedia services on a global-standard, high-speed wireless network. DoCoMo may require the repurchase of its investment at DoCoMo's original purchase price, plus interest, if AT&T does not complete the split-off by specified dates beginning January 1, 2002, or if AT&T Wireless Group fails to meet specified technological milestones. Basis of Presentation AT&T Wireless Group is an integrated business of AT&T. 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 combined attributed net assets and cash flows of 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 AT&T Wireless Group had it been a separate, stand-alone entity during the periods presented. The combined financial statements of AT&T Wireless Group should be read in conjunction with AT&T's Form 10-K for the year ended December 31, 2000. The combined financial statements of AT&T Wireless Group conform to generally accepted accounting principles. The combined financial statements reflect the assets, liabilities, revenue and expenses directly attributable to AT&T Wireless Group, as well as allocations deemed reasonable by management, to present the results of operations, financial position and cash flows of 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 combined financial statements of AT&T Wireless Group primarily include the legal entity results of AT&T Wireless Services, Inc. and its subsidiaries (AWS), AT&T Wireless Group, LLC (AWG), AT&T Wireless PCS, LLC and its subsidiaries (AWPCS), and Winston, Inc. and its subsidiaries (Winston), all of which were direct subsidiaries of AT&T Corp., as of December 31, 2000. In February 2001, the legal entities of Winston and AWPCS as well as certain assets of AWG were transferred to AWS. The remaining assets and liabilities of AWG will be transferred prior to the split-off. The April 2000 offering of 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 AT&T Wireless Group, in the form of a note receivable, which was repaid by December 31, 2000, primarily to fund acquisitions and capital expenditures. Interest on the note receivable was calculated based upon the average daily balance outstanding at a rate equal to the one month London InterBank Offered Rate (LIBOR) minus six basis points, a rate intended to be equivalent to the rate AT&T Wireless Group would receive if it were a stand-alone entity. AT&T WIRELESS GROUP (an integrated business of AT&T) NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (In Millions Unless Otherwise Noted) 1. Background and Basis of Presentation (Continued) Prior to the offering of AT&T wireless group tracking stock, the capital structure of AT&T Wireless Group had been assumed based upon AT&T's historical capital ratio adjusted for certain items. In determining the allocation between short- and long-term debt and preferred stock, we considered factors such as prospective financing requirements for the business, working capital commitments and future requirements, and peer group analysis. This resulted in $3.4 billion in long-term debt due to AT&T at December 31, 1999, paying annual interest at 7.25%. In addition, as of December 31, 1999, AT&T Wireless Group had issued and outstanding, $1.0 billion of 9% cumulative preferred stock held by AT&T that, subject to the approval of AT&T Wireless Group capital stock committee, is redeemable at the option of AT&T. The preferred stock is included within "Combined attributed net assets" on the accompanying combined balance sheets. On May 1, 2000, following the offering of AT&T Wireless Group tracking stock, $2.0 billion of AT&T Wireless Group's outstanding long-term debt to AT&T was recapitalized into an additional $2.0 billion of 9% cumulative preferred stock issued to AT&T. 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 intended to be substantially equivalent to the interest rate that 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. During December 2000, AT&T Wireless Group, through AWS, obtained a short-term revolving loan from AT&T, which is included in "Short-term debt due to AT&T" in the accompanying combined balance sheets. At December 31, 2000, the amount outstanding under the loan was $638, paying interest monthly at the average seven-day commercial paper rate, which was 8.37% at December 31, 2000. The revolving loan matures on December 29, 2001. The loan was repaid in full in January 2001. Changes in combined attributed net assets prior to the offering primarily represented net transfers to or from AT&T, after giving effect to the net income or loss of 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 AT&T Wireless Group have been treated as noncash transactions prior to the offering. AT&T performs cash management functions on behalf of the AT&T Wireless Group. Substantially all of the AT&T Wireless Group's cash balances are swept to AT&T on a daily basis, where they are managed and invested by AT&T. Prior to the offering of the AT&T Wireless Group tracking stock, transfers of cash to and from AT&T were reflected as a component of combined attributed net assets, with no interest income or expense reflected. Subsequent to the offering, transfers were reflected as changes in the note receivable from or short-term debt payable to AT&T. Cash balances maintained and reported by the AT&T Wireless Group primarily represent cash balances for which no right of offset exists with AT&T. AT&T WIRELESS GROUP (an integrated business of AT&T) NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (In Millions Unless Otherwise Noted) 1. Background and Basis of Presentation (Continued) General corporate overhead related to AT&T's corporate headquarters and common support divisions has been allocated to AT&T Wireless Group as it was not deemed practicable to specifically identify such common costs to AT&T Wireless Group. These allocations were based on the ratio of AT&T Wireless Group's external costs and expenses to AT&T's consolidated external costs and expenses, adjusted for any functions that AT&T Wireless Group performs on its own. However, the costs of these services charged to AT&T Wireless Group are not necessarily indicative of the costs that would have been incurred if AT&T Wireless Group had performed these functions entirely as a stand-alone entity, nor are they indicative of costs that will be charged or incurred in the future. Consolidated income tax provision, related tax payments or refunds, and deferred tax balances of AT&T have been allocated to AT&T Wireless Group based principally on the taxable income and tax credits directly attributable to AT&T Wireless Group. These allocations reflect AT&T Wireless Group's contribution to AT&T's consolidated taxable income and the consolidated tax liability and tax credit position. The AT&T Common Stock Group and AT&T Wireless Group have entered into a tax sharing agreement that provides for tax sharing payments based on the taxes or tax benefits of a hypothetical affiliated group consisting of AT&T Common Stock Group and AT&T Wireless Group. Based on this agreement, the consolidated tax liability before credits is allocated between the groups, based on each group's contribution to consolidated taxable income of the hypothetical group. For purposes of the tax sharing agreement, the 9% cumulative preferred stock held by AT&T is treated as if it were an intercompany debt instrument and, accordingly, tax sharing payments are calculated by treating coupon payments on the preferred stock as interest expense to AT&T Wireless Group and interest income to AT&T Common Stock Group. Consolidated tax credits of the hypothetical group are allocated between groups based on each group's contribution to each tax credit. 2. Summary of Significant Accounting Policies Cash Equivalents All highly liquid investments with original maturities of generally three months or less are considered to be cash equivalents. Cash Flows For purposes of the combined statements of cash flows, all transactions between AT&T Wireless Group and AT&T, except for purchase business combinations and initial investments in joint ventures and partnerships which were funded by AT&T and contributed by AT&T to AT&T Wireless Group prior to the offering, have been accounted for as having been settled in cash at the time the transaction was recorded by AT&T Wireless Group. Inventories Inventories, which consist principally of handsets and accessories, are recorded at the lower of cost or market. Cost is principally determined by the first-in, first-out (FIFO) method. Market is determined using replacement cost. AT&T WIRELESS GROUP (an integrated business of AT&T) NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (In Millions Unless Otherwise Noted) 2. Summary of Significant Accounting Policies (Continued) Property, Plant and Equipment Property, plant and equipment are recorded at cost, unless impaired, and depreciation is determined based upon the assets' estimated useful lives. Depreciation is calculated on a straight-line basis according to the following useful lives: Wireless communications systems and other equipment 3-15 years Building and improvements 5-20 years When AT&T Wireless Group sells, disposes or retires assets, the related gains or losses are included in operating results. During 1998, AT&T Wireless Group completed a review of the estimated service lives of certain wireless communications equipment. As a result, effective January 1, 1998, the estimated service lives of such equipment were changed from 12 years to varying periods ranging primarily from seven to ten years, with certain assets being changed to 15 years, depending on the nature of the equipment. The net impact of these changes to 1998 results was an annual increase in depreciation expense of approximately $42 and an annual reduction in net income of approximately $26. See Note 14 for further discussion associated with an additional change in depreciable lives. Software Capitalization AT&T Wireless Group capitalizes certain direct development costs associated with internal-use software, including external direct costs of materials and services, and payroll costs for employees devoting time to the software projects. These costs are included within other assets and are amortized over a period not to exceed five years beginning when the asset is substantially ready for use. Costs incurred during the preliminary project stage, as well as maintenance and training costs, are expensed as incurred. AT&T Wireless Group also capitalizes initial operating-system software costs and amortizes them over the life of the associated hardware. AT&T Wireless Group also capitalizes costs associated with the development of application software incurred from the time technological feasibility is established until the software is ready to provide service to customers. These capitalized costs are included in property, plant and equipment and are amortized over a useful life not to exceed five years. Licensing Costs Licensing costs are primarily incurred to acquire cellular (850 megahertz) and PCS (1900 megahertz) licenses. In addition, licensing costs include costs incurred to acquire 38 gigahertz and 2.3 gigahertz licenses. Amortization begins with the commencement of service to customers and is computed using the straight-line method over periods of 35 or 40 years. AT&T WIRELESS GROUP (an integrated business of AT&T) NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (In Millions Unless Otherwise Noted) 2. Summary of Significant Accounting Policies (Continued) Capitalized Interest AT&T Wireless Group capitalizes interest which is applicable to the construction of additions to property, plant, and equipment and the acquisitions of licenses until the assets are placed into service. These costs are amortized over the related assets' estimated useful lives. Investments Investments in which AT&T Wireless Group, primarily held by AWS and AWPCS, exercises significant influence but which AT&T Wireless Group does not control are accounted for under the equity method. Under the equity method, investments are stated at initial cost and are adjusted for AT&T Wireless Group's subsequent contributions and its share of earnings or losses, and distributions. The excess of the carrying value of investment over the underlying book value of the investee's net assets is being amortized over periods ranging from 20 to 40 years. Investments in which AT&T Wireless Group has no significant influence over the investee are accounted for under the cost method. Investments covered under the scope of Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," are classified as "available for sale" and are carried at fair value. Unrealized gains or losses, net of tax, are included within combined attributed net assets as "Net revaluation of investments". Goodwill Goodwill is the excess of the purchase price over the fair value of net assets acquired in business combinations accounted for as a purchase. Goodwill is amortized on a straight-line basis over periods not exceeding 40 years. Valuation of Long-Lived Assets Long-lived assets such as property, plant and equipment, licensing costs, goodwill, investments and capitalized software are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. It is reasonably possible that these assets could become impaired as a result of technological or other industry changes. For assets AT&T Wireless Group intends to hold for use, if the total of the expected future undiscounted cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying value of the asset. For assets AT&T Wireless Group intends to dispose of, a loss is recognized for the amount that the estimated fair value, less costs to sell, is less than the carrying value of the assets. In addition, in accordance with Accounting Principles Board Opinion No. 17, "Intangible Assets", AT&T Wireless Group continues to evaluate the amortization periods to determine whether events or circumstances warrant revised amortization periods. Additionally, AT&T Wireless Group periodically evaluates the useful lives of its wireless communications systems and other equipment based on changes in technological and industry conditions. AT&T WIRELESS GROUP (an integrated business of AT&T) NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (In Millions Unless Otherwise Noted) 2. Summary of Significant Accounting Policies (Continued) Revenue Recognition Wireless services revenue is recognized based upon minutes of traffic processed and contracted fees. Customer activation fees, along with the related costs, are deferred and amortized over the customer relationship period. The revenue and related expenses associated with the sale of wireless handsets and accessories are recognized when the products are delivered and accepted by the customer, as this is considered to be a separate earnings process from the sale of wireless services. During 2000, we adopted Securities and Exchange Commission Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements". The adoption did not have a material impact on our results of operations or financial condition. Advertising and Promotional Costs Costs of advertising and promotions are expensed as incurred. Advertising and promotional expenses were $618, $386, and $344, in 2000, 1999 and 1998, respectively. Income Taxes AT&T Wireless Group is not a separate taxable entity for federal and state income tax purposes and its results of operations are included in the consolidated federal and state income tax returns of AT&T and its affiliates. AT&T Wireless Group's provision or benefit for income taxes is based upon its contribution to the overall income tax liability of AT&T and its affiliates as described in Note 1. Issuance of Common Stock By Affiliates Changes in AT&T Wireless Group's proportionate share of the underlying equity of a subsidiary or equity method investee, which result from the issuance of additional equity securities by such entity, are recognized as increases or decreases in combined attributed net assets. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and revenue and expenses during the period reported. Actual results could differ from those estimates. Estimates are used when accounting for certain items such as the allowance for doubtful accounts, depreciation and amortization, taxes, valuation of investments and asset impairment and restructuring charges. Reclassifications Certain reclassifications have been made to prior year amounts to conform with current year presentations. AT&T WIRELESS GROUP (an integrated business of AT&T) NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (In Millions Unless Otherwise Noted) 2. Summary of Significant Accounting Policies (Continued) Concentrations AT&T Wireless Group purchases a substantial portion of its wireless infrastructure equipment from three major suppliers. Additionally, four primary vendors provide AT&T Wireless Group's multi-network handsets. Further, AT&T Wireless Group relies on one vendor to provide substantially all of its billing services. Loss of any of these suppliers could adversely impact operations temporarily until a comparable substitute could be found. AT&T Wireless Group does not have a concentration of available sources of labor or services, nor does AT&T Wireless Group have any significant concentration of business transacted with a particular customer, that could, if suddenly eliminated, severely impact operations. 3. Recent Accounting Pronouncements In September 2000, the Financial Accounting Standards Board (FASB) issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities--A Replacement of FASB No. 125". This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. Under these standards, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. This statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. AT&T Wireless Group does not expect that the adoption of SFAS No. 140 will have a material impact on its results of operations, financial position or cash flows. In June 1998, the 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 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 AT&T Wireless Group, 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 adoption of SFAS No. 133 in January 2001, did not have a material impact to the AT&T Wireless Group's results of operations, financial position or cash flows. In addition, based on the types of contracts we currently have, AT&T Wireless Group does not anticipate that this standard will have a material impact on future results of AT&T Wireless Group. AT&T WIRELESS GROUP (an integrated business of AT&T) NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (In Millions Unless Otherwise Noted) 4. Acquisitions and Dispositions During 2000, 1999 and 1998, AT&T Wireless Group, through AWS, AWPCS and Winston, completed certain transactions as part of its overall strategy to expand its wireless footprint and divest itself of non core interests. The net pretax gains recognized were $362, $99 and $600 in 2000, 1999 and 1998, respectively. The pretax gains and losses from the sale and exchange transactions are included in "Other income" in the accompanying combined statements of operations. A summary of the significant transactions follows. In November 1998, AT&T Wireless Group, through AWS, and BellSouth combined their jointly owned cellular properties in Los Angeles, Houston and Galveston, Texas, plus cash, to form AB Cellular Holding, LLC (AB Cellular), which owned, controlled and supervised all three properties. AT&T Wireless Group held a 55.62% equity interest in AB Cellular, however, held a 50% voting interest, therefore, this investment was accounted for under the equity method. Pursuant to the AB Cellular Limited Liability Company Agreement, there were redemption provisions that allowed BellSouth, commencing in December 2000, to alter the ownership structure of AB Cellular pursuant to one of three options. On December 4, 2000, BellSouth announced its election to have AB Cellular exercise its option to redeem AT&T Wireless Group's 55.62% equity interest. On December 29, 2000, AB Cellular completed the redemption of AT&T Wireless Group's 55.62% equity interest in AB Cellular, and in exchange, AT&T Wireless Group, through AWS, received 100% of the net assets of the Los Angeles cellular property. As a result of the redemption, AB Cellular recognized a significant gain on the transaction based on the estimated fair value of the net assets of the Los Angeles cellular property on the date of redemption. AT&T Wireless Group's net equity earnings for the year ended December 31, 2000, included $372 reflecting its proportionate share of the gain. The net assets of the Los Angeles cellular property were recorded at fair value and resulted in a pretax loss of $184 to AT&T Wireless Group. The excess of the fair value of the Los Angeles cellular property over the fair value of net tangible assets received, based on a preliminary allocation, totaled $3,174 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 fair value of assets acquired in future periods as the related fair value appraisals of certain assets and liabilities are finalized. As a result of this transaction, AT&T Wireless Group's results include a non-cash reduction to investments of $3,756, associated with the redemption of its equity interest in AB Cellular. 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, AT&T Wireless Group, through AWPCS, held equity interests in each of TeleCorp and Tritel which were both affiliates of AT&T Wireless Group. In connection with the merger, AT&T Wireless Group contributed to TeleCorp PCS, Inc., rights to acquire 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 AT&T WIRELESS GROUP (an integrated business of AT&T) NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (In Millions Unless Otherwise Noted) 4. Acquisitions and Dispositions (Continued) additional common shares in the newly combined company. This transaction brought 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, AT&T Wireless Group, through AWPCS, completed an exchange of certain wireless licenses and rights to acquire additional licenses in the Wisconsin and Iowa markets, as well as made a cash payment of approximately $80. In return, AT&T Wireless Group received TeleCorp's PCS licenses and wireless systems in several New England markets. The acquisition of the wireless systems was recorded as a purchase. Accordingly, the operating results have been included in the accompanying combined financial statements since the date of acquisition. The excess of aggregate fair value of total assets acquired over the fair value of net tangible assets acquired, based on a preliminary allocation, totaled $268 and has been assigned to licensing costs, goodwill and other intangible assets and is being amortized over periods of five to 40 years. AT&T Wireless Group recognized a pretax gain of $379 associated with these transactions. On October 2, 2000, AT&T Wireless Group, through AWPCS, completed its acquisition of a wireless system in Indianapolis for approximately $530 in cash. The transaction was recorded as a purchase. Accordingly, the operating results of Indianapolis 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 $494 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 allocations of the purchase prices in future periods as the related fair value appraisals of certain assets and liabilities are finalized. On June 19, 2000, 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. On December 29, 2000, AT&T Wireless Group, through AWS and AWPCS, completed the acquisition of the wireless system in Houston for approximately $1.0 billion in cash. On September 29, 2000, AT&T Wireless Group, through AWS, completed the acquisition of the wireless system in San Diego, for approximately $500 in cash. On June 29, 2000, AT&T Wireless Group, through AWS, 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 AT&T Wireless Group a 100% ownership interest in this partnership. These transactions were recorded as purchases. Accordingly, the operating results of the acquired entities have been included in the accompanying combined financial statements since their dates of acquisition. The excess of aggregate purchase price over the fair value of net tangible assets acquired, based on preliminary allocations, totaled $3,082 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 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, AT&T Wireless Group's 50% ownership interest in CMT AT&T WIRELESS GROUP (an integrated business of AT&T) NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (In Millions Unless Otherwise Noted) 4. Acquisitions and Dispositions (Continued) Partners was accounted for as an equity investment. As a result of the transaction, $190 was reclassified from investments to goodwill on the accompanying combined balance sheet. On June 1, 2000, AT&T Wireless Group, through AWS, completed its acquisition of the assets of Wireless One Network, L.P., for $859 in cash, acquiring wireless systems in Northwest and Southwest Florida. The transaction was recorded as a purchase. 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 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. In June 2000, AT&T Wireless Group, through AWS, sold its interest in two equity investments for cash resulting in pretax gains of approximately $141. On August 2, 1999, AT&T, through AWPCS, completed its acquisition of Honolulu Cellular Telephone Company for $194 in cash. AT&T contributed its interest in Honolulu Cellular to AT&T Wireless Group as of the acquisition date. This transaction was accounted for as a purchase. Accordingly, the operating results of Honolulu Cellular Telephone Company 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 totaled $154, and has been allocated to licensing costs and goodwill and is being amortized over 40 years. On May 3, 1999, AT&T, through Winston, acquired Vanguard Cellular Systems, Inc. (Vanguard) and has contributed its interest in Vanguard to AT&T Wireless Group as of the date of acquisition. Under the agreement, each Vanguard shareholder was entitled to elect to receive either cash or AT&T stock in exchange for their Vanguard shares subject to the limitation that the overall consideration would consist of 50% AT&T stock and 50% cash. Consummation of the merger resulted in the issuance of approximately 12.6 million AT&T shares and payment of $485 in cash. In addition, Vanguard had approximately $550 in debt, which was subsequently repaid by AT&T. The merger with Vanguard was recorded as a purchase. Accordingly the operating results of Vanguard have been included in the accompanying combined financial statements since the date of acquisition. The excess of aggregate purchase price over the fair value of net tangible assets acquired totaled $1,436 and has been assigned to licensing costs, goodwill and other intangible assets and is being amortized over periods of five to 40 years. Additionally, AT&T Wireless Group recorded $241 in deferred tax liabilities associated with this transaction. In April 1999, AT&T Wireless Group, through AWS, acquired Bakersfield Cellular Telephone Company in exchange for several cellular markets in Texas and cash of $77. The acquisition was accounted for as a purchase. The excess of aggregate purchase price, including markets exchanged, over the fair value of net tangible assets acquired totaled $104, and has been allocated to licensing costs and goodwill and is being amortized over 40 years. AT&T WIRELESS GROUP (an integrated business of AT&T) NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (In Millions Unless Otherwise Noted) 4. Acquisitions and Dispositions (Continued) In addition to the acquisitions of Honolulu Cellular, Vanguard and Bakersfield Cellular, AT&T Wireless Group, through AWS and other direct subsidiaries of AT&T, acquired other cellular markets in Utah, Oregon, California, Idaho, and Louisiana during 1999. All of these acquisitions were accounted for as purchases. The excess of aggregate purchase prices over the fair value of net tangible assets acquired totaled $220, and has been allocated to licensing costs and is being amortized over 40 years. In June 1999, AT&T Wireless Group, through AWS, sold its interest in WOOD-TV for cash resulting in a pretax gain of $88. In May 1999, AT&T Wireless Group, through AWPCS, sold its net assets in the geographic area of San Juan, Puerto Rico, including a portion of the PCS license, to TeleCorp PCS, Inc. for cash and preferred stock of TeleCorp resulting in a pretax gain of $11. In the fourth quarter of 1998, AT&T Wireless Group, through AWPCS, sold its net assets in the geographic area of Norfolk, Virginia, including a portion of the PCS license, to Triton PCS Holdings, Inc. for cash and preferred stock of Triton resulting in a pretax gain of $29. Also in the fourth quarter of 1998, AT&T Wireless Group, through AWPCS, sold a portion of its net assets in the geographic areas of Cincinnati and Dayton, Ohio, including portions of the PCS licenses, to Cincinnati Bell Wireless, LLC for cash and an ownership interest. A pretax gain of $24 was recognized on this transaction. On October 2,1998, AT&T Wireless Group, through AWS, sold its one-way messaging services business and a narrowband PCS license to Metrocall, Inc. in exchange for cash and preferred stock of Metrocall. A pretax loss of $5 was recognized on this transaction. AT&T Wireless Group subsequently distributed its investment in the preferred stock of Metrocall to AT&T. In the second quarter of 1998, AT&T Wireless Group, through AWS, sold, for cash, its interest in two equity investments and recognized pretax gains of $195. In the first quarter of 1998, AT&T Wireless Group, through AWS, sold, for cash, its equity interest in LIN Television Corp. and recognized a pretax gain of $342. 5. Asset Impairment and Restructuring Charges During the fourth quarter of 1999, AT&T Wireless Group recorded a $531 asset impairment charge primarily associated with the planned disposal of certain wireless communications equipment resulting from a program to increase capacity and operating efficiency of the wireless network. As part of a multi-vendor program, contracts have been executed with certain vendors to replace significant portions of the wireless infrastructure equipment in the Western United States and the metropolitan New York markets. The program is intended to provide AT&T Wireless Group with the newest technology available and allow it to evolve to new next-generation digital technology, which is designed to provide high-speed data capabilities. AT&T WIRELESS GROUP (an integrated business of AT&T) NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (In Millions Unless Otherwise Noted) 5. Asset Impairment and Restructuring Charges (Continued) The planned disposal of the existing wireless infrastructure equipment required an evaluation of asset impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," to write-down these assets to their fair value, which was estimated by discounting the expected future cash flows to be generated by these assets from their use and eventual disposition through the date of disposal. Since the assets will remain in service from the date of the decision to dispose of these assets to the disposal date, the impairment has been recorded as accumulated depreciation and the remaining net book value of the assets will be depreciated over this shortened period. As of December 31, 2000, approximately $320 of the asset impairment reserve has been utilized for assets that have been disposed of and written off. The remaining net book value of these assets was approximately $23 at December 31, 2000, which will be depreciated over an estimated remaining useful life of 3 months. During 1998, AT&T Wireless Group recorded a pretax asset impairment charge of $120, which represented the write-down of unrecoverable assets associated with nonstrategic businesses. 6. Supplementary Financial Information Supplementary Income Statement Information For Ihe Years Ended December 31, 2000 1999 1998 ---- ---- ---- Other income: Interest income $146 $ 4 $ 15 Minority interests in consolidated subsidiaries 28 17 35 Net gains on sale/exchange of businesses and investments 362 99 600 Miscellaneous, net (2) 2 -- ---- ---- ---- Total Other Income $534 $122 $650 ---- ---- ---- AT&T WIRELESS GROUP (an integrated business of AT&T) NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (In Millions Unless Otherwise Noted) 6. Supplementary Financial Information (Continued) Supplementary Balance Sheet Information At December 31, 2000 1999 -------- -------- Property, plant and equipment, net: Wireless communications systems and other equipment $14,319 $10,127 Land, buildings and improvements 316 255 ------- ------- Total property, plant and equipment 14,635 10,382 ------- ------- Accumulated depreciation (4,743) (4,033) ------- ------- Property, plant and equipment, net $ 9,892 $ 6,349 ------- ------- Goodwill and other assets, net: Goodwill $ 4,937 $ 2,303 Accumulated amortization (241) (168) ------- ------- Goodwill, net 4,696 2,135 ------- ------- Other assets 1,384 544 Accumulated amortization (264) (217) ------- ------- Other assets, net 1,120 327 ------- ------- Goodwill and other assets, net $ 5,816 $ 2,462 ------- ------- Included in other current liabilities: Advertising and promotion accruals $ 179 $ 162 Business tax accruals 258 139 Supplementary Cash Flow Information For the Years Ended December 31, ------------------- 2000 1999 1998 ---- ---- ---- Interest payments, net of amounts capitalized $ 85 $136 $120 Income tax (refunds) payments (202) (41) 177 AT&T WIRELESS GROUP (an integrated business of AT&T) NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (In Millions Unless Otherwise Noted) 7. Investments AT&T Wireless Group, primarily through AWS and AWPCS, holds investments in ventures and partnerships that provide AT&T Wireless Group access to additional domestic and international wireless markets. Substantially all of these investments are accounted for under the equity method. At December 31, 2000 and 1999, AT&T Wireless Group had equity method investments of $3,080 and $4,409, respectively. Amortization of excess carrying value of $25, $19 and $52 in 2000, 1999 and 1998, respectively, is reflected as a component of net equity earnings in the accompanying combined statements of operations. At December 31, 2000 and 1999, the carrying value of investments accounted for under the equity method exceeded our share of the underlying reported net assets by approximately $446 and $551, respectively. AT&T Wireless Group received distributions based on its equity interest in these investments of $201, $232 and $233 for the years ended December 31, 2000, 1999 and 1998, respectively. Ownership of significant equity investments is as follows: At December 31, ------------------------- 2000 1999 ------------ ------------ AB Cellular N/A (1) 55.62% (1) CMT Partners N/A (2) 50.00% (2) ACC Acquisitions, LLC 50.00% (3) N/A (3) Triton PCS Holdings, Inc 16.71% (4) 16.80% (4) TeleCorp PCS, Inc. 22.99% (5) 15.67% (5) Tritel, Inc N/A (6) 21.64% (6) Cincinnati Bell Wireless, LLC 19.90% (7) 19.90% (7) Alaska Native Wireless, LLC 39.90% (8) N/A (8) Rogers Wireless Communications, Inc 16.65% (9) 16.65% (9) Japan Telecom 5.00 (10) N/A (10) EuroTel Praha, spol. s.r.o 24.50% (11) N/A (11) Far EasTone Telecommunications, ltd 22.70% (12) 13.87% (12) - ---------- (1) See Note 4 for further discussion related to the redemption of AT&T Wireless Group's equity interest in AB Cellular in December 2000. (2) See Note 4 related to AT&T Wireless Group's acquisition of the remaining 50% interest in CMT Partners in June 2000. (3) On February 28, 2000, AWS and Dobson Communications Corporation (Dobson) acquired American Cellular Corporation, through a joint venture, ACC Acquisitions, LLC, for approximately $2.4 billion. AT&T contributed cash equal to AWS' interest in the joint venture to 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 AT&T Wireless Group. Accordingly, this investment is accounted for as an equity method investment in the accompanying combined financial statements. AT&T WIRELESS GROUP (an integrated business of AT&T) NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (In Millions Unless Otherwise Noted) 7. Investments (Continued) (4) During 1998, AT&T Wireless Group, through AWPCS, entered into a venture with Triton PCS Holdings, Inc. to build and operate digital wireless networks in the Southeast and MidAtlantic areas of the United States. AT&T Wireless Group contributed licenses to the venture in exchange for preferred stock. The effect of the above transaction resulted in a non-cash reclassification of license balances of approximately $101 to investments. Additionally during the fourth quarter of 1998, AT&T Wireless Group, through AWPCS, sold its net assets in the geographic area of Norfolk, Virginia, including a portion of the PCS license, to Triton for cash and preferred stock. Ownership percentages reflect AT&T Wireless Group's ownership of common stock, assuming conversion of all currently convertible preferred shares to common stock. In addition, AT&T Wireless Group, through AWPCS, holds redeemable preferred shares in this investment, which are not currently convertible to common stock. These preferred shares have certain liquidation preference rights. (5) During 1998, AT&T Wireless Group, through AWPCS, entered into a venture with TeleCorp PCS, Inc. to build and operate digital wireless networks in portions of New England and the Midwestern and Southeastern United States. AT&T Wireless Group contributed licenses to the venture in exchange for preferred stock. The effect of the above transaction resulted in a non-cash reclassification of license balances of approximately $40 to investments. Additionally in May 1999, AT&T Wireless Group sold, through AWPCS, its net assets in the geographic area of San Juan, Puerto Rico, including a portion of the PCS license, to TeleCorp for cash and preferred stock. In November 2000, Telecorp completed a merger with Tritel. See Note 4 regarding the discussion of the merger. Ownership percentages reflect AT&T Wireless Group's ownership of common stock, assuming conversion of all currently convertible preferred shares to common stock. In addition, AT&T Wireless Group holds, through AWPCS, redeemable preferred shares in this investment, which are not currently convertible to common stock. These preferred shares have certain liquidation preference rights. (6) In January 1999, AT&T Wireless Group, through AWPCS, entered into a venture with Tritel, Inc. to build and operate a digital wireless network across parts of the Southwestern United States. AT&T Wireless Group contributed licenses to the venture in exchange for preferred stock. The effect of the above transaction resulted in a non-cash reclassification of license balances of approximately $94 to investments. In November 2000, Telecorp completed a merger with Tritel. See Note 4 regarding the discussion of the merger. The December 31, 1999, ownership percentage reflected AT&T Wireless Group's ownership of common stock, assuming conversion of all convertible preferred shares, as of December 31, 1999, to common stock. In addition, the AT&T Wireless Group, through AWPCS, held redeemable preferred shares as of December 31, 1999, in this investment, which were not convertible to common stock. These preferred shares had certain liquidation preference rights. AT&T WIRELESS GROUP (an integrated business of AT&T) NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (In Millions Unless Otherwise Noted) 7. Investments (Continued) (7) During the fourth quarter of 1998, AT&T Wireless Group sold, through AWPCS, a portion of its net assets in the geographic areas of Cincinnati and Dayton, Ohio, including portions of the PCS licenses, to Cincinnati Bell Wireless, LLC for cash and an ownership interest. The effect of this transaction resulted in a non-cash reclassification of license balances of approximately $20 to investments. (8) During November 2000, AT&T Wireless Group, through AWPCS, joined with others in the formation of a venture, Alaska Native Wireless, LLC, which participated in the Federal Communication Commissions' recent auction of license spectrum in the 1900 megahertz band, which is used to provide wireless services. AT&T Wireless Group provided funding to the joint venture through a combination of a non-controlling equity interest and debt securities of Alaska Native Wireless totaling approximately $229 as of December 31, 2000. AT&T Wireless Group has made certain future commitments related to this joint venture. See Note 12 for further discussion of outstanding commitments. (9) In August 1999, AT&T and British Telecommunications plc through a newly created joint venture acquired a 33.3% ownership interest in Rogers Wireless Communications, Inc., formerly Rogers Cantel Mobile Communications, Inc., for approximately $934 in cash. AT&T contributed its interest in the joint venture to AT&T Wireless Group as of the date of acquisition. The investment is owned equally by AT&T Wireless Group, through AWS, and British Telecommunications plc. This investment is accounted for under the equity method because of our ability to elect certain members of the board of directors of this entity, which we believe provides us with significant influence. (10)In the first quarter of 2000, AT&T Wireless Group was allocated one-half of AT&T's interest in Japan Telecom, which is held through a joint venture with British Telecommunications plc. This investment is accounted for under the equity method because of our ability to elect certain members of the board of directors of this entity, which we believe provides us with significant influence. See Note 14 for discussion of subsequent events associated with Japan Telecom. (11)On October 2, 2000, AT&T Wireless Group, through AWS, completed its acquisition of several interests in international ventures, including Eurotel Praha in the Czech Republic, acquired by AT&T as a result of its acquisition of MediaOne in June 2000. 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, AT&T Wireless Group assumed deferred tax liabilities totaling approximately $200 which were transferred from AT&T. (12)On December 8, 2000, AT&T Wireless Group, through AWS, exercised its options to purchase additional shares of stock in its equity investment in Far EasTone Telecommunications, ltd. AT&T Wireless Group paid approximately $205 for the additional shares and increased its ownership percentage to 22.70%. AT&T WIRELESS GROUP (an integrated business of AT&T) NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (In Millions Unless Otherwise Noted) 7. Investments (Continued) The combined results of operations and the financial position of the significant equity method investments are summarized below. Condensed Income Statement Information For the Years Ended December 31, -------------------------- 2000 1999 1998 -------- -------- -------- Revenue $15,221 $ 3,466 $ 2,065 Operating income (loss) 287 (141) 448 Net income (loss) 1,002 (190) 453 Condensed income statement information includes the results of AB Cellular and CMT Partners prior to their consolidation by AT&T Wireless Group. The net income in 2000 includes the gain recognized by AB Cellular associated with the redemption of AT&T Wireless Group's equity interest in December 2000. Condensed Balance Sheet Information As of December 31, ---------------- 2000 1999 ------- ------- Current assets $ 4,024 $ 2,900 Noncurrent assets 21,792 8,867 Current liabilities 2,439 1,215 Noncurrent liabilities 10,008 3,131 Current assets are comprised primarily of cash, accounts receivable and other current assets. Noncurrent assets are comprised primarily of net goodwill and other assets, net licenses and net property, plant and equipment. Current liabilities are comprised primarily of operating accruals and accounts payable. Noncurrent liabilities are comprised primarily of long-term debt and deferred income taxes. AT&T Wireless Group also has investments accounted for under the cost method of accounting. Under this method, investments are stated at cost, and earnings are recognized to the extent distributions are received in excess of accumulated earnings of the investee. Distributions received in excess of accumulated earnings are recognized as a reduction of our investment balance. These investments, which are covered under the scope of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," are classified as "available-for-sale" and are carried at fair value with any unrealized gain or loss, net of tax, being included within our other comprehensive income as a component of combined attributed net assets. AT&T WIRELESS GROUP (an integrated business of AT&T) NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (In Millions Unless Otherwise Noted) 8. Income Taxes AT&T Wireless Group is not a separate taxable entity for federal and state income tax purposes and its results of operations are included in the consolidated federal and state income tax returns of AT&T and its affiliates, as described in Note 1. The following table shows the principal reasons for the difference between the effective income tax rate and the United States federal statutory income tax rate: For the Years Ended December 31, ------ ------ ------ 2000 1999 1998 ------ ------ ------ U.S. federal statutory income tax rate 35% 35% 35% Federal income tax at statutory rate $ 144 $(238) $ 65 State and local income taxes, net of federal income tax effect -- (20) 5 Dividends received deduction -- -- (2) Amortization of intangibles 19 17 12 Sale of foreign investment (31) -- -- Change in valuation allowance and other estimates -- (50) (17) Other differences, net 9 (3) (4) ------ ------ ------ Provision (benefit) for income taxes $ 141 $(294) $ 59 ------ ------ ------ Effective income tax rate 34.1% 43.2% 31.6% Provision (benefit) for income taxes: Current: Federal $(370) $(207) $ 83 State and local (74) (2) 15 ------ ------ ------ (444) (209) 98 ------ ------ ------ Deferred: Federal $ 499 $ (41) $ (38) State and local 86 (44) (1) ------ ------ ------ $ 585 $ (85) $ (39) ------ ------ ------ Provision (benefit) for income taxes $ 141 $(294) $ 59 ------ ------ ------ Deferred income tax liabilities are taxes AT&T Wireless Group expects to pay in future periods. Similarly, deferred income tax assets are recorded for expected reductions in taxes payable in future periods. Deferred income taxes arise because of differences in the book and tax bases of certain assets and liabilities. AT&T WIRELESS GROUP (an integrated business of AT&T) NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (In Millions Unless Otherwise Noted) 8. Income Taxes (Continued) Deferred income tax liabilities and assets consist of the following:
At December 31, -------------- 2000 1999 ------ ------ Long-term deferred income tax liabilities: Property, plant and equipment and licenses $(3,618) $(3,246) Investments (989) (508) Other (74) (49) ------- ------- Total long-term deferred income tax liabilities $(4,681) $(3,803) ------- ------- Long-term deferred income tax assets: Net operating loss/credit carryforwards $ 37 $ 65 Valuation allowance (15) (12) ------- ------- Total net long-term deferred income tax assets 22 $ 53 ------- ------- Net long-term deferred income tax liabilities $(4,659) $(3,750) ------- ------- Current deferred income tax liabilities: Total current deferred income tax liabilities $ -- $ -- ------- ------- Current deferred income tax assets: Employee benefits $ 11 $ 11 Reserves and allowances 65 101 Other 17 15 ------- ------- Total current deferred income tax assets $ 93 $ 127 ------- -------- Current deferred income tax assets $ 93 $ 127 -------- --------
At December 31, 2000, AT&T Wireless Group had net operating loss carryforwards for federal and state income tax purposes of $21 and $619, respectively, expiring through 2019. AT&T Wireless Group also has federal tax credit carryforwards of $29 which are not subject to expiration. AT&T Wireless Group recorded a valuation allowance to reflect the estimated amount of deferred tax assets which, more likely than not, will not be realized by AT&T Wireless Group. The realization of AT&T Wireless Group's deferred tax assets is not dependent upon the consolidated tax group of AT&T. On a stand alone, separate company basis, AT&T Wireless Group has sufficient reversing taxable temporary differences to warrant recognition of its deferred tax assets without the need for any additional valuation allowance. AT&T Wireless Group received payments under its tax sharing arrangement with AT&T for the net domestic tax losses and credits it had generated. These payments were recorded as a reduction to the related deferred tax assets. AT&T WIRELESS GROUP (an integrated business of AT&T) NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (In Millions Unless Otherwise Noted) 8. Income Taxes (Continued) AT&T previously announced that it intends to split-off AT&T Wireless Group (see Note 1). If it were determined that the split-off failed to qualify as a tax-free transaction, a tax liability would be created which would have a material effect on AT&T Wireless Group. In addition, there may be tax costs associated with the split-off that result from AT&T Wireless Group ceasing to be a member of the AT&T consolidated tax return group, as well as from pre-split transactions, If incurred, these costs could be material to AT&T Wireless Group's results. 9. Employee Benefit Plan AT&T Wireless Group sponsors a savings plan for the majority of its employees. The plan allows employees to contribute a portion of their pretax income in accordance with specified guidelines. The plan matches a percentage of employee contributions up to certain limits. In addition, AT&T Wireless Group may make discretionary or profit sharing contributions. Contributions amounted to $60, $37 and $31 in 2000, 1999 and 1998, respectively. 10. Stock-Based Compensation Plans Under the AT&T 1997 Long-term Incentive Program (Program), which was effective June 1, 1997, and amended on May 19, 1999 and on March 14, 2000, AT&T grants stock options, performance shares, restricted stock and other awards on AT&T common stock as well as stock options on AT&T Wireless Group tracking stock. Under the Program, there were 150 million shares of common stock available for grant with a maximum of 22.5 million common shares that could be used for awards other than stock options. Beginning with January 1, 2000, the remaining shares available for grant at December 31, of the prior year, plus 1.75% of the shares of AT&T common stock outstanding on January 1 of each year become available for grant. There is a maximum of 37.5 million shares that may be used for awards other than stock options. The exercise price of any stock option is equal to the stock price when the option is granted. Generally, the options vest over three or four years and are exercisable up to 10 years from the date of grant. Under the Program, performance share units are awarded to key employees in the form of either common stock or cash at the end of a three-year period based on AT&T's total shareholder return and certain financial performance targets. Under the 1987 Long-term Incentive Program, performance share units with the same terms were also awarded to key employees based on AT&T's return-to-equity performance compared with a target. AT&T WIRELESS GROUP (an integrated business of AT&T) NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (In Millions Unless Otherwise Noted) 10. Stock-Based Compensation Plans (Continued) On April 27, 2000 AT&T created a new class of stock and completed an offering of AT&T Wireless Group tracking stock. Under the Program as amended on March 14, 2000, 5% of the outstanding AT&T Wireless Group tracking shares became available for grant with a maximum of 1.25% of the outstanding shares that may be used for awards other than options. Beginning with January 1, 2001 the remaining AT&T Wireless Group shares available for grant at December 31 of the prior year plus 2.0% of outstanding AT&T Wireless Group tracking shares on January 1 of each year become available for grant. The exercise price of any stock option is equal to the stock price when the option is granted. Generally, the options vest over two to three and one half years and are exercisable up to 10 years from the date of grant. In 2000 there were no grants of awards other than stock options. On April 27, 2000, AT&T granted AT&T Wireless Group tracking stock options to substantially all AT&T and AT&T Wireless Group employees. Under the AT&T 1996 Employee Stock Purchase Plan (Plan), which was effective July 1, 1996, AT&T is authorized to issue up to 75 million shares of AT&T common stock to its eligible employees. Under the terms of the Plan, employees may have up to 10% of their earnings withheld to purchase AT&T's common stock. The purchase price of the stock on the date of exercise is 85% of the average high and low sale prices of shares on the New York Stock Exchange for that day. Under the Plan, AT&T sold approximately 1,127 thousand shares to AT&T Wireless Group employees in 2000, approximately 424 thousand shares in 1999 and approximately 535 thousand shares in 1998. AT&T and AT&T Wireless Group apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its plans. Accordingly, no compensation expense has been recognized for its stock-based compensation plans other than for performance-based and restricted stock awards and stock appreciation rights (SARs). Compensation costs charged against AT&T Wireless Group's results of operations for AT&T performance-based awards, restricted stock awards and SARs for AT&T Wireless Group employees were not material in any periods presented. AT&T and AT&T Wireless Group have adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." If AT&T Wireless Group had elected to recognize compensation costs based on the fair value at the date of grant for AT&T awards granted to AT&T Wireless Group employees in 2000, 1999 and 1998, and for AT&T Wireless Group awards granted to AT&T Wireless Group employees in 2000, consistent with the provisions of SFAS No. 123, AT&T Wireless Group's net income (loss) would have been adjusted to reflect additional compensation expense resulting in the following pro forma amounts: For the Years Ended December 31, ------------------- 2000 1999 1998 ---- ---- ---- Net Income (loss) $481 $(464) $127 AT&T WIRELESS GROUP (an integrated business of AT&T) NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (In Millions Unless Otherwise Noted) 10. Stock-Based Compensation Plans (Continued) The pro forma effect on net income for 1998 may not be representative of the pro forma effect on net income (loss) of future years because the SFAS No. 123 method of accounting for pro forma compensation expense has not been applied to options granted prior to January 1, 1995, as all such options were fully vested by the end of 1998. There were approximately 53,308 thousand AT&T Wireless Group stock options granted to AT&T Wireless Group employees during 2000. At the date of grant the weighted- average exercise price of these options granted was $29.23. The weighted-average fair value at date of grant was $14.43 and was estimated using the Black-Scholes option-pricing model. The following weighted-average assumptions were applied: (i) expected volatility rate of 55.0%, (ii) expected life of 4 years and (iii) risk-free interest rate of 6.52%. AT&T granted approximately 1,082 thousand, 9,438 thousand and 10,503 thousand stock options to AT&T Wireless Group employees during 2000, 1999 and 1998, respectively. At the date of grant, the weighted-average exercise price for AT&T options granted to AT&T Wireless Group employees during 2000, 1999 and 1998 were $48.05, $59.35 and $41.86, respectively. The weighted-average fair values at date of grant for AT&T options granted to AT&T Wireless Group employees during 2000, 1999 and 1998 were $14.26, $15.36 and $9.80, respectively, and were estimated using the Black-Scholes option-pricing model. The following weighted-average assumptions were applied for 2000, 1999 and 1998, respectively: (i) expected dividend yields of 1.7%, 1.7% and 2.1%, (ii) expected volatility rates of 31.2%, 27.2% and 23.8%, and (iii) risk-free interest rates of 6.69%, 4.71% and 5.27% and (iv) expected lives of 3.9 years, 4.9 years and 4.5 years. 11. Fair Values of Financial Instruments The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and other current liabilities are a reasonable estimate of their fair value due to the short-term nature of these instruments. The fair value of the short-term and long-term debt due to AT&T approximates its carrying value. 12.Commitments and Contingencies In the normal course of business, 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, AT&T Wireless Group is unable to ascertain the ultimate aggregate amount of monetary liability or financial impact with respect to these matters at December 31, 2000. AT&T Wireless Group also makes routine filings with the Federal Communications Commission and state regulatory authorities. These matters could affect the operating results of any one quarter when resolved in future periods. However, AT&T Wireless Group believes that after final disposition any monetary liability or financial impact to us beyond that provided for at year-end would not be material to our annual combined financial statements. AT&T WIRELESS GROUP (an integrated business of AT&T) NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (In Millions Unless Otherwise Noted) 12. Commitments and Contingencies (Continued) During January 2001, AT&T closed its previously announced agreement with DoCoMo. Pursuant to this agreement, DoCoMo may require the repurchase of its investment at DoCoMo's original purchase price, plus interest, if AT&T does not complete the split-off by specified dates beginning January 1, 2002, or if AT&T Wireless Group fails to meet specified technological milestones. See Note 1 for further discussion related to the DoCoMo investment. AT&T Wireless Group has entered into various purchase commitments for network equipment as well as handsets, related to the development of its next-generation strategy. Those commitments totaled $432 as of December 31, 2000. These commitments expire between 2001 and 2004. During November 2000, AT&T Wireless Group joined with others in the formation of a venture, Alaska Native Wireless, which participated in the Federal Communication Commission's recent auction of license spectrum in the 1900 megahertz band, which is used to provide wireless services. In January 2001, the auction was completed, and Alaska Native Wireless was the high bidder on approximately $2.9 billion in licenses. AT&T Wireless Group has committed to fund $2.6 billion to Alaska Native Wireless to fund Alaska Native Wireless' purchase of licenses. As of December 31, 2000, AT&T Wireless Group funded approximately $229 of the commitment through a combination of a non-controlling equity interest and debt securities of Alaska Native Wireless. Additionally, in February 2001, AT&T Wireless Group funded an additional $80. The remaining approximate $2.3 billion of additional funding will be made when such licenses are granted, and will take the form of non-convertible notes of Alaska Native Wireless. At the fifth anniversary of the first date on which licenses won in the auction are granted to Alaska Native Wireless, and in addition to other means by which they may transfer their interests, the other owners of Alaska Native Wireless have the right to require AT&T Wireless Group to purchase their equity interests. If this right were exercised five years after license grant, the purchase price could be as much as approximately $950 and would be payable, at AT&T Wireless Group's option, in cash or marketable securities. The right to require AT&T Wireless Group to purchase these interests may be exercised before the five-year anniversary of the license grant if the conditions of certain FCC regulations restricting the free transferability of certain licenses offered in this auction are met earlier. If the right were exercised earlier, the purchase price would be calculated in generally the same way as if exercised at five years, except that a discount would be applied. In certain circumstances, if a winning bid of Alaska Native Wireless is rejected or if any license granted to it is revoked, AT&T Wireless Group would be obligated to compensate other owners for making capital available to the venture. In certain circumstances, if the grant of the licenses is challenged, AT&T Wireless Group may be obligated to purchase the interests of other owners. Depending on when such revocation or challenge takes place, the amount may be material but will be less than the $950 purchase price described above. AT&T WIRELESS GROUP (an integrated business of AT&T) NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (In Millions Unless Otherwise Noted) 12. Commitments and Contingencies (continued) AT&T Wireless Group leases land, buildings and equipment through contracts that expire in various years through 2037. Rental expense under operating leases was $271 in 2000, $205 in 1999, and $181 in 1998. The following table shows the future minimum rental payments due under noncancelable operating leases at December 31, 2000. 2001 2002 2003 2004 2005 Later Years ---- ---- ---- ---- ---- ----------- $328 $291 $243 $200 $133 $214 During 2000 and 1999, AT&T Wireless Group expensed $28 and $82, respectively, for losses associated with commitments related to certain equity investments. Included in the 1999 loss of $82 was AT&T Wireless Group's commitment of $63 to fund the long-term debt obligations of one of its equity investments, which fully satisfied AT&T Wireless Group's commitment for this equity investment. 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. 13. Related Party Transactions As discussed in Note 1, AT&T has provided necessary working capital requirements to AT&T Wireless Group, through AWG and AWS, via an attribution of a portion of the offering proceeds, intercompany debt and preferred stock, as well as capital contributions prior to the offering. Intercompany debt is reflected in the accompanying combined balance sheets as "Short-term debt due to AT&T" and "Long-term debt due to AT&T" Preferred stock held by AT&T is included in "Combined attributed net assets" in the accompanying combined balance sheets. In addition, AT&T Wireless Group loaned the proceeds back to AT&T via an intercompany note receivable. Intercompany interest income on the note receivable from AT&T for the year ended December 31, 2000, totaled $143. There was no intercompany interest income for the years ended December 31, 1999 and 1998. The intercompany interest income was determined based upon the methodology described in Note 1 and is included within other income in the accompanying combined statements of operations. Intercompany debt and interest expense was assumed based upon the methodology discussed in Note 1. Intercompany debt was $2,438 and $3,400 at December 31, 2000 and 1999, respectively, of which $638 represented short-term debt at December 31, 2000. Intercompany interest expense was $196, $214, and $190, for the years ended December 31, 2000, 1999 and 1998, respectively, of which $123, $88 and $75, was capitalized as of December 31, 2000, 1999, and 1998, respectively. The 9% cumulative preferred stock held by AT&T was $3.0 billion and $1.0 billion as of December 31, 2000, and 1999, respectively. Dividend requirements were $130, $56 and $56, for the years ended December 31, 2000, 1999 and 1998, respectively. AT&T WIRELESS GROUP (an integrated business of AT&T) NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (In Millions Unless Otherwise Noted) 13. Related Party Transactions (continued) AT&T Wireless Group, through AWS, purchases long distance and other network-related services from AT&T at market-based prices. For the years ended December 31, 2000, 1999 and 1998, these amounts totaled $241, $170 and $65, respectively. These amounts are reflected within costs of services 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 AT&T Wireless Group, as well as costs for AT&T employees who directly support AT&T Wireless Group, amounting to $56, $40 and $42, for the years ended December 31, 2000, 1999 and 1998, respectively. These amounts are included within selling, general and administrative expenses in the accompanying combined statements of operations and were determined based on the methodology described in Note 1. Also included in selling, general and administrative expenses are charges paid to AT&T related to 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 AT&T Wireless Group's behalf. Effective April 1, 2000, the aforementioned sales force became employees of AT&T Wireless Group, through AWS. These charges amounted to $67, $223 and $65, for the years ended December 31, 2000, 1999 and 1998, respectively. AT&T Wireless Group, through AWS, purchases their administrative telephone services from AT&T. These amounts are included within selling, general and administrative expenses and totaled $104, $69, and $50 for the years ended December 31, 2000, 1999 and 1998, respectively. AT&T Wireless Group, through AWS, 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 $97 and $83 as of December 31, 2000 and 1999, respectively, associated with receivables from AT&T for these bundled customers. Selling, general and administrative expenses included $38, $36 and $22 for the years ended December 31, 2000, 1999 and 1998, respectively, and costs of services included $38, $29 and $14, for the years ended December 31, 2000, 1999, and 1998, respectively, for the billing and collection fees charged by AT&T. AT&T Wireless Group, through AWS, utilizes the AT&T remittance processing organization to process customer payments into AT&T's lockbox. AT&T Wireless Group paid $23, $22 and $12, to AT&T for reimbursement of its costs associated with these services for the years ended December 31, 2000, 1999 and 1998, respectively. These costs are included with selling, general and administrative expenses on the accompanying combined statements of operations. AT&T WIRELESS GROUP (an integrated business of AT&T) NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (In Millions Unless Otherwise Noted) 14. Subsequent Events In January 2001, AT&T Wireless Group executed agreements with certain network equipment vendors, related to the development of its next-generation network strategy. These agreements require AT&T Wireless Group to buy equipment from these vendors totaling approximately $1.8 billion through 2004. Effective January 1, 2001, AT&T Wireless Group implemented the results of a review of the estimated service lives of certain wireless communications equipment, primarily electronics. Lives were shortened to fully depreciate all such equipment within seven years. Similar equipment acquired after January 1, 2001, will have useful lives no longer than seven years. On January 22, 2001, AT&T Wireless Group, through AWS, completed its previously announced transaction with DoCoMo. See Note 1 for further discussion of the transaction. On November 17, 2000, AT&T Wireless Group announced that AT&T's board of directors had approved an agreement under which AT&T Wireless Group would purchase $200 in Series AA preferred stock from Dobson Communications Corporation. AT&T Wireless Group, through AWS, completed this transaction on February 8, 2001. The Series AA preferred stock acquired has a liquidation preference of $1,000 per share and is exchangeable into Series A convertible preferred stock. If the Series AA preferred stock is exchanged into Series A convertible preferred stock, AT&T Wireless Group will increase its ownership interest in Dobson, on an as converted to common stock basis, from its current ownership of 4.6% to approximately 11.6%. On March 23, 2001, AT&T Wireless Group, through AWS, entered into Competitive Advance and Revolving Credit Facilities (the "Facilities") in the aggregate amount of $2.5 billion consisting of an up to $1.25 billion 364-day Competitive Advance and Revolving Credit Facility and an up to $1.25 billion Five-Year Competitive Advance and Revolving Credit Facility. The facilities are subject to a facility fee and utilization fee and bear interest at variable rates based upon, in various cases, LIBOR, the prime rate or the rates on overnight Federal funds transactions. The Facilities may be used for general corporate purposes and are subject to customary covenants, representations and warranties and events of default. In addition, the Facilities contain financial covenants providing for a maximum total debt to total Consolidated Operational EBITDA ratio (as defined in the facilities agreement) not to exceed 4:0 to 1:0 for AT&T Wireless Group and a minimum interest coverage ratio of 3.5:1.0. From the date of the closing of the Facilities until the date of the split-off of AT&T Wireless Group, AWS will be prohibited from declaring and/or paying dividends. The Facility also specifies limitations on AT&T's and AT&T Wireless Group's ability to consummate the split-off including a provision that it will constitute an event of default if the split-off is consummated without obtaining a favorable tax ruling from the IRS or an unqualified tax opinion that the split-off will qualify as a tax-free transaction. In addition, the existence of an obligation by AT&T Wireless Group to repurchase equity interests from DoCoMo may under certain circumstances constitute an event of default. AT&T WIRELESS GROUP (an integrated business of AT&T) NOTES TO COMBINED FINANCIAL STATEMENTS (Continued) (In Millions Unless Otherwise Noted) 14. Subsequent Events (continued) On February 26, 2001, AT&T agreed to sell its entire interest in Japan Telecom for approximately $1.35 billion. The net after-tax proceeds are expected to be approximately $1 billion. AT&T has indicated that the net after-tax proceeds will be split evenly between AT&T and AT&T Wireless Group. AT&T Wireless Group anticipates that it will recognize a significant gain on the transaction. On March 1, 2001, AT&T Wireless Group, through AWS, completed a private placement of $6.5 billion in Senior Notes with maturity dates from 2006 to 2031. The notes pay interest at rates ranging from 7.350% to 8.750% per annum, and include customary covenants. The notes include registration rights, such that AWS is required to exchange the notes for a new issue of notes registered under the Securities Act of 1933 and are to be declared effective no later than 240 days after the issue date. EX-99 19 0019.txt EXHIBIT (99)B Exhibit 99b LIBERTY MEDIA GROUP FINANCIALS (a combination of certain assets and businesses owned by AT&T) Liberty Media Group is a combination of certain assets and businesses owned by AT&T Corp. and not a stand-alone entity. As Liberty Media Group is a tracking stock of AT&T, separate financial statements are not required to be filed. We are providing these financial statements to provide additional disclosures to investors to allow them to assess the financial performance of Liberty Media Group. Presenting separate financial statements for Liberty Media Group does not indicate that we have changed title to any assets or responsibility for any liabilities, and does not purport to affect the rights of any of AT&T's creditors. Holders of Liberty Media Group tracking stock do not have claims against the assets of Liberty Media Group. Instead, Liberty Media Group shareholders own a separate class of AT&T common stock that is intended to reflect the financial performance and economic value of the assets and businesses owned by AT&T that are attributed to Liberty Media Group. INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders AT&T Corp.: We have audited the accompanying combined balance sheets of Liberty Media Group (a combination of certain assets and businesses owned by AT&T Corp., as defined in note 1) ("New Liberty" or "Successor") as of December 31, 2000 and 1999, and the related combined statements of operations and comprehensive earnings, attributed net assets, and cash flows for the year ended December 31, 2000 and the period from March 1, 1999 to December 31, 1999 (Successor periods) and from January 1, 1999 to February 28, 1999 and for the year ended December 31, 1998 (Predecessor periods). These combined financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The combined financial statements of Liberty Media Group are presented for purposes of additional analysis of the consolidated financial statements of AT&T Corp. As more fully described in note 1, the combined financial statements of Liberty Media Group are intended to reflect the performance of the businesses of AT&T Corp., that produce, acquire and distribute entertainment, educational and informational programming services. The combined financial statements of Liberty Media Group should be read in conjunction with the consolidated financial statements of AT&T Corp. In our opinion, the aforementioned Successor combined financial statements present fairly, in all material respects, the financial position of New Liberty as of December 31, 2000 and 1999, and the results of their operations and their cash flows for the Successor periods, in conformity with accounting principles generally accepted in the United States of America. Further, in our opinion, the aforementioned Predecessor combined financial statements present fairly, in all material respects, the results of their operations and their cash flows for the Predecessor periods, in conformity with accounting principles generally accepted in the United States of America. As discussed in note 1, effective March 9, 1999, AT&T Corp., the owner of the assets comprising New Liberty, acquired Tele-Communications, Inc., the owner of the assets comprising Old Liberty, in a business combination accounted for as a purchase. As a result of the acquisition, the combined financial information for the periods after the acquisition is presented on a different cost basis than that for the periods before the acquisition and, therefore, is not comparable. KPMG LLP Denver, Colorado February 26, 2001 "LIBERTY MEDIA GROUP" (a combination of certain assets and businesses owned by AT&T, as defined in note 1)
COMBINED BALANCE SHEETS December 31, 2000 and 1999 2000 1999 ----------- ----------- amounts in millions Assets Current assets: Cash and cash equivalents $ 1,295 1,714 Short-term investments 500 378 Trade and other receivables, net 307 134 Prepaid expenses and committed program rights 537 406 Deferred income tax assets (note 9) 242 750 Other current assets 73 5 ----------- ----------- Total current assets 2,954 3,387 ----------- ----------- Investments in affiliates, accounted for under the equity method, and related receivables (notes 4 and 6) 20,464 15,922 Investments in available-for-sale securities and others (notes 5 and 6) 19,035 28,601 Property and equipment, at cost 976 162 Less accumulated depreciation 131 19 ----------- ----------- 845 143 ----------- ----------- Intangible assets: Excess cost over acquired net assets 11,146 9,973 Franchise costs 190 273 ----------- ----------- 11,336 10,246 Less accumulated amortization 1,048 454 ----------- ----------- 10,288 9,792 ----------- ----------- Other assets, at cost, net of accumulated amortization 682 839 ----------- ----------- Total assets $ 54,268 58,684 =========== ===========
(continued)
COMBINED BALANCE SHEETS December 31, 2000 and 1999 2000 1999 ----------- ----------- amounts in millions Liabilities and Combined Attributed Net Assets Current liabilities: Accounts payable and accrued liabilities $ 473 245 Accrued stock compensation 1,216 2,405 Program rights payable 179 166 Current portion of debt 1,094 554 ----------- ----------- Total current liabilities 2,962 3,370 ----------- ----------- Long-term debt (note 8) 5,269 2,723 Deferred income tax liabilities (note 9) 11,337 14,107 Other liabilities 62 23 ----------- ----------- Total liabilities 19,630 20,223 ----------- ----------- Minority interests in equity of attributed subsidiaries (note 7) 348 1 Combined attributed net assets (note 10): Combined attributed net assets 34,506 31,876 Accumulated other comprehensive (loss) earnings, net of taxes (note 11) (397) 6,557 ----------- ----------- 34,109 38,433 Due to related parties 181 27 ----------- ----------- Total combined attributed net assets 34,290 38,460 ----------- ----------- Commitments and contingencies (note 12) Total liabilities and combined attributed net assets $ 54,268 58,684 =========== ===========
See accompanying notes to combined financial statements. "LIBERTY MEDIA GROUP" (a combination of certain assets and businesses owned by AT&T, as defined in note 1) COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE EARNINGS
New Liberty Old Liberty -------------------------------------- ----------------------------------- Year Ten months Two months Year ended ended ended ended December 31, December 31, February 28, December 31, 2000 1999 1999 1998 ----------------- --------------------- ---------------- ----------------- amounts in millions (note 1) Revenue: Unaffiliated parties $ 1,283 549 239 1,301 Related parties (note 10) 243 180 43 258 --------- --------- --------- --------- 1,526 729 282 1,559 --------- --------- --------- --------- Operating costs and expenses: Operating 801 343 136 932 Selling, general and administrative 348 229 89 427 Charges from related parties (note 10) 37 24 2 28 Stock compensation (950) 1,785 183 518 Depreciation and amortization 854 562 47 243 ---------- --------- --------- --------- 1,090 2,943 457 2,148 ---------- --------- --------- --------- Operating income (loss) 436 (2,214) (175) (589) Other income (expense): Interest expense (399) (134) (27) (116) Adjustment to interest expense for contingent portion of exchangeable debentures 153 (153) -- -- Interest expense to related parties, net (note 10) -- (1) (1) (10) Dividend and interest income 301 243 12 100 Share of losses of affiliates, net (note 4) (2,161) (904) (66) (1,034) Impairment of investments (note 6) (2,787) -- -- -- Minority interests in losses of attributed subsidiaries 63 46 4 102 Gains on dispositions, net (notes 4, 5 and 7) 7,343 3 14 4,738 Gains on issuance of equity by affiliates and subsidiaries (notes 4 and 7) -- -- 389 357 Unrealized gains on financial instruments 70 -- -- -- Other, net 3 (5) -- 6 --------- --------- --------- --------- 2,586 (905) 325 4,143 --------- --------- --------- --------- Earnings (loss) before income taxes 3,022 (3,119) 150 3,554 Income tax benefit (expense) (note 9) (1,534) 1,097 (209) (1,397) --------- --------- --------- --------- Net earnings (loss) $ 1,488 (2,022) (59) 2,157 --------- --------- --------- --------- Other comprehensive earnings, net of taxes: Foreign currency translation adjustments (202) 60 (15) 3 Unrealized holding gains arising during the period, net of reclassification adjustments (6,752) 6,497 971 2,947 --------- --------- --------- --------- Other comprehensive earnings (loss) (6,954) 6,557 956 2,950 --------- --------- --------- --------- Comprehensive earnings (loss) (note 11) $ (5,466) 4,535 897 5,107 ========= ========= ========= =========
See accompanying notes to combined financial statements.
COMBINED STATEMENTS OF ATTRIBUTED NET ASSETS Years ended December 31, 2000, 1999 and 1998 Accumulated other Total Combined comprehensive Due to combined attributed earnings, related attributed net assets net of tax parties net assets ------------ ---------------- ----------- ------------ amounts in millions Balance at January 1, 1998 4,011 768 530 5,309 Net earnings 2,157 -- -- 2,157 Foreign currency translation adjustments -- 3 -- 3 Unrealized gains on available-for-sale securities -- 2,947 -- 2,947 Payments for call agreements (140) -- -- (140) Repurchase of common stock (30) -- -- (30) Premium received in connection with put obligation 2 -- -- 2 Reclassification of redemption amount of common stock subject to put obligation (17) -- -- (17) Gain in connection with issuance of stock of affiliates and attributed subsidiaries (note 4) 70 -- -- 70 Issuance of common stock 777 -- (5) 772 Transfer of net liabilities to related party 50 -- -- 50 Assignment of option contract from related party 16 -- (16) -- Other transfers from related parties, net -- -- 188 188 ------------- ---------------- ----------- ------------ Balance at December 31, 1998 6,896 3,718 697 11,311 Net loss (59) -- -- (59) Foreign currency translation adjustments -- (15) -- (15) Unrealized gains on available-for-sale securities -- 971 -- 971 Reversal of reclassification of redemption amount of common stock subject to put obligation 8 -- -- 8 Transfer of net liabilities to related party, net of taxes 99 -- -- 99 Excess paid on settlement of preferred stock conversion (18) -- -- (18) Other transfers to related parties, net -- -- (24) (24) ------------ ---------------- ----------- ------------- Balance at February 28, 1999 $ 6,926 4,674 673 12,273 ============ ================ =========== ============= (continued) COMBINED STATEMENTS OF ATTRIBUTED NET ASSETS Years ended December 31, 2000, 1999 and 1998 Accumulated other Total Combined comprehensive Due to combined attributed earnings, related attributed net assets net of tax parties net assets ------------- ------------------ ------------- ------------ amounts in millions Balance at February 28, 1999 $ 6,926 4,674 673 12,273 ============ ================ =========== ============= alance at March 1, 1999 33,515 -- 197 33,712 Net loss (2,022) -- -- (2,022) Foreign currency translation adjustments -- 60 -- 60 Recognition of previously unrealized losses on available-for-sale securities, net -- 7 -- 7 Unrealized gains on available-for-sale securities -- 6,490 -- 6,490 AT&T Liberty Media Group Tracking Stock issued for conversion of debentures 354 -- -- 354 Reversal of reclassification of redemption amount of common stock subject to put obligation 9 -- -- 9 Gain in connection with the issuance of common stock of affiliates and attributed subsidiaries 108 -- -- 108 Utilization of net operating losses of Liberty Media Group by AT&T (note 9) (88) -- -- (88) Other transfers to related parties, net -- -- (170) (170) ----------- ---------------- ----------- ------------- Balance at December 31, 1999 31,876 6,557 27 38,460 Net earnings 1,488 -- -- 1,488 Foreign currency translation adjustments -- (202) -- (202) Recognition of previously unrealized gains on available-for-sale securities, net -- (635) -- (635) Unrealized losses on available-for-sale securities -- (6,117) -- (6,117) Issuance of AT&T Class A Liberty Media Group common stock for acquisitions (note 7) 1,064 -- -- 1,064 Purchase of AT&T Class A Liberty Media Group common stock (269) -- -- (269) Premium received in connection with put obligation, net 7 -- -- 7 Gain in connection with the issuance of common stock of affiliates and attributed subsidiaries, net 355 -- -- 355 Utilization of net operating losses of Liberty Media Group by AT&T (note 9) (38) -- -- (38) Exercise of stock options 23 -- -- 23 Other transfers to related parties, net -- -- 154 154 ------------ ---------------- ----------- ------------- Balance at December 31, 2000 $ 34,506 (397) 181 34,290 ============ ================ =========== =============
See accompanying notes to combined financial statements. COMBINED STATEMENTS OF CASH FLOWS
New Liberty Old Liberty ------------------ -------------------- ------------------ --------------- Year Ten months Two months Year ended ended ended ended December 31, December 31, February 28, December 31, 2000 1999 1999 1998 ------------------ -------------------- ------------------ --------------- amounts in millions (note 3) Cash flows from operating activities: Net earnings (loss) $ 1,488 (2,022) (59) 2,157 Adjustments to reconcile net earnings (loss) to net cash provided (used) by operating activities: Depreciation and amortization 854 562 47 243 Stock compensation (950) 1,785 183 518 Payments of stock compensation (319) (111) (126) (58) Share of losses of affiliates, net 2,161 904 66 1,034 Deferred income tax (benefit) expense 1,821 (1,025) 205 1,393 Intergroup tax allocation (294) (75) -- (2) Cash payment from AT&T pursuant to tax sharing agreement 414 1 -- -- Minority interests in losses of subsidiaries (63) (46) (4) (102) Unrealized gains on financial instruments (70) -- -- -- Gains on issuance of equity by affiliates and subsidiaries -- -- (389) (357) Gains on disposition of assets, net (7,343) (3) (14) (4,738) Impairment of investments 2,787 -- -- -- Noncash interest (138) 153 -- -- Other noncash charges -- 3 9 55 Changes in operating assets and liabilities, net of the effect of acquisitions and dispositions: Receivables (116) 7 (19) (49) Prepaid expenses and program rights (121) (119) (10) (39) Payables and other current liabilities 88 119 4 11 ----------------- ---------------- -------------- --------------- Net cash provided (used) by operating activities 199 133 (107) 66 ----------------- ---------------- -------------- --------------- Cash flows used by investing activities: Cash paid for acquisitions (735) (109) -- (92) Capital expended for property and equipment (221) (40) (21) (144) Investments in and loans to affiliates and others (3,372) (2,596) (45) (1,404) Purchases of marketable securities (848) (7,757) (132) (124) Sales and maturities of marketable securities 1,820 5,725 34 -- Cash proceeds from dispositions 463 130 43 423 Other, net 34 (11) (62) (17) ----------------- ---------------- -------------- --------------- Net cash used by investing activities (2,859) (4,658) (183) (1,358) Cash flows from financing activities: Borrowings of debt 5,509 3,187 156 2,428 Repayments of debt (3,068) (2,211) (148) (622) Net proceeds from issuance of stock by subsidiaries 121 123 -- 75 Payments for call agreements -- -- -- (140) Cash transfers (to) from related parties (293) (159) 132 (216) Other, net (28) (20) (46) (50) ----------------- ---------------- -------------- --------------- Net cash provided by financing activities 2,241 920 94 1,475 ----------------- ---------------- -------------- --------------- Net increase (decrease) in cash and cash equivalents (419) (3,605) (196) 183 Cash and cash equivalents at beginning of year 1,714 5,319 407 224 ----------------- ---------------- -------------- --------------- Cash and cash equivalents at end of year $ 1,295 1,714 211 407 =============== ================ ============== ===============
See accompanying notes to combined financial statements. "LIBERTY MEDIA GROUP" (a combination of certain assets and businesses owned by AT&T, as defined in note 1) December 31, 1999, 1998 and 1997 (1) Basis of Presentation The accompanying combined financial statements include the accounts of the assets and businesses owned by AT&T Corp. ("AT&T") that are attributed to Liberty Media Group, as defined below. All significant intercompany accounts and transactions have been eliminated. On March 9, 1999, AT&T acquired Tele-Communications, Inc. ("TCI"), the former owner of the assets and businesses attributed to Liberty Media Group, in a merger transaction (the "AT&T Merger"). In connection with the AT&T Merger, holders of shares of TCI's then outstanding Liberty Media Group tracking stock and TCI Ventures Group tracking stock were issued shares of a new targeted stock of AT&T. Each share of TCI's then outstanding Liberty Media Group Series A tracking stock was converted into four shares of a newly created class of AT&T tracking stock, the AT&T Liberty Media Group Class A common stock, each share of TCI's then outstanding Liberty Media Group Series B tracking stock was converted into four shares of a newly created class of AT&T tracking stock, the AT&T Liberty Media Group Class B common stock, each share of TCI's then outstanding TCI Ventures Group Series A tracking stock was converted into 2.08 shares of AT&T Liberty Media Group Class A common stock and each share of TCI's then outstanding TCI Ventures Group Series B tracking stock was converted into 2.08 shares of AT&T Liberty Media Group Class B common stock. The AT&T Class A Liberty Media Group common stock and the AT&T Class B Liberty Media Group common stock (together, the AT&T Liberty Media Group tracking stock) are tracking stocks of AT&T designed to reflect the economic performance of the businesses and assets of AT&T attributed to the Liberty Media Group. Effective with the AT&T Merger, each share of TCI's Convertible Preferred Stock Series C-Liberty Media was converted into 225 shares of AT&T Liberty Media Group Class A common stock and each share of TCI's Redeemable Convertible Liberty Media Group Preferred Stock, Series H was converted into 2.3625 shares of AT&T Liberty Media Group Class A common stock. In general, the holders of shares of AT&T Liberty Media Group Class A common stock and the holders of shares of AT&T Liberty Media Group Class B common stock will vote together as a single class with the holders of shares of AT&T common stock on all matters presented to such stockholders, with the holders being entitled to three-eightieths (3/80th) of a vote for each share of AT&T Liberty Media Group Class A common stock held, three-eighths (3/8th) of a vote for each share of AT&T Liberty Media Group Class B common stock held and 1 vote per share of AT&T common stock held. The AT&T Merger has been accounted for using the purchase method. Accordingly, Liberty Media Group's assets and liabilities have been recorded at their respective fair market values therefore, creating a new cost basis. For financial reporting purposes the AT&T Merger and related restructuring transactions are deemed to have occurred on March 1, 1999. Accordingly, for periods prior to March 1, 1999 the assets and liabilities attributed to Liberty Media Group and the related combined financial statements are sometimes referred to herein as "Old Liberty", and for periods subsequent to February 28, 1999 the assets and liabilities attributed to Liberty Media Group and the related combined financial statements are sometimes referred to herein as "New Liberty". The "Company" and "Liberty Media Group" refer to both New Liberty and Old Liberty. Immediately prior to the AT&T Merger, certain assets previously attributed to Old Liberty (including, among others, the shares of AT&T Common Stock received in the merger of AT&T and Teleport Communications Group, Inc. ("Teleport"), Old Liberty's interests in At Home Corporation ("@Home"), the National Digital Television Center, Inc. ("NDTC") and Western Tele-Communications, Inc.) were attributed to "TCI Group" (a group of TCI's assets, which, prior to the AT&T Merger, was comprised primarily of TCI's domestic cable and communications business) in exchange for approximately $5.5 billion in cash (the "Asset Transfers"). Also, upon consummation of the AT&T Merger, through a new tax sharing agreement between Liberty Media Group and AT&T, Liberty Media Group is entitled to the benefit of approximately $2 billion in net operating loss carryforwards available to the entities included in TCI's consolidated income tax return as of the date of the AT&T Merger. Such net operating loss carryforwards are subject to adjustment by the Internal Revenue Service ("IRS") and are subject to limitations on usage which may affect the ultimate amount utilized. Additionally, certain warrants to purchase shares of Motorola, Inc. ("Motorola") (successor to General Instruments Corporation) ("Motorola Warrants") previously attributed to TCI Group were attributed to Liberty Media Group in exchange for approximately $176 million in cash. Certain agreements entered into at the time of the AT&T Merger provide, among other things, for preferred vendor status to Liberty Media Group for digital basic distribution on AT&T's systems of new programming services created by Liberty Media Group and for a renewal of existing affiliation agreements. The following table represents the summary balance sheet of Old Liberty at February 28, 1999 prior to the restructuring transactions and the consummation of the AT&T Merger and the opening summary balance sheet of New Liberty subsequent to the restructuring transactions and the consummation of the AT&T Merger. Certain pre-merger transactions occurring between March 1, 1999 and March 9, 1999 that affected Old Liberty's attributed net assets, gains on issuance of equity by subsidiaries and stock compensation have been reflected in the two-month period ended February 28, 1999.
New Liberty Old Liberty -------------------------------- (amounts in millions) Assets: Cash and cash equivalents $ 5,319 211 Other current assets 451 648 Investments in affiliates 17,116 3,971 Investment in available-for-sale securities 13,100 15,855 Property and equipment, net 125 532 Intangibles and other assets 11,159 817 -------------- ---------------- $ 47,270 22,034 ============== ================ Liabilities and Equity: Current liabilities $ 1,675 1,446 Long-term debt 1,845 2,319 Deferred income taxes 9,971 5,369 Other liabilities 19 168 -------------- ---------------- Total liabilities 13,510 9,302 -------------- ---------------- Minority interests in equity of attributed subsidiaries 39 450 Obligation to redeem common stock 9 9 Attributed net assets 33,712 12,273 -------------- ---------------- $ 47,270 22,034 ============== ================
(continued) At December 31, 2000, Liberty Media Group consisted principally of attributed assets and businesses of AT&T related to the following: o AT&T's assets and businesses which provide programming services including production, acquisition and distribution through all available formats and media of branded entertainment, educational and informational programming and software, including multimedia products; o AT&T's assets and businesses engaged in electronic retailing, direct marketing, advertising sales relating to programming services, infomercials and transaction processing; o certain of AT&T's assets and businesses engaged in international cable, telephony and programming businesses; and, o AT&T's holdings in a class of tracking stock of Sprint Corporation (the "Sprint PCS Group Stock"). The assets and businesses outlined above are principally owned by Liberty Media Corporation and its subsidiaries. Liberty Media Corporation is a wholly owned subsidiary of AT&T. 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. The shares of AT&T Liberty Media Group common stock issued in the AT&T Merger are intended to reflect the separate performance of the assets and businesses attributed to Liberty Media Group. The combined financial statements of Liberty Media Group are presented for purposes of additional analysis of the consolidated financial statements of AT&T and should be read in conjunction with such consolidated financial statements. The attribution of assets and businesses to Liberty Media Group for the purpose of preparing these combined financial statements does not affect the ownership or the respective legal title to such assets or responsibility for liabilities of AT&T or any of its subsidiaries. AT&T and its subsidiaries each continue to be responsible for their respective liabilities. Holders of each class of AT&T Liberty Media Group tracking stock are common stockholders of AT&T and are subject to risks associated with an investment in AT&T and all of its businesses, assets and liabilities. The issuance of AT&T Liberty Media Group tracking stock does not affect the rights of creditors of AT&T. The financial impacts of AT&T issuing and purchasing shares of AT&T Liberty Media Group tracking stock are reflected in these combined financial statements for Liberty Media Group. Pursuant to amended corporate governance documents for the entities attributed to the Liberty Media Group and certain agreements among AT&T and TCI, the business of Liberty Media Group will continue to be managed by certain persons who were members of TCI's management prior to the AT&T Merger. As a result, AT&T does not have a controlling financial interest for financial reporting purposes over the Liberty Media Group and therefore accounts for the Liberty Media Group as an equity method investment. (continued) (2) Summary of Significant Accounting Policies Cash and Cash Equivalents Cash equivalents consist of investments which are readily convertible into cash and have maturities of three months or less at the time of acquisition. Receivables Receivables are reflected net of an allowance for doubtful accounts. Such allowance at December 31, 2000 and 1999 was not material. Program Rights Prepaid program rights are amortized on a film-by-film basis over the anticipated number of exhibitions. Committed program rights and program rights payable are recorded at the estimated cost of the programs when the film is available for airing less prepayments. These amounts are amortized on a film-by-film basis over the anticipated number of exhibitions. Investments All marketable equity securities held by the Company are classified as available-for-sale and are carried at fair value. Unrealized holding gains and losses on securities classified as available-for-sale are carried net of taxes as a component of accumulated other comprehensive earnings in combined attributed net assets. Realized gains and losses are determined on a specific-identification basis. Other investments in which the ownership interest is less than 20% and are not considered marketable securities are carried at the lower of cost or net realizable value. For those investments in affiliates in which the Company's voting interest is 20% to 50%, the equity method of accounting is generally used. Under this method, the investment, originally recorded at cost, is adjusted to recognize the Company's share of net earnings or losses of the affiliates as they occur rather then as dividends or other distributions are received, limited to the extent of the Company's investment in, advances to and commitments for the investee. The Company's share of net earnings or losses of affiliates includes the amortization of the difference between the Company's investment and its share of the net assets of the investee. Subsequent to the AT&T Merger, changes in the Company's proportionate share of the underlying equity of an attributed subsidiary or equity method investee, which result from the issuance of additional equity securities by such attributed subsidiary or equity investee, are recognized as gains or losses in the Company's combined statements of attributed net assets. (continued) The Company continually reviews its investments to determine whether a decline in fair value below the cost basis is other than temporary. If the decline in fair value is deemed to be other than temporary, the cost basis of the security is written down to fair value and the amount of the write-down is included in the combined statements of operations as an impairment of investments. Property and Equipment Property and equipment, including significant improvements, is stated at cost. Depreciation is computed on a straight-line basis using estimated useful lives of 3 to 20 years for support equipment and 10 to 40 years for buildings and improvements. Excess Cost Over Acquired Net Assets Excess cost over acquired net assets consists of the difference between the cost of acquiring non-cable entities and amounts assigned to their tangible assets. Such amounts are amortized on a straight-line basis over periods ranging from 5 to 20 years. Franchise Costs Franchise costs generally include the difference between the cost of acquiring cable companies and amounts allocated to their tangible assets. Such amounts are amortized on a straight-line basis over 20 years. Impairment of Long-lived Assets The Company periodically reviews the carrying amounts of property, plant and equipment and its intangible assets to determine whether current events or circumstances warrant adjustments to such carrying amounts. If an impairment adjustment is deemed necessary, such loss is measured by the amount that the carrying value of such assets exceeds their fair value. Considerable management judgment is necessary to estimate the fair value of assets, accordingly, actual results could vary significantly from such estimates. Assets to be disposed of are carried at the lower of their financial statement carrying amount or fair value less costs to sell. Minority Interests Recognition of minority interests' share of losses of attributed subsidiaries is generally limited to the amount of such minority interests' allocable portion of the common equity of those attributed subsidiaries. Further, the minority interests' share of losses is not recognized if the minority holders of common equity of attributed subsidiaries have the right to cause the Company to repurchase such holders' common equity. (continued) Preferred stock (and accumulated dividends thereon) of attributed subsidiaries are included in minority interests in equity of attributed subsidiaries. Dividend requirements on such preferred stocks are reflected as minority interests in earnings of attributed subsidiaries in the accompanying combined statements of operations and comprehensive earnings. Foreign Currency Translation The functional currency of the Company is the United States ("U.S.") dollar. The functional currency of the Company's foreign operations generally is the applicable local currency for each attributed foreign subsidiary and foreign equity method investee. Assets and liabilities of attributed foreign subsidiaries and foreign equity investees are translated at the spot rate in effect at the applicable reporting date, and the combined statements of operations and the Company's share of the results of operations of its foreign equity affiliates are translated at the average exchange rates in effect during the applicable period. The resulting unrealized cumulative translation adjustment, net of applicable income taxes, is recorded as a component of accumulated other comprehensive earnings in combined attributed net assets. Transactions denominated in currencies other than the functional currency are recorded based on exchange rates at the time such transactions arise. Subsequent changes in exchange rates result in transaction gains and losses which are reflected in the accompanying combined statements of operations and comprehensive earnings as unrealized (based on the applicable period end exchange rate) or realized upon settlement of the transactions. Unless otherwise indicated, convenience translations of foreign currencies into U.S. dollars are calculated using the applicable spot rate at December 31, 2000, as published in The Wall Street Journal. Derivative Instruments and Hedging Activities Liberty Media Group uses various derivative instruments including equity collars, put spread collars, and interest rate swaps to manage fair value risk associated with certain investments and interest rate risk on certain indebtedness. Derivative instruments are generally not used for speculative purposes. The derivative instruments may involve elements of credit and market risk in excess of amounts recognized in the financial statements. Liberty Media Group monitors its positions and the credit quality of counter parties, consisting primarily of major financial institutions, and does not anticipate nonperformance by any counter-party. Disclosures regarding the fair value of derivative and other financial instruments are included in notes 5 and 8. Fair value of these instruments is based on market quotes or option pricing models using the historical volatility of the underlying security. (continued) Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by Statement of Financial Accounting Standards No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, and Statement of Financial Accounting Standards No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, is effective for the Company as of January 1, 2001. Statement of Financial Accounting Standards No. 133 requires that an entity recognize all derivatives as either assets or liabilities measured at fair value. The accounting for changes in the fair value of a derivative depends on the use of the derivative. Adoption of these new accounting standards will result in cumulative after-tax increases in net earnings of approximately $800 million and reductions in other comprehensive earnings of approximately $300 million in the first quarter of 2001. The adoption will also impact assets and liabilities recorded on the balance sheet. Revenue Recognition Programming revenue is recognized in the period during which programming is provided, pursuant to affiliation agreements. Advertising revenue is recognized, net of agency commissions, in the period during which underlying advertisements are broadcast. Revenue from post-production services is recognized in the period the services are rendered. Cable and other distribution revenue is recognized in the period that services are rendered. Cable installation revenue is recognized in the period the related services are provided to the extent of direct selling costs. Any remaining amount is deferred and recognized over the estimated average period that customers are expected to remain connected to the cable distribution system. Stock Based Compensation Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("Statement 123"), establishes financial accounting and reporting standards for stock-based employee compensation plans as well as transactions in which an entity issues its equity instruments to acquire goods or services from non-employees. As allowed by Statement 123, Liberty Media Group continues to account for stock-based compensation pursuant to Accounting Principles Board Opinion No. 25 ("APB Opinion No. 25"). Compensation relating to stock options with tandem stock appreciation rights ("SARs") granted to employees of Liberty Media Group and its subsidiaries have been recorded as variable award plans in the accompanying combined financial statements pursuant to APB Opinion No. 25. Liabilities under these awards are subject to future adjustment based upon vesting provisions and the market value of the underlying security and, ultimately, on the final determination of market value when the rights are exercised. The amount of compensation under Statement 123 would not have been significantly different from what has been reflected in the accompanying combined financial statements due to substantially all of Liberty Media Group's stock option plans having tandem SARs, which are treated as liabilities for financial statement purposes and require periodic remeasurement under both APB Opinion No. 25 and Statement 123. (continued) Agreements that may require Liberty Media Group to reacquire interests in subsidiaries held by officers and employees in the future are marked-to-market periodically with corresponding adjustments being recorded to stock compensation expense. Reclassifications Certain prior period amounts have been reclassified for comparability with the 2000 presentation. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities 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. (3) Supplemental Disclosures to Combined Statements of Cash Flows
New Liberty Old Liberty -------------------------------- --------------------------------- Year Ten months Two months Year ended ended ended ended December 31, December 31, February 28, December 31, ------------ ------------ ------------ ------------ 2000 1999 1999 1998 ------------ ------------ ------------ ------------ amounts in millions Cash paid for acquisitions: Fair value of assets acquired $ 3,733 122 -- 903 Net liabilities assumed (1,208) (13) -- (107) Deferred tax liability (281) -- -- (154) Minority interest (445) -- -- 224 Contribution to combined attributed net assets for acquisitions (1,064) -- -- (772) Other -- -- -- (2) ------------ ------------ ------------ ------------ Cash paid for acquisitions $ 735 109 -- 92 ============ ============ ============ ============ Cash paid for interest $ 335 93 32 112 ============ ============ ============ ============ Cash paid for income taxes $ -- -- -- 29 ============ ============ ============ ============
During the ten months ended December 31, 1999 certain subsidiaries with a carrying value of $135 million were exchanged for a cost method investment in an online music venture. (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 the Asset Transfers, net of cash balances transferred 5,284 Cash paid to TCI for certain warrants (176) ---------- Cash and cash equivalents subsequent to the AT&T Merger $ 5,319 ==========
(4) 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 the Company's carrying amount and percentage ownership of the more significant investments in affiliates at December 31, 2000 and the carrying amount at December 31, 1999: December 31, December 31, 2000 1999 -------------------------------- --------------- Percentage Carrying Carrying Ownership Amount Amount --------- ----------------- --------------- amounts in millions USA Networks, Inc. ( "USAI ") and related investments 21% $ 2,824 2,699 Telewest Communications plc ( "Telewest ") 25% 2,712 1,996 Discovery Communications, Inc. ("Discovery") 49% 3,133 3,441 Gemstar-TV Guide International, Inc. ("Gemstar") 21% 5,855 -- QVC, Inc. ( "QVC ") 43% 2,508 2,515 UnitedGlobalCom, Inc. ("UnitedGlobalCom") 11% 314 505 TV Guide -- 1,732 Foreign investments (other than Telewest) various 1,754 2,190 Other various 1,364 844 ------------- --------------- $ 20,464 15,922 ============= ===============
(continued) The following table reflects Liberty Media Group's share of earnings (losses) of affiliates:
New Liberty Old Liberty -------------------------------- --------------------------------- Year Ten months Two months Year ended ended ended ended December 31, December 31, February 28, December 31, ------------ ------------ ------------ ------------ 2000 1999 1999 1998 ------------ ------------ ------------ ------------ amounts in millions USAI and related investments $ (36) (20) 10 30 Telewest (441) (222) (38) (134) Discovery (293) (269) (8) (39) Gemstar (254) -- -- -- QVC (12) (11) 13 64 UnitedGlobalCom (211) 23 -- -- Teligent, Inc. ("Teligent") (430) -- -- -- Foreign investments (350) (208) (27) (146) PCS Ventures (note 5) -- -- -- (629) Other (134) (197) (16) (180) ------------- ------------ ------------ ------------ $ (2,161) (904) (66) (1,034) ============= ============ ============ ============
The $15 billion aggregate excess of Liberty Media Group's aggregate carrying amount in its affiliates over Liberty Media Group's proportionate share of its affiliates' net assets is being amortized over estimated useful lives ranging from 2 to 20 years. Such amortization was approximately $1,058 million, $463 million, $9 million and $8 million for the year ended December 31, 2000, the ten months ended December 31, 1999, the two months ended February 28, 1999 and the year ended December 31, 1998, respectively, and is included in share of losses of affiliates. Certain of Liberty Media Group's affiliates are general partnerships and, as such, are liable as a matter of partnership law for all debts (other than non-recourse debts) of that partnership in the event liabilities of that partnership were to exceed its assets. Summarized unaudited combined financial information for affiliates is as follows: December 31, ----------------------- 2000 1999 ---------- ---------- amounts in millions Combined Financial Position Investments $ 1,924 1,415 Property and equipment, net 11,854 8,885 Other intangibles, net 31,619 19,778 Other assets, net 10,014 9,207 ---------- ----------- Total assets $ 55,411 39,285 ========== =========== Debt $ 21,216 17,210 Other liabilities 15,373 12,645 Owners' equity 18,822 9,430 ---------- ----------- Total liabilities and equity $ 55,411 39,285 ========== =========== (continued)
Year Ten months Two months Year ended ended ended ended December 31, December 31, February 28, December 31, ------------ ------------ ------------ ------------ 2000 1999 1999 1998 ------------ ------------ ------------ ------------ amounts in millions Combined Operations Revenue $ 13,895 10,492 2,341 14,062 Operating expenses (12,784) (9,066) (1,894) (13,092) Depreciation and amortization (2,328) (1,461) (353) (2,629) ------------ ------------ ------------ ------------ Operating income (loss) (1,217) (35) 94 (1,659) Interest expense (1,185) (886) (281) (1,728) Other, net (2) (151) (127) (166) ------------ ------------ ------------ ------------ Net loss $ (2,404) (1,072) (314) (3,553) ============ ============ ============ ============
USAI USAI owns and operates businesses in network and television production, television broadcasting, electronic retailing, ticketing operations, and internet services. At December 31, 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 million shares of USAI common stock. Liberty Media Group's direct ownership of USAI is currently restricted by Federal Communications Commission ("FCC") regulations. The exchange of these shares can be accomplished only if there is a change to existing regulations or if Liberty Media Group obtains permission from the FCC. If the exchange of subsidiary stock into USAI common stock was completed at December 31, 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 had a closing market value of $19.44 per share on December 31, 2000. Liberty Media Group accounts for its investments in USAI and related subsidiaries on a combined basis under the equity method. In February 1998, USAI paid cash and issued shares and one of its subsidiaries issued shares in connection with the acquisition of certain assets from Universal Studios, Inc. (the "Universal Transaction"). Liberty Media Group recorded an increase to its investment in USAI of $54 million and an increase to combined attributed net assets of $33 million (after deducting deferred income taxes of $21 million) as a result of this share issuance. USAI issued shares in June 1998 to acquire the remaining stock of Ticketmaster Group, Inc. which it did not previously own (the "Ticketmaster Transaction"). Liberty Media Group recorded an increase to its investment in USAI of $52 million and an increase to combined attributed net assets of $31 million (after deducting deferred income taxes of $21 million) as a result of this share issuance. No gain was recognized in the combined statement of operations and comprehensive earnings for either the Universal Transaction or the Ticketmaster Transaction due primarily to Liberty Media Group's intention to purchase additional equity interests in USAI. (continued) In connection with the Universal Transaction, Liberty Media Group was granted an antidilutive right with respect to any future issuance of USAI's common stock, subject to certain limitations, that enables it to maintain its percentage ownership interests in USAI. Telewest Telewest currently operates and constructs cable television and telephone systems in the UK. Flextech Limited ("Flextech") develops and sells a variety of television programming in the UK. In April 2000, Telewest acquired Flextech. As a result, each share of Flextech was exchanged for 3.78 new Telewest shares. Prior to the acquisition, Liberty Media Group owned an approximate 37% equity interest in Flextech and a 22% equity interest in Telewest. As a result of the acquisition, Liberty Media Group owns an approximate 24.6% equity interest in Telewest. Liberty Media Group recognized a $649 million gain (excluding related tax expense of $227 million) on the acquisition 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 December 31, 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 $1.58 per share on December 31, 2000. Effective September 1, 1998, Telewest and General Cable PLC ("General Cable") consummated a merger (the "General Cable Merger") in which holders of General Cable received New Telewest shares and cash. Based upon Telewest's closing price of $1.51 per share on April 14, 1998, the General Cable Merger was valued at approximately $1.1 billion. The cash portion of the General Cable Merger was financed through an offer to qualifying Telewest shareholders for the purchase of approximately 261 million new Telewest shares at a price of $1.57 per share (the "Telewest Offer"). Liberty Media Group subscribed to 85 million Telewest ordinary shares at an aggregate cost of $133 million in connection with the Telewest Offer. In connection with the General Cable Merger, Liberty Media Group converted its entire holdings of Telewest convertible preference shares (133 million shares) into Telewest ordinary shares. As a result of the General Cable Merger, Liberty Media Group's ownership interest in Telewest decreased to 22%. In connection with the increase in Telewest's equity, net of the dilution of Liberty Media Group's interest in Telewest, that resulted from the General Cable Merger, Liberty Media Group recorded a non-cash gain of $60 million (before deducting deferred income taxes of $21 million) during 1998. Gemstar Gemstar is a leading global technology and media company focused on consumer entertainment. The common stock of Gemstar is publicly traded. At December 31, 2000, Liberty Media Group held 87.5 million shares of Gemstar common stock. Gemstar's stock reported a closing price of $46.13 per share on December 31, 2000. (continued) 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 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. UnitedGlobalCom UnitedGlobalCom is a global broadband communications provider of video, voice and data services with operations in over 20 countries throughout the world. At December 31, 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 9.9 million shares of UnitedGlobalCom Class B common stock and .6 million shares of UnitedGlobalCom Class A common stock. The UnitedGlobalCom Class B common 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 $13.63 per share on December 31, 2000. (5) Investments in Available-for-sale Securities and Others ------------------------------------------------------- Investments in available-for-sale securities and others are summarized as follows: December 31, --------------------------- 2000 1999 ----------- ------------ amounts in millions Sprint Corporation ("Sprint PCS") $ 5,192 10,186 Time Warner, Inc. ("Time Warner") 6,325 8,202 News Corp. 2,342 2,403 Motorola 1,982 3,430 Other available-for-sale securities 2,989 3,773 Other investments, at cost, and related receivables 705 985 ----------- ----------- 19,535 28,979 Less short-term investments 500 378 ----------- ----------- $ 19,035 28,601 =========== =========== Sprint PCS Liberty Media Group and certain of its consolidated subsidiaries collectively are the beneficial owners of approximately 197 million shares of Sprint PCS Group stock and certain other instruments convertible into such securities (the "Sprint Securities"). The Sprint PCS Group stock is a tracking stock intended to reflect the performance of Sprint's domestic wireless PCS operations. Liberty Media Group accounts for its investment in the Sprint Securities as an available-for-sale security. (continued) Pursuant to a final judgment (the "Final Judgment") agreed to by Liberty Media Group, 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 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 of the District of Columbia on August 23, 1999, requires the Trustee, on or before May 23, 2002, to dispose of a portion of the Sprint Securities sufficient to cause Liberty Media Group to beneficially own no more than 10% of the outstanding Sprint PCS Group common stock - Series 1 on a fully diluted basis on such date. On or before May 23, 2004, the Trustee must divest the remainder of the Sprint Securities beneficially owned by Liberty Media Group. The Final Judgment requires that the Trustee vote the Sprint Securities beneficially owned by Liberty Media Group and its consolidated subsidiaries in the same proportion as other holders of Sprint Securities so long as such securities are held by the trust. The Final Judgment also prohibits the acquisition by Liberty Media Group of additional Sprint Securities, with certain exceptions, without the prior written consent of the DOJ. On November 23, 1998, Liberty Media Group exchanged its investments in certain wireless businesses ("PCS Ventures") for the Sprint Securities (the "PCS Exchange"). Liberty Media Group recorded a non-cash gain of $1.9 billion (before deducting deferred income taxes of $647 million) on the PCS Exchange based on the difference between the carrying amount of Liberty Media Group's equity method interest in the PCS Ventures and the fair value of the Sprint Securities received. Time Warner Liberty Media Group holds shares of a series of Time Warner's series common stock with limited voting rights (the "TW Exchange Stock") that are convertible into an aggregate of 114 million shares of Time Warner common stock. Liberty Media Group accounts for its investment in Time Warner as an available-for-sale security. On January 11, 2001, Time Warner and America Online, Inc. completed their merger, pursuant to which each share of the Time Warner common stock held by Liberty Media Group was converted into 1.5 shares of an identical series of stock of AOL Time Warner Inc. ("AOL Time Warner"). Following this conversion, Liberty Media Group owns approximately 171 million shares of AOL Time Warner, which represents an approximate 4% interest in the combined entity. Pursuant to an option granted by Liberty Media Group, Time Warner acquired Southern Satellite Systems, Inc., effective January 1, 1998, for $213 million in cash. Liberty Media Group recognized a $515 million pre-tax gain in connection with such transaction in the first quarter of 1998. (continued) News Corp. On July 15, 1999, News Corp. acquired Liberty Media Group's 50% interest in Fox/Liberty Networks in exchange for 51.8 million News Corp. American Depository Receipts ("ADRs") representing preferred limited voting ordinary shares of News Corp. Of the 51.8 million ADRs received, 3.6 million were placed in an escrow (the "Escrow Shares") pending an independent third party valuation, as of the third anniversary of the transaction. The remainder of the 51.8 million ADRs received (the "Restricted Shares") are subject to a two-year lockup which restricts any transfer of the securities for a period of two years from the date of the transaction. Liberty Media Group recorded the Restricted Shares at fair value of $1,403 million, which included a discount from market value due to the two-year restriction on transfer, resulting in a $13 million gain on the transaction. In a related transaction, Liberty Media Group acquired from News Corp. 28.1 million additional ADRs representing preferred limited voting ordinary shares of News Corp. for approximately $695 million. Liberty Media Group accounts for its investment in News Corp. as an available-for-sale security. Motorola On January 5, 2000, Motorola completed the acquisition of 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 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. During 2000, Liberty Media Group exercised a warrant to purchase approximately 9 million shares of Motorola common stock at an exercise price of $8.26 per share. At December 31, 2000 Liberty Media Group holds approximately 63 million shares of Motorola common stock and vested warrants to purchase an additional 28 million shares of such common stock. AT&T During July 1998, Teleport was acquired by AT&T and Liberty Media Group received in exchange for all of its interest in Teleport approximately 70.4 million shares of AT&T common stock. Liberty Media Group recognized a $2.3 billion gain (excluding related tax expense of $883 million) on such transaction during the third quarter of 1998 based on the difference between the carrying value of Liberty Media Group's interest in Teleport and the fair value of the AT&T common stock received. (continued) Investments in available-for-sale securities are summarized as follows: December 31, --------------------------- 2000 1999 ------------ ------------ amounts in millions Equity securities: Cost basis $ 17,641 13,661 Gross unrealized holding gains 2,254 11,457 Gross unrealized holding losses (2,620) (646) ------------ ------------ Fair value 17,275 24,472 ------------ ------------ Debt securities: Cost basis 1,533 2,017 Gross unrealized holding gains 86 -- Gross unrealized holding losses (64) (22) ------------ ------------ Fair value $ 1,555 1,995 ------------ ------------ Management estimates the fair market value of all of its investments in available-for-sale securities and others aggregated $19.7 billion and $29.2 billion at December 31, 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. Equity Collars and Put Spread Collars The Company enters into equity collars and put spread collars to manage pricing risk associated with its investments in certain marketable securities. These instruments are recorded at fair value based on option pricing models using the historical volatility of the underlying security. Accounting for changes in fair value of these instruments depends on the amount of correlation between the change in the fair value of the instrument and the offsetting change in the underlying equity security. Equity collars generally have a high correlation with the underlying security, while put spread collars generally do not have high correlation. Accordingly, changes in the fair value of the equity collar are recorded as an adjustment to the carrying value of the related investment with an offsetting change recorded in other comprehensive earnings. The offsetting change in the value of put spread collars is recorded in the combined statements of operations as unrealized gains on financial instruments. The following table illustrates the fair value of the Company's equity collars and put spread collars as follows: December 31, ------------------------ Type of Derivative 2000 1999 ------------------ ---------- ---------- Equity collars $ 1,293 (633) Put spread collars 188 -- (continued) (6) Impairment of Investments During the year ended December 31, 2000, Liberty Media Group determined that its investments in ICG Communications, Inc. ("ICG"), Teligent, Motorola, Primedia, Inc. and certain others experienced other than temporary declines in value. As a result, the cost bases of such investments were adjusted to their respective fair values at December 31, 2000 based primarily on recent quoted market prices. These adjustments resulted in realized losses of approximately $2.8 billion and are reflected as impairment of investments in the combined statements of operations. (7) Acquisitions and Dispositions 2000 Associated Group, Inc. ("Associated Group") 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 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 attributed net assets. (continued) Liberty Satellite and Technology, Inc. ("LSAT") 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 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 tax expense of $84 million) based on the difference between the cost basis and fair value of the economic interest in the Sprint PCS Group stock exchanged. Ascent Entertainment Group, Inc. ("Ascent") On March 28, 2000, Liberty Media Group announced that it had completed its cash tender offer for the outstanding common stock of 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 $228 million excess of the purchase price over the fair value of the net assets acquired is being amortized over 5 years. Liberty Livewire Corporation ("Liberty Livewire") 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 the AT&T Class A Liberty Media Group common stock issued in this transaction, Liberty Media Group recorded a $145 million increase to combined attributed net assets 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. (continued) 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 the AT&T Class A Liberty Media Group common stock issued in this transaction, Liberty Media Group recorded a $106 million increase to combined attributed net assets 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. 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. 1999 TV Guide On March 1, 1999, United Video Satellite Group, Inc. ("UVSG") and News Corp. completed a transaction whereby UVSG acquired News Corp.'s TV Guide properties and UVSG was renamed TV Guide. Upon completion of this transaction, and another transaction completed by TV Guide on the same date, Liberty Media Group owned an economic interest of approximately 44% and controlled approximately 49% of the voting power of TV Guide. 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). Upon consummation, Liberty Media Group began accounting for its interest in TV Guide under the equity method of accounting. (continued) 1998 Pramer S.A. ("Pramer") On August 24, 1998, Liberty Media Group purchased 100% of the issued and outstanding common stock of Pramer, an Argentine programming company, for a total purchase price of $97 million, which was satisfied by $32 million in cash and the issuance of notes payable in the amount of $65 million. Such transaction was accounted for under the purchase method. Accordingly, the results of operations of Pramer have been consolidated with those of Liberty Media Group since August 24, 1998. The $101 million excess cost over acquired net assets is being amortized over ten years. Other During 1998, TCI acquired certain minority interests of TV Guide and Liberty Media International, Inc. (formerly named Tele-Communications International, Inc.). The transactions were accounted for as acquisitions of minority interests. The aggregate value assigned to the shares issued by TCI was based upon the market value of the shares issued at the time each transaction was announced. Immediately following the transactions TCI contributed the minority interests acquired to Liberty Media Group. The contributions were recorded as an increase to combined attributed net assets of $772. Proforma Information The following unaudited condensed results of operations for the years ended December 31, 2000 and 1999 were prepared assuming the 2000 acquisitions discussed above and the AT&T Merger occurred on January 1, 1999. These pro forma amounts are not necessarily indicative of operating results that would have occurred if the acquisitions discussed above and the AT&T Merger had occurred on January 1, 1999. Years ended December 31, ----------------------- 2000 1999 ---------- ---------- (amounts in millions) Revenue $ 1,769 1,848 Net earnings (loss) $ 1,416 (2,853) (continued) (8) Long-Term Debt Debt is summarized as follows: Weighted average interest rate December 31, ---------------------- 2000 2000 1999 --------- ---------- ---------- amounts in millions Parent company debt: Senior notes 7.88% $ 742 741 Senior debentures 8.33% 1,486 494 Senior exchangeable debentures 3.70% 1,679 1,022 Securities lending agreement 6.53% 338 -- Bank credit facilities 7.43% 475 390 ---------- --------- 4,720 2,647 Debt of subsidiaries: Bank credit facilities 8.41% 1,129 573 Senior notes 11.88% 179 -- Other debt, at varying rates 335 57 ---------- --------- 1,643 630 ---------- --------- Total debt 6,363 3,277 Less current maturities 1,094 554 ---------- --------- Total long-term debt $ 5,269 2,723 ========== ========= Senior Notes and Debentures On July 7, 1999, Liberty Media Group issued $750 million of 7-7/8% Senior Notes due 2009 and issued $500 million of 8-1/2% Senior Debentures due 2029 for aggregate cash proceeds of $741 million and $494 million, respectively. Interest on both issuances is payable on January 15 and July 15 of each year. On February 2, 2000, Liberty Media Group issued $1 billion of 8-1/4% Senior Debentures due 2030 for aggregate cash proceeds of $983 million. Interest on these debentures is payable on February 1 and August 1 of each year. The senior notes and debentures are stated net of an aggregate unamortized discount of $22 million and $15 million at December 31, 2000 and 1999, respectively, which is being amortized to interest expense in the combined statements of operations. Senior Exchangeable Debentures On November 16, 1999, Liberty Media Group issued $869 million of 4% Senior Exchangeable Debentures due 2030 for aggregate cash proceeds of $854 million. Interest is payable on May 15 and November 15 of each year. Each $1,000 debenture is exchangeable at the holder's option for the value of 22.9486 shares of Sprint PCS Group stock. After the later of December 31, 2001 or the date Liberty Media Group's ownership level in the Sprint PCS Group falls below a specified level, Liberty Media Group may, at its election, pay the exchange value in cash, Sprint PCS Group stock or a combination thereof. Prior to such time, the exchange value must be paid in cash. (continued) On February 10, 2000, Liberty Media Group issued $750 million of 3-3/4% Senior Exchangeable Debentures due 2030 for aggregate cash proceeds of $735 million. On March 8, 2000, an additional $60 million of 3-3/4% Senior Exchangeable Debentures due 2030 were issued for aggregate proceeds of $59 million. Interest is payable on February 15 and August 15 of each year. Each $1,000 debenture is exchangeable at the holder's option for the value of 16.7764 shares of Sprint PCS Group stock. After the later of February 15, 2002 or the date Liberty Media Group's ownership level in the Sprint PCS Group falls below a specified level, Liberty Media Group may, at its election, pay the exchange value in cash, Sprint PCS Group stock or a combination thereof. Prior to such time, the exchange value must be paid in cash. 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. Securities Lending Agreement 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 $338 million at December 31, 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. Unutilized cash collateral of $49 million at December 31, 2000 represents restricted cash and is included in other current assets on the combined balance sheets. At December 31, 2000, Liberty Media Group had utilized $289 million of the cash collateral under the securities lending agreement. At December 31, 2000, Liberty Media Group had approximately $270 million in unused lines of credit under its bank credit facilities. The bank credit facilities of Liberty Media Group generally contain restrictive covenants which require, among other things, the maintenance of certain financial ratios, and include limitations on indebtedness, liens, encumbrances, acquisitions, dispositions, guarantees and dividends. Liberty Media Group was in compliance with its debt covenants at December 31, 2000. Additionally, Liberty Media Group pays fees ranging from .15% to .375% per annum on the average unborrowed portions of the total amounts available for borrowings under bank credit facilities. The U.S. dollar equivalent of the annual maturities of Liberty Media Group's debt for each of the next five years are as follows: 2001: $1,094 million; 2002: $28 million; 2003: $132 million; 2004: $270 million and 2005: $347 million. (continued) Based on quoted market prices, the fair value of Liberty Media Group's debt at December 31, 2000 is as follows (amounts in millions): Senior notes of parent company $ 737 Senior debentures of parent company 1,384 Senior exchangeable debentures of parent company 1,053 Senior notes of subsidiary 184 Liberty Media Group believes that the carrying amount of the remainder of its debt approximated its fair value at December 31, 2000. (9) Income Taxes Subsequent to the AT&T Merger, Liberty Media Group is included in the consolidated federal income tax return of AT&T and is a party to a tax sharing agreement with AT&T (the "AT&T Tax Sharing Agreement"). Liberty Media Group calculates its respective tax liability on a separate return basis. The income tax provision for Liberty Media Group is calculated based on the increase or decrease in the tax liability of the AT&T consolidated group resulting from the inclusion of those items in the consolidated tax return of AT&T which are attributable to Liberty Media Group. Under the AT&T Tax Sharing Agreement, Liberty Media Group receives a cash payment from AT&T in periods when it generates taxable losses and such taxable losses are utilized by AT&T to reduce the consolidated income tax liability. This utilization of taxable losses is accounted for by Liberty Media Group as a current federal intercompany income tax benefit. To the extent such losses are not utilized by AT&T, such amounts are available to reduce federal taxable income generated by Liberty Media Group in future periods, similar to a net operating loss carryforward, and are accounted for as a deferred federal income tax benefit. In periods when Liberty Media Group generates federal taxable income, AT&T has agreed to satisfy such tax liability on Liberty Media Group's behalf up to a certain amount. The reduction of such computed tax liabilities will be accounted for by Liberty Media Group as an addition to combined attributed net assets. The total amount of future federal tax liabilities of Liberty Media Group which AT&T will satisfy under the AT&T Tax Sharing Agreement is approximately $830 million, which represents the tax effect of the net operating loss carryforward reflected in TCI's final federal income tax return, subject to IRS adjustments. Thereafter, Liberty Media Group is required to make cash payments to AT&T for federal tax liabilities of Liberty Media Group. To the extent AT&T utilizes existing net operating losses of Liberty Media Group, such amounts will be accounted for by Liberty Media Group as a reduction of combined attributed net assets. Net operating losses of Liberty Media Group with a tax effected carrying value of $38 million and $88 million were recorded as a reduction to combined attributed net assets during the year ended December 31, 2000 and the ten months ended December 31, 1999. Liberty Media Group will generally make cash payments to AT&T related to states where it generates taxable income and receive cash payments from AT&T in states where it generates taxable losses. (continued) Prior to the AT&T Merger, Liberty Media Group was included in TCI's consolidated tax return and was a party to the TCI tax sharing agreements. Liberty Media Group's obligation under the 1995 TCI Tax Sharing Agreement of approximately $138 million (subject to adjustment), which is included in "due to related parties," shall be paid at the time, if ever, that Liberty Media Corporation deconsolidates from AT&T. Liberty Media Group's receivable under the 1997 TCI Tax Sharing Agreement of approximately $220 million was forgiven in the AT&T Tax Sharing Agreement and recorded as an adjustment to combined attributed net assets by Liberty Media Group in connection with the AT&T Merger. Income tax benefit (expense) consists of:
New Liberty Old Liberty --------------------------- ------------------------------ Year Ten months Two months Year ended ended ended ended December 31, December 31, February 28, December 31, ------------ ------------ ------------- ------------ 2000 1999 1999 1998 ------------ ------------ ------------- ------------ amounts in millions Current: Federal $ 277 75 (3) (1) State and local 10 (3) (1) (2) Foreign -- -- -- (1) ------------ ------------ ------------- ------------ 287 72 (4) (4) ------------ ------------ ------------- ------------ Deferred: Federal (1,490) 873 (169) (1,190) State and local (331) 152 (36) (200) Foreign -- -- -- (3) ------------ ------------ ------------- ------------ (1,821) 1,025 (205) (1,393) ------------ ------------ ------------- ------------ Income tax benefit (expense) $ (1,534) 1,097 (209) (1,397) ============ ============ ============= ============
(continued) Income tax benefit (expense) differs from the amounts computed by applying the U.S. federal income tax rate of 35% as a result of the following:
New Liberty Old Liberty ------------ ------------ ------------ ------------ Year Ten months Two months Year ended ended ended ended December 31, December 31, February 28, December 31, ------------ ------------ ------------ ------------ 2000 1999 1999 1998 ------------ ------------ ------------ ------------ amounts in millions Computed expected tax benefit (expense) $ (1,058) 1,092 (53) (1,244) Dividends excluded for income tax purposes 22 11 6 16 Minority interest in equity of subsidiaries 22 16 3 33 Amortization not deductible for income tax purposes (187) (122) (4) (21) State and local income taxes, net of federal income taxes (204) 102 (29) (132) Recognition of difference in income tax basis of investments in subsidiaries (69) -- (133) (1) Change in valuation allowance (50) -- -- (44) Other, net (10) (2) 1 (4) ------------ ------------ ------------- ------------ $ (1,534) 1,097 (209) (1,397) ============ ============ ============ ============
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2000 and 1999 are presented below: December 31, ---------------------------- 2000 1999 ------------- ------------ amounts in millions Deferred tax assets: Net operating and capital loss carryforwards $ 295 43 Accrued stock compensation 247 749 Other future deductible amounts -- 61 --------- ------------ Deferred tax assets 542 853 Less valuation allowance 131 50 --------- ------------ Net deferred tax assets 411 803 --------- ------------ Deferred tax liabilities: Investments in affiliates 11,255 13,915 Intangible assets 221 200 Other 30 45 --------- ------------ Deferred tax liabilities 11,506 14,160 --------- ------------ Net deferred tax liabilities $ 11,095 13,357 ========= ============ (continued) At December 31, 2000, Liberty Media Group had net operating and capital loss carryforwards for income tax purposes aggregating approximately $800 million which, if not utilized to reduce taxable income in future periods, will expire as follows: 2004: $63 million; 2005: $42 million; 2006: $14 million; 2007: $27 million; 2008: $12 million; 2009: $23 million; 2010: $34 million; and beyond 2010: $585 million. These net operating losses are subject to certain rules limiting their usage. (10) Combined Attributed Net Assets Stock Purchases During the year ended December 31, 2000, pursuant to a stock repurchase program, 14 million shares of AT&T Class A Liberty Media Group common stock were purchased at an aggregate cost of $269 million. Such amount is reflected as a decrease to combined attributed net assets in the accompanying combined financial statements. During the year ended December 31, 1998, pursuant to a stock repurchase program, Liberty Media Group repurchased .2 million shares of TCI's then outstanding TCI Ventures Group tracking stock and 1.5 million shares of TCI's then outstanding Liberty Media Group tracking stock at an aggregate cost of approximately $30 million. Stock Issuances of Subsidiaries and Equity Affiliates Certain consolidated subsidiaries and equity affiliates of Liberty Media Group have issued shares of common stock in connection with acquisitions and the exercise of 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 attributed net assets as follows (amounts in millions): Ten months Year ended ended December 31, December 31, 2000 1999 ------------ ------------ Stock issuances by consolidated subsidiaries $ 212 107 Stock issuances by equity affiliates (net of deferred income taxes of $75 million and $1 million, respectively) 143 1 ------------ ------------ $ 355 108 ============ ============ (continued) Transactions with Officers and Directors In December 2000, Liberty Media Group entered into an agreement to guaranty the repayment of a revolving line of credit extended by a financial institution to a director of Liberty Media Group with an aggregate available amount of up to $19.2 million. In consideration of this guaranty, the director has agreed to pay Liberty Media Group an annual fee of $96,000, payable quarterly, for each year of the two year term of the line of credit. To secure the director's repayment of any amount paid by Liberty Media Group under the guaranty, the director has granted to Liberty Media Group a security interest in all of his stock options and tandem or free-standing SARs with respect to shares of AT&T's Liberty Media Group tracking stock and shares of AT&T's common stock. If the value of these securities fall below two times the amount of the loan Liberty Media Group has guaranteed, the director is required to pledge additional collateral to Liberty Media Group of sufficient value to maintain the two-times coverage ratio. In November 2000, Liberty Media Group granted certain officers, a director of Liberty Media Group and a board member of a subsidiary an aggregate 4.0725% common stock interest in a subsidiary that owns a direct interest in Liberty Livewire. The common stock interest granted to these individuals had a value of approximately $400,000. The subsidiary also awarded the director of Liberty Media Group a deferred bonus in the initial total amount of approximately $3.4 million, which amount will decrease by an amount equal to any increase over the five-year period from the date of the award in the value of certain of the common shares granted to the director. Liberty Media Group and the individuals entered into a stockholders' agreement in which the individuals could require Liberty Media Group to repurchase, after five years, all or part of their common stock interest in exchange for AT&T Class A Liberty Media Group common stock at its then fair market value. In addition, Liberty Media Group has the right to repurchase, in exchange for AT&T Class A Liberty Media Group common stock, the common stock interests held by the individuals at fair market value at any time. In October 2000, Liberty Media Group restructured its ownership interests in certain assets into a new consolidated subsidiary. Liberty Media Group then sold a preferred interest in such subsidiary to the Chairman of the Board of Directors in exchange for approximately 540,000 shares of LSAT Series A common stock, approximately 3.3 million shares of LSAT Series B common stock and cash consideration of approximately $88 million. No gain or loss was recognized due to the related party nature of such transaction. In September 2000, certain officers of Liberty Media Group purchased a 6% common stock interest in a 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 a 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 purchase, in exchange for AT&T Class A Liberty Media Group common stock, the common stock interests held by the officers at fair market value at any time. (continued) In August 2000, a subsidiary of Liberty Media Group sold shares of such subsidiary's Series A Convertible Participating Preferred Stock (the "Preferred Shares") to a director of Liberty Media Group, who is also the Chairman and Chief Executive Officer of such subsidiary, for a $21 million note. The Preferred Shares are convertible into 1.4 million shares of the subsidiary's common stock. The note is secured by the Preferred Shares or the proceeds from the sale of such shares and the director's personal obligations under such loan are limited. The note, which matures on August 1, 2005, may not be prepaid and interest on the note accrues at a rate of 7% per annum. In May 2000, an officer of Liberty Media Group, certain officers of a subsidiary and another individual purchased an aggregate 20% common stock interest in a subsidiary for $800,000. This subsidiary owns a 10% interest in Jupiter Telecommunications Co., Inc. Liberty Media Group and the individuals entered into a shareholders agreement in which the individuals could require a 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 its then fair market value. In addition, Liberty Media Group has the right to purchase, in exchange for AT&T Class A Liberty Media Group common stock, the common stock interests held by the officers at fair market value at any time. Liberty Media Group recognized $3 million of compensation expense related to changes in the market value of its contingent liability to reacquire the common stock interests held by these officers during the year ended December 31, 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. Liberty Media Group is party to a call agreement with certain shareholders of AT&T Class B Liberty Media Group common stock, including the Chairman of the Board of Directors, which grants Liberty Media Group a right to acquire all of the AT&T Class B Liberty Media Group common stock held by such shareholders in certain circumstances. The price of acquiring such shares is generally limited to the market price of the AT&T Class A Liberty Media Group common stock, plus a 10% premium. Liberty Media Group paid an aggregate $140 million to these shareholders for the rights under the call agreement in February 1998. Transactions with AT&T and Other Related Parties Certain subsidiaries of Liberty Media Group produce and/or distribute programming and other services to cable distribution operators (including AT&T) and others pursuant to long term affiliation agreements. Charges to AT&T are based upon customary rates charged to others. Amounts included in revenue for services provided to AT&T were $243 million, $180 million, $43 million and $258 million for the twelve months ended December 31, 2000, the ten months ending December 31, 1999, the two month period ending February 28, 1999 and the year ended December 31, 1998, respectively. (continued) AT&T allocates certain corporate general and administrative costs to Liberty Media Group pursuant to an intergroup agreement for services provided. Management believes such allocation methods are reasonable and materially approximate the amount that Liberty Media Group would have incurred on a stand-alone basis. In addition, there are arrangements between subsidiaries of Liberty Media Group and AT&T and its other subsidiaries for satellite transponder services, marketing support, programming, and hosting services. These expenses aggregated $37 million, $24 million, $2 million and $28 million during the year ended December 31, 2000, the ten months ended December 31, 1999, the two months ended February 28, 1999 and the year ended December 31, 1998, respectively, and are included in operating, selling, general and administrative expenses in the accompanying combined statements of operations and comprehensive earnings. On April 8, 1999, Liberty Media Group redeemed all of its outstanding 4-1/2% convertible subordinated debentures. The debentures were convertible into shares of AT&T Liberty Media Group Class A common stock at a conversion price of $11.77, or 84.96 shares per $1,000 principal amount. Certain holders of the debentures had exercised their rights to convert their debentures and 29.2 million shares of AT&T Liberty Media Group tracking stock were issued to such holders. In connection with such issuance of AT&T Liberty Media Group tracking stock, Liberty Media Group recorded an increase to combined attributed net assets of $354 million. During September 1998, TCI assigned its obligation under an option contract to Liberty Media Group. As a result of such assignment, Liberty Media Group recorded a $16 million reduction to the intercompany amount due to TCI and a corresponding increase to combined attributed net assets. 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. (continued) (11) Other Comprehensive Earnings Accumulated other comprehensive earnings included in Liberty Media Group's combined balance sheets and combined statements of attributed net assets reflect the aggregate of foreign currency translation adjustments and unrealized holding gains and losses on securities classified as available-for-sale. The change in the components of accumulated other comprehensive earnings, net of taxes, is summarized as follows:
Accumulated Foreign other currency Unrealized comprehensive translation gains on earnings, net adjustments securities of taxes ------------------------------------- ----------------- amounts in millions Balance at January 1, 1998 $ 3 765 768 Other comprehensive earnings 3 2,947 2,950 ---------------- -------------- ------------------ Balance at December 31, 1998 6 3,712 3,718 Other comprehensive earnings (loss) (15) 971 956 ---------------- -------------- ------------------ Balance at February 28, 1999 $ (9) 4,683 4,674 ================ ============== ================== ----------------------------------------------------------------------------------------------------------- Balance at March 1, 1999 $ -- -- -- Other comprehensive earnings 60 6,497 6,557 ---------------- -------------- ------------------ Balance at December 31, 1999 60 6,497 6,557 ---------------- -------------- ------------------ Other comprehensive earnings (202) (6,752) (6,954) ---------------- -------------- ------------------ Balance at December 31, 2000 $ (142) (255) (397) ================ ============== ==================
(continued) The components of other comprehensive earnings are reflected in Liberty Media Group's combined statements of operations and comprehensive earnings, net of taxes and reclassification adjustments for gains realized in net earnings (loss). The following table summarizes the tax effects and reclassification adjustments related to each component of other comprehensive earnings.
Tax Before-tax (expense) Net-of-tax amount benefit amount --------------- ------------- ------------ amounts in millions Year ended December 31, 2000: Foreign currency translation adjustments $ (334) 132 (202) ------------- ------------- --------------- Unrealized gains on securities: Unrealized holding losses arising during period (10,119) 4,002 (6,117) Less reclassification adjustment for gains realized in net loss (1,050) 415 (635) ------------- ------------- --------------- Net unrealized losses (11,169) 4,417 (6,752) ------------- ------------- --------------- Other comprehensive earnings $ (11,503) 4,549 (6,954) ============= ============= =============== Ten months ended December 31, 1999: Foreign currency translation adjustments $ 99 (39) 60 --------------------------- --------------- Unrealized gains on securities: Unrealized holding gains arising during period 10,736 (4,246) 6,490 Less reclassification adjustment for losses realized in net loss 12 (5) 7 --------------------------- --------------- Net unrealized gains 10,748 (4,251) 6,497 --------------------------- --------------- Other comprehensive earnings $ 10,847 (4,290) 6,557 =========================== =============== ------------------------------------------------------------------------------------------------------------- Two months ended February 28, 1999: Foreign currency translation adjustments $ (25) 10 (15) Unrealized gains on securities: Unrealized holding gains arising during period 1,606 (635) 971 --------------------------- --------------- Other comprehensive earnings $ 1,581 (625) 956 =========================== =============== Year ended December 31, 1998: Foreign currency translation adjustments $ 5 (2) 3 Unrealized gains on securities: Unrealized holding gains arising during period 4,875 (1,928) 2,947 ---------------------------- --------------- Other comprehensive earnings $ 4,880 (1,930) 2,950 =========================== ===============
(continued) (12) Commitments and Contingencies Starz Encore Group, a wholly owned subsidiary of 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 2017 (the "Film Licensing Obligations"). Based on customer levels at December 31, 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. Liberty Media Group has guaranteed various loans, notes payable, letters of credit and other obligations (the "Guaranteed Obligations") of certain affiliates. At December 31, 2000, the Guaranteed Obligations aggregated approximately $659 million. Currently, Liberty Media Group is not certain of the likelihood of being required to perform under such guarantees. Liberty Media Group leases business offices, has entered into pole rental and transponder lease agreements and uses certain equipment under lease arrangements. Rental expense under such arrangements amounts to $50 million, $30 million, $18 million and $98 million for the year ended December 31, 2000, for the ten months ended December 31, 1999, the two months ended February 28, 1999 and the year ended December 31, 1998, respectively. A summary of future minimum lease payments under noncancelable operating leases as of December 31, 2000 follows (amounts in millions): Years ending December 31: 2001 $ 46 2002 41 2003 37 2004 32 2005 23 Thereafter 61 It is expected that in the normal course of business, leases that expire generally will be renewed or replaced by leases on other properties; thus, it is anticipated that future minimum lease commitments will not be less than the amount shown for 2000. Liberty Media Group has contingent liabilities related to legal proceedings and other matters arising in the ordinary course of business. Although it is reasonably possible Liberty Media Group may incur losses upon conclusion of such matters, an estimate of any loss or range of loss cannot be made. In the opinion of management, it is expected that amounts, if any, which may be required to satisfy such contingencies will not be material in relation to the accompanying combined financial statements. (continued) (13) Proposed Split Off Transaction AT&T currently owns all the outstanding shares of Class A Common Stock, Class B Common Stock and Class C Common Stock of Liberty Media Corporation. Subsequent to December 31, 2000, AT&T initiated a process for effecting a split off of Liberty Media Corporation from AT&T by means of a redemption of AT&T Liberty Media Group tracking stock (the "Split Off Transaction"). Prior to the Split Off Transaction, Liberty Media Corporation will increase its authorized capital stock. The Liberty Class A and Class B Common Stock will be reclassified as Series A Liberty Media Corporation common stock ("Series A common stock"), and the Class C Common Stock will be reclassified as Series B Liberty Media Corporation common stock ("Series B common stock"). In the Split Off Transaction, each share of Class A and Class B Liberty Media Group Common Stock will be exchanged for a like share of Liberty Media Corporation Series A common stock and Liberty Media Corporation Series B common stock, respectively. Upon completion of the Split Off Transaction, Liberty Media Corporation will no longer be a subsidiary of AT&T, and no shares of AT&T Liberty Media Group tracking stock will be outstanding. The Split Off Transaction will be accounted for at historical cost. There can be no assurance that the split off will be effected. Immediately prior to the Split Off Transaction, AT&T will contribute to Liberty Media Corporation assets that are currently attributed to the Liberty Media Group but not held by Liberty Media Corporation (the "Contributed Assets"). These assets include (i) a preferred stock interest and common stock warrants in ICG, a competitive local exchange telephone company; (ii) an approximate 34% common equity interest in Teligent, a full service facilities based communications company and (iii) an approximate 8% indirect common equity interest in Liberty Digital, Inc., a consolidated subsidiary. The contributions will be accounted for in a manner similar to a pooling of interests and, accordingly, the financial statements of Liberty Media Corporation for periods prior to contributions will be restated to include the financial position and results of operations of the Contributed Assets once this transaction is completed. In connection with the Split Off Transaction, Liberty Media Corporation will also be deconsolidated from AT&T for federal income tax purposes. As a result, AT&T will be required to pay Liberty Media Corporation an amount equal to 35% of the amount of the net operating loss carryforward reflected in TCI's final federal income tax return that has not been used as an offset to our obligations under the Tax Sharing Agreement and that has been, or is reasonably expected to be, utilized by AT&T. The payment will be reduced by Liberty Media Corporation's obligation under the 1995 TCI Tax Sharing Agreement. The expected net payment from AT&T is approximately $692 million. In addition, certain deferred intercompany gains will be includible in taxable income as a result of the Split Off Transaction and the resulting tax liability of approximately $122 million will be an obligation to Liberty Media Corporation. -----END PRIVACY-ENHANCED MESSAGE-----