0000950123-01-506597.txt : 20011009
0000950123-01-506597.hdr.sgml : 20011009
ACCESSION NUMBER: 0000950123-01-506597
CONFORMED SUBMISSION TYPE: 8-K
PUBLIC DOCUMENT COUNT: 4
CONFORMED PERIOD OF REPORT: 20010924
ITEM INFORMATION: Other events
ITEM INFORMATION: Financial statements and exhibits
FILED AS OF DATE: 20010924
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: 8-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-01105
FILM NUMBER: 1743832
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
8-K
1
y533468ke8-k.txt
AT&T CORP.
1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report: September 24, 2001
AT&T CORP.
A New York Commission File I.R.S. Employer
Corporation No. 1-1105 No.13-4924710
32 Avenue of the Americas, New York, New York 10013-3412
Telephone Number (212) 387-5400
2
Form 8-K AT&T Corp.
September 24, 2001
ITEM 5 OTHER EVENTS.
AT&T Corp. Consolidated financial information
a) On July 9, 2001, AT&T completed the split-off of AT&T Wireless as a
separate, independently traded company. This transaction was a tax free
transaction as ruled by the Internal Revenue Service on May 29, 2001. AT&T
Corp. is making available its audited consolidated financial results and
certain other information for the year ended December 31, 2000 restated to
reflect AT&T Wireless as a discontinued operation. Filed as Exhibit 99 to
this 8-K is the following information:
1. Management's Discussion and Analysis.
2. Five-Year Summary of Selected Financial Data.
3. Report of Independent Accountants.
4. Consolidated Statements of Income for the Years Ended December 31,
2000, 1999 and 1998.
5. Consolidated Balance Sheets at December 31, 2000 and 1999.
6. Consolidated Statement of Changes in Shareowners' Equity for the
Years Ended December 31, 2000, 1999 and 1998.
7. Consolidated Statements of Cash flows for the Years Ended December
31, 2000, 1999 and 1998.
8. Notes to the Consolidated Financial Statements.
9. Schedule II - Valuation and Qualifying Accounts.
10. Ratio of Earnings to Fixed Charges.
b) AT&T Corp. is making available its 2000 quarterly income statements as
well as 2000 quarterly segment information restated to reflect AT&T
Wireless as a discontinued operation. This information is included in
Exhibit 99.1 to this 8-K.
ITEM 7 Financial Statements and Exhibits.
c) Exhibits.
Exhibit 23 Consent of PricewaterhouseCoopers LLP
Exhibit 99 AT&T Corp. consolidated financial results and certain
other information for the year ended December 31, 2000.
Exhibit 99.1 AT&T Corp. restated quarterly income statements and
segment information for the year ended December 31,
2000.
3
Form 8-K AT&T Corp.
September 24, 2001
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AT&T CORP.
/s/ N. S. Cyprus
----------------------------------
By: N. S. Cyprus
Vice President and Controller
September 24, 2001
EX-23
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y533468kex23.txt
CONSENT OF PRICEWATERHOUSECOOPERS LLP
1
EXHIBIT 23
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-
2
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
3
(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, except for Note 6 as to which
the date is May 29, 2001, and Note 23 as to which the date is August 10, 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 Current Report on Form 8-K. We
also consent to the incorporation by reference of our report dated March 16,
2001 relating to the consolidated financial statement schedule, which appears in
this Form 8-K.
PricewaterhouseCoopers LLP
New York, New York
September 24, 2001
EX-99
4
y533468kex99.txt
CONSOLIDATED FINANCIAL RESULTS
1
Exhibit 99
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 and local 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. The results of
AT&T Wireless Group, both the 16% financial performance reflected in the AWE
tracking stock and the 84% financial performance reflected in AT&T common stock,
are reported as income (loss) from discontinued operations in our Consolidated
Statements of Income.
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
and are reflected as earnings from discontinued operations of AT&T Wireless
group. Similarly, the earnings and losses related to LMG are excluded from the
earnings available to AT&T Common Stock Group.
2
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".
AT&T Wireless Group is an integrated business of AT&T and Liberty
Media Group is a combination of certain assets and businesses of AT&T, neither
of which is a stand-alone entity. As AT&T Wireless Group and Liberty Media Group
are tracking stocks of AT&T, separate financial statements are not required to
be filed. The tracking stocks are governed by a common board of directors, the
AT&T board of directors could make operational and financial decisions or
implement policies that affect disproportionately the businesses of any group.
For example, our board of directors may decide to transfer funds or to
reallocate assets, liabilities, revenue, expenses and cash flows among groups,
without the consent of shareholders. All actions by the board of directors are
subject to the board members' fiduciary duties to all shareholders of AT&T as a
group and not just to holders of a particular class of tracking stock and to our
charter, policy statements, by-laws and inter- company agreements.
Our board of directors may change or supplement the policies set
forth in the tracking stock policy statements and our by-laws in the sole
discretion of our board of directors, subject to the provisions of any
inter-group agreement but without approval of our shareholders. In addition, the
fact that we have separate classes of common stock could give rise to occasions
when the interests of the holders of AT&T common stock, AT&T Wireless Group
common stock and Liberty Media Group tracking stock diverge, conflict or appear
to diverge or conflict. Our board of directors would make any change or addition
to the policies set forth in the tracking stock policy statements or our
by-laws, and would respond to any actual or apparent divergence of interest
among our groups, in a manner consistent with its fiduciary duties to AT&T and
all of our shareholders after giving consideration to the potentially divergent
interests and all other relevant interests of the holders of the separate
classes of our shares.
You should consider that as a result of the flexibility provided to
our board of directors, it may be difficult for investors to assess the future
prospects of a tracking stock group based on that group's past performance.
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.
On July 8, 2001, Comcast Corp. (Comcast) made an unsolicited offer to acquire
AT&T Broadband. On July 18, AT&T's Board of Directors unanimously voted to
reject Comcast's proposal to acquire AT&T Broadband. The Board has directed
management to explore financial and strategic alternatives relating to AT&T
Broadband, including the previously announced restructuring plans, with the goal
to provide the greatest long-term value to shareowners. The Board also decided
to delay finalizing and mailing to shareowners the proxy materials, filed
preliminary with the SEC on July 3, 2001, for its current restructuring plans.
However, AT&T remains committed to separate AT&T Consumer and AT&T Business from
AT&T Broadband and to creating a separate tracking stock designed to represent
the financial performance of AT&T Consumer.
On May 25, 2001, AT&T completed an exchange offer of AT&T common
stock for AT&T Wireless stock. Under the terms of the exchange offer, AT&T
issued 1.176 shares of AT&T Wireless Group tracking stock in exchange for each
share of AT&T common stock validly tendered. A total of 372.2 million shares of
AT&T
3
common stock were tendered in exchange for 437.7 million shares of AT&T Wireless
Group tracking stock.
On July 9, 2001, AT&T completed the split-off of AT&T Wireless as a
separate, independently-traded company. All AT&T Wireless tracking stock was
converted into AT&T Wireless common stock on a one-for-one basis and 1,136
million shares of AT&T Wireless common stock, held by AT&T, was distributed to
AT&T common shareowners on a basis of 0.3218 of a share of AT&T Wireless for
each AT&T share outstanding. The split-off of AT&T Wireless will result in a
non-cash gain of approximately $13 billion, which represents the difference
between the fair value of the Wireless tracking stock at the date of the
split-off and AT&T's book value in AT&T Wireless Services. This gain will be
recorded in the third quarter of 2001 and be reflected as "Gain on the
disposition of discontinued operations." In addition, AT&T retained
approximately $3 billion, or 7.3%, of AT&T Wireless common stock, about half of
which was used in a debt-for-equity exchange in July which will result in a
pretax gain of approximately $0.5 billion to be recorded in other income. The
remaining shares are expected to be sold, exchanged or monetized within six
months of the split-off.
On August 10, 2001, AT&T completed the split-off of Liberty Media
Corporation as an independent, publicly-traded company. AT&T redeemed each
outstanding share of Class A and Class B Liberty Media Group (LMG) tracking
stock for one share of Liberty Media Corporation's Series A and Series B common
stock, respectively. The split-off will be recorded as a book value transaction,
therefore, no gain or loss will be recorded on the transaction.
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.
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
4
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:
- 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,
- 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,
- 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.
- the impact of oversupply of capacity resulting from excessive
deployment of network capacity,
- 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,
- 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,
- the ability to enter into agreements to provide, and the cost
of entering new markets necessary to provide services,
- the ability to establish a significant market presence in new
geographic and service markets,
- the availability and cost of capital and the consequences of
increased leverage,
- the successful execution of plans to dispose of non-strategic
assets as part of an overall corporate deleveraging plan,
- 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,
- the impact of any unusual items resulting from ongoing
evaluations of the business strategies of the company,
- the requirements imposed on the company or latitude allowed to
competitors by the Federal Communications Commission (FCC) or
5
state regulatory commissions under the Telecommunications Act
of 1996 or other applicable laws and regulations,
- the risks associated with technological requirements,
technology substitution and changes and other technological
developments,
- the results of litigation filed or to be filed against the
company,
- 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
- 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, which was included in our 2000 results
for part of the year, but was not in 1999 results. In 1999, we acquired TCI and
the IBM Global Network (now AT&T Global Network Services, or AGNS). 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
6
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 and AGNS, 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 .............. $ 28,900 $ 28,692 $ 25,357
Consumer Services .............. 18,894 21,753 22,763
Broadband ...................... 8,226 5,070 --
Other and Corporate ............ (487) (542) (303)
Total Revenue .................. $ 55,533 $ 54,973 $ 47,817
Total revenue increased 1.0%, or $0.6 billion, in 2000 compared with
the prior year primarily driven by a growing demand for our Internet protocol
(IP) products and outsourcing and broadband services of approximately $2.2
billion and the impact of acquisitions and the consolidation of Excite@Home,
offset by the impact of Concert, dispositions and the elimination of PICC of
approximately $1.5 billion. These revenue increases were offset by continued
declines in long distance voice revenue of approximately $2.9 billion. We expect
long distance revenue to continue to be negatively impacted by ongoing
competition and product substitution.
Total revenue in 1999 increased $7.2 billion, or 15.0%, compared
with 1998. Approximately $6.5 billion of the increase was due to acquisitions,
net of dispositions. The remaining increase was fueled by growth in 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
Access and other connection .... $13,140 $14,439 $15,116
Access and other connection expenses decreased 9.0%, to $13.1
billion in 2000, compared with $14.4 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 $0.6 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
7
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 $0.7 billion, or 4.5%,
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
Costs of services and products . $12,795 $11,013 $ 8,285
Costs of services and products include the costs of operating and
maintaining our networks, costs to support our outsourcing contracts,
programming and licensing costs for cable services, the provision for
uncollectible receivables and other service-related costs.
These costs increased $1.8 billion, or 16.2%, in 2000 compared with
1999. Nearly $1.9 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. Expense also increased due to higher costs associated
with new outsourcing contracts of approximately $0.5 billion and approximately
$0.3 billion of higher video-programming costs principally due to rate increases
and higher costs associated with new broadband services. 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 $2.7 billion, or 32.9%, in 1999
compared with 1998, primarily due to acquisitions, net of dispositions, which
accounted for approximately $3.6 billion of the increase. The higher costs
associated with new outsourcing contracts increased expenses by approximately
$0.2 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
Selling, general and administrative $ 9,752 $10,894 $10,693
8
Selling, general and administrative (SG&A) expenses decreased $1.1
billion, or 10.5%, 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. Partially offsetting this decrease
was approximately $0.5 billion of higher expenses associated with our growing
broadband business, and nearly $0.5 billion of expenses associated with
acquisitions and the consolidation of Excite@Home, net of the impact of Concert
and dispositions.
SG&A expenses increased $0.2 billion, or 1.9%, 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 $1.2 billion.
Largely offsetting this increase 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 $5,924 $5,137 $3,533
Depreciation and other amortization expenses rose $0.8 billion, or
15.3%, in 2000 compared with 1999 and increased $1.6 billion, or 45.4%, in 1999
compared with 1998. Approximately $0.5 billion of the increase in 2000 compared
with 1999 and $0.9 billion of the increase in 1999 compared with 1998,
respectively 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 $10.4
billion, $11.2 billion and $6.9 billion, respectively. We continue to focus the
vast majority of our capital spending on our growth businesses of broadband,
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 ...... $2,665 $1,057 $ 44
Amortization of goodwill, franchise costs and other purchased
intangibles increased $1.6 billion, or 152.3%, 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.
Amortization of goodwill, franchise costs and other purchased
intangibles increased $1.0 billion in 1999 compared with 1998 due primarily to
the acquisition of TCI and, to a lesser extent, AGNS.
As a result of our evaluation of recent changes in our industry and
the views of regulatory authorities, AT&T expects that the amortization period
for all licensing costs, franchise costs, and goodwill associated with newly
acquired telecommunications and cable operations will not exceed 25 years.
9
For the Years Ended December 31, 2000 1999 1998
------ ------ ------
Dollars in millions
Net restructuring and other charges $7,029 $ 975 $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.
10
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 $1.0 billion of net restructuring and other
charges, which had an approximate $0.27 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
11
products/services, anticipated incremental future cash flows attributable to
expected profits from such new products/services may not be realized.
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 $260 million in 2000, and is expected to save nearly
$260 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.
12
For the Years Ended December 31, 2000 1999 1998
------- ------- -------
Dollars in millions
Operating income ............... $ 4,228 $11,458 $ 7,632
Operating income decreased $7.2 billion, or 63.1%, in 2000 compared
with 1999. The decrease was primarily due to higher net restructuring and other
charges of $6.1 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 $3.8 billion, or 50.1%, in 1999 compared with
1998. The increase was driven by approximately $2.2 billion of operating income
improvements in Business Services and Consumer Services, reflecting operating
expense efficiencies, partially offset by higher restructuring charges for these
units. Also contributing to the increase was $1.9 billion of lower net
restructuring and other charges for all other units.
For the Years Ended December 31, 2000 1999 1998
------ ------ ------
Dollars in millions
Other income ................... $1,150 $ 826 $ 812
Other income increased $0.3 billion, or 39.3%, in 2000 compared with
1999. This increase was primarily due to greater net gains on sales of
businesses and investments of approximately $0.7 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
related transactions. These gains aggregated approximately $0.5 billion and had
an approximate $0.21 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 and a portion of our ownership interest in AT&T
Canada which aggregated approximately $0.3 billion and had an approximate $0.05
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 increased $14 million, or 1.8%, in 1999 compared with
1998. The increase was primarily due to higher net gains on sales of businesses
and investments of approximately $0.2 billion offset by 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 and a portion of
our ownership interest in AT&T Canada which aggregated approximately $0.3
billion and had an approximate $0.05 earnings per diluted share impact to the
AT&T Common Stock Group. In 1998, we recorded a significant gain associated with
the sale of AT&T Solutions Customer Care of approximately $0.4 billion and had
an approximate $0.08 earnings per diluted share impact to the AT&T Common Stock
Group.
13
For the Years Ended December 31, 2000 1999 1998
------ ------ ------
Dollars in millions
Interest expense ............... $2,964 $1,503 $ 293
Interest expense increased 97.2%, or $1.5 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.
Interest expense increased $1.2 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 ..... $3,284 $4,016 $2,989
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 136.1% in 2000, 37.3% in 1999 and 36.7% 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) $4,103 $ (126) $ (1)
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) --
14
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 $ 588 $ 756 $ 109
Net losses from other equity investments, which are recorded net of
income taxes, were $0.6 billion in 2000, a 22.2% improvement compared with
1999. This improvement was primarily a result of higher earnings from our
investment in Cablevision Systems Corp. (Cablevision) of approximately $0.2
billion due to gains from cable-system sales. Offsetting this increase 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 aggregrated approximately $0.1 billion. .
Net losses from other equity investments were $0.8 billion in 1999
compared with $0.1 billion 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 .............. $ 2,645 $ 5,883 $ 5,052
Income (loss) from discontinued operations ..... 460 (433) 193
Gain on sale of discontinued operations ........ -- -- 1,290
Earnings from continuing operations per share:
Basic ........................................ 0.76 1.91 1.89
Diluted ...................................... 0.75 1.87 1.87
Earnings (loss)from discontinued operations per
share:
Basic ........................................ 0.13 (0.14) 0.07
Diluted ...................................... 0.13 (0.13) 0.07
Gain on sale of discontinued operations -
basic and diluted ......................... -- -- 0.48
AT&T Wireless Group:
Income from discontinued operations ............ $ 76 -- --
Earnings from discontinued operations 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 continuing
operations of
15
the AT&T Common Stock Group were $0.75 in 2000 compared with $1.87 in 1999, a
decrease of 59.9%. 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 an increase in other income, primarily associated
with higher net gains on sales of businesses and investments, and higher
investment-related income, and lower losses from equity investments. 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 were $1.87 in both 1999 and 1998. EPS increased
primarily due to increased income from our Business and Consumer operations due
to revenue growth and operating expense efficiencies, as well as lower net
restructuring and other charges. Offsetting these increases was the impact of
the TCI and AGNS acquisitions, including the impact of shares issued and equity
losses of Excite@Home and Cablevision.
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, and AT&T Wireless, which was split-off from AT&T on July 9, 2001, as
discontinued operations. Accordingly, the revenue, costs and expenses, and cash
flows of UCS, through the date of disposition, and AT&T Wireless have been
excluded from the respective captions in the 2000, 1999 and 1998 Consolidated
Statements of Income and Consolidated Statements of Cash Flows and have been
reported as "Income from discontinued operations," net of applicable income
taxes; and as "Net cash provided by discontinued operations". The assets and
liabilities of AT&T Wireless have been excluded from the respective captions in
the December 31, 2000 and 1999 Consolidated Balance Sheets and are reported as
"Net assets of discontinued operations". The gain associated with the sale of
UCS is recorded as "Gain on sale of discontinued operations," net of applicable
income taxes in the 1998 Consolidated Statement of Income.
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 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.
16
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 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. 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 $8.4 billion, $10.9
billion and $8.3 billion for the years ended December 31, 2000, 1999 and 1998,
respectively. EBITDA for AT&T was $17.1 billion, $17.7 billion and $11.8 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. Business Services also includes the results of International
ventures and operations.
17
For the Years Ended December 31, 2000 1999 1998
------- ------- -------
Dollars in millions
External revenue ............... $28,157 $28,087 $25,001
Internal revenue ............... 743 605 356
Total revenue .................. 28,900 28,692 25,357
EBIT ........................... 5,990 5,248 4,017
EBITDA ......................... 10,200 9,468 7,376
Capital additions .............. 6,839 9,091 6,773
At December 31, 2000 1999
------- -------
Total assets .. $42,747 $37,974
REVENUE
In 2000, Business Services revenue grew $0.2 billion, or 0.7%,
compared with 1999. Strength in data and IP services as well as growth in our
outsourcing business contributed $1.8 billion to the increase. This growth was
largely offset by an approximate $0.9 billion decline in long distance voice
services as a result of continued pricing pressures in the industry and
approximately $0.5 billion due to the net impacts of Concert, international
dispositions and acquisitions.
Revenue in 1999 grew $3.3 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 $138 million, or 22.7%,
in 2000 and $249 million, or 70.0%, in 1999. The increase in 2000 was the result
of
18
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. In 1999, the increase in internal revenue was primarily due to greater
sales of long distance services to Wireless Services.
EBIT/EBITDA
EBIT improved $0.7 billion, or 14.2%, and EBITDA improved $0.7
billion, or 7.7%, 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.
In 1999, EBIT improved $1.2 billion, or 30.6%, and EBITDA improved
$2.1 billion, or 28.4%, 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 $2.3 billion in 2000, and increased $2.3
billion in 1999. In 2000, the decrease was a result of lower spending for our
long distance network (including the data network) and lower investment in
nonconsolidated international investments. In 1999, the increase was primarily
due to additional spending for the build out of our local services SONET
transport network and increased nonconsolidated international investments that
support our global strategy.
Total assets increased $4.8 billion, or 12.6%, 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, as well as
receivables from Concert, and higher goodwill due to AT&T Latin America.
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 ........................ $18,894 $21,753 $22,763
EBIT ........................... 6,893 7,619 6,289
EBITDA ......................... 7,060 7,803 6,406
Capital additions .............. 148 299 99
At December 31, 2000 1999
------ ------
Total assets ................... $3,150 $3,781
REVENUE
Consumer Services revenue declined 13.1%, 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,
19
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 4.4%,
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 $0.7 billion, or 9.5%, and EBITDA declined $0.7
billion, or 9.5%, 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 36.5% and 37.4%,
respectively, compared with 35.0% and 35.9%, respectively, in 1999.
EBIT grew $1.3 billion, or 21.1%, and EBITDA grew $1.4 billion, or
21.8%, in 1999. The EBIT margin improved to 35.0% in 1999 (excluding the gain on
the sale of Language Line Services, the 1999 EBIT margin was 34.3%) from 27.6%
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 $0.2 billion, or 50.6%, 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 201.9%,
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 $0.6 billion, or 16.7%, during 2000. The
decline was primarily due to assets transferred to Concert during 2000, as well
as lower accounts receivable, reflecting lower revenue.
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.
20
For the Years Ended December 31, 2000 1999
--------- --------
Dollars in millions
Revenue ............................. $ 8,226 $ 5,070
EBIT ................................ (1,240) (1,545)
EBITDA* ............................. 1,639 733
Capital additions ................... 4,968 4,759
At December 31, 2000 1999
--------- --------
Total assets ........................ $ 114,848 $ 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 $3.2 billion in 2000, or 62.3%, 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 19.7%. 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 $1.6 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
21
approximately $0.2 billion offset these increases.
OTHER ITEMS
Capital additions increased 4.4% 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 $114.8 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
Excite@Home.
For the Years Ended December 31, 2000 1999 1998
-------- -------- --------
Dollars in millions
Revenue ...................... $ (487) $ (542) $ (303)
EBIT ......................... (3,279) (441) (2,040)
EBITDA ....................... (2,382) 37 (1,938)
Capital additions ............ 1,683 271 310
At December 31, 2000 1999
-------- --------
Total assets ................. $ 12,101 $ 12,069
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)and revenue from Excite@Home of $0.2 billion (which was consolidated
beginning on September 1, 2000).
For 1999, revenue decreased $0.2 billion, or 78.6%. 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.
EBIT/EBITDA
EBIT and EBITDA deficits in 2000 increased $2.8 billion and $2.4
billion to $3.3 billion and $2.4 billion, respectively. The increases in the
deficits were largely related to Excite@Home. In 2000, restructuring and other
charges, net of minority interest, were $2.9 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 $0.6 billion. In addition, higher net gains on sales of
investments and an increase in interest income increased EBIT and EBITDA by
22
approximately $0.6 billion.
In 1999, EBIT and EBITDA improved $1.6 billion and $2.0 billion to a
deficit of $0.4 billion and earnings of $37 million, respectively. The
improvements were driven by $2.4 billion of lower net restructuring and other
charges in 1999 compared with 1998, partially offset by higher net losses from
other equity investments, lower gains on the sales of businesses and lower
interest income, which negatively impacted EBIT and EBITDA by $0.6 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 $1.4 billion in 2000. The increase was
driven by our investment in 2000 in Net2Phone, Inc. (Net2Phone). 1999 Capital
additions were essentially flat when compared to 1998.
Total assets were consistent at December 31, 2000 and December 31,
1999.
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 FLOWS:
Provided by operating activities
of continuing operations .............. $ 11,665 $ 10,509 $ 9,944
(Used in) provided by investing activities
of continuing operations .............. (30,045) (23,884) 4,135
Provided by (used in) financing activities
of continuing operations .............. 25,732 13,854 (11,051)
Used in discontinued operations .......... (8,306) (2,594) (207)
In 2000, net cash provided by operating activities of continuing
operations increased $1.2 billion. The increase was primarily driven by
increased other assets and liabilities and an increase in net income excluding
the noncash impact of depreciation and amortization, net restructuring and other
charges, minority interest income (expense) and the impact of earnings and
losses from equity investments, and increased gains on sales of businesses and
investments, partially offset by decreased accounts payable. In 1999, net cash
provided by operating activities of continuing operations increased $0.6
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, mostly offset by
decreased other assets and liabilities and increased accounts receivable, 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 $30.0
23
billion in 2000, compared with a net use of cash of $23.9 billion in 1999.
During 2000, AT&T used approximately $16.7 billion for acquisitions of
businesses, primarily MediaOne, and spent $11.5 billion on capital expenditures.
During 1999, AT&T spent approximately $11.9 billion on capital expenditures,
approximately $6.0 billion on acquisitions of businesses, primarily AGNS, and
contributed $5.5 billion of cash to LMG. During 1998, we received $10.6 billion
related to the sales of businesses, including receivables from UCS, partially
offset by capital expenditures of $6.8 billion.
During 2000, net cash provided by financing activities was $25.7
billion, compared with $13.9 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, $6.1 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 $14.7 billion and
current liabilities of $48.0 billion. A significant portion of the current
liabilities, $31.8 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. Through June 30, 2001, we have
retired $8.5 billion of short term debt and $0.8 billion of long term debt
through the use of some of the proceeds received from the investment by NTT
DoCoMo of $9.8 billion for a new class of AT&T preferred stock and sales of
investments or assets. Subsequent to June 30, 2001, we closed or announced the
sale of investments or assets, which will result in gross cash proceeds of
approximately $2.0 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. On May 14,
2001, we named Credit Suisse First Boston as our investment banker for the
registration process under the TWE partnership agreement. On August 9, 2001, we
have reached an agreement with Cablevision Systems Corporation (Cablevision) in
which Cablevision will amend a pending registration statement to allow the sale
of up to $1 billion of the Cablevision shares currently owned by AT&T.
Cablevision has also agreed, at AT&T's request, to file a registration statement
for the sale of AT&T's remaining Cablevision shares in March 2002. In addition,
Cablevision, at AT&T's request, will file a registration statement by October 1,
2001 for the sale of Rainbow Media Group tracking stock AT&T holds.
In connection with the split-off of AT&T Wireless in July 2001, we retained $3.0
billion in shares of AT&T Wireless and immediately exchanged $1.6 billion of
these shares to retire debt. We expect to dispose of the remaining $1.4 billion
by the end of 2001.
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,
24
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 has subsequently been
reduced as a result of the NTT DoCoMo investment, the AT&T Wireless bond
offering, the sale of Japan Telecom and the sale of various cable-systems. As of
June 30, 2001, AT&T had $14.7 billion in bank credit facilities available to it.
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.
Our board of directors has the power to make determinations that may
impact the financial and liquidity position of each of the tracking stock
groups. This power includes the ability to set priorities for use of capital
and debt capacity, to determine cash management policies and to make decisions
regarding whether to make capital expenditures and as to the timing and amount
of any capital expenditures. All actions by the board of directors are subject
to the board members fiduciary duties to all shareholders of AT&T as a group
and not just to holders of a particular class of tracking stock and to our
policy statements, by-laws and inter-company agreements. As a result of this
discretion of our board of directors, it may be difficult for investors to
assess each group's liquidity and capital resource needs and in turn the future
prosepcts of each group based on past performance.
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
25
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 ............................. $234,360 $163,457
Total liabilities ........................ 121,611 77,458
Total shareowners' equity ................ 103,198 78,927
Total assets increased $70.9 billion, or 43.4%, 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.
Total liabilities at December 31, 2000, increased $44.2 billion, or
57.0%, 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 for AT&T's continuing
operations, excluding LMG (debt of continuing operations divided by total debt
of continuing operations and equity excluding discontinued operations and LMG)
was 57.2% at December 31, 2000, compared with 54.3% at December 31, 1999. The
equity portion of this calculation includes convertible trust preferred
securities, as well as subsidiary redeemable preferred stock and excludes the
equity of discontinued operations and LMG. 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 3.80X at
December 31,
26
2000, compared with 1.96X 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 3.29X.
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
$0.4 billion of income, or approximately $0.09 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 $1.2 billion ($0.7
billion after income taxes), or approximately $0.19 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
$0.5 billion of income, or approximately $0.21 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 the second quarter of 2001, AT&T adopted 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 extinguishment 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 extinguishment of liabilities occurring after March 31, 2001. The
adoption had no material impact on AT&T's results of operations, financial
position or cash flows.
In July 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141, "Business Combinations," which supercedes Accounting Principles
Board (APB) Opinion No. 16. SFAS No. 141 requires all business combinations
initiated after June 30, 2001 be accounted for under the purchase method. In
addition, SFAS No. 141 establishes criteria for the recognition of intangible
assets separately from
27
goodwill. AT&T does not expect that the adoption of SFAS No. 141 will have a
material effect on AT&T's results of operations, financial position or cash
flows.
Also in July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets," which supercedes APB Opinion No. 17. Under SFAS No. 142
goodwill and indefinite lived intangible assets will no longer be amortized, but
rather will be tested for impairment at least annually. In addition, the
amortization period of intangible assets with finite lives will no longer be
limited to 40 years. SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001, which for AT&T means the standard will be adopted on January
1, 2002. In connection with the adoption of this standard, AT&T's unamortized
goodwill balance will no longer be amortized, but will continue to be tested for
impairment. Therefore, we expect that this standard will have a significant
impact on our results. We are assessing the impact of the standard on other
indefinite lived assets and the total impact of such standard on our results of
operations.
SUBSEQUENT EVENTS
Effective January 1, 2001, AT&T sold to Insight Communications Company
LP (Insight) several Illinois cable-systems serving approximately 98 thousand
customers for $0.4 billion. Insight subsequently contributed the purchased
cable-system and additional cable-systems serving approximately 177 thousand
customers to Insight Midwest L.P. in which AT&T has a 50% interest. AT&T also
contributed entities owning cable-systems serving approximately 248 thousand
customers in Illinois to Insight Midwest L.P. The transactions resulted in
pretax gains of $0.2 billion, which were deferred due to a debt support
agreement with Insight Midwest, L.P.
On January 8, 2001, AT&T and Cablevision Systems Corporation
(Cablevision) completed the transfer of cable-systems in which AT&T received
cable-systems serving 358 thousand subscribers in Boston and Eastern
Massachusetts. In exchange, Cablevision received cable-systems serving
approximately 130 thousand subscribers in northern New York suburbs, and 44
million shares of AT&T common stock valued at approximately $0.9 billion, and
approximately $0.2 billion in cash. Cablevision recorded a gain as a result of
the transaction. Due to AT&T's ownership interest in Cablevision, AT&T recorded
an after-tax gain of approximately $0.1 billion included within "Net losses from
other equity investments."
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. On May 18, 2001, AT&T, Cox
Communications (Cox) and Comcast reached agreement on the terms of the
previously announced transaction on the put options related to Excite@Home.
Under the new agreement, which was no longer a tax-free exchange, Cox and
Comcast retained their stakes in Excite@Home and AT&T issued 75 million of AT&T
common shares to Cox and more than 80 million of AT&T common shares to Comcast.
We recorded a loss of approximately $0.8 billion in other income for this put
option settlement in the second quarter of 2001. The new agreement resulted in a
tax benefit to AT&T, which essentially offset this loss.
On January 22, 2001, NTT DoCoMo invested approximately $9.8 billion for
812,511.778 shares of a new class of AT&T preferred stock with a par value of $1
per share; and 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. The
$9.8 billion of proceeds were recorded based on their relative fair values as
$9.2 billion for the preferred shares, $0.3 billion for the warrants in other
current liabilities and $0.3 billion for the beneficial conversion feature. The
preferred shares, convertible at NTT DoCoMo's option, were economically
equivalent to 406 million shares (a 16 percent interest) of AT&T Wireless Group
tracking stock at June 30, 2001. On July 9, 2001, in conjunction with the
split-off of AT&T Wireless Group, these preferred shares were converted into
AT&T Wireless common stock. Upon conversion, AT&T reduced its portion of the
financial performance and economic value in the AT&T Wireless Group by 178
million shares, and the balance of the 406 million shares came from the issuance
of 228 million new shares of AT&T Wireless common stock. Since NTT DoCoMo
converted their preferred stock in connection with the
28
Wireless Group split-off, we will recognize, in the third quarter of 2001, the
remaining unamortized beneficial conversion feature balance of $0.2 billion.
On April 27, 2001, AT&T completed the sale announced on February 27,
2001, of our 10% stake in Japan Telecom Co. Ltd to Vodafone Group plc for $1.35
billion in cash. The proceeds from the transaction were split evenly between
AT&T and AT&T Wireless Group since AT&T Wireless Group held one-half of AT&T's
investment. The transaction resulted in a pretax gain of approximately $0.5
billion recorded in AT&T continuing operations and a pretax gain of
approximately $0.5 billion recorded in discontinued operations.
On April 30, 2001, AT&T received 63.9 million shares of AT&T common
stock held by Comcast Corp. (Comcast) in exchange for an entity owning
cable-systems which serves approximately 590 thousand customers in six states.
The transaction resulted in a pretax loss of $0.3 billion.
On May 25, 2001, AT&T completed an exchange offer of AT&T common stock
for AT&T Wireless stock. Under the terms of the exchange offer, AT&T issued
1.176 shares of AT&T Wireless Group tracking stock in exchange for each share of
AT&T common stock validly tendered. A total of 372.2 million shares of AT&T
common stock were tendered in exchange for 437.7 million shares of AT&T Wireless
Group tracking stock.
On June 20, 2001, AT&T amended an existing accounts receivable
securitization program for a new 364-day term providing for up to $0.5 billion
of funding. Under the program, AT&T Consumer accounts receivable were sold on a
discounted, revolving basis, to a special purpose, wholly-owned subsidiary of
AT&T, which assigns interests in such receivables to unrelated third-party
financing entities. Interest is paid monthly based on a floating rate set by the
corresponding agreements. The borrowing was collateralized by approximately $1.0
billion of accounts receivable.
On June 22, 2001, AT&T initiated a 364-day accounts receivable
securitization program providing for up to $2.2 billion of funding. Under the
program, AT&T Business accounts receivable were sold on a discounted, revolving
basis, to a special purpose, wholly-owned subsidiary of AT&T, which assigns
interests in such receivables to unrelated third-party financing entities.
Interest is paid monthly based on a floating rate set by the corresponding
agreements. The borrowing was collateralized by approximately $5.7 billion of
accounts receivable.
On June 30, 2001, AT&T transferred its 99.75% interest in an entity
owning Baltimore Maryland cable-system serving approximately 115 thousand
customers to Comcast for approximately $0.5 billion in cash. The transaction
resulted in a pretax gain of $0.1 billion.
On July 8, 2001, Comcast made an unsolicited offer to acquire AT&T
Broadband. On July 18, AT&T's Board of Directors unanimously voted to reject
Comcast's proposal to acquire AT&T Broadband. The Board has directed management
to explore financial and strategic alternatives relating to AT&T Broadband,
including the previously announced restructuring plans, with the goal to provide
the greatest long-term value to shareowners. The Board also decided to delay
finalizing and mailing to shareowners the proxy materials, filed preliminary
with the SEC on July 3, 2001, for its current restructuring plans. However, AT&T
remains committed to separate AT&T Consumer and AT&T Business from AT&T
Broadband and to creating a separate tracking stock designed to represent the
financial performance of AT&T Consumer.
On July 9, 2001, AT&T completed the split-off of AT&T Wireless as a
separate, independently-traded company. All AT&T Wireless tracking stock was
converted into AT&T Wireless common stock on a one-for-one basis and 1,136
million shares of AT&T Wireless common stock, held by AT&T, was distributed to
AT&T common shareowners on a basis of 0.3218 of a share of AT&T Wireless for
each AT&T share outstanding. The split-off of AT&T Wireless will result in a
non-cash gain of approximately $13 billion, which represents the difference
between the fair value of the Wireless tracking stock at the date of the
split-off and AT&T's book value in AT&T Wireless Services. This gain will be
recorded in the third quarter of 2001 and be reflected as "Gain on the
disposition of discontinued operations." In addition, AT&T retained
approximately $3 billion, or 7.3%, of AT&T Wireless common stock, about half of
29
which was used in a debt-for-equity exchange in July which will result in a
pretax gain of approximately $0.5 billion to be recorded in other income. The
remaining shares are expected to be sold, exchanged or monetized within six
months of the split-off.
On August 10, 2001, AT&T completed the split-off of Liberty Media
Corporation as an independent, publicly-traded company. AT&T redeemed each
outstanding share of Class A and Class B Liberty Media Group (LMG) tracking
stock for one share of Liberty Media Corporation's Series A and Series B common
stock, respectively. The split-off will be recorded as a book value transaction,
therefore, no gain or loss will be recorded on the transaction.
30
ITEM 6. SELECTED FINANCIAL DATA.
AT&T Corp. and Subsidiaries
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA (UNAUDITED)
Dollars in millions (except per share amounts)
2000(1) 1999(2) 1998 1997 1996
RESULTS OF OPERATIONS AND EARNINGS PER SHARE
Revenue .................................... $ 55,533 $ 54,973 $47,817 $ 46,910 $ 46,442
Operating income ........................... 4,228 11,458 7,632 6,835 8,341
Income from continuing operations .......... 4,133 3,861 5,052 4,088 5,064
INCOME FROM CONTINUING OPERATIONS
AT&T Common Stock Group:
Income .................................. 2,645 5,883 5,052 4,088 5,064
Earnings per basic share ................ 0.76 1.91 1.89 1.53 1.92
Earnings per diluted share .............. 0.75 1.87 1.87 1.53 1.92
Dividends declared per share ............ 0.6975 0.88 0.88 0.88 0.88
Liberty Media Group(3):
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 ......... $ 41,269 $ 33,366 $21,780 $ 19,177 $ 16,871
Total assets-continuing operations ......... 207,136 146,094 40,134 41,029 38,229
Total assets ............................... 234,360 163,457 54,185 55,797 52,265
Long-term debt ............................. 33,089 23,214 5,555 7,840 8,861
Total debt ................................. 64,927 35,694 6,638 11,895 11,334
Mandatorily redeemable preferred
securities .............................. 2,380 1,626 -- -- --
Shareowners' equity ........................ 103,198 78,927 25,522 23,678 21,092
Debt ratio(4) .............................. 57.2% 54.3% 36.7% 57.2% 61.6%
Gross capital expenditures ................. 10,462 11,194 6,871 6,065 5,263
OTHER INFORMATION
Operating income as a percent of
revenue ................................. 7.6% 20.8% 16.0% 14.6% 18.0%
Income from continuing operations
attributable to AT&T Common Stock
Group as a percent of revenue ........... 4.8% 10.7% 10.6% 8.7% 10.9%
Return on average common equity(5) ........ 5.5% 15.2% 25.3% 19.7% 27.3%
Employees-continuing operations(5) ........ 136,800 129,500 94,500 116,800 117,100
Data at year-end:
AT&T stock price per share .............. 13.40 39.46 39.22 31.74 21.42
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. AT&T Common Stock Group continuing operations results 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. LMG earnings per share amounts and stock prices have been restated to
reflect the June 2000 two-for-one stock split. No dividends have been
declared for LMG tracking stock.
4. Debt ratio reflects debt from continuing operations as a percent of total
capital (debt plus equity, excluding LMG and AT&T Wireless Group). For
purposes of this calculation, equity includes convertible quarterly trust
preferred securities as well as redeemable preferred stock of subsidiary.
5. Data provided excludes LMG.
31
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
32
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 of America. 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 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 and the report of other auditors provide a reasonable basis for our
opinion.
PricewaterhouseCoopers LLP
New York, New York
March 16, 2001, except for Note 6 as to which the date is May 29, 2001, and Note
23 as to which the date is August 10, 2001
33
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 $ 55,533 $ 54,973 $ 47,817
Operating Expenses
Access and other connection 13,140 14,439 15,116
Costs of services and products (excluding depreciation of $4,410, $4,215
and $2,763 included below) 12,795 11,013 8,285
Selling, general and administrative 9,752 10,894 10,693
Depreciation and other amortization 5,924 5,137 3,533
Amortization of goodwill, franchise costs and other purchased intangibles 2,665 1,057 44
Net restructuring and other charges 7,029 975 2,514
Total operating expenses 51,305 43,515 40,185
Operating income 4,228 11,458 7,632
Other income 1,150 826 812
Interest expense 2,964 1,503 293
Income from continuing operations before income taxes, minority interest
and earnings (losses) from equity investments 2,414 10,781 8,151
Provision for income taxes 3,284 4,016 2,989
Minority interest income (expense) 4,103 (126) (1)
Equity earnings (losses) from Liberty Media Group 1,488 (2,022) --
Net losses from other equity investments 588 756 109
Income from continuing operations 4,133 3,861 5,052
Discontinued Operations
Income from discontinued operations (net of income taxes of $307, $(238) and $158) 536 (433) 193
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 $ 0.76 $ 1.91 $ 1.89
Income (loss) from discontinued operations 0.13 (0.14) 0.07
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 $ 0.75 $ 1.87 $ 1.87
Income (loss) from discontinued operations 0.13 (0.13) 0.07
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.
34
AT&T CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
At December 31,
2000 1999
--------- ---------
Dollars in millions
ASSETS
Cash and cash equivalents ............................................................................ $ 64 $ 1,018
Receivables, less allowances of $1,185 and $1,151 .................................................... 9,408 8,657
Other receivables .................................................................................... 1,645 585
Investments .......................................................................................... 2,102 --
Deferred income taxes ................................................................................ 720 1,160
Other current assets ................................................................................. 781 924
TOTAL CURRENT ASSETS ................................................................................. 14,720 12,344
Property, plant and equipment, net ................................................................... 41,269 33,366
Franchise costs, net of accumulated amortization of $1,664 and $697 .................................. 48,218 32,693
Goodwill, net of accumulated amortization of $609 and $195 ........................................... 26,782 5,310
Investment in Liberty Media Group and related receivables, net ....................................... 34,290 38,460
Other investments and related advances ............................................................... 30,875 14,856
Prepaid pension costs ................................................................................ 3,003 2,464
Other assets ......................................................................................... 7,979 6,601
Net assets of discontinued operations ................................................................ 27,224 17,363
TOTAL ASSETS ......................................................................................... $ 234,360 $ 163,457
--------- ---------
LIABILITIES
Accounts payable ..................................................................................... $ 5,382 $ 5,848
Payroll and benefit-related liabilities .............................................................. 1,991 2,360
Debt maturing within one year ........................................................................ 31,838 12,480
Liability under put options .......................................................................... 2,564 --
Other current liabilities ............................................................................ 6,200 5,330
TOTAL CURRENT LIABILITIES ............................................................................ 47,975 26,018
Long-term debt ....................................................................................... 33,089 23,214
Long-term benefit-related liabilities ................................................................ 3,670 3,964
Deferred income taxes ................................................................................ 32,054 20,507
Other long-term liabilities and deferred credits ..................................................... 4,823 3,755
TOTAL LIABILITIES .................................................................................... 121,611 77,458
Minority Interest .................................................................................... 4,841 2,372
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 ............................................................ $ 234,360 $ 163,457
--------- ---------
The notes are an integral part of the consolidated financial statements.
35
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.
36
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 (loss) from discontinued operations ................................ 536 (433) 193
Gain on sale of discontinued operations ................................... -- -- 1,290
Add: Extraordinary loss on retirement of debt ..................................... -- -- 137
Income from continuing operations ................................................. 4,133 3,861 5,052
Adjustments to reconcile net income to net cash provided by operating activities of
continuing operations:
Net gains on sales of businesses and investments ............................... (1,321) (585) (408)
Net restructuring and other charges ............................................ 6,793 678 2,362
Depreciation and amortization .................................................. 8,589 6,194 3,577
Provision for uncollectible receivables ........................................ 1,080 1,216 1,290
Deferred income taxes .......................................................... 341 354 (105)
Minority interest (income) expense ............................................. (4,329) 24 5
Net equity (earnings) losses from Liberty Media Group .......................... (1,488) 2,022 --
Net losses from other equity investments ....................................... 1,017 1,224 177
Increase in receivables ........................................................ (2,512) (2,409) (1,299)
Decrease in accounts payable ................................................... (577) (165) (456)
Net change in other operating assets and liabilities ........................... (376) (1,785) 130
Other adjustments, net ......................................................... 315 (120) (381)
NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS ................ 11,665 10,509 9,944
INVESTING ACTIVITIES
Capital expenditures and other additions .......................................... (11,511) (11,876) (6,822)
Proceeds from sale or disposal of property, plant and equipment ................... 600 286 104
(Increase) decrease in other receivables .......................................... (1,052) 17 6,403
Sales of marketable securities .................................................... 96 -- 2,003
Purchases of marketable securities ................................................ -- -- (1,696)
Equity investment distributions and sales ......................................... 992 1,574 146
Equity investment contributions and purchases ..................................... (2,394) (7,837) (125)
Net (acquisitions) dispositions of businesses including cash acquired ............. (16,657) (5,969) 4,183
Other investing activities, net ................................................... (119) (79) (61)
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES OF CONTINUING OPERATIONS ...... (30,045) (23,884) 4,135
FINANCING ACTIVITIES
Proceeds from long-term debt issuances ............................................ 4,601 8,396 17
Retirement of long-term debt ...................................................... (2,118) (2,255) (2,594)
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 10,173 (3,091)
Other financing activities, net ................................................... (63) 373 93
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES OF CONTINUING OPERATIONS ...... 25,732 13,854 (11,051)
NET CASH USED IN DISCONTINUED OPERATIONS .......................................... (8,306) (2,594) (207)
Net (decrease) increase in cash and cash equivalents .............................. (954) (2,115) 2,821
Cash and cash equivalents at beginning of year .................................... 1,018 3,133 312
Cash and cash equivalents at end of year .......................................... $ 64 $ 1,018 $ 3,133
-------- -------- --------
The notes are an integral part of the consolidated financial statements.
37
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 and local 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. 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 $1,377, $1,418 and $1,576 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
38
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.
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, 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
39
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
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, AT&T 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. If the plan is completed as announced, AT&T Wireless, AT&T Broadband,
AT&T Business and AT&T Consumer would all be represented by asset-based or
tracking stocks.
On July 8, 2001, Comcast Corp. (Comcast) made an unsolicited offer to
acquire AT&T Broadband. On July 18, AT&T's Board of Directors unanimously voted
to reject Comcast's proposal to acquire AT&T Broadband. The Board has directed
management to explore financial and strategic alternatives relating to AT&T
Broadband, including the previously announced restructuring plans, with the goal
40
to provide the greatest long-term value to shareowners. The Board also decided
to delay finalizing and mailing to shareowners the proxy materials, filed
preliminary with the SEC on July 3, 2001, for its current restructuring plans.
However, AT&T remains committed to separate AT&T Consumer and AT&T Business from
AT&T Broadband and to creating a separate tracking stock designed to represent
the financial performance of AT&T Consumer.
On May 25, 2001, AT&T completed an exchange offer of AT&T common stock
for AT&T Wireless stock. Under the terms of the exchange offer, AT&T issued
1.176 shares of AT&T Wireless Group tracking stock in exchange for each share of
AT&T common stock validly tendered. A total of 372.2 million shares of AT&T
common stock were tendered in exchange for 437.7 million shares of AT&T Wireless
Group tracking stock.
On July 9, 2001, AT&T completed the split-off of AT&T Wireless as a
separate, independently-traded company. All AT&T Wireless tracking stock was
converted into AT&T Wireless common stock on a one-for-one basis and 1,136
million shares of AT&T Wireless common stock, held by AT&T, were distributed to
AT&T common shareowners on a basis of 0.3218 of a share of AT&T Wireless for
each AT&T share outstanding. AT&T common shareowners received whole shares of
AT&T Wireless and cash payments for fractional shares. The Internal Revenue
Service (IRS) ruled that the transaction qualified as tax-free for AT&T and its
shareowners for U.S. federal income tax purposes, with the exception of cash
received for fractional shares. AT&T retained approximately $3 billion, or 7.3%,
of AT&T Wireless common stock, about half of which was used in a debt-for-equity
exchange in July. The remaining shares will be sold, exchanged or monetized
within the next six months. AT&T Wireless will continue trading on the New York
Stock Exchange (NYSE) under the symbol "AWE".
On August 10, 2001, AT&T completed the split-off of Liberty Media
Corporation as an independent, publicly-traded company. AT&T redeemed each
outstanding share of Class A and Class B Liberty Media Group (LMG) tracking
stock for one share of Liberty Media Corporation's Series A and Series B common
stock, respectively. The IRS ruled that the split-off of Liberty Media
Corporation qualified as a tax-free transaction for AT&T, Liberty Media and
their shareowners. Liberty Media Corporation's Series A common stock and Series
B common stock is now listed on the NYSE under the symbols "LMC.A" and "LMC.B",
respectively.
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 rulings. AT&T expects that the transactions
associated with AT&T's restructuring plan will be tax-free to U.S. shareowners.
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 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 shareowners in the restructuring.
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 .............................. $ 512 $ 203 $ 374
Net gains on sales of businesses and investments ....... 1,321 585 408
Mark-to-market charge on put options ................... (537) -- --
Investment impairment charges .......................... (248) (40) --
Miscellaneous, net ..................................... 102 78 30
------- ------- -------
Total other income ..................................... $ 1,150 $ 826 $ 812
======= ======= =======
DEDUCTED FROM INTEREST EXPENSE
Capitalized interest ................................... $ 177 $ 143 $ 106
======= ======= =======
41
SUPPLEMENTARY BALANCE SHEET INFORMATION
At December 31, 2000 1999
-------- --------
PROPERTY, PLANT AND EQUIPMENT
Communications, network and other equipment .... $ 60,232 $ 50,971
Buildings and improvements ..................... 8,643 7,855
Land and improvements .......................... 523 579
-------- --------
Total property, plant and equipment ............ 69,398 59,405
Accumulated depreciation ....................... (28,129) (26,039)
-------- --------
Property, plant and equipment, net ............. $ 41,269 $ 33,366
======== ========
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 . $3,234 $1,162 $ 287
Income tax payments ........................... 2,369 3,948 2,761
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
42
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)
43
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 ........................................... $ 56,858 $ 58,609
Income from continuing operations ................. 5,081 6,885
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 Liberty Media Group shares ....... 2,572 2,519
AT&T Common Stock Group earnings from
continuing operations per common share:
Basic ........................................ $ 0.96 $ 2.41
Diluted ...................................... $ 0.95 $ 2.34
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, AND DISPOSITIONS
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
44
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 was
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. On July 9, 2001, AT&T completed the
split-off of AT&T Wireless (see Note 23).
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.
45
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 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.
6. DISCONTINUED OPERATIONS
Pursuant to AT&T's restructuring plan (see Note 2), AT&T completed the
split-off of AT&T Wireless as a separate, independently-traded company on July
9, 2001. The split-off of AT&T Wireless will result in a non-cash gain of
approximately $13 billion, which represents the difference between the fair
value of the Wireless tracking stock at the date of the split-off and AT&T's
book value in AT&T Wireless Services. This gain will be recorded in the third
quarter of 2001 and be reflected as "Gain on the disposition of 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 AT&T Wireless
and UCS as discontinued operations. Accordingly, the revenue, costs and
expenses, assets and liabilities and cash flows of these discontinued operations
have been excluded from the respective captions in the Consolidated Statements
of Operations, Consolidated Balance Sheets and Consolidated Statements of Cash
Flows and have been reported as "Income from discontinued operations", net of
applicable income taxes; as "Net assets of discontinued operations"; and as "Net
cash used in discontinued operations" for all periods presented. The gain
associated with the sale of UCS in 1998 is reflected as "Gain on sale of
discontinued operations," net of applicable income taxes.
Revenue for discontinued operations was $10,448, $7,627, and $5,771
for 2000, 1999 and 1998, respectively.
46
Net assets of discontinued operations included assets of $35,087 and
$23,312 at December 31, 2000 and 1999, respectively, and total liabilities of
$7,822 and $5,929 at December 31, 2000 and 1999, respectively. Total assets were
comprised primarily of licensing costs, property, plant and equipment, goodwill
and investments. Total liabilities were comprised primarily of deferred income
taxes, other short-term liabilities and accounts payable. Net assets of
discontinued operations also included minority interest of $41 and $20 at
December 31, 2000 and 1999, respectively.
Interest expense of $330, $253 and $221 was allocated to AT&T Wireless
discontinued operations in 2000, 1999 and 1998, respectively, based on the debt
of AT&T Corp. that was attributable to AT&T Wireless. This debt was repaid to
AT&T in connection with the subsequent distribution of AT&T Wireless. No
interest 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.
ACQUISITION-RELATED INTANGIBLE ASSETS
As a result of our evaluation of recent changes in our industry and the
views of regulatory authorities, AT&T expects that the amortization period for
all franchise costs and goodwill associated with newly acquired
telecommunications and cable operations will not exceed 25 years.
7. EARNINGS PER COMMON SHARE AND POTENTIAL COMMON SHARE
Income (loss) attributable to the different classes of AT&T common
stock is as follows:
AT&T Common Stock Group AT&T Wireless Group Liberty Media Group
For the Years Ended 2000 1999 1998 2000 1999 1998 2000 1999 1998
December 31,
Income (loss) from continuing
operations $2,645 $5,883 $5,052 $ -- $ -- $ -- $1,488 $(2,022) $ --
Income (loss) from discontinued
operations 460 (433) 193 76 -- -- -- -- --
Gain on sale of discontinued
operations -- -- 1,290 -- -- -- -- -- --
Extraordinary loss -- -- 137 -- -- -- -- -- --
Net income (loss) available to
common shareowners $3,105 $5,450 $6,398 $76 $ -- $ -- $1,488 $(2,022) $ --
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
AT&T Common Stock Group:
Income from continuing operations $2,645 $5,883 $5,052
Income impact of assumed conversion of preferred stock of
subsidiary 32 26 --
47
Income adjusted for conversion of securities $2,677 $5,909 $5,052
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 from discontinued operations 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.
8. 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
48
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.
49
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 $975 of net restructuring and other charges.
50
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.
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.
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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.
9. 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.
10. 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
$10,494 and $13,921, respectively. The carrying value of these investments
exceeded our share of the underlying reported net assets by approximately $8,274
and $11,979, 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 $546 and $477 in 2000 and 1999, respectively. There was no
amortization of goodwill in 1998. 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
$13, $85 and $127, 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%
52
Century-TCI California, LP. ............................................................ 25.00% 25.00%
Kansas City Cable Partners ............................................................. 50.00% 50.00%
Parnassos, LP. ......................................................................... 33.33% 33.33%
At Home Corporation .................................................................... -- (d) 25.00%(d)
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) 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 ...................................................................... $27,211 $9,285 $2,422
Operating loss ............................................................... 385 1,243 210
Loss from continuing operations before extraordinary items and
cumulative effect of a change in accounting principle ..................... 1,844 2,511 306
Net loss ..................................................................... 2,212 2,707 400
At December 31, 2000 1999
---- ----
(Unaudited)
Current assets ......................................................... $10,643 $4,716
Noncurrent assets ...................................................... 29,055 29,140
Current liabilities .................................................... 10,690 4,994
53
Noncurrent liabilities ................................................. 18,741 16,302
Redeemable preferred stock ............................................. 1,548 637
Minority interest ...................................................... 621 1,729
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.
11. 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 ............................................................................ 375 151
Total debt maturing within one year .............................................. $31,838 $12,480
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
54
6.55% - 7.50% 2001-2037 ................................................... 6,470 3,701
7.53% - 8.50% 2001-2097 ................................................... 5,267 4,762
8.60% - 11.13% 2001-2045 ................................................... 7,317 5,386
Variable rate 2001-2054 ................................................... 4,164 867
Total debentures, notes and trust preferred securities ............................. 36,517 24,334
Other .............................................................................. 360 362
Unamortized discount, net .......................................................... (64) (127)
Total long-term obligations ........................................................ 36,813 24,569
Less: Currently maturing long-term debt ............................................ 3,724 1,355
Net long-term obligations .......................................................... $33,089 $23,214
(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 13).
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
55
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 20).
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 20).
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
56
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;
57
(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:
58
(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.
59
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 $36,813 in
total long-term obligations:
2001 2002 2003 2004 2005 Later Years
---- ---- ---- ---- ---- -----------
$3,724 $2,661 $3,673 $4,692 $4,050 $18,013
12. 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
60
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
61
December 31, 2000, and were included within "Minority interest income (expense)"
in the Consolidated Statement of Income.
13. 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.
62
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
63
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 .................................................................... 833 243
Guarantees of debt ................................................................... 1,557 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
64
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 ...................... $64,430 $61,574 $35,350 $33,935
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 --
14. 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
65
* 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 -- --
66
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 $220
in 2000, $197 in 1999 and $173 in 1998.
15. 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
67
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:
68
Options Outstanding Options Exercisable
------------------------------------------------------- -----------------------------
Weighted- Number
Average Weighted- Exercisable 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
69
The following table summarizes information about the AT&T Wireless
Group tracking stock options outstanding at December 31, 2000:
Options Exercisable
Options Outstanding ---------------------------------
-------------------------------------------------- Number
Weighted- Exercisable
Number Average Weighted- at Weighted-
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................................................................. $2,342 $5,685 $4,932
Income (loss) from discontinued operations........................................................ 283 (492) 153
Gain on sale of discontinued operations........................................................... -- -- 1,290
Extraordinary loss................................................................................ -- -- 137
Income............................................................................................ $2,625 $ 5,193 $6,238
Earnings (loss) per AT&T Common Stock Group common share-basic:
Continuing operations............................................................................. $ 0.67 $ 1.84 $ 1.84
Discontinued operations........................................................................... 0.08 (0.16) 0.06
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 (loss) per AT&T Common Stock Group common share-diluted:
Continuing operations............................................................................. $ 0.66 $ 1.80 $ 1.82
Discontinued operations........................................................................... 0.08 (0.15) 0.06
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.
16. INCOME TAXES
70
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............................................................ $ 845 $3,774 $2,853
Amortization of investment tax credits.......................................................... (23) (10) (14)
State and local income taxes, net of federal income tax effect.................................. 176 279 190
In-process research and development write-off................................................... -- 208 --
Amortization of intangibles..................................................................... 91 26 17
Foreign rate differential....................................................................... 104 56 30
Taxes on repatriated and accumulated foreign income, net of tax credits......................... (84) (45) (36)
Research and other credits...................................................................... (37) (61) (83)
Valuation allowance............................................................................. -- (76) 38
Investment dispositions, acquisitions and legal entity restructurings........................... (445) (94) (153)
Operating losses and charges relating to Excite@Home............................................ 2,757 -- --
Other differences, net.......................................................................... (100) (41) 147
Provision for income taxes...................................................................... $3,284 $4,016 $2,989
Effective income tax rate....................................................................... 136.1% 37.3% 36.7%
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................................................................................ $2,823 $10,449 $7,953
Foreign...................................................................................... (409) 332 198
Total........................................................................................ $2,414 $10,781 $8,151
------ ------- ------
PROVISION FOR INCOME TAXES
CURRENT
Federal................................................................................... $2,323 $2,896 $2,714
State and local........................................................................... 281 417 220
Foreign................................................................................... 89 100 41
2,693 3,413 2,975
DEFERRED
Federal................................................................................... 633 593 (45)
State and local........................................................................... (14) 12 73
Foreign................................................................................... (5) 8 --
614 613 28
Deferred investment tax credits.............................................................. (23) (10) (14)
Provision for income taxes................................................................... $3,284 $ 4,016 $2,989
------ ------- ------
-----------
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 $(279) and $(251) in 2000, $(273) and $(249) in
1999 and $51 and $(119) 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.
71
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................................................................... $ 5,393 $ 4,447
Investments..................................................................................... 9,558 6,477
Franchise costs................................................................................. 18,571 11,998
Other........................................................................................... 2,694 1,059
Total long-term deferred income tax liabilities................................................. 36,216 23,981
LONG-TERM DEFERRED INCOME TAX ASSETS
Business restructuring.......................................................................... 127 120
Net operating loss/credit carryforwards......................................................... 602 644
Employee pensions and other benefits, net....................................................... 1,470 1,359
Reserves and allowances......................................................................... 99 145
Other........................................................................................... 2,604 1,429
Valuation allowance............................................................................. (740) (223)
Total net long-term deferred income tax assets..................................................... 4,162 3,474
Net long-term deferred income tax liabilities...................................................... $32,054 $20,507
------- -------
CURRENT DEFERRED INCOME TAX LIABILITIES
Investments..................................................................................... $ 670 $ --
Other........................................................................................... 310 417
Total current deferred income tax liabilities................................................... 980 417
CURRENT DEFERRED INCOME TAX ASSETS
Business restructuring.......................................................................... 155 47
Employee pensions and other benefits............................................................ 377 549
Reserves and allowances......................................................................... 621 574
Other........................................................................................... 586 407
Valuation allowance............................................................................. (39) --
Total net current deferred income tax assets....................................................... 1,700 1,577
Net current deferred income tax assets............................................................. $ 720 $ 1,160
------- -------
At December 31, 2000, we had net operating loss carryforwards
(tax-effected), excluding Excite@Home, for federal and state income tax purposes
of $36 and $125, respectively, expiring through 2015. In addition, we had
federal tax credit carryforwards of $116, of which $35 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 August 10, 2001, AT&T completed the split-off of LMG. The IRS ruled
that the split-off qualified as a tax-free transaction for AT&T, Liberty Media
and their shareowners. Pursuant to the tax-sharing agreement dated March
72
9, 1999 between AT&T and LMG, AT&T is required to reimburse LMG approximately
$816 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 is obligated to
pay AT&T approximately $138 upon its split-off from AT&T.
17. 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 2017. Our rental expense under operating leases was $705
in 2000, $622 in 1999 and $558 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......................................... $ 514 $ 149
2002......................................... 433 137
2003......................................... 383 87
2004......................................... 342 66
2005......................................... 304 63
Later years.................................. 1,027 175
------ -----
Total minimum lease payments................. $3,003 677
======
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.
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.
18. RELATED PARTY TRANSACTIONS
AT&T has various related party transactions with Concert as a result of
73
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.
19. SEGMENT REPORTING
AT&T's results are segmented according to the way we manage our
business: Business Services, Consumer 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 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
74
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. 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....................................................... $28,157 $28,087 $25,001
Business Services internal revenue....................................................... 743 605 356
------- ------- -------
Total Business Services revenue............................................................. 28,900 28,692 25,357
Consumer Services external revenue.......................................................... 18,894 21,753 22,763
Broadband external revenue............................................................... 8,212 5,069 --
Broadband internal revenue............................................................... 14 1 --
------- ------- -------
Total Broadband revenue..................................................................... 8,226 5,070 --
Total reportable segments............................................................. 56,020 55,515 48,120
Corporate and Other(1)...................................................................... (487) (542) (303)
------- ------- -------
Total revenue............................................................................... $55,533 $54,973 $47,817
======= ======= =======
(1) Includes $248 and $10 related to Excite@Home in 2000 and 1999, respectively.
DEPRECIATION AND AMORTIZATION(1)
For the Years Ended December 31, 2000 1999 1998
---- ---- ----
Business Services............................................................................. $4,220 $4,219 $3,357
Consumer Services............................................................................. 167 184 116
Broadband..................................................................................... 3,063 1,636 --
------ ------ ------
Total reportable segments............................................................... 7,450 6,039 3,473
Corporate and Other(2)........................................................................ 1,139 155 104
------ ------ ------
Total depreciation and amortization........................................................... $8,589 $6,194 $3,577
====== ====== ======
(1) Includes the amortization of goodwill, franchise costs and other purchased
intangibles.
(2) Includes $991 and $38 related to Excite@Home in 2000 and 1999, respectively.
EARNINGS (LOSSES) FROM OTHER EQUITY INVESTMENTS
For the Years Ended December 31, 2000 1999 1998
---- ---- ----
Business Services............................................................................ $ 35 $ (72) $(128)
Broadband.................................................................................... (215) (396) --
----- ----- -----
Total reportable segments.............................................................. (180) (468) (128)
Corporate and Other(1)....................................................................... (408) (288) 19
----- ----- -----
Total net (losses) from other equity investments............................................. $(588) $(756) $(109)
===== ===== =====
(1) Includes $(382) and $(311) related to Excite@Home in 2000 and 1999,
respectively.
75
RECONCILIATION OF EBIT TO INCOME BEFORE INCOME TAXES
For the Years Ended December 31, 2000 1999 1998
-------- -------- --------
Business Services ......................................... $ 5,990 $ 5,248 $ 4,017
Consumer Services ......................................... 6,893 7,619 6,289
Broadband ................................................. (1,240) (1,545) --
-------- -------- --------
Total reportable segments ........................... 11,643 11,322 10,306
Corporate and Other(1) .................................... (3,279) (441) (2,040)
Less: Pretax minority interest income (expense) ........... 4,003 (180) (1)
Add: Pretax losses from other equity investments .......... 1,017 1,223 177
Interest expense .......................................... (2,964) (1,503) (293)
-------- -------- --------
Total income from continuing operations before income taxes $ 2,414 $ 10,781 $ 8,151
======== ======== ========
(1) Includes $(3,603) and $(686) related to Excite@Home in 2000 and 1999,
respectively. The Excite@Home EBIT impact in 2000 includes $2,630 of net
restructuring and other charges.
ASSETS
At December 31, 2000 1999 1998
-------- -------- --------
Business Services ............................................ $ 42,747 $ 37,974 $ 27,320
Consumer Services ............................................ 3,150 3,781 3,732
Broadband .................................................... 114,848 53,810 --
Total reportable segments ................................. 160,745 95,565 31,052
------- ------ ------
Corporate and Other assets:
Other segments ............................................ 1,174 1,204 1,227
Prepaid pension costs ..................................... 3,003 2,464 2,074
Deferred income taxes ..................................... 406 527 815
Other corporate assets(1) ................................. 7,518 7,874 4,966
Net assets of discontinued operations ..................... 27,224 17,363 14,051
Investment in Liberty Media Group and related receivables, net 34,290 38,460 --
-------- -------- --------
Total assets ................................................. $234,360 $163,457 $ 54,185
======== ======== ========
(1) Includes $2,541 and $2,726 related to Excite@Home for 2000 and 1999,
respectively.
EQUITY INVESTMENTS (EXCLUDING LMG)
At December 31, 2000 1999 1998
-------- -------- --------
Business Services .................... $ 2,355 $ 582 $ 51
Broadband ............................ 6,473 10,327 --
-------- -------- --------
Total reportable segments ......... 8,828 10,909 51
Corporate and Other(1) ............... 1,666 3,012 344
-------- -------- --------
Total equity investments ............. $ 10,494 $ 13,921 $ 395
======== ======== ========
(1) Includes $35 and $2,726 related to Excite@Home for 2000 and 1999,
respectively.
CAPITAL ADDITIONS
For the Years Ended December 31, 2000 1999 1998
-------- -------- --------
Business Services ....................... $ 6,839 $ 9,091 $ 6,773
Consumer Services ....................... 148 299 99
Broadband ............................... 4,968 4,759 --
-------- -------- --------
Total reportable segments ............ 11,955 14,149 6,872
Corporate and Other(1) .................. 1,683 271 310
-------- -------- --------
Total capital additions ................. $ 13,638 $ 14,420 $ 7,182
======== ======== ========
(1) Includes $92 related to Excite@Home in 2000.
76
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.
20. 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.
77
CONSOLIDATING CONDENSED BALANCE SHEET
As of December 31, 2000
Guarantor Guarantor Guarantor TCI TCI TCI
AT&T Subsidiary Subsidiary Financing Financing Financing
Parent TCI MediaOne I II IV
--------- --------- --------- --------- --------- ---------
ASSETS
Cash and cash
equivalents ........ $ -- $ -- $ -- $ -- $ -- $ --
Receivables ........... 11,424 2,577 78
Investments ...........
Deferred income taxes . 811
Other current assets .. 1,103 11
TOTAL CURRENT ASSETS .. 13,338 2,588 78
Property, plant &
equipment, net ..... 9,463 102 22
Franchise costs, net .. 838 30
Goodwill, net ......... 161 19,786
Investment in Liberty
Media Group and
related receivables,
net ................ 34,290
Other investments and
related advances .. 164,844 32,650 27,712
Other assets .......... 5,500 186 528 514 204
Net assets of
discontinued
operations .........
TOTAL ASSETS .......... $ 194,144 $ 69,846 $ 47,598 $ 528 $ 514 $ 204
LIABILITIES
Debt maturing within
one year ........... $ 52,556 $ 664 $ 2,337 $ -- $ -- $ --
Liability under put
options ............
Other current
liabilities ........ 9,535 1,129 76
TOTAL CURRENT
LIABILITIES ........ 62,091 1,793 2,413
Long-term debt ........ 21,333 30,096 1,702 528 514 204
Deferred income taxes . 569 230
Other long-term
liabilities and
deferred credits ... 7,341 773 129
TOTAL LIABILITIES ..... 91,334 32,662 4,474 528 514 204
Minority Interest .....
Company-Obligated
Convertible
Quarterly Income
Preferred Securities
of Subsidiary Trust
Holding Solely
Subordinated Debt
Securities of AT&T . 4,710
SHAREOWNERS' EQUITY
AT&T Common Stock ..... 4,176
AT&T Wireless Group
common stock ....... 362
Liberty Media Group
Class A Common Stock 2,364
Liberty Media Group
Class B Common Stock 206
Other shareowners'
equity ............. 90,992 37,184 43,124
TOTAL SHAREOWNERS'
EQUITY ............. 98,100 37,184 43,124
TOTAL LIABILITIES AND
SHAREOWNERS' EQUITY $ 194,144 $ 69,846 $ 47,598 $ 528 $ 514 $ 204
Elimination
Media-One Media-One Media-One Media-One Non- and
Financing Financing Finance Finance Guarantor Consolidation Consolidated
I II II III Subsidiaries Adjustments AT&T Corp.
--------- --------- --------- --------- ------------ ----------- ----------
ASSETS
Cash and cash
equivalents ........ $ -- $ -- $ -- $ -- $ 64 $ -- $ 64
Receivables ........... 48,896 (51,922) 11,053
Investments ........... 2,102 2,102
Deferred income taxes . (91) 720
Other current assets .. (328) (5) 781
TOTAL CURRENT ASSETS .. 50,643 (51,927) 14,720
Property, plant &
equipment, net ..... 31,685 (3) 41,269
Franchise costs, net .. 47,350 48,218
Goodwill, net ......... 6,835 26,782
Investment in Liberty
Media Group and
related receivables,
net ................ 34,290
Other investments and
related advances .. 19,673 (214,004) 30,875
Other assets .......... 51 44 230 516 15,714 (12,505) 10,982
Net assets of
discontinued
operations ......... 24,876 2,348 27,224
TOTAL ASSETS .......... $ 51 $ 44 $ 230 $ 516 $ 196,776 $(276,091) $ 234,360
LIABILITIES
Debt maturing within
one year ........... $ -- $ -- $ -- $ -- $ 5,432 $ (29,151) $ 31,838
Liability under put
options ............ 2,564 2,564
Other current
liabilities ........ 11,219 (8,386) 13,573
TOTAL CURRENT
LIABILITIES ........ 19,215 (37,537) 47,975
Long-term debt ........ 30 28 214 504 2,558 (24,622) 33,089
Deferred income taxes . 31,255 32,054
Other long-term
liabilities and
deferred credits ... 331 (81) 8,493
TOTAL LIABILITIES ..... 30 28 214 504 53,359 (62,240) 121,611
Minority Interest ..... 4,841 4,841
Company-Obligated
Convertible
Quarterly Income
Preferred Securities
of Subsidiary Trust
Holding Solely
Subordinated Debt
Securities of AT&T . 4,710
SHAREOWNERS' EQUITY
AT&T Common Stock ..... (416) 3,760
AT&T Wireless Group
common stock ....... 362
Liberty Media Group
Class A Common Stock 2,364
Liberty Media Group
Class B Common Stock 206
Other shareowners'
equity ............. 21 16 16 12 138,992 (213,851) 96,506
TOTAL SHAREOWNERS'
EQUITY ............. 21 16 16 12 138,576 (213,851) 103,198
TOTAL LIABILITIES AND
SHAREOWNERS' EQUITY $ 51 $ 44 $ 230 $ 516 $ 196,776 $(276,091) $ 234,360
78
CONSOLIDATING CONDENSED INCOME STATEMENT
For the year ended December 31, 2000
Guarantor Guarantor Guarantor TCI TCI TCI
AT&T Subsidiary Subsidiary Financing Financing Financing
Parent TCI MediaOne I II IV
--------- ---------- ---------- --------- --------- ---------
Revenue ................ $ 22,234 $ -- $ -- $ -- $ -- $ --
Operating Expenses
Costs of services and
products ............ 2,961
Access and other
connection .......... 7,047
Selling, general and
administrative ...... 2,071 19 29
Depreciation and
other amortization .. 1,806 52 7
Amortization of
goodwill, franchise
costs and other
purchased intangibles 50 6 226
Net restructuring
and other charges ... 443 60
Total operating
expenses ............ 14,378 137 262
Operating income (loss) 7,856 (137) (262)
Other income (expense) . 971 30 64 43 46 18
Interest expense
(benefit) ........... 4,786 1,793 170 43 46 18
Income (loss) from
continuing
operations before
income taxes,
minority interest
and earnings
(losses) from
equity investments .. 4,041 (1,900) (368)
Provision (benefit)
for income taxes .... 1,505 (727) (54)
Minority interest
income (expense) .... (161)
Equity earnings from
Liberty Media Group . 1,488
Net earnings (losses)
from other equity ... 6,258 (3,765) (202)
investments
Income (loss) from
continuing operations 8,633 (3,450) (516)
Income from
discontinued
operations (net
of income taxes) ....
Net income (loss) ...... 8,633 (3,450) (516)
Dividend requirements
on preferred stock
held by AT&T, net ...
Net income (loss)
after preferred
stock dividends ..... $ 8,633 $ (3,450) $ (516) $ -- $ -- $ --
Elimination
Media-One Media-One Media-One Media-One Non- and
Financing Financing Finance Finance Guarantor Consolidation Consolidated
I II II III Subsidiaries Adjustments AT&T Corp.
--------- --------- --------- --------- ----------- ----------- ----------
Revenue ................ $ -- $ -- $ -- $ -- $ 35,386 $ (2,087) $ 55,533
Operating Expenses
Costs of services and
products ............ 11,536 (1,702) 12,795
Access and other
connection .......... 6,425 (332) 13,140
Selling, general and
administrative ...... 7,649 (16) 9,752
Depreciation and
other amortization .. 4,059 5,924
Amortization of
goodwill, franchise
costs and other
purchased intangibles 2,383 2,665
Net restructuring
and other charges ... 6,526 7,029
Total operating
expenses ............ 38,578 (2,050) 51,305
Operating income (loss) (3,192) (37) 4,228
Other income (expense) . 2 2 11 25 4,242 (4,304) 1,150
Interest expense
(benefit) ........... 1 1 11 24 311 (4,240) 2,964
Income (loss) from
continuing
operations before
income taxes,
minority interest
and earnings
(losses) from
equity investments .. 1 1 1 739 (101) 2,414
Provision (benefit)
for income taxes .... 1 2,559 3,284
Minority interest
income (expense) .... 4,264 4,103
Equity earnings from
Liberty Media Group . 1,488
Net earnings (losses)
from other equity ... (586) (2,293) (588)
investments
Income (loss) from
continuing operations 1 1 1,858 (2,394) 4,133
Income from
discontinued
operations (net
of income taxes) .... 546 (10) 536
Net income (loss) ...... 1 1 2,404 (2,404) 4,669
Dividend requirements
on preferred stock
held by AT&T, net ... 111 (111)
Net income (loss)
after preferred
stock dividends ..... $ 1 $ 1 $ -- $ -- $ 2,293 $ (2,293) $ 4,669
79
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
For the year ended December 31, 2000
Guarantor Guarantor Guarantor TCI TCI TCI
AT&T Subsidiary Subsidiary Financing Financing Financing
Parent TCI MediaOne I II IV
--------- ---------- ---------- --------- --------- ---------
NET CASH PROVIDED BY
(USED IN) OPERATING
ACTIVITIES OF
CONTINUING OPERATIONS $ 2,735 $ (374) $ (138) $ -- $ -- $ --
INVESTING ACTIVITIES
Capital expenditures
and other additions . (51) (79) (21)
Equity investment
distributions
and sales ........... 363 1,384
Equity investment
contributions and
purchases ........... (1,700) (7,360)
Net (acquisitions)
dispositions of
businesses net
of cash
acquired/disposed ... (23,943)
Other .................. (2,057) (48)
NET CASH (USED IN)
PROVIDED BY INVESTING
ACTIVITIES OF
CONTINUING OPERATIONS (27,388) (7,487) 1,363
FINANCING ACTIVITIES
Proceeds from long-term
debt issuances ...... 739
Proceeds from debt
from AT&T ........... 5,867 13,743 275
Retirement of
long-term debt ...... (498) (1,058)
Retirement of AT&T
debt ................ (4,990) (1,500)
Issuance of AT&T
Wireless Group
common shares ....... 10,314
Dividends paid on
common stock ........ (3,047)
Increase (decrease)
in short-term
borrowings, net ..... 12,108
Other .................. (830) 166
NET CASH PROVIDED BY
(USED IN) FINANCING
ACTIVITIES OF
CONTINUING OPERATIONS 24,653 7,861 (1,225)
Net cash provided by
(used in)
discontinued
operations ..........
Net (decrease)
increase in cash
and cash equivalents
Cash and cash
equivalents at
beginning of year ...
Cash and cash
equivalents at
end of period ....... $ -- $ -- $ -- $ -- $ -- $ --
Elimination
Media-One Media-One Media-One Media-One Non- and
Financing Financing Finance Finance Guarantor Consolidation Consolidated
I II II III Subsidiaries Adjustments AT&T Corp.
--------- --------- --------- --------- ------------ ----------- ----------
NET CASH PROVIDED BY
(USED IN) OPERATING
ACTIVITIES OF
CONTINUING OPERATIONS $ 1 $ 1 $ -- $ -- $ 9,079 $ 361 $ 11,665
INVESTING ACTIVITIES
Capital expenditures
and other additions . (10,760) (10,911)
Equity investment
distributions
and sales ........... 629 (1,384) 992
Equity investment
contributions and
purchases ........... (694) 7,360 (2,394)
Net (acquisitions)
dispositions of
businesses net
of cash
acquired/disposed ... 7,286 (16,657)
Other .................. (6,186) 7,216 (1,075)
NET CASH (USED IN)
PROVIDED BY INVESTING
ACTIVITIES OF
CONTINUING OPERATIONS (9,725) 13,192 (30,045)
FINANCING ACTIVITIES
Proceeds from long-term
debt issuances ...... 3,862 4,601
Proceeds from debt
from AT&T ........... 4,595 (24,480)
Retirement of
long-term debt ...... (562) (2,118)
Retirement of AT&T
debt ................ 6,490
Issuance of AT&T
Wireless Group
common shares ....... 10,314
Dividends paid on
common stock ........ (3,047)
Increase (decrease)
in short-term
borrowings, net ..... 706 4,159 16,973
Other .................. (1) (1) (1,242) 917 (991)
NET CASH PROVIDED BY
(USED IN) FINANCING
ACTIVITIES OF
CONTINUING OPERATIONS (1) (1) 7,359 (12,914) 25,732
Net cash provided by
(used in)
discontinued
operations .......... (7,667) (639) (8,306)
Net (decrease)
increase in cash
and cash equivalents (954) (954)
Cash and cash
equivalents at
beginning of year ... 1,018 1,018
Cash and cash
equivalents at
end of period ....... $ -- $ -- $ -- $ -- $ 64 $ -- $ 64
80
CONSOLIDATING CONDENSED BALANCE SHEET
As of December 31, 1999
ELIMINATION
GUARANTOR GUARANTOR TCI TCI TCI AND
AT&T SUBSIDIARY FINANCING FINANCING FINANCING NON-GUARANTOR CONSOLIDATION CONSOLIDATED
PARENT TCI I II IV SUBSIDIARIES ADJUSTMENTS AT&T CORP.
---------- ---------- --------- --------- -------- ------------ ------------ ------------
ASSETS
Cash and cash
equivalents ....... $ -- $ -- $ -- $ -- $ -- $ 1,018 $ -- $ 1,018
Receivables .......... 12,513 5 40,968 (44,244) 9,242
Deferred income taxes 945 215 1,160
Other current assets . 381 3 545 (5) 924
TOTAL CURRENT ASSETS . 13,839 8 42,746 (44,249) 12,344
Property, plant &
equipment, net .... 11,078 128 22,160 33,366
Franchise costs, net . 8 32,685 32,693
Goodwill, net ........ 88 5,222 5,310
Investment in Liberty
Media Group and
related
receivables, net .. 38,460 38,460
Other investments and
related advances .. 111,056 34,046 18,829 (149,075) 14,856
Other assets ......... 5,143 74 528 521 217 9,368 (6,786) 9,065
Net assets of
discontinued
operations ........ 17,449 (86) 17,363
TOTAL ASSETS ......... $141,204 $72,724 $528 $521 $ 217 $ 148,459 $(200,196) $163,457
LIABILITIES
Debt maturing within
one year .......... $ 40,246 $ 1,136 $ -- $ -- $ -- $ 5,988 $ (34,890) $ 12,480
Other current
liabilities ....... 6,319 1,462 13,855 (8,098) 13,538
TOTAL CURRENT
LIABILITIES ....... 46,565 2,598 19,843 (42,988) 26,018
Long-term debt ....... 13,429 18,873 528 521 217 889 (11,243) 23,214
Deferred income taxes 78 20,429 20,507
Other long-term
liabilities and
deferred credits .. 6,600 153 1,069 (103) 7,719
TOTAL LIABILITIES .... 66,672 21,624 528 521 217 42,230 (54,334) 77,458
Minority Interest .... 5 2,367 2,372
Company-Obligated
Convertible
Quarterly Income
Preferred
Securities of
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
Stock ............. 217 217
Other shareowners'
equity ............ 63,813 51,100 104,149 (145,862) 73,200
TOTAL SHAREOWNERS'
EQUITY ............ 69,827 51,100 103,862 (145,862) 78,927
TOTAL LIABILITIES AND
SHAREOWNERS' EQUITY $141,204 $72,724 $528 $521 $ 217 $ 148,459 $(200,196) $163,457
81
CONSOLIDATING CONDENSED INCOME STATEMENT
For the year ended December 31, 1999
ELIMINATION
GUARANTOR GUARANTOR TCI TCI TCI NON- AND
AT&T SUBSIDIARY FINANCING FINANCING FINANCING GUARANTOR CONSOLIDATION CONSOLIDATED
PARENT TCI I II IV SUBSIDIARIES ADJUSTMENTS AT&T CORP.
---------- ---------- --------- --------- -------- ------------ ------------ ------------
Revenue ................ $ 24,755 $ -- $-- $-- $ -- $ 31,879 $(1,661) $ 54,973
Operating Expenses
Costs of services and
products ............ 1,536 10,707 (1,230) 11,013
Access and other
connection .......... 8,403 6,232 (196) 14,439
Selling, general and
administrative ...... 4,363 575 5,960 (4) 10,894
Depreciation and other
amortization ........ 2,072 49 3,016 5,137
Amortization of
goodwill, franchise
costs and other
purchased intangibles
34 4 1,019 1,057
Net restructuring and
other charges ....... 18 326 631 975
Total operating
expenses ............ 16,426 954 27,565 (1,430) 43,515
Operating income
(loss) .............. 8,329 (954) 4,314 (231) 11,458
Other income (expense) . 539 6 36 40 16 2,734 (2,545) 826
Interest expense
(benefit) ........... 3,186 342 36 40 16 634 (2,751) 1,503
Income (loss) from
continuing
operations
before income taxes,
minority interest and
earnings (losses)
from equity
investments ......... 5,682 (1,290) 6,414 (25) 10,781
Provision (benefit) for
income taxes ........ 2,118 (363) 2,261 4,016
Minority interest
income (expense) .... (87) (39) (126)
Equity earnings from
Liberty Media Group . (2,022) (2,022)
Net earnings (losses)
from other equity
investments ......... 4,171 (1,271) (779) (2,877) (756)
Income (loss) from
continuing
operations .......... 7,648 (4,220) 3,335 (2,902) 3,861
Income from
discontinued
operations (net of
income taxes) ....... (458) 25 (433)
Net income (loss) ...... $ 7,648 $(4,220) $-- $-- $ -- $ 2,877 $(2,877) $ 3,428
82
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
For the year ended December 31, 1999
ELIMINATION
GUARANTOR GUARANTOR TCI TCI TCI AND
AT&T SUBSIDIARY FINANCING FINANCING FINANCING NON-GUARANTOR CONSOLIDATION CONSOLIDATED
PARENT TCI I II IV SUBSIDIARIES ADJUSTMENTS AT&T CORP.
------ ----- --- --- ------ -------- ------ --------
NET CASH PROVIDED BY
(USED IN) OPERATING
ACTIVITIES OF
CONTINUING
OPERATIONS ........ $ 2,672 $ (578) $-- $-- $ -- $ 8,613 $ (198) $ 10,509
INVESTING ACTIVITIES
Capital expenditures
and other additions (1,733) (60) -- -- (9,797) -- (11,590)
Equity investment
distributions and
sales ............. 61 -- -- -- 1,513 -- 1,574
Equity investment
contributions and
purchases ......... (5,473) (1,857) -- -- (2,364) 1,857 (7,837)
Net (acquisitions)
dispositions of
businesses net
of cash
acquired/disposed . (6,405) -- -- -- 436 -- (5,969)
Other ................ (203) 103 -- -- (15,056) 15,094 (62)
NET CASH (USED IN)
PROVIDED BY
INVESTING
ACTIVITIES OF
CONTINUING
OPERATIONS ........ (13,753) (1,814) -- -- (25,268) 16,951 (23,884)
FINANCING ACTIVITIES
Proceeds from
long-term debt
issuances ......... 8,396 -- -- -- -- 8,396
Proceeds from debt
from AT&T ......... -- 5,866 -- -- 5,365 (11,231) --
Retirement of
long-term debt .... (1,014) (1,365) -- -- 124 -- (2,255)
Retirement of AT&T
debt .............. -- (2,109) -- -- 2,109 --
Issuance of AT&T
convertible
securities ........ 4,694 -- -- -- (56) -- 4,638
Net acquisitions of
treasury shares ... (4,624) -- -- -- -- (4,624)
Dividends paid on
common stock ...... (2,685) -- -- -- (27) -- (2,712)
Increase (decrease)
in short-term
borrowings, net ... 19,154 -- -- -- (1,207) (7,774) 10,173
Other ................ (13,215) -- -- -- 13,365 88 238
NET CASH PROVIDED BY
(USED IN) FINANCING
ACTIVITIES OF
CONTINUING
OPERATIONS ........ 10,706 2,392 -- -- 17,564 (16,808) 13,854
Net cash provided by
(used in)
discontinued
operations ........ -- -- -- -- (2,649) 55 (2,594)
Net (decrease)
increase in cash
and cash
equivalents ....... (375) -- -- -- (1,740) -- (2,115)
Cash and cash
equivalents at
beginning of year . 375 -- -- -- 2,758 -- 3,133
Cash and cash
equivalents at end
of period ......... $ -- $ -- $-- $-- $ -- $ 1,018 $ -- $ 1,018
83
21. QUARTERLY INFORMATION (UNAUDITED)
First Second Third Fourth
2000
Revenue(1).....................................................................$13,703 $13,744 $14,176 $13,910
Operating income (loss)(2)..................................................... 2,347 3,140 2,907 (4,166)
Income (loss) from continuing operations....................................... 2,650 1,857 3,074 (3,448)
Income (loss) from discontinued operations - net of income taxes............... 33 177 (2) 328
Net income (loss).............................................................. $2,683 $2,034 $3,072 $ (3,120)
AT&T Common Stock Group:
Earnings (loss) per share - basic:
Continuing operations....................................................... $.54 $.49 $.35 $ (.52)
Discontinued operations .................................................... .01 .05 -- .07
Total ...................................................................... $.55 $.54 $.35 $ (.45)
Earnings (loss) per share - diluted:
Continuing operations....................................................... $.53 $.48 $.35 $ (.52)
Discontinued operations..................................................... .01 .05 -- .07
Total ...................................................................... $.54 $.53 $.35 $ (.45)
Dividends declared............................................................. $.22 $.22 $.22 $.0375
AT&T Wireless Group(3):
Earnings (loss) from discontinued operations per share:
Basic and diluted........................................................... $ -- $.06 $ (.01) $.16
Liberty Media Group(3):
Earnings (loss) per share:
Basic and diluted(4)........................................................ $.37 $.10 $.68 $ (.57)
Stock price(5):
AT&T common stock
High........................................................................ $47.37 $45.67 $27.33 $23.30
Low......................................................................... 34.41 24.27 21.16 12.81
Quarter-end close........................................................... 43.68 24.56 22.81 13.40
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 stock(4)
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 stock(4)
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
Revenue(1).....................................................................$12,554 $13,875 $14,283 $14,261
Operating income(2)............................................................ 2,191 2,881 3,309 3,077
Income from continuing operations ............................................. 1,079 991 1,415 376
(Loss) income from discontinued operations - net of income taxes............... (61) 54 1 (427)
Net income (loss).............................................................. $1,018 $1,045 $1,416 $ (51)
AT&T Common Stock Group:
Earnings (loss) per share - basic:
Continuing operations....................................................... $ .41 $ .48 $.51 $.49
Discontinued operations..................................................... (.02) .02 -- (.13)
Total ...................................................................... $ .39 $ .50 $.51 $.36
Earnings (loss) per share - diluted:
Continuing operations....................................................... $ .40 $.47 $.50 $.49
Discontinued operations..................................................... (.02) .02 -- (.13)
Total ...................................................................... $ .38 $.49 $.50 $.36
Dividends declared............................................................. $ .22 $.22 $.22 $.22
Liberty Media Group(3):
Loss per share:
Basic and diluted(4)........................................................ $ .02 $.21 $.09 $.48
Stock price(5):
AT&T common stock
High........................................................................ $49.77 $48.93 $45.82 $47.37
Low......................................................................... 39.28 38.88 32.47 32.23
Quarter-end close........................................................... 41.32 43.34 33.78 39.46
Liberty Media Group Class A common stock(4)
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 stock(4)
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 $273 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.
84
(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
$359 of income, or approximately $0.09 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 $713, or approximately $0.19 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 $545 of
income, or approximately $0.21 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
85
Effective January 1, 2001, AT&T sold to Insight Communications
Company LP (Insight) several Illinois cable-systems serving approximately 98
thousand customers for $0.4 billion. Insight subsequently contributed the
purchased cable-system and additional cable-systems serving approximately 177
thousand customers to Insight Midwest L.P. in which AT&T has a 50% interest.
AT&T also contributed entities owning cable-systems serving approximately 248
thousand customers in Illinois to Insight Midwest L.P. The transactions resulted
in pretax gains of $0.2 billion, which were deferred due to a debt support
agreement with Insight Midwest, L.P.
On January 8, 2001, AT&T and Cablevision Systems Corporation
(Cablevision) completed the transfer of cable-systems in which AT&T received
cable-systems serving 358 thousand subscribers in Boston and Eastern
Massachusetts. In exchange, Cablevision received cable-systems serving
approximately 130 thousand subscribers in northern New York suburbs, and 44
million shares of AT&T common stock valued at approximately $0.9 billion, and
approximately $0.2 billion in cash. Cablevision recorded a gain as a result of
the transaction. Due to AT&T's ownership interest in Cablevision, AT&T recorded
an after-tax gain of approximately $0.1 billion included within "Net losses from
other equity investments."
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. On May 18, 2001, AT&T, Cox
Communications (Cox) and Comcast reached agreement on the terms of the
previously announced transaction on the put options related to Excite@Home.
Under the new agreement, which was no longer a tax-free exchange, Cox and
Comcast retained their stakes in Excite@Home and AT&T issued 75 million of AT&T
common shares to Cox and more than 80 million of AT&T common shares to Comcast.
We recorded a loss of approximately $0.8 billion in other income for this put
option settlement in the second quarter of 2001. The new agreement resulted in a
tax benefit to AT&T, which essentially offset this loss.
On January 22, 2001, NTT DoCoMo invested approximately $9.8 billion
for 812,511.778 shares of a new class of AT&T preferred stock with a par value
of $1 per share; and 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. The $9.8 billion of proceeds were recorded based on their relative fair
values as $9.2 billion for the preferred shares, $0.3 billion for the warrants
in other current liabilities and $0.3 billion for the beneficial conversion
feature. The preferred shares, convertible at NTT DoCoMo's option, were
economically equivalent to 406 million shares (a 16 percent interest) of AT&T
Wireless Group tracking stock at June 30, 2001. On July 9, 2001, in conjunction
with the split-off of AT&T Wireless Group, these preferred shares were converted
into AT&T Wireless common stock. Upon conversion, AT&T reduced its portion of
the financial performance and economic value in the AT&T Wireless Group by 178
million shares, and the balance of the 406 million shares came from the issuance
of 228 million new shares of AT&T Wireless common stock. Since NTT DoCoMo
converted their preferred stock in connection with the Wireless Group split-off,
we will recognize, in the third quarter of 2001, the remaining unamortized
beneficial conversion feature balance of $0.2 billion.
On April 27, 2001, AT&T completed the sale announced on February 27,
2001, of our 10% stake in Japan Telecom Co. Ltd to Vodafone Group plc for $1.35
billion in cash. The proceeds from the transaction were split evenly between
AT&T and AT&T Wireless Group since AT&T Wireless Group held one-half of AT&T's
investment. The transaction resulted in a pretax gain of approximately $0.5
billion recorded in AT&T continuing operations and a pretax gain of
approximately $0.5 billion recorded in discontinued operations.
On April 30, 2001, AT&T received 63.9 million shares of AT&T common
stock held by Comcast Corp. (Comcast) in exchange for an entity owning
cable-systems which serves approximately 590 thousand customers in six states.
The transaction resulted in a pretax loss of $0.3 billion.
On May 25, 2001, AT&T completed an exchange offer of AT&T common
stock for AT&T Wireless stock. Under the terms of the exchange offer, AT&T
issued 1.176 shares of AT&T Wireless Group tracking stock in exchange for each
86
share of AT&T common stock validly tendered. A total of 372.2 million shares of
AT&T common stock were tendered in exchange for 437.7 million shares of AT&T
Wireless Group tracking stock.
On June 20, 2001, AT&T amended an existing accounts receivable
securitization program for a new 364-day term providing for up to $0.5 billion
of funding. Under the program, AT&T Consumer accounts receivable were sold on a
discounted, revolving basis, to a special purpose, wholly-owned subsidiary of
AT&T, which assigns interests in such receivables to unrelated third-party
financing entities. Interest is paid monthly based on a floating rate set by the
corresponding agreements. The borrowing was collateralized by approximately $1.0
billion of accounts receivable.
On June 22, 2001, AT&T initiated a 364-day accounts receivable
securitization program providing for up to $2.2 billion of funding. Under the
program, AT&T Business accounts receivable were sold on a discounted, revolving
basis, to a special purpose, wholly-owned subsidiary of AT&T, which assigns
interests in such receivables to unrelated third-party financing entities.
Interest is paid monthly based on a floating rate set by the corresponding
agreements. The borrowing was collateralized by approximately $5.7 billion of
accounts receivable.
On June 30, 2001, AT&T transferred its 99.75% interest in an entity
owning Baltimore Maryland cable-system serving approximately 115 thousand
customers to Comcast for approximately $0.5 billion in cash. The transaction
resulted in a pretax gain of $0.1 billion.
On July 8, 2001, Comcast made an unsolicited offer to acquire AT&T
Broadband. On July 18, AT&T's Board of Directors unanimously voted to reject
Comcast's proposal to acquire AT&T Broadband. The Board has directed management
to explore financial and strategic alternatives relating to AT&T Broadband,
including the previously announced restructuring plans, with the goal to provide
the greatest long-term value to shareowners. The Board also decided to delay
finalizing and mailing to shareowners the proxy materials, filed preliminary
with the SEC on July 3, 2001, for its current restructuring plans. However, AT&T
remains committed to separate AT&T Consumer and AT&T Business from AT&T
Broadband and to creating a separate tracking stock designed to represent the
financial performance of AT&T Consumer.
On July 9, 2001, AT&T completed the split-off of AT&T Wireless as a
separate, independently-traded company. All AT&T Wireless tracking stock was
converted into AT&T Wireless common stock on a one-for-one basis and 1,136
million shares of AT&T Wireless common stock, held by AT&T, was distributed to
AT&T common shareowners on a basis of 0.3218 of a share of AT&T Wireless for
each AT&T share outstanding. The split-off of AT&T Wireless will result in a
non-cash gain of approximately $13 billion, which represents the difference
between the fair value of the Wireless tracking stock at the date of the
split-off and AT&T's book value in AT&T Wireless Services. This gain will be
recorded in the third quarter of 2001 and be reflected as "Gain on the
disposition of discontinued operations." In addition, AT&T retained
approximately $3 billion, or 7.3%, of AT&T Wireless common stock, about half of
which was used in a debt-for-equity exchange in July which will result in a
pretax gain of approximately $0.5 billion to be recorded in other income. The
remaining shares are expected to be sold, exchanged or monetized within six
months of the split-off.
On August 10, 2001, AT&T completed the split-off of Liberty Media
Corporation as an independent, publicly-traded company. AT&T redeemed each
outstanding share of Class A and Class B Liberty Media Group (LMG) tracking
stock for one share of Liberty Media Corporation's Series A and Series B common
stock, respectively. The split-off will be recorded as a book value transaction,
therefore, no gain or loss will be recorded on the transaction.
87
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) $1,204 $1,080 $1,043 $1,241
Deferred tax asset valuation
allowance(c) $ 223 $ 824 $ 268 $ 779
Year 1999
Allowances for doubtful
accounts(b) $1,032 $1,216 $1,044 $1,204
Deferred tax asset valuation
allowance(c) $ 268 $ 124 $ 169 $ 223
Year 1998
Allowances for doubtful
accounts(b) $ 964 $1,290 $1,222 $1,032
Deferred tax asset valuation
allowance(c) $ 205 $ 194 $ 131 $ 268
(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) The end of period balance at December 31, 2000 includes $39 which
represents the current portion of the deferred tax valuation allowance.
There was no current portion at December 31, 1999 or 1998. 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.
88
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 $6,888 $7,356 $7,973 $6,696 $7,972
Add net equity investment
losses, net of distributions
of less than 50% owned
affiliates 542 854 257 192 11
Add fixed charges, excluding
capitalized interest 3,556 1,888 479 534 600
Total earnings from
continuing operations
before income taxes
and fixed charges $10,986 $10,098 $8,709 $7,422 $8,583
Fixed Charges:
Total interest expense $ 2,964 $1,503 $ 293 $ 304 $ 394
Capitalized interest 177 143 106 100 94
Interest portion of
rental expense 239 206 186 230 206
Dividend requirements on
subsidiary preferred stock
and interest on trust
preferred securities 353 179 - - -
Total fixed charges $ 3,733 $2,031 $ 585 $ 634 $ 694
Ratio of earnings
to fixed charges 2.9 5.0 14.9 11.7 12.4
EX-99.1
5
y533468kex99-1.txt
RESTATED QUARTERLY INCOME STATEMENTS
1
Exhibit 99.1
AT&T CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Dollars in millions
(except per share amounts)
For the three months ended
3/31/00 6/30/00 9/30/00 12/31/00 3/31/01
-------- ------- -------- -------- --------
Revenue $13,703 $13,744 $14,176 $13,910 $13,551
Operating Expenses
Access and other connection 3,506 3,527 3,147 2,960 3,151
Costs of services and products 2,958 3,009 3,282 3,546 3,572
Selling, general and administrative 2,548 2,357 2,461 2,386 2,794
Depreciation and other amortization 1,270 1,366 1,568 1,720 1,702
Amortization of goodwill, franchise costs and
other purchased intangibles 301 345 787 1,232 710
Net restructuring and other charges 773 -- 24 6,232 808
Total operating expenses 11,356 10,604 11,269 18,076 12,737
Operating income (loss) 2,347 3,140 2,907 (4,166) 814
Other income (expense) 647 346 365 (208) (783)
Interest expense 536 568 896 964 879
Income (loss) from continuing operations before
income taxes, minority interest and earnings
(losses) from equity investments and cumulative
effect of accounting change 2,458 2,918 2,376 (5,338) (848)
Provision for income taxes 499 1,094 939 752 218
Minority interest income (expense) (46) (46) 103 4,092 640
Equity earnings (losses) from Liberty Media Group 942 267 1,756 (1,477) (697)
Net (losses) gains from other equity (205) (188) (222) 27 (57)
investments
Income (loss) from continuing operations 2,650 1,857 3,074 (3,448) (1,180)
Income (loss) from discontinued
operations (net of income taxes) 33 177 (2) 328 (68)
Cumulative effect of accounting change (net of tax) -- -- -- -- 904
Net income (loss) $ 2,683 $ 2,034 $ 3,072 $(3,120) $ (344)
Dividend requirements of preferred stock -- -- -- -- 181
Net income (loss) available to common shareowners $ 2,683 $ 2,034 $ 3,072 $(3,120) $ (525)
AT&T Common Stock Group--per basic share:
Income (loss) from continuing operations $ 0.54 $ 0.49 $ 0.35 $ (0.52) $ (0.17)
Income (loss) from discontinued operations 0.01 0.05 -- 0.07 (0.02)
Cumulative effect of accounting change -- -- -- -- 0.09
AT&T Common Stock Group earnings (loss) $ 0.55 $ 0.54 $ 0.35 $ (0.45) $ (0.10)
AT&T Common Stock Group--per diluted share:
Income (loss) from continuing operations $ 0.53 $ 0.48 $ 0.35 $ (0.52) $ (0.17)
Income (loss) from discontinued operations 0.01 0.05 -- 0.07 (0.02)
Cumulative effect of accounting change -- -- -- -- 0.09
AT&T Common Stock Group earnings (loss) $ 0.54 $ 0.53 $ 0.35 $ (0.45) $ (0.10)
AT&T Wireless Group--per basic and diluted share:
Earnings (loss) from discontinued operations $ -- $ 0.06 $ (0.01) $ 0.16 $ (0.02)
Liberty Media Group -- per basic and diluted share:
Income (loss) - before cumulative effect of
accounting change $ 0.37 $0.10 $ 0.68 $ (0.57) $ (0.27)
Cumulative effect of accounting change -- -- -- -- 0.21
Liberty Media Group (loss) earnings $ 0.37 $ 0.10 $ 0.68 $ (0.57) $ (0.06)
2
b. The reflection of AT&T Wireless as a discontinued operation in AT&T's
financial statements did not impact the Consumer, Business or Broadband
segments. The Corporate and Other Group, which reflects the consolidated
results of Excite@Home, pure corporate staff functions and the elimination
of transactions between segments was impacted. The following summarizes
the restated Corporate and Other results:
1Q00 2Q00 3Q00 4Q00
-------- -------- -------- --------
EBIT (470) 67 106 (2,982)
EBITDA (326) 213 338 (2,607)
c. Earnings per share on a diluted basis from continuing operations,
excluding other income (expense), equity earnings (losses), asset
impairment charges, and the effects of the Wireless exchange offer
restated to reflect AT&T Wireless as a discontinued operation were $0.34,
$0.47. $0.35, $0.23, $0.05 for the quarters ended March 31, 2000, June 30,
2000, September 30, 2000, December 31, 2000 and March 31, 2001,
respectively.